BIS Issues Record $300M Fine Against Seagate for Violating Huawei Export Controls

Matt Axelrod, top export enforcement official at BIS, called the fine a “clarion call about the need for companies to comply rigorously with BIS export rules.”  He also noted that Seagate continued selling to Huawei “even after Huawei was placed on the Entity List for conduct inimical to our national security” and after Seagate’s “competitors had stopped selling” to the Chinese technology company.

As part of a settlement agreement with BIS, Seagate agreed to a “mandatory multi-year audit requirement,” including two internal audits and an external audit in which the company must hire an unaffiliated third-party consultant with expertise in U.S. export control laws. The company must report the audit results to BIS, and it could face a five-year export denial order if it violates the terms of the agreement.

The settlement comes about 18 months after Senate Republicans urged BIS to penalize Seagate for “likely” violating U.S. export controls against Huawei (see 2110260040) and about eight months after Seagate said it received a proposed charging letter from BIS (see 2210260022).

Companies are now “on notice” that BIS is investigating firms for violating its FDP rule restrictions, said John Sonderman, director of the agency’s office of export enforcement. He said any business exporting to any entity subject to FDP rule restrictions needs to assess its “entire manufacturing process” to determine if certain U.S. technologies or software were used “in building the essential tools used in production.” He urged companies that discover any violations to submit voluntary self-disclosures. 

BIS said Seagate and its Singapore branch committed 429 violations of the Export Administration Regulations when they “ordered or caused” exports, reexports or transfers of 7,420,496 controlled hard disk drives to Huawei or its affiliates between August 2020 and September 2021. The disk drives were valued at more than $1.1 billion, BIS said.

Seagate exported the hard drive disks despite the fact that “its only two competitors” publicly stated that they had stopped selling them to Huawei after the Chinese company became subject to FDP rule restrictions in 2020 (see 2005150058 and 2008170029), BIS said, “resulting in Seagate becoming Huawei’s sole source provider of HDDs.” Seagate and Huawei entered into a three-year “Strategic Cooperation Agreement” in which Seagate was named as “Huawei’s strategic supplier” and granted “priority basis over other Huawei suppliers.”

BIS said Seagate’s chief financial officer previewed the company’s plans during a September 2020 industry conference, which took place one month after BIS published its new Huawei FDP rule restrictions. “I don’t see any particular restriction for us in term[s] of being able to continue to keep the Huawei or any other customers in China. So, we don’t think we know we need to have a specific license…,” the person said, according to BIS. The company became Huawei’s sole source provider of the HDDs within “days of that statement,” BIS said.

Under the Strategic Cooperation Agreement, Seagate agreed to provide Huawei with its “newest and most advanced technologies available in order to support and sufficiently maintain Huawei’s products in terms of innovation and market leadership,” according to BIS. Huawei praised the partnership, with an executive telling Seagate soon after they signed the agreement that the two companies “are about to reach our new milestone of 600+M USD thanks to our concerted efforts.”

BIS said Seagate “incorrectly interpreted the FDP rule to require evaluation of only the last stage of its HDD manufacturing process rather than the entire process.” The company had HDD manufacturing sites in China, Northern Ireland, Malaysia, Singapore, Thailand and the U.S., and used equipment manufactured by another company and that was subject to the EAR and the FDP rule, which imposes license requirements on foreign-produced items that are made with certain U.S. goods or technology. That equipment included a “fully automated laser-based surface inspection system” classified in the EAR under Export Control Classification Number 3B992, BIS said. The equipment was also the direct product of U.S.-origin ECCN 3E991 technology.

“As such,” BIS said, the equipment was “essential, i.e. a major component, of the Seagate HDD plants,” and Seagate “was prohibited from exporting the HDDs from abroad to a listed Huawei entity, and from involving a listed Huawei entity as a party to the transaction, without a BIS license.”

The agency said Seagate also used other equipment subject to the EAR and the FDP rule to produce the HDDs to Huawei and its affiliates. The company, for example, used EAR-controlled Ion Beam Etch, Ion Beam Deposition and Physical Vapor Deposition equipment to produce the HDDs’ wafers and sliders, BIS said. The equipment was classified under ECCN 3B992 and was the direct product of U.S.-origin ECCN 3E991 technology.

Seagate continued its shipments to Huawei despite receiving a “notification” from the manufacturer of the EAR-controlled equipment in January 2021 that the items were subject to export controls. That same month, Seagate US was notified that Huawei had placed an order for two million HDDs. After hearing the news, BIS said a Seagate U.S. senior manager wrote: “this is great!!!”

BIS also said Seagate "authorized extending to Huawei multiple temporary credit lines totaling more than one billion dollars” between January 2021 and September 2021. “In the meantime, the sales volume and quick timeframe meant that Seagate struggled to maintain production,” BIS said. In a January 2021 email among Seagate staff, employees said “Huawei is getting anxious as we have been their only HDD supplier since 15Sep’20 and they are close to line down situation should we be unable to support [HDD] Evans pilot shipments.”

By early February 2021, Huawei, in an attempt to “preserve the appearance of being able to maintain its production line despite the BIS Entity List designation,” suggested to Seagate that “it would look elsewhere for a supplier,” BIS said. Despite the supply concerns, Huawei and Seagate Singapore signed a “Long Term Agreement” around March 2021 that represented the “intent of the parties to cooperate in new technology co-development, early access to new [HDD] Products and related business on a worldwide basis,” BIS said.

Seagate’s sales to or involving Huawei continued until about September 2021, BIS said, more than a year since the agency had published its FDP rule restrictions. As part of the settlement agreement, BIS said Seagate “admitted to the conduct.”

“We believe entering this agreement with BIS and resolving this matter is in the best interest of Seagate, our customers and our shareholders,” Seagate CEO Dave Mosley said. "Integrity is one of our core values, and we have a strong commitment to compliance as evidenced by our global team of international trade compliance and legal professionals -- complemented by external experts and outside counsel."

Seagate "believed" it complied with "all relevant export control laws at the time we made the hard disk drive sales at issue," Mosley said, but "determined that engaging with BIS and settling this matter was the best course of action. We are now moving forward fully focused on executing our strong technology roadmap to support the growing demand for mass data storage solutions.”