Axelrod Warns Financial Institutions: Don’t Gamble on Lax Export Enforcement

Matthew Axelrod, former Assistant Secretary for Export Enforcement at the U.S. Department of Commerce, cautioned financial institutions against assuming any relaxation in export control enforcement under the new administration. “Enforcement risk doesn’t change with administrations,” Axelrod told listeners to a webinar hosted by the compliance technology firm Kharon.

General Prohibition 10 and EAR Compliance

Axelrod, now practicing with Gibson Dunn, cited General Prohibition 10 (GP10) of the Export Administration Regulations (EAR), and the October 2024  BIS guidance  on best practices for EAR compliance.

GP10 prohibits transactions involving items subject to the EAR when the person has knowledge—actual or constructive—that a violation has occurred or is about to occur. “Burying your head in the sand is not a defense,” Axelrod emphasized. “That’s not how the law works, and it’s not how BIS sees it.”

While the October 2024 BIS guidance is non-binding, Axelrod clarified it is rooted in long-standing legal principles that remain fully enforceable. “The guidance isn’t mandatory, but the enforcement risk is real. If your compliance program is outdated or you’re doing nothing, and BIS comes knocking, you’ll have little to say in your defense,” he warned.

He acknowledged that institutions have flexibility in how they structure their controls. “You don’t have to implement the BIS guidance exactly as written if you have a more effective approach. But you must be doing something, and it must be risk-based.”

Axelrod noted that institutions should expect updates to the BIS guidance as the administration reviews feedback and adjusts policy direction. However, even if revised, “GP10 isn’t going anywhere,” he said.

The key takeaway: financial institutions must maintain current, tailored, and defensible compliance programs—or risk serious exposure. “The statutes of limitations outlive administrations,” Axelrod concluded. “Don’t bet on disengagement.”

50% Rule at BIS?

Axelrod offered a measured assessment of proposals to implement a “50 Percent Rule” under the Bureau of Industry and Security’s (BIS) Entity List regime—mirroring the ownership standard long used by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).

Currently, the Entity List does not automatically extend export restrictions to entities that are majority-owned by listed companies. Axelrod acknowledged this as a persistent vulnerability in the enforcement framework. “It is frustrating to BIS—and certainly to the enforcement side—that this doesn’t exist,” he said, noting how easy it is for listed companies to set up subsidiaries to evade controls. “If they’re doing it deliberately to evade the Entity List, it’s still a violation. But it’s hard to identify.”

He dismissed the notion that screening challenges justify inaction. “OFAC already has that rule, and people have to screen for OFAC too,” Axelrod said. “So I haven’t found that logic particularly convincing.”

Still, Axelrod warned that the issue is not simply technical. “There is a real argument on the other side,” he said. He described the complexity of applying restrictions to conglomerates where only part of the business presents a national security concern. “If the goal is to restrict what’s necessary—but not more than that—this can get tricky.”

Illustrating the point, he offered a hypothetical: “Imagine a Chinese company that has a pencil division and a quantum computing division. We want U.S. companies to be able to sell pencils, right? No concerns there. It’s the quantum stuff we care about.”

Axelrod also cautioned against unintended consequences, such as making it harder to build consensus for new designations. “You can see a world in which it actually ends up being harder for BIS to put companies on the Entity List in the first place,” he said, particularly if interagency partners resist restrictions that would apply company-wide, including to low-risk divisions relied upon for other purposes.

While Axelrod indicated the proposal remains “under serious discussion,” he emphasized the need to balance effectiveness with precision. “The thinking, which makes sense, is: yes, we ought to do this—extend coverage and enhance effectiveness—but it’s about how you weigh the competing interests.”

Link to Kharon's Event Site

Paul Weiss Report  on the October 2024 Guidance