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Treasury, Commerce Alert May Lead to More Diligence Steps, Affect Disclosures, Law Firm Says

Customers and borrowers of financial institutions may start to receive more requests from banks about their export control compliance practices due to a recently issued joint alert by the Treasury and Commerce departments, Crowell & Moring said July 13. The alert also has other implications for customers of certain financial institutions, the firm said, and could hurt their ability to receive lenient penalties from a voluntary disclosure.

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The alert, issued last month by Treasury's Financial Crimes Enforcement Network and Commerce's Bureau of Industry and Security, puts companies and entities “on notice” about the types of red flags they should be monitoring for potential sanctions and export control evasion tactics (see 2206280056 and 2206280056). Crowell said the alert essentially describes to banks regulated by the Bank Secrecy Act about the types of “reasonable steps” they are expected to take to review those suspicious transactions and avoid potential penalties.

As a result, BSA-regulated institutions may start sending compliance-related information requests to customers, particularly when the two parties are “negotiating credit agreements” or during the “know-your-customer onboarding diligence” process, Crowell said. Banks will specifically target the information requests to customers that manufacture or export items identified under the FinCEN/BIS alert as being of “special concern,” the firm said. This may include any export-controlled goods or items “involving known transshipment points for Russian and Belarusian end use.”

“Covered Institutions should familiarize themselves with applicable export controls regulations and consider whether updates to their compliance programs are warranted,” Crowell said.

The firm said the alert and any increased reporting by banks may also affect their customers' ability to benefit from voluntary disclosures. If a bank’s customer is preparing a disclosure to BIS, but the bank has already filed a suspicious activity report (SAR) that BIS has seen, that voluntary disclosure may not count, the firm said.

“This may lead to not only an inability to claim disclosure credit (because BIS was aware of the issue previously), but also increased information requests to customers on the basis of information disclosed by Covered Institutions,” Crowell said.

Banks also could face increased risk, the firm said, especially for transactions covered by BIS’s new Russia-related foreign direct product rule. Those financial institutions might face liability for “financing or otherwise facilitating” exports blocked under the rule, Crowell said, and SARs filed on the potential violations may “trigger inquiries” by BIS.