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Manufacturing Processes

page 3

Changes to the Trunkliner Program

When McDonnell Douglas applied for export licenses on May 26, 1994, the applications noted that the machine tools would be used by the Beijing CATIC Machining Center primarily for the Trunkliner program. According to those license applications, McDonnell Douglas had a contract with CATIC to co-produce 20 MD-82 and 20 MD-90 aircraft.29

In June 1994, McDonnell Douglas representatives provided a series of briefings to officials from the Commerce, State, and Defense Departments regarding the nature of the Trunkliner program and McDonnell Douglas╠s other activities in the PRC.30 In July 1994, however, Flight International magazine announced that the Trunkliner Program had been significantly changed.31

Instead of co-producing 20 MD-82 and 20 MD-90 aircraft in the PRC, only 20 MD-90 aircraft would be built there. Although the PRC would still acquire 20 additional aircraft, those would now be built at McDonnell Douglas╠s Long Beach, California plant █ albeit with many parts that were to be fabricated in the PRC.

Prompted by the press reports, the Defense Department sought additional information from McDonnell Douglas in late July and early August 1994 regarding how the machine tools would be employed if the number of aircraft to be co-produced in the PRC was to be reduced.32

In letters to the Defense Technology Security Administration dated August 8 and August 12, 1994, McDonnell Douglas provided further clarification regarding the number and complexity of the parts that were to be manufactured in the PRC.

Commerce Department Licensing Officer Christiansen recalls that Commerce was not concerned that the number of aircraft to be co-produced in the PRC might be reduced, since parts for the aircraft would continue to be fabricated in the PRC.33

The Defense Technology Security Administration and the Defense Department, on the other hand, were concerned since they thought the machine tools might represent significant excess manufacturing capacity that the PRC might be tempted to divert to other, unauthorized uses.

The actual agreement that reduced the number of aircraft to be assembled in the PRC was signed on November 4, 1994.34

Discussions in the Advisory Committee for Export Policy

The McDonnell Douglas export license applications were discussed at the June 24, 1994 meeting of the Advisory Committee for Export Policy (ACEP).

According to the minutes of that meeting, no decision was reached. The Defense Department representative at the meeting advised against approving the licenses that day, because internal Defense Department review was continuing. The Defense Department believed the applications could be approved if reasonable safeguards were put into place to prevent the machine tools from being used for unauthorized purposes.35

Among the other agencies in attendance, the State Department agreed with the Defense Department that further review was required. The Department of Energy deferred to the Defense Department on whether licenses should be approved.36

The license applications for the McDonnell Douglas machine tools were again discussed at a meeting of the Advisory Committee for Export Policy on July 28, 1994. Again, the matter was deferred until the next Advisory Committee meeting. The minutes reflect that "a final decision on this transaction would have to be remanded until the next meeting of the ACEP, or as soon as possible before that date, if all the agencies complete their reviews earlier."

According to the ACEP minutes, the respective positions of each agency on the applications were as follows:37

  • [The Department of Defense] said that, if it had to vote at that time, it would recommend denial of the licenses because of concerns that the machine tools would be diverted. Moreover, there were concerns that the McDonnell Douglas machine tools would give the PRC excess production capacity, thus allowing other machine tools in its inventory to be diverted from civilian to military production.
  • [The Department of] Energy indicated that, without further review, "it would have to defer to Defense in denying this transaction and the underlying applications."
  • [The Department of] State recommended approval, provided that appropriate safeguards and conditions could be formulated to minimize the risk of diversion.
  • [The] Arms Control and Disarmament Agency agreed with DOD [the Defense Department]╠s position, noting that it would recommend denial of the license applications should it have to vote at that time.
  • [The Department of] Commerce recommended approval with conditions to minimize the risk of diversion to unauthorized uses.

