United States: New Rules Address Due Diligence Required for Export Transactions

United States exports of weapons and other Munitions List items remain subject to strict licensing requirements under the International Traffic in Arms Regulations (ITAR) administered by the U.S. State Department. For dual use items subject to the Export Administration Regulations (EAR) administered by the Commerce Department’s Bureau of Industry and Security (BIS), licensing requirements have been relaxed significantly. Fewer items require an export license based solely on the classification of the item and the country of destination. However, two other elements, end-use and end-user, have become critical to the U.S. export controls process, and a license may be required where the end-use or end-user raises concerns about diversion, weapons proliferation, terrorism and other export risks.

The EAR requires U.S. exporters to make this determination. U.S. exporters will be liable for violating the EAR if they export an item without advance authorization when they know or have reason to know that the end-use or end-user presents an export controls issue. BIS has published a set of guidelines called Know Your Customer and illustrative red flags on the web to help exporters comply with this standard (available at www.bxa.doc.gov/enforcement/unauthorizedpersons.htm).

The EAR imposes various requirements on exporters based on whether the exporter knows or has reason to know facts that trigger the requirement—e.g., that a potential customer has been identified by the U.S. government as a "specially designated terrorist." In order to clarify when these knowledge-based requirements apply, in October 2004 BIS proposed a new reasonable person standard under which BIS would attribute knowledge of the relevant facts or circumstances to the exporter if a reasonable person in the same situation would "more likely than not" conclude those facts or circumstances exist. BIS would retain authority to infer an exporter’s awareness of relevant facts if the exporter has shown a "conscious disregard" or "willful avoidance" of facts.

In its proposal, BIS expanded its Know Your Customer guidelines and its illustrative list of red flags. BIS has also proposed a procedure that would give exporters a safe harbor from future legal liability. The process would require exporters to submit a report to BIS identifying the facts and circumstances relating to the proposed transaction and setting out the steps taken to resolve any concerns raised by red flags found to exist for the proposed transaction. BIS would plan to respond to such a report within 45 days and, if it agrees that the exporter has properly addressed potential concerns, BIS would provide a safe harbor against an enforcement action arising from the issues the exporter has addressed.

Since 9/11, the U.S. government has increased scrutiny on both imports and exports, resulting in a heightened level of enforcement activity in cases of suspected export controls violations. With significant penalties—including possible loss of exporting privileges—at stake, U.S. exporters are well advised to maintain an export compliance policy. At a minimum, U.S. companies should (1) establish the proper classification and relevant licensing requirements for all goods, technology and services intended to be sent to a non-U.S. destination (or to a non-U.S. national/permanent resident, considered a deemed export); and (2) investigate whether the export may be destined to go to an inappropriate end-use or end-user.

Some exporters and trade associations have complained that BIS’s proposed clarifications to the definition of "knowledge"and its safe harbor procedure could increase the compliance burdens and potential legal liability for exporters. Some have argued that the current BIS license application process gives exporters a quicker and equally certain ruling for any particular export. BIS officials have defended their proposal as pro-viding a different and meaningful benefit to exporters, but will consider these concerns in finalizing the rules.

In any event, U.S. exporters should ensure that they understand the evolving requirements of U.S. export controls and plan accordingly to ensure their specific transactions meet those requirements. Failure to do so could result in substantial business costs.

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