On July 28, various arms of the U.S. government announced concurrent export enforcement resolutions involving Cadence Design Systems, Inc. (Cadence), a California-based software and technology firm. Cadence will pay over $140 million in combined net criminal and civil penalties and forfeiture.
Involving the U.S. Attorney’s Office for the Northern District of California (NDCA), the Counterintelligence and Export Control Section (CES) of National Security Division of the Department of Justice (DOJ), and the Department of Commerce, Bureau of Industry and Security (BIS), the resolutions focus on misconduct by a small number of employees at an indirectly owned and wholly controlled Chinese subsidiary of Cadence (Cadence China). The government asserted that those employees knowingly and willfully transferred hardware, software, and technology to entities in China in violation of the U.S. Export Administration Regulations (EAR). The EAR, administered by BIS, are the main U.S. regulations that govern exports, re-exports and – importantly – in-country transfers of U.S.-origin commercial items.
This enforcement action serves as a reminder of the need to ensure compliance control over non-U.S. subsidiaries, particularly as the Trump administration intends to use trade enforcement as a tool to promote national security.
Conduct Involved Conspiracy to Violate Export Controls
According to the government, Cadence and Cadence China participated in a conspiracy to violate export control laws by providing electronic design automation (EDA) hardware, software, and semiconductor design technology to restricted parties without the necessary EAR licenses. Exports and transfers (hereinafter, exports) were made to affiliates of the National University of Defense Technology (NUDT), a Chinese university under the authority of China’s Central Military Commission. BIS added NUDT to its Entity List in February 2015 for its role in developing supercomputers “believed to support nuclear explosive and military simulation activities.” A license is required for the transfer to a party on the Entity List of nearly any U.S.-origin item. The EAR also prohibit proceeding with a transaction with knowledge that a violation will occur.
As stated in Cadence’s plea agreement with the DOJ and settlement agreement with BIS, between 2015 and 2020, Cadence and Cadence China made at least 56 unlawful exports to NUDT through an entity called Central South CAD Center (CSCC). According to the government, when Cadence became aware that CSCC was an alias for NUDT, Cadence China pivoted and continued the business with an entity called Phytium Technology Co., Ltd. (Phytium). The government asserts that Cadence China was aware, and that Cadence itself had reason to know, that Phytium was affiliated with both CSCC and NUDT – and in fact Phytium was ultimately added to the Entity List.
Knowledge of Export Control Requirements
According to the plea agreement, Cadence’s export control officer notified employees at Cadence and Cadence China of NUDT’s addition to the Entity List in 2015 and specified that “export licenses will be required if sales are made” to that entity. Cadence and Cadence China continued to export to NUDT, using the alternate name CSCC: for example, Cadence China employees requested that items for CSCC be delivered to NUDT addresses and corresponded about CSCC businesses with NUDT personnel.
Concealment of and Failure to Disclose Activity
The plea agreement states that Cadence China concealed from Cadence that CSCC was an alias for NUDT. Notably, after NUDT was added to the Entity List, Cadence’s then-head of sales in China instructed personnel through email to refer to the customer as “CSCC” in English and to use only Chinese characters when referencing NUDT, noting that “the subject [was] too sensitive.” Additionally, correspondence and business records indicated that Cadence China viewed CSCC and Phytium as functionally the same entity, e.g., counterparties had email addresses under both company domains.
Additional Violations Unrelated to the Conspiracy
Unrelated to the illegal exports to NUDT, BIS also charged Cadence with three additional violations for permitting customers to download technology subject to the EAR after those customers had been added to the Entity List – even though Cadence’s compliance program mandated the termination of transactions with parties added to the Entity List.
Enforcement Involved Multiple U.S. Government Agencies and Departments
According to press releases issued by the U.S. Attorney’s Office for NDCA and BIS, Cadence agreed to plead guilty to criminal charges, as well as pay criminal penalties of nearly $118 million and administrative penalties of over $95 million. Both DOJ and BIS agreed to credit a portion of their respective fines against payments made to the other agency. This resulted in aggregated net penalties and forfeiture of over $140 million.
Cadence did not voluntarily disclose the matter, and so did not receive any related mitigation of the administrative penalty imposed by BIS. DOJ’s penalty reflects its consideration of Cadence’s partial cooperation and remedial efforts, such as enhancing its export compliance program, though Cadence did not receive full cooperation credit because it failed to proactively provide communications or facilitate interviews with its China-based employees.
Takeaways
Increasing Export Enforcement and Continued Focus on China
President Trump’s America First Investment Policy, issued in February, specifically identified China as a foreign adversary that “[exploits] United States capital to develop and modernize its military, intelligence, and other security apparatuses.” China as adversary was a recurring theme in March during BIS’ annual Update Conference on Export Controls and Policy, at which Secretary of Commerce Howard Lutnick also stated there will be a “dramatic” increase in enforcement for violations of the EAR. Similarly, in May, DOJ Criminal Division Chief Matthew Galeotti released a memo that prioritized investigation of ten high-impact areas, including “trade” and “national security.”
Benefits of Voluntary Self-Disclosure
The severe penalties imposed in this matter underscore the value of voluntary self-disclosure of export violations. Both the DOJ and BIS have promoted the benefits of prompt disclosure of potential administrative and criminal violations, including as described in a March 2023 note. Notably, both the DOJ and BIS observed, in detailing how penalties were calculated, that Cadence did not voluntarily self-disclose. For comparison, in 2024, the DOJ declined to prosecute Sigma Aldrich, Inc. in a matter involving conspiracy to divert chemicals to China in violation of export control laws. While the DOJ cited several factors in deciding to decline prosecution, central to the decision was Sigma Aldrich’s prompt voluntary self-disclosure and exceptional ongoing cooperation.
Importance of Top-Down, Fulsome Compliance Programs
Ultimately, the government held Cadence liable for the actions of a – seemingly small – group of employees at a non-U.S. subsidiary. To be clear, the long arm of U.S. export controls means that the U.S. government has jurisdiction to, and regularly does, charge non-U.S. parties that export or otherwise transfer U.S.-origin items in violation of U.S. law. That the U.S. parent company was the primary target in this matter may suggest a more aggressive approach by enforcement authorities to hold parent companies accountable for the actions of their subsidiaries (even if outside of the United States). Correspondingly, companies and compliance personnel need to ensure that their compliance programs reach all locations and operations.
