Congressional Proposal to Prevent Circumvention in Export Controls

Jul. 7, 2023
By: Marvin E. McPherson

Congress is searching for ways to stop further circumvention or evasion in export controls. As seen in the past year in both new controls against Russia and China, exports to subsidiaries and affiliates of listed entities remain largely unscathed.

Representative Mike Gallagher (R-WI) proposed an amendment, adding a new section to the Export Control Reform Act of 2018. The proposed section would impose export controls on subsidiaries of certain entities. The proposal as drafted would require any license or authorization requirements for exports, reexports, or in-country transfers applied to an entity on the Entity List maintained by the Bureau of Industry and Security (BIS) shall also apply to its covered subsidiaries. The amendment includes definitions and calls for the issuance of regulations within 120 days to implement this section, requiring certification that the end user of an item is not a covered subsidiary of an entity on the Entity List.

The Office of Foreign Assets Control (OFAC) has a similar provision called the OFAC 50 percent rule. Under this rule, entities are considered blocked if they are owned 50 percent or more (directly or indirectly) in the aggregate by one or more blocked persons. Furthermore, if a U.S. person or entity owns or controls 50 percent or more of a non-U.S. company, or if a non-U.S. person or entity owns or controls 50 percent or more of a U.S. company, both the U.S. entity and the foreign entity are subject to U.S. sanctions and regulations.

The OFAC rule is aimed at preventing circumvention of U.S. sanctions by entities that may try to evade restrictions by establishing shell companies or subsidiaries. It expands the reach of U.S. sanctions to entities indirectly controlled by persons subject to U.S. jurisdiction.

As is always true, proposed legislation may (or may not) become law, but it does reflect concerns that members of Congress have. If you have questions about the proposed legislation or your companies’ sanctions  or export controls program do not hesitate to contact an attorney at Barnes Richardson, & Colburn LLP.