U.S. Split Over Computer Sale To a Soviet-Owned Company

By Susan F. Rasky with David E. Sanger
The New York Times

WASHINGTON, Sept. 28, 1987 -- An American export control blunder has let a Soviet-owned company in West Germany obtain a powerful computer that Defense Department officials insist is a risk to American security.

Just how serious a mistake was made - or, indeed, whether any breach of national security occurred at all - is in dispute among Government experts on technology transfer, and it has provoked a battle within the Administration.

The dispute centers on a disagreement between the Commerce Department, which administers export control laws, and the Defense Department over what policies govern the export of sensitive equipment to the 100 or so Soviet-owned companies in the West.

An Interdepartmental Feud

The dispute is the latest and perhaps the most bitter episode in the long-running feud between the Commerce and Defense Departments over export controls. It underscores differences in the way the United States and its allies treat exports to the Eastern bloc, and American officials fear it may undercut efforts by the United States to press its allies to adopt more stringent export control policies in the wake of the Toshiba scandal.

The company caught in the middle of the bureaucratic tangle is the nation's largest computer maker, the International Business Machines Corporation. Originally I.B.M. had agreed to sell one of its mainframe computers to Transnautic, a company in West Germany.

Sale of a Japanese Model

But while the Commerce and Defense Departments argued over whether the sale should go through, the Commerce Department inadvertently allowed the shipment of a similar Japanese-made computer to the same Soviet-controlled company. It came under Commerce Department jurisdiction because the Japanese computer was shipped through a Silicon Valley company.

Defense Department officials contend that sending the computer to Transnautic was tantamount to sending it directly to the Soviet Union. ''This is an egregious case, and the Defense Department discovered it almost accidentally,'' said Fred C. Ikle, Under Secretary of Defense. ''The computer that was shipped was several times more powerful than the type Cocom permits to be sold to the Soviet Union.'' Cocom, formally known as the Coordinating Committee for Export Control, is the international organization that tries to regulate sensitive technology exports to the Eastern bloc.

However, extensive interviews with industry officials both here and in Europe, including officials of Transnautic, cast serious doubt on the Pentagon's arguments that American security has been compromised. Transnautic, a Hamburg-based shipping company, is 51 percent owned by Sovfracht, a Soviet state-controlled company. Transnautic has legally purchased mainframe computers from I.B.M. for more than a decade, and there is no evidence that any of them have been diverted out of West Germany.

The case began in September 1986 when IBM Germany, the American company's West German subsidiary, applied to the Commerce Department for a license to ship a Model 4381 mainframe. The machine represents five-year-old technology but is among the more powerful computers in I.B.M.'s line. The application listed Transnautic, which already owned a smaller version of the 4381, as the customer.

Transnautic keeps track of the thousands of freight containers and other cargo passing through all German ports. It controls much of the traffic in Hamburg harbor and also handles some scheduling for Aeroflot, the Soviet airline.

Transnautic officials said they viewed the computer transaction as a routine West-to-West sale.

''As long as I have worked at this company, 10 or 11 years, we have had computers from I.B.M., regularly replacing them with more modern or up-to-date ones,'' said Klaus Behrens, the company's managing director. The computers, he said, have never left West Germany, and were frequently serviced by I.B.M. technicians. ''There was never the least problem,'' he said. I.B.M. confirmed Mr. Behrens's account.

But I.B.M.'s previous exports occurred before a change in Commerce Department rules. Under regulations adopted in early 1986, said Paul Freedenberg, Assistant Secretary of Commerce for trade administration, ''we have a policy on Soviet-owned companies, which is to treat them as if they were actually in the Soviet Union.'' That policy, Mr. Freedenberg added, is unique among Western allies, who generally treat sales to Soviet-owned companies in Western countries the same way they treat similar sales to Western-owned companies.

Under the new rules, I.B.M.'s application was sent to the Pentagon, which urged that the shipment be stopped. In February the Commerce Department sent I.B.M. a ''negative consideration'' letter, warning it that the application might be denied but not formally taking any action.

