On September 29, 2025, after some months of speculation, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) issued an interim final rule “Expansion of End-User Controls to Cover Affiliates of Certain Listed Entities” (the “IFR”). The IFR immediately introduces a new “Affiliates Rule,” essentially a “50% ownership flow-down rule,” into the Export Administration Regulations (“EAR”). This marks a major shift in US export control policy by automatically extending certain EAR end user licensing requirements and restrictions to unlisted foreign affiliates owned 50% or more by one or more entities on any of the EAR Entity List, Military End-User (“MEU”) List, or by Specially Designated Nationals (“SDNs”) blocked under certain OFAC sanctions programs identified in EAR § 744.8 of the EAR (“EAR SDN List Program”).
BIS has issued updated and expanded Entity List FAQs to reflect this change.
BIS’s stated objective in implementing the Affiliates Rule is to clamp down on diversionary schemes whereby designated parties create new, unlisted, foreign companies to evade the Entity List licensing requirements, and to reduce the associated administrative burden on BIS for issuing rules adding those new parties to the Entity List. The Affiliate Rule is modeled on the US Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) “50% Rule” for “deemed” SDNs, a point BIS discusses in detail in the preamble to the IFR. BIS also notes the increasing vital role of the Entity List in protecting US national security and foreign policy interests. BIS’s press release is available here.
Effective Date
The Affiliates Rule is effective immediately but contains a savings clause and a 60-day temporary general license (“TGL”) for certain limited transactions, as further detailed below.
Key Changes
Previously, the EAR end user restrictions applicable to parties designated on the Entity List, MEU List, or EAR SDN List Program did not extend automatically to legally distinct subsidiaries and affiliates of the listed party unless they were themselves specifically named on any of those lists. The Affiliates Rule replaces this “legally distinct” approach to align with OFAC’s “50% Rule.”
Specifically, foreign entities that are at least 50 percent owned, directly or indirectly, individually or in the aggregate, by one or more parties (1) listed on the BIS Entity List or unlisted entities subject to the Entity List restrictions based on their ownership, (2) listed on the MEU List in Supplement No. 7 to EAR Part 744 or unlisted entities subject to the MEU List restrictions based on ownership (not owned solely by unlisted ‘military end users’), or (3) who are blocked SDNs under an OFAC program listed in EAR § 744.8(a)(1) (listed SDNs or blocked under OFAC’s 50% Rule), are automatically subject to the same licensing requirements, restrictions, and license review policy as their designated parent entity(ies).
Note that BIS applies the same approach to calculation of indirect ownership interests for purposes of the Affiliates Rule as OFAC, i.e., you have to consider whether each intervening entity is caught under the Affiliates Rule before applying the flow-down to the next (indirect) level below—hence, the reference to both ownership by listed and unlisted entities subject to Entity List/MEU List restrictions based on their ownership. You should not apply a mathematical calculation that dilutes the final, indirect ownership interest. For example, in the following new FAQ 52, Company C is caught:
- Q.52: Company A (an Entity List party with a license requirement for all items subject to the EAR), owns 50% of Company B (an unlisted party), which owns 50% of Company C (an unlisted party). May I export items subject to the EAR to Company C?
- A.52: No, not unless you first obtain a license from BIS. Company B meets the criteria for the Affiliates Rule and is subject to the same restrictions as Company A (its only listed owner). Because Company C is 50% owned by Company B, it also meets the criteria for the Affiliates Rule and is subject to the same restrictions.
Ownership by a Combination of Different Restricted Parties—Rule of Most Restrictiveness
- If an entity is 50% or more owned in aggregate by a combination of designated parties subject to different restrictions across the Entity List, MEU List, or EAR SDN List Program, the most restrictive licensing requirement, license exception eligibility, and license review policy applies under the “rule of most restrictiveness.” For example, if a foreign entity is 2% owned by an Entity List entity and 48% owned by an MEU List party, the foreign entity is both caught under the Affiliate Rule on the basis of 50% aggregate ownership and is automatically subject to the stricter Entity List restrictions, regardless of the breakdown of relative ownership levels.
- If only one Entity List owner is eligible for a license exception, that license exception does not overcome the licensing requirements otherwise applicable to the unlisted Entity List party based on ownership of the other Entity List parties that are not eligible for that license exception.
Foreign Direct Product Rule Implications
- The new Affiliate Rule also applies in the context of the end user scope of the Entity List FDP rules and the Russia/Belarus-Military End User and Procurement FDP rule in EAR §§ 734.9(e) and (g), respectively.
- The rule of most restrictiveness applies in the FDP rule context too; for example, even if only one owner is an Entity List party subject to the expansive FDP Entity List rules in EAR § 734.9(e), those FDP Entity List requirements will apply to the unlisted foreign affiliate entity, even if the other covered owners have greater ownership interests and are not similarly subject to those FDP end user scope rules. Also, if an unlisted foreign entity is 10% owned by Footnote 1 FDP Entity List party A and 40% owned by Footnote 3 FDP Entity List party B, both the FDP Entity List Footnote 1 and 3 requirements would flow-down and apply to the unlisted entity.
End Users Not Covered
- The Affiliates Rule only applies to foreign entities; it does not apply to US entities 50% or more owned by designated parties.
- The Affiliates Rule also does not apply to foreign affiliates owned 50% or more by one or more entities operating at a listed address on the Entity List if the entities operating at that address are not specifically identified on the Entity List by name, i.e., “address only” Entity Listings do not flow down automatically. BIS gives the example of entities located at different addresses but owned by a parent company registered at a shared corporate services address on the Entity List.
