Cadence Design Systems Fined Over $140 Million for Illegal Tech Exports to Chinese Military University

Nicola Iuvinale
1 giorno fa
Tempo di lettura: 5 min

Cadence Design Systems Inc., his declaration of guilt and the transactive agreement of over 140 million dollars for the illegal export of sensitive and intellectual semiconductor design tools to a Chinese military university subject to restrictions, the National University of Defese Technology (Nudt). Although the Nudt is present in the U.S. Entity list since 2015 due to its involvement in the supercalcolo for nuclear simulation and in military activities, Cadence and its Chinese subsidiary have been involved in a conspiracy continued over time, using indirect channels such as the Central South Cad Center (CSCC) and Phytium Technology Co. Ltd. to evade the US regulations on the administration of export administration (Ear). The report reveals tactics of concealment, confidential information on violations and sales incentives that facilitated these illegal transactions. The significant sanctions imposed by the Department of Justice and the Bureau of Industry and Security underscore the United States' intensified efforts to protect critical technologies and serve as a stark reminder to companies in strategic sectors to implement robust export compliance programs to avoid serious legal and financial repercussions.

by Gabriele and Nicola Iuvinale

Cadence Design Systems Inc., a global giant in the electronic design automation (EDA) sector, has reached a landmark agreement, pleading guilty and agreeing to pay over $140 million in criminal and civil penalties. The accusation: illegally exporting highly sensitive semiconductor design tools to a restricted Chinese military university. This case highlights intensifying U.S. efforts to protect critical technology and serves as a clear warning to companies operating in strategic sectors.

The joint announcement by the U.S. Department of Justice and the Bureau of Industry and Security (BIS) of the Department of Commerce reveals how Cadence violated export controls by selling EDA hardware, software, and semiconductor design intellectual property (IP) to the National University of Defense Technology (NUDT). NUDT, a Chinese military institution under the leadership of the Central Military Commission of the PRC, was added to the Department of Commerce's "Entity List" in February 2015. The reason was clear: its use of U.S.-origin components to produce supercomputers believed to support nuclear explosive simulations and military activities in China.

The Conspiracy and Detailed Violations

Cadence's admissions, supported by court documents, outline a prolonged conspiracy. From February 2015 to April 2021, Cadence and its Chinese subsidiary, Cadence Design Systems Management (Shanghai) Co. Ltd. (Cadence China), engaged in an operation to circumvent Export Administration Regulations (EAR). They provided EDA tools to NUDT through indirect channels: the Central South CAD Center (CSCC), known as an alias for NUDT, and Phytium Technology Co. Ltd. (Phytium), a closely associated entity, all without the necessary BIS licenses.

Cadence admitted that its employees in China directly installed EDA hardware on the NUDT campus in Changsha, and that NUDT personnel downloaded EDA software and IP technology from Cadence's portals. This activity continued despite Cadence and Cadence China's full awareness of NUDT's inclusion on the Entity List since February 18, 2015. An internal email from a Cadence export control manager, sent the same day NUDT was listed, had clearly indicated the need for licenses for sales.

Even more seriously, in March 2016, a Cadence China employee even drafted a presentation for a sales review meeting that explicitly acknowledged the U.S. embargo on four national supercomputer centers in China, including NUDT, due to their alleged use of U.S. microprocessor chips in "TianHe" supercomputing systems for nuclear explosive simulations. Furthermore, Cadence admitted that its employees working at the CSCC site on the NUDT campus were aware of the deep ties between CSCC and the Chinese military.

Concealment Tactics and Incentives for Illegal Sales

The report reveals a strategy of concealing the violations. Cadence China employees deliberately failed to disclose or hid from Cadence export compliance personnel that exports to CSCC were actually destined for NUDT or the Chinese military. A striking example was provided in May 2015, when Cadence's then-head of China sales instructed colleagues to refer to the customer as "CSCC" in English and only by Chinese characters as "NUDT," calling the matter "too sensitive." Similarly, in October 2019, an internal weekly Cadence China customer email was edited to remove a reference to the PRC People's Liberation Army in connection with CSCC.

This behavior was further incentivized by a sales commission system: employees of Cadence's subsidiaries, including those at Cadence China involved in sales to CSCC, received compensation packages that pushed them to achieve high sales quotas.

Phytium's Involvement and Late Discontinuation

In October 2020, despite full knowledge of prior illegal exports to NUDT, Cadence agreed to the assignment of CSCC's contracts for EDA tools to Phytium, another company closely linked to CSCC and NUDT. Cadence continued to transfer U.S.-origin EDA software and IP technology to Phytium until February 2021. Only in March 2021, following an internal compliance review, did Cadence place Phytium on "export hold" and discontinue transactions. Phytium was then formally designated on the Entity List in April 2021.

Historic Penalties and a Warning for Companies

The agreement with the Department of Justice imposes criminal penalties of nearly $118 million on Cadence. In parallel, BIS levied a civil penalty of over $95 million. Thanks to unprecedented coordination between the two agencies, a portion of the payments will be cross-credited, bringing the total net criminal and civil penalties to exceed $140 million.

John A. Eisenberg, Assistant Attorney General for National Security, stated: "Cadence has accepted responsibility for illegally exporting sensitive semiconductor design tools to a restricted Chinese military university... American ingenuity is one of our Nation's most precious assets, and the National Security Division will rigorously enforce U.S. export control laws to protect the technological advantage we enjoy."

Jeffrey I. Kessler, Assistant Secretary of Commerce for Industry and Security, reinforced the message: "Companies that violate export laws and compromise national security must be subject to severe penalties that deter future wrongdoing."

Cadence received partial credit for its cooperation in the investigation, which included collecting and disclosing relevant evidence and facilitating interviews. However, it did not receive full credit for failing to proactively obtain and disclose relevant communications and for failing to proactively facilitate interviews with certain key employees based in China. This resulted in only a 20% reduction from the maximum statutory penalty. The agreement is now awaiting final approval by a federal district court judge in the Northern District of California.

Broader Impact of Export Regulations

This case serves as a powerful reminder of U.S. authorities' increasing focus on export control violations, especially those involving sensitive technologies and foreign military or governmental actors. Companies operating in high-tech sectors, with subsidiaries or operations in restricted countries, must implement extremely robust export compliance programs to avoid devastating legal and financial consequences.

These regulations, and their increasingly strict enforcement, can significantly impact various companies and sectors:

Semiconductor and EDA Sector: Companies that design, produce, or supply chip manufacturing tools and software are under close scrutiny. They must ensure their end-customers are not restricted entities, even if operating through intermediaries.
Artificial Intelligence and Supercomputing: Technology related to AI and supercomputing is considered "dual-use," meaning it has potential both civilian and military applications. Companies in these sectors must be particularly vigilant.
Biotechnology and Advanced Materials: Sectors like biotechnology, advanced chemistry, and materials with military applications are also subject to export controls, as their innovations could be used for non-civilian purposes.
Companies with Foreign Subsidiaries: Multinationals with subsidiaries in countries like China must pay utmost attention to training local staff and implementing internal control systems that prevent violations of U.S. regulations, even if local operations appear compliant with the host country's laws. Responsibility often falls on the parent company.
Investments and Mergers/Acquisitions: Companies looking to acquire or invest in foreign entities, particularly those operating in sensitive technological sectors, must conduct thorough due diligence to identify any risks related to export controls.

In summary, the Cadence case is a clear signal that the U.S. government is determined to protect its technological leadership and national security, and companies are called to an unprecedented level of responsibility in managing their global supply chains and customer relationships.