The second-largest civil penalty in BIS history came with a detail compliance teams should remember: The internal emails and checklists that mapped an overseas routing strategy became the government’s evidence of conscious risk-taking. Bass, Berry & Sims attorneys Thad McBride and Faith Dibble use the settlement to map what BIS is actually looking for when it scrutinizes cross-border manufacturing models — and what export compliance programs need to account for as a result.
The US Department of Commerce’s Bureau of Industry and Security (BIS), the US government department with primary responsibility for administering controls on exports of US-origin commercial goods, software and technology (any of which is an “item”), has long reminded exporters that export controls follow the item.
The agency’s recent settlement with Applied Materials (AMAT) and Applied Materials Korea (AMK) drives that point home.
On Feb. 11, BIS announced a $253 million penalty (the second highest civil penalty in its history), coupled with audit requirements and a suspended three‑year denial order, to resolve allegations that AMAT and AMK re-exported semiconductor manufacturing equipment from South Korea to China’s Semiconductor Manufacturing International Corp. (SMIC) and its affiliates without the required US government authorization.
While the size of the penalty is eye-catching, there are also several important lessons for exporters: Recognize that US export jurisdiction is expansive, especially when it comes to designated end‑users; and beware that complex supply chains do not negate the application of US law, and in fact may make compliance more challenging.
Background
AMAT is a US-headquartered provider of semiconductor manufacturing equipment. The company had a longstanding commercial relationship with SMIC.
In September 2020, BIS sent AMAT an “is‑informed” letter advising that a license was required for certain exports, re-exports and in‑country transfers to SMIC due to military end‑use risk. Not long thereafter, in December 2020, BIS added SMIC and multiple SMIC subsidiaries to the entity list, which is maintained by BIS and that lists parties subject to heightened US export licensing requirements, even in the case of relatively low-technology items.
Notwithstanding the September 2020 notice to AMAT and the subsequent designation, according to BIS, between November 2020 and July 2022, AMAT committed 56 violations by re-exporting or attempting to re-export US-origin semiconductor manufacturing equipment from South Korea to SMIC and its listed affiliates. The equipment value was roughly $126 million.
In the materials BIS has published, the agency alludes to a “dual‑build” approach where partially built US equipment and parts were shipped from the US to AMK in South Korea for additional assembly and testing before onward shipment to China. Internal communications reflected business urgency to operationalize the Korea pathway and concerns about delays, license denials and competitive displacement if SMIC turned to non‑US rivals.
AMAT appears to have believed that the finishing work in South Korea constituted “substantial transformation” such that the finished items were no longer subject to the jurisdiction of US export administration regulations (EAR). BIS rejected that view outright. As the agency emphasized, “substantial transformation” is not the test under the EAR; production began in the United States, the South Korea steps did not convert the equipment into a foreign‑made item, and thus the goods remained “subject to the EAR” for entity list purposes. Because the items were subject to the EAR, their re-export to SMIC required a license, even if routed through South Korea.
Big penalty, bigger message
Under the settlement, AMAT agreed to pay a $253 million civil penalty (twice the value of the illegal transactions and the maximum allowed by statute) and conduct two internal compliance audits with reports to BIS; those are due July 1, 2027, and July 1, 2028. BIS also imposed a three‑year denial of export privileges, though the denial order is suspended contingent on timely payment and audits. If AMAT misses a payment or audit deadline, BIS can activate the denial order and revoke licenses in which AMAT has an interest. During any active denial, AMAT and its representatives would be broadly barred from participating in transactions involving items subject to the EAR and third parties would face parallel prohibitions.
The architecture here mirrors other BIS resolutions in its reliance on conditional relief (suspended denial), independent auditing and significant monetary penalties, all of which are features that BIS increasingly deploys in settlements. In framing this as one of its largest settlements ever, BIS signaled both the sensitivity of semiconductor equipment and its willingness to scrutinize cross‑border manufacturing, assembly and testing models that intersect with China and listed parties.
The foundational importance of export jurisdiction
The most important legal takeaway is jurisdictional and the need to understand the broad scope of the EAR. An appropriate jurisdiction analysis must ask where the item was produced, what components and technology it includes, the value of US-origin content and whether the direct product rule applies. If the answer is “subject to the EAR,” the item remains subject to the EAR wherever it is shipped, including via in-country transfers.
This is not merely academic. Companies often organize their operations around process labels — “final assembly,” “foreign build,” “functional testing” — and then impute jurisdictional consequences to those labels. BIS’s treatment of AMAT’s “dual‑build” shows how risky that can be: A partially assembled tool exported from the United States and finished abroad did not become non‑US; it stayed subject to the EAR, so re-exporting to a listed end user without a license was prohibited.
