[Federal Register: October 13, 2004 (Volume 69, Number 197)]
[Proposed Rules]
[Page 60829-60836]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13oc04-15]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 60829]]
DEPARTMENT OF COMMERCE
Bureau of Industry and Security
15 CFR Parts 732, 736, 740, 744, 752, 764, and 772
[Docket No. 040915266-4266-01]
RIN 0694-AC94
Revised ``Knowledge'' Definition, Revision of ``Red Flags''
Guidance and Safe Harbor
AGENCY: Bureau of Industry and Security, Commerce.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would revise the knowledge definition in
the Export Administration Regulations to incorporate a ``reasonable
person'' standard and to replace the phrase ``high probability'' with
the phrase ``more likely than not.'' It also would update the ``red
flags'' guidance and would provide a safe harbor from liability arising
from knowledge under that definition.
DATES: Comments must be received by November 12, 2004.
ADDRESSES: Send comments on this proposed rule to: the Federal
eRulemaking Portal: http://www.regulations.gov, via e-mail to
rpd2@bis.doc.gov, fax them to 202-482-3355, or on paper to Regulatory
Policy Division, Office of Exporter Services Room 2705, U.S. Department
of Commerce, Washington, DC 20230. Refer to Regulation Identification
Number 0694-AC94 in all comments.
FOR FURTHER INFORMATION CONTACT: For further information regarding this
proposed rule, contact: William Arvin, Office of Exporter Services, at
warvin@bis.doc.gov, fax 202-482-3355 or telephone 202-482-2440
SUPPLEMENTARY INFORMATION:
Background
Knowledge Definition
The current definition of ``knowledge'' in Sec. 772.1 of the EAR
encompasses ``not only positive knowledge that a circumstance exists or
is substantially certain to occur, but also an awareness of a high
probability of its existence or future occurrence. Such awareness is
inferred from evidence of the conscious disregard of facts known to a
person and is also inferred from a person's willful avoidance of
facts.'' This proposed rule would amend the definition of knowledge in
four ways, incorporating a ``reasonable person'' standard, replacing
the phrase ``high probability'' with the phrase ``more likely than
not,'' adding the phrase ``inter alia'' to the description of the facts
and circumstances that could make person aware of the existence or
future occurrence of a fact, and eliminating the phrase ``known to the
person'' from the sentence in the knowledge definition that states that
knowledge may be inferred from ``conscious disregard of facts known to
the person.'' The proposed rule also limits the applicability of the
definition to certain actors in transactions subject to the Export
Administration Regulations (EAR) and excludes certain usages from the
definition.
BIS believes that incorporating the reasonable person standard into
the definition will facilitate public understanding of the definition,
particularly as it applies to knowledge-based license requirements, and
restrictions on use of License Exceptions. Under this revised
definition a party would have knowledge of a fact or circumstance if a
reasonable person in that party's situation would conclude, upon
consideration of the facts and circumstances, that the existence or
future occurrence of the fact or circumstance in question is more
likely than not.
BIS believes that replacing the phrase ``high probability'' with
the phrase ``more likely than not'' is not a change from current policy
and practice. The phrase ``more likely than not'' is better understood
than ``high probability.'' Moreover, companies with a strong compliance
commitment are unlikely, even under the current definition, to proceed
with transactions if they conclude that the circumstance of concern is
``more likely than not.''
Adding the phrase ``inter alia'' to the description of the
circumstances under which knowledge may be inferred emphasizes that the
factors cited in the definition, i.e. the conscious disregard or
willful avoidance of facts are not the only factors from which
knowledge may be inferred.
Removing the phrase ``known to the person'' from the sentence in
the knowledge definition that states that knowledge may be inferred
from ``conscious disregard of facts known to the person'' would
eliminate the use of the defined term in the definition.
Other proposed changes to the definition address the scope of its
application. The phrase ``When referring to an actor in a transaction
that is subject to the EAR'' would be added to the beginning of the
definition, and language would be added to specify that the definition
concerns knowledge of a fact or circumstance relating to such a
transaction. These changes would make clear that the definition would
not apply to provisions of the EAR in which ``knowledge'' and related
terms are used: (1) To refer to technology; (2) to ``personal
knowledge'' or to knowledge of the EAR; (3) to describe the basis for
an agency or official to take an enforcement or administrative action;
(4) to indicate an alternative name (as in the phrase ``also known
as''); (5) in explanatory text that has no legal effect; (6) in a
requirement that a party certify that a statement is true to the best
of its knowledge; or (7) when referring to the requirements or
prohibitions of a law other than those implemented by the EAR. Finally,
language would be added excluding from the definition the use of
``knowledge'' terms in the description of criminal liability in Section
764.3(b). The proposed definition, like the current definition of
``knowledge'' in Sec. 772.1, would also not apply to Part 760 of the
EAR (Restrictive Trade Practices or Boycotts).
Enhanced Red Flags
BIS is proposing to update and augment the ``red flag'' guidance
and to increase from 12 to 23 the number of circumstances expressly
identified as presenting a red flag. The revised guidance would reflect
experience gained since the existing red flags and guidance were
developed in the mid-1980s. The ``red flags'' would continue to provide
guidance that BIS believes is useful in preventing the diversion of
items that are subject to the EAR to proliferation related purposes as
well as
[[Page 60830]]
other potential violations of the EAR. Although the ``red flags''
provide guidance, this rule would also incorporate them by reference
into the proposed safe harbor and the Internal Compliance Programs
requirements of Special Comprehensive Licenses. To clarify the role the
red flags would play under this rule, BIS is proposing to add a
statement that the red flags and know your customer guidance do not
derogate from obligations imposed elsewhere in the EAR and to remove
the statement ``This guidance does not change or interpret the EAR''
from supplement No. 3 to part 732.
BIS believes that many conscientious participants in export
transactions are following the current ``red flag'' guidance. BIS
anticipates that the added benefit of the safe harbor provision would
encourage more parties to take these measures and thereby prevent
diversions to proscribed or inappropriate end-uses.
