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Expanded US Export Controls Target Foreign Subsidiaries

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Expanded US Export Controls Target Foreign Subsidiaries

The U.S. Commerce Department's Bureau of Industry and Security has issued a new rule significantly expanding the reach of existing export controls by targeting subsidiaries of blacklisted foreign entities.

Rule Overview

On September 29, 2025, BIS implemented a rule that automatically applies Entity List and Military End-User (MEU) List restrictions to corporate subsidiaries. The key provisions include:

Direct Application

Any entity that is at least 50 percent owned, directly or indirectly, by one or more entities on the US Entity List or MEU List will now be automatically subject to the same export restrictions as the parent company. This applies regardless of:

  • Corporate structure complexity
  • Jurisdiction of incorporation
  • Operational independence
  • Business model differences from parent entity

Enhanced Due Diligence Requirements

For entities with "significant minority ownership" by companies on the Entity List or MEU List, the rule establishes a "red flag" requiring additional due diligence by US exporters. While not automatically prohibited, such transactions face heightened scrutiny and documentation requirements.

Strategic Intent

The rule addresses a longstanding loophole in US export control enforcement. Previously, foreign entities could potentially circumvent restrictions by conducting sensitive transactions through subsidiaries or affiliated companies not explicitly listed. Common evasion tactics included:

  • Shell company creation in different jurisdictions
  • Complex ownership structures obscuring ultimate beneficiaries
  • Front companies with nominal operational independence
  • Restructuring to place restricted activities in non-listed entities

Implementation Challenges

Ownership Verification

US exporters now face substantial compliance burdens in verifying ownership structures of foreign customers:

  • Limited transparency in many jurisdictions regarding beneficial ownership
  • Complex corporate structures requiring extensive research
  • Rapidly changing ownership arrangements
  • Potential for deliberate obfuscation

Resource Requirements

Companies must invest in:

  • Enhanced due diligence systems and procedures
  • Additional compliance personnel with expertise in corporate structures
  • Third-party verification services
  • Legal review of complex transactions

Transaction Delays

The additional verification requirements will likely extend transaction timelines, potentially affecting:

  • Just-in-time supply chains
  • Time-sensitive commercial relationships
  • Competitive positioning versus non-US suppliers
  • Customer satisfaction and retention

Industry Impact

Semiconductor Sector

The rule particularly affects semiconductor equipment and materials suppliers, who maintain complex global customer bases. Many Chinese semiconductor firms have previously established subsidiaries or reorganized operations to maintain access to US technology.

Telecommunications

Network equipment manufacturers and component suppliers face similar challenges, particularly given the presence of multiple Chinese telecommunications firms on the Entity List.

Defense and Aerospace

Companies in defense-related sectors must now conduct enhanced scrutiny of dual-use technology customers, including commercial entities with potential military connections.

Extraterritorial Implications

The rule's extraterritorial reach creates potential friction with allied nations:

European Union

EU companies using US-origin technology in their products may face compliance conflicts between US extraterritorial requirements and EU sovereignty concerns. The EU has historically resisted US attempts to extend export controls beyond American borders.

Japan and South Korea

Asian allies maintaining substantial commercial relationships with China face difficult compliance choices, potentially requiring them to choose between US technology access and Chinese market opportunities.

Chinese Response

Beijing will likely view this expansion as further evidence of US economic containment strategy. Potential Chinese responses include:

  • Acceleration of technological self-sufficiency initiatives
  • Counter-export controls on critical materials or products
  • Regulatory retaliation against US firms in Chinese market
  • Increased obfuscation of ownership structures

Enforcement Considerations

Resource Allocation

BIS faces significant challenges in enforcing the expanded regulations given:

  • Limited investigative resources
  • Difficulty obtaining ownership information in non-cooperative jurisdictions
  • Volume of potential violations
  • Complexity of modern corporate structures

Penalties and Deterrence

Enforcement actions may serve primarily as deterrence, with BIS likely focusing on:

  • High-profile violations with clear evasion intent
  • Cases involving advanced technologies with military applications
  • Repeat offenders or systematic evasion patterns
  • Transactions with particularly sensitive end-users

Business Strategy Implications

Companies affected by the rule should consider:

Compliance Program Enhancement

  • Investment in automated screening tools
  • Enhanced training for sales and compliance personnel
  • Development of standardized due diligence protocols
  • Regular audits of customer relationships

Customer Relationship Management

  • Proactive communication with customers regarding compliance requirements
  • Documentation requirements for ownership verification
  • Contractual provisions addressing compliance obligations
  • Contingency planning for customer disqualification

Market Strategy Adjustments

  • Evaluation of market exposure to potentially restricted entities
  • Product development focusing on unrestricted markets
  • Geographic diversification away from high-risk jurisdictions
  • Partnership strategies minimizing compliance complexity

Outlook

The subsidiary rule represents a significant expansion of US export control reach, closing loopholes that previously allowed restricted entities to access controlled technologies through corporate restructuring.

While the rule enhances enforcement effectiveness, it also imposes substantial compliance burdens on US exporters and creates potential friction with allied nations. Long-term effectiveness will depend on:

  • Adequacy of BIS enforcement resources
  • International cooperation in ownership transparency
  • Allied government acceptance of extraterritorial reach
  • Chinese counter-measures and evasion sophistication

Companies engaged in international technology trade should prioritize compliance program investment to manage risks under the expanded regulatory framework.