REPORT ON BLUE LANTERN LEVEL 3 END-USE CHECK ON

UNCLAS TEL AVIV 000219

SIPDIS

SIPDIS
SENSITIVE

STATE FOR PM/DTCC - BLUE LANTERN COORDINATOR
STATE FOR NEA/IPA (MAHER)

E.O. 12958: N/A
TAGS: ETTC KOMC IS
SUBJECT: REPORT ON BLUE LANTERN LEVEL 3 END-USE CHECK ON
LICENSE DA-1643-00

REF: 2006 STATE 130060


1. (SBU) On November 15, 2006, Blue Lantern Officer and
Defense Contract Management Agency (DCMA) employee conducted
a site visit to the former Israel Military Industries
Aircraft System Division (IMIASD) facility and met with Danny
Inbal, Corporate Security Director; Israel Zigerson,
Purchasing Manager; Avi Goldberg, Purchasing Control Manager;
Ruth Lipkin, Deputy Legal Advisor at IMI; and Yaron Arad,
Deputy Security Director for Information Security. Inbal,
who acknowledged upon questioning that he is an employee of
MALMAB/DSDE -- the Israeli MOD's security division -- led the
Israeli team during discussions that lasted over two hours,
and the tour of the facilities that followed.


A. In response to the Blue Lantern Officer's question, Inbal
confirmed that the facility is operating under authority
granted in DA-1643-00. Inbal and his team provided the
following information during the visit:


B. Description of IMIASD and the Tirat Hacarmel facility:
IMIASD is no longer a part of IMI. It used to manufacture
and assemble parts for weapons pylons and fuel tanks for the
F-15 and F-16. IMIASD had 4,000 employees at the height of
its operations. Its aviation in Tirat Hacarmel plant was
sold to Cyclone.


C. Description of Security at the IMIASD facility: As a
result of the loss of the 24 controlled items, IMI has
revised its security procedures and thoroughly reviewed the
briefing that it gives its employees. Inbal noted that the
Israeli Security Agency (a.k.a. the Shin Bet -- the
equivalent of the U.S. FBI) conducts a background check on
every employee and subcontractor. Visitors to the facility
are escorted. The facility's perimeter is monitored by an
alarm system, and there is a control room a the main gate.
Spot checks are conducted on vehicles entering and exiting
the facility. All of the facility's security personnel are
trained in counterterrorism and receive periodic refresher
training from MALMAB/DSDE. WDA and DSP-5 parts are stored
separately.


D. Question: What articles licensed under DA-1643-00 (or any
other Department license) were transferred to Cyclone?

Answer: According to Inbal and his team, none under the WDA.
Under the DSP-5, all items needed to assemble pylons. Inbal
said that Cyclone knows that it cannot own parts until the
re-transfer is authorized. Until then, Cyclone can only
operate as a subcontractor for IMI. To date, Cyclone only
assembles parts as a subcontractor to IMI. Inbal claims that
no WDA parts were ever passed into the hands of Cyclone, and
that no controlled items part have been transferred to
Cyclone for assembly under the WDA. Inbal said that some
DSP-5 parts and production line equipment were provided to
Cyclone in its capacity as a subcontractor. Inbal said that
no WDA items have been sold to Cyclone.


E. Question: Have any other licensed operations/articles
been transferred from IMI, Israel to Cyclone?

Answer: No. Ownership of items subject to licenses has not
been transferred.


F. Question: What were the provisions of the asset transfer
agreement between IMI, Israel and Cyclone?

Answer: IMI and Cyclone's legal understanding is that the
supply of parts to Cyclone in its position as subcontractor
is not re-transfer. IMI sells and receives payments for
finished products. IMI is seeking the re-transfer of its
license to Cyclone. According to Inbal, a request for
approval was sent to Susan Clark in DTC Licensing. IMI and
Cyclone are now following the "Luks plan" named after a
former employee of PM/DDTC, Harold Luks, who now also works
for Elbit. IMI's legal department is consulting with Luks
and a U.S. lawyer on these steps. On December 31, 2003, a
conditional agreement with Cyclone was signed, wherein
certain conditions had to be fulfilled by dates certain to
affect the transfer. The agreement has not been completely
fulfilled. On March 20, 2005, Cyclone and IMIASD signed a
second amendment to this conditional agreement. This
amendment noted adjustments to the original agreement, and
the intent of the parties to conclude a re-transfer
agreement. The agreement is to be executed by Cyclone's
subsidiary, MATLAM Mechanics Karmiel, Limited. Article 5 of
the agreement identifies the various actions that have to be
carried out. In Chapter 6, in refers to the fulfillment of
State Department licenses and permits according to the Luks


plan. Annex B specifies all the required activities. This
annex was attached to the closing documents It was signed on
March 27, 2005.


