On December 19, 2011, the US Department of State's Directorate of Defense Trade Controls ("DDTC") published a proposed rule to amend Part 129 of the International Traffic in Arms Regulations ("ITAR") relating to brokering and other select provisions.  The proposed rule would expand the scope of the activities that constitute brokering, and also would provide additional exemptions.  In addition, the proposed rule would amend brokering-related registration, prior approval, reporting, and recordkeeping provisions.  A summary of the detailed proposed rule follows.

Definitions of "Broker" and "Brokering Activities" in Proposed § 129.2

  • Broker: The proposed rule would amend the definition of a "broker" to mean "any person who engages in brokering activities."  The proposed language would not maintain the current elements in the definition that limit a broker to someone: i) "who acts as an agent for others"; and ii) "in return for a fee, commission, or other consideration."  The proposed definition could be viewed as an expansion of the scope of the term because it would apply even if the broker acts independently, is not delegated sufficient authority to bind a principal, and is not compensated with remuneration for services rendered.  
  • Brokering activities: The proposed definition of "brokering activities" would encompass "any action to facilitate" defense trade activities.  The removal of the language "action of an intermediary nature" from a prior unpublished version of proposed rule posted on DDTC's website, along with the removal of the agency concept from the definition of "broker", may present some confusion given that the proposed definition of "brokering activities" does not express clearly that brokering activities arise when one person acts on behalf of another.  The proposed definition includes as representative examples financing, insuring (a new activity previously not included in this list), transporting, freight forwarding, soliciting, promoting, negotiating, and contracting activities.  The breadth of the proposed definition is tempered to some degree by the express exclusion of "administrative services" (with illustrative examples provided such as providing legal advice, furnishing office space, arranging visas, or offering translation services) from the proposed definition of "brokering activities."  In addition, activities by a US person that are limited to US domestic sales or transfers, and activities by employees of the US government when acting in an official capacity, would be excluded from the definition of "brokering activities." 
  • Application to Foreign Persons: As with the current brokering regulations, the proposed rule would apply Part 129 requirements to any "person", which would include an individual or organization constituting a "US person" or a "foreign person", as defined in ITAR Part 120.  First, the proposed rule applies to US persons, wherever located, when brokering any defense article or defense service, regardless of origin.  Second, the proposed rule applies to foreign persons in certain circumstances.  Importantly, the proposed rule would eliminate the language encompassing "foreign persons subject to US jurisdiction" that currently exists and which has not been further defined by the ITAR.  Rather, DDTC proposes to cover activities by a foreign person:  i) physically located in the United States; or ii) located outside the US and a) involving a "US-origin" defense article or defense service; b) importing into the United States any defense article or defense service; or (c) acting on behalf of a US person.  With these proposals, DDTC appears to be attempting to define more clearly when a foreign person is reached by the rule rather than putting the burden on the foreign person to ascertain when jurisdiction attaches.  Notably, a foreign person is captured by the proposed rule when engaging in activities solely related to foreign defense articles when the activities are on behalf of a US person, are undertaken from within the United States, or involve import into the United States.  In this regard, the proposed rule states that the general term "defense article" or "defense service" refers generally both to US and foreign defense articles and services unless otherwise specified. 

However, neither the proposed rule nor additional commentary from DDTC offers a definition or scope of the term "US-origin" as related to a foreign person's involvement with a defense article or defense service.  Additionally, no guidance is provided as to what "involving" or "acting on behalf of a US person" means.  In the absence of such guidance, the proposed changes still could cover a wide scope of conduct by foreign persons as brokering activities.

