A look behind Seagate’s record-breaking export penalty

This month, U.S. authorities imposed a $300 million civil penalty against Seagate Technology over its lucrative relationship with blacklisted Chinese technology firm Huawei Technologies.  The penalty was to resolve alleged violations of export controls related to selling hard disk drives.  The $300 million settlement announced by the Department of Commerce’s Bureau of Industry and Security (BIS) is the largest ever stand-alone administrative resolution in the agency’s history.  The resolution also includes a multi-year audit requirement and a five-year suspended Denial Order.

Computer storage company Seagate Technology LLC of Fremont, California (Seagate U.S.) and Seagate Singapore International Headquarters Pte. Ltd., of Singapore (Seagate Singapore) were involved in the shipment of hard disk drives valued at more than $1.1 billion to Huawei entities, despite U.S. export controls.

Huawei History:  101

In 2019, the United States added Huawei and some of its affiliates to a trade blacklist that imposed licensing requirements on exports, re-exports and transfers of goods.  The Entity List designation was based on a determination made by the End User Review Committee, composed of the Departments of Commerce, Defense, State, Energy and, where appropriate, the Treasury “that there is 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, BIS also introduced controls in 2020 over certain foreign-made items to better address the continuing threat by Huawei to U.S. national security and foreign policy interests.

Seagate’s involvement with Huawei

The violations of the foreign direct product (FDP) rule, according to the Commerce Department, took place between August 2020 and September 2021.  BIS’s investigation determined that Seagate engaged in conduct prohibited by the Export Administration Regulations (EAR) by ordering or causing the reexport, export from abroad, or transfer (in-country) of more than 7.4 million hard disk drives subject to the Huawei FDP rule without BIS authorization.  As a consequence of the controls described above, for items subject to the FDP rule, Huawei may not receive such items or act as a party to the transaction without a license from BIS.  (This includes being the “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user” for example.)

According to BIS, neither Huawei nor Seagate made efforts to hide their relationship and despite the controls imposed in 2020, Seagate said it would continue doing business with Huawei.  “Even after Huawei was placed on the Entity List for conduct inimical to our national security, and its competitors had stopped selling to them due to our foreign direct product rule, Seagate continued sending hard disk drives to Huawei,” said Assistant Secretary for Export Enforcement Matthew Axelrod.  The two other companies capable of making HDDs promptly and publicly indicated that they had discontinued sales to Huawei.  Of the three, only Seagate refused to stop sales and transactions involving Huawei and seized the opportunity resulting in Seagate becoming Huawei’s sole source provider of HDDs.

Seagate then entered into a three-year Strategic Cooperation Agreement with Huawei being named Huawei’s strategic supplier and granting the company priority basis over other Huawei suppliers.  Seagate prioritized its relationship with Huawei over other U.S. customers, federal regulators alleged, with one executive writing that the company “moved supply to support China,” even after export controls had been imposed.

As the transactions progressed, Seagate US repeatedly authorized extending lines of credit to Huawei totaling more than $1 billion dollars between January and September 2021.  This resulted in an increasing volume of HDD exports to Huawei that they wouldn’t have been able to pay for otherwise.  Even after export controls were imposed, a senior Seagate executive publicly justified the continued relationship with Huawei, regulators alleged.  “I don’t see any particular restriction for us,” the Seagate executive reportedly said.

Per Deputy Secretary of Commerce Don Graves:

This historic action could not be possible without the deep commitment to justice and tireless work of our agents and analysts, who are contributing to the wider effort of protecting our national security.

Key takeaways for exporters

As with any major settlement like this, there are several key takeaways and other learnings that both U.S. and non-U.S. companies alike can glean.  These include:

• The size of the settlement. At $300 million, this is the largest standalone administrative penalty in BIS history.  This underscores how serious the U.S. government views export control violations – particularly those with the potential to harm to national security.  Notably, the penalty amount is more than twice what BIS estimates Seagate’s net profits to be from sales to Huawei.

 

• The swiftness of the settlement. In the past, we have seen investigations occur over a span of years, followed by more time as the process of enforcement carries out between the U.S. government and the alleged violators.  In this case with Seagate, the alleged violations occurred during a period of just 13 months (from 2020-2021) and the penalty was announced just 17 months after the activity ceased.  This represents swift action by the U.S. government to identify, investigate and stop bad behaviors.

 

• The publicity of the settlement. BIS has held nothing back in its public statements about Seagate’s activities and the alleged violations.  Notably, the agency has called out how Seagate’s competitors reacted to the Huawei restrictions (ceasing all sales to the entity) and contrasted that with Seagate’s apparent lack of regard for the regulations.  The agency is proactively communicating this settlement, and other recent enforcement news, to companies who have previously submitted voluntary disclosures.  BIS is also making it known that Seagate did not voluntarily disclose the activity, and that this contributed to the severity of the fine.

Make no mistake!  The Department of Commerce is committed to vigorous and stringent enforcement of U.S. export controls in every corner of the world.  Companies involved in exporting and importing goods have a lot on the line if they violate trade regulations.  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. Companies that do discover violations should submit voluntary self-disclosures.