2 Seized in Plot to Sell Code Devices

With a government undercover agent playing the role of a nervous arms dealer, the Customs Service arrested two U.S.-based businessmen--including the owner of a Compton freight company--on suspicion of conspiring to smuggle high-tech military code devices to China, the agency said Wednesday.

The two suspects, arrested after a four-month-long sting, allegedly sought to obtain military encryption technology that is so sensitive it cannot be exported even to allies without approval of the National Security Agency, the supersecret government code-making and code-breaking organization. Exports to China are never authorized, officials said.

A third man, based in Singapore, was still being sought.

The case illustrates a widespread attack on U.S. secrets by China, Pakistan, Iran, Iraq and other countries that under U.S. law are ineligible to purchase military equipment without a license from the State Department, said Allan Doody, the special agent in charge of the Baltimore Customs office.

“We take it very seriously at Customs. We devote a lot of resources to prevent illegal export of our technology,” Doody said, adding that it was “difficult to quantify” the magnitude of the threat.

Earlier this year, a Chinese citizen pleaded guilty to trying to ship to China military fiber optic gyroscopes used in “smart” missile technology. In other recent cases, suspects allegedly sought to obtain items ranging from pepper spray, a riot control agent, to precision machine tools used for manufacturing aircraft parts that China tried to obtain from the former McDonnell Douglas Corp.

On Tuesday night, David Tzu Wvi Yang, operator of Dyna Freight Inc., was arrested at his Compton office. Yang, 48, of Temple City, was accused of conspiring to handle the actual shipment of the KIV-7HS encryption devices.

Eugene You Tsal Hsu, 58, was arrested at his home in Blue Springs, Mo., and accused of trying to purchase the equipment.

Authorities did not cite a possible motive in the case.

An arrest warrant was issued for Charlston Ho, a Singapore businessman, who remains at large. The maximum sentence for smuggling sensitive technology is 10 years in prison and a $1-million fine for each violation.

Yang, born in Taiwan, is a permanent resident of the United States. Hsu is a naturalized U.S. citizen.

According to the Customs affidavit that led to the arrest warrants, Hsu approached Mykotronx Inc., a Columbia, Md., contractor that produces the KIV-7HS and other equipment for the NSA. The company and the federal agency are headquartered in Washington’s Maryland suburbs.

The affidavit said the device is used to code and decode military secrets. Presumably, Beijing wanted the equipment, a 21st century variant of the enigma device that Nazi Germany employed during World War II, to code its own communications and to facilitate decoding U.S. transmissions. Although the technology is extremely sensitive, the devices are not particularly expensive, selling for about $8,000 each.

According to the affidavit, prepared by Mary Hamman, a special agent in the Baltimore Customs office, Hsu approached Mykotronx with an offer to buy the equipment. The company tipped off Customs, which assigned an undercover agent--unnamed in the affidavit--to pose as a company representative.

The affidavit said that in a series of tape-recorded conversations, the special agent repeatedly told Hsu, Yang and Ho that it would be illegal to sell the devices to China without a license, which would be impossible to obtain.

In one exchange, the agent told Hsu that he could arrange a sale to an American user but that export would be illegal. Hsu replied that it should be all right if “everyone will just keep [their] mouths shut.” In another conversation, Hsu said he would prefer to pay cash for the equipment “so there’s no trail.”

Doody said none of the devices actually left the Mykotronx plant, although the company did send the conspirators two nonworking samples.

Officials said Yang will probably appear this week in U.S. District Court in Los Angeles. Hsu will make his first appearance in Kansas City, Mo. However, the case will be tried in U.S. District Court in Baltimore, the district that includes both the NSA and the Mykotronx plant.

No one answered the door Wednesday at Yang’s home on a cul-de-sac in Temple City. Next-door neighbor Tommy Tang said no one had been there for two days.

Tang said he had a casual friendship with Yang, who he said has been “going back and forth to Hong Kong all the time.”

He described Yang as married with a daughter about 10 years of age. “He’s friendly. He’s always saying hi. He’s not the kind of person who gets arrested,” Tang said.

Public records show that Yang has lived in the home, assessed at $271,000, since 1990. The records say he has a loan on the property for $170,000.

Doody said U.S. law is designed to keep sensitive military technology out of the hands of such potential adversaries as China, Iraq, Iran and North Korea, and countries engaged in combat with neighbors.

Earlier this year, Customs agents arrested two people on suspicion of trying to export unmanned surveillance aircraft and sophisticated cameras to Pakistan. Doody said the equipment was apparently intended for battlefield surveillance over the disputed territory of Kashmir.

In a less sophisticated case, a San Diego-area liquor store operator who dreamed of being an international munitions trafficker was sentenced to prison in 1999 for trying to sell military night vision goggles to his native Iraq.

Meanwhile, the General Accounting Office said the Department of Energy has made some improvements in its security procedures but must do far more to protect secrets at nuclear weapon laboratories.

The department, which handles an estimated 10 million classified nuclear arm documents, has been criticized for its handling of the spy probe of Taiwan-born scientist Wen Ho Lee.

“DOE has recently taken, and continues to take, steps to upgrade protection and control over its classified information but additional steps are needed,” the GAO wrote in a study requested by Republican Rep. W. J. “Billy” Tauzin of Louisiana. The GAO is the investigative arm of Congress.

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Times staff writer Kenneth Reich contributed to this report.