U.S. regulators are investigating how a multi-million-dollar storage system from NetApp Inc. (Nasdaq: NTAP) came to underpin a sweeping Internet-surveillance system being built last year for the Syrian regime of President Bashar al-Assad.

The U.S. Department of Commerce’s Bureau of Industry and Security is conducting the probe, according to department spokesman Eugene Cottilli. “The investigation is ongoing,” he said.

The Sunnyvale, California-based maker of storage technology has condemned any potential use of its equipment in Syria. After Bloomberg News exposed the surveillance project in November, NetApp said it notified the U.S. government that it’s conducting an internal review and would cooperate with any inquiry.

[NetApp operates one of its largest campuses in Research Triangle Park, N.C.]

NetApp is “continuing to finalize our internal review,” spokeswoman Jodi Baumann said on April 30. She declined yesterday to comment on the government investigation.

The Internet surveillance system was being built to intercept and catalog virtually every e-mail flowing through Syria, and had been under construction as Assad’s regime waged a crackdown that has killed as many as 10,000 people.

Italian company Area SpA, which spearheaded the development of the surveillance project, bought the NetApp gear for 2.75 million euros ($3.5 million) from an Italian distributor and exported it to Syria, Bloomberg News reported in November. While the sale was indirect, workers for Area and NetApp communicated directly, e-mailing each other after the sale about configuring the equipment, copies of the correspondence show.

Ban and Sanctions

After Bloomberg disclosed the project, Area said it was exiting the deal and the European Union banned the sale of surveillance gear to Syria. On April 23, President Barack Obama authorized sanctions against individuals and entities that provide information technology that aids Syria and Iran in cracking down on dissidents.

The U.S. has banned most American exports to Syria other than food or medicine since 2004.

NetApp didn’t discuss Syria or the government investigation in its quarterly earnings call after the close of regular trading on Wednesday. However, the company alerted investors in a Dec. 5 filing with the Securities and Exchange Commission that it faces possible punishment and it intends to cooperate with any inquiry.

‘Adverse Impact’

“If we are found to have violated U.S. export control laws, we may be subject to various penalties available under the laws, any of which could have a material and adverse impact on our business,” the company said in the quarterly filing. It repeated the statement in its quarterly report filed in March.

NetApp has a market value of about $10 billion, and more than 10,000 employees.

Area, which was building the system under a contract with Syria’s state controlled fixed-line phone company, has said it never had any relations with Syrian intelligence agencies, and its dealings comply with all export rules. The project was never completed and has never been operational, the company said last November.

An investigation last year by Bloomberg News showed how repressive regimes including Bahrain, Iran and Syria have increasingly used Western surveillance technology to track, detain and torture dissidents. Advocacy groups such as Human Rights Watch say Assad’s regime has a pattern of using surveillance for arrests that lead to torture and death.

E-mail Archive

The Area system was designed to use NetApp’s hardware and software for archiving e-mails for easy retrieval.

Early project schematics state that NetApp’s technology would provide four petabytes of storage for archiving e-mails and other data. That is more than 15 times the amount of data stored in the online archive of the Library of Congress, or enough storage space for more than a billion digital copies of the epic Leo Tolstoy novel “War and Peace.”

In November, U.S. Senators Mark Kirk, a Republican from Illinois, Robert Casey, a Democrat from Pennsylvania, and Christopher Coons, a Democrat from Delaware, called for an investigation into NetApp’s role in the Syrian project.

The senators also called for a review into the possibility of suspending U.S. government contracts with NetApp until a full investigation is completed, noting that NetApp has received more than $111 million in U.S. contracts since 2001.