Feds Ready to Indict McDonnell Douglas for Illegal Exports to China

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Federal prosecutors have told lawyers for McDonnell Douglas to expect a criminal indictment in connection with its 1994 export of machine tools to China unless the company agrees to a plea bargain later this month.

Federal law enforcement sources tell TIME that Attorney General Janet Reno has approved indictments under the Export Administration Act for both McDonnell Douglas, now part of the The Boeing Company, and Catic, the huge state-owned Chinese aerospace outfit that bought the equipment. The companies were informed last week.

McDonnell Douglas sold the surplus machine tools to Catic, the China National Aero-Technology Import Export Corporation, in 1994. Under the terms of the export licenses obtained for the shipments, the equipment was to be used for the production of commercial aircraft in a specific location. But within months of the $5 million sale, McDonnell Douglas discovered that some of the tools had been diverted to a facility that produced, among other things, Silkworm missiles a violation of the export license. The company reported back to the U.S. government, and seven months later, the Commerce Department began an investigation. But the case was also referred to the Justice Department, where in 1996 prosecutors from the U.S. Attorney's Office in Washington, D.C., began a grand jury investigation of whether Catic and McDonnell Douglas had violated export control laws.

The indictment of Catic would not be unexpected; the company has been trying to work out a deal with prosecutors since at least earlier this year. But while some government prosecutors had recommended charging McDonnell Douglas as well, that case had been considered problematic in part because the company forcefully argued that it couldn't have known in advance of the diversion and that this is an example of the system's safeguards working, since the company discovered the diversion not long after it occurred and reported it right away. But investigators have said they have evidence that the Chinese intended all along to put the equipment to military use, and that McDonnell Douglas knew that the plant where the machines were supposed to be used was behind schedule and might not be built at all.

The companies have been given a drop-dead date of Oct. 21 to decide on the plea bargains offered by the government, according to a lawyer familiar with the cases. Should the companies and prosecutors fail to reach agreement, the government is expected to ask the grand jury to hand up the indictments shortly. It is unclear whether individuals within the companies would be indicted as well. If convicted, the companies would face monetary penalties, but there are other potentially serious ramifications for a risk-averse firm like Boeing, including possible exclusion from government contracts and denial of export licenses and privileges.

Larry McCracken, a spokesman for Boeing, wouldn't comment on the current status of the government's investigation but said, "We continue to believe that McDonnell Douglas acted properly in this matter. We've maintained that this is how the system was supposed to work."

A spokeswoman for Catic said only that "Catic is fully cooperating with the government's investigation and hopes that we can resolve the U.S. concerns."

Republicans on Capitol Hill have long been critical of what they view as the Justice Department's lax attitude toward various allegations having to do with China, from campaign contributions to espionage. A chapter on the McDonnell Douglas sale was included in last May's report by a select congressional committee on transfers of American technology to China. The committee, headed by Republican Rep. Christopher Cox, noted Catic's role in trying to obtain technology with civilian and military uses for China and said the company had sometimes misrepresented the intended use of U.S. technology it was seeking.