Banks are increasingly verifying with their exporting clients whether their transactions related to the export of goods—even ordinary consumer goods—had appropriate license authorization from the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), especially where Russia or Belarus are involved. As discussed in a prior article of ours, this is ostensibly because BIS has actively coordinated with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) in issuing joint alerts to inform financial institutions (“FI”) on the scope of U.S. export controls targeting Russia and Belarus under BIS’s Export Administration Regulations (“EAR”), unauthorized diversion tactics and relevant monitoring measures, and reminding them of their suspicious activity reporting (“SAR”) obligations under the Bank Secrecy Act (“BSA”) for suspected unlawful export control activity. Given the success of these joint alerts, FinCEN and BIS also published a similar joint alert on November 6, 2023 focusing on the evasion of U.S. export controls globally (not just for Russia and Belarus), which should cause more due diligence inquiries from FIs to their clients.
Since February 2022, the number of items subject to the EAR requiring a BIS license for Russia and Belarus has increased exponentially, including countless ordinary consumer goods as illustrated below. Exporters should ensure that their items do not require BIS license authorization when destined for Russia and Belarus, even if indirectly through third-party intermediaries—e.g., distributor, reseller, sales agent, procurement agent—and should be prepared to corroborate their position to FI’s facilitating related payment transfers. In this article I’ll provide a high-level overview on the relevant Russia-/Belarus-related provisions of the EAR, 15 C.F.R. parts 730-774, potential reasons for FI’s export controls related due diligence inquiries, and provide certain legal considerations for exporters that receive such inquiries from their FI.
Relevant Background on U.S. Export Controls Targeting Russia and Belarus
Prior to February 2022, items (commodities, software, or technology) subject to the EAR—i.e.,U.S.-origin items and foreign made items exceeding defined thresholds of U.S.-origin content or technology—that were intended for Russia or Belarus, were treated like most other non-embargoed destinations. In short, if the item was identified on the EAR’s Commerce Control List (“CCL”) with an Export Control Classification Number (“ECCN”), a BIS license would have been required depending on the stated reason for control of the item under its corresponding ECCN entry, in relation to Russia or Belarus’s entry in the EAR’s Commerce Country Chart. The CCL identifies numerous dual-use items—which are essentially items that can be used for both civil and military applications—while all other items subject to the EAR fall under the broad basket category labeled “EAR99.”
In general, EAR99 items consist of low-technology consumer goods (e.g., even a pencil made in the U.S. would be EAR99), which prior to February 2022 didn’t require a BIS license for Russia or Belarus unless intended for a prohibited end-user or end-use in those destinations. However, this all changed after February 2022, as BIS began expanding the Embargoes and Other Special Controls in Part 746 of the EAR for Russia and Belarus. Since then, a license is generally required for the export, reexport, or transfer (in-country) of items subject to the EAR to or within Russia and Belarus for any item with an ECCN under the CCL. Furthermore, licensing requirements have been imposed for countless items that are classified as EAR99, which are predominately identified in supplement nos. 2, 4, 5, 6, and/or 7 to Part 746 of the EAR with their Harmonized Tariff Schedule (“HTS”)-6 codes and descriptions. To illustrate the broad scope of ordinary consumer goods that are identified in these supplements, here are just a few examples: clothing, perfumes, fountain pens, pianos, printer ink, paints and varnishes, bakery ovens, snowplows, electric hairdryers, sunglasses, vodka, cigarettes, passenger motor vehicles, ceramic roofing tiles, and dishwashing machines.
These embargo controls of the EAR on Russia and Belarus, are separate and distinct from the U.S. Department of the Treasury’s Office of Foreign Assets Control’s (“OFAC”) various Russia and Belarus-related sanctions programs, which prohibit persons subject to U.S. jurisdiction from dealing with sanctioned targets, certain sectors of Russia’s economy, and the Crimea, Luhansk, and Donetsk occupied regions of Ukraine, without prior license authorization from OFAC (while BIS has similar overlapping embargo controls on these regions in § 746.6 of the EAR). If an exporter is dealing with Russia or Belarus, it should be taking OFAC’s sanctions programs into consideration as well.
What’s Leading to Banks Export Controls Related Due Diligence Inquiries?
Given the broad scope of EAR99 items that have quickly grown to require BIS license authorization for export/reexport to Russia and Belarus in a rather short period of time, it’s no surprise that impacted exporters of ordinary consumer goods who haven’t previously dealt with the EAR are startled when asked by their FI if their export transactions required a BIS license. Meanwhile, FI’s are also experiencing a sharp learning curve on the EAR’s Russia/Belarus related controls, as their compliance divisions have historically and primarily concerned themselves with OFAC administered sanctions programs, and BIS has only recently coordinated with FinCEN to enlists FIs in monitoring export controls evasion.
