On September 29, 2025, the U.S. Commerce Department, Bureau of Industry and Security (“BIS”) issued an interim final rule titled Expansion of End-User Controls to Cover Affiliates of Certain Listed Entities (the “Affiliates Rule”). This rule:
- Extends license requirements under the Export Administration Regulations (“EAR”) to non-U.S. entities that are owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more entities identified on the BIS Entity List (Supplement No. 4 to EAR Part 744), the BIS Military End User List (the “MEU List,” Supplement No. 7 to EAR Part 744), and/or the Specially Designated Nationals and Blocked Persons List (the “SDN List”) pursuant to certain U.S. sanctions programs maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).
- Clarifies that if an entity is owned 50% or more, directly or indirectly, by multiple entities subject to EAR license requirements pursuant to any combination of the Entity List, MEU List, and/or SDN List under OFAC programs listed in EAR § 744.8(a)(1), then the entity 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.
- Makes conforming revisions to the Foreign Direct Product (“FDP”) Rules applicable to certain Entity List parties under EAR §§ 734.9(e) and (g), to extend their application to unlisted entities that are owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more parties identified on the Entity List, MEU List, and/or SDN List under an EAR § 744.8(a)(1) program, if one or more of the listed owners is identified on the Entity List and meets the end-user scope of one of these FDP Rules.
- Adds a new Red Flag to BIS’s “Know Your Customer” Guidance and Red Flags, applicable where exporters, reexporters, or transferors have “knowledge” that a foreign entity that is a party to the transaction has one or more owners that are listed on the Entity List or the MEU List, or that are unlisted entities that are subject to license requirements or other restrictions based upon their ownership, and establishes new red flag guidance regarding scenarios that merit additional due diligence, including where a non-U.S. party has significant minority ownership by or other significant ties to a listed entity (e.g., via overlapping board members or other indicia of control).
The Affiliates Rule was effective immediately upon issuance on September 29, 2025, subject to a narrow temporary general license (“TGL”) and standard savings clause.
BIS is seeking public comments on the Affiliates Rule by October 29, 2025.
Expansion of End-User Controls
The Affiliates Rule expands existing EAR license requirements applicable to persons or entities identified on the Entity List, the MEU List, and/or the SDN List pursuant to OFAC sanctions programs identified in EAR § 744.8(a)(1)—i.e., certain sanctions programs related to Russia, terrorism, weapons of mass destruction (“WMDs”), narcotics trafficking, and other criminal networks—to also apply to non-U.S. entities that are owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more of these listed entities, and/or by one or more unlisted entities that are themselves subject to these license requirements by virtue of their ownership.
Historically, the EAR restrictions applicable to parties identified on the Entity List, MEU List, and SDN List under OFAC programs identified in EAR § 744.8(a)(1) did not automatically extend to unlisted subsidiaries, affiliates, or parent companies. Rather, BIS had, for example, provided Frequently Asked Question (“FAQ”) guidance that an export/reexport/in-country transfer transaction involving an unlisted affiliate of an Entity List party constituted a red flag that merited further due diligence to ensure that the unlisted affiliate: (i) was legally distinct from the listed entity, and not merely a branch or sales office of the listed entity; (ii) would not divert items subject to the EAR to the listed entity; and (iii) was not otherwise acting for or on behalf of the listed entity to violate the EAR. Similar considerations applied with respect to unlisted affiliates of parties on the MEU List and, from an EAR compliance perspective, the SDN List pursuant to the EAR § 744.8(a)(1) programs. (This approach was, notably, different from the long-standing application of U.S. property-blocking sanctions not only to entities designated to the SDN List but also to entities owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more SDNs, pursuant to OFAC’s “50 Percent Rule.”)
