BIS’s New Export Control Rule Increases Compliance Burden for Companies

As part of the new rule, any affiliates that are at least 50% owned by entities on the Entity List or Military End-User list will be subject to export restrictions, but identifying them is not always a straightforward task, Pillsbury partner Jennifer Kennedy Gellie, of the International Trade practice, told Global Investigations Review.

“This is absolutely a heightened compliance obligation compared to the prior legally distinct standard,” which only required a company be legally distinct from a listed entity, said Gellie, the former chief of the Department of Justice’s Counterintelligence and Export Control Section. “The issue is going to be this 50% rule really expands the type of due diligence that is going to have to happen, and it’s going to be really difficult if you are dealing with countries that are a bit more black-box.”

While China is a persistent area of focus, it is not the only country that “makes it hard for those on the outside sometimes to figure out what that corporate structure looks like,” Gellie said.

It’s not the first time companies have grappled with a 50% ownership threshold, given the Office of Foreign Assets Control's own version of the rule has been in place from as early as 2008, Gellie noted. But its sudden implementation and tall compliance orders could leave companies scrambling to reassess their export programs.

That is why Gellie thinks it’s possible there will be an uptick in voluntary self-disclosures as companies realize their programs had missed someone in the corporate structure that pushed a business over the 50% ownership mark.

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