Supplement No. 3 to Part 732 - BIS's “Know Your Customer” Guidance and Red Flags
15:2.1.3.4.22.0.1.7.26 :
Supplement No. 3 to Part 732 - BIS's “Know Your Customer” Guidance
and Red Flags “Know Your Customer” Guidance
Various requirements of the EAR are dependent upon a person's
knowledge of the end-use, end-user, ultimate destination, or other
facts relating to a transaction or activity. These provisions
include the nonproliferation-related “catch-all” sections and the
prohibition against proceeding with a transaction with knowledge
that a violation of the EAR has occurred or is about to occur.
(a) BIS provides the following guidance on how individuals and
firms should act under this knowledge standard. This guidance does
not change or interpret the EAR.
(1) Decide whether there are “red flags”. Take into
account any abnormal circumstances in a transaction that indicate
that the export may be destined for an inappropriate end-use,
end-user, or destination. Such circumstances are referred to as
“red flags”. Included among examples of red flags are orders for
items that are inconsistent with the needs of the purchaser, a
customer declining installation and testing when included in the
sales price or when normally requested, or requests for equipment
configurations that are incompatible with the stated destination
(e.g., 120 volts in a country with 220 volts). Commerce has
developed lists of such red flags that are not all-inclusive but
are intended to illustrate the types of circumstances that should
cause reasonable suspicion that a transaction will violate the
EAR.
(2) If there are “red flags”, inquire. If there are no
“red flags” in the information that comes to your firm, you should
be able to proceed with a transaction in reliance on information
you have received. That is, absent “red flags” (or an express
requirement in the EAR), there is no affirmative duty upon
exporters to inquire, verify, or otherwise “go behind” the
customer's representations. However, when “red flags” are raised in
information that comes to your firm, you have a duty to check out
the suspicious circumstances and inquire about the end-use,
end-user, or ultimate country of destination. The duty to check out
“red flags” is not confined to the use of License Exceptions
affected by the “know” or “reason to know” language in the EAR.
Applicants for licenses are required by part 748 of the EAR to
obtain documentary evidence concerning the transaction, and
misrepresentation or concealment of material facts is prohibited,
both in the licensing process and in all export control documents.
You can rely upon representations from your customer and repeat
them in the documents you file unless red flags oblige you to take
verification steps.
(3) Do not self-blind. Do not cut off the flow of
information that comes to your firm in the normal course of
business. For example, do not instruct the sales force to tell
potential customers to refrain from discussing the actual end-use,
end-user, and ultimate country of destination for the product your
firm is seeking to sell. Do not put on blinders that prevent the
learning of relevant information. An affirmative policy of steps to
avoid “bad” information would not insulate a company from
liability, and it would usually be considered an aggravating factor
in an enforcement proceeding.
(4) Employees need to know how to handle “red flags”.
Knowledge possessed by an employee of a company can be imputed to a
firm so as to make it liable for a violation. This makes it
important for firms to establish clear policies and effective
compliance procedures to ensure that such knowledge about
transactions can be evaluated by responsible senior officials.
Failure to do so could be regarded as a form of self-blinding.
(5) Reevaluate all the information after the inquiry. The
purpose of this inquiry and reevaluation is to determine whether
the “red flags” can be explained or justified. If they can, you may
proceed with the transaction. If the “red flags” cannot be
explained or justified and you proceed, you run the risk of having
had “knowledge” that would make your action a violation of the
EAR.
(6) Refrain from the transaction or advise BIS and wait.
If you continue to have reasons for concern after your inquiry,
then you should either refrain from the transaction or submit all
the relevant information to BIS in the form of an application for a
license or in such other form as BIS may specify.
(b) Industry has an important role to play in preventing exports
and reexports contrary to the national security and foreign policy
interests of the United States. BIS will continue to work in
partnership with industry to make this front line of defense
effective, while minimizing the regulatory burden on exporters. If
you have any question about whether you have encountered a “red
flag”, you may contact the Office of Export Enforcement at
1-800-424-2980 or the Office of Exporter Services at (202)
482-4532.
Red Flags
Possible indicators that an unlawful diversion might be planned
by your customer include the following:
1. The customer or purchasing agent is reluctant to offer
information about the end-use of a product.
2. The product's capabilities do not fit the buyer's line of
business; for example, a small bakery places an order for several
sophisticated lasers.
3. The product ordered is incompatible with the technical level
of the country to which the product is being shipped. For example,
semiconductor manufacturing equipment would be of little use in a
country without an electronics industry.
4. The customer has little or no business background.
5. The customer is willing to pay cash for a very expensive item
when the terms of the sale call for financing.
6. The customer is unfamiliar with the product's performance
characteristics but still wants the product.
7. Routine installation, training or maintenance services are
declined by the customer.
8. Delivery dates are vague, or deliveries are planned for
out-of-the-way destinations.
9. A freight forwarding firm is listed as the product's final
destination.
10. The shipping route is abnormal for the product and
destination.
11. Packaging is inconsistent with the stated method of shipment
or destination.
12. When questioned, the buyer is evasive or unclear about
whether the purchased product is for domestic use, export or
reexport.
13. You receive an order for “parts” or “components” for an end
item in 9x515 or the “600 series.” The requested “parts” or
“components” may be eligible for License Exception STA, another
authorization, or may not require a destination-based license
requirement for the country in question. However, the requested
“parts” or “components” would be sufficient to service one hundred
of the 9x515 or “600 series” end items, but you “know” the country
does not have those types of end items or only has two of those end
items.
14. The customer indicates or the facts pertaining to the
proposed export suggest that a 9x515 or “600 series” item may be
reexported to a destination listed in Country Group D:5 (see
supplement no. 1 to part 740 of the EAR).
[61 FR 12740, Mar. 25, 1996. Redesignated and amended at 62 FR
25453, 25456, May 9, 1997; 78 FR 22706, Apr. 16, 2013; 79 FR 27434,
May 13, 2014]
[82 FR
61155, Dec, 27, 2017]
[69 FR 5687, Feb.
6, 2004]