California Tool Builder Fined $2.5 Million for Compliance Failures

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The Department of Commerce’s Bureau of Industry and Security and the Treasury’s Office of Foreign Assets Control imposed approximately $2.5 million in combined civil penalties against Haas Automation, Inc. for permitting authorized distributors to sell equipment and repair parts to sanctioned entities in China and Russia,

The transactions charged by BIS involved parties that were added to the Entity List for supporting the defense sectors of China or Russia.

As part of a settlement agreement with Haas, BIS issued an order imposing an administrative penalty of $1.5 million, as well as an ongoing audit and reporting requirement.

In addition to the BIS penalty, Haas entered a corresponding settlement with OFAC whereby Haas agreed to a $1,044,781 civil penalty to resolve apparent violations of OFAC’s sanctions regulations involving Russia and Ukraine.  

“Today’s coordinated resolution with OFAC demonstrates our resolve to hold accountable companies that do not put in place effective compliance programs to prevent exports to Entity Listed companies,” said Acting Assistant Secretary for Export Enforcement Kevin J. Kurland

Under the terms of the BIS Settlement Agreement, Haas admitted to 41 violations of the Export Administration Regulations (EAR) involving sales to Entity-Listed parties in China and Russia without BIS authorization.

The relevant parts used to service previously sold Haas CNC machines—were valued in total at approximately $29,254, according to the Commerce Department.  The OFAC Filing noted an additional value of $98,096 of the Russia sales.  The violations included the provision of financial unlock codes necessary for the Haas CNC machines purchased by the blocked end users to keep operating. Without these codes, the machines would have otherwise eventually shut down automatically and become inoperable. 

Haas also admitted to an additional violation involving the filing of inaccurate Electronic Export Information (EEI) for certain shipments to Russia.

Haas cooperated with the investigation by BIS’s Office of Export Enforcement (OEE) Los Angeles Field Office and OFAC, and took remedial measures after discovering the conduct, which resulted in a reduction of the penalty.

“Exporting items to Entity-Listed parties in Russia and China has serious national security implications,” said OEE Director John Sonderman. “When choosing to do business in these jurisdictions, industry must enhance screening efforts when it comes to prohibited parties.”

Headquartered in Oxnard, California, Haas is a privately held manufacturer of machine tools and related parts, including CNC vertical and horizontal machining centers and CNC lathes. CNC machines and parts have a wide range of potential applications, including uses across the electronics, transportation, oil and gas, aerospace, marine, and military and defense industries.

Additionally, Haas violated the EAR by making nine sales to two defense sector parties on the Entity List in Russia—DJSC Factory Krasnoe Znamya and JSC LEMZ R&P Corporation—between January 2020 and November 2021.

Haas sold machine tool parts to certain Haas authorized distributors, which were then used by such distributors to service CNC machines owned by 6 Entity List parties in China and 2 Entity List parties in Russia.

All relevant parts sold by Haas were of U.S.-origin, subject to the Regulations, and designated as EAR99 (e.g., gearboxes, magnetic encoder adapters, and dual battery replacement kits).

Haas supplied such parts to its distributors for customers in China and Russia after the relevant customers had been added to the Entity List, and without the requisite license or authorization from BIS.

China Transactions

On 32 occasions between April 2019 and March 2024, Haas violated the EAR by selling CNC machine parts designated as EAR99, through Haas’s authorized distributors, for export, reexport, or transfer (in-country) to defense sector parties that were on the BIS Entity List in China,  including

  • Beijing University of Aeronautics and Astronautics (also known as Beihang University),
  • Shandong Institute of Space Electronic Technology, and
  • China Electronics Technology Group Corporation 14th Research Institute (CETC 14).

The relevant sales parts used to service previously sold Haas CNC machines—were valued in total at approximately $29,254, according to the Commerce Department.

Russia Violations

Between December 17, 2019 and March 22, 2022, Haas appears to have violated § 589.201 of the URSR on 21 occasions when the company:

(i) indirectly exported through their distributor one CNC machine to a customer that was 50 percent or more owned by a company that was, in turn, majority owned by an entity identified on OFAC’s SDN List;

(ii) indirectly exported through their distributor 13 spare parts orders to four customers that were 50 percent or more owned by an SDN and one customer that was itself identified on OFAC’s SDN List;

(iii) on two occasions provided their distributor with financial unlock codes for machines owned by customers that were 50 percent or more owned by entities identified on OFAC’s SDN List; and

(iv) on five occasions permitted their distributor to obtain financial unlock codes through the HBC for machines owned by customers that were 50 percent or more owned by entities on the SDN List (collectively, the “Apparent Violations”).

The total value of these 21 transactions was approximately $98,096.

Further, from on or about November 15, 2021 through on or about May 27, 2022, Haas’s authorized third-party distributor in Russia  through its freight forwarder, filed a series of inaccurate and incomplete Electronic Export Information (EEI) filings for exports of items subject to the EAR destined to Russia—including exports post-dating comprehensive export controls on Russia implemented by BIS effective February 24, 2022.

