Red Flags and Diversion: Key Reminders for Trade Compliance

Why Identifying Red Flags Matters in Trade Compliance

Many companies sell products worldwide, which is why it is important to identify trade compliance issues and red flags to prevent an export violation from occurring.  This blog acts as a reminder and points out some important questions to ask yourself when processing transactions that involve shipping products, items, technology or services around the world.

What Is a Red Flag in Trade Compliance?

Let’s start by reviewing what is considered a red flag.  In trade compliance terms, a “RED FLAG” is an unusual set of circumstances regarding a particular transaction.  The reason it’s important to detect an unusual set of circumstances or “red flag” on an order is to help avoid someone from diverting products to a prohibited person or destination and / or to be used for an illegitimate or restricted application.  It has been confirmed that when “red flags” are left undetected a “diversion” will most likely occur.

Common Red Flags to Watch For

You are probably asking yourself what methods can be used to help detect red flags to avoid diversion.  Many governments and multi-national organizations provide guidelines to help determine the legitimacy of a sale or request for service.  Here are some examples:

• Is it difficult to find information about the customer on public sources such as the internet?
• Does the customer request a product that seems overly capable for the intended application?
• Does the customer have a foreign company name in a language that is unexpected for the country where they are located?
• Is the stated end user a trading company, distributor or based in a free trade zone?
• Is the end-user connected to the military, the defense industry or a governmental military research body despite the stated end-use being civilian?
• Is the customer reluctant to provide information about the end-use of the product, or to provide clear answers to routine commercial/technical questions?
• Is the customer reluctant to provide end-user information or documentation?
• Is the customer calling in intermediaries for no good reason?

Countries with Higher Risks of Diversion

There are also guidelines provided telling us that diversions will occur in certain countries more than in others.  These locations include, but are not limited to, Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan.

Guidelines and Resources for Detecting Red Flags

The US Government has issued a Policy Guidance Document called Commodity, End-user and Transshipment Country Red Flag FAQ’s which are helpful.  In addition, the US Government has also provided “Know Your Customer” Guidance  which further explains red flags as well as the responsibility of exporters to not self-blind.  Additional guidance was provided by the G7 (U.S., Canada, France, Germany, Italy, Japan, the U.K. and the European Union) joint guidance for industry on preventing evasion of the export controls and sanctions imposed on Russia.

Identifying Red Flags by employees is key to a strong export compliance program as it could prevent potential export violations before they occur.  Training employees on the recognition and remediation of red flags is one to prevent an inadvertent violation.

Schedule a no-charge consultation with one of our experts today to strengthen your organization’s export compliance program and mitigate the risks of red flags and diversions.