ITT Nears Justice Settlement


The federal contractor has been the subject of a long investigation into alleged exports of night-vision technology to China

ITT (ITT) is close to settling a case with the Justice Dept. for illegally exporting night-vision technology that authorities worry could put U.S. pilots and ground troops at risk.

The company, the military's leading supplier of night-vision goggles, has taken a $25 million charge to net income in anticipation of the settlement. The charge reduces ITT's fiscal 2006 earnings by 13¢ a share, the company said. The company disclosed the charge in a Dec. 15 filing with the Securities & Exchange Commission. The investigation has not previously been reported.

Federal law enforcement sources say the technology—including knowledge that could be used by an adversary to compromise the effectiveness of ITT's goggles in combat—was bound for China. But they would not say whether the transaction was successful.

No Mea Culpa

An ITT spokeswoman on Jan. 31 denied the company knowingly sold "any night-vision technology to China or through a mechanism that was bound for China." The spokeswoman, Courtney Reynolds, confirmed, however, that the Justice Dept. has concluded the company had breached export rules and that the pending settlement caps a several-year inquiry. "We can't provide further details," she said.

Reynolds said the company had recently taken steps to prevent such sales in the future. The safeguards include more oversight, training programs, and personnel changes, she said.

In a written statement Feb. 1, ITT said it is "absolutely certain that the heart of this technology—the night vision tube itself—is secure," adding that "there is also no evidence that night vision goggles or know-how regarding the manufacture of night vision tubes was ever transferred to China or any other non-approved nation." The statement went on to say that the investigation "has not revealed any evidence that night vision goggles are in the possession of any nation, government, or group unauthorized to receive them." An internal inquiry uncovered "many of the facts the case," the company also said.

Reynolds continued to refuse to discuss details of the case and its pending resolution, including an explanation for how the company calculated its $25 million charge, or whether the settlement includes an agreement to develop, at cost to the company, a new generation of night-vision technology that some authorities now fear may be necessary.

Lengthy Investigation

ITT acknowledged in its SEC filing Dec. 15 that it anticipated a settlement "regarding compliance with U.S. export regulations" during the first quarter of 2007. In its filing, the company said the settlement "would resolve all outstanding issues relating to this investigation that began several years ago."

The investigation was conducted by the Defense Criminal Investigative Service and the Immigration & Customs Enforcement agency, part of the Homeland Security Dept. U.S. Attorney John Brownlee of the Western District of Virginia has been leading the prosecution in Roanoke, Va., where ITT's night-vision business is based. All declined comment.

White Plains (N.Y.)-based ITT, which generated $7 billion in 2005 sales and expects full-year 2006 continuing operations earnings of around $2.80 per share, is a global leader in water treatment and transport. Military electronics and services, partly driven by night-vision sales to the U.S. military and countries such as Switzerland and Australia, generate around 43% of the company's revenue. ITT also sells electrical connectors and leisure marine products. Shares closed Jan. 31 at $59.65. Final quarter 2006 financial results are due to be released Feb. 2.

Beware of Buyers

Since September 11, sales of sensitive military and intelligence technology have grown into a major worry for U.S. authorities, who struggle to keep it from falling into unfriendly hands.

An arms and strategic technology investigations unit at Immigration & Customs Enforcement has stepped up efforts to crack down on illegal exports of sensitive technology. In 2006 they obtained 128 indictments and achieved 98 convictions, according to a November, 2006, press release. Thousands of times each year, customs officers also reach out to U.S. manufacturers in special attempts to educate them on export laws and teach them how to detect purchasers who often act as middlemen for people in countries not authorized to receive their products.

Since 2004, those crackdowns have involved several attempts to obtain night-vision equipment for China and Iran.

Bigger Fish

Cases involving such illegal exports usually ensnare lesser-known companies. ITT is both a major corporation and a federal contractor whose products have played critical roles in significant military actions, including Operations Just Cause and Desert Storm during the Persian Gulf War.

Thanks to the technology, "one of the big takeaways from the first Gulf War was: We own the night," observes John Pike, director of globalsecurity.org, a Washington group that conducts military research. "American forces were able to operate 24 hours a day. It's a real big advantage over people who can't do that."

Just what potential adversaries might do with the technology is less clear, military analysts say. "It depends on which enemy we're talking about," says Pike. "The goggles would be about as much help to al Qaeda as they would be to a dog. If the enemy in Iraq, the Sunni insurgency, suddenly came up with them, that might be of help to them. Thousands of goggles there would really worry me. Or if the Chinese could reverse engineer and replicate them."

Epstein is a correspondent in BusinessWeek's Washington bureau.

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