Anand Samal
Senior Product Marketing Manager
Trademo

With the tightening of export controls on Common High-Priority List (CHPL) items to Russia, companies face a heightened responsibility to ensure that goods don’t end up in the wrong hands. The U.S. Bureau of Industry and Security (BIS) recently outlined stringent due diligence requirements for firms dealing with CHPL goods—items with high military or dual-use value to Russia.

The increased scrutiny is part of an ongoing effort to prevent these critical items from inadvertently supporting Russia’s military capabilities amid geopolitical tensions. This article will walk you through four key due diligence steps that can help prevent diversion, using global trade data, shipping information, and a solid compliance strategy to stay compliant.

1. Screening Partners for Sanctions Compliance

When dealing with CHPL items, the first step is screening all business partners thoroughly. This includes customers, intermediaries, and suppliers, to ensure they’re not associated with sanctioned entities. The latest sanctions data shows that Russian entities and individuals have almost 20,000 sanctions against them.

Screening isn’t just about a sanction check; it’s a layered process that can include cross-referencing with multiple global watchlists, verifying business legitimacy, and understanding ownership structures.

By using sanctions screening tools, firms can automate checks against BIS’s Entity List and the OFAC Sanctions List, catching any affiliations with Russia’s military end-users or high-risk entities in allied countries.

A deeper dive may involve:

Ownership Checks: If you’re dealing with a corporate customer, understanding who truly owns and controls the business can reveal hidden links to sanctioned parties. Many countries have intricate ownership webs, where sanctioned entities may have indirect stakes, so investigating ownership layers becomes essential.

Verifying Business Purpose: Scrutinize whether your customer’s business aligns with the CHPL items they’re ordering. For instance, if a civilian electrical company suddenly places large orders for parts of high-precision computer numerical control (CNC) machine which can be used to develop small components for electronics, this could be a red flag. Unusual requests for CHPL items often warrant additional questions and documentation to verify legitimacy.

Screening forms the first line of defense, but it’s essential to look beyond the basic lists and ask whether each partner’s involvement is consistent with known compliance records and the nature of their business.

2. Spotting Trade Transactional Red Flags Using Shipping Data

Once partners are screened, the next step is to look for red flags within each transaction. Russian imports show over $11 billion worth of goods under Chapter 85 from September 2023 to March 2024, which primarily is a part of CHPL items.

Often, these red flags appear in shipping routes, and the countries involved in the transaction. Global trade data provides valuable insights here, helping companies to track suspicious patterns that could suggest diversion risks.

Here are key indicators to watch for:

Unusual Routing Patterns: If your shipment’s routing suddenly changes to a country near Russia or a known transshipment hub like Armenia or Kazakhstan, this could indicate potential diversion. Trade data allows you to track previous transactions for similar patterns, which might signal that your customer is deliberately rerouting goods to evade export controls.

Discrepancies in Customs Declarations: Customs data often includes product classifications and descriptions, and any discrepancies here can be telling. For example, a declaration that mislabels sensitive electronics as standard parts might suggest an attempt to slip items past export control authorities.

Global trade and customs data enable you to go beyond what’s on paper and observe how a transaction unfolds. With these insights, you can identify unusual patterns early on, allowing you to halt or investigate the transaction before it poses a compliance risk.

3. Performing Enhanced Customer Due Diligence

Enhanced customer due diligence (CDD) takes standard due diligence further by focusing on the customer’s history, business patterns, and end-use justifications. This is particularly important for buyers from high-risk regions where diversion risks are prevalent. Here’s how trade data and industry insights can aid in a more thorough customer analysis:

Evaluating Business Activities: By comparing the customer’s trade data with their declared business use, you can assess if their requests align with legitimate operations. For instance, a company in Turkey specializing in consumer electronics places orders for capacitors and integrated circuits (ICs), which is used to make such electronics, but is exporting the same components to Russia.

Another situation, as highlighted by analyzing trade data, showed that a company in China ordered ICs from Malaysia and the United States, and exported speakers and home appliances to Russia. The highlight was that the company had no record of exporting such speakers and appliances to any other country, and had no trade with Russian entities prior to 2023. This could suggest that they are embedding restricted ICs into these home devices which would be removed and used in other ways once it reaches Russia. Analyzing detailed shipping and customs records can confirm whether this trade is legitimate or potentially problematic.

End-Use Verification: For transactions involving CHPL items, verifying the end-use application is crucial. This may involve requesting technical specifications, usage plans, and potentially even visiting customer sites. Global trade data can provide insights into where similar goods have ended up, guiding compliance teams on possible diversion risks.

Enhanced CDD is about going beyond initial checks, making sure every aspect of the customer’s business and transaction history lines up with their claims. This deeper dive provides the confidence that your transaction won’t become a weak link in the supply chain.

4. Third-Party Monitoring and Verification

For companies working with intermediaries and logistics providers, third-party monitoring becomes essential. Diversion risks often arise when sanctioned items pass through multiple intermediaries, making it easier to mask their true destination. BIS recommends that companies take extra measures to monitor intermediaries involved in CHPL item transactions:

Regular Audits: Conduct regular audits of your logistics partners and intermediaries to ensure they’re maintaining the same compliance standards. Audits should review their compliance programs, training, and the robustness of their controls, particularly in regions with high diversion risks.

Monitoring and Verification of Trade Patterns: Using trade data to monitor and verify the flow of goods can reveal if your intermediaries are consistently involved in high-risk transactions. Patterns such as repeated exports to neighboring countries with lax export controls can indicate a need to reconsider your partners or put additional controls in place.

This monitoring process, supported by trade and shipping data, helps companies mitigate the risk of diversion to Russia by identifying any suspicious activity within third-party transactions. By establishing compliance checks with each link in the supply chain, you can reduce the chances that CHPL items reach unauthorized end-users.

Summing Up

Export controls on CHPL items require a proactive, data-driven compliance strategy. Screening partners, spotting transactional red flags, enhancing customer due diligence, and monitoring third parties are four critical steps that not only keep businesses compliant but also help protect national and global security interests.

By using screening tools, global trade, shipping, and customs data, companies can stay one step ahead of diversion risks, safeguarding against transactions that might ultimately support unauthorized military activities.