Scanner Maker Loses Baggage

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Hawthorne’s OSI Systems Inc. is used to controversy. It’s the company that made the now-infamous “naked” body scanners that showed too much of airline passengers.

But now the company has lost another federal contract and must face questions of potential Chinese espionage and concerns about company management – this time, over its baggage scanners.

Shares of the company last week tumbled to their lowest price in two years after the Transportation Security Administration canceled a $60 million baggage-scanner contract with the company, and after a congressional committee expressed concern that OSI scanners could be susceptible to spying or sabotage.

OSI was the biggest loser on the LABJ Stock Index for the week ended Dec. 11, down 33 percent. (See page 26.)

The company’s recent woes began Dec. 5, when it announced that the TSA had canceled the contract for “breach” but didn’t explain further.

The following day, members of the House Committee on Homeland Security penned a letter to the TSA and the Department of Homeland Security, implying that the scanners could pose a security threat to the United States because they contain an unapproved Chinese component. However, the letter did not detail any specific concerns or say how the component could possibly make the scanners vulnerable to spying.

“It is our understanding that TSA is utilizing experts at Johns Hopkins University to assist in determining whether the systems are at risk for sabotage or espionage,” the members wrote.

They asked the TSA to produce documents assessing the machines’ “potential for sabotage or espionage attempts” and a list of scanner parts made in China. The letter said the questionable components are in 250 baggage scanners already in use and that the contract, if not canceled, would have resulted in the purchase of 550 more.

The letter came to light during the weekend of Dec. 7. When markets opened Dec. 9, OSI shares plummeted despite a statement from OSI that said the TSA was aware all along that the baggage scanners would include Chinese-made components.

In that statement, the company acknowledged it had improperly used a new component without needed approval from the TSA. But Deepak Chopra, OSI’s chief executive, also sought to downplay the importance of the part in question, implying that it could not be used to spy on U.S. citizens or sabotage the scanners.

“The referenced component is the X-ray generator, an electrical component with no moving parts or software,” Chopra said in the statement.

OSI declined to comment for this article.

In a written statement, the TSA said it had not identified any security or operational problems with OSI scanners and that it is conducting a review of the company’s contract.

But the statement said the agency “does not tolerate any violation of contract obligations.”

Troubled history

OSI had run afoul of the TSA and members of Congress before over its now-infamous body scanners that showed naked-looking images of travelers. The TSA stopped buying those scanners for a time, then insisted OSI provide software that would replace the nearly nude images with less revealing ones. Last year, Rep. Mike Rogers, an Alabama Republican, accused OSI of faking test results for that software.

In May, Homeland Security, which runs the TSA, threatened to stop doing business with OSI over that issue, though the department and the company reached a settlement in June. TSA hasn’t bought any of the company’s body scanners since 2009.

But the company and analysts downplayed the loss of the body scanner business because it was still selling other scanners, including those used for baggage and body scanners used by the military.

Also, in the past few years, the company has been growing revenue by providing security services to government agencies in other countries.

This latest episode drags OSI into wider concerns over Chinese espionage – concerns that have until now been focused on Chinese firms.

For example, in a development unrelated to OSI, the chief executive of Shenzhen, China, electronics manufacturer Huawei Technologies Co. last month said the company plans to stop pursuing business in the United States because American officials have labeled the firm a de facto arm of China’s military and intelligence agencies.

Analysts who follow OSI have said problems with the body scanners aren’t a serious issue for the company, as those scanners represented a relatively small part of OSI’s business.

But analysts at New York’s Oppenheimer & Co. who follow OSI said in a research note that those issues, coupled with the latest contract problems, raise “serious questions about the day-to-day management” of Rapiscan, the OSI division that makes body and baggage scanners.