Tangential Participant Liability Under the EAR

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Oct. 28, 2024
By: Marvin E. McPherson

The role of tangential participants in export transactions has come under increased scrutiny by regulatory bodies, particularly by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS). The Export Administration Regulations (EAR) sets a vast array of controls on products and technology exported from the United States, and those controls follow the products wherever located, leaving various actors along the supply chain exposed to liability.

In addition to traditional export transactions, BIS regulations also apply to a range of tangential participants, from financial institutions to insurers, who might not directly handle controlled items but play a role in the facilitation of transactions that could indirectly support controlled activities.

Generally, enforcement actions tended to focus on primary exporters, manufacturers, and distributors, leaving financial institutions and other secondary actors with comparatively low exposure. However, BIS has stated the importance of these actors in helping to prevent circumvention. For entities with indirect or secondary roles in exports, such as organizations involved in facilitating, financing, or brokering cross-border transactions, it is crucial to understand BIS’s compliance expectations. BIS released guidance for financial institutions to help those entities understand their liability in an export transaction. The guidance emphasis the need for entities on the periphery of export transactions to reassess their potential exposure under the EAR.

While the BIS guidance is directed at financial institutions, it carries important implications for a wider audience of tangential participants involved in export transactions. Logistics providers, insurers, and third-party brokers are similarly at risk and could benefit from adopting parallel measures to ensure they are not inadvertently facilitating unauthorized exports. The guidance highlights BIS’s expectation that financial institutions conduct due diligence beyond traditional Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols.

Specifically, it recommends that institutions assess whether any underlying transactions involve controlled goods or technology subject to the EAR, as well as consider the end-users and end-uses associated with the funds or assets being transferred. Financial institutions are thus encouraged to examine the scope of their customer activities beyond merely understanding the immediate transactional relationship.

Additionally, the BIS guidance introduces the need for training and awareness among employees, particularly within compliance and operations teams, are essential for effective risk management. BIS’s guidance advocates for regular training on EAR-related risks and escalation procedures to help ensure that employees can identify and report suspicious transactions or behaviors.

BIS’s new guidance for financial institutions marks an important step in recognizing and warning the roles of tangential participants in export transactions. As BIS continues to expand its compliance expectations, financial institutions, logistics providers, and other third-party facilitators should consider revising and updating their compliance plans accordingly. If you need further assistance or have specific questions about your export control liability, please contact any attorney at Barnes Richardson and Colburn.