4/87 TOSHIBA CASE—COCOM - FOREIGN EXCHANGE & FOREIGN TRADE CONTROL REVISION

The imperialists are so hungry for profits that they will sell us the rope with which to hang themselves. V. Lenin.

Sign at Toshiba products-bashing party held by US congressmen in July.

 

Gregory Clark, an American (sic) professor of sociology and international business at Tokyo's Sophia University, dismissed the government's penalties on Toshiba Machine and the other companies as mere "slaps on the wrist"...The more than 50 Japanese trading companies competing in the Soviet Union "are vulnerable to suggestions they will get favorable treatment if they cooperate with Soviet authorities." Mr. Clark said. "They are all jockeying for the same market, he added, and the pressure to cooperate is overwhelming." To deter wrongdoing, Mr. Clark said, far stiffer penalties are necessary. THE ASIAN WALL STREET JOURNAL 7/20/87. p.7.

 

This problem arose in March of this year, when the US Defense Department pointed out that machine tools of Toshiba Machine have been used to improve the efficiency of Soviet submarines. The president of Toshiba Machine defiantly replied, "When we received these charges before, it was found that we were innocent. All exports receive the approval of MITI. There was no violation of COCOM. Why are they bringing this up now? MITI also took the position that "There was no violation. The case is closed." But now the company is being prosecuted by MITI itself. There is a great deal of mystery surrounding what happened between March and now...The chairman of the Japan Machine Tool Industry Association charged that "what has brought this problem back is the deterioration of relations between the US and Japan." This investigation is "a human sacrifice due to American pressure. It is a false charge." NIKKEI SANGYO. 5/1/87, p.10.

 

Above, the president of Toshiba Machine. MITI and the Chairman the Japan Machine Tool Industry Association, in knee-jerk reactions all called American charges trumped up. Later after employees of Toshiba Machine admitted installing the devices in Soviet shipyards, two presidents and one chairman in the Toshiba group had resigned and Prime Minister Nakasone had claimed that Toshiba had betrayed Japan, the government of Japan has prepared new legislation to be implemented to make certain that "what didn't happen" never happens again. Nevertheless, one of the leading business experts an Japan, Professor Gregory Clark (not an American, but an Australian), has called the new measures totally inadequate. Under the new legislation, if Toshiba were to do the same thing again, i.e. make a $17 million sale to the Soviets and inflicting $30 billion in damages to American security, the company would be subjected to a fine of 2 million yen ($14,000).

 

On May 27 1987 the Japanese police arrested two senior executives of Toshiba Machine, who had been in charge of designing and exporting machine tools to the Soviet Union, for selling four nine-axis in 1982-1984 and 4 five-axis milling machines in 1984 to the Soviets, in violation of COCOM provisions. The executives admitted the charges. Based on the Foreign Exchange and Foreign Trade Control Law Toshiba was banned from conducting business with communist bloc nations for one year, and C.Itoh. a Japanese trading company was similarly banned for three months. The one year ban for Toshiba Machine was the most severe punishment ever issued based on the Foreign Exchange and Foreign Trade Control Law. Exports to communist nations account for 12% of Toshiba Machine's total exports or about 5 billion yen.

MITI had reportedly been informed about the transaction as early as December 1985 but did not act until prompted by the US Defense Department in the autumn of 1986. In its export application. Toshiba Machine falsely described the machinery as two-axis machine tools. Anything over two-axis violates COCOM. Indeed, according to some reports in the Japanese press (the YOMIURI newspaper) "MITI officials recommend particular steps to be taken to get around restrictions of the COCOM regulations." MITI denies the charges.

A network of seabed listening devices and ships around Greenland, Iceland and the United Kingdom follow Soviet submarines, but the milling machines have made the propellers thinner and quieter. No less than Prime Minister Nakasone and MITI minister Tamura have admitted that the sales of the milling machines by Toshiba Machinery were responsible for the lower propeller noise in Soviet submarines. In July 1987 Japanese Prime Minister Nakasone blasted Toshiba Machine for betraying Japan. (Engineers of Toshiba Machine admitted that they had assembled the devices in Leningrad shipyards.)

According to Hitori Kumagai, chief Moscow representative of Wako Koeki trading company and who informed COCOM of the violations by Toshiba Machine, for Japanese trading companies operating Moscow, "Russian business is delicious, especially dangerous business. Illegal machines contain profits." Indeed, he claimed that most of thee small companies serving Moscow business could not survive without forbidden sales. According to an article he wrote for the prestigious BUNGEI SHUNJU magazine:

Probably all of these (50-plus) trading companies have at least once violated Japanese export control laws. I do not have evidence, but having engaged in trade with the Soviet Union for many years. I am almost convinced they have...Japanese customs inspectors are expert at discovering contraband drugs and jewels, but appear to have less concern about whether certain high tech products violate COCOM rules or not." according to Kumagai. THE JAPAN TIMES. 7/19/87, p.l.

American experts believe it will cost the US $30 billion to recover its position lost by Toshiba's indiscretion. Assistant Secretary of Commerce Paul Freedenberg told Congress that the transaction was the most significant transfer of sensitive technology to the Soviets during the past decade with profound deleterious effects on the US strategic posture.

