CALDERWOOD & HARKNESS LLP 1301 K Street, N.W., Suite 1200 Washington, D.C. 20005
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Marcus Friedl, General Counsel, Halcyon Semiconductor AG
FROM: Howard Quinn, Liam Donahue, Steven Hollander
DATE: January 28, 2026
RE: Internal Investigation Findings and Recommendations — DOJ NSD-CES-2025-04871
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I. Executive Summary
Calderwood & Harkness LLP ("C&H") has completed its internal investigation into the matters encompassed by the U.S. Department of Justice, National Security Division inquiry designated NSD-CES-2025-04871 (the "Investigation"). This memorandum presents C&H's findings, analysis, and recommendations to the General Counsel of Halcyon Semiconductor AG ("HSAG" or the "Company"), including its wholly owned U.S. subsidiary, Halcyon Semiconductor, Inc. ("HSI"), and the Company's authorized Asia-Pacific distribution partner, Archipelago Component Solutions Pte. Ltd. ("Archipelago"). Our six principal findings are as follows:
1. Three post-Entity-List shipments to Zhonghe constitute apparent violations of the Export Administration Regulations ("EAR"). Three shipments to Zhonghe Microelectronics Co., Ltd. ("Zhonghe"), dated June 27, July 15, and August 3, 2025, were made after Zhonghe's addition to the Bureau of Industry and Security ("BIS") Entity List (Supplement No. 4 to Part 744 of the EAR) on June 14, 2025, without a required BIS license. These shipments constitute apparent violations of 15 C.F.R. § 744.11, which prohibits exports, reexports, and in-country transfers of items subject to the EAR to parties on the Entity List without a license from BIS, unless an applicable license exception is available (none applies here). The aggregate value of the three violative shipments is $1,197,000.
2. The violations were not willful. Based on exhaustive review of documentary evidence, electronic communications, and sworn witness interviews, C&H has found no evidence that any employee of HSAG, HSI, or Archipelago knowingly shipped controlled items to an Entity-Listed party. The root causes of the violations were systemic and compounding in nature: (a) a 12-calendar-day (9-business-day) delay by Sentinel Compliance Data Services Ltd. ("Sentinel") in updating Archipelago's restricted-party screening database, in breach of the 5-business-day update service-level agreement ("SLA") set forth in Section 4.3 of the Master Services Agreement between Archipelago and Sentinel dated February 15, 2020; (b) a process failure in Archipelago's order management system, which did not re-screen orders against the restricted-party database at the ship-confirm stage for previously pre-approved orders; and (c) a character-encoding mismatch in Sentinel's screening module that prevented correct association of Zhonghe's simplified Chinese trade name (中和微电子有限公司) with the romanized Entity List entry published in the Federal Register. This finding of non-willfulness is critical to the Company's mitigation position and to securing a civil (rather than criminal) resolution.
3. Eight pre-Entity-List Zhonghe shipments are not violations. The eight Zhonghe shipments completed between March 12, 2024 and May 22, 2025 occurred before Zhonghe's Entity List designation became effective. At the time of each shipment, no BIS license was required and no EAR violation occurred. These shipments require no further remedial action.
4. Six Lansheng shipments do not constitute demonstrable violations. DOJ's inquiry also encompasses six shipments to Lansheng Harborline Technologies Technologies Ltd. ("Lansheng"), based in Chengdu, PRC, under a military end-use theory pursuant to EAR § 744.21. After thorough investigation, C&H found no evidence that HSAG, HSI, or Archipelago had knowledge — actual or constructive — that Lansheng was procuring items for military end use or acting as a procurement front for a PRC defense research institute. Lansheng is not, and has never been, on the BIS Entity List, the Unverified List, or the Denied Persons List. Under § 744.21, absent either actual knowledge of military end use or a BIS "is informed" notification to the exporter, the license requirement is not triggered. BIS issued no such notification to HSAG, HSI, or Archipelago prior to any of the six Lansheng shipments. DOJ's position on Lansheng is legally weak and factually unsupported by the evidence available to the Company, and no concession should be made with respect to these shipments.
5. No OFAC violations. As detailed in C&H's November 22, 2025 memorandum to the General Counsel entitled "OFAC and Sanctions Exposure Analysis" (privileged), none of the end users identified in the DOJ inquiry, nor their principals, beneficial owners, or known affiliates, appear on any list administered by the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), including the Specially Designated Nationals and blocked Persons List ("SDN List"), the Sectoral Sanctions Identifications List ("SSI List"), and the Non-SDN Chinese Military-Industrial Complex Companies List ("NS-CMIC List"). No OFAC-administered sanctions program — whether country-based or list-based — is implicated by the transactions under review. DOJ has confirmed, in a communication from Assistant Chief Stephanie Kerrigan to C&H on December 19, 2025, that no referral to OFAC has been made or is contemplated.
6. Compliance program deficiencies require immediate remediation. The Phase I assessment conducted by Ashford Pennington LLC ("Ashford Pennington") and delivered by Dr. Miriam Hecht, Principal Consultant, on February 5, 2026, identified six principal deficiencies in the Company's export compliance program. These deficiencies are consistent with C&H's own findings during the course of this Investigation and are summarized in Section VI of this memorandum. Timely remediation of these deficiencies is essential both for operational risk reduction and for demonstrating good faith to DOJ in the context of the ongoing resolution discussions.
II. Investigation Methodology
Duration and Scope
The Investigation was conducted over a period of approximately 14 weeks, commencing on October 18, 2025 and concluding on January 24, 2026. The scope of the Investigation encompassed all transactions between the Company (including HSI and Archipelago acting as the Company's authorized distributor) and Zhonghe and Lansheng, respectively, from January 2023 through August 2025, as well as the Company's export compliance program, policies, procedures, and systems architecture as they relate to restricted-party screening and order processing for shipments destined for the People's Republic of China ("PRC").
