SEC has stepped up scrutiny of tech firms over potential ties to Syria

Securities regulators have been increasingly probing ties between tech firms and war-torn Syria, where a strict economic embargo remains in place.

As of yet, none of the inquiries initiated by the U.S. Securities and Exchange Commission seems to have resulted in legal actions or findings of any wrongdoing on the part of tech companies. But the increased focus over the past year seems to indicate that the SEC is intent on sending clear reminders to tech firms to refrain from doing any business in Syria.

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Names of the tech firms that have been questioned so far were revealed in a series of publicly available comment letters made as part of routine securities filings. The recipients of these “comment letters” related to the topic of Syria (and in some cases, Sudan) include:

• LinkedIn
• IBM
• T-Mobile
• ARM Holdings
• Splunk
• Twilio
• Taiwan Semiconductor Manufacturing
• STMicroelectronics
• Acacia Communications
• Texas Instruments
• Schlumberger
• Qualcomm
• Oracle
• Maxim
• Gravity
• Glu Mobile
• TripAdvisor
• Planet Payment
• NCR
• NeoPhotonics
• AVG Technologies
• Flextronics

The U.S. government has had economic sanctions in place against Syria that date back to 1979, when the country was designated a state sponsor of terrorism. At various times since then, those sanctions have been modified.

But in April 2011, with the Syrian Civil War breaking out, President Obama signed an executive order that “prohibits new investments in Syria by U.S. persons, prohibits the exportation or sale of services to Syria by U.S. persons, prohibits the importation of petroleum or petroleum products of Syrian origin, and prohibits U.S. persons from involvement in transactions involving Syrian petroleum or petroleum products.”

While the SEC is always monitoring disclosures related to business in troubled regions, it appears it was concerned by a recent announcement from China’s Huawei over a telecom deal it struck with the government of Syria.

Indeed, Huawei was also subpoenaed in June by the U.S. Department of Commerce in connection with that deal.

The SEC wants to make it clear that any tech company listed on a U.S. stock exchange shouldn’t have any involvement in the region. Taiwan Semiconductor, STMicroelectronics, and NeoPhotonics were all asked about their relationship with Huawei and their business in the Middle East, including Syria.

In its letter to NeoPhotonics of San Jose last November, the SEC noted that Huawei represented 38 percent of NeoPhotonic’s revenues and that the company had disclosed that it had many employees in the Middle East.

“Please describe to us the nature and extent of any past, current, and anticipated contacts with Sudan … whether through subsidiaries, affiliates, distributors, partners, customers, joint venture or other direct or indirect arrangements,” the SEC wrote in language fairly typical of the letters. “You should describe any products, information or technology you have provided to Sudan or Syria directly or indirectly, and any agreements, commercial arrangements, or other contacts you have had with the governments of those countries or entities they control.”

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NeoPhotonics answer across the board was: None. The SEC subsequently said it was satisfied with the response.

In other cases, the SEC seemed to be updating the responses from firms it had previously queried back in 2012. That was the case with IBM, which the SEC noted had responded to similar questions four years ago, and which wanted to clarify that IBM still had no business in nor intent to do business with Syria.

IBM stated that it continues to avoid all business dealings with Syria, as required by the economic sanctions.

Making inquiries to companies like IBM or NeoPhotonics makes a certain degree of sense, given that they make various sensitive hardware and software products that could be useful to a government like Syria’s. But some targets on the list seem a bit more puzzling.

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For example, Glu Mobile, maker of such notable mobile games as “Kim Kardashian: Hollywood” also received a letter. The SEC said Glu gets 11.5 percent of its revenues from Europe, Middle East, and Africa and wonders whether any of that revenue comes from deals with Syria or its government.

In its letter to the company, the SEC said:

We note that certain of your operating platform providers and digital storefronts are reported to have contacts with those countries. Please describe to us the nature and extent of any past, current, and anticipated contacts with Syria and Sudan, whether through subsidiaries, affiliates, distributors or other direct or indirect arrangements, including through operating platform providers and digital storefronts. You should describe any products, components, technology or services you have provided, directly or indirectly to those countries, and any agreements, commercial arrangements, or other contacts with the governments of those countries or entities they control.

Glu responded:

The Company further advises the Staff that the primary digital storefronts through which the Company publishes its games (the Apple App Store, Google Play, the Amazon App Store and Facebook) do not permit distribution in either Syria or Sudan; these countries are not available for selection when the Company choose the territories in which it wishes to publish its games through these storefronts.  Additionally, the Company is not aware of any distribution of its games in Syria or Sudan.

In the case of LinkedIn, the SEC was concerned that “..we recently located LinkedIn pages for Careers.Sy, which state that it is Syria’s number one job site and asks people looking for jobs in Syria to send resumes; and for SudaZone, which advertises jobs in Sudan. We also located LinkedIn profiles for Syriatel and Syria International Islamic Bank, companies which are on the Specially Designated Nationals list maintained by the Treasury Department’s Office of Foreign Assets Control.”

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LinkedIn responded that while any individual or company can make a free account on its service, the Syrian accounts are not allowed access to premium paid services. The SEC found this response satisfactory.

Indeed, that was the case with almost all of the letters exchanged. However, there was at least one exception: Twilio.

During its examination of a filing in advance of Twilio’s IPO in June, the SEC highlighted a previous disclosure from Twilio that some of its products have been obtained for use in prohibited countries. The SEC wanted to know specifically which ones.

In a December 2015 letter, Twilio responded:

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The Company respectfully advises the Staff that during an audit of customer records, the Company discovered that a small number of individuals accessed the Company’s service from IP addresses that are associated with Cuba, Iran, Sudan and Syria and that the Company’s software products may have been exported to these countries. In November 2015, the Company submitted initial voluntary self-disclosure notices of apparent violations to the Bureau of Industry and Security, U.S. Department of Commerce, and the Office of Foreign Assets Control, U.S. Department of the Treasury.  The Company is investigating the matter and will submit final reports of its findings with these agencies once its investigation is completed.

Subsequently, Twilio said that it identified two users as possibly coming from Syria (and possibly 29 in Iran, also the target of sanctions). The company said it had also received an export license that would make it permissible for its products to be used in Syria but that it was still taking steps to block its use there.

In the end, as with all the other cases, the SEC dropped the matter.