Last week, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued an interim final rule (IFR) to amend the Export Administration Regulations (EAR) to address a loophole that allowed foreign companies to circumvent export restrictions applying to companies on the Entity List and Military End Users (MEU) List. Under this new “Affiliates Rule,” any entity that is at least 50 percent owned by one or more entities on the Entity List or MEU List will itself automatically be subject to Entity List or MEU List restrictions. The Affiliates Rule also applies to ownership by certain entities on the Specially Designated Nationals and Blocked Persons List (SDN List).
Effective September 29, 2025, the adoption of the Affiliates Rule substantially expands the scope of BIS’s list-based controls and imposes enhanced due diligence obligations on parties exporting, reexporting, or transferring items subject the EAR.
BACKGROUND
The Entity List comprises certain foreign entities, such as businesses, research institutions, government and private organizations, and individuals, that pose a significant risk to the national security or foreign policy interests of the United States. Transactions involving listed entities are subject to specific license requirements under the EAR, and license exceptions for such transactions are limited.
Prior to this IFR, Entity List restrictions only applied to listed entities and their related foreign entities located in the same country, not to “legally distinct” foreign affiliates. Under this “legally distinct” standard, companies could evade such restrictions by creating non-listed foreign companies. The Affiliates Rule aims to close this gap.
THE AFFILIATES RULE
Summarized briefly below, the Affiliates Rule incorporates key changes to the EAR to address the evasion of license requirements through the creation of new foreign companies. These changes include the following:
- 50 Percent Ownership Test
- Any foreign entity that is owned 50 percent or more, directly or indirectly, by one or more entities on the Entity List, MEU List, or SDNs designated under programs listed in section 744.8 of the EAR, or by one or more entities subject to restrictions based upon ownership by such listed entities, are now also considered subject to these same restrictions.
- Entities captured by the Affiliates Rule will not typically be designated on these lists, although BIS indicated it may make exceptions. BIS may also add entities that are under 50 percent owned by listed entities to these lists.
- Adopts a “rule of most restrictiveness”
- An entity that falls under the Affiliates Rule 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, regardless of the level of ownership.
- Expands scope of Foreign Direct Product (FDP) Rules
- Foreign companies that are owned 50 percent or more by Entity List or MEU List entities subject to the FDP Rules and the Russia/Belarus-Military End User and Procurement FDP Rule at section 734.9 of the EAR are subject to each FDP rule that applies to its owners, no matter how small or large the owners’ share in the unlisted entity.
- Ownership by unlisted entities is also captured
- When an unlisted foreign entity is owned 50 percent or more by other unlisted entities that are subject to list-based restrictions by virtue of the Affiliates Rule, that unlisted foreign entity is also subject to list-based restrictions.
- Does not apply to every restricted parties list
- The Affiliates Rule does not apply to entities on the Unverified List or to parties subject to Denial Orders issued under EAR section 764.
- It also does not impose restrictions on U.S. entities owned by listed entities.
The Affiliates Rule brings the EAR into alignment with OFAC’s 50 percent rule, under which entities owned 50 percent or more by one or more blocked persons are treated as blocked, even if not named on the SDN List.
ENHANCED DUE DILIGENCE OBLIGATIONS
The Affiliates Rule imposes additional due diligence obligations on the private sector, including exporters, reexporters, and transferors of items subject to the EAR. These include the following:
- Restricted party lists are no longer exhaustive
- Because the names of foreign entities captured by the Affiliates Rule will not be added to these lists, the Entity List and MEU List will no longer be exhaustive. This also means that the Consolidated Screening List is no longer exhaustive.
- Creates Red Flag 29 to Supplement No. 3 to Part 732
- If an exporter, reexporter, or transferor knows that a foreign entity is owned by one or more listed entities or unlisted entities subject to the Affiliates Rule, it must either determine the ownership percentage of those restricted entities or obtain a license from BIS (unless a license exception is available).
- This creates affirmative duties for exporters and heightens due diligence requirements.
- Extra due diligence urged for minority control
- BIS also cautions that foreign parties with significant minority ownership by, or significant ties to (g., overlapping board membership or other indicia of control), listed or unlisted entities present a particular risk of diversion to the restricted entities. In such circumstances, BIS urges that additional due diligence is necessary.
In the wake of these revisions, BIS added Supplement No. 8 to Part 744, Guidelines for Applying the Affiliates Rule to Entity List Entries and Other End-User Controls, to assist exporters in managing these changes and dealing with new due diligence obligations. BIS also updated the Entity List FAQs.
TAKEAWAYS AND OPPORTUNITY TO COMMENT
As currently drafted, the Affiliates Rule will greatly expand the scope of companies subject to list-based restrictions under the EAR, which in turn requires increased vigilance and additional due diligence measures by exporters, reexporters, and transferors of U.S.-origin and/or EAR-controlled items.
Parties are permitted to submit comments on the IFR implementing the Affiliates Rule on regulations.gov under ID BIS-2025-0017. BIS is particularly interested in comments as to whether the 50 percent ownership threshold should be lower and whether BIS should extend the Affiliates Rule to other EAR end-user lists. Comments are due by October 29, 2025.
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Cassidy Levy Kent’s attorneys, compliance professionals, economists, and licensed customs brokers assist clients navigating export controls and sanctions issues. We expect further developments in this space and will continue to provide updates. Please contact us with any questions.