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The Emerging Intersection of Export Controls and Financial Crime Compliance

This article is the first in a series examining how export controls and financial crime compliance frameworks are converging as a result of an evolving regulatory landscape. Throughout the series, the authors will provide practical insights for financial institutions now facing additional obligations as a result of overlapping compliance domains.

Evolving geopolitical tensions have altered traditional enforcement trends, blurring the lines between export controls, sanctions, and financial crime compliance. As a result, financial institutions now face increased responsibilities in preventing the financing and flow of export-controlled items to prohibited destinations, end-users, and end-uses.

Historically, financial institutions have not been the target of an enforcement action under export controls regulations, even though General Prohibition Ten of the Export Administration Regulations (“EAR”) prohibits proceeding with a transaction, including financing a transaction, with knowledge that a violation of the EAR has or is about to occur.¹ In contrast, there are many cases of financial institutions facing enforcement actions for knowingly or being willfully blind to transmitting the proceeds of criminal activity.

This is because export controls were previously viewed as primarily a responsibility of the exporter, allowing financial institutions to claim limited responsibility; “it’s the customers, not us.” However, with heightened concerns regarding the transfer of sensitive technology, software, equipment, and other dual-use items (collectively, “items”) to adversaries, export controls regulators are increasingly looking to broaden the gatekeeping responsibilities of financial institutions involved in cross-border transactions and re-examining what constitutes “knowledge” under the export controls regulations. Accordingly, export controls are now an important element of financial crime compliance.

Regulatory Shifts = New Responsibilities

Over the past few years, the Department of Commerce’s Bureau of Industry and Security (“BIS”) and the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) have released joint alerts for financial institutions regarding export controls, focusing on obligations of these organizations.²

These alerts contain examples of red flags that financial institutions should be monitoring for and articulate expanded expectations to identify and prevent diversion. This includes requirements regarding Suspicious Activity Reports (“SARs”) for export control violations, confidential findings submitted to FinCEN when suspicious transactions are detected, and expectations that financial institutions ensure programs are in place to detect non-traditional red flags, such as the use of shell distributors and logistics intermediaries. This will require financial institutions to risk assess their customers specifically for export controls violations and change their due diligence and investigative protocols as appropriate.

Why This Intersection Matters

In addition to financial crime compliance, financial institutions should now implement export control compliance programs, requiring a strategic integration of frameworks that used to be siloed. Ensuring that potential violations are properly identified involves an arduous process of reviewing trade finance and other documents related to international business, reliance on trained and knowledgeable personnel, and investments in technology.

With increased enforcement intent from regulators comes increased reputational risk for financial institutions that fail to detect potential violations of export controls in transaction flows. Unprepared organizations face the reality of regulatory penalties and damaged reputations. Conversely, those with advanced export controls compliance functions could gain competitive advantages in high-risk markets that are avoided by financial institutions because of an inability to confidently operate, knowing sanctions are not being violated.

What’s Next

The convergence of export controls and financial crime compliance represents a foundational shift in how regulators monitor and oversee global trade. Financial institutions must prepare now or otherwise face significant compliance costs, enforcement actions, and disruption to business operations.

A more comprehensive regulatory framework now exists due to this intersection and should result in fewer opportunities for exploitation within the international trade market. Further highlighting the evolving geopolitical landscape, regulators are placing financial institutions on the frontline, responsible for protecting national security interests through robust transaction monitoring. This topic will be explored in more detail in part two of the series.

Footnotes:

1: 15 C.F.R. § 736.2(b)(10), General Prohibitions.

2: Financial Crimes Enforcement Network, “FinCEN and the Bureau of Industry and Security (“BIS”) Issue Joint Notice and New Key Term for Reporting Evasion of U.S. Export Controls Globally” (Nov. 6, 2023).