United
Technologies, Pratt & Whitney Canada and Hamilton Sundstrand Corporations
Also Agree to Pay More than $75 Million to U.S. Government
BRIDGEPORT, CT—Pratt & Whitney
Canada Corp. (PWC), a Canadian subsidiary of the Connecticut-based defense
contractor United Technologies Corporation (UTC), today pleaded guilty to
violating the Arms Export Control Act and making false statements in connection
with its illegal export to China of U.S.-origin military software used in the
development of China’s first modern military attack helicopter, the Z-10.
In addition, UTC, its U.S.-based
subsidiary Hamilton Sundstrand Corporation (HSC) and PWC have all agreed to pay
more than $75 million as part of a global settlement with the Justice
Department and State Department in connection with the China arms export
violations and for making false and belated disclosures to the U.S. government
about these illegal exports. Roughly $20.7 million of this sum is to be paid to
the Justice Department. The remaining $55 million is payable to the State
Department as part of a separate consent agreement to resolve outstanding
export issues, including those related to the Z-10. Up to $20 million of this
penalty can be suspended if applied by UTC to remedial compliance measures. As
part of the settlement, the companies admitted conduct set forth in a
stipulated and publicly filed statement of facts.
Today’s actions were announced by David
B. Fein, U.S. Attorney for the District of Connecticut; Lisa Monaco, Assistant
Attorney General for National Security; John Morton, Director of U.S.
Immigration and Customs Enforcement (ICE); Ed Bradley, Special Agent in Charge
of the Northeast Field Office of the Defense Criminal Investigative Service
(DCIS); Kimberly K. Mertz, Special Agent in Charge of the FBI New Haven
Division; David Mills, Department of Commerce Assistant Secretary for Export
Enforcement; and Andrew J. Shapiro, Assistant Secretary of State for
Political-Military Affairs.
The
Charges
Today in the District of Connecticut,
the Justice Department filed a three-count criminal information charging UTC,
PWC and HSC. Count One charges PWC with violating the Arms Export Control Act
in connection with the illegal export of defense articles to China for the Z-10
helicopter. Count Two charges PWC, UTC and HSC with making false statements to
the U.S. government in their belated disclosures relating to the illegal
exports. Count Three charges PWC and HSC with failure to timely inform the U.S.
government of exports of defense articles to China.
While PWC has pleaded guilty to Counts
One and Two, the Justice Department has recommended that prosecution of UTC and
HSC on Count Two, and PWC and HSC on Count Three be deferred for two years,
provided the companies abide by the terms of a deferred prosecution agreement
with the Justice Department. As part of the agreement, the companies must pay
$75 million and retain an Independent Monitor to monitor and assess their
compliance with export laws for the next two years.
The
Export Scheme
Since 1989, the United States has
imposed a prohibition upon the export to China of all U.S. defense articles and
associated technical data as a result of the conduct in June 1989 at Tiananmen
Square by the military of the People’s Republic of China. In February 1990, the
U.S. Congress imposed a prohibition upon licenses or approvals for the export
of defense articles to the People’s Republic of China. In codifying the
embargo, Congress specifically named helicopters for inclusion in the ban.
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.
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.
According to court documents, PWC’s
illegal conduct was driven by profit. PWC anticipated that its work on the Z-10
military attack helicopter in China 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.
Belated
and False Disclosures to U.S. Government
These companies failed to disclose to
the U.S. government the illegal exports to China for several years and only did
so after an investor group queried UTC in early 2006 about whether PWC’s role
in China’s Z-10 attack helicopter might violate U.S. laws. The companies then
made an initial disclosure to the State Department in July 2006, with follow-up
submissions in August and September 2006.
The 2006 disclosures contained numerous
false statements. Among other things, the companies falsely asserted that they
were unaware until 2003 or 2004 that the Z-10 program involved a military
helicopter. In fact, by the time of the disclosures, all three companies were
aware that PWC officials knew at the project’s inception in 2000 that the Z-10
program involved an attack helicopter.
