“Where are the other ten seats?”

In March 2003, as development of the Chinese helicopter moved forward, P&WC engineers from Montreal flew to China to assist with ground testing for the first flight. On March 15, they got their first look at the helicopter prototype, which they had been told by management was for a 12-seat transport helicopter. They walked into the hangar and saw a helicopter with two PWC engines and two seats, one above and behind the other—for a gunner and a pilot. It also had mocked-up weapons systems.

Surprised, one of the Canadian engineers asked, “Where are the other ten seats?” The P&WC program chief laughed in response. Another engineer asked the Chinese about the design, and they politely explained that they had been budgeted to develop an attack helicopter.

When they got back to Montreal, the engineers met with the company’s Asia general manager and export manager, among others, for a debriefing. According to an engineer present at the meeting, the managers still felt the project could go forward as long as the engine had a “predominantly civil application.” The managers expressed surprise about the design but made no move to stop the program. The company proceeded as before, and engineers made several more trips to China to work on the Z-10.

It was apparently clear to the project team that it was time to cover themselves. The P&WC export manager sent a letter to the Canadian DFAIT, saying, “In the initial permit application we informed you… that there would be two aircraft development programs for both civil and military helicopters and that development of these helicopters would be done very much in parallel.”

But, the export manager wrote, the delays in the development of a Chinese engine for the military helicopter had “prompted the Chinese to consider using the PT6C-67C engine for the initial military aircraft,” and that the military helicopter’s development had rocketed ahead of the civilian one, with ground tests already using the P&WC engine. “First flight of the aircraft is expected to be before the end of April and will be the two seat military version of the aircraft and not the civil version.”

Not to worry, though, the export manager wrote: P&WC was “assured by the Chinese that the civil aircraft is continuing under development and that the [P&WC] engine would only be used on the military version for a limited transition production batch.” And, by the way, “because of the sensitivity of military programs in China,” the export manager asked DFAIT to contact the company if the officials thought they might need a permit now to export 100 more engines to China.

The P&WC export manager e-mailed a copy of the letter to UTC’s government business development staff in Washington, DC. But the information was never sent to Hamilton Sundstrand. A week later, Hamilton Sundstrand software engineers sent the final version of the EEC software to P&WC—which was promptly forwarded to China, despite the fact that it now seemed clear they were breaking US law.

Someone at Hamilton Sundstrand must have become suspicious of just what kind of helicopter he was writing code for, however. In the minutes of a Hamilton Sundstrand software control board meeting, notes included a discussion of clues that “PWC is having problems with export control.” About the same time, P&WC was looking for an alternate Canadian source for the software.

On January 28, 2004, Hamilton Sundstrand’s export compliance team requested an “end-use” statement from P&WC. This asked the company to spell out what the software was being used for. P&WC’s export manager sent an e-mail to the Asia general manager and other executives:

“We are now being asked by Hamilton Sundstrand to provide the end use for the Z10 program. They require this to determine if there are any US re-export issues. Would you please provide me with a statement of the end use for the Z10 program that I can provide to HS... I expect that this will not be the last request of this nature as the US suppliers are becoming more aware of export and re-export issues.”

A week later, P&WC sent back a response, indicating that the Z-10 military helicopter would be the first to get the engine and software:

Based on current activity, the military version of the helicopter appears to lead the development program. The civil program is active but certification date has not been announced... As the military version of the helicopter appears to be the first application, any US sourced components that are not common to other civil certified engine applications will be subject to the US ITAR controls and will require an export license from State in order for HS to ship the components to P&WC and for P&WC to ship these components either as spare parts or as part of the engine for this application to China. It is our understanding that the US will not issue an export license for any military component to China. We are therefore required to resource this component from HS to a non US supplier as we cannot risk the supply of components should the first application be military and we are refused a US export license for China.

With that statement in hand, Hamilton Sundstrand could no longer legally do work on the project (and the company did cease work on the project). But that notification didn’t make its way back up through the parent company’s ranks, and the project continued without Hamilton Sundstrand’s involvement. P&WC could not quickly find a Canadian source for EEC software, since that would mean replacing EEC hardware as well and starting over from scratch. From that point on, P&WC took over work on the code itself, altering what Hamilton Sundstrand had already provided—shipping four of its own “patches” of Hamilton Sundstrand’s software to China between November 2004 and June 2005.

All the while, P&WC executives were telling the folks at the front office at UTC that everything was peachy.

“A Major Breakthrough”

In May of 2004, in a briefing for what Justice Department documents refer to as a “senior executive” of United Technologies on the ongoing project in China, P&WC executives called the program a “major breakthrough” for the company.

Instead of referring to the Z-10 as an attack helicopter, the report described it as a “two-seat military version” of a common helicopter platform that had been the first model to reach flight testing. “Because of the military applications, risks do exist on export control issues,” the report admitted, but P&WC executives asserted those risks had been dealt with by “obtaining the necessary export permits and through appropriate selection of suppliers for engine components."

