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When Larry Chalfan was awakened by the telephone at 3.40 one Saturday
morning last October, he knew something was wrong. But he was still shocked
when the caller described how five robbers armed with revolvers and automatic
rifles had broken into the semiconductor factory he manages in the quiet
suburbs of Portland, Oregon. The thieves attacked the security guard, and
then tied, gagged and blindfolded 12 employees working the night shift before
making off with several hundred thousand computer chips.

That morning Oki Semiconductor became another victim of what is being
dubbed the ‘crime of the 1990s’ – computer chip theft. Oki Semiconductor
is a subsidiary of Japan’s Oki Electric Industry company, and Chalfan’s
plant in Portland makes the 1 megabit and 4 megabit dynamic random access
memory (DRAM) chips used to store the programs running on a personal computer.
The thieves had got away with $2 million worth of memory chips, making
it the biggest theft of its kind and sparking a nationwide investigation
by the FBI.

Over the past two years memory chips and the microprocessors used as
the ‘brain’ of personal computers have become the targets of well-organised
groups of criminals. Though no nationwide statistics exist, police estimate
hundreds of millions of dollars worth of semiconductors and other high-technology
products such as disc drives and printers are stolen each year. According
to Sergeant Jim McMahon of California’s San Jose Police Department, the
chip and computer manufacturers, as well as some computer stores in California’s
Silicon Valley, have been sustaining losses totalling at least $1 million
per week for the past three years.

McMahon heads one of the few task forces in the US dedicated to investigating
these computer crimes. Other police departments in high-tech belts, such
as Austin, Texas, are only just beginning to educate their investigators
about such thefts.

One of McMahon’s main worries is that thieves are increasingly turning
to violence in their quest for the latest computer parts. ‘Armed robberies
have been increasing of late,’ says McMahon. ‘These are well-organised groups.
These individuals are capable and willing to use violence to accomplish
their needs.’ They rob computer stores, factories and the warehouses of
companies that buy computer parts in bulk for contract work. According to
McMahon, the thieves generally don’t know much about the products they are
stealing but the people who hire them know exactly what to take and how
to resell it.

Most of the organisers of the crime rings act as distributors, he says,
selling the chips on to other distributors and, ultimately, to small computer
shops that use them to assemble IBM-compatible PCs. The market for these
products is huge; IBM-compatible machines are the most prevalent kind of
personal computer now sold. According to Infocorp, the California market
research firm based in Santa Clara, around 16.5 million were sold in the
US in 1993, while worldwide shipments topped 40 million.

Quick killing

One of the attractions of stealing memory and processor chips is that
they are difficult to identify; unlike other computer parts, such as disc
drives and printers, they do not have individual identification numbers
by which they can be traced. The chips are also small: microprocessors
and 4-Mbit DRAMs average 50 millimetres square or less, making them easy
to hide in a pocket or briefcase. And the prices are high: for example,
$4.50-$15 a piece for 1-Mbit and 4-Mbit DRAMs, anything up to $500 for
a 486 processor and $900 for a Pentium, the latest processor from Intel.
These are the prices for bulk purchases – up to 10 000 in the case of memory
chips and 1000 in the case of processors.

‘This is a small, highly transportable, difficult to identify product
which is worth more than its weight in gold and moves faster than narcotics,’
says McMahon. And, unlike narcotics, semiconductors are legal to possess
and easy to sell to distributors. On the black market, by the time the
chips reach the end of the distribution channel, the prices are likely
to be equal to manufacturers’ costs, or even higher, according to law enforcement
officers.

Another difficulty is the speed at which the criminals operate, using
faxes, phones and express mail delivery. Acting on an informant’s tip, McMahon’s
team was able to trace $87 000-worth of mathematics co-processors stolen
from a company in Silicon Valley and sent by overnight mail to New York,
Boston, Houston and Los Angeles as well as to a number of major cities overseas.
The mathematics co-processors are used with microprocessors such as the
386 and 486 to make software programs, particularly engineering applications,
run faster. ‘This group had about half a dozen people in various parts of
the country distributing the goods. And that’s just one small transaction,’
says McMahon.

