LawFlash

BIS Adopts ‘50% Rule’: Key Takeaways for Trade Compliance

September 30, 2025

The Affiliates Rule automatically extends the US Department of Commerce’s Entity List and Military End-User (MEU) List to entities owned 50% or more by entities on either list.

On September 29, 2025, the US Department of Commerce’s Bureau of Industry & Security (BIS) adopted its long-awaited Affiliates Rule as an interim final rule with immediate effect. The Affiliates Rule applies BIS’s Entity List and MEU List requirements to entities that are owned 50% or more by listed entities, whether directly or indirectly, individually or in the aggregate. [1]

ABANDONMENT OF THE ‘LEGALLY DISTINCT’ STANDARD

In the Affiliates Rule, BIS repeatedly expresses concern over diversion and the insufficiency of prior standards that might have been misunderstood to elevate form over substance, particularly the “legally distinct” standard that BIS previously used “for applying restrictions to subsidiaries and other foreign affiliates of entities identified on the Entity List.” [2]

Now, “BIS is concerned that the old approach can enable diversionary schemes, such as the creation of new foreign companies to evade Entity List restrictions. Creation of such companies may allow listed entities to deceive exporters, reexporters, and transferors into providing items in violation of the Entity List restrictions that apply to the listed entities.” [3]

DIRECT OR INDIRECT, INDIVIDUALLY OR IN THE AGGREGATE

The Affiliates Rule broadly evaluates “ownership” based not only on direct ownership stakes but also indirect holdings. In other words, BIS will “look through”—and expects companies subject to US export controls to look through—corporate structures to find potentially listed entities.

The Affiliates Rule additionally broadly evaluates ownership not only based on the individual ownership stake that a particular listed company might hold but also aggregates the ownership of any and all entities listed not only on either the Entity List or the MEU List, but also entities otherwise designated on the Specially Designated Nationals and Blocked Persons list (SDN List) maintained by the Department of the Treasury’s Office of Foreign Assets Control (OFAC), consistent with the catch-all provision that automatically applies a license requirement to entities designated under certain US sanctions regimes.

Moreover, pursuant to the “rule of most restrictiveness,” where the 50% threshold is met by several parent entities subject to differing Entity List or MEU license requirements, BIS emphasizes that the most restrictive provisions flow down to the non-listed subsidiary entity, even if the listed owner subject to those restrictions is a minority owner.

The takeaway is that the Affiliates Rule seeks to dissuade organizations from thinking that corporate reorganization can shield affiliates of listed entities from the new rule’s impact, or that in some way artificially diluting the ownership interests of listed entities at the level of the relevant affiliate is a way to stay clear of the new rule’s reach.

RELEVANCE OF ‘KNOWLEDGE’ AND REQUIREMENT FOR RISK-BASED DUE DILIGENCE

BIS reiterates that while the Entity List and MEU List end-user restrictions are strict-liability catch-all provisions, “knowledge”—defined to include “an awareness of a high probability”—is nonetheless “a factor that is considered when determining penalty calculations for a violation of the EAR.” [4]

The interim final rule accordingly amends the “Know Your Customer” Guidance and Red Flags under the US Export Administration Regulations (EAR) to state clearly that exporters, reexporters, and in-country transferors “have an affirmative responsibility to know the ownership of the foreign companies that are parties to a transaction” [5] and states further in a “Compliance Aid” as part of the Affiliates Rule that “[e]xporters, reexporters, and transferors must adopt a risk-based compliance program to assist them in complying with these requirements.” [6]

While this call to adopt a risk-based compliance program could be burdensome for companies that have yet to adopt one, especially given the Affiliate Rule’s express caution that “the Consolidated Screening List (‘CSL’) will no longer comprise an exhaustive listing of foreign entities subject to Entity List license requirements,” [7] such risk-based compliance programs are a concept around which companies subject to US export controls can make and defend the inherently subjective judgments they will need to make about where they conduct additional enhanced due diligence into counterparties and “how far they go” up the corporate ownership ladder when they do.

