Consultants Corner

By George Canovas, Vice President, Compliance; Creighton Chin, Senior Compliance Associate

Edited by Jenny Hahn, President, FD Associates

I. Introduction

On June 19, 2025, I wrote an article “Understanding the 50% Rule: How BIS Is Rewriting Export Control Boundaries.” I ended this article with “No drama, no panic. Just preparation. Because when this rule lands, and it will, you’ll want to be ready, not surprised.” Well, it landed on September 29, 2025 and the question of “who really owns the company you are dealing with” is now a reality. That question has now become central to compliance. On September 29, 2025, the Bureau of Industry and Security (BIS) amended 15 C.F.R. §744.11 and its Supplements 4 and 7, extending restrictions to any entity that is fifty percent or more owned, directly or indirectly, by a party on the Entity List or the Military End User (MEU) List.

The Affiliates Rule goes further than the Entity List and MEU List. BIS extended the 50 percent ownership test to affiliates of parties designated under certain OFAC Specially Designated National (SDN) programs identified in 15 C.F.R. §744.8(a). It also extends the Foreign Direct Product (FDP) rules under §734.9(e), including the Russia/Belarus MEU FDP rule, so that foreign-produced items meeting FDP criteria through the involvement of a covered affiliate are now subject to EAR license requirements.

To be clear, these companies are now automatically subject to the same restrictions as their listed entities. This significant policy shift is not an isolated change but rather the culmination of a long regulatory evolution that began with the International Traffic in Arms Regulations’ (ITAR) foreign ownership rules, matured with the Office of Foreign Assets Control’s (OFAC) 2014 50% guidance, and has now fully integrated into the Export Administration Regulations (EAR) framework, making ownership a cornerstone of export compliance that demands a thorough understanding of its history and implications to prepare for what lies ahead.

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II. Executive Takeaways

• Effective immediately. The BIS Affiliates Rule took effect September 29, 2025.
• Short window of relief. A Temporary General License (TGL) applies only through November 28, with strict limits.
• Covers Entity List, MEU List, and SDN programs. Ownership links to these parties now trigger license requirements.
• Foreign Direct Product rules included. Affiliates bring foreign-produced items under EAR controls if FDP criteria are met.
• Ownership is cumulative. Direct and indirect stakes are aggregated at each tier of the chain.
• Cascade effect. Subsidiaries of subsidiaries are restricted once the 50% threshold is crossed.
• Most restrictive rule applies. If multiple restricted owners exist, the toughest license policy governs.
• Branches and divisions are covered. Even non-legally distinct operations fall under the Affiliates Rule.
• EAR99 is no safe harbor. Simple, uncontrolled items still require a license when affiliates are involved.
• Red Flag 29 adds a duty. Exporters must resolve ownership uncertainties or stop the transaction.
• CSL is no longer sufficient. Screening lists won’t catch all covered affiliates; ownership due diligence is mandatory.
• Petition process available. Non-listed affiliates can request BIS modification to exclude them if risk is low.
• Savings clause. Shipments already en route on Sept. 29 can be completed by Oct. 29 without a license.
• Universities and research institutions affected. Especially those with foreign partnerships or end-users tied to listed entities.
• Small and mid-sized defense firms at risk. Limited compliance resources make ownership checks harder to scale.
• Tech startups vulnerable. Venture funding and opaque ownership create exposure under the rule.
• Multinationals with JVs hit hard. Especially in aerospace, energy, and high-tech with ties to China, Russia, or sanctioned hubs.
• Financial institutions implicated. Banks, PE, and law firms must incorporate ownership into diligence and financing reviews.
• Global supply chains disrupted. Transactions through Europe, the Middle East, or Asia may suddenly become restricted.
• Immediate compliance upgrades needed. Companies must expand screening, enhance KYC, escalate reviews, and train staff.
• FD Associates is ready. We assist with risk assessment, red flag resolution, and tailored compliance strategies to keep exporters ahead of enforcements.

