Red Flags Rising - Episode 29 - Affiliates Rule Aftermath - Finding the Right Path Forward
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[00:00:00] Michael: The views expressed in this podcast are solely our own. This information is provided for your convenience. It does not constitute legal advice, nor does it create an attorney-client relationship. Prior results do not guarantee similar outcomes. This is attorney advertising. Enjoy!



[00:00:30] Michael: Hi, welcome to Red Flags Rising. My name is Mike Huneke. I'm a partner at Morgan Lewis and Bockius, LLP. With me, as always is my good friend, Brent Carlson of Red Flags Rising Solutions, LLC. Brent, welcome and how are you doing today?

[00:00:45] Brent Carlson: Excellent. Thanks, Mike. Glad to be here as always. Today is Friday, October 3rd, just around 1:30 PM US Eastern time.

[00:00:55] Michael: So there was a flurry of news, including our latest podcast episode around the [00:01:00] affiliates rule, or more commonly known as maybe the 50% rule that was issued by the Bureau of Industry & Security Monday morning. Now that the dust is maybe somewhat settled, although probably still a fair amount of it is up in the air, we thought it would be helpful and valuable to our listeners if we talked about the aftermath of the Affiliates Rule. Based on all of the attention and the commentary that we have seen, are we seeing some misperceptions out there? What would be the consequence of applying those misperceptions, or basing your expectations and your calculation of risk around those misperceptions? If you're an in-house trade compliance professional and you getting asked, from your immediate supervisors, maybe all the way up to the c-suite and the board, What is this? And what does it change about what we do and how we do it? We wanted to conclude with some concrete guidance about how to answer that question. So we will start with some of the misperceptions and then go into that concrete guidance, before [00:02:00] the ever popular backed by ever increasing popular demand, managing up with Brent, where he has a special message today. 

[00:02:07] Brent Carlson: it's also important just to level set the conversation. Our point here in this is is that, look, there's just a lot of stuff swirling around the new rule a lot of folks saying, Oh, it's this, it's that going to do that. It's going to do this. It's going to make you have to do this or that. the thing at the end of the day is it's important to cut through all that and understand what is the way in which companies, their leadership teams, the legal and compliance teams can make an informed decision and find that right path forward, in a thoughtful and strategic way. The point in discussion is just that to help everyone find the right path forward. So why don't we jump into these misperceptions that we've been seeing. 

Misperception number one that we see new BIS 50 percent rule or the affiliates rule as it's properly called is just like the OFAC one. Mike, you've talked about how the OFAC 50 percent rule was [00:03:00] designed and has very different intent behind intent it than the new BIS affiliates rule. Why don't we unpack that a little bit? It's dangerous to assume that they're going to be exactly the same.

[00:03:10] Michael: Certainly there are some overlaps. Conceptually, why this was an attractive enhancement to the entity list, both from the perspective of the United States Congress and from the perspective of political appointees within the Commerce Department with whom Congress floated this idea, is that it makes sense, at least at the top level, to have both OFAC and the Commerce Department have the same construct, the same rule. It is not exactly going to walk and talk the same way. To us, Brent, and you and I have talked about this a few times, there are important distinctions about the purposes for which each of these rules is being applied. For example, when talking about sanctions programs, US economic sanctions, those target individuals or individual companies, and the idea is to change behavior. [00:04:00] The purpose is to change the behavior of those designated persons or entities. If they change behavior, then they can be delisted. In that context, the focus is on them and making their lives difficult. And then there's a question usually about legal entities in which they have an ownership interest. What happens there? That's where the OFAC fifty-percent rule, quote unquote, comes in. Say, for example, an oligarch is designated. He's sanctioned. If he owns fifty percent or more of a legal entity, that legal entity is now also sanctioned.

So, in that context, you're encouraging the person to change their behaviors or to sell their controlling interest in that company. When you talk about export controls, we're not talking necessarily about particular people. We're talking about goods, technology, or services that either just being able to be used by certain persons would be against the national security interests of the United States, or the items themselves could have a use that is against our national [00:05:00] security interests. When you're talking about the fifty-percent rule there, it's less about changing behaviors and more about stopping the flow of goods, services, or technology to certain persons and to certain entities.

