What Happened

On July 10, 2024, the US Department of Commerce’s Bureau of Industry and Security (BIS) issued a press release announcing new guidance outlining its methods for informing exporters about parties posing a heightened risk of export diversion and the steps exporters can take to mitigate those risks. This guidance provides essential insights and strategies for companies to enhance their due diligence practices and uphold regulatory standards. This guidance is particularly relevant for companies and universities that export items subject to the Export Administration Regulations (EAR).

BIS Measures to Address Export Diversion

Diversion risk refers to the potential for goods, technologies or services to be re-routed or transferred to unauthorized end-users or end-uses, contrary to export control laws and regulations. This poses significant legal and reputational risks for companies involved in international trade. Understanding and effectively managing diversion risks are, therefore, critical for compliance and business continuity.

The guidance highlights several methods BIS utilizes to identify and address export diversion risks. These include:

• Public Screening Lists: BIS maintains various lists identifying parties known or suspected of engaging in proliferation activities, terrorism or other activities that violate US national security or foreign policy interests. Companies are encouraged to screen potential transaction partners against these lists, readily available on the BIS website.
• Supplier List Letters: BIS may issue “Supplier List” letters to companies believed to have previously engaged with high-risk parties not yet publicly listed. These letters detail red flags and tailored due diligence guidance to assist in identifying and mitigating diversion risks.
• Project Guardian Requests & Red Flag: Project Guardian is a BIS initiative designed to safeguard sensitive technologies. Companies may receive requests from BIS to remain vigilant about specific parties or items. Any such requests should be taken seriously, and companies are encouraged to deny suspicious orders and contact their local Export Enforcement field office. BIS may notify companies if a customer is suspected of violating export control regulations by re-exporting or transferring controlled items without authorization.
• “Is Informed” Letters: BIS uses “is informed” letters to notify individual companies and universities of supplemental license requirements applicable to specific items going to specific entities or destinations, or to specific activities of US persons. A company or university receiving such a letter “is informed” of license requirements for specific transactions because of US national security or foreign policy concerns, including concerns related to weapons of mass destruction, military end uses or end users, or involvement in other activities contrary to US national security or foreign policy interests.
• Trade Integrity Project. The BIS guidance places significant emphasis on a new resource—the Trade Integrity Project (TIP). This initiative, launched by the UK-based Open-Source Centre, maintains a website that monitors military and dual-use trade with Russia. The website focuses specifically on trade in Common High-Priority List (CHPL) items, a list of 50 strategic goods identified by BIS, in cooperation with its allies, as being particularly sought by Russia for its military programs. These CHPL items are categorized by their six-digit Harmonized System (HS) codes, a standardized international product classification system.

  The BIS guidance strongly encourages companies exporting, re-exporting or transferring CHPL items to screen potential transaction parties against the TIP website. Companies identified on the TIP website as having a history of shipping CHPL items to Russia since 2023 should be subject to heightened scrutiny. This additional due diligence should help ensure that controlled items are not ultimately diverted to unauthorized end-users or end-uses that could undermine US national security interests.

Strengthening Your Export Compliance Program

The BIS guidance underscores the importance of robust export compliance procedures. Companies involved in exporting EAR-controlled items should take proactive steps to mitigate diversion risks, including:

• Comprehensive Due Diligence and Know Your Customer (KYC) Programs: Implement a thorough due diligence process for all potential customers, including background checks, verification of end-users and end-uses, and investigation of red flags. Develop and maintain KYC programs that gather and maintain detailed information about customers, including beneficial ownership structures and prior export activity.
• Internal Controls & Training: Establish clear internal controls to prevent unauthorized exports. This includes regular employee training on export control regulations, licensing requirements and red flag identification. The guidance provides clarity on the types of documentation that should be collected and retained to demonstrate compliance efforts in case of regulatory scrutiny.
• Recordkeeping & Auditing: Maintain comprehensive records of all export transactions and conduct periodic audits to ensure compliance with BIS regulations.
• Engagement With BIS: The guidance underscores the importance of open communication with BIS. If a company receives a letter identifying a transaction party as having diversion risk, prompt and proactive engagement with BIS can help clarify responsibilities and mitigate potential penalties.

Why Companies Should Care

• Legal Compliance. Adhering to BIS guidance helps companies avoid legal pitfalls associated with diversion risks. Non-compliance can lead to substantial fines, penalties and even export privileges being revoked, which can severely impact a company’s operations and reputation.
• Reputational Risks. Maintaining a strong reputation is crucial in today’s interconnected business environment. Being associated with diversion activities can damage a company’s brand image and credibility in the market, potentially leading to loss of customer trust and business relationships.
• Operational Continuity. Effective compliance with BIS guidance ensures smoother operations by reducing the likelihood of disruptions caused by regulatory investigations or sanctions. By implementing robust compliance measures, companies can focus on their core business activities without the distraction of regulatory issues.
• Global Competitive Edge. Companies that prioritize compliance and risk management gain a competitive advantage in global markets. They demonstrate reliability and trustworthiness to international partners and customers, thereby enhancing their attractiveness as preferred business partners.