According to U.S. export officials, one of the most significant export control issues facing U.S. companies today is illegal diversion risk. Simply defined, illegal diversion is when your company sells a product to a foreign customer (say in the U.A.E.) 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 occur most commonly in the high risk transshipment hubs such as Dubai (for diversion to Iran and Syria), China (for diversion to N. Korea), Russia (for diversion to multiple locations) and Central American countries (for diversion to Cuba), however diversion can occur in any foreign country. Illegal diversion can create significant problems for U.S. exporters, ranging from reputational damage (news story about your product showing up in markets in Iran) to enforcement actions.
The following are a number of steps that we advise for our clients to reduce potential liability from illegal diversion. This list is not complete and other steps are often added based upon the company, product and countries in question:
The Bureau of Industry and Security (“BIS”) has previously published a set of industry “best practices” for U.S. companies to combat illegal diversion and the Directorate of Defense Trade Controls (“DDTC”) has also promulgated a list of ten “best practices” for diversion risk for ITAR compliance. We strongly advise every exporter to adopt these practices and comply with them scrupulously. The BIS and DDTC best practices can be found at: http://www.bis.doc.gov/news/2011/bis_press08312011.htm.
This article contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. Retired partner Tom McVey was the original author of these materials. Please contact Chris Skinner for more information at 202.293.8129 or cskinner@williamsmullen.com.