By George Canovas, Vice President of Compliance, FD Associates
The US Department of Commerce Bureau of Industry and Security has reached a settlement with Applied Materials, Inc. and Applied Materials Korea, Ltd. resolving allegations that the companies committed 56 violations of the Export Administration Regulations involving unauthorized reexports of semiconductor manufacturing equipment to Semiconductor Manufacturing International Corporation and affiliated entities in China.
The conduct occurred over an approximately 18 month period between March 2021 and June 2022 and involved ion implantation equipment valued at approximately $126 million. BIS imposed a civil penalty of $252,500,300, calculated at twice the value of the transactions and described by the agency as the statutory maximum and the second largest administrative penalty it has issued.
Manufacturing and export flow
Applied Materials produced ion implantation system modules at its facility in Gloucester, Massachusetts. Ion manipulation modules are used to accelerated ion beams to precisely introduce controlled amounts of dopant atoms into silicon wafers in order to modify their electrical properties during chip fabrication.
These modules, together with US origin components and certain foreign sourced parts, were shipped to the company facility in South Korea for completion of assembly, system integration, and testing. Finished systems were then exported from South Korea to SMIC fabrication facilities in China.
BIS determined that the equipment remained subject to the Export Administration Regulations throughout this process. The agency concluded that production of the systems began in the United States and that the assembly and testing activities performed in South Korea did not change their regulatory status for export control purposes.
Regulatory notice and Entity List restrictions
On September 25, 2020, BIS issued an informed notice to Applied Materials, advising that specified items required a license for export, reexport, or transfer to SMIC due to the risk of diversion to military end use in China. On December 18, 2020, SMIC and multiple subsidiaries were added to the Entity List. Following that designation, exports, reexports, or transfers of items subject to the EAR to those entities required BIS authorization.
The settlement states that between March 23, 2021 and June 3, 2022, the companies caused 54 unauthorized reexports of ion implantation equipment from South Korea to SMIC and attempted 2 additional shipments involving affiliated entities.
Internal export control analysis
The settlement describes that Applied Materials internal export control personnel evaluated whether the equipment completed in South Korea could be treated as foreign made.
According to the settlement, internal company export control personnel concluded that assembly and testing performed in South Korea resulted in sufficient transformation for the completed equipment to qualify as foreign made items. The company implemented internal procedures, including a transformation checklist, that allowed shipments to proceed when those internal criteria were satisfied.
The export compliance system included automated shipment blocks for SMIC transactions but permitted manual overrides when the internal checklist was met. BIS rejected the company analysis and determined that the Applied Material’s item sold to SMIC remained subject to the Export Administration Regulations and required authorization for shipment to the listed entities.
The settlement states that the concept of substantial transformation originates from Customs law and is not used within the Export Administration Regulations as the test for determining whether US origin items remain subject to the EAR.
Classification of the equipment
The settlement identifies the ion implantation equipment involved in the transactions as classified under ECCN 3B991.
Settlement terms and compliance requirements
In addition to the civil penalty, the agreement imposes a 3 year denial of export privileges that is suspended provided the companies comply with settlement conditions. Failure to meet those conditions may result in activation of the denial order.
The agreement also requires 2 internal export compliance audits focused on exports, reexports, or transfers of semiconductor manufacturing equipment involving China. The first audit covers the 12 month period beginning January 1, 2026, with a report due by July 1, 2027. The second audit covers the following 12 month period, with a report due by July 1, 2028.
The companies must maintain global export control training programs, certify training completion for relevant personnel, and maintain internal procedures for reporting suspected export compliance violations, including an anonymous reporting channel.
Enforcement significance for multinational manufacturers
The settlement confirms that reexports from foreign subsidiaries remain subject to EAR licensing requirements when items produced in the United States are exported to entities on the Entity List. The enforcement action also highlights the regulatory risk associated with relying on internal jurisdiction analyses to release shipments after formal licensing requirements have been communicated.