As a result of the Affiliates Rule, the following license requirements now apply:
- Entity List: EAR §§ 744.11 and 744.16 generally require, with limited exceptions, a BIS license for the export, reexport, or transfer (in-country) of any item subject to the EAR, regardless of export control classification (i.e., to include EAR99 items), where a party to the transaction (e.g., the purchaser, intermediate consignee, ultimate consignee, or end user) is:
- Identified on the Entity List (as had previously been the case); or
- A non-U.S. entity that is owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more parties identified on the Entity List, the MEU List and/or the SDN List pursuant to the OFAC programs set out in EAR § 744.8(a)(1), where at least one such owner is identified on the Entity List.
- MEU List: EAR § 744.21 imposes a license requirement for the export, reexport, or transfer (in-country) of any item subject to the EAR that is classified under an Export Control Classification Number (“ECCN”) listed in Supplement No. 2 to EAR Part 744, if any entity that is a party to the transaction (e.g., as purchaser, intermediate consignee, ultimate consignee, or end user) is:
- Identified on the MEU List (as had previously been the case); or
- A non-U.S. entity that is owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more parties identified on the MEU List, Entity List, and/or the SDN List pursuant to the OFAC programs set out in EAR § 744.8(a)(1), where at least one such owner is identified on the MEU List.
(Note: There are separate but related controls applicable to items intended, entirely or in part, for certain unlisted “military end users” and “military end uses,” as those terms are defined at EAR § 744.21, in Belarus, Burma (Myanmar), Cambodia, China, Nicaragua, Russia, or Venezuela. These controls are not impacted by the revisions to the EAR imposed by the Affiliates Rule.)
- SDN List: Unless authorized by OFAC, EAR § 744.8 requires a BIS license for the export, reexport, or transfer (in-country) of any item subject to the EAR, regardless of export controls classification (i.e., to include EAR99 items), where a party to the transaction (e.g., the purchaser, intermediate consignee, ultimate consignee, or end user) is:
- Designated to the SDN List pursuant to OFAC programs identified in EAR § 744.8(a)(1) (as had previously been the case); or
- A non-U.S. entity that is owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more parties identified on the SDN List pursuant to the OFAC programs set out in EAR § 744.8(a)(1), the Entity List, and/or the MEU List, where at least one such owner is identified on the SDN List under a program set out in EAR § 744.8(a)(1).
The Affiliates Rule also establishes a “Rule of Most Restrictiveness,” whereby if an entity is owned 50% or more, directly or indirectly, by multiple entities subject to EAR license requirements or other restrictions pursuant to some combination of the Entity List, MEU List, or SDN List under the OFAC programs listed in EAR § 744.8(a)(1), then the entity 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. For example:
- Company A is identified on the Entity List, such that a BIS license is required for the export, reexport, or transfer of any item subject to the EAR where Company A is a party to the transaction;
- Company B is identified on the MEU List, such that a BIS license is required for the export, reexport, or transfer of any item subject to the EAR and identified in Supplement No. 2 to EAR Part 744, if Company B is a party to a transaction.
- Company C is a non-U.S. entity that is not identified on any U.S. restricted party list, but Company C is 10% owned by Company A and 40% owned by Company B. The remaining 50% of Company C’s ownership interests is held by unlisted entities.
- As a result, Company C is subject to the same Entity List license requirements, license exception eligibility, and license review policy as Company A because (i) Company C is in the aggregate 50% owned by parties on the Entity List (Company A) and MEU List (Company B); and (ii) the Entity List license requirements applicable to Company A are more restrictive than the MEU List license requirements applicable to Company B, so the Entity List requirements applicable to Company A also apply to Company C under the “Rule of Most Restrictiveness.”
The controls applicable to parties on the Entity List, MEU List, and SDN List pursuant to a program identified in EAR § 744.8(a)(1), and to non-U.S. entities owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more of these restricted entities, can be enforced on a strict liability basis. Accordingly, if a transaction involves the export, reexport, or transfer of an item that is subject to the EAR, BIS states that the Affiliates Rule effectively “creates an affirmative duty to determine the ownership of other parties to the transaction in order to comply.”
