Pentagon Contractor Caught Illegally Selling Military Technology to China

ZACH TOOMBS & R. JEFFREY SMITHJUL 6 2012, 7:28 AM ET

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A six-year U.S. probe found that Pratt & Whitney, a key military hardware supplier to the U.S., sold China the software and engines needed to make its first-ever modern attack helicopter.

A Chinese Z10 helicopter shows off its 30 mm cannons, anti-tank guided missiles, and air-to-air missiles. (Global Security)

The Canadian arm of the aircraft engine manufacturer Pratt & Whitney closed a six-year U.S. government probe last week by admitting that it helped China produce its first modern attack helicopter, a serious violation of U.S. export laws that drew a multimillion dollar fine.
At the same time it was helping China, the company was separately earning huge fees from contracts with the Pentagon, including some in which it was building weapons meant to ensure that America can maintain decisive military superiority over China's rising military might.
The Chinese helicopter that benefited from Pratt's engines and related computer software, now in production, comes outfitted with 30 mm cannons, anti-tank guided missiles, air-to-air missiles and unguided rockets. "This case is a clear example of how the illegal export of sensitive technology reduces the advantages our military currently possesses," Immigration and Customs Enforcement Director John Morton said in a statement released on June 28.
The events are once again raising questions about the circumstances under which major defense contractors might be barred from government work. Independent watchdogs have long complained that few such firms have been barred or suspended, even for egregious lawbreaking, such as supplying armaments or related equipment to a hypothetical adversary.
Nothing in the settlement agreement, in which Pratt & Whitney and two related companies, United Technologies and Hamilton Sundstrand agreed to pay a total of $75 million for multiple violations of export rules, directly threatens Pratt's existing or future government contracting.
It's not the first time that United Technologies -- the parent company of Pratt -- has run afoul of government regulations. An SEC filing by the firm in February, in which the company disclosed the probe's existence, listed two earlier lawsuits filed by the government against the company over its defense-related work; both were listed as still pending in the courts.
The Project on Government Oversight, a nonprofit watchdog group in Washington, ranks United Technologies at number seven on a list of the top 100 contractors cited for misconduct since 1995.
"They've had a smattering of issues over the years -- everything from environmental violations to false claims made to the government," said Neil Gordon, a POGO investigator focusing on government contracting issues. "The military relies on too few companies for these weapons and services. So, they often have few other options when a provider is guilty of misconduct."
Since July 2006, when United Technologies filed statements about its assistance to China that it now admits were erroneous, the Pentagon has awarded more than $1.67 billion in contracts to Pratt and its affiliates, according to a search of the Federal Procurement Data System. And since Pratt & Whitney began its dealings with China in September 2000, the company has received $2.27 billion from the Defense Department.
One of Pratt & Whitney's principal contracts now is to supply jet engines for Air Force's F-35 Joint Strike Fighter jets. The Obama administration waged a major battle to make the company the sole provider of those engines over the last two years, writing General Electric's rival engine contract out of federal budgets in an effort to save money. The Pentagon explained in the White House's proposed fiscal year 2011 budget -- issued Feb. 1, 2010 -- that Pratt & Whitney's engine work was "progressing well," making GE's work superfluous. The Government Accountability Offices subsequently disclosed in December 2010 that engine costs for the jets have risen by 75 percent since 2001.
The jet is being developed in part to ensure that the U.S. military can prevail against any potential adversary, including major powers able to field multiple advanced aircraft. Though officials say there's no reason to expect a U.S. military confrontation with China, the Pentagon said this spring it was reorienting its forces to reassure allies worried about what they regard as a rising Chinese threat.
In addition to prosecuting firms in court, the U.S. government has three options for taking action against defense contractors. Suspension typically bars a company from receiving government contracts for 18 months, and debarment does the same for a longer period -- three years. The State Department can also choose to revoke a company's export license, blocking sales to foreign governments or corporations.
Cheryl Irwin, a spokeswoman for Secretary of Defense's office, said the Defense Department to her knowledge had not taken action against UTC and its affiliates or reviewed the company's contracts in light of last week's settlement.
The prosecution marked "one of the largest resolutions of export violations with a major defense contractor in the Justice Department's history," U.S. Attorney for Connecticut David Fein, who directed the prosecution, announced at a press conference last week. Assistant Attorney General Lisa Monaco, who spoke with Fein in Bridgeport, Connecticut said Pratt had compromised "U.S. national security for the sake of profits and then lie[d] about it to the government."