A. Document Review
The Investigation team reviewed approximately 42,000 documents and 1.2 terabytes of structured data. Document sources included:
• HSAG's SAP GTS (Global Trade Services) system, which contains export classification records, license determination data, and restricted-party screening logs for shipments originating from HSAG's European facilities;
• HSI's email systems (Strathmore Data Systems and Ashgrove Software), encompassing email accounts of relevant sales, logistics, trade compliance, and management personnel for the period January 2023 through September 2025;
• Archipelago's order management system records, customer account databases, screening logs, and internal communications, obtained pursuant to contractual audit rights under Section 12.4 of the Master Distribution Agreement between HSAG and Archipelago dated September 1, 2019; and
• Sentinel Compliance Data Services Ltd.'s database update logs, version control records, and SLA compliance reporting, obtained through Archipelago's exercise of its audit rights under the Archipelago–Sentinel Master Services Agreement dated February 15, 2020.
Document review was conducted on C&H's internal document review platform (relativity) by a team of four C&H attorneys and six contract document reviewers, all of whom executed appropriate confidentiality and conflict-clearance undertakings. Documents were reviewed for relevance, privilege, and substantive content bearing on the questions of violation, willfulness, and compliance program adequacy. Predictive coding was employed to prioritize review of high-relevance documents, supplemented by manual review of all documents from key custodians.
B. Witness Interviews
C&H conducted a total of 17 witness interviews during the Investigation:
• 14 interviews of Company personnel (HSAG and HSI employees), covering individuals in the sales, trade compliance, logistics, regulatory affairs, and management functions;
• 3 interviews of Archipelago Component Solutions Pte. Ltd. personnel, conducted through Singapore counsel engaged by Kessler Pratt & Whitfield LLP's ("KPW") Singapore-office network, in accordance with Singapore legal-professional privilege requirements and the terms of Archipelago's cooperation obligations under the Master Distribution Agreement.
Key interviews included the following:
• Ryan Oshiro, Director, Asia-Pacific Sales, HSI — interviewed November 6, 2025 at C&H's Washington, D.C. office, with HSI in-house counsel present.
• Janet Liang, Trade Compliance Analyst, HSI — interviewed November 8, 2025 at C&H's Washington, D.C. office, with HSI in-house counsel present.
• Annika Brauer, Head of Trade Compliance, HSAG — interviewed November 12, 2025 by videoconference from HSAG's headquarters in Munich, Germany, with HSAG in-house counsel and KPW's Dr. Tobias Engel present.
• Pamela Neuhaus, Vice President, Regulatory Affairs, HSI — interviewed November 14, 2025 at C&H's Washington, D.C. office, with HSI in-house counsel present.
• Rajiv Sundaram, Managing Director, Archipelago Component Solutions Pte. Ltd. — interviewed December 3, 2025 at the offices of Singapore counsel, with Archipelago's external counsel present.
• Twelve additional interviews of sales, logistics, and compliance personnel from HSAG, HSI, and Archipelago were conducted between November 15, 2025 and January 10, 2026. These individuals are not named in this memorandum to protect confidentiality, but their identities and interview summaries are maintained in C&H's privileged investigation files and are available to the General Counsel upon request.
All interviews were conducted under Upjohn warnings, and interviewees were advised that C&H represents the Company (not the individual), that the interview was being conducted for the purpose of providing legal advice to the Company, and that the privilege belongs to the Company and may be waived at the Company's sole discretion.
C. Data Analysis
C&H, in coordination with its forensic data analytics consultants, conducted a systematic analysis of all shipments of items classified under Export Control Classification Number ("ECCN") 3A001 to PRC destinations from January 2023 through August 2025. This analysis involved cross-referencing shipment records against Entity List addition dates, Sentinel screening logs, Archipelago order approval timestamps, and ship-confirm records. The analysis identified the 11 Zhonghe shipments and 6 Lansheng shipments that form the universe of transactions at issue, confirmed the sequencing of Entity List updates relative to order processing and shipment dates, and established the timeline of the Sentinel SLA breach with precision.
D. Coordination with Ashford Pennington LLC
Throughout the Investigation, C&H maintained regular coordination with Ashford Pennington LLC, the independent export compliance consulting firm retained by the Company at C&H's recommendation to conduct a Phase I assessment of the Company's export compliance program. Dr. Miriam Hecht, Principal Consultant, led the Ashford Pennington engagement. Coordination meetings between C&H and Ashford Pennington were held approximately biweekly during the Investigation period. The Phase I assessment report was delivered on February 5, 2026, under attorney-client privilege as a communication made at the direction of counsel for the purpose of providing legal advice. The findings of the Phase I assessment are consistent with C&H's own findings and are summarized in Section VI of this memorandum.
III. Detailed Findings — Three Post-Entity-List Zhonghe Shipments
The three shipments discussed in this Section constitute the violations that C&H recommends be included in the Company's resolution with DOJ and BIS. Each shipment involved the same product (HCA-9100-A3 series analog-to-digital converter ("ADC") chipsets, ECCN 3A001), the same origin (HSAG's fabrication facility in Dresden, Germany), the same routing through Archipelago's Singapore warehouse, and the same destination (Zhonghe's facility in Shenzhen, PRC). The shipments are internally designated as Shipments #9, #10, and #11 within the chronological numbering of all 11 Zhonghe shipments reviewed during the Investigation.
A. Shipment #9: June 27, 2025 — $412,000
Order entry. The purchase order for Shipment #9 was entered into Archipelago's order management system on June 10, 2025. The order was initiated by Zhonghe's procurement department and received by Archipelago's Singapore office through the standard electronic purchase order interface.
Automated restricted-party screening. Upon order entry, Archipelago's order management system automatically initiated a restricted-party screen against Sentinel's database. On June 10, 2025, the screening returned a result of "CLEAR," indicating that no match was found between Zhonghe Microelectronics Co., Ltd. (or any known alias) and any party on the BIS Entity List, Denied Persons List, Unverified List, or any other restricted-party list maintained in Sentinel's database. This "CLEAR" result was accurate as of June 10, 2025 — Zhonghe had not yet been added to the Entity List, which did not occur until four days later.
Pre-approval. Based on the "CLEAR" screening result and the routine nature of the order, Archipelago's compliance officer, Mei Lin Tan, pre-approved the order on June 13, 2025. Pre-approval authorized Archipelago's warehouse to ship the order upon receipt of goods and confirmation of shipping logistics. The pre-approval was granted one day before Zhonghe's Entity List addition became effective.
