BIS Issues New Guidance on Diversion Risk

Washington, D.C. (July 26, 2024) - On July 10, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published a new guidance document addressing risks associated with the export, reexport, and transfer of controlled items under the Export Administration Regulations (“EAR”). The guidance outlines both (1) methods by which BIS informs affected parties about export diversion risks, outside of its public screening lists and (2) BIS-recommended practices to comply with related regulations and mitigate diversion risks.

Risk Communications

The guidance document outlines three methods by which BIS identifies parties of national security concern—including “those that present a risk of diverting EAR items to restricted end uses or end users in Russia”— outside of public screening lists like the Entity List (see our previous alert regarding recent BIS Entity List updates). These methods, described as “Letters,” are outlined more fully below:

1. “Supplier List” Letters

BIS may issue a letter to a company containing a “supplier list” of parties that, “based on commercially available data sets,” may be diverting Common High Priority List (“CHPL”) items to Russia. Notably, the parties identified on this “supplier list” may not be included on one of BIS’ public screening lists. BIS recommends that parties receiving a “supplier list” letter “closely scrutinize transactions” to determine whether any red flags, as identified in Supplement No. 3 to 15 C.F.R. § 732, are present.

2. Project Guardian Requests and “Red Flag” Letters

A Project Guardian request asks a company to deny or suspend filling transactions with a specific item or party that BIS has identified, using open-source information and government data, as connected with “foreign adversaries seeking to illicitly acquire EAR items.” Such requests additionally direct the company to contact their local field office for additional guidance.
Similarly, “Red Flag” Letters, based on open-source information, inform a company that their customers’ reexport or in-country transfer history indicates a high probability of a potential export violation. BIS recommends that companies receiving “Red Flag” Letters conduct additional due diligence prior to filling an order from the identified/flagged customer.
The guidance document further outlines that companies have a duty to evaluate red flags and determine whether they can be explained or justified; if a company proceeds with a transaction without an export license, despite knowledge that a red flag exists without explanation or justification, BIS will consider the conduct an aggravating factor in any related administrative enforcement action. “Knowledge,” as explained by the guidance, 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.” Thus, for both Project Guardian Requests and “Red Flag” Letters, BIS recommends that companies both review the guidance in Supplement No. 3 to 15 C.F.R. § 732 to ensure compliance with relevant requirements and voluntarily provide information to BIS, which will be considered a mitigating factor in any later enforcement action, “even for unrelated conduct.”

3. “Is Informed” Letters

An “Is Informed” Letter puts companies on notice of supplemental license requirements applicable to certain items, entities, destinations, or activities. Such letters specify the items, entities, or activities subject to license requirements, the review policy BIS will apply to relevant license applications, and necessary steps in the license application submission process. Non-compliance with an “Is Informed” Letter is treated as an EAR violation in the same manner as non-compliance with any other license requirement and is subject to administrative and/or criminal penalties.

Additional Recommended Practices

In addition to reviewing the “red flag” guidance in Supplement No. 3 to 15 C.F.R. § 732 or other information contained in a notification letter, the guidance document recommends that companies screen export transactions against parties identified on the Trade Integrity Project (“TIP”) website. TIP monitors military and dual-use trade with Russia, with a specific focus on CHPL items, and includes a search function and downloadable list of parties with a history of CHPL exports to Russia. The guidance document recommends that companies involved in the export, reexport, or transfer (in-country) of CHPL items screen any parties with which they transact against the TIP list; if any parties appear on the TIP list, BIS encourages companies to review those parties against the red flags identified in Supplement No. 3 to 15 C.F.R. § 732 prior to conducting or continuing transactions.

Lewis Brisbois’s attorneys are actively advising clients on managing legal and business risk in the rapidly-developing area of international sanctions and export controls. For more information, contact the author or editor of this alert, and visit our Ukraine Conflict Response Practice page for additional alerts in this area.

Author:

George Leahy, Associate

Editor:

Andrew Pidgirsky, Partner and Chair of Ukraine Conflict Response Practice