Intelligence

1993 Congressional Hearings
Intelligence and Security

                                 TESTIMONY
                                    BY
                             STEPHEN T. WALKER
                                 PRESIDENT
                     TRUSTED INFORMATION SYSTEMS, INC.
                                    FOR
          SUBCOMMITTEE ON ECONOMIC POLICY, TRADE AND ENVIRONMENT
                       COMMITTEE ON FOREIGN AFFAIRS
                       U.S. HOUSE OF REPRESENTATIVES
                             OCTOBER 12, 1993
Good Afternoon.  I am pleased to testify today about the negative
impact that U.S. export control regulations on cryptography are
having on one of the few industries where the U.S. remains
dominant worldwide:  the information system software industry.
The major points of my testimony are that U.S. export controls do
not prevent the international availability of good quality
cryptography but do penalize the U.S. software industry and U.S.
business in general.
My name is Stephen T. Walker.  I am the founder and President of
Trusted Information Systems (TIS), Inc., a ten year old firm with
85 employees.  With offices in Glenwood, MD; Los Angeles, CA;
Mountain View, CA; Minneapolis, MN; and London, UK, TIS
specializes in research, product development, and consulting in
the fields of computer and communications security.  I am also
here representing the Software Publishers Association (SPA) and
its members on this most important topic.
The SPA is the principal trade association of the personal
computer software industry.  Since 1984, it has grown to over
1,000 members, representing the leading publishers in the
business, consumer, and education software markets.
My background includes twenty-two years as an employee of the
Department of Defense, with the National Security Agency (NSA),
the Defense Advanced Research Projects Agency, and the Office of
the Secretary of Defense.  During my final three years in
Government, I was the Director of Information Systems for the
Assistant Secretary of Defense for Communications, Command,
Control, and Intelligence (C3I).
In 1983, I left Government service and began my own consulting
firm, specializing in the area of information systems security.
My company has experienced steady growth and now offers a variety
of products with improved information security for military and
civilian applications in addition to our continuing consulting
activities.  Several of these products are adversely affected by
U.S. Government export controls, as are the products of many SPA
members.
For the past two years, I have been a member of the Computer
System Security and Privacy Advisory Board (CSSPAB), chartered by
Congress in the Computer Security Act of 1987 to advise the
Executive and Legislative Branches on matters of national concern
in computer security.  In March 1992, the Board first called for
a national review of the balance between the interests of law
enforcement/national security and those of the public regarding
use of cryptography in the United States.  The Board has been
heavily involved in this review, receiving public input on the
Administration's Clipper Initiative, announced by the President
on April 16 of this year.  Participation in the Board's review
has been highly beneficial in helping me form my opinions in this
area.
OVERVIEW
The focus of attention at today's hearing is the negative impact
that U.S. export controls on cryptography are having on the U.S.
computer industry.  In May 1992, I testified before the House
Judiciary Committee, Subcommittee on Economic and Commercial Law
hearings, on the impact of U.S. export laws on our industry's
ability to protect itself from foreign industrial espionage.  I
also participated in similar hearings in July 1991 and June 1990
in which this topic was of major importance.  The export control
subject continues to arise in different contexts, but the
difficult problems lurking behind it are always the same.
The stakes for the software industry are high.  The U.S. holds
75% of the global market for packaged software.  Most software
companies make 35-40% of their revenue from exports; for some
companies exports are as much as 50% of their business.  When
demand for cryptographic products is increasing, export
restrictions essentially place an "earnings cap" on U.S. software
publishers.
A National Dilemma
The basic issue is a dilemma of truly national proportions
between the long standing and vital interests of our Government
to learn as much as it can about its adversaries--be they
criminals, terrorists, or other governments--on the one hand, and
the basic right to privacy that all Americans assume they have
and are seeking to extend to their personal and business
communications, whether by telephone, electronic mail, or other
forms of computer communications.
The resolution of this dilemma will have enormous impact on our
country for decades to come.  The Government's national security
interests contend that if good quality cryptography were to
become widely available in this country and the world, our
ability to wiretap criminals and listen in to terrorists and
other adversaries would be severely hurt.  Those seeking improved
privacy protection argue that encryption is needed to support
worldwide business operations and good quality cryptography is
already available worldwide.  Continuing U.S. Government
restrictions are only penalizing U.S. users with inferior U.S.-
developed security products and limiting U.S. industry from
participating in a rapidly growing international marketplace.
Technology Has Shifted
The core of the issue is a shift in technology over the past
twenty years that has fundamentally altered both business
communications needs and an advantage that law enforcement and
national security interests have enjoyed since the earliest days
of electronic communications.  Before radio and telephone
communications, governments had to resort to intercepting mail
and notes carried by spies to learn their adversaries' plans.
When electronic communications became prevalent, governments
found they could intercept those communications relatively easily
with very useful results.  When encryption was applied to these
communications, it became more difficult to make sense of them,
but that turned into a test of wits among the mathematicians of
various countries.  Some were more successful than others.
