Workers at a Boeing Co. plant in Los Angeles are nearing completion of a new satellite, which uses restricted technology relied on by the U.S. military. It was ordered by a local startup that seeks to improve web access in Africa.
In reality, the satellite is being funded by Chinese state money, according to corporate records, court documents and people close to the project.
About $200 million flowed to the satellite project from a state-owned Chinese financial firm in a complex deal that used offshore companies to channel China’s money to Boeing. It included a discussion with a longtime friend of China’s president, said the startup’s founders.
Such technology would help fill in a missing piece of the puzzle for 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.
A web of U.S. laws effectively prohibits exporting satellite technology to China, and its satellites lag far behind those made in America. Current and former U.S. officials, and people close to the startup, called Global IP, fear the satellite could ultimately be used by China’s government or military once in space, or its technology reverse-engineered.
The deal, playing out over three years, is a reminder that even though the U.S. and China have agreed to a temporary ceasefire in their battle over trade, the two powers are still locked in a deeper struggle that won’t be easy to quell.
The American founders of the startup, Emil Youssefzadeh and Umar Javed, said they told Boeing from the outset over two years ago that Chinese government money was financing their satellite order. Later, they warned Boeing the Chinese financiers were actively interfering in the project.
“I am baffled that Boeing would proceed with the project knowing about Chinese government involvement,” said retired Adm. Dennis Blair, a former U.S. director of national intelligence, after reviewing the transaction. “They deal with projects like this all the time. They know the intent and letter of U.S. law in this area.” Adm. Blair chairs an advisory committee for Lockheed Martin Space Systems, a Boeing competitor.
Boeing said in a written statement 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 obtained an export license from the Commerce Department for the Global IP satellite “and will 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 Wall Street Journal. The Commerce Department said it couldn’t comment on an individual application.
Details of the satellite deal began to emerge after tensions boiled over last year between founders of the startup and the state-owned Chinese company that provided financing, China Orient Asset Management Co.
China Orient is owned by China’s Ministry of Finance, and its top executives are senior Communist Party members. In an essay published this year by the official Xinhua News Agency, China Orient’s chairman stressed the firm’s role as a financier for providers of China’s military technology.
Global IP’s founders eventually resigned and sued a subsidiary of China Orient, alleging the subsidiary took control of the project in violation of U.S. law.
Lawyers for the defendant have denied the allegations in federal court in California.
“The inflammatory allegations in the complaints brought by Emil Youssefzadeh and Umar Javed have no merit,” lawyers for the China Orient subsidiary said in a written statement to the Journal.
Bahram Pourmand, Global IP’s chief executive, said the company isn’t controlled by China. He said strict firewalls will prevent any sensitive U.S. technology from leaking.
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 the founders’ allegations 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, declined to comment.
U.S. officials say Chinese state companies’ attempts to gain critical technologies, sometimes using illicit tactics, are among Washington’s toughest challenges.
“It’s a multi-pronged, multi-faceted kind of attack,” said Eric Hirschhorn, undersecretary at the Commerce Department overseeing export controls in the Obama administration. “They’ve got their hand in every pocket they can find, their nose in every crack, their eye in every keyhole.”
The idea for a satellite to provide better internet service in Africa began around 2008 with Mr. Youssefzadeh, a satellite engineer who previously launched a ground-equipment company that listed on Nasdaq , and Mr. Javed, a longtime executive at the company.
They figured they would need to raise well over $100 million of equity to sign up a manufacturer and more than $400 million in total to get a satellite into orbit. U.S. investors worried about the risk, and fundraising was slow.
In July 2015, an email landed in Mr. Javed’s inbox that seemed almost too good to be true: Executives of China Orient said they had heard of the project and were considering financing it. Could he meet them in Beijing?
Days later, a black sedan whisked Mr. Javed to a walled compound near the Forbidden City. Past the armed guards, Chinese executives waited, among them the president of China Orient and a white-haired man named Geng Zhiyuan.
Mr. Geng’s father was a leader of China’s military starting in 1979 and employed as his personal secretary a young official named Xi Jinping. Mr. Xi and Geng Zhiyuan became friends and remained close as Mr. Xi climbed China’s ranks to its presidency, according to Michael Wade, a former business partner of Geng Zhiyuan. Mr. Geng didn’t respond to a request for comment.
Over cups of tea, Mr. Geng and the others marveled about U.S. satellites, according to Mr. Javed. They flicked through cellphone photos of Boeing’s Los Angeles plant and admired a book signed by a senior satellite sales executive.
Mr. Javed then was asked to step outside so the Chinese could consult privately. They emerged smiling—and pledged to bankroll Global IP.
“All is good,” Mr. Javed recalls being told.
The founders of Global IP needed an equity investment, not just a loan, to impress a satellite manufacturer. U.S. laws concerning satellite technology made it impossible for China Orient to take a sizable stake.
Global IP agreed to receive China Orient’s money through an intermediary, the founders said. A Shanghai-born businessman named Charles Yiu Hoi Ying set up a company in the British Virgin Islands called Bronzelink Holdings Ltd. Mr. Yiu could invest China’s money in the satellite project, Global IP was advised by its lawyers, because he held a passport from Hong Kong, which is semiautonomous and deemed separate from mainland China under U.S. export controls.
