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The United States (“US”) Department of Commerce’s Bureau of Industry and Security (the “BIS”) has issued an interim final rule, effective 29 September 2025, that significantly…
United States
International Law
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The United States (“US”) Department
of Commerce’s Bureau of Industry and Security (the
“BIS”) has issued an interim final rule,
effective 29 September 2025, that significantly expands the scope
of US export controls by introducing a new ‘Affiliates
Rule’.
What has changed?
Previously, US export controls (governed by the Export
Administration Regulations (“EAR”)) only
applied to entities specifically named on the Entity List (which
include, for example certain Chinese, Russia and Iranian banks,
shipping companies and manufacturers). On application of the new
Affiliates Rule, the EAR now applies to foreign (non-US) affiliates
which are 50% or more owned (directly or indirectly) by parties
which appear on the Entity List, Military End-User List and which
are subject to certain US sanctions.
This broader application is similar to the “50% rule”
applied by the US Office of Foreign Assets Control
(“OFAC”) in respect of sanctions. The
introduction of the Affiliates Rule assists the BIS in closing a
loophole where restricted companies could operate through overseas
“front companies.”
Why this matters
Local companies which may be unknown to the BIS and are
therefore not included on the Entity List, may be now affected as a
result of the listing of their owners. The application of the EAR
will typically introduce a requirement to obtain a licence in order
to export, re-export or transfer (in-country) items which are
subject to the EAR (including, but not limited to, items
originating in the US) to the ‘listed’ company. The BIS
asserts its jurisdiction over the item and there is
accordingly no need to establish any other US nexus – e.g. the
involvement of a US person – for the EAR to apply. The
Affiliates Rule will have a significant impact for newly covered
companies, who may expect to face the following challenges:
procurement issues, with US-suppliers, or other third-party
suppliers who deal in US-origin goods ceasing supply;
logistical issues, e.g. shipping companies refusing to ship
goods;
more onerous due diligence screening process, as companies now
need to go beyond merely verifying if a company is on the Entity
List, and will need to introduce ownership based analyses of
third-parties in order to assess the potential applicability of the
EAR.
What should companies do?
While the BIS has provided for a very limited short-term
Temporary General License (expiring 28 November 2025), the
Affiliates Rule is effective immediately. Immediate steps to
consider in response include:
assessing existing ownership structure to determine whether the
EAR may apply to your company as a result of the Affiliates
Rule;
conducting an assessment of your vendors and customers to
identify any companies likely to be subject to the EAR, and the
impact thereof; and
reviewing your existing due diligence procedures to ensure they
include sufficient ownership-based.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.