Entity List designation. On June 14, 2025, BIS published a final rule in the Federal Register (90 Fed. Reg. 42118) adding Zhonghe Microelectronics Co., Ltd. to the Entity List (Supplement No. 4 to Part 744 of the EAR). The rule was effective upon publication. From that date forward, a BIS license was required for any export, reexport, or in-country transfer of items subject to the EAR to Zhonghe, with a license review policy of presumption of denial.
Sentinel database update delay. Sentinel did not push the updated Entity List data — reflecting the June 14, 2025 additions — to Archipelago's restricted-party screening system until June 26, 2025. This represented a delay of 12 calendar days (9 business days), exceeding the 5-business-day SLA specified in Section 4.3 of the Master Services Agreement between Archipelago and Sentinel dated February 15, 2020. Section 4.3 provides, in relevant part:
"Sentinel shall update the Screening Database to reflect changes to the BIS Entity List, the OFAC SDN List, and all other Covered Lists within five (5) business days of publication of such changes in the Federal Register or other official government publication, as applicable."
The 9-business-day delay constituted a material breach of this provision. C&H's review of Sentinel's internal logs indicates the delay was attributable to a staffing shortage in Sentinel's data operations team during the relevant period, though Sentinel has not provided a formal root-cause analysis.
Absence of re-screening at ship-confirm. Even after Sentinel pushed the updated Entity List data to Archipelago's system on June 26, 2025, Shipment #9 was not flagged. This is because Archipelago's order management system was configured to perform restricted-party screening only at the order entry stage. Once an order received a "CLEAR" screening result and was pre-approved, the system did not re-screen the order against the restricted-party database at any subsequent stage — including the ship-confirm stage, which is the final authorization step before physical release of goods from the warehouse. As a result, when the shipment was confirmed and released on June 27, 2025, the system relied on the June 13, 2025 pre-approval without any awareness that the consignee had, in the interim, been added to the Entity List.
Product details. Shipment #9 consisted of 480 units of HCA-9100-A3 series ADC chipsets, classified under ECCN 3A001. The commercial invoice value was $412,000.
Routing. The shipment followed the standard distribution pathway for Zhonghe orders: HSAG fabrication facility (Semperstrasse 15, 01069 Dresden, Germany) → Archipelago warehouse (18 Boon Lay Way, #07-142 TradeHub 21, Singapore 609966) → Zhonghe Microelectronics Co., Ltd. (12/F, Nanshan Digital Tower, Keji South Road, Nanshan District, Shenzhen 518057, PRC). The items were manufactured by HSAG in Dresden, shipped to Archipelago's Singapore bonded warehouse for consolidated distribution to Asia-Pacific customers, and then reexported from Singapore to Zhonghe's Shenzhen facility.
B. Shipment #10: July 15, 2025 — $387,000
New order. The purchase order for Shipment #10 was entered into Archipelago's order management system on July 8, 2025 — well after the June 14, 2025 Entity List effective date and after Sentinel's June 26, 2025 database update. Under any reasonable compliance framework, this order should have been flagged by automated screening as involving an Entity-Listed party.
Character-encoding mismatch. The reason the order was not flagged lies in a critical character-encoding mismatch between Sentinel's database and Archipelago's order management system. Sentinel's Entity List update, pushed on June 26, 2025, included Zhonghe's entry using the romanized name "Zhonghe Microelectronics Co., Ltd." and the address in English transliteration, consistent with the format used in the Federal Register publication. However, the Sentinel update did not include the simplified Chinese characters for Zhonghe's trade name (中和微电子有限公司). Archipelago's order management system, which was designed primarily for the Asia-Pacific market, stored Zhonghe's account name in simplified Chinese characters as the primary identifier, with the romanized English name stored in a separate alias field. Sentinel's screening module, as configured within Archipelago's system, matched incoming orders against the primary identifier field for Entity List checks but did not cross-reference the alias field. Because the primary identifier (simplified Chinese) did not match the Entity List entry (romanized English), the automated screening returned "CLEAR."
This was a configuration deficiency of significant consequence. It meant that any PRC customer whose primary account name was stored in simplified Chinese characters would not be matched against Entity List entries that were recorded only in romanized form — a systematic blind spot affecting the screening of all PRC-based restricted parties.
Product details. Shipment #10 consisted of 440 units of HCA-9100-A3 series ADC chipsets, ECCN 3A001. The commercial invoice value was $387,000.
The routing for Shipment #10 was identical to that described for Shipment #9 above.
C. Shipment #11: August 3, 2025 — $398,000
Same root cause as Shipment #10. Shipment #11 was affected by the identical character-encoding mismatch that caused the screening failure in Shipment #10. A new purchase order was entered into Archipelago's system on July 28, 2025. Automated restricted-party screening returned "CLEAR" due to the same failure to match Zhonghe's simplified Chinese primary identifier against the romanized Entity List entry in Sentinel's database.
discovery. The character-encoding error was not discovered until Janet Liang, HSI's Trade Compliance Analyst, conducted her quarterly compliance review in September 2025. During that review, Ms. Liang cross-referenced HSI's internal sales records for PRC-destined shipments against the then-current BIS Entity List and identified the three post-June-14 shipments to Zhonghe. She immediately escalated her findings to Pamela Neuhaus, VP Regulatory Affairs, on September 19, 2025. Ms. Neuhaus in turn notified the General Counsel's office, and C&H was engaged on October 2, 2025 to conduct this Investigation.
Product details. Shipment #11 consisted of 460 units of HCA-9100-A3 series ADC chipsets, ECCN 3A001. The commercial invoice value was $398,000.
The routing was identical to that described for Shipments #9 and #10 above.
D. Aggregate Value of Three Violative Shipments
The aggregate commercial invoice value of the three violative shipments is as follows:
The total of 1,380 units of HCA-9100-A3 series ADC chipsets, with an aggregate value of $1,197,000, represents the full scope of the Company's apparent EAR violations.
E. Knowledge Assessment
A central question in both the penalty determination and the distinction between civil and criminal liability is whether any individual within the Company, HSI, or Archipelago had knowledge of Zhonghe's Entity List status at the time of the three violative shipments. C&H conducted a thorough assessment of knowledge through both witness interviews and comprehensive review of electronic communications (email, instant messaging, and internal memoranda) for all relevant personnel. The results of that assessment are summarized below.
