Boeing Fighting Indictment -- Mcdonnell Douglas Charged With Conspiracy In Deal With China

WASHINGTON - Rejecting a plea-bargain deal, Boeing's McDonnell Douglas unit was charged today with misleading federal export-control officials about shipping to China machine tools that were diverted to a military factory.

In a 16-count criminal indictment, a grand jury here alleged that machine tools meant for commercial airplane production wound up at a military plant that built rockets and jet fighters.

U.S. Attorney Wilma Lewis said that the transfer was a serious breach of national security.

The indictment alleges that McDonnell Douglas, Douglas Aircraft and Hitt filed false export-license applications "when in truth and in fact they knew, had reason to know and acted with willful blindness to the fact" that the machinery had a military purpose.

Also indicted were: China National Aero-Technology Import and Export Corp. (CATIC), the company that received the aircraft parts for $5.4 million; various CATIC subsidiaries; and Robert Hitt, who had been chief of Douglas Aircraft's China unit in 1994 when the alleged offenses occurred.

CATIC and Boeing, which acquired McDonnell Douglas in 1997, face a $10 million fine. More serious for the Seattle aerospace giant would be any ramifications for future exports that require U.S. approval. Export offenses in the past have resulted in various export prohibitions, but government officials declined to say today whether Boeing would be restricted from any overseas business.

Hitt and the two other individuals named, U.S.-based Chinese nationals Yan Liren and Hu Boru, face a maximum of five years in prison and a $250,000 fine.

Boeing vigorously denied the allegations and contended that the government's theory was weak and tenuous.

"There is no proof that any one person at McDonnell Douglas Corp. even knew enough facts" to have aided the Chinese diversion of the machine tools, Boeing said in a statement. "But rather, prosecutors are relying on an additional attenuated legal theory of `collective knowledge' of a number of people."

`Criminal conspiracy'

Rejecting Boeing's defense of corporate ignorance, Lewis countered that McDonnell Douglas, Hitt and the Chinese knowingly conspired to mislead the Department of Commerce by withholding information, including CATIC's initial inquiries about using the equipment for military purposes.

"Although none of the equipment was used by the Chinese military aerospace industry," Lewis said, "this criminal conspiracy was a serious attempt to circumvent the export control laws that are designed to protect the national security of the United States and further our non-proliferation goals."

District of Columbia federal prosecutors alleged that, in 1994, before Boeing acquired it, McDonnell Douglas sold China tools that ended up at a Nanchang aircraft factory, which also produced cruise and ballistic missiles.

The diverted equipment was relocated to another aircraft factory before it could be misused, the government said.

But Bonni Tischler, assistant commissioner for the U.S. Treasury Department, said that the plant built Silkworm missiles and Chinese A-5 attack planes.

"Let this investigation sound a warning to any company that believes that their profit is more important than our prosperity," Tischler said. "Even before the equipment left U.S. soil, the evidence indicates that both firms (McDonnell Douglas and CATIC) knew that it was military bound."

U.S. cleared the deal

The corporate defendants are charged with making false, fraudulent and misleading statements and material applications on the May 26, 1994, application for 1,310 export licenses. The Commerce Department actually approved the sale to China on Sept. 14, 1994, but with 14 conditions meant to prevent the tools from being diverted for military use.

During the Commerce Department review, government officials raised concerns about possible diversion. In the end, however, the precautions satisfied officials at the departments of State, Commerce, Energy and Defense.

Douglas discovered diversion

McDonell Douglas discovered the machine tools were in the improper locations and notified the U.S. government before retrieving them. McDonnell Douglas cooperated fully with the subsequent investigation, providing 100,000 pages of documents and making employees and former employees available for interviews, Boeing said.

Boeing spokesman Larry McCracken did not say what pleas Boeing had considered before negotiations with the government broke off.

Stated reason for the tools

The tools ostensibly were purchased for CATIC and its so-called Trunkliner Program, which was to produce aircraft for China's domestic trunk routes. The tools were meant for a CATIC machining center that was to be built in Beijing in 1994 and 1995.

McDonnell Douglas planned a limited role at the machining center, according to an assessment by a select House committee that this year reviewed alleged illegal transfers of technology to China.

"Although McDonnell Douglas was planning to place up to four of its employees at the Beijing CATIC Machining Center, this was not to occur until late 1995 at the earliest," said the select committee chaired by Rep. Chris Cox, R-Calif.

Not long after the tools were shipped, McDonnell Douglas notified the government that six of the machine tools were diverted to Nanchang Aircraft more than 800 miles south of Beijing.

The diversion was in conflict with the key conditions of the U.S. export licenses, which required the equipment be used elsewhere and stored in one location.

In the machine-tool deal, reached in 1993, equipment was sent from a McDonnell Douglas plant in Columbus, Ohio, that was closing. The plant had produced parts for the C-17 transport, the B-1 bomber and the Titan and MX Peacekeeper missiles.

CATIC also bought tools from a McDonnell Douglas subcontractor in Amityville, N.Y.

In April 1995, McDonnell Douglas notified the government that the machine tools were in three different locations.

Nine were located at two places in Tianjin, a port city a two-hour drive from Beijing. Six were at the Nanchang plant, the indictment alleged.

After the tools were diverted, the Commerce Department denied a request to allow the diverted tools to remain in Nanchang.

The department did approve transfer of the tools to the Shanghai Aviation Industrial Corp., a factory responsible for final assembly of Trunkliner aircraft. Seattle Times aerospace reporter Kyung M. Song contributed to his report.

James Grimaldi's phone message number is 206-464-8550. His e-mail address is: jgrimaldi@seattletimes.com