Exporters Should Be Mindful of 'Control' Factor in BIS 50% Rule, Lawyer Says
Although the Bureau of Industry and Security in FAQs this week suggested its new 50% rule applies only to ownership and not the control that a parent company may have over an affiliate, that doesn’t mean U.S. exporters should ignore an Entity Listed company’s controlling influence over an unlisted company, said Mike Huneke, a trade lawyer with Morgan Lewis.
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The rule, which took effect Sept. 29, extends BIS Entity List and Military End-User List restrictions, along with certain restrictions applied to sanctioned parties, to affiliates majority-owned by entities on those lists (see 2509290017). In guidance published the next day, BIS clarified that the rule “speaks only to ownership and not to control,” adding that an entity controlled 50% or more by one or more listed entities is “not considered to automatically meet the Affiliates Rule criteria” (see 2509300049).
But Huneke noted that BIS still considers certain aspects of “control” to be a red flag that requires further due diligence. BIS has said if an exporter can’t calculate the exact ownership breakdown of a potential customer that is minority-owned by a listed party, the exporter needs to look at other factors besides ownership, such as “overlapping board membership or other indicia of control,” which could present a red flag. In those cases, the exporter may need to apply for a BIS license.
“I've seen a lot of people just say, ‘oh, control doesn't matter,' and then they have bad ideas and take that way too far and get creative in ways that I think will be dangerous for them” when BIS begins enforcing the rule, Huneke said. He said he can envision BIS becoming “really dissatisfied with a lot of people creatively structuring ownership in a way” to get below the 50% threshold when “there's still some kind of indirect control going on in the background.”
Huneke also noted that the "control" language isn't in the actual BIS rule -- it's only in the explanatory language in the rule's preamble and in the agency's FAQs. "I think people might overlook it," he said.
Aside from overlapping board membership, Huneke said other red flags that may signal “control” could be “shared executives” between the unlisted foreign company and the listed company, or whether there are loan agreements, contracts or joint ventures that relay a certain level of control to a listed entity. He also noted that, in some countries, control isn’t always exercised through specific shareholdings.
“Not every economy in the world is based on capitalistic shareholding structures and free markets and things like that,” he said. “There are many countries in the world where there is political control that, frankly, exists, even when there's not any shareholding at all.”
Huneke said he thinks BIS could issue more guidance in the coming months about what constitutes control.