The License Is Issued

The Advisory Committee member agencies later agreed to issue the export licenses with 14 conditions.38

Those conditions required, among other things, that:

  • The machine tools were to be stored in one location pending completion of the Beijing CATIC Machining Center
  • McDonnell Douglas was to provide quarterly reports to the Department of Commerce and the Defense Technology Security Administration should the Beijing CATIC Machining Center not be completed when the machine tools arrived39

As a final part of the licensing process, a Department of State cable was sent to the U.S. Embassy/Beijing on August 29, 1994 requesting that a senior CATIC official provide a written end use assurance that the machine tools would only be used for specified purposes.40

In a September 13, 1994 response, the U.S. Embassy/Beijing reported that it had obtained the assurance from CATIC Deputy Director Sun Deqing. However, the cable also noted that Deqing had indicated to the embassy officials that:

CATIC plans to establish several specialized factories under their new CATIC Machinery Company, and that [the CATIC Machining Center] would be one of those plants. [The CATIC Machining Center] will be established either near Beijing . . . or in Shijianzhuang at the Hongxing Aircraft Company . . .41

McDonnell Douglas╠s Plans

McDonnell Douglas╠s Limited Role at the Machining Center

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.

Moreover, the Machining Center was not to be a joint venture between CATIC and McDonnell Douglas. Rather, it was to be a CATIC facility that supported CATIC╠s responsibilities to the Trunkliner Program.

Trunkliner Program

Media reports indicated in July 1994 that McDonnell Douglas and the PRC were engaged in negotiations over the number of Trunkliner aircraft to be assembled in

the PRC.42

Notes from a June 7, 1994 briefing that McDonnell Douglas provided to U.S. Government officials regarding its license applications indicate that McDonnell Douglas╠s representatives made references to the fact that the company was negotiating with the PRC over changing the mix of aircraft to be built in the PRC.43 CATIC was to remain responsible for the fabrication of large numbers of parts both for the aircraft that would be assembled in the PRC, and for the aircraft that were to be built in the United States under an "offset" agreement.

When queried by DOD officials regarding the continued PRC need for the machine tools in light of possible changes to the Trunkliner program, McDonnell Douglas responded in an August 8, 1994 letter to Defense Technology Security Administration Acting Director Sullivan. The letter provided further explanation regarding CATIC╠s proposed use of the machine tools. A subsequent August 12, 1994 McDonnell Douglas letter to the Defense Technology Security Administration╠s Colonel Henry Wurster noted:

. . . . The PRC factories that are participating in the Trunk Aircraft Program . . .do not have the capability individually, nor collectively, to accomplish the work share the PRC has agreed to (75 percent of the airframe) . . . . If the licenses are denied, the PRC would purchase these types of machines somewhere else . . . .

Commerce Department Delays Investigating Machine Tool Diversion for Six Months

The Commerce Department╠s Actions in April 1995

As part of the licensing conditions for the machine tools, the machines tools were to be stored in one location pending completion of the Beijing machining center, and McDonnell Douglas was required to ". . . notify the [U.S. Government] of the location of the machine tools and update the [U.S. Government] with any changes of location prior to plant completion."

In April 4, 1995 letters to the Commerce Department╠s Office of Export Enforcement, Washington Field Office, and to the Technical Information Support Division/Office of Exporter Services, McDonnell Douglas reported that the machine tools were located at four different places:

  • Nine of the machine tools were located at two sites in the port city of Tianjin, a two hour drive from Beijing
  • Four other machine tools had yet to be exported and were located at Monitor Aerospace Corporation in Amityville, New York
  • Six machine tools were reported to be at the Nanchang Aircraft Company44

According to the letters, a McDonnell Douglas employee had physically observed the machine tools in Tianjin, and confirmed that they remained in their original crates. He had not personally viewed the machine tools at the Nanchang Aircraft Company. However, the McDonnell Douglas letters reported that:

. . . CATIC did provide the attached letter to substantiate the list of equipment stored there. CATIC stated that the equipment has not been unpacked and remains in the original crates.

The April 4 McDonnell Douglas letters did not trigger any kind of investigative response.

