A Recap of Significant Export Control Enforcement Efforts from 2023
Alexander J. Cotoia currently serves as the Regulatory Compliance Manager at The Volkov Law Group, where he regularly advises the firm and its clients on the latest developments implicating trade compliance concerns. He may be reached at [email protected];
As global political tensions continued to escalate on multiple fronts, the 2023 calendar year saw a noticeable increase in the number of enforcement actions initiated by the U.S. government against entities and individuals found to be complicit in undermining export controls.
In 2023 alone for instance, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), in conjunction with the U.S. Department of Justice, brought eight (8) separate indictments against a total of fourteen (14) individuals for their role in illegally procuring controlled commodities on behalf of entities operating in the Russian Federation military-industrial space. Notably, the subjects of these indictments included a number of U.S. persons—among them, two (2) Kansas residents—who defied the law by exporting sophisticated avionics equipment and providing repair services to customers operating Russian Federation-origin aircraft.
These prosecutions were augmented by the zealous pursuit of administrative penalties against entities responsible for the most egregious export violations, including violations stemming from dealings with prohibited entities. In the single most significant enforcement action in its history, BIS announced the imposition of a massive $300 million penalty against Seagate Technology LLC of Fremont, California (“Seagate US”) and Seagate Singapore International Headquarters Pte. Ltd., of Singapore (“Seagate Singapore”) (collectively, “the Seagate Entities”) stemming from the export of hard disk drives (“HDDs”) to Huawei Co. Ltd. (“Huawei”) in contravention of the EAR’s foreign direct product (“FDP”) rules. According to a settlement agreement made public by the agency at the time the penalty was announced, the Seagate Entities admitted to violating the Export Administration Regulations (“EAR”) on no less than 429 occasions when they collectively ordered or caused the re-export and transfer (in-country) of 7,420,496 HDDs to Huawei and affiliated entities designated by BIS for inclusion on the Entity List. Huawei and its affiliates were specifically included on the Entity List for their involvement in activities deemed “contrary to the national security or foreign policy interests of the United States” including but not limited to, participating in telecommunications development projects at the behest of the Iranian government.
But while BIS’s pursuit of the Seagate Entities was perhaps the most noteworthy development of the year, the federal government’s enforcement priorities were also reflected in the assessment of penalties against other entities involved in flagrant export violations, among them 3D Systems Corp. (“3D Systems”). In February 2023, BIS announced that it had settled with 3D Systems for violations of the EAR arising from nineteen (19) instances during which it admitted to exporting controlled aerospace technology and metal alloy powder to both the People’s Republic of China and the Federal Republic of Germany without the required licenses. At the time, 3D Systems provided 3D printing, cast urethane modeling, and injection molding services to a global customer base and routinely e-mailed design documents, blueprints, and technical specifications—all controlled “technology” within the meaning of the EAR—to a number of entities abroad. 3D Systems ultimately stipulated to the payment of a $2.77 million administrative penalty to BIS and was forced to resolve related proceedings arising from substantially similar conduct with the State and Justice Departments as well.
BIS similarly settled with Microsoft Corporation (“Microsoft”) over allegations that the entity violated the EAR by entering into software licensing agreements with two (2) Russian Federation (2) entities contained on the Entity List. According to documents made public by BIS in connection with the underlying enforcement action, between the period of December 2016 and December 2017, Microsoft entered into a series of agreements that permitted the transfer of, or access to, software subject to the EAR to “FAU Glavgosekspertiza Rossii” and United Shipbuilding Corporation Joint Stock Company; organizations that had been placed on the BIS Entity List for their contributions to civil engineering and shipbuilding projects that enhanced the capacity of the Russian Federation military-industrial complex. BIS subsequently imposed an administrative penalty on Microsoft of $624,013 in recognition of the fact that it agreed to resolve a more expansive universe of charges with the Treasury Department’s Office of Foreign Assets Controls (“OFAC”) arising from 1,339 violations of OFAC-administered sanctions regulations involving Ukraine/Russia, Cuba, Iran, and Syria.
In the end, the federal government seems to have made good on its promise to prioritize trade controls along with sanctions enforcement as the “new FCPA” throughout the 2023 calendar year. Accordingly, organizations involved in the manufacture, production and distribution of commodities subject to such export controls should utilize these enforcement actions as a baseline for improvement. By extracting critical lessons learned and adjusting internal controls to meet emerging regulator expectations made manifest by such enforcement actions, the compliance function of the organization can ensure that the company’s approach to trade compliance remains both responsive and relevant.