Hughes Electronics [GMH] and Boeing Satellite Systems, formerly Hughes Space and Communication (HSC), have agreed to jointly pay a $32 million penalty to the U.S. Department of State to resolve claims of technology transfer that stemmed from Chinese rocket launch failures in 1995 and 1996.

In addition, the two companies have agreed to reform the way they oversee launches of their satellites aboard foreign-owned rockets. Each company has agreed to appoint a third party to serve as a special compliance officer for exports. The duties of the compliance officer will include ensuring that terms of the consent agreement are followed and that oversight is given over exports regulated by the State Department, officials of both companies said. Particular emphasis will be placed on oversight of launches by China and several other countries, company officials said.

At Boeing, the compliance officer’s three primary responsibilities will be to assist in strengthening the company’s export compliance program and processes, monitoring compliance with reporting requirements and overseeing other activities regulated by U.S. export controls.

Boeing’s compliance officer will provide input to company management to enhance its export compliance program and to strengthen the working relationship between the company and the State Department.

The companies $32 million in penalties included $4 million credited to the companies for past expenditures on export program enhancements and $8 million to be invested by Hughes and Boeing to enhance their compliance programs. The $20 million cash portion of the penalty is to be paid in eight equal installments over the next seven years, according to the consent decree.

Of the $20 million in cash, $15 million is coming from Hughes and $5 million from Boeing, said Richard Esposito, a Boeing spokesman. Of the $8 million to be invested in compliance programs by both companies, Boeing will spend $6 million and Hughes will pump in $2 million. The two companies had each previously invested $4 million in compliance program upgrades.

The 1995 launch that touched off the export problems for Hughes and Boeing involved an Apstar 2 satellite built by then-Hughes Space and Communications (HSC) for APT Satellite Company Ltd., of Hong Kong. The 1996 launch involved a Space Systems /Loral-built satellite, Intelsat 708, and ensnared Hughes when its officials participated in a launch failure review at the request of insurance underwriters.

The State Department charged that the companies had violated the Arms Export Control Act because of information they shared with Chinese officials in the launch failure review process. HSC was sold in October 2000 to Boeing, which took responsibility for resolving HSC pre-acquisition export matters.

Lessons Learned

“The underlying problem was never an affirmative intent to compromise the national security interests at the core of the U.S. export control regime, but rather an unfortunate laxness in viewing the importance of strict adherence to that regime,” said Maury Mechanick, an attorney in the Washington office of White & Case. Mechanick also was the U.S. governor to Intelsat at the time of the Intelsat 708 launch in 1996.

“Valuable lessons have been learned, accompanied by a very high price tag for those involved, both in a financial and public relations sense, but it does appear as though new and improved controls are now in place that should avoid any recurrence of the problem in the future,” Mechanick said.

Jack Shaw, president and chief executive officer of Hughes Electronics, and Dave Ryan, vice president and general manager of Boeing Satellite Systems, issued a joint statement acknowledging the “seriousness of the offenses” charged by the State Department. The statement also recognized the harm such offenses could cause to the security and foreign policy interests of the United States.

The companies admitted that HSC should have sought and obtained a State Department license before disclosing to Chinese nationals or to the international insurance community any launch failure analysis, information or assistance about the design, development, operation, maintenance, modification or repair of launch vehicles, systems or facilities. Hughes and Boeing also acknowledged that assistance to a launch operator in any of these areas could aid in the development of missile system technology by China and thus have a negative impact on U.S. national security.

In addition, the companies accepted full responsibility and offered regret for not having obtained licenses required under the law, despite prior public comments by Hughes to the contrary.

“Both of our companies are committed to vigorous compliance with the laws and implementing regulations and have made, and will continue to make, substantial investments in export compliance training, processes and personnel,” according to the joint statement. “Both companies and their employees acknowledge the critical importance to America’s national security of, and the need for strict compliance with, U.S. export control laws.”

The companies further said that it is” crucial” to the security and foreign policy of the United States to prevent the unauthorized sharing of protected information or defense services that would or could promote the illicit development of missile system technology.

The settlement resolved all outstanding issues stemming from these incidents and was preceded by the closing of investigation into these matters by the U.S. Department of Justice in January 2002, company officials said. Neither company is limited in the future from pursuing export licenses for satellite launches in China or any other countries.

–Paul Dykewicz

(Maury Mechanick, White & Case, 202/626-3635; Richard Esposito, Boeing Satellite Systems, 310/335-6314)