BA Boeing Co

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 7, 2018).

By Brian Spegele and Kate O'Keeffe 

Boeing Co. said Thursday it was canceling a controversial satellite order that was financed by a Chinese government-owned firm, citing default for nonpayment.

Boeing's decision follows a Wall Street Journal investigation this week that highlighted China's opaque role in funneling around $200 million to the project.

Under U.S. export-control laws, Boeing isn't allowed to sell satellites to China directly. The company faced criticism from national security officials that it attempted to sidestep U.S. regulations on sensitive technology, which the U.S. military relies on.

A person familiar with Boeing's thinking said canceling the order was a business decision. The person said the company would likely attempt to resell the satellite, which had been nearing completion at a Boeing facility in Los Angeles.

On paper, a Los Angeles startup called Global IP was Boeing's customer in the project. The company was behind on payments for the satellite and needed to raise over $200 million more to complete it.

Global IP didn't immediately respond to request for comment. Its CEO Bahram Pourmand previously pledged to push ahead despite the controversy over China's involvement.

The satellite was intended to provide better web access to Africa. A concern among officials was that China might repurpose the commercial technology for military use.

Details of the satellite deal began to emerge after tensions boiled over last year between founders of the startup and a state-owned Chinese company that had already provided about $200 million in financing through an intermediary.

Global IP's founders, Emil Youssefzadeh and Umar Javed, allege in a lawsuit in federal court in California that the Los Angeles startup was secretly controlled by China after it accepted financing from a unit of state-owned China Orient Asset Management Co. in a complex deal that involved offshore firms in the British Virgin Islands. Global IP has denied it was controlled by China.

Lawyers for the China Orient subsidiary didn't immediately comment. Previously, they said the founders' allegations were false and "inflammatory."

The Global IP controversy came at a difficult juncture for U.S.-China relations, with rising tensions in particular over China's alleged theft of U.S. technology. The Canadian authorities' arrest of a prominent Chinese telecommunications executive on Saturday at the request of U.S. officials marked the start of an even more aggressive phase in the technology battle between Washington and Beijing.

Obtaining such satellite technology would help China as it seeks to secure its status as a superpower alongside the U.S. It would bolster China's burgeoning space program, as well as initiatives to dominate cutting-edge industries and expand its influence in the developing world.

Boeing had said in an earlier written statement that it "undertakes rigorous measures to comply with U.S. export regulations and protect national interests."

The company, the second-largest federal contractor after Lockheed Martin Corp., said it had obtained an export license from the Commerce Department for the Global IP satellite and that it would "continue to work closely with Commerce officials to ensure appropriate protection of satellite technology."

Boeing declined to say what it told Commerce officials about the deal or its financing when seeking the license, or to answer most other specific questions from the Journal. The Commerce Department said it couldn't comment on an individual application and again declined to comment Thursday.

Convinced there was no way forward, the two Global IP founders resigned, as did the general counsel. When they left, they expressed concern to Boeing that the company was controlled by China. Boeing agreed to push ahead with the project after a compliance review, a decision the founders criticized.

"When we resigned over a year ago, we informed Boeing of the reasons for our decision and hoped that all the parties involved would see the need to put the company on the right course towards compliance," said Mr. Youssefzadeh on Thursday. "It's unfortunate that this did not happen at the time."

Global IP and its backers should have flagged the satellite transaction to the Committee on Foreign Investment in the U.S., or CFIUS, a panel that can recommend the president block transactions on national-security grounds, said legal experts and former and current U.S. officials who reviewed allegations in the lawsuit about the transaction at the Journal's request.

After the Journal began looking into the project this past summer, U.S. officials referred the transaction to CFIUS, according to people familiar with the matter. A spokesman for the Treasury Department, which leads the interagency CFIUS panel, earlier declined to comment. Treasury wouldn't immediately comment Thursday.

After reviewing the transaction, Adm. Dennis Blair, a former U.S. director of national intelligence, told the Journal that he was baffled Boeing would proceed with the project. Adm. Blair chairs an advisory committee for Lockheed Martin Space Systems, a Boeing competitor.

Write to Brian Spegele at brian.spegele@wsj.com and Kate O'Keeffe at kathryn.okeeffe@wsj.com

(END) Dow Jones Newswires

December 07, 2018 02:47 ET (07:47 GMT)

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