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III. FOCI and ITAR - The First Ownership Gatekeeper

The path to this moment is not new. The ITAR Regulations tied ownership to compliance decades ago. Under 22 C.F.R. §120.16, the definition of a “foreign person” includes entities under foreign ownership or control. For cleared contractors, the National Industrial Security Program Operating Manual (NISPOM) at 32 C.F.R. Part 117 requires mitigation of Foreign Ownership, Control, or Influence, usually through proxy boards, voting trusts, or technology control plans.

Crucially, the ITAR does not leave “ownership” and “control” undefined. 22 C.F.R. §120.65 expressly sets out what counts as ownership and control in this context, clarifying that both direct and indirect power to direct the policies of management of a company triggers ITAR coverage. Crossing the fifty percent ownership threshold has never automatically barred participation in defense contracting, but it has always presumed foreign influence and triggered mitigation. The message from ITAR was clear: ownership and control cannot be separated from compliance.

IV. OFAC and the Birth of the 50% Rule (2014)

The sharper turn came from sanctions. In August 2014, the Office of Foreign Assets Control (OFAC) issued its Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property Are Blocked. This guidance, grounded in 31 C.F.R. §500.310 and elaborated in OFAC’s published FAQs (398 and 401 through 403), confirmed that any entity fifty percent or more owned by one or more blocked persons is itself treated as blocked. The rule aggregates ownership stakes, so two sanctioned parties holding twenty-five percent each are treated the same as one holding fifty percent. Indirect ownership through shell companies also counts. Once blocked under the fifty percent rule, an entity remains blocked absent specific OFAC authorization. That guidance forced a shift across industry: list screening alone was no longer sufficient, because without knowing who owned a counterparty, one could not know whether the transaction was legal.

V. EAR and BIS Expansion (2014–2020)

BIS absorbed the same logic over time. Under 15 C.F.R. §744.11, the agency has long designated parties on the Entity List when their activities are deemed contrary to U.S. security. In 2020, BIS added 15 C.F.R. §744.21, creating a framework for “military end use” and “military end users” in China, Russia, and Venezuela. The Military End User List, set out in Supplement No. 7 to Part 744, formalized this approach. These rules did not yet impose a bright-line ownership test, but they tied export controls to affiliations and relationships that often turned on state ownership. The system was moving toward a recognition that control through ownership was itself an end-use risk.

VI. The September 29, 2025 BIS Rule

On September 29, 2025, BIS announced an interim final rule that decisively aligns its regulations with OFAC’s 2014 guidance by declaring that any subsidiary or affiliate owned 50 percent or more by an Entity List or MEU List party is automatically treated as if it were listed, eliminating loopholes that allowed clean subsidiaries to act as export fronts for listed parents, accounting for indirect ownership through layered structures and offshore holding companies, flagging significant minority ownership as a red flag requiring enhanced due diligence, and providing companies with a short transition period to unwind deals, re-screen counterparties, and update contracts before enforcement begins. This rule represents a full alignment of BIS’s approach with OFAC’s sanctions framework and ITAR’s FOCI principles, closing a critical gap in export control enforcement and reshaping compliance obligations across industries.

It is important to note where ownership is shared among multiple restricted parties, for example, one on the Entity List and another on the MEU List, BIS requires that the most restrictive licensing requirements apply, even if one owner’s stake is small. This “most restrictive” standard means exporters must trace and aggregate ownership across all restricted categories to evaluate license eligibility.

The reach of the rule is not theoretical. BIS illustrated in its Federal Register notice that if Company A is on the Entity List and owns 50 percent of Company B, which is not listed, then Company B is automatically subject to the Entity List restrictions. If Company B in turn owns 50 percent of Company C, then Company C is also restricted. The chain continues, even if the later-tier affiliates never appear on a BIS list. (See above)

VII. Country Risk Under the BIS 50% Rule

The September 29, 2025 BIS “50% Rule” expansion has different practical consequences depending on the country where your business or partners operate. Certain jurisdictions are far more likely to host Entity List or Military End User (MEU) parties, or to conceal beneficial ownership through state-owned enterprises (SOEs) and opaque holding structures.

