What Every Multinational Company Should Know About … Export Controls and Economic Sanctions Red Flags (Red Flags Series Part II)

We have received several requests to publish a list of red flags pertinent to multinational organizations. To accommodate these requests, we are publishing a three-part series on anticorruption, export controls and economic sanctions, and antiboycott red flags. The first of these articles (found here) centers on anticorruption red flags; the second one addresses export controls and economic sanctions red flags and follows below.

As covered in previous articles in our biweekly series — see “What Every Multinational Company Should Know About … Implementing an International Compliance Program,” Part I, Part II, and Part III — export controls and economics sanction compliance is a key part of any multinational’s international regulatory risk management. The U.S. government has prioritized enforcement of export controls and economic sanctions laws and regulations, and penalties in individual enforcement actions can reach the hundreds of millions or even billions of dollars.

As is true with anticorruption compliance, it is important that multinational companies identify, distribute, and educate personnel regarding export controls and economic sanctions red flags. These red flags are indicators or warning signs that suggest the potential for the export or diversion of goods to a restricted country, region, government, or person that would require a license due to concerns about the presence of corrupt practices within an organization, transaction, or relationship. Multinational companies should take steps to identify the most relevant anticorruption red flags pertinent to their operations and to ensure they are widely known within an organization.

Educating relevant personnel regarding export controls and economic sanctions red flags is important for numerous reasons:

1. Global Business Operations: In today’s interconnected world, businesses operate across borders and engage in international trade and transactions. Economic sanctions regimes vary by jurisdiction and can change frequently in response to geopolitical developments. Promulgating awareness of red flags helps multinational organizations navigate the complex landscape of export controls and economic sanctions compliance, minimizing risk while allowing the organization to access global markets in a prudent way.
2. Legal Compliance: Violating sanctions laws can lead to civil and criminal liability for individuals and organizations involved in prohibited activities. Educating employees regarding export controls and economic sanctions red flags helps ensure legal compliance by identifying and addressing potential violations before they occur or before small problems grow into large ones.
3. Risk Management: Economic sanctions violations can pose significant risks to businesses, including financial, legal, operational, and reputational risks. Identifying red flags allows organizations to assess and mitigate these risks effectively and work with other compliance measures, such as screening procedures and due diligence checks, to minimize the likelihood of inadvertently violating export controls and economic sanctions regimes.
4. Supply Chain Integrity: Economic sanctions not only restrict transactions with sanctioned countries, entities, or individuals but also prohibit indirect involvement in activities that support or facilitate sanctions evasion. With the U.S. and other governments increasingly stressing the importance of companies fully understanding their supply chains and expecting organizations to identify any potential supplies from sanctioned countries or persons, promulgating knowledge of red flags can help multinational companies assess the integrity of their supply chains and identify potential risks associated with suppliers, vendors, intermediaries, or counterparties engaging in prohibited activities. Monitoring for potential red flags helps multinational companies ensure the integrity and compliance of their supply chain relationships.
5. Enhanced Due Diligence: Red flags serve as indicators that warrant enhanced due diligence on transactions, parties, or activities that may pose sanctions compliance risks, including customers, counterparties, suppliers, and other business partners. Multinational companies can use red flags to screen customers, partners, vendors, and other counterparties more rigorously and verify the legitimacy of proposed transactions.
6. Protection of Reputation: Involvement in sanctions violations can severely damage an organization’s reputation and brand image. Public perception of integrity, trustworthiness, and corporate responsibility is essential for maintaining relationships with customers, investors, partners, and other stakeholders. Recognizing and addressing red flags demonstrates a commitment to ethical conduct and compliance with export controls and economic sanctions requirements, which increasingly are coordinated across countries.

For all these reasons, economic sanctions red flags are important because they facilitate compliance with legal obligations, manage risks, prevent illicit activities, protect reputation, enhance due diligence, support global business operations, and promote international security and stability. By recognizing and addressing red flags, organizations can navigate the complex regulatory landscape effectively while upholding ethical standards and fulfilling their responsibilities as global citizens.

The red flags that are pertinent to a particular multinational company can vary, depending on the company’s way of doing business, its international footprint, its use of distributors, the countries into which it sells, its customer base, its supply chain, and other factors. But as a starting point, we have compiled a list of export controls and economic sanctions red flags that should form a good starting basis for many companies. These red flags do not, in and of themselves, indicate specific liability risks with respect to a particular transaction but nonetheless indicate the need for heightened vigilance.

• The buyer or its address is similar to one of the parties found on the Commerce Department’s (BIS’s) list of denied persons.

• The contact information provided for the buyer does not originate from the same country as the named company.

• The customer or purchasing agent is reluctant to offer information about the end-use of the item.

• The product’s capabilities do not fit the buyer’s line of business.

• The item ordered is incompatible with the technical level of the country to which it is being shipped.

• The buyer is willing to pay cash for a very expensive item when the terms of sale would normally call for financing.

• The buyer splits a contract for a composite order into several individual contracts for no reason.

• The buyer has little or no business background.

• The buyer is unfamiliar with the product’s performance characteristics but still wants the product.

• The buyer declines routine installation, training, or maintenance services.

• 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.

• When questioned, the buyer is evasive and unclear about whether the purchased product is for domestic use, for export, or for reexport, or it is unclear whether re-shipment will take place and where.

• The buyer is willing to pay a large amount in cash immediately or otherwise wants to use unusual payment terms or an unusual method of payment, such as through banks that are not well known or with cryptocurrency.

• The buyer offers to pay prices well over normal market value for the goods or services.

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