Safe Harbor
BIS is proposing to create a safe harbor from liability arising
from knowledge-based license requirements, knowledge-based restrictions
on use of License Exceptions, and other knowledge provisions in the EAR
that are subject to the proposed definition of knowledge described
above. Under this safe harbor, parties who take steps identified in a
new Sec. 764.7 will not have knowledge imputed to them by application
of the ``reasonable person'' standard stated in the new definition.
Parties who report to BIS's Office of Enforcement Analysis, prior to
shipment, all material information regarding the existence, assessment,
and satisfactory resolution of the red flag(s) and who do not otherwise
have ``knowledge,'' as defined in Sec. 772.1, will be eligible for a
safe harbor from any enforcement action arising from the red flag(s)
that they have addressed.
The steps to be listed in Sec. 764.7 are:
(1) Comply with any item and/or destination-based license
requirements and other notification or review requirements;
(2) Determine whether parties in the transaction are subject to a
denial order or to certain sanctions, whether they appear on the Entity
List or the Unverified List, whether the transaction is governed by a
general order issued by BIS; and
(3) Follow the procedures for identifying and resolving red flags
set forth in Supplement No. 3 to Part 732.
If BIS concludes that a reported transaction involves unresolved
red flags, it will so advise the submitting party. If a party has
actual knowledge or awareness that the fact or circumstance in question
is more likely than not, then even if the party receives BIS
concurrence (based on a report to the Office of Enforcement Analysis)
that red flags are resolved, the party will not be eligible for the
safe harbor nor will BIS concurrence bind a subsequent enforcement
action or prosecution, because the report would have misstated or
withheld relevant information.
BIS expects to respond to most such reports within 45 days of
receipt. BIS will acknowledge in writing receipt of all reports and
will provide a telephone number for the reporting party to call to
learn the status of the report if it has not heard from BIS by the date
stated in the acknowledgment. BIS may consult with other government
agencies before responding to the party submitting the report. However,
until receiving written confirmation from BIS or contacting BIS after
the date specified in the acknowledgment and learning that BIS will not
be responding to the report, the party is not entitled to conclude that
BIS concurs in the party's assessment that any red flags have been
successfully resolved.
Parties who have filed such reports may not file a license
application relating to the same situation while the report is under
review by BIS. Such license applications will be returned without
action. In addition to language in the new Sec. 764.7, Sec. 748.4(f)
would be modified to implement this prohibition.
Other Clarifying Amendments and Conforming Changes
The proposed rule would also amend the EAR in the following ways:
(1) Removal of Superfluous or Potentially Confusing Uses of a
``Knowledge'' Term
The proposed rule would revise three provisions of the EAR to
clarify that they refer to all requirements under part 744, not just to
requirements based on knowledge. These amendments would not change the
substance of any provision. The provisions to be amended in this way
are:
--General Prohibition Five, which references the recipient and end-use
based export and reexport requirements of part 744 and which is found
at Sec. 736.2(b)(5);
--The prohibition on using License Exception AGR for transactions in
which a license is required by part 744 found at Sec. 740.18; and
--The prohibition on using Special Comprehensive Licenses to meet
license requirements imposed by part 744 found at Sec.
752.9(a)(3)(ii)(H).
(2) Consolidation of ``Red Flags'' Terminology
--The recitation of the text of the ``red flags'' that are currently
described as `` * * * signs of potential diversion * * *'' in Sec.
752.11(c)(13)(i) would be replaced with a reference to supplement No. 3
to part 732.
Request for Comments
BIS is seeking public comments on this proposed rule. BIS will
consider comments about all aspects of this proposed rule, but is
particularly seeking comments on whether the proposed changes to the
definition of the term ``knowledge'' will increase the burden on small
entities and whether the economic impact of the proposal will be
significant and on whether the ``safe harbor'' provision is likely to
be useful. The period for submission of comments will close November
12, 2004. BIS will consider all comments received before the close of
the comment period in developing a final rule. Comments received after
the end of the comment period will be considered if possible, but their
consideration cannot be assured. BIS will not accept public comments
accompanied by a request that a part or all of the material be treated
confidentially because of its business proprietary nature or for any
other reason. BIS will return such comments and materials to the
persons submitting the comments and will not consider them in the
development of the final rule. All public comments on this proposed
rule must be in writing, including fax or e-mail, and will be a matter
of public record, available for public inspection and copying. The
Office of Administration, Bureau of Industry and Security, U.S.
Department of Commerce, displays these public comments on BIS's Freedom
of Information Act (FOIA) Web site at http://www.bis.doc.gov/foia. This
office does not maintain a separate public inspection facility. If you
have technical difficulties accessing this web site, please call BIS's
Office of Administration at (202) 482-0637 for assistance.
Rulemaking Requirements
1. This proposed rule has been determined to be significant for
purposes of E.O. 12866.
2. Notwithstanding any other provision of the law, no person is
required to respond to, nor shall any person be subject to a penalty
for failure to comply with a collection of information, subject to the
requirements of the PRA, unless that collection of information displays
a currently valid
[[Page 60831]]
OMB control number. This proposed rule involves a collection-of-
information requirement approved by the Office of Management and Budget
(OMB) under the Paperwork Reduction Act (PRA). The OMB control number
for this collection is 0694-0088, which relates to BIS's application
forms. This proposed rule also would create a new information
collection in which private parties provide the government information
about suspicious circumstances they encounter and how they resolve
them. This information collection would require OMB approval before
being implemented.
3. This rule does not contain policies with Federalism implications
as this term is defined in Executive Order 13132.
4. The Chief Counsel for Regulation of the Department of Commerce
has certified to the Counsel for Advocacy that this proposed rulemaking
is not expected to have a significant economic impact on a substantial
number of small entities.
