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Originally published July 6, 2005 at 12:00 AM | Page modified July 6, 2005 at 12:07 PM

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State Department goes after Boeing

The State Department has prepared civil charges against Boeing alleging 94 violations of the Arms Control Act because the company sold commercial...

Seattle Times aerospace reporter

The State Department has prepared civil charges against Boeing alleging 94 violations of the Arms Control Act because the company sold commercial airliners without obtaining an export license for a tiny gyrochip that has defense applications.

The company faces a potential fine of as much as $47 million, and the case could be another blow to the company's fragile relations with the federal government.

In pursuing Boeing over exports of 96 jets to China and other countries between 2000 and 2003, the government is resurrecting a thorny and highly politicized issue: How should the U.S. protect dual-use technology that has both military and commercial applications without damaging its increasingly globalized trade?

To Boeing, the case is fallout from an overzealous application of export controls that threatened to derail overseas sales by treating commercial airplanes on a par with fighter jets. In September 2003, two 737 jets went to China only after President Bush personally signed off on the deliveries.

Yet early last year, the federal government conceded Boeing's right to export the technology as a civilian item rather than a military one.

Though the central national-security issue ultimately was decided in Boeing's favor, the State Department alleges that between 2000 and 2003 the company showed "a blatant disregard for the authority of the Department," misrepresenting facts and making false statements on shipping documents to get around the export restrictions.

Boeing claims it ignored State Department edicts because its lawyers advised that the department was "without legal authority" to regulate the exports.

That open defiance of the State Department is the crux of the current case.

In a meeting with Boeing lawyers last month, State Department officials made clear that they will seek a substantial fine, according to an account of the meeting.

A draft charging letter obtained by The Seattle Times asserts the government could impose potential fines of up to half a million dollars per charge, plus a potential but unlikely three-year suspension from government contracts.

Similar cases against Loral and Hughes Electronics, as well as a previous case involving Boeing's sea-launch rocket program, were settled with multimillion-dollar fines, but no suspensions.

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No permanent solution

Perhaps worse for Boeing, the resolution to the export question last year did not comprehensively solve the broad underlying problem — so that the issue of dual-use technology could arise again to threaten the company's ability to sell airplanes.

The State Department charges against Boeing relate to the export of jets that contain a gyroscopic microchip called QRS-11, used as a backup system in determining a plane's orientation in the air.

Though a Boeing document refers to the chip as "relatively unsophisticated" technology, the gyrochip also has been used to help stabilize and steer guided missiles.

In the draft charging letter, the State Department's Directorate of Defense Trade Controls alleges that between 2000 and 2003 Boeing broke export control laws in shipping to China and other countries what was then classified as militarily significant technology.

Further, it claims the company did so deliberately and repeatedly even after it had been warned to stop.

"False statements"

Boeing "was aware that a [State] Department export license was required but chose to export without authorization by using false statements on documents," the charging letter alleges.

Boeing managers declared on shipping certificates that no export license was required, even after the State Department had told the company otherwise, according to the letter.

Boeing eventually acknowledged to the State Department it had exported 96 aircraft and 27 spare gyrochip-equipped flight boxes without export licenses.

The QRS-11 chip, made by a unit of BEI Technologies in Concord, Calif., is just over 1-½ inches in diameter and weighs about 2 ounces. It sells for between $1,000 and $2,000.

Described as "a gyro on a chip," it is used to help control the flight of missiles and aircraft.

On Boeing jets, three BEI microchips are embedded in an instrument box made by French avionics firm Thales.

Acting together, the three chips provide a three-dimensional positional reading, telling the pilot through the flight display the precise yaw, roll and pitch of the airplane.

This no-moving-parts electronic-sensor system acts as a back-up to a spinning gyroscope.

Because of its use in guided missiles, the sensor is classified as a significant military item. Export-control regulations dictate that any larger system containing the sensor — even a commercial airplane — also must be considered a military item.

China sanctions

Such systems require a license every time they are moved to another country. In addition, in China's case, sanctions introduced after the bloody 1989 Tiananmen Square crackdown mean that export of military items requires a specific presidential waiver from the White House.

Boeing had used the QRS-11 sensors in its jets since 2000. The supplier, Thales, told Boeing in 2000 that an export license was needed, according to the charging letter. Boeing told the State Department later that its engineers "failed to appreciate the potential significance" of that early notice.