Although the EEIs were submitted by the authorized distributor’s freight forwarder, Haas did not obtain any written authorization from the distributor affirming that the distributor would be responsible for all export compliance obligations for the shipments. Accordingly, Haas maintained export compliance responsibility for the accuracy of the EEIs.

One of the six blocked entities with which Haas dealt directly was itself identified on OFAC’s SDN List for being a producer of hydroacoustic equipment and a supplier to the Russian Navy.

The remaining five blocked entities Haas dealt with were directly or indirectly owned 50 percent or more by persons designated for, among other things, manufacturing armaments, electronic warfare equipment, or for being a senior official of the Government of the Russian Federation and operating in the energy sector of the Russian Federation economy.

Fines and Penalties

The settlement amount reflects the determination by the Office of Foreign Assets Control (OFAC) that the apparent violations were not voluntarily disclosed and that eight of the 21 apparent violations were egregious.

Under OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, Appendix A (“Enforcement Guidelines”), the statutory maximum civil monetary penalty applicable in this matter is $7,730,856. OFAC determined that although Haas reported the Apparent Violations to OFAC, its submissions did not constitute a voluntary self-disclosure under the Enforcement Guidelines. OFAC further determined that Haas’s export of one CNC machine and its provision of the unlock codes on seven occasions were egregious, and its exports of spare parts orders on 13 occasions were non-egregious.

In addition to the penalties, Haas shall complete two (2) audits of its export controls compliance program. Haas shall hire an unaffiliated third-party consultant with expertise in U.S. export control laws to conduct the external audits of its compliance with U.S. export control laws (including recordkeeping requirements), with respect to all exports, reexports, or transfers (in country) that are subject to the Regulations.

Aggravating Factors

OFAC determined the following to be aggravating factors:

(1) Haas failed to exercise due care in relation to the high-risk environment in which it was operating when, over the course of two years and three months, it failed to perform adequate due diligence and, as a result, exported goods and services to customers that were either identified on OFAC’s SDN List or that were owned 50 percent or more by such persons.

In light of the advanced nature of the machinery Haas produces and the risks posed by transacting with a customer base in Russia during the relevant time period, including dealings with the arms, defense, and/or related materiel sectors of the Russian 3 Federation economy, Haas exercised inadequate caution or care.

Reasonable due diligence and screening controls that took into account the risk related to Haas’s industry and customer base should have prevented the Apparent Violations.

(2) Seven of the eight end users that received these goods from Haas were themselves designated or owned by persons designated for operating in the defense sectors of the Russian Federation economy, and in one case the energy sector.

Additionally, Haas’s provision of the unlock codes enabled CNC machines owned by blocked entities in critical Russian industries to operate. This conduct negatively impacted a major U.S. foreign policy objective to deny Russia’s ability to supply the military sectors of its economy and to degrade the Russian Federation’s capacity to wage war against Ukraine.

As such, Haas caused severe harm to the policy objectives of the URSR.

Mitigating Factors

OFAC determined the following to be mitigating factors:

(1) Haas took prompt and significant remedial action in response to the Apparent Violations by conducting a thorough internal investigation and enhancing their compliance program, including by hiring additional personnel, improving compliance policies and procedures, purchasing a new compliance screening tool which includes screening for customers’ ownership, implementing comprehensive training requirements for all Haas and HFO employees, and establishing an audit procedure on high risk HFOs.

Haas is also deploying tools to track a CNC machine’s location and ensure it is not moved without permission.

(2) Haas was highly cooperative with OFAC’s investigation, filed a comprehensive selfdisclosure, and agreed to toll the statute of limitations.

(3) Haas has not received a Penalty Notice or Finding of Violation from OFAC in the five years preceding the earliest date of the transactions giving rise to the Apparent Violations.

Compliance Considerations

This enforcement action highlights the importance of considering risks posed by customers with which companies maintain an ongoing relationship, including through the provision of after-sale services, such as through the selling of spare parts or other goods and services to sustain a product’s continued operation. Additionally, companies conducting business through foreignbased subsidiaries, distributors, and resellers should ensure that their controls are sufficient to identify and address risks related to those relationships. Limiting direct business relationships alone may not be enough to guard against risks, especially in light of the dynamic nature of OFAC’s sanctions and complex ownership interests that may not be readily apparent. Firms should thus be sure to implement effective measures to prevent both direct and indirect access to their goods and services by blocked persons, including those who are not identified on OFAC’s SDN List, even after an initial transaction. One way to limit this access is by implementing sufficient due diligence measures for customers and end users. Doing so can help avoid conduct 4 leading to sanctions violations and ensure blocked persons do not have access to U.S. goods and services.

The full order, settlement agreement, and Proposed Charging Letter are available online here.

OFAC Enforcement [Release]

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