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Pratt & Whitney guilty of breaking arms embargo with China

By Edmund H. Mahony, Mara Lee and Christine Dempsey, The Hartford Courant –

BRIDGEPORT, Conn. — United Technologies Corp. agreed to pay $75 million in fines and subsidiary Pratt & Whitney Canada pleaded guilty Thursday to settle charges that the company violated arms control laws and made false statements about the export of software that controlled the engines in China’s first military attack helicopter.

Federal prosecutors described the export program involving the Z-10 attack helicopter as a calculated effort by Pratt & Whitney Canada to claim the dominant position in helicopter engines in China.

“Pratt and Whitney Canada exported controlled U.S. technology to China, knowing it would be used in the development of a military attack helicopter in violation of the U.S. arms embargo with China,” U.S. Attorney David B. Fein said. “Pratt and Whitney Canada took what it described internally as a ‘calculated risk,’ because it wanted to become the exclusive supplier for a civil helicopter market in China with projected revenues of up to $2 billion.”

The U.S. has prohibited exports that will be used in Chinese military equipment since the Tiananmen Square massacre of peaceful protestors in 1989.

United Technologies Chairman and CEO Louis Chenevert said, “We accept responsibility for these past violations, and we deeply regret they occurred.” He said United Technologies, the Hartford, Conn.-based parent of Pratt & Whitney, has spent $30 million since the violations took place to improve export compliance, something he described as “an integral part of safeguarding U.S. national security and foreign policy interests.”

Of the fine, $20 million will be suspended if the company documents that level of investment in compliance.

In support of its contention that the violations were willful, the government quoted an internal email from Pratt & Whitney Canada that 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 with a gun ship then we could have problems with the U.S. government.”

The Justice Department on Thursday outlined the violations in U.S. District Court in Bridgeport. Those documents suggested conflict among the United Technologies units over the China sales. In particular, the government documents assert that fellow subsidiary Hamilton Sundstrand realized that the helicopter sales had military implications but was unable to stop them.

Pratt & Whitney Canada sold engines for Chinese helicopters and Hamilton Sundstrand, based in Windsor Locks, Conn., produced operating software for the engines. In all, United Technologies made $2.3 million in profit on the sale of the ten engines and software to China. Pratt didn’t end up with the lock on the civilian program it had expected, and ended up withdrawing from the military program as a result.

Federal prosecutors said China had hoped to build its own engines for the military helicopter, but the program hit roadblocks, and they decided to import them from a Western country.

Pratt Canada could only get Canadian permission to export the engines if they would be used in both military and civilian helicopters, and the Chinese-owned firm said that would be the case.

Federal prosecutors said the marketing department at Pratt & Whitney Canada was skeptical from the start of Chinese claims that it was involved in the simultaneous development of civilian and military helicopter lines.

Yet Pratt Canada, in spite of its skepticism, saw an opportunity “to insist on exclusivity in (the) civil version of this helicopter,” according to prosecution documents. The prosecutors said in a statement that Pratt Canada failed to notify United Technologies or Hamilton Sundstrand “about the attack helicopter until years later and purposely turned a blind eye to the helicopter’s military application.”

Hamilton Sundstrand, which designs the software, first realized there was an export problem in 2004, and stopped working on the project within a week, according to the prosecution documents. Hamilton also questioned Pratt Canada about the legality of the exports.

But Pratt Canada continued to refine the software, and continued to sell it to China through June 2005, the documents said. Pratt Canada had not told Hamilton that the software would be used on military helicopters for years, the documents show.

United Technologies officials claimed to have learned that the Chinese would use the engines exclusively in a military attack helicopter when they walked through a hangar in 2003. The guilty plea says Pratt Canada admits that it willfully made false statements about what it knew China would do with the helicopter engines, including that story. In fact, the government concluded, Pratt knew China’s plans from 2000, years before it ever sent the first engine.

United Technologies told the State Department about the export’s military use in 2006. That disclosure followed a complaint from a nonprofit group that advises investors, which wrote to United Technologies’ investment relations division, complaining of Pratt & Whitney Canada’s sales of engines for Chinese attack helicopters. That complaint said United Technologies was violating the arms embargo, and that the group would suggest stockholders sell their holdings depending on the depth of United Technologies’ involvement.

As the company worked on its explanation to the State Department in for how the improper sales happened, a Hamilton Sundstrand compliance officer complained about changes to its wording, Justice Department documents show.

He “communicated those concerns to (a Hamilton Sundstrand) senior executive involved in the disclosure. The Hamilton executive responded that it was ‘(Pratt Canada), not us.’ ”

The mechanism of the guilty plea waives an indictment. The first count in the case charges Pratt Canada with violating the Arms Export Control Act. The second count accuses United Technologies and both subsidiaries of making false statements to the U.S. government in their disclosures relating to the illegal exports. The final count accuses the two subsidiaries of failing to inform the U.S. government of the export of defense articles to China in a timely fashion.

Pratt Canada pleaded guilty to the second count. On the remaining charges, the government and United Technologies reached a two-year, deferred prosecution deal. The deal involves the payment of $75 million in fines and requires UTC to retain an independent monitor to assess its compliance with export laws over the next two years.

United Technologies also disclosed Thursday that, in addition to the independent monitor, Pratt Canada has expanded its export compliance staff from two people to 11, and will soon have 15 employees in that department.

Hamilton used to have six export specialists and a manager, as well as an import specialist. Now it has an executive, seven export managers, seven export personnel, two import specialists, and the division is looking to hire two more export managers and an import specialist. The staff includes seven lawyers and four engineers.

“As a supplier of controlled products and technologies to the Department of Defense and other domestic and international customers, we are committed to conducting business in full compliance with all export laws and regulations,” Chenevert said.

The company and the State Department had been negotiating the settlement since November.

“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 in the future,” said U.S. Immigration and Customs Enforcement Director John Morton in a written statement.

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