Jul 26, 2022 - Economy

Senate report: Chinese officials attempted to infiltrate the Fed for over a decade

The front facade of the Federal Reserve building in Washington. Photo: Bill Clark/CQ-Roll Call via Getty Images

China-based officials tried to build a network of confidants inside the Federal Reserve, in some cases attempting to offer employees of the central bank lucrative contracts in exchange for confidential information about interest rate policy changes and the U.S. economy, a congressional investigation found.

Why it matters: The report, which has received strong pushback from the Fed, calls out a failure to counter a decade-long attempt by Chinese officials to infiltrate the world's most powerful central bank. The findings, however, stop short of saying whether sensitive economic information had been compromised.

Details: The investigation was conducted by Republicans on the Senate Homeland Security Committee.

  • Perhaps the most shocking details of the investigation concerned a Fed economist who traveled to Shanghai in 2019. Chinese officials threatened to imprison him if he did not disclose information about the economy, including about tariffs while the U.S. and China were in the middle of a trade war. The economist was detained four separate times while on the trip, according to the report.
  • The staffer reported the incident to the Fed, who passed it along to the State Department and FBI.
  • The report, which relies and builds on a separate internal investigation conducted by the Fed itself in 2015, said the findings show a “sustained effort by China” to gain influ­ence over the Fed­. Republicans say the central bank was "unable to counter this threat effectively.”

What they’re saying: In a letter to Sen. Rob Portman, the top Republican on the committee, Fed chairman Jerome Powell pushed back against the report's conclusion.

  • "We would be concerned with any supportable allegation of wrongdoing, whatever the source. In contrast, 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.
  • Powell also said that the Fed staff with access to sensitive information about the U.S. economy undergo comprehensive background checks and it has technology that's used to prevent security breaches. The letter also said the Fed encourages staff to participate in engagements with other central banks, but officials must adhere to information security protocols — and any alleged violation is investigated.
  • "Because we understand that some actors aim to exploit any vulnerabilities, our processes, controls and technology are robust and updated regularly," Powell wrote.

The big picture: The Fed began its own internal probe after an outside source warned that foreign adversaries were offering “compensated contractual relationships” in an attempt to build alliances with Fed employees, according to the congressional report.

  • The report says the Fed’s probe identified a former employee, with ties to a Chinese government-backed talent recruitment program, who tried to pull in a network of as many as 13 researchers employed across eight Fed regional banks.
  • The Fed presented these findings to Congress in 2020, but now disputes many of the internal probe’s claims and can’t locate parts of the investigative material, the report says.

The congressional report outlines a few incidents concerning some of the 13 individuals, including one who received a request from someone linked to the Chinese government for confidential information about three regional Fed bank presidents' views on interest rate increases.

  • The report also says that the Fed started to ban officials from accepting pay from countries including China, after Congress started its investigation.
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