But there were clearly doubts about how well the risk had been managed. A few days later, according to court documents, the briefing paper from P&WC ended up in front of Pratt & Whitney’s vice president for government business development in UTC’s Washington, DC office. According to the company’s records, that was David Manke. After reviewing it, he fired off e-mail messages to two top-level lawyers in Pratt & Whitney’s legal department who handled export control issues for the company:

Attached is a briefing paper for [UTC senior management’s] upcoming trip to China (June 22-26). Please note the description of the PT6 activity with the helicopters, especially the Z-10c. I would say that the “2 seat version” is code for an attack helicopter. I believe that Canada has all the appropriate approvals from the Canadian government and a paper trail to support this, however, this has the possibility to be very controversial and I’m sure [the UTC senior management] will want to be sure this has all the appropriate government approvals. Are you aware of this program? Any concerns?

That e-mail triggered a flurry of e-mails between UTC’s legal department and P&WC about the origin of technology in the engines being shipped to China. In a June 3, 2004 e-mail, P&WC’s export manager assured UTC’s lawyers that there would be no US-origin EEC software on the production engines shipped to China. He didn’t mention the software that was already there on the development engines, however. After a series of meetings between Manke and the P&WC managers involved in the project, concerns seemed to be set aside.

It would be another year before the questions would come up again. In May 2005, as UTC senior managers were preparing to meet with the Chinese, they received a briefing paper on the Z-10 program. But this time, there was less credulity, and a UTC export specialist in DC fired off an e-mail to Hamilton Sundstrand. Senior management “needs to understand how it is that Pratt Canada can supply engines for the Z-10 Chinese military attack helicopters. I know we’ve discussed this before, but here’s what we need from Hamilton: What goods and technology does Hamilton supply to PWC that is used on these helicopters/engines?... Under what export authorization are they exported to Canada?"

Once again, P&WC’s export manager got pulled into the conversation. He claimed that the engine used in the project was “developed using Canadian technology” and the electronic engine controls were Canadian-sourced. But after more inquiries, a P&WC export project manager admitted that some engines had been shipped with Hamilton EECs and software for development (this admission came in a footnote within a reply).

Neither P&WC nor Hamilton reported the breach to the US government at this point—and development of the Z-10 once again went forward.

Getting the shaft

In 2006, the deal with the Chinese started to come apart. With development of the Z-10 nearly complete, the Chinese changed the game with the civil helicopter and renegotiated their deal to make P&WC the exclusive provider. The design of the “CMH” civilian helicopter was changed—now called the Z-15, it was nearly a full ton heavier than the Z-10. None of the development work done on the Z-10 would apply. P&WC would now have to re-compete with their engine against the French engine manufacturer Turbomeca.

On June 7, 2006, P&WC sent a letter to the Canadian government. The company reported, “Recent developments in the civil variant program” had called into question whether P&WC’s engines would ever be used in a civilian version of the Z-10. “The concept of the ‘common platform’ has been eroded.” Since this meant P&WC was being essentially cut out of its potential fortunes with a civilian Z-10, “we wish to be forthright and make you aware of these developments.” The company asked for permission to now pursue the Z-15 with the same engine.

Still, the breach of US export laws went unreported. But as the Z-10 deal went sour for P&WC, an investigation from outside the company was raising questions about the project—not from the government, but from an institutional investor. In February of 2006, an unnamed non-governmental organization, only identified by court documents as an organization that advises clients on socially responsible investing, sent an e-mail to UTC’s investor relations department as the company was preparing for its annual shareholders’ meeting. In essence, the message said that unless UTC came clean on what was going on with the Z-10, the organization would recommend that its clients dump their UTC stocks.

The inquiry from the NGO led to a meeting of UTC, Hamilton, Pratt & Whitney, and P&WC lawyers, and a team from UTC’s Export, Licensing, and Economic Sanctions office in April of 2006. That meeting led to more meetings, and more internal investigations. Finally, after a May 8 conference call, consensus was reached: it was time to inform the US State Department’s Directorate of Defense Trade Controls that the company had screwed up.

But when UTC sent its disclosure letter to the State Department, the company’s representatives said the company had no idea that the Chinese were developing an attack helicopter until 2004, and that the company had taken “swift remedial action.”

It would be another four years until the company would admit that Hamilton had neglected to follow through on those actions, as the State Department continued to follow up on the disclosure. Finally, in a July 2010 response to yet another State Department inquiry, UTC admitted that Hamilton had exaggerated the degree to which they had corrected their actions and had lied to the State Department to help make the problem look less severe.

The wages of sin

That confession led to things hitting the fan for UTC—the State Department launched a full investigation and brought in the Justice Department. On June 28, UTC's lawyers admitted the company's violation of the law after negotiating a deferred prosecution agreement with the Justice Department.

In the plea, the company’s lawyers confessed the organization’s guilt in violating the defense embargo on China and other international trade regulations. UTC agreed to pay a fine of $20.7 million dollars—$4.6 million (twice the value of the 10 engines sold to the Chinese, plus spare parts and support work) plus a $14 million “deferred prosecution monetary penalty.” UTC also agreed to pay the State Department a $55 million civil penalty—$20 million of which was suspended. To keep that $20 million, UTC has to satisfy the State Department that it has cleaned up its compliance act.

In comparison to other fines that companies have been hit with for these sorts of export violations, the $75 million (or $55 million) that UTC will have to cough up is substantial. But it’s just a speed bump when compared to the value of the company’s continuing business in China. The company’s wrongdoing didn’t even faze stockholders.

After news of the agreement broke, the company’s stock price... was up.