SUMMARY: The Bureau of Industry and Security is publishing the guidance entitled, “Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items subject to the Export Administration Regulations, Particularly through Transshipment Trade.”
On September 1, 2010, the Bureau of Industry and Security (BIS) published a notice of inquiry requesting public comment on its draft Best Practices for Transit, Transshipment, and Re-export of items subject to the Export Administration Regulations (EAR) (75 FR 53639). In response to this notice of inquiry, BIS received 5 written industry comments. Between September and December 2010, BIS also received 52 comments through individual meetings and outreach activities with stakeholders, including trade associations, exporters, freight forwarders, carriers, software vendors, advisory committees, and other government agencies.
This effort updates BIS’s Transshipment Countries Export Control Initiative’s efforts that recommended Best Practices for Transit, Transshipment, and Re-export of Items Subject to the Export Administration Regulations. BIS published these best practices on its website in November 2003. The best practices were intended to help industry, and in particular Exporters/Re-exporters and Trade Facilitators/Freight Forwarders to contribute to a reduction in unlawful transactions and facilitate legitimate global commerce by increasing the capacity to distinguish between lawful and unlawful transactions.
The 2011 Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items, Particularly through Transshipment Trade reflects the changes over seven years in the U.S. and global trade facilitation industry’s practices and the growing diversion risks for sensitive dual-use items.
Following is a review of the 5 written industry comments received in response to BIS’s notice of inquiry on the best practices as well as the 52 oral comments received through meetings and outreach activities with stakeholders. BIS responds to these comments and where appropriate indicates that it has modified certain best practices or created new best practices.
Best Practice No. 1 – Pay heightened attention to the Red Flag Indicators on the BIS Website. There were very few comments on this best practice. Those received indicated that red flags are raised to a higher level within companies, but most companies cannot detect everything. One commenter indicated that orders for dual-use items placed by potential diversion risk buyers are refused when red flags surface. However, such potential diversion risk buyers will often continue to pursue orders at other divisions/branches of the company until orders are granted. In addition, this commenter noted that these buyers may contact several divisions of a freight forwarding company or several freight forwarding companies until they find one that will facilitate the movement of their items with minimal questions. One commenter focused on risks in the trade practice of split shipments because the carrier may act on its own to split the shipment without the exporter’s or ultimate consignee’s knowledge and may reduce each parties tracking ability.
As diversion risk grows, BIS will continue the practice of educating exporters on red flag indicators at all forums. BIS notes that companies’ compliance units should transmit red flag concerns to all divisions/branches, particularly when an exporter denies a buyer’s order or a freight forwarder declines to provide export services for dual-use items. BIS will assess with other government agencies the trade practice of split shipments to better understand the elements of risk and the possible options to reduce them. BIS believes that this element of diversion prevention can be strengthened. For example, BIS initiatives are under consideration to improve exporters’ compliance with the EAR that include changing the Automated Export System (AES) requirements, edits and validations, as well as increasing BIS compliance activities with governments and industries both domestically and internationally.
Best Practice No. 2 - An Exporter/Re-exporter should seek to utilize only those Trade Facilitators/Freight Forwarders that also observe these best practices and possess their own Export Management and Compliance Programs (EMCPs). Eleven commenters indicated that there is agreement that freight forwarders belonging to a trusted network or having a certification program should be sought out and utilized. The commenters recommended creating a list of nominated freight forwarders. For example, one commenter pointed out that a standard practice for companies lacking visibility in other countries is to use foreign agent networks or trusted global gateways and counterparts that provide ground, air, and ocean oversight. Five of the eleven commenters support a freight forwarder certification program that includes specific consequences for non-compliance with export laws and regulations. Two other commenters suggested adding export language to the import Customs-Trade Partnership Against Terrorism (C-TPAT) that can be applied to both importers who also export and to brokers who also work as freight forwarders. Commenters suggested that the U.S. Government (USG) should provide programs such as C-TPAT that offer incentives to companies for complying with export control laws and regulations.
As a party to the export transaction, the freight forwarder has a responsibility to report a violation of export control regulations and laws. Therefore, BIS continues to believe that freight forwarders need to be informed of and educated about those regulations and laws and know when they are dealing with a noncompliant party. BIS believes that there is a need for a level playing field in freight forwarding so noncompliant exporters cannot shop around to find one that fails to practice due diligence. The Export Control Reform Initiative (ECR) aims to facilitate more secure trade and identify new approaches to educating exporters such as trade facilitators/freight forwarders on best practices and EMCPs. In 2010, BIS conducted five EMCP conferences. BIS will consider industry’s interest in a trusted network/industry program for forwarders as part of its exporter compliance outreach efforts. Also, BIS considers that industry’s participation in ECR will provide valuable contributions to understanding and implementing proactive compliance with export control laws and regulations.
