Summary:
Echelon is the term popularly used for an automated, global, quasi-total surveillance system operated by the intelligence agencies in five nations: the United States (NSA), the United Kingdom (GCHQ), Canada (CSE), Australia (DSD) and New Zealand (GCSB). Echelon intercepts huge amounts of ordinary phone calls, e-mail messages, Internet downloads, satellite transmissions, etc., gathering all of these transmissions indiscriminately and distilling the information that is most heavily desired through artificial intelligence programs. Some sources have claimed that Echelon sifts through an estimated 90 percent of all traffic that flows through the Internet. The United States government has gone to extreme lengths to keep Echelon a secret, even after the governments of Australia and New Zealand admitted to its existence. Echelon is a highly classified operation, which is conducted with little or no oversight by national parliaments or courts, so there is no way to know how the information is used, and whether that use is lawful or not. Significant privacy concerns have been raised by Congress and many other governments and institutions. [Source for this information]

Details:

Data is collected in multiple ways. Massive ground based radio antennae intercept satellite transmissions and tap surface traffic. Satellites are used to catch "spillover" data from transmissions between cities and beam this information down to processing centers on the ground. Echelon also intercepts Internet transmissions through numerous "sniffer" devices which collect information from data packets as they traverse the Internet via several key junctions. It also uses search software to scan for web sites that may be of interest. Echelon has even used special underwater devices which tap into cables that carry phone calls across the seas. The nations that are involved with Echelon also train special agents to install a variety of special data collection devices, such as an information processing kit that is the size of a suitcase or a sophisticated radio receiver that is as small as a credit card. All of the information collected is sifted through a system of computers, known as Dictionaries, to pick out relevant information. [ACLU]

The U.S. government refuses to admit that Echelon even exists. It is known to exist because both the governments of Australia and New Zealand have admitted to this fact (even after this, the U.S. refuses to comment). In addition, the Scientific and Technical Options Assessment program office of the European Parliament commissioned two reports which confirm the existence of Echelon and describe its activities. These reports unearthed a startling amount of evidence which suggests that Echelon's powers may have been underestimated and that "Echelon is designed for primarily non-military targets: governments, organizations and businesses in virtually every country." [ACLU]

When the House Select Committee on Intelligence started asking questions about the legality of Echelon activities (since US law severely limits the ability of the intelligence agencies to engage in domestic surveillance), the NSA invoked the attorney-client privilege and refused to disclose the legal standards by which Echelon might have conducted its activities. [ACLU]

The NSA and its compatriot organizations may have circumvented countless laws in numerous countries which are in place to prevent such invasions of privacy (including U.S. laws against wiretapping and spying on citizens without due process). There are suspicions that Echelon has engaged in subterfuge to avoid these legal restrictions. For example, it is rumored that nations do not use their own agents to spy on their own citizens, but assign the task to agents from other countries. [ACLU]

The original purpose of Echelon was to protect national security, but national security is not Echelon's only concern. Reports have indicated that industrial espionage has become a part of Echelon's activities, and there are concerns that Echelon's information may be used to stifle political dissent. There is also evidence that Echelon has been engaged in significant invasions of privacy, including secret surveillance of political organizations, such as Amnesty International. There are no known safeguards to prevent such abuses of power. [ACLU]

An office was created within the Department of Commerce, the Office of Intelligence Liaison, to forward certain intercepted information to major U.S. corporations. In many cases, the beneficiaries of this commercial espionage effort are the very companies that helped the NSA develop the systems that power the Echelon network (Lockheed, Boeing, Loral, TRW and Raytheon). This relationship is so strong that sometimes this intelligence information is used to push other American manufacturers out of deals in favor of these mammoth U.S. defense and intelligence contractors, who frequently are the source of major cash contributions to both political parties. [POOLE]

As one example of industrial espionage, in 1990 the German newsmagazine Der Spiegel revealed that the NSA intercepted messages about a pending $200-million telecommunications deal between Indonesia and a Japanese satellite manufacturer. George Bush intervened on the basis of the intelligence intercept and convinced the Indonesians to split the contract between the Japanese and U.S.-owned AT&T. [NP]

Several former GCHQ officials confidentially told the London Observer in June 1992 that Echelon targeted seemingly non-controversial organizations including Amnesty International, Greenpeace and Christian Aid. [POOLE]

A former Maryland Congressman, Michael Barnes, claimed in a 1995 Baltimore Sun article that under the Reagan Administration his phone calls were regularly intercepted, which he discovered only after reporters had been passed transcripts of his conversations by the White House. [POOLE]

