Export Due Diligence Challenges Causing Companies to Cancel Deals, Industry Official Says

Some companies are struggling to meet a due diligence threshold set by the U.S. government for sales to foreign suppliers accused of illegal sales to Russia, said Anne van de Heetkamp, vice president of product management for global trade intelligence at Descartes Systems Group.

That due diligence has been particularly challenging for small and medium-sized businesses, which may not have as much time or resources to spend on the complex vetting of a customer flagged by the U.S., van de Heetkamp said in a recent interview. He said those challenges have caused many exporters to abandon those transactions altogether.

“It's very difficult,” he said. “To gather basically not just an affidavit, but to actually prove that out has been terribly difficult.”

The Bureau of Industry and Security earlier this year began sending a list of 700 foreign suppliers to U.S. companies whose products were being shipped by those suppliers to Russia for use in missiles, drones and other military or dual-use items (see 2406060041). In July guidance, the agency said American companies need to “identify affirmative information” that a party on the list is no longer “engaged” in violations of the Export Administration Regulations before starting or continuing business with them (see 2407100027).

Van de Heetkamp, speaking generally about due diligence challenges, said “a number of transactions have been canceled” because exporters don’t have the time, resources or ability to prove that a foreign customer isn’t violating the EAR.

Finding that “affirmative” information may include analyzing global trade data and creating a way to prove that the goods won’t “end up in the wrong hands,” Van de Heetkamp said. Those extra compliance steps “cost money,” he said, “and that may negate the benefits from making a transaction.”

He said small or medium-sized dual-use exporters in particular are wary of the high legal threshold -- and high cost -- of proving that a transaction with a flagged customer should be allowed. He compared it to a company trying to make use of preferential tariff rates as part of a free trade agreement. Use of some free trade deals is “relatively low” because traders must spend time and money proving the goods “are indeed of a certain origin, just like they have to prove here that the goods do not end up in the wrong hands,” including in Russia.

“That's going to cost a pretty penny,” he said. “And that means that the transaction really has to be worth it before you want to go through all that.”

Compliance challenges for companies with large trade volumes have risen in recent years, he said, especially because of increased Russia-related sanctions and export controls. The U.S. and its allies have prioritized stopping shipments of items included on their list of common high-priority items such as low-level microelectronics and industrial inputs -- items that historically haven’t been subject to intense government scrutiny.

Companies are trying to keep pace, Van de Heetkamp said, especially smaller businesses.

“For them, trade compliance was, if you’re lucky, in the top 10 of priorities,” he said. “And now all of a sudden they're getting called out, if you will, and punished for something that was never a priority. So they have to reprioritize in order to stay in play in that export market, and that's a challenge for them.”

Larger companies may have an easier time conducting Russia-related export due diligence, he said, partly because they already have experience tracking shipments of sensitive, highly controlled technologies. Descartes in March acquired OCR Services (see 2403290041), a trade compliance solutions firm, and since has been working with “a lot more customers that are really heavily into that dual-use good export hemisphere,” Van de Heetkamp said. “And they're all extremely knowledgeable.”