A Formula for Insider Risk Management in the Chemicals Sector

Picture by Kai Dahms

Highlights

  • Almost 30% of industry turnover depends on trade secrets, although at the company level that percentage can reach 80-100% when the trade secret is the foundation of the product or process differentiation.
  • Companies have lost tens of millions, sometimes hundreds of millions, in research investments in recent trade secret theft cases.
  • Classify, compartmentalize and copyright, plus other prevention tips to protect innovations.

Thomas Rukavina committed suicide in June 2015, a tragic end after being charged with the theft of trade secrets. Rukavina had been arrested a month earlier on charges he stole sensitive designs from his old employer PPG Industries, a global supplier of paints, coatings, and specialty materials. His termination as a chemist from the company in 2012 was unpleasant. He claimed to have been “forced out” of the company and he expressed anger at signing confidentiality and release agreements, even though PPG would pay him an extra USD 92,000 in severance for doing so. That bitterness likely contributed to his decision to offer Jiangsu Tie Mao Glass Company (JTMG), a Chinese competitor of PPG, highly sensitive documents from his former Opticor project. Opticor was the industry’s first new transparent plastic in more than 50 years and is used in a range of specialty windows, from military jets to high-speed trains, and PPG was its first and only sole supplier. To catch up, JTMG paid Rukavina over USD 100,000 over a two-and-a-half year period for the secrets and Rukavina had plans to move to China in the weeks leading up to his arrest. His arrest ended those dreams and later his life. As for PPG’s case against JTMG, the court deferred approval pending a determination of final damages in its most recent ruling (31 March 2020).

Cases like this are common in the industry. While the full range of insider risks include fraud, sabotage and insider trading, this blog focuses on trade secret theft due to its high frequency and impact on this sector. We provide an overview of the industry in Europe and its vulnerabilities, highlight recent cases demonstrating the risk and share specific measures on how chemical companies can best protect themselves.

Industry characteristics and vulnerabilities as a sector

The European Union’s market share of chemical sales has declined since 2008, when it led the world in the production of chemicals. Despite China’s ascendance, the European chemical industry accounted for EUR 565 billion in sales and is still regarded as highly innovative.  

Source: cefic.org

Those innovations are secured by IP and provide the basis for future industry competitiveness. What are the drivers of sustained advantage? The following list of trade secrets shows the diversity of know-how that can give companies the edge, and are highly sought after by competitors as a result:

  • Raw materials, their source, price and contribution to the product;
  • Product formulations and compositions;
  • Manufacturing processes and know-how;
  • R&D and marketing innovation, including information relating to research and development into new products and product improvements and new marketing plans and marketing materials;
  • Application know-how, including information how to best use chemicals in combination with other products, in certain applications, in certain environments, in synthesizing new products, etc.

Almost 30% of industry turnover depends on trade secrets, although at the company level that percentage can reach 80-100% when the trade secret is the foundation of the product or process differentiation. For small and medium sized companies, which represent the vast majority of the EU chemical industry, a loss of intellectual property can signal the end of the company. Even when the theft of trade secrets don’t pose an existential threat, their loss can lead to major reorganizations, including plant shutdowns and delocalisation to lower cost countries if differentiation or process/productivity advantage is lost and they must compete only on manufacturing costs only. Clearly, the risk of losing trade secrets is substantial and three key sector characteristics increase its likelihood and impact.

First, industry employees change or start companies frequently. This creates two problems: (1) many different people are granted access to trade secrets over time and (2) transitioning workers can take trade secrets to their new company. The first problem increases exposure to loss since larger populations are more likely to contain malicious members. The second problem can cause leavers to exchange trade secrets for direct cash payments, better positions or higher salaries. We’ll highlight examples of each in the cases below.

Second, the chemical industry plays a key role in the supply chains of virtually all sectors of the economy, particularly the manufacturing and agricultural industries. Approximately 70% of the combined output of the chemical is sold to other industries, as opposed to end users. Industry innovations often provide solutions to both upstream and downstream user problems, drive energy and resource efficiency, and create economic development and wealth in multiple parts of an economy. For these reasons, many nation states regard chemical trade secrets as a force multiplier for boosting their economies, increasing their likelihood of being stolen. China’s “Made in China 2025” initiative, for example, includes new materials, which the China’s 13th Five-Year Plan specifies to be key technologies ranging from fundamental materials, advanced electronic materials, nanomaterials and advanced structural materials. When chemical companies lose their trade secrets, the damage can cascade throughout the chain. Organisations that differentiate themselves based on premium inputs soon find that their prices are being undercut by new competitors, and this may extend into other sectors of the economy. As a result, the impact of trade secret theft can be much higher than lost research costs for a single company.

The third key sector characteristic is its heavily regulated nature and that of its downstream clients. Some organisations, such as defense contractors, must meet heavy compliance requirements, and these requirements are increasingly being pushed down to suppliers. As this happens, the impact on companies for poorly guarded secrets can be exacerbated by regulatory fines.

We now look at real incidents that highlight the seriousness of these vulnerabilities.

A look at recent Insider incidents in the chemical sector

Most trade-secret theft goes unreported because companies fear disclosing such incidents will hurt their stock prices, damage their relationships with customers, or result in increased attention from regulators. In addition, prosecuting cases of trade secret theft can be time-consuming and complicated, and convictions are often difficult to win, especially for conspiracy to commit espionage.

