U.S. Commerce Department significantly expands the Entity List under new Affiliates Rule

The impact of the Affiliates Rule on the Entity List

The Entity List is set forth at supplement no. 4 to part 744 of the EAR. The EAR impose license requirements on, and limit the availability of most license exceptions for, exports, reexports and transfers (in-country) that involve an Entity List entity.

Prior to this IFR, BIS long-standing practice was to apply a “legally distinct” standard for determining whether restrictions are applicable to subsidiaries and other foreign affiliates of Entity List entities. Pursuant to this standard, Entity List restrictions applied not only to an Entity List entity but also to any related foreign entity located in that same country that was not legally distinct from the Entity List entity (e.g., a branch office). Conversely, the Entity List restrictions did not apply to a related foreign entity that was legally distinct from the Entity List entity (e.g., separately incorporated wholly owned subsidiary) unless the entity was acting as a front or agent of the Entity List entity or otherwise diverting items to the listed entity. BIS has now replaced this standard due to diversion and circumvention-related concerns. BIS also anticipates that the Affiliates Rule will reduce the need for separate future designations of subsidiaries as the Affiliates Rule will apply automatically.

Going forward, the Entity List license requirements and other Entity List restrictions apply to any foreign entity that is owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more listed entities or unlisted (i.e., not explicitly listed) entities that are subject to Entity List license requirements or other related requirements based upon their ownership. BIS can add an affiliated entity that is under the 50 percent threshold to the Entity List.

Expansive ownership standard and aggregation

In the context of the Foreign-Direct Product (FDP) rules, the end-user scope of the Entity List FDP rule includes any foreign entity that is owned 50 percent or more, directly or indirectly, individually or in aggregate, by one or more listed entities or unlisted entities that are subject to Entity List license requirements or other Restricted Party List restrictions based upon their ownership, including at least one entity within the end-user scope of the provision—even if only one of the owners is within the end-user scope. BIS made corresponding changes to the Russia/Belarus-Military End User and Procurement FDP rule.

Physical address

BIS specifies that the Affiliates Rule does not apply to a physical address that is listed on the Entity List. Specifically, the Entity List license requirements and other Entity List restrictions “do not apply to foreign affiliates that are owned, directly or indirectly, individually or in aggregate, 50 percent or more by one or more entities that are operating at an address listed on the Entity List if the entities operating at that address are not specifically identified on the Entity List.” BIS makes this distinction because it concludes that “entities located at a different address with a parent company registered at a corporate services address listed on the Entity List may not present the same diversion risks exhibited by such parent company.”

The impact of the Affiliates Rule on the MEU List

The EAR was also revised to apply the Affiliates Rule to parties identified on the MEU List (supplement no. 7 to part 744 of the EAR). Accordingly, “the MEU List license requirements and other MEU restrictions also apply to any foreign entity that is owned 50 percent or more by one or more listed entities or entities that are subject to restrictions based upon their ownership.”

BIS explicitly confirms that the Affiliates Rule “does not extend the license requirements of § 744.21 to unlisted foreign affiliates when there is no direct or indirect ownership by a listed MEU or Entity List party with a footnote 3 designation.” As such, the Affiliates Rule does not apply to MEUs that fit the definition set forth in § 744.21 but are not explicitly listed on the MEU List.

The impact of the Affiliates Rule on certain sanctioned parties

The EAR controls described in § 744.8 also apply to “any entity that is owned, directly or indirectly, individually or in aggregate, 50 percent or more by one or more persons blocked under one of the specific programs identified under § 744.8(a)(1).” BIS clarifies that “the same restrictions apply regardless of how a party is blocked (i.e., included on the SDN List or by operation of OFAC’s 50 percent rule).”

BIS intended these requirements as a “backstop for activities over which OFAC does not exercise jurisdiction, including certain situations involving deemed exports and deemed reexports, and for reexports and transfers (in-country) that would otherwise not involve U.S. persons (e.g., U.S. financial institutions).”