Best Practice No. 3. Exporters/Re-exporters should have information regarding their foreign customers. In particular, a company should know if the customer is a trading company or distributor, and inquire whether the customer resells to or has guidelines to resell to third parties. Six commenters indicated that the USG should provide additional education and outreach focused on working with trading companies and distributors. These commenters suggested strengthening foreign distributors’ compliance programs and designation of certain foreign territories as secure points for transshipment. As one commenter stated, “The reseller or distributor in a foreign country should be an extension of the U.S. exporter.” Four commenters noted that the effectiveness of export controls is reduced and diversion threats are heightened when they engage in “indirect selling” (selling to trading companies and distribution centers). Two commenters suggested that new language be inserted into seller contracts with buyers who are trading/distribution companies stating that unauthorized diversion is prohibited. Several commenters suggested that AES be strengthened to include specific, detailed data on ultimate consignees and end-users. Many industry representatives suggested that export compliance among small and medium-size exporters could be strengthened if the USG combined the U.S. screening lists into one consolidated file in one location. Finally, one exporter recommended that knowing a customer well and having professional trust in and a relationship with that customer is a very important business practice to ensure that transshipment of dual-use items occurs in compliance with export laws and regulations.
BIS agrees with these comments and has proposed to the U.S. Census Bureau adding two new data fields to the AES. The two fields are an “end-user” field to identify the end-user from the ultimate consignee when the two data fields are different and an “ultimate consignee type” field to identify whether exporters are doing business with trading companies/distributors, government consumers or government distributors. The Administration has created a consolidated screening list as part of its ECR Initiative on www.export.gov/ECR that includes BIS’s Denied Party List, Unverified List, and Entity List, State Department’s Debarred List and Sanction Lists and Treasury’s Specially Designed Nationals List. BIS encourages companies to educate foreign resellers/distributors about their legal obligations and responsibilities under the EAR in preventing the diversion of dual-use items. Such education should include providing detailed and specific guidelines for receiving, handling, reselling, transshipping, and distributing dual-use items.
Best Practice No. 4. With respect to transactions to, from, or through transshipment hubs, Exporters/Re-exporters should take appropriate steps to inquire about the end-user and to determine whether the item will be re-exported or incorporated into an item to be re-exported. Several commenters indicated that BIS should conduct more visits aimed at improving compliance with the EAR for both U.S. exporters and foreign companies targeted as having no, or weak compliance programs involving the export or import of U.S. dual-use items.
One commenter stated that although some foreign companies are knowledgeable about the EAR, others are not, and only companies with effective compliance programs follow this best practice. One commenter noted that current export control regulations do not require communication between third buyers in foreign countries and original U.S. sellers: “communication stops when distributors or trading companies distribute.” One commenter suggested that the U.S. should be more aggressive in requesting import certificates for exported sensitive dual-use items. Other commenters suggested that BIS conduct license reviews whenever there is knowledge that the final destination differs from the ultimate consignee location. Some commenters suggested strengthening the EAR by adding a reseller provision that would strengthen obligations on resellers or alternatively that sellers insert language in contracts with buyers that focuses on foreign companies’ requirements to follow certain procedures when receiving, handling or transshipping dual-use items or munitions.
BIS believes that this best practice No. 4 is consistent with best practice No. 3. Although this best practice No. 4 is directed at items moving to, from, or through transshipment hubs, knowing your customer(s) is an important best practice for shipping to any country. In this regard, customers are defined as purchasers, intermediaries, ultimate consignees or end-users, whether or not they are distributors or resellers. While heightened scrutiny should be applied to exports/re-exports through transshipment hubs, the best practice of knowing your customer should be applied to exports through or to any destination. Therefore, BIS will combine this best practice with best practice No. 3 and modify the resulting content.
