BIS Adopts the OFAC 50% Rule — Effective Immediately

Under the September 29^th rule, any entity, regardless of location, that is at least 50 percent owned by one or more entities on the BIS Entity List or the BIS Military End-User (MEU) List will automatically be subject to Entity List/MEU List restrictions.  If this sounds familiar to you then you are right!  It is straight out of the U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) 50 Percent Rule, except under the EAR it is called the “BIS Affiliate Rule” which mandates that any entity that is at least 50 percent owned by one or more entities on the Entity List or the Military End-User (MEU) List will itself automatically be subject to Entity List/MEU List restrictions.

In addition, significant minority ownership by an Entity List/MEU List company is a red flag that triggers additional due diligence requirements for exporters.  Due to diversion concerns, BIS has determined that to protect U.S. national security and foreign policy interests, the Entity List restrictions should also extend to certain foreign companies that are subsidiaries or other foreign affiliates owned by listed entities.

Note that the Internal Final Rule references adding Supplement No. 8 to Part 744—Guidelines for Applying Affiliates Rule to Entity List Entries and Other End-User Controls.  However, it is not yet embedded within the EAR but can be found at the end of this blog as well as within the Federal Register.

Where did this rule come from?

As mentioned, OFAC uses a 50 percent ownership rule in connection with the Specially Designed Nationals and Blocked Persons List (SDN List).  The purpose of the rule under OFAC is threats of circumvention through unlisted subsidiaries.  Like OFAC, BIS is applying the 50 percent rule under the EAR to address diversionary/circumvention tactics/risks.  And also, like OFAC, entities will not be cited on any sort of public list, instead, the burden is on industry to understand the ownership structure of each and every export to ensure that their transaction is not caught under the BIS Affiliate Rule.

What is the BIS Entity List Restrictions?

Quick reminder on what the BIS Entity List (supplement no. 4 to part 744) is  – a searchable public list of trade restricted  individuals, businesses, government organizations, as well as addresses that are subject to specific license requirements for the export, reexport, and/or transfer (in-country) of specified items, usually with a presumption of denial.

It identifies entities for which there is reasonable cause to believe, that they have been involved, are involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States, pursuant to § 744.11.

Then versus Now

Then (as in last week), subsidiaries, parent companies, and sister companies were legally distinct from listed entities. Meaning that even if the parent company was on the BIS Entity List, it did not extend to their subsidiary, parent, and/or  sister companies. Now, with this expansion, thousands of subsidiaries are subject to violations.

What are the Military End User (MEU) List Restrictions?

Like the above, BIS is also rolling out the Affiliates rule for the `Military End-User’ (MEU) List in supplement no. 7 to part 744 as well as adopting the Affiliates rule for Part § 744.8 in an attempt to prevent diversion while aligning with OFAC restrictions applying to  SDNs under the authorities specified in § 744.8.

What if the entity is not owned 50% or more, and is instead under the 50% threshold?

BIS has determined that this would be a Red Flag and has instituted a new Red Flag within supplement no. 3 to part 732 (note that the EAR has yet to be updated, but you can find the new Red Flag #29 below) that would trigger additional due diligence as a requirement for all exporters.

And what if you are unable to determine the ownership percentage of a foreign entity that is an entity owned by one or more listed entities on the Entity List or the MEU List?  As the exporter, you must resolve this Red Flag prior to proceeding with any exports, reexports, or transfers (in-country) to the foreign entity by submitting a license application to BIS or identify an available license exception based on the restrictions applicable to the listed party.

Red Flag 29:  Identifies a scenario 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. It specifies that such exporters, reexporters, or transferors have an affirmative duty to determine the percentage of ownership of those listed entities and if that is not possible, to obtain a license from BIS if required under the Entity List or MEU List based on the requirements for the listed owner or owners of that foreign entity, unless a license exception is available.

What if it turns out that the entity falls within this new scope?