To estimate the number of small entities that would be affected by
this rule, BIS evaluated its licensing database to determine the number
of businesses that applied for export licenses where ``knowledge'' of a
particular circumstance concerning the end-use or end-user triggers a
license requirement. A total of 149 entities applying for such licenses
in 2003 were identified. BIS then conducted an Internet search of those
businesses to determine which of those businesses disclosed their sales
or employment levels on Web sites. BIS compared those sales or
employment levels to those found in the Small Business Administration's
Table of Small Business Size Standards Matched to North American
Industry Classification System published on its Web site at http://www.sba.gov/size/sizetable2002.html.
That table provides maximum sales
or employment levels that constitute a small business for a number of
industries. BIS does not have similar industry classification for the
entities in its licensing database so it adopted a conservative
approach and used the maximum sales and employment values from the SBA
table. Those values were $28.5 million and 1500 employees,
respectively. BIS excluded any entity that it could identify as
exceeding either of these values. Forty-three entities were excluded by
this method, leaving a total of 106 that might be small entities. All
of these entities would be subject to this rule. In addition, this rule
would not increase the number of entities that are subject to the
Export Administration Regulations or to the provisions of those
regulations under which knowledge triggers a requirement to act or
refrain from acting.
BIS does not have data to indicate how many enforcement proceedings
under the Export Administration Regulations apply to small entities.
However, in its Fiscal Year 2003 Annual Report, BIS reported the
criminal ``conviction of 21 individuals and businesses'' and ``34
administrative enforcement settlements'' for the fiscal year. In
addition, there were three administrative proceedings that resulted in
denials of export privileges. Some of these actions probably did not
involve small entities and there may be some overlap in cases where a
single entity received both criminal and administrative sanctions.
Assuming that all of BIS's FY 2003 enforcement actions were against
small entities and that 106 of the 149 entities that applied for a
license in FY 2003 were all small entities, the rule would affect a
substantial number of small entities. However, although there would be
a substantial number of small entities affected by this rule, this rule
will not have a significant economic impact on a substantial number of
small entities because the overall economic costs associated with this
rule are minimal. As discussed below, BIS does not believe that
businesses will see this change as imposing a materially different
standard on their compliance activities.
Although this proposal has the potential to impact a substantial
number of small entities, BIS does not believe that it will have a
significant economic impact on the affected small entities.
Fundamentally, BIS does not believe that moving to a ``more likely than
not'' formulation increases a company's responsibility with respect to
knowledge. Rather, as stated in the rule, we see this as a
clarification of the current standard and as consistent with existing
BIS and industry practice.
From a practical perspective, based on BIS's experience with
industry compliance with the existing standard, BIS believes that
companies treat facts that are ``more likely than not'' as creating a
``high probability'' of the fact. In other words, in our experience,
companies would take the position that there is a ``high probability''
of a given fact if the fact is ``more likely than not.'' Those who must
comply with these regulations are in businesses engaged in exporting
and reexporting and must make decisions quickly based on practical
considerations. The likely scenarios are that either (1) the party has
knowledge of some facts that suggest a proliferation end-use, an
obligation to disclose or a possible violation of law and with that
knowledge decides to either apply for a license or to forego the
business, or (2) that the party has no knowledge of any such facts, and
would not be required to obtain a license under either the old or the
new definitions. Thus, even if there were a distinction between the
terms ``high probability'' and ``more likely than not,'' the
distinction would be unlikely to affect the decision making process of
a business person who is deciding whether to proceed with a sale.
Stated otherwise, if a party preparing to undertake an export
transaction encounters a reason to believe that a fact or circumstance
exists that implicates a licensing requirement under the Regulations,
that party can reasonably be expected either to apply for a license or
forego the transaction, regardless of whether ``knowledge'' is defined
by reference to a ``more likely than not'' or ``high probability''
formulation.
To the extent that a business engages in this kind of legal
analysis, use of the term ``more likely than not,'' which is a well
known legal standard, will reduce uncertainty among those who make
these decisions, and thereby will reduce the economic impact of the
control and the necessity of legal counsel. In addition, BIS does not
believe that small entities will incur additional costs due to training
or legal counseling to comply with the new requirements. BIS provides a
number of opportunities for counseling or training to assist businesses
in their compliance efforts at no charge or at a reasonable cost. BIS
maintains telephone advice lines in California and Washington to
provide timely answers to people who have questions concerning its
regulations. It also provides an e-mail address where such questions
may be submitted. BIS gives written advisory opinions concerning its
regulations. BIS provides training seminars in cooperation with trade
associations and other groups around the country. The costs of this
training ranges from $75 to $350 depending on the nature, length and
location of the program. However, one should not attribute the entire
training cost or even a significant portion of it to this proposed
rule. Even if one did, BIS does not believe that $350 would constitute
a significant economic impact.
In terms of the costs of the inquiry that BIS recommends companies
conduct in response to red flags, BIS does not believe that the costs
will significantly increase when compared to the company's
responsibility under the existing rule. Companies are currently
[[Page 60832]]
expected to make inquiries before proceeding when information
indicating a proliferation end-use, an obligation to disclose, or a
violation of law comes to their attention. The Regulations currently
provide an illustrative list of red flags, but do not limit any duty to
inquire to the circumstances on that list. By increasing the number of
circumstances that are specifically called out as ``red flags,'' BIS is
reducing any uncertainty that a company faces in determining what
information provides such indications. BIS expects that, under the
proposed rule, the cost of the inquiries performed by companies will
not increase and will continue to be reasonable given the information
that the company has received and the items involved in the
transaction. The proposed rule makes this point clear by stating that:
You are expected to conduct an inquiry that is reasonable for a
party in your circumstances. Thus, if you are exporting specially
ordered equipment that you manufactured as part of a negotiated sale
to an end-user in an industry with which you do a substantial part
of your business, you may be expected to conduct a more thorough and
better targeted inquiry than a distributor exporting off-the-shelf
equipment that is used in a wide range of commercial and industrial
contexts.
The purpose of the rule is to clarify responsibilities and provide
greater certainty to parties involved in export transactions when
confronted with indications of a proliferation end-use, an obligation
to disclose or a possible violation of law.
