Transaction Screening

Regarding operational implementation, transaction screening is the most critical element of an Internal Compliance Program (ICP). This element contains the company‘s internal measures to ensure that no transaction is made without the required license or in breach of any relevant trade restriction or prohibition.

The transaction screening procedures collect and analyze relevant information concerning item classification, transaction risk assessment, license determination and application, and post-licensing controls. Transaction screening measures also allow the company to develop and maintain a certain standard of care for handling suspicious inquiries or orders.

To prepare this core chapter of your company’s ICP, you should review and document accordingly:

• How do you handle item classification for goods, software, and technology regarding export control lists?
• How is your company checking trade-related embargoed, sanctioned, or sensitive destinations and entities?
• How are you integrating customer due diligence in your daily operations?
• If and how are you screening stated end-use and involved parties?
• How are you assessing diversion risk screening, meaning the possible misuse of your dual-use items in the context of, e.g., conventional military or WMD proliferation?
• The way you are managing catch-all controls for non-listed dual-use items.
• How have all relevant employees been rendered attentive to and verified possible red flags relating to suspicious customer inquiries?
• The process you have in place to determine license requirements and license application as appropriate, including brokering, technical assistance, and transit activities.
• How are you implementing and keeping records of post-licensing controls, including shipment control and compliance with the conditions of the authorization?
• The internal process you have in place for keeping export control records and documentation safe and accessible.

All these points must be integrated into your ICP to demonstrate to licensing authorities that you have correctly assessed your export control risks and have appropriate internal proceedings in place to manage those risks.

Product classification

As an exporting company, you are deemed to know your products and screen them against the applicable trade regulations and control lists, starting with determining what CN code is given to your products.

What should your ICP manual contain in terms of product classification?

Before starting, please consider the current classification of your product portfolio that has already been issued and integrated into the Risk Assessment chapter of your ICP. In the Transaction Screening chapter, you must display your company’s internal proceedings to ensure proper classification of existing and new products.

First, start telling licensing authorities who the engineers who classify your products regularly and who the persons responsible for legal assessment and validation of the classification are.

Secondly, indicate and display the item classification sheet you are using. Such a classification sheet shall document why the concerned item falls in a particular category of a control list, noting the specific parameters and subparagraphs of the CN, dual-use, or military lists. It shall also document if the product is mentioned in the sanctions regulations against a particular country and if authorization is required for export, transit, import, technical assistance, brokering, or technology transfer of such product. In Luxembourg, for example, authorities have issued and made available in their 2020 Guidelines a template sheet that may be used for the different classification steps.

The classification sheet should leave enough room for a reasoned and structured assessment. For example, if the use of the correlation table has resulted in one or more potential dual-use codes, take one code after the other and assess if the description of this code (including technical notes and definitions that may appear on different parts of the control list) correlates with the technical specifications of your product.

To facilitate review by authorities (who may claim such product classification sheet as a justifying document for license applications), start the assessment by repeating the wording of the code, followed by a complete and duly reasoned (including technical data) argumentation of why (or why not) the code applies to your product, and a conclusion.

Third point: Confirm and tell authorities what your classification process is. Mention that your classification starts with the correct CN number (and explain also to your internal staff what this is about). Indicate the product categories you are screening against. Speak about dual-use and military equipment lists.

Remember: The transaction risk assessment always starts with a proper product classification. As long as all your products have yet to be properly classified in export control lists, it shall be difficult, not to say impossible, to be safe on the requirements attached to a specific product. And even if a product is not listed on a control list, it may be subject to catch-all provisions.

To start the wording of the ICP without having achieved complete product classification is not a good idea. As this classification shall be one of the risk factors you must assess in the Risk Assessment chapter, the risk assessment shall be complete with the classification. All measures you shall implement and explain in the ICP may be appropriate and complete with this classification and risk assessment duly documented.

Screening procedures

In this section of Chapter 6, you should first explain and demonstrate the screening procedures you have implemented and are following with regard to export control requirements during the order and shipping process.

The workflow should be displayed in a chart and explained in the text. A compliance-focused workflow will include the following:

Customer screening

Your ICP Manual should explain how you are (1) screening if your customer is not a sanctioned entity, (2) checking if the client’s KYC Profile is up to date, and verifying (3) that the necessary due diligence has been conducted and that there is a recent (less than three years old) full due diligence report available in the system.

Product screening

Your ICP should demonstrate how you ensure that the export control classification of your products is considered in your order and shipping process. Tell the reader how and when you are reviewing if the product intended to be shipped has already been classified.

If an item classification sheet exists for the concerned product, you must review the accuracy of the classification and if it is still up-to-date. In case of doubt, an information request has to be made with the supplier. Product engineers and the export control team will be asked for any assistance.

You should also indicate your internal process if an item classification sheet does not exist for the concerned product, meaning who will manage and document the product classification and how.

Explain also how you ensure the license requirement check will be followed if any of the product screenings reveal a listing in the dual-use, military, or torture goods lists.

End-use screening

The Internal Compliance Program shall describe how you ensure that, for any transaction, an end-use screening has been made and is still valid.

Indicate also how you guarantee that if end-use checks reveal a nuclear, chemical, biological, or military use, notification or license requests will be made to licensing authorities.

Transaction screening

Your ICP should show how you ensure that a transaction screening has been made and is still valid.

Transaction screening comprises a “red-flag” verification. If a red flag is revealed, the operation shall be stopped. Suppose no such red flag appears in the verification process. In that case, a sanctions screening is operated to disclose if the operation is prohibited or subject to any restrictions or to confirm that the operation is not restricted.