There is a Temporary General License (TGL) under General Order No. 7.  However, this expires on November 28, 2025, and must meet certain requirements including only being applicable for specific transactions involving non-listed affiliates located in Country Groups A:5 or A:6 (supplement no. 1 to part 740) and cannot be destined to or within any Country Groups E:1 or E:2 as well as other regulatory parameters.

How does this affect the Unverified List (UVL) in Supplement No. 6 to Part 744?

BIS is not adopting the Affiliates rule currently for the Unverified List (UVL) in supplement no. 6 to part 744.

How is industry supposed to comply?

This is a great question!  The hurdle for all exporters will be how to determine if their export now complies with the BIS Affiliate Rule because traditional screening lists do not include the subsidiaries of listed entities on the BIS Entity list.  This means that screening against the Consolidated List only is no longer adequate as it will not capture BIS Affiliated Entities under the new rule.

BIS has admitted that the Affiliates rule requires additional analysis by exporters, reexporters, or transferors to comply but ascertains that they should already be undertaking this analysis as part of a risk-based approach under OFAC prohibitions to reduce their risk of liability for dealings with blocked persons who are subject to OFAC’s 50 percent rule. But let’s be honest, this rule was mostly applicable to companies exporting to Russia prior to the Ukraine invasion and was not part of every day due diligence for those companies exporting outside of that region.  BIS also understands that “Applying the Affiliates rule 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. Adopting the Affiliates rule will also mean that the Consolidated Screening List (CSL) will no longer comprise an exhaustive listing of foreign entities subject to Entity List license requirements, because the CSL will only include the entities listed on the Entity List and will not reflect these additional foreign affiliates of listed entities that are owned 50 percent or more by one or more listed entities.”  This is not good news for exporters who do not have the financial resources to purchase a screening tool that costs thousands and thousands of dollars per year.

BIS has also acknowledged that there are various private sector screening resources for companies that may help to mitigate this challenge, including vendors that conduct 50 percent ownership analysis already as part of their OFAC compliance screening programs. OFAC also provides guidance regarding certain entities that may be blocked pursuant to the 50 percent rule to facilitate compliance, though this does not replace the need for independent compliance screening or due diligence. We can only hope that BIS will add Affiliate Entities to a published list to assist exporters who are required to comply.

Conclusion

As mentioned before, traditional screening lists do not include tens of thousands of now-restricted subsidiaries which creates a large compliance gap for exporters.  So, what can we do to comply?  Exporters must know the ownership structure of the companies they are doing business with, and if that cannot be identified, they must either resolve this red flag (most likely by engaging with a company that offers this screening service) or apply for a license.

Note also that direct and indirect ownership interests by Designated Parties must be aggregated to determine whether the 50% threshold is met. This means that the 50% threshold can be met by combining ownership stakes from multiple designated parties, even if they are listed on different export control and/or sanctions lists (i.e., Entity List, MEU List, and/or SDN List). If multiple listed parties are involved, apply the most restrictive license requirements, even if they only apply to a minority shareholder. If ownership cannot be determined, do not proceed without a BIS license or a valid license exception.

We all know that the US Government considered exporting as a privilege and not a right.  This means that complying with the BIS Affiliates Rule is not optional.

References

media.bis.gov/press-release/department-commerce-expands-entity-list-cover-affiliates-listed-entities

Federal Register :: Expansion of End-User Controls To Cover Affiliates of Certain Listed Entities

BIS also provides this Table 1 in the preamble of this Interim Final Rule to assist in understanding the changes being made:

