On the last day of 2024, the Bureau of Industry and Security (“BIS”) added eight “Red Flags” to its “Know Your Customer” guidance set forth in Supplement No. 3 to Part 732 of the Export Administration Regulations (EAR).  These additions aim to enhance exporters’ ability to detect, prevent and address potential violations, particularly concerning advanced technologies and restricted end-users, to boost compliance and to avoid inadvertent violations of the U.S. export control laws.

Overview of the Red Flags Guidance

“Red Flags” are warning signs indicating that a transaction may involve prohibited end-uses, end-users, or destinations.  The original guidance (Red Flags 1-19) highlights various scenarios that require heightened scrutiny, including:

• Customers with little or no business background providing incomplete or evasive responses about end-use or end-users, and/or ordering products with which they are unfamiliar, or that are outside of their line of business or technical capabilities. 
• Customers paying cash even for expensive shipments normally subject to financing.
• Discrepancies in shipping routes or documentation, especially where freight forwarding firms are listed as the products’  end-user, and/or where the products’ packaging does not match the stated method of shipment or the destination.  Transactions involving destinations or parties with known export restrictions, and/or vague delivery dates.
• The ordered products are typically exclusively or predominantly used to produce advanced-node integrated circuits (IC) and/or the exporter has knowledge that a particular customer intends to develop or produce “supercomputers” or IC in the future or has advertised such plans or capabilities prior to October 7, 2022.  Products are being delivered to a facility where production of advanced-node ICs occurs.

These long-standing indicators provide a foundation for ensuring compliance and preventing unauthorized diversions.

New Red Flags (20–27): Enhanced Focus on Advanced Technologies

The newly added “Red Flags” address increasingly complex risks and known diversion practices in global trade.  They are particularly relevant for exporters dealing with advanced computing, semiconductor manufacturing equipment, and other sensitive technologies, as well as for exporters selling into countries known for their transshipping practices.

• Technology Mismatch in Equipment Orders (Red Flag 20):  non-advanced facilities ordering equipment designed for advanced-node IC production (e.g., § 742.4(a)(4) ECCNs) suggest potential unauthorized use.
• Unclear Ultimate Owner or User (Red Flag 21):  transactions with unknown or questionable end-users, particularly those lacking manufacturing capabilities, raise concerns about diversion risks especially for advanced computing, supercomputers, or semiconductor manufacturing equipment (SME).
• Licensing History Uncertainty (Red Flag 22):  request for an item subject to licensing requirements to the destination country where such license application would be reviewed with a presumption of denial.
• Altered Items for Advanced End-Use (Red Flag 23):  requests to service or upgrade items modified for advanced uses without proper licensing suggest possible violations.
• Overlap with Entity List Management (Red Flag 24):  new customers with personnel or prior dealings linked to an Entity List entity necessitate further due diligence.
• Continuity of Prohibited Operations (Red Flag 25):  new customer ordering items that were customized or modified for a prior customer, who is now designated on the Entity List.  Orders resembling those of prior Entity List customers may indicate ongoing prohibited activities.
• Applicability of Foreign-Produced Direct Product Rules (FDP Rules¹) (Red Flag 26):  items containing specific IC must comply with FDP rules. Verification is essential to avoid violations.
• Connected Facilities Producing Advanced-Node ICs (Red Flag 27):  end-user facilities linked to advanced-node IC production raise concerns about shared production.  Exporters should confirm the technology node or consult BIS.

Please note that this Red Flag Guidance builds upon on Red Flag and diversion risk guidance released by BIS in July, 2024.  With the earlier guidance, BIS highlighted mechanisms (in addition to prohibited and restricted parties screening lists) that BIS may use to alert or notify companies or universities about additional parties of national security concern, such as specified entities whose involvement in a transaction constitute a “Red Flag” risk of diverting EAR items to restricted end uses or end users in Russia. These mechanisms referenced by BIS in the July, 2024 guidance are (1) “Supplier List” letters; (2) Project Guardian Requests (pursuant to which BIS asks companies and universities to be on the lookout for specific transactions and/or to take certain actions); (3) Red Flag Letters; and (4) “Is Informed” letters (pursuant to which recipients of such letters are formally put on notice that the involvement of parties named in such “Is Informed” letters constitute a Red Flag risk of diversion. 

“The July, 2024 guidance also contained a newly recommended best practice that exporters, reexporters, and transferors specifically of Common High Priority List (CHPL) items under the Russian sanctions should be screening transaction parties using online resources made newly available by the Trade Integrity Project (TIP). The TIP is not an official BIS, or US governmental list, but it purports to identify third-country suppliers with a history of exporting CHPL items to Russia since its full-scale invasion of Ukraine. The TIP provides another screening tool to enable companies and universities around the globe to identify possible Red Flags prior to proceeding with an export transaction that risks diversion to Russia.  Its inclusion in published BIS guidance suggests that it is an meaningful due diligence screening tool, particularly in the event that it is determined that a CHPL item or technology exported to a TIP-named entity was, in fact, diverted (or attempted to be diverted) in violation of U.S. export controls or sanctions.

DCG Recommends the Following Review and Strategies:

Additionally, if you have not already addressed the earlier July, 2024 guidance, you should consider (a) enhanced training for key personnel to ensure that one-to-one communications from the Department of Commerce (e.g., Suppliers List letters, or Red Flag letters) are understood to be significant and processed accordingly; and (b) determining how best to address the best practices guidance from BIS regarding TIP screening in a manner that is appropriate to your business.

Exporters must review both the longstanding and newly introduced “Red Flags” to ensure compliance with the EAR.  Particular attention should be paid to transactions involving advanced technologies, ambiguous end-users, or destinations of concern.  Please note that under certain circumstances, newly enumerated “Red Flags” may require much closer scrutiny and screening of individuals known to be associated with customers including basic web searches to determine prior affiliations. Failing to address these “Red Flags” could result in severe penalties and national security implications. 

Each strategy depends on the specific contract terms and business conditions.  For more information or assistance with these updates, and for tailored solutions please consult you DCG trade professionals.

1. FDP stands for “Foreign Direct Product,” which is a rule that applies to certain foreign-made products utilizing certain U.S. technology.↩