New '50 percent rule' adopted by BIS to address diversion concerns

The new rule models the '50 percent rule' used by the Office of Foreign Assets Control (OFAC), meaning that any foreign entity that is 50 percent or more owned by entities on the Entity List, Military End-User List (MEU List), or certain Specially Designated Nationals (SDNs), or non-listed parties subject to Affiliates Rule restrictions, to the same export licensing and restriction requirements as its designated owners. The rule targets circumvention risks, especially by parties who have previously used subsidiaries and complex ownership structures to avoid US export controls.

The adoption of the Affiliates Rule marks a major compliance shift with respect to US export controls for exporters, re-exporters, and transferors, requiring robust due diligence to identify covered affiliates and imposing strict liability for non-compliant transactions. Affected companies, particularly those in technology, defence, and supply chain sectors, should revisit screening procedures and ownership analysis. The changes have already triggered widespread industry responses and international attention, with China and other affected jurisdictions issuing strong objections. This Sanctions Alert outlines the key features of the Affiliates Rule, and practical compliance implications.

Background and Rationale

Prior to the adoption of the Affiliates Rule, BIS applied export control restrictions only to entities specifically identified on the Entity List, MEU List, or relevant sanctions lists. Subsidiaries and affiliates of listed entities were subject to restrictions only if they were individually included, based on the "legally distinct entity" standard. This differed from the application of the 50 % rule that OFAC for many years has used for the SDN List. The "legally distinct entity" standard under EAR enabled listed parties, including those from China and Russia, to circumvent US controls by conducting transactions through unlisted subsidiaries or newly formed companies, thereby avoiding licensing requirements and other restrictions.

The Affiliates Rule directly addresses this compliance gap and diversion risk. By extending export control restrictions to any foreign entity with 50% or greater aggregate ownership by one or more parties on the Entity List or the MEU List BIS aims to prevent listed entities from acquiring US-origin goods and technology through complex ownership structures. The revised framework closes a longstanding loophole that was increasingly utilized by entities seeking to evade US export controls, particularly in sectors involving advanced technology and defence.

These changes reflect BIS' stated policy objective to strengthen US national security and foreign policy interests by enhancing the effectiveness of export control regulations and reducing administrative burdens related to frequent updates of sanctions lists.

Key Changes and Scope

The new Affiliates Rule applies automatically to any foreign entity – not individually listed – where 50 percent or more of its ownership is held, directly or indirectly, in aggregate, by parties on the Entity List, MEU List, or certain SDNs covered by EAR § 744.8(a)(1). The aggregation method means all qualifying ownership stakes, even across different export controls or sanctions lists, are combined for rule application. The rule does not apply to US entities, even if they are owned by listed parties.

Affiliates captured by the rule are subject to the most stringent licence requirements and review policies applicable to any listed owner. BIS has clarified that where multiple owners are subject to different requirements, the strictest restrictions prevails.

Coverage does not currently extend to the Unverified List or Denied Persons List. However, BIS is accepting comments on possible inclusion of these lists in future rulemaking.

Exclusions can be granted if the BIS End-User Review Committee determines that a particular entity does not pose diversion risk.

A 60-day Temporary General Licence is in place, allowing certain transactions involving affected affiliates until 28 November 2025.

Finally, since the Consolidated Screening List will no longer include all subject entities, parties engaged in exports, reexports, or transfers must conduct ownership analysis to ensure compliance.

Practical Compliance Obligations and Red Flags

The Affiliates Rule imposes strict compliance duties on exporters, re-exporters, and transferors. The application of the Affiliates rule creates an affirmative duty to determine the ownership of other parties to the transaction in order to comply. This obligation is enforced on a strict liability basis, meaning that lack of intent does not exempt companies from liability in case of non-compliance. 

BIS has added a Red Flag in its "Know Your Customer" guidance under 15 CFR § 732, Supplement No. 3, requiring companies to investigate and verify the ownership percentage where there is any knowledge or indication of ties to listed parties. If the degree of ownership cannot be established, businesses are required either to obtain a BIS licence before proceeding or to rely on an applicable licence exception.

Enhanced due diligence is strongly advised not only where direct or indirect ownership reaches the 50% threshold, but also where listed entities hold significant minority interests or exert influence through board membership or similar means. Companies should maintain detailed documentation of all ownership investigations and compliance efforts for each transaction. Companies should be particularly aware of challenges in conducting ownership analysis in jurisdictions with limited corporate transparency or restricted access to ownership data.

Any transaction with an affiliate subject to the rule must be licenced according to the most restrictive policy applicable among listed owners. Some transactions may not be eligible for authorisation based on the specific restrictions that apply. In some cases, transactions may be prohibited entirely under applicable licensing policies.

Implementation and Industry Impact

The Affiliates Rule has immediate consequences for thousands of companies worldwide, with particular impact on those operating in China, Russia, and sectors such as technology, aerospace, defence, finance, and logistics. For example, initial analysis suggest thatthat thousands of subsidiaries of Chinese state-owned enterprises will be directly affected. Entities in these sectors or countries, or entities doing business with them, must quickly expand compliance and screening procedures to assess the ownership structure of all relevant counterparties, as reliance on the "legally distinct standard" is no longer sufficient. 

Public consultation on the rule remains open until 29 October 2025, providing an opportunity for affected parties to submit feedback or request clarifications.

Companies are advised to promptly update internal compliance programmes, due diligence processes, and know-your-customer (KYC) procedures to reflect the expanded scope and aggregation methodology of the BIS rule. While prior experience with OFAC's 50% rule under 31 CFR § 561.314 may provide some guidance, the BIS Affiliates Rule has different scope, methodology, and applies to different types of restrictions.

Companies that must comply with the EAR, including both US and non-US companies, should reassess ongoing and future business relationships to identify possible exposure under the new obligations. Failure to implement robust and documented compliance may result in enforcement actions under a strict liability standard.

WR Sanctions Alerts provide you with updates on material developments in the country-specific sanctions programmes implemented by the US, the UN, the UK, the EU and Norway. We will not provide updates on mere prolongations, without material changes, of existing sanctions programmes, nor on any listings or de-listings of individuals/entities placed on implemented sanctions lists. Please note that the WR Sanctions Alerts are provided as general information and do not constitute legal advice.