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Highlights
- The U.S. Department of Commerce Bureau of Industry and Security (BIS) published an interim final rule, which makes foreign entities that are owned 50 percent or more by a company on the Entity List, Military End-User List or certain entities on the Specially Designated Nationals and Blocked Persons List subject to the same U.S. export control restrictions as those parent entities.
- Affected companies will be subject to the most stringent license requirements, license exception limitations and licensing policies that apply to any of their owners.
- The interim final rule also creates new export controls due diligence obligations, establishes a 60-day temporary general license and sets out procedures for entities now subject to export controls restrictions under this new rule to seek an exclusion.
The U.S. Department of Commerce Bureau of Industry and Security (BIS) published a much-anticipated interim final rule (IFR) on Sept. 30, 2025. The IFR makes foreign entities that are owned 50 percent or more, directly or indirectly, by one or more companies listed on 1) the Entity List, 2) the Military End-User List (MEU List) and/or 3) certain entities on the Specially Designated Nationals and Blocked Persons List (SDN List) (collectively, the Listed Entities) subject to the same U.S. export control restrictions as those parent entities. This rule, which BIS is calling the "Affiliates Rule," is modeled on the U.S. Department of the Treasury Office of Foreign Assets Control's (OFAC) long-standing 50 Percent Rule. In addition to increasing the number of parties that are subject to the specified restrictions, the Affiliates Rule makes restrictions applicable to Listed Entities in all foreign locations, rather than only in the country specified on the Entity List. The Affiliates Rule therefore significantly increases the scope of BIS' list-based controls and imposes enhanced due diligence obligations on parties exporting, reexporting or transferring items subject to the U.S. Export Administration Regulations (EAR).
The BIS Affiliates Rule
Under the EAR, Listed Entities are subject to specific licensing requirements based on a determination that such entities pose risks to U.S. national security and foreign policy interests. Such restrictions may be implicated whenever such entities are parties to transactions involving items that are U.S.-origin or otherwise considered "subject to the EAR." Until now, Listed Entity restrictions applied only to the individually identified Listed Entities but not to any legally distinct affiliates or to branches and affiliates in other countries.
Under the new Affiliates Rule, any foreign entity that is owned 50 percent or more, directly or indirectly, by one or more entities listed on the Entity List, MEU List1 or SDNs designated under programs listed in § 744.8(a)(1) of the EAR or by one or more entities subject to restrictions based upon ownership by such listed entities are also considered subject to these same restrictions. Under the "rule of most restrictiveness," a company will automatically be subject to the most restrictive license requirements, license exception eligibility and license review policy applicable to one or more of its owners under the EAR, even if the most restricted owner holds the smallest amount of equity. As a result, under the Affiliates Rule, if a company is owned 1 percent by an Entity List party that is subject to a license requirement for all items subject to the EAR and 49 percent by an Entity List party that is subject to a license requirement for all items subject to the EAR except EAR99 items, this affiliated entity will be subject to the license requirement for all items, including EAR99, even though the owner subject to that restriction only holds a 1 percent ownership interest.
Similarly, while certain EAR License Exceptions may be applicable in narrow circumstances to entities affected by the Affiliates Rule, the IFR specifies that "[w]hen an unlisted entity is owned 50 percent or more by multiple Entity List parties, and only one such owner is eligible for a license exception, that license exception will not apply to transactions involving the unlisted entity, because BIS will apply the most restrictive license requirements to the unlisted entity." Therefore, when conducting due diligence, parties should pay careful attention not just to whether and how much ownership is held by restricted parties but also to the specific EAR restrictions applicable to the parent entities.
Importantly, the Affiliates Rule does not currently extend to U.S. entities owned by Listed Entities nor to parties owned by certain other restricted party lists such as the Unverified List (UVL) or entities subject to Denial Orders, though BIS is seeking public comment on potential expansion with respect to such groups.
Other Impacts of the Affiliates Rule and IFR
Enhanced Due Diligence Obligations
The IFR stresses that entities with significant minority ownership or other ties to listed entities may present a red flag for diversion, and BIS expects companies to engage in enhanced due diligence in such cases.
