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Saturday, April 8, 2006 - Page updated at 12:00 AM

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Boeing pays $15 million fine

Seattle Times aerospace reporter

Boeing has paid the largest fine ever levied on a company for violation of the Arms Export Control Act, settling a dispute with the State Department over the unlicensed foreign sales of commercial airplanes carrying a small gyrochip with military applications.

In addition to a $15 million fine, a consent decree signed March 28 imposes oversight requirements on Boeing because three previous settlements of similar alleged violations didn't result in full compliance with export controls.

Still, Boeing may consider itself lucky. The maximum fine was $43 million.

And because Boeing "has acknowledged the seriousness of the violations ... expresses regret for these activities and its willingness to make amends," the State Department decided that the ultimate sanction of "debarment," or banned from government contracts, "is not appropriate."

In a January speech at a private retreat in Orlando, Fla., for top Boeing executives, senior vice president and general counsel Douglas Bain described export control as the "biggest issue we face" and listed the QRS-11 charges among the company's unresolved legal problems.

According to the State Department charges, between 2000 and 2003 Boeing shipped overseas 94 commercial jets with the QRS-11 gyrochip embedded in the flight boxes, including 19 to China. Export of listed defense items to China is specifically proscribed.

The State Department had determined in 1993 that the chip, used in the guidance system of the Maverick missile, "has significant military utility." That put the devices on a list of products that require a license for foreign sales.

Boeing continued the exports even after the State Department told the company to stop. Boeing ignored those orders after its lawyers advised that the State Department "did not have jurisdiction" to regulate the exports.

"In hindsight, we should have handled it differently," said Boeing spokesman Tim Neale. "We would handle it differently today."

The settlement includes an acknowledgment by Boeing that the State Department has authority to decide which technologies are designated as defense items under export control.

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The 2-ounce, 1-inch-diameter QRS-11 chip, made by a unit of BEI Technologies in Concord, Calif., sells for less than $2,000. Boeing executives argued that a military enemy seeking the chip would have alternatives to buying a $60 million jet and taking apart the flight box.

Reaches a head

The dispute between Boeing and the State Department reached a head in the fall of 2003, when two 737 jets were released to China only after President Bush signed a last-minute waiver after a request from then-Chief Executive Phil Condit.

That produced a political settlement the following January in line with Boeing's view of the issue: QRS-11 chips remained on the list of military items but were reclassified as commercial items when integrated into commercial-jet flight boxes.

After that, export of the chips inside Boeing commercial jets was no longer an issue. The case remained alive because of Boeing's previous "blatant disregard" of the State Department. In addition to unauthorized export, State charged Boeing with misrepresentation of facts and false statements.

Other incidents

Boeing has violated arms-export-control rules on three previous occasions.

• In 1998, Boeing was fined $10 million because it shared sensitive technologies without an export license with its Russian, Ukrainian, Norwegian and German partners in the Sea Launch space rocket joint venture.

• In 2001, Boeing was fined $4.3 million for technology transfer without an export license to Australia, Malaysia, Turkey and Singapore on its Wedgetail 737 Airborne Early Warning and Control aircraft program.

• In 2003, Loral and Hughes Space and Communication were fined $32 million for illegal export of satellite technology to China. By then that Hughes division had been acquired by Boeing, though the violations happened before the acquisition.

In the March consent decree, the State Department points out that more than $9 million of those previous fines were returned to Boeing to fund remedial compliance measures that would avoid future violations.

Because that didn't work, the new settlement requires Boeing to appoint an independent external officer to oversee companywide export-control compliance for two years, as well as a senior manager internally. And it must retain an outside firm to audit implementation.

The company informed employees of the settlement Friday.

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

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