Registration Requirements, Exemptions, and Limitations in Proposed §§ 129.3-5

Under the proposed rule, any person who engages in brokering activities must register with DDTC and registration remains a precondition to obtaining a prior approval or utilizing nearly all exemptions of the ITAR.  There are four registration exemptions:

  • Employees of foreign governments or international organizations acting in an official capacity are exempt from registration, prior approval, reporting, and recordkeeping requirements.
  • Service providers exclusively in the business of insuring, financing, transporting, or freight forwarding are exempt from registration, prior approval, reporting and recordkeeping requirements as long as  their activities do not exceed the scope of the services noted above.  The proposed rule contains limitations on this exemption; for example where a bank arranges a sale for or holds title to a defense article, such activity may fall outside the exemption and be considered a brokering activity.  
  • Persons registered as manufacturers or exporters of defense articles or defense services pursuant to Part 122, as well as their US subsidiaries, joint ventures, other "affiliates", bona fide full-time employees, and "exclusive" foreign brokers, are not required to submit a separate Part 129 registration statement and fee and also are exempt from  prior approval and reporting requirements, provided their brokering activities: i) involve defense articles or services subject to export licenses obtained by the Part 122 registered person; or ii) are on behalf of the Part 122 registered person and involve only defense articles or defense services located in and obtained from a US domestic source for export under a DDTC issued license. To be exempt, such persons must be included and identified in the Part 122 Statement of Registration of a US person.  (The US person so registered with DDTC would appear to be ultimately responsible for monitoring compliance with applicable ITAR registration, notification, licensing, and reporting requirements of all covered persons.)  Foreign brokers covered in the Part 122 registration statement are not required to file separate registration statements, notifications of changes to registration statements, obtain prior approval, or file annual brokering reports, but still are subject to recordkeeping requirements of proposed § 129.11.
  • End-users/ reexporters: Persons acting only as end-users of defense articles and services under an approval, or subsequently acting only as a reexporter under an approval, are exempt from all Part 129 requirements.

The proposed rule would incorporate into § 129.4 brokering registration requirements and obligations to notify DDTC of material changes to registration statement, such as those involving changes in ownership.  The proposed rule includes various requirements regarding certification of eligibility (related to compliance with US laws, and, if applicable, relevant foreign laws.)  The parent organization of a broker registered under part 129 may be included on the registration statement, provided that the appropriate the certification can be made.  (As discussed above, a broker—including a foreign person--that must register under Part 129 need not do so if specifically covered by a Part 122 registration statement of a US manufacturer or exporter of defense articles or defense services.) 

Proposed § 129.5  makes clear that a broker cannot engage in, or make proposals to engage in, brokering activities involving arms embargoed "proscribed" countries of § 126.1 or debarred persons pursuant to § 127.7, even if the broker is exempt from registration.  The term "proposal" is not defined, so additional guidance may be warranted.  A policy of denial applies to such business, and any person who knows or has reason to know of brokering activities (including proposals) related to proscribed countries or debarred persons "must immediately inform [DDTC]." 

Prior Approvals in Proposed §§ 129.6-8

The proposed rule provides that "no person who is required to register as a broker" may engage in brokering activities, absent an exemption, without the prior approval of DDTC.  Brokers that are not registered under Part 129 (or not covered by a Part 122 registration statement), or who engage in business with proscribed countries or debarred persons, are ineligible to obtain prior approval.  There also are three prior approval exemptions:

  • US Government agency contract: Brokering activity would be exempt from the prior approval requirement if it is undertaken pursuant to a direct contract with a US Government agency: i) if the brokering activity involves defense articles and services solely for the use of the agency; or ii) the brokering activity is undertaken for carrying out a US government foreign assistance or foreign government sales program under subject to certain conditions.  Under this second prong, either the US government agency contract with the broker must contain an explicit provision stating that the agreement supports an authorized foreign assistance or sales program and such agency must establish control over the activity congruent with ITAR requirements, or DDTC must furnish written concurrence in advance that such conditions are met.
  • NATO Plus countries: Prior approval for brokering would not be required when the brokering activities are undertaken wholly within and involve defense articles and defense services located within and destined exclusively for the North Atlantic Treaty Organization (NATO), any NATO member countries, or Australia, Japan, New Zealand, or South Korea, as long as the defense articles or defense services are not identified on the list of defense articles set forth in § 129.7(e).  We note that § 129.7(e)(14) includes all foreign defense articles and defense services of a nature described on the US Munitions List (USML) among those items that are excluded from the brokering approval exemptions.  However, section 129.7(e)(14) states that the exclusion of foreign defense articles and services does not apply to brokering activities qualifying under the NATO plus exemption. Thus, the proposed rule can be read as having an internal inconsistency, which may need to be resolved or clarified prior to publishing a final rule.  In this regard. it would appear that DDTC intended to exempt brokering activities involving foreign defense articles and services, as long as (a) the brokering activities meet the geographical limitations set forth in 129.7(c)(2), and (b) the foreign defense articles or services do not fall within any of the sensitive categories set forth in subsection (e)(1) – (e)(13).  
  • Other countries: The rule proposes a new exemption for brokering activities outside the above countries (provided that they are not proscribed countries) that involve US defense articles or defense services, provided that articles and related services: i) are not significant military equipment ("SME"); ii) are intended for end-use by foreign governments or international organizations; and iii) are not valued at or above $25 million; or iv) are not enumerated on the exclusion list found at § 129.7(e).

To obtain a brokering prior approval, the rule proposes that more detailed information be supplied under proposed § 129.8, including the full identities of all persons participating in the brokering activities or related defense trade transaction, the scope of the relevant brokering activities, a fulsome description of the relevant defense articles and/or services (including security classifications and whether SME) to be provided to an end user, the estimated value of defense articles and/or services to be furnished, and any consideration (including fees, commissions, loans, gifts, donations, political contributions, or other payments)  made, or offered or agreed to be made, directly or indirectly, in cash or in kind. The last requirement is separate from and additional to disclosure requirements under Part 130.  Any omissions must be identified and explained – for example, a broker seeking a prior approval for a sales proposal may not know the amount of the potential fee or commission involved.  A prior approval is valid for a period up to four (4) years.

Reporting and Recordkeeping in Proposed §§ 129.10-11

The proposed rule sets out the requirement for detailed brokering reports to be submitted annually (unless exempt) at the time of registration renewal, or 30 days after expiration of registration.  The main proposed change here is that brokering reports would be due based upon the month when the applicable registration statement renewal is due.  Under proposed § 129.11, records on brokering activities must be maintained according to § 122.5.

Additional ITAR Revisions

The proposed rule would revise several other ITAR provisions to conform with the proposed changes to Part 129.  These proposed amendments largely relate to brokering activity, but also present additional implications for license applications and registration.

Licenses and Other Approvals: The proposed rule would modify Part 120 regarding the types of licenses and approvals that US and foreign persons are qualified to receive.

  • License Eligibility: Current § 120.1(c) identifies the circumstances under which US persons and foreign governments may be granted licenses or other approvals.  The proposed rule would add language making foreign persons eligible for reexport and retransfer approval, as well as for brokering approval.  The proposed rule also would clarify that the circumstances that would make a person ineligible to receive a license include not only criminal convictions for violations of certain US and foreign laws, but also criminal charges and indictments relating to the same laws.  It also states anyone subject to an interim suspension or policy of denial is ineligible to receive a license.
  • Other Approvals: Proposed § 120.20 would add a category of "other approvals," which are distinct from licenses. Under the proposed definition, "other approvals" include written approvals as well as the use of an exemption to license requirements.  As a result of this definition, any provisions applicable to obtaining a "license or other approval" could be viewed as applicable to the use of an exemption from license requirements, including "exemptions of general applicability." For example, ITAR licensees should review Part 130 regarding fees, commissions, and political contributions and reporting requirements related to "approval" for possible implications.

Definition of Affiliate: The rule adds a definition of "affiliate" to § 120.40.  Under the proposed definition, "An affiliate of a registrant is a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such registrant."  The proposed definition does not define control for the purpose of the definition; it is unclear whether the existence of "control" for the purposes of the definition of "affiliate" would be determined in accordance with the same parameters used to determine the existence of "foreign control" under § 120.37.  