Finally, in assessing the possible economic impact of this rule,
one should look at it in its entirety. The rule contains a safe harbor
provision that enables a business to learn, before proceeding with the
transaction, whether BIS concurs that its actions qualify for the safe
harbor. This opportunity to avoid fines and penalties mitigates the
impact of this rule.
Accordingly, the Chief Counsel for Regulation of the Department of
Commerce has certified to the Chief Counsel of Advocacy that this
proposed rule will not have a significant economic impact on a
substantial number of small entities. BIS invites comment on this
certification, including, but not limited to whether the proposed
changes to the definition of the term ``knowledge'' will increase the
burden on small entities and whether the economic impact of the
proposal will be significant.
List of Subjects
15 CFR Parts 732, 740, 748, and 752
Administrative practice and procedure, Exports, Reporting and
record keeping requirements.
15 CFR Parts 736, and 772
Exports.
15 CFR Part 744
Exports, Reporting and record keeping requirements.
15 CFR Part 764
Administrative practice and procedure, Exports Law enforcement,
Penalties.
Accordingly, parts 732, 736, 740, 744, 752, 764, and 772 of the
Export Administration Regulations (15 CFR 730-799) are amended as
follows.
PART 732--[AMENDED]
1. Revise the authority citation for part 732 to read as follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66
FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August 6, 2004, 69 FR
48763 (August 10, 2004).
2. Revise supplement No. 3 to part 732 to read as follows:
Supplement No. 3 to part 732--BIS's Know Your Customer Guidance and Red
Flags
(a) Introduction. Several provisions of the EAR are applicable if a
party has knowledge (as defined in Sec. 772.1 of the EAR) of a
particular fact or circumstance. Examples include Sec. 764.2(e), which
prohibits taking certain actions regarding an item that is subject to
the EAR with knowledge that a violation has occurred, is about to occur
or is intended to occur with respect to that item and Sec. 744.4,
which requires a license to export or reexport any item subject to the
EAR if the exporter or reexporter knows that the item will be used in
the design, development, production, stockpiling, or use of chemical or
biological weapons in or by any country. The following guidance is
provided with respect to these knowledge standards. It is also useful
with respect to other EAR requirements because a heightened awareness
of the signs of potential diversion can help to prevent violations.
This guidance and the red flags are also incorporated by reference in
Sec. 764.7 (Safe Harbor from Certain Knowledge-based Requirements) of
the EAR. The red flags are incorporated into the system for screening
customers that is part of the internal control program required of
Special Comprehensive License holders and consignees and described in
Sec. 752.11(c)(13)(i) of the EAR. The ``red flags'' and know your
customer guidance do not derogate from obligations imposed elsewhere in
the EAR.
(b) Know Your Customer Guidance. (1) Look out for red flags. In all
transactions subject to the EAR, look out for any abnormal
circumstances that indicate that the transaction may involve an
inappropriate end-use, end-user or destination or otherwise violate the
EAR. Such circumstances are referred to as ``red flags.'' Red flags may
be presented by information provided by a customer or information
obtained from another source (e.g., a credit report that you might run
on a new customer wishing to place a large order).
(i) Red flags point to a heightened risk of a problem with the
transaction. Most commonly, red flags indicate a heightened risk that a
claimed end-use, end-user or ultimate destination is not the actual
one. Red flags of this type thus can point to the possibilities that
the export or reexport is actually destined for an embargoed country,
an end use that triggers a license requirement under part 744 of the
EAR, a person denied export privileges under part 764 of the EAR, a
person on the Entity List in supplement No. 4 to part 744, specially
designated global terrorists (see Sec. 744.12), specially designated
terrorists (see Sec. 744.13), designated foreign terrorist
organizations (see Sec. 744.14), persons on the list of specially
designated nationals identified by the bracketed suffix IRAQ2 (see
Sec. 744.18), a transaction that would violate a BIS General Order
(see supplement No. 1 to part 736), persons on the Unverified List
published by BIS, or an end-use or end-user that is restricted under
part 744.
(ii) What constitutes a red flag depends on the context. A fact or
circumstance that raises a red flag for an export of one type of item,
to a given destination, or a particular business model may be innocuous
for an export involving a different item, a different destination, or
different business model. The role that you are playing in a
transaction is also relevant to what facts or circumstances you are
expected to recognize as red flags. For example, a manufacturer who is
exporting one of its products will be expected to be highly familiar
with the configurations or specifications required for an end-use
stated by a customer. Thus, a manufacturer should be able to recognize
when a deviation from such parameters is indicative of an end-use
[[Page 60833]]
other than what is stated. Similarly, if a freight forwarder is better
able than an exporter to recognize that the location of an intermediate
consignee is incongruous with the claimed ultimate destination, then
such information could be regarded as a red flag for the freight
forwarder, but not the exporter. The general rule is that you should
treat a fact or circumstance as a red flag if it would cause a
reasonable person in your situation (e.g., manufacturer/exporter,
freight forwarder, distributor/reexporter) to suspect that a
transaction may involve an inappropriate end-use, end-user or
destination, or otherwise violate the EAR.
(iii) Red flags may also be raised in exports that have been
licensed by BIS; for example, information you receive after obtaining
an export license may suggest a risk of diversion. Parties should
identify and respond to red flags in all transactions, including ones
for which an export license has been obtained.
(2) Make those who act on your behalf aware. Your employees and
others acting on your behalf (for example, a contractor hired to
perform export-related functions) need to know how to take the steps
described below, especially identifying and responding to red flags. If
such persons have knowledge or reason to know a fact or circumstance,
that knowledge or reason to know can also be imputed to employers or
other principals, so that the latter are also liable for a violation.
Thus, it is especially important for firms to establish clear policies
and effective compliance procedures to ensure that knowledge about
transactions can be evaluated by responsible senior officials. Failure
to do so could be regarded as a form of self-blinding (see paragraph
(b)(5) of this supplement No. 3 and Sec. 772.1, definition of
knowledge).