During the time up to the 1980s, this behind-the-scenes struggle
was waged among governments with little if any effect on
individuals or business communities.  But technology shifts
beginning in the early 1980s and accelerating at breathtaking
rates today resulted in vast computer communications and security
capabilities for industrial and personal use worldwide and at the
same time have made it much harder for law enforcement and
national security interests to continue their interception roles.
As we struggle to understand the complex issues confronting us in
this dilemma, we must recognize that even if U.S. commercial and
private interests were willing to forgo their right to private
communications and U.S. computer manufacturers were willing to
drop out of the international market for information products
employing good quality security protection, the ability of the
Government to decrypt the communications of its adversaries will
continue to diminish at ever increasing rates over the
foreseeable future, no matter what measures, such as employing
key escrow techniques or outlawing cryptography, our Government
may choose to take.
The technology shifts we are seeing here have interesting
parallels to those in the field of radar.  Since the beginning of
World War II, radar has played an essential role in defending
against attacks from the air.  But recent technology shifts have
produced stealth capabilities that for now, at least, effectively
defeat radar.  We will soon face an equivalent dilemma as stealth
measures become widely available:  how to prevent drug dealers,
terrorists, and other adversaries from using them to enter our
country undetected.  We could require that all aircraft have some
form of reflector that will guarantee that the Government can
detect them whenever it has the need, but it is unlikely that
those who wish to enter our airspace undetected will comply with
such requirements.
We must recognize that those who wish to protect their
communications from eavesdroppers will increasingly be able to do
so.  We must be careful not to continue to insist on misguided
measures to try to retain decryption capability that will
inevitably be eroded by technology, no matter how important we
feel that capability may be.
The Congress Must Act Now!
The principal vehicle that the Government's law enforcement and
national security interests have used to maintain the balance on
their side of this dilemma over the years has been the imposition
of strict export control measures on all cryptographic products
leaving this country.  In light of the ongoing and inevitable
technological shift toward better protection mechanisms and
increasing business communications needs, a review of this policy
is urgently needed.  Such a review must be conducted by someone
willing to understand the needs of both sides of the issue.
Based on our experiences to date, I am convinced that the U.S.
Congress is the only organization with the authority and balanced
perspective to tackle such a tough issue.  I hope that these
hearings will be the beginning of a true national debate of this
most vital issue.
I would like to begin my testimony with a review of how these
export controls came into place and why they made good sense in
an earlier time but not necessarily now.  I will then discuss the
widespread and rapidly growing foreign availability of
cryptographic products that is making this technological shift so
hard for our intelligence capabilities.   Following this, I will
review the highly negative effect that U.S. export controls are
having on U.S. industries and the average U.S. citizen.
WHY DO WE HAVE EXPORT CONTROLS ON CRYPTOGRAPHY?
The method that governments have used for most of this century to
protect the privacy of their electronic communications and that
has gradually become available to individuals throughout the
world is called cryptography:  the scrambling of data prior to
transmission (encryption) and unscrambling upon receipt
(decryption).
As governments came to rely upon cryptography to protect their
vital communications, groups of highly skilled mathematicians
were assembled by the same governments to attempt to break the
encrypted communications of their adversaries.
In David Kahn's 1973 book, The Codebreakers, he states:
     Codebreaking is the most important form of secret
     intelligence in the world today.  It produces much more and
     much more trustworthy information than spies, and this
     intelligence exerts great influence upon the policies of
     governments.
Few would argue that this statement remains just as true today as
when it was written.
Export Controls Were Essential Initially
All modern governments face the difficult competing tasks of
having good enough encryption capabilities to protect their own
communications while trying to defeat the encryption capabilities
of their adversaries.  As encryption hardware devices became
readily available, governments had to control where these devices
went in order to limit the availability of good cryptography to
hostile adversaries.  Export control on encryption devices became
an integral part of the Department of State munitions control
process, where it remains today.
With the advent of computers, the ability to perform encryption
functions using software programs rather than hardware made
encryption more readily available and its export control more
difficult.  In the 1970s, efforts to improve the protection of
domestic sensitive information led to publication of encryption
algorithms such as the Federal Information Processing Standard
(FIPS) Data Encryption Standard (DES) algorithm, which, while
intended to be implemented only in hardware, quickly became
available throughout the world in software.
Personal computers gave individual users direct access to the
vast power of the computer and led to a revolution in how
businesses operate.  Now highly sensitive corporate plans and
financial information flow freely over the phone lines among
clusters of computers, and users are demanding improved security
for their sensitive information from their software suppliers.
The natural result of this evolution is the need to include good
quality encryption capabilities within modern software products
for sale to multinational corporations worldwide.  However,
governments still want to control where encryption devices go in
order to limit the availability of good quality encryption to
hostile adversaries.
But Times Have Changed
So a problem that twenty years ago only affected governments and
that led to the harsh export control restrictions presently in
place on encryption now threatens the ability of U.S. citizens
and businesses to protect their own sensitive information and the
ability of the U.S. software industry to market the products that
its multinational customers are demanding.  This is truly a
dilemma of national proportions that cannot be left solely in the
hands of the national security interests to resolve.
