What are the “new” red flags?

If you’ve spent the last year-and-a-half focused on Russia, hold that thought, and don’t take your eye off other bad actors around the world.  That’s what the U.S. Government is warning with its third joint notice, published earlier this month.

The previous two notices were specific to Russia.  Now, the new notice warns U.S. institutions about individuals and entities “seeking to evade U.S. export controls not related to Russia’s invasion of Ukraine.”  The notice was issued by the U.S. Department of Commerce, Bureau of Industry and Security (BIS) and the U.S. Department of Treasury Financial Crimes Enforcement Network (FinCEN).

The joint statement urges companies to be vigilant against efforts by nation-state adversaries and illicit actors globally to acquire items subject to the EAR.  They highlight advanced technologies that can be used in new or novel ways to enhance adversaries’ military capabilities or support mass surveillance programs that enable human rights abuses.

In trade compliance, the phrase “Know Your Customer” is ubiquitous with export controls.  We talk about this all the time.  We help clients dig behind their purchase orders to understand – truly – the end use and end user for international shipments.  All export transactions should be scrutinized for end-use, end-user, ultimate destination along with the classification of the item you are looking to export.  Now, the government is helping companies by outlining new red flags for transactions.

What are the new red flags?

Below are examples of “red flags” that should give exporters pause and initiate more research:

• Purchases under a letter of credit that are consigned to the issuing bank, not to the actual end-user. In addition, supporting documents (such as a commercial invoices) that do not list the actual end-user.
• Transactions involving entities with little to no web presence, such as a website or a domain-based email account.
• A customer lacks or refuses to provide details to banks, shippers, or third parties, including details about end-users, intended end-use(s), or company ownership.
• Transactions involving customers with phone numbers with country codes that do not match the destination country.
• Parties to transactions listed as ultimate consignees or listed in the “consign to” field appear to be mail centers, trading companies, or logistics companies.
• The item (commodity, software or technology) does not fit the purchaser’s line of business.
• The customer’s name or its address is similar to one of the parties on a proscribed parties list, such as the BIS Lists of Parties of Concern (e.g., Entity List, Unverified List, Denied Persons List), Treasury’s List of Specially Designated Nationals and Blocked Persons (SDN List), or State’s Statutorily Debarred Parties List. Special attention should be paid to the basis for listing on the Entity List or SDN List, as linkages to weapons of mass destruction programs or military-intelligence end-users or end-uses implicate broader controls regardless of whether an item is subject to the EAR.
• Transactions involving a purported civil end-user, but basic research indicates the address is a military facility or co-located with military facilities in a country of concern.
• Transactions involving companies that are physically co-located, or have shared ownership, with an entity on the Entity List or the SDN List.
• Transactions that use open accounts/open lines of credit when the payment services are conducted in conjunction with known transshipment jurisdictions and/or the products listed in payment memos align with those identified by BIS as a disruptive technology (see the “Disruptive Technology Strike Force” highlighted below) or included on the CCL.
• The customer is significantly overpaying for an item based on known market prices.
• Transactions that involve a last-minute change in payment routing that was previously scheduled from a country of concern but now routed through a different country or company.
• Transactions that involve payments being made from entities located at potential transshipment points or involve atypical shipping routes to reach a destination.

 What is new and what should you do?

Although these new red flags are helpful, they won’t help very much unless your company actually does something with them.  Here are some helpful tips on how to implement these in your organization:

• Communicate these additional red flags within your business.
• Understand the geopolitical realities and how that affects your business.
• Conduct restricted parties and end use screening of your current partners to evaluate current risks.
• Are you doing business in new countries? We have seen many companies having requests for quotations from countries with whom they had not done business with prior, including Uzbekistan and Kazakhstan, etc.
• Incorporate the new Red Flags into your customer and/or supplier vetting process.
• Seek guidance from either BIS or Treasury with any questions prior to any involvement.
• Update your export program accordingly.

For more information, see EAR Part 732, Supplement No. 3 Know Your Customer.

Need help vetting your transactions or improving your process?  Schedule a no-charge consultation with one of our trade compliance experts today.