On August 30, 2019, the US Commerce Department’s Bureau of Industry and Security (“BIS”) published Due Diligence Guidance urging companies to employ heightened due diligence when exporting to Pakistan (the “Pakistan Guidance”). The Pakistan Guidance specifically focuses on (i) supplemental licensing requirements applicable for items (e.g. goods, software, or technology) subject to the Export Administration Regulations (“EAR”) that may be destined to nuclear or missile activities, and (ii) best practices for screening customers in Pakistan to prevent diversion of items subject to the EAR to unauthorized end uses and end users.
BIS published the Pakistan Guidance in an effort to bring attention to compliance risks related exports/reexports to Pakistan after investigations by the BIS Office of Export Enforcement “revealed schemes” by Pakistani entities attempting to acquire items subject to the EAR for entities listed on the Entity List. The Pakistan Guidelines appear to reflect an enforcement focus on Pakistan from BIS, so companies exporting/reexporting items subject to the EAR to Pakistan should take into account these BIS recommendations to ensure compliance.
Key takeaways from the Pakistan Guidance are found below:
- Supplemental Licensing Requirements: BIS reminds companies that the supplemental licensing requirements found in EAR Part 744 apply to any item subject to the EAR destined for nuclear or missile end-users or end-uses (e.g., UAVs, nuclear power plants). These end-use-based licensing requirements apply to all items classified as EAR99, as well as items identified on the Commerce Control List that are not normally controlled for export/reexport to Pakistan.
- Entity List Focus: BIS stressed that it routinely adds both Pakistani and non-Pakistani parties to the Entity List including companies in industries such as engineering and commercial services, and that companies should be aware of the scope of prohibitions of Entity List orders since certain entities might not be specifically identified. For example, the Pakistan Guidance says the Entity-List entry for the Pakistan Atomic Energy Commission extends to all Pakistani nuclear reactors, including power plants (i.e., Karachi Nuclear Power Plant; Chashma Nuclear Power Plant) not specifically identified on the Entity List.
- Due Diligence/Best Practices: In accordance with its “Know Your Customer” Guidance, BIS advises companies to supplement their screening capabilities with extra due diligence to identify and resolve red flags associated with Pakistan-related transactions potentially destined for nuclear- or missile-related activities by:
- Heightening due diligence for unknown customers;
- Thoroughly assessing the potential dual-use application of products;
- Determining the full scope of restrictions under the Entity List for a given party because many times automatic screening products do not provide a full picture of all affected entities; and
- Filing true, accurate, and complete Electronic Export Information (“EEI”) for shipments from the United States.
- Red Flags: The Pakistan Guidance highlights the following red flags parties should keep in mind when conducting due diligence for Pakistan related transactions:
- A new customer places an unexpected and/or high-value order for sophisticated equipment.
- The customer is a reseller or distributor, in which case a company should inquire about the end user.
- The customer has no website or social media and is not listed in online business directories.
- The customer’s address is similar to an entity identified on the Consolidated Screening List, or the address indicates the customer is located close to end users of concern, including co-located with an entity identified on the Entity List.
- Customer places an order ex works and makes all shipping arrangements through a freight forwarding service, in which case BIS recommends that parties request that the freight forwarder provide a copy of the EEI filing for shipments from the United States, to ensure the information is accurate.
We expect BIS will use the Pakistan Guidance to measure the adequacy of companies’ due diligence and compliance policies in EAR enforcement matters related to Pakistan.