Aggregation and application of most restrictive controls

Under the Affiliates Rule, “an entity owned 50 percent or more, directly or indirectly, [in the aggregate] by multiple entities subject to EAR license requirements pursuant to some combination of the Entity List, MEU List or SDN List designated under programs listed in § 744.8(a)(1), 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” (emphasis added).

In determining which measure is more restrictive, one may be comparing, for example, (i) the measures applicable to two different Entity List entities, or (ii) the measures applicable to an Entity List entity and an MEU. The more restrictive controls apply even if the owner with the more restrictive measures owns the smallest percentage of the foreign affiliate when compared to other Restricted Party owners.

This concept also applies to the context of license exceptions. For example, when an unlisted foreign affiliate is 50 percent or more owned by a Restricted Party and a license exception is applicable to such Restricted Party, both the restriction and the license exception applicable to such restricted entity are applicable to the foreign affiliate. However, when the foreign affiliate is owned 50 percent or more by multiple restricted entities, and only one such owner is eligible for a license exception, that license exception will not apply to the foreign affiliate.

The IFR provides an example:

• Company A is listed on the Entity List and requires a license for all items subject to the EAR and has a presumption of denial license review policy. Company A owns 35 percent of Company C. Company C is not listed on the Entity List.
• Company B is listed on the Entity List and requires a license for any item on the CCL and has a case-by-case license review policy. Company B owns 15 percent of Company C.
• Company C is owned directly or indirectly, individually or in aggregate, 50 percent or more by one or more listed entities (i.e., Companies A and Bin this example).
  • The Entity List license requirements that are applicable to Company C are the same as if the item was being exported, reexported or transferred (in-country) to the owners listed on the Entity List.
  • Because the Entity License requirements and license review policy is more restrictive for Company A, the Entity List license requirements and license review policy for Company A would be followed for any transaction where Company C is a party to the transaction.
  • Also note that the breakdown of the percentages adding up to 50 percent or more does not matter (e.g., in this hypothetical, it would not matter if Company B held 35 percent and Company A held 15 percent—Company A’s requirements would still apply).
• Company D is owned 50 percent by Company C.
  • Because Company D is owned, directly or indirectly, individually or in the aggregate, 50 percent or more by an unlisted entity (Company C) that is subject to Entity List license requirements or other Entity List restrictions based upon its ownership, the Entity List license requirements that are applicable to Company D are the same as if the item was being exported, reexported or transferred (in-country) to its owner(s) listed on the Entity List. Assuming Company D has no direct or indirect ownership by other listed parties that are subject to more restrictive license requirements and other restrictions, the Entity List license requirements and license review policy for Company C would be followed for any transaction where Company D is a party to the transaction (emphasis added and bullet-point structure modified).

Red Flag guidance and related obligations

BIS states that “foreign parties with significant minority ownership by, or other significant ties to (e.g., overlapping board membership or other indicia of control),” a Restricted Party List entity present “a Red Flag of potential diversion risk to the listed entity.” In this type of situation, “additional due diligence is necessary, especially given the opaque ownership structures and limited access to accurate ownership data in certain jurisdictions.” BIS discusses this issue in new supplement no. 8 to part 744 of the EAR, as well as in the updated Entity List FAQs, which states, in relevant part:

Q.43: Does BIS consider entities over which one or more listed entities exercise control, but of which they do not own 50 percent or more in the aggregate, to be subject to the Affiliates Rule?

A:43: No. BIS’s Affiliates Rule speaks only to ownership and not to control. An entity that is controlled (but not owned 50 percent or more) by one or more listed entities is not considered to automatically meet the Affiliates Rule criteria.

BIS also notes that the Affiliates Rule does not constrain the ERC’s ability to add an affiliated entity that is under the 50 percent threshold when the ERC has reasonable cause to believe, based on specific and articulable facts, that the foreign entity has been involved, is involved, or poses a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States, pursuant to § 744.11(b).

In addition, BIS notes that foreign parties with significant minority ownership by, or other significant ties to (e.g., overlapping board membership or other indicia of control), an Entity List entity, an MEU List entity, or an SDN subject to § 744.8(a)(1) present a Red Flag of potential diversion risk to the listed entity. In this type of situation, additional due diligence is necessary, especially given the opaque ownership structures and limited access to accurate ownership data in certain jurisdictions.

