Why hi-tech means high risk

From the Silicon Valley to Scotland, the computer industry is under siege from gangs of violent criminals. By Niall McKay

Inventory Management Systems (IMS), a small computer chip dealer in Orange County, California, is built like a fortress. The company has armed guards 24 hours a day, every employee's desk has a panic button and its stock is kept in a time-locked vault. Instead of delivery vans, the company hires an armoured car service.

This is the reality of dealing in the computer chip; a commodity that weighs about an ounce, is about the size of a thumbnail and is worth more than an ounce of gold or an ounce of cocaine.

"Each Pentium processor is worth about $600 [pounds 400], so a single hold- all could have about $3m to $4m worth of goods in it," says Joe Jonovich, president of IMS. In Silicon Valley, the spawning ground for California's computer industry, there is an armed robbery every four days involving computer components.

"If the banks were held up every four days, you would have the Marines surrounding the area by the end of the week," says John O'Loughlin, directory of security at Sun Microsystems, a computer manufacturer that has been robbed twice in the past two years.

While armed robbery may seem consistent with the media image of the US, areas not best-known for their crime statistics such as the north of Scotland and the south of Ireland are no better off because they are big computer manufacturing locations. They, too, have many armed robberies; however, the statistics are not available because officials are keen not to discourage American and Asian companies from investing in the regions.

In the past year, the PC manufacturer AST Research and the microprocessor giant Intel have been targeted in Ireland. Recently, a van driver for Quantum, a disk-drive manufacturer in Dundalk, Co. Louth, was held at gunpoint and more than pounds 2.5m worth of disk drives was stolen. The driver was found handcuffed to a tree in Dublin's Phoenix Park. The disk drives turned up in Amsterdam a day later and were intercepted by the FBI in San Francisco by the end of the week.

The problem is so acute that the FBI estimates the market for stolen components to be worth $8bn a year. In Scotland, the cost of computer crime to businesses is estimated at around pounds 1bn a year. The police believe that the goods are being stolen to order.

Industry watchers believe that the computer manufacturers have been adding to the problem. "There has been a sort of unspoken conspiracy of 'ask no questions'," says Mr O'Loughlin. "If a computer manufacturer has been put on allocation by the microprocessor or SIMM [Single Inline Memory Module] manufacturer, then it will go get the parts wherever it can."

Stolen components often make their way to the "spot market", a commodities market for computer components, but they can do this via a number of routes. Spot market prices for the latest hardware tend to be higher than those of the manufacturers, but prices of components already released will be much lower than manufacturers' prices. While many of the components sold to the spot market are legitimate, many are not, according to the FBI.

Special Agent Richard Bernes, supervisor of the FBI's hi-tech squad in San Francisco, calls the component market the "grey market" because stolen goods are cut with legitimate goods in much the same way that drugs are cut with drug substitutes.

"There are many similarities between these businesses," says Agent Bernes. "These days, processors are used as currency by crime gangs. They are better than drugs or guns, because practically every police officer in the world will know what cocaine looks like but many would have never seen a computer chip before and possession of them is not illegal in itself."

The market exists because systems vendors sometimes over-order components from manufacturers, and dump the surplus on the spot market. Dealers will then try to sell the components to systems vendors who have underestimated their needs. When manufacturers have a shortfall of components, they will buy from the spot market as well. While the manufacturers blame the microprocessor dealers for the market, the dealers blame the manufacturers for creating the market in the first place.

"Intel makes its customers order microprocessors 90 days in advance," said Mr Jonovich. "Ninety days is a very long time in this business."

A spokesman for Intel Europe responded by saying that no company is doing more to combat computer crime. "We now put unique serial numbers on all our processors so that they can be tracked," says Michael Sullivan of Intel.

