The Bureau of Industry and Security (BIS) is considering a 50% rule to address loopholes that are being used by subsidiaries of parent organizations on the BIS entity list. The proposed regulation would be similar to current to regulations enacted by the Office of Foreign Asset Controls (OFAC). This action would impose licensing requirements across corporate structures to parent companies and sister companies.
Restricting Exports of Advanced Technologies to China
The United States has implemented strict export controls to limit China’s access to advanced technology, particularly in the semiconductor and artificial intelligence (AI) sectors. These measures aim to protect national security and maintain U.S. technological leadership. China has implemented several strategies including having Chinese entities create subsidiaries to circumvent export controls. Currently BIS sanctions do not apply to to distinct legal entities such as separate subsidiaries.
Implications of the Proposed Rule
The draft regulation is a needed enforcement action to prevent evasion of export controls. It will however, require increased due diligence from organizations involved in the export of regulated items and technologies to avoid unintended violation of export regulations. Increased scrutiny will be required in the screening of potential customers to ensure that they are not associated with listed entities. Many in export compliance agree that the BIS may release an enhanced version of the BIS Entity List.
Denied Parties Screening
The U.S. Government maintains multiple screening lists of sanctioned entities and individuals that are updated on a regular basis. These updates should be checked against an organization’s current database of customers, suppliers, employees (to include consultants and contractors), and visitors, to determine if any new matches may exist. Records of these screenings should be maintained for a minimum of five years.
Performing effective screening programs can be a challenge for smaller organizations. Many opt to rely on the Consolidated Screening List which is maintained by the United States Government. While this provides basic tools for screening, it is not easily implemented into business systems and databases.
CVG Strategy recommends that Restricted Party Screening tools supplied by private vendors be used. These tools can perform automatic rescreenings and provide alerts for any change in previously screened entities’ status.
Conclusions
Businesses will need to develop plans to react to the potential for increased risk while the BIS is considering this 50% rule. This may include review and amendment of the organization’s export policies and procedures and a review of required resources to address the complexities involved with enhanced denied party screening.
In the last decade, enforcement authorities actions in sanction cases have resulted in billions of dollars in civil and criminal penalties. This is because many businesses are lax in ensuring that parties they are engaging in transactions are not on denied parties lists.
CVG Strategy Export Compliance Expertise
The DDTC, the BIS, and the OFAC, along with international partners have greatly increased their activities in the generation and enforcement of regulations. This increases the likelihood of a non-egregious violation occurring even in a company with a well-run export compliance program. CVG Strategy can assist organizations through the Voluntary Self Disclosure process and guide you through these difficult procedures.
If you are part of a large corporation or a small company with a part-time compliance person, CVG Strategy has the compliance and training programs to help you meet International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR) rules and requirements. As the BIS place controls on a growing number of technologies it becomes increasing difficult for smaller businesses to stay abreast of regulatory developments. Because of this, we provide Export Compliance Management Programs (ECMP) for businesses of all sizes.
CVG Strategy, LLC is recognized the world over as the premier provider of Export Compliance Consulting and Export Compliance Programs for businesses involved in export in the U.S. and Canada. We also provide the essential training that ensures that your team is up to date on governmental regulations, including the Export Administration Regulations (EAR), the International Traffic in Arms Regulations (ITAR), the Canadian Controlled Goods Program, and Office of Foreign Asset Controls (OFAC) and other regulatory agencies and more.