This article is a follow-on from the fifth article about the importance of internal compliance programs by Debbie Richardson, my fellow Goal Group consultant.
While compliance programs may seem complex, the reality is that many breaches of export control could have been avoided had companies proactively monitored for recognisable export control related ‘Red Flags’. In FY 2020, the US Bureau of Industry and Security (BIS) reported US$33m in administrative export control violations.
We will define an export control Red Flag as a warning or indicator that something is amiss in an export scenario. The US BIS administers the export of US military and commercial dual-use items and provides a summary of some common Red Flags on their website (https://www.bis.doc.gov/index.php/all-articles/23-compliance-a-training/51-red-flag-indicators).
Like any type of audit work, you will develop an instinct around the questions to ask and responses which make you dig deeper. Here are my preferred Red Flag checks which will reduce the likelihood of an inadvertent breach:
- Business location: Does the location of the stated business make sense? If a maps application indicates that your client’s engineering or manufacturing company is a unit block when you were expecting a facility of significance, then this would warrant further investigation. Additionally, if the company’s address appears on an embargoed entities list, then the bells should be ringing. Note: the US Directorate of Defense Trade Controls (DDTC) advertises its list of Debarred Parties on its public portal.
- Business Legitimacy: Are the actions and persona of the business aligned? Legitimate businesses have established processes including marketing. Does the business website and marketing material reflect a stable and legitimate business? A company with no specific website or means by which you can seek information on their background and experience is a clear Red Flag requiring further investigation. Additionally, an incongruence between a product order and the primary purpose of the business should warrant a deeper look. Example: an order for high technology equipment from a business which specialises in homewares.
- Demonstrated Expertise: A legitimate business will have expertise within their stated profession. An inquiring client demonstrating little knowledge or understanding of the product or related product technology under export consideration is not normal. Additionally, a lack of interest in the normal support services, such as product training, could be a cause for concern. Sometimes, the client may be vague about the end-use of the item or propose an abnormal or indirect shipping route - these need to be investigated further.
- Aligned Capacity: Does the size of the business make sense? A small number of staff may not be a concern; however, if the business is delivering services beyond those that can be performed by their indicative number, then further investigation is warranted.
These simple checks are easily applied and should be completed as part of an initial licence or agreement screening program.
There are situations where more complex fact checking is prudent, and you will need the expertise of export control specialists. These situations will be influenced by the state of world events, such as the challenges in Afghanistan and the recently changed political situation in Hong Kong. An example of a complex export control scenario might be Australia’s ability to control the end-use of its military exports to the Middle East.
The intent of the article is to demonstrate that a few logical questions and thoughtful consideration of available business facts can mitigate several export control type risks from occurring. To reduce the risk of a breach in Defence Exports, it is vital that Australian businesses do not assume or ignore these warning signs and ensure awareness of the risks is constantly maintained.