In addition, the IFR adds a new "Red Flag No. 29" in Supplement No. 3 to Part 732 of the EAR, indicating that "where an exporter, reexporter, or transferor has 'knowledge' that a foreign entity has one or more owners that are listed on the Entity List or the MEU List, or that are unlisted entities that are subject to license requirements or other restrictions based upon their ownership," but the ownership information is unclear, the exporter must resolve this red flag, apply for a license or identify a license exception before proceeding with transaction.
The Affiliates Rule's Effect on Foreign Direct Product Rules
By increasing the number of parties that are subject to Entity List and MEU List restrictions, the IFR also expands the situations in which transfers of foreign-produced items between foreign countries may be subject to U.S. export control requirements under the Entity List Foreign Direct Product Rules (EL FDP) and the Russia/Belarus-Military End User and Procurement Foreign Direct Product Rule (RU MEU FDP) at Part 734.9(e) and (g) of the EAR.
At a high level, these rules can cause items produced outside the U.S. to be subject to U.S. export control restrictions when 1) the items are the direct product of or produced using equipment that is a direct product of certain specified technology and software subject to the EAR, and 2) the end use of the items satisfies certain criteria such as being incorporated into or used in the production or development of items produced, purchased or ordered by parties subject to certain Entity List restrictions (including those indicated in footnotes 1, 3, 4 and 5 to the Entity List), or such a party is otherwise a party to a transaction involving the foreign-produced items, including as a purchaser, intermediate consignee, ultimate consignee or end-user.
These rules now apply to transactions involving any parties that are subject to restrictions imposed under the Entity List or MEU List, including under the Affiliates Rule, if any of the relevant owners meet the end-user scope specified in the EL FDP or RU MEU FDP, even if that owner's individual equity holding is small. For example, foreign-produced items would have to be examined under these rules if ordered by a company that is 1 percent owned by an entity with a Footnote 3 designation on the Entity List and 49 percent owned by a party that is on the Entity List, but does not satisfy the end user scope of the EL FDP or EL MEU FDP.
Procedures for Requesting Exclusion from Affiliate Rule
The IFR provides procedures to Part 744.16(e) of the EAR for non-listed foreign affiliates subject to restrictions under the Affiliates Rule to request that they be specifically removed from the restrictions otherwise applicable under the Affiliates Rule after the effective date.
Temporary General License and Savings Clause
Under the IFR's savings clause, items that were en route aboard a carrier on Sept. 29, 2025, pursuant to an actual order for export, reexport or transfer (in-country) to or within a foreign destination may proceed as long as delivery is made no later than Oct. 29, 2025.
The IFR also announces a Temporary General License (TGL) that authorizes the export, reexport and transfer transactions of items involving certain foreign entities that are 50 percent or more owned particular Listed Entities but who are not themselves listed on the Entity List or MEU List. This will expire Nov. 28, 2025, and will authorize transactions to which non-listed foreign entities subject to the Affiliates Rule are a party 1) to or within Country Group A:5 or A:6 or 2) to other non-embargoed countries but only if the affected entity is a joint venture with a non-restricted party headquartered in the U.S. or an A:5 or A:6 country.
Submitting Comments on the IFR
Public comments on the IFR be submitted within 30 days from the date of filing for public inspection (Oct. 29, 2025).
Takeaways
- In the short term, parties potentially affected by these significant regulatory updates to U.S. export controls should carefully examine whether and to what extent the IFR's savings clause or 60-day TGL may be applicable for any transactions that are ongoing.
- Parties dealing with items subject to the EAR should act rapidly to ensure that they have a method of identifying ownership interests by parties subject to BIS restrictions, not only sanctioned party interests. Parties using screening software should immediately ask their providers to clarify whether the service includes ownership mapping for parties subject to BIS restrictions and, if not, when such functionality will be available. Parties relying on manual screening through free resources such as BIS' Consolidated Screening List should bear in mind that such resources do not contain information about problematic ownership interests and that manual research will be needed to comply with the "affirmative duty to determine the percentage of ownership" imposed by the Affiliates Rule.
- As the new Affiliates Rule may warrant modifications to counterparty screening tools and processes, parties should also ensure such changes are reflected in documented internal policies and procedures and promptly communicated to relevant personnel.
Footnote
1 "Military end users" that are not on the MEU List would not be impacted by the Affiliates Rule. See Part 744.21(a)(3) of the EAR.
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.
