The State Department has charged that two of the country's largest aerospace companies, Hughes Electronics Corp. and Boeing Satellite Systems Inc., illegally transferred sensitive U.S. space technology to China in the 1990s that could have helped Beijing's military develop intercontinental missiles.
If a federal administrative judge and, later, a top State Department official agree with the allegations in a 32-page State Department "charging letter" filed without public notice last Thursday, the companies could be fined as much as $60 million and barred for three years from selling controlled technologies overseas, a penalty that could particularly hurt Boeing.
The companies have strenuously denied wrongdoing in the case, which began with a series of failed space launches in China starting in 1995. Hughes officials are alleged to have given Chinese experts detailed information about rocketry to help China's space program figure out why its rockets were failing soon after launch.
The Hughes Electronics space launch division, which committed the supposed improprieties, was purchased by Boeing in 2000 for $3.7 billion. The two corporate bodies charged by the State Department last week are the Hughes parent company and the division of Boeing that gobbled up the former Hughes space launch unit.
This type of administrative charge is extraordinarily rare, U.S. officials said. The filing reflects officials' anger that the two firms have aggressively battled the charges and resisted admitting what they did in China was wrong, they added.
"We don't believe we've done anything wrong," said Hughes Electronics spokesman Robert Marsocci. "We're in negotiations with the State Department, and we'll be reviewing our options."
A Boeing spokesman, Dan Beck, said the company would not comment.
The Justice Department spent years on a criminal investigation of those companies and a third, Loral Space & Communications Ltd., involved in similar activity in China. But several months ago, federal prosecutors informed the firms that they would not file criminal charges.
Last January, Loral agreed to pay a $14 million fine and to spend $6 million on internal reforms to stop overseas technology transfers. The government did not file the kind of administrative charges against Loral that it filed last week against Hughes and Boeing.
The charging document, signed by William J. Lowell, director of the State Department's office of defense trade controls, said Hughes and Boeing committed 123 violations of the Arms Export Control Act and the International Traffic in Arms Regulations.
Government officials praised Loral for facing up to its past improprieties and imposing corporate guidelines to prevent a recurrence. Officials offered no such praise for Boeing and Hughes.
"The department has had several rounds of discussion with Hughes and Boeing to explore a resolution similar to the one with Loral," said State Department spokesman Jay Greer. "We can note that unlike Loral, Hughes and Boeing have both failed to recognize the seriousness of the violations and have been unprepared to take steps to resolve the matter, or to ensure no recurrence of violations in the future."
Hughes and Boeing for years have insisted the State Department is wrong to declare it improper for them to have had discussions with Chinese officials about the space launch failures. The firms point out that during the mid-1990s, their operations in China were covered by Commerce Department regulations that were more lax and, the companies say, allowed for some give and take with Beijing officials. The State Department says that the more stringent export control laws still were in force, and that the companies broke them.
After the explosion of the space shuttle Challenger in 1986, President Ronald Reagan decided in 1988 that U.S. space companies should be allowed to launch their satellites aboard China's Long March rockets to accommodate the fast-growing American telecommunications industry.
But the U.S. firms were barred from giving the Chinese any help on their launches without U.S. licenses and supervision by Pentagon inspectors. The U.S. government's fear was that the Chinese could use American know-how on the Long March commercial rocket launches to help the performance of Beijing's nuclear-tipped missiles.
The problem was that China's space officials were extremely aggressive in demanding that the U.S. companies provide "technology transfer" as a condition for entry into the desirable Chinese market. The issue came to a head each time a Long March rocket crashed or failed, because global insurance companies demanded in-depth probes into the technical causes of the glitches. U.S. firms came under intense pressure to share their insights with the Chinese.
Hughes Electronics was by far the most hard-charging of the U.S. satellite manufacturers and staked much of its corporate future in the 1990s on cracking the Chinese market. The State Department's charging letter lays out dozens of instances when Hughes engineers or executives gave the Chinese lengthy briefings or papers describing the reasons that Long Marches blew up.
Following the January 1995 explosion of a Long March rocket upon liftoff, Hughes then-Vice President Steven Dorfman wrote to a top Chinese space official that "Hughes is prepared to fully cooperate with you in investigating this failure. . . . I have instructed our people to make available whatever data and resources are required. . . . I strongly support our mutual cooperation, including meaningful technology transfer."
A Hughes fax that same year said Hughes officials briefed executives of a top Chinese telecommunications entity "about everything" concerning the launch problem. The Chinese entity "had been present in all of the failure meetings to date, and has copies of everything from both sides."
"It is time for Hughes to either 'put up or shut up' in regard to meeting their previously stated commitment of transferring technology to China," said an internal Hughes memorandum in May 1995. "If we want to win [a particular Chinese contract], Hughes must make a real commitment to transferring technology to China."
The State Department's charging letter also said that in 1996, Hughes failed to disclose that a Chinese man it had hired to work as a translator on a Hughes proposal to build a $600 million communications satellite for China was the son of a top Chinese general who oversaw the contract.
The son's role "went well beyond that of an interpreter/translator and more closely resembled that of an intermediary with his father, General Shen, and other [Chinese] space authorities, in order to cultivate their support in various matters of interest to Hughes," the State document said. In one internal Hughes memo, a company executive called the general "the most important Chinese space official."
In 1999, Hughes officials voluntarily told the State Department they were uncomfortable that their company, in trying to land that $600 million Chinese contract, had paid $3 million to an intermediary firm in Macao that played a murky role in the deal, which Hughes ultimately won, the document said. The firm was controlled by a business executive who had helped set up telecommunications networks for the Chinese military, the document said.
Hughes performed an internal investigation of the matter but refused to divulge the results to State, the department's letter said. In 1999, State officials rejected Hughes's application for a license to build the network, citing the company's intimate dealings with China.
If it is found liable in the case, Boeing could lose hundreds of millions of dollars in overseas sales of satellites and other foreign space business, officials said.