The Bureau of Industry and Security recently announced a settlement imposing its second-highest penalty ever against a U.S. company that allegedly committed dozens of export violations after conflating U.S. customs and export regulations.
According to information from BIS, in 2020 a Chinese company to which the U.S. firm had been shipping semiconductor manufacturing equipment for decades was placed on the Entity List. The U.S. company applied for the BIS licenses required to export goods to such entities but also continued with and accelerated a change in its production process under which (1) the equipment was partially produced in the U.S., (2) the partially assembled items and all other required U.S.- and foreign-origin parts and components were sent to South Korea to complete production, and (3) the finished goods were shipped from South Korea to China.
The settlement notes that the U.S. company appears to have pursued this strategy because it “incorrectly concluded that if an item is ‘substantially transformed’ in a foreign country,” which the company believed was the result of the above process, “that was sufficient for the item to qualify as foreign-made for purposes of the EAR [Export Administration Regulations] and the item therefore would not be subject to the EAR provided that the EAR’s de minimis and foreign direct product rules also did not apply.”
However, the settlement adds, “substantial transformation” is a concept under U.S. customs regulations and “does not appear anywhere in the EAR and is not the correct test for determining whether an item is subject to the EAR because it is an item of U.S. origin.”
To settle BIS charges the company has agreed to pay a penalty of $252 million, conduct two internal audits of its export controls compliance program, and continue to provide extensive training on applicable export control requirements, maintain internal and external procedures to notify company management if a party is suspected of export-related noncompliance, and provide an anonymous reporting mechanism.
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