On April 20, 1995, an interagency meeting was held in which two McDonnell Douglas officials discussed the status and locations of the machine tools. The McDonnell Douglas officials reported that there had been changes in the number of aircraft that would be built jointly with the PRC, and changes in the location of the machine tools.

Since the machine tools were not stored in one authorized location, this violated the licensing conditions. McDonnell Douglas representatives responded by stating that the machine tools had inadvertently been moved to more than one location contrary to what had been specified in the export licenses, but that the building for the machine tools had not been completed and the tools had to be stored somewhere in the interim.

Six months later the Office of Export Enforcement received additional information from Commerce Department Licensing Officer Christiansen that, in conjunction with a formal request from the Defense Technology Security Administration, finally triggered the opening of a formal investigation into the diversion.

The Commerce Department╠s Actions in October 1995

An October 5, 1995 e-mail from Christiansen to a number of Commerce Department officials, including Office of Export Enforcement Acting Director Mark Menefee, reported that one of the six machine tools in storage at the Nanchang Aircraft Company had been uncrated, and was in the final stages of assembly.

In clear violation of the export license, the machine tool █ a hydraulic stretch press █ had been installed in a building that apparently had been built specifically to accommodate that piece of equipment.

In his e-mail message, Christiansen stated:

For OEE [the Office of Export Enforcement], please investigate to determine who was responsible for both the diversion of the equipment originally and second who is responsible for the decision to install the equipment at Nanchang.

The formal request from the Defense Technology Security Administration for an investigation consisted of an October 4, 1995 letter from its Director of Technology Security Operations.45 The Defense Technology Security Administration informed the Acting Director of the Office of Export Enforcement, Mark Menefee, that:

During last week╠s ACEP [Advisory Committee for Export Policy] meeting a package of materials were handed out concerning the violation of McDonnell Douglas╠s export license to the Chinese.

The facts of the case are that CATIC has intentionally misused the export licenses to put controlled technology at a facility not authorized to receive [it].

This facility as confirmed by the Chinese is involved in the manufacture of both missiles and attack aircraft. I will be forwarding a copy of those materials to you separately.

We believe that this is a very serious matter and that the Office of Export Enforcement should conduct a serious investigation into this matter . . .

The Office of Export Enforcement determined that an active investigation was warranted, and opened a case file in early November 1995. The case was forwarded to the Office of Export Enforcement╠s Los Angeles Field Office for investigation because McDonnell Douglas Aircraft in Long Beach, California █ the exporter of record for the machine tools █ was located in the Los Angeles Field Office╠s area of responsibility.

Allegation that the Commerce Department Discouraged the Los Angeles Field Office╠s Investigation

On June 7, 1998, the CBS program "60 Minutes" suggested that the Commerce Department or other U.S. Government entities were not necessarily interested in a complete and thorough investigation of the machine tool diversion. Among other things, the program included a brief appearance by Marc Reardon, a former Los Angeles Field Office special agent, who had initially been assigned to investigate the case. According to the official CBS transcript of the program:

[CBS journalist Steve] KROFT: (Voiceover) And there╠s still some debate over just how hard the Commerce Department tried to find out who the bad guys really were. It took them six months to open an investigation. And Marc Reardon, the Commerce Department case agent assigned to investigate,

says higher ups in Washington didn╠t seem anxious to

get to the bottom of things.

Did you feel like you were getting support from the department?

Mr. Marc REARDON: No. Not at all.

. . . .

KROFT: (voiceover) Reardon, who is now an investigator with the Food and Drug Administration, says he was told who to interview and what questions he could and couldn╠t ask.

Has that ever happened before?

Mr. REARDON: Not in my career.

KROFT: What did you make of it?

Mr. REARDON: That somebody didn╠t really want the

truth coming out.46

The Select Committee conducted an investigation of these allegations. However, the Justice Department has requested that the Select Committee not disclose the details of its investigation to protect the Justice Department╠s prosecution of CATIC and McDonnell Douglas.

