What Flags Should a Prospective Exporter Look For?

Exporters and re-exporters are responsible under the EAR for engaging in lawful export transactions and not engaging in export transactions where they “know” or have “reason to know” that the export transaction may involve an unauthorized party, end-use, or end-user.  When evaluating the due diligence collected in relation to prospective export transactions, exporters and re-exporters should highlight any facts where there is missing information or where answers to questions about the parties, end-use, and end-users do not “add up.”

For example, if a party receives a completed EUS/EUC that lists a distributor as an end-user, the entire export transaction is a red flag since details regarding the true end-use and end-user are not being provided.  Similarly, if a party receives a completed EUS/EUC that lists various parties, including the purchaser, ultimate consignee, and end-users, that cannot be validated through an internet search, there is a red flag to the export transaction, and additional due diligence should be performed.

Liability in the Event that a Party to An Export Transaction Provides Incorrect Information?

Entities in China that have been placed on the Entity List or designated as MEUs still need to receive components to manufacture their products.  Companies like Huawei and Semiconductor Manufacturing International Corporation (“SMIC”) have not slowed their production of products for the commercial marketplace or for the Chinese Government.  As a result, we fully expect that “front” companies will be formed solely for the purpose of diverting goods to companies like Huawei and SMIC in contravention of the EAR.  Exporters and re-exporters cannot afford to completely stop exporting to China and Hong Kong (and other destinations) solely because there is a possibility that their shipments will be diverted for unauthorized end uses or unauthorized end users.

To mitigate the risks associated with diversions downstream in export transactions, exporters and re-exporters need to be able to rely on certifications made by legitimate parties to export transactions.  There is no requirement to perform post-delivery validation of export transactions involving products that are EAR99 or controlled by the EAR for Anti-Terrorism (“AT) reasons alone.  However, exporters and re-exporters need to be able to validate before shipment that the parties to export transactions are legitimate legal entities and that other red flags are overcome.

Therefore, a critical burden on exporters and re-exporters is to ensure that the parties who sign EUS/EUC for prospective export transactions are legitimate legal entities.  Once the EUS/EUC is received and the bona fides of the parties have been established and export classifications validated, exporters and re-exporters can export/re-export freely, whether under an export license, under a license exception, or as NLR, if applicable.  If an exporter or re-exporter learns after the fact that there has been a diversion, the matter should be reported to BIS, and steps taken internally to document concerns with the pertinent parties to the export transaction resulted in diversion should be undertaken to avoid any recurrence of the diversion.

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