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President Clinton greets Democratic donor Bernard Schwartz, head of Loral Space and Communications Ltd. (AP)

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Chinese Missile Gain Questioned by Experts (Washington Post, May 31)

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Loral Company Statement

Bureaucracy, Bungled Report Collide at Loral

By Roberto Suro and John Mintz
Washington Post Staff Writers
Sunday, May 31, 1998; Page A16

Loral Corp. general counsel Julie Bannerman's rush order to stop transmission of a fax from her company's Beijing office to the Chinese government came an hour too late. The 25-page document, a report by Space Systems/Loral and other U.S. firms on why a Chinese rocket carrying their communications satellite into space had crashed, had already been sent to a distribution list that included the Chinese rocket-builders.

The same day, May 10, 1996, Bannerman told the State Department that Loral might inadvertently have violated laws regulating the export to China of high-technology information by transmitting the crash report and three other potentially sensitive documents.

Bannerman's call led to a Justice Department criminal investigation that is still ongoing into whether Loral jeopardized national security by turning over information that could aid Beijing's missile guidance systems. Yet early this year, despite expressions of concern from the Justice Department, President Clinton gave the company permission to launch another satellite in China.

Those events are the basis for an unlikely political scandal that has produced two congressional inquiries and some of the most highly charged rhetoric heard in Washington since the end of the Cold War. In recent weeks, Republicans have alleged that Clinton cavalierly compromised "the national interest" as a favor to Loral and its chairman, Bernard L. Schwartz, in exchange for large campaign contributions since 1994. Both the White House and Loral have denied this.

But the election year charges are politically powerful. "What we now have is the second-largest country in the world, it is a communist country, that has 13 missiles pointed at the United States with nuclear warheads on the end of them, and because of our technology, they can now navigate those missiles to hit any city in the United States. President Clinton bears that responsibility," Republican National Committee Chairman Jim Nicholson said last week.

The White House said it is not aware of any information developed by the Justice investigation suggesting that Loral's 1996 report helped China's military capability. And it insists that adequate security safeguards are now in place to prevent any improper transfers in the future.

"What happened is what often happens in Washington, which is that emotions run faster than facts" national security adviser Samuel R. "Sandy" Berger said in an interview. "But ultimately, facts catch up with emotion. The facts here are our friends."

A reconstruction of the administration's handling of the 1998 launch permission – technically a "waiver" of prohibitions against some high-technology dealings with China – reveals a complicated, and in many ways mundane, picture of a bureaucratic process propelled by a policy forged in the Reagan and Bush administrations.

For the past 10 years, the U.S. government has permitted – even encouraged – U.S companies to launch commercial satellites atop Chinese rockets. Not only are the Chinese launches cheaper than those of other countries – a boost to U.S. industry in a highly competitive business – they are seen as facilitating future U.S. commercial entree into other lucrative Chinese markets and, most important for policymakers, as enticing China into a more cooperative relationship on such sensitive issues as nuclear proliferation.

But the fact that the president is required to ascertain the national security implications of each launch request indicates the high level of concern that still exists about Chinese military capability and intentions.

The question of whether Loral provided Beijing with valuable information after the 1996 crash remains murky. Although Loral acknowledges the report should not have been sent to the Chinese, it insists no significant technology was illegally conveyed. But, in a crucial component of the Republican allegations, an obscure Pentagon agency charged with making such determinations concluded that information contained in the report did, in fact, harm U.S. national interests.

The Initial Crash

In the predawn darkness of Feb. 14, 1996, a three-stage Long March booster rocket lifted off from the Xichang Satellite Launching Center in southwest China. Its payload was a Loral-made satellite designed to provide direct broadcast television services to Latin America.

Seconds into its flight, the rocket veered off course, burst into a massive fireball and smashed into a village a few milles away, killing six people and injuring 57, according to an official account.

In international aerospace circles, the crash became known as the "St. Valentine's Day Massacre," and not just because of the loss of human life. Many potential customers already were wary because of crashes and other mishaps suffered by the Long March, produced by the state-run China Great Wall Industry Corp. The February launch was the maiden flight of a new model of the rocket, and within days several contracts for future launches were canceled by U.S. companies.

