BIS Expands List-Based Controls Through Implementation Of "50 Percent Rule"

On September 29, 2025, the U.S. Department of Commerce Bureau of Industry and Security (BIS) issued an interim final rule (IFR) that expands the coverage of list-based requirements and restrictions imposed by the Entity List, Military End User (MEU) List, and Section 744.8 of the Export Administration Regulations (EAR), which restricts exports, reexports, and transfers (in-country) when a person who is designated on the Specially Designated Nationals and Blocked Persons List with certain specified program identifiers (SDN List) is a party to the transaction. Known as the "Affiliates Rule," the IFR extends the requirements and restrictions under the EAR to entities that are owned 50 percent or more — directly or indirectly, individually or in aggregate — by (a) parties identified on the Entity List, MEU List, or SDN List and/or (b) entities that are themselves subject to those restrictions due to their ownership structure, and, as a result, such impacted entities become subject to the same license requirements and restrictions as the previously listed parties. These new restrictions took effect on September 29, 2025, but are subject to a savings clause and a limited Temporary General License (TGL), discussed below. According to BIS, the Affiliates Rule is intended to align the EAR more closely with economic sanctions enforcement regimes (e.g., OFAC's 50 percent rule) to prevent EAR evasion via subsidiary structuring. The Affiliates Rule substantially expands due diligence obligations on exporters, reexports, and transferors, who may no longer rely solely on the Consolidated Screening List (CSL) and will now have to conduct due diligence to confirm ownership information.

Background

Prior to the IFR, BIS used the "legally distinct" standard to determine the applicability of Entity List, MEU List, and SDN List-based restrictions. Under the "legally distinct" standard, list-based restrictions applied only to the listed entity and to legally indistinct entities located in the same country (i.e., branch offices). BIS did not automatically apply restrictions based on the Entity List, MEU List, and SDN List to subsidiaries, parent companies, sister companies, or other foreign affiliates of listed entities, provided those affiliates were legally separate and not themselves listed.

BIS modeled the Affiliates Rule on the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) 50 Percent Rule, which provides that entities owned 50 percent or more, directly or indirectly, individually or in aggregate, by one or more blocked persons are generally subject to the same restrictions as the blocked persons. However, BIS' Affiliates Rule is more expansive in scope and application, differing in areas such as list aggregation and the application of a "most restrictive" standard, as discussed below. In the IFR, BIS cites three principal reasons for adopting the Affiliates Rule: (1) preventing diversion to listed entities of concern, (2) reducing the administrative burden on BIS to continuously add affiliated entities to these lists, and (3) protecting U.S. national security and foreign policy interests.

Overview of the IFR

Affiliates Rule

Under the Affiliates Rule, the requirements and restrictions imposed by the Entity List, MEU List, and SDN List requirements and restrictions now apply to "any foreign entity that is owned, directly or indirectly, individually or in aggregate, 50 percent or more by one or more listed entities or entities that are subject to restrictions based upon their ownership."

The Affiliates Rule does not extend the MEU license requirements to unlisted foreign affiliates when there is no direct or indirect ownership by a MEU List or Entity List-listed party with a footnote 3 designation, unless the unlisted foreign affiliates themselves satisfy the definition of "military end user." For instance, imagine that Company 1 has been self-assessed as a "military end user" (i.e., not affirmatively listed on the MEU List). Company 2, a foreign entity that is 50 percent owned by Company 1, has not been self-assessed as a "military end user" and is not on the MEU List. Company 2 would not be subject to the Affiliate Rule by virtue of Company 1's self-assessed "military end user" status. In contrast, if Company 3 is listed on the MEU List, Company 3's 50-percent subsidiary Company 4 is unlisted, and Company 4's 50-percent subsidiary Company 5 is also unlisted, both Company 4 and Company 5 would be subject to the Affiliates Rule and MEU license requirements.

The IFR does not restrict BIS' existing ability to add a party to the Entity List when there is a reasonable belief that the party is or is likely to be involved in activities that are contrary to U.S. national security or foreign policy interests.

Rule of Most Restrictiveness

Under the new IFR, BIS has adopted the rule of most restrictiveness when applying the Affiliates Rule. The rule of most restrictiveness provides that if a foreign entity is 50 percent or more owned by multiple entities that are subject to the license requirements applicable to the Entity List, MEU List, and/or SDN List, the most restrictive license requirement or restriction of its owners applies.

