Commerce Department Significantly Expands Scope of Certain Export Restrictions

Companies with robust export sales, particularly in high tech sectors, have significant new compliance obligations. The Commerce Department’s Bureau of Industry and Security (BIS) has issued a new rule expanding restrictions applicable to restricted parties on the Entity List and the Military End-User (MEU) List to any entities owned 50% or more by those restricted parties (the “BIS Affiliates Rule”). The BIS Affiliates Rule intends to close a perceived “loophole” in restricted party lists that enabled continued exports of restricted items to corporate affiliates of restricted parties. BIS concluded that this loophole created a high risk of illegal diversion of sensitive U.S. products. The BIS Affiliates Rule is now in effect with certain exceptions authorized through December 1, 2025, for exports to entities in a limited set of countries otherwise subject to restrictions. Accordingly, exporters of items subject to U.S. export control jurisdiction will need to now assess their counterparties’ ownership and screen against the Entity List and MEU List to ensure compliance with the added restrictions imposed by the BIS Affiliates Rule.

Overview of Rule Change

The Entity List is a restricted party list administered by BIS that imposes licensing requirements on the export, re-export, and in country transfer of items subject to the Export Administration Regulations (EAR). Generally, all items subject to the EAR (even low-tech items made in the United States) are subject to a licensing requirement for shipment of those items to restricted parties on the applicable lists, and any applications for licenses are reviewed by BIS with a presumption of denial.

From the Entity List’s inception in 1997, the licensing requirements imposed on Entity List restricted parties applied only to the designated restricted party that was specifically named on the list; affiliates were not automatically deemed to be designated. In contrast, the Treasury Department’s Office of Foreign Assets Control has applied a 50% rule to persons listed on the Specially Designated Nationals and Blocked Persons (SDN) List, applying sanctions to designees on the SDN List and all entities owned 50% or more by such designees. The BIS Affiliates Rule aligns the scope of application of the Entity List and MEU List with the SDN List.

As of September 29, 2025, any non-listed entity owned 50% or more, directly or indirectly, individually or in aggregate, by restricted parties designated on the Entity List or MEU List is now subject to the licensing requirements applicable to such designated restricted parties. In cases in which the 50% threshold is met by aggregating ownership and the licensing requirements differ among the restricted party owners, BIS will apply the most restrictive licensing requirements to the non-listed entity.

Concurrent with the issuance of the BIS Affiliates Rule, BIS issued a Temporary General License (TGL) providing a limited grace period for certain exports through December 1, 2025. The TGL authorizes exports to non-designated foreign affiliates of restricted parties designated on the Entity List or MEU List located in countries listed in Country Groups A:5 or A:6 in the EAR, and to non-designated foreign affiliates located in certain other countries that are a joint venture with a company headquartered in the United States or certain other U.S.-allied countries.

Finally, the BIS Affiliates Rule has amended BIS’s KYC Guidance to impose an affirmative duty on exporters who have knowledge that a counterparty has some ownership by a restricted party to determine the percentage of such ownership. If such information is not available, the exporter must obtain a license from BIS prior to exporting.

Implications

Exporters of items (physical goods, software, and technology) subject to the EAR will need to update their compliance programs to obtain ownership information of their customers: including end users as well as distributors, resellers in order to confirm they are not subject to licensing requirements pursuant to the BIS Affiliates Rule.

As items subject to the EAR include both U.S.-origin items and foreign-made items that incorporate more than a de minimis amount of U.S.-origin components, or are made with certain U.S.-origin equipment, software, or technology, this assessment will need to extend to non-U.S. companies that deal in items subject to the EAR. These obligations apply to U.S. exporters as well as non-U.S. exporters outside the United States that handle items subject to the EAR.

Going forward, exporters should ensure that their compliance programs include screening procedures that review the ownership of counterparties to determine whether any parent companies are designed on the Entity List or MEU List. Reliance on the Commerce Department’s Consolidated Screening List, for example, will no longer be sufficient.

Companies that have economic sanctions screening procedures in place that already look at ownership for sanctions compliance purposes can expand the procedures to screen against the Entity List and MEU List as well. Ownership diligence procedures can often be challenging to administer, as ownership information is often viewed as sensitive proprietary information. As with all procedures, a risk-based approach is often the most effective, and is also in consistent with U.S. Government expectations.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta L. Nightingale, an O’Melveny partner licensed to practice law in the District of Columbia; David N. Kelley, an O’Melveny partner licensed to practice law in New York and Connecticut; David J. Ribner, an O’Melveny partner licensed to practice law in the District of Columbia and New York; and Hannah V.L. George, an O'Melveny associate licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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