PARIS – The recent legal dispute between EchoStar Communications Corp. and the world’s major space-insurance underwriters turned up multiple cases in which insurance companies were in violation of U.S. arms-export regulations as they apply to satellites, according to several U.S. and European officials.
These officials also said they fear that U.S. export law may distort an ongoing legal arbitration dispute between Boeing and insurance underwriters over satellite defects.
The EchoStar case, which ended after seven years with an arbitration panel awarding the Littleton, Colo.-based satellite-television company $240 million, has added to long-standing U.S. State Department suspicions that insurance underwriters are the weak link in the current satellite-export regime, according to industry officials.
John Ordway, a partner in the law firm Berliner, Corcoran & Rowe LLP of Washington and an export-regulations expert, said the EchoStar case could spur the State Department to make a public example of at least one large insurance company.
“If DDTC wanted to send a message, it would choose one large foreign underwriter” to attack with the threat of being barred from doing business in the United States or paying a large fine, Ordway said. The DDTC is the State Department’s Directorate of Defense Trade Controls.
The DDTC and, especially, the U.S. Defense Department’s Defense Technology Security Administration are the two principal agencies that manage satellite export controls as part of the International Traffic in Arms Regulations, or ITAR.
“We already know that within the ITAR enforcement offices there are suspicions,” Ordway said April 14 during the 13th International Space Insurance Conference, held in Stresa, Italy. “The EchoStar arbitration showed [Defense Technology Security Administration] that people had no
idea when they were in possession of ITAR-controlled data. The data is ITAR-controlled no matter where in the world the data is. Jurisdiction follows the data.”
Under ITAR rules, satellites are treated as weapons and are subject to strict controls that cover not only the export of the hardware, but the transfer to any non-U.S. citizen of virtually any information about the satellite that is not clearly in the public domain.
Alleged violations of export controls already have forced several large U.S. companies, including Boeing, Loral Space and Communications, Raytheon and others, to settle by paying multimillion-dollar fines and signing consent decrees.
An official with one company that agreed to sign an ITAR-related consent decree said that even several years after the event, State and Defense department officials retain round-the-clock access to the company’s computers, in some cases with government overseers stationed permanently on the company’s premises.
The ITAR regime was tightened in 1999 amid allegations that two U.S. satellite makers illegally shared sensitive technical information with China during investigations, demanded by insurers, into separate Chinese rocket failures. Commercial telecommunications satellites were placed on the U.S. Munitions List, effectively reclassifying them as weapons for export purposes and transferring jurisdiction over such exports from the Commerce Department to the State Department.
The global space-insurance market has shrunk in the past five years with the slowdown in the commercial satellite business. But it remains true that most of the world’s space insurance capacity comes from non-U.S. underwriters. These companies want technical information about satellites before they are launched to evaluate each satellite’s insurability.
Once a satellite or a rocket has experienced problems , underwriters demand details of what went wrong as a condition of paying claims.
It is this global information flow that ITAR has slowed.
The law is such that even when a non-U.S. insurer sends satellite-related information to a U.S. satellite operator or builder, the U.S. recipient needs to obtain State Department approval before returning the data to the insurer.
The ITAR regime stretches beyond access to the satellite or its designs. Nationals from 22 nations — including China, Vietnam, Syria, Iran and Indonesia — are barred from access to ITAR data without a waiver granted by the U.S. president. In one case, a Middle Eastern satellite operator was asked to dismiss several of its satellite control center employees because of their nationalities as a condition of buying a U.S. satellite. The company refused, and purchased a European satellite.
Insurance underwriters are now concerned that ITAR could play a role in litigation between them and Boeing Satellite Systems International of El Segundo, Calif. The dispute concerns Boeing’s conduct in regard to the first six Boeing 702 satellites, which were launched between December 1999 and May 2001.
These satellites had a solar-array design defect that resulted in $1.6 billion in claims filed by their owners. The satellite owners eventually settled for a total insurance payment of $875 million. Underwriters are seeking to recover at least part of that sum by claiming that Boeing committed gross negligence in not informing them of the solar-array problem while there was still time to correct it before all the affected satellites were launched.
Boeing has denied the allegations. The International Chamber of Commerce in Paris has been taking evidence on the case since September 2004.
Some underwriters that are party to the case are concerned that ITAR rules will have the effect of giving Boeing an advantage in the proceedings .
Ordway declined to address the Boeing case specifically, but he said the DDTC in the past has insisted that anyone communicating information that is proprietary to another company must obtain written authorization from the company before an export license is granted.
This means that underwriters could be forced to show their litigation strategy to Boeing before making their case to the arbitration panel.