50% Rule Could Make Entity List Additions More Difficult, Former BIS Enforcement Chief Says

Landon Heid, President Donald Trump’s nominee to be assistant secretary of commerce for export administration, told lawmakers in April that BIS should adopt the 50% rule, which the Office of Foreign Assets Control uses to imposes sanctions on any entity owned 50% or more by a sanctioned entity on OFAC's Specially Designated Nationals List (see 2504100036).

Axelrod, speaking during a webinar this week hosted by risk intelligence firm Kharon, said this is “not the first time” the idea has been floated. He said the BIS enforcement division has sometimes been “frustrated” that Entity List restrictions don’t automatically capture subsidiaries because of “how easy it can be” for a listed company to create a subsidiary and evade export licensing rules. Although Axlerod said using a subsidiary to evade the Entity List would violate U.S. export controls, it’s sometimes “hard to identify” those subsidiaries.

“I think it is frustrating to BIS, and certainly to the enforcement side of BIS from a national security perspective, that this doesn't exist,” he said of the 50% rule.

Axelrod added that he doesn’t necessarily agree with concerns raised by some industry officials that a 50% rule would make it too difficult for companies to screen counterparties against the Entity List. OFAC “already has that rule, and people have to screen for OFAC [SDN Listings] too,” he said. “So I haven't found that logic particularly convincing.”

But he also said a similar rule for the Entity List could have unintended effects on businesses. He gave a hypothetical example of a foreign company with one division that makes sensitive technologies and another division that makes harmless, non dual-use items. If BIS adopted a 50% rule and the company’s sensitive technology division was added to the Entity List, that listing may also capture its unrelated, non-sensitive business.

This issue has been a “debate internally for a while.” Axlerod said. “If the goal is to restrict U.S. companies from selling items and to restrict what's necessary, but not more than that, this can get tricky.”

Axlerod also said BIS could face greater hurdles adding new companies to the Entity List if it adopts a 50% rule, especially because Entity List decisions are made not just by BIS, but also by the State, Defense and Energy departments -- the agencies that make up the End-User Review Committee. The Pentagon or other U.S. agencies would need to make sure, for example, that none of their contractors would be indirectly impacted by a new listing.

“You can see a world in which it actually ends up being harder for BIS to put companies on the Entity List, because it's harder to get interagency buy-in among the four agencies,” Axelrod said. “There might be a part of that company that DOD relies on very heavily.”

BIS adopting the 50% rule “certainly is something that might end up happening,” he said.

“It will allow for greater coverage and greater effectiveness of the Entity List. But one thing on the other side of the balance is it could result in a reduction of the number of companies going on the Entity List in the first place.”

Axelrod was also asked about guidance BIS issued last year -- while he was still working at the agency -- that outlined due diligence expectations for banks and other financial institutions, including how they should screen customers, verify customer compliance with export laws and investigate red flags 2410090027 and 2411010030). The guidance focused on General Prohibition 10 of the Export Administration Regulations, which restricts companies from financing or servicing any item subject to the EAR if they have knowledge an EAR violation has occurred or will occur.

Axlerod said he’s expecting the Trump administration to “revisit” and possibly update that guidance.

“I don't think they're going to just revoke it and replace it with nothing,” he said. But he said he believes banks have likely been providing feedback to BIS about their experience so far trying to follow the guidance, including “what's working well and what's been more challenging than maybe BIS anticipated.”

“And so I expect, just like any time guidance goes out for the first time, that BIS is taking that on board and will likely update the guidance to account for some of the feedback and account for whatever the new political leadership’s policy direction is,” he said.

Even if BIS were to significantly change or revoke the guidance, Axelrod stressed that the risks associated with General Prohibition 10 aren’t “going anywhere.”

“There is enforcement risk here,” he said. “That doesn't change with the administration.”

Banks need to make sure they’re carrying out due diligence to mitigate their export control risks, Axelrod said, and that doesn’t necessarily mean doing “exactly what's in that BIS guidance,” especially “if what you're doing is more effective.” He said BIS is just looking to make sure “you're paying attention and doing something.”

He added: “And if you do nothing, that's fine, too. But if something goes sideways and BIS comes knocking, you're not going to have much of a defensible story to tell to explain why that happened on your watch.”