Few would argue that the Government should not continue listening
to the communications of its adversaries.  But now that we have a
worldwide economy with massive amounts of sensitive information
flowing in all directions at all times, few are willing to give
up the ability to provide reasonable protection to their own
information in order to help the Government eavesdrop.
"Listening In" Will Keep Getting Harder
Even if we could forgo our personal and business privacy needs
for the sake of the national security interests, the continuous
evolution of technology has already made it harder to listen in
to those who do not want to be heard than it was even a year ago.
And that evolution will continue to make it even harder next year
and in every year that follows.
The same technologies that have brought about the personal
computer revolution are making good quality cryptography
available worldwide, and those people, businesses, and
governments that choose to protect their communications can now
do so quite effectively and at reasonable cost.  The task of
listening in to others is becoming more and more difficult every
day in spite of extensive export controls.
The widespread availability of encryption products worldwide will
make it ever harder to decrypt the communications of adversaries
who do not want to be heard, with or without excessive export
control measures.
It is important to note that whether the U.S. Government drops
export controls altogether on encryption products or attempts to
impose absolute restrictions even on domestic use of encryption,
the task of law enforcement and the national security community
to listen in to our adversaries is going to get progressively
harder day by day.
Now Export Controls Are Harmful to the Nation
Export controls served a useful purpose following World War II
and up to the early 1980s.  They protected the Government's
interests and did not interfere with the interests of private
citizens and commerce.  Since cryptography has become an
important tool for protecting the sensitive information of
everyone, not just governments, and since the technology to
implement good quality cryptography has now become readily
available worldwide, export controls on good quality cryptography
are no longer needed and are highly detrimental to the interests
of the nation.
HOW WIDESPREAD IS CRYPTOGRAPHY WORLDWIDE?
Since the publication of the Data Encryption Standard as a U.S.
Federal Information Processing Standard in 1977, cryptography has
shifted from the exclusive domain of governments to that of
individuals and businesses.  DES in both hardware and software
implementations is the de facto international standard against
which all other algorithms are measured.
DES must be recertified as a FIPS every five years.  In 1982, it
was recertified without controversy.  In 1987-1988, NSA
recommended against recertification except for specialized use
such as banking, but the recertification proceeded.  This year
the recertification is before the Secretary of Commerce awaiting
approval.  If approved, software implementations of DES will be
allowed for the first time.
DES was adopted by the U.S. and international banking community
shortly after its publication as a FIPS.  The banking community
fought for and obtained the right to export DES for financial
uses, primarily integrity checks but also for banking
confidentiality uses, and the right to generate their own keying
material (the random numbers that initialize the
encryption/decryption processes) without relying on any other
Government agency.
In the mid 1980s, DES was proposed as an international standard
by the International Standards Organization (ISO) as Data
Encryption Algorithm-1 (DEA-1).  Final approval was not made
because of an appeal by the U.S. suggesting that the ISO should
not approve any specific algorithms but leave that decision to
individual nations.
The availability of DES and the controversy that arose as soon as
it was published concerning whether it had weaknesses that NSA
could exploit fostered the highly fruitful academic research into
public key cryptography in the late 1970s.  Public key algorithms
have the major advantage that the sender does not need to have
established a previous secret key with the recipient for
communications to begin.  Public key algorithms such as RSA have
become as popular and widely used as DES throughout the world for
integrity, confidentiality, and key management.
SPA Study of Availability of Cryptography
The Administration has asserted that export controls are not
harming U.S. firms by causing them to lose market shares because
there are no foreign products and programs available.
Implementations of DES, RSA, and newer algorithms such as the
International Data Encryption Algorithm (IDEA), an algorithm that
has a key length more than twice that of DES, are available
routinely on the Internet from sites all over the world.  But
according to the Administration, these do not count as commercial
products.
In order to develop a definitive assessment of just how
widespread cryptography is in the world, in May of this year, the
SPA commissioned a study of products employing cryptography.
There was a significant amount of knowledge about specific
products here and there, but no one had ever tried to assemble a
comprehensive database with, where possible, verification of
product availability.
The SPA research team focused exclusively on products providing
text, file, and data communications encryption capabilities and
on programs and products using DES or its equivalent, i.e., the
precise products subject to export restrictions.  We did not
include facsimile and voice encryption products.  The team
obtained information from product literature, reference guides,
industry surveys, trade press and journal articles, and responses
to requests for information from SPA members, cryptography
experts, and information requests put on the Internet.
Whenever possible, the team followed up information with requests
for product literature.  This was carefully scanned by at least
two independent project members, and the data was prepared for
entry into the database.  To the greatest extent possible, phone
calls have been made to vendors to clarify ambiguous technical
information.