G. Question: Does IMI, Israel continue to operate the
warehouse in Tirat Hacarmel, Haifa?

Answer: Yes.


H. Question: Has IMI, Israel continued to investigate the
missing articles listed in its disclosure?

Answer: Inbal said that while the investigation has been
closed, awareness regarding the importance of protecting
controlled items among employees has increased, and
procedures have been revised to minimize or prevent future
losses. Inbal noted that there are 350 pieces in a pylon.
Only 24 parts for pylons went missing. No parts for fuel
tanks disappeared. The 24 parts consist of 4 types of parts,
including fuel system parts. Inbal gave emboffs a list of
the missing parts with their part numbers. Inbal said that
the disappearance of the parts was reported in voluntary
disclosures sent to the State Department's Office of Defense
Trade Controls Licensing; and Office of Defense Trade
Controls Compliance. IMI's president signed the disclosures.
Inbal said that there were there were 950 parts that were
supposed to be in the WDA warehouse when, during an inventory
in October 2005, IMI discovered that 24 of the parts were
missing. Inbal clarified that the closing of the division is
what prompted the inventory. Upon discovery that parts were
missing, a fact-finding team was set up to locate the missing
parts. The team did not find the parts, but concluded that
the parts were not re-transferred or sold. (NOTE: While
touring the facility, Inbal told Blue Lantern Officer he
believes that the parts might have been damaged in assembly
training exercises, and thrown out by employees who did not
understand that you cannot simply throw away such items.)


I. Question: Has IMI, Israel informed IMITRADING, U.S. of
the missing articles?

Answer: Inbal answered affirmatively, but said that he
cannot find the specific document proving this. He claimed
that all questions posed by DDTC were also addressed to
IMITRADING, U.S.


2. (SBU) On November 21, Blue Lantern Officer and DCMA
Employee made a site visit to Cyclone's facilities in Karmiel
and met with Eitan Igra, Cyclone's Vice President for
Programs and Sales; Adar Dotan, Head of Security at Cyclone;
and Milstein Marcel, Cyclone's Warehouse Manager. Igra said
that he has overseen the movement of IMI programs to Cyclone.
Igra and his team provided the following information during
the visit:


A. Description of Cyclone: Cyclone is a subsidiary of Elbit
Systems Group, the largest private defense company in Israel.
It is owned 100 percent by Elbit. It reports to the
Airborne and Helmet Systems. Cyclone has been owned by Elbit
since 1999. Previously, it was a public company.
Ninety-five percent of Cyclone's operations are in Karmiel,
where its headquarters is located. It has 50 persons at an
Israeli Air Force (IAF) base in the south. Among other
things, it produces the access door for the Boeing 747. It
subcontracts to Vought in the U.S.

Seventy-five percent of Cyclone's operations concern design
and production. Cyclone conducts overhauls and repairs on
IAF helicopters and aircraft. It performs this service for
local and outside customers. Cyclone designs and produces
fuel tanks and pylons that it is acquiring from IMI. Cyclone
also manufactures the Elbit Group's Unmanned Aerial Vehicles
(UAVs),including the Hermes 450 and 1500. Cyclone works as
a subcontractor on helicopters for many Israeli primes.
Lockheed and SIBAT have representatives located at Cyclone's
facilities in Karmiel. They conduct quality control audits
all the time.

Boeing's military side has been Cyclone's main customer since

1978. Next in line are General Dynamics/Lockheed Martin,
with the F-16. Cyclone also supplies spare parts to the U.S.
Air Force -- its third largest customer. Cyclone produces
many parts for the F-16 including the 600 gallon fuel tank
and pylons. The pylons and fuel tanks are brought to Cyclone
from IMI. They are not in production yet, because there are
no orders or customers at this time. Cyclone is a single
source producer for the Lockheed Martin production line. It
also produces the centerline pylon, which was formerly done
at IMI Haifa.


Most of its sales are to military customers. Next year
(2007),its commercial side will expand due to anticipated
work on the Boeing 757. In the past, it produced 330 gallon
external fuel tanks for the F/A-18 Block C/D. It bought from
IMI the rights to produce the F-15 fuel tanks and pylons.

Cyclone is also working on the fan cowl doors for the Russian
Regional Jet (RRJ) program in Russia. Cyclone added Far
Eastern air forces and NATO air forces as its customers due
to its purchase of IMIASD

Cyclone performed work on the MD-11 engine. It is a sole
source provider of the MD-11's doors and pylons. It also
produces elevators for the Airbus 310, the tail skid faring
for the Boeing 767, the nose landing gear doors for the
Boeing 787, and the wheel well doors for the Boeing 737.


