U.S. government to scrutinize financial institutions in new ways around foreign policy
The U.S. Commerce Department has published new guidance for financial institutions on transaction screenings that are likely to be an enhanced focus of the agency’s enforcement authority. The Bureau of Industry and Security (BIS) within the Commerce Department prohibits domestic and international shipments and transfers of numerous types of products, including intangibles such as technology, and related services, that contribute to foreign policy concerns, most recently around Russia and China. While these prohibitions typically pertain to manufacturers and sellers of covered items, BIS is now leaning on the financial industry’s ability to disrupt transactions of concern by preventing the financing they require. The financial industry is put on notice that BIS will likely investigate how institutions implement the guidance and impose financial penalties for practices it considers inadequate.
The key legal provision in the guidance is a prohibition against “proceeding with transactions with knowledge that a violation has occurred or is about to occur.” This means one “may not … finance … or otherwise service” prohibited transactions “with knowledge that a violation … has occurred, is about to occur, or is intended to occur.” BIS recognizes many of the key details determining whether a violation will occur, e.g., a product’s technical attributes or intended use of an item, are less likely to be known by financial institutions, but the guidance emphasizes certain key details are known.
A main example is that many relevant prohibitions arise when a company or individual involved is designated on one of several BIS restricted lists as being a concern, like playing a role in foreign military efforts. The guidance emphasizes a financial institution’s obligation to screen all accounts and transaction parties against these lists and respond as required to actual hits and red flags. Many financial institutions may already cover this aspect in their Know-Your-Customer screening, but related processes and their screening mechanisms should be reviewed for this purpose.
The Commerce Department’s guidance does, however, call for new screening that may be more difficult under current processes. Financial institutions are being asked to detect whether any information they receive about transactions, and new information BIS might want to be obtained, indicates anything about the type of details a manufacturer or exporter usually has that could indicate a violation is about to occur. These include the type of item being shipped or transferred, and whether its destination or intended end-use is prohibited. Financial institutions will likely need to give this area particular thought and evaluate how details currently obtained relate to the prohibitions and how financial institutions could detect and respond to them.
As for penalties, financial institutions have seen over the years that inadequate Know-Your-Customer procedures can generate numerous violations given the volume of business transacted and, accordingly, substantial penalties. The potential violations BIS will likely investigate in this area are not different, with the penalties for just a few violations easily exceeding millions of dollars.
For more information, please contact Corey Norton or any member of the International Business & Trade practice group.
