BIS Draft Rule Would Apply 50% Rule to Entity List, MEU List; Includes TGL
The Bureau of Industry and Security has drafted and is preparing to soon publish an interim final rule that will introduce a 50% rule for parties on the Entity List and Military End-User List, according to a copy of the rule seen by Export Compliance Daily. The rule would impose the same export license requirements as the parent company for any affiliate owned 50% or more by an entity on those two lists, and it includes a 60-day temporary general license to authorize certain transactions with some non-listed entities before the new restrictions apply.
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The rule is expected to take effect on publication in the Federal Register, and could be issued as soon as this week.
A BIS spokesperson didn’t immediately respond to request for comment.
The text of the draft rule, which hasn’t yet been released and hasn’t been previously reported, says if exporters can’t determine the ownership percentage of a foreign entity owned by a party on the Entity List or MEU List, the exporter must resolve that “red flag” or obtain a BIS license before moving forward with the export, reexport or transfer, unless a license exception is available. If a non-listed foreign entity is owned 50% by more than one party on those lists, “the most restrictive of those Entity Lists license requirements apply,” BIS said.
If, after receiving a license application, BIS is able to determine that the foreign entity is not owned 50% or more by a listed party, BIS said it will return the license to the applicant “without action” and inform the applicant that a license isn’t required. “In such cases BIS may consider issuing guidance, as appropriate, in the form of a frequently asked question on the BIS website to advise other exporters of such determination,” the rule says.
The rule also said affiliates of listed parties can ask BIS to be exempted from the 50% rule restrictions. In those cases, BIS said it may modify a listing to "exclude" certain affiliates.
The rule says BIS is mirroring the approach of the 50% rule used by the Office of Foreign Assets Control. “Adopting the same standard that exporters, reexporters and transferors have already been using in their OFAC compliance programs will likely ease the burden in adopting the new standard for Entity List compliance as compared with a distinct standard that applies a lower ownership threshold,” BIS said.
But the agency also acknowledged that the new rule, which it calls the “Affiliates Rule,” may “require additional analysis” and compliance resources by the private sector. “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,” the rule says.
The agency also said it’s “concerned” that its current approach to the Entity List “can enable diversionary schemes, such as the creation of new foreign companies to evade Entity List restrictions. Creations of such companies may allow listed entities to deceive exporters, reexporters, and transferors into the provision of items in violation of the Entity List restrictions that apply to the listed entities.”
The agency added that its “old approach” required it to “expend substantial efforts to address the tactics that listed entities would adopt to circumvent their placement” on the Entity List, such as creating front companies under different names. “Because of such 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.”
The rule also includes compliance guidance and several example scenarios to show how the rule might apply.