Best Practice No. 5 – Freight Forwarders should inquire about the details of a routed transaction when asked by a foreign principal party in interest to ship to a country or countries of destination or ultimate consignees that are different from those provided by the U.S. principal party in interest. Industry representatives commented that “drop” shipments to an ultimate consignee other than the foreign principal party in interest (FPPI) are a normal business practice. Six commenters indicated that U.S. exporters and freight forwarders face challenges fulfilling obligations and requirements in drop shipments and routed export transactions. For example, Freight Forwarders asserted that U.S. corporations hide behind the routed export transaction provision of the EAR and Census Bureau’s Foreign Trade Regulations and sometimes refuse to provide information to freight forwarders authorized by FPPIs. Another commenter indicated that exporters often confuse routed export transactions with International Commercial (INCO) Terms. One forwarder indicated that exporters generally classify items as EAR99 and certify shipments as “no license required” (NLR) in routed export transactions destined for distributors. Two commenters also indicated that these types of transactions are not risky if there is trust between the U.S. exporter and FPPI whereby the U.S. exporter recommends a specific freight forwarder for the FPPI to use, and ensures that the freight forwarder fulfills the requirements of export laws and regulations.
BIS carefully considered the comments that indicated that U.S. companies face increasing challenges in fulfilling requirements of export laws and regulations in routed export transactions and the comments by freight forwarders and carriers that they will not handle routed export transactions because of the risk of noncompliance and potential unlawful diversion. Therefore, BIS amends this best practice by recommending that U.S. exporters and freight forwarders avoid routed export transactions when exporting dual-use items unless a long standing and trustworthy relationship has been built among the exporter, the FPPI, and the FPPI’s U.S. agent.
Best Practice No. 6 – An Exporter/Re-exporter should communicate the appropriate Export Control Classification Number (ECCN) or other classification information (EAR99) for each export/re-export to the end-user and, where relevant, to the ultimate consignee. Four commenters recommended that this information be communicated on the Destination Control Statement (DCS). Another four suggested that the DCS be added to all commercial documents, purchase order confirmations, and certificates accompanying the item. Nine commenters indicated that §758.6 of the EAR, the provision that describes the DCS and what language it should contain, needed to be strengthened. Another commenter suggested DCS language should state that “this bill of lading is export controlled” and include the country of destination on the DCS. Certain commenters stated that the current DCS only provides a warning without including detailed and specific information about the items. Two carriers commented that the language on the DCS does not allow them to determine if the containers are loaded with high or low-risk items. Two commenters asserted that additional BIS or private sector classification assistance would be needed to communicate the ECCN to the ultimate consignee. Two other commenters expressed their belief that if providing the ECCN were required, companies might use EAR99 more often. To improve classifications of dual-use items by exporters, these two commenters suggested that BIS conduct more visits with exporters targeted as having made mistakes in classification of dual-use items that could result in potential export violations. One commenter indicated that exporters who were not manufacturers frequently get classifications wrong. Another commenter stated that its trade software was not programmed to put the ECCN on any shipping documents.
BIS has amended this best practice to suggest additional language beyond the minimum required language outlined in §758.6 of the EAR in order to address commenters’ concerns. The amended best practice refers to the inclusion of the ECCN and end-user destination on all commercial documents such as invoices and bills of lading or air waybills accompanying the export or re-export. This will help ensure that intermediaries and foreign buyers are knowledgeable of the receipt of dual-use items and abide by U.S. export regulations and laws.
Best Practice No. 7 - An Exporter/Re-exporter should report such ECCN or the EAR99 classifications for all export transactions, including “No License Required” designations to the Trade Facilitator/Freight Forwarder or enter them in the Automated Export System (AES). Three commenters stated that this best practice was welcomed and expressed their belief that the EAR’s provisions regarding classification of dual-use items needed to be strengthened. Some exporters commented that it is the forwarder’s duty to provide the service to customers to classify items. Some forwarders commented that they will classify items, but only on a limited, fee-based basis. Two freight forwarders commented that they have to ask exporters repeatedly for classification information. These two forwarders also commented that exporters are aware that there is not a level playing field when it comes to classification requirements. They noted that some freight forwarders will always require classification from exporters while other freight forwarders (competitors) will not. Two freight forwarders also indicated that they do not know when due diligence ends and how much questioning about the items to be shipped is necessary in order to determine whether the classification is correct. On the topic of classification assistance, one commenter indicated that better classification tools are necessary and that forwarders should never classify items. One commenter raised the concept of building a “crosswalk” between the Harmonized System/Schedule B number (HS) and the ECCN and asserted that it would be unlikely that a crosswalk could be developed, especially in Chapter 85 (electric machinery, etc., sound equipment, television equipment, and parts thereof) of the HS. Note: The term crosswalk refers to the matching of a particular HS number with an ECCN so that the particular item covered by the HS may be covered by a specified ECCN.
