BIS issues new guidance to industry and academia on methods to address diversion risks

The Guidance from the the Department of Commerce’s Bureau of Industry and Security (BIS) provides an overview of the agency’s methods for helping at-risk industries—especially exporters and reexporters (such as manufacturers, distributors, and resellers) as well as their service providers (such as financial institutions, logistics companies, transportation providers, and freight forwarders)—identify parties that present diversion risks, beyond those explicitly identified on Commerce Department screening lists.

New best practice recommendation: Trade Integrity Project (TIP) screening

BIS is now instructing exporters to regularly screen transactions against the Trade Integrity Project (TIP) database that identifies entities that have shipped key Common High Priority List (CHPL) items to Russia since 2023. 

The TIP website is an initiative of the UK-based Open-Source Centre that monitors military and dual-use trade with Russia using publicly available trade data.  The CHPL, developed by BIS in cooperation with the EU, Japan, and UK, currently includes fifty items identified by their six-digit HTS codes that Russia seeks to procure for its weapons programs, including electronic integrated circuits and fixed capacitors. Companies and universities involved in the export, reexport, or in-country transfer of CHPL-designated items are strongly encouraged to regularly screen transaction counterparties using the TIP website tool, in addition to the Consolidated Screening List (CSL).

While the TIP website does not appear to provide a viewable list of identified entities, users may enter individual party names into the search bar to see whether or not they have been flagged as shipping CHPL items to Russia. Companies and universities should apply heightened due diligence to transactions involving identified parties and scrutinize transactions relating to such parties for red flags before proceeding with transactions.  

Other BIS diversion risk notification methods

The BIS Guidance provides an overview of the actions BIS takes to help at-risk industries identify parties that pose circumvention risks of the Export Administration Regulations (EAR), other than those parties explicitly identified on the CSL. BIS employs several tools—“supplier list” letters, Project Guardian requests, “red flag” letters, and “is informed” letters—to assist industry participants and to share information that the agency receives regarding export control risks. These notifications generally require that the recipients take additional steps when dealing with the identified foreign end users by either resolving the red flags or proactively requesting an export license. 

“Supplier list” letters

A “supplier list” letter notifies the recipient that a foreign party not identified on a BIS public screening list (e.g., the Entity List or Denied Persons List) has either exported to, or facilitated transactions with, destinations or end users that pose a national security or foreign policy concern. BIS may issue these letters to a company or university regardless of whether or not it had previously engaged in transactions with the “supplier list” parties. Recipients are instructed to closely scrutinize transactions with the identified parties to determine if any “red flags” (identified in the EAR here) are present before filling an order.

Project Guardian Requests and “red flag” letters

A Project Guardian Request is a letter from BIS requesting that its recipient be on the lookout for transactions with a specific party or for inquiries about a specific item. The guidance instructs recipients who identify such transactions or receive such a product inquiry to deny (or at the very least, suspend) the order and to contact their local BIS enforcement agent for guidance on how to proceed.

A “red flag” letter notifies the recipient that one of its customers may have reexported or transferred (in-country) the same type of item that the recipient previously exported to that same customer in violation of the EAR. Red flag letters warn companies and universities to beware of dealing with a particular customer because the customer’s reexport or in-country transfer history indicates a high probability that an export violation may occur. Recipients of these letters are instructed to conduct additional due diligence to identify and, if possible, resolve the red flags, which may include obtaining an export license. 

Recipients of Project Guardian requests and red flag letters have a duty to review any red flags and to confirm that parties likely to have conducted transactions in violation of the EAR are no longer doing so before engaging in export transactions with such parties. If a request or letter recipient chooses to proceed with transactions with entities identified in a Project Guardian request or red flag letter, the recipient should keep detailed records of the information received in its review and due diligence of the transaction, steps taken to verify the information, and documentation of its decision-making process to proceed with the transaction. If a red flag cannot be resolved, the recipient should refrain from the transaction or apply for a BIS license.  Proceeding with a transaction without first obtaining an export license and with knowledge that a red flag exists that has not been resolved, especially when the red flag is identified through a Project Guardian request or red flag letter, will be considered an aggravating factor in any subsequent BIS enforcement actions.

“Is informed” letters

An “is informed” letter notifies the recipient of additional license requirements applicable to particular items that are destined for specific entities and/or destinations, or to specific activities of U.S. persons. The items and activities typically relate to weapons of mass destruction, military end uses, or involvement in other activities contrary to U.S. national security or foreign policy interests. The guidance instructs recipients to obtain the appropriate authorization as described in the letter. Recipients who engage in a transaction covered by the letter without the required license are considered to have violated the EAR. Non-compliance with “is-informed” letters is treated the same as non-compliance with other license requirements under the EAR and can similarly result in administrative or criminal penalties.

Next steps

Companies and universities are encouraged to review the Guidance and become familiar with the appropriate steps to take following the receipt of a “supplier list” letter, Project Guardian request, “red flag” letter, or “is informed” letter. Additionally, parties that produce or sell CHPL items are advised to incorporate screening on the TIP website as part of their due diligence procedures for transactions.

Please contact any of the listed Hogan Lovells attorneys if you would like help identifying parties that pose diversion risk of items subject to BIS export controls or to countries and entities of concern. We would be happy to assist you.

Authored by Deborah Wei and Ashley Roberts.

Summer associate Elizabeth Spaeth contributed to this report.