With enemy drone and missile attacks on US interests and allies escalating this year in the Middle East, Red Sea and Ukraine, the urgency to trace the origin of enemy weapons, particularly when they illicitly use US-produced materials like semiconductors, is growing. Streamlining the monitoring of the distribution chain of such precision weapons now requires concerted government and industry action, especially considering the challenges posed by commercial items with dual military and civilian uses.
Understanding the legal standard for knowledge of evasion, specific under the Export Administration Regulations, fundamentally strengthens this mission. This standard puts the onus not only on obvious instances of evasion, but also holds accountable parties aware of a ‘high probability’ of evasion, thereby providing regulators and prosecutors with the tools to break up sophisticated schemes.
Manufacturers and exporters can greatly benefit from this standard. It allows them to refuse shipments pending further scrutiny, and holds counterparties, like distributors and resellers, accountable for compliance with US laws. The applicability of this standard goes a long way in boosting companies’ ability to assess and guard against evasion risks.
However, a key challenge comes from the supply chain itself, where transferring an item to the next party is often the locus of evasion. It is suggested that the Commerce Department’s Bureau of Industry and Security create a Validated Distributor & Reseller (VDR) pilot program for semiconductor industry with additional resources from Congress. The VDR program could build on ideas from BIS’s Validated End-User program and Homeland Security’s Customs Trade Partnership Against Terrorism Trusted Trader and Global Entry Trusted Traveler programs.
A successful VDR program would naturally impose obligations on distributors and resellers – they would have to commit to recordkeeping and compliance duties, certify their conduct, and allow US officials to appropriately review for compliance checks. It could also help detect weak links in supply chains where evasion or diversion may occur. The program would serve to enhance accountability within the supply chain.
Distributors and resellers who invest in controls and processes to meet VDR program requirements could drive more business, further promoting the cause for stronger compliance. And if an attack occurs, knowing that someone in the supply chain knowingly evaded export controls or sanctions could empower BIS to identify, reward good actors, and focus on other compliance resources. It could also place accountability squarely with parties most capable of preventing evasion.
With several instances of attacks against US and allied interests, it is clear that current methods of allocating risk and accountability fall short. The best solution is increasingly becoming traceability and accountability in supply chains, with laws that make evasion difficult and unrewarding.
For more detail, you may read the full article here.
Written by:
Michael Huneke, partner at Hughes Hubbard & Reed’s sanctions and export controls practice.
Sean Reilly, counsel at Hughes Hubbard & Reed and formerly served with the Department of Commerce.
Kevin Carroll, partner at Hughes Hubbard & Reed and formerly served with the Department of Homeland Security.