United Technologies sold China software for attack copter
Connecticut-based United Technologies, Hamilton Sundstrand Corp. and Pratt & Whitney Canada covered up the illegal sales by delaying their disclosures and lying to the government, the Justice Department said in its news release.
The motive? Profit.
In 2002 and 2003, Pratt & Whitney Canada sold China engine-control software that was made by Hamilton Sundstrand. Federal prosecutors say PWC "anticipated that its work on the Z-10 military attack helicopter would open the door to a far more lucrative civilian helicopter market in China, which according to PWC estimates, was potentially worth as much as $2 billion to PWC."
The Justice Department says United Technologies did not disclose the illegal exports until investors questioned whether PWC's involvement with the Z-10 might violate U.S. law. Military sales to China were restricted after the 1989 Tiananmen Square massacre of pro-democracy demonstrators.
For pleading guilty to violating the Arms Export Control Act and making false statements, United Technologies and its subsidiaries were fined $75 million. Of that, $20.7 million will to be paid to the Justice Department and $55 million to the State Department.
But, as the company says in its news release, $20 million of the $55 million will be suspended "subject to certification and approval of qualifying compliance expenditures." And the $35 million will be paid over four years.
As The Washington Post points out, United Technologies reported net sales of $58 billion for 2011.
"Export controls are an integral part of safeguarding U.S. national security and foreign policy interests. As a supplier of controlled products and technologies to the Department of Defense and other domestic and international customers, we are committed to conducting business in full compliance with all export laws and regulations," said Louis Chênevert , United Technologies' chairman and CEO. "We accept responsibility for these past violations and we deeply regret they occurred."
"These violations revealed important opportunities to strengthen our export compliance program. We have taken considerable steps to improve our export controls and to enhance our compliance infrastructure," he added.
Here are the particulars of the scheme, according to the Justice Department:
During the development phases of China's Z-10 program, each Z-10 helicopter was powered by engines supplied by PWC. PWC delivered 10 of these development engines to China in 2001 and 2002. Despite the military nature of the Z-10 helicopter, PWC determined on its own that these development engines for the Z-10 did not constitute "defense articles," requiring a U.S. export license, because they were identical to those engines PWC was already supplying China for a commercial helicopter.
Because the Electronic Engine Control software, made by HSC in the United States to test and operate the PWC engines, was modified for a military helicopter application, it was a defense article and required a U.S. export license. Still, PWC knowingly and willfully caused this software to be exported to China for the Z-10 without any U.S. export license. In 2002 and 2003, PWC caused six versions of the military software to be illegally exported from HSC in the United States to PWC in Canada, and then to China, where it was used in the PWC engines for the Z-10.
According to court documents, PWC knew from the start of the Z-10 project in 2000 that the Chinese were developing an attack helicopter and that supplying it with U.S.-origin components would be illegal. When the Chinese claimed that a civil version of the helicopter would be developed in parallel, PWC marketing personnel expressed skepticism internally about the "sudden appearance" of the civil program, the timing of which they questioned as "real or imagined." PWC nevertheless saw an opening for PWC "to insist on exclusivity in [the] civil version of this helicopter," and stated that the Chinese would "no longer make reference to the military program." PWC failed to notify UTC or HSC about the attack helicopter until years later and purposely turned a blind eye to the helicopter's military application.
HSC in the United States had believed it was providing its software to PWC for a civilian helicopter in China, based on claims from PWC. By early 2004, HSC learned there might an export problem and stopped working on the Z-10 project. UTC also began to ask PWC about the exports to China for the Z-10. Regardless, PWC on its own modified the software and continued to export it to China through June 2005.
In its report, the Post notes that "U.S. officials have long accused China of actively spying on the American defense contractors to steal intellectual property."
Officials suspect, for instance, that stolen U.S. technology helped the Chinese build a stealth fighter jet, the J-20, and modify its cruise missiles to make them harder to detect.
"By obtaining these materials illegally from the United States, China can save itself considerable time and expense needed to develop advanced military technology on its own," a federal law enforcement official, speaking on condition of anonymity, told the Post.
DefenseTech posted a photo of the Z-10 back in February. It says the gunship is "based on the Eurocopter Dauphin light cargo chopper. You know, the same helo the U.S. Coast Guard uses for search and rescue and even combat air patrols over Washington, DC."
Update Friday at 4:48 p.m. ET: The Project on Government Oversight has gotten ahold of documents filed by the government, including a statement of the charges, the guilty plea, and the deferred prosecution agreement.
It also says that United Technologies "was the fifth largest federal contractor in fiscal year 2011 with $7.9 billion in contracts" and that the conglomerate "has 17 resolved misconduct instances and $465.9 million in misconduct penalties since 1995."