By: John Black
What Does PWC’s Debarment Mean for Your Company?
On June 28, 2012 Pratt Whitney Canada (PWC) pleaded guilty to violating the Arms Export Control Act and making false statements in connection with its illegal export to China of U.S.-origin military software used in the development of China’s new Z-10 military attack helicopter.
PWC, its US parent company United Technologies Corporation (UTC), and UTC’s US subsidiary Hamilton Sundstrand (HSC) agreed to pay $75 million as part of a global settlement with the Departments of Justice ($20.7 million) and State ($55 million) in relation to the violations. $20 million of the penalty can be suspended if UTC applies it to enhance its compliance program.
The high dollar penalty and the debarment are a direct result of various aggravating factors. First, PWC appeared to apply its own favorable interpretation that its exports were for commercial or dual-use engines that were used in the Z-10 so they were not subject to the ITAR. PWC also provided electronic engine control software, made by HSC in the US and modified for the military helicopter. The government said PWC took such actions so it could make money, as opposed to it being an honest misinterpretation of the ITAR. Also, PWC allegedly lied to the US Government many times in its 2006 disclosure to the US Government regarding the violations.
While the financial penalties certainly are a big deal for UTC, HSC and PWC, for the rest of you reading this article, the key issue is how does the debarment of PWC impact your ability to do business with PWC involving “defense articles” controlled by the ITAR?
Fortunately, the State Department was quick to act and posted guidance on its website regarding how the debarment of PWC impacts other companies.
Here are the key issues:
1) Who Is Debarred? The statutory debarment is applicable to P&W Canada only and not to UTC or to other subsidiaries and divisions of UTC. Associated restrictions extend to P&W Canada subsidiaries, divisions and business units, and successor entities. P&W Canada subsidiaries include Pratt & Whitney Kalisz Sp. z o.o., Pratt & Whitney Canada International, Inc., and Pratt & Whitney Canada Leasing, LP. The associated restrictions do not extend to entities managed, but not owned, by P&W Canada.
2) What about existing approvals (licenses and agreements)? All licenses and other approvals granted prior to June 28, 2012 are valid and are not affected by the statutory debarment.
3) What about exemptions involving PWC? You may not use ITAR exemptions for activities that involve PWC unless the activities fall within one of the three carve outs.
4) What about new applications? There is a presumption of denial for license applications “involving” PWC unless they fall within one of the three carve-outs, or a request is made for a transaction exemption.
5) What about pending applications? Applications which are pending with the Department as of June 28, 2012, will be Returned Without Action, unless the applicant submits a carve-out applicability confirmation or a transaction exception request via DTrade2 no later than July 6, 2012.
6) What are the carve outs? Applications for licenses or other authorizations, or use of ITAR exemptions, involving P&W Canada (including its subsidiaries, divisions and business units, and successor entities) that fall within the following three categories, are not subject to the debarment or associated restrictions, and do not require the submission of a supplemental “transaction exception” request:
Transactions in support of:
1. U.S. Government programs.
2. Coalition Operation Enduring Freedom efforts.
3. Government programs for NATO and Major Non-NATO Ally (ITAR § 120.32) countries.
The State Department requests that applicants reference the carve-out(s) from the statutory debarment and their applicability in submissions for authorizations.
7) What are the transaction exceptions? If the carve outs do not apply, you may ask for a transaction exception. If you request a transaction exception you should do your best at demonstrating why your application satisfies one or more of these criteria:
- Is the exception warranted by overriding U.S. foreign policy or national security interests,
- Would the exception further law enforcement concerns consistent with the foreign policy or national security interests of the U.S., or
- Do compelling circumstances exist that are consistent with the foreign policy or national security interests of the U.S.?
Background on the Case
If you want a slightly longer version of what PWC, HSC and UTC allegedly did wrong, here is an excerpt from the US Government press release:
The Counts
…[T]the Justice Department filed a three-count criminal information charging UTC, PWC and HSC. Count One charges PWC with violating the Arms Export Control Act in connection with the illegal export of defense articles to China for the Z-10 helicopter. Count Two charges PWC, UTC and HSC with making false statements to the U.S. government in their belated disclosures relating to the illegal exports. Count Three charges PWC and HSC with failure to timely inform the U.S. government of exports of defense articles to China.
While PWC has pleaded guilty to Counts One and Two, the Justice Department has recommended that prosecution of UTC and HSC on Count Two, and PWC and HSC on Count Three be deferred for two years, provided the companies abide by the terms of a deferred prosecution agreement with the Justice Department. As part of the agreement, the companies must pay $75 million and retain an Independent Monitor to monitor and assess their compliance with export laws for the next two years.