Companies such as IMS will buy the excess microprocessors and sell them to a third party (often a major systems vendor) that is short of processors. But while there are many reputable dealers such as IMS, there are many disreputable dealers who will buy from anybody if the price is right. "There are too many dealers out there," says Agent Bernes. "The last person in the chain may be completely legitimate. But what about the 10 dealers he has dealt with?"

However, Mr Jonovich admits that any component that enters his premises will be stripped of identifying marks. "IMS is the middle man," he explains. "Our suppliers rely on confidentiality. Many of them are large computer manufacturers whose shareholders would not be too happy if they knew they were buying processors from Intel and dumping them at a fraction of the price."

Every manufacturer has cause to dump product from time to time. Even IBM admitted that it has occasionally over-ordered or manufactured too much product for its needs. "But with us it's different," says Trevor Littlecott, UK security manager for IBM. "We have so many manufacturing operations that normally if we have overestimated our needs in Europe, we will find that we have underestimated our needs in the US or Asia."

"Stolen components can end up in any computer, including those supplied by the major manufacturers," says Agent Bernes. "The problem is that most stolen components are untraceable, so there is no way of knowing if you're buying them."

FBI officials reckon that much of the component theft in the US is carried out by Asian crime gangs in the San Francisco Bay area. Last February, the FBI carried out Operation West Chip and arrested a number of Vietnamese- American suspected gang members. "The problem with the Asian gangs is that it becomes international," says Sun's Mr O'Loughlin. "Components stolen in the Silicon Valley will probably be in Taipei or Hong Kong in a couple of days."

According to industry watchers, Taiwan and Hong Kong are ideal destinations for stolen components because there are thousands of small PC assembly operators that buy from the computer markets. In Taiwan, computer components are sold in Taipei's Kwang Hwa Computer Bazaar. Some traders openly admit that not all of the goods on sale were acquired legitimately. But Taiwanese crime organisations pose another major problem to both the industry and police forces. "Many microprocessors will test at a higher speed than their marking," says Kevin Carson, procurement director for Apricot Computers. "So many of the processors from Asia are remarked."

Last week, Cyrix Corp officials in Taiwan found Cyrix 5X86 and 6X86 processors on sale in Kwang Hwa Computer Bazaar at below cost price. It turned out that the processors were remarked IBM processors.

Whether processors are remarked or simply stolen, it is clear that the industry will have to organise itself to stop the illegal trade, according to Mr O'Loughlin.

"Some sort of major initiative needs to be taken," he says. "If we don't start working together to put pressure on the Government, and try and regulate some of the dealers, we're not only going to continue losing a lot of money, but we may put our employees' lives at stake." Meanwhile, industry watchers estimate that up to a third of all computers sold may contain stolen components.

Additional reporting by Terho Uimonen in Taipei.

Suggested Topics
Have you tried new the Independent Digital Edition apps?
Life and Style
ebookNow available in paperback
ebookA delicious collection of 50 meaty main courses
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.


ES Rentals

    iJobs Job Widget
    iJobs General

    Recruitment Genius: Telephone Sales Advisor - OTE £35,000

    £18000 - £35000 per annum: Recruitment Genius: A Telephone Sales Advisor is re...

    Recruitment Genius: Appointment Maker - OTE £20,000

    £14000 - £20000 per annum: Recruitment Genius: An office based Appointment Mak...

    Recruitment Genius: Healthcare Assistant

    £7 per hour: Recruitment Genius: This provider of care services is looking for...

    Recruitment Genius: Lettings Administrator

    £16000 per annum: Recruitment Genius: Purpose of Role: To co-ordinate maintena...

    Day In a Page

    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones
    Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

    Why are we addicted to theme parks?

    Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
    Tourism in Iran: The country will soon be opening up again after years of isolation

    Iran is opening up again to tourists

    After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
    10 best PS4 games

    10 best PS4 games

    Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
    Transfer window: Ten things we learnt

    Ten things we learnt from the transfer window

    Record-breaking spending shows FFP restraint no longer applies
    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent