“New” Best Practice Guidance to Address Diversion Risk

This past July, the Bureau of Industry and Security (BIS) recently issued guidance on addressing both export controls and diversion risks. (Diversion risk refers to the potential for items, technology, or services to be redirected or transferred to unauthorized end-users or end-uses, which can violate export control laws and regulations).

The guidance outlines various actions BIS takes to inform industry about entities compliance programs that present diversion risks, beyond those identified on public screening lists such as the Entity List.

It includes mechanisms for such letters as “Supplier List” letters, Project Guardian Requests, Red Flag Letters, and “Is Informed” letters. These tools help industry screen their customers and transactions more effectively to protect U.S. national security by identifying entities that might divert export-controlled items to restricted end uses/users as well as countries of concern such as Russia.

Additionally, BIS recommends that exporters of Common High Priority List (CHPL) items use the Trade Integrity Project (TIP) online resource for screening purposes.  When the entity is entered into the search field, the results will indicate whether or not the company has exported to Russia by listing the USD value of goods shipped.

What is the “Supplier List” Letter?

BIS has compiled information about foreign parties (not listed on any of its public screening lists) that it has identified as having exported to, or facilitated transactions with, certain countries or end users of national security concern, or foreign policy concerns.

As recent as March 2024, companies have been receiving “Supplier Lists” from BIS indicating that their foreign supplier has been diverting Common High Priority List (CHPL) items to Russia.

What if I receive a “Supplier List” Letter?

It is the company’s responsibility as an exporter to closely scrutinize the transaction to identify whether Red Flags exist. BIS has guidance to assist exporters with identifying Red Flags as identified in Supplement No. 3 to Part 732 – BIS’s “Know Your Customer” .

What are Project Guardian Requests?

Project Guardian requests are issued by BIS to alert entities about specific transactions/parties that may pose a risk of diversion.

This is different from such requests as the “Supplier List” in that BIS contacts the exporter and advises them to be on the lookout for transactions with such parties or certain entities or for certain items.

What if my company receives Project Guardian Request?

If you receive this type of inquiry, BIS expects the exporter to deny the order and contact their local Office of Export Enforcement Field Office for guidance on next steps.

What about Red Flag Letters?

These are letters issued by BIS to the exporter to alert them that their customer may have violated the EAR by reexporting/transferring the same exact item to a country of concern, a restricted entity or an entity of concern.

What if my company receives a Red Flag Letter?

Exporters must be vigilant of dealing with this particular customer without due diligence guidance due to the assumption that they will continue with violating the EAR.

Receiving such a letter should prompt the exporter to conduct additional enhanced due diligence to resolve the Red Flag (if possible) prior to fulfilling the order.

Supplement No. 3 to Part 732 provides guidance on how entities should address export transactions where there are red flags, including those affirmatively raised by BIS through a Project Guardian request or “red flag” letter.

What about these “Is Informed” Letters?

BIS has identified companies and universities that have items (hardware, software and/or technology) that require an export license and alert them of this requirement via the “Is Informed” letter.

Note that if you are in receipt of items subject to this letter and an export license is not obtained prior to shipment, it is treated the same as non-compliance with any other license requirement under the EAR and is subject to administrative and/or criminal penalties.

What is this screening tool “TIP” and what does this mean for my company?

TIP has developed a screening tool that identifies third-country suppliers specific entities with a history of exporting Common High Priority List (CHPL) items to Russia since its full-scale invasion of Ukraine.

The purpose of this tool is to identify potential Red Flags prior to proceeding with an export transaction which could results in a diversion risks a shipment diversion to Russia.

Because TIP is a tip screening tool not embedded into any of the free public screening lists today (the Unverified List, Entity List, Military End User List nor the Denied Persons List etc.) and your company has items that fall under the CHPL list, BIS has recommended screening separately via the TIP tool.

How Do I Know if your Item falls under the CHPL list?

BIS has broken the list into four tiers that have extensive commercial applications but have also been found in Russian missiles and drones on the battlefield in Ukraine.

The items within the 50 HS codes  are a combination of EAR99 items (lower technology) and more sensitive Export Control Classification Numbers (ECCNs); specifically 2A001, 2A101, 2A991, 2B001, 2B002, 2B003, 2B201, 2B991, 2B992, 2B993, 2B998, 3A001, 3A002, 3A090, 3A991, 3A992, 3B001, 3B991, 3B992, 5A001, 5A991, 6A002, 6A003, 6A993, 7A003, 7A994, and 9A991.

Ultimately, if your product falls under one of the 50 HS codes above, screening through TIP has been recommended as a best practice by BIS and those results retained to meet the record keeping requirements.

Because it is a public site, there is not a log in which means screeners must manually save the results and maintain detailed records.

Conclusion

BIS is taking a proactive approach in addressing the reality of diversion contrary to US’ export controls and regulations.  They have issued a Responsibilities Matrix to assist exporters with their due diligence efforts:

Through additional engagement with industry companies and universities, the expectation by BIS is that exporters will go above and beyond a basic export license determination in order to perform enhanced due diligence through TIP as well as review and react to letters received from BIS.

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