B. Description of Security at Cyclone: Cyclone works of a
system called the BAAN System. Controlled items are managed
by a computer system. Procurement, inventory and production
are all monitored on the computer system. It is a closed
system. Items can be traced by purchase order, license
number, received items, inventory management. Parts are also
tied to programs. Only the security manager can override
this aspect. A security officer signs on all applications.

Cyclone is implementing a new labeling process to replace the
existing one. The new labels include more data on them.
Elmec in the U.S. asks for licenses for Elbit Group. Also
controls shipment to Israel. Purchase orders from Cyclone go
to Elmec.

Security features at the warehouse include physical ones
(e.g., fence surrounding complex, alarm systems). No
controlled items have ever gone missing.


C. Question: What were the details of the acquisition of
IMIASD by Cyclone?

Answer: Cyclone bought some of IMIASD's parts, but not all
of the parts in IMIASD's warehouses containing controlled
items. These include the WDA agreement parts and parts
subject to DSP-5 licenses. Uncontrolled parts have been
physically transferred to Cyclone. Cyclone is not actively
working with controlled items subject to the WDA agreement.
They remain at the IMIASD facility in a separate warehouse.
In theory, Cyclone has bought this warehouse from IMIASD.
Igra said that Cyclone has not started any kind of physical
re-transfer of the parts, and IMI continues to manage the
warehouse. Igra corroborated what the IMIASD team stated:
that there has been no activity at the WDA warehouse for some
time as there are no orders from customers. Cyclone started
the process to re-transfer licenses for the DSP-5 parts.
Igra confirmed that IMI had submitted the request for
re-transfer, and that it has not yet been approved. Igra
stressed that all controlled inventory remains in the
warehouse managed by IMIASD, and that Cyclone -- in effect --
owns a "virtual warehouse."


D. Question: Has Cyclone distributed U.S. defense articles
obtained from the acquisition of IMIASD? If so, to what
parties were sales/transfers made?

Answer: No. All sales and/or transfers were made under IMI.
Cyclone does not sell parts as they are controlled items,
and purchase orders are directed to IMI, for which Cyclone
performs subcontract work. Cyclone merely finishes assembly.
IMI then sells the parts, receives payment for the parts,
and then transfers the payment to Cyclone. When Cyclone
assembles anything, it is sold through IMI.


E. Question: Does Cyclone understand the restrictions on
USML articles, particularly regarding re-exporting (i.e. no
re-export without USG authorization)?

Answer: Yes.


F. Question: Has Cyclone continued W&AD operations under the
authority of DA-1643-00? If so, what articles have been
procured by Cyclone, and from what sources? Where are
licensed articles warehoused by Cyclone? What security and
inventory procedures are in place for these articles?


G. Answer: No. IMI is still managing Cyclone's warehouse.
There is some thought about canceling the agreement.


H. Question: Has Cyclone conducted investigations into the
whereabouts of the 24 missing items listed in IMI, Israel's

disclosure? If so, has it discovered pertinent information?


I. Answer: IMI informed Cyclone that the parts were missing.
IMI searched Cyclone's facilities and did not find anything.
Cyclone cooperated with the investigation into the missing
parts. No pertinent information was discovered.


3. (SBU) IMIASD provided the following documents to emboffs.
They have been FAXed to Compliance Specialist Michael Romero
at PM/DTCC, FAX number: 202-261-8198:


A. March 30, 2006 letter to David Trimble, Director, PM/DTCC,
concerning voluntary disclosure of 24 missing controlled
items (1 page).


B. June 27, 2006 letter to Susan Clark, Acting Director,
Office of Defense Trade Controls, Licensing, requesting
approval for re-transfer; and attachments (53 pages).


C. August 16, 2006 letter to Haim Guz, President of
IMITRADING, U.S., from Patricia Slygh, Chief, Enforcement
Division (2 pages).


D. September 14, 2006 letter to Jae Shin, a compliance
specialist in PM/DDTC, regarding the above-mentioned letter
from Slygh to IMITRADING, U.S. (4 pages).


E. October 18, 2006 e-mail from Harold Luks to Eitan Igra re:
updating on the re-transfer request (3 pages).


F. November 13, 2006 letter to Jae Shin of PM/DDTC and Blue
Lantern Officer Michael Keays re: responses to questions
posed to IMIASD (2 pages).


G. November 13, 2006 letter to Haim Guz, President,
IMITRADING, U.S., from Avraham Goldberg, IMIASD Sales Manager
(4 pages).


I. Power Point Presentation on Cyclone Aviation Products,
Ltd. (26 pages).

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