The Department of Commerce’s Bureau of Industry and Security (BIS) has issued an interim final rule (IFR) that extends end-user restrictions to entities owned 50% or more by parties identified on the Entity List and the Military End-User (MEU) List. This new “Affiliates Rule” substantially expands the reach of Entity List and MEU List restrictions by prohibiting unlicensed exports to a large number of new unlisted companies based on their ownership chains, particularly the subsidiaries of listed Chinese entities. It further creates significant new diligence requirements for U.S. and foreign exporters.
A New 50% Rule
The Entity and MEU Lists identify persons that BIS has determined are acting contrary to U.S. national security or foreign policy interests. Exports, re-exports, and transfers of covered items – including low technology goods – to persons on the Entity List are generally prohibited without a license. The restrictions that apply to MEU List entities are narrower, but still strict. Licenses for exports to such parties are rarely granted.
Prior to September 29, when the IFR became effective, the Export Administration Regulations (EAR) restricted exports, re-exports, and transfers of covered items only to these designated entities (or to MEUs meeting specific definitions). It did not apply such restrictions to their unlisted and legally distinct affiliates and subsidiaries. This approach differed from that in the Department of the Treasury, Office of Foreign Assets Control’s (OFAC) 50% Rule, which applies blocking sanctions to entities owned 50% or more by blocked persons.
With the new Affiliates Rule, the restrictions that BIS applies to listed Entity List and MEU List persons (as well as certain persons identified on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List) now also apply to entities that are owned 50% or more, directly or indirectly, individually or in the aggregate, by listed persons.
The result is a significant expansion in the number of entities to which exports, re-exports, and transfers of items subject to the EAR are restricted, as well as a dramatic increase in the compliance risks facing exporters and re-exporters.
Most Restrictive License Requirements
The IFR further provides that when an affiliate is owned 50% or more by a combination of Entity List or MEU List parties subject to different export restrictions, BIS will apply the most restrictive license requirements to the unlisted party. For example, if an unlisted party is owned in part (e.g., 15%) by an Entity List entity to which all exports subject to the EAR are prohibited without a license, and owned in part (e.g., 40%) by an MEU List entity to which only certain exports are restricted, BIS will apply the broader Entity List restrictions to the unlisted party.
Additional Diligence Requirements
Beyond direct application of export restrictions to entities known to be 50% or more owned by listed persons, the new Affiliates Rule further clarifies that BIS considers that exporters have an affirmative responsibility to know the ownership of their foreign business partners as part of their risk-based compliance programs.
BIS further expects exporters to exercise additional due diligence in dealings with unlisted foreign parties that are owned less than 50% by listed entities when the listed entities have a significant minority interest or other significant ties to the unlisted persons, given the heightened risk of diversion.
Finally, BIS added a new Red Flag to Supplement No. 3 to Part 732 of the EAR, providing that if an exporter knows that a business partner is owned in part by a listed entity, it must determine the ownership percentage of that entity or obtain a license prior to proceeding with a covered export. BIS has clarified (see FAQ 41) that failure to resolve the Red Flag before exporting can be deemed a knowing violation of the EAR, significantly increasing the risk of enforcement and substantial penalties.
These provisions impose additional compliance burdens on exporters who are expected to exercise heightened diligence in tracing the ownership chain of their foreign business partners.
Limited Temporary General License
The IFR includes a Temporary General License (TGL) authorizing exports, re-exports, and transfers to certain entities that fall within the Affiliates Rule for 60 days (ending December 1, 2025). However, the TGL is limited in its application to an unlisted entity that has a specific nexus to U.S. partners and allies. (Specifically, the entity must be located in Country Group A:5 or A:6 or be a joint venture (not located in Cuba, North Korea, Iran or Syria) with a non-listed entity headquartered in the U.S. or Country Group A:5 or A:6. And, of course, this is subject to other conditions and restrictions that could apply.)
Looking Ahead
While BIS states that the prior application of OFAC’s 50% Rule to the SDN List should ease the transition to application of the Affiliates Rule for the Entity and MEU Lists, exporters will need to carefully assess the measures that they are going to take to comply, including determining whether their screening solutions appropriately capture the large volume of new restricted parties. BIS has invited public comments on the new rules until October 29, and exporters with concerns are encouraged to submit their views.
Miles & Stockbridge’s international trade lawyers will continue to monitor these developments and can advise on what the recent changes mean for businesses.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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