After closely examining company procedures and internal records, investigators concluded that United Technologies was responsible for a string of 576 export-related violations. What the Defense Department knew and when it knew it is not completely clear.
When the Justice Department launched its probe in 2006, it made no public announcement. DOJ spokesman Dean Boyd first said that to his knowledge, others besides the State Department weren't notified but later affirmed that the Defense Criminal Investigative Service, an arm of the Pentagon, had assisted the investigation. In the SEC filing [6], Pratt & Whitney said the Justice Department had been in discussions with the company about the violations since Nov. 2011.
In the settlement, Pratt admitted that some officials in its Canadian subsidiary were aware from the outset that the work with China was initially to be of military use. A marketing manager referred explicitly in an Aug. 2000 e-mail to the company's export officials to the task of making engines for an "attack helicopter," an agreed "Statement of Facts" accompanying the settlement recounted. The Chinese called the helicopter the "Z10."
The United States has had an embargo on military exports to China since the events in Tiananmen Square in 1989. But the company told the Canadian government that because the engines were already approved for civilian export, it needed no special permission for use on a military aircraft. Canadian regulators disagreed, and demanded that company request a permit.
After Pratt conveyed this news to the Chinese, China's Aviation Industry Corporation suddenly told the company it had begun developing a civilian variant of the military helicopter - the "Z10C," which it said would be used for sightseeing, business VIPs, and search-and-rescue missions.
Management within Pratt & Whitney was skeptical of the civilian helicopter program's "sudden appearance," according to United Technologies' deferred prosecution agreement. But the company nonetheless saw the claim as providing a useful opening: On November 13, 2000, a Pratt & Whitney manager for Asia Marketing emailed two other executives that whether the civil program was "real or imagined," the company could bid for an exclusive role.
Prosecutors, in a court filing, said the company turned a "blind eye" to any doubts because it was hungry to earn up to $2 billion from the civilian program. Canadian authorities, after being told about the parallel Z10C helicopter, approved the export of 10 engines.
Pratt & Whitney's Canadian subsidiary next asked its sister subsidiary Hamilton Sundstrand -- headquartered in the United States -- to write the software needed to control the engines, without saying that the purpose was to equip a military helicopter. From January 2002 to October 2003, Hamilton Sundstrand exported 12 versions of the software to Pratt & Whitney, which sent six of those on to China for use in the development model of the Z10 helicopter, according to the settlement agreement.
Pratt & Whitney executives also kept the military end-use of its engines and software secret from some of the company's engineers. When two were dispatched to China in March 2003 to observe the helicopters, one asked a Chinese official, "where are the other 10 seats," meaning those intended for civilian passengers? The helicopter they saw had only two seats in tandem -- typical of an attack model -- and mock weapons on the hull. According to federal prosecutors who interviewed the engineers, the Chinese official smiled and said, in effect, that it had always been an attack helicopter.
The engineers reported their observation -- and their concerns -- to Pratt & Whitney's manager for Asian marketing upon returning to the company's Montreal headquarters. But no restrictions were imposed by the firm and they kept working on the project.
When Hamilton finally discovered the military use of its software in Feb. 2004, it shut down its production in less than a week. Pratt, still holding out hope for the large civilian helicopter contract, picked up where Hamilton Sundstrand left off and exported its own versions of the software to China through June 2005.
United Technologies made a limited disclosure about its involvement to the State Department in 2006, after an institutional investor said it was researching the company's role in helping China's military and threatened to disinvest. The company has now admitted that disclosure -- which claimed the company believed at the outset there were dual civilian and military helicopter programs -- was inaccurate.
In the end, Pratt got little more for its troubles than a federal probe. In early 2006, China's Aviation Industry Corporation told Pratt & Whitney the supposedly parallel civilian helicopter development would be scrapped. Instead, China said it would instead build a much larger civilian helicopter, too large for the engines built by Pratt & Whitney.
According to the Justice Department's statement announcing the settlement, the first batches of the Z10 attack helicopter were delivered to the People's Liberation Army of China in 2009 and 2010.
UTC, a company with $58 billion in 2011 sales, told the Center through an email on Friday it was taking steps to improve oversight. Spokesman John Moran said UTC has established a new "Export Council" to internally inspect arms shipments and is now requiring online training for employees working with exports.
The company's deferred prosecution agreement also shows a lengthy list of reforms the company has promised in response to the exports violation, assigning 175 executives to keep an eye on export law compliance for UTC and its subsidiaries, along with requiring internal reviews of exports from all its subsidiaries, including Pratt & Whitney.