We have seen versions of this story in other enforcement matters, too. Consider BIS’s January 2026 action against Exyte, a Germany‑based contractor whose China affiliate facilitated “in‑country” transfers of EAR‑controlled items to SMIC. The company treated local purchasing and distributor deliveries as if they were insulated from US licensing because there was no cross‑border export, yet the entity list requirement still applied to transfers within China. BIS imposed a civil penalty and highlighted the absence of robust end‑user screening for domestic transfers.
A second key lesson pertains to the importance of end‑to‑end entity list risk management. Once an end user (or party to the transaction) is on the entity list, any export, re-export or transfer (in‑country) to that party of an item subject to the EAR requires a license. And it does not matter if the item is high- or low-tech. In the Exyte matter, the items included flowmeters, pressure transmitters, logic controllers and voltage‑sag protectors, hardly cutting‑edge chips but still subject to the EAR and thus restricted as to SMIC.
Documentation cuts both ways
BIS’s narrative relies heavily on contemporaneous internal communications — emails and checklists that mapped the “dual‑build” pathway, characterized risks and captured the business rationale for moving quickly. That should not surprise anyone who has lived through an export investigation; agencies reconstruct not just what happened but why it happened, and they often place weight on process artifacts that show intent, risk awareness or a willingness to proceed amid legal uncertainty. In the AMAT matter, BIS emphasized that the company operationalized its transformation theory through internal checklists and shipment controls, which undercut later arguments about ambiguity.
There is a broader through‑line here to earlier compliance lessons. In a 2021 export case involving Keysight Technologies, the US State Department alleged that Keysight violated the International Traffic in Arms Regulations, the primary US regulations governing exports of defense articles, by relying on an export jurisdiction self‑classification while a commodity jurisdiction request was pending.
Penalty drivers
Several factors likely drove the size and structure of the AMAT penalty:
- End‑user sensitivity: SMIC is subject to heightened scrutiny given US national security concerns around advanced semiconductor manufacturing in China. Violations involving listed Chinese semiconductor entities have drawn outsized attention and penalties.
- Transaction value and duration: BIS alleged 56 violations over roughly 20 months with total equipment value around $126 million. BIS ultimately assessed a penalty of twice that value consistent with agency appetite to make penalties more than a cost of doing business.
- Intent evidence: Internal documentation that shows deliberate structuring to navigate around perceived licensing obstacles can aggravate penalties, even absent classic “willfulness.” BIS drew on email traffic and other communications to tell a story of consciousness of risk and speed to execute.
- Deterrence objective: BIS framed this as a message case for companies using global build, assembly and testing models to serve restricted end users through third countries. By pairing a nine‑figure penalty with suspended denial and audits, BIS created ongoing leverage to verify remediation.
Practical takeaways for export compliance teams
The critical importance of understanding the item’s jurisdiction and classification
Only by knowing the jurisdiction and classification of an item can an exporter know what licensing requirements exist. This includes both any requirements for physical exports and sharing of technology internally. The government expects companies to self-classify items, but when in doubt, seek a formal determination (e.g., a jurisdiction and classification request from the State Department or a commodity classification request from BIS) before building a business process around a favorable assumption.
Treat entity list controls as following the item all the way to the end user
Whether the transaction is an export, a re-export through a partner’s facility or an in‑country delivery by a distributor, the entity list license requirement applies if the item is subject to the EAR and the listed party is a “party to the transaction.” Expand screening to all parties and all stages of the chain, not just the ship‑to address and not only cross‑border activities. The Exyte case shows how “in‑country” transfers can be just as risky as exports. And the compliance challenge related to entity list parties will only expand if the United States reintroduces the entity list 50% rule that was suspended by President Donald Trump in the fall of 2025.
Elevate ‘in‑country’ transfer controls
Many multinationals have robust screening for cross‑border exports but weaker processes for local procurement and distributor deliveries inside a single jurisdiction. BIS’s enforcement posture makes clear that is not sufficient. Treat domestic transfers in high‑risk countries as compliance events on par with exports: Screen the end user and document that screening and other diligence with support from the legal or compliance department.
Conclusion
BIS’ $253 million settlement with AMAT is not just a number; it is a blueprint for how the agency views jurisdiction, re-exports, end‑user controls and compliance overall in an era of globally distributed manufacturing. Any company that builds equipment across borders must ensure that its export compliance program reflects the challenging enforcement environment.
Thad McBride is a member at Bass, Berry & Sims PLC in the firm’s Washington, D.C. office. He counsels clients on compliance with and investigations involving the FCPA, economic sanctions and embargoes, export and import controls and other US trade laws.
Faith Dibble
