BIS Proposes Rule to Update Red Flag Guidance, Create a Safe Harbor, Amend Definition of Knowledge, Etc

This is Part I, the first of a two-part series of summaries on this proposed rule, which provides highlights of the explanatory text preceding the proposed regulations. See future issue of ITT for Part II.

Definition of "knowledge" would be amended. BIS is proposing to amend the current definition of "knowledge" in 15 CFR 772.1 by:

incorporating a "reasonable person" standard. BIS states that under this revision, a party would have knowledge of a fact or circumstance if a reasonable person in that party's situation would conclude, upon consideration of the facts and circumstances, that the existence or future occurrence of the fact or circumstance in question is more likely than not.

replacing the phrase "high probability" with the phrase "more likely than not," which BIS states is not a change from current policy and practice.

adding the phrase "inter alia" to the description of the facts and circumstances that could make a person aware of the existence or future occurrence of a fact. According to BIS, this phrase emphasizes that the factors cited in the definition (i.e., the conscious disregard or willful avoidance of facts) are not the only factors from which knowledge may be inferred.

removing the phrase "known to the person" from the sentence that states that knowledge may be inferred from "conscious disregard of facts known to the person" in order to eliminate the use of the defined term in the definition.

In addition, the proposed rule would limit the applicability of the definition to certain actors in transactions subject to the EAR and exclude certain usages from the definition.

"Red flag" guidance would be updated and expanded. BIS is proposing to update and expand the "red flag" guidance, and increase to 23 (from 12) the number of circumstances expressly identified as presenting a red flag.

BIS states that although the "red flags" provide guidance, this proposed rule would also incorporate them by reference into the proposed safe harbor and the Internal Compliance Programs requirements of Special Comprehensive Licenses. To clarify the role the red flags would play, BIS is also proposing to add a statement that the red flags and know your customer guidance do not derogate from obligations imposed elsewhere in the EAR, and remove the statement that "This guidance does not change or interpret the EAR'' from 15 CFR 732, Supplement No. 3.

Safe harbor from liability would be created. BIS is proposing to create a safe harbor from liability arising from knowledge-based license requirements, knowledge-based restrictions on use of License Exceptions, and other knowledge provisions in the EAR that are subject to the proposed definition of knowledge described in the proposed rule.

According to BIS, parties who report to its Office of Enforcement Analysis, prior to shipment, all material information regarding the existence, assessment, and satisfactory resolution of the red flag(s) and who do not otherwise have "knowledge" would be eligible for a safe harbor from any enforcement action arising from the red flag(s) that they have addressed.

BIS states that it expects to respond to most such reports within 45 days of receipt, and acknowledge in writing receipt of all reports. However, until receiving written confirmation from BIS or contacting BIS after the date specified in the acknowledgment and learning that BIS will not be responding to the report, the party is not entitled to conclude that BIS concurs in the party's assessment that any red flags have been successfully resolved.

BIS further states that parties who have filed such reports would not be able to file a license application relating to the same situation while the report is under review by BIS.

Superfluous/confusing uses of the term "knowledge." The proposed rule would revise three provisions of the EAR to clarify that they refer to all requirements under 15 CFR Part 744, not just to requirements based on knowledge. BIS notes that these amendments would not change the substance of any provision.

Consolidation of "Red flags" terminology. The proposed rule would replace current terminology in 15 CFR 752.11(c)(13)(i) (which concerns an Internal Control Program's (ICP's) ability to screen for "signs of potential diversion") with a reference to the red flags in paragraph (c) of 15 CFR Part 732, Supplement No. 3.

- comments must be received by November 12, 2004

BIS contact - William Arvin (202) 482-2440

BIS proposed rule (D/N 040915266-4266-01, FR Pub 10/13/04) available at http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.access.gpo.gov/2004/pdf/04-22878.pdf