Meanwhile, Transnautic was growing angry at the delay, warning IBM Germany that by refusing to deliver the 4381 the computer company was on the verge of violating West German law prohibiting discrimination against customers.

''It quickly became clear that we might have to answer in civil court,'' said Mark Holcomb, an I.B.M. spokesman in Washington, and there was a specter of criminal action against the company.

Fearful of being caught in an international bind, I.B.M. appealed the Commerce Department's action. Again the Defense Department was consulted, and again it recommended denying the license. Pentagon officials say they assumed the matter was then closed.

But during the appeal, Mr. Freedenberg said, the United States was approached by West German officials who argued that the sale was perfectly legal under German law. American denial of the license, the officials said, would put the Bonn Government in an untenable position.

''It amounted to the United States telling one German company, IBM Germany, that it could not sell to another German company, Transnautic,'' said a West German official in Washington who asked that his name not be used.

''German export control law does not have any prohibition on sales to a Soviet-controlled company in a third country,'' the official said.

Mr. Freedenberg said that he then tried to work out a licensing arrangement that would satisfy American security concerns by requiring additional monitoring of the equipment by I.B.M. personnel and the West German Government. On June 10 the Commerce Department granted IBM Germany the license but without notifying the Pentagon.

''I acted unilaterally - I thought it was a reasonable deal,'' Mr. Freedenberg said, noting that Pentagon review of such licenses is a matter of discretion, not something required by law.

I.B.M. officials were relieved to have the path finally cleared. But ''when we went back to Transautic, we discovered we had already lost the business,'' Mr. Holcomb said.

In fact, Transnautic had ordered - and was preparing to install - an I.B.M.-compatible AS-8043 mainframe from National Advanced Systems, a subsidiary of the National Semiconductor Corporation. The $1.2 million machine, though sold under National's label, is made by the Hitachi Corporation, one of Japan's largest computer makers.

In accordance with American law, National Advanced Systems had applied for a license to ship the computer while I.B.M.'s dispute with the Commerce Department was still pending. But Commerce officials say Transnautic was not described on the application as a Soviet-controlled company - and the license was approved with no questions asked. ''It's amazing to me that they could make a mistake like that,'' said Stephen D. Bryen, who heads the Pentagon's export control office and who is harshly critical of the Commerce Department's actions in the case.

In a heated meeting at the White House last week, attended by officials from Commerce, Defense, the National Security Council, the intelligence agencies and the Customs Service, Mr. Freedenberg acknowledged that the Commerce Department had erred in failing to recognize Transnautic's ownership. The department, he said, has since tried to explain to the Pentagon that Commerce has customarily given extra scrutiny to licenses on technology being shipped to Soviet-controlled companies. However, an aide to Mr. Freedenberg, Cecil Hunt, wrote to I.B.M. in early July that the law ''does not require export to Transnautic in West Germany to be treated as an export to the Soviet Union.''

Mr. Freedenberg says the Commerce Department's position has now changed. ''I understand the Pentagon's concerns, and I am happy to accommodate them,'' Mr. Freedenberg said. ''But this is more a procedural dispute than a substantive one.''

At the Pentagon, however, Mr. Bryen have accused the Commerce Department of deliberate deception and have raised concerns that Commerce may have approved other licenses for sensitive technology to Soviet-controlled companies. The entire matter came to the Pentagon's attention two weeks ago when the Commerce Department sent over for review an application for yet another I.B.M. computer, a new 9370 minicomputer, for a Soviet-controlled company in Singapore. That application is still pending.

To mollify the Pentagon, the Commerce Department is drawing up amendments to the export control regulations making clear that sales of technology to Soviet-controlled companies in the West will be treated as West-to-East transfers subject to more stringent requirements.

Mr. Freedenberg said he had also assured the Pentagon that Defense Department officials would be permitted to review all applications of such technology sales.