Unsatisfied with Chinese assurances that the crash was caused by an easily rectified "low-tech" problem, the specialized insurance companies that underwrite satellite launches threatened to cancel coverage of future launches unless a non-Chinese review reached the same conclusion. After Beijing reluctantly agreed, Loral's satellite division signed on to lead a review team that included its major rival, Hughes Electronic Corp., and Intelsat, the satellite's owner.

Loral's outside corporate security committee advised getting a U.S. government license to sanction the review effort – and the possibility that some technology transfer might occur, said committee member Stephen Bryen, who served as Defense Department undersecretary for trade security policy from 1985-88. Although Loral executives agreed, Bryen said, no such government approval was sought.

Ironically, Bryen and others said, Loral's reputation for handling sensitive materials had been among the best in the business. "They worked very hard at it, and were very rigorous," he said.

In an account later given federal authorities by Loral, all members of the review team were given detailed instructions to prevent them doing anything that might raise questions about an illegal transfer of information. Whether the company failed to convey those instructions forcefully enough, or whether they were willfully disregarded is one questioned being investigated by a federal grand jury.

What is known for certain is that minutes of two lengthy meetings the review team held with its Chinese counterparts were given to the Chinese along with two drafts of the team's final report – a 25-page document with nearly 200 pages of supporting materials and attachments. The report included information and ideas about the causes of the crash that had not been shared with the Chinese investigators during the meetings.

Loral's Cooperation

On June 17, 1996, Loral provided the State Department with all the material the Chinese had given the crash review team, all documents the team had generated for internal use, all documents that had been sent to the Chinese, and a report detailing Loral's own account of what had happened.

At the State Department, Loral's cooperation was considered significant. "Voluntary disclosure certainly puts the company in a better light," said one senior federal official recently, although it "is no guarantee that the company will avoid a criminal referral."

The State Department's export controls office passed word of Loral's confession to its Pentagon counterpart, the Defense Technology Security Administration (DTSA), which launched its own assessment with advice from Air Force intelligence.

For the entire subsequent year, the question of whether Loral had done anything improper lived only in the bowels of the technology export bureaucracy. Loral executives and attorneys recorded several separate contacts with different agencies inquiring whether further information was needed, but never received a response, company officials said.

Then, last May, DTSA – an agency known for its long-standing opposition to the satellite waiver policy – approved an Air Force intelligence finding that technology transferred by Loral to the Chinese during the crash review could have allowed China to improve the guidance systems on their intercontinental ballistic missiles, which are virtually identical to the Long March rockets. National security had been harmed, the DTSA report said.

Although a Justice Department criminal investigation of Loral was launched almost immediately in the U.S. Attorney's office here, it languished through the summer and early fall of 1997 – in part because prosecutors were tied up on another big case, according to officials familiar with the investigation.

It was not until late fall that prosecutors began digesting the highly technical documentation, officials said. Even as they decided to bring the case to a grand jury after New Year's, they felt the case merited no special urgency and were still undecided on what specific violations of law could be alleged, and whether there was a case that could or should be prosecuted.

The prosecutors had no idea that Loral's request for a new launch waiver was simultaneously making its way to the White House.

Challenger's Influence

The initial policy decision to allow U.S. satellite makers to launch their products atop Chinese rockets had its roots in the shutdown of the space shuttle program after the 1986 Challenger crash, and the failures of several satellite launches using U.S. rockets. On Sept. 9, 1988, the Reagan administration announced it would reverse policy and allow China to launch American-made commercial satellites within a year.

Before the new policy could be implemented, however, Tiananmen Square happened. After the bloody, June 4, 1989, Chinese crackdown on pro-democracy demonstrators, the Bush administration – followed by Congress – imposed sanctions prohibiting exports to China of weapons as well as hardware and technology that could be used for military purposes. Although the sanctions also prohibited the Chinese launch of U.S.-made commercial satellites, a provision was included for case-by-case waivers if the president determined a launch to be in the national interest.

