Recent Enforcement Action by the Department of Justice on Export Control underscores the potential dangers and threats associated with China
In a landmark case, semiconductor design company Cadence Design Systems has pleaded guilty to export control violations relating to transfers of sensitive technology to a restricted Chinese university. This case, the first corporate criminal plea following the Department of Justice's (DOJ) revised NSD Enforcement Policy for Business Organizations in March 2024, underscores the US government's focus on national security risks arising from transfers of sensitive technologies to adversary nations.
The resolution, worth $140 million, comes after Cadence admitted to engaging in transactions with China's National University of Defense Technology (NUDT), directly and through affiliates, between 2015 and 2020. The transactions involved items valued at more than $45 million.
Key Elements of a Strong Compliance Program
The case highlights the importance of a robust risk-based compliance program for companies involved in US technology transfers to China. Key elements of such a program include:
- Robust Export Controls and Due Diligence: Companies must maintain strict controls over exports and transfers of technology, including thorough due diligence on all third parties and intermediaries involved in transactions to ensure they are not on restricted entity lists like the BIS Entity List.
- Effective Subsidiary Oversight and Communication: Strong compliance programs require effective oversight and coordination between the parent company and foreign subsidiaries to avoid concealment or nondisclosure of prohibited transactions.
- Continuous Monitoring and Risk Assessment: Compliance programs must continually monitor and reassess risks associated with customers, partners, and end-users—especially entities linked to military or restricted activities.
- Responsiveness and Remediation: A strong program includes swift termination of prohibited relationships and remediation measures when violations are identified.
- Training and Accountability: Regular employee training on export laws and clear accountability mechanisms are crucial to prevent and detect illegal transfers.
- Transparency and Cooperation with Authorities: In the US enforcement environment, transparency and cooperation during investigations are critical. Companies must be prepared to provide requested information, even when it involves subsidiaries in China.
- Structured Compliance Reporting and Certification: Post-settlement measures often include corporate probation, progress reporting to the DOJ on compliance reforms, and compliance officer involvement.
The Plea Agreement
The plea agreement specifies central compliance program elements and standards for Cadence's export compliance program, including ongoing reporting to the DOJ regarding remediation steps and prospective compliance program implementation. The agreement also identifies mitigating factors such as the company's implementation of remedial measures, including adding export control compliance personnel, improving internal compliance programs, formalizing its export compliance training program, and enhancing export control compliance screening procedures.
Implications for Other Companies
This case serves as a warning to other companies involved in US technology transfers to China. Companies should consider requiring contractual provisions that address export control risks through required due diligence or through representations of compliance with applicable law. They should also establish a timely voluntary self-disclosure mechanism, as this is likely to be a key element and factor for consideration in any regulator enforcement action.
Moreover, periodic risk-based reviews of the compliance programs and the compliance policies and procedures are to be conducted annually. Risk-based due diligence reviews for mergers and acquisitions are also essential.
In conclusion, the Cadence case underscores that a strong risk-based compliance program for US technology transfers to China must integrate stringent controls, proactive risk assessment, official entity screening, enhanced internal communication, timely and effective remediation, and full transparency with regulators to avoid potentially significant criminal and civil liabilities.
- The Cadence Design Systems case emphasizes the necessity of a robust risk-based compliance program for companies dealing with US technology transfers to China, particularly focusing on elements like rigorous export controls, thorough due diligence, effective communication with subsidiaries, continuous monitoring, responsiveness, training, transparency with authorities, and structured reporting.
- To mitigate potential risks and liabilities associated with US technology transfers to China, companies should implement strategies such as contractual provisions addressing export control risks, voluntary self-disclosure mechanisms, annual risk-based reviews of compliance programs, and thorough risk-based due diligence reviews during mergers and acquisitions.
