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US firm fined for selling China military helicopter software

United Technologies  and two of its subsidiaries sold China software enabling Chinese authorities to develop and produce their first modern military attack helicopter, U.S. authorities said.
/ Source: Reuters

United Technologies Corp. and two of its subsidiaries sold China software enabling Chinese authorities to develop and produce their first modern military attack helicopter, U.S. authorities said on Thursday.

At a federal court hearing in Bridgeport, Conn., United Technologies and its two subsidiaries, Pratt & Whitney Canada and Hamilton Sundstrand Corp, agreed to pay more than $75 million to the U.S. government to settle criminal and administrative charges related to the sales.

As part of the settlement, Pratt & Whitney Canada agreed to plead guilty to two federal criminal charges -- violating a U.S. export control law and making false statements. The charges were in connection with the export to China of U.S.-origin military software used in Pratt & Whitney Canada engines, which was used to test and develop the new Z-10 helicopter.

Also as part of the deal, United Technologies and Hamilton Sundstrand admitted to making false statements to the U.S. government about the illegal exports.

Hamilton Sundstrand and Pratt & Whitney Canada also admitted that they had failed to make timely disclosures, required by regulations, to the U.S. State Department about the exports.

The government said that the $75 million settlement breaks down into roughly $20.7 million in criminal fines, forfeitures and other penalties to be paid to the Justice Department and roughly $55 million in payments to the State Department as part of a consent agreement resolving more than 500 administrative export control violations.

About $20 million of the fines will be suspended, to be used by the company for continuing to improve its export control procedures, and for hiring an independent monitor, United Technologies said.

As part of the agreement, the U.S. State Department also will impose a partial debarment of Pratt & Whitney Canada for new export licenses, although the company can request licenses on a case-by-case basis. The debarment does not affect United Technologies or Hamilton Sundstrand, and the Canadian unit can request full reinstatement in one year.

A law enforcement source familiar with the case said investigators believe United Technologies and its subsidiaries deliberately set out to provide the embargoed military technology to China in order to ingratiate themselves with Chinese authorities, hoping to win them entree into China's lucrative civilian helicopter market, worth an estimated $2 billion.

However, the source said, the companies ultimately were cut out of China's civilian helicopter market when the Chinese chose to buy from other manufacturers.

United Technologies said it accepted responsibility for the past violations and regretted them. The company said it had spent $30 million to investigate and fix export control procedures throughout the company, and hired more than 1,000 full and part-time employees to address the issue. Officials said they were determined to have "best-in-class compliance" going forward.

Jay DeFrank, a spokesman for Pratt & Whitney Canada, said the company continued to do business in China.

"China is and remains an important market for UTC and we will continue to do business there in full compliance with the law," he said.

Western experts said the Z-10 is developing into one of the world's most modern and capable combat helicopters. Full production of the Z-10 powered by Pratt & Whitney Canada engines would give Chinese military forces unprecedented levels of "aerial artillery" to support any amphibious invasion and subsequent operations against Taiwan, which Beijing claims as its own, according to Richard Fisher, an expert on China's military application of so-called dual-use technologies.

U.S. authorities said China had been trying to develop a specialized modern military attack helicopter since the 1980s. But since the Chinese government's 1989 crackdown on the pro-democracy movement, the U.S. government has prohibited the export to China of U.S. defense equipment and technology.

Beginning in the 1990s, a U.S. official said, China began an effort to develop a military attack helicopter but under the guise of a civilian helicopter program. The program culminated in the Z-10 attack helicopter, which is in production today, the official said.

Initial batches of the aircraft were delivered to China's People's Liberation Army beginning in 2009. The helicopters' primary use would be for attacking armor and battlefield operations but it also has limited air-to-air combat capabilities.

Z-10 prototypes have been equipped with 30mm cannons, anti-tank guided missiles, air-to-air missiles and unguided rockets.

U.S. authorities said that Pratt & Whitney Canada's initial involvement in the program was to deliver 10 engines t o China from Canada in 2001 and 2002. The United States said that for the purposes of this deal, Pratt & Whitney Canada argued that the engines did not constitute defense equipment subject to the U.S. military embargo on China because the engines were identical to those it was supplying China for commercial helicopters.

As part of Wednesday's settlement, however, Pratt & Whitney Canada agreed to plead guilty to criminal charges related to its export to China of U.S.-made electronic engine control software used to test and operate the Pratt & Whitney Canada engines. U.S. authorities maintain that when the software, made in the United States by Hamilton Sundstrand, was modified for use in military helicopters, it thus became subject to the U.S. military embargo on China.

According to court documents, Pratt & Whitney Canada allegedly knew from the outset of the Z-10 project in 2000 that the Chinese were developing a military attack helicopter and that helping them by supplying U.S.-origin components would be illegal. U.S. authorities say that the Canadian subsidiary failed to notify its U.S. parent and Hamilton Sundstrand until years later.

The United States maintains the Canadian company deliberately turned a blind eye to the military applications of the technology it was exporting to China.

According to court documents, in one 2001 internal email, a Pratt & Whitney Canada manager said: "We must be very careful that the helicopter programs we are doing with the Chinese are not presented or viewed as military programs. As a result of these sanctions, we need to be very careful with the Z10C program. If the first flight will be a gunship, then we could have problems with the U.S. government."

Meanwhile, U.S. investigators say, Hamilton Sundstrand back in the United States believed it was providing its software to Pratt & Whitney Canada for use in a civilian Chinese helicopter. By 2004, investigators say, Hamilton Sundstrand learned there might be an export law problem and stopped working on the Z-10 program. But authorities say Pratt & Whitney Canada then modified software on its own and continued to export it to China through June 2005.

The U.S. government said in court documents that Pratt & Whitney Canada's illegal activities were driven by a desire for profit, namely an entree into the Chinese civilian helicopter market. "We are on the brink of reaping the benefits of our investment," one internal company document said.

Court documents say neither United Technologies, Pratt & Whitney Canada nor Hamilton Sundstrand made any disclosures to U.S. authorities about their knowledge of Pratt & Whitney Canada's illegal exports to China for several years.

A law enforcement source said the companies did not even launch an internal inquiry until a non-governmental organization involved in examining "socially responsible" investments in February 2006 asked United Technologies whether Pratt & Whitney Canada's involvement in the Z-10's development might violate U.S. export laws. The group threatened to recommend that investors sell their holdings in UTC.

Subsequently, in July 2006, UTC and its subsidiaries began a series of disclosures to U.S. authorities, although investigators say that these were found to contain false statements.

Among the alleged false statements were assertions by the companies that they did not learn until 2003 or 2004 about the military role of the Z-10, whereas in fact all three companies were earlier aware that Pratt & Whitney Canada officials knew at the project's inception in 2000 that the Z-10 was intended for the Chinese military.