Today, the Z-10 helicopter is in
production and initial batches were delivered to the People’s Liberation Army
of China in 2009 and 2010. The primary mission of the Z-10 is anti-armor and
battlefield interdiction. Weapons of the Z-10 have included 30 mm cannons,
anti-tank guided missiles, air-to-air missiles and unguided rockets.
“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,” said U.S.
Attorney Fein. “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, China was able to develop its first modern military attack
helicopter with restricted U.S. defense technology. As today’s case
demonstrates, the Justice Department will spare no effort to hold accountable
those who compromise U.S. national security for the sake of profits and then
lie about it to the government,” said Assistant Attorney General Monaco. “I
thank the agents, analysts and prosecutors who helped bring about this
important case.”
“This case is a clear example of how the
illegal export of sensitive technology reduces the advantages our military
currently possesses,” said ICE Director Morton. “I am hopeful that the
conviction of Pratt & Whitney Canada and the substantial penalty levied
against United Technologies and its subsidiaries will deter other companies
from considering similarly ill-conceived business practices in the future.
American military prowess depends on lawful, controlled exports of sensitive
technology by U.S. industries and their subsidiaries, which is why ICE will
continue its present campaign to aggressively investigate and prosecute
criminal violations of U.S. export laws relating to national security.”
“Today’s charges and settlement
demonstrate the continued commitment of the Defense Criminal Investigative
Service (DCIS) and fellow agencies to protect sensitive U.S. defense technology
from being illegally exported,” said DCIS Special Agent in Charge Bradley.
“Safeguarding our military technology is vital to our nation’s defense and the
protection of our war fighters both home and abroad. We know that foreign
governments are actively seeking U.S. defense technology for their own
development. Thwarting these efforts is a top priority for DCIS. I applaud the
agents and prosecutors who worked tirelessly to bring about this result.”
“Preventing the loss of critical U.S.
information and technologies is one of the most important investigative
priorities of the FBI,” said FBI Special Agent in Charge Mertz. “Our
adversaries routinely target sensitive research and development data and
intellectual property from universities, government agencies, manufacturers,
and defense contractors. While the thefts associated with economic espionage and
illegal technology transfers may not capture the same level of attention as a
terrorist incident, the costs to the U.S. economy and our national security are
substantial. Violations of the Arms Export Control Act put our nation at risk
and the FBI, along with all of our federal agency partners, are committed to
ensuring that embargoed technologies do not fall into the wrong hands. Those
who violate these laws should expect to be held accountable. An important part
of the FBI’s strategy in this area involves the development of strategic
partnerships. In that regard, the FBI looks forward to future coordination with
UTC and its subsidiaries to strengthen information sharing and
counterintelligence awareness.”
“Protecting national security is our top
priority,” said Assistant Secretary of Commerce for Export Enforcement Mills.
“Today’s action sends a clear signal that federal law enforcement agencies will
work together diligently to prevent U.S. technology from falling into the wrong
hands.”
Assistant Secretary Shapiro, of the
State Department’s Bureau of Political and Military Affairs, said, “Today’s $75
million settlement with United Technologies Corporation sends a clear message:
willful violators of U.S. arms export control regulations will be pursued and
punished. The successful resolution of this case is the byproduct of the
tireless work of our compliance officers and highlights the relentless
commitment of the State Department to protect sensitive American technologies
from being illegally transferred.”
U.S. Attorney Fein commended the many
agencies involved in this investigation, including ICE’s Homeland Security
Investigations (HSI) in New Haven; the DCIS in New Haven; the New Haven
Division of the FBI; the Department of Commerce’s Boston Office of Export
Enforcement. He also praised the Office of the HSI Attaché in Toronto, which
was essential to the initiation and investigation of this matter, and the State
Department’s Office of Defense Trade Controls Compliance in the Bureau of
Political-Military Affairs, for its critical role in the global resolution of
this matter.
The prosecution is being handled by
Assistant U.S. Attorneys Stephen B. Reynolds and Michael J. Gustafson from the
U.S. Attorney’s Office for the District of Connecticut, with assistance from
Steven Pelak and Ryan Fayhee of the Counterespionage Section of the Justice
Department’s National Security Division.
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