Challenges await business – and BIS – as 50% rule bites

The US Department of Commerce’s Bureau of Industry and Security (‘BIS’) has published its long-anticipated ‘50%’ rule, or ‘affiliate entities’ rule under which ‘any entity that is at least 50 percent owned by one or more entities on the Entity List or the Military End-User (MEU) List will itself automatically be subject to Entity List/MEU List restrictions.’

BIS said that the rule ‘closes a significant loophole in restricted party lists – strengthening the export control regime overall,’ and said that ‘significant minority ownership by an Entity List/MEU List company is a red flag that triggers additional due diligence requirements for exporters’.

Previously, it said, ‘the Entity List and MEU List completely excluded all entities that were not specifically named on the Entity List/MEU List – even if there were extensive corporate and financial ties with listed entities,’ undermining American national security and foreign policy interests, according to Jeffrey I Kessler, Under Secretary of Commerce for Industry and Security.

Compliance professionals anticipate a significant ramping up of due diligence by companies in response to the rule. Kit Conklin, a former US Treasury Department official who now is the global head of risk and compliance at Exiger, a supply-chain screening company, told WorldECR‘s sister publication Risk Journal,

‘I don’t believe that most have a sense of how many thousands and thousands and thousands of new entities will be subject to export-control restrictions. It’s every industry vertical that you can imagine,’ adding, ‘It’s going to impact everything from civil aviation to the auto sector.’

Former BIS assistant secretary Mattew Axelrod described the rule as shifting the burden of screening for potentially dangerous counterparties ‘from the government to companies’.

‘It’s on the company to try to figure it out rather than throwing their hands up and saying “Well, we don’t know so it’s OK to ship,”’ Axelrod said.

Dawson Law, a former US Treasury and OFAC official (and founder of Conseil Global Advisors) told WorldECR that while moving from a name-based to an ownership-based system makes the controls more effective, ‘The challenge for industry will be implementing this rule in practice. Ownership and control data in China is often opaque or incomplete, which makes it difficult for companies to reliably determine whether a counterparty is subject to restrictions.’

He added that whether the legislation is actually able to achieve its goals ‘will depend on BIS’s ability to process a surge of license applications and enforce compliance’.

‘BIS is already stretched thin, and success will require additional resources and close coordination with other agencies,’ he said.

Commerce said the rule will ‘generally’ go into effect 60 days after it is published in the Federal Register. Interested parties have one month to submit comments on the rule.

Trade compliance professionals have known for months some version of the rule could be coming. US financial sanctions have long had their own version of the 50% rule to stop financial flows to problematic entities, and officials have periodically pushed for expanding that logic to export controls. 

Landon Heid, Trump’s choice to lead export-controls enforcement at Commerce until his nomination was pulled earlier this month, hinted at such a rule during his confirmation hearing in April. Risk Journal previously reported that a draft of the rule has been under consideration since at least May. 

But the hints only gave companies a rough idea of what the rule could look like, said former Commerce official Opher Shweiki, now a partner at law firm Akin Gump.

‘Until the rule was actually drafted, it was difficult for companies to put concrete steps in place,’ Shweiki said. ‘Companies may have to find entirely new supply sources now. That’s not an easy thing to do on the spot.’  

Shweiki said the rule could make companies more risk-averse, because its ‘strict liability’ standard doesn’t allow them to defend a transaction by claiming they had no knowledge their counterparty was subject to export restrictions. 

Companies have the option to try to seek permission for a transaction, but many may simply decide to forgo potentially problematic transactions, Shweiki said. 

‘I think a lot of companies are potentially just going to say no,’ Shweiki said.