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September 01, 2011 

BIS Publishes New Best Practices for Preventing Unlawful Diversion of Dual-Use Items Subject to the Export Administration Regulations

The U.S. Department of Commerce's Bureau of Industry and Security today published on its website a series of new "Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items Subject to the Export Administration Regulations, Particularly through Transshipment Trade."

These seven new best practices are being issued by BIS following last year's publication in the Federal Register of a notice of inquiry requesting public comments on a draft version of the first update to best practices on transit, transshipment and reexport of dual-use items since 2003.

In response to the notice of inquiry, BIS received written comments from industry and many additional comments through meetings with trade associations, exporters, freight forwarders, carriers, software vendors, advisory committees and other government agencies. As a result of this input, BIS substantially modified several of the proposed best practices in the final version, including combining two of the proposed best practices into one and adding a new best practice (No. 7) regarding the use of information technology.

In publishing these seven industry best practices BIS noted that, while this guidance  practices as it applies to items and transactions that are subject to the EAR, it has broader potential applications. BIS indicated that it 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.

Best practice No. 4 is particularly noteworthy, and is likely to generate the most interest among exporters and freight forwarders, since it recommends that companies "avoid routed export transactions when exporting and facilitating the movement of dual-use items unless" there is a "long standing and trustworthy relationship" between the exporter, foreign buyer and the foreign buyer's freight forwarders. A "routed export transaction is defined in Census' Foreign Trade Regulations (15 CFR Part 30) is when a Foreign Principal Party in Interest (e.g., a non-U.S. buyer) authorizes a freight forwarder or other agent in the U.S. to facilitate export of items from the United States on its behalf and prepare and file the Electronic Export Information (EEI). Many exporters of controlled items, whether they are subject to the EAR or ITAR, already prohibit routed export transactions unless they are confident that the buyer of the goods will comply with any restrictions on the diversion or transfer of the exported products. On the other hand, many non-U.S. customers prefer to hire their own freight forwarder in the U.S., particularly when they want to consolidate shipments in the U.S. prior to being exported.

It is important to note that these best practices are recommendations only. While exporters and freight forwarders are recommended to implement these best practices, to the extent possible, there is no legal obligation to comply with these best practices, absent a legal requirement that is set forth elsewhere in the Export Administration Regulations (EAR). In addition, compliance with these best practices creates no defense to liability for the violation of export control laws. However, BIS has indicated that demonstrated compliance with these best practices by a company will be considered an "important mitigating factor in administrative prosecutions arising out of violations of provisions of the EAR that apply to transit, transshipment or reexport transactions."

While these best practices are issued by BIS and are intended for exports of dual-use items subject to the EAR, many of the same principles are applicable to exporters that export defense articles subject to the jurisdiction of the ITAR.

2011 Best Practices for Preventing Unlawful Diversion of U.S. Dual-Use Items Subject to the Export Administration Regulations, Particularly through Transshipment Trade

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.

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