It's just a slightly different idea. Where you might accept, for example, in the context of a OFAC sanction, a sanctioned oligarch or a sanctioned entity divesting some of their interests in something and really consider at that point that you've caused them the difficulty, the discomfort, that the sanctions were intended to cause, when you're talking about items, it's more important to look at those "red flags," I think, because if you're going to continue to ship to an affiliate of a listed entity, you don't want to do that, and united States isn't gonna want to allow you to do that, if this is just essentially acting, even in this particular context, it's just a front company for the listed parent entity, whatever it might be.

It's important to read the Affiliates Rule with that national security objective in mind. It's not really for the private sector or industry [00:06:00] to decide that they just disagree with the national security perspective or finding of the United States government and then self excuse themselves from the application of these rules. Certainly you can debate the national security findings and objectives. But for the purpose of looking at export controls and trying to ascertain how to comply with them, you have to take that as a given.

[00:06:21] Brent Carlson: You make some good points there, Mike. One thing I thought was really interesting is the discussion that we've had over the OFAC 50 percent rule, being designed to push sanctioned individuals to divest assets. Taking that construct over to the BIS affiliates rule, it has that same motivational factor to go below that 50%. At a certain level, people assume, Oh, well, I can go below that 50 percent threshold and then that's going to be okay, because the 50 percent rule is pushing me down into that. This is where it's important to recognize that BIS's affiliates rule is very different from the OFAC 50 percent rule. Ironically, they're [00:07:00] generating the same type of behavior. On the OFAC side, you're incentivizing an oligarch to divest of assets, to go below that 50%. For the BIS affiliates rule, that's pushing people to think, Oh, well, I can go below that 50 percent threshold and do business with a subsidiary affiliate that's below that threshold, and that would be okay. It's not. I think that's very important to recognize in this. If somebody's just thinking that, Oh, this is a 50 percent threshold below that cutoff, I can just go run and gun and everything's just fine, that is a recipe for disaster. That's something that I think, folks should keep in mind.

In the BIS Affiliates rule itself is a clear reference to control as well in that even for subsidiaries and affiliates of entity-listed companies t hat have minority share below that 50%, that and other indicia of control are still considered a red flag. That's very important, to recognize that phrase in the affiliates rule, because in our business, " red flag" is a loaded term.

The other thing is that there's two different [00:08:00] things that we're talking about when you have the affiliates rule applying to subsidiaries that are 50% or more owned by an Entity Listed company, and control. There are two separate issues here.

[00:08:10] Brent Carlson: One is that you've got that automatic extension of the entity list designation to those subsidiaries. That's a no brainer. But it's also a separate issue in terms of that control. Cause then again, the affiliates rule that BS put out on Monday, it says that indicia o f control are a red flag and a red flag is a loaded term. So it means you're not completely scot free here. You still have to do your due diligence and and mitigate any of those red flags before proceeding with the transaction. I think it's important not to get caught up, again, in this misperception of that 50 percent rule being just like the OFAC one. There is some overlap, but how they work in practice and how compliance teams should be thinking about this in terms of compliance and mitigating enforcement risk. it's totally different. 

[00:08:56] Michael: On this point, Brent, an even better analog [00:09:00] here is the Foreign Corrupt Practices Act. That's where the full definition of knowledge also exists and has been really the fulcrum for an enforcement wave over the last two decades. Think about what you would tell people to manage their risks and to avoid really getting a foul of the FCPA when you're talking about how to comply with the affiliates rule. You know, Certainly don't let anyone in your company maintain the false assumption or misperception that there's some kind of easy workaround that somehow satisfies the national security objectives. 

Shifting business to a new 49% or below affiliate, as you just explained, might not trigger then the automatic application of the entity list to that affiliate, but as BIS has warned in the language at the beginning of the new rule, that's still a red flag. If you're going to do that, you wanna be able to point to documented reasons and decision making in case BIS BIS asks you questions about well, how on earth could you be comfortable with this? So, if you look back at the July [00:10:00] 10th, 2024 guidance that BIS issued, they talk about, look, we expect you to do risk-based due diligence. If you proceed with the transaction, we expect you to document how you did risk-based diligence, and who made the decision, and how, to go ahead and ship something. If you couldn't really get something below that high probability threshold, then apply for a license. There's a lot more parallels to that and to the FCPA than to the OFAC 50% rule in terms of how this walks and talks, Brent, what's the next misperception that we wanted to cover today? 

