New 50% Rule is Based on Ownership, Not Control, BIS Says in FAQs
The Bureau of Industry and Security's new 50% rule only applies to ownership, not the “control” that a parent company may have over an affiliate, the agency said in new FAQs. Other FAQs stress that the government’s Consolidated Screening List is no longer exhaustive, clarify how license exceptions may apply to unlisted affiliates, explain how BIS will determine whether a U.S. exporter has “knowledge” that a listed entity owns part of a non-listed foreign affiliate, and more.
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The rule, released and effective Sept. 29, extends BIS Entity List and Military End-User List restrictions -- including certain restrictions applied to sanctioned parties -- to affiliates majority-owned by entities on those lists (see 2509290017). In new guidance, BIS clarified that the rule “speaks only to ownership and not to control," adding that an entity that is controlled, but not owned by 50% or more, by one or more listed entities is “not considered to automatically meet the Affiliates Rule criteria.”
But the agency also said the End-User Review Committee, the group of interagency officials that makes Entity List decisions, can at any time add an affiliated entity to the Entity List, even if they’re under 50% ownership threshold. BIS also said foreign parties with “significant minority ownership” or other ties to a party on the Entity List, MEU List or subject to U.S. sanctions are a red flag.
“In this type of situation, additional due diligence is necessary, especially given the opaque ownership structures and limited access to accurate ownership data in certain jurisdictions,” BIS said.
Another FAQ suggests the Consolidated Screening List -- the government-run list of parties subject to export controls -- may lose some of its usefulness. Because the export restrictions now apply to many affiliates not on that list, BIS said the CSL “will no longer be considered an exhaustive listing of foreign entities subject to Entity List requirements.”
The list now 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,” BIS said. “Persons should screen proposed transactions against the CSL and separately screen for purposes of the Affiliates Rule.”
The agency said there are “various private sector screening resources” that may help exporters comply with the rule, including “vendors that conduct 50 percent ownership analysis.” BIS said it doesn’t endorse any particular company.
The agency said it may also follow the Office of Foreign Assets Control’s practice of “providing guidance regarding certain entities that may be subject to the Affiliates Rule to facilitate compliance.”
The FAQs also stressed that even though license exceptions are “generally prohibited” for listed entities, unlisted majority-owned affiliates will generally be eligible for the same license exception that applies to the listed entity. But BIS also said it may decide to restrict certain unlisted affiliates from being eligible for the listed entity’s license.
The agency said that decision will be “noted in the license requirements for the listed entity.” It also said when an unlisted entity is majority-owned multiple Entity List parties, and only one of those listed parties is eligible for a license exception, “that license exception will not apply to transactions involving the unlisted entity.”
Another FAQ expands on how BIS will treat situations in which an exporter had “knowledge” that a listed entity owns part of a non-listed affiliate and proceeded with the transaction without applying for a license. In that case, the exporter “may be determined to have had ‘knowledge’ that a violation” of the Export Administration Regulations “was about to occur,” BIS said.
“The exporter, reexporter, or transferor may be subject to enforcement action under the EAR, including increased penalties due to this ‘knowledge,’” the agency said.
If an exporter can’t determine the exact ownership percentage of a foreign affiliate, BIS said, the exporter “must” apply for a license if a license is required under the Entity List or MEU List for the listed owner.
Other FAQs say Entity List license requirements for a listed entity apply to all foreign branches or sales offices of the listed entity, “regardless of where the branches or sales offices are located;” outline guidance for applying for a license involving foreign affiliates of listed entities; stress that non-listed hospitals and medical centers are subject to the same restrictions as their Entity List owner; provide another example scenario for how the rule may apply in practice; and more.