Export Controls

Following a lengthy review, the Commerce Department in 1994 allowed the McDonnell Douglas Corporation to export to China machine tools for producing commercial aircraft. Some of these machine tools were later diverted to a Chinese facility that built fighter aircraft and cruise missiles for the Chinese army. Commerce's enforcement office, however, did not formally investigate the export control violations until six months after they were reported. The U.S. Customs Service and Commerce are now conducting a criminal investigation under the direction of the Justice Department.

GAO found that: (1) the machine tools exported by McDonnell Douglas to China have military and commercial applications; (2) these machine tools had been used in the United States to produce parts for military systems but were exported to manufacture parts for commercial passenger aircraft; (3) China needs machine tools to upgrade both its military and commercial aircraft production capabilities; (4) after a lengthy interagency review, the Department of Commerce approved the license applications with numerous conditions designed to mitigate the risk of diversion; (5) during the review period, concerns were raised about the need for the equipment to support Chinese aircraft production, the reliability of the end user, and the capabilities of the equipment being exported; (6) senior officials at Commerce, the Departments of State, Energy, and Defense, and the Arms Control and Disarmament Agency agreed on the final decision to approve these applications; (7) some of these U.S. exported machine tools were subsequently diverted to a Chinese facility engaged in military production; (8) this diversion was contrary to key conditions in the licenses that required equipment to be used for the Trunkliner program and be stored in one location until the CATIC Machining Center was built; (9) six weeks after the reported diversion, Commerce suspended licenses for four machine tools not yet shipped to China; (10) Commerce subsequently denied McDonnell Douglas's request to allow the diverted machine tools to remain in the unauthorized location for use in civilian production; (11) Commerce approved the transfer of the machine tools to the Shanghai aviation facility, which is responsible for final assembly of Trunkliner aircraft; (12) the diverted equipment was relocated to Shanghai before it could be misused; (13) some of the amended license conditions apply only after the equipment is installed, which has not yet occurred; (14) Commerce's enforcement office did not formally investigate the export control violations until 6 months after they were first reported; and (15) the U.S. Customs Service and Commerce's enforcement office are now conducting a criminal investigation under the direction of the Department of Justice.