United Technologies Admits to 576 Export Violations; Will Pay $75 Million

The State Department announced a consent agreement today under which United Technologies Corporation (UTC) and three of its operating units or subsidiaries will pay $75 million in fines and penalties and take remedial actions for hundreds of civil violations of export control laws and regulations in its dealings with China.   UTC subsidiary Pratt & Whitney Canada  (P&W Canada) additionally pleaded guilty in a Connecticut court to a criminal violation.

UTC voluntarily disclosed most of the 576 violations to the U.S. Government beginning in 2006 according to the State Department.  Some of the violations took place in 2002-2003 and involved the sale of engine software by P&W Canada that is being used in Chinese military attack helicopters.  The software was of U.S. origin and governed by the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR).  Because it voluntarily disclosed violations and cooperated with the investigation, the State Department did not debar the defense contractor.  However, it did impose a statutory debarment on some P&W Canada activities.

The State Department asserts that the consent agreement addresses not only the illegal exports, but “false and belated disclosures to the U.S. Government about these illegal exports, and many other compliance failures.” While acknowledging the voluntary disclosures as mitigating factors, it decided to charge the company with 576 violations “given the harm to national security and the systemic, longstanding and repeated nature of certain violations,” it said in a proposed charging letter.

The consent agreement will remain in effect for four years.  UTC will pay $20.7 million in fines, forfeitures and other penalties to the Justice Department, and $55 million to the State Department as a penalty.  The State Department suspended $20 million of the $55 million on the condition that it be used for remedial compliance measures.

Export control reform is a major goal of the aerospace industry, particularly satellite manufacturers.  Progress was recently made in that regard with release of the “Sec. 1248” report by the State and Defense Departments, and House-passage of an amendment to the FY2013 National Defense Authorization Act to ease export controls for certain satellites. The export violations revealed today do not appear to involve satellites and under the House-passed language satellite exports to China would continue to be denied in any case.  

Thus, today’s announcement may not complicate the satellite export debate, although it may undermine confidence that the aerospace industry has learned from the mistakes of the 1990s that led to the current strict export limits on satellites.

In an unrelated development, Canada’s MacDonald, Dettwiler & Associates (MDA) purchased Space Systems/Loral today for $875 million.   It was a Loral employee sending a letter to China without export approval in 1996 that initiated the chain of events that became known as the “Loral/Hughes” affair.  It led to a congressional investigation chaired by then-Rep. Christopher Cox.  The Cox Committee report concluded that Loral and Hughes Aircraft (a satellite manufacturer later bought by  Boeing) violated export laws in helping China determine why its satellite launches failed.  In response, Congress passed language in the FY1999 National Defense Authorization Act that put satellites back on the State Department’s Munitions List with its ITAR regulations.  It also removed the President’s authority to decide whether satellites are governed by ITAR or the dual-use Commerce Commerce List administered by the  Commerce Department.  The aerospace industry has been trying to undo that language ever since, claiming that ITAR restrictions put them at a significant competitive disadvantage with foreign companies and thereby harm the U.S. economy.