BIS 50% Rule: Compliance for Controlled Entities

What Is the BIS 50% Rule?

The BIS 50% Rule, defined by the US Department of Commerce’s Bureau of Industry and Security (BIS), stipulates that any entity 50% or more owned - individually or collectively - by sanctioned individuals or entities becomes subject to export restrictions under US sanctions. This rule ensures sanctioned parties cannot use complex ownership structures to bypass export limitations, maintaining the integrity of sanctions compliance.

Here’s an illustration for clarity:

If Company X in Germany is 60% owned by a Russian firm listed on the BIS Entity List, Company X becomes restricted under BIS’s 50% Rule. Exporting US - origin goods to this German company would require a specific licence.

This rule applies not only to US - produced goods but also to foreign products incorporating significant US - origin technology or components, reinforcing its relevance in modern supply chains.

Purpose and Scope

The purpose of the BIS 50% Rule is to close compliance loopholes that might enable sanctioned parties to access US - controlled goods, software, and technology. Integral to this rule is its focus on indirect ownership, particularly in:

  • Dual - Use Items: Items with both civilian and military applications.
  • US - Origin Goods and Content: Encompasses items regulated by the Export Administration Regulations (EAR).
  • Collective Ownership: Restrictions apply when multiple sanctioned parties collectively own ≥50% of an entity.

Key Context:

  • A Chinese distributor might supply both civilian drones and components for military equipment. If the distributor is 51% cumulatively owned by two separate sanctioned parties, transactions involving US - origin technology or components are automatically prohibited under the BIS 50% Rule.

Legal Framework and Authority

The BIS 50% Rule is an extension of the Export Administration Regulations (EAR), which are implemented and enforced by the BIS under the US Department of Commerce. This legal framework complements other international sanctions regimes, such as the OFAC 50% Rule applied by the US Treasury Department.

Key aspects include:

  • Ownership Transparency: The BIS framework is focused on ensuring that companies transparently assess ownership structures.
  • Alignment with OFAC: Cross - referencing is critical for transactions involving both export compliance (BIS) and financial compliance (OFAC).

LSEG Risk Intelligence supports adherence to this regulatory framework through solutions such as LSEG World-Check, which identifies sanctioned parties and alerts compliance teams to ownership risks.

How the BIS 50% Rule Works

To apply the BIS 50% Rule in practice, organisations must follow several compliance steps:

  1. Ownership Verification: Determine whether any party on the BIS Entity List or other sanctioned list holds 50% or more ownership (individually or cumulatively).
  2. Aggregate Control Dynamics: Add together partial ownership by multiple sanctioned entities to determine whether the 50% threshold is met.
  3. Transaction Screening: Evaluate transactions for items restricted under EAR regulations, such as dual - use technology.

For enhanced efficiency, solutions like LSEG World - Check One facilitate ownership screening at scale, offering detailed hierarchical insights and comprehensive reporting required for audit trails.

Difference Between BIS and OFAC 50% Rules

Aspect BIS 50% Rule OFAC 50% Rule
Administered By BIS, US Department of Commerce OFAC, US Treasury Department
Focus Export controls on items and technology Financial asset freezes and prohibitions
Jurisdiction EAR - regulated global goods & technology Transactions with US financial nexus
Critically, while BIS focuses on indirect control over tangible assets, OFAC is concerned with financial transactions involving sanctioned ownership or connections. Businesses operating internationally must remain vigilant of both aspects to avoid inadvertent breaches.

Implications for Businesses

Global organisations must align export operations and supply chains with the BIS 50% Rule requirements to mitigate operational risks. Factors that warrant close attention include:

  • Ownership Dynamics: Screening not just direct partners but their subsidiaries.
  • Mitigating Third - Party Risks: Relationships spanning sanctioned or high - risk jurisdictions.

LSEG supports businesses in navigating these compliance complexities by offering:

Application to BIS Entity and Military End User Lists

The BIS 50% Rule applies explicitly to organisations featured on:

  1. BIS Entity List: Designates entities requiring a specific licence for specific goods and technologies.
  2. Military End User (MEU) List: Focuses on entities known for supporting military objectives, prohibiting relevant exports without authorisation.

Organisations or subsidiaries that breach the ownership threshold aligned with these lists are automatically classified as restricted entities.

Example:

  • A software vendor in Tokyo aiming to supply US - origin encryption software to a company partly owned (55%) by a sanctioned defence contractor would require a BIS licence, irrespective of the vendor’s Japanese ownership.

Compliance Best Practices

Violations of the BIS 50% Rule can result in:

  1. Administrative Fines: Up to $300,000 per violation.
  2. Loss of Export Privileges: Any deliberate or accidental infraction severely impacts market access.
  3. Criminal Accountability: Particularly in cases of intentional violations.

