Former BIS Official: Entity List 50% Rule Could Face Delays If Seen Hurting China Trade Talks
Companies could see a significant uptick in compliance responsibilities if the Bureau of Industry and Security follows through with a possible 50% rule for parties on the Entity List, although it’s unclear when exactly such a rule could take effect, former BIS officials said this week.
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Matthew Borman, an Akin trade lawyer who left BIS earlier this year, said the rule could add “several thousand parties” to the Entity List. “It would be quite a dramatic expansion in compliance requirements and screening requirements for companies,” he said during a webinar this week hosted by supply chain risk intelligence firm Sayari.
Kevin Wolf, also an Akin lawyer, said a possible 50% rule, coupled with the recent “proliferation” of U.S. extraterritorial controls over certain foreign-made items and the expansion of U.S. end-use controls, means “companies need to fundamentally rethink how they do their screening.”
Export control screening “can't just be limited to names on a purchase order to a country,” Wolf said. “The automatic screening is a minimum. But there are other compliance program requirements -- in terms of identifying knowledge or suspicion or red flags about other parties -- that are critical.”
A BIS official confirmed in June that the agency was drafting a new rule to create a 50%-type rule for the Entity List, which could extend the list’s export license requirements to companies that are majority owned by entities on the list see (2506100047).
Borman said he’s expecting the change to be issued as an interim final rule as opposed to a proposed rule, which would mean a less extensive public consultation period. He noted the rule could have a delayed effective date along with a public comment period, “given the significant amount of revisions to compliance plans that would need to be made by companies.” Public comments received by BIS “might influence some revisions to the rule once it's published,” he said.
Borman also noted that the timing of the potential rule is “uncertain.” Although a 50% Entity List seems to be a "priority" for Trump administration officials, it could “complicate” ongoing trade talks with Beijing, he said.
“That may mean that its publication [and] implementation may be delayed for some time,” Borman said.
Eileen Albanese, an Akin trade adviser who also left BIS earlier this year, said companies should reevaluate which of their products may be subject to the Export Administration Regulations and how exports of those products may be captured by foreign direct product rule restrictions, especially those that intersect with the Entity List. “I really think it begins with knowing what your products are and whether or not they're subject” to the EAR, she said.
She also said companies should start “knowing” their customers if they don’t already. “Try to get ahead of the curve a little bit” to get “confidence that your customer is exactly who they say they are and that you're building a better relationship with them,” Albanese said. “So that way, when and if the 50% rule comes in, you have greater confidence that you have already done your due diligence and that the 50% rule will not be part of the transaction or the concern with your specific customer.”
Albanese also said companies should be prepared for an expansion of the BIS Military End-User List controls to capture a broader set of items beyond those that are currently controlled for anti-terrorism purposes. “There is some discussion that [the] small list of [Export Controlled Classification Numbers] controlled for anti-terrorism reasons will be expanded,” she said. “That could be a huge expansion of basically the commodities you will have to look at when you're sending to what could be a possible military end user.”
BIS may also decide to add all parties on its MEU List to the Entity List to “simplify things,” Borman said. “We don't know that for sure, but that's a possibility.” Under that scenario, Albanese said there's a “possibility” that BIS would put in place a license review policy of denial for all those entities as opposed to a review policy of presumption of denial.
Asked why BIS is considering adding a 50% rule and possibly expanding other controls, Borman said the administration wants to close any perceived export control loopholes.
“I think there's a view that the current legal requirements are too narrow and therefore susceptible to diversion and circumvention,” he said. “I think the vast majority of cases do not involve those parties. But the policy perspective in this administration, by those who are interested in this change, is that this is a gap or a loophole that needs to be closed."