Bureau of Industry and Security Extracts $300 Million Fine Against Seagate Technology for Violation of Huawei Prohibition
Say What You Mean and . . . Mean What [You] Say – The March Hare in Lewis Caroll’s, Alice’s Adventures in Wonderland
Matt Axelrod, the Assistant Secretary for Export Enforcement, at the Bureau of Industry and Security (“BIS”) of the U.S. Department of Commerce, must be grinning with satisfaction that BIS delivered, in a big way, after he warned businesses that BIS would be ramping up export enforcement. Axelrod, who has a terrific reputation in Washington, D.C. for being a straight-shooter and talented former prosecutor, accomplished a significant export enforcement settlement.
BIS’s $300 million settlement with Seagate Technology (“Seagate”) stands as the largest administrative penalty in BIS history.
Huawei Export Controls
In August 2020, BIS imposed a comprehensive controls over foreign-produced items related to Huawei. Prior to those controls, on May 16, 2019, Huawei and certain non-U.S. affiliates were added to the Entity List, which imposed licensing requirements on exports, reexports and transfers (in-country) of all items subject to EAR destined to or involving Huawei entities. The government cites “reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States.”
Subsequently, in August 2020, BIS imposed controls over certain foreign-produced items, including a license requirement on certain foreign-produced items when (1) there is knowledge that a listed Huawei entity is a party to the transactions; and (2) the foreign-produced item is produced by an overseas plant or major component of a plant that is itself a direct product of U.S.-origin technology or software subject to the EAR and applicable to certain Export Control Classification Numbers.
Under these specific controls, Huawei is barred, in the absence of a license, from receiving such items or act as a party to the transactions (e.g., as the “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user.”
Seagate had HDD manufacturing sites in China, Northern Ireland, Malaysia, Singapore, Thailand and the United States. Seagate used equipment, including testing equipment, subject to the EAR and the FDP rule.
Seagate Ignores Export Controls
Starting in September 2020, Seagate announced that it would continue to do business with Huawei. Seagate’s action stood out because its two competitors stopped selling HDDs to Huawei in response to the new BIS controls. Seagate became Huawei’s sole supplier of HDDs, and entered into a three-year Strategic Cooperation Agreement.
BIS’ Charging Letter stated that, between approximately August 17, 2020, and September 29, 2021, Seagate engaged in 429 separate violations of the Export Administration Regulations (“EAR”) by exporting more than 7.4 million HDDs subject to the Huawei Foreign Direct Product Rule (“FDP”) without a BIS license. BIS estimated that Seagate earned approximately $1.1 billion in revenues from the sale of HDDs to Huawei.
As the transactions continued, Seagate extended lines of credit to Huawei totaling more than $1 billion between January and September 2021, thereby increasing the volume of HDD exports to Huawei. In March 2021, Seagate and Huawei entered into a Long-Term Agreement to purchase 5 million HDDs and naming Seagate as a :key strategic supplier.” Seagate’s competitors continued to forego exports to Huawei under the belief that such sales were prohibited by the BIS controls.
BIS imposed an administrative penalty of $300 million, a mandatory multi-year audit requirement, and a five-year suspended Denial Order. Seagate admitted to the conduct set out in BIS’ Charging Letter.
