The ÔunverifiedÕ headache

The ÔunverifiedÕ headache

A notice in the June 14 Federal Register announces a new addition to the burgeoning number of lists of names that must be checked by shippers, forwarders and others in export trade. This one comes from the Bureau of Industry and Security (BIS) at the Department of Commerce. The quaint name is the "Unverified List."

The Unverified List is a reaction to a real concern. In licensing the export of controlled dual-use goods, it has long been the practice of the U.S. government to verify the legitimacy of a transaction by visiting the declared recipient of the goods. Such a "pre-license check" or "post-shipment verification" is conducted for only a small fraction of the number of exports licensed. A pre-license check can confirm that the declared end-user operates at the stated location and has a legitimate civilian need for the kind of strategically significant dual-use equipment it seeks. Post-shipment verification can determine if goods that were licensed for export remain where they are supposed to be ? or might they have been diverted to a military use? Occasionally, either the foreign government or (rarely) the foreign buyer will refuse a verification visit. If a visit is blocked, the obvious response is "no license" or "no more licenses" for that buyer or facility.

The just-published Unverified List names nine entities in China and one each in Malaysia and the United Arab Emirates. The notice does not specify whether the inability to conduct a verification visit was attributable to the entity, the government, or to both.

What does the Unverified List mean for the U.S. exporting community? The notice states that the list "does not equate to a licensing requirement." This makes it unlike the "entity list" and the "denied persons list" in the Commerce regulations and the "specially designated nationals" list and the several other lists of names promulgated by Treasury's Office of Foreign Assets Control. Instead, the BIS notice advises exporters that participation of a person on the Unverified List in any proposed transaction will be considered by BIS to be a "red flag."

What is the significance of a red flag? The BIS notice cites "know your customer" guidance in a supplement to the Export Administration Regulations and states that a red flag gives exporters an "affirmative duty" to "inquire, verify, or otherwise substantiate" so as to "satisfy themselves" that the transaction does not involve a proliferation activity or other violation of the regulations. If an exporter cannot get such satisfaction, the notice advises either to refrain from the transaction or to apply for a license or advisory opinion from BIS.

What are some of the questions raised by the publication of the Unverified List?

The first is whether it applies only to items on the export control list. The notice states that it applies to all transactions "subject to the EAR." This means that it applies to all civilian use goods, even if low-tech or "no tech" and on no control list.

What is the extent of the required due diligence? Good question! It prompts another question. If our government is worried that visits were denied because these entities may be involved in proliferation activity, wouldn't it have used its resources to check this out and, if warranted, place on the "entity list" any facilities thought to be engaged in such activity? Is a would-be exporter expected to dig deeper?

Does a company's "duty" to inquire mean that, even if no "bad" use of what it sells is shown, it could be punished simply for its inability to show reasonable due diligence? Based on the language of the notice, the answer would appear to be "yes." But wait ? the regulations do not refer to this duty anywhere other than in the "know your customer" guidance, and they state that the guidance "does not change or interpret the EAR."

For sure, this latest addition to the proliferation of lists will require the providers of transaction-screening software to work this latest wrinkle into their product. Exporters will have to decide whether they even want to pursue business with the "unverified" company. If they do, they will need to make many judgments as to the kind of inquiries to be made when the "red flag" is not something questionable they have spotted in the deal, but only a name match with the Unverified List.

One may question whether this new list is the best reaction to frustrated efforts to conduct verification. It is hard to see how placing murky screening responsibility on exporters of uncontrolled goods will affect either openness or weapons activity by foreign customers or governments. Perhaps more security could be obtained by quietly sharing the U.S. concerns with governments that cooperate in the control of strategic goods exports. Neither we nor our friends (who generally do not conduct on-site verification) should send sensitive goods into suspicious dark holes.

Cecil Hunt, an attorney with the Washington, D.C., firm of Harris, Wiltshire & Grannis, was with the Commerce Department and involved in export-control work. He may be contacted at