[00:10:31] Brent Carlson: one thing that we've been seeing a lot of folks talk about is that the new rule brings significant new compliance burdens on companies with a whole lot more heavy lifting for the compliance teams.

I think it's actually like, well, wait a minute. At a certain level, the government's going to be asking the question, for companies on their KYC or know your customer screening, oh, what have you been doing all along already? S houldn't you have been looking at your customers already? How come you don't know the profile of them [00:11:00] already? So in a certain sense, it shouldn't be a big ramp up. The other thing you made this a great point where in one sense that automatic designation actually makes it easier in the sense for companies because you know that's an already must apply for license scenario. That's already a must apply for license customer So that sort of takes that guesswork out of it. There is some work to be done, but a lot of it should have been happening already. if the compliance program needs to be enhanced, you can take it in thoughtful, strategic, and incremental steps forward.

Mike, there was a recent GIR article where you made a really good point in that this new affiliates rule encourages companies to adopt a risk -based compliance program and that's good news for companies. That's good news for exporters because you can focus on where the risks are. You're not being forced to look under every rock and nobody should have to do that. But it's risk -based, and so going to be tailored and focused.

[00:11:52] Michael: Brent, this is the concept we've been talking about for years now, where high probability enforcement invites the [00:12:00] government to deploy a particular enforcement playbook to its advantage. But it also invites, for companies who wanna lean into this, a corollary, a corresponding compliance playbook that allows them to focus on high probability risk. This, idea that this is shifting responsibility from the government to the private is probably something the government will disagree with. I'm not taking a position way or the other. Look, the there are gonna be more questions that the private-sector trade compliance teams have to deal with, have to face at least until there's some catching up done on which entities are 50% owned more, or otherwise carry red flags indicating that the government would take the view, you should have gotten a license to ship If you look in the Export Administration Regulations at a, basically, decision tree that the government has already put in there and you follow that, it's not super user friendly because it's all references to particular CFR, Code of Federal Regulations, provisions but we'll link to it in the show notes and maybe we [00:13:00] can work together Brent on doing a plain English version of this for people that we can share on LinkedIn. If you start at the top, you're supposed to look for end use and end user provisions, and you're supposed to do due diligence. The government could take the perspective if you were arguing with them about this that, well, you're supposed to start with due diligence. What does the entity list do? It actually does a lot of that for you. Now, Hopefully they don't say you're welcome to your face in the meeting, but from their perspective, I think they're looking at that and saying we are removing The need that you otherwise, would have to do risk-based due diligence for things that are listed and, good news, now we're removing that need for even more, as a just automatic decision that we're taking as the government.

I think there's also a risk that the more that someone might complain about this, the more the government might come back to them and say, wait a second. Why is this a big problem for you now? What were you doing previously regarding purchasers, parties to transactions who were owned to some degree by [00:14:00] listed entities? The Government could take the view that there was commercially available software for a long time that maybe didn't automatically block these entities. But if you had other reason, for example, to do periodic risk-based due diligence, maybe because of the type of thing you were selling, maybe because of who you were worried about, it might be going to, this is something you might already have been able to find if you were looking at it.

Going back to what we were just saying about the different purposes of the OFAC list versus the entity list. if the real national security concern is that the United States doesn't want an item going to a certain person or to be used in a certain way, the government could take the view well do we really think, and did you really think, that selling the same item, maybe to take an extreme example, let's just say hypothetically it was same item, same quantity, same configuration, same same markings. Did you really think that selling that to a newly created subsidiary in a third country didn't carry some type of risk or even a high probability risk that it would ultimately be going on to the [00:15:00] parent? The inchoate provisions of the EAR existed for some time and well before this new rule, obviously. Aiding and abetting, conspiring, evasion, acting with knowledge, all of those things have always been there for a long time. The government has been clear for a long time, the entity list is not the end of the EAR in and of itself. Even in the new rule announced Monday, there's a warning in there that the rest of the EAR still apply and have to be complied with. It's very possible that one could protest too much, with Shakespearean consequences. Be wary of poking the bear too much , and then prompting questions back on you that maybe the government will think you should have been anticipating years ago, but obviously you weren't, or you wouldn't have been asking those questions now. You wouldn't be alone in that situation. But it may be time to just quietly migrate to adapting to this new environment, rather than fighting about it. 

