On 10/9/24, the Bureau of Industry and Security (BIS) within the Department of Commerce has issued guidance aimed at financial institutions (FIs), outlining best practices for adherence to the Export Administration Regulations (EAR). This BIS new guidance offers foundational information regarding the EAR and outlines measures that financial institutions can implement to reduce the risk of violations. Among the recommendations are best practices for due diligence related to the EAR, the promotion of continuous transaction reviews to identify potential red flags, and a clarification of which forms of real-time transaction screening are considered best practices and which are not.
The responsibilities of FIs under the EAR have expanded in the wake of Russia’s intensified invasion of Ukraine in 2022, alongside a heightened national security and foreign policy focus on curbing China’s military modernization and addressing human rights abuses.
“Every export – every single one – has a related financial transaction,” said Assistant Secretary for Export Enforcement Matthew S. Axelrod. “Today’s guidance provides recommendations to financial institutions on how to best comply with our regulations so they can spot red flags and avoid being used as instruments to facilitate export evasion.”
BIS new guidance issued on 10/9/28 highlights best practices that FIs should adopt in order to minimize their risks of violating the EAR, including General Prohibition 10 (GP 10). Note that BIS encourages the submission of Voluntary Self-Disclosures (VSDs) from parties who suspect they may have violated the EAR. FI’s ought to implement measures and screening tools to recognize, document, and avert possible breaches of U.S. export control regulations.
“General Prohibition Ten—Proceeding with transactions with knowledge that a violation has occurred or is about to occur (Knowledge Violation to Occur). You may not sell, transfer, export, reexport, finance, order, buy, remove, conceal, store, use, loan, dispose of, transport, forward, or otherwise service, in whole or in part, any item subject to the EAR and exported, reexported, or transferred (in-country) or to be exported, reexported, or transferred (in-country) with knowledge that a violation of the Export Administration Regulations, the Export Control Reform Act of 2018, or any order, license, license exception, or other authorization issued thereunder has occurred, is about to occur, or is intended to occur in connection with the item”.
Extracts of BIS New Guidance for FI’s
- BIS recognizes that exporters generally have more information than FIs about whether an item may be subject to the EAR.
- FIs should be aware that items shipped from the United States are generally subject to the EAR, with narrow exceptions.
- Under GP 10, FIs and other persons (regardless of location, country in which they are headquartered or registered, or nationality) may not finance or otherwise service, in whole or in part, any item subject to the EAR with knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item.
- U.S. persons, wherever located – including FIs – may not support (e.g., finance or facilitate) certain specified activities that they know involve certain WMD or military-intelligence programs. In both instances, “knowledge“ of a circumstance includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness may be inferred from evidence of the conscious disregard of facts known to a person or from a person’s willful avoidance of facts.
- BIS recommends that FIs incorporate EAR related due diligence into their risk management and compliance processes, both before onboarding a new customer and as part of regular risk-based due diligence thereafter.
- BIS recommends that such EAR-related due diligence include reviewing customers against lists of persons subject to BIS’s end-user restrictions, such as the Unverified List, Entity List, Military End-User List, and Denied Persons List.
- BIS recommends that FIs heavily weigh a customer’s presence on a BIS restricted-party list when determining the customer’s overall risk profile for potential EAR violations—including in connection with the receipt of services.
- BIS recommends as an EAR related due diligence best practice that FIs review customers – and, where appropriate, customers’ customers – against lists of entities that have shipped Common High Priority List (CHPL) items to Russia since 2023, according to publicly available trade data.
- FIs should closely scrutinize entities or addresses identified as shipping CHPL items to Russia to determine whether any circumstances indicating export control evasion (“red flags”) are present.
- BIS recommends that FIs determine whether the customer is engaged in the export, reexport, or transfer of items subject to the EAR.
- BIS recommends that FIs ask that customer to certify whether it has sufficient controls in place to comply with the EAR, including screening transactions against lists of persons subject to BIS’s end-user restrictions; exercising heightened due diligence for exports, reexports, or transfers to destinations subject to BIS-administered embargoes or broad trade restrictions, such as Russia; and engaging in enhanced due diligence processes for items included on the Commerce Control List (CCL) (Supplement No. 1 to Part 774 of the EAR), or the CHPL. EAR-related due diligence, of course, is not a one-and-done process.
- The restricted-party lists BIS maintains under the EAR and other publicly available red flag lists based on trade data are updated continuously to add and remove parties. BIS recommends that FIs check these lists on a regular basis to ensure they have the most up-to-date information informing the risk profiles of both their customers and their customers’ customers.
- BIS recommends that, in order to minimize the potential for violations of GP 10, FIs review transactions on an ongoing basis for red flags.
- BIS recognizes that FIs will likely not have sufficient information to individually assess every transaction for potential EAR violations before proceeding
- BIS does not expect FIs to review transactions for these red flags in real time. Nevertheless, an FI may learn of information that constitutes a red flag after it has processed payment for a transaction, which may give rise to “knowledge” for purposes of GP 10 for future transactions involving the same customer or counterparties.
- BIS recommends that FIs have risk-based procedures in place to detect and investigate red flags post-transaction and, if necessary, take action to prevent violations of the EAR before proceeding with any transactions involving the same customer or counterparties.
- If, during a post-transaction review, an FI encounters one of the below red flags and cannot resolve it to its satisfaction, BIS recommends that the FI refrain from future transactions with the relevant transaction parties.
Under the BIS New Guidance, FI’s risk liability for a violation of the EAR under GP 10 under the extracts below:
- A customer refuses to provide details to banks, shippers, or third parties, including details about end-users, intended end-use(s), or company ownership.
- The name of one of the parties to the transaction is a “match” or similar to one of the parties on a restricted-party list.
- Transactions involving companies that are physically co-located with a party on the Entity List or the SDN List or involve an address BIS has identified as an address with high diversion risk.
- Transactions involving a last-minute change in payment routing that was previously scheduled from a country of concern but is now routed through a different country or company.
BIS New Guidance Real Time Screening Extracts:
- BIS does not expect FIs to engage in real-time screening of parties to a transaction to prevent violations of GP 10.
- BIS recommends that FIs implement the EAR-related due diligence and ongoing review for red flags to avoid financing or servicing a transaction with “knowledge” in violation of GP 10.
- BIS recommends real-time screening against certain BIS-administered restricted party lists in certain circumstances to avoid potential violations of GP 10. Specifically, for cross-border payments and other transactions that are likely to be associated with exports from the United States (or re-exports or in-country transfers outside the United States)
There is a market expectation that the BIS, together with OFAC and FinCEN will continue to work together
Does your FI have a real-time screening of parties to a transaction to prevent violations of GP 10?
Is your FI ready for BIS New Guidance?
Has your FI implement measures and screening tools to recognize, document, and avert possible breaches of U.S. export control regulations?
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