Information on new products continues to flow in daily but as of
October 12:
     o    We have identified 264 foreign hardware, software, and
          combination products for text, file, and data
          encryption from 21 foreign countries: Argentina (1),
          Australia (18), Belgium (8), Canada (16), Denmark (14),
          Finland (1), France (5), Germany (33), Hong Kong (1),
          India (1), Ireland (1), Israel (10), Japan (2), the
          Netherlands (15), New Zealand (1), Norway (1), Russia
          (8), South Africa (7), Sweden (17), Switzerland (18),
          and the United Kingdom (86).
     o    Of these 264 products, 123 employ DES.
     o    We have confirmed the availability of 58 foreign
          encryption software programs and kits that employ the
          DES algorithm.  These are published by companies in
          Australia, Belgium, Canada, Denmark, Finland, Germany,
          Israel, the Netherlands, Russia, Sweden, Switzerland,
          and the United Kingdom.  We know some have distributors
          in other foreign countries and in the United States;
          one, a UK company, has distributors in 13 countries
          (Bahrain, Denmark, France, Greece, Ireland, Italy,
          Malta, the Netherlands, Norway, Singapore, Spain,
          Sweden, and Yugoslavia).  One in Germany has
          distributors in 14 countries (Australia, Austria,
          Belgium, Canada, France, Italy, the Netherlands,
          Norway, Spain, Sweden, Switzerland, Turkey, the UK, and
          the U.S.).  The programs are installed by the user
          inserting a floppy diskette; the kits enable encryption
          capabilities to be easily programmed into a variety of
          applications.
A complete listing of all confirmed products in the database is
identified in Attachment 1.
We have ordered and taken delivery on products containing DES
from four countries: Denmark, Germany, Israel, and the United
Kingdom.
Foreign customers increasingly recognize and are responding to
the need to provide software-only encryption solutions.  Although
the foreign encryption market is still heavily weighted towards
encryption hardware and hardware/software combinations, the
market trend is towards software for reasons of cost,
convenience, and space.
     o    On the domestic front, we have identified 288 products,
          of which 142 employ DES.  Thus, at least, 142 products
          are unable to be exported, except in very limited
          circumstances, to compete with the many available
          foreign products.
     o    In total, we have identified to date 552 cryptographic
          products, developed or distributed by a total of 366
          companies (211 foreign, 155 domestic) in at least 33
          countries.
DES is also widely available on the Internet, and the recently
popularized Pretty Good Privacy (PGP) encryption software
program, which implements the IDEA, also is widely available
throughout the world.
The ineffectiveness of export controls is also evident in their
inability to stop the spread of technology through piracy.  The
software industry has a multibillion dollar worldwide problem
with software piracy.  Mass market software is easy to duplicate
and easy to ship via modem, suitcase, laptop, etc.  Accordingly,
domestic software products with encryption are easily available
for export--through illegal but pervasive software piracy--to
anyone who desires them.
It cannot be any clearer:  the existence of widespread and
affordable cryptographic products overseas is an indisputable
fact.  Based on that fact, unilateral U.S. export controls keep
U.S. firms from competing in the global marketplace.
Foreign customers who need data security now turn to foreign
rather than U.S. sources to secure that need.  As a result, the
U.S. Government is succeeding only in crippling a vital American
industry's exporting ability.
Following the first publication of the cryptographic database at
the Advisory Board meeting on June 2, the Administration
requested a meeting with the SPA research team to review their
approach and findings.  This meeting was held on July 1, 1993, at
the Department of Commerce and involved Government
representatives from the Department of Commerce and NSA.  The
team described both their technique for gathering and cataloging
the information and the latest results.  At the conclusion of the
meeting, it appeared that the Administration representatives were
satisfied that a valid survey process was being carried out.
At the second meeting of the Advisory Board on July 29, a
Government representative of the Administration indicated that
the mere availability of products overseas was not sufficient,
that what was needed was an assessment of the market impact of
those products.  It is important to note to the contrary, though,
that the Department of Commerce, in similar deliberations,
requires only the demonstrated existence of foreign products, not
an assessment of their market share.  It would seem that no
matter how much information is acquired at what level of detail,
the Administration will request more to delay further action.
Nevertheless, the study begun in May by the SPA will continue to
collect additional information on cryptographic product
availability and to periodically publish its results to help
focus attention on this important and often ignored situation.
We would welcome Government participation in this ongoing effort
to ensure the maximum coverage of available products and maximum
utility to the Government.
Frequently Heard Arguments
One argument that is frequently heard to justify continued export
controls is that cryptographic products are not available outside
the U.S. so U.S. software and hardware developers are not hurt by
export controls.  The statistics from the SPA survey (264 foreign
products, 123 using DES) prove that this argument is patently
false!
A second argument is that even if products are available, they
cannot be purchased worldwide.  This is also patently false!
We have found 366 companies in 32 foreign countries and the U.S.
that are manufacturing, marketing, and/or distributing
cryptographic products, most on a worldwide basis.  The names of
these companies are listed in Attachment 2.
A third argument frequently heard is that the products sold in
other parts of the world are inferior to those available in the
U.S.  Again, the results of our survey show this to be patently
false!
We purchased products from several sources throughout the world.