The IFR provides several illustrative examples of how the Affiliates Rule and the rule of most restrictiveness apply. For instance, if Company C is owned — directly or indirectly, individually or in the aggregate — 50 percent or more by two listed entities (e.g., Company A and Company B), BIS will apply the most restrictive license requirements and review policy among the owners. Even if Company A holds a smaller ownership stake in Company C than Company B, if Company A's restrictions are more stringent, those will govern the licensing obligations for Company C.

In connection with the rule of most restrictiveness, exporters should be aware that when an unlisted entity is owned 50 percent or more, in aggregate, by multiple listed parties, and only one of those owners qualifies for a license exception, the exception will not apply to transactions involving the unlisted entity. In general, license exceptions under the Entity List, MEU List, and SDN List restrictions are extremely limited.

Foreign Direct Product Rule Implications

Under the IFR, the Affiliates Rule now applies to Entity List-related foreign direct product rules (FDPRs). The FDPRs make foreign-produced items subject to the EAR if they use certain U.S.-origin technology, software, or equipment, or if they are a direct product of technology of software subject to the EAR. The end user scopes of Entity List-related FDPRs are expanded to cover foreign entities owned, directly or indirectly, individually or in aggregate, 50 percent or more, by parties identified on the Entity List.

Importantly, the FDPR-related changes also adopt the rule of most restrictiveness discussed above. Therefore, the Entity List-related FDPR would apply if one of the owners of the foreign entity is subject to the Entity List-related FDPR, even if that particular owner does not have 50 percent or more ownership. For instance, if a foreign entity is owned 35 percent by an Entity List-listed entity with a footnote 3 designation; and 15 percent by an Entity List-listed entity with a footnote 1 designation, then the foreign entity would be subject to both footnote 1 and footnote 3-related FDPRs.

Savings Clause

BIS has included a savings clause in the IFR, allowing certain shipments to proceed under previous licensing eligibility. Specifically, any items that lose eligibility for a license exception or for export, reexport, or transfer (in-country) without a license (no license required; NLR) due to this regulatory change may still be shipped if they were en route aboard a carrier to a port of export, reexport, or transfer on September 29, 2025, pursuant to actual orders. These shipments must be completed no later than October 29, 2025.

Temporary General License

BIS is issuing a TGL, which authorizes:

• Exports, reexports, or transfer (in-country) to or within an A:5 or A:6 country when a non-listed foreign entity that is owned 50 percent or more, individually or in aggregate, by: (1) one or more listed entities on the Entity List or MEU List, or by (2) unlisted entities that are subject to Entity List or MEU license requirements or other Entity List or MEU restrictions based upon their ownership is a party to the transaction.
• Exports, reexports, or transfers (in-country) to or within any country other than Country Group E:1 or E:2 when a party to the transaction is a non-listed foreign affiliate of a listed entity that is owned 50 percent or more, directly or indirectly, individually or in the aggregate, by (1) one or more listed entities on the Entity List or MEU List, or by (2) unlisted entities that are subject to Entity List or MEU license requirements or other Entity List or MEU restrictions based upon their ownership and such party to the transaction is a joint venture with a non-listed entity headquartered in the United States or Country Group A:5 or A:6 that is not owned 50 percent or more, directly or indirectly, individually or in aggregate, by (1) one or more listed entities on the Entity List or MEU List or by (2) unlisted entities that are subject to Entity List or MEU license requirements or other Entity List or MEU restrictions based upon their ownership.

Although the Federal Register notice accompanying the amendments states that the TGL would expire on November 28, 2025, the actual regulatory text states that the TGL expires on December 1, 2025 instead. BIS may issue further guidance to confirm the TGL expiration date but, until BIS issues further clarification, it may be prudent to assume that the TGL would expire on the earlier date, November 28, 2025.

Potential Exceptions

BIS may grant exceptions to the Affiliates Rule on a case-by-case basis if it determines that a foreign affiliate that is 50 percent owned by a listed entity does not pose a significant risk of diversion to that listed entity. These exceptions may apply either to all affiliates of a particular listed entity or to a specific foreign affiliate. When such determinations are made, BIS will notify the public by updating the relevant entry on the Entity List or MEU List to indicate that the Affiliates Rule does not apply to the specified affiliate(s).