The US Congress is studying legislation that would ban sales in the US of products of Toshiba Corporation and its affiliates. The House of Representatives voted to ban the sale of Toshiba products at US military stores. Exports to the US account for 10% of the company's total sales. The Japanese have tried to argue that the scandal involved only Toshiba Machine, an independent subsidiary of Toshiba Corporation in which Toshiba owns only 50.2% of the shares. American government leaders in both the administration and the Congress have been dissatisfied with the sanctions imposed on Toshiba Machine by the Japanese government and do not buy arguments that the parent company should not be punished. According to Senator Dale Bumpers: "If we were in wartime and you could locate the culprits you would try them for high treason. But it's not wartime and all we do here is punish them economically."

As a result of Toshiba's indiscretion, the US Army cancelled a contract with Toshiba on guided missile technology. The US Air Force also decided to review a $100 million bid by Toshiba for 90,000 lap top computers. It ultimately gave the contract to Zenith. The Defense Department has stopped all contracts with Toshiba Corp. The US Department of Commerce stripped the US subsidiary of Toshiba of its blanket authority to export products. Henceforth, any exports from the US by the firm will require approval for each transaction.

The president of Toshiba Machine resigned in May 1987 and both the president and chairman of Toshiba Corporation resigned in early July. Toshiba cancelled plans to display its goods in Moscow for an International exhibition in July 1987. Toshiba Corporation also launched a massive advertising effort in major American newspapers and magazines, running full page ads apologizing to the American public.

The president of Wako Koeki Co.. which had acted as intermediary in the Toshiba Machine transaction. also resigned in June, 1987.

REVISION TO FOREIGN EXCHANGE AND FOREIGN TRADE CONTROL LAW.

The main objective of the US administration as a result of the scandal is said to be to encourage Japan to tighten up its export screening process and it looks like that will be achieved. An amendment to the Foreign Exchange and Foreign Trade Control law has been drawn up, approved by the Cabinet and submitted to the current session of the Diet. Enactment is considered highly likely. The main provisions of the amendment involve the following measures:

1. Extension of the statute of limitations from three years to five years.

2. Increasing penalties from one million yen or three years in jail to two million yen ($14,000) or five years

3. Government officials will be given authority to enter factories and offices in order to make inspections.

Trade in goods and services that might endanger international peace and security would be banned and the export of goods banned under COCOM would be punished.

5. Export or import transactions could be banned for three years instead of the present one year maximum.

6. Due to pressures from American congressmen, the Foreign Ministry and Diet members from Japan's ruling Liberal Democratic Party, the monopoly of the Ministry of International Trade and Industry in approving these types of exports has been weakened. Although the precise provisions are vague, the Foreign Minister "May give his opinion to the Minister of International Trade and Industry when he deems it especially necessary for the maintenance of international peace and security." This is thought to mean that the Economic Affairs Bureau of the Foreign Ministry will monitor MITI's COCOM related export licenses and the Foreign Ministry will not otherwise be able to affect Japanese trade with communist nations. Provisions will also be made for liaison activities with the Self Defense Agency, the Justice Ministry and the Customs Bureau of the Ministry of Finance.

OTHER MEASURES. In addition to the amendment to the Foreign Exchange and Foreign Trade Control Law other measures were also adopted by the Japanese government in order to prevent future occurrences of the problem. Specifically:

1. MITI will seek to increase its COCOM related inspectors to 80 in the next fiscal year, up from 40 at present. This compares to 500 COCOM inspectors at the US Commerce Department and 150 at the US Defense Department.

2. Japan will increase steeply its contributions to COCOM. presently estimated at $40,000 per year out of a total COCOM budget of $3 million per year 1/3 of which is underwritten by the US government.

3. Japan will accept a special envoy from the US who will instruct the Japanese on how to tighten export controls on strategic goods.

4. MITI has requested 140 industry associations in Japan to draw up their own guidelines in order to control illegal exports to communist nations.

---The Japanese may have the last laugh however. Toshiba may have lost the $100 million contract to sell lap-top computers to the Pentagon, but in essence the Japanese still got the contract. Zenith ultimately won the contract, but the machines will be made by Sanyo Electric of Japan, and provided to Zenith on an original equipment manufacturer (OEM) basis. Indeed, according to Japanese press reports the Pentagon discretely asked Toshiba if it could build the computers at its US factory before the Pentagon backed down due to possible negative publicity ramifications.

---Although reports had it that US Defense Secretary Weinberger would ask for compensation from the Japanese when he visited Japan in late June, he appears to have gotten something else probably dearer to the hearts of the Reagan administration. The Japanese agreed to work closely with the Americans to develop new advanced anti- submarine techniques. Shortly thereafter Japan also agreed to join the SDI Star Wars project, after stalling for months.

 

ADDITIONAL SECURITY LEAKS. Japan has found other cases recently where defense related information has been sold to the Soviets. It appears that a representative of Aeroflot paid an employee of Tokyo Aircraft Instrument Co. for information on flight management systems and the design of a 16 bit microprocessor used in the system. It violates COCOM to provide information on such 16 bit microprocessors to the Soviet bloc. The Japanese employee of the company turned himself in and confessed. The Soviets also paid the employee 500.000 yen for information on the FYX transport plane currently under development, including a revolutionary turboprop engine.

THE JAPAN LAWLETTER, April 1987. By Roderick Seeman

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