On July 10, 2024, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) published new guidance, "Guidance to Industry on BIS Actions Identifying Transaction Parties of Diversion Risk" (Diversion Guidance), highlighting how BIS informs companies and universities of parties that present heightened risks of export diversion and outlining the informed parties' responsibilities for addressing these risks once informed. The Diversion Guidance also includes a new best practice, encouraging companies trading in certain high-priority items to utilize a new screening resource compiled by the U.K.-based Trade Integrity Project (TIP). 

Overview

As explained in the Diversion Guidance, BIS typically informs parties of export diversion risks in one of four ways, with varying expectations and possible outcomes:

• "Supplier list" letters are issued to at-risk companies and universities, identifying parties of diversion concern. They often include specific guidance on red flags and due diligence tips. Recipients of a "supplier list" letter are expected to determine whether there are any diversion red flags and resolve them prior to proceeding with a transaction. 
• Project Guardian requests ask companies and universities to monitor for transactions with a specific party or questions about a specific item. Upon identifying a matching party or request, the recipient should deny the order, or, at a minimum, suspend completion until contacting their local Export Enforcement field office for guidance.
• "Red flag" letters notify companies and universities that one of their customers may have previously reexported or transferred an item similar in type to an item that the company previously exported to that customer in violation of the Export Administration Regulations (EAR) and this prior history creates a "high probability" that an export violation may occur. Recipients should conduct additional due diligence on the customer and resolve any red flags prior to filling another order from the customer. 
• "Is informed" letters notify companies and universities of supplemental license requirements applicable to specific U.S. person activities and to specific items intended for specific entities or destinations. "Is informed" letters are often tied to specific U.S. national security or foreign policy concerns. Engaging in a transaction covered by an "is informed" letter without the required authorization is a violation of the EAR.

The Diversion Guidance also includes a new best practice recommendation that companies and universities trading in items listed on the Common High Priority List (CHPL) screen transaction parties using the TIP website, a new U.K.-based Open-Source Centre initiative focusing on trade in CHPL items with respect to Russia. Where transaction parties include persons identified on the TIP website, the transaction should be "heavily scrutinize[d]" for red flags before proceeding. This screening tool is recommended in addition to — not as a substitute for — using the Consolidated Screening List.

Takeaways

• Continued Focus on Diversion Efforts: The Diversion Guidance signals that BIS continues to be proactive in notifying and providing detailed information to companies about export diversion risks. In turn, BIS expects companies to heed these warnings and respond accordingly, often through increased due diligence efforts focusing on the specific risks identified by BIS. 
• At-Risk Transaction? Keep Records of Your Due Diligence: Recipients informed about export diversion risks by BIS, who ultimately determine that the diversion risks have been addressed and who then proceed with a particular export transaction, should maintain detailed records of the company's due diligence measures and any other information they relied upon to make that determination. 
• Benefits of Cooperation and Risks of Ignoring Red Flags: The Diversion Guidance indicates a company's or university's response or cooperation with BIS following a notification can bring substantial mitigation benefits in the event of a future enforcement action, while a failure to undertake additional due diligence or respond appropriately to a risk identified by BIS can lead to higher penalties. In certain cases, a party's cooperation with BIS can be counted towards mitigation in a future enforcement action, even for unrelated conduct. 
• Increasing Due Diligence Expectations: Regardless of whether BIS provides a notification, companies and universities should review whether they trade in items on the CHPL and consider incorporating the TIP screening tool into their existing screening and/or due diligence procedures. Even parties who do not trade in CHPL items should consider how best to use the TIP screening tool, particularly if such parties have trade ties involving, directly or indirectly, Russian counterparties. 

For more information, please contact:

Timothy P. O'Toole, totoole@milchev.com, 202-626-5552

Laura Deegan, ldeegan@milchev.com, 202-626-5942

Caroline J. Watson, cwatson@milchev.com, 202-626-6083

Melissa Burgess, mburgess@milchev.com, 202-626-5914

Manuel Levitt, mlevitt@milchev.com, 202-626-5921

Annie Cho, acho@milchev.com, 202-626-1570

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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