The Bureau of Industry and Security recently imposed a $300 million civil penalty against a U.S. company and its foreign parent company to resolve allegations that they sold hard disk drives to Huawei Technologies Co. Ltd. of China in violation of the foreign direct product rule.

BIS states that this penalty, which is more than twice the estimated net profits from the alleged violations, represents the largest stand-alone administrative penalty in agency history. It also includes a mandatory multi-year audit requirement and a suspended order denying the companies’ export privileges for five years.

“This settlement is a clarion call about the need for companies to comply rigorously with BIS export rules, as our enforcement team works to ensure both our national security and a level playing field,” said Assistant Secretary for Export Enforcement Matthew Axelrod. John Sonderman, director of the BIS Office of Export Enforcement, added that “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.

Huawei and certain of its non-U.S. affiliates were added to the Entity List in May 2019, which imposed licensing requirements on exports, reexports, and transfers (in-country) of all items subject to the Export Administration Regulations that were destined to or involving the listed Huawei entities. In August 2020 BIS imposed a license requirement on exports of certain foreign-produced items when (1) there is knowledge that a listed Huawei entity is a party to the transaction and (2) the foreign-produced item is produced by an overseas plant or major component of a plant that is itself a direct product of U.S.-origin technology or software subject to the EAR and specified in certain export control classification numbers. For items subject to this FDP rule, Huawei may not receive such items or act as a party to the transaction without a BIS license.

However, between approximately August 2020 and September 2021 the two companies ordered or caused the reexport, export from abroad, or transfer (in-country) of approximately 7.4 million foreign-produced HDDs to Huawei entities on the Entity List, or where such entities were a party to a transaction, without BIS authorization. BIS states that this occurred after the two other companies capable of making HDDs promptly – and publicly – indicated that they had ceased sales to Huawei.

According to a Reuters article, the companies at issue argued that their “foreign-made drives were not subject to U.S. export control regulations, essentially because they were not the direct product of U.S. equipment.” However, BIS determined that the companies “wrongly interpreted the foreign product rule to require evaluation of only the last stage of [their] manufacturing process rather than the entire process.”

For more information on export restrictions and ensuring your company is in compliance, please contact attorney Kristine Pirnia at (202) 730-4964 or via email.

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