FI’s are also likely motivated to make their due diligence requests with clients because of the scope of General Prohibition (“GP”) 10 under the EAR, which I’ve observed several FI’s compliance units express concern about over the years. Specifically, General Prohibition Ten of the EAR states as follows:
You may not sell, transfer, export, reexport, finance, order, buy, remove, conceal, store, use, loan, dispose of, transport, forward, or otherwise service, in whole or in part, any item subject to the EAR and exported, reexported, or transferred (in-country) or to be exported, reexported, or transferred (in-country) with knowledge that a violation of the Export Administration Regulations, the Export Control Reform Act of 2018, or any order, license, license exception, or other authorization issued thereunder has occurred, is about to occur, or is intended to occur in connection with the item. Nor may you rely upon any license or license exception after notice to you of the suspension or revocation of that license or exception. There are no license exceptions to this General Prohibition Ten in part 740 of the EAR.
In providing financial services, including financing or facilitation of payment transfers, related to an exporter’s export/reexport of items subject to the EAR to Russia or Belarus, it would arguably need to ensure that no violation of the extensive EAR’s controls on those destinations occurred, to ensure its own compliance with General Prohibition 10. However, I would note that I’ve yet to seen a bank get into trouble by the U.S. government for allegedly violating GP 10, at least based on public information.
In consideration of the foregoing, especially FIs relatively new foray into the realm of export controls, it’s no surprise that they are requesting export controls related due diligence from their clients for export transactions involving Russia and Belarus. Consequently, just because an exporter’s FI is making inquiry as to whether a BIS license is required, it doesn’t automatically mean that the exporter’s transactions indeed required a BIS license.
Considerations for Responding to Your Bank on BIS Licensing
If your company receives a letter/inquiry from its FI regarding the applicability of a BIS license for its export transactions involving Russia or Belarus, you should first determine (ideally with the assistance of competent counsel) whether the transaction in question required a BIS export or reexport license under the EAR. Potentially applicable OFAC sanctions programs should also be considered in the foregoing analysis to rule out any sanctions prohibitions or risks that may have been incurred in the overall transaction (if you haven’t done so already), prior to responding to the respective FI. Keep in mind that whatever you turn over to the FI may be shared with relevant U.S. government agencies.
If any violations of the EAR and/or OFAC sanctions programs may have occurred based on the foregoing investigation, your organization will also have to internally assess whether to self-disclose to BIS, OFAC, and/or the U.S. Department of Justice (“DOJ”). Self-disclosing potential violations can provide substantial mitigation for civil or criminal liability depending on the corresponding agency. For example, BIS’s Office of Export Enforcement (“OEE”) has noted that voluntary self-disclosures (“VSD”) involving: (1) minor or technical infractions are resolved on a fast-track basis, with the issuance of a warning or no-action letter within 60 days of final submission; or (2) for more serious violations OEE will do a deeper diver to determine whether enforcement action may be warranted, while at the same time adhering to the principle that companies deserve, and will get significant credit for coming forward voluntarily.
However, there’s a catch for receiving VSD credit: if your FI has already filed a SAR with FinCEN suggesting potential violations of the EAR, it can impact your organization’s ability to receive VSD credit (or at least full credit) in any enforcement response, because VSD credit is generally only given if it’s initiated before the U.S. government has learned the same or substantially similar information from another source and has already commenced its own investigation/inquiry in connection with that information. See e.g., 15 C.F.R. § 764.5(b)(3). Therefore, depending on the nature of an FI’s inquiry regarding your export transactions, whether to file a VSD should be assessed prior to responding.
It’s also important to consider that not self-disclosing can also be an aggravating factor should the U.S. government initiate an enforcement response, regardless of any VSD mitigation credit you would otherwise receive by doing so. According to a BIS memorandum published in April 2023, a deliberate non-disclosure of a significant possible violation of the EAR will be considered an aggravating factor under BIS penalty guidelines, and companies cannot sidestep the “should we voluntarily self-disclose or not” decision by self-blinding and choosing not to do an internal investigation in the first place.
Furthermore, the existence, nature, and adequacy of a company’s compliance program, including it success at self-identifying and rectifying compliance gaps, can also be considered a mitigating factor under BIS’s settlement guidelines (and similar OFAC and DOJ published guidelines) for any enforcement response, and irrespective of any VSD credit. See, Section III.E to Supplement No. 1 to 15 C.F.R. Part 766. If your existing export compliance program wasn’t able to identify on its own the potential compliance issues otherwise raised by the FI’s inquiry with your organization, then you should also consider assessing or reassessing the organization’s sanctions and export controls risk profile to make necessary adjustments to your program (or creating a program where none existed before).
Finally, if your investigation uncovers that a BIS and/or OFAC license is indeed required for the items and/or transactions in question by the FI, your organization will need to request relevant license authorization from the respective agency before continuing to proceed (and perhaps simultaneously submitted with any VSD or thereafter).
The author of this blog post is Kian Meshkat, an attorney specializing in U.S. economic sanctions and export controls matters. If you have any questions please contact him at [email protected].
