BIS Establishes 50 Percent Rule for Certain Restricted End-Users

Summary

On September 29, 2025, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued an immediately effective interim final rule (referred to as the “Affiliates Rule”)[1] which amends the Export Administration Regulations (“EAR”) to address diversion concerns with respect to certain restricted end-users. Whereas licensing requirements and restrictions on these end-users previously applied only to the specified party itself (with BIS guidance cautioning that dealing with related parties could under certain conditions constitute a “red flag” requiring further due diligence), under the new Affiliates Rule any foreign entity that is owned 50 percent or more by one or more specified restricted end-users is automatically subject to the same licensing requirements and restrictions as its listed owner(s).

Background

The Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has for many years applied a 50 percent ownership rule in connection with persons whose property and interests in property are blocked under OFAC-administered sanctions.[2] Under OFAC’s 50 percent rule, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person, regardless of whether the entity is specifically added to OFAC’s Specially Designated Nationals and Blocked Persons List, because the blocked person(s) are considered to have an interest in all property and interests in property of such an entity. OFAC has also applied the 50 percent rule in contexts outside of blocked property rules, such as directives under Russia-related sanctions programs that prohibit certain dealings with, or involving new debt or equity of, specified persons (and, pursuant to the 50 percent rule, entities owned 50 percent or more by one or more such persons).

To date, BIS has used a “legally distinct” standard for applying licensing requirements and restrictions to subsidiaries and other foreign affiliates of entities included on its end-user lists. Under this standard, licensing requirements and restrictions applicable to a listed party have automatically extended to branches and operating divisions, but have not automatically extended to its “legally distinct” affiliates, regardless of the extent of the affiliates’ corporate or financial ties to the listed party. BIS guidance has nevertheless cautioned that those who export, reexport, or transfer (in-country) items subject to the EAR with knowledge that the items are destined to a subsidiary, sister, parent, or other affiliate of a listed entity are encouraged to take extra due diligence steps to ensure that the items are not ultimately destined for the listed entity and the affiliate is a separate legal entity (as opposed to a branch or operating division of the listed entity).

BIS has now determined that this standard is not in all cases sufficient to adequately protect U.S. national security or foreign policy interests. The Affiliates Rule is intended to address these concerns.

The Affiliates Rule

Citing concerns regarding diversionary schemes such as the creation of new foreign companies to evade end-user restrictions, as well as the administrative burden associated with publishing new rules to add entities to end-user lists, BIS’s Affiliates Rule adopts the 50 percent rule for (1) the Entity List,[3] (2) the Military End-User (“MEU”) List,[4] and (3) Section 744.8 of the EAR[5] (the “covered lists”). As a result, the license requirements and other restrictions that apply to parties specified on these covered lists (“listed parties”) now also automatically apply to foreign entities[6] that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more listed parties and/or unlisted entities that are subject to license requirements and other restrictions pursuant to the Affiliates Rule based upon their ownership (“covered affiliates”). Export, reexport, or transfer (in-country) transactions involving listed parties (and now, their covered affiliates) are subject to additional BIS licensing requirements. The availability of license exceptions is limited, and license applications are generally reviewed with a presumption of denial.[7]

In connection with the expansion of the scope of the covered lists, the Affiliates Rule makes several related changes to clarify and augment its application.