Risk-based compliance is not an invitation or excuse for deliberate ignorance or willful blindness but, assuming mistakes will be made in the high-volume, high-pressure reality of international trade, risk-based compliance programs, when properly designed and implemented, are at least strong mitigating evidence in terms of the resulting consequences.

DUE DILIGENCE EXPECTATIONS EVEN FOR ‘SIGNIFICANT’ MINORITY OWNERSHIP BY LISTED ENTITIES

In the Affiliates Rule, “BIS is also informing the public that foreign parties with significant minority ownership by, or other significant ties to (e.g., overlapping board membership or other indicia of control), an Entity List entity, an MEU List entity, or an SDN . . . present a Red Flag of potential diversion risk to the listed entity.” BIS continues that, “[i]n this type of situation, additional due diligence is necessary, especially given the opaque ownership structures and limited access to accurate ownership data in certain jurisdictions.” [8]

In other words, dropping the ownership of a listed entity or the aggregated ownership of more than one listed entity below 50% does not necessarily satisfy the US national security objectives behind the Affiliates Rule. And where the affected ownership level is below 50% but the remaining ownership is not entirely known, additional due diligence as prescribed under new Red Flag 29 is expected before an exporter, reexporter, or transferor can be certain that the Affiliate Rule would not apply. Otherwise, the exporter, reexporter, or transferor must obtain a license from BIS or identify an applicable license exception before proceeding.

BIS has also introduced Supplement No. 8 to Part 744 of the EAR to explain how the new Affiliates Rule should be applied. The guidance draws from OFAC’s 2014 approach but is adapted specifically for export controls, with a focus on identifying foreign affiliates of listed entities that may be used to divert US-controlled items.

(VERY) LIMITED TEMPORARY GENERAL LICENSE

BIS announced a very limited temporary general license (TGL) available for 60 days from publication (i.e., expires on December 1, 2025).

The TGL is available generally for exports, reexports, or transfers to or within Country Group A:5 or A:6. It is under no circumstances available for exports, reexports, or transfers “to or within” a country in Country Group E:1 or E:2 (i.e., Cuba, Iran, North Korea, or Syria). [9]

For all other exports, reexports, or transfers—including, for example, to Country Group D:5 countries including China or even to Country Group B countries including Malaysia or Singapore—the TGL is only available where the 50% or more entity is “a joint venture with a non-listed entity headquartered in the United States or [a country in] Country Group A:5 or A:6 that is not [itself] owned 50 percent or more, directly or indirectly, individually or in [the] aggregate, by one or more listed entities on the Entity List or the MEU List or entities subject to [either Lists’] restricts based on [that entity’s] ownership.” [10]

The limitations in scope and time of the TGL may force certain US companies to seek export licenses on an expedited basis to avoid noncompliance. For example, a non-listed Chinese subsidiary of an entity-listed company that is not in a joint venture with a Western company will not be eligible for the TGL.

Exports to that non-listed Chinese subsidiary now require an export license.

The bottom line is that, for entities caught by the new Affiliate Rule, this TGL is likely to be just as, if not more, limited in applicability as it is already limited in time. Additionally, BIS reminds parties who might take advantage of this TGL that they must also comply with all other applicable provisions of the EAR.

UNIQUE LICENSE APPLICATION AND SUBMISSION REQUIREMENTS

The Affiliates Rule imposes unique license application and submission requirements for the export, reexport, or transfer to entities affiliated with listed entities. [11] The same process applies to entities known to be 50% or more owned by listed entities and entities as to which the ownership percentage cannot be determined. Applicants may request modification of the relevant entry at any time on or after September 29, 2025.