We ordered DES-based PC file encryption programs for shipment
using routine channels from:
     o    Algorithmic Research Limited (ARL), Israel
     o    Sophos Ltd., UK
     o    Cryptomathic A/S, Denmark
     o    CEInfosys GmbH, Germany
     o    uti-maco, Germany
     o    Elias Ltd., Russia (distributed through EngRus Software
          International, UK)
All the products we ordered were shipped to us in the U.S. within
a few days.  The German products were sent to us directly from
their U.S. distributors in Virginia and Connecticut,
respectively.  Our experience has been that if there is paperwork
required by the governments in which these companies operate to
approve cryptographic exports, it is minimal and results in
essentially immediate approval for shipping to friendly
countries.
The products we obtained from these manufacturers and
distributors were in every case first rate implementations of
DES.  To better understand if foreign products are somehow
inferior, we tried to order the same Sophos product from their
Bahrain distributor.  We were informed by the distributor that
since we were outside his area, he could not sell directly to us.
He then told us that everything he sells is shipped directly from
the manufacturer in England.
The uti-maco U.S. distributor in Connecticut indicated that he
could ship us his German made product immediately (we received it
the next day), without needing any further approval from the
German parent company or the German government.  Apparently, the
Germans have a form of blanket approval for sale to anyone in the
U.S.  I asked if that was true elsewhere in the world and the
representative told me that while he dealt only in the U.S., he
believed that this was true.
We have no indication that products being shipped to the U.S. or
the rest of the world from foreign manufacturers or distributors
are in any way inferior to products available in the U.S.
Others Use Different Rules
But our survey results also point to a much more ominous finding!
Apparently the controls imposed by the U.S. Government on export
of cryptographic products from the U.S. are far more restrictive
than those imposed by most other countries including our major
allies.  The effect of this most unfortunate situation is to
cripple U.S. industry while our friends overseas are essentially
free to export as they wish.
The U.S. imposes very strict rules on the export of cryptographic
products.  In general, applications for the export of products
that use DES will be denied even to friendly countries unless
they are for financial uses or for U.S. subsidiaries.  We have
been told repeatedly by the U.S. Government that other countries
such as the United Kingdom and Germany have the same export
restrictions that the U.S. does.
But our experiences with these purchases of cryptographic
products show a very different picture.
Companies in the UK, Germany, Denmark, and Israel can freely ship
DES products to the U.S. and presumably elsewhere in the world
with no more then a few days of government export control delay,
if any.  The claim is they have to "fill out some papers," but
it's no big problem.
Based on our experiences to date, I conjecture that these
countries are using CoCom (the Coordinating Committee of western
nations and Japan) rules for determining where to allow exports.
If this conjecture is true, most countries in the free world can
readily receive exports from these countries.  I speculate that
companies in these countries are required to fill out export
forms but if they can show that the destination country is not
proscribed by CoCom or their local equivalent, they can ship
without waiting for further government approval.  Every
experience we have had supports this supposition.
Whether my theory is correct or not, our experience with these
purchases has demonstrated conclusively that U.S. business is at
a severe disadvantage in attempting to sell products to the world
market.  If our competitors overseas can routinely ship to most
places in the world within days and we must go though time
consuming and onerous procedures with the most likely outcome
being denial of the export request, we might as well not even
try.  And that is exactly what many U.S. companies have decided.
And please be certain to understand that we are not talking about
a few isolated products involving encryption.  More and more we
are talking about major information processing applications like
databases, electronic mail packages, and integrated software
systems that must use cryptography to provide even the most basic
level of security being demanded by multinational companies.
Demonstrations of Available Cryptographic Products
We have before us today several examples of cryptographic
products that were lawfully obtained in the United States from
foreign vendors:
     o    AR DISKrete:  produced by Algorithmic Research Limited
          (ARL), Israel.
               Uses DES disk/file encryption to provide PC
               security and access control.
     o    EDS:  produced by Sophos Ltd., UK.
               DES-based PC file encryption package.
     o    F2F (File-to-File):  produced by Cryptomathic A/S,
          Denmark.
               DES-based PC file encryption utility.
     o    Softcrypt:  produced by CEInfosys GmbH, Germany.
               DES-based PC file encryption utility.
     o    SAFE-GUARD Easy:  produced by uti-maco, Germany.
               DES-based PC file encryption utility.
     o    EXCELLENCE for DOS:  produced by Elias Ltd., Russia
          distributed through EngRus Software International, UK.
               GOST-based (Russian DES equivalent) PC file
               encryption utility.
We also have a demonstration of the power of the digital
revolution and the impact it will have on all our communications
in the future.  Traditionally, when we think of voice
communications, we think of the telephone in its many forms
(desk, cordless, cellular, car).  However, many modern computer
workstations now have the ability to carry voice as well as other
multimedia communications.  Routinely today on the Internet,
voice conferences are held over packet switched communications
networks.
Today we have a demonstration using two workstations that come
with software to digitize voice communications, packetize it for
transmission over a network, and resynthesize it into perfectly
good (sometimes better than phone quality) voice.  Systems like
these are being used daily for voice conferencing over networks
around the world.
With this capability, it is straightforward to protect phone
conversations from eavesdroppers. Since all the capabilities are
performed in software, it is trivial to add an encryption
algorithm, such as the Data Encryption Standard, to the software
and provide good quality encryption to the digitized, packetized
speech.  Today we have DES versions from Finland, Sweden,
Australia, and the U.S.