In the workflow, your ICP should also identify who is responsible for each flow stage and at what points an export violation could happen. The workflow must integrate various checks into the process at those points of vulnerability.

Say a word on the frequency of export checks. For example, a sanctioned persons and entities check conducted by sales personnel at the initial stages of a transaction could minimize the time and expense a company might incur to win business that it cannot fulfill. The same check at the end of the process, immediately before shipping, can identify any last-minute changes relevant to the transaction.

Tell your reader about preventative controls you are implementing to minimize vulnerabilities before order entry, in-process controls that will place a “hold” on a transaction necessitating a secondary review, and after-process controls that would alert you to system failures.

End-use screening

The objective for the end-use screening is to:

• Verify that the items to be exported will not be used for purposes other than the declared use.
• Ensure that any non-listed dual-use items for a destination subject to a binding embargo are not intended for a “military end-use”.

To determine the appropriate authorization, the ICP must create a system to identify and stop export, re-export, and selected in-country transfer transactions involving specific end-uses and activities. A good compliance practice is to:

• Verify the intended end use of the exported item for each order.
• This information is primarily obtained via contacts with the customer and following consultation of open, i.e., publicly accessible, sources on the end user concerned.
• Obtain several guarantees, i.e., an end-user certificate drawn up and signed by the customer at an early stage of the sales process.
• Ensure that the end-use statement specifies the intended end use and comprises a commitment by the consignee of the items to not use these items for proliferation purposes or the production of weapons of mass destruction.
• Check that this document also indicates whether it concerns a defense-related end use and specifies the exact location of the items and the ordered quantities.

Your ICP should allow sufficient resources for you to screen your customer, consignee, and/or end user, check the end-use certificate, verify if the indicated end-use is logical and in line with previously held customer information, and tally with the end user’s business activities, and be attentive to the type and quantity of products ordered compared to previous orders.

Diversion risk screening

Illegal diversion risk is one of the most significant export control issues facing exporting companies today. Illegal diversion is when your company sells a product to a foreign customer outside the EU, and that customer resells the product without your knowledge in a prohibited country (such as Iran or Syria) to a prohibited party or for a prohibited end-use. Illegal diversion can create significant problems for exporters, ranging from reputational damage (news stories about your product appearing in Iranian markets) to enforcement actions.

The Internal Compliance Program should aim to reduce potential liability from illegal diversion.

Here are some steps that you should include in your ICP in order to demonstrate awareness about illegal diversion and concrete measures to fight against it (other steps are often added based upon the company, product and countries in question): 

• Require the purchaser to provide a complete and duly signed end-use statement in the export contract or a separate document as part of the transaction documentation.
• Conduct a careful due diligence review of the purchaser and all other parties to the transaction.
• Maintain documentation about due diligence conducted to perfectly “know” your foreign customers by obtaining detailed information on the bona fides (credentials) of their customer to measure the risk of diversion, especially when the customer is a broker, trading company, or distribution center and, thus, establishing your good faith attempts to comply with export control regulations.
• Use only freight forwarders and other intermediaries who have sound export compliance processes.
• Avoid “routed” transactions unless you have a long-standing and trustworthy relationship with your purchaser.
• Conduct screening for: (a) prohibited parties (for all parties to the transaction); (b) prohibited country destinations; and (c) prohibited end-uses.
• Communicate export control classifications and destination information to end-users, consignees, freight forwarders, and other parties to the transaction.
• Use information technology to enhance your due diligence review.
• Conduct training for foreign distributors, resellers, and other intermediaries regarding the legal risks of unauthorized diversion.
• Include a clause in your contact with the foreign purchaser that (a) provides that the customer will not re-export the product from the purchaser’s country without obtaining the consent of the exporter and (b) provides that the purchaser will indemnify the exporter from liability (including litigation costs) arising from unauthorized diversion.
• Pay high attention to any red flags and communicate internally such red flags and the measures you have taken to deal with these issues.

License determination

All efforts to draft and submit a perfect Internal Compliance Program are meaningless if your company cannot determine day by day if an administrative authorization (often called a license) must be applied for and obtained before the export (or another export-controlled transaction) takes place. As this is a complex question and the most important one in export control compliance, all resources and available documentation have to be considered in this assessment.

Your ICP should demonstrate that you are mastering the multi-step process to determine if a license is required for a particular transaction. You are duly documenting relevant criteria assessed during this process. Here are some tips for drafting the relevant ICP chapter:

• Start your process concerning your product (requires a duly completed product classification sheet).
• Consider the type of transaction concerning the concerned product (e.g., export, import, transit, transfer, brokering, technical assistance, and intangible transfer of technology).
• Review the end-use of the item, the customer, and the end-user, and pay attention to potential red flags.
• Assess if the transit, destination, and end-use country are sensitive or even sanctioned, meaning indicated on a UN, EU, or national sanctions list.
• Determine the license requirement by combining the four previous steps (there must be a clear yes/no answer, but take into account that a prior notification may be due to licensing authorities to ask them if a license is required, e.g., due to catch-all or end-use provisions in national or international export control regulations).
• Indicate what type of authorization must be applied for (in general, individual authorizations, but global or general authorizations on international or national level may be available for use).
• Tell your reader what conditions apply to the different categories of authorizations, what underlying documents must be attached to the application, what forms may be used, whose signatures are required, what processing times within the public administration, and who will sign the licenses.
• Indicate the possible post-licensing requirements, for example, in case of expiration or loss of licenses, for the assignment of licenses, about conditions of use and return, and above all, any reporting requirements.