BIS Adds New FAQs to Clarify Affiliates Rule - Our Top Takeaways

We summarized the Rule — which extends end-user-based export controls to foreign affiliates that are directly or indirectly owned 50% or more by companies on the Entity List and other proscribed parties — in an earlier alert.

The updated FAQs shed more light just how far the Affiliates Rule has extended the scope of the Export Administration Regulations (EAR).

Top Takeaways From the New FAQs

• Ownership, Not Control (but Watch Out for Red Flags): The Affiliates Rule puts restrictions on companies that are directly or indirectly owned 50% or more, individually or in the aggregate, by parties on the Entity List, Military End-User (MEU) List, or the Specially Designated National programs pursuant to sanctions programs named in EAR §744.8(a). Companies that are controlled, but not 50% or more owned, by one or more listed entities are not captured by the Affiliates Rule, per FAQ #43. 

However, the same FAQ cautions that when a company has significant minority ownership by, or other significant ties (e.g., overlapping board membership or other indicia of control) to a listed entity, this presents a Red Flag of potential diversion risk and triggers the need for additional due diligence. 

• Foreign Branches and Offices Covered: In addition to the new ownership-based controls, the Affiliates Rule also extends restrictions to foreign branches and offices that are part of any listed entity. FAQ #45 explains:

For example, suppose an entity on the Entity List in China has a sales office in Malaysia. Prior to this IFR, that sales office was not included within the scope of the Entity List license requirements, unless BIS also included it on the Entity List or if an exporter, reexporter, or transferor (in-country) had information that the item was intended for the listed Chinese entity. Now, the license requirements, license exception eligibility, and license review policy applicable to the listed entity in China are applicable to the sales office in Malaysia.

This detail seems to be buried in the Compliance Aid that is part of the Affiliates Rule’s preamble. Let us know if you can find where it is spelled out in the actual regulations!

• Watch Out for General Prohibition 10: The updated FAQ #23 warns that even when the Affiliates Rule’s criteria are not met, General Prohibition 10 still applies whenever there is any reason to know that a company — affiliated or not — is acting as an agent, a front, or a shell company for a listed entity to facilitate unauthorized transactions. This provision functions as a catchall, prohibiting virtually all dealings involving items subject to the EAR if you know or have reason to know that an export control violation has occurred, is about to occur, or is intended to occur in connection with that item.
• Consolidated Screening List (CSL) No Longer Enough: FAQ #46 reiterates that CSL is no longer an exhaustive listing of foreign entities subject to Entity List restrictions. Exporters therefore “should screen proposed transactions against the CSL and separately screen for purposes of the Affiliates Rule.” Apparently, BIS is done updating lists to specify foreign affiliates, but an export compliance officer’s job is never done. Luckily, per FAQ #47, there are private sector screening resources that “may assist in compliance” and are doubtless sending a big thank you to the Administration.
• Hospitals and Medical Centers Not Exempt: FAQ #50 clarifies that hospitals and medical centers captured by the Affiliates Rule will not be treated differently than other types of entities. We think this guidance is aimed at military hospitals and similar facilities owned by organizations on the MEU List. These hospitals, assuming they meet the Rule’s criteria, would be subject to EAR restrictions regardless of whether they are actually involved in any functions related to military items.

A reminder that the Affiliates Rule does not apply to ownership by organizations meeting the definition of “military end user,” but are not named on the MEU List. Hospitals owned by unlisted MEUs are not automatically subject to additional export controls (though heightened due diligence is certainly recommended whenever dealing with any entity with a possible military connection).

• How to Complete a License Application: FAQ #49 helpfully tells exporters how to apply for a license in transactions that are captured by the Rule, which will be even more helpful if or when the US government eventually reopens and begins processing license applications again:
  • Block 9 (Special Purpose) must specify “50 percent ownership rule.”
  • For each affiliate captured by the Rule and named in the application, you must also identify the listed entity or entities that directly or indirectly own 50% or more of the affiliate, individually or in aggregate. The application must also identify the percentage of ownership by listed parties, as well as specify the method that the applicant used to make those determinations.
  • Where you do not know the percentages, you need to name the listed party or parties that own the affiliate entity on your application, explain the due diligence conducted to determine the percentage of ownership, and state why that information was not able to be determined. We hope that it will be sufficient, especially for smaller exporters without large compliance departments, to provide the results of a public internet search and state that they do not have the resources of the US government, or to retain private sector screening companies.

Conclusion

The updated FAQs are helpful in clarifying the scope of the Affiliates Rule. Even so, they do not address some of our burning questions. What level of due diligence does BIS expect when exporters do not have any indication that they are dealing with an entity that has problematic ownership? How will license applications be adjudicated if BIS, like the applicant, cannot determine ownership percentages?

We are hopeful for more guidance from BIS in the future. In the meantime, public comments on the Affiliates Rule are due on October 29, and our Export Controls & Economic Sanctions team is available to assist.