On February 5, 1996 U.S. News and World Report reported that the machine tools had been diverted, and that an investigation was underway. The Commerce Department received inquiries from then-Chairman Alfonse M. D╠Amato of the Senate Committee on Banking, Housing and Urban Affairs, and from Chairman Benjamin A. Gilman of the House Committee on International Relations, concerning these reported allegations.47 Subsequently, Chairman Floyd D. Spence of the House Committee on National Security and Representative Frank Wolf asked the General Accounting Office to review the facts and circumstances relating to the licensing and export of the machine tools. The results of the General Accounting Office review are summarized earlier in this chapter.48

The February 5, 1996 U.S. News and World Report also claimed that "a confidential U.S. Commerce Department investigative report" had been obtained and used in the article. Concerned that the disclosure of such a report to U.S. News and World Report may have violated the confidentiality provisions of Section 12 (c) of the Export Administration Act, the Office of Export Enforcement initiated an internal inquiry. Responsibility for the disclosure was never determined.

The Office of Export Enforcement╠s Los Angeles Field Office╠s Request for a Temporary Denial Order Against CATIC

Under the provisions of Part 766.24 of the Export Administration Regulations (EAR), the Assistant Secretary for Export Enforcement is authorized to issue a Temporary Denial Order (TDO):

. . . upon a showing by [the Bureau of Export Enforcement] that the order is necessary in the public interest to prevent an imminent violation of the [Export Administration Act], the [Export Administration Regulations], or any order, license or authorization issued thereunder.49

In late November 1995, the Los Angeles Field Office requested that the Commerce Department issue a TDO against CATIC.50 The TDO request was prepared as a means to compel CATIC to comply with the terms of the machine tool export licenses by preventing the approval of future export licenses.

The Commerce Department declined to issue the TDO. In a December 7, 1995 memorandum, the Office of Export Enforcement Headquarters returned the TDO case report because it contained a number of technical deficiencies, including:

ď Did not include licensing determination for each commodity that was exported. Licensing determinations were necessary elements of proof that the commodities required a license to be exported.

ď Did not include any documentary evidence such as shipping and export control documents to confirm that the exports had occurred.

ď Did not include a schedule of violations that described the specific violations that allegedly had occurred.

ď Did not use the proper form and format that Office of Export Enforcement regulations specified in the Office╠s Special Agent Manual.

Headquarters, noted, however, that "the violations do appear to be deliberate and substantial." It instructed the Los Angeles Field Office to give the investigation a high priority. Moreover, it instructed them to conduct additional interviews and to obtain relevant documentation.

The Los Angeles Field Office was concerned that Headquarters was using those technical deficiencies as a bureaucratic rationale for not seeking Commerce Department approval of the TDO request.

At the date of the Select Committee╠s Final Report (January 3, 1999), the Office of Export Enforcement and the U.S. Customs Service reportedly are continuing to investigate the machine tool diversion under the direction of the U.S. Attorney for the District of Columbia.

Back  |  Forward


COX REPORT

Overview
pages 1 | 2 | 3 | 4

PRC Acquisition of U.S. Technology
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

PRC Theft of U.S. Nuclear Warhead Design Information
pages 1 | 2 | 3 | 4 | 5

High Performance Computers
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

PRC Missile and Space Forces
pages 1 | 2 | 3 | 4 5 | 6 | 7 | 8 | 9

Satellite Launches in the PRC: Hughes
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

Satellite Launches in the PRC: Loral
pages 1 | 2 | 3 | 4 | 5 | 6

Launch Site Security in the PRC
pages 1 | 2 | 3 | 4 5 | 6

Commercial Space Insurance
pages 1 | 2 | 3 | 4

U.S. Export Policy Toward the PRC
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

Manufacturing Processes
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

Recommendations
pages 1 | 2 | 3

Appendices
pages introduction | A | B | C | D | E | F



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