This piece is an excerpt from a longer article we published in January 2012 on the Arent Fox website. The full article may be found here. 

On December 19, 2011, the US Department of State, Directorate of Defense Trade Controls (DDTC) published a long-awaited proposed rule on defense brokering. (The proposed regulation may be found in the “Downloads” section to the right.) There are those that love to read the incredibly detailed brokering regulations, and then there are the rest of us. The summary we published on the AF website, is intended for the rest of us, too tired so soon after the holidays to attempt an expedition through the relatively short yet expansive and labyrinthine proposed rule.

What does the proposed rule do?

First: It puts into writing these years of broad but unwritten DDTC interpretations of the brokering regulations.

• It confirms DDTC’s unwritten guidance that, to be a “broker,” you need not act as an agent for someone else, and you don’t have to get paid for it. Any action that “facilitates” the manufacture, export, reexport, import, transfer, or retransfer of a defense article or defense service is brokering. This means that distributors of defense articles would likely be brokers under the proposed rule, even if all they do is purchase and resell defense articles for their own accounts and even if the underlying export/reexport or transfer transactions are approved by DDTC.
• It asserts jurisdiction quite broadly and extraterritorially. In addition to US persons, the proposed regulation also applies to foreign persons:
  1. When they are “located in the United States”;
  2. When a US-origin defense article or defense service is involved; OR
  3. When they are “located outside the United States” but are “acting on behalf of a U.S. person.”

Second: It creates three narrow carve outs to the definition of “brokering activities.”

Persons meeting these carve outs need not register, get prior approvals, or even file annual reports or keep records. In addition, it is not prohibited for these persons to conduct those activities in transactions involving countries proscribed under section