Direct payoffs or benefits are likely the most common pattern for trade secret theft. In cases where theft is conducted by senior people, the damage can be considerable. A recent incident at Coca-Cola involved its then principal engineer for global research, Xiorang You, who had access to the shared secrets from six chemical companies to advance BPA-free research. The engineer is alleged to have provided those secrets to Weihai Jinhong Polymer Company and to support her application for China’s Thousand Talents Program grant and Yishi-Yiri award, which she eventually won. The damage to affected companies was considerable: PPG Industries (USD 39 million), Sherwin-Williams Valspar (USD 30 million), Dow Chemical (USD 25 million), AkzoNobel (USD 7.3 million), BASF and Toyochem (USD 5.3 million combined). You later joined Eastman Chemical Company in another senior role, where her continued theft of trade secrets resulted in USD 13 million in lost research and development costs. In total, You is alleged to have stolen secrets that caused companies to lose USD 119.6 million in research investments.

Collusion among several employees can also result in large losses. Six BASF engineers, including at least one senior manager, are suspected of selling electronic manufacturing processes trade secrets to China-based Jiangyin Jianghua Microelectronics Materials for the purpose of building a chemicals plant in mainland China. BASF stands to lose USD 114 million per year as a result.

Sometimes employees steal trade secrets as a prelude to starting their own companies or to those of their relatives. For example, Prabhu Mohaptra, a senior scientist from Frontier Scientist, pled guilty to unlawfully accessing Frontier’s chemical-resource notebook and emailing information regarding chemical formulas to his brother-in-law, who lived in India and was setting up a competing company to undercut Frontier Scientific on prices it charged for pharmaceutical chemicals. In the case of Lanxess, a German specialty chemicals company, a former employee abused a position of trust to steal trade secrets in order to build a copycat reactor in China. Lanxess successfully won a civil theft suit and is now pursuing criminal charges.

Another common reason employees steal secrets is to make themselves attractive to other companies for employment. In 2014, Michael Agoda, admitted stealing more than 100 confidential silicone formulas from Wacker Chemical, which he then sold many to KCC Silicone, a South Korean competitor. He later quit Wacker to join KCC Silicone full-time. Wacker estimates that Agoda’s actions cost it USD 15.5 million.

A more challenging scenario is when companies target ex-employees to obtain secrets. Walter Liew recruited two ex-Dupont employees, one retired and the other recently laid-off, to help him successfully recreate Dupont’s titanium dioxide process, considered the best in the world at the time and responsible for USD 2.6 billion in sales to them. Eventually, Liew and his accomplices were arrested and sentenced, but Pangang Jinzhou plant, whom Liew was contracting with, operates using what is widely believed to be DuPont’s process, and there may be others. In another important case, DuPont won a $919 million judgment against Kolon Industries, a chemical and textile manufacturing company, in 2011. Kolon was found to recruit current and former DuPont employees to assist with the theft of DuPont’s Kevlar para-aramid fiber trade secrets, which are used to make body armor and fiber-optic cables. In 2013, DuPont sought judicial assistance to enforce the judgment but lost as the court found Kolon was beyond its jurisdictional reach, highlighting the challenges victims of IP theft face in securing relief, even after winning a judgment on the merits.

The above cases, all with damages in the millions, highlight the need for companies to protect their trade assets. We now turn to specific recommendations organizations can take in this regard.

Managing (insider) risk in the chemicals industry

A strong insider risk programme can be a competitive advantage. It can assure suppliers and customers that any shared secrets are secure and be the difference in winning new business. Furthermore, the right procedures must be in place if a company intends to seek redress through the courts when incidents do occur. Here is how companies can protect themselves. 

First, add an insider risk lens to your existing enterprise risk practices. Include insider risk when establishing the right operational structures, defining the right culture and making an organisational commitment to core values, all key principles in the COSO enterprise risk management framework. These principles are often embedded through training and education, yet guidance on mitigating insider risk is often missing.  In addition, organizations often rely heavily on technology to safeguard against insiders. In the end, however, insider risk is about people. Use training sessions to highlight The Critical Pathway to Insider Risk and to describe reporting mechanisms. The key is picking up early warning signals. Insiders that commit damaging acts rarely start off malicious and an appropriate intervention at the first signs of concern can save a person’s career, and an organisation’s hard won secrets. 

Another key recommendation is to connect the dots between countermeasures and early signals. Many insider incidents can be averted when small, seemingly innocuous pieces of information scattered across silos are merged into a composite picture. This requires an insider risk governance model with clear accountabilities and responsibilities and strong senior management support to ensure cooperation across functions.

Finally, organisations should be aware that to qualify for redress, they must demonstrate that they safeguarded their trade secrets, something many fail to do. Some specific considerations to demonstrate this include the following:

  • Keep trade secrets at home, or at least a key component, ingredient, process, onshore.
  • When the full trade secret must be brought to overseas manufacturing plants, consider allocating it in discrete steps at separate locations so no one employee will have full knowledge of it. The same compartmentalized approach should apply to employees to ensure few have access to everything in a plant.
  • Copyright the information where possible to afford greater opportunity for protection
  • Conspicuously label documents containing trade secrets as “Confidential”.
  • Classify trade secrets as business critical assets and limit access to them among your partners, suppliers, customers, and employees on a need-to-know basis.
  • Ensure non disclosure agreements (NDAs) remain in force for a reasonable period after any expiration/termination of employees. This should be stipulated in partner NDAs as well.

When facing nation state actors, only a comprehensive programme can provide the necessary safeguards to protect your business. Signpost Six has identified fourteen key countermeasures that enable organizations to mitigate insider risks.

How strong is your insider risk programme? Signpost Six can help you assess it with a quick scan to understand where gaps exist and help you design a roadmap for improvement. Our specialists can provide targeted guidance on each countermeasures listed above and explain the benefits of a complete insider threat program. Please reach out to us to learn more. We look forward to talking with you.

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