U.S. Expands Export Controls to Cover Affiliates of Restricted Entities

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has introduced a major change to export control rules, designed to close loopholes that have allowed restricted companies to bypass sanctions. The Interim Final Rule (IFR) expands restrictions under the Export Administration Regulations (EAR) to include foreign affiliates owned by entities already on U.S. watchlists.

Why This Rule Matters

Until now, BIS rules only applied to the exact entities named on the Entity List or Military End-User (MEU) List. This meant that companies could create legally distinct affiliates in other countries to continue business, undermining U.S. controls.

The new rule targets these circumvention tactics by:

• Extending restrictions to any company that is 50% or more owned, directly or indirectly, by a listed entity.
• Applying this standard consistently across the Entity List, the MEU List, and certain parties sanctioned by the Treasury Department’s Office of Foreign Assets Control (OFAC).
• Introducing stronger compliance expectations for exporters, requiring them to investigate corporate ownership structures.

Key Features of the New “Affiliates Rule”

• 50% Ownership Standard:
  • Any foreign affiliate at least 50% owned by a listed entity is automatically restricted.
  • If ownership is split among multiple listed entities, the affiliate is subject to the most restrictive requirements of its owners.
     
• Alignment with Treasury Sanctions:
  • The BIS approach mirrors OFAC’s “50 Percent Rule,” which has long applied to sanctions compliance.
  • This reduces regulatory complexity and ensures consistency across U.S. economic restrictions.
     
• Due Diligence & Red Flags:
  • Exporters, reexporters, and transferors must confirm ownership structures before transactions.
  • A new Red Flag 29 requires parties to resolve uncertain ownership stakes. If they cannot, they must apply for a BIS license.
     
• Temporary General License (TGL):
  • Allows limited transactions with non-listed affiliates of listed entities for 60 days after the rule takes effect.
  • Applies mainly to companies in U.S.-aligned countries (Groups A:5 and A:6).
     

Compliance Implications for Businesses

The Affiliates Rule places more responsibility on businesses to ensure they are not indirectly supplying restricted entities. Key takeaways:

• Screening Lists Are No Longer Enough
  • The Consolidated Screening List will not capture all restricted entities. Companies must go beyond list-checking to investigate ownership.
     
• Stricter Liability
  • Companies can face penalties even without intent if they unknowingly transact with a restricted affiliate.
  • This enforces a “strict liability” approach similar to OFAC rules.
     
• Increased Licensing Requirements
  • BIS expects around 245 additional license applications annually under this rule.
  • Companies dealing with complex supply chains, joint ventures, or opaque corporate structures should expect more compliance work.

Final Takeaway

This rule is a significant tightening of U.S. export controls. Businesses must now look beyond names on a list and actively trace ownership structures to avoid violations. The Affiliates Rule represents not just a regulatory update, but a broader shift toward deeper, risk-based compliance in global trade.