• Rule of Most Restrictiveness. The Affiliates Rule clarifies that in cases where an unlisted entity is owned 50 percent or more by multiple listed parties (or other covered affiliates of a listed party), BIS will apply a “rule of most restrictiveness”—meaning that the unlisted entity will be subject to the most restrictive license requirements, license exception eligibility, and license review policy applicable to any of its listed party owners, regardless of the listed owners’ relative ownership percentages.
• Conforming Changes to Foreign-Direct Product Rules. The Affiliates Rule makes conforming changes to the Entity List Foreign Direct Product (“FDP”) Rule and the Russia/Belarus End User and Procurement FDP Rule to specify that the end-user scope of these FDP Rules now includes covered affiliates of listed entities.
• Removal or Modification Requests. The Affiliates Rule updates the existing EAR provisions regarding requests for removal from or modification of the MEU List and Entity List to specify that a covered affiliate of one or more foreign entities listed on the MEU List or the Entity List may request that its MEU List or Entity List owner’s entry listing be modified to exclude the covered affiliate.
• Guidance for License Applications. The Affiliates Rule adds new guidance regarding the information that must be included in license applications for an export, reexport, or transfer (in-country) for any covered affiliate of a listed party or when the exporter, reexporter, or transferor cannot determine the ownership percentage of a foreign entity that is owned by one or more listed parties (see New Red Flag 29 below).
• Temporary General License. The Affiliates Rule adds a new Temporary General License (“TGL”), effective until December 1, 2025, that authorizes certain export, reexport, or transfer (in-country) transactions to which a covered affiliate of one or more listed parties is a party that would otherwise be subject to Entity List or MEU List-related licensing requirements and restrictions under the Affiliates Rule—essentially negating the applicability of the Affiliates Rule to such transactions until the expiration of the TGL. Specifically, the TGL applies to exports, reexports, or transfers (in-country): (1) to or within any destination in Country Group A:5 or A:6 (most countries that have joined at least one of the United States’ multilateral export control regimes);[8] and (2) to or within any country other than Country Group E:1 or E:2 (Cuba, Iran, North Korea, and Syria) when the covered affiliate that is a 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 a covered affiliate of any listed party.
• Guidelines for Applying the Affiliates Rule. The Affiliates Rule adds a new Supplement No. 8 to Part 744 of EAR that provides guidance regarding the application of the Affiliates Rule (the “Guidelines”). The Guidelines, which are similar to OFAC’s 50 percent rule guidance, (1) describe the general scope of the Affiliates Rule, (2) explain how to apply it, including the rule of most restrictiveness and Red Flag 29, and (3) call for caution and additional due diligence where a transaction involves a foreign entity in which one or more listed entities “has a significant ownership interest that is less than 50 percent” or that is a parent entity of a listed entity.
• New Red Flag 29. The Affiliates Rule adds a new red flag to BIS’s “Know Your Customer” Guidance and Red Flags[9] specifying that exporters, reexporters, or transferors that know (or have reason to know) that a foreign entity has one or more owners that are listed parties have an “affirmative duty” to determine the percentage of ownership of those listed parties and if that is not possible, to obtain a license from BIS if required based on the requirements applicable to the listed party owner or owners of that foreign entity.
• Savings Clause. The adopting release provides that shipments of items already en route aboard a carrier as of September 29, 2025 that would now require a license as a result of the Affiliates Rule may proceed to their destination, provided that the export, reexport, or transfer (in-country) is completed no later than October 29, 2025.

Simultaneously with the issuance of the Affiliates Rule, BIS also updated its Entity List FAQs to add 13 new FAQs specific to the Affiliates Rule.[10] The new FAQs, like the adopting release and the Guidelines, generally cover the scope of the Affiliates Rule, the implications of its applicability (e.g., the rule of most restrictiveness, Red Flag 29), and related due diligence requirements and expectations.

Implications

Parties may be held liable for unauthorized exports, reexports, or transfers (in-country) on a strict liability basis, so the implementation of the Affiliates Rule necessitates that due diligence be conducted to determine whether any foreign entities that are parties to such transactions are owned by one or more listed parties (or covered affiliates of listed parties). Indeed, BIS states that “the application of the Affiliates [R]ule creates an affirmative duty to determine the ownership of other parties to the transaction in order to comply.” BIS acknowledges that the application of the Affiliates Rule “may take more time and compliance resources … especially in situations where limited information on corporate ownership structures is publicly available.”

• Parties will no longer be able to rely solely on the Consolidated Screening List (“CSL”) as an exhaustive list of entities subject to Entity List requirements, as the CSL will not include unlisted covered affiliates.
• Parties will need to conduct sufficient due diligence on the other parties involved in their export transactions to be comfortable that those parties are not unlisted covered affiliates of listed parties (or covered affiliates of listed parties), and a BIS license application may be required if this cannot be confirmed through diligence.
• BIS’s new Guidelines for Applying the Affiliates Rule caution that, even in the absence of 50 percent or greater ownership by listed parties, “significant minority ownership” or “other significant ties” (such as overlapping board membership or other indicia of control) to a listed party present a red flag of potential diversion risk and necessitate additional due diligence.

Nevertheless, BIS notes that “the private sector should already be undertaking this analysis as part of a risk-based approach under OFAC prohibitions,” and that this experience should “ease the transition” for companies as they establish measures to comply with the Affiliates Rule. BIS also notes that there are various private sector screening resources for companies that may help mitigate compliance challenges, including vendors that conduct 50 percent ownership assessments as part of the OFAC compliance screening services that they offer.

Parties that engage in transactions subject to the EAR should promptly begin planning and implementing necessary changes and expansions to their existing compliance programs to account for the expanded scope of the covered lists. This may include not only augmenting transaction-specific due diligence processes, but also reconsidering existing customer and counterparty risk assessments and standard contractual terms, such as EAR-related representations and warranties.