(3) If there are red flags, inquire. When there is a red flag, you
have an affirmative duty to inquire into the circumstances giving rise
to the red flag and whether they in fact present a heightened risk of
an inappropriate end-user, end-use or ultimate destination, or of some
other possible violation of the EAR. In so doing, your object is to
verify or substantiate whether the concerns indicated by the red flag
are really present (e.g., the real end-use, end-user or ultimate
destination). This duty of heightened scrutiny is present in all
transactions subject to the EAR involving red flags. Absent red flags
(or an express requirement in the EAR), you do not have an affirmative
duty to inquire, verify, or otherwise ``go behind'' the customer's
representations. Thus, if there are no red flags, you can rely upon
representations from your customer in preparing and submitting export
control documents and any license application that may be required.
(i) In responding to red flags, you are expected to conduct an
inquiry that is reasonable for a party in your circumstances. Thus, if
you are exporting specially ordered equipment that you manufactured as
part of a negotiated sale to an end-user in an industry with which you
do a substantial part of your business, you may be expected to conduct
a more thorough and better targeted inquiry than a distributor
exporting off-the-shelf equipment that is used in a wide range of
commercial and industrial contexts.
(ii) The following are means of inquiry that, depending on
particular circumstances, you should pursue in response to a red flag:
(A) Seek further information or clarification from the customer,
the ultimate consignee, and/or end-user.
(B) Conduct searches of relevant publications or public information
on the Internet for additional information or to confirm
representations you have received.
(C) Where appropriate for a particular industry or commercial
context, consult standard references or official sources. For example,
the International Atomic Energy Agency (IAEA) makes available
information about what nuclear facilities are under IAEA safeguards,
which is relevant to determining whether export or reexport for use at
a particular nuclear facility requires a license under Sec. 744.2.
(4) Reevaluate all of the information after the inquiry. The
purpose of your inquiry is to provide a basis for making an honest,
well-informed assessment of whether the concerns indicated by the red
flag are really present in your transaction. One way of making this
assessment is to determine that the red flag is in fact explained by
circumstances that, in the context of your transaction, do not present
the concerns generally associated with the red flag. For example, a
sudden change in delivery instructions can present a red flag, but the
red flag could be resolved by establishing that the facility to which
the items were originally to be delivered had been recently damaged by
fire. If the result of your reasonable inquiry and reevaluation is that
this red flag does not point to a risk of diversion or concealed end-
use, you could proceed with the transaction. On the other hand, if
after evaluating in good faith all of the facts and circumstances you
have ascertained, you believe that the export is actually destined for
a country, end-user or end-use for which an export license is required,
you should not proceed with the transaction without complying with that
license requirement. In making such an assessment, you are expected to
bring to bear whatever relevant background or expertise you have.
(5) Do not self-blind. Throughout the process of identifying and
responding to red flags, you must honestly take into account the facts
and circumstances presented to you. Do not cut off the flow of
information obtained or received in the normal course of business. For
example, do not instruct the sales force to tell potential customers to
refrain from discussing the actual end-use, end-user, and ultimate
destination for the product your firm is seeking to sell. Do not put on
blinders that prevent learning relevant information. An affirmative
policy of steps to avoid ``bad'' information would not insulate a
company from liability, and would be considered evidence of knowledge
or reason to know the facts in question.
(6) If there are still reasons for concern, refrain from going
forward with the transaction or contact BIS. If you continue to have
reasons for concern after your inquiry and reevaluation, then you
should either refrain from going forward with the transaction or submit
all of the relevant information to BIS in the form of an application
for a license or in such other form as BIS may specify. You have an
important role to play in preventing exports and reexports contrary to
the national security and foreign policy interests of the United
States. BIS will continue to work in partnership with the private
sector to make this front line of defense effective, while minimizing
where possible the regulatory burden on legitimate participants in
export transactions. If you have any question about whether you have
encountered a red flag or what steps you should take in response to a
red flag, or if you decide to refrain from the transaction, but believe
you have information relating to completed or attempted violations of
the EAR, you are encouraged to advise BIS's Office of Export
Enforcement through BIS's Web site or at 1-800-424-2980 or the Office
of Exporter Services at (202) 482-4811.
(c) Red Flags: Examples. As described below, BIS has identified a
number of red flags that apply in different contexts. This discussion
is not all-inclusive, but is intended to illustrate the types of
circumstances to which you should be alert. BIS may supplement this
description of red flags in future guidance on its Web site. Examples
of red flags in various situations include:
[[Page 60834]]
1. The customer or purchasing agent is vague, evasive, or
inconsistent in providing information about the end-use of a product.
2. The product's capabilities do not fit the buyer's line of
business or level of technical sophistication. For example, a customer
places an order for several advanced lasers from a facility with no use
for such equipment in its manufacturing processes.
3. A request for equipment configuration is incompatible with the
stated ultimate destination (e.g., 120 volts for a country with 220
volts).
4. The product ordered is incompatible with the technical level of
the country to which the product is being shipped. For example,
semiconductor manufacturing equipment would be of little use in a
country without an electronics industry.
5. The customer has little background in the relevant business. For
example, financial information is unavailable from ordinary commercial
sources and the customer's corporate principal is unknown.
6. The customer is willing to pay cash for an expensive item when
the normal practice in this business would involve financing.
7. The customer is unfamiliar with the product's performance
characteristics, but still wants the product.
8. Installation, testing, training, or maintenance services are
declined by the customer, even though these services are included in
the sales price or ordinarily requested for the item involved.
9. Terms of delivery, such as date, location, and consignee, are
vague or unexpectedly changed, or delivery is planned for an out-of-
the-way destination.
10. The address of the ultimate consignee, as listed on the airway
bill or bill of lading, indicates that it is in a free trade zone.
11. The ultimate consignee, as listed on the airway bill or bill of
lading, is a freight forwarding firm, a trading company, a shipping
company or a bank, unless it is apparent that the ultimate consignee is
also the end-user or the end-user is otherwise identified on the airway
bill or bill of lading.
