Enforcement of US export controls is currently at a pivotal juncture, especially in the wake of critical actions taken by the Department of Commerce’s Bureau of Industry and Security (BIS) this summer. Notable among these were the issuance of new guidance and a significant settlement involving export control violations.
US export controls depend heavily on the self-reported information from market participants. Exporters routinely ask counterparties, such as customers and resellers, for data on an item’s destination, end user, and end use to ensure compliance. However, the effectiveness of these due diligence forms is constrained by the truthfulness and completeness of the data provided. Consequently, form-based diligence efforts alone often fall short in deterring bad actors, especially given the economic incentives to evade regulations.
Reports have surfaced detailing brazen diversion schemes highlighting the limitations of form-based programs. These schemes include everything from overt smuggling networks to open-air diversion markets, such as those in Shenzhen where chips worth more than $100 million were reportedly sold in a single transaction. Such schemes often involve deceptive practices, like falsely labeling shipments or creating fake companies.
Nonetheless, the existence of such schemes does not absolve counterparties involved in these deceptive practices from enforcement risks. US export controls demand more than just form-based diligence; they include broad catch-all provisions that call for deeper, substantive analysis. Participants must assess whether exports are for specific end uses, such as ballistic missiles, unmanned aerial vehicles, or weapons of mass destruction, or to specific end users.
The regulations also restrict certain conduct by US persons, and include General Prohibition 10, which bars participation in transactions with knowledge that a violation has occurred or is about to occur. This knowledge is defined not as an absolute certainty but as an “awareness of a high probability” of diversion—a standard in place since 1996 and similarly applied in the Foreign Corrupt Practices Act to help mitigate bribery risks.
Recent guidance from BIS emphasizes this “high probability” standard for responding to “red flag” letters and other diversion risks. This was illustrated by the August 15 $5.8 million settlement with a US company, which BIS used to underscore the necessity of obtaining licenses for exporting dual-use items under conditions of high probability of UAV-related end uses.
This development sends a clear message: reliance on perceived loopholes or technicalities in form-based compliance carries escalating enforcement risks. US exporters and manufacturers must design risk-based methodologies to evaluate the high probability of diversion and focus compliance resources on mitigating the most substantial risks. The recent BIS actions underline that export controls prioritize substance over form and are not merely geopolitical formalities.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
For further details, you can access the original article here.