Export control experts are well aware of the OFAC 50% rule. But now BIS is considering an extension of the rule to the Entity List. What would it mean for you?
The 50% rule in US sanctions law includes indirect provisions and is the US equivalent of the ban on indirect provisions in EU sanctions regulations. Specifically, the 50% rule refers to companies that are not sanctioned themselves but are still subject to bans on indirect provisions if they are owned or controlled to 50% or more by a sanctioned entity. One characteristic of the application area of these bans on indirect provisions is that the affected entities themselves are not listed on sanctions lists.
The dilemma for companies is that a default screening of their business partner against relevant sanctions lists does not return any matches and they have no business relationships with the owners of their business partner that would in fact result in a match. Identifying bans on indirect provisions therefore always requires research concerning the ownership constellations behind the actual business partners.
Currently, the 50% rule applies to all sanctions programs of the US Specifically Designated Nationals List – in short, the SDN List. The SDN List is the US financial sanctions list and it is managed by the Department of the Treasury – Office of Foreign Assets Controls (OFAC). Only US companies are subject to fully comprehensive compliance with this list.
However, since a few sanctions programs in the SDN List also involve secondary sanctions, companies outside the US also check their business partners and their owners against the SDN List. This is based on the US understanding that secondary sanctions must be observed worldwide, and thus also by non-US companies. The 50% rule in the SDN List has a very limited application area for companies based outside of the US.
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The significance of the 50% rule for companies outside of the US could increase considerably if a 50% rule were to apply to the US Entity List (EL) as well in the future. The EL is a list of extraterritorial US export control laws under the Export Administration Regulations (EAR) and it is administered by the US Department of Commerce’s Bureau of Industry and Security (BIS). The EAR apply worldwide to trade involving US products – and there are many of them in companies around the world.
The inclusion of the 50% rule in the US Entity List of the BIS is planned and already prepared in light of massive evasions of sanctions against Russia. Particularly in view of the good trade relations between China and Russia, the US wants to prevent US products from reaching Russia unnoticed via unlisted Chinese entities that are owned by sanctioned Chinese companies, research institutes, and universities.
A real-life use case: The Huawei Technologies Group has more than 200 locations around the globe that are listed on the EL. Due to the extraterritorial scope of the EAR, re-exporting US products to these worldwide locations that are explicitly mentioned is effectively prohibited. Given that there are many more Huawei locations than the ones that are explicitly listed and these locations are not subject to re-export bans due to the lack of a 50% rule, it becomes clear that the US would like to close this gap.
The course of action planned by the US is perfectly understandable. However, including the 50% rule in the US Entity List would lead to a significant additional burden for companies outside of the US. All companies that have US products in their portfolio would have to check their re-exports against the EAR, which would include the 50% rule for non-listed business partners.
In practice, this will lead to considerable difficulties simply because many companies do not even know which products fall within the scope of the EL as US products. At present, this is not causing any problems, as most business partners are checked against the Entity List regardless of US-product considerations. If the screening returns a match, companies begin to consider the legal consequences of that match, which then also includes identifying the US product.
If this procedure is applied to the US Entity List with a 50% rule, the ownership structures of all business partners would have to be determined and checked for a listing in the EL. The additional time and money required to do so would be immense.
On the positive side, the US authorities have not (yet) been able to decide upon enacting the 50% rule. Instead, a 50% rule with limited application is currently being discussed, particularly with regard to business activities with China. We are following the discussions with interest and will keep you informed. Just sign up to our newsletter to make sure you don't miss it.
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