Last month, the United States, along with other G7 members, stepped up efforts to curtail Russia’s evasion of western sanctions adopted to impede Russia’s invasion of Ukraine. It has been reported in the press that U.S. components are showing up in weapons systems used against Ukraine and from firms that produce high-technology equipment ultimately sold to Russian defense entities. Likewise, restricted U.S. commercial products are ending up in Russian hands. Now more than ever, U.S. companies must strictly follow the “Know Your Customer” compliance principles.
The U.S. government has long touted the “Know Your Customer” principle as a basic element of a robust export compliance program. To guard against efforts by purchasers to evade sanctions, U.S. companies should perform enhanced due diligence to ensure that a purchaser (1) is trustworthy, (2) will comply with applicable U.S. laws, and (3) will not divert (or allow to be diverted) restricted U.S. products for ultimate use by Russia, a military end-use or by Russian consumers. Additional measures for ensuring compliance include (i) end-use and end-user certificates, (ii) incorporating warranties on trade and sanctions compliance in contractual documents, and (iii) above all, continued monitoring of customers. If at any time a U.S. company identifies any “red flags” such as reluctance to provide end-use and end-user information, or a request to ship goods to a freight forwarder, it should halt all shipments until those “red flags” are resolved.
As indicated in guidance from the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), U.S. exporters “have a duty to exercise due diligence to inquire regarding the suspicious circumstances and ensure appropriate end-use, end-user, or ultimate country of destination in the transactions [an exporter] propose[s] to engage in.” If any concerns remain, the exporter must refrain from going through with the transaction. Otherwise, BIS may conclude that the exporter chose to “self-blind.” If a violation occurs, BIS could find the circumstances to be egregious, constituting grounds for higher penalties or fines than would be assessed had the exporter taken steps to resolve the “red flags.” In certain circumstances, violations can lead to criminal or civil inquiries by the U.S. Department of Justice.
Taking steps to “Know Your Customer” is a must for all U.S. businesses. Though BIS’s guidance is geared towards U.S. exporters, all U.S. companies should take care to avoid, minimize and mitigate supply chain risks. Simply put, the duty to exercise due diligence relates not only to exports, but also to reexports and in-country transfers. That is, the risk extends beyond a company’s own actions; what happens downstream in the supply chain matters. Financial and reputational damages can be quite severe. Now more than ever, it is important to ask the right questions and seek advice as to whether your company is doing enough to protect itself.