BIS recognizes that exporters need proper classification in order to make informed and correct export license determinations. BIS understands that certain commenters support providing or entering classification for EAR99 and CCL items. However, BIS also understands that many items do not fall within the CCL, and requiring exporters to classify to this level for every item would be burdensome. A large number of AES transactions contain no ECCN classification, and being able to identify items by the ECCN is an important tool for BIS to monitor and measure exporters’ compliance with the EAR. Therefore, BIS will continue to discuss with industry what existing tools are available or proposals for new tools that would be beneficial to companies in need of public classification assistance.
BIS also received a substantial number of comments that it has addressed by including one additional best practice. This best practice is to improve compliance efforts to avoid unlawful diversion by making use of available information technology.
New Best Practice - Companies should use information technology (IT) to the maximum extent feasible to combat the threats of diversion and to increase confidence that shipments will reach authorized end-users for authorized end-uses.
The comments that provide the basis for this new best practice are discussed below.
Four commenters indicated that software is essential to achieve effective, cost-efficient compliance with export and import laws and regulations around the world, especially for large companies. One commenter noted that “without effective IT solutions, some large companies could not perform effective and cost-efficient levels of compliance checks and monitoring of sensitive dual-use exports.” Overall, most commenters stated that compliance software today is very good and some systems have the capability to conduct a check to see if the items shipped have been re-exported without the proper authorization. Three commenters suggested formulating a best practice on operating an IT system that includes adding problem codes, flags, stops, and trigger points in the programs to alert companies of red flags, risks and diversion threats. Two commenters indicated that export compliance software is affordable and a good return on the investment.
BIS agrees that an effective IT system is an essential element in developing and maintaining a successful export and management compliance program. BIS understands that there is a need for such programs in large and medium-sized companies handling a large volume of export transactions. BIS also recommends that small companies seek IT solutions within their budget and take advantage of the recent U.S. Government’s consolidated party screening list to improve compliance. For its part, BIS has and will continue to improve AES functionality to strengthen industry compliance with the EAR.
BIS received other comments that identified additional emerging threats to the security of dual-use international trade. However, many of these comments are outside the scope of the best practices developed by BIS. BIS will look at the list of relevant additional comments and consider the recommendations they contain where feasible to address illegal diversion concerns.
The additional comments are as follows.
BIS agrees with this proposal and has modified the title of this 2011 document to “Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items subject to the Export Administration Regulations, Particularly through Transshipment Trade” to describe more accurately best practices in preventing illegal diversion, particularly in high-risk transshipment trade.
BIS agrees that export control agencies and companies are continually challenged by emerging threats, such as those described in the four comments above. For example, during times of economic downturn and war, companies may reduce or drop compliance activities and seek profit only. BIS agrees that detection becomes more challenging when companies receive orders from purchasers ‘buying blind’ via the Internet. These two challenges are the result of profit-driven companies seeking to sell to anyone, and this environment can be exploited by diverters and terrorists.
In addition, mislabeling of packages or misreporting of information may be causes for inadvertent export or re-export of an item to an end-user or end-use of concern (e.g., the use of country code IR (Iran) for Ireland (IE)). In regard to the de minimis rule, which governs the applicability of the EAR to foreign-made items that contain some level of controlled U.S. origin content, some companies may be unaware of or misunderstand the rule or simply guess the percentage of U.S. content in a foreign-manufactured product.
BIS agrees that government-to-government and government-to-industry exchanges are necessary. These exchanges should focus on developing a set of international best practices based on successful strategic trade controls aimed at preventing diversion of dual-use items. The USG is currently engaged with other countries in bilateral and multilateral activities. BIS agrees that other countries and the USG need to strengthen their collaborative efforts and share the responsibility on the risk to international trade and security posed by the diversion of dual-use items, particularly in transshipment trade.
BIS is continuously reviewing the EAR to identify any potential actions, including using AES as a tool, to enhance export control compliance activities.
Commenters suggested that BIS adopt a program to improve exporters and freight forwarder’s compliance of the EAR modeled on the Census Bureau’s AES compliance program. Census’ program identifies best practices of compliant AES filers (freight forwarders and exporters) and common problems of noncompliant AES filers. The Census Bureau also conducts one-on-one visits to both compliant and noncompliant companies and publishes the best practices of the compliant companies and shares them with noncompliant companies and requires an improvement in compliance by a specific deadline. Other commenters suggested that BIS consider allowing export companies to self-assess, similar to the CBP initiative on the import side. A freight forwarder suggested that BIS should consider establishing a freight forwarder technical advisory committee. Freight forwarders explained that over the last decade U.S. and foreign exporters’ use of and dependence on freight forwarders grew sharply increasing reliance on forwarders to manage and execute compliance responsibilities for their dual-use customers including some classification of products.
