Diversion and Transshipment: The Export Compliance Risk Hiding in Plain Sight

As export controls and sanctions have become more sophisticated, so have the strategies used to circumvent them. Products may be sold to a legitimate customer in one country, routed through another country, and then ultimately diverted to a restricted end user to a prohibited destination. This is known as diversion and is becoming a significant challenge for many exporters.

What Diversion Looks Like in Practice

Diversion occurs when items are exported in compliance with the regulations but are then subsequently transferred or reexported to a restricted country, prohibited end use, or to a restricted entity.  Diversion can involve distributors, brokers, shell companies, freight forwarders, resellers, or other intermediaries.  This is why knowing the end user, ultimate destination, end use, and parties involved in the transaction is so important.

This is becoming a major compliance issue because the global trading environment has changed dramatically.  Export controls not only target advanced technologies, military-related applications, and sensitive components but also low-level technologies classified as  EAR99 under the EAR.  Export Enforcement has responded by emphasizing the importance of due diligence, end-use and end-user controls, and identifying potential diversion risks.

Red Flags Exporters Should Not Ignore

This is why due diligence must include understanding and identifying Red Flags.  For example, if your customer is a small trading company with no apparent history in semiconductor manufacturing and they suddenly requests sophisticated semiconductor equipment; that is a Red Flag.  Remember that Red Flags do not mean that the transaction is not permitted, but it does make the transaction problematic.  As an exporter, questions to ask would be:  Why does the customer need it?  Who will use it?  Where will it be installed?  Who is the ultimate end user?  What is the end use?

A Clean Screening Result Is Not Enough

Exporters should also be on the lookout for customers who are reluctant to provide end-use information and push back when asked questions pertaining to end-user details, installation location, intended application etc. One of the most common misconceptions in trade compliance is that a clean screening result means the transaction is safe.  This is not entirely true because restricted-party screening is only one part of the analysis. An exporter may need to consider:  Who is purchasing the product?  Who will receive the product?  Where will it ultimately be located? What will it be used for? Are intermediaries involved?  Does the transaction make commercial sense?  Are there inconsistencies in the documentation?

This broader analysis becomes especially important when dealing with complex international distribution networks and the importance of end-use and end-user due diligence.

Document the Decision, Not Just the Screening

Effective diversion controls begin with understanding the transaction before the product leaves the company’s control, which means having a risk-based analysis.  In addition, always document your reasoning if Red Flags were identified and cleared.  Record retention is key to proving that your transaction was in accordance with the export regulations. If a transaction was reviewed and approved, the company should be able to demonstrate why it believed the transaction was permissible.

Good documentation can include, at a minimum, screening results, customer information, end-use statements, emails and correspondence, shipping documentation, classification analysis, internal review notes, and escalation and approvals.  Remember that a compliance decision that cannot be reconstructed later is difficult to defend.

Ultimately, companies cannot control every movement of every product after it leaves their facilities.  But they can build a compliance program designed to recognize when a seemingly ordinary transaction may be something more.

If you’d like a second set of eyes on your export transactions and potential diversion risks, schedule a no-charge consultation with one of our experts today. We’re here to help you strengthen your due diligence and navigate export compliance with confidence.