But when the State Department became aware of the issue in 2003, it insisted upon the need for export licenses, presenting an enormous barrier to Boeing commercial sales.

"If you have to file for an export license every single time an airplane takes off and lands from China, that's a completely unrealistic and nightmarish scenario," said Pierre Chao, a senior defense analyst with the Center for Strategic and International Studies.

Was there a genuine threat to U.S. national security if these sensors inside the electronics bay of 737s were sold to China?

"You can't dismiss it out of hand," said Chao. "However, the notion that someone is going to buy a $30 million airplane in order to strip out a chip and equip an entire missile fleet does stretch the imagination."

Further, by 2003, the QRS-11 chips were on Boeing, Airbus and business jets dispersed around the globe. The government was attempting to bolt the door after the planes had flown.

"There was a common-sense element that didn't quite compute," Chao said.

Both Boeing's defense and the government's case zero in on a letter to the State Department dated August 2003, in which the company said it had re-reviewed the classification of the sensor and decided that the department "did not have jurisdiction."

That's why, Boeing argued in a formal defense last year, the company still didn't follow instructions to cease the airplane deliveries even after becoming fully aware of State Department objections.

"Good faith" exports

The exports were "made in good faith based upon a well-founded legal opinion," the written defense states.

The standoff over the gyrochip reached crisis point in September 2003, when executives from China Southern Airlines arrived in Seattle to take delivery of two 737s, and the State Department informed Boeing that a presidential waiver would be needed.

Boeing's then-Chief Executive Phil Condit ordered his Washington, D.C., lobbying staff to pull out all the stops. President Bush issued a verbal waiver Sept. 20, the scheduled day of delivery.

U.S. Rep. Henry Hyde, R-Ill., chairman of the House Committee on International Relations, and ranking Democrat U.S. Rep. Tom Lantos, D-Calif., lodged a strong letter of protest at the hastily processed exemption.

In November, top Boeing and U.S. aviation-industry leaders petitioned then-Secretary of State Colin Powell for a resolution, as did Airbus executives.

In January 2004, a political fudge emerged: QRS-11 sensors were kept on the list of military items; but when integrated into commercial-jet flight boxes, they were reclassified as commercial, not military, items.

Export control of sensors inside commercial jets was transferred from the State Department to the Department of Commerce.

In a January 2005 interview in Beijing, David Wang, president of Boeing China, talked about the problems caused by the QRS 11 chip, which he described as "a little bitty thing."

Wang's remarks seem to reflect Boeing's view that the regulation is nothing but an impediment to sales.

"[The gyrochip] is a low-value card that they could find other ways to buy," he said. "If they want to buy a 737 to pull that part out, I'd love them to buy more 737s."

Fast White House response

"We had to work a lot with [the U.S. government] bureaucracy to say, 'Guys, this is not a problem,' " he added. "I have to say the [Bush] administration responded extremely quickly, so the first delivery that was affected was only affected a couple days. But then we kept having to go back and resolve the next delivery ... it dragged on for a number of months. It wasn't just China. It was everywhere."

Wang must have been relieved by the 2004 reclassification of gyrochip-equipped flight boxes.

But if Boeing thought it was completely off the hook, it was mistaken. Boeing's 2003 refusal to accept State Department authority is coming back to bite it.

Both a State Department official involved in the case and a department spokesman declined comment for this story.

A prepared statement from Boeing emphasized that the charges relate only to activity prior to 2004 and said the company continues "to work with the State Department towards possible resolution of this matter."

Meanwhile, the underlying issue hasn't gone away.

"[The QRS-11 issue] ended up being a one-off crisis," said Chao. "It did not trigger any kind of broader reform. We are still living with the central issue: Can you control technologies? How do you control them? ... All these issues raised in the heat of the moment remain unresolved."

Affordable technology

The military adopted the QRS-11 gyrochip, originally conceived of as a commercial product, for use in a missile system primarily because the technology was so affordable.

Such cross-pollination between the military and commercial sectors is only likely to increase as defense-procurement officials seek to curtail spiraling costs. Yet government oversight of technology transfer is ill-equipped to deal with the issues that will arise.

"We still have an export-control system that is constructed for a different era," said Chao.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Times business reporter Kristi Heim contributed to this report.

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