Regulatory: Know your customer when doing business overseas

Trading goods with restricted countries can lead to costly sanctions

In our last column, we emphasized how a company wishing to do business in overseas markets must first lay a solid foundation through the proper classification of its products. Once goods have been classified correctly, there is another critical step that must precede every international transaction: checking to make sure that you can legally do business with the potential trade partner in the first place.

The U.S. government restricts trade with certain entities and individuals because of national security or other foreign policy concerns. Several different agencies maintain lists of these restricted parties. Although checking these lists is a very simple task, and the potential penalties for doing business with a restricted party are quite severe, an alarming number of U.S. companies are not even aware that the lists exist.

The Bureau of Industry and Security (BIS) within the Department of Commerce maintains three such lists, called the “Entity List,” the “Denied Persons List” and the “Unverified List.” The Entity List often requires companies to apply for a license before shipping goods to an entity on the list, even if a license would not otherwise be required to ship the same goods to another business in the same country. Likewise, in most cases, U.S. companies cannot ship any goods to entities and individuals on the Denied Persons List. The Unverified List contains companies that BIS has been unable to verify in prior transactions. Companies must exercise extreme caution before doing business with parties on this list.

The Department of State also maintains lists of restricted parties, which include parties that have been sanctioned under various statutes, or those that are debarred from directly or indirectly participating in the export of items subject to the International Traffic in Arms Regulations. The Department of the Treasury also maintains a “Specially Designated Nationals” list that includes parties restricted because of other concerns, such as suspected terrorist or narcotics trafficking activities. U.S. companies are generally prohibited from doing any business with these parties.

At the outset of a transaction, a U.S. company should check to see whether its potential trade partner is on any of these lists. Fortunately, all of the lists have now been consolidated into one master spreadsheet that the government updates periodically. Companies can download the current version of this consolidated screening list online.

The consequences of accidentally doing business with a restricted party can be significant. For example, earlier this year, FedEx agreed to pay a $370,000 penalty for six violations, three of which related to shipments of goods to restricted parties on the Entity List. The government does not only target the big fish for enforcement, either. For example, a small company in Madison, Wis. agreed to pay $7,500 for only one shipment of an X-ray instrument to a Pakistani university on the Entity List.

Some companies assume that if the goods they export do not need an export license, they do not need to worry about where they send them. That is not the case, as shipments to restricted parties often are prohibited even if the shipment would not require an export license if sent to anybody else. For example, in the enforcement action involving FedEx earlier this year, each of the shipments to the restricted party involved goods that were “EAR 99,” meaning that ordinarily a license would not have been necessary to ship them. In another enforcement action that BIS filed just this month, a New Jersey company was fined $50,000 for shipping scrap steel to a mill in Pakistan. If the mill had not been on the Entity List, the company likely would not have needed a license to ship the scrap steel to Pakistan.

Obviously, the right time to check the restricted party lists is at the initial stages of the transaction, before the company wastes resources pursuing a customer only to learn later that it is a restricted party. A company should set up its internal procedures so that the sales force does not try to do business with restricted parties. For companies with relatively few international transactions, this can be done by checking the consolidated screening list manually on a case-by-case basis. For companies with a larger volume of overseas business, subscribing to a screening service through a specialized software vendor might make the most sense.

Most importantly, a company must pay attention to red flags that may signal that more due diligence is required before agreeing to follow through with the transaction. For example, even if the customer’s name does not match any of the entities on the restricted party lists, is the business address eerily similar? Or is the customer reluctant to offer information about the end use of the goods? Trust your instincts. If something seems fishy, do not proceed with the transaction before ensuring that your potential customer is not a restricted party.

Contributing Author

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Eric Wilson

Eric J. Wilson is a shareholder in Godfrey & Kahn's Litigation Department and a member of the White Collar Defense and Investigations Practice Group. He...

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Contributing Author

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Wendy Arends

Wendy Arends is an associate in the Godfrey & Kahn's Madison office, where she advises businesses, organizations and trade associations regarding their interactions with local,...

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