12. The shipping route is abnormal for the product and destination.
13. Packaging is inconsistent with the stated method of shipment or
destination.
14. When questioned, the buyer is evasive or unclear about whether
the purchased product is for domestic use, export or reexport.
15. The customer uses an address that is inconsistent with standard
business practices in the area (e.g., a P.O. Box address where street
addresses are commonly used).
16. The customer does not have facilities that are appropriate for
the items ordered or end-use stated.
17. The customer's order is for parts known to be inappropriate or
for which the customer appears to have no legitimate need (e.g., there
is no indication of prior authorized shipment of system for which the
parts are sought).
18. The customer is known to have or is suspected of having
dealings with embargoed countries.
19. The transaction involves a party on the Unverified List
published by BIS in the Federal Register.
20. The product into which the exported item is to be incorporated
bears unique designs or marks that indicate an embargoed destination or
one other than the customer has claimed.
21. The customer gives different spellings of its name for
different shipments, which can suggest that the customer is disguising
its identity and/or the nature and extent of its procurement
activities.
22. The requested terms of sale, such as product specification and
calibration, suggest a destination or end-use other than what is
claimed (e.g., equipment that is calibrated for a specific altitude
that differs from the altitude of the claimed destination).
23. The customer provides information or documentation related to
the transaction that you suspect is false, or requests that you provide
documentation that you suspect is false.
PART 736--[AMENDED]
3. Revise the authority citation for part 736 to read as follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
22 U.S.C. 2151 (note), Pub. L. 108-175; E.O. 12938, 59 FR 59099, 3
CFR, 1994 Comp., p. 950; E.O. 13020, 61 FR 54079, 3 CFR, 1996 Comp.
p. 219; E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O.
13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; E.O. 13338, 69 FR
26751, May 13, 2004; Notice October 29, 2003, 68 FR 62209, 3 CFR,
2003 Comp., p. 347; Notice of August 6, 2004, 69 FR 48763 (August
10, 2004).
4. In Sec. 736.2, revise paragraph (b)(5) to read as follows:
Sec. 736.2 General prohibitions and determination of applicability.
* * * * *
(b) * * *
(5) General Prohibition Five--Recipient and end-use license
requirements. If a license is required because of the recipient or end
use as specified in part 744 of the EAR, you may not export or reexport
without such license.
* * * * *
PART 740--[AMENDED]
5. Revise the authority citation for part 740 to read as follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
Sec. 901-911, Pub. L. 106-387; E.O. 13026, 61 FR 58767, 3 CFR, 1996
Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783;
Notice of August 6, 2004, 69 FR 48763 (August 10, 2004).
6. In Sec. 740.18, revise the last sentence of paragraph (c)(4) to
read as follows:
Sec. 740.18 Agricultural commodities (AGR).
* * * * *
(c) * * *
(4) * * * (Note that the fact that you have been advised that no
agency has objected to the transaction does not exempt you from other
license requirements under the EAR, including those based on recipient
or end-use in part 744 of the EAR.)
* * * * *
PART 748--[AMENDED]
7. Revise the authority citation for part 748 to read as follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66
FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August 6, 2004, 69 FR
48763 (August 10, 2004).
8. In Sec. 748.4, revise paragraph (f) to read as follows:
Sec. 748.4 Basic guidance related to applying for a license.
* * * * *
(f) Redundant submissions prohibited. You may not submit a license
application for a transaction if:
(1) You have already submitted a license application for that
transaction and the license application is still pending before BIS; or
(2) You have submitted a safe harbor report for the transaction
pursuant to Sec. 764.7(c) of the EAR and the BIS decision is still
pending.
* * * * *
PART 752--[AMENDED]
9. Revise the authority citation for part 752 to read as follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
E.O. 13020, 61 FR 54079, 3 CFR, 1996 Comp. p. 219; E.O. 13222, 66 FR
44025, 3 CFR, 2001 Comp., p. 783; Notice of August 6, 2004, 69 FR
48763 (August 10, 2004).
[[Page 60835]]
10. In Sec. 752.9, revise paragraph (a)(3)(ii)(H) to read as
follows:
Sec. 752.9 Action on SCL applications.
(a) * * *
(3) * * *
(ii) * * *
(H) A notice that the consignee, in addition to other requirements
may not sell or otherwise dispose of any U.S. origin items under the
SCL if a license is required by part 744 of the EAR.
* * * * *
11. In Sec. 752.11, revise paragraph (c)(13) to read as follows:
Sec. 752.11 Internal Control Programs.
* * * * *
(c) * * *
(13) A system for screening customers and transactions to identify
any circumstances (``red flags'') that indicate an item might be
destined for an inappropriate end-use, end-user, or destination. This
system must:
(i) Be able to identify, as a minimum, the red flags in paragraph
(c) of supplement No. 3 to part 732 of the EAR, and;
(ii) Function in conformance with the ``know your customer''
guidance provided in paragraph (b) of supplement No. 3 to part 732 of
the EAR:
* * * * *
PART 764--[Amended]
12. Revise the authority citation for part 764 to read as follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August
6, 2004, 69 FR 48763 (August 10, 2004).
13. Add Sec. 764.7 to read as follows:
Sec. 764.7 Safe harbor from knowledge-based requirements.
Parties involved in exports, reexports or other activities subject
to the EAR who meet the requirements of this section can avail
themselves of a ``safe harbor'' against being found to have had
knowledge of a fact or circumstance under the definition of knowledge
in Sec. 772.1. The safe harbor can apply only to requirements or
prohibitions of the EAR that incorporate knowledge, as defined in Sec.
772.1, as an element.
(a) You must not have actual knowledge or actual awareness that the
fact or circumstance at issue is more likely than not. The safe harbor
is available only to parties who do not have actual knowledge or actual
awareness that the fact or circumstance in question is more likely than
not. For example, if you are about to export an item subject to the EAR
and are aware that it is more likely than not that the item will be
used in the design, development, production, stockpiling, or use of
chemical or biological weapons in any country, Sec. 744.4 of the EAR
requires you to obtain a license for that export and the safe harbor
will not relieve you of that license requirement.
