US Machine Tool Maker Fined for Sales to Restricted Entities in China, Russia

The penalty holds “accountable companies that do not put in place effective compliance programs to prevent exports to Entity Listed companies,” said Kevin Kurland, the Bureau of Industry and Security’s acting export enforcement chief.

Haas will pay BIS about $1.5 million -- and must complete at least two export compliance audits -- as part of a settlement to resolve 42 violations of the Export Administration Regulations. It will also pay the Office of Foreign Assets Control about $1.04 million to resolve 21 violations of U.S. sanctions against Russia.

A Haas spokesperson didn't immediately respond to a request for comment.

BIS Settlement

All the parts sold by Haas were designated as EAR99 -- generally technologies or other items that usually aren’t subject to specific license requirements -- such as gearboxes, magnetic encoder adapters and dual battery replacement kits, BIS said. But the agency said the items required a license, in part, because they were destined to Chinese and Russian entities on the Entity List.

BIS said Haas sold the machine tool parts to its “authorized distributors,” which were then used by the distributors to “service” the company’s computer numerical control (CNC) machines owned by six Chinese entities and two Russian ones. It sold the items to China from about April 2019 through about March 2024, and to Russia from about January 2020 through about November 2021. They were worth a combined $29,254 but “were used to service CNC machines worth far more,” BIS said.

BIS also said Haas violated export filing requirements when its third-party distributor in Russia used a freight forwarder to file “inaccurate and incomplete” Electronic Export Information in the Automated Export System from about November 2021 through about May 2022. The exports, also designated as EAR99, included some shipments that took place after the U.S. put in place sweeping new export controls against Russia for its invasion of Ukraine in February 2022, BIS said.

Although the EEI was submitted by the Russian distributor’s freight forwarder -- and not Hass -- BIS said Haas was liable. The California company “did not obtain any written authorization from the distributor affirming that the distributor would be responsible for all export compliance obligations for the shipments,” BIS said. “Accordingly, Haas maintained export compliance responsibility for the accuracy of the EEIs.”

BIS said some of the violations were caused by Haas compliance failures. Although the company carried out “manual screening” of customers against restricted party lists, including the Entity List, it did so only when it first exported a CNC machine to a customer through an authorized distributor, when there was a customer change request or when Haas became aware of a change in a customer's name or address. But the company didn’t always rescreen existing customers, so BIS said its system “failed to flag certain shipments of machine parts that were intended for ultimate delivery to customers in China and Russia on the Entity List at the time of shipment.”

BIS said Haas’ Entity Listed customers in China were: Beijing University of Aeronautics and Astronautics; Shandong Institute of Space Electronic Technology; China Electronics Technology Group Corporation; Wuxi Jiangnan Institute of Computing Technology; China State Shipbuilding Corporation; Yangzhou Marine Electronic Instrument Research Institute; and Anhui Bowei Chang An Electronics. The agency said Shandong Institute of Space Electronic Technology is a listed alias under the Entity List entry for China Academy of Space Technology 513 Research Institute, while Anhui Bowei Chang An Electronics is a “subordinate institution” listed under the entry for China Electronics Technology Group Corporation 38th Research Institute.

BIS said Haas’ Entity Listed customers in Russia were: DJSC Factory Krasnoe Znamya; and JSC LEMZ R&P Corporation.

OFAC Settlement

OFAC said Haas used Russia-based Abamet Management Limited as its regional distributor for Russian and Belarusian customers between 2002 and February 2022. From 2019 to 2022, it used Abamet to indirectly export $98,096 worth of items, including one CNC machine and 13 spare parts orders, to six sanctioned entities.

One of the entities was added to OFAC's Specially Designated Nationals List for producing and supplying “hydroacoustic equipment” to the Russian navy. The other five were owned 50% or more by people sanctioned for making weapons and equipment for the Russian military, for being a senior Russian government official, or for operating in Russia's energy sector.

OFAC also said Haas supplied those entities -- through its Russian distributor -- financial unlock codes needed to operate certain CNC machines. Haas provides those codes to certain customers after they’ve made all their payments under a payment installation plan, allowing the customer to input the code into the machine so it can run “continuously," OFAC said.

“The provision of these financial unlock codes were necessary for the Haas CNC machines purchased by the blocked end users to keep operating,” the agency said. “Without these codes, the machines would have otherwise eventually shut down automatically and become inoperable.”

The agency added that Haas “failed to conduct sufficient due diligence” on the ownership structures of seven of the eight designated customers, which could have revealed they were subject to U.S. sanctions. OFAC said Haas failed to rescreen the eighth customer against the SDN List for a spare parts sale, which would have shown that it was also sanctioned.

OFAC said some of Hass’ violations were egregious while others were “non-egregious.” It also said that even though Haas reported the violations to OFAC, “its submissions did not constitute a voluntary self-disclosure under the Enforcement Guidelines.”

The agency said it could have imposed a fine of more than $7.7 million but settled on a lesser amount after taking into account several mitigating factors, including the company’s prompt and significant remedial action” in response to the violations, including its “thorough” investigation and the improvements it made to its compliance program. OFAC said Hass hired more compliance employees, improved its compliance policies and procedures, bought a new screening tool to scrutinize customer ownership, put in place “comprehensive training requirements” for all employees, and established a new audit procedure for certain high-risk transactions.

The company is also “deploying tools to track a CNC machine’s location and ensure it is not moved without permission,” OFAC said.

The agency added that Haas was “highly cooperative” with OFAC’s investigation, agreed to extend the statute of limitations for its case and hadn’t received a penalty notice in the previous five years.

OFAC also pointed to several aggravating factors, including that Haas “failed to exercise due care in relation to the high-risk environment in which it was operating.” The company “failed to perform adequate due diligence,” especially “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," the agency said. It also noted that seven of the eight Russian end-users “were themselves designated or owned by” sanctioned people operating in the Russian defense or energy sectors.

The company’s “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,” OFAC said, adding that it “caused severe harm to the policy objectives” of U.S. sanctions.