ISRAELI VENTURE CAPITALISTS REQUEST CLARITY ON

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 001381

SIPDIS

DHS FOR INTERNATIONAL AFFAIRS DIRECTORATE

E.O. 12958: DECL: 03/04/2014
TAGS: ETRD PTER IS ECONOMY AND FINANCE ISRAEL RELATIONS LABOR AND COMMERCE
SUBJECT: ISRAELI VENTURE CAPITALISTS REQUEST CLARITY ON
SALE OF ISRAELI SOFTWARE TO USG SECURITY AGENCIES

Classified By: Ambassador Daniel C. Kurtzer for Reasons 1.4 (b,d)


1. (C) Summary. Senior Israeli venture capitalists outlined
to the Ambassador March 3 difficulties Israeli firms are
having selling software relating to homeland security and
counterterrorism to certain USG entities. According to Chemi
Peres, chairman of one of Israel's largest VC firms, Pitango
Investments, and Moshe Mor, general partner in the U.S. firm
Greylock, the sale of such software to USG agencies is being
blocked as a result of counterintelligence and
counterterrorism concerns. The Ambassador noted that the
purchase of software by U.S. security agencies is a very
sensitive issue involving legitimate national security
concerns. In order to facilitate useful dialogue, he said
the Israeli Government, not private firms would need to
decide if it wanted to raise this issue. He stressed that
any progress on the issue would take time and would have to
enable U.S. firms to sell to the GOI as well. End summary.


2. (C) Mor began the meeting by noting that his firm,
founded in 1965 with private investors and a number of U.S.
universities, had begun investing in Israeli high tech
companies two years ago. A number of these firms produced
software with direct application in the field of homeland
security. Although the firms' products were a perfect fit
for USG agencies engaged in the fight against terror, Mor
said, the firms had run into two sets of security concerns
that were hindering sales. The first issue, foreign
ownership, was an "old" problem with well-established and
clear remedies. The more difficult issue, according to Mor,
was USG aversion to purchasing software developed outside the
U.S. for sensitive applications. Mor claimed that USG
agencies do not wish to discuss their objections to the
purchase of "offshore" software in an open, transparent
manner, and that there are no established remedies for the
Israeli companies to address USG concerns. Mor claimed that
Israeli companies are subject to greater scrutiny by USG
agencies than firms from other countries.


3. (C) Mor presented four examples. He said that one USG
security agency had informed an Israeli firm that "its
counterintelligence team would not allow 'doing business with
an Israeli company.'" A second firm, Checkpoint Software,
had spent USD 500,000 trying to address concerns about its
Israeli-developed code, and had only partial success in
overcoming USG objections. Another company that had
developed smart alerts software (which looks at a complex
series of data, collates it, and issues alerts if certain
pre-set criteria have been met) suddenly found its commercial
discussions with the USG cut off for no reason. Lastly, the
FBI had signed a $700 million annual contract with an Israeli
firm, Clear Forest, to supply text analytics software. Mor
noted that, one year into deployment of the software in
question, the FBI decided not to renew the contract, "citing
(informally) a veto by its counterintelligence team."


4. (C) Mor noted that the established method of certifying
software for sensitive uses, clearance through the National
Information Assurance Partnership (NIAP),is expensive and
burdensome, particularly for many Israeli high-tech firms,
which tend to be small. Summing up, Mor asked the Ambassador
for help in establishing a dialogue with USG agencies in
order to identify the issues of concern to them and to search
for a way to resolve those concerns.


5. (C) The Ambassador noted that U.S. concerns over the
purchase of "offshore" software by USG national security
entities reflect the highly sensitive nature of such
purchases. He stressed this sensitivity is based on
experience and that it is legitimate. He asked whether U.S.
software firms can sell intelligence-related software to the
Israel security and intelligence agencies. The Ambassador
said he doubted such sales were possible. He also stressed
that, as far as he knew, USG concerns about software
developed outside the U.S. apply to all countries and not to
Israel in particular. If this was not the case, the Israelis
needed to demonstrate this clearly.


6. (C) The Ambassador noted that Israel had successfully
addressed related concerns in the area of defense
procurement, but that the process had taken a number of
years. He imagined that software procurement would be even
more time consuming. As a first step, he said the GOI would
need to decide whether it wanted to raise this issue and then
to identify a point of contact to discuss it. Once this step
was taken, the appropriate authorities could begin to
introduce this issue into the on-going bilateral discussions
on related issues. In this regard, he noted that the
Commerce Department Undersecretary for Industry and Security,
Kenneth Juster, was currently in country discussing dual use
issues with GOI bodies. Other opportunities for such
discussions would present themselves. (Note: Minister of
Industry and Trade Olmert raised with U/S Juster a related
issue -- the failure of the Israeli high-tech firm Checkpoint
Software to gain approval for its proposed purchase of a U.S.
firm because of security-related issues (see septel).)


7. (C) The Ambassador stressed, however, that any agreement
reached would have to work in two directions. He reminded
Peres and Mor of the difficulties U.S. firms are having with
the GOI's procurement system, as outlined in remarks by the
Ambassador at the Israel-US Chamber of Commerce meeting on
February 10, 2004. These difficulties were exacerbating a
significant U.S. trade deficit with Israel. If Israel wanted
USG entities to purchase Israeli goods for sensitive uses,
then the USG would demand the opportunity for U.S. firms to
compete for similar GOI contracts on the basis of a level
playing field.
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