Axelrod Clarifies GP 10 Guidance to Financial Institutions

The Commerce Department's Bureau of Industry and Security (BIS) guidance for financial institutions' compliance with the Export Administration Regulations (EAR)  [12883] is an "all hands on deck moment," according to the Bureau's Enforcement Chief, and banks just have to step up.

Assistant Secretary for Export Enforcement Matthew S. Axelrod  discussed the rationale for the guidance, and expectations of inductry in a conversation sponsored by Kharon October 31st. 

"This is an attempt to provide concrete reccomendations on best practices," he said.  The regulations are already in place, according to the former prosecutor.  

The guidance provides both background information on the EAR and recommendations on steps financial institutions can take to minimize the likelihood of EAR violations.

The recommendations include a description of EAR-related due diligence best practices, the encouragement of ongoing transaction reviews for red flags, and a delineation of which types of real-time transaction screenings are and are not regarded as a best practice. 

“Every export – every single one – has a related financial transaction,” said Assistant Secretary for Export Enforcement Matthew S. Axelrod. “Today’s guidance provides recommendations to financial institutions on how to best comply with our regulations so they can spot red flags and avoid being used as instruments to facilitate export evasion.” 

General Prohibition 10

The guidance focuses on General Prohibition 10 (GP 10), which prohibits financial institutions (and other persons) from financing or otherwise servicing any item subject to the EAR with knowledge that a violation of EAR has occurred, is about to occur, or is intended to occur.   "General Prohibition 10 means if you're financing a transaction you know violates the law, you're liable, said Axelrod.

Such knowledge of a circumstance includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also "an awareness of a high probability of its existence or future occurrence." 

Suspicious Activity Report (SAR)

"We've actively using the SAR," Axelrod told listeners on the Kharon call.  " We've reviewed over 1,250 and actioned 160 - that's about 13 percent."   Actioning means etiher:

1. Opening an new investigation
2. Updating an existing investigation, or
3. Addition to the Entity List.

The first Joint FinCEN & BIS Joint Alert of June 2022 , financial institutions were told to reference potential EAR violations in SAR field 2 (Filing Institution Note to FinCEN) by including the following key term: “FIN-2022-RUSSIABIS"

"The SAR form had no field for expoert violations," Axelrod recalled.  "and revising the form is a three-year process."

Practice Pointers suggested by Axelrod for filing an effective and actionable SAR include the following:

1. BLUF - Bottom line up front: begin with a summary
2. Include details as an attachment - not in the body
3. If the report has a US nexus, more likely to be investigated
4. Recent and timely reports are more likely to be actionable
5. Point to the actual source of derogatory information.
6. Highlight the party's links to a known party of concern.

 New Guidance - Onboarding KYC

To avoid potential violations of GP 10 of the EAR, the guidance outlines several best practices, including:

• screening customers when onboarded and after against the U.S. Consolidated Screening List;
• recommending that customers who deal with EAR items certify compliance with the EAR under certain circumstances; and establishing risk-based procedures to detect and investigate red flags post-transaction and,
• where necessary, to take action to prevent violations of the EAR before proceeding with any transactions involving the same customer or counterparties. 

BIS does not generally authorize transactions that would otherwise be prohibited by GP 10. BIS also does not confirm the existence of a license to third parties. Accordingly, FIs should seek confirmation from their customers regarding BIS-issued licenses, including by obtaining a copy .

The guidance also recommends that financial institutions closely review their customers (and, where appropriate, their customers’ customers) against lists of entities that, according to publicly available trade data (such as the Trade Integrity Project), have shipped Common High Priority List (CHPL) items to Russia since 2023, and determine whether any other red flags are present.- 

Post Transaction Reviews / Red Flags

BIS does not expect FIs to review transactions for these red flags in real time. Nevertheless, an FI may learn of information that constitutes a red flag after it has processed payment for a transaction, which may give rise to “knowledge” for purposes of GP 10 for future transactions involving the same customer or counterparties.

If, during a post-transaction review, an FI encounters one of the below red flags and cannot resolve it to its satisfaction, BIS recommends that the FI refrain from future transactions with the relevant transaction parties. Otherwise, the FI risks liability for a violation of the EAR under GP 10:

• A customer refuses to provide details to banks, shippers, or third parties, including details about end-users, intended end-use(s), or company ownership
• The name of one of the parties to the transaction is a “match” or similar to one of the parties on a restricted-party list.
• Transactions involving companies that are physically co-located with a party on the Entity List or the SDN List or involve an address BIS has identified as an address with high diversion risk.
• Transactions involving a last-minute change in payment routing that was previously scheduled from a country of concern but is now routed through a different country or company.

Real Time Screening Not Expected

Generally, in recognition of difficulties in implementation, BIS does not expect FIs to engage in real-time screening of parties to a transaction to prevent violations of GP 10. Instead, BIS recommends that FIs implement the EAR-related due diligence and ongoing review for red flags described above to avoid financing or servicing a transaction with “knowledge” in violation of GP 10.

Consistent with the prior joint notices issued by BIS and FinCEN, BIS expects FIs to report all suspicious activity related to EAR violations using the appropriate SAR terms. BIS also actively encourages the submission of Voluntary Self-Disclosures (VSDs) from parties who suspect they may have violated the EAR. FIs can submit VSDs electronically to BIS_VSD_INTAKE@bis.doc.gov.

BIS, along with the Departments of the Treasury, Justice, and others previously issued several joint alerts, advisories, and notices on topics ranging from Russian evasion tactics to voluntary self-disclosures.