Cadence Pleads Guilty, Fined for Illegal Chip Design Tech Exports to China

The penalty includes a $95 million civil fine by BIS, among the largest it has issued since penalizing Seagate Technology $300 million in 2023 for violating export controls against Huawei (see 2304190071), as well as a $118 million fine by DOJ. Both agencies suspended portions of their fines to reach the combined penalty of more than $140 million.

BIS said Cadence committed 61 violations of the Export Administration Regulations, including more than $40 million worth of illegal exports, and admitted that employees of its Chinese subsidiary knowingly transferred sensitive U.S. technology to entities that develop supercomputers for China's military and nuclear weapons programs, including the National University of Defense Technology and Tianjin Phytium Information Technology.

As part of a settlement with BIS, Cadence agreed to complete two audits of its export compliance program and submit the results to BIS.

BIS Undersecretary Jeffrey Kessler said “companies that violate export laws and compromise national security should face strong penalties that deter future wrongdoing. Today’s action shows BIS’s commitment to making this happen.”

John Eisenberg, DOJ’s assistant attorney general for national security, said Cadence has “agreed to accept responsibility” for the illegal exports “and has implemented a strong export compliance program to help prevent any further illegal transmission of American technology.”

DOJ said the violations took place from February 2015 to April 2021, when Cadence and its Chinese subsidiary, Shanghai-based Cadence Design Systems Management, "engaged in a conspiracy to commit export control violations." The companies sought to provide EDA tools to the Chinese university's alias, the Central South CAD Center, and another associated entity, Phytium Technology, without receiving the proper export licenses. The agency said Cadence and its Chinese subsidiary exported EDA tools at least 59 times through September 2020, when Cadence eventually ended its subsidiaries’ relationship with the Central South CAD Center because of its links to the Chinese university.

BIS said Cadence had “reason to know, or awareness of circumstances that should have prompted further due diligence,” that the Central South CAD Center was an alias for the National University of Defense Technology. This includes “not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence,” BIS said. The agency added that the items it exported were controlled either under Export Control Classification Numbers 3B991b.2.c, 3D991 or 3E991 or designated as EAR99.

Cadence admitted that employees installed EDA hardware on the National University of Defense Technology’s campus in China and that university personnel downloaded EDA software and IP technology from Cadence’s download portals while Cadence and its subsidiary “had knowledge” the university had been added to the Entity List, DOJ said.

On the same day the university was added to the Entity List, Cadence’s export control officer emailed its employees to inform them, “meaning that export licenses will be required if sales are made.” DOJ also said employees of the company's affiliate wrote a presentation for a quarterly sales review meeting stating that BIS had "embargoed" four Chinese supercomputer centers, including the university.

Employees of Cadence’s subsidiary hid from or failed to disclose to other Cadence employees, including the company’s export compliance officers, that exports to the Central South CAD Center were “intended for delivery” to the Entity Listed university and the Chinese military, DOJ said. The agency noted that Cadence’s then-head of sales in China asked employees to refer to the customer as the Central South CAD Center in English and the National University of Defense Technology in Chinese characters, writing that “the subject [was] too sensitive.”

In October 2020, while Cadence and its subsidiary “had knowledge” that past exports sent to the Central South CAD Center were actually sent to the National University of Defense Technology in violation of export controls, DOJ said Cadence began selling to Phytium, a semiconductor firm closely linked with the center and university.

“Internal Cadence communications show certain Cadence employees’ understanding that [the Central South CAD Center] and Phytium were effectively the same entity both before and after the decision to transfer Cadence China’s business” to Phytium, DOJ said. BIS said this violated General Prohibition 10 of the EAR, which places restrictions on exporters and others if they have knowledge that a violation of the EAR has occurred, is about to occur or is intended to occur. “At the time, Cadence China employees were aware that [the Central South CAD Center] and Phytium were closely linked and shared some personnel,” BIS said.

It wasn’t until March 2021 that Cadence placed Phytium on an “export hold” because of an internal compliance review and stopped transactions with the company, DOJ said. Phytium was added to the Entity List in April 2021.

Even though Cadence had in place a compliance process to end transactions with customers that were later added to the Entity List, BIS said “certain system-level gaps” allowed certain “terminated” customers to download controlled software after they were added to the list, leading to more export violations. That included exports to technology companies Mikron, Huawei and Semiconductor Manufacturing International Corp. “The terminated customers did not receive the corresponding license keys from Cadence to unlock and use the majority of the unauthorized software downloads,” the agency said.

DOJ said Cadence didn't voluntarily disclose the violations to its National Security Division and cited the “nature and seriousness of the offense,” which included shipping sensitive chip design tools and technology to a Chinese entity working on supercomputers with military and nuclear weapons uses. But the agency also noted that Cadence showed “willingness to accept responsibility for the actions of its employees and agents” and took steps to “remediate the root cause of the offense conduct” by improving its export control compliance program.

The company received a 20% reduction of the statutory maximum fine from DOJ because of its cooperation with the agency, which included collecting and disclosing evidence, helping to arrange interviews with employees, and agreeing to toll the statute of limitations. But the firm didn’t receive “full credit for cooperation because it failed proactively to obtain and disclose to the government relevant communications, and it failed proactively to facilitate interviews of certain China-based employees with information relevant to the offense conduct.”

Cadence is "pleased to have reached these settlements and believes they are in the best interests of Cadence, its customers and its stockholders," the company said in its most recent SEC filing, released July 28. "Cadence has agreed to the terms of the settlement agreements at the parent corporate level to accept responsibility for the past conduct and to address the laws of both the United States and the People’s Republic of China. Since the conduct occurred, Cadence has further invested in and significantly enhanced its export compliance programs across its business, including implementing policies and procedures designed to proactively address evolving trade restrictions, and will continue to do so."