A China Orient subsidiary called Dong Yin Development (Holdings) Ltd. agreed to lend funds to Bronzelink, working through a Dong Yin unit in the British Virgin Islands.
Bronzelink poured $175 million into Global IP, acquiring a 75% interest, and gave it a $25 million credit line.
Bronzelink’s independence from the Chinese government was crucial for the deal to be legal, the founders said they were advised by their counsel. In succeeding months, their doubts about that independence grew.
How Chinese state money flowed to a Boeing satellite filled with sensitive technology.
China Orient, through its subsidiary, had the right to approve at least four members of Global IP’s board, according to loan documents and the founders. Hong Kong corporate records reviewed by the Journal also place Bronzelink’s office at the same address as Dong Yin, the China Orient subsidiary, at the time of the deal.
With equity funding secured, the founders set about securing a satellite manufacturer, with their new backers preferring Boeing, they said. The company is a leader in “high throughput” communications satellites that provide better internet coverage to remote areas, a technology the U.S. military uses to support troops and drones. For Global IP, this technology would allow them to precisely assign bandwidth based on customer demand.
During discussions with Boeing in the summer of 2016, Messrs. Youssefzadeh and Javed said, they described the Chinese funding arrangement to executives including Mark Spiwak, president of Boeing’s satellite business. Mr. Spiwak, now retired, declined to comment.
Days before the August 2016 deadline for signing a manufacturing contract with Boeing, several new board members of Global IP arrived unexpectedly in Los Angeles. Led by a Chinese lawyer who represented China Orient, the state-owned asset manager, the directors demanded to be allowed to study the contract, according to the Global IP founders.
Messrs. Youssefzadeh and Javed said they already had board authorization to make the deal. They didn’t understand why individual directors were showing up on short notice wanting more information.
For days, the visiting directors holed up in Global IP’s conference room and in an airport Hilton studying the deal. Messrs. Youssefzadeh and Javed said the visitors made repeated requests to be shown Boeing’s designs.
Buried in the contract were hundreds of pages of exhibits detailing how Boeing’s technology worked, most of them marked restricted under export control laws. The two founders said they resisted these requests and others made later by the directors for Bronzelink, which by this time was Global IP’s majority owner.
A lawyer representing Bronzelink said, “There is no evidence to suggest that anyone at Bronzelink, never mind its lender or the [People’s Republic of China], has ever made any attempt to obtain any export-controlled technology. Any suggestion otherwise is not true.”
The lawyer, who also represents Global IP, said accusations by Messrs. Youssefzadeh and Javed were “riddled with inaccuracies,” without elaborating. He said he didn’t think the deal warranted a national-security review by CFIUS, but his clients “will not hesitate to comply fully with any questions from the government.”
By June 2017, the relationship was crumbling. Mr. Youssefzadeh, concerned that Global IP couldn’t prove its independence from the Chinese government, ordered Global IP’s general counsel to investigate whether its structure still left it eligible to own a U.S-made satellite.
The attorney cited “control through intimidation” and other tactics by the China-approved directors to conclude that Global IP couldn’t prove it was independent of Beijing.
Global IP board members refused to convene to discuss the general counsel’s conclusion, according to Messrs. Youssefzadeh and Javed.
Convinced there was no way forward, the two founders resigned, as did the general counsel.
Mr. Youssefzadeh wrote to Boeing executives expressing concern over what he now believed was the Chinese government’s control of Global IP.
Boeing agreed to proceed with satellite construction after U.S. lawyers for Mr. Yiu’s Bronzelink, the 75% owner of Global IP, conducted a compliance review of the deal.
In their lawsuit, Messrs. Youssefzadeh and Javed allege that state-owned Chinese entities fraudulently took over the satellite project and put the founders at risk of violating U.S. laws. They are seeking damages.
Dong Yin’s lawyers said in a court filing the case should be thrown out because the court in California didn’t have jurisdiction over the Hong Kong-based company. That Dong Yin is state-owned “heightens the affront to China’s sovereignty,” its lawyers said.
Boeing isn’t a party to the suit and had no comment on it.
Inside Boeing’s Los Angeles plant, the satellite is taking shape, with testing set to begin soon. Global IP’s Mr. Pourmand said it could be launched as soon as spring.
Elon Musk’s Space Exploration Technologies Corp. has been contracted to handle the satellite’s launch, which would also require an export license. SpaceX said it is committed to complying with U.S. laws, and declined to elaborate.
If Global IP proceeds to launch the satellite, a concern of some officials and others close to the project is whether China will try to repurpose it after it is in orbit. “Once it’s up there, whoever is the owner can choose whichever customers and whichever uses he wants,” said one person familiar with the project.
A remaining hurdle is money. Global IP needs to raise more than $200 million to pay Boeing for the rest of the project. The founders say they are watching to see whether more cash will come from China.
—Lisa Schwartz contributed to this article.
The Wall Street Journal.