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US Export Compliance 101: Screening is Your First Defense

By Angela Bao

Sep. 9, 2019
A customs inspector standing and reviewing a tack of containers
Understanding and maintaining export compliance is crucial to the success of any business that deals with exporting. (Photo credit): Gettyimages.com/Yuri_Arcurs

Staying compliant with export regulations means staying competitive in your industry.

Whether you are a small business, a large corporation or just getting into exporting, understanding and maintaining export compliance is crucial to your company’s health and longevity. Especially during the current global trade tensions, knowing, complying with and staying up-to-date with all the relevant regulations is especially important for business continuity. If you don’t, you could be subject to fines, denial of export privileges and, in extreme cases, even imprisonment. It’s more important now than ever for companies to take initiative and develop their own internal export compliance programs.

Over the past few years, the United States has increasingly cited national security concerns as reasons for enhanced export controls, says Paula Murphy, director of the Massachusetts Export Center. The restricted parties lists are constantly being updated, so it’s important for companies to check at each stage of exporting so they don’t run into compliance issues, adds Allen Yao, vice president of trade risk operations at East West Bank. Otherwise, they won’t be able to complete their export transactions and conduct business.

“They really need to be well-versed in these regulations and compliant with them, in order to remain competitive,” emphasizes Murphy.

Every company’s first line of defense is to develop proper screening procedures. “This is one of the most critical steps for export compliance, and it’s also one of the most overlooked, especially for small business exporters,” shares Murphy. “It’s unfortunately not unusual for us to go to a company, and they aren’t even aware they need to be screening, or that they have insufficient screening operations.”

Types of risks to screen for

There are several factors businesses need to consider when screening their export transactions, some of which may overlap.

  1. Restricted parties
  2. Ensures that export transactions do not involve organizations, companies or individuals that any U.S. government agency has identified as prohibited.

  3. Sanctions
  4. Ensures that transactions do not involve restricted countries or sanctioned parties. “The key list for sanctioned parties, which is the specially designated nationals (SDNs) list, also has ownership restrictions in place,” adds Murphy.

    Specifically, Murphy says that a party involved in a U.S. export transaction cannot be 50 percent or more owned by one or more SDNs. “When you’re doing business in countries where there’s a prevalence of SDNs, screening needs to be enhanced to include ownership,” she advises.

  5. End-use or user
  6. Some products may have dual uses, where it can have a conventional use, but could potentially be used for something prohibited, such as to make a weapon of mass destruction. Businesses must check the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR), which controls defense-related products and services, to make sure that your product’s end-use is compliant.

    Murphy adds that in the past 10 years, there has been a significant export control initiative where a lot of items that were included under ITAR are now under EAR, so it’s important for businesses to check both lists. If the end-use is involved in any of the listed functions below (detailed more thoroughly in part 744 of the EAR), then those products may require a license to export.

    • Weapons of mass destruction
    • Nuclear activities (e.g., nuclear reactors)
    • Rocket systems (e.g., space launch vehicles)
    • Unmanned air vehicles

    Yao also recommends that businesses screen against the U.S. Department of Commerce, Bureau of Industry and Security’s (BIS) Unverified List (UVL), which he says is a list of companies that the BIS “could not verify as bona fide because the end-user check could not be completed to a satisfactory level.” Parties on the UVL cannot receive items subject to the EAR, even with license exceptions.

  7. Red flags
  8. The EAR defines red flags as “any abnormal circumstances in a transaction that indicate that the export may be destined for an inappropriate end-use, end-user, or destination.” The BIS has put together a list of red flag indicators for exporters to screen against.

  9. Antiboycott
  10. U.S. companies are prohibited from engaging in activities that directly or indirectly support certain boycotts in foreign countries, particularly the boycott of Israel by the Arab League.

  11. Illegal diversion
  12. Also referred to as transshipment, illegal diversion is when a business sells a product to a foreign customer, and then that customer resells that product to a prohibited entity or for a prohibited end-use.

Developing export screening procedures

Screening can be one of the biggest challenges for a business because there are no regulatory guidelines, shares Murphy. Each individual company will also require different levels of screening, depending on the size of their exports, where they are exporting and what their products are. However, Murphy emphasizes that it’s important for companies to conduct their own risk analysis and determine what works best for them, while minimizing the disruption of business.

“Exporters must determine the lists they need to screen against. At a minimum, they need to be screening against all 11 lists maintained by the U.S. government that restrict exports, re-exports and transfer of items,” suggests Murphy. “But companies operating globally might choose to screen against additional lists that might be relevant to foreign jurisdictions where they operate.”

Businesses that don’t export large volumes can usually get away with manually screening for each transaction or use the screening tools the U.S. government provides, such as the Consolidated Screening List, which is ideal for businesses with low-to-moderate export volumes. For businesses that deal with higher volumes, there are tools and services that can automate the screening process, such as global trade management systems Amber Road, Integration Point and BluJay Solutions, among many others.

Assess the risk

There are a number of factors that businesses need to consider when developing screening procedures. “Export volume will help to determine the method of screening, and sales and production cycles will help determine the frequency of screening,” adds Murphy. “But exporters should also assess their information systems to determine where and how screening can be best integrated.”

For instance, many exporters sell through distributors, but if they know who the distributors’ end customers are, then they should expand their scope of screening to include those end customers. Some companies may want to have their distributors handle the end-use and user screening, but Murphy warns that, ultimately, the exporters will still be liable for any violations.

Yao emphasizes, “The exporter needs to perform due diligence on the parties they are doing business with, and follow the U.S. Export Administration Regulations closely and regularly. If they miss new names and new requirements, the exporter will face great penalties and other regulatory enforcement.”

At the very minimum, companies need to screen immediately before shipping out their goods, but in some cases where risks are higher, companies should be screening at several intervals. “Many companies screen upon order receipt and immediately before shipping, as restricted parties may be added to federal lists at any time,” says Murphy. For instances in which transactions require further screening efforts, she recommends that companies include “screening escalation” as part of their operating procedures so that they are prepared to handle the additional workload.

Train employees and vendors on regulatory compliance

The best way to ensure regulatory compliance is to educate company management and employees on what to look for and train them on company screening procedures.

“In order to develop an export compliance program, develop an export compliance committee to pull the whole program together,” recommends Kathleen Kinahan-Newell, international trade compliance manager at the Massachusetts Export Center. “This would involve a representative from a multitude of divisions within the company—legal, sales, order entry, order management, your financing department—so they might catch any antiboycott language, shipping, engineering when they are developing products.”

After appointing a team leader, they should review the company processes currently in place and then determine where to best incorporate compliance aspects that cover all the potential risks while minimizing the disruption of business. Afterward, Kinahan-Newell says to distribute the procedural guidelines to employees, preferably someplace that is digital, centralized and easily accessible, such as an intranet.

She adds, “Train the personnel on these new procedures, and audit on a regular basis. Internal audit maybe every six months, and external audit every year. It’s a living document—go back and make changes to your compliance programs. As regulations change, make sure you make changes to your document, as well, and provide that information to your personnel.”

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