License Application

Exporters will be required to clearly indicate when a license application is related to the new Affiliates Rule. This includes providing detailed information about the listed entities involved, their ownership stakes in the foreign entity, and the methodology used to assess ownership. In cases where the exporter is unable to determine the exact ownership percentage of a foreign entity that is owned, directly or indirectly, by one or more listed parties on the Entity List or MEU List, the license application must still identify the listed entities involved. In addition, the exporter must describe the due diligence conducted to assess ownership and explain why a precise ownership percentage could not be determined. And as discussed below, under the new Red Flag 29, an exporter, reexporter, or transferor must obtain a license from BIS (or identify an applicable license exception) before proceeding with the transaction if they are unable to confirm the foreign entity's ownership structure after their diligence.

Comment Period

The public comment period for the IFR ends on October 29, 2025. BIS invites comments on the IFR, including whether the 50 percent ownership threshold should be lower and whether the Affiliates Rule should apply to the Unverified List (UVL) in supplement no. 6 to part 744 of the EAR and Denial Orders issued under part 764 of the EAR.

Due Diligence Considerations

BIS reiterates in the IFR that Entity List, MEU List, and SDN List and requirements are enforceable on a strict liability basis. That is, "'knowledge' is not required to trigger these end user requirements under the EAR, although 'knowledge' is a factor that is considered when determining penalty calculations for a violation of the EAR." Thus, BIS requires exporters, reexporters, and transferors to conduct sufficient due diligence to determine the ownership of foreign companies (or to explain in the license application why a precise ownership percentage could not be determined).

BIS also introduces a new Red Flag 29, which states that an exporter, reexporter, or transferor that has "knowledge" that a foreign entity has one or more owners listed on the Entity List or the MEU List (or other unlisted entities that are subject to ownership-based license requirements) has an "affirmative duty" to determine the foreign entity's ownership structure. If, after conducting the requisite affirmative due diligence, the foreign entity's ownership structure cannot be confirmed, the exporter, reexporter, or transferor must obtain a license from BIS (or identify an applicable license exception) before proceeding with the transaction. Companies should implement Red Flag 29 into their due diligence processes, including requiring foreign companies to disclose their shareholding structure and beneficial ownership, and verifying this information using business intelligence platforms.

In addition, BIS introduces new due diligence guidance on the application of the Affiliates Rule titled "Guidelines for Applying Affiliates Rule to Entity list Entries and Other End-User Controls" in Supplement No. 8 to Part 744 of the EAR. This new guidance largely tracks OFAC's existing guidance on its 50 Percent Rule, with updates to reflect EAR-specific elements.

BIS cautions that foreign parties with significant minority ownership by, or other significant ties to (e.g., overlapping board membership or other indicia of control), an entity designated on the Entity List, MEU List, or SDN List present potential diversion risk to a listed entity, or may be subject to future designation on one of these lists. BIS advises companies to conduct due diligence to address diversion risks associated with transactions with companies that are less than 50 percent owned by a company designated on the Entity List, MEU List, or SDN List. It further warns against relying solely on the CSL for compliance purposes. The CSL will no longer be a comprehensive source of foreign entities subject to certain license requirements because it will not reflect additional entities subject to the Affiliates Rule. Companies will now be required to track both CSL entities and affiliated parties subject to restrictions and license requirements under the Affiliates Rule.

BIS acknowledges that the Affiliates Rule portends higher compliance obligations and costs for companies: "[t]he private sector should already be undertaking this analysis as part of a risk-based approach under OFAC prohibition ... [the analysis] may take more time and compliance resources compared to simply screening a list for identified names, especially in situations where limited information on corporate ownership structures is publicly available, such as where a listed entity is privately held." BIS indicates that it will provide public guidance regarding entities that may be subject to the Affiliates Rule, including by adding such entities to the Entity List.

Key Shifts From the Current Regime

Conclusion

The IFR significantly expands the scope of Entity List, MEU List, and SDN List-based controls, and exporters must adapt their trade compliance processes accordingly. The CSL is no longer a comprehensive list of foreign entities subject to requirements and restrictions — it is a starting point. Building on existing sanctions compliance procedures, it is critical that exporters require foreign entities involved in their transactions to provide their direct and indirect ownership shareholders and verify and screen these shareholders in accordance with the new IFR. Further guidance from BIS on the Affiliates Rule is likely, and exporters should continuously monitor guidance and FAQs issued by BIS to keep track of the latest developments.

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