The pace of these organised crimes intensified last summer following
a fire at a Sumitomo Chemical factory in Japan. The factory was one of the
main suppliers of the epoxy resin used to make the plastic casings or packages
that hold the DRAMs and static random access memory chips. Estimates put
Sumitomo’s output of the resin at 60 per cent of the world’s supply, and
the fire had an immediate effect. ‘Fear spread worldwide that there would
be a shortage of semiconductors and that prices would rise,’ says Chalfan.
A day after the fire, there was a run on memory chips.

As with any commodity in short supply, this attracted criminals hoping
to make a quick buck. But to compound matters, demand for memory chips has
soared in the past year. Not only have the PC sales increased, but users
want more and more memory-hungry software. For example, the Lotus 123 spreadsheet,
running on Windows, needs a minimum of 4 Mbits of memory inside the PC to
run properly.

In the past two or three years the number of companies making IBM-compatibles
has grown. Even small companies can afford to set up an assembly plant.
All they need is some space for putting the machines together and the capital
to buy pre-assembled boards and components such as disc drives and power
supplies. Many of these companies add value to their machines by using the
latest microprocessors such as the Pentium, and offering more memory for
a lower price than their more established competitors.

Chalfan says that Oki and the other chip makers cannot meet the demand
for DRAMs processors. Computer companies the size of IBM and Apple generally
get first priority in buying chips from semiconductor makers, because they
are long-term, steady buyers. This means the smaller companies, such as
those making IBM-compatible PCs, are increasingly having to look elsewhere
for the chips they need, which makes it easy for the chip thieves to find
buyers.

Asian connection

FBI agents and local police officials are still searching for the Oki
robbers. At present, the FBI is following a lead that the break-in was the
work of an Asian gang. Phil Frocht of the FBI says the robbers spoke one
or more Asian languages, but he would not identify the languages spoken
since the investigation is still in progress. Asian gangs have been suspected
in a number of cases throughout the nation’s high-tech belts, sometimes
selling the products in the US and other times to Asia, Europe or Canada.
‘Most people handling stolen property are Asian because a lot of small computer
firms are run by people from Asia – Vietnamese, Chinese and East Asians,’
says McMahon.

There are no statistics about how many cases have been brought to court,
but companies are beginning to press for stiff penalties. One such company
is XeTel of Austin, Texas, which was the target of two thefts by the same
gang. In May, the gang followed an employee home and stole his security
badge from the car while he was in the house. Using the badge, they got
into the factory and stole hundreds of thousands of dollars, worth of memory
chips. ‘The thieves knew exactly what part numbers they wanted. They only
got the good stuff,’ says Rick Winter, chief financial officer at XeTel.
Rather than taking 256-kbit memory chips, they stole 1-Mbit and 4-Mbit Motorola
DRAMs.

The gang attempted a second burglary in July. But this time an informant
had tipped off the FBI, who caught six people as they tried to break into
the plant. Four members of the gang were Asian. Later, the FBI succeeded
in arresting 16 more people in connection with the chips stolen in May.
Law enforcement officers are now trying to gather enough evidence so that
alleged thieves can be tried in federal court, where sentences can be up
to 10 years imprisonment and $250 000 in fines.

McMahon’s department has become a national leader in educating high-tech
companies about improving security. As a result, most are taking greater
precautions to keep out thieves, and manufacturers such as Intel are taking
steps to make it easier to trace stolen batches of chips .

But the education is a two-way process. Two years ago, several of the
largest semiconductor manufacturers – including Motorola, Advanced Micro
Devices and Texas Instruments – formed a High Technology Criminal Investigators’
Association to teach law enforcement officials about the computer industry
and its products. Their argument is that the police can only catch the chip
thieves if they know as much about the chips, their market value and how
they are distributed as the thieves.

