US authorities are increasing their focus on the role of banks in detecting violations of the country’s export control regime.

In a further update to their guidance, two regulators have put financial institutions on notice to look for indications of export control violations in their customers’ activity in trade finance documentation.

US export control laws, largely overseen by the Bureau of Industry and Security (BIS), are designed to prevent US exports from contributing to the manufacture of weapons of mass destruction or the arms stockpiles and sensitive military technology of its rivals, such as China and Russia.

A joint alert published on November 6 by BIS and the Financial Crimes Enforcement Network (FinCEN), the US financial crime regulator, includes a list of red flags that may indicate attempts to export sensitive US goods and technology – or even foreign goods containing US inputs – to unauthorised end users.

“Financial institutions directly involved in providing trade financing for exporters also may have access to information relevant to identifying potentially suspicious activity,” the regulators say.

“This may include the financial institutions’ customers’ end-use certificates, export documents, contracts, or other documentation, such as those associated with letters of credit-based trade financing”.

The first red flag in the alert is “purchases under a letter of credit [LC] that are consigned to the issuing bank, not to the actual end-user” and “supporting documents, such as a commercial invoice, do not list the actual end-user”.

Neil Chantry, a specialist trade finance consultant, points out that some countries require imports to be consigned to a bank, so that red flag will not always be an indication of suspicious activity.

Banks would not typically be able to identify the end user of goods from an LC unless it is the applicant, he adds, meaning the negotiating bank would have to rely on due diligence on the customer and its counterparties.

Chantry expects banks will insist on exporting customers providing the necessary information to satisfy the requirements in the notice, but that “the problem is how effective is a bank’s ability to determine the ‘true end user’ when they have to rely on the information provided by their customer and the applicant of the LC”.

Other possible indicators of attempts to skirt export controls include companies that refuse to provide end-use and ownership information to banks; transactions where consignees appear to be mail centres or logistics companies; addresses of companies shared with military facilities; and goods being shipped by common transshipment routes.

Chantry, a former HSBC global trade and compliance executive, says most of the red flags should already be part of banks’ risk assessment models and due diligence reviews.

Since Russia’s invasion of Ukraine in February 2022, the US has put renewed attention on export controls as a way of stymying Moscow’s efforts to replenish its war machine.

BIS and FinCEN have previously issued alerts to banks, seeking their help to detect violations. Earlier this year the regulators said those efforts had yielded significant data on common transaction structures and transshipment methods being used by Russian importers.

“In the abstract, the guidance makes a lot of sense,” says Dj Wolff, a partner with law firm Crowell & Moring. “Banks will be in the middle of virtually all export transactions globally and are therefore a logical focus for BIS to identify potential export control evasion.”

But it may mean banks have to probe further than the documents presented as part of a trade transaction, he adds.

“If a bank provides trade financing via letters of credit then it might have access to some of that information in the underlying trade documents. If, however, a bank’s financing is processed via a wire, that classification information is not included in the Swift payment message, unless voluntarily included by the remitter in the notes field.”

He says unless Swift messages are altered to include fields where this information can be catered for, banks will have to focus on controls at the on-boarding or post-payment stage.

While banks are currently being “deputised” by regulators to help detect suspicious activity, they are also exposed to enforcement activity, Wolff says.

“BIS could directly pursue an enforcement action under a theory that processing a payment related to an export control violation could itself be an export control violation, though it has yet to do so, while FinCEN could pursue an enforcement action” for failing to report suspicious activity, he says.

“Many banks are also worried about their prudential banking regulators at either a state or federal level who may now begin including questions related to what controls a bank is implementing in their regular examinations.”