[00:15:48] Brent Carlson: a great point, especially during this comment period that's open. Think very thoughtfully and strategically about you want to do that, if at all.

[00:15:58] Michael: Public comment is public comment, [00:16:00] and if there's something in the public comment that causes the government to ask questions about prior conduct, that's fair game. So it's something important to keep in mind as you're evaluating, do we engage in an aggressive way in the public comment process? And what do we say in the public comment process about what has changed for us in this new environment, which the government might not think is a new environment.

Brent, let's move on to another misperception, and it's a counterintuitive one. Typically when you do any kind of white collar investigation, there is no substitute for being in person on the ground. If you're talking with someone about a sensitive matter, and you and I both lived this through decades of FCPA compliance and investigations work, people are not gonna tell you over teams over Google or over even the telephone in many countries that their fearless leader accepted a bribe, for example, in the context of the FCPA, right? There's a very good instinct and a very well intentioned instinct of needing to have people on the ground. Certainly, indisputably, you need to [00:17:00] have people who speak the language and who know the culture of wherever the end use or end user might have been. We saw from the large enforcement action on July 28th, for example, that local employees were using the correct Chinese characters for a customer that by its own name raised red flags, but then we're using in English a somewhat vanilla, not entirely transparent acronym that seemed, okay. We have seen a lot of the discussion around this rule and the talk of the additional burden that will be imposed, focus on, well now you're gonna have to go do on the ground, boots, on the ground, human intelligence gathering in countries where a controlled item supposedly went, or where a listed customer might be.

The problem is that in a world of increasingly geopolitical insecurity, we've already seen instances where in, different but very adjacent contexts, one government is telling its companies and people subject to its laws that they cannot rely upon the audits or investigations [00:18:00] conducted on the ground inside another country, because one government believes that in the other country, people trying to do that work are being coerced or bullied or manipulated. That's going to proliferate. There's already similar restrictions going the other direction. There are going to be other countries that do this to each other. You're going to be in a situation where, sure, it would be nice if you had boots on the ground, but if they were able to operate freely and if they were able to report out freely without risk to themselves or, frankly, to your company. So, Brent, what's your reaction to all of this? What is a way to think about finding a least worse solution to that problem? 

[00:18:38] Brent Carlson: Saif, I mean, saadahun. It's wishful thinking to assume that the old ways of, doing things are going to be carried forward. The world has changed. The environment has changed, for doing this. But the good news is that there are new tools and techniques that can help companies and the compliance teams do things more efficiently and effectively. Look, you're already sitting on tons of data already internally [00:19:00] within the company. Use that. And then there's been a proliferation of open source information as well, to which the government also has access. Triangulate between that and in this era of high probability enforcement, that's going to be the key information that you're going to need to assemble, assess, and make decisions.

[00:19:16] Michael: Basically, you have to find circumstantial evidence that at least you have control over and that you trust from which you can infer a likelihood or not of what was happening in the country where you can't rely on the data.

Brent, let's move on to another misperception, about how and when the rules might be enforced.

[00:19:36] Brent Carlson: Right. So this is the other thing that we've been sort of seeing out there. Thoughts, comments along the lines of well, BIS may not enforce this or BIS may find this too challenging to enforce. It's understandable in one sense because we haven't seen that big wave of corporate enforcement cases really hitting yet. But, recently, you've got the nine- figure settlement case that [00:20:00] came at the end of July, and I think , there's more on the way because the old ways of doing things are not going to be carried forward. They're no longer effective. So if you look at what the signals are coming out of BIS in terms of enforcement, really the high probability era of enforcement is here. That's going to allow BIS to bring more cases, resolve them faster with higher penalties leveraging that full definition of knowledge under the EAR.

So whole thing about this as a being, again, a Herculean task for for BIS to go enforce, that's just a misconception that is not consistent with the new reality. 

[00:20:37] Michael: a good reference point that drives this home in my mind, brent, are the recent arrests of two individuals in Los Angeles that we've talked about on an earlier episode. Yes, in that case, the BIS agents did a lot of work to really track down shipments and items, and even went, for example, to Malaysia in that particular case.

But a lot of the evidence that they relied upon was sitting in front of [00:21:00] everyone's faces here in the United States. In this world, where BIS is looking at the full definition of knowledge as it has been written since 1996 and they're looking at every option they have under that definition, they do not need to prove up actual knowledge, where knowledge is an element.

