Regulatory intelligence for US exporters

US Tech Company Likely Violated Huawei-Related Export Controls, Senate Republicans Say

A U.S.-based technology company “likely” violated U.S. export controls against Huawei for more than a year but hasn't yet faced penalties by the Bureau of Industry and Security, Republican staff on the Senate Commerce Committee said Oct. 26. The committee’s minority staff said Seagate Technology likely continued shipping hard disk drives to Huawei after BIS amended its foreign direct product rule last year, which imposed controls on goods that are the direct product of certain technology or software subject to the Export Administration Regulations (see 2005150058 and 2008170029).

“By shipping these prohibited products to Huawei, it appears Seagate benefitted from an uneven playing field to the detriment of national security and at the expense of its competitors who abide by the rule designed to combat threats posed by companies with known connections to the Chinese government,” committee staff wrote in a report released by the committee’s top Republican, Sen. Roger Wicker, R-Miss.

The minority staff said it began looking into Seagate’s shipments last year after sending letters to various U.S. hard disk drive suppliers to determine how they were complying with the recently amended FDP rule. Seagate “declined to provide its interpretation of the rule, detail its transactional relationship with Huawei, or disclose whether the company had obtained a license,” according to the report. Seagate officials eventually “agreed to an interview” with the committee’s minority staff and said the company had not applied for or received a BIS license to ship items covered by the amended FDP rule, which significantly increased restrictions on certain foreign-made items destined to Huawei. Seagate believed its products didn’t need a license, the report said.

But “evidence” gathered by the committee suggests the company did need a license. The committee’s minority staff said it reviewed “disclosures and documents” that showed Seagate “incorporated semiconductor products that fall within the rule’s coverage into hard disk drives with knowledge that the products were destined to Huawei.” The report also said Huawei grew its storage system sales in the last year, and that it “is unlikely that Huawei could have seen such significant growth in their storage system business without access to Seagate’s hard disk drives.”

“Based on the evidence available to Minority Staff, it appears that Seagate Technology knowingly violated the Foreign Direct Product Rule for more than one year,” the report said. “Seagate likely made the strategic calculation to continue violating national security regulations based on the prospect of earning significantly greater profits through market monopolization than the potential cost of regulatory penalties. All unlicensed shipments of prohibited products to Huawei should cease without delay.” Seagate didn’t respond to a request for comment.

The report was also critical of BIS’s “failure” to clarify the scope of the FDP rule for the committee’s minority staff and its lack of enforcement action against Seagate so far. BIS “has created a commercial environment that incentivizes companies to continue shipping prohibited products to Huawei,” the report said. It also said the Commerce Department should do more to prioritize enforcement of the FDP rule to stop similar illegal exports to Huawei.

“Given the grave security interests at stake, extended delay from BIS in completing its investigation into Seagate Technology’s compliance with the rule, including its determination about whether enforcement actions are necessary, would allow Huawei to continue accessing prohibited hard disk drives,” the report said. BIS told the committee that its investigations sometimes take five years.

A Commerce spokesperson said BIS is “committed to fully investigating any allegation of violations” of the Export Administration Regulations, including those related to Huawei. “Enforcement actions can generally be made public at the end of the investigation,” the spokesperson said Oct. 27. “BIS is committed to briefing Congressional offices at the conclusion of such an investigation and looks forward to continued dialogue with Congress on our national security and economic interests related to” China.

The committee’s minority staff said it will “continue performing oversight of BIS to determine why no enforcement action has been taken” against Seagate. In a statement, Wicker said BIS needs to employ “stronger monitoring and enforcement” and urged the Biden administration to make BIS “more vigilant in its actions.”