On October 9, 2024, the U.S. Department of Commerce's (Commerce) Bureau of Industry and Security (BIS) issued Export Administration Regulations (EAR) compliance guidance (Guidance) specifically outlining recommendations and expectations for financial institutions (FIs). The Guidance notes that "[w]hile EAR compliance has traditionally been of greatest concern to exporters, FIs' responsibilities under the EAR have increased significantly following Russia's further invasion of Ukraine in 2022 and the enhanced national security and foreign policy imperative to restrict China's military modernization efforts and commission of human rights violations." 

The Guidance begins by providing FIs with an overview of the scope of items considered "subject to the EAR" and BIS's jurisdiction over transactions involving items subject to the EAR even where no U.S. persons or U.S. FIs are involved. BIS notes that while FIs typically have less information than exporters about whether an item is subject to the EAR, a lack of information may not shield a FI from liability, as the "knowledge" requirement under General Prohibition (GP) 10 can be interpreted broadly. Furthermore, the Guidance indicates that certain characteristics of a transaction, an item, or its destination will nearly always implicate restrictions under the EAR.

With these considerations in mind, the Guidance provides best practice recommendations that FIs should adopt to minimize risks of violating the EAR's GP 10. GP 10 prohibits U.S. persons from financing or otherwise servicing, in whole or in part, any item subject to the EAR with knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item. As discussed below, these best practice recommendations, include: (1) conducting proper due diligence upon new customer onboarding; (2) reviewing transactions on an ongoing basis to determine if transactions present certain red flags indicating potential GP 10 violations; and (3) in certain cases, conducting real-time screening of transaction parties. 

Best Practice Recommendations 

Due Diligence for New Customer Onboarding 

BIS recommends that FIs screen customers and, in some cases, customers' customers, against various restricted party lists, which may also specify specific license requirements that may apply to particular items or transactions. These include BIS's Unverified List, Entity List, Military End-User List, and Denied Persons List. 

In addition to commonly used restricted party lists (e.g., restricted party lists included in Commerce's Consolidated Screening List (CSL)), BIS recommends that FIs screen parties against lists of companies that have shipped Common High Priority List (CHPL) items to Russia since 2023 (e.g., lists provided by the Trade Integrity Project (TIP) maintained by U.K.-based Open-Source Centre) and scrutinize publicly available trade data for indications of export controls evasion. 

Where a customer is included on a restricted party list, the Guidance recommends that FIs determine whether a proposed transaction involving the customer involves exports, reexports, or transfers of items subject to the EAR and, where applicable, ask customers to certify that they have sufficient controls to comply with the EAR. 

Ongoing Reviews for Red Flags 

Along with conducting due diligence during customer onboarding, the Guidance recommends ongoing reviews of transactions for red flags indicating potential violations of GP 10. The Guidance notes that in most scenarios, FIs may not have "sufficient information to assess each individual transaction for an EAR violation before proceeding" and thus does not expect "real time" reviews for red flags. Nonetheless, BIS expects FIs to have "risk-based procedures in place to detect and investigate red flags post-transaction and, if necessary, take action to prevent violations of the EAR before proceeding with any transactions involving the same customer or counterparties." Specifically, FIs should avoid future transactions with that same party when it becomes aware of one of the following red flags with respect to transaction or a customer, each of which demonstrate a high probability of export controls evasion: 

• A customer's refusal to provide details, particularly about ownership and end-users
• A match, or notable similarity, between the name of a party to a transaction and one on a restricted party list
• A potential customer sharing a physical location with a party on a restricted party list 
• A last-minute change in payment routing, particularly when changed from a country of concern to a different country

The Guidance provides additional comments regarding how FIs may resolve some of these red flags, the facts that FIs should take into account when conducting post-transaction reviews, when it is appropriate for an FI to rely upon the representations of its customers, and when FIs should seek additional information about BIS licenses held by transaction parties. The Guidance also notes that FIs that file a Suspicious Activity Report (SAR) with Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) may be provided with additional information that would provide them with "knowledge" under GP 10. In such situations, FIs are expected to take action to prevent any violation of the EAR, including, if necessary, by terminating a relationship with a customer. 

Real-Time Screening for Certain Cross-Border Payments  

While the Guidance notes that, because of the difficulties of implementation, BIS generally does not expect FIs to engage in real-time screening of parties to a transaction to prevent GP 10 violations, it notes that "cross-border payments and other transactions that are likely to be associated with exports from the United States (or re-exports or in-country transfers outside the United States)," do warrant real-time screening of certain transaction parties (e.g., parties listed on interbank financial messages) against certain restricted party lists. 

Takeaways

• The Guidance builds on BIS and FinCEN's joint guidance issued in November 2023 that focused on export controls evasion. The Guidance comes amidst an ever-growing mesh of regulations and accompanying guidance regarding prohibitions on financial activity touching Russia and China. In sum, this is the latest push by government agencies involved in administering export controls to enlist FIs in evasion prevention efforts. 
• Given the increased scope and complexity of restrictions imposed pursuant to the EAR, FIs should familiarize themselves with the scope of items that can be considered subject the EAR. As the Guidance highlights, there are less obvious situations where items shipped from outside the U.S. may still be subject to the EAR (i.e., certain non-U.S. items that incorporate U.S. technology). FIs should also increase their awareness of activities that they or their customers could engage in that might trigger violations of GP 10, including financing, disposing, servicing, and storing of items subject to the EAR that have been or will be exported in violation of the EAR. 
• A major theme of the Guidance is the expectation that, even as FIs may generally have less information than exporters, they are nonetheless expected to take reasonable steps to obtain information and continue to review the activities of its customers for apparent export controls compliance red flags. 
• FIs, particularly those undertaking significant trade financing activities, should consider implementing measures designed to address both BIS's increased compliance expectations and an environment where export controls-related restrictions are becoming increasingly complex. 
  • For example, increased export controls-focused training for bank compliance professionals, who have traditionally maintained expertise on sanctions but not export controls, can help improve overall export controls risk awareness. 
  • FIs should also consider implementing specific processes designed to improve monitoring of their trade finance activity, such as undertaking thematic reviews focused on customers who are exporters and conducting lookbacks on transactions against the TIP List. 
  • FIs should also consider undertaking reviews aimed at identifying common patterns of diversion, such as examining trade flow data across customers to determine if there has been a decrease in Russia-related activity for certain customers that corresponds with an uptick in the same trade activity in other jurisdictions that BIS warns present an elevated risk of diversion (e.g., Brazil, India, Turkey, Kazakhstan, or the United Arab Emirates).

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

Peter Kentz, pkentz@milchev.com, 202-626-5891

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