Importance: High
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
Marcus,
I wanted to get you a prompt update following our call this afternoon with Adrienne Kolb (Senior Trial Attorney, DOJ NSD/CES) and Jonathan Weir (Trial Attorney, DOJ NSD/CES). The call focused on DOJ's responses to the redline we submitted on March 10, 2026 of the draft administrative settlement agreement (DOJ's draft was dated March 3, 2026), reference number NSD-CES-2025-04871. The bottom line is that we are in very good shape. Below is a detailed summary of DOJ's positions on each of our ten priority redlines.
**1. Lansheng Carve-Out (Recitals, Article V §5.1, Article VII §7.1)**
DOJ **accepted** our position — and this was our most important redline. The outcome is excellent. The agreement will not include any finding or admission of a violation with respect to the six shipments to Lansheng Harborline Technologies Technologies Ltd. (Chengdu, PRC). The recitals will reference the Lansheng shipments as factual context for the compliance enhancements, but the language will make clear that no violation is admitted. The release in Article VII will expressly cover Lansheng-related conduct.
As you know, our internal investigation found no evidence that HSAG, HSI, or Archipelago had knowledge of Lansheng's alleged military end-use connections. Lansheng is not on the Entity List. DOJ's theory under EAR § 744.21 required either knowledge or a BIS "is informed" notice, neither of which existed. Those six shipments — totaling $2.42 million — are thus excluded from the violations and from the penalty calculation. This is the right result, and DOJ recognized it.
**2. Article III — No-Prosecution, No-Denial, No-OFAC-Referral**
DOJ **accepted** both the no-criminal-prosecution commitment and the no-denial-of-export-privileges commitment without modification.
On the OFAC non-referral provision (§3.3), Kolb pushed back, noting that DOJ cannot formally bind OFAC as a separate agency of the U.S. Department of the Treasury. We proposed compromise language under which DOJ will represent that "based on information currently known to DOJ NSD/CES, the Department does not intend to make a referral to OFAC in connection with the conduct described in this Agreement." This is slightly weaker than our original redline, which sought an unconditional commitment, but it is still meaningful and, frankly, reflects the institutional reality. Kolb agreed to take this language to her supervisor. I expect acceptance.
For context, our OFAC and sanctions exposure analysis (completed November 22, 2025) confirmed no OFAC violations. All PRC end users — Zhonghe, Lansheng — and their principals (Chen Weiming, Zhang Haifeng, Li Wenxiu, Wang Peng), as well as Archipelago, screened negative on the SDN List, SSI List, and NS-CMIC List. No OFAC-administered sanctions program is implicated. Kolb had previously confirmed on our October 14, 2025 and November 12, 2025 calls that no OFAC referral had been made or was contemplated.
**3. Monitor Term — 18 Months**
DOJ **accepted** the 18-month monitor term, reduced from 24 months in DOJ's original draft. This was already part of the resolution-in-principle framework we agreed on February 24, 2026, so no surprise here. The monitor will be selected from the DOJ-approved candidate list and will operate within the 3-year Enhanced Compliance Period.
**4. Reporting Frequency — Semi-Annual vs. Quarterly**
DOJ **counter-proposed**: quarterly reporting for the first 12 months, transitioning to semi-annual reporting for the remainder of the 3-year Enhanced Compliance Period. Our redline had sought semi-annual reporting throughout. I view this as a reasonable compromise — the quarterly cadence during the first year gives DOJ comfort that the monitor and compliance program are functioning, and the step-down to semi-annual acknowledges the burden on the Company. I recommend acceptance.
**5. Payment Term — 60 Days**
DOJ **accepted** the 60-day payment term for the $3,250,000 civil penalty, extended from the 30-day term in DOJ's original draft. As we discussed, the extended timeline is necessary to accommodate HSAG's internal treasury approval processes in Glenrock Assurance and the EUR/USD currency conversion. Supervisory Board-level authorization is required for expenditures of this nature, and 30 days was simply not practicable. No issues here.
**6. Public Disclosure Advance Notice (Article VIII §8.6)**
DOJ **accepted** our 5-business-day advance notice provision for any public disclosure by DOJ. Kolb confirmed that DOJ plans to issue a press release upon execution of the settlement but will coordinate timing with the Company. She understood the MAR Article 17 issue — HSAG's ad-hoc disclosure obligation as a publicly listed company on XETRA (ticker: HCA) under the Frankfurt Stock Exchange rules. If DOJ issues a press release, HSAG must simultaneously publish an ad-hoc notice under MAR Article 17. The 5-business-day window gives us the runway to prepare and coordinate that disclosure. This was a straightforward discussion, and Kolb was constructive.
