NOTE: Implementation of this rule has been postponed by one year. For more details click here.
A new rule will apply Bureau of Industry and Security [“BIS”] sanctions to “affiliates,” and thus the sanctions will be expanded to include certain non-listed companies. This will create a de facto increased obligation for exporters to collect data and perform due diligence on export transactions.
As most of you know, State Department sanctions “flow-down,” meaning that if a company is sanctioned and it controls another company, the sanctions apply to the controlled company as well, even though the controlled company might not be listed as a sanctions-target.
The new BIS rules will apply a similar “flow-down” approach to any transaction that is subject to the jurisdiction of the BIS (which is most transactions in civil aircraft parts). If the potential partner is owned by a business or person that is restricted under Commerce or Treasury regulations, then the restrictions may “flow-down” to the potential partner. The rule is published in multiple parts, so here is a summary of the relevant parts:
- If the parent entity is sanctioned under the BIS Entity List, and the parent entity owns 50% or more of the child business, then the child business is treated as if it were a BIS-sanctioned business as well (new language in 15 C.F.R. § 744.11(a)(1)).
- If the parent entity is sanctioned as a military end user (“MEU”) under the BIS rules, and the parent entity owns 50% or more of the child business, then the child business is treated as if it were a BIS-sanctioned business as well (new language in 15 C.F.R. § 744.11(a)(1)).
- If the parent entity is sanctioned as a Treasury Department Specially Designated National (SDN), and the parent entity owns 50% or more of the child business, then the child business is treated as if it were a BIS-sanctioned business as well (new language in 15 C.F.R. § 744.8(a)(2)).
- For purposes of these rule, ownership will include direct or indirect ownership; if two or more restricted entities own 50% or more of a business, then their ownership will be aggregated for purposes of identifying whether the rule applies.
- Generally these restrictions will not (yet) flow-down from the unlisted entities. Thus if an unlisted child entity is restricted by these rules, then its own 50%-owned subsidiaries (grandchildren) will typically not be affected by the restrictions until (1) the child-owner is listed or (2) the grandchild is listed.
- The child business who is affected by these rules can request that it be specifically excluded from its parent listing. If this is successful, then parent entity’s listing (on the Entity List) would be modified to exclude the child business (new language in 15 C.F.R. §§ 744.16(e); 744.21(b)(2)).
This is an interim final rule, which means it became effective immediately, backdated to September 29, 2025. The government has opened comments on this interim final rule, through October 29, and if any reader sees ways to improve the rule, please let us know so that we can make sure your comments are received.
Compliance diligence remains important. We can see this from the latest addition to the Entity List. Tomorrow, the U.S. government plans to add TGB Aviation to the BIS sanctions list (it will be effective as of today). TGB Aviation is a parts distributor in Turkey and they are accused of shipping U.S.-origin aircraft components into Iran.