Types of entities	Application notes
Listed entities. A foreign entity listed on the Entity List, MEU List, or in SDN designations in § 744.8(a)(1), including any branch or sales office that is not legally distinct from the listed entity	• These entities are currently subject to Entity List, MEU List, and § 744.8 restrictions under the ‘legally distinct’ standard and will continue to be subject to such restrictions under the Affiliates rule. • These requirements applied to all addresses of these entities located in the destination under which the entities were listed. • Prior to this IFR, there were three entities on the Entity List that were subject to a worldwide license requirement. • Because of the changes made in this IFR, the requirements for all listed entities on the Entity List, MEU List, and the requirements in § 744.8 will now apply to all foreign countries. • For example, an entity listed on the Entity List under China has a sales office in Malaysia. Prior to this IFR, the sales office in Malaysia of the listed Chinese entity was not included within the scope of the Entity List license requirements, unless BIS listed that Chinese sales office in Malaysia also on the Entity List or there was information that the item was intended for the listed Chinese entity.
Foreign affiliates of listed entities that meet the Affiliates rule. Foreign affiliates of listed entities owned 50 percent or more, directly or indirectly, by one or more listed entities on the Entity List, MEU List, or an SDN identified in § 744.8(a)(1) or by one or more entities subject to restrictions based upon ownership	• These entities meet what is described in this IFR as the Affiliates rule and are subject to the license requirements and other restrictions under the Entity List, MEU List, or § 744.8. • This is an expansion of the Entity List, MEU List, and § 744.8 license requirements that is needed to protect U.S. national security and foreign policy interests because of the diversion concerns with these entities. • These requirements apply to all foreign countries regardless of under which destination the listed entity or entity’s owners are listed. • This IFR adds a TGL that temporarily authorizes (i) exports, reexports, or transfers (in-country) to or within any destination in Country Group A:5 or A:6 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 aggregate, by one or more listed entities on the Entity List or MEU List, or entities subject to Entity List or MEU List restrictions based upon their ownership, and (2) exports, reexports, or transfers (in-country) to or within any destination 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 aggregate, by one or more listed entities on the Entity List or on the MEU List, or entities subject to Entity List or MEU List 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 one or more listed entities on the Entity List or on the MEU List or entities subject to Entity List or MEU List restrictions based upon its ownership. • The TGL expires on December 1, 2025.
Foreign affiliates of listed entities owned by listed entities where percentage of ownership cannot be determined (unresolvable Red Flag entities) Foreign affiliates of listed entities that have some direct or indirect ownership by listed entities on the Entity List, MEU List, or by SDNs in § 744.8(a)(1), but the exporter, reexporter, or transferor cannot determine whether the listed entity ownership meets the Affiliates rule	• The Entity List, MEU List, and § 744.8 requirements are enforceable on a strict liability basis, so “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. • By adding a requirement to resolve the red flag to §§ 744.11 and 744.21, BIS is informing the public that when an exporter, reexporter, or transferor has “knowledge” that a foreign entity has one or more direct or indirect owners that are listed on the Entity List or MEU List, it has an affirmative duty to determine the percentage of ownership of those listed entities and if that is not possible, to obtain a license from BIS if required under the Entity List or MEU List based on the requirements for the listed owner or owners of that foreign entity, unless a license exception is available. • Because of diversion concerns to listed entities, including concerns about listed entities obfuscating their ownership stakes in foreign affiliates of listed entities as a method to evade Entity List or MEU List license requirements, this IFR specifies that the exporter, reexporter or transferor must resolve the Red Flag or obtain a license from BIS prior to proceeding with the export, reexport, or transfer (in-country), unless a license exception is available.
Foreign companies where there is no “knowledge” that the foreign entity is owned by a listed entity	• BIS advises exporters, reexporters, and transferors to exercise due diligence as part of their internal compliance programs with such foreign companies because as noted in the previous row, the Entity List, MEU List, and § 744.8 requirements are enforceable on a strict liability basis. • This means that exporters, reexporters, and transferors are responsible if they engage with a foreign entity that is in fact owned 50 percent or more by a listed entity on the Entity List, MEU List, or an SDN designation under § 744.8, or by entities subject to restrictions based upon their ownership. • Accordingly, exporters, reexporters, and transferors have an affirmative responsibility to know the ownership of the foreign companies that are parties to a transaction. • Exporters, reexporters, and transferors must adopt a risk-based compliance program to assist them in complying with these requirements. • Supplement No. 3 to Part 732—BIS’s “Know Your Customer” Guidance and Red Flags is an EAR regulatory resource that assists exporters, reexporters, and transferors in developing their compliance programs.
U.S. entities owned by listed entities	• This IFR does not impose restrictions, as the Affiliates rule established in this IFR applies only to foreign companies, nor does it limit any compliance obligations that may exist under other provisions of the EAR or under the regulations of other agencies.

