This is the 10th article in a 12-part series, U.S. Regulation of Exports and International Conduct: A Compliance Primer, from Gregory Husisian of Foley & Lardner LLP. The first nine parts discussed The Pitfalls of Operating Abroad, Taking an Integrated Approach to Compliance, Basic FCPA Compliance Principles, Dealing with Third Parties under the FCPA, Dealing with Merger Issues Under the FCPA, Basic Export Controls Compliance Principles, Export Controls on Goods, Export Controls on Information and Technology, Economic Sanctions and Export Controls & Economic Sanctions Compliance.
Export control and economic sanction requirements have been around for years, but now are taking on increasing prominence in the wake of record-setting fines. This article provides a list of export controls and economic sanctions red flags. Priming employees to be alert to red flags such as these is an important bulwark against export controls and economic sanctions missteps.
Export Control and Economic Sanction Red Flags for Exporters
Shipment-Related Fact Patterns
- The final consignee is a trading company, freight forwarder, export company or other entity with no apparent connection to the purchaser.
- Delivery dates are vague or deliveries are planned for out-of-the-way destinations.
- A freight-forwarding firm is listed as the product’s final destination.
- The shipping route is abnormal for the product and destination.
- Packaging is inconsistent with the stated method of shipment or destination.
Order-Related Fact Patterns
- The customer volunteers or is willing to pay cash for a high-value order rather than using a standard method of payment.
- The item ordered is incompatible with the technical level of the country to which it is being shipped, such as semiconductor manufacturing equipment being shipped to a country that has no electronics industry.
- The end-use information provided is incompatible with the customary purpose for which the product is designed.
- “Fragile” or other special markings on the package are inconsistent with the commodity described.
- The product is inappropriately or unprofessionally packaged (e.g., a freight forwarder receives a package that is unusually packaged).
User-Related Fact Patterns
- The customer appears on one of the blocked-person lists. Links to the current lists can be found at www.bis.doc.gov/ComplianceAndEnforcement/ListsToCheck.htm.
- The customer or ultimate end-user is unknown.
- Financial information about the customer is unavailable.
- The customer is willing to pay well in excess of market value for the shipment.
- When questioned, the buyer is evasive about whether the purchased product is for domestic use, for export or for re-export.
- The purchaser is reluctant to provide information on the end-use or end-user of the product.
- The customer appears unfamiliar with the product, its application, support equipment or performance.
- The customer orders products or options that do not correspond with its line of business.
- The customer has little or no business background.
- Firms or individuals from foreign countries other than the country of the stated end-user place the order.
- The customer declines normal service, training or installation.
- The product’s capabilities do not fit the buyer’s line of business, such as an order for sophisticated computers for a small bakery.
- The customer’s order seems inappropriate, such as an order for a replacement part for an item that the customer never ordered.
- The customer is willing to pay cash for a very expensive item when the terms of sale normally would call for financing.
- The customer is unfamiliar with the product’s performance characteristics but still wants the product.
- Routine installation, training or maintenance services are declined by the customer.
Destination-Related Fact Patterns
- The order is being shipped using circuitous or economically illogical routing.
- The customer’s name or its address are the same as or similar to those of a person found on a blocked-person list.
- The customer asks for delivery in a country that does not match its supposed area of operations.
- The end-destination is Iran, Sudan, North Korea, Cuba, Burma, Syria or another country with OFAC or BIS restrictions.
Export Control and Economic Sanction Red Flags for Financial Institutions
For financial institutions, the primary concern generally is economic sanction red flags. For these institutions, the following red flags can indicate the need for further checking.
New-Account Fact Patterns
- The customer refuses to provide information normally required, such as verification of identity, information regarding the source of funds or other information required to meet typical know-your-customer questions.
- The customer attempts to set up multiple accounts and then makes deposits in them that aggregate to more than reporting thresholds but individually less than those thresholds.
- The customer provides unusual or suspicious identification documents.
- The new customer provides information that does not check out, that is difficult to verify or that is downright misleading.
- The customer is reluctant to provide information about the nature and purpose of its business or its business location.
- The customer cannot provide a working telephone contact.
- The customer requests signature authority for multiple people who seem to have no relationship to each other, whether by family or business ties.
- A new account application appears to be connected with an entity on a designated list.
- The customer requests to establish accounts in countries where local laws or regulations prevent or limit the collection of client-identification information.
Existing Account Fact Patterns
- An account receives large or unusual deposits, interspersed with periods of dormancy.
- A dormant account suddenly receives a large deposit or series of deposits, followed by quick cash withdrawals that remove the added money.
- The customer makes cash deposits or withdrawals, especially in large quantities, from a business entity that normally would be expected to deal with checks, payment instruments or wire transfers.
- The customer makes conducts multiple transactions, particularly in cash, where the customer attempts to use different tellers at the same branch of a financial institution.
- The customer makes repeated requests international wire transfers when it does not appear that business reasons would support such a request.
- There are multiple deposits by different individuals at the same branch within a short time.
- There are consistent patterns of deposits or withdrawals of cash in amounts that are just below reporting thresholds, especially if there seems to be a conscious desire to do so (e.g., the individual presents cash but, after finding out that it exceeds the reporting threshold amount, asks to deposit less so that the threshold is not exceeded).
- The customer makes deposits in amounts that do not make sense given the stated occupation of the individual (e.g., large deposits from a student).
- There are cash withdrawals by the same individual at different branches.
- The customer attempts to persuade a bank employee not to file a required regulatory report regarding customer information or suspicious activity.
- The customer uses an ATM machine to make large bank deposits, especially of cash or of amounts that are just below threshold reporting requirements.
- The customer makes frequent deposits of checks or money orders with sequential numbers.
Fund Transfer Fact Patterns
- There are movements of funds beyond the expected business or personal income level of the person or entity that owns the account.
- The customer requests to move funds to or from an offshore bank.
- The customer requests to wire funds to suspect countries or designated entities, especially if there appears to be no valid business reason or doing so is inconsistent with the customer’s stated business or previous history.
- There are wire transfers, particularly for large quantities, from foreign sources where there is no valid reason appearing for them.
- There is unexplained wire activity, especially if it is repetitive or shows unusual patterns.
- There is a large volume of cashier checks, wire transfers or money orders into or out of an account when the account holder does not appear to have a reason for such activity.
- There are unusual or unexpected transfers of funds between related accounts.
- There are frequent transfers of funds among multiple banks, such as moving funds from Bank A to Bank B and then back again.
- There are frequent requests for withdrawals of large-dollar denominations, particularly if paid for by small-dollar deposits.
About the Author
Gregory Husisian is of counsel with Foley & Lardner LLP and has extensive experience in export controls, the Foreign Corrupt Practices Act (FCPA), and issues arising from international trade. Mr. Husisian is a member of the firm’s Government Enforcement, Compliance & White Collar Defense; Securities Enforcement & Litigation; and Appellate Practices.