On January 7, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued an Order resolving allegations that Exyte Management GmbH (Exyte), a Germany-based company, committed 13 violations of the Export Administration Regulations (EAR) in China. The violations were committed by Exyte’s Chinese affiliate, Exyte Shanghai Ltd (Exyte China).
Notably, the matter did not directly involve exports, but rather in-country transfers of relatively low-technology goods controlled under the EAR. The matter is therefore a cautionary tale: U.S. export controls are not limited to cross-border exports, and even in-country transfers can trigger licensing obligations when an Entity List party is involved.
Alleged In-country Transfers of Items Controlled under EAR99
According to BIS, between March 2021 and March 2022, Exyte China “caused, counseled, procured, or aided” 13 in-country transfers of items subject to the EAR from China-based suppliers and distributors to Semiconductor Manufacturing International (Beijing) Corporation (SMIC). Because SMIC is named on the Entity List maintained by BIS, any export, re-export, or in-country transfer to SMIC of an EAR-controlled item requires authorization from BIS.
The items included flowmeters, pressure transmitters, logic controllers, and voltage sag protectors for construction of a semiconductor fabrication facility. In total, BIS alleges, 884 items valued at approximately $2.85 million were transferred to SMIC. BIS acknowledged that Exyte China did not understand that a BIS license requirement applied to these in-country transactions, which were handled by local Chinese suppliers, but noted that Exyte China did know that SMIC Beijing was the end user of the items.
$1.5 Million Penalty Offset by Company’s Cooperation in Matter
To resolve the matter, Exyte agreed to pay a $1.5 million civil penalty. The resolution is contingent on Exyte making timely payment: if it fails to do so, Exyte would be unable to obtain, maintain, or take advantage of any U.S. export license, license exception, permission, or privilege.
BIS also emphasized that the penalty amount was reduced because of Exyte’s response to the matter. Among other things, Exyte retained outside counsel, conducted an internal investigation, voluntarily disclosed the matter to BIS, and invested in improving its compliance program.
Practical Compliance Takeaways for EAR Programs
The basis for liability in this matter is straightforward. Under the EAR, a license is required for the export, re-export, or transfer (in-country) of any item subject to the EAR when an Entity List party is involved as a “party to the transaction.” Yet the burden for complying with this requirement, particularly in the case of in-country transfers, is substantial.
One approach is to treat in-country transfers as a compliance risk akin to exports and re-exports. For its part, BIS framed the violations in this matter as being due to a breakdown in controls around local purchasing and distributor deliveries in China. Perhaps, but then it is a controls weakness that many large companies, especially outside the United States, probably share. It is rare to encounter a company that has a similarly robust screening and Know Your Customer (KYC) program for domestic and international customers.
A better approach may be to ensure that restricted-party screening covers all parties in a transaction, not only those involved in the shipping process. BIS emphasized that Exyte China knew that SMIC was the end user but apparently did not conduct end-user screening. Had they done so, these violations might have been avoided.
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