February 14, 2024 - Hughes Hubbard & Reed attorneys explain how government and industry can discourage US products from landing into enemy hands for attacks on US interests overseas.
As enemy drone and missile attacks on US interests and allies increase this year in the Middle East and Red Sea, and the Ukraine war persists, the origin of enemy weapons and their parts becomes more urgent to trace—particularly when US-produced materials such as semiconductors are used illicitly.
Government and industry action is needed to better monitor the distribution chain of these precision weapons, along with illicit actors' efforts to evade sanctions and export controls. Commercial items with dual military and civilian uses complicate that monitoring process, pulling US companies and federal agencies into the fray.
First, the legal standard for knowledge of evasion is fact-and-circumstance specific under the Export Administration Regulations. In addition to prohibiting exports made with actual knowledge of evasion, regulations also prohibit exports when there is awareness of a "high probability" of evasion.
Such awareness is contextual—it can change with time and with new information, or be inferred from evidence of conscious disregard of facts. This allows regulators and prosecutors to go after sophisticated schemes that might otherwise make it impossible to establish actual knowledge.
Applying this existing language would counter-intuitively benefit manufacturers that seek to prevent evasion. It provides manufacturers and exporters with a legal basis to refuse shipments pending further review. It also increases obligations for counterparties—including distributors and resellers—that commit contractually to comply with (or not violate) US laws.
The high probability standard thus allows companies to assert against counterparties their subjective assessments of evasion risks made with imperfect information.
Second, in the supply chain, the party transferring an item to the next party is best placed to detect and prevent evasion. Congress should provide the Commerce Department's Bureau of Industry and Security additional resources to create and administer a targeted Validated Distributor & Reseller, or VDR, pilot program for the semiconductor industry.
The program can borrow concepts from BIS's Validated End-User program and Homeland Security's Customs Trade Partnership Against Terrorism Trusted Trader and Global Entry Trusted Traveler programs.
Such a VDR program should require distributors and resellers to commit to recordkeeping and compliance obligations, certify their conduct, and submit to risk-appropriate reviews by US officials to verify compliance with the conditions of authorization.
BIS, military intelligence, and industry representatives can collaboratively develop a risk-appropriate VDR program targeting items recovered from enemy weapons and weak links in supply chains where evasion or diversion occur. Let's empower sellers, distributors, and resellers that are committed to complying with US export controls.
US semiconductor companies should then be entitled to a presumption of an absence of actual knowledge—or an awareness of a high probability—of evasion for sales and shipments made to VDRs. The program should direct more business to distributors and resellers investing in controls and processes to meet VDR program requirements, encouraging them to make such investments.
When an item with US components is used to attack US or allied personnel or interests, someone in the supply chain acted knowingly to evade export controls or sanctions, or with a mistaken belief of plausible deniability to avoid actual knowledge—and didn't acknowledge or act on potential consequences.
Providing BIS with means to identify and reward good actors in supply chains would allow US semiconductor and other companies to focus compliance resources elsewhere, and place accountability for evasion with parties most able to prevent it.
Current methods of allocating risk and accountability inadequately prevent hostile powers from attacking US and allied interests. Each attack, each recovery of weaponry, and the casualties they cause make a better solution even more imperative.
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