Compliance professionals would do well to take their summer holidays early this year, before the Bureau of Industry and Security drops its anticipated “50% Rule,” a move set to multiply the roughly 3,000 entities currently subject to export licensing requirements with the stroke of a pen.
Tim Mooney, the acting director of BIS’ Regulatory Policy Division, confirmed on June 10 that his office is working on regulatory language that would create licensing requirements for companies owned 50% or more by parties named on the U.S. Department of Commerce’s Entity List.
“We do have a draft rule,” Mooney said at this month’s meeting of the Regulations and Procedures Technical Advisory Committee.
The as-yet unpublished rulemaking would seek to address diversion of U.S. technology to foreign entities of concern, and the so-called “subsidiary loophole.” Mooney described it as a “Whac-a-Mole problem” of listed parties creating wholly-owned subsidiaries outside the reach of Commerce Department regulations.
Industry Faces A Tall Order
Looming large among the potential downsides of such a rule is the compliance burden it would place on U.S. companies, which could face exposure to the agency’s strict liability standard through interactions involving clients without easily discernible red flags.
The most relevant model for BIS’ expected change is the Office of Foreign Asset Control’s existing 50% Rule, which prohibits U.S. persons from transacting with a company if half the ownership is subject to sanctions.
Much of the stress over BIS’ prospective rule is tied to the presumption that Commerce will set out a similarly aggregated test, obliging purveyors of sensitive U.S. technnology to suss out how much of a potential buyer is owned by parties on the Entity List and whether those pieces add up to 50% or more.
Current Akin Gump partner and former Assistant Secretary of Commerce for Export Administration Kevin Wolf said he declined to advance such a rule during his tenure under the Obama administration because it would have demanded too much from industry.
“My thought back at the time was: Just automatically listing every subsidiary always for all reasons no matter what would have made it unnecessarily burdensome for exporters, particularly small and medium-sized companies that wouldn’t necessarily have the resources to identify these complex corporate relationships, particularly in countries including China and Russia, where those relationships are not necessarily transparent from public records,” Wolf told attendees at a recent webinar hosted by compliance software provider Sayari.
“The government was in a better position to identify companies that were at risk of diverting or engaging in acts contrary to national security,” Wolf said.
New Tech Offers Partial Solutions
With a 50% rule back on the table, third-party risk analysis providers Sayari and Kharon have mounted marketing campaigns over the past month promoting their respective softwares as the answer companies need to get to the root of opaque corporate ownership structures.
But even advanced tools are not foolproof, Gibson Dunn partner Christopher Timura told The Export Practitioner.
“Going beyond identified persons on lists really does require the collection of ownership information about the company, and that's not easily accessible. It's not publicly available in many countries; it's deliberately obscured in other countries; and it requires a kind of software and a kind of analysis that is not something you can do within a second,” he said.
Even for experienced practitioners using advanced tools, establishing a complete overview of a foreign company, its owners and other relationships often takes upwards of an hour, according to Timura.
While third-party verifications are necessary, they are no replacement for exporters examining their customers directly, Kian Meshkat of Meshkat Law told The Export Practitioner.
“Maybe it's a mitigating factor if you were using someone else's software that claims to be able to do this homework for you,” Meshkat said. “But at the end of the day, you're going to be the one that gets in trouble [if your product winds up in the wrong hands].”
Former Assistant Secretary Wolf and fellow former BIS officials turned Akin Gump attorneys Matt Borman, the most recent deputy assistant secretary for export administration, and Eileen Albanese, former director of BIS’ Office of National Security Controls, raised similar points during Sayari’s webinar.
Relationship building was the surest way to build “confidence that your customer is exactly who they say they are” as industry waits to see the exact contours of the anticipated rule, according to Albanese. Even more foundationally, exporters should ensure they fully understand how each of their products fits into the EAR.
Enforcement Must Fit to Scale
Even the most well-intentioned U.S. exporter could run into compliance difficulties under a 50% ownership rule if their business is structured around high sales volumes.
Between a company doing 100,000 transactions a day and one that does 1,000 a year, “it's really only the latter kind of company that's going to be in a position to be able to leverage information from their counterparties about who owns them,” Timura said.
Attorneys told The Export Practitioner they were anxious to see BIS adopt a clear enforcement framework laying out the agency’s expectations for due diligence, ideally one that could adapt to different business models.
“I just hope that if and when BIS changes the rule, they do publish a lot of guidance because industry will need that,” said Meshkat. He highlighted OFAC’s approach as an example of solid communication with industry since the Treasury Department introduced its 50% rule in 2014.
Support for implementation will be even more critical given BIS’s expected rapid rollout of the 50% rule.
Borman told attendees at the Sayari webinar that the new regulations are likely to show up in the Federal Register as an interim final rule, though potentially with a delayed effective date “given the significant amount of revisions to compliance plans” companies will need to undertake.
Differing Perspectives
It bears noting that compliance reviews could be made even more arduous than the expected changes from BIS.
The European Union, for example, looks not only at ownership but also aggregated control to determine whether a business is subject to sanctions. Since 2024, the EU also requires its exporters to separately assess whether a potential business partner might be “acting on behalf or at the direction” of a sanctioned entity.
Within the context of U.S. export controls, the arrival of the 50% rule would signal not only a seachange for industry compliance obligations, but also a hard pivot in where BIS is focusing its monitoring.
“I have to say I’m not aware of any analysis that’s shown that the diversions that are identified and prosecuted are through unlisted subsidiaries, for example,” Borman said. “I think the vast majority of cases do not involve those parties, but the policy perspective in this administration by those who are interested in this change is that this is a gap or a loophole that needs to be closed.”
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