The Bureau of Industry and Security has issued an interim final rule expanding export restrictions to many subsidiaries of entities on two federal lists. In light of this rule companies should increase their due diligence on end-users involved in export transactions.
BIS’s Entity List and Military End-User List impose stringent license requirements for exports of goods subject to the Export Administration Regulations, respectively, (1) to parties involved in activities contrary to U.S. national security or foreign policy interests and (2) when there is an unacceptable risk of use in or diversion to a military end-use. The license review policy for parties on these lists is generally a presumption of denial and the availability of most license exceptions for transactions involving listed parties is limited.
Previously, BIS notes, these lists excluded all entities that were not specifically named even if they had extensive corporate and financial ties with listed entities. However, BIS is concerned that this approach “can enable diversionary schemes, such as the creation of new foreign companies to evade Entity List [and MEU List] restrictions.”
As a result, the new rule provides that any entity that is at least 50 percent owned by one or more entities on either of these lists will itself automatically be subject to Entity List/MEU List restrictions (although exceptions may be granted on a case-by-case basis). BIS notes that this change effectively adopts for these lists the 50 percent rule that the Treasury Department’s Office of Foreign Assets Control has used for many years with respect to companies subject to economic sanctions.
BIS is also informing the public 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 on the Entity List, the MEU List entity, or OFAC’s list of specially-designated nationals present a red flag of potential diversion risk to the listed entity. “Additional due diligence is necessary” in such situations, BIS states, “especially given the opaque ownership structures and limited access to accurate ownership data in certain jurisdictions.” If an exporter cannot determine the ownership percentage of a foreign entity owned by one or more entities on the Entity List or MEU List it must resolve that red flag prior to proceeding with any exports, reexports, or transfers (in-country) to that entity, submit a license application to BIS, or identify an available license exception.
BIS emphasizes that compliance with this rule “may take more time and compliance resources compared to simply screening a list for identified names, especially in situations where limited information on corporate ownership structures is publicly available, such as where a listed entity is privately held.” It will also mean that “the Consolidated Screening List will no longer comprise an exhaustive listing of foreign entities subject to Entity List license requirements, because the CSL will only include the entities listed on 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.”
On the other hand, BIS notes, the rule’s adoption of the same standard that exporters and others have already been using in their OFAC compliance programs “will likely ease the burden in adopting the new standard for Entity List [and MEU List] compliance, as compared with a distinct standard that applies a lower ownership threshold.”
The new rule is effective as of Sept. 29 and comments on it are due no later than Oct. 29. A temporary general license will permit some otherwise restricted transactions through Nov. 28.
For more information on how this rule may affect your exports, please contact your ST&R professional.
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