BIS Reaches Settlement of $5.8 Million Enforcement Action with TE Connectivity Corporation over Export of EAR99 Commodities
On August 15, 2024, the U.S. Department of Commerce’s Office of Export Enforcement (“OEE”) announced the settlement of the latest administrative enforcement action involving TE Connectivity Corporation—a Pennsylvania-based electronics company—and its affiliate, TE Connectivity Hong Kong Limited (collectively, “TE Connectivity”), for their involvement in seventy-nine (79) separate violations of the Export Administration Regulations (“EAR”) arising from a series of unlicensed EAR99 exports made to Entity List designees in the People’s Republic of China (“PRC”).
According to resolution documents released in connection with the administrative settlement, the violations occurred from roughly December 2015 through October 2019, and resulted in the shipment of space-grade and general-use wires, connectors, clamps, circuit-board connectors, and other low-grade technology items to a multitude of third parties that were otherwise prohibited from receiving such commodities absent explicit authorization by Commerce’s Bureau of Industry and Security (“BIS”). All told, the value of the shipments equated to approximately $1.74 million. While the settlement agreement notes that TE Connectivity undertook exhaustive efforts to investigate and promptly disclose the underlying misconduct to BIS, the resulting decision to impose a $5.8 million fine on the entity is likely attributable to the fact that its foreign personnel systematically undermined trade compliance protocols to facilitate illegal exports to a myriad of organizations involved in the development of the PRC’s hypersonic, unmanned aerial vehicle (“UAV”) and military electronics capabilities. More specifically, the settlement agreement alleges—and TE Connectivity concedes—that certain personnel involved in the sale of electronic components to distributors and customers located in the PRC knowingly employed misleading end-user certificates (“EUCs”) to circumvent the company’s denied screening protocols.
In one particular instance dating back to 2012, the director of TE Connectivity’s Chinese aerospace, defense, and marine (“ADM”) division instructed his subordinates to refer to Chinese military corporation end-users in code, by employing numbers instead of their corporate names, in order to avoid detection of illegal sales activity by TE Connectivity’s U.S.-based compliance personnel. These efforts were supplemented by a number of other sophisticated artifices—including the substitution of “stand-in” entity names for restricted parties and the routine modification of orders for bona fide customers to encompass items purchased for prohibited entities—and were all intended to deceive TE Connectivity’s compliance personnel into believing that the underlying transactions were legal and legitimate. Separately, the settlement agreement further alleges that TE Connectivity’s Sensors Division—which specializes in the sale of off-the-shelf products with various measurement capabilities to the transportation industry—permitted an unnamed distributor in Hong Kong to engage in prohibited transactions with Entity List designee China Aerodynamics Research and Development Center (“CARDC”). From 2016 to 2019, the agreement contends that the distributor sold approximately $990,473.31 in EAR99 designated pressure scanners to CARDC by falsifying EUCs. While the activity was discovered by TE Connectivity in 2019, after a salesperson affiliated with the Sensors Division reported the matter to its compliance personnel, the settlement agreement contends that TE Connectivity should have known about the transactions much earlier, since the distributor inadvertently revealed the true identity of its customer to TE Connectivity’s sales team on a number of previous occasions in the context of commercial sales reports.
The latest BIS enforcement action against TE Connectivity underscores the importance of understanding—and effectively operationalizing—proscriptions concerning the provision of EAR99 commodities to prohibited end-users and in support of prohibited end-uses, consistent with the EAR’s General Prohibition Five. While EAR99 designated commodities are generally less controlled than items specifically referred to by Export Control Classification Number (“ECCN”) and included on the Commerce Control List (“CCL”), a growing number of EAR99 items—including the low-grade technology items implicated in the TE Connectivity matter—are controlled when destined for certain designated parties in accordance with broader national security and foreign policy objectives. This means that a party must apply for (and successfully receive), an appropriate authorization from BIS before engaging in any export, re-export, or transfer (in-country) activity with a person or organization included on the Entity List. Even more importantly, U.S. companies engaged in the sale of any commodity “subject to the EAR” to counterparties situated abroad must ensure that their foreign employees are acquainted with these restrictions and agree to abide by them. As an additional precaution, organizations regularly engaged in commercial sales activity with parties located in higher-risk jurisdictions (e.g., the PRC, the Russian Federation, and others) should undertake continuous monitoring and periodic audit and inspection efforts in order to detect—and address—potential irregularities early. Finally, exporters should remain vigilant about allowing their compliance personnel to interface directly with their customers and distributors to verify information contained in EUCs, attestations, and other documents that are essential for trade compliance purposes.
