Banks export too: New BIS guidance tags financial firms

Pull offer: “Every export – every item – has an associated financial transaction”

You are a banker. You do banking. You read the ledgers, compile the numbers, and manage the accounts. Maybe you take out a loan, maybe you invest, but in general, you move your money to where it should be (and from where it shouldn’t be). (1) Something you do no All you have to do is pack up a box of widgets and ship them to a customer in another country.

However, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has warned that bankers should maintain “ongoing” export due diligence. This news may liven up your daily life. You are now a banker and (sort of) exporter.

We know that modern banks have robust and advanced due diligence infrastructure to detect and prevent fraud, money laundering, terrorist financing, sanctions violations and many other potential financial crimes. Now, those of you who don’t have it yet need to add Export Compliance to that list. You will be responsible for exports that are not your Export, but now it’s your responsibility (and more importantly, it’s part of your liability exposure).

Guide Overview

Guidance issued by the Bank for International Settlements highlights the expanded role of financial institutions (FIs) in preventing breaches of export controls. It highlights the need for “continuous” due diligence by these financial institutions, including transaction review for red flags and, in some cases, real-time screening of transactions.

1. Scope of Financial Institution EAR: BIS understands that exports provide a better understanding of whether an item is “subject to the EAR,” but BIS expects FIs to understand that, generally speaking, most items shipped from the United States will be subject to the EAR. Additionally, nearly all foreign-manufactured semiconductors, particularly those bearing U.S.-based company names, are subject to the provisions of the EAR when shipped to Russian, Belarusian, Iranian, or Russian/Belarusian military end users or procuring entities. This scope is particularly broad given General Prohibition No. 10, which prohibits financing or otherwise providing services for projects subject to the EAR knowing that a violation has occurred. Furthermore, this “knowledge” can be inferred from conscious neglect or deliberate avoidance (e.g., failure to conduct appropriate due diligence).
2. EAR related due diligence: Financial institutions are advised to incorporate EAR components into their existing risk management and compliance processes, which include screening customers against restricted party lists maintained by BIS and other U.S. agencies. For example, BIS proposes to screen customers against its End User Restrictions List (e.g., through the Comprehensive Screening List) and include entities shipping Common High Priority List items to Russia starting in 2023 (e.g., from Commercial Service Providers) )). While these lists do not automatically prohibit financial institutions from dealing with customers, BIS recommends that these lists should figure prominently in a customer’s risk profile.
3. Ongoing review of red flag transactions: In addition to initial due diligence, financial institutions should continually monitor transactions for potential red flags that indicate evasion of export controls. This involves a post-trade review process where financial institutions evaluate transactions based on known red flags and take necessary steps to prevent future breaches.
4. Real-time filtering: In certain circumstances that may be related to U.S. exports, financial institutions are encouraged to conduct real-time screening of transactions against restricted party lists administered by BIS. These lists include the BIS Denied Persons List and certain military intelligence end-user and entity lists. The BIS recommends that all clients listed in interbank financial information be screened against these lists.

Impact on financial institutions

The changing role of financial institutions in export control compliance reflects the recognition that, as BIS Assistant Secretary Matthew Axelrod puts it, “Every export—every ——have related financial transactions.” This puts financial institutions at a critical point for enforcement. Export controls. Financial institutions must now ensure they have the necessary systems in place to conduct continuous and real-time screening of transactions, a task that may require significant investments in compliance infrastructure.

Furthermore, the guidance emphasizes the concept of “knowledge” in the context of export controls, indicating that financial institutions must not ignore red flags that indicate a higher likelihood of export control evasion. The position on what constitutes “knowledge” of financial institutions places a greater responsibility on financial institutions to investigate and resolve any red flags encountered in the course of their business activities.

How financial institutions are responding to new risks

The expanded responsibilities of financial institutions outlined in new BIS guidance have created new risk vectors for many banks. Penalties for export violations can stack up if each item exported is considered a separate violation, and the EAR’s knowledge standard means penalties can happen before you even notice—just because they There should be Blink on your radar. This means that if BIS believes that a financial institution should have known about an export violation, the financial institution can at least receive an administrative subpoena regarding the relevant export transaction.

Financial institutions must now quickly assess and respond to expanded compliance obligations and ensure they have the necessary processes and technology in place to meet heightened due diligence expectations. This work may require certain operational adjustments and may require investments in increased compliance infrastructure. We will continue to monitor regulatory and enforcement developments and report here.

footnote

(1) I must admit that even though I serve as sanctions advisor to more than a dozen major global financial institutions, the word “banker” still brings to mind the Edwardian Mr. Banker character in Mary Poppins Returns. So this little episode in a banker’s life may be a bit unrealistic.