High Risk (Directly Implicated)

• China, Hong Kong, Macau – Largest concentration of Entity List and MEU List parties. State-owned enterprises hold controlling stakes in aerospace, AI, quantum, and semiconductor firms. Even civilian-facing firms may be majority-owned by listed parents.
• Russia – Extensive Entity List coverage, particularly in aerospace, energy, and defense-industrial sectors. Sanctioned oligarch ownership structures are common.
• Iran – Wide-ranging restrictions, with nearly all major industrial entities majority-owned or controlled by sanctioned parties.
• Belarus – High overlap with Russian military-industrial base and sanctions.

Moderate Risk (Targeted Sectors, Regional SOEs)

• Venezuela – State-owned energy, mining, and defense companies frequently appear on BIS/OFAC lists.
• North Korea – Already nearly comprehensive embargo, but risk lies in indirect dealings via third countries.
• United Arab Emirates (select free zones/partners) – While not sanctioned, the UAE hosts intermediaries and holding structures that can obscure Chinese, Russian, or Iranian ownership. Enhanced diligence required.
• Turkey – Growing scrutiny for dual-use exports and middleman roles in Russia-related transactions.
• Cyprus – Also known as a transshipment point where companies are setup to facilitate transactions with China and Russia.

Lower but Not Zero Risk

• India, Malaysia, Singapore – Generally lower baseline risk, but technology hubs can attract Chinese/Russian capital or host opaque investment vehicles.
• Latin America (Brazil, Mexico, Argentina) – Lower Entity List presence, but risk arises when firms are partly owned by Chinese SOEs or used as transshipment points.

NOTE: This list is not all encompassing.

• EAR99 Implications are SUBSTANTIAL

 

1. EAR99/ECCN”99” in General

EAR99/ECCN “99” items are those not specifically listed on the Commerce Control List or are listed with an ECCN number with a 99 in it (i.e. 9A991- the AT controlled ECCNs). They typically don’t require a license for export to most destinations. But, and this is the critical point, they are still subject to end-use and end-user controls under Part 744 of the EAR. That means if your counterparty is restricted, EAR99/ECCN “99” status doesn’t help as it would continue to require export licensing, and because of a presumption of denial, it would likely not be approved.

1. How the 50% Rule Changes the Landscape

Under the new rule (amended 15 C.F.R. §744.11 and its supplements), any entity that is 50% owned by an Entity List or MEU Listed party is treated as if it were itself listed.

That means:

• Even EAR99 or AT controlled items (previously no license required) require a license if they are destined to such an entity.
• The presumption of denial that applies to listed entity and MEU parties applies equally to their majority-owned subsidiaries, no matter the classification of the item.
• A shipment of innocuous EAR99 or AT controlled spares, software, or support materials can now be just as prohibited as a controlled ECCN 9A610 or 3B001 item if the recipient falls under the new ownership test.

1. Examples

Imagine a U.S. company shipping common replacement fasteners classified EAR99 to a European distributor. On the surface, the distributor looks clear, it is not a named on the Entity List. But under the new rule, because it is 55 percent owned by a Chinese aerospace conglomerate already on the Entity List, that distributor is treated as listed. Suddenly, the EAR99 fasteners require a license from BIS, and that license will likely be denied.

Or consider a university sending EAR99 lab consumables to an overseas research partner. If the partner university is majority-owned by a foreign state entity that appears on the MEU List, the transaction is restricted even though the items are not controlled.

1. The EAR Takeaway

The September 29, 2025 rule makes it clear that classification alone does not insulate you from ownership risk. EAR99 or AT controlled (previously no license required commodities) no longer represents a “safe harbor” when the recipient is owned by a listed entity. Screening for ownership is now as important as screening for the entity name itself. For exporters and compliance teams, the message is blunt: if you don’t know who owns your counterparty, you don’t know whether you can legally ship, even if all you are sending is EAR99.