Ryan Oshiro (Director, Asia-Pacific Sales, HSI). Mr. Oshiro was the senior sales relationship owner for the Zhonghe account at HSI. He was responsible for managing the overall commercial relationship, including pricing, volume commitments, and product roadmap discussions. Mr. Oshiro stated in his interview on November 6, 2025, that he was not aware of Zhonghe's Entity List addition until notified by Pamela Neuhaus on September 19, 2025, approximately three months after the designation became effective. C&H's review of Mr. Oshiro's email correspondence for the period June 1 through September 19, 2025 confirmed this account. There are no emails, calendar entries, or instant messages reflecting any discussion of the Entity List, export restrictions, or regulatory concerns in connection with Zhonghe orders during this period. Mr. Oshiro stated that he relied on Archipelago's compliance screening process to identify any regulatory issues with specific orders and did not independently monitor BIS regulatory list changes. While this reliance reflects a broader compliance culture issue (discussed in Section VI), it is consistent with his functional role and does not suggest willful blindness.
Janet Liang (Trade Compliance Analyst, HSI). Ms. Liang discovered the discrepancy during her September 2025 quarterly compliance review. She credibly stated in her November 8, 2025 interview that she was not aware of Zhonghe's Entity List addition prior to that review. HSI's internal compliance procedures did not assign real-time Entity List monitoring to any specific individual; the function was assumed to be handled by Archipelago's automated restricted-party screening system, with HSI performing only retrospective quarterly checks. Ms. Liang's September 2025 review was the first occasion on which she cross-referenced Archipelago's PRC shipment records against the then-current Entity List. Her prompt escalation upon discovering the issue is consistent with good-faith compliance conduct and weighs favorably in the mitigation analysis.
Rajiv Sundaram (Managing Director, Archipelago). Mr. Sundaram was interviewed on December 3, 2025, through Singapore counsel, at the offices of the Singapore law firm engaged by KPW. Mr. Sundaram stated that Archipelago relied entirely on Sentinel for restricted-party list updates and that he was not aware of the Sentinel SLA breach or the character-encoding issue until notified by HSI in September 2025. Mr. Sundaram's account is corroborated by the absence of any internal Archipelago communications referencing the June 14, 2025 Entity List update or Zhonghe's designation during the period June 14 through September 19, 2025.
Mei Lin Tan (Compliance Officer, Archipelago). Ms. Tan pre-approved Shipment #9 on June 13, 2025, based on the "CLEAR" automated screening result generated on June 10, 2025. At the time of her pre-approval, Zhonghe had not yet been added to the Entity List; her approval was therefore correct as of the date it was given. Ms. Tan stated, through Singapore counsel, that she did not independently monitor Entity List additions and was not aware of Zhonghe's designation until informed by Mr. Sundaram in September 2025. There is no evidence to contradict this account.
All other interviewed personnel. The remaining 12 interviews conducted during the Investigation yielded no evidence of knowledge of Zhonghe's Entity List status during the relevant period (June 14 through August 3, 2025). No communications among sales, logistics, or compliance personnel at HSAG, HSI, or Archipelago suggest awareness of the designation or any intent to circumvent export controls.
F. Conclusion on Willfulness
Based on the totality of the evidence reviewed — including approximately 42,000 documents, 1.2 terabytes of structured data, and 17 witness interviews — C&H concludes that there is no evidence of willful conduct by any individual in connection with the three violative shipments. The violations were systemic in nature, caused by three compounding factors operating simultaneously:
(1) Vendor delay. Sentinel's failure to update Archipelago's restricted-party screening database within the contractual 5-business-day SLA, resulting in a 12-calendar-day (9-business-day) gap between the Entity List effective date and the database update — the direct cause of the screening failure for Shipment #9;
(2) Process gap. The absence of a re-screening function at the ship-confirm stage in Archipelago's order management system, which allowed Shipment #9 to proceed on the basis of a stale pre-approval even after the Entity List data was eventually loaded — a compounding factor for Shipment #9;
(3) Technology failure. The character-encoding mismatch between simplified Chinese primary identifiers in Archipelago's customer database and romanized Entity List entries in Sentinel's screening data, which prevented the screening module from associating Zhonghe's account with its Entity List designation — the direct cause of the screening failures for Shipments #10 and #11.
This finding of non-willfulness is critical to the Company's position in several respects. First, it supports the Company's argument for mitigation under the BIS voluntary self-disclosure and settlement guidelines, which provide for significant penalty reductions where violations are non-willful, promptly self-disclosed, and accompanied by remedial measures. Second, it supports the Company's position that a civil resolution is appropriate and that criminal prosecution is not warranted. Third, it provides the factual foundation for the Company's narrative to DOJ that the violations resulted from identifiable, remediable systems failures rather than from a culture of non-compliance or deliberate circumvention.
IV. Detailed Findings — Pre-Listing Zhonghe Shipments
The Investigation reviewed eight shipments to Zhonghe completed prior to Zhonghe's Entity List designation. These shipments were completed between March 12, 2024 and May 22, 2025, representing the first eight of the 11 total Zhonghe shipments in the investigation universe.
All eight shipments were lawful at the time of completion. Zhonghe was not on any BIS restricted-party list (Entity List, Denied Persons List, or Unverified List) during this period. The items shipped — HCA-9100-A3 series ADC chipsets classified under ECCN 3A001 — did not require a BIS license for export or reexport to Zhonghe, as no Entity List, military end-use, or other EAR license requirement was triggered at the time the shipments were made.
C&H reviewed the restricted-party screening records for all eight shipments and confirmed that each received a "CLEAR" automated screening result from Sentinel's database, consistent with Zhonghe's status at the time. The screening records are in order, and no anomalies or deficiencies were identified with respect to these eight transactions.
No further legal analysis or remedial action is required with respect to the pre-Entity-List Zhonghe shipments. The aggregate value of these eight shipments, combined with the three post-listing shipments, yields a total of 11 Zhonghe shipments with an aggregate value of approximately $4.41 million (average approximately $401,000 per shipment). DOJ has not alleged that the pre-listing shipments constitute violations, and there is no basis for such an allegation.