Non-listed affiliates of listed entities, wherever located, that are subject to EAR license requirements pursuant to the Affiliates Rule may submit a request to the interagency End-User Review Committee (“ERC”)—which is composed of representatives of the Departments of Commerce, War (Defense), Energy, State and, where appropriate, Treasury—for modification of the relevant Entity List or MEU List entry to remove the requester from the licensing requirement (but not an SDN List entry, which is subject to separate de-listing procedures administered by OFAC).
The Affiliates Rule expands the jurisdictional scope of the EAR to capture additional foreign-produced items when destined to or for non-U.S. entities that are owned 50% or more, individually or in the aggregate, by one or more Entity List, MEU List, and/or SDN List parties designated pursuant to OFAC programs listed in EAR § 744.8(a)(1), if one or more of the listed owners is identified on the Entity List with a Footnote 1, 3, 4, or 5 designation.
Specifically, the Rule revises the Entity List FDP Rules under EAR § 734.9(e) to specify that the end-user scope of these rules includes any non-U.S. entities that are owned 50% or more, directly or indirectly, individually or in the aggregate, by one or more listed entities or unlisted entities subject to Entity List license requirements or other Entity List restrictions based upon their ownership, including at least one entity captured by the end-user scope of the relevant provision (i.e., the Footnote 1, Footnote 4, or Footnote 5 FDP Rule). Corresponding revisions are made to the Russia/Belarus Military End User and Procurement FDP Rule at EAR § 734.9(g), which applies to parties identified on the Entity List with a Footnote 3 designation.
As a result, if exports, reexports, and in-country transfers involving an Entity List company are subject to expanded EAR jurisdiction due to the company’s Footnote 1, 3, 4, or 5 designation, that expanded EAR jurisdiction will also apply to exports, reexports, and in-country transfers involving non-U.S. entities that are owned 50% or more, individually or in the aggregate, by that Entity List company, either alone or in combination with any other Entity List, MEU List, and/or SDN List parties designated pursuant to OFAC programs listed in EAR § 744.8(a)(1).
The Affiliates Rule adds a new red flag to BIS’s “Know Your Customer” Guidance and Red Flags at Supplement No. 3 to EAR Part 732. Specifically, new Red Flag 29 alerts exporters, reexporters, and transferors that, where they have “knowledge” that a foreign entity that is a party to the transaction has one or more owners that are listed on the Entity List or the MEU List, or that are unlisted entities that are subject to license requirements or other restrictions based upon their ownership, they have “an affirmative duty to determine the percentage of ownership by those entities and if that is not possible, to obtain a license from BIS if required under the Entity List or MEU List based on the requirements for the owner or owners of that foreign entity, unless a license exception is available.” EAR § 772.1 defines “knowledge” of a circumstance as including “not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence.” Such awareness “is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person’s willful avoidance of facts.”
In addition, BIS identifies as a potential diversion red flag meriting additional due diligence a scenario in which a non-U.S. party has significant minority ownership by, or other significant ties to (e.g., via overlapping board membership or other indicia of control), an Entity List party, an MEU List entity, or an SDN designated pursuant to the OFAC programs listed in EAR § 744.8(a)(1). In this scenario, BIS states, “additional due diligence is necessary, especially given the opaque ownership structures and limited access to accurate ownership data in certain jurisdictions.”
The preamble to the Affiliates Rule contains several illustrative examples of scenarios where the new license requirements imposed by the Rule apply, including under the “Rule of Most Restrictiveness” and the revised FDP Rules (as described above). The Rule also includes a table entitled “Compliance Aid for Understanding the Application of the Affiliates Rule for the Entity List, MEU List, and SDN Designations Under § 744.8(a)(1),” which states that “exporters, reexporters, and transferors have an affirmative responsibility to know the ownership of the foreign companies that are parties to a transaction.”