Now, some of you listening may say, well, wait a second, Mike, I read the BIS FAQs and the guidance and I see that this is a strict liability offense. What are you talking about? Well, it is a strict liability offense that if they can show that you shipped to an entity on the entity list or affiliated there with, as that's defined, they don't have to prove whether you are aware of that or not. They just have to prove that the item was sent there or that there was frankly an attempt or a conspiracy to send it there. Where knowledge is going to be relevant is very similar to how it's relevant under ofac sanctions enforcement. There, the offense itself is strict liability, but knowledge is super relevant to the penalty that results under the OFAC enforcement guidelines. BIS is gonna look at that [00:22:00] here as well. And then there's this other category as we've been talking about, of potentially affected entities where they are maybe minority-owned by a listed entity, but there are other indicia of control. BIS has expressly said it is informing the public that this is a risk. Why are they doing that? This is not one of those old public services announcements that we all grew up watching on NBC with the star and the rainbow above some movie star's head about, "the more you know." They are putting you on high probability awareness, unless you can demonstrate through risk-based due diligence otherwise. So, to the question that some have posed out there, how are they gonna enforce this? This is gonna be tough for them. They're gonna have to put agents with guns and warehouses, no, they aren't gonna have to do any of that. It would be very foolish to think that you could sit tight until they're somehow able to do that. They can enforce these laws without ever setting foot in the foreign country where these things went to. They really can, and it's unfair perhaps, and it will [00:23:00] certainly feel unfair, but in practice, this shifts the burden from them to you if you wanna continue.

So Brent, let's get to the last major misperception that we wanted to talk about throughout the podcast. So far we've talked about knowledge and where and how it, and control are still relevant even under this otherwise strict liability rule. It's important to think about knowledge in the correct way and what knowledge is really doing here. It would be a mistake to complain about this rule as having taken away a defense of no knowledge that you thought you had before. Yes. In some sense where something turns on knowledge, anything turns on knowledge. The absence of knowledge is then your defense to that if you really had the absence of it. But it's not because this is like now suddenly strict liability that you can't make that defense. It's just that the way the export controls are written and the way that they're being enforced, if you think of knowledge incorrectly as only being actual [00:24:00] knowledge, then you might still think of it that way. You might think of, oh, great, they have to show actual knowledge. My absence of actual knowledge was a defense. Now they're telling me this rule is strict liability, which by the way though, catchall provision that creates the entity list is a strict liability catchall provision. It's one of the few, but it is one. So it's always been strict liability just to put that out there. But if you correctly perceive knowledge to be fully defined again as it has been since 1996, to include not only actual knowledge, which if that was, it would be a very convenient defense, that probably could be easily constructed just through a few creative corporate reorganizations, and maybe an offshore transshipment jurisdiction or two. but you need to think of it as the full definition because that includes reason to know, which our OFAC practitioners out there will be very familiar with already, and an awareness of a high probability. Where it's fully defined like that and fully understood, if you are going to go to the government and say, oh, I used to be able to say I [00:25:00] didn't know anything and now I can't, you're going to prompt them to ask you some very serious questions about, well, why did you think you could say you didn't know before? When we all know since 1996, knowledge has been defined to include an awareness of high probability. If the government had placed an entity on the entity list because the government determined that that entity was participating in, let's say, a WMD program, or nuclear weapons program, or somehow supporting nuclear weapons development in another country that the US considered to be adversarial, the government might take the view that correctly interpreting knowledge to include an awareness of high probability would mean, well, how could you ship to an affiliate of the same entity? Again, putting this rule in the proper context of export controls and say not sanctions and not have seen potential high probability risk that you should have done risk-based due diligence to mitigate, or if you couldn't mitigate it, applied for a license. If we're worried about the item going into, again to carry through this example, a [00:26:00] nuclear weapons program, even if it's a paperclip for example, to which those catchalls would still apply, if it's a 50% affiliate, if it's a 5% affiliate, if there's just common shareholding, common management, the government might take the view that that was a high probability risk that the item, which is what we really care about in the world of export controls, is just going to be diverted up to the parent. Again, it's another one of these misperceptions where if people start getting into the public comments or lobbying the government or in front of the government complaining that they don't have this actual knowledge defense anymore, the government's gonna say, well, what about the other two definitions of knowledge, which were equally applicable since 1996? This rule doesn't change that, it didn't change that obligation to look at risk. To me, if you look at the rule and you're surprised by the statements in the rule that say you have an affirmative duty to know the foreign ownership of all parties to a transaction, and you're surprised because you had looked at certain language and prior guidance from BIS where [00:27:00] you interpreted it to mean you didn't have an affirmative duty to look behind the representations of counterparties, as we've said before, Brent, even though before and after that clause and throughout the guidance document, it's clear you need to be aware of red flags and trying to mitigate them, the government is not going to be sympathetic if that's why there's suddenly additional costs and expense and inconvenience to you, they're not gonna be sympathetic. Knowledge in this context is not something that you could have flipped on its head to say, well, yes, we knew that this nuclear weapons program involved entity that the government just listed, owns 80%, whatever it might have been, of this affiliate. But as long as we can convince ourselves we don't actually know that the affiliate is going to flip these parts immediately up to the parent, then we're, okay. Where are you gonna be particularly challenged to respond to government questions about that is the more that the items resembled exactly what you were shipping to the listed parent entity before. Same items, same quantity, same specs, same markings, how different are the shipping documents, [00:28:00] actually, where do they actually go? You wanna be very careful that you can defend cleanly and very confidently what was done in the past, if you're going to raise these issues with the government right now. 