V. Detailed Findings — Lansheng Shipments
A. Overview
DOJ's inquiry encompasses six shipments to Lansheng Harborline Technologies Technologies Ltd. ("Lansheng"), a privately held company based in Chengdu, Sichuan Province, PRC. These six shipments were completed between April 8, 2024 and August 19, 2025, with an aggregate commercial invoice value of approximately $2.42 million (average approximately $403,000 per shipment). All six shipments involved HCA-9100-A3 series ADC chipsets, ECCN 3A001, routed through Archipelago's Singapore warehouse to Lansheng's Chengdu facility.
Lansheng is not, and has never been, listed on the BIS Entity List, the Unverified List, or the Denied Persons List. Lansheng does not appear on any OFAC-administered sanctions list, including the SDN List, the SSI List, and the NS-CMIC List. At the time of each shipment, Lansheng passed all automated restricted-party screens conducted by Sentinel through Archipelago's order management system, as well as any internal HSAG/HSI screening checks.
B. DOJ's Theory
DOJ's inquiry into the Lansheng shipments is premised on EAR § 744.21, which imposes a license requirement on exports of certain items — including items classified under ECCNs listed in Supplement No. 2 to Part 744, which includes ECCN 3A001 — to the PRC when the exporter "knows" or has "reason to know" that the item will be used in a "military end use" as defined in § 744.21(f). Under § 744.21(b), the license requirement is triggered when the exporter has knowledge of the military end use at the time of export, reexport, or transfer, or when BIS has informed the exporter that a license is required because of a military end-use concern (commonly referred to as an "is informed" notification).
DOJ has asserted, in communications with C&H during the course of the investigation and resolution discussions, that Lansheng may be a procurement front for a PRC defense research institute. DOJ's assertion is based on classified intelligence that has been shared with the Department of Justice but has not been disclosed to the Company or C&H. DOJ has identified Lansheng's Managing Director, Chen Weiming, as a person of interest in this context, though no specific factual allegations regarding Mr. Chen's activities have been shared with the defense team.
DOJ's nominal concern is the potential diversion of HCA-9100 series ADC components to PLA-linked radar and electronic-warfare programs. This concern is thematically similar to the concerns underlying Zhonghe's Entity List designation, though the legal basis differs: Zhonghe's case rests on the Entity List designation itself, which creates a bright-line license requirement regardless of knowledge, while the Lansheng theory requires proof that the Company had knowledge or reason to know of the military end use at the time of export.
C. Investigation Findings on Lansheng
C&H's investigation of the Lansheng shipments focused on whether any evidence exists that would support DOJ's theory that the Company had knowledge or reason to know of Lansheng's alleged military end-use or defense-sector connections. The investigation yielded the following findings:
1. Communications review. C&H reviewed all communications between HSI and Archipelago personnel, on the one hand, and Lansheng, on the other, for the period January 2023 through August 2025. This review encompassed email correspondence, purchase order communications, technical support inquiries, and internal discussions among HSI and Archipelago sales and compliance personnel regarding the Lansheng account. None of these communications contain any reference to military applications, defense research, PLA end users, radar systems, electronic-warfare programs, or any end use other than civilian infrastructure monitoring and telecommunications signal processing. The communications are entirely consistent with a routine commercial relationship involving the supply of ADC components for civilian telecommunications applications.
2. End-user certificates. Lansheng provided end-user certificates ("EUCs") for all six shipments. Each EUC states that the products will be used for "civilian telecommunications infrastructure signal processing" and contains standard certifications that the products will not be used for military end uses, will not be diverted to any end user or destination prohibited under applicable export control laws, and will not be reexported without required authorizations. While end-user certificates are not dispositive — a sophisticated diversion scheme would of course involve false certifications — the EUCs are one element of the totality of the evidence, and their consistent civilian-use representations are relevant to the Company's knowledge assessment.
3. No employee knowledge. None of the 17 individuals interviewed during the Investigation had any awareness of or reason to know about Lansheng's alleged connections to PRC military or defense entities. No HSAG, HSI, or Archipelago employee reported receiving any information, from any source, suggesting that Lansheng was engaged in military procurement, was affiliated with a PRC defense research institute, or was acting as a front for any entity other than itself. The absence of knowledge is corroborated by the documentary record, which contains no "red flags" — such as unusual order patterns, requests for technical specifications relevant to military applications, anomalous shipping instructions, or communications from third parties raising concerns — that would have put a reasonable exporter on notice of potential military end-use issues.
4. No BIS "is informed" notice. BIS did not issue an "is informed" letter, email notification, or any other form of communication to HSAG, HSI, or Archipelago regarding Lansheng prior to any of the six shipments. Under § 744.21(b)(2), the "is informed" mechanism is the regulatory tool by which BIS alerts exporters to military end-use concerns when the exporter may not otherwise have knowledge. The absence of an "is informed" notice is significant: it means that even if BIS or the intelligence Community possessed information suggesting Lansheng's military connections, the regulatory framework's mechanism for imputing that information to the exporter was not invoked. The Company cannot be held to have "reason to know" facts that the government itself chose not to communicate through the regulatory channels established for that purpose.
5. Screening results. Lansheng passed all restricted-party screenings at the time of each shipment. Both Sentinel's automated screening (through Archipelago's system) and any independent screening performed by HSAG or HSI returned "CLEAR" results. Lansheng has never appeared on any U.S. or multilateral export-control restricted-party list.
D. Conclusion on Lansheng
Based on the foregoing findings, C&H concludes that a violation of EAR § 744.21 cannot be established with respect to any of the six Lansheng shipments. The essential element of § 744.21 — knowledge or reason to know of military end use, or a BIS "is informed" notification — is absent. The Company had no actual knowledge of Lansheng's alleged military connections, no constructive knowledge based on red flags or other indicators, and received no notification from BIS that a license was required.
DOJ appears to recognize the weakness of this theory. In resolution discussions held on January 6 and January 15, 2026, DOJ's counsel (Assistant Chief Stephanie Kerrigan and Trial Attorney David Murakami) indicated that the Lansheng shipments will not be included in the penalty calculation in any proposed settlement. This is an important concession and should be memorialized clearly in any settlement documentation.
