Corporate Espionage – A Strategic Move or A Crime?

Have you ever heard of this term ‘Corporate Espionage’ before? Probably not. But, this has prevailed since the corporate setup gained momentum.

The term ‘Industrial Espionage’ or ‘Corporate Espionage’ refers to “the illegal and unethical theft of business trade secrets for use by a competitor to achieve a competitive advantage.”  (Definition : Investopedia)

Healthy competition is always encouraged, but when the means to achieve profit is unethical and illegal, the same can distort the spirit of others in the field.

This is similar to kings sending their personnel to other regions/territories to spy on and get to know confidential information that can benefit the king ultimately. Hence, we can say this is just another form of spying or a corporate spying. 

The Idea of getting a competitive-edge is appreciated across fields, but as a serial media-entrepreneur says, “there’s two ways to build the tallest building, either demolish the buildings taller than you or build the tallest building.” The idea is very well conveyed about those business tactics that fall on the negative side of the coin. 

A similar method used for gathering information is called “Competitive Intelligence”. However, Competitive Intelligence is legal and so is an ethical means for information gathering. It involves due diligence of the market and external factors affecting companies. Both are divided by a thin line consisting of legality and ethics. It is important to be cognizant of the fact that where Competitive Intelligence ends, Corporate Espionage begins.

Such Corporate Espionage is no longer centred on a few “sensitive” industries, It is now a go-to move to target smaller companies in surprising sectors, including education and agriculture. It has, in short, become a general business risk. 

KPMG reveals that the “corporate spying” in the ‘consumer products’ segment made the companies suffer huge losses. 80% of frauds are committed by the enemy within, acting in collusion with a third party.

Did you watch the movie “Rocketry – The Nambi Effect” which was based on the true story of Dr. Nambi Narayan. The espionage case, which involved multiple conspiracies, centred around seven people, were accused of leaking out vital defense secrets.

Need for Legislation in India 

The very rise in such espionage can be associated with lack of any specific legislation by the government.

Courts in India have relied on principles of equity and the law of contracts to provide relief. However, the lack of clear policy comes to center stage with alarming instances of espionage that have stunned the corporate sector and government alike.

• Nuclear Power Corporation of India Limited, a government-owned company that operates commercial nuclear reactors, verified that a cyber-attack was initiated on its system.

• This corporate espionage hypothesis is best illustrated by the case of espionage against Tata-owned VSNL by its employee. It was alleged that the MD’s Secretary had shared the agendas of the Company’s board meetings with its competitor. The police had charged the suspect under Section 408 of the Indian Penal Code that punishes a clerk or servant for criminal breach of trust.

Now, SEBI had taken certain legislative measures to Insider Trading through The SEBI (Prohibition of Insider Trading) Regulations, 2015. 

This indirectly also demotivate the act of espionage.

As per Regulation 2(1)(g) of the SEBI (Prohibition of Insider Trading) Regulations, 2015– Insider is a Person who is “Connected” with the company, who could have the Unpublished Price Sensitive information (UPSI) or receive the information from somebody in the company.

“Unpublished Price Sensitive Information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities.

It does solve most of the problems we discussed above –

1. Connected Person / Insider
2. And he shares any information which is not disclosed to public
3. And that information affects the price of securities of the company.

However, there is no explicit mention of information which is shared, which affects the company in the long term, but have certainly not affected the securities’ market price.

Illustration :

A Company XYZ Ltd. is working on a product that will provide them an edge over others. But, ABC Ltd employs a few of their “spies” in disguise as employees of XYZ Ltd and extract the required information. They can modify and turn around the trade secret obtained to their advantage, thus espionage wins.

This makes it so important for a company to draft a proper Non-Disclosure Agreement instead of using the standard format with clauses that don’t serve the purpose. The problem still persists as a need for specific legislation is required to curb the act and make it unethical.

Reforms Required —

• Adding provisions explicitly curbing ‘economic espionage’ in Insider Trading Regulation.
• Competition Laws can bring a separate provision section and rules to curb “corporate espionage”.
• Setting up of a seperate authority to deal into such cases or expanding the role of SFIO to cover such deterrent moves.
• Senior Management is generally under the liability of specifying their business interests. Corporate Laws including SEBI regulations puts them under enough disclosures that espionage hardly goes unnoticed. 

• Lastly, to have proper due-diligence of the employee, policies for confidentiality should be strengthened, Internal Control Systems is the only way out.