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Posted: August 31, 2009

Think you know who your partners are? Think again

Who you don't know really can hurt you

Ivan P. Koves

Two key axioms in the world of export controls are:

1. Know your product.

2. Know your business partners.

Knowing your product (its classification on control lists maintained by the State and Commerce Departments) is important, but this article will focus on knowing your “business partners” and how an exporter can address this requirement.  Let me try to anticipate your questions:

Who are my business partners?
A business partner is anyone you deal with in the course of conducting your transactions.  Typically, it is a customer, supplier or financier, and can be a natural person, association or a business entity. 

With whom may I partner?
U.S. regulations and multilateral agreements restrict U.S. individuals and businesses from conducting transactions with specific entities.  These entities are often referred to as “Restricted Parties.” 

Examples include known terrorists, organizations/companies that fund terrorists, and/or parties guilty of trade violations.  While it may seem clear to you that those with whom you deal do not fall into any of these categories, many businesses have been surprised to learn the controlling interests behind some of their partners. Before negotiating or conducting any transactions with a business partner, an exporter must take steps to ensure that the U.S. government does not prohibit such dealings.

How do I know whether a potential business partner is a “restricted party?"

Embargoed and Sanctioned Countries -- The U.S. government maintains sanctions and/or full embargoes against a number of countries.  U.S. companies are generally forbidden from participating in any transaction (export, import, or investment) involving not only the governments, but also companies and resident nationals of these targeted countries.  Lists of countries subject to embargoes and sanctions are maintained by the Treasury Department and the State Department.  

Denied Parties and Entities -- In addition to countries, there are individuals and companies that have been sanctioned or denied export privileges by U.S. government agencies.  These are usually foreign individuals and companies, but can also be U.S. companies, citizens and legal permanent residents (“green-card” holders).  They are contained on several lists, maintained by various agencies:

The Specially Designated Nationals and Blocked Persons List includes:
▪ terrorists

▪ drug traffickers

▪ persons or companies acting on behalf of embargoed countries, terrorists, and drug traffickers. 

The Debarred Parties List --  A debarred party is a person or company that is not allowed to participate in the export of defense articles or to provide defense related services.   The Denied Persons List.  Includes individuals and companies prohibited from receiving U.S. products because they have violated U.S. export control laws.

Restricted Entities List --  Includes end-users that have been determined to present an unacceptable risk of diverting exported items to entities engaged in the development of weapons of mass destruction or missiles used to deliver those weapons.

The Unverified List.  Includes foreign persons who were parties to a transaction with respect to which the Commerce Department could not conduct a pre-license check or a post-shipment verification.

You mean I have to check my business partners against all of these lists?

Yes.  In fact, it’s a good idea to check twice - once before you enter into a business relationship and then again before you export an item to the partner.  A partner who is “clean” at order time may have landed on a list before you ship.

Is there an easier way?

Fortunately, yes.  There are several web-based services that allow you to check current and potential business partners against all of these lists with a single click.  All you need to supply is the name and address.  These services offer varying levels of automation and sophistication (some can even operate in conjunction with your ERP system), but all will save you the time of checking against each government list, one by one.

The bottom line: This is an area of the law where ignorance is costly.  Penalties for violating these restrictions can be severe, including large fines, loss of export privileges, and/or loss of contracting privileges with the U.S. government.  If you are an exporter it is your obligation to ensure that your business partners are not Restricted Parties.

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Ivan Koves practices in import and export regulatory matters and has 19 years of experience developing and implementing trade compliance policies, procedures and training. He has broad experience in many international trade areas, including national export and import regimes and supply chain security programs. Prior to joining Holland & Hart, he was the director of global trade compliance for Flextronics, a $30B multinational corporation with over 100 locations in 30 countries around the world.

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