IX. Who This Hits Hardest

The new rule falls hardest on companies that lack the resources or visibility to conduct deep ownership checks. Small and medium-sized enterprises are at the front line. Many rely on thin compliance budgets and basic screening tools, which makes them especially vulnerable when their distributors, resellers, or investors are majority-owned by listed parties. A Virginia-based commercial drone quadcopter company, for example, might sell through a European distributor that appears clean in standard screening, only to discover it is 60 percent owned by a Chinese aerospace conglomerate on the Entity List. In that situation, every shipment becomes un-licensable, enforcement risk escalates, and prime contractors disengage.

Tech startups in dual-use fields face a different but equally severe challenge. Venture funding that tips foreign ownership past fifty percent can instantly flip their licensing posture from compliant to prohibited. One financing round can jeopardize the ability to ship, partner, or even continue operations in the U.S. market.

Larger multinational firms are also caught when joint ventures with state-owned enterprises shift into restricted territory. Even if the venture itself has never appeared on a list, once majority ownership by a listed entity is established, the restrictions apply. This creates contractual uncertainty, operational disruption, and reputational risk in industries like aerospace, energy, and advanced manufacturing.

Financial institutions and professional services firms also bear new exposure. Banks, private equity funds, and law firms structuring transactions in jurisdictions such as Cyprus, the British Virgin Islands, or Hong Kong may inadvertently become conduits for restricted ownership structures if diligence stops at name screening. These sectors must now implement forensic-level beneficial ownership checks to avoid entanglement with listed parents.

X. Real World Example of Complexity

The Aviation Industry Corporation of China (AVIC) is explicitly listed on the Military End User List (MEU) under BIS’s Supplement No. 7 to Part 744744 and is also listed on the Entity List, Supplement No. 4 to Part 744 of the EAR.  As a Chinese state-owned aerospace and defense conglomerate, AVIC maintains a vast portfolio of subsidiaries and equity stakes, many of which straddle civilian and military sectors.

Because AVIC is an MEU, under the September 29, 2025 “50 % Rule,” any entity that is 50 percent or more owned (directly or indirectly) by AVIC is now treated as though it were similarly restricted—even if that entity has never been named on a BIS list itself.

Several publicly reported U.S. connections illustrate how this might play out in practice:

• AVIC owns Cirrus Aircraft, which is headquartered in Minnesota, making Cirrus a U.S. subsidiary of a Chinese aerospace conglomerate.
• Through acquisitions, AVIC has gained control of or influence over U.S. firms in aerospace and component manufacturing, including the U.S.–based steering systems company Nexteer Automotive. In 2010, Nexteer, based in Michigan, was acquired by a subsidiary of AVIC.
• AVIC has also acquired U.S. component firms and supply chain assets, such as Continental Aerospace Technologies (through which it indirectly controls Thielert, Southern Avionics, and Danbury Aerospace).
• AVIC also has dozens of subsidiary companies in Europe either from U.S. owned companies or European founded companies.

Think about a U.S. company shipping basic avionics part to a domestic or a foreign subsidiary of a U.S. company in Europe. On paper, everything looks fine, the distributor isn’t on any government list and it passes routine screening. But, if that distributor is a majority owned by a U.S. company and that company is ultimately controlled by AVIC in China, the new BIS rule makes the transaction restricted.

The outcome is simple and costly as a license would be required, and it would almost certainly be denied. That means the exporter risk in losing or delaying contracts, facing compliance penalties and damaging its reputation with prime contractors.

The rule also makes clear that branches and non-legally distinct operations of listed entities are treated as affiliates, closing another common gap. The lesson is clear. It is not enough to know who you are selling to by name. You need to know who owns them.