- We also note that BIS is not adopting the Affiliates rule for certain other restricted party lists, including the Unverified List and the Denied Persons List.
Compliance Expectations
The IFR introduces new compliance considerations and responsibilities, including the following:
- Entities with significant minority ownership (below 50%) by or significant ties to—e.g., overlapping board membership or other indicia of control—designated parties are considered a “red flag” for potential diversion risk to the designated entity. In that case, additional due diligence is required.
- BIS has added new Red Flag No. 29 to Supplement No. 3 to Part 732 of the EAR, imposing an affirmative duty on parties to either determine the percentage of ownership of designated entities in cases where such parties have “knowledge” that a foreign entity has one or more owners, who are designated on the Entity List or MEU List before proceeding with the transaction. If parties are unable to determine the percentage of ownership, the parties must apply for a license from BIS under the Entity List or MEU List based on the requirements of the designated owner(s), unless a license exception is available. In such cases, the applicant must explain the due diligence conducted and why it was not conclusive as to the level of ownership.
- The Affiliates Rule is enforceable on a strict liability basis, meaning exporters may be held liable even without actual knowledge of a designated or non-designated—under the Affiliates Rule—party’s involvement. Exporters therefore have an affirmative responsibility to know the ownership of foreign parties to a transaction and should exercise due diligence as part of their risk-based compliance program. In that regard, it may be worth noting that the Consolidated Screening List (“CSL”) will no longer be exhaustive. Affiliates covered under the new rule may not appear on the CSL, so exporters are encouraged to use third-party screening tools capable of conducting ownership analysis consistent with OFAC and BIS standards.
Savings Clause and Temporary General License
While the Affiliates Rule is effective immediately as of September 29, 2025, shipments of items where a license is now required under the Affiliates Rule may proceed to the final foreign destination if the items were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on September 30, 2025 pursuant to an actual order to or within that final foreign destination. The export, reexport, or in-country transfer has to be completed no later than October 29, 2025.
To ease the transition, BIS has also issued a TGL valid for 60 days (expiring on December 1, 2025). The TGL is quite limited and authorizes the following exports, reexports, or transfers (in-country) of items subject to the EAR where a non-listed foreign entity subject to the Affiliates Rule is a party to the transaction:
- to or within any destination in Country Group A:5 or A:6; or
- to or within any destination, other than Country Group E:1 or E:2 (currently Cuba, Iran, North Korea, and Syria), where the unlisted party is both a foreign affiliate of a listed entity 50% or more owned by one or more Entity List or MEU List parties and is a joint venture with a non-listed entity headquartered in the United States or in any jurisdiction in Country Group A:5 or A:6 (e.g., a French joint venture 50% or more owned by an Entity List party).
Note that the TGL is not available for transactions involving parties subject to the Affiliates Rule due to ownership by SDN parties under Part 744.8 of the EAR.
Affiliates Rule Guidelines and FAQs
BIS has added a Guidelines for Applying the Affiliates Rule to Entity List Entries and Other End-User Controls to a new Supplement No. 8 to Part 744 of the EAR.
BIS has also updated the Entity List FAQs to add 12 new FAQs under Q.41–Q.53 specific to the Affiliates Rule. Key FAQs are summarized below:
- Q.41—Clarifies parties must obtain a BIS license if unable to determine percentage of designated entity ownership under Red Flag 29. Q.41 confirms that parties who have “knowledge” that a foreign entity party to the transaction has one or more owners designated on the Entity List or the MEU, but who are unable to satisfy their affirmative duty under Red Flag 29 to determine the percentage ownership of those designated entities, must obtain a license from BIS if required under the applicable Entity List or MEU List restrictions, unless a license exception is available.
- Q.43—Affiliates Rule does not operate on control, only ownership. Like OFAC’s 50% Rule, BIS’ Affiliates Rule only operates on the basis of ownership of designated entities, not control. However, the End-User Review Committee could designate entities found to be controlled by designated entities to the Entity List or MEU List.
- Q.44—Clarifying the Rule of Most Restrictiveness. Q.44 clarifies that an entity owned 50 percent or more, directly or indirectly, by multiple entities subject to EAR license requirements under the Entity List, MEU List, or SDN-related restrictions in EAR § 744.8 is subject to the most restrictive license requirements, license exception eligibility, and license review policy applicable to one or more of its owners under the EAR. Q.44 also clarifies that the operation of the Affiliates Rule aggregates ownership by designated entities across all three lists, even if the ownership by parties designated on one of these lists alone is less than 50%. Accordingly, a party owned 25% by an Entity List party and 25% by an MEU List party is subject to the Affiliates Rule and is subject to the most restrictive license requirements, license exception eligibility, and license review policy applicable to the Entity List owner and MEU List owner.
- Q.49—Provides guidance on how to apply for licenses. Q.49 provides guidance on how to apply for licenses involving foreign affiliates of designated parties.
Exclusion Requests
The End-User Review Committee may grant case-by-case exceptions to the Affiliates rule if it determines that a foreign affiliate does not pose a significant risk of diversion. Entities seeking exclusion may submit a written request to the End-User Review Committee to modify the relevant Entity List or MEU List entry of its owner(s). Any exceptions will be noted in the relevant Entity List or MEU List entry.
Comments
Comments to the IFR must be received by BIS no later than October 29, 2025. BIS welcomes comments, in particular, on whether the 50% threshold should be lower and whether the Affiliates Rule should cover other EAR restricted end users. Please contact our Trade team for more information.