However, DOJ has indicated that it may reference the Lansheng shipments in the settlement agreement's factual recitals as context for the enhanced compliance undertakings that the Company will assume as part of the resolution. C&H's position is that such references are acceptable provided the language makes clear that no violation is alleged or admitted with respect to the Lansheng shipments, and that the references serve solely to explain the scope of the government's inquiry and the basis for the compliance enhancements.
Recommendation. C&H strongly recommends that the Company resist any concession, whether explicit or implied, that the Lansheng shipments constitute violations of § 744.21 or any other EAR provision. Including Lansheng in the settlement as violations would have three significant adverse consequences:
(a) Penalty increase. Including six additional violations would increase the civil penalty by an estimated $1.5 million to $2.5 million, based on the BIS base penalty of $330,947 per violation and the aggravating and mitigating factor analysis applied by DOJ to the Zhonghe violations.
(b) Adverse precedent. Conceding liability under § 744.21 without actual knowledge or a BIS "is informed" notification would create an adverse precedent — not only for the Company but for the export-control compliance community broadly — suggesting that exporters can be held liable for military end-use violations on the basis of classified intelligence that was never communicated to the exporter through regulatory channels. This would effectively transform § 744.21 from a knowledge-based standard into a strict-liability regime, which is inconsistent with the regulatory text and its administrative history.
(c) Future risk. If Lansheng is subsequently added to the Entity List — which is a realistic possibility given the government's apparent concerns — the Company's prior concession of Lansheng-related violations would complicate its ability to demonstrate good-faith compliance with respect to the pre-listing shipments and could be cited as an aggravating factor in any future enforcement action.
VI. Compliance Program Deficiencies
C&H's investigation and Ashford Pennington LLC's Phase I assessment, delivered by Dr. Miriam Hecht on February 5, 2026, identified six principal deficiencies in the Company's export compliance program. These deficiencies are interrelated and collectively created the conditions that allowed the three violative Zhonghe shipments to occur. Remediation of these deficiencies is both operationally necessary and strategically important in the context of the DOJ resolution, as the Company's demonstrated commitment to compliance enhancement will be a key factor in the penalty mitigation analysis and in any negotiation regarding the scope and duration of a compliance monitor.
The six principal deficiencies are as follows:
1. Over-reliance on third-party distributor screening. HSAG delegated restricted-party screening for its Asia-Pacific distribution channel entirely to Archipelago and, by extension, to Sentinel Compliance Data Services Ltd. as Archipelago's screening database vendor. Neither HSAG nor HSI performed independent, parallel screening of Archipelago's PRC customers against BIS or OFAC restricted-party lists. This created a single point of failure: if Archipelago's screening process failed — whether due to a database update delay, a configuration error, or any other cause — there was no independent check to catch the error. The Company's compliance architecture treated Archipelago as a trusted gatekeeper without building in verification mechanisms. This approach was inconsistent with BIS guidance on compliance best practices, which emphasizes that exporters retain ultimate responsibility for EAR compliance regardless of whether functions are delegated to distributors, agents, or third-party service providers.
2. No re-screening at ship-confirm. Archipelago's order management system was configured to perform restricted-party screening only at the order entry stage. Once an order received a "CLEAR" result and was pre-approved by the compliance officer, the system did not re-screen the order at any subsequent stage, including the ship-confirm stage — the critical control point at which goods are physically released for shipment. This process gap was the direct cause of the Shipment #9 failure: even though Sentinel's database was updated to include Zhonghe on June 26, 2025 (one day before the shipment), the shipment was not caught because the system did not perform a re-screen at the point of ship confirmation. In an environment where restricted-party list changes can occur at any time and orders may remain in the pipeline for days or weeks between entry and shipment, a single screening at order entry is insufficient. Industry best practice, as reflected in BIS guidance and in the compliance frameworks of major U.S. semiconductor companies, requires screening at multiple stages of the order-to-shipment cycle, including at minimum order entry, approval, and ship-confirm.
3. Inadequate SLA monitoring. HSAG did not audit or monitor Sentinel's compliance with the 5-business-day database update SLA set forth in Section 4.3 of the Archipelago–Sentinel Master Services Agreement dated February 15, 2020. While HSAG was not a direct party to the Archipelago–Sentinel contract, HSAG had constructive oversight obligations as the principal in the distribution arrangement and possessed contractual audit rights over Archipelago's compliance operations under Section 12.4 of the Master Distribution Agreement. Despite these rights, HSAG did not conduct any audit of Sentinel's SLA performance during the five-year term of the Archipelago–Sentinel agreement. The SLA breach that contributed to the Shipment #9 violation (a 12-calendar-day / 9-business-day delay in pushing the June 14, 2025 Entity List update, which was not pushed until June 26, 2025) went undetected until the broader investigation in the fall of 2025. A routine audit of SLA compliance would have identified this deficiency — and potentially earlier instances of SLA breaches — before a violation occurred.
4. Character-encoding deficiency. Archipelago's order management system stored PRC customer names in simplified Chinese characters as the primary identifier, reflecting the operational reality of Archipelago's Asia-Pacific customer base. Sentinel's Entity List database updates, however, used romanized (English) names, consistent with the format published in the Federal Register. Sentinel's screening module, as configured within Archipelago's system, matched incoming orders against the primary identifier field for Entity List checks but did not cross-reference the alias field where romanized names were stored. This character-encoding mismatch was the direct cause of the screening failures for Shipments #10 and #11, as the simplified Chinese primary identifier (中和微电子有限公司) was not matched against the romanized Entity List entry ("Zhonghe Microelectronics Co., Ltd."). The deficiency was systemic: it affected not only Zhonghe but potentially any PRC customer whose account was stored in simplified Chinese and whose romanized name appeared on a restricted-party list. The absence of multi-language, multi-script matching capability in the screening system represents a fundamental gap in the Company's compliance technology infrastructure.