The Affiliates Rule provides some guidance on completing the license application in these circumstances:

  • The application “must specify the names of the listed party or parties that own an aggregate 50 percent or more, directly or indirectly, individually or in aggregate, of that entity(ies) listed on the license application, including identifying the percentage of ownership by listed parties and identifying the method that the applicant used to make that determination.”
  • If “the exporter, reexporter, or transferor cannot determine the ownership percentage of a foreign entity that is an entity owned by one or more listed entities on the Entity List or ‘military end users’ on the MEU List, the license application must”
    • “specify the names of the listed party or parties that own that entity”; and
    • “explain the due diligence conducted to determine the percentage of ownership, including providing an explanation for why percentage of ownership was not able to be determined.” [12]

Companies seeking such licenses will accordingly need to conduct, and be able to document and present, risk-based due diligence before determining that the ownership percentage cannot be known. We expect that, despite the Affiliates Rule being silent on this point, in practice companies will be required to show what would essentially be “best efforts” at obtaining ownership information as part of BIS’s review of the license application.

The Affiliates Rule does not indicate whether such license applications will be considered under a presumption of denial.

Companies applying for such licenses for companies in D:5 countries [13] should also be mindful of the recently enacted Maintaining American Superiority by Improving Export Control Transparency Act, signed into law this August, [14]which will require BIS to report to the US Congress regarding any license granted for exports to such countries to entities on either the Entity List or MEU List.

Accordingly, companies should be prepared (if the license application might be politically sensitive in the eyes of Congress) to defend the due diligence against congressional and media scrutiny.

THE BROADER PICTURE

The Affiliates Rule comes at a watershed moment in US export controls enforcement, shortly after a corporate resolution this July for $140 million that turned not on the company’s actual knowledge of violations but merely on the company’s “reason to know, including [an] awareness of a high probability” of violations of US export controls catch-all provisions.

Exporters, reexporters, and transferors are responsible for compliance with the Affiliates Rule and can be held liable for unauthorized exports, reexports, or transfers (in-country) on a strict liability basis. The rule’s reference to and expectation for risk-based compliance programs is yet another data point in the value proposition that trade compliance professionals can make to stakeholders in their organizations for greater investments in export controls compliance.

HOW WE CAN HELP

Morgan Lewis’s international trade and national security practice can assist clients to:

  • Communicate to business stakeholders quickly and effectively on the new rule’s scope and impact;
  • Understand and meet the new rule’s expectations for risk-based due diligence and how to design and implement same;
  • Assess the potential availability, and limitations, of the TGL that could delay application of the rule until December 2, 2025;
  • Understand how the new rule fits into recent US export controls compliance and enforcement trends more broadly; and
  • Prepare comments (due by October 29, 2025) to advocate for potential changes or seek clarifications.

Our international trade and national security practice is at the forefront of practical, risk-based solutions to US export controls compliance and compliance with other US national security laws.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:

Authors
Michael H. Huneke (Washington, DC)
Katelyn M. Hilferty (Washington, DC)
Casey Weaver (Houston)
JiaZhen Guo (Washington, DC)

[1] US Dep’t of Comm., Bureau of Indus. & Security, RIN 0694-AK11 (Docket No. 250509-0083), Interim Final Rule, “Expansion of End-User Controls to Cover Affiliates of Certain Listed Entities” (Sept. 29, 2025) (Affiliates Rule) (scheduled to be published in the US Federal Register on Sept. 30, 2025).

[2] Affiliates Rule at 4.

[3] Id.

[4] Id. at 28 (part of Table 1).

[5] Id. at 33 (amending Supplement No. 3 to Title 15, Code of Federal Regulations, Part 732).

[6] Id. at 29 (part of Table 1).

[7] Id. at 6.

[8] Id. at 8.

[9] See Supplement No. 1 to Part 740 of the EAR (“Country Groups”).

[10] Affiliates Rule at 35–37.

[11] Id. at 45–46.

[12] Id. at 46.

[13] See Supplement No. 1 to Part 740 of the EAR (Afghanistan, Belarus, Burma, Cambodia, Central African Republic, China, Congo (Democratic Republic of), Cuba, Eritrea, Haiti, Iran, Iraq, North Korea, Lebanon, Libya, Nicaragua, Russia, Somalia, South Sudan, Sudan, Syria, Venezuela, and Zimbabwe) (as of Sept. 29, 2025).

[14] Pub. L. 119-34.