Officials of Pratt & Whitney Canada, a subsidiary of United Technologies Corp., had two key concerns as they started to purse a potential $2 billion helicopter engine market in China: profits and credibility.

United Technologies pleaded guilty on June 28 to violating the Arms Export Control Act and making false statements in connection with exports of software China used to develop its first attack helicopter. A federal investigation showed that while Pratt & Whitney Canada wanted to capture the Chinese civilian helicopter market, the price of entry was helping China develop a military attack helicopter.

The United States has prohibited the export of military hardware and software to China since 1989, but in pursuit of what was potentially a huge stake in the Chinese civilian aviation market, Pratt & Whitney Canada turned a “blind eye” to China’s use of the technology as it worked to help that country ostensibly develop a dual use military/civil helicopter, the Justice Department charged.

David Fein, U.S. attorney for the District of Connecticut, said Pratt & 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.” Fein said the company “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 dollars.”

Lisa Monaco, assistant attorney general for national security said, “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.”

United Technologies informed the State Department in July 2006 that it had violated export control laws in helping China develop the attack helicopter even though Pratt & Whitney Canada officials knew the Chinese wanted their aid on development of the military version first, Justice said.

Company emails cited in the deferred prosecution agreement Justice signed with United Technologies showed that in August 2000, Pratt & Whitney Canada export managers reported that “discussions on [the engine] for [the] Chinese Z-10 attack helicopter [emphasis included] are progressing smoothly.”

This same email also acknowledged the export control laws and raised the credibility issue: “P&WC will lose all credibility in China, if P&WC/UTC, as [a] corporation, backs out of the program at a later date when put under pressure even if [a] legal basis for export restriction may not exist.”

In a September 2001 email, the Pratt & Whitney Canada export manager warned: “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 Z-10C program. If the first flight will be with a gun ship then we could have Problems with the U.S. government [emphasis included].”

Canada also has its own strict export control laws, and in September 2000, Pratt & Whitney Canada submitted a letter to the Canadian government for export of 10 engines to China. The letter acknowledged military use, but never mentioned development of an attack helicopter.

In January 2002, Pratt & Whitney Canada turned to another United Technologies subsidiary, U.S.-based Hamilton Sundstrand, for electronic engine control hardware and software, and the Canadian company “made no mention of a military end use,” the Justice Department said.

Hamilton Sunstrand developed 12 different versions of the software for the Chinese helicopter, which was exported by email, Justice said. Because the Chinese helicopter was dubbed commercial by Pratt & Whitney Canada, Hamilton Sundstrand did not seek an export license.

By April 2003, Pratt & Whitney Canada officials knew the first flight of a Chinese helicopter would be a military version, but did not inform Hamilton Sundstrand that the prototype was an attack helicopter.

By January 2004, Hamilton Sundstrand was aware there might be an export control problem with its software and requested and end use statement from Pratt & Whitney Canada, which the next month concluded it could not obtain U.S. export licenses and would use a Canadian supplier.

Officials of Pratt & Whitney Canada briefed senior United Technologies management in May 2004 and, according to internal documents obtained by Justice, called the Chinese engine program a “major breakthrough . . . it breaks the dominance of a competitor.” The Canadian company officials added: “Because of military applications, risks do exist on export control issues [emphasis included]. These risks have been mitigated by obtaining the necessary export permits and through appropriate selection of suppliers for engine components.”

In 2005, China told Pratt & Whitney Canada it intended to use the company’s engines only for the military helicopter and would conduct a competition for the civil program. Internal documents showed the company believed it needed to prove itself on the military program to win the civil business, but lost that competition.

In June 2006, Justice said that lawyers from United Technologies told Pratt & Whitney Canada and Hamilton Sundstrand they had concluded an export violation occurred with the software supplied to China. Company officials informed the State Department in a series of letters sent in July, August and September of 2006.

“The thrust of the disclosure letters was that none of the UTC entities had any idea that the Chinese were developing a military attack helicopter until 2003 or 2004, and that after learning about it, and subsequently recognizing the corresponding export violations, the UTC entities had taken swift remedial action to address the issue,” Justice said.

Those letters, Justice said, falsely claimed that the focus of the China engine project was to develop a dual use military/civil engine, when in fact, Pratt & Whitney Canada knew from the start that China sought the technology for an attack helicopter. These false claims, Justice said, were part of what it called a profit driven export scheme that resulted in China developing an attack helicopter based on U.S. technology.