5. No real-time Entity List monitoring. Neither HSAG nor HSI maintained a process for real-time monitoring of BIS Entity List additions. The Company's compliance framework relied on periodic (quarterly) retrospective reviews — conducted by Janet Liang at HSI — to identify discrepancies between the Company's customer base and the current Entity List. Between quarterly reviews, the Company's only check against Entity List additions was Archipelago's automated screening, which was itself subject to the deficiencies described above. The quarterly review cadence meant that Entity List additions effective in June 2025 were not reviewed until September 2025, a lag of approximately three months during which three violative shipments occurred. Real-time or near-real-time monitoring of Federal Register publications and BIS announcements, supplemented by automated alerts to compliance personnel, is a standard element of robust export compliance programs and was notably absent from the Company's framework.
6. Insufficient compliance staffing. HSI had only one trade compliance analyst — Janet Liang — responsible for screening oversight for all U.S. and reexport transactions involving HSI's product lines. This single analyst was responsible for monitoring restricted-party list compliance, conducting quarterly reviews, responding to compliance inquiries from sales and distribution personnel, and coordinating with Archipelago and HSAG's trade compliance function in Munich. This staffing level was inadequate given the volume and risk profile of HSI's PRC-facing business. HSI generated $1.14 billion in revenue in FY 2024, a significant portion of which involved exports or reexports to PRC end users. HSAG's consolidated PRC revenue in FY 2024 was approximately €612 million, representing approximately 14.3% of HSAG's €4.27 billion in consolidated revenue. A single compliance analyst cannot provide adequate oversight for a business of this scale, particularly given the heightened regulatory scrutiny of semiconductor exports to the PRC under the current U.S. export-control regime.
VII. Recommendations
Based on the findings set forth in this memorandum, C&H makes the following five recommendations:
1. Proceed with resolution discussions on the basis of the three Zhonghe violations. The evidence developed during the Investigation supports a strong mitigation case. The violations were non-willful, were promptly self-disclosed through the BIS voluntary self-disclosure ("VSD") process (VSD filed November 4, 2025, BIS reference OEE-VSD-2025-00319), and the Company has cooperated extensively with DOJ and BIS throughout the investigation, including the production of approximately 21,000 documents and the provision of two employee proffers on January 13, 2026 (Ryan Oshiro and Janet Liang, with Upjohn counsel present).
The civil penalty currently under negotiation is $3.25 million, which C&H believes is within an acceptable range given the nature and scope of the violations. The negotiation history is as follows:
• DOJ opening position: $5.5 million. This figure was based on the BIS statutory base penalty of $330,947 per violation (as adjusted for inflation), multiplied by three violations ($992,841 base), with aggravating factors applied for: (i) the strategic sensitivity of the products (ECCN 3A001 ADC chipsets with potential military applications); (ii) the PRC destination; and (iii) the aggregate value of the violative shipments ($1,197,000).
• C&H counter-position: $1.8 million. C&H's counter was based on the $992,841 base penalty with full mitigating credits for: (i) voluntary self-disclosure under the BIS VSD program; (ii) the absence of willfulness; (iii) the Company's extensive cooperation; (iv) the Company's commitment to comprehensive remedial measures; and (v) the systemic (rather than deliberate) nature of the compliance failures.
• Current convergence point: $3.25 million. This figure reflects DOJ's recognition of the significant mitigating factors, while preserving DOJ's position on the aggravating factors related to product sensitivity and destination. C&H believes further negotiation below $3.25 million is unlikely to succeed without concessions that would be adverse to the Company's interests (such as acceptance of Lansheng violations or a longer compliance monitor term).
C&H recommends that the Company authorize final resolution at the $3.25 million level, subject to the conditions set forth in Recommendations 2 through 5 below.
2. Resist any Lansheng-related violations in the settlement terms. For the reasons set forth in Section V.D above, the evidence does not support a finding that the Company violated EAR § 744.21 with respect to the six Lansheng shipments. Conceding Lansheng violations in the settlement would have three significant adverse consequences:
(a) It would increase the civil penalty by an estimated $1.5 million to $2.5 million, reflecting six additional violations at the base penalty rate with applicable aggravating and mitigating factors;
(b) It would create adverse precedent suggesting that exporters can be held liable under § 744.21's military end-use restrictions without actual knowledge of the military end use and without a BIS "is informed" notification — a result that is inconsistent with the plain text of the regulation and that would significantly expand the scope of § 744.21 liability beyond its intended parameters; and
(c) It would complicate the Company's position in any future enforcement action if Lansheng is subsequently added to the Entity List, as the prior concession could be cited by BIS or DOJ as evidence of a pattern of non-compliance or as an aggravating factor in penalty determination.
C&H recommends that the Company take the firm position that Lansheng shipments will not be included in the settlement as violations, and that any reference to Lansheng in the settlement agreement's factual recitals be limited to context for the compliance enhancements, with explicit language confirming that no violation is alleged or admitted.
3. Implement Ashford Pennington's recommended remedial measures in advance of settlement. The Company's ability to demonstrate that it has already taken concrete remedial steps — rather than merely promising future improvements — will significantly strengthen its position in the penalty mitigation analysis and in negotiations regarding the scope and duration of any compliance monitor. C&H recommends that the following measures, identified by Ashford Pennington's Phase I assessment and consistent with C&H's own findings, be implemented on an expedited basis:
• Dual screening. HSAG and HSI shall perform independent restricted-party screening of all Archipelago PRC-destined orders in parallel with Archipelago's own screening. This eliminates the single-point-of-failure risk inherent in the current framework and ensures that HSAG/HSI maintain direct oversight of restricted-party compliance for their most sensitive market.
• Automated re-screening at every stage of the order-to-shipment cycle. Archipelago's order management system shall be reconfigured to perform automated restricted-party screening at each of the following stages: order entry, order approval, ship-confirm, and (where applicable) post-shipment verification. Any change to the restricted-party screening database during the order lifecycle shall trigger an automatic re-screen of all open orders.
• Reduction of the Sentinel SLA. The database update SLA in the Archipelago–Sentinel Master Services Agreement shall be amended from 5 business days to 2 business days, with automated alerts to Archipelago's and HSAG's compliance teams if the SLA is breached. HSAG shall conduct semi-annual audits of Sentinel's SLA compliance.
• Multi-language / multi-script screening matching. Sentinel's screening module shall be upgraded to perform matching across romanized, simplified Chinese, and traditional Chinese character sets, ensuring that Entity List entries are matched against customer records regardless of the script or language in which the customer's name is stored. This remediation directly addresses the character-encoding deficiency that caused the screening failures for Shipments #10 and #11.