[00:28:11] Brent Carlson: Absolutely, Mike. New situations, new challenges require new solutions. you have to carefully about this because again, the government has been giving signals that high probability enforcement is here. very careful in your engagements and communications.

[00:28:26] Michael: Brent, that's a great transition to the other thing we previewed at the beginning that we wanted to tee up for people that we thought would be helpful. Let's say you're in a situation where under the affiliates rule, you're either in a position where you're going to help a party to a transaction petition to not be impacted by this rule, and there's a process for that to otherwise apply for a license. Maybe there's a customer that is important enough to your business and your colleagues that they are willing to go through the expense and effort to try to apply for a license to ship to it. , There's a requirement that you explain the due [00:29:00] diligence process that you went through. You need to explain why your shipment of that item to the affiliate is not really going to, trigger, in a practical sense, the same type of national security concerns that, a shipment directly to the parent would. So some things that at least came to our mind, Brent, as key points for people to keep in mind that if they really believe that the affiliate doesn't pose the same national security concerns, what might be the types of things that at least spitballing off the tops of our heads here would be the types of things that if they could anticipate these questions and address them in the application or alongside the application, that would go a long way to getting in front of what would likely be the immediate questions from BIS.

The first thing is, throughout the whole process of preparing and then submitting the application, go back and Connect the dots between your current request and the original reasons why the parent entity was put on the entity list in the first place. You may have to do a bit of digging. Usually, there's at least a sentence or two that explains what was the [00:30:00] particular concern of the United States government that caused the review committee to put that entity on the entity list. If there's something about the affiliate, maybe about its other owners, maybe about the business that it does, maybe about the location it's in that very credibly would distinguish the affiliate from the activities that cause those concerns, you should highlight that and highlight that often because that I think would be a very compelling point to make if you were applying for a license.

The other thing that comes to mind for me, Brent, in describing the due diligence, it is never going to be enough that you got one, two, or dozens of end use certificates or enhanced end use certificates. This goes back to the point we were raising about the misperception that there's value in having on the ground investigative work done in all cases here. If something's on the entity list and you're trying to ship to an affiliate, presume that the government is going to be inherently highly skeptical of any self certifications that either the party [00:31:00] that you're trying to ship to or the listed owner might be making, and they'll of course make whatever ones you need and they could all be true, but they're not going to tip the needle in my or your expectation.

Anything else, Brent, that comes to mind if someone's asked, Hey, we have to be able to ship to this affiliate. What do we need to have in our file, in our application, in our argumentation to BIS to make this have the best chance of success?

[00:31:24] Brent Carlson: the thoughts that you put out, Mike, where basically you make the case that the business with that affiliate, now, even though it may be attached to the entity list designation of its parent, did not overlap with what was going on in the past with its entity listed parent.

I think that's really important. And that happens. that would be important to show where it's like, Hey, this is a different product, different technology, different applications that are going on here. this has been something that's been going on for a while. It's not something that just came out of the blue when the parent onto the entity list. There are definitely cases to be made there that can be quite helpful. 

