Peter Lichtenbaum and Eric Sandberg-Zakian’s commentary was included in a Global Investigations Review article examining a new export controls rule from the U.S. Bureau of Industry and Security (BIS). Under the new rule, any affiliates that are at least 50 percent owned by entities on the BIS’ Entity List or Military End-User list will be subject to export restrictions,
Peter noted that screening tools for BIS’ 50% rule were “being built as this rule was rumored in the export control area. We know that there are people out there saying they have this service, but I don’t think anybody really knows how good it is.” Nonetheless, companies looking to do ownership due diligence are seeking out screening providers as their “hopefully” near-term solution, Peter said. “It’s not something that even large companies can really do on their own.”
Noting the level of risk involved for companies, Peter said, “Where do you draw your risk tolerance? Some situations will be clear that you need to suspend, but in other situations, it will be less clear, and you risk cutting off important business operations just because you can’t prove the negative: that a company is not owned by an Entity List party.” “If I were in-house, the most challenging is how much risk tolerance does the company have in these situations where the facts are not known and are very difficult to know,” he added.
Peter and Eric also argued that how BIS moves forward with enforcement could also impact how likely companies are to get behind the policy. Peter pointed out that “it’s understandable that there would be concerns about diversion among related companies, which is the main rationale for the rule. At the same time, there’s a significant burden imposed on the compliance community,” he added, which begs the question, “Where do we want the business community to devote its compliance resources?” “In the past, there’s been concern that the significant compliance burden might not be justified by the actual diversion risk,” Peter said, adding that evidence of actual diversion between related parties is unclear.
Eric provided his insight that to encourage companies to work in tandem with the government, BIS may need to “balance carefully encouraging companies to comply with this rule through deterrence against not bringing cases that feel unfair to industry.” “The more enforcement that's conducted with respect to strict liability violations stemming from facts that were difficult for companies to know at the time of a transaction, the more risk there is of the government’s enforcement programs having their credibility and corporate buy-in eroded,” he said.
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