Any compliance officer will tell you the best way to assess the risk of a certain matter is to think about it from a regulatory perspective.
“‘What would the Department of Justice think if we did this? Would this violate any laws or restrictions?’” If the answers to these questions aren’t clear, it’s often advised to err on the side of caution.
Seagate did not when it decided in 2020 to continue selling hard disk drives to Chinese telecommunications giant Huawei after the latter had certain export restrictions placed on it by the Commerce Department. The data storage company was fined $300 million—the largest stand-alone administrative penalty in the history of the Bureau of Industry and Security (BIS)—for this miscalculation.
As part of the settlement, announced April 19, Seagate admitted its U.S. and Singapore subsidiaries ordered or caused the export of more than 7.4 million hard disk drives to Huawei entities from August 2020 through September 2021. The value of the hard disk drives surpassed $1.1 billion, according to the BIS, though Seagate’s net profits were around $150 million. The BIS said its penalty was more than twice what it estimated to be the net profit for the exports to or involving Huawei.
The amount of export administration regulation violations identified by the BIS—429—is unsurprising when you consider Seagate wasn’t trying to hide its continued dealings with Huawei. It acknowledged the business during a September 2020 conference call and how it believed it was doing nothing wrong despite the BIS’s restrictions announced a month earlier.
“I don’t see any particular restriction for us in terms of being able to continue to ship to Huawei or any other customer in China,” said Seagate Chief Financial Officer Gianluca Romano. “So, we don’t think we need to have a specific license.”
Even after the enforcement action, company leadership remains undeterred in this assessment.
“While we believed we complied with all relevant export control laws at the time we made the hard disk drive sales at issue, we determined that engaging with BIS and settling this matter was the best course of action,” said Seagate Chief Executive Dave Mosley in a press release.
The company added in a regulatory filing the BIS found it “incorrectly interpreted the regulation at issue to require evaluation of only the last stage of Seagate’s hard disk drive manufacturing process rather than the entire process.”
But this does not address Seagate’s greater miscalculation. It doesn’t matter how the company assessed the situation; it mattered what the regulator—the BIS, in this case—would think. Even though the agency was criticized for failing to “provide clarity” on the scope of its restrictions on Huawei in a Senate report on the matter released in October 2021, the company was still left with little chance to defend itself.
This is because the red flags were clear for Seagate to know it was venturing into questionable territory:
- Two of its primary competitors ceased doing business with Huawei at the time the restrictions were announced, the BIS noted. Seagate instead agreed to a three-year strategic cooperation agreement with the telecom in March 2021.
- Multiple investment firms and financial researchers noted the increased sales in their 2021 analysis and questioned the activity. “‘[Seagate’s] legal team likely interpreted U.S. restrictions differently than its peers,’” said Wedbush Securities in March 2021, as cited in the Senate report.
- Seagate itself disclosed in an August 2021 regulatory filing it could not “ensure that our interpretation of relevant restrictions and regulations will be accepted in all cases by relevant regulatory and enforcement authorities” when discussing export controls and business in China.
The result is another lesson for companies in risk assessment—and a new cautionary tale for export compliance officers to tell.