On July 10, 2024, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) published new guidance on the mechanisms it uses to inform exporters about parties posing a heightened risk of diversion and the steps exporters can take to mitigate those risks. The new guidance further underscores BIS' efforts to prevent evasion of U.S. export controls and to facilitate front-end compliance within the industry.
BIS relies on a variety of sources, including open-source information and government data, to identify prohibited activities and efforts by foreign adversaries to unlawfully acquire items subject to the Export Administration Regulations (EAR). Based on these inputs, BIS may list parties of concern on various trade restriction lists under the EAR. Alternatively, BIS may engage directly with industry through various notification measures such as the following:
- "Supplier List" Letters: BIS may determine that an entity not publicly proscribed has engaged in prohibited transactions with foreign parties. To assist industry in identifying the high-risk party, BIS may send letters to companies that BIS believes have previously engaged in transactions with those high-risk parties and outline tailored due diligence guidance. Recipients of such letters should closely review transactions with those parties to assess and resolve any red flags before proceeding.
- Project Guardian Requests: BIS also may request that entities remain vigilant to requests from specific parties or for certain items. To the extent that a company receives such a request, it should deny or otherwise refrain from completing such orders and contact its local Export Enforcement field office. Cooperating with such requests will be considered a mitigating factor in any subsequent enforcement actions, even if unrelated.
- "Red Flag" Letters: BIS may notify companies that one of their customers may have reexported or transferred (in-country) the company's items in violation of the EAR. Once BIS has affirmatively raised a concern, companies must conduct additional due diligence to overcome the "red flag" before proceeding with any orders. In other words, companies carry the burden of determining whether the customer is no longer engaged in prohibited activity and must maintain detailed records of this decision-making process. Failing to resolve the red flag and proceeding with a transaction without BIS authorization will be treated as an aggravating factor in any subsequent enforcement actions.
- "Is Informed" Letters: BIS also may inform exporters of additional license requirements for certain items intended for specific entities or destinations, or for specific U.S. person activities. Each "is informed" letter outlines the scope of items or activities that require a license from BIS, due to U.S. national security or foreign policy concerns, and details the license review policy and process for submitting such requests to BIS. Recipients who engage in transactions outlined in the letter without obtaining the proper authorization violate the EAR and risk administrative and/or criminal penalties.
In short, "Supplier List" letters, Project Guardian requests, and "Red Flag" letters notify exporters that they should voluntarily cease engaging with certain customers or conduct additional due diligence before proceeding with an export. Meanwhile, "Is Informed" letters provide notice that a license is required to engage in contemplated activity. BIS' latest guidance provides the following table to assist exporters in understanding their responsibilities:
| Responsibilities in Response to BIS Identification of Parties/Transactions of Concern | |||||
|---|---|---|---|---|---|
| Supplier List | Project Guardian Request | "Red Flag" Letter | "Is Informed" Letter | Publicly Proscribed Party | |
| Action | Identification of parties of diversion concern | BIS notification of red flag (i.e., knowledge of high probability that a violation may occur) | Individual notice of a license requirement | Dependent upon requirement of list (e.g., license requirement for parties on Entity List) | |
| Who is Impacted | Recipient of letter or other publicly available information | Recipient of BIS Project Guardian request | Recipient of BIS "red flag" letter | Recipient of BIS "is informed" letter | Any person involved in a transaction subject to the EAR |
| Responsibility | Determine whether any red flags are present and, if present, resolve before proceeding | Resolve red flags to proceed | Submit license application as required by letter | Submit license application if required by EAR or comply with other EAR requirements | |
BIS also announced a new "best practice" that exporters should follow to ensure that their transactions are compliant, which involves consulting and screening customers against a list maintained on the Trade Integrity Project (TIP), an initiative of UK-based Open-Source Centre. TIP monitors military and dual-use trade with Russia and, using publicly available trade data, lists parties that have sent items listed on the Common High Priority List (CHPL) to Russia since 2023. The CHPL includes 50 items identified by the Harmonized System Codes deemed necessary to sustain Russia's war efforts.
BIS' latest guidance follows comments made at BIS' 2024 Update Conference in April 2024, in which BIS called on industry's support to prevent diversion. Exporters should consult the latest guidance and implement additional due diligence in their compliance programs where appropriate.
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