In response to national security concerns regarding shipments of export-controlled items diverted to entities on the Entity List and other U.S. restricted parties lists, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) has amended the Export Administration Regulations (EAR) to implement a new standard that BIS refers to as the "Affiliates rule." The rule extends U.S. export control restrictions under the EAR to entities owned 50 percent or more, whether directly or indirectly, individually or in the aggregate, by one or more entities designated to the Entity List or the Military End User List or to persons otherwise subject to export controls under section 744.8 of the EAR, i.e., most persons designated to the Specially Designated Nationals and Blocked Persons (SDN) List. The new rule became effective on September 29, 2025, although a temporary general license will permit certain transactions until December 1, 2025.
The Affiliates rule is a departure from BIS's "legally distinct" standard, which had limited restrictions for the Entity List and other BIS restricted parties lists to only listed entities and any branch or affiliate in the same country that was not legally distinct from the listed entities. With its newly expanded scope, the Affiliates rule now aligns with the long-standing practice of the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC), under its 50 Percent Rule, which extends sanctions restrictions beyond SDNs and SSI entities to also apply to subsidiaries, joint ventures, and affiliates owned 50%+ by SDNs or SSI entities.
With the change, U.S. persons and non-U.S. persons involved in the export, reexport, or transfer (in-country) of items subject to the EAR must stay up to date with their increasingly strict trade compliance obligations and ensure that their Know Your Customer (KYC) protocols properly verify the ownership of their transaction counterparties to avoid violations of the Affiliates rule.
Below we highlight key points from BIS's new rule.
- Applicability of the Affiliates Rule
- The expanded rule applies to BIS's Entity List, Military End User List, and section 744.8 of the EAR (export controls for most persons designated on OFAC's SDN List). It also applies to the Foreign Direct Product (FDP) Rule and the Russia/Belarus-Military End User and Procurement FDP Rule.
- The rule does not apply to other BIS restricted parties lists or provisions of the EAR, such as persons designated on the Unverified List or subject to Denial Orders.
- Foreign entities that are owned by entities operating at an address listed on the Entity List but which are not themselves designated to the Entity List are not captured by the Affiliates rule.
- Under BIS's "rule of most restrictiveness," if a foreign entity's owner(s) is subject to more than one license requirement under the Entity List, Military End User List, or SDN List listed in 744.8(a)(1), the most restrictive license requirements, license exception eligibility, and license review policy apply. If a foreign entity's owners meet the Affiliates rule and at least one of those owners is subject to an FDP requirement, the foreign entity is also subject to the applicable FDP requirements.
- Obligations to Verify Ownership: Exporters, reexporters, and transferors should exercise reasonable due diligence and adopt a risk-based compliance approach, including by verifying the ownership of foreign customers and transaction parties. If the exporter, exporter, or transferor, through its due diligence, becomes aware that (i) a foreign entity has one or more owners listed on the Entity List, Military End User List, or SDN List, or (ii) the owners are unlisted entities subject to license requirements or export controls based on their ownership, there is an affirmative duty to determine the percentage of ownership and whether the Affiliates rule applies. If the percentage of ownership cannot be verified, BIS rules require the exporter, reexporter, or transferor to resolve the red flag or apply for a license from BIS prior to proceeding with the transaction, unless a license exception is available.
- New License Application for Affiliates Rule: A unique license application form will be available for requesting BIS authorization for a transaction involving a foreign entity subject to the Affiliates rule. The application will require an explanation on the ownership percentages identified for listed owners and how those ownership percentages were calculated. In cases where the ownership percentages cannot be determined, a description of what due diligence was conducted for the listed owners and why the percentages cannot be determined must be provided.
- Request to Modify or Remove Entity List or Military End User List: Foreign entities that are owned 50 percent or more by owner(s) designated to the Entity List, subject to entity license requirements or other restrictions based upon their ownership, may request the entry on the Entity List for the owner be removed or modified to exclude the requester. The same provision for requesting modification or removal is also available for foreign entities owned 50 percent or more by entities designated to the Military End User List or otherwise subject to the Military End User List restrictions based upon their ownership.
- Temporary General License: A Temporary General License will be available until December 1, 2025, according to section (g) of Supplement No. 1 to Part 736. The Temporary General License will authorize certain transactions with such foreign entities subject to the Affiliates rule. Exporters, reexporters, and transferors using the Temporary General License must adhere to all applicable recordkeeping requirements.
Venable's International Trade Group is experienced with supporting companies' compliance and due diligence efforts around U.S. government restricted parties lists, including the BIS Entity List, the Military End User List, and more. If you have questions about the impact of the new Affiliates rule on your company's compliance program or practices, please reach out to the authors for guidance.