Lori Valigra is a freelance writer, based in Massachusetts, specialising
in technology and business. Rob Causey writes for Electronics Times.

* * *

Keeping track of hot chips

Chip thefts are no longer a problem in the US alone. In November, three
employees of Intel, the world’s biggest chip maker, were charged with stealing
$1.2 million worth of 486 microprocessors from the company’s factory in
Malaysia. In Europe, Intel and its customers suffered six thefts of about
$1 million each in the last six months of 1993, according to Intel’s European
general manager, Stephen Nachtsheim.

The 486 is the chip at the heart of about 90 per cent of the world’s
personal computers. The microprocessor is the chip that reads the program
running on the computer and tells the rest of the system what to do. This
includes reacting to keys being pressed on the keyboard, putting information
onto the screen and talking to other computers, as well as doing any calculations
needed by the program itself. The microprocessor is nearly always the most
expensive chip in any computer.

About 40 million 486s will be sold around the world this year, mostly
by Intel which invented the device. Intel regularly takes legal action against
companies trying to sell copies of the chip without permission. At the moment,
only IBM has been given the undisputed right to make 486s by Intel. This
near-monopoly can lead to shortages.

In 1993, Intel’s sales in Europe rose by 82 per cent, according to
figures published by market researchers Data-quest in December. It takes
three years to build a new chip factory, from initial planning to the start
of production, so there is no way a company can respond within a year to
an unexpected increase in sales. As a result, 486s have been very hard to
obtain over the past 12 months, creating a market for stolen chips.

In December, Nachtsheim announced a plan to combat the theft of 486s
and Intel’s next generation of processor, the Pentium. The company has
always written an iden-tification number on top of its processors to keep
track of batches of chips as they pass through its factories. A batch
consists of around 10 000 processors, the number normally sold to PC makers
at one time.

Intel has now reorganised its databases so that when a PC maker buys
a set of chips, it is told the batch number. If the chips are stolen, the
PC maker can give the number to the police. And where a company is approached
by someone selling on 486s which it suspects may be stolen, it can ask
Intel who originally bought the chips.

Nachtsheim admits there are problems with this scheme. Intel’s 486s
need to be cooled while running and the usual method is to glue a set of
metal fins, called a heatsink, to the top of the chip and blow air at the
fins with a fan. The heatsink obscures the identification number so once
a chip is put into a computer no one would know if it was from a batch that
had been stolen.

The identification numbers are etched onto most 486 and Pentium chips
using a laser, making it impossible to change the number and hide what
had happened. But some versions of the 486 are sold in plastic casings or
packages. As plastic would melt if a laser were used, the numbers are printed
on, making it easier for thieves to change the number.

Nachtsheim says the company is looking at ways around these problems,
such as scribing a bar code onto the edge of the chip’s package. This could
be read by a machine once the device was inside the PC, and would be hard
to change.

A number of other companies already sell microprocessors, mostly for
specialist use, with individual identification numbers stored in the circuitry
of the chip itself. Nachtsheim is not aware that Intel is considering an
individual numbering scheme; it would cost the company more than $10 million
to change its manufacturing process so as to allow it to write numbers into
486s and Pentiums. An effective scheme would also require PC makers to change
some of their working practices, he says. There would be no point Intel
writing a secure serial number in the silicon if the PC makers did not include
a way of reading it once the device was inside their computers.

Manufacturers of memory chips have more difficult problems stamping
out thefts than Intel. Their products are a hundred times cheaper than Intel’s,
so any antitheft scheme must be much cheaper. All memory chips are sold
in plastic packages, making laser etching of identification numbers impossible.
But as one engineer working for a memory supplier points out, the easiest
way for the chip industry to end the spate of thefts would be to make enough
devices to satisfy the demand.

Rob Causey