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Federal Reserve and Senate Republicans spar over allegations of Chinese influence

By Katie Bo Lillis, CNN

Senate Republicans are sparring with the Federal Reserve over what the GOP lawmakers say has been a gross failure by the Fed to combat Chinese efforts to gain influence there.

Minority staff from the Senate Homeland Security and Governmental Affairs Committee issued a report on Tuesday morning detailing five “case studies” of individuals whose conduct and connections to Chinese academic and state institutions they described as a potential concern. The individual employees — four of whom are current employees, according to a committee aide — are not identified by name.

The report also reveals for the first time that a 2015 Federal Reserve counterintelligence analysis identified 13 “persons of interest” working for the bank that investigators determined raised troubling concerns about their ties to the Chinese government.

But the Fed is now disputing its own findings from 2015, according to the committee, arguing that its original analysis drew conclusions about Fed employees “that may lack factual support” and ultimately could not be substantiated.

And Federal Reserve Chairman Jerome Powell pushed back on the report’s findings in a strongly worded letter sent on Monday to top committee Republican, Sen. Rob Portman of Ohio.

“We are deeply troubled by what we believe to be the report’s unfair, unsubstantiated, and unverified insinuations about particular individual staff members,” Powell wrote.

Republican committee staff based the report’s findings on the 2015 counterintelligence analysis and a classified FBI report detailing the threat, according to a GOP committee aide. The FBI did not respond to a request for comment.

The ultimately murky nature of the report’s findings hint at some of the difficulties federal authorities have faced in separating out espionage from legitimate relationships between Chinese and US academia and business.

Many of the individuals cited in the report were identified based on their connections to Chinese entities viewed by investigators as potentially problematic, including Chinese academic organizations associated with China’s so-called Thousand Talents program — a lucrative overseas Chinese recruitment effort that became a focus for the Justice Department during the Trump administration as it sought to uncover US-based academics who might be stealing research or other intellectual property.

But amid allegations of xenophobia, racial profiling and executive overreach — and after some of its high-profile prosecutions fell apart — the Biden administration this year shut down the investigative initiative that had homed in on Thousand Talents.

According to the Senate report, Federal Reserve officials told the committee earlier this month that in 2015, the Fed became “concerned … that there were organized efforts by foreign governments, some with economic and strategic interests at odds with those of the U.S., to solicit Federal Reserve researchers, typically by requesting that they enter into compensated contractual relationships.” At the time, Fed investigators referred to the 13 “persons of interest” — who worked at eight of the 12 Federal Reserve Banks — as the “P-Network.”

Although the Fed is now disputing “many of its own prior findings,” according to the report, committee Republicans believe that emails, travel itineraries and employment contracts support the Fed’s original 2015 counterintelligence analysis.

A spokesman for the Chinese Embassy in Washington condemned the report’s findings in a statement on Monday.

“The remarks of the relevant US congressmen are full of Cold War zero-sum thinking and ideological prejudice,” Liu Pengyu said. “The cooperation between China and the US in economic, financial and other fields is open and aboveboard. The US should take off its colored glasses and stop disrupting local and non-governmental exchanges between the two countries.”

The findings

The Senate committee minority report claims that “China has used a variety of tactics to recruit U.S.-based economists to provide China with knowledge and intellectual capital in exchange for monetary gain and other benefits.”

Despite that, the committee’s Republican investigators say the Fed has since failed to adequately combat the threat that it identified in 2015, in part thanks to poor coordination with federal law enforcement and intelligence agencies and in part thanks to “a lack of internal counterintelligence competency.”

In his letter to Portman, Powell also pushed back on those assertions.

“We … have robust policies, protections, and controls in place to safeguard all confidential and sensitive information and to ensure the integrity of our workforce,” Powell wrote. “We are confident that Federal Reserve staff understand their obligations and are committed to maintaining both the confidentiality of sensitive information and the integrity of our workforce.”

According to the committee’s minority, the Federal Reserve began prohibiting its employees from accepting any compensation from China or other countries of concern after the panel raised concerns.

“However, the Federal Reserve still has limited approval requirements for international collaborations or prohibitions on participating in a talent recruitment plan,” the committee Republicans wrote.

“Left unchecked, these gaps continue to present China with an open avenue to disrupt the integrity of the American financial system, jeopardizing U.S. national security.”

Powell argued that international collaboration is an important — and encouraged — part of the Fed’s mission, “with the aim of deepening and broadening our understanding of critical issues.”

“We encourage and support staff participation in multilateral organizations, and sponsor conferences together with other central banks,” he wrote, adding that “information security considerations also shape this engagement.”

The five ‘case studies’

The report details the interactions of five Fed employees.

In one instance, a Federal Reserve employee was allegedly forcibly detained on four separate occasions during a 2019 trip to Shanghai. According to the report, “Chinese officials threatened the individual’s family unless the individual provided them with economic information and assistance, allegedly tapped the employee’s phones and computers, and copied the contact information of other Federal Reserve officials from the individual’s WeChat account.” These officials then allegedly threatened the employee with imprisonment in an effort to get him to sign a letter stating he would not discuss the interactions with anyone.

On two of the four occasions, according to the report, Chinese officials interrogated the employee about his position at the bank and told him “that he must cooperate with the Chinese government and share sensitive non-public economic data to which he has access as a [Federal Reserve] economist” and “advise senior [Chinese] government officials on sensitive economic issues.”

Federal Reserve officials told committee staff that they reported the incident to both the FBI and the Department of State after they were alerted to it by the employee, but “neither the FBI nor State Department advised the Federal Reserve regarding what to do to prevent and mitigate these incidents going forward.” CNN has reached out to both the FBI and the State Department for comment.

In 2019, the Fed ultimately issued a general warning to all economists preparing to travel to China, according to the report.

Another employee “with sensitive access to Federal Reserve Board data provided modeling code to a Chinese university with ties to” China’s central bank in 2018, the report alleges. The report alleges that this person maintains “longstanding ties” to China’s central bank, has encouraged the Federal Reserve Bank where he works to deepen its relationship with the People’s Bank of China, and has used WeChat to communicate directly with officials with the central bank to coordinate visits and assist with “developing predictive models.”

“These and other actions taken by [this employee] because of these relationships raise concerns about actual or apparent foreign influence,” the report states.

That individual “maintains access to sensitive [Federal Reserve Bank] information” in his or her current role as “a top economist,” the report notes.

Yet a third employee was “observed communicating with Chinese State Council affiliated research center [and] assisting Chinese Government news agencies with publications,” according to the report. Federal Reserve public affairs officials were kept out of the loop, Senate investigators said.

One of the five employees is no longer employed at the Fed, but the report does not disclose the circumstances of the person’s departure. The report says only that the employee “maintained close connections with Chinese universities known to be active in talent recruitment plans” and that the person’s browsing history “showed a particular interest in Chinese President Xi Jinping, as well as articles relating to individuals arrested for economic espionage.” According to the report, a keystroke capture showed that the employee was using “Xijinping as a website password.”

Still another employee — not part of the five cases detailed in the report — “attempted to transfer large volumes of data from the Federal Reserve to an external site in at least two separate instances,” according to the report.

™ & © 2022 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.

CNN’s Matt Egan contributed to this report.

Article Topic Follows: CNN - US Politics

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