United Technologies Corp. (UTX:US) pleaded guilty to violating the Arms Export Control Act and making false statements in connection with exports of software that China used to develop its first attack helicopter.
The company’s Pratt & Whitney Canada unit and its U.S.- based Hamilton Sundstrand unit will pay more than $75 million as part of a settlement with the U.S. Justice Department and State Department, according to prosecutors. The case stemmed from an investigation led by Immigration and Customs Enforcement, the Justice Department said in a statement.
The company entered the plea, and accepted a deferred- prosecution agreement, today before U.S. District Judge Warren W. Eginton in Bridgeport, Connecticut.
“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,” the agency’s director, John Morton, said in a statement.
The U.S. has prohibited exports of U.S. defense articles and associated technical data to China since 1989 as a result of the crackdown on student demonstrators in Tianamen Square in Beijing earlier that year, according to the Justice Department. Congress imposed a ban on licenses or approvals of defense articles to China in February 1990, specifically naming helicopters for inclusion.
“Export controls are an integral part of safeguarding U.S. national security and foreign policy interests,” United Technologies’ Chief Executive Officer Louis Chenevert said in a statement. “We accept responsibility for these past violations and we deeply regret they occurred.”
United Technologies fell $1.56, or 2.1 percent, in New York trading, the biggest decline since June 1. The shares posted the biggest drop in the Standard & Poor’s 500 aerospace and defense index.
About $20.7 million of the fine will be paid to the Justice Department, while the remaining $55 million will be paid to the State Department as part of a separate accord to resolve outstanding export issues, according to the statement.
As much as $20 million of the fine may be suspended if the Hartford, Connecticut-based company applies it to “remedial compliance measures,” the statement says. The companies must also retain an independent monitor to make sure they comply with export laws for the next two years.
Although no individuals were charged in the case, Connecticut U.S. Attorney David Fein said the investigation is continuing and he wouldn’t rule out the possibility.
China sought to develop a military attack helicopter starting in the 1980s, and tried to disguise it as a civilian program after Congress imposed the ban in order to secure western assistance, the Justice Department said.
The helicopter, the Z-10, is in production and the first batches were delivered to the Chinese army in 2009 and 2010, the Justice Department said. The helicopter has weapons including 30-millimeter cannons, anti-tank guided missiles, air-to-air missiles and unguided rockets.
During the development of the Z-10, each helicopter was powered by engines supplied by Pratt & Whitney Canada, 10 of which were delivered to China in 2001 and 2002, the Justice Department said. Pratt & Whitney Canada determined that the engines didn’t require a U.S. export license because they were identical to those supplied to China for a commercial helicopter.
However, the software used to test and operate the engines was made by Hamilton Sundstrand in the U.S. and required a U.S. export license because it was modified for a military helicopter, the Justice Department said.
Pratt & Whitney knew from the start of the project that the Chinese were developing an attack helicopter and that supplying it with U.S.-built components would be illegal, the Justice Department said. Yet the unit failed to tell its parent company or Hamilton Sundstrand about the program until years later “and purposely turned a blind eye to the helicopter’s military application,” according to the department.
“PWC’s illegal conduct was driven by profit,” the Justice Department said. “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 worth as much as $2 billion.”
Hamilton Sundstrand believed it was providing software for a civilian Chinese helicopter then stopped work on the program after it learned there might be an export problem, the Justice Department said. United Technologies also asked Pratt & Whitney Canada about the exports, yet the unit modified the software on its own and continued to export it until June 2005.
The companies told the State Department about the program in July 2006 after an investor group asked United Technologies about whether Pratt & Whitney’s role in the program might violate U.S. laws, according to the statement.
Company disclosures contained “numerous false statements,” including the assertion that the companies were unaware that the program involved a military helicopter until 2003 or 2004, the Justice Department said.
United has spent more than $30 million since 2006 to strengthen its export compliance, Chenevert said in the statement. The company has also settled 576 civil charges with the State Department, which include more than 800 exports made from the mid-1990s to 2011, along with making false statements, the State Department said.
The agreement comes a year after BAE Systems Plc, Europe’s biggest defense company, agreed to pay as much as $79 million to settle an export regulations case, the largest civil penalty in U.S. State Department history.
The Homeland Security Department has seen a “significant increase” in illegal exports of U.S. weapons technology to China, said Bruce Foucart, special agent in charge of investigations for the department’s Boston office.
“This is not the first, and in all likelihood won’t be the last,” Fourcart said at a press conference in Bridgeport today.
The case is U.S. v. United Technologies, 3:12-cr-146, U.S. District Court, District of Connecticut (Bridgeport).
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