XI. Steps to Address the New Era

The September 29 rule makes clear that traditional denied party list screening alone is not enough. To address the new ownership-based obligations under 15 C.F.R.§744.11 and it supplements companies and its employees must take the following steps:

1. Conduct Beneficial Ownership Checks. Move beyond surface screening. For all counterparties determine the direct and indirect owners, including through registries, corporate filings and reliable commercial databases.
2. Request certified ownership structure. Develop and implement a certification that requires counterparties to certify their structure.
3. Escalate complex structures. When ownership appears opaque or layered through offshore companies, escalate immediately to the Empowered Official or legal team. Do not proceed with the transaction until you are given the trade compliance all-clear.
4. Document Ownership Diligence. Documentation is your friend here, having a process can demonstrate and are following for all international transactions is imperative. Maintain records of how the ownership was determined, what sources were used and any escalation decisions. Remember that documentation is critical for demonstrating compliance in an audit.
5. Train Staff and Suppliers. Provide annual training on the BIS 50% rule on OFAC parallel ownership rule Make clear that EAR99 and AT controlled ECCN’s are not exempt when the counterparty is majority-owned by a listed entity.
6. Assume Presumption of Denial. For transactions involving majority owned affiliates of listed parties, do not rely on licensing as a fallback. BIS has indicated such licenses will face a presumption of denial.

BIS created two procedural relief mechanisms.

• First, a savings clause allows shipments that were already en route on September 29 pursuant to actual orders to be completed without a license if they arrive by October 29, 2025.
• Second, non-listed affiliates captured solely through ownership may petition BIS under §744.16(e) or §744.21(b)(2) to request that their parent’s entry be modified to exclude them if diversion risk is demonstrably low.

NOTE: In addition, BIS created a new Red Flag 29 in Supplement No. 3 to Part 732. If an exporter has reason to know that a counterparty may be majority-owned by a listed party but cannot determine the exact ownership, there is now an affirmative duty to resolve the question. If ownership cannot be confirmed, the transaction must be stopped unless a BIS license is obtained. Simply screening names is no longer enough.

XII. Conclusion

The rule is effective immediately as of September 29, 2025. BIS also issued a Temporary General License (TGL) that remains in effect through November 28, 2025. The TGL is narrow. It allows certain exports, reexports, and transfers involving affiliates captured only by ownership, provided either: (1) the destination is in Country Group A:5 or A:6, or (2) the affiliate is a joint venture with a U.S. or A:5/A:6 partner that is not itself majority-owned by a restricted party. The TGL does not apply if the affiliate is owned in any percentage by a Specially Designated National under a §744.8 program, and it only suspends the new ownership-based license requirement. All other EAR requirements remain in place. This change means that list screening alone is no longer enough. Exporters must be able to identify the beneficial owners of their counterparties, document how that determination was made, and escalate cases where ownership is opaque. Even shipments of EAR99 and AT controlled items will now require a license if the counterparty is majority-owned by a listed entity, and those licenses will almost always be denied.

The takeaway is clear. Ownership checks must become a standard part of every compliance program, alongside classification and licensing. Companies that do not adapt quickly will face blocked transactions, contract losses, and heightened enforcement risk once the 60-day window closes.

At FD Associates we understand that the September 29, 2025 rule doesn’t just raise the compliance bar, it fundamentally changes how business must approach ownership, risk and due diligence. Our team has decades of experience interpreting BIS and OFAC guidance, and designing compliance programs that work in the real world, not just on paper. We can discuss strategies to address these obligations.

Whether you are a startup navigating foreign investment, a smaller or mid-tier defense supplier under pressure from primes, or a multinational with joint ventures abroad, FD Associates can help you map beneficial ownership, evaluate exposure under the 50% rule, and put in place procedures and safeguards regulators expect. The rule may be blunt, but the path forward does not have to be. With the right partner, companies can protect contracts, reduce risk, and stay ahead of enforcement.

FD Associates is that partner. Please reach out to use at +1.703.847.5801 or info@fdassociates.net