In 1988, a former Lockheed software manager who was responsible for a dozen VAX computers that powered the Echelon computers at Menwith Hill, Margaret Newsham, came forth with the stunning revelation that she had actually heard the NSA's real time interception of phone conversations involving Senator Strom Thurmond. [POOLE] "The surveillance was incredibly target-oriented. We were capable of singling out an individual or organization and monitoring all electronic communication - real time - and all the time. The person was monitored without ever having a chance to discover it, and most of the information was sent with lightening speed to another station using the enormous digital capacity at our command. Everything took place without a search warrant." [EB]

The NSA has a history of domestic political spying. Nixon presidential aide John Ehrlichman revealed in his published memoirs that Henry Kissinger used the NSA to intercept the messages of then-Secretary of State William P. Rogers, which Kissinger used to convince President Nixon of Rogers' incompetence. Kissinger also found himself on the receiving end of the NSA's global net. Word of Kissinger's secret diplomatic dealings with foreign governments would reach the ears of other Nixon administration officials, incensing Kissinger. [POOLE] In the 1970's, Congressional committees found that government agencies, including the NSA, had eavesdropped on actress Jane Fonda, Dr. Benjamin Spock and other anti-Vietnam War activists. [CNN]

As of February, 2000 the NSA had a global staff of 38,000 and a budget estimated at more than $3.6-billion - more than the FBI and the CIA combined. [NP] In July, 2002 the House Intelligence Subcommittee on Terrorism and Homeland Security found that the NSA was unable to identify how it spends the money it gets from Congress each year "to any level of detail." [TIME]

In 2001, the CIA's Office of Advanced Information Technology began developing a number of data-mining enhancements to make eavesdropping on electronic communications easier. One program, called Oasis, automatically converts audio signals into conveniently readable, and searchable, text (distinguishing the speakers). [WAPOST] This will very likely be used by the NSA to improve Echelon's ability to monitor and log masses of intercepted phone conversations. [REG]

In March, 2003 the United Nations began a top-level investigation into the bugging of its delegations by the United States using Echelon. The Observer published details of a memo sent by the NSA ordering a "dirty tricks" intelligence surge against Angola, Cameroon, Chile, Bulgaria and Guinea with "extra focus on Pakistan UN matters." The operation was designed to win votes in favor of intervention in Iraq. While the bugging of foreign diplomats at the UN is permissible under the U.S. Foreign Intelligence Surveillance Act, it is a breach of the Vienna Convention on Diplomatic Relations. [OBS]

As of June, 2003, Congress is going to allow the NSA to exempt itself from all Freedom of Information Act requests dealing with files that document the means by which foreign intelligence or counterintelligence is collected through technical systems. (In other words, the details of Echelon would become off-limits from FOIA requests). Apparently, similar exemptions allowed in the past for the operational files of other agencies, such as the National Reconnaissance Office, led to those agencies categorizing all of their directives as "operational". It is possible the NSA will continue this trend and over-apply the exemption. [NSARCH]

The National Security Archive, a research institute based at George Washington University, has uncovered apparently definitive proof of the existence of Echelon from the government itself, in the form of two declassified documents obtained under the Freedom of Information Act which refer directly to Echelon and known Echelon sites (including Yakima in Washington state and Sugar Grove in West Virginia). Those documents can be found online here and here.

Sources:
American Civil Liberties Union - Echelon FAQ [ACLU]
The Observer - UN Launches Inquiry Into American Spying [OBS]
TIME Online The NSA Draws Fire [TIME]
Patrick Poole - Echelon: America's Secret Global Surveillance Network [POOLE]
The National Post (Canada) - The New Space Invaders [NP]
Ekstra Bladet (Denmark) - Interview With Margaret Newsham (trans.) [EB]
Washington Post - Making Sense of the Deluge of Data [WAPOST]
The Register - CIA Patching Echelon Shortcomings [REG]
CNN.com - The NSA: Spying On You? [CNN]
National Security Archive - Spy Agencies Abuse Freedom of Information Exemptions [NSARCH]

Further Info:
ACLU - Large resource of news and links on Echelon
Duncan Campbell - Article "Inside Echelon"
Duncan Campbell Article on Echelon and corporate espionage
National Security Archive - Archive of declassified U.S. documents obtained through FOIA
ZDNet UK - Tech editor's speculation on the nuts and bolts of Echelon
NSA - Official Homepage of the National Security Administration
GCHQ - Official Homepage of the British Government Communications Headquarters