[00:31:56] Michael: last point on that that anticipate that [00:32:00] BIS will ask you about history of shipments to the listed parent or otherwise shareholding entity and the shipments Now. were the trade flows like before and how were the new trade flows set up now?

You couldn't do this obviously for every counterparty, but if you look at the july 28th, enforcement action, where was the information that was ultimately relevant to the enforcement risk? It was not sitting with trade compliance. In fact, none of it was sitting with trade compliance. There was no allegation in the BIS settlement of that case that trade compliance knew anything. That's part of the problem, but they weren't sitting on information and people weren't telling them information that was relevant to the real concerns that ultimately led to $140 million penalty. It was information with sales. It was information with finance. It was information with the materials team. It was information throughout the company. Do you have to turn over every stone? Interrogate people, pull millions of emails? No. But before you make that application, it would be a very good idea to check with your [00:33:00] sales colleagues, check with your logistics companies. Does the information that they have match your understanding of the facts? if it does, highlight that in some way when you reach out and apply for the license, because you'll be cutting off a concern that might be raised later and at least anticipate it. It's a much stronger application if you can say, by the way, the information I'm telling you is entirely consistent with the information in Salesforce or whatever program your sales team uses. And it's consistent with the shipping records. And by the way, all this makes sense because of X, Y, Z reasons. That's the type of application that I think will have the greatest chance of success. Obviously, we can't guarantee outcomes and much of what's actually allowed and authorized will depend on myriad geopolitical factors outside of all of our control. But that's an appropriate way to frame what would the ideal application look like. That's a path to follow. Thinking about an application that way and having that constructive discussion with your stakeholders and your colleagues is really, in our view, the [00:34:00] best path forward. It's a path forward, frankly, that can give you as a trade compliance professional comfort that you're looking at, as reasonably as possible, a whole picture that you can really stand behind and not feel like you're just submitting the same application over and over again, and wondering why it goes nowhere.

Look, all of these things that we've talked about today, of these misperceptions, we are not making light of it. is. complicated world that we all live in. Things are changing all the time. No one needs yet another thing to change. in thinking about the impact of this change and articulating its impact on you, especially if you participate in public comment on this over the next 30 days, be very cognizant of how, what seems like a very legitimate concern you may have, might be perceived a little differently, perhaps by the people reviewing the public comments. Again, anything you put in the public comment is a public comment. And yes, you can hold back confidential business information, you can do all that stuff so it's not public, public, but it's still going to be fair game for anyone at [00:35:00] the Office of Export Enforcement who might end up looking at it. 

Well, Brent, I think that brings us to a very important and special managing up I think you have a bit of self-criticism you would like to share with everyone. 

[00:35:11] Brent Carlson: criticism. Yeah, that's right. Okay. we spent too much time in China. The managing up this time is even monkeys fall from trees. So I first want to just apologize to listeners out there. On the last episode, my sound sounded like I was in a fishbowl. actually was not in a fishbowl, I had some just minor adjustments to my microphone, yielded fantastic results. And so sometimes it's like, you know, we deal in this world, we're running and gunning and we're dealing with a million different things, everything all at once. And sometimes the, solution literally staring us right in the face. So, you know, just keep in mind, you know, we may think everything's along, humming all real well. But yes, indeed, even monkeys fall from trees. some of this in, think about it, think thoughtfully and strategically as we move forward on this. And look, we're all in this [00:36:00] together. We're all here to help. Um, and sometimes it just takes a little bit of adjustment, turning of the knob and there you go. We've, recalibrated the system to the right conditions of the time. 

[00:36:09] Michael: There's an ancient podcaster saying, speaking to the right end of the microphone. that's also applicable here, but also I think relevant to this affiliates rule, this 50% rule. Many of the misperceptions that you and I have seen and commented on just in the, few days that the rule has been in effect, essentially are looking at it in the wrong way, maybe through the wrong end of the telescope, is another way to think about it. Thinking about it how it might be perceived by the government, it might be perceived differently than how it may be commonly be perceived by industry is important.

[00:36:42] Brent Carlson: It's important to do that in a, again, in a thoughtful, strategic and measured manner with actions appropriate to the situation at hand.

[00:36:50] Michael: Well, Brent, that concludes this episode of Red Flags Rising. As always, be well.

[00:36:55] Brent Carlson: Thanks, Mike. Be well. And to everyone else out there, be well.

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