On February 11, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced a settlement with Applied Materials, Inc. (AMAT) and Applied Materials Korea, Ltd. (AMK) resolving allegations that the companies illegally reexported U.S.-origin semiconductor manufacturing equipment to China.

BIS administers and enforces the Export Administration Regulations (EAR), which are the primary U.S. regulations governing exports, re-exports, and in-country transfers of commercial or “dual use” goods, software, and technology.

BIS assessed a $252,500,300 civil penalty, required two internal compliance audits with reporting to BIS, and imposed a three-year denial of export privileges that is suspended so long as AMAT meets payment and audit obligations. BIS framed this settlement – one of its largest ever – as reflecting its aggressive scrutiny of cross-border manufacturing, assembly, and testing arrangements involving sensitive U.S. technology.

AMAT Had Long-Standing Relationship With Restricted Chinese Company

AMAT, a semiconductor manufacturing equipment company based in Santa Clara, California, had a long-standing commercial relationship with China’s Semiconductor Manufacturing International Corporation (SMIC). In September 2020, BIS sent AMAT an “is-informed” letter advising that a license was required for certain exports/re-exports/transfers to SMIC due to military end-use risk. Soon thereafter, in December 2020, SMIC and multiple SMIC subsidiaries were added to the BIS Entity List. As a general matter, a license is required to export (or re-export or transfer in-country) any item subject to the EAR to a party on the Entity List.

According to the charging documents, between November 8, 2020, and July 18, 2022, AMAT committed 56 violations involving the re-export or attempted re-export of semiconductor manufacturing equipment from South Korea to SMIC and its subsidiaries on the Entity List. The value of merchandise illegally shipped was approximately $126 million.

In the charging documents, BIS describes a “dual-build” approach in which partially built equipment and parts were shipped from Massachusetts to AMK in South Korea for further assembly and testing before being shipped onward to SMIC in China. BIS highlighted internal communications reflecting urgency to operationalize the Korea pathway and business concerns about delays, denial risk, and competitive displacement if SMIC turned to AMAT’s competitors.

AMAT apparently interpreted completion of assembly/testing in South Korea as creating “substantial transformation” sufficient to convert the resulting products into non-U.S. origin items, and thus not subject to controls under the EAR. AMAT then operationalized that approach through internal checklists and shipment controls.

BIS Rejected Substantial Transformation as Basis for Establishing Products Were Non-U.S.

BIS rejected AMAT’s view that “substantial transformation” occurred in South Korea and emphasized that, in any event, “substantial transformation” is not relevant to determining jurisdiction under the EAR. As stated by BIS, “‘substantial transformation’ does not appear anywhere in the EAR and is not the correct test for determining whether an item is subject to the EAR …”

In fact, BIS concluded, the process in South Korea did not produce a non-U.S. origin item, and thus there was no basis to conduct a de minimis analysis. (Relatedly, BIS suggests that even if there had been substantial transformation, under a de minimis analysis the AMAT products would be have been deemed to be subject to the EAR.) Correspondingly, when the item was shipped to China from South Korea, it was subject to U.S. re-export requirements. (These same requirements were the basis for the January 2026 penalty imposed on Exyte, which we addressed here.)

Major Monetary Penalty, Audit Requirements, and Suspended Denial Order

BIS imposed a $252,500,300 civil penalty, twice the value of the underlying transactions, and the maximum allowed by statute. This is uncommon as in the majority of settlements, BIS imposes less – and often much less – than the maximum based on mitigating factors.

AMAT also must conduct two internal audits covering shipments of semiconductor manufacturing equipment to or within China. In addition, AMAT is subject to a three-year denial of export privileges, though the denial order is suspended so long as AMAT complies with the terms of the settlement agreement. But this is the sword of Damocles – if AMAT fails to pay the penalty or otherwise fails to comply with the terms of the settlement agreement, BIS can modify or revoke the suspension, activate the denial order, and revoke BIS licenses in which AMAT has an interest. For a company like AMAT, which is heavily reliant on export business, an export denial is effectively the death penalty.

Takeaway: The Long-Arm of U.S. Export Jurisdiction

The AMAT settlement is unique, given the size of the monetary penalty and the conduct at issue. But the settlement is not unusual in the way the action is targeted at a sensitive sector – semiconductors – and a sensitive recipient – China. We expect this to continue, particularly given the nature of global supply chains and the hunger for processing chips.

Please contact the authors if you have any questions.