HOW IS U.S. INDUSTRY BEING AFFECTED BY EXPORT CONTROLS?
TIS Experiences
To begin this section, I would like to give several examples of
experiences that my company has had recently in dealing with the
export control process.
Trusted Information Systems is a member of the Internet community
and has implemented a version of the Internet Privacy Enhanced
Mail (PEM) system, which it is offering free to users on the
Internet and for sale to commercial users under the name Trusted
MailTM.  Several hundred Internet users have retrieved the PEM
source code, and many of them are using it on a daily basis.  Our
experiences with PEM illustrate the variety of frustrations,
confusion, and lost opportunities that confront U.S. businesses
in the area of international cryptographic products.
PEM is based on international Internet specifications developed
over the past five years by a team of researchers from throughout
the world.  In its present version, PEM uses DES for
confidentiality and RSA for signature and key management.  As
such, it does not meet the U.S. Department of State requirements
for export outside the U.S. or Canada.
In order to establish a distribution system for PEM similar to
that of other software products on the Internet, TIS reviewed
various techniques that universities and other companies have
used.  The "anonymous FTP" approach, in which a user who does not
have an account is allowed to log on to the computer containing
the information and perform a file transfer of the specific
program files, was considered the best choice.  Such techniques
are routinely used throughout the Internet, but in the case of
software that is subject to export controls, one must be
concerned that individuals outside the U.S. and Canada may
attempt to retrieve the programs.  The problem is how to identify
whether someone who is anonymous is approved to retrieve the
software or not.
As had been done earlier by others, we have created a "READ ME"
file that the person seeking the software must read before
retrieving the PEM program.  The reader is cautioned that if he
or she is not from the U.S. or Canada, it is against U.S. export
law to proceed.  The file name of the PEM programs contained in
the "READ ME" file is changed frequently to force the anonymous
user to read the export control caution.  We also installed
filters that automatically refuse requests that are clearly
coming from outside the U.S. or Canada.  But we know that those
filters cannot stop inquiries from foreign sources that have
accounts in the U.S.  To the best of our knowledge, our approach
is as sound as many that others are using and better than most.
Before we put the system on line, though, we sought the approval
of the Department of State and the National Security Agency.
Initially we got acknowledgements to our phone calls describing
our problem and proposed solution.  We were told orally at one
time that because the PEM software was "free," it was permissible
to proceed this way, implying that if we charged for it, somehow
this process would not be approved.  But as we began to seek
official approval for this process, we received fewer and fewer
responses.  Our inquiries finally took the form of:  "Unless you
tell us not to do this, this is how we intend to proceed." On
June 1, 1993, we put the anonymous FTP process on line, and our
system has responded to hundreds of requests.  We have never
received acknowledgement that the process is either acceptable or
unacceptable to the Government despite being told on several
occasions that we would receive such acknowledgement.
The above described process is patterned after a similar process
that takes place now in software retail stores.  Programs for
sale over the counter containing DES or similar export controlled
software are supposed to be marked with explicit and obvious
labels telling the buyer that these products cannot be taken from
the U.S. or Canada.  The burden of complying with the export laws
rests entirely with the buyer since the seller has no
responsibility to ascertain whether the buyer is a U.S. or
Canadian citizen.  One has to wonder if these prominent notices,
rather than advising buyers to beware, do not guide the foreign
buyer, who is not concerned with violating U.S. export laws,
directly to the product he or she wishes to buy.
A second situation of interest involves a potential major
customer of PEM, the British Ministry of Defence (MoD).  For
several years, TIS has been discussing PEM with officials in the
MoD for use with unclassified information among MoD users and
their industrial suppliers.  TIS has a perfectly good solution to
MoD's problems and could have had it running there years ago.
Unfortunately, we cannot export PEM even to the British MoD
because PEM uses the DES and RSA encryption algorithms.
Last year, the SPA succeeded in obtaining expedited export
approval for software products that use cryptography so long as
the key length is 40 bits or less.  While this was a significant
accomplishment, since it was the first time that any cryptography
for confidentiality was given general export approval, the
victory was short lived.  Forty-bit key algorithms can be
exhaustively searched in very short times.  If a device could be
built to exhaustively search a 56-bit key space (DES) in 176
years, it would take less than 1 day to search a 40-bit key
space.  Foreign customers for U.S. products who already have DES
readily available laughed at the 40-bit U.S. restriction.  TIS
produced a 40-bit version of Trusted Mail and obtained the
expedited Department of State export approval but to date has
been unable to find a foreign (or domestic) customer willing to
accept the weak 40-bit key length.
After spending much energy searching for plausible solutions to
this problem, our newly formed Trusted Information Systems (UK)
Limited office has contracted with British scientists to
implement a new UK version of PEM based on the same international
specifications and using DES and RSA algorithms that are already
available in the UK.  In a very real sense, this situation
demonstrates that the only accomplishment of U.S. export control
restrictions is the export of U.S. jobs.