• Addition of compliance personnel. HSI shall add at least two full-time-equivalent ("FTE") trade compliance positions to support screening oversight, real-time regulatory monitoring, and coordination with Archipelago and HSAG's trade compliance function. The additional staff shall be in place prior to the effective date of any settlement agreement.
• Quarterly compliance audits. HSAG's internal audit function shall conduct quarterly compliance audits of Archipelago's restricted-party screening operations, database update processes, and order management system configurations. Audit findings shall be reported to HSAG's Head of Trade Compliance and to the General Counsel.
4. Accept a compliance monitor for 18 months as part of the resolution. While the Company would prefer to avoid the imposition of an independent compliance monitor, C&H recognizes that a monitor is a standard element of NSD settlements in export-control cases, particularly where the violations involved shipments to Entity-Listed PRC parties and where the compliance program exhibited multiple systemic deficiencies. Resistance to a monitor is unlikely to succeed without significant concessions on penalty or other terms that would be more adverse to the Company's interests.
C&H recommends that the Company accept a compliance monitor for a period of 18 months, subject to the following parameters:
• The monitor shall be selected from a DOJ-approved list of qualified export-control compliance professionals. The Company shall have the right to object to any proposed monitor for cause (e.g., conflicts of interest, lack of relevant expertise).
• The monitor's scope shall be limited to the Company's export compliance program as it relates to controlled items (ECCN-classified) destined for PRC, Russia, and EAR Country Group D:1 and D:5 destinations, and shall not extend to general corporate compliance or areas unrelated to export controls.
• The estimated cost of the monitor engagement is $800,000 to $1,200,000 over the 18-month term, based on comparable NSD monitor engagements.
• The monitor period shall be part of a broader 3-year Enhanced Compliance Period, which shall also include: (i) annual export-compliance audits by an independent third party (in addition to the monitor's activities during the first 18 months); (ii) automated restricted-party screening for all shipments to PRC, Russia, and EAR Group D:1/D:5 countries; and (iii) mandatory training for all PRC-facing sales and distribution personnel, to be conducted semi-annually.
5. Coordinate disclosure with external advisors. The settlement of this matter will trigger disclosure obligations under multiple regulatory frameworks and contractual commitments. C&H recommends that the Company coordinate the following disclosures in a timely and consistent manner:
• Securities disclosure (U.S.). Braxton Merritt LLP (Elena Voss) should be consulted regarding the Company's obligations under SEC Regulation FD and applicable securities disclosure requirements, including the timing and content of any Form 6-K filing or press release related to the settlement. Ms. Voss should advise on whether the settlement constitutes material information requiring immediate disclosure under Regulation FD or may be disclosed in the ordinary course with the Company's next periodic filing.
• Frankfurt Stock Exchange / EU disclosure. Kessler Pratt & Whitfield LLP (Dr. Tobias Engel) should be consulted regarding HSAG's ad-hoc disclosure obligations under Article 17 of the Market Abuse Regulation ("MAR"), which requires issuers listed on EU-regulated markets to disclose inside information "as soon as possible." Dr. Engel should also coordinate with the Company regarding any parallel German or EU export-control matters with the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, or "BAFA"), as the underlying shipments originated from HSAG's Dresden facility and may implicate German and EU dual-use export control regulations.
• Financial reporting. Pinnacle Ridgeway Partners (Graham Sinclair) should be engaged to advise on the appropriate IAS 37 contingency provision for the FY 2025 audit. The $3.25 million civil penalty, combined with total estimated professional fees of $3.7 million to $4.3 million (encompassing C&H fees, Ashford Pennington fees, Singapore counsel fees, KPW fees, and estimated monitor costs), should be evaluated against the Company's materiality threshold. HSAG's materiality threshold is €15 million. The $3.25 million civil penalty and the estimated professional fees are individually below this threshold, but collectively the total exposure — including the penalty, professional fees, remediation costs, and monitor costs — approaches materiality and should be assessed holistically.
• Credit facility notice. The Company has already provided material-litigation notice to Lodestar National Bank (Danielle Osborne), dated November 1, 2025, under Section 6.02(b) of the $300 million revolving credit facility agreement. The Company should provide an updated notice to Lodestar upon execution of any settlement agreement with DOJ, as the settlement may constitute a "Material Litigation Event" or trigger other reporting obligations under the credit facility.
Closing
Howard Quinn, Liam Donahue, and Steven Hollander are available to discuss the findings and recommendations set forth in this memorandum with the General Counsel in person at C&H's Washington, D.C. office, at HSAG's Munich headquarters, or by secure videoconference, at the General Counsel's convenience. We recommend scheduling such a discussion at the earliest opportunity, as the resolution discussions with DOJ are proceeding on an accelerated timeline and several of the recommendations herein — particularly the implementation of remedial measures in advance of settlement — require prompt action.
We reiterate that this memorandum, and all underlying investigation materials — including interview memoranda, document review analyses, data analysis workpapers, and communications with Ashford Pennington LLC — are protected by the attorney-client privilege and the work product doctrine. This memorandum should not be disclosed to any person or entity outside HSAG's legal department, including to other HSAG or HSI business units, to Archipelago, to the Company's auditors, or to regulatory authorities, without the prior written approval of C&H. Any voluntary disclosure of this memorandum or its contents could result in a waiver of privilege that would be adverse to the Company's interests in the ongoing DOJ matter and in any future proceedings.
CALDERWOOD & HARKNESS LLP
By: ________
Howard Quinn, Partner
By: ________
Liam Donahue, Partner
By: ________
Steven Hollander, Counsel
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED — ATTORNEY WORK PRODUCT This memorandum was prepared by Calderwood & Harkness LLP at the request of the General Counsel of Halcyon Semiconductor AG for the purpose of providing legal advice in connection with DOJ NSD-CES-2025-04871. It is not intended for distribution beyond HSAG's legal department without C&H's prior written approval.
| Shipment | Date | Units | Value |
| #9 | June 27, 2025 | 480 | $412,000 |
| #10 | July 15, 2025 | 440 | $387,000 |
| #11 | August 3, 2025 | 460 | $398,000 |
| Total | 1,380 | $1,197,000 |