Important Reminder for Trade Compliance

Why identifying red flags is important for trade compliance

Many companies sell products globally, so it is important to identify trade compliance issues and red flags to prevent export violations from occurring. This blog is intended to serve as a reminder and point out some important questions to ask yourself when dealing with a transaction that involves shipping products, items, technology or services around the world.

What are the red flags in trade compliance?

Let’s first review what a red flag is. In trade compliance terms, a “red flag” refers to an unusual set of circumstances related to a particular transaction. Detecting a range of anomalies or “red flags” on orders is important because it can help prevent someone from diverting product to prohibited persons or destinations and/or for use in illegal or restricted applications. It has been confirmed that if “red flags” are not detected, a “diversion” is likely to occur.

Common red flags to watch out for

You may be asking yourself what methods you can use to help detect red flags to avoid diversion. Many governments and multinational organizations provide guidance to help determine the legality of a sale or service request. Here are some examples:

• Is it difficult to find information about your customers on public resources such as the Internet?
• Is the customer requesting a product that seems too suitable for the intended application?
• Does the client have a foreign business name in a language that is unexpected for the country in which it is located?
• Is the end user in question a trading company, a distributor or a company located in a free trade zone?
• Although the stated end use is civilian, does the end user have a connection to the military, defense industry, or government military research agency?
• Are customers reluctant to provide information about the product’s end use or to provide clear answers to general business/technical questions?
• Is the customer reluctant to provide end-user information or documentation?
• Do clients come to agencies for no reason?

Countries with higher risk of transfer

Guidelines are also provided that tell us that more transfers will occur in some countries than in others. These locations include, but are not limited to, Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan.

Guides and resources for detecting red flags

The U.S. government has published a helpful policy guidance document called “Commodity, End-User, and Transshipment Country Red Flags FAQs.” Additionally, the U.S. government has provided “Know Your Customer” guidance that further explains red flags and exporters’ responsibilities not to blind themselves. The G7 (United States, Canada, France, Germany, Italy, Japan, the United Kingdom and the European Union) has provided industry with joint guidance on preventing the evasion of export controls and sanctions imposed on Russia.

Employee recognition of red flags is key to a strong export compliance program because it can prevent potential export violations from occurring. Training employees on red flag recognition and remediation is one way to prevent unintentional violations.

Schedule a free consultation with one of our experts today to strengthen your organization’s export compliance program and mitigate red flags and diversion risks.