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From the New York Times, Apr. 4, 1998


Companies Are Investigated For Aid to China on Rockets


A Federal grand jury is investigating whether two American companies illegally gave China space expertise that significantly advanced Beijing's ballistic missile program, according to Administration officials.

But the officials said the criminal inquiry was dealt a serious blow two months ago when President Clinton quietly approved the export to China of similar technology by one of the companies under investigation.

The decision was opposed by Justice Department officials, who argued that it would be much more difficult to prosecute the companies if the Government gave its blessing to the deal, the officials said.

Under investigation, the officials said, are Loral Space and Communications of Manhattan and Hughes Electronics, a Los Angeles-based division of the General Motors Corporation. The companies denied wrongdoing, but declined to discuss the investigation.

Loral has numerous business deals with China and close ties to the White House. Its chairman and chief executive, Bernard L. Schwartz, was the largest personal contributor to the Democratic National Committee last year.

Loral's vice president for government relations, Thomas B. Ross, said Mr. Schwartz had not spoken about the matter with Mr. Clinton or any other Administration official.

The Federal inquiry stems from a 1996 incident in which a Chinese rocket carrying aloft a satellite built by Loral exploded shortly after liftoff. The two companies took part in an independent review of the failure, and reported to the Chinese on what went wrong.

Those exchanges, officials believe, may have gone beyond the sharing of information that the companies had been permitted, giving the Chinese crucial assistance in improving the guidance systems of their rockets. The technology needed to put a commercial satellite in orbit is similar to that which guides a long-range nuclear missile to its target.

In February, with the investigation of this incident well under way, Mr. Clinton gave Loral permission to launch another satellite on a Chinese rocket and provide the Chinese with the same expertise that is at issue in the criminal case, officials said.

A senior official said the Administration recognized the sensitivity of the decision, but approved the launching because the investigation had reached no conclusions and because Loral had properly handled subsequent launchings. The Administration, he said, could still take administrative action against the companies if they were found to have violated export laws in their earlier dealings with the Chinese.

Michael D. McCurry, the White House spokesman, said the launching that President Clinton approved in February `will not contribute to Chinese military capabilities' because Loral has agreed to `stringent safeguards' to prevent the unauthorized transfer of technology.

Emery Wilson, public relations manager for Hughes Space and Communications, a division of Hughes Electronics, said the company had not been notified of any Federal criminal investigation.

`In response to a letter from the State Department,' Mr. Wilson said, `we conducted a thorough review and concluded that no Hughes employee had engaged in the unauthorized export of controlled technology or equipment.'

The Administration has been hoping to reach a broader agreement with Beijing that would make it much easier to launch American satellites on China's rockets. Mr. Clinton is to visit China this summer in the first Presidential trip to the country since the suppression of the pro-democracy movement in the 1989 Tiananmen Square massacre.

There are huge commercial interests at stake. A host of companies, from cellular telephone networks to international television conglomerates, are waiting in line for low-cost satellites to be sent into orbit. An important bottleneck facing the companies is a shortage of rocket systems available to launch satellites.

China is eager to offer its low-cost--but not always reliable--services.

For American companies, there is a significant complication. All American satellites sent into orbit by China's rockets require Presidential approval, a waiver of the sanctions imposed after the Tiananmen massacre. Congress must be told of each waiver. Thus far, Presidents Bush and Clinton have issued 11 waivers for satellite launchings.

The policy under consideration by the Clinton Administration would end the case-by-case waivers and would treat future launchings of American satellites like any other export of sensitive technology, which require Government licenses.

Critics in Congress argue that Mr. Clinton is putting commercial interests ahead
of national security. They caution that China has yet to prove it will abide by previous pledges it has made not to share missile technology with countries like Iran.

Few nations can deliver intercontinental ballistic missiles. China has lagged because, among other reasons, it lacks the guidance technology, also used for satellites, that allows multiple warheads to be sent from a single missile.

President Clinton signed the waiver to allow the Loral satellite launching on Feb. 18. The waiver states that the deal is `in the national interest.'

`We are more engaged with China,' Mr. McCurry said. `One area of that engagement has been commercial satellite technology, which we perceive to be in our interests as well as that of China's.'

But law-enforcement officials argued against the waiver, saying the approval jeopardized their investigation because it sanctioned the export of essentially the same guidance expertise involved in the possibly illegal transfer two years ago, Administration officials say.

Administration officials said the inquiry is focused on the events following the Feb. 15, 1996, explosion of a Chinese rocket carrying a $200 million Loral satellite seconds after liftoff at the Xichang Satellite Launch Center in Sichuan Province, in southern China.

After the explosion, the Chinese asked two American companies to help conduct an independent study of what went wrong. The team was led by Loral and included two experts from Hughes, according to Hughes.

According to Administration officials, the American experts provided crucial data and information to the Chinese to prevent future accidents. Later, Loral gave a copy of the written report to the State Department, which licenses the export of defense-related items.

Government officials immediately began to assess whether there had been a security breach. Last year, a criminal inquiry was begun by the United States Customs Service and the Department of Justice, officials said.

Under Federal export rules, American companies are supposed to take careful precautions to safeguard classified technology when their satellites are launched by Chinese rockets.

Satellites are shipped to China in sealed containers, and only American officials can mount them in the nose cones of the launching rockets. The Commerce Department approves the export of the satellites. But the more sensitive support activities must be approved by the State Department.

That process is meant to insure tight controls over the testing, repair and maintenance of the satellite so the Chinese cannot learn related classified information.

The State Department license issued several years ago for the Loral satellite was silent on the issue of what role, if any, the American experts could play in an analysis of a failed launching.

After United States companies took part in more than one study of failed Chinese launchings, the Federal Government changed its regulations and now requires companies to obtain a separate license to take a role in any accident review, an Administration official said.


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