Under the U.S. Export Administration Regulations (EAR), Part 736 General Prohibition #5 (EAR 736.5) imposes restrictions on certain activities related to exports, reexports, and transfers (in-country) of items subject to the Export Administration Regulations. Specifically, General Prohibition #5 states:
“General Prohibition Five (End-use/End-user Controls): You may not, without a license, knowingly export, reexport, or transfer (in-country) any item subject to the EAR to an end-use or end-user that is prohibited by part 744 of the EAR or an order, license, or authorization denied by BIS.”
Part 744 of the Export Administration Regulations identifies certain entities, organizations, individuals, and countries subject to specific export controls due to concerns related to national security, nonproliferation, terrorism, or other factors. In essence, General Prohibition #5 prohibits the export, re-export, or transfer of items subject to the EAR to an end-use or end-user that is specifically prohibited under Part 744 of the Export Administration Regulations.
Compilations of the entities and individuals subject to these controls are known as “Restricted Parties Lists” (RPLs). The United States government maintains the following RPLs:
Specially Designated Nationals (SDN) List: Maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), this list includes individuals, organizations, and countries with whom U.S. entities are generally prohibited from conducting business.
Entity List: Published by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), this list identifies foreign entities that are subject to specific export control restrictions due to concerns related to national security, nonproliferation, or foreign policy.
Denied Persons List: Also maintained by the BIS, this list includes individuals and organizations that have been denied export privileges, typically due to violations of export control regulations.
The U.S. Government (USG) Consolidated Screening List (the “Consolidated List”) combines these lists which facilitates screening. Screenings can be conducted by accessing the Consolidated List directly online at the official website (https://www.export.gov/csl-search) or through commercially available software screening services.
To ensure compliance, companies should conduct screenings at multiple phases:
Onboarding Customers or Suppliers: Companies should conduct screening when onboarding new customers or suppliers.
Transaction Processing: Screening should be conducted when processing transactions. This includes screening all parties involved in the transaction: buyers, sellers, intermediaries, and end-users.
Regular Compliance Reviews: Periodically review existing customer and supplier databases to identify any newly listed or sanctioned parties. Regular compliance reviews help ensure ongoing compliance and minimize the risk of inadvertently engaging with restricted parties.
Red Flags and Suspicious Activities: Companies should conduct heightened screening when they encounter red flags or suspicious activities that may indicate potential violations of export control regulations. Such activities could include requests for unusual end-uses, destinations, or unusual payment methods. Enhanced due diligence and screening should be performed in these cases. Companies need to establish robust compliance procedures and integrate screening processes into their daily operations. By conducting regular screenings at these key points, companies can better identify and prevent transactions with restricted parties.
Conducting business with restricted parties can result in severe penalties, even if done so unknowingly. The penalties for violations of the Export Administration Regulations (EAR) and the Office of Foreign Assets Control (OFAC) sanctions regulations can vary depending on the specific circumstances and severity of the violation.
Violations of the EAR can result in civil and/or criminal penalties. The maximum civil penalty for each violation is currently set at $302,584 or twice the value of the transaction, whichever is greater. In certain cases, intentional and willful violations of the EAR can be prosecuted as criminal offenses. Criminal penalties for individuals can include fines of up to $1 million and imprisonment of up to 20 years. For organizations, the maximum fine can be up to $5 million.
Violation of Office of Foreign Assets Control (OFAC) Sanctions Regulations can also result in civil and/or criminal penalties. Civil penalties for OFAC sanctions violations can be substantial and vary depending on the program or regulation being violated. The maximum civil penalties are adjusted periodically to account for inflation and can range from thousands to millions of dollars per violation. Serious or willful violations of OFAC sanctions regulations can lead to criminal prosecution. Criminal penalties for individuals may include fines ranging from hundreds of thousands to millions of dollars and imprisonment for terms of up to 30 years. Organizations can face fines of up to the greater of $1 million or twice the value of the transaction.
If a potential violation is discovered after the fact, it is important to take immediate action to cease any prohibited activities, conduct a thorough internal investigation, and self-report the violation to the appropriate regulatory bodies. Cooperate fully with the authorities and take remedial actions as required. Demonstrating a genuine commitment to rectifying mistakes can mitigate penalties.
Guidance from legal counsel experienced in export control regulations and compliance can ensure compliance with OFAC and BIS regulations.
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