On April 19, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) imposed a $300 million civil penalty against Seagate Technology LLC (California) and Seagate Singapore International Headquarters Pte. Ltd. (Singapore) to resolve alleged violations of U.S. export controls related to selling hard disk drives (HDDs) to Huawei Technologies Co. Ltd. (Huawei) in violation of the foreign direct product (FDP) rule under the Export Administration Regulations (EAR). This penalty represents the largest standalone administrative penalty in BIS history. This enforcement action also includes a mandatory multi-year audit requirement and a five-year suspended Denial Order. As part of the BIS settlement, Seagate admitted to the conduct set forth in the Order and Proposed Charging Letter.
On May 16, 2019, Huawei and numerous of its non-U.S. affiliates were added to BIS’ Entity List for posing a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States. As a result, licensing requirements were imposed on exports, reexports, and transfers (in-country) of all items subject to the EAR destined to or involving these listed Huawei entities. See Update of May 17, 2019. On August 17, 2020, BIS added further Huawei affiliates to the Entity List (bringing the total number to over 150 Huawei-related entities) and imposed a license requirement on foreign produced direct products (FDP) of certain U.S.-origin software and technology when: (1) “there is “knowledge” that [a listed Huawei entity] is a party to any transaction involving the foreign-produced item” and (2) “the foreign-produced item is produced by any plant or major component of a plant that is located outside the United States… [and that] itself is a direct product of U.S.-origin “technology” or “software” subject to the EAR that is specified in” certain Export Control Classification Numbers (“ECCN”). See Update of August 19, 2020.
Upon implementation of the FDP rule in 2020, two of the three companies capable of manufacturing HDDs announced they had ceased sales to Huawei. According to the BIS Order, “[o]nly Seagate continued HDD sales and transactions involving Huawei. The company incorrectly interpreted the FDP rule to require evaluation of only the last stage of its HDD manufacturing process rather than the entire process.” Between approximately August 17, 2020 and September 29, 2021, Seagate engaged in the reexport, export from abroad, or transfer (in-country) of approximately 7.42 million foreign-produced HDDs, valued at over $1.1 billion. According to BIS, as these transactions continued, Seagate “repeatedly authorized extending lines of credit to Huawei totaling more than $1 billion between January and September 2021 resulting in an increasing volume of HDD exports to Huawei that the entity was otherwise unable to obtain.” In March 2021, “Seagate and Huawei even entered into a Long-Term Agreement involving a purchase agreement of over 5 million HDDs and naming Seagate a ‘key strategic supplier.’”
BIS Penalty
Under the Penalty Order, Seagate has been assessed a civil penalty of $300,000,000 with payments due in quarterly installments of $15,000,000 over the next five years. In addition, Seagate must complete a total of three audits of its export controls compliance program. The first audit must be an external audit conducted by an unaffiliated third-party consultant, with the remaining two audits allowed to be internal audits. All audit results must be reported to BIS. Finally, both Seagate entities – California and Singapore – are subject to a five-year denial of export privileges under the EAR. However, this Denial Order is suspended so long as Seagate makes all of it quarterly payments in a timely manner and completes all three audits. In the Settlement Agreement, Seagate admitted to committing the alleged conduct and entered into the agreement voluntarily.
In announcing the Settlement Agreement and penalty, BIS’ Director of the Office of Export Enforcement John Sonderman stated, “Those who would violate our FDP rule restrictions are now on notice that these cases will be investigated and charged, as appropriate. … Any company exporting to an entity subject to the additional FDP rule restrictions needs to evaluate its entire manufacturing process to determine if specified U.S. technologies or software were used in building the essential tools used in production.”