BIS agrees that essential elements to enhancing outreach and compliance activities should be expanded. These include expanding BIS’ capacity to analyze data to identify exporters and foreign re-exporters who pose a risk to national security and provide enhanced outreach and compliance programs to prevent noncompliant activities.
Following are the final best practices that reflect consideration of the public comments and other comments received from industry and other stakeholders through outreach and other activities.
The best practices identified herein are intended to help industry guard against diversion risk. Both government and industry recognize that implementing effective export compliance programs is an important component of responsible corporate citizenship and good business practices.
The success of export control laws rests on well-managed and comprehensive export compliance programs. The diversion of dual-use U.S. origin items from authorized to unauthorized end-uses, end-users, or destinations, even inadvertently, undermines efforts to counter the proliferation of weapons of mass destruction, terrorism, and other threats to national and international security. Global ``transshipment hubs''--i.e., countries or areas that function as major hubs for the trading and shipment of cargo--pose special risks due to their large volumes of export, transit, transshipment, and import and re-export traffic. Such hubs make transshipment trade particularly vulnerable to the diversion of sensitive items to unlawful purposes.
To combat diversion risk, the Bureau of Industry and Security (BIS) has exchanged information with industry (including exporters, freight forwarders, carriers, consolidators, express couriers, and others) involved in the export of items subject to the Export Administration Regulations (EAR). BIS consolidated existing best practices and established new practices aimed at preventing diversion. BIS recognizes the importance of soliciting input from industry to define this new set of best practices to prevent diversion.
The publication of these best practices creates no legal obligation to comply with such practices on the part of any person, absent a legal requirement that is set forth elsewhere in the EAR. Compliance with these best practices creates no defense to liability for the violation of the EAR or other export control laws. However, demonstrated compliance with these best practices may be considered in assessing a person’s conduct.
Although BIS issues this guidance on industry best practices as it applies to items and transactions that are subject to the EAR, the guidance clearly has broader potential application. BIS envisions this guidance as a step toward a strengthened dialogue with all members of the export logistics supply chain industry, other agencies that administer export controls, and foreign governments in a manner that may make the guidance pertinent beyond its application to the EAR.
These best practices are based on the following four principles:
The following reflect new best practices that guard against diversion risk, particularly through transshipment trade.
Best Practice No. 1 – Companies should pay heightened attention to the Red Flag Indicators on the BIS Website and communicate any red flags to all divisions, branches, etc., particularly when an exporter denies a buyer’s order or a freight forwarder declines to provide export services for dual-use items.
Best Practice No. 2 - Exporters/Re-exporters should seek to utilize only those Trade Facilitators/Freight Forwarders that administer sound export management and compliance programs which include best practices for transshipment.
Best Practice No. 3 - Companies should “Know” their foreign customers by obtaining detailed information on the bona fides (credentials) of their customer to measure the risk of diversion. Specifically, companies should obtain information about their customers that enables them to protect dual-use items from diversion, especially when the foreign customer is a broker, trading company or distribution center.
Best Practice No. 4 - Companies should avoid routed export transactions when exporting and facilitating the movement of dual-use items unless a long standing and trustworthy relationship has been built among the exporter, the foreign principal party in interest (FPPI), and the FPPI’s U.S. agent.
Best Practice No. 5 - When the Destination Control Statement (DCS) is required, the Exporter should provide the appropriate Export Control Classification Number (ECCN) and the final destination where the item(s) are intended to be used, for each export to the end-user and, where relevant, to the ultimate consignee. For exports that do not require the DCS, other classification information (EAR99) and the final destination should be communicated on bills of lading, air waybills, buyer/seller contracts and other commercial documentation. For re-exports of controlled and uncontrolled items, the same classification and destination specific information should be communicated on export documentation as well.
Best Practice No. 6 - An Exporter/Re-exporter should provide the ECCN or the EAR99 classification to freight forwarders, and should report in AES the ECCN or the EAR99 classifications for all export transactions, including “No License Required” designation certifying that no license is required.
Best Practice No. 7 - Companies should use information technology to the maximum extent feasible to augment "know your customer" and other due-diligence measures in combating the threats of diversion and increase confidence that shipments will reach authorized end-users for authorized end-uses.