Examples and Case Insights

Illustrating the application of the BIS 50% Rule in practical terms can clarify compliance risks for organisations:

  1. Hypothetical Scenario - Hong Kong Distributor: A technology distributor in Hong Kong seeks to import US - origin software components. A compliance screening reveals that the distributor is 55% owned by a sanctioned entity listed on the BIS Entity List. This ownership automatically subjects the distributor to the same restrictions as its sanctioned parent, blocking the transaction without proper licensing.
  2. Hypothetical Scenario - Turkish Logistics Affiliate: A logistics company in Turkey unknowingly collaborates with a subsidiary of a Russian entity under sanctions. Later analysis shows the subsidiary to be 52% owned by one or more entities under BIS export controls. Under the BIS 50% Rule, exports involving US - origin dual - use goods destined for this company would require approval.

Conclusion

Understanding and adhering to the BIS 50% Rule is critical for businesses linked to global trade. This regulation prevents indirect access by sanctioned entities to US - origin products. By leveraging LSEG’s innovative risk intelligence solutions, such as World - Check On Demand, companies can address ownership risks in real - time and maintain robust compliance programmes.

FAQs

  • The BIS 50% Rule is a regulation issued by the Bureau of Industry and Security (BIS) under the US Department of Commerce. It states that any business entity owned 50% or more by one or more sanctioned entities under US export controls is subject to the same restrictions as its owner. This ensures compliance with US laws by preventing indirect access to controlled goods, software, or technology.

  • The BIS 50% Rule is issued and enforced by the BIS, part of the US Department of Commerce. The bureau ensures compliance with the Export Administration Regulations (EAR), which include the 50% ownership provision.

  • The 50% ownership threshold prevents sanctioned parties from using majority - owned subsidiaries or affiliates to bypass export controls. By targeting entities with substantial ownership stakes held by sanctioned individuals or entities, it closes loopholes that might otherwise undermine sanctions enforcement.

  • If a parent entity or multiple sanctioned entities collectively own 50% or more of a subsidiary, the subsidiary is automatically subject to BIS sanctions. This means that exports, re - exports, or transfers of controlled goods or technology to such subsidiaries become restricted under the rule.

  • While the BIS 50% Rule is part of the EAR focusing on export and re - export controls, the OFAC 50% Rule pertains to financial transactions and asset controls under the US Treasury. BIS primarily manages trade and technology - related restrictions, while OFAC oversees sanctions linked to the financial system.

  • Yes, the BIS 50% Rule has extraterritorial reach. It applies to US - origin goods, software, and technology globally, as well as foreign - made items that incorporate more than a de minimis amount of US - controlled content.

  • The BIS Entity List is a detailed compilation of foreign entities, businesses, or individuals subject to specific licence requirements for dealing with US - origin goods and technology. Entities are added based on activities deemed inconsistent with US national security and foreign policy interests.

  • The BIS updates the Entity List periodically based on evolving threats, geopolitical developments, or new enforcement actions. Updates can include adding or removing entities, reflecting ongoing assessments of global security risks and compliance requirements.

  • The MEU List identifies foreign organisations engaged in military operations or end - use activities contrary to US national interests. Any entity included on this list requires a specific licence to receive US - exported products, regardless of commercial or civilian use.

  • The ownership threshold under BIS rules is 50%. Once this threshold is reached - individually or collectively - sanctioned ownership triggers the same export controls as those applied to the sanctioned entity itself.

  • Businesses should conduct ownership screening using compliance solutions that trace beneficial ownership hierarchies. Tools like LSEG World - Check enable real - time due diligence, automated monitoring, and analysis of entities across sanctions and enforcement lists, helping to identify indirect ownership risks.

  • Non - compliance with the BIS 50% Rule can result in significant administrative penalties, including fines up to $300,000 or twice the transaction value, revocation of export privileges, and, in severe cases, criminal prosecution.

  • The BIS enforces the EAR, which governs the export and re - export of US goods, technology, and services, including those subject to the BIS 50% Rule. EAR compliance ensures that export restrictions align with US foreign policy and national security goals.

  • Yes, non - US companies that violate BIS rules - for example, by re - exporting US - origin goods to sanctioned parties - can face enforcement actions. These can include civil penalties, loss of export privileges, and legal proceedings.

  • To mitigate risks, businesses should integrate ownership screening into their risk management frameworks. Employing automated solutions like LSEG’s World - Check One allows firms to identify sanctioned ownership and potential control risks effectively while remaining compliant with shifting regulations.

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