China tried to build a network of informants inside the Federal Reserve system, at one point threatening to imprison a Fed economist during a trip to Shanghai unless he agreed to provide nonpublic economic data, a congressional investigation found.
The investigation by Republican staff members of the Senate’s Committee on Homeland Security and Governmental Affairs found that Fed employees were offered contracts with Chinese talent-recruitment programs, which often include cash payments, and asked to provide information on the U.S. economy, interest-rate changes and policies, according to a report of the findings released Tuesday.
In the case of the economist, the report said, Chinese officials in 2019 detained and tried to coerce him to share data and information on U.S. government policies, including on tariffs while the U.S. and China were in the midst of a trade war.
The report doesn’t say whether any sensitive information was compromised in what it said has been a decadelong effort that began around 2013. Access to such information could provide valuable insights given the Fed’s extensive analysis of U.S. economic activity, its oversight of the U.S. financial system, and the setting of interest-rate policy.
The Republican-led investigation said the Fed failed to mount an adequate response. The report’s findings show “a sustained effort by China, over more than a decade, to gain influence over the Federal Reserve and a failure by the Federal Reserve to combat this threat effectively.”
Fed Chairman Jerome Powell strongly disputed the report’s findings and called its characterizations of some employees unfair. “Because we understand that some actors aim to exploit any vulnerabilities, our processes, controls, and technology are robust and updated regularly. We respectfully reject any suggestions to the contrary,” he wrote in a letter to Sen. Rob Portman of Ohio, the committee’s top Republican.
Mr. Powell detailed the central bank’s information security and background screening protocols, including reviews of foreign travel and personal contacts for staff who have access to restricted information. “We take seriously any violations of these robust information security policies,” he wrote.
Sen. Rob Portman (R., Ohio) said China presents a threat to U.S. monetary policy.PHOTO: CHIP SOMODEVILLA/GETTY IMAGESThe letter didn’t address China’s conduct. The Fed declined to comment on it.
China has mounted what U.S. counterintelligence officials say is among the broadest campaigns to obtain U.S. government information and proprietary business secrets and scientific and technology research. Federal Bureau of Investigation Director Christopher Wray, along with his British counterpart, issued a rare joint warning this month to businesses over Chinese espionage efforts. China-linked cyberhackers have previously infiltrated the Defense Department, and Chinese operatives have spread money around to cultivate current and former officials in the intelligence agencies and State Department.
China criticized the Senate Republicans’ report, with a Chinese embassy spokesman in Washington citing the “Cold War zero-sum thinking” of some members of Congress. “The cooperation between China and the U.S. in economic, financial and other fields is open and aboveboard, which has played an important role in enhancing mutual understanding and mutual trust between the two countries,” said the spokesman, Liu Pengyu.
The congressional Republican report draws heavily from a separate internal Fed investigation conducted by the central bank beginning in 2015. The Fed, the congressional report said, began its probe after an unspecified outside entity warned that foreign adversaries had tried to build relationships with Fed researchers typically by offering “compensated contractual relationships.”
The Fed investigation identified 13 people of interest, dubbed the “P-Network” by internal investigators, who were employed at eight of the 12 regional Fed banks, the report said.
A former employee of the Fed or one of its regional banks, identified as “Z,” attempted to recruit the network’s members, according to the report. That person maintained ties to Chinese government-backed talent-recruitment programs and “expressed a desire to maintain an inside information sharing relationship” with Fed employees, the report said.
The Fed investigation found that one economist in the Fed system, who was later fired for violating central-bank rules, had been close to “Z,” the report said.
Since providing its “P-Network” findings to Congress in December 2020, the Fed now disputes many results of its inquiry, the report said. The Fed raised concerns about the accuracy of its findings this month and can’t locate some of the investigative materials, the report said.
In his letter to Mr. Portman, Mr. Powell said the Fed would be concerned about “any supportable allegation of wrongdoing, whatever the source. In contrast, we are deeply troubled by what we believe to be the report’s unfair, unsubstantiated, and unverified insinuations about particular staff members.”
“I am concerned by the threat to the Fed,” Mr. Portman said in a statement. He said he hopes the investigation “wakes the Fed up to the broad threat from China to our monetary policy. The risk is clear.”
The Fed maintains channels to central banks around the world, and inside the Fed system many researchers have previous work experience at foreign central banks and universities. The international appeal of the U.S. central bank is seen by many economists as one of its strengths in fostering excellence in research.
China has frequently used talent-recruitment programs in its efforts to obtain classified or proprietary information, offering lucrative appointments at Chinese research institutes which U.S. counterintelligence officials say amount to an incentive to steal secrets.
After Congress began its investigation, the Fed began banning officials from accepting compensation from certain countries including China, the report said. The policies, however, don’t require employees to disclose membership in talent-recruitment plans, the report said. Despite known ties to talent plans or relationships with members, committee aides said that four of the five people cited in their report retain access to confidential Fed information.
The congressional report details multiple instances involving “P-Network” individuals including one who gave economic modeling code to a Chinese university with ties to the People’s Bank of China, the report said.
Another attempted to transfer large volumes of data from the Fed to an external site on at least two occasions, the report said. This person had also previously received a request from a person linked to the Chinese government for nonpublic information on three Fed bank presidents’ views on rate increases, the report said.
A committee aide said he didn’t know if Chinese government officials received any of the information.
In his letter, Mr. Powell said the central bank posts its most important economic models publicly online to better engage with other professionals about its analysis. He said that Fed systems monitor for unauthorized transfers of data and information.
The most extreme example cited in the report involved the Fed economist who traveled to Shanghai in 2019 after the U.S. and China had levied tariffs on hundreds of billions of dollars of goods. Chinese officials detained the economist on four occasions during the trip, the report said.
The economist later reported to the bank that Chinese officials initially approached him at his hotel room, “making the atmosphere frightening,” and told him that they had been monitoring his phone conversations, including those involving a previous divorce, the report said.
The Chinese officials told the Fed employee that he must “share sensitive, nonpublic economic data to which he has access” and that he must “advise senior [Chinese] government officials on sensitive economic issues, including trade tariffs” and confidential information, according to the report. The officials also threatened to imprison him and destroy his life if he didn’t sign a letter promising not to mention the encounters to his family, the report said.
Fed officials told committee staff that they reported the incident to the FBI and to the State Department. In July 2019, the Fed issued a general warning to all economists about travel to China, the report said. The FBI declined to comment; the State Department didn’t return a request for comment.
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