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Is that a Legitimate Export Customer or an Illegal Front Company?

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The U.S. government remains concerned about efforts by front companies and other intermediaries, who are not the true final end users, to transship or reexport U.S.-origin items to the Russian Federation in violation of current export controls.

To prevent unauthorized reexports to Russia, especially for transactions involving nationally security-controlled items or items listed in Supplement No. 2 to Part 744 of the EAR, the Bureau of Industry and Security has published additional guidance for U.S. exporters.

Here are a few preventative measures you can take to minimize the chances of unknowingly enabling illegal diversion of your exported goods to Russia. You can read the full version here.

  • Pay attention to discrepancies between the destination country and the country from which an order is placed (or the country from which payment is made). If the countries do not match, it’s possible that someone is planning to illegal divert your exported goods to a different country, such as Russia.
  • If a freight forwarder’s office/address is listed as the export’s final destination, you are required by law to investigate the situation further. Do not proceed with the transaction or even think about shipping out the goods before asking the purchaser about the item’s end user, end use, and ultimate destination.
  • Before shipping the item, go through the emails you’ve previously received from the customer, taking note of any mention of other email addresses or telephone number country codes. Do any of these details suggest a destination country other than what you’ve been told by the customer? If so, you should be wary of going through with the transaction.
  • Always check that your customer is not listed on the U.S. government’s consolidated export screening list. You can also use the International Trade Administration’s new online tool to search the list by entity name or address.

Russia Due Diligence Guidance (Bureau of Industry & Security)

By Michelle Kelley

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My Goods Are EAR99. Why Do I Have to Screen?

One afternoon I get a phone call from a frantic export client who is desperate to meet with me. He’s just been informed by the Bureau of Industry and Security (BIS) that he’s being penalized $250,000 for failing to do proper export screening.

He tells me that the Bureau has made a huge mistake. His goods are harmless commodities with no specific ECCN, so they are classified as EAR99.

Since his goods don’t need a license, he was under the impression that he didn’t have do any screening.

Not exactly, I tell him.

***

Additional Screening

It is in an exporter’s best interest to document the process for each of the following screens as well as keep the records for each completed screen for five years.

Denied Party Screening. This screen involves checking a number of lists to ensure that an export or reexport is not being shipped to a prohibited end-user. Exporters can invest in software to perform this screen or use the Lists of Parties of Concern on the Bureau of Industry and Security’s website.

The first part of the screen involves checking the Denied Persons List and Debarred List. It is illegal for an exporter to conduct a sale with any individual or entity on these two lists, regardless of whether the end-user is located in the U.S or overseas.

Next, exporters should check all parties against the Unverified List, Entity List, Specially Designated Nationals List, and Nonproliferation Sanctions List. Export transactions involving certain parties on these lists may be completely prohibited or only allowed with a license.

Red Flags Check. This is a check for any abnormal circumstances in an export transaction that cause a reasonable suspicion of a potential violation of the Export Administration Regulations (EAR). The Bureau of Industry and Security refers to such circumstances as “red flags.” Examples of red flags include the customer insisting on paying with cash for an expensive item when normally the terms of sale would call for financing OR the products don’t fit the buyer’s line of business (e.g. an order of sophisticated computers for a small bakery).

Sanctioned or Embargoed Countries Check. Exporters must verify that the destination is not a sanctioned country. The U.S. restricts shipping to Sudan, Syria, Cuba, North Korea, and Iran. Exporters should carefully review embargo provisions for license requirements.

End-Use Check. For goods subject to 15 CFR 744, exporters must check for prohibited end-uses, such as chemical, biological, and nuclear applications; as well as those used to transport them (e.g. a vessel, aircraft, or rocket system).

If any of the above screens results in a prohibition, the exporter must request a license from the Bureau of Industry and Security or ensure the export is eligible for a license exception.

The Real Cost of Noncompliance

It’s important that U.S. exporters understand and comply with all screening requirements to avoid losing export privileges and hundreds of thousands of dollars in penalties [2]. In 2010, the Bureau of Industry and Security completed 708 end-use checks, resulting in over $12.2 million in criminal fines and $25.4 million in civil penalties [3].

MGTA’s export audit service can help you to uncover gaps in your procedures that could lead to the scenario described at the beginning of this piece. Click here to learn more about our export audit service. Our export compliance programs can assist you in developing, improving, and enhancing these procedures too. Click here to learn more about our export compliance programs.

By Jim Trubits, Vice President. Click here to read more about Jim.

Footnotes

[1] See 15 CFR 736.2.

[2] See 15 CFR 766.

[3] Amounts for fines taken from page 9 of the Bureau of Industry and Security’s “Annual Report to Congress for Fiscal Year 2010.”

©2011 Mohawk Global Trade Advisors

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