To make matters even worse (in the job export sense, at least),
because of provisions in the UK export laws, it appears that we
can import the UK product for sale in the U.S., something we
would never be able to do in reverse.
These examples of problems with the export control process or its
consequences are typical of the situations many U.S. companies
find as they attempt to enter the world of software cryptography.
Industrywide Experiences
Some companies do try to compete and offer excellent DES-based
products in the U.S.  But because of the export restrictions,
they must develop weaker versions for export if they wish to
pursue foreign markets.  Many companies forgo the business rather
than spend extra money to develop another inferior product that
cannot compete with products widely available in the market.
The Government already has a measure of lost sales and
dissatisfied customers in the number of State Department/NSA
export license applications denied, modified, or withdrawn.
However, it is impossible to estimate accurately the full extent
of lost sales.  Many potential customers know that U.S. companies
cannot meet their demand and thus no longer inquire.  Conversely,
some companies have given up even trying to get export approvals
for DES to meet customer demand.
Gauging the extent of economic harm to companies is an inherently
difficult task because most companies do not want to reveal that
sort of information.  Consequently, there exists only anecdotal
information.  But the accumulation of anecdotal information
collected by the SPA paints a picture of three ways in which the
export controls on cryptographic products are hurting American
high-tech industry.
(1)  First, for many data security companies, every sale is
vital, and the loss of contracts smaller than $1 million can
often mean the difference between life and death for these
companies.  The confusion and uncertainty associated with export
controls on encryption generate severe problems for small firms,
but not as severe as the loss of business they suffer from anti-
competitive export controls.  Examples abound:
     o    One U.S. company reported loss of revenues equal to a
          third of its current total revenues because export
          controls on DES-based encryption closed off a market
          when its customer, a foreign government, privatized the
          function for which the encryption was used, and the
          U.S. company was not permitted to sell to the private
          foreign firm.  The company estimates it loses millions
          of dollars a year because it receives substantial
          orders every month from various European customers but
          cannot fill them because of export controls.
     o    One small firm could not sell to a European company
          because that company sold to clients other than
          financial institutions (for which export controls grant
          an exception).  Later, the software firm received
          reports of sales of pirated copies of its software.
          This constituted a loss of a $400,000 contract for the
          small U.S. software firm.
     o    Because of existing export restrictions, an American
          company recently found itself unable to export a mass
          market software program that provided encryption using
          Canadian technology based on a Japanese algorithm.  Yet
          other European and Japanese companies are selling
          competing products worldwide using the same Canadian
          technology.
     o    An SPA member's product manager in Europe reported the
          likely loss of at least 50% of its business among
          European financial institutions, defense industries,
          telecommunications companies, and government agencies
          if present restrictions on key size are not lifted.
     o    Yet another SPA member company reported the potential
          loss of a substantial portion of its international
          business if it cannot commit to provide DES in its
          programs.
     o    A German firm that opened a subsidiary in the U.S.
          sought a single source encryption software product for
          both its German and U.S. sites.  A U.S. data security
          firm that bid for the contract lost the business
          because U.S. export controls required that the German
          firm would have to wait approximately six months while
          a license was processed to sell them software with
          encryption for foreign application.  The license could
          only be for one to three years, the three year license
          being more expensive.  Consequently, the German firm
          ended up purchasing a DES-based system from another
          German company, and the U.S. firm lost the business.
     o    A foreign government selected one software company's
          data security product as that government's security
          standard.  The company's application to export the DES
          version was denied, and as a consequence the order was
          lost.  This cost the company a $400,000 order and
          untold millions in future business.
(2)  Second, multinational corporations (MNCs) are a prime source
of business in the expanding international market for encryption
products.  Many U.S.-based firms have foreign subsidiaries or
operations that do not meet export requirements.  While U.S.
products may be competitive in the U.S., many MNCs obtain from
foreign sources encryption systems that will be compatible with
the company's worldwide operations.  Moreover, foreign MNCs
cannot rely on the availability of U.S. products and have been
known to import foreign cryptography for use in their U.S.
operations.
     o    One U.S. firm reports the loss of business from foreign
          MNCs that will not integrate the company's products
          into their U.S. operations because of the export
          restrictions that would prevent them from being
          compatible with their domestic operations.
     o    The Computer Business Equipment Manufacturers
          Association reports that one of its members was denied
          an export license and lost a $60 million sale of
          network controllers and software for encryption of
          financial transactions when the Western European
          customer could not ensure that encryption would be
          limited to financial transactions.
(3)  Third, encryption systems are frequently sold as a component
of a larger system.  These "leveraged" sales offer encryption as
a vital component of a broad system.  Yet the encryption feature
is the primary feature for determining exportability.  Because of
the export restrictions, U.S. firms are losing the business not
just for the encryption product but for the entire system because
of the restrictions on one component of it.
     o    One data security firm has estimated that export
          restrictions constrain its market opportunities by two-
          thirds.  Despite its superior system, it has been
          unable to respond to requests from NATO, the Swedish
          PTT, and British telecommunications companies because
          it cannot export the encryption they demand.  This has
          cost the company millions in foregone business.
     o    One major computer company lost two sales in Western
          Europe within the last 12 months totaling approximately
          $80 million because the file and data encryption in the
          integrated system was not exportable.
