From Sanctions Wiki
Know Your Customer Guidance
Certain provisions in the Export Administration Regulations (EAR) require an exporter to submit an individual validated license application if the exporter "knows" that an export that is otherwise exempt from the validated licensing requirements is for end-uses involving nuclear, chemical, and biological weapons (CBW), or related missile delivery systems, in named destinations listed in the regulations.
BIS has issued the following guidance on how individuals and firms should act under this knowledge standard
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 which are inconsistent with the needs of the purchaser, a customer's declining installation and testing when included in the sales price or when normally requested, or requests for equipment configurations which are incompatible with the stated destination (e.g.--120 volts in a country with a standard of 220 volts). Commerce has developed lists of such "red flags" which 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.
If there are red flags
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", 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 the 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 general licenses affected by the "know" or "reason to know" language in the EAR. Applicants for validated licenses are required by 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.
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.
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.
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.
The above information recides on the Bureau of Industry & Security website BIS Guidance
Red Flags Indicators - Things to Look for in Export Transactions
- A Free Zone as final destination.
- A freight forwarding firm is listed as the product's final destination.
- Delivery dates are vague, or deliveries are planned for out of the way destinations.
- Inconsistencies in the size of shipment compared with normal business of a customer or with industry practice.
- Packaging is inconsistent with the stated method of shipment or destination.
- Routine installation, training, or maintenance services are declined by the customer.
- Shipments through multiple jurisdictions without clear purpose.
- Significant discrepancies appear between the description of the commodity on the bill of lading and the invoice.
- Significant discrepancies appear between the description of the goods on the bill of lading (or invoice) and the actual goods shipped.
- Significant discrepancies appear between the value of the commodity reported on the invoice and the commodity’s fair market value.
- Significant discrepancies between values of goods on any documents sighted.
- Significant discrepancies between values of goods shipped and market value of goods on any documents sighted.
- The commodity is shipped to (or from) a jurisdiction designated as “high risk” for money laundering activities.
- The commodity is transshipped through one or more jurisdictions for no apparent economic reason.
- The customer has little or no business background.
- The customer is unfamiliar with the product's performance characteristics but still wants the product.
- The customer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing.
- The customer or its address is similar to one of the parties found on list of denied persons or entities.
- The customer or purchasing agent is reluctant to offer information about the end-use of the item.
- The item ordered is incompatible with the technical level of the country to which it is being shipped, such as semiconductor manufacturing equipment being shipped to a country that has no electronics industry.
- The method of payment appears inconsistent with the risk characteristics of the transaction.
- The product's capabilities do not fit the buyer's line of business, such as an order for sophisticated computers for a small bakery.
- The shipping route is abnormal for the product and destination.
- The size of the shipment appears inconsistent with the scale of the exporter or importer’s regular business activities.
- The transaction involves the receipt of cash (or other payments) from third party entities that have no apparent connection with the transaction.
- The transaction involves the use of front (or shell) companies.
- The transaction involves the use of repeatedly amended or frequently extended letters of credit.
- The type of commodity being shipped appears inconsistent with the exporter or importer’s regular business activities.
- The type of commodity being shipped is designated as “high risk” for money laundering activities.
- Transactions or shipments that do not appear to make economic sense.
Things to Look for in Export Transactions BIS Red Flags
The Export Control and Related Border Security Assistance (EXBS) program is the United States Government's premier initiative to help other countries improve their export control systems. For more information please visit their website Export Control