Summary
- Behavior in an illicit market can be profitably viewed through the lens of industrial organization economics.
- Various market factors made the FBI’s monopolization efforts relatively ineffective in spite of a lack of legal checks on the FBI’s efforts.
- Customers and distributors protected themselves in different ways in light of the lack of legal remedies.
Introduction
In Dark Wire: The Incredible True Story of the Largest Sting Operation Ever, Joseph Cox details how from 2018 to 2021, the FBI secretly ran a company selling encrypted phones to criminals. This firm was named Anom, and it produced and distributed customized mobile handsets with a specialized operating system and an encrypted communications app also called Anom.
The FBI’s effort, code named Operation Trojan Shield, provided extensive information on criminal operations around the world.
While the story itself is well worth reading from a general interest perspective, this book review appears in an antitrust publication because the FBI’s efforts provide fascinating examples of practices and issues familiar to antitrust practitioners. Moreover, they illustrate how businesses and consumers may respond when legal remedies are not available. In this review, Anom’s history is explored through the lens of antitrust economics.
One of the goals of Operation Trojan Shield was to move criminals to Anom from other encryption platforms. In economic terms, one could say that the FBI wanted to monopolize a product market for encrypted handsets in geographic markets outside of the US.
The book discusses developments in both product and geographic markets, including the challenges of manufacturing and distribution as well as the competition between different products and between distributors of the same (as well as differing) products.
The story of Anom, and the outcome of Operation Trojan Shield, are well worth understanding to appreciate that a black market is still a market. Moreover, behavior in an illicit market can be profitably viewed through the lens of industrial organization economics. It is interesting to see how customers protect themselves when legal protections are unavailable, and how effective, or ineffective, those strategies are in the absence of a legal backstop. Indeed, it is remarkable that in spite of customers lacking any legal protections such as antitrust laws, and in spite of the FBI being able to literally shut down large competitors through state action, various market factors appear to have made the FBI’s monopolization efforts to secure a large share of sales relatively ineffective.
Background on the “Market” for Encrypted Criminal Communications
In this section we discuss different providers of encrypted communications, differences between them, and patterns of entry and exit. This background is helpful when thinking about how Anom fits into possible product markets.
Criminals have always been interested in secure communications, and enforcers have always been interested in accessing those communications.
With the widespread adoption of smartphones in the early 2000s, many criminals began using encrypted messaging services such as BlackBerry Messenger that were provided by consumer-facing enterprises. Some used these services on standard handsets, relying on the app on the handset being encrypted and the app provider being unwilling to work with law enforcement. Others went a step further and used modified handsets that contained additional security measures.
Firms with integrated hardware and software solutions have entered (and exited) the broader encrypted communications space on a regular basis, as have app-only firms. Over the past decade, a number of firms focused on selling dedicated hardware and software solutions to transnational criminal enterprises. Those firms included Phantom Secure, Encrochat, Ennetcom, MPC, beStealth, Ciphr, Sky ECC, No. 1 BC, and Anom, among others.
This is the group of competitors that Dark Wire, and the FBI and its international counterparts focused on.
In reviewing these products’ history, Dark Wire tells a story of quick substitution of communication methods in the world of transnational crime. For example, in 2016, Netherlands police announced that they had obtained traffic from the Danish encrypted handset company Ennetcom, which was then shut down. At the time, Ennetcom was reported to have around 19,000 users.
One group of criminal users in Scotland then vertically integrated, forming their own company, MPC, which subsequently began offering service to others. The pattern of one encrypted device’s death precipitating the growth of others is a theme throughout Dark Wire. As of 2018, MPC in its turn was estimated to have around 5,000 users.
Other former Ennetcom customers went to a company called Phantom Secure, which sold modified BlackBerry smartphones that had the camera, microphone and GPS physically removed. Phantom Secure phones’ only local functionality was encrypted text messaging. The company also marketed the ability to remotely wipe users’ handsets as part of the sales pitch for the product.
The CEO of Phantom Secure was a citizen of Canada, where his company’s operations were legal. However, during a 2018 visit to Las Vegas, the FBI cornered him. He was kept in a hotel room for several days while the FBI sought to cut a deal for access to the Phantom Secure servers. The CEO escaped, however, shutting down the company’s servers while making a run for Canada. He was captured just short of the border because of his purchase and use of a prepaid “burner” phone—which, ironically, he expected to be secure—to contact executives of his company. More specifically, the FBI obtained the phone number of the burner phone when the CEO used it to contact other Phantom Secure executives. The FBI then followed the phone as it pinged cell towers on the way towards Canada. The CEO was captured just short of the border when he stopped to get lunch.
Phantom Secure then shut its operations down permanently. Reports on its user base vary, but the FBI estimated Phantom Secure had around 20,000 users at the time.