One possible solution to the problem of export controls may be
for U.S. companies to relocate overseas.  Some U.S. firms have
considered moving their operations overseas and developing their
technology there to avoid U.S. export restrictions.  Thus, when a
U.S. company with technology that is clearly in demand is kept
from exporting that technology, it may be forced to export jobs
instead.
HOW ARE U.S. CITIZENS AND BUSINESSES BEING AFFECTED BY ALL THIS?
The answer to this question is painfully simple.  When U.S.
industry forgoes the opportunity to produce products that
integrate good security practices, such as cryptography, into
their products because they cannot export those products to their
overseas markets, U.S. users (individuals, companies, and
Government agencies) are denied access to the basic tools they
need to protect their own sensitive information.  This is where
the greatest frustration sets in.
The U.S. Government established export controls in order to keep
good quality cryptography from proliferating outside the U.S.
The result has been exactly the opposite effect.  Good quality
cryptography is now available everywhere in the world including
the U.S.  But U.S. customers cannot buy it integrated into the
information system products they normally use because U.S. export
laws discourage U.S. suppliers from developing such products.
We seem caught in a vicious circle that appears to make sense
only to those who do not want to see good quality cryptography
used anywhere.
WHAT EFFECT WILL CLIPPER HAVE?
In the midst of all of this, on April 16, 1993, the President
announced the Clipper initiative to ensure the public's right to
privacy while allowing law enforcement to conduct lawful
wiretaps.
The principal concern of many with Clipper is the potential it
has for violating the privacy of citizens.  In his April 16
announcement, the President stated that "The Administration is
committed to policies that protect all Americans' right to
privacy while also protecting them from those who break the law."
It would appear that the only way both aspects of this policy can
be carried out is if the individual's right to privacy is
superseded by the Government's right to listen in whenever the
Government chooses.  Many people fear that this isn't much of a
right to privacy.
There are many other concerns that have been expressed about the
Administration's Clipper Initiative and the negative aspects of
key escrow.  But with respect to the issue of export restrictions
on software products, Clipper represents primarily a distraction
only serving to cloud the issues.  Unless Clipper is made
mandatory, its requirement to use hardware and its key escrow
provisions will cause it to have little impact on the software
market.  No one will willingly give up the convenience of
integrated software encryption for an expensive hardware box that
will let the Government listen in.
The international aspects of Clipper are not at all thought out.
Even if Clipper were exportable, the fact that the U.S.
Government will hold the keys and not share them with other
governments ensures that this will be no more successful overseas
than the 40-bit key length "solution."
Clipper is a major diversion that does not solve any of the
problems discussed above.
WHAT CAN BE DONE?
Many Calls for Action
Many people have been clamoring about the need to relax export
controls on encryption for years.  The National Research Council
has recently issued four reports expressing serious concern in
this area (Attachment 3).
The computer industry has been complaining ever more loudly for
ten years.
The Congressionally chartered Computer System Security and
Privacy Advisory Board has called for a national review of these
issues involving Government (civilian, law enforcement, and
national security interests) and industry (users and vendors).
The Advisory Board passed resolutions on the need for a national
review and expressing serious concerns about the Clipper
Initiative (Attachment 4).
The Administration has formed an Interagency Review at the
request of the President to look at all aspects of the
cryptography issue including export control.  This review is the
highest level investigation of this problem to date.  Its report
is due out any time, within days or weeks.  Unfortunately, the
review is being conducted from behind closed doors with the only
public input coming through the auspices of the Advisory Board
and such industry groups as the Digital Privacy and Security
Working Group.
Since the Interagency review began with the Clipper announcement
and is being conducted by Government officials who are heavily
committed to Clipper, it is unlikely that its results will assist
business by easing the software cryptography export control
constraints.
President Clinton, in commenting on the North American Free Trade
Agreement, was quoted by the Washington Post, September 16, 1993,
as saying:
     I'm telling you folks, we cannot repeal the force that is
     driving the world economy together.  We can run away from it
     and get beat by it, or we can embrace it, do what we have to
     do and win with it.
If only those who control cryptographic exports understood this.
On September 30, the President announced a significant relaxation
of the export control rules for high performance computer
technology.  It would be good if some of that change could affect
the cryptography export area, but the present export position is
so well entrenched, it is unlikely there will be much change from
the Executive Branch.
The Congress Must Act Now!
The only hope for a recognition of the counterproductive nature
of this situation is in the Congress.  No other organization has
the breadth of constituencies to allow an honest look at all the
concerns and the authority to come to a definitive resolution on
the issue.
We need to recognize that the U.S. public has a right to a
reasonable level of protection for its sensitive information.
Enabling that right through allowing the export of good quality
cryptography such as DES will not harm the intelligence gathering
capabilities of this country any more than the worldwide
proliferation of cryptography already has.
I strongly encourage this Subcommittee to press as vigorously as
possible for legislation that will allow the export of good
quality cryptography so that our industry will implement it and
our citizens can use it!



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