The Export Scheme
Since 1989, the United States has imposed a prohibition upon the export to China of all U.S. defense articles and associated technical data as a result of the conduct in June 1989 at Tiananmen Square by the military of the People’s Republic of China. In February 1990, the U.S. Congress imposed a prohibition upon licenses or approvals for the export of defense articles to the People’s Republic of China. In codifying the embargo, Congress specifically named helicopters for inclusion in the ban.
Dating back to the 1980s, China sought to develop a military attack helicopter. Beginning in the 1990s, after Congress had imposed the prohibition on exports to China, China sought to develop its attack
helicopter under the guise of a civilian medium helicopter program in order to secure Western assistance. The Z-10, developed with assistance from Western suppliers, is China’s first modern military attack helicopter.
During the development phases of China’s Z-10 program, each Z-10 helicopter was powered by engines supplied by PWC. PWC delivered 10 of these development engines to China in 2001 and 2002. Despite the military nature of the Z-10 helicopter, PWC determined on its own that these development engines for the Z-10 did not constitute “defense articles,” requiring a U.S. export license, because they were identical to those engines PWC was already supplying China for a commercial helicopter.
Because the Electronic Engine Control software, made by HSC in the United States to test and operate the PWC engines, was modified for a military helicopter application, it was a defense article and required a U.S. export license. Still, PWC knowingly and willfully caused this software to be exported to China for the Z-10 without any U.S. export license. In 2002 and 2003, PWC caused six versions of the military software to be illegally exported from HSC in the United States to PWC in Canada, and then to China, where it was used in the PWC engines for the Z-10. According to court documents, PWC knew from the start of the Z-10 project in 2000 that the Chinese were developing an attack helicopter and that supplying it with U.S.-origin components would be illegal. When the Chinese claimed that a civil version of the helicopter would be developed in parallel, PWC marketing personnel expressed skepticism internally about the “sudden appearance” of the civil program, the timing of which they questioned as “real or imagined.” PWC nevertheless saw an opening for PWC “to insist on exclusivity in [the] civil version of this helicopter,” and stated that the Chinese would “no longer make reference to the military program.” PWC failed to notify UTC or HSC about the attack helicopter until years later and purposely turned a blind eye to the helicopter’s military application.
HSC in the United States had believed it was providing its software to PWC for a civilian helicopter in China, based on claims from PWC. By early 2004, HSC learned there might an export problem and stopped working on the Z-10 project. UTC also began to ask PWC about the exports to China for the Z-10. Regardless, PWC on its own modified the software and continued to export it to China through June 2005.
According to court documents, PWC’s illegal conduct was driven by profit. 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 potentially worth as much as $2 billion to PWC .
Belated and False Disclosures to U.S. Government
These companies failed to disclose to the U.S. government the illegal exports to China for several years and only did so after an investor group queried UTC in early 2006 about whether PWC’s role in China’s Z-10 attack helicopter might violate U.S. laws. The companies then made an initial disclosure to the State Department in July 2006, with follow-up submissions in August and September 2006.
The 2006 disclosures contained numerous false statements. Among other things, the companies falsely asserted that they were unaware until 2003 or 2004 that the Z-10 program involved a military helicopter. In fact, by the time of the disclosures, all three companies were aware that PWC officials knew at the project’s inception in 2000 that the Z-10 program involved an attack helicopter.
Today, the Z-10 helicopter is in production and initial batches were delivered to the People’s Liberation Army of China in 2009 and 2010. The primary mission of the Z-10 is anti-armor and battlefield interdiction. Weapons of the Z-10 have included 30 mm cannons, anti-tank guided missiles, air-to-air missiles and unguided rockets.
“PWC 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,” said U.S. Attorney Fein. “PWC 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 two billion dollars. Several years after the violations were known; UTC, HSC and PWC disclosed the violations to the government and made false statements in doing so. The guilty pleas by PWC and the agreement reached with all three companies should send a clear message that any corporation that willfully sends export controlled material to an embargoed nation will be prosecuted and punished, as will those who know about it and fail to make a timely and truthful disclosure.”
“Due in part to the efforts of these companies, China was able to develop its first modern military attack helicopter with restricted U.S. defense technology. As today’s case demonstrates, the Justice Department will spare no effort to hold accountable those who compromise U.S. national security for the sake of profits and then lie about it to the government,” said Assistant Attorney General Monaco. “I thank the agents, analysts and prosecutors who helped bring about this important case.”
For more information see: http://www.bis.doc.gov/news/2012/doj06282012.htm