Relatedly, BIS added a red flag (i.e., Red Flag 29) to supplement no.3 to part 732 “to indicate that if an exporter, reexporter or transferor cannot determine the ownership percentage of a foreign entity that is an entity owned by one or more listed entities on the Entity List or the MEU List, it must:

• [R]esolve the red flag prior to proceeding with any exports, reexports or transfers (in-country) to the foreign entity,
• [S]ubmit a license application to BIS or
• [I]dentify an available license exception based on the restrictions applicable to the listed party” (bullet-point structure added).

BIS states that because EAR restrictions are enforced on a strict liability basis, “knowledge” is not required to trigger a violation of the EAR.

The circumstances where the Affiliates Rule does not apply

Unverified List and Denied Persons List

BIS is not adopting the Affiliates Rule “at this time” for the entities listed on the Unverified List (i.e., supplement no. 6 to part 744) or the list of parties subject to Denial Orders issued under part 764.

Parties located in the United States

It has been BIS’s long-standing position that U.S. companies are not subject to Entity List restrictions by virtue of ownership. BIS has issued a Frequently Asked Question to this effect. BIS states:

Q.17: Does the Entity List include U.S. persons?

A.17: No, it does not.

In addition, BIS explicitly stated in the IFR that it is not applying the Affiliates Rule to parties located in the United States, even if a company is owned by an Entity List entity. In relevant part, BIS states:

U.S. entities owned by listed entities • This IFR does not impose restrictions, as the Affiliates rule established in this IFR applies only to foreign companies, nor does it limit any compliance obligations that may exist under other provisions of the EAR or under the regulations of other agencies.

Application to the ERC for Exceptions

If BIS’s End-User Review Committee “determines that the foreign affiliates owned by a particular listed entity, or one specific foreign entity owned by a listed entity, do not pose a significant risk of being or becoming involved in diversion to the listed entity,” BIS may “apply exceptions to the Affiliates rule on a case-by-case basis . . . by approving additions or modifications to the Entity List or the MEU List. These exclusions will be identified by specifying in the relevant entry on the Entity List or MEU List that the Affiliates rule does not apply to” (i) any foreign affiliate owned by a particular listed entity or (ii) a specific foreign affiliate. Such determinations will be conducted based on the procedures set forth in supplement no. 5 to part 744 of the EAR, and any foreign entity subject to restrictions due to the Affiliates Rule may request such an exclusion through a request to modify the relevant Entity List or MEU List entry pursuant to the procedures identified in § 744.16(e) and § 744.21(b)(2).

Related instructions on specific license applications

The IFR also provides specific instructions for license applications involving entities subject to the Affiliates Rule. The applicant must specify “Affiliates Rule” in Block 9 (Special Purpose) of the BIS-748P “Multipurpose Application” form.

Further, in the context where the applicant cannot determine the ownership percentage of a foreign entity that is an entity owned by one or more listed entities on the Entity List or the MEU List, the applicant should include the names of the listed party or parties that own that entity, the specific due diligence conducted to determine the percentage of ownership and an explanation for why percentage ownership could not be determined. If the application has relevant ownership information, the applicant “must specify the names of the listed party or parties that own, individually or in the aggregate, 50 percent or more, directly or indirectly, of that entity(ies) listed on the license application, including identifying the percentage of ownership by listed parties and identifying the method that the applicant used to make that determination.”

As demonstrated by the example discussed in Section 1.5, the applicable license review policy depends on the license review policies of the listed owner(s), and the rule of most restrictiveness applies when there are multiple listed owners.

Banks and freight forwarders

The Affiliates Rule also creates compliance obligations for freight forwarders and financial institutions. The IFR references BIS’s guidance for freight forwarders and financial institutions. Accordingly, freight forwarders and financial institutions also have to screen parties and address potential involvement of parties subject to the Affiliates Rule.

Temporary General License and savings clause

The IFR includes a new Temporary General License (TGL) (Supplement No. 1 to Part 736) that expires on 1 December 2025.

This TGL authorizes:

1. A:5/A:6 Destinations: “[E]xports, reexports or transfers (in-country) to or within any destination in Country Group A:5 or A:6 (supplement no. 1 to part 740) when a non-listed foreign entity that is owned 50 percent or more, individually or in aggregate, by one or more listed entities on the Entity List (supplement no. 4 to part 744) or Military End-User (MEU) List (supplement no. 7 to part 744), or by unlisted entities that are subject to Entity List or MEU license requirements or other Entity List or MEU restrictions based upon their ownership, is a party to the transaction” (emphasis added); and
2. U.S./A:5/A:6 Joint Ventures: “[E]xports, reexports or transfers (in-country) to or within any country other than Country Group E:1 or E:2 [(i.e., Cuba, Iran, North Korea and Syria)] when a party to the transaction is a non-listed foreign affiliate of a listed entity that is owned 50 percent or more, directly or indirectly, individually or in the aggregate, by one or more listed entities on the Entity List or Military End-User (MEU) List, or by unlisted entities that are subject to Entity List or MEU license requirements or other Entity List or MEU restrictions based upon their ownership; and such party to the transaction is a joint venture with a non-listed entity headquartered in the United States or Country Group A:5 or A:6 that is not owned 50 percent or more, directly or indirectly, individually or in aggregate, by one or more listed entities on the Entity List or MEU List or by unlisted entities that are subject to Entity List or MEU license requirements or other Entity List or MEU restrictions based upon their ownership (emphasis added).

This TGL “may only be utilized to overcome the license requirements described in §§ 744.11 and 744.21 of the EAR applicable to the non-listed foreign affiliate to which this TGL applies.”

The separate savings clause provides that for shipments of items that are no longer eligible for a License Exception or export, reexport or transfer (in-country) without a license because of the Affiliates Rule, and if those items were en route aboard a carrier to a port of export, reexport or transfer (in-country), on 29 September 2025, pursuant to actual orders for export, reexport or transfer (in-country) to or within a foreign destination, those shipments can proceed pursuant to a License Exception or without a license as long as the export, reexport or transfer (in-country) is completed no later than 29 October 2025.

Compliance aid and guidance

The IFR notes that with the adoption of the Affiliates Rule, the “Consolidated Screening List (CSL) will no longer comprise an exhaustive listing of foreign entities subject to Restricted Party-related requirements, because the CSL will only include the entities listed on the [Restricted Party lists (e.g., the Entity List)] and will not reflect these additional foreign affiliates of listed entities that are owned 50 percent or more by one or more listed entities.” This has always been the case in relation to the OFAC lists that are included in the CSL given OFAC’s long-standing application of its 50% rule. The IFR explicitly references “private sector screening resources” as a way to mitigate the compliance challenge. In this context, BIS is indicating that commercial screening software would often be useful tool to support compliance with the EAR depending on the client base of an exporter and the applicable export compliance risks.

BIS has followed OFAC’s practice of providing guidance regarding the applicability of the Affiliates Rule on certain entities to facilitate compliance. The IFR sets forth “Table 1—Compliance Aid for Understanding the Application of the Affiliates rule for the Entity List, MEU List and SDN designations under § 744.8(a)(1)” to facilitate compliance. In addition and as noted above, BIS issued a press release on 29 September 2025 and updated its “Entity List FAQs” document with new FAQs under Q.41-Q.53.

For discussion on supplement no. 3 to part 732 (i.e., BIS’s “Know Your Customer” Guidance and Red Flags”), please see Section 1.6 above.

Strict liability and enforcement

As discussed, the Restricted Party List requirements are enforceable on a strict liability basis. The IFR confirms that “knowledge” is “not required to trigger these end-user requirements under the EAR” although lack of knowledge may be considered as a mitigating factor when determining penalties in an enforcement scenario. BIS also states in the IFR that companies have an “affirmative responsibility” to “know the ownership of the foreign companies that are parties to a transaction” and “must adopt a risk-based compliance program to assist them in complying with these requirements."

Authored by Beth Peters, Ajay Kuntamukkala, Anthony Capobianco, Ashley Roberts, and Hao-Kai Pai.