Treasury Secretary: Bureau of Industry and Security’s 50% Rule Suspended for One Year
Treasury Secretary: Bureau of Industry and Security’s 50% Rule Suspended for One Year
By John H. Kester and Oliver M. Krischik
Effective November 10, the U.S. will be suspending for one year the so-called “50% Rule” or “Affiliates Rule” that had extended applicability of Entity and Military End-User List restrictions, according to the White House. The move had been telegraphed by Secretary of the Treasury Scott Bessent in an interview on Fox Business last week.
The U.S. Department of Commerce’s Bureau of Industry and Security announced in September an interim final rule (“IFR”) stating that any entity that is at least 50 percent owned by one or more entities on the Entity List or the Military End-User List (“MEU List”), directly or indirectly, individually or in aggregate, would itself automatically be subject to Entity List/MEU List restrictions. The rule had downstream effect, meaning that if, e.g., an Entity List listed entity owns 50 percent of Company B which in turn owns 50 percent of Company C, even Company C is subject to Entity List restrictions. See, FAQ Answer 52.
“We are going to be suspending that for a year…in return for the suspension…on the rare earth licensing regime,” Bessent said in the interview. The suspension is not effective until November 10th, according to the White House, and so transactions before then remain subject to the Affiliates Rule.
For its part, China agreed to suspend new export controls it had announced on October 9th, and will issue general licenses valid for exports of rare earths, gallium, germanium, antimony, and graphite, according to the Administration, which it characterized as a de facto removal of the controls imposed by China since 2023. The actions are part of a broader set of agreements between both parties that also include the U.S. lowering tariffs on Chinese goods for a one-year period, also effective November 10th, and China removing a number of its retaliatory tariffs and agreeing to purchase from the U.S. at least 12 million metric tons of soybeans from the U.S. this year and at least 25 million metric tons in each of 2026, 2027, and 2028, the White House stated.
Broadly, the Entity and MEU Lists impose supplemental export license requirements on parties whose activities BIS has deemed contrary to U.S. national security or foreign policy interests, or who present an unacceptable risk that goods will be used in or diverted to a military end-use.
Exporters and transportation intermediaries should take note that the rule will remain effective until November 10, 2025, which means that the “Affiliates Rule” remains effective for shipments and transactions occurring between September 29 and November 10, 2025. GKG Law on October 1 previously alerted exporters to prudent compliance steps in response to the Rule. The Temporary General License (“TGL”) remains in effect at this time authorizing shipments subject to certain terms and conditions.
Notwithstanding the one-year suspension, it would be prudent for forwarders, logistics providers, exporters, and manufacturers to continue developing their compliance programming and systems to account for the “Affiliates Rule” for the following reasons:
- Potential Change in Policy. It is possible that the U.S. government will reimpose the “Affiliates Rule” early if there are problems with other terms of the agreements with China.
- Ownership Due Diligence Can Take Time. Due Diligence with respect to ownership can take time with certain partners and sometimes require follow up communications. Further, under the “Affiliates Rule,” exporters have an affirmative obligation to determine ownership percentages of any identified Entity List or MEU List owners before proceeding with unlicensed transactions. To the extent any ownership due diligence has not yet been completed, parties would benefit from having ownership due diligence complete for important and/or ongoing suppliers, partners, customers, and service providers when the rule comes back into effect.
- Addressing Affected Partners. If companies have owners or partners that were affected by the “Affiliates Rule” identified during due diligence, the suspension period provides time for divestment of shares or for the parties to seek exemption from the “Affiliates Rule” by applying to the End-User Review Committee.
- Updating Contractual Language. Existing contracts and contracts entered into during the suspension period may have terms that extend through November 10, 2026. It would be prudent for companies to ensure that contracts to have appropriate provisions to handle due diligence procedures, reporting of changes in ownership or suspected noncompliance, and noncompliance generally.
- Policies, Procedures, and Training. To the extent that compliance programs and training have not been updated to account for the “Affiliates Rule” or to incorporate new controls with respect to ownership screening, the suspension period provides additional time to: (1) effectively integrate those elements into companies’ policies and procedures; (2) and train staff on upcoming regulatory requirements and internal procedures.
- Partners’ Risk Management Policies. Partners may insist that companies conduct and certify ownership screening even during the suspension period. While the “Affiliates Rule” will be suspended, U.S. economic sanctions programs continue to include restrictions based on ownership of listed entities. Accordingly, contractual requirements or risk management policies regarding ownership screening in supply chains may continue to develop in industries during the suspension period.
We hope this is helpful, and please let us know if you have any questions.
John H. Kester jkester@gkglaw.com
Oliver M. Krischik okrischik@gkglaw.com
