Requirements for Transactions with Unverified Parties: Rev up for Changes

Companies out there that enjoy exporting their goods and all the benefits that come with it may want to take a look at the Bureau of Industry and Security’s recent proposed changes to the Export Administration Regulations (EAR) (You can find them in 78 Fed. Reg. 55664 (Sep. 11, 2013)). If you’re meticulous and diligent enough to reacquaint yourself with the Federal Register, you would see that BIS is tightening its grip around those shadowy “persons” listed on the Unverified List (UVL) by creating additional requirements for U.S. exporters.

Under current regulations, the UVL lists entities in foreign countries that were parties to past export transactions where a pre-license check or post-shipment verification could not be carried out for reasons outside the control of the U.S. government. For example, the U.S. government may be prevented from conducting a verification due to a lack of cooperation by a host government authority, the end user, or the ultimate consignee. Furthermore, entities may find their names on the UVL if: a) BIS is unable to verify the existence or authenticity of the end user, intermediate consignee, ultimate consignee or other party to an export transaction or, b) they are affiliated with a person on the UVL due to ownership, control, position of responsibility, or other affiliation or connection in the conduct of trade or business. When a company subject to U.S. laws finds that a participant in one of their transactions is listed on the UVL, this is supposed to raise a red flag. The company is then required to use due diligence to inquire about the suspect entity and verify that the transaction does not violate the EAR.

BIS is now proposing to reign in these elusive unverified “persons,” entities, or whatever they are, with new amendments to the EAR that would:

1)    Require exporters to file an Electronic Export Information (EEI) for all exports subject to the EAR where entities listed on the UVL are involved in the transactions, even if a particular transaction is otherwise exempt from reporting;

2)    Suspend the use of license exceptions for exports, re-exports, and transfers (in-country) involving entities listed on the UVL;

3)    Requiring entities listed on the UVL to provide exporters, re-exporters, and transferors an end-user statement before proceeding with a transaction. This end-user statement would have to also certify the end-use and country of ultimate destination, while also consenting to an end-use check by the U.S. government; and

4)    Providing procedures to request removal or modification of a UVL entry within the EAR.

The proposed changes would also establish criteria for listing an entity on the UVL. Examples of why an entity may find itself on the UVL include being unable to demonstrate the disposition of items during an end-use check or inability to show the existence or authenticity of the subject during an end-use check. However, foreign parties who prevent the completion of an end-use check through their failure to cooperate can find themselves on the Entity List rather than the UVL. Furthermore, mere affiliation with an entity on the UVL would no longer be basis for adding foreign persons to the UVL without some other justification.

These proposed changes are designed to strengthen the ability of BIS to verify the bona fides, or proof of authenticity, of the parties to a transaction involving the export, re-export, or transfer of goods subject to the EAR, while also allowing BIS more visibility into those transactions where the bona fides cannot be ascertained. This has several impacts on exporters, the most obvious among them being that exporters will have to do more work. No longer will “due diligence” be enough, the vague fancy lawyer way of saying just enough work to show that you tried. Instead, exporters will have to do exactly what BIS is asking them to do or face the possibility of falling on some awful export control list themselves.

The new rules now outline concrete obligations for exporters who will need to familiarize themselves with the new requirements. U.S. companies should review and revise their procedures to deal with the proposed changes to the rules around the Unverified List parties. Additionally, given BIS’ tightening grip around dealings with unverified parties, it may be worth assessing your company’s overall compliance with BIS regulations on restricted parties. By examining current practices and preparing for the new more stringent requirements, companies can brace themselves for the upcoming changes. Foreign companies dealing in U.S.-origin goods will also want to pay heed to the new requirements and make sure they are complying with U.S. export control laws, especially those related to maintaining proper documentation, in order to avoid becoming “unverified.”

By Ashley McCauley, Attorney