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Pratt Pleads Guilty To Illegal Weapons Sale To Chinese; UTC Parent Coughs Up $75M

Posted by Colin Clark on



WASHINGTON: Just when United Technologies’s Pratt & Whitney subsidiary seemed to have put the troubles with its F135 engine for the Joint Strike fighter behind it, there comes news that the company violated the so-called Tianamen sanctions and illegally sold engine control software to China for use in an attack helicopter.

Perhaps worse than the sales themselves, the company “made false and belated disclosures to the U.S. government about these illegal exports,” the Justice Department said in its press release announcing a plea agreement reached between UTC and the government.

How bad were the violations? What national security impact did development of the Z-10 attack helicopter have? The next few sentences are enough to send chills through the Aerospace Industries Association and much of the defense industry as they continue the fight for a more sensible arms export control regime:

“PWC exported controlled U.S. technology to China, knowing it would be used in the development of a military attack helicopter in violation of the U.S. arms embargo with China,” U.S. Attorney David Fein said in a statement. “PWC took what it described internally as a ‘calculated risk,’ because it wanted to become the exclusive supplier for a civil helicopter market in China with projected revenues of up to two billion dollars. Several years after the violations were known, UTC, HSC and PWC disclosed the violations to the government and made false statements in doing so. The guilty pleas by PWC and the agreement reached with all three companies should send a clear message that any corporation that willfully sends export controlled material to an embargoed nation will be prosecuted and punished, as will those who know about it and fail to make a timely and truthful disclosure.”

“Due in part to the efforts of these companies,” Fein went on, “China was able to develop its first modern military attack helicopter with restricted U.S. defense technology.”

But the State Department offered a more nuanced view of UTC’s conduct, perhaps reflecting the difference between the rip-your-throat-out approach of a prosecutor and that of a regulator. But it also seems reasonable to conclude that State, not known for bending over to be nice to defense companies, simply knows more about what UTC did and didn’t do, since they were the ones working with them from the beginning.

UTC disclosed nearly all of the ITAR violations resolved in this settlement voluntarily to the Department, acknowledged their serious nature, cooperated with Department reviews, and implemented or has planned extensive remedial measures.

Given that, State did not debar UTC from selling arms. And State offered a more calibrated view of the damage to national security. “These exports directly supported the development of Chinese military attack helicopters and caused harm to U.S. national security,” the department’s charging statement says. “Export of the modified EEC software, however, did not impart specific military engine or aircraft development technology.”

On the other hand, State told UTC: “However, given the harm to national security and the systemic, longstanding and repeated nature of certain violations, the Department has decided to charge Respondent with five hundred and seventy six (576) violations at this time.” And the letter says that if UTC had not worked closely with State to fix its export compliance system, “the Department would have charged Respondent with many additional violations and imposed a more severe penalty.” Remember that the range of violations took place over a six-year period.

One part of Pratt knew what was happening, according to the Justice Department statement: “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.” If you want to make the corporate argument, you note that these are large entities with their own command structures and you can’t expect the parent company to know what all its far-flung pieces are doing. We understand that the corporate folks were lied to by people at the Canadian subsidiary.

Put it all together and UTC’s 536 violations are precisely the type of actions that those who oppose arms export reform like to point to as “proof” that companies can’t be trusted and must be watched like hawks.

UTC Chairman and CEO Louis Chênevert said in a statement that his company “deeply” regrets the violations “occurred.” He also said that the violations “revealed important opportunities to strengthen our export compliance program.” The company’s press statement notes that it has spent $30 million since 2006 improving its export compliance and “dedicated more than 175 executives, managers and professionals full-time to export compliance, and hundreds more on a part-time basis.” (Note that UTC sold $9.8 billion to the U.S government in 2011 and had net sales of $58.2 billion.)

Given that company lawyers carefully crafted Chênevert’s statement, you have to be awfully optimistic about corporate behavior to read into that much concern that the company did something really stupid and illegal that damaged national security. The UTC statement reads like something a bank that illegally issued mortgages might say when paying an SEC fine. This is national security and politics, not high finance. Apologies and contrition would be welcome.

If UTC doesn’t send clear signals that it feels rotten about this and is doing everything possible to fix the problem, it and the defense industry as a whole may well find an intelligent politician or two with doubts about arms export reform raising objections to Obama administration’s export control reforms. That could mean the U.S. losing perhaps its best chance in 20 years to build a more intelligent, rational and effective arms export control regime.

For those with an interest in the timeline of China and UTC’s actions, here is the relevant part of the Justice Department statement:

“Dating back to the 1980s, China sought to develop a military attack helicopter. Beginning in the 1990s, after Congress had imposed the prohibition on exports to China, China sought to develop its attack helicopter under the guise of a civilian medium helicopter program in order to secure Western assistance. The Z-10, developed with assistance from Western suppliers, is China’s first modern military attack helicopter.

“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.”

What do you think?