© Reuters. FILE PHOTO: A 3D printed Huawei logo is placed on glass above displayed US flag in this illustration taken January 29, 2019. REUTERS/Dado Ruvic/Illustration
By Karen Freifeld
(Reuters) -Seagate Technology Holdings said in a filing on Wednesday the U.S. government has warned the company that it may have violated export control laws by providing hard disk drives to a customer that a source familiar with the situation identified as Huawei Technologies.
Reuters was the first to report the disclosure on Wednesday and to identify Huawei as the customer. Huawei is on the U.S. Commerce Department’s entity list and banned from receiving U.S. exports and certain foreign-made items without government approval.
Seagate was warned in a “proposed charging letter” it received from the Commerce Department on Aug. 29, according to the filing with the U.S. Securities and Exchange Commission.
The filing said the company’s position is that the hard disk drives are not subject to the U.S. export regulations, and that it did not engage in prohibited conduct as alleged by the Commerce Department.
Seagate’s filing did not identify the customer. Seagate paused its shipments to Huawei a year ago, said the source familiar with the matter.
The Commerce Department declined comment on any potential pending enforcement matters but a spokesperson said the department is committed to “fully investigating any allegation of violations” of the rule restricting certain foreign-made items, adding that it “aggressively pursues criminal and civil actions related to unauthorized exports to China.”
A spokeswoman for Huawei had no immediate comment. The Chinese telecommunications equipment maker was placed on the entity list in 2019 for activities deemed contrary to U.S. national security.
Seagate, a Dublin-based company that also operates in California, said it was cooperating with the Commerce Department and sought to resolve the matter.
The products at issue were provided to the entity listed customer and its affiliates between August 2020 and September 2021, according to the disclosure.
The company said the timing of any final outcome is unclear, as are the terms. It also could not estimate the range of loss or penalty, although it said a material impact on the business was possible.
The company could face civil penalties of up to $300,000 per violation or twice the value of the transaction, whichever is greater, for administrative charges.
The company hopes to make its case in an upcoming meeting with the Commerce Department, the source said. It sent an initial response to the letter in late September and filed more information this week.
Seagate’s shares were down 11 percent early Wednesday after the company reported financial results and disclosed the warning over the alleged export violations.
At issue is a U.S. regulation that governs the way certain foreign-made items destined for Huawei become subject to U.S. export regulations.
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 produced by essential equipment that is the direct product of U.S.-origin software or technology. Such shipments can only be made with a U.S. license.
The rule was designed to cut the global supply of semiconductors to Huawei.
Seagate’s view is that its foreign-made hard drives are not subject to the restriction, the source told Reuters, because they are neither the direct product of any U.S. semiconductor technology or software nor of any equipment that itself is the direct product of any U.S. semiconductor technology or software.
However, the source said, the Commerce Department’s proposed charges are based on an interpretation that foreign-made items are subject to the rule if equipment that is the direct product of U.S. semiconductor technology or software was used to produce any component of the end-item, no matter how far removed in the production process.
The hard disk drives are made in China and Thailand and also do not have enough U.S. content to make them subject to U.S. export rules, the source said.
The company has not applied for U.S. licenses for the hard disk drives but has applied for licenses for other items when it determined they were required, the source added.
Republicans on the U.S. Senate Commerce Committee issued a report last October that found that Seagate had likely shipped restricted products to Huawei for as long as a year, giving it a competitive advantage over Toshiba (OTC:TOSYY) and Western Digital (NASDAQ:WDC), the other primary suppliers of hard disk drives, who said they had ceased shipments to Huawei after the new rule took effect in 2020.
Western Digital told Reuters in May 2021 it had stopped shipping to Huawei in September 2020 and applied for a license, which was pending. The company did not respond to requests for an update and comment.
Toshiba also did not respond to requests for comment.