Registration Requirements under Part 122:

  • Statement of Registration Certification: The ITAR currently require that the Statement of Registration for US manufacturers or exporters of defense articles or defense services include a certification by a senior officer indicating the eligibility of certain corporate officers to receive an export license.  The proposed rule, at § 122.2(b)(1), would extend the certification requirement to cover the registrant's parent or any subsidiary, joint venture, other affiliate, and other persons to be listed in the Statement of Registration (e.g., exclusive foreign brokers.)  The rule also introduces a proposed requirement that if an intended registrant is foreign owned or foreign controlled, the certification "shall include an explanation of such ownership or control, including the identities of all foreign persons who ultimately own or control the registrant." 
  • Notification of Changes: The proposed rule provides explicit events triggering the requirements for notification of changes in information furnished by registrants.  Current rules require notification of any "material change" to the registration statement within five days of the change.  The proposed § 122.4 would require notification within five days of the event only for the following enumerated list of changes: (i) Registrant's name, (ii) registrant's address, (iii) registrant's legal organization structure, (iv) ownership or control, (v) the establishment, acquisition, or divestment of a US or foreign subsidiary, joint venture, or other affiliate who is engaged in manufacturing defense articles, exporting defense articles or services, or otherwise required to be listed on the statement of registration.   All other changes should be provided as part of annual registration renewal.  Under the proposed rule, notification of change may only be made by a senior officer. Notably, the Part 122 registration statement may include information about persons "otherwise required to be listed on registrant's Statement of Registration"(e.g., "exclusive" foreign brokers) and therefore the proposed rule may obligate notification changes for covered brokers, which may be a regulatory requirement that could be difficult to monitor and create risk for the registered person.

Requirement to list brokers and brokering activity on license application:   The proposed rule adds to § 126.13 a requirement that all applications for licenses or other approvals identify all brokers and describe the brokering activities involved in the transaction subject to such application or prior notification.  This proposed revision to the rule creates an opportunity for DDTC to cross-check against prior brokering registrations and approvals for enforcement purposes.

Responsibility for brokers:  The proposed brokering rules impose additional responsibilities on Part 122 registrants in order to avoid violations pursuant to Part 127.  The proposed § 127.1(b) states that any person granted a license or other approval is responsible for the actions of their brokers to whom defense articles and technical data have been entrusted, the same as for employees, agents, or other authorized persons. Additionally, liability can arise for misrepresentation or omission of material fact regarding an export or temporary import control document, including those related to brokering activities.  Thus, US exporters and manufacturers utilizing brokers are now on notice of their explicit regulatory responsibility for monitoring those persons facilitating trade related to defense articles and technical data, but it remains to be seen how failures by brokers to comply with requirements will be ascribed to US person registrants and licensees.  The proposed rule indicates that the responsibility for brokers applies whether the person is granted a license or "acts pursuant to an exemption," which now would be considered an "other approval." The proposed Part 127 clarifies the penalties for violations related to brokering activities and makes clear that brokers can be subject to debarment and interim suspension by the DDTC. 

Examples

In conjunction with the proposed rules, the DDTC has offered seven examples of conduct that constitutes brokering activities to illustrate the application of the ITAR to those activities.  Most of the examples include situations in which persons are either: (1) actively engaged in sales of defense articles or defense services in a typical middleman scenario, such as by establishing introductions with foreign officials, arranging in-country demonstrations, negotiating the terms of sales, purchasing and reselling or distributing articles, etc. or (2) engaging in activities specifically exempt from the registration requirements (e.g., freight forwarding) or included as general administrative services explicitly covered in proposed § 129.2(e).  Consequently, the examples do not furnish constructive guidance on scenarios when persons' activities may not fall squarely into one of the examples provided.  Given that the scope of the definition for broker and brokering activities effectively would be expanded by removing certain terms currently appearing in Part 129 of the ITAR, more illustrative examples may be advisable.  It is unclear whether the examples will be published along with the final rule as official amendments to the ITAR, or whether the examples will remain purely as DDTC guidance.  

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