Seagate Fine Shows BIS Is Looking to 'Aggressively' Enforce FDP Rule, Law Firms Say

Although the U.S. continues to impose new sanctions and export controls against Russia, the Commerce Department’s $300 million penalty assigned to Seagate Technologies last month signals that the U.S. is increasingly prioritizing enforcement, particularly against China, law firms said this month. They also said the fine shows that Commerce is looking to strictly enforce its foreign direct product rule restrictions, even for violations of the rule that may not be obvious.

The settlement with Seagate, which sold more than 7 million export-controlled hard disk drives to Huawei in violation of the Bureau of Industry and Security’s FDP rule (see 2304190071), “makes clear that BIS and the U.S. government more broadly remain focused on aggressively enforcing U.S. export controls targeting Chinese companies on the Entity List and related restrictions,” Paul Weiss said in a client alert. The record penalty, combined with a new effort by BIS to increase penalties on companies for failing to disclose significant export violations (see 2304180071), suggests the U.S. is “increasing its focus on the enforcement of sanctions and export controls,” the firm said.

Seagate settled with BIS even though the company said it “believed” it was complying with all U.S. export controls when it sold the disk drives to Huawei. The company likely thought it didn’t have to apply for a license because its products were made and supplied from outside the U.S. and “were not otherwise subject” to the Export Administration Regulations, Orrick said, adding that their equipment was “lightly controlled.” That line of thinking is common, the law firm said -- suppliers of foreign products “for decades” have thought “that they are safe from U.S. export control enforcement, provided it is not obvious that the products are subject to the EAR.”

But this case shows the U.S. is “prepared to apply foreign direct product rules and related EAR scope requirements aggressively, notwithstanding the rules’ complexity and resistance to clear application,” Orrick said. U.S. and foreign companies “should not be comfortable assuming that their foreign-made products are outside the regulations’ scope except as established through comprehensive expert analysis.”

Some companies struggle to comply with FDP rule restrictions, which can sometimes require multiple levels of supply chain analysis to determine whether a foreign-made product needs a BIS license (see 2302020034), especially if the transaction involves China. “[I]t is especially risky for companies to rely on aggressive interpretations of trade restrictions, particularly regarding complicated regulations that establish the extraterritorial scope of the restrictions,” Orrick said.

Shearman & Sterling said exporters should consider whether they need to “enhance their compliance programs” to better adapt to the aggressive BIS enforcement, and should expect underwriters, joint venture partners and acquirers to “focus heavily on export compliance” surrounding potential loans, investments and mergers. Companies also should make sure “proper channels of communication exist within the business” to allow a compliance department to inform senior officials about potentially submitting a voluntary disclosure to BIS, the firm said.

“As the geopolitical landscape continues to evolve,” Shearman said, “we expect to see additional resources deployed toward enforcement and additional scrutiny applied to companies’ compliance policies, procedures and culture when assessing violations and setting penalties.”