The BIS 50% Rule

Source: Kharon (January 2025)

As shown in the diagram, one of Geovis Technology’s majority-owned subsidiaries (65% shareholding) is Geovis Environment Technology. According to analysis by a global risk analytics provider, Geovis Environment Technology has sold services including data analysis and processing systems to BIS-Listed entities including its parent (listed since 2024),  and the National University of Defense Technology [of China] (listed since 2015). Geovis Environment Technology has also sold services to two additional suppliers to the National University of Defense Technology.

At the date of this article, Geovis Environment Technology has not been added to the BIS Entity List and would not previously have been subject to export restrictions, despite being a majority-owned subsidiary of a listed entity. Under the BIS Affiliates Rule, it will also be considered subject to the same restrictions as its listed parent entity.

OFAC’s 50% Rule: A Model – But with Differences

If a foreign entity is a majority-owned or wholly-owned subsidiary of an entity on the BIS Entity List, BIS MEU List, or the specified subset of the OFAC SDN List, it is subject to the same restrictions as the parent entity.

The Affiliates rule is modeled on the OFAC 50% Rule: the BIS statement states that it is “designed to be consistent with longstanding Department of the Treasury practice.”

There are common elements between the BIS and OFAC Rules:

• Direct and indirect ownership count towards the 50% threshold.
• The threshold applies in aggregate. This means that if an entity is owned by several listed companies, these shareholdings are added together.

A “significant minority ownership” by listed entities (BIS or OFAC), or leadership links to listed entities, are also a “red flag of diversion risk” and require additional due diligence.

In contrast with many types of economic sanctions, being subject to export control licensing requirements does not bar all activity with the entity. Instead, a more nuanced analysis is required which includes the end use, end user, licenses required, and licenses held.

Actions for Financial Institutions to Take

Following the New Guidance to Financial Institutions, published by BIS in October 2024, financial institutions should already have incorporated export controls into their counter illicit finance programs. The scope of the guidance and potential actions for banks are described here.

In response to the BIS Affiliates Rule, financial institutions would be well-advised to re-confirm and, where required, adapt their existing controls to ensure the requirements are met:

1. Screen against BIS as well as OFAC lists: Financial institutions should already have implemented the systems and processes to identify any direct exposure to potential export control violations, such as clients or potential clients who are listed by BIS or OFAC. As lists can change, ongoing screening and monitoring is also required. Where exposure is identified, further investigation should be performed.

2. Augment lists with ownership data to identify indirect and aggregate exposure: To identify entities subject to restrictions under the BIS Affiliates rule, institutions should identify the ownership structures (parents and subsidiaries) and the ownership percentages. This data should be applied to identify whether any clients, potential clients, or counterparties are subject to restrictions under the Affiliates rule. Additionally, they should ensure that “significant minority” or leadership links are also identified. Since new subsidiaries can be created, the data must continue to be maintained, and be an input to ongoing screening and monitoring. Where exposure is identified, further investigation should be performed.

3. Review clients and counterparties: Institutions should review clients and counterparties to identify any existing exposure. For example, if a client has engaged in extensive transactional activity with an entity newly subject to restrictions under the BIS Affiliates rule, it should be investigated further. This may require enhanced trigger due diligence, closer monitoring, or even client exit.

4. Provide training for due diligence, transaction monitoring, investigations, and other staff on export control specific measures: As described above, export controls can be more nuanced than sanctions. For example, trade (and the financing of it) may be permitted with a listed entity or subsidiary if licenses are in place. Staff with export control responsibilities should be provided with training to ensure they understand and are able to apply export control specific considerations in due diligence, transaction monitoring, and investigations.

5. Consider enhancement of export control programs to include additional dual-use data: As export control requirements become increasingly rigorous, institutions could consider enhancing their programs with additional data sources to more efficiently identifying trade risk factors. These data sources could include maritime and transponder data to identify anomalies in routes that may indicate export control or sanctions evasion, dual-use cargo data to identify inconsistencies in prices or vessel-cargo combinations, or owner-operator that may indicate the ship is part of a shadow fleet. While none of these suggestions are required under the BIS Affiliates rule, in an environment with increasingly sophisticated diversion methods, additional data sources can help spotlight real risks and minimize false positives.

The BIS Affiliates Rule closes a loophole that facilitated unlawful diversion of sensitive and restricted components to western adversaries. By closing it, better protection is provided for these items, and export controls are moved into closer alignment with sanctions.