On September 29, the U.S. Department of Commerce Bureau of Industry and Security (BIS) issued a new interim final rule that significantly expands the scope of U.S. export controls. Entitled Expansion of End-User Controls to Cover Affiliates of Certain Listed Entities and referred to by BIS as the "Affiliates Rule," the rule is designed to close a longstanding loophole by extending restrictions to foreign affiliates of parties already subject to export restrictions, including those parties designated on the Entity List and the Military End-User (MEU) List.
This post summarizes key provisions of the Affiliates Rule and implications for companies engaged in international trade.
What Has Changed?
Historically, BIS export restrictions applied only to parties explicitly named on the Entity List or MEU List. BIS generally treated foreign affiliates of listed parties as "legally distinct" unless specifically named, creating opportunities for diversion through subsidiaries or related companies. The new rule addresses this gap by automatically extending restrictions to certain affiliates of listed parties.
Key Provisions
Automatic Inclusion of Affiliates Based on Ownership
Under the Affiliates Rule, any foreign entity that is at least 50% owned, directly or indirectly, individually or in the aggregate, by one or more entities on the Entity List or MEU List, or by parties subject to controls specified at 15 CFR § 744.8 (related to Specially Designated Nationals (SDNs)), will itself be subject to the same restrictions as the listed entity. Where multiple listed parties hold ownership, the most restrictive controls will apply.
This change aligns BIS policy with the "50% Rule" long used by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) in the sanctions context. Under the new rule, BIS will add a new supplement to Part 744 of the Export Administration Regulations (EAR) with guidance for determining whether an entity is covered.
Notably, the Affiliates Rule does not apply to parties listed on the Unverified List or to parties subject to Denial Orders. In addition, foreign entities subject to the Affiliates Rule may apply for an exclusion, which will be reviewed on a case-by-case basis.
Finally, the Affiliates Rule does not apply to U.S. entities owned by listed parties. While a sale to a domestic entity would not necessarily be considered an export, by excluding U.S. affiliates from the scope of the new rule, BIS allows exporters to focus on foreign transactions that pose greater diversion risks.
Significant Minority Ownership as a Red Flag
While the rule does not automatically impose restrictions on foreign entities in which a listed party owns a significant minority interest, BIS now considers such ownership a "red flag." Exporters are expected to conduct enhanced due diligence when dealing with entities that have substantial minority ties to listed parties.
Furthermore, the Affiliates Rule adds new "Red Flag 29." This requires that, where an entity is owned by a listed party but the exact percentage cannot be confirmed, the exporter treat the transaction as restricted and identify an available license exception or apply for an export license.
Temporary General License in Effect For 60 Days
To ease the transition, BIS has issued a Temporary General License (TGL) to allow certain transactions involving specified countries, or newly-restricted entities joint-ventured with entities headquartered in specified countries, to continue temporarily. This grace period, which extends for 60 days after the date of the rule's publication, provides a short window to give exporters time to adjust compliance procedures and assess affected relationships.
Implications for Exporters and Multinational Businesses
Expanded Compliance Obligations
Exporters must continue to check whether counterparties are on the Entity List or MEU List, or subject to specified sanctions, and now also assess whether a party is owned, directly or indirectly, 50% or more (in the aggregate) by one or more such listed entities. This requires deeper corporate ownership analysis, including identifying any minority stakes held by listed parties. Companies should review existing relationships with foreign entities to evaluate potential exposure under the new rule. Relatedly, internal compliance measures should be updated to reflect the expanded scope of restrictions.
Risk of Unintentional Violations
Companies that previously relied on the absence of a formal listing to conduct business with affiliates of listed entities are now at risk of violating U.S. export controls. Transactions involving such affiliates may now require a license, and the license review policy is a presumption of denial.
Due Diligence and Screening Enhancements
Exporters should enhance their due diligence procedures to account for the new rule, including the following:
- Reviewing ownership structures of foreign counterparties.
- Updating restricted party screening tools to flag affiliated parties.
- Training compliance and other personnel involved in due diligence.
- Documenting ownership assessments and compliance decisions.
Final Thoughts
The expansion of end-user controls to cover affiliates of listed parties marks a major shift in U.S. export control policy. For businesses, this means heightened compliance responsibilities and increased scrutiny of international transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
