Know Your Customer Guidance

Certain provisions in the Export Administration Regulations (EAR) require an exporter to submit an individual validated license application if the exporter "knows" that an export that is otherwise exempt from the validated licensing requirements is for end-uses involving nuclear, chemical, and biological weapons (CBW), or related missile delivery systems, in named destinations listed in the EAR.

BIS has issued the following guidance on how individuals and firms should act under this knowledge standard. This guidance does not change or revise the EAR.

Decide whether there are "Red Flags"

Take into account any abnormal circumstances in a transaction that indicate that the export may be destined for an inappropriate end-use, end-user, or destination. Such circumstances are referred to as "Red Flags." Included among examples of red flags are orders for items which are inconsistent with the needs of the purchaser, a customer's declining installation and testing when included in the sales price or when normally requested, or requests for equipment configurations which are incompatible with the stated destination (e.g.--120 volts in a country with a standard of 220 volts). BIS has developed lists of such "Red Flags" which are not all-inclusive but are intended to illustrate the types of circumstances that should cause reasonable suspicion that a transaction will violate the EAR. You should also review U.S. Government Lists to Check to identify parties prohibited or restricted from participating in U.S. export transactions; and BIS's Univerified List of parties whose bona fides BIS has been unable to determine in end-use checks.

If there are "Red Flags"

If there are no "Red Flags" in the information that comes to your firm, you should be able to proceed with a transaction in reliance on information you have received. That is, absent "Red Flags" (or an express requirement in the EAR), there is no affirmative duty upon exporters to inquire, verify, or otherwise "go behind" the customer's representations. However, when "Red Flags" are raised in the information that comes to your firm, you have a duty to exercise due diligence to inquire regarding the suspicious circumstances and ensure appropriate end-use, end-user, or ultimate country of destination in the transactions you propose to engage in.

The duty to check out "Red Flags" is not confined to transactions involving the "know," "reason to know," or "is informed" sections of the EAR. Parties engaging in export transactions are required by the EAR to obtain documentary evidence concerning the transaction, and misrepresentation or concealment of material facts is prohibited, both in the licensing process and in all export control documents. You can rely upon representations from your customer and repeat them in the documents you file unless "Red Flags" oblige you to take verification steps.

Do not self-blind

Do not cut off the flow of information that comes to your firm in the normal course of business. For example, do not instruct the sales force to tell potential customers to refrain from discussing the actual end-use, end-user and ultimate country of destination for the product your firm is seeking to sell. Do not put on blinders that prevent the learning of relevant information. An affirmative policy of steps to avoid "bad" information would not insulate a company from liability, and it would usually be considered an aggravating factor in an enforcement proceeding.

Employees need to know how to handle "Red Flags." Knowledge possessed by an employee of a company can be imputed to a firm so as to make the firm liable for a violation. This makes it important for firms to establish clear policies and effective compliance procedures to ensure that such knowledge about transactions can be evaluated by responsible senior officials. Failure to do so could be regarded as a form of self-blinding.

Reevaluate all the information after the inquiry

The purpose of this inquiry and reevaluation is to determine whether the "Red Flags" can be explained or justified so as to evidence the bona fides of the party and the legitimacy of the transaction. If they can, you may proceed with the transaction. If the "Red Flags" cannot be explained or justified and you proceed, you run the risk of having had "knowledge" that would make your action a violation of the EAR.

Refrain from the transaction, disclose the information to BIS and wait

If you continue to have reason for concern after your inquiry, then you should either refrain from the transaction or submit all the relevant information to BIS in the form of an application for a validated license or in such other form as BIS may specify.

Industry has an important role to play in preventing exports and reexports contrary to the national security and foreign policy interests of the United States. BIS works in partnership with industry to make this front line of defense effective, while minimizing the regulatory burden on exporters. If you have any question about whether you have encountered a "Red Flag," you may contact BIS' Office of Export Enforcement or use this Confidential Enforcement Lead/Tip Form to submit a confidential tip.

Please note that use of the form will not generate any return e-mail to you so that the information you submit will remain confidential.