E6-17265. Revised “Knowledge” Definition, Revision of “Red Flags” Guidance and Safe Harbor

AGENCY:

Bureau of Industry and Security, Commerce.

ACTION:

Proposed rule; withdrawal.

SUMMARY:

BIS is withdrawing a proposed rule published October 2004. That rule would have revised the definition of “knowledge” in the Export Administration Regulations. It also would have updated the “red flags” guidance and would have provided a safe harbor from liability arising from knowledge under the definition of that term. In light of the public comments received on the proposed rule and BIS's review of relevant provisions of the existing regulations, this proposed rule is being withdrawn.

DATES:

The proposed rule is withdrawn on October 18, 2006.

FOR FURTHER INFORMATION CONTACT:

William Arvin, Office of Exporter Services, at [e-mail], fax [phone] or telephone [phone].

SUPPLEMENTARY INFORMATION:

Background

On October 13, 2004, BIS published a proposed rule to amend the EAR by revising the definition of “knowledge” that applies throughout most of the regulations, to revise its “red flag” guidance and to create a safe harbor with respect to certain violations that have “knowledge” as one of the elements of the offense (69 FR 60829, October 13, 2004; Comment period reopened 69 FR 65555, November 15, 2004).

The proposed rule would have revised the definition of knowledge in § 772.1 of the EAR in four ways. It would have incorporated a “reasonable person” standard, replaced the phrase “high probability” with the phrase “more likely than not,” added the phrase “inter alia” to the description of the facts and circumstances that could make a person aware of the existence or future occurrence of a fact, and eliminated the phrase “known to a person” from the sentence in the knowledge definition that states that knowledge may be inferred from “conscious disregard of facts known to a person.” The proposed rule also would have limited the applicability of the definition to certain actors in transactions subject to the Export Administration Regulations (EAR) and excluded certain usages from the definition.

The proposed rule would have increased from 12 to 23 the number of circumstances explicitly set forth as “red flags” in Supplement No. 3 to part 732 of the EAR.

The proposed rule would have created a “safe harbor” from knowledge based violations. To take advantage of the safe harbor, a party would have to commit no violations of the EAR, in connection with the transaction, identify and resolve any “red flags” present in the transaction and report the red flags found and the resolution to BIS. BIS would have been required to acknowledge receipt of all such reports. Thereafter, if BIS responded to the party's report by stating that it concurred that the party had adequately addressed red flags or by advising the party that BIS would not be responding to the report, the party would have been able to take advantage of the safe harbor, assuming the party had accurately disclosed all relevant information to BIS. The proposed rule stated BIS's intention to respond to most reports within 45 days. However, the response might consist of a notice that BIS needed more time to evaluate the party's report. If BIS did not respond to the party's report by the date stated in the acknowledgment provided to the party, the party could have contacted BIS to inquire about the status of the report.

BIS received 18 comments on this proposed rule. Nine of these comments were filed by associations that have multiple members.

With regard to revising the definition of knowledge, the most frequently expressed opinion was that the revisions were, in fact, substantive changes to the definition rather than mere clarifications. Commenters also stated that BIS had not offered any reason as to why any change in the knowledge definition was necessary.

Although the revisions to the “red flags” were criticized less than other proposed changes, commenters made suggestions for revisions or elimination of 12 specific “red flags.” In addition, some commenters asserted that the proposal increased the number of circumstances that could be red flags without providing adequate guidance as to the circumstances when any particular “red flag” would be applicable. The notice did state (as does current Supplement No. 3 to part 732 of the EAR) that not all red flags are applicable in all circumstances.

A number of commenters criticized the safe harbor proposal, stating that it was too complex and lengthy. Several predicted that few, if any, firms would be inclined to use it. Some suggested that submitting a license application for the transaction would be simpler and probably faster than waiting to see if BIS approved of the manner in which the party resolved the “red flags.”

Withdrawal of Proposal

BIS has considered the comments on the proposed rule. BIS has also reviewed the proposed rule as compared to the corresponding existing provisions of the EAR and has considered several possible modifications of the proposed rule. As a result of this consideration, BIS has concluded that utilizing this proposed rule as a basis for amending the EAR would neither clarify the public's responsibilities under the EAR nor make the regulations more effective. Accordingly, BIS is withdrawing this proposal.

Dated: October 11, 2006.

Christopher A. Padilla,

Assistant Secretary for Export Administration.