Commerce Department expands scope of Entity List and MEU List to apply to 50%-owned subsidiaries

As anticipated, the US Department of Commerce Bureau of Industry and Security (BIS) issued an interim final rule to expand certain end-user restrictions under the Export Administration Regulations (EAR) to entities that are 50% or more owned by designated entities (Affiliates Rule or Rule). The Affiliates Rule is now aligned with the so-called “50% Rule,” the longstanding test used by the Office of Foreign Assets Control (OFAC) in applying sanctions designations on the Specially Designated Nationals and Blocked Persons (SDN) List and other US Treasury Department sanctions lists.

Specifically, in order to address diversion and circumvention concerns, the Affiliates Rule will automatically apply Entity List, MEU List, and EAR-related SDN List restrictions and requirements to any foreign entity that is owned, directly or indirectly, individually or in the aggregate, 50% or more by an entity identified on the Entity List, MEU List, or SDN List (or unlisted entity subject to such restrictions and requirements based upon its ownership). Prior to the Affiliates Rule, BIS applied a “legally distinct standard,” through which Entity List restrictions and requirements extended to the identified entity as well as any related foreign entity located in the same country that is not legally distinct from the listed entity. It did not extend to affiliates and/or subsidiaries of that identified entity that were legally distinct from the identified entity. Under the prior standard, for the affiliate or subsidiary to be subject to Entity List restrictions and requirements, that affiliate or subsidiary needed to be separately identified on the Entity List.

The Affiliates Rule applies to all entities already identified on the Entity List and MEU List as well as any future designations. The Entity List identifies parties reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security or foreign policy of the United States. Exports, reexports, or transfers of hardware, technology, and software subject to US export jurisdiction to parties identified on the Entity List, even items designated as “EAR99,” are subject to export licensing requirements and either a general licensing policy of denial or a presumption of denial. The MEU List is a non-exhaustive list of foreign entities that the US government considers military end users and to which exports, reexports, and transfers present an unacceptable risk of use in or diversion to a military end use. It applies to entities in Belarus, Burma, Cambodia, China, Nicaragua, Russia, or Venezuela, or for a Belarusian, Burmese, Cambodian, Chinese, Nicaraguan, Russian, or Venezuelan military end user wherever located. Generally, exports, reexports, or transfers of specified items to an entity on the MEU List require a license and are reviewed with a presumption of denial. 

Below are examples of how the BIS Affiliates Rule will apply in practice: 

• Example 1: Company A is identified on the Entity List. Company B is 53% owned by Company A but not identified on the Entity List. The Affiliates Rule applies and extends Entity List restrictions and requirements to Company B. 
• Example 2: Company A is identified on the MEU List. Company B is 75% owned by Company A but not identified on the MEU List. Company C is 100% owned by Company B. The Affiliates Rule applies and extends the MEU List restrictions and requirements to Company B and Company C. 

Exclusions under the Rule

The End-User Review Committee, which is responsible for designating entities on the Entity List and MEU List, may provide for exceptions to the Affiliates Rule on a case-by-case basis if it determines that foreign affiliates owned by a particular listed entity do not pose a significant risk of being or becoming involved in diversion to the listed entity. Such exclusions will be identified in the relevant Entity List or MEU List entry. Foreign entities that are subject to restrictions pursuant to the Affiliates Rule may request an exclusion by making a request to modify the relevant entry or entries. 

Temporary General License 

BIS is also providing a temporary general license (TGL) that authorizes exports, reexports, and transfers (in-country) involving certain eligible non-listed entities that are owned 50% or more by one or more listed entities on the Entity List or MEU List, or by unlisted entities that are subject to Entity List or MEU restrictions and requirements based upon their ownership. The TGL expires on November 29, 2025. 

New Affiliates Rule Red Flag 

In connection with the new Rule, BIS also provides notice that foreign parties with significant minority ownership by, or other significant tie to (e.g., overlapping board membership or other indicia of control), an Entity List entity, MEU List entity, or an SDN List entity present a potential diversion risk to the identified entity. The Rule creates a new “Reg Flag 29” that provides that if an exporter, reexporter, or transferor cannot determine the ownership percentage of a foreign entity that is owned by an entity on the Entity List or the MEU List, it must resolve the Red Flag prior to proceeding with any exports, reexports, or transfers (in-country) to the foreign entity. Such resolution could involve submitting a license application to BIS or identifying an available license exception based on the restrictions applicable to the party of concer. 

Exporters should ensure their risk-based export control compliance programs are updated to account for and consider expanded due diligence under the Affiliates Rule. Exporters, reexporters, and transferors must now conduct due diligence to determine whether a party to a transaction is owned by an entity on the Entity List or MEU List for all international transfers of goods, software and technology.

In light of these expanded requirements, multinational companies and exporters should take proactive steps to strengthen their compliance frameworks. This includes implementing enhanced ownership screening protocols that go beyond mere list screening to ensure that all counterparties, including indirect owners and affiliates, are vetted for connections to Entity List, MEU List, or SDN List parties. Companies should leverage technology and third-party data sources to map complex ownership structures, regularly update their risk assessments, and train relevant personnel on the nuances of the Affiliates Rule. Additionally, exporters should establish clear escalation procedures for unresolved ownership questions and document their due diligence efforts to demonstrate good faith compliance in the event of regulatory scrutiny. By adopting these measures, organizations can better manage diversion risks and maintain strict compliance with evolving US export controls and other regulations.

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