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

This is Part II, the final part of a two-part series of summaries on this proposed rule, and highlights the regulatory text. (See ITT's Online Archives or 10/15/04 news, 04101520, for Part I.)

Proposed Amendments to Supplement No. 3: Know Your Customer Guidance and Red Flags

BIS is proposing to substantially update and augment its "Know Your Customer Guidance and Red Flags" (Supplement No. 3 to 15 CFR Part 732). The following are samples of the proposed changes to this supplement (partial list):

What constitutes a red flag would depend on context and person's role in a transaction. Proposed paragraph (b)(ii) of Supplement No. 3 to 15 CFR Part 732 would state, among other things, the role a person is playing in a transaction is relevant to what facts or circumstances that person is expected to recognize as red flags. For example, a manufacturer who is exporting one of its products will be expected to be highly familiar with the configurations or specifications required for an end-use stated by a customer. Thus, a manufacturer should be able to recognize when a deviation from such parameters is indicative of an end-use other than what is stated.

Similarly, if a freight forwarder is better able than an exporter to recognize that the location of an intermediate consignee is incongruous with the claimed ultimate destination, then such information could be regarded as a red flag for the freight forwarder, but not the exporter.

This supplement would state that the general rule is that one should treat a fact or circumstance as a red flag if it would cause a reasonable person in that situation (e.g. a manufacturer/exporter, freight forwarder, distributor/reexporter) to suspect that a transaction may involve an inappropriate end-use, end-user or destination, or otherwise violate the EAR.

BIS proposes to revise and expand list of red flags. BIS also is proposing to revise its examples of red flags in various situations, and expand their number to 23 (from 12). Among others, BIS is proposing to add the following as red flags (partial list):

The customer gives different spellings of its name for different shipments, which can suggest that the customer is disguising its identity and/or the nature and extent of its procurement activities.

The customer provides information or documentation related to the transaction that you suspect is false, or requests you to provide documentation that you suspect is false.

Proposals to Remove "Knowledge," "Knowingly," Etc. from Certain Regulations

BIS is proposing revisions to the following regulations in order to remove such terms and phrases as "knowingly," based on knowledge of," "when it knows," and "known to have": 15 CFR 736.2(b)(5) (General Prohibition Five - Recipient and end-use license requirements), 15 CFR 740.18 (Agricultural commodities (AGR)), 15 CFR 748.4 (Basic guidance related to applying for a license), 15 CFR 752.9 (Action on SCL applications), and 15 CFR 752.11 (Internal Control Programs).

BIS Proposes to Add a "Safe Harbor" from Knowledge-Based Requirements

BIS is proposing to add a new 15 CFR 764.7 (Safe harbor from knowledge-based requirements) which it states would allow parties involved in exports, reexports, or other activities subject to the EAR who meet these proposed requirements to avail themselves of a "safe harbor" against being found to have had knowledge of a fact or circumstance under the definition of knowledge in 15 CFR 772.1. The paragraph headings for proposed 15 CFR 764.7 are as follows:

(a) The person must not have actual knowledge or actual awareness that the fact or circumstance at issue is more likely than not.

(b) The person must take the following steps:

1. Comply with item and/or destination-based license requirements and other notification or review requirements.
2. Determine whether the parties to the transaction are subject to a denial order, or to certain sanctions, and whether they appear on the Entity List or Unverified List, and whether the transaction is governed by a BIS General Order.
3. Identify and respond to red flags.

(c) Report to BIS

- 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