**7. Penalty Arithmetic Narrative (Former §2.4 / Replacement §2.3)**
DOJ wants to include some narrative regarding the penalty calculation in the agreement but accepted that it does not need to be as detailed as their original draft, which had laid out the base penalty of $330,947 × 3 violations = $992,841 along with specific aggravating factors and mitigating factors. We agreed to work on compromise language that references the base penalty framework and mitigating factors — specifically, the voluntary self-disclosure filed November 4, 2025 (BIS VSD reference OEE-VSD-2025-00319), substantial cooperation including 21,000 documents produced in two productions, the non-willful nature of the conduct, prompt remedial actions, and no prior enforcement history — without locking in specific multipliers. Liam Donahue and Jonathan Weir will exchange drafts on this language early next week.
**8. Employee Protection Scope (§3.1)**
DOJ **counter-proposed** limiting employee protection to "current and former officers and employees of the Company, based on conduct known to DOJ NSD/CES as of the Effective Date." This is narrower than our original draft, which sought protection based on all conduct arising out of or relating to the transactions at issue, regardless of DOJ's current knowledge. That said, the DOJ formulation is standard in these agreements, and in this case I am comfortable with it. No individual criminal prosecution is contemplated. As you will recall, Ryan Oshiro (Director, Asia-Pacific Sales, HSI) and Janet Liang (Trade Compliance Analyst, HSI) provided voluntary proffers at our D.C. office on January 13, 2026, and neither Kolb nor Weir has signaled any individual-level concerns. I recommend acceptance.
**9. Breach Remedies (Article VI §6.2)**
DOJ insisted on retaining the ability to seek additional monetary penalties in the event of material breach — we were not going to get them off this entirely, and we did not expect to. However, we secured two important concessions: (a) DOJ agreed to cap additional penalties at $1,000,000, and (b) DOJ agreed to require a finding of material breach (not mere technical non-compliance) before additional penalties or other remedies can be sought. This is livable. It gives the Company a clear standard and a defined ceiling, while giving DOJ a meaningful enforcement backstop.
**10. Release Scope (Article VII §7.2)**
DOJ **accepted** our narrower carve-out language. The agreed formulation provides that the release's exception applies to "conduct not known to DOJ NSD/CES as of the Effective Date," rather than DOJ's original broader language of "any conduct not described in this Agreement." This is an important distinction. Under DOJ's original language, conduct that DOJ knew about but that was not specifically described in the agreement text could have fallen outside the release. Under the agreed language, the Company gets genuine finality for all known conduct, while DOJ preserves its ability to pursue any concealed violations that come to light later. This is the right balance.
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**Overall Assessment**
We are very close to final. Of our 10 priority redlines, DOJ accepted 7 outright, offered reasonable compromises on 2 (reporting frequency and breach penalties), and is taking 1 to a supervisor (the OFAC non-referral language in §3.3). I expect an agreed draft within 7–10 business days.
**Next Steps**
- **Liam Donahue and Jonathan Weir** will exchange the penalty-narrative language and compromise §3.3 (OFAC non-referral) language by **March 17, 2026**.
- **I will circulate a clean revised draft** to you and the team by **March 20, 2026** (target).
- **Board/Audit Committee authorization** is needed by late March. Please confirm the planned meeting date. Authorization will be required for: (a) the civil penalty amount (not to exceed $3,500,000, providing $250,000 of negotiating room above the current $3,250,000 figure); (b) the monitor engagement; (c) signatory designations — Marcus Friedl for HSAG and Derek Tran for HSI; and (d) the disclosure protocol.
- **Coordination call with Elena Voss (Braxton Merritt LLP, corporate/securities counsel) and Dr. Tobias Engel (Kessler Pratt & Whitfield LLP, German/EU export control counsel)** should be scheduled for the week of March 17 to prepare the disclosure protocol. We need to address SEC Regulation FD considerations and nail down the MAR Article 17 ad-hoc notice timing and content.
- **Ashford Pennington (Dr. Miriam Hecht)** should be informed of the monitor provisions so she can begin preparing the transition from the Phase I/Phase II compliance review work to monitor-readiness. I can loop her in directly if you prefer, or you can handle that on your end — let me know.
Marcus, please let me know if you have any questions or if the Board needs additional information before the authorization vote. Happy to set up a call over the weekend if useful.
Best regards, Howard
Howard Quinn Partner
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