The Bureau of Industry and Security (“BIS”) just released the decision of an Administrative Law Judge recommending a 15-year denial of export privileges to Megatech Engineering, a Mumbai-based distributor of MTS Systems products, and three of its employees. At issue were unlicensed exports of two MTS Systems products to the Indira Gandhi Centre for Atomic Research {“IGCAR”), a company on BIS’s Entity List. Based on the ALJ’s recommendation, Megatech and the named employees have been added to the Denied Persons List.

Megatech and the individual respondents argued before the ALJ that they were duped by IGCAR which set up front companies and then diverted the exported products from those companies. The ALJ rejected this argument on two grounds.

First, the ALJ noted that the orders that were allegedly destined to the front companies were negotiated by Megatech with an individual that Megatech knew to be an employee of IGCAR. This wasn’t a red flag as much as it was a smoking gun.

Second, the ALJ noted that Megatech departed from its routine procedures with respect to the sales that were diverted to the IGCAR. Normally, MTS Sytems employees would travel to India for installation and final acceptance of products sold by Megatech to its customers in India. For the sales at issue, however, the Indian customer traveled to the United States for pre-shipment inspection, and MTS Systems trained a Megatech engineer to install the equipment and handle final acceptance in its stead. This change guaranteed that MTS Systems would not travel to India to discover that the front companies were not the final end user of the products.

Of course, the change in procedures should have been a red flag not only to Megatech but also to MTS Systems. So, not surprisingly, MTS Systems agreed in March 2006 to a $36,000 civil penalty. The charging documents against MTS Systems noted that an employee working on the exports at issue sent an email stating that “all kinds of flags are being raised here.” Those “flags” weren’t specified, but chief among them had to be the change in routine installation and acceptance procedures.

The State Department is apparently upset that a Pratt & Whitney engine exported from Canada by Pratt & Whitney Canada, a Canadian subsidiary of United Technologies, wound up in the Chinese military’s Z-10 attack helicopter, pictured above.

State Department spokesman Karl Duckworth said information was being gathered before deciding whether to take any action. “We are reviewing the matter and have no further comments at this time,” he said.

According to P&W Canada, it received an export license in 2001 to ship 10 PT-6 engines to the Chinese. The PT-6, developed 40 years ago in Canada, is used in 25,000 civilian helicopters around the world.

So, the State Department may be upset, but where’s the beef? First, the State Department’s jurisdiction under the section 120.17 of the International Traffic in Arms Regulations extends only to exports of defense articles, including technology, from the United States. Unless the PT-6 engine shipped from P&W Canada contains U.S. technology, the State Department doesn’t have a hook to hang it’s annoyed hat on.

Second, the technology has to relate to a United States Munitions List (“USML”) item. Category VIII(b) of the USML only applies to engines for military helicopters. P&W Canada says that it shipped these engines for use on civil helicopters and that the Chinese, because of delays in developing engines for its military helicopters, subsequently decided to adapt the exported engines on the military helicopter.

Nobody, other than the Chinese, is particularly happy that the P&W engine wound up on the Z-10. But until the U.S. and other countries decide to restrict the sale of civilian aircraft engines to China, there’s nothing to be gained by threatening investigations against companies that legally exported the engines.