Additionally, in connection with issuing the Affiliates Rule, BIS established new “Guidelines for Applying Affiliates Rule to Entity List Entries and Other End-User Controls,” at Supplement No. 8 to EAR Part 744. Of note, Supplement No. 8 to Part 744 advises exporters, reexporters, and transferors to “act with caution” in considering transactions with a non-Entity List, non-MEU List, or non-§ 744.8 foreign entity if an entity identified on the Entity List or MEU List or an SDN designated under programs identified in EAR § 744.8 “has a significant direct or indirect ownership interest that is less than 50 percent or is a parent entity of listed entities.”
Further, BIS updated in parallel its Entity List FAQs to account for the Affiliates Rule. One notable FAQ (Question 43) provides: “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.” However, the same FAQ also reiterates the red flag guidance cited above with respect to non-U.S. entities that have “significant minority ownership by, or other significant ties to (e.g., overlapping board membership or other indicia of control)” an Entity List, MEU List, or SDN List party designated pursuant to an OFAC program identified in EAR § 744.8(a)(1)—i.e., the FAQ states that in this scenario, additional due diligence is necessary.
The Affiliates Rule creates a narrow TGL that authorizes, until December 1, 2025, exports, reexports, or transfers that would otherwise require a license pursuant to the Affiliates Rule destined to or within:
- Country Groups A:5 or A:6 (at Supplement No. 1 to EAR Part 740)—which includes, among others, countries in the European Union, Canada, Japan, South Korea, Australia, and the United Kingdom—where a non-listed, non-U.S. entity that is owned 50% or more, individually or in the aggregate, by one or more Entity List or MEU List parties is a party to the transaction (e.g., as purchaser, intermediate consignee, ultimate consignee, or end user); or
- Any destination outside of Country Group E—i.e., Cuba, Iran, North Korea, and Syria—where a non-listed, non-U.S. entity that is owned 50% or more, individually or in the aggregate, by one or more Entity List or MEU List parties is a party to the transaction (e.g., as purchaser, intermediate consignee, ultimate consignee, or end user), but only if the relevant entity is a joint venture with a non-listed entity headquartered in the United States or Country Groups A:5 or A:6 that is not itself owned 50% or more, individually or in the aggregate, by one or more Entity List or MEU List parties, or by unlisted entities that are subject to Entity List or MEU restrictions based on their ownership.
The TGL does not appear to apply if the non-listed, non-U.S. entity is subject to a license requirement under the Affiliates Rule due to ownership by an SDN designated pursuant to an OFAC sanctions program listed in EAR § 744.8(a)(1).
(Note that December 1, 2025, is the expiration date stated at paragraph (g)(3) of Supplement No. 1 to Part 736 and therefore appears to be the correct date, though the introduction to the Federal Register notice states that the TGL instead expires on November 28, 2025.)
The Affiliates Rule contains a standard Savings Clause, which provides that license requirements imposed under the Affiliates Rule do not apply to shipments of items that were en route aboard a carrier to a port of export, reexport, or in-country transfer as of September 29, 2025, pursuant to actual orders for export, reexport, or in-country transfer, provided that the export, reexport, or in-country transfer is completed no later than on October 29, 2025.
To blunt the impact of non-Chinese trade controls such as the Affiliates Rule, China has enacted various countermeasures, including the Countering Foreign Sanctions Law and Unreliable Entities List, which created mechanisms for companies to be penalized for complying with non-Chinese trade controls to the detriment of Chinese companies. Under those countermeasures, China has designated a range of U.S. and EU politicians, non-governmental organizations, and companies that have advocated for policies or otherwise taken actions viewed by the Chinese government as hostile to China’s interests (e.g., defense sales to Taiwan). The Affiliates Rule could prompt additional designations. As companies comply with the Affiliates Rule, they also should be attentive to the risks of China using such countermeasures in response to actions that could be perceived as negatively affecting business transactions with Chinese entities.
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We are closely monitoring developments concerning U.S. export controls and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have, or to assist with the preparation of comments on the Rule.
Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with these new and proposed export controls developments, or to assist with comments on these proposed rules. Our trade controls lawyers also work regularly with Covington’s Global Public Policy team—consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia—many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.
If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls practice.
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