Bush signed three waivers covering nine separate launches of satellites manufactured by U.S. companies – including the Loral-made satellite destroyed in the 1996 crash. Clinton has signed eight waivers covering 11 launches. The waiver process is fairly routine, with negotiations between satellite firms and government agencies often beginning years before a proposed launch.

The new waiver for which Loral applied in May 1997, was for Chinasat8, a communications satellite to be used by the Chinese to expand their national telephone system. By all accounts, the application was handled routinely, with no explicit mention of the ongoing Justice investigation of the 1996 crash review.

All involved agencies signed off on the waiver, officials said. DTSA, the Pentagon agency that had accused Loral of compromising national security by turning over the 1996 review, also agreed to the new request, after stipulating that the Defense Department review all technological data on the launch before it was released to China. DTSA also asked for assurances that physical custody of the satellite would remain entirely in U.S. hands, and that Pentagon monitors would attend all technical meetings between Loral and the Chinese.

"There was no controversy, because DTSA got what it wanted," the senior defense official said.

Waiver Recommendation

A State Department memorandum recommending the waiver arrived at the White House on Jan. 9, 1998. "We have reviewed this case and believe these exports are in the U.S. national interest," it said, using language virtually identical to other such recommendations. It differed from others, however, in one cryptic paragraph advising that "information about unauthorized defense services" provided by Loral to the Chinese about the Long March rocket could lead to the imposition of sanctions against Loral "that would require denial of licenses for the transfer of missile equipment or technology."

Documents released last week by the White House indicated that this was the first the National Security Counsel staff knew of the Justice Department investigation into the 1996 crash review. Notes included in the documents indicate staff inquiries gleaned that prosecutors intended to take the case to a grand jury, that Loral had voluntarily disclosed the matter and that DTSA had concluded Loral had made a potentially significant contribution to the Chinese nuclear weapons program.

By Jan. 13, the NSC staff was prepared to recommend the waiver. A memorandum that day from Maureen Tucker, an NSC nonproliferation specialist, read "Hi folks: attached is a very quick turnaround package for which I am seeking your clearance by tomorrow."

The package included a draft memorandum to the president explaining the reasons for approval. It made no mention of the investigation, but noted Loral could suffer sanctions because of unspecified "unauthorized defense services." It also noted that Loral needed a decision by Jan. 18 to avoid financial penalties under its contract with the Chinese.

NSC lawyer Newell Highsmith responded the next day, recommending explicit mention be made of the investigation and the allegation that the Chinese ballistic missile program might have been aided. Highsmith also suggested Clinton be warned the waiver might generate political heat, but said the administration could mount "a strong rebuttal to such criticism."

On Jan. 15 Malcolm Lee, a senior official on international economic policy, urged the staff to get more information about "what Loral did." "By no means should we downplay violations" in the memo to Clinton, Lee argued.

Berger added a handwritten order: "Find out as much as you can . . . status/timetable/seriousness of DOJ . . . anything we can hang our hat on to characterize Loral's 'offense?' We need some more info."

Subsequent notes indicate Highsmith and others learned that Loral definitely had made an unauthorized transfer but that the Justice Department had yet to determine whether it was intentional and unlawful. Information was still contradictory as to whether the information made any contribution to improving China's missile guidance systems.

In reconstructing those events last week, a senior administration official said that because Loral had voluntarily disclosed the problem and there had been no other allegations it had acted improperly during any dealings with China, there was no reason to consider Loral a future security risk. As to the 1996 problem, language was included in the waiver saying it was not meant in any way to exonerate Loral, and the waiver could be revoked if there were indictments.

Top Justice Department officials argued to the NSC staff, and to White House Counsel Charles F.C. Ruff, that a new waiver might prejudice their case, if for no other reason than a jury would be reluctant to find fault with a company that had been given subsequent presidential approval to keep doing business with China.

Ruff and Berger decided that the final memo would advise Clinton of Justice Department fears that the waiver would have "a significant adverse impact" on its effort to possibly prosecute Loral, but that these concerns were outweighed by national security benefits.

On Feb. 18, Clinton signed the waiver and, as required by law, advised Congress he had done so.

Staff writers Bradley Graham and Ruth Marcus contributed to this report.

© Copyright 1998 The Washington Post Company

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