US exclusive alleges Seagate breached export rules to sell Huawei hard drive sources

Oct 26 (Reuters) – Seagate Technology Holdings said in a filing on Wednesday that the U.S. government warned the company that it may have violated export control laws by providing hard drives to a customer that a source familiar with the situation said was Huawei Technologies (HWT.UL).

Reuters first reported the disclosure on Wednesday and identified Huawei as a customer. Huawei is on the US Department of Commerce’s Entity List and has been banned from receiving US exports and certain foreign-made items without government approval.

Seagate was warned in a “proposed shipping letter” it received from the Commerce Department on August 29, according to a report filed with the US Securities and Exchange Commission.

The file stated that the company’s position is that hard drives are not subject to US export regulations, and that it has not engaged in prohibited behavior as the Commerce Department has alleged.

The Seagate files did not identify the customer. The insider said Seagate temporarily halted shipments to Huawei a year ago.

The Commerce Department declined to comment on any potential pending enforcement matters, but a department spokesperson said the department was committed to “fully investigating any allegations of violations” of the rule restricting certain foreign-made items, adding that it was “vigorously pursuing criminal and civil actions related to unauthorized exports to China.” “.

A Huawei spokeswoman had no immediate comment. The Chinese telecommunications equipment maker was placed on the Entity List in 2019 for activities deemed contrary to the national security of the United States.

Seagate, a Dublin-based company also operating in California, said it was cooperating with the Department of Commerce and seeking to resolve the matter.

According to the disclosure, the products in question were offered to the listed customer of the entity and its affiliates between August 2020 and September 2021.

The company said the timing of any final outcome was unclear, as were the terms. He also could not estimate the extent of the loss or penalty, although he said the material impact on the business was possible.

The company may face civil penalties of up to $300,000 for each violation or twice the value of the transaction, whichever is greater, for administrative fees.

The source said that the company hopes to present its case in an upcoming meeting with the Ministry of Commerce. It sent an initial response to the letter in late September and provided more information this week.

Seagate shares fell 11 percent early Wednesday after the company reported financial results and disclosed the warning about alleged export violations.

At issue is US regulation that governs the way certain foreign items destined for Huawei are subject to US export laws.

The Foreign Direct Product Rule, as revised in August 2020, restricts companies from shipping items made outside the United States to Huawei if they are the direct product of certain U.S. technology or software, or were produced with essential equipment that is the direct product of the U.S.-origin program or technology. Such shipments can only be made with a US license.

The base is designed to cut off the global supply of Huawei’s semiconductors.

The source told Reuters that Seagate’s view is that its foreign-made hard drives are not subject to restrictions, as they are not a direct product of any US semiconductor technology or software nor of any equipment that is itself the direct product of any US semiconductor. technology or software.

However, the source said, the Commerce Department’s proposed fee is based on the interpretation that overseas-made items are subject to the rule if equipment that is the direct product of US semiconductor technology or software is used to produce any component of the final item. , no matter how much they are removed in the production process.

The source said the hard drives are made in China and Thailand and also do not contain enough US content to make them subject to US export rules.

The source added that the company did not apply for US licenses for the hard drives but applied for licenses for other items when it decided they were needed.

Republicans on the US Senate Commerce Committee released a report last October that found Seagate likely shipped restricted products to Huawei for up to a year, giving it a competitive advantage over Toshiba.(6502.T) Western Digital (WDC.O)other major suppliers of hard drives, who said they halted shipments to Huawei after the new rule went into effect in 2020.

Western Digital told Reuters in May 2021 that it had stopped shipping to Huawei in September 2020 and had applied for a pending license. The company did not respond to requests for updates and comment.

Toshiba also did not respond to requests for comment.

(Reporting by Karen Freifeld) Editing by Chris Sanders and Howard Guler

Our criteria: Thomson Reuters Trust Principles.

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