Supplement No. 8 to Part 744—Guidelines for Applying 50 Percent Ownership Rule to Entity List Entries and Other End-User Controls

(a) Scope. These guidelines relating to the status of foreign affiliates of listed entities owned by individuals or entities identified on the Entity List, `Military End-User’ (MEU) List, or Specially Designated Nationals (SDN) List under programs listed in § 744.8(a)(1) of this part. This supplement sets forth guidelines with respect to foreign affiliates of listed entities owned, directly or indirectly, individually or in aggregate, 50 percent or more by one or more listed entities on the Entity List in supplement no. 4 to this part, the MEU List in supplement no. 7 to this part, by one or more SDNs designated under programs listed in § 744.8(a)(1) of this part, or by one or more entities subject to restrictions based upon ownership by listed entities, as well as for when an exporter, reexporter, or transferor cannot determine the ownership percentage of a foreign entity that is an entity owned, directly or indirectly, by one or more listed entities on the Entity List or the MEU List, because the involvement of such entities as party to the export, reexport, or transfer (in-country) presents a diversion concern.

(b) Application of Affiliates rule. Any foreign entity that is owned, directly or indirectly, individually or in aggregate, 50 percent or more by one or more entities listed on the Entity List, `military end-users’ on the MEU List, or SDNs designated under programs listed in § 744.8(a)(1), or by one or more entities subject to restrictions based upon ownership by listed entities, is considered to be a diversion concern to such listed entities or SDNs. A license is required for any transaction where that foreign entity is a party to the transaction to the same degree as if the export, reexport, or transfer (in-country) was being exported, re-exported, or transferred (in-country) to its owners. Consequently, any foreign entity owned 50 percent or more by one or more entities on the Entity List, MEU List, or SDNs designated under programs listed in § 744.8 is itself considered to be listed on the Entity List, MEU List, or subject to the requirements under § 744.8, respectively. An entity owned 50 percent or more, directly or indirectly, by multiple entities subject to EAR license requirements pursuant to some combination of the Entity List, MEU List, or SDN List designated under programs listed in § 744.8(a)(1), is 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. If an exporter, reexporter, or transferor cannot determine the ownership percentage of a foreign entity that is an entity owned, directly or indirectly, by one or more listed entities on the Entity List or MEU List, they must resolve the Red Flag or obtain a license from BIS prior to proceeding with the export, reexport, or transfer (in-country) (see Red Flag 29 in supplement no. 3 to part 732).

(c) Due diligence for foreign entities of listed entities with less than 50 percent ownership by listed entities or SDNs or for parent entities of listed entities. Exporters, re-exporters, and transferors are advised to act with caution when considering a transaction with a non-Entity List, non-MEU List, or non-§ 744.8 foreign entity in which one or more entities identified on the Entity List, MEU List, or SDNs designated under programs identified in § 744.8 has a significant direct or indirect ownership interest that is less than 50 percent or is a parent entity of listed entities. Such entities may be the subject of future designation on the Entity List, MEU List, or the SDN List under one of the designations identified in § 744.8, or of enforcement actions. Exporters, re-exporters, and transferors should undertake due diligence to ensure that items exported to the entity are not destined for the Entity List party, MEU List party, or SDN and are reminded that the EAR imposes licensing requirements, such as end-user and end-use based restrictions in part 744 of the EAR, that could apply to such companies even if they are legally separate from the listed entity.

If the new BIS Affiliates Rule has you rethinking how you assess ownership and screening, our team is here to help. Schedule a no-charge consultation with one of our experts to review your compliance approach and safeguard your business against these expanded restrictions.”