BIS Imposes $300 Million Civil Penalty Associated with Exports to Huawei and Violation of FDP Rule

On April 19, 2023, the Division of Trade’s Bureau of Trade and Safety (BIS) imposed a $300 million civil penalty towards Seagate Era LLC (California) and Seagate Singapore World Headquarters Pte. Ltd. (Singapore) to unravel alleged violations of U.S. export controls associated with promoting onerous disk drives (HDDs) to Huawei Applied sciences Co. Ltd. (Huawei) in violation of the international direct product (FDP) rule below the Export Management Rules (EAR).  This penalty represents the most important standalone administrative penalty in BIS historical past.  This enforcement motion additionally features a obligatory multi-year audit requirement and a five-year suspended Denial Order. As a part of the BIS agreement, Seagate admitted to the behavior set forth within the Order and Proposed Charging Letter.

On Might 16, 2019, Huawei and a large number of of its non-U.S. associates have been added to BIS’ Entity Record for posing an important possibility of being or changing into eager about actions opposite to the nationwide safety or international coverage pursuits of the US. Because of this, licensing necessities have been imposed on exports, reexports, and transfers (in-country) of all pieces matter to the EAR destined to or involving those indexed Huawei entities.  See Replace of Might 17, 2019.  On August 17, 2020, BIS added additional Huawei associates to the Entity Record (bringing the whole quantity to over 150 Huawei-related entities) and imposed a license requirement on international produced direct merchandise (FDP) of positive U.S.-origin tool and era when: (1) “there’s “wisdom” that [a listed Huawei entity] is a celebration to any transaction involving the foreign-produced merchandise” and (2) “the foreign-produced merchandise is produced through any plant or main part of a plant this is situated outdoor the US… [and that] itself is an immediate made from U.S.-origin “era” or “tool” matter to the EAR this is laid out in” positive Export Keep an eye on Classification Numbers (“ECCN”).  See Replace of August 19, 2020.

Upon implementation of the FDP rule in 2020, two of the 3 corporations in a position to production HDDs introduced they’d ceased gross sales to Huawei.  In keeping with the BIS Order, “[o]nly Seagate endured HDD gross sales and transactions involving Huawei. The corporate incorrectly interpreted the FDP rule to require analysis of handiest the final level of its HDD production procedure relatively than all of the procedure.” Between roughly August 17, 2020, and September 29, 2021, Seagate engaged within the reexport, export from in another country, or switch (in-country) of roughly 7.42 million foreign-produced HDDs, valued at over $1.1 billion.  In keeping with BIS, as those transactions endured, Seagate “many times approved extending traces of credit score to Huawei totaling greater than $1 billion bucks between January and September 2021 leading to an expanding quantity of HDD exports to Huawei that the entity used to be differently not able to acquire.” In March 2021, “Seagate and Huawei even entered right into a Lengthy-Time period Settlement involving a purchase order settlement of over 5 million HDDs and naming Seagate a ‘key strategic provider.’” 

BIS Penalty

Beneath the Penalty Order, Seagate has been assessed a civil penalty of $300,000,000 with bills due in quarterly installments of $15,000,000 over the following 5 years.  As well as, Seagate will have to whole a complete of 3 audits of its export controls compliance program. The primary audit will have to be an exterior audit carried out through an unaffiliated third-party guide, with the remainder two audits allowed to be inside audits.  All audit effects will have to be reported to BIS.  In the end, each Seagate entities – California and Singapore – are matter to a five-year denial of export privileges below the EAR.  Alternatively, this Denial Order is suspended as long as Seagate makes it all quarterly bills in a well timed way and completes all 3 audits.  Within the Agreement Settlement, Seagate admitted to committing the alleged behavior and entered into the settlement voluntarily.

In saying the Agreement Settlement and penalty, BIS’ Director of the Place of business of Export Enforcement John Sonderman mentioned, “Those that would violate our FDP rule restrictions are actually on realize that those instances will probably be investigated and charged, as suitable. …  Any corporate exporting to an entity matter to the extra FDP rule restrictions wishes to guage its whole production procedure to resolve if specified U.S. applied sciences or tool have been utilized in development the very important equipment utilized in manufacturing.”