	Background

Commerce is responsible for licensing exports of U.S. dual-use items—items with both military and commercial applications—and helps enforce controls over them. The Shanghai facility is responsible for final assembly of the aircraft. The machine tools McDonnell Douglas exported to China had been used at a U.S. government-owned plant to produce parts for the B-1 bomber, C-17 military transport aircraft, and the Peacekeeper missile. During this review process, DOD officials raised several questions about the justification for the export. Their concerns primarily focused on (1) whether the stated end-use on the license applications justified the export; (2) the legitimacy of the CATIC Machining Center, the stated end user of the equipment; and (3) the quantity and capabilities of the machine tools. Prior to approving the licenses, the reviewing agencies added numerous conditions to mitigate the risks identified. Applications Went Through Interagency Review Process

Commerce, State, Energy, DOD, and the Arms Control and Disarmament Agency officials recognized the risk of diversion, considered it in their deliberations, and added conditions to the licenses to minimize this risk. After some of the machine tools were diverted to a Chinese military facility not involved in the Trunkliner program, McDonnell Douglas submitted license applications to Commerce to maintain the equipment at this facility to manufacture parts for trainer aircraft and motorcycles. Specifically, the license conditions required that the machine tools be stored in one location until the CATIC Machining Center was constructed; restricted the use of the equipment to Trunkliner-related production; required assurances from CATIC that the equipment would be used as required metering devices to record equipment usage and the installation of password protection on some equipment; and included various reporting requirements, such as quarterly inspection reports by McDonnell Douglas, that were designed to monitor the equipment and detect unauthorized use. Machine Tools Were Diverted to a Chinese Military Facility Contrary to License Conditions

The machine tools were shipped to three locations contrary to the license conditions and CATIC’s assurances regarding end use. In a letter to McDonnell Douglas, Commerce indicated that the movement of the equipment to Nanchang and partial installation of the stretch press was a “direct violation of the conditions under which the equipment was originally authorized for export to China.”
Under the terms of the export licenses and CATIC’s written assurance, the machine tools were only to be used to manufacture commercial parts for the Trunkliner and other McDonnell Douglas commercial aircraft. Commerce also suspended four licenses for the equipment that had not yet been shipped to China. Commerce Began Investigation 6 Months After the Reported Diversion

Commerce’s Office of Export Enforcement, which is responsible for investigating export control violations, did not formally investigate the machine tool diversion until 6 months after McDonnell Douglas reported the incident. The U.S. Customs Service and the Office of Export Enforcement are now conducting an investigation under the direction of the Department of Justice. Later, it subsequently approved relocating the equipment to the Shanghai aviation facility with similar conditions. 2. 3. 5. 7. 8. 10. 11. 12. 13. 14. 4.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the circumstances surrounding the export of machine tools by the McDonnell Douglas Corporation to the China National Aero-Technology Import and Export Corporation (CATIC), focusing on: (1) the military and civil applications of the equipment and whether these military applications are important to China's military modernization plans; (2) the process for approving the licenses and how the process addressed the risks associated with this export; and (3) whether export control license conditions were violated and, if so, how the U.S. government responded.

What GAO Found

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.