3 Kentucky, Indiana residents accused in conspiracy to sell U.S. military secrets to China

LOUISVILLE, Ky. (WXIX) - A federal indictment unsealed Wednesday implicates two Indiana residents and a man from Kentucky in a years-long conspiracy to sell U.S. military secrets to China.

At risk, according to the U.S. Department of Justice, were sensitive technical drawings related to military projects including aviation, submarine, radar, tank, mortars, missiles, infrared and thermal imaging targeting systems and fire control systems for the U.S. Department of Defense.

The suspects are also accused of supplying the DOD with illegal Chinese-sourced parts that were then used in the F-16, the F-18, and other defense assets.

The DOJ announced the indictment Wednesday after an investigation involving FBI Counterintelligence, the Department of Homeland Security and the criminal investigative sections of DOD, IRS and U.S. Navy.

The DOJ names the suspects as Phil Pascoe, 60, and Monica Pascoe, 45, both of Floyds Knobs, Indiana; and 59-year-old Scott Tubbs, of Georgetown, Kentucky.

Also implicated is a Louisville-based company, Quadrant Magnetics.

The three suspects and Quadrant Magnetics allegedly conspired to send around 70 drawings containing export-controlled technical data to a company located in China without a federal license. That would constitute a violation of the Arms Export Control Act and the International Traffic in Arms Regulations.

The proprietary drawings belonged to two U.S. companies. were sent over a six-year period between January 2012 and December 2018, per the indictment.

Quadrant Magnetics then imported rare earth magnets smelted and magnetized by a company located in China, the indictment reads. Quadrant Magnetics allegedly proceeded to sell the magnets to two U.S. companies that included them in components sold to the DOD.

That all would constitute a violation of the Defense Acquisition Regulations System, which specifies that rare earth magnets sold to DOD must be produced and magnetized in the U.S. or an approved country. China is not one of those, the DOJ notes.

FBI agents arrested the suspects Wednesday.

They face charges in the U.S. District Court for the Western District of Kentucky of wire fraud, AECA violations and goods smuggling.

The suspects face maximum penalties of 20 years for each count of wire fraud, 20 years for each AECA violation and 10 years for goods smuggling.

They face an additional five years for conspiracy to defraud the U.S.

A Quadrant Magnetics spokesperson says the company is cooperating with the government.

Stealing to get ahead

The long-held belief is that China has engaged a huge amount of resources in a concerted, Soviet-style effort to achieve military parity with the U.S. by means of intellectual property theft.

Its likelihood of success is a matter of debate. Some experts have argued there are areas of interest too internally complex to steal outright, such as stealth technology, and that the inevitability of a globally homogenized military IP landscape is overstated. Yet the threat remains, and both the Defense Department and the DOJ are taking it seriously.

Most recently, on Monday a former U.S. Army helicopter pilot of 23 years who became a contractor was sentenced in federal court. The man acted as an agent for China and took thousands from the Chinese government to provide aviation-related information from the defense contractor that employed him.

In November of last year, a Chinese intelligence agent was found guilty in federal court of attempting to steal cutting edge proprietary technology from Evendale-based GE Aviation. One target was the company’s composite aircraft engine fan, which no other company in the world has been able to duplicate.

But the alleged conspiracies go back years, and increasingly they appear to involve the reflow of China-made parts and infrastructure.

In a high-profile case from 2016, a Chinese national pleaded guilty to hacking into U.S. defense contractors’ computer networks to steal sensitive military data and sent them to China. The data related to the C-17 Globemaster, the Lockheed F-22 and F-35 stealth fighters and the Boeing V-22 Osprey.

Former Defense Secretary Mark Esper warned in 2019 China is perpetrating “the greatest intellectual property theft in human history.” His remarks came in the context of European leaders deciding whether to allow China-based Huawei, the world’s largest communications equipment manufacturer, to build 5G networks in their countries, according to Business Insider.

The DOJ indicted Huawei in January 2019.

Fast forward to October 2019, when the DOJ announced three cases filed against 13 alleged Chinese operatives. FBI Director Christopher A. Wray told the Washington Post the cases show Beijing is trying to “lie, cheat and steal” its way to a competitive advantage in technology.

Three of those suspects are accused in a 10-year intelligence campaign targeting U.S. residents to act as agents for China. The DOJ described it as “a wide-ranging and systematic effort to target and recruit individuals to act on behalf of the PRC in the United States with requests to provide information, materials, equipment, and assistance to the Chinese government in ways that would further China’s intelligence objectives.”

Two other suspects are accused of scheming to steal DOJ files and bribe a U.S. government employee related to the federal investigation and prosecution of an unnamed global telecommunications company based in China. The government employee, unbeknownst to the suspects, was working as a double agent for the U.S.

The Washington Post report links that case to Huawei.

A CNN report from July details an ultra-secret FBI investigation that determined Huawei equipment installed in the U.S. could disrupt U.S. nuclear arsenal communications.

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