(b) You must take the following steps. (1) Comply with item and/or
destination-based license requirements and other notification or review
requirements. Determine whether a license is required because of the
destination and the item's status on Commerce Control List and comply
with any such license or other review requirements. If you are an
exporter or reexporter, you must either make a good faith effort to
classify the item or you must obtain a classification from BIS. You
must obtain any licenses required to send the item to the destination
you intend to send it to. If the item's reason for control on the
Commerce Control List is EI, you must comply with any requirements to
notify the U.S. government or to obtain U.S. government approval prior
to export or reexport.
(2) Determine whether the parties to the transaction are subject to
a denial order, or to certain sanctions, and whether they appear on the
Entity List or Unverified List, and whether the transaction is governed
by a BIS General Order. If you are an exporter or reexporter, or a
freight forwarder or other party acting on an exporter's or
reexporter's behalf, determine whether the parties to the transaction
fall within any of the following categories:\1\
---------------------------------------------------------------------------
\1\ If you find that a party to your transaction has a name or
address that is similar, but not identical, to a party within one of
the listed categories, you should take reasonable steps to determine
whether the party to your transaction is in fact identical to the
party within that category, then act in accordance with your
determination and this guidance.
---------------------------------------------------------------------------
(i) Persons subject to denial of U.S. export privileges under a BIS
order. Such orders are published in the Federal Register. BIS also
makes available unofficial lists of denied persons on its Web site at
http://www.bis.doc.gov and in an unofficial version of the EAR, which
is published by the Government Printing Office and to which members of
the public may subscribe. If an end-user, ultimate consignee or
principal party in interest is subject to a denial order that prohibits
your proposed transaction, you must not proceed.
(ii) Persons appearing on the Unverified List, which is published
by BIS in the Federal Register and unofficially maintained on BIS's Web
site. The Unverified List identifies persons in foreign countries that
were parties to past transactions for which an end-use visit (either a
pre-license check or a post-shipment verification) could not be
conducted for reasons outside of the control of the U.S. Government.
The presence on the Unverified List of an end-user, ultimate consignee
or principal party in interest presents a red flag for the transaction,
as described in supplement No. 3 to part 732 of the EAR.
(iii) Persons appearing on the Entity List in supplement No. 4 to
part 744. To the extent described in that supplement, a license is
required to export or reexport items subject to the EAR to persons on
the Entity List. See Sec. 744.1(c). Any applicable license
requirements must be met before you proceed with the transaction.
(iv) Specially designated global terrorists [SDGT], (see Sec.
744.12), specially designated terrorists [SDT] (see Sec. 744.13),
designated foreign terrorist organizations [FTO] (see Sec. 744.14),
and persons on the list of specially designated nationals identified by
the bracketed suffix [IRAQ2] (see Sec. 744.18). License requirements
for exports and reexports to such parties are described in the
referenced sections of part 744. Any applicable license requirements
must be met before you can proceed with the transaction.
(v) The requirements of a BIS General Order. These General Orders,
which are published in the Federal Register and codified in supplement
No. 1 to part 736, may place special restrictions on exports and
reexports certain destinations or to named persons. Before you may
proceed with the transaction, you must comply with any applicable
license requirements or other restrictions imposed by any applicable
General Order.
(3) Identify and respond to red flags. If you are a party involved
in an export, reexport or other activity subject to the EAR, comply
with the guidance on how to identify and respond to red flags as set
forth in paragraphs (b) and (c) of supplement No. 3 to part 732 of the
EAR.
(c) Report to BIS. To be eligible for the safe harbor, parties must
report the red flags that they identified and how they resolved them.
BIS will respond to such reports indicating whether it concurs with the
party's conclusion. BIS may consult with other government agencies in
developing its response to any such report.
(1) Prior to proceeding with the transaction a party seeking to be
eligible for the safe harbor must submit a written report by first-
class mail, express mail, or overnight delivery to
[[Page 60836]]
the Bureau of Industry and Security, Office of Enforcement Analysis,
14th Street and Constitution Avenue, NW, Room 4065, Attn: Safe Harbor
Guidance, Washington, DC 20230. The report must demonstrate that the
party has taken the actions described in paragraph (b) of this section.
In particular, the report must include all material information
relating to the red flags and the steps the party took to resolve the
concerns raised by the red flags.
(2) BIS will acknowledge receipt of all reports received and
provide the reporting party with a telephone number at which to contact
BIS if it does not receive a response by the date stated in the
acknowledgement. BIS expects to respond to most reports within 45 days
of its receipt of the report. The response shall:
(i) State that BIS concurs with the party's judgement that it has
adequately addressed the concerns raised by the red flags;
(ii) State that BIS does not concur with the party's judgement that
it has adequately resolved those concerns and describe additional
information that would be necessary to resolve them adequately;
(iii) Issue an ``is informed'' notice (pursuant to Sec. Sec.
744.2(b), 744.3(b), 744.4(b), 744.6(b) or 744.17(b) of the EAR)
informing the party of a license requirement under Sec. Sec. 744.2,
744.3, 744.4, 744.6, or 744.17(b) of the EAR; or
(iv) state that more time is needed to review the submission.
(3) The party is not entitled to conclude that BIS concurs with the
party's judgement that the party has adequately resolved the concerns
raised by the red flags until it either receives a response from BIS so
stating or contacts BIS at the telephone number indicated in the
acknowledgment and is told that BIS will not be responding to this
report.
(4) A response by BIS stating that it concurs with the party's
judgement that it has resolved the concerns raised by the red flags or
a statement by BIS that it will not be responding to the reexport
shall, provided the party submitting the report has taken the steps in
paragraph (b) of this section, serve as confirmation, based on the
information in the party's submission, that the party has adequately
resolved the concerns raised by the red flags. However, such
confirmation shall not bind a subsequent enforcement action or
prosecution if the submitting party had actual knowledge or actual
awareness that the fact or circumstance in question was more likely
than not, or if the submission misstated or withheld relevant material
information.
(5) If BIS responds as described in paragraph (c)(2)(ii) of this
section and the party proceeds without taking the additional steps to
resolve the concerns, then it will not qualify for the safe harbor.
(6) In this paragraph (c), the date of BIS's receipt of the report
shall be the date of receipt by the Office of Enforcement Analysis as
recorded in a log maintained by that office for this purpose and the
date of BIS's response shall be the postmark date of BIS's response.
PART 772--[AMENDED]
14. The authority citation for part 772 continues to read as
follows:
Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.;
E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of August
6, 2004, 69 FR 48763 (August 10, 2004).
15. In Sec. 772.1 revise the definition of knowledge to read as
follows:
Sec. 772.1 Definition of terms as used in the Export Administration
Regulations (EAR).
* * * * *
Knowledge. When referring to an actor in a transaction that is
subject to the EAR, knowledge (the term may appear in the EAR as a
variant, such as ``know,'' ``reason to know,'' or ``reason to
believe'') of a fact or circumstance relating to the transaction
includes not only positive knowledge that the fact or circumstance
exists or is substantially certain to occur, but also an awareness that
the existence or future occurrence of the fact or circumstance in
question is more likely than not. Such awareness is inferred, inter
alia, from evidence of the conscious disregard of facts and is also
inferred from a person's willful avoidance of facts. This usage of
``knowledge'' incorporates an objective, ``reasonable person''
standard. Under that standard, a party would have knowledge of a fact
or circumstance if a reasonable person in that party's situation would
conclude, upon consideration of the facts and circumstances, that the
existence or future occurrence of the fact or circumstance in question
is more likely than not. Note: This definition applies to Sec. Sec.
730.8(a)(4)(iv); 732.1(d)(1)(x); 732.3(m); 732.4(a); Supp. No. 2 to
part 732; Sec. Sec. 734.2(b)(2)(ii); 736.2(b)(7); 736.2(b)(10); Supp.
No. 2 to part 736, Administrative Order Two, paragraph (a)(1)(ii)(E);
Sec. Sec. 740.13(e)(4); 740.13(e)(6); 740.16(i); 740.17(e)(3); 740.5;
740.7(b)(4); 740.9(a)(3)(iii)(B); 742.10(a)(2)(ii) ; 742.8(a)(2); Supp.
No. 6 to part 742, paragraph (d)(1); Sec. Sec. 744.17; 744.2; 744.3;
744.4; 744.5; 744.6; 745.1(a)(1)(ix); 746.3(a)(4), 746.3(f)(2)(i),
746.7(a)(2)(ii); 748.11(e)(4)(ii)(2); 748.14(g)(2)(vii);
748.3(c)(2)(iii); 748.4(d)(1); 748.9(g)(3); Supp. No. 1 to part 748;
Supp. No. 2 to Part 748, paragraphs (g)(2)(iii) and (iv); Supp. No. 2
to Part 748, paragraph (j)(3)(ii); Supp. No. 2 to Part 748, paragraph
(l); Supp. No. 2 to Part 748, paragraph (o)(3)(i); Supp. No. 5 to part
748, paragraph (a)(5)(ii); Sec. Sec. 750.7(h)(3); 752.4(b);
752.11(c)(12); 752.11(c)(13); 752.4; 754.2(j)(3)(i)(D); 758.3(c);
762.1(a)(2); 762.6(a)(2); 764.2(e); 764.2(f)(2); 764.2(g)(2); Supp. No.
1 to part 764(b), paragraph (d) under the heading ``SECOND'; Supp. No.
1 to part 766, III, A paragraphs headed ``Degree of Willfulness'' and
``Related Violations'; and Sec. 772.1 definition of ``transfer.'' This
definition does not apply to part 760 of the EAR (Restrictive Trade
Practices or Boycotts) or to the following EAR provisions: Sec. Sec.
730.8(b); 732.1(c); 732.3(n); 734.1(a); 734.2(b)(3); Supp. No. 1 to
part 734, questions D(5) and F(1); 738.4(a)(3); 740.11(c)(1)(ii)(C);
742.12(b)(3)(iv)(B)(8); 742.18; Supp. No 4 to Part 742, paragraph 2;
744.12; 744.14; 745.1(b)(2); 745.2(a)(1); 748.7(a)(2)(ii);
748.11(c)(1); 748.11(c)(3); 748.11(e)(4)(i); 750.8; 752.5(a)(2)(iv);
752.8(d)(9); 754.4(d)(1); 758.7(b)(6); 764.5(b)(5); 764.5(c)(5);
766.3(b); 766.6(b); 770.3(d)(1)(i)(A) and (B); 772.1 definitions of
``basic scientific research,'' ``cryptography,'' ``deformable
mirrors,'' ``defense trade controls,'' ``expert systems,'' ``multilevel
security,'' ``recoverable commodities and software,'' ``technology,''
and ``time modulated wideband''; Supp. No 1 to part 774, Category 1,
ECCN 1C351, Reason for Control paragraph; Supp. No. 1 to part 774,
Category 1, ECCN 1C991, Related Controls paragraph; Supp. No 1 to part
774, Category 2, ECCN 2B119 Note to List of Items Controlled; Supp. No.
1 to part 774, Category 3, ECCN 3A001, N.B. to paragraph 8 of List of
Items Controlled; Supp. No 1 to part 774, Category 3, ECCN 3A002,
Related Definitions and List of Items Controlled; Supp. No. 1 to part
774 Category 3, ECCN 3A225, Heading and List of Items Controlled; Supp.
No 1 to part 774, Category 4, ECCN 4A994, List of Items Controlled; and
Supp. No. 1 to part 774, Category 6, ECCN 6C004 List of Items
Controlled.
* * * * *
Dated: October 5, 2004.
Peter Lichtenbaum,
Assistant Secretary for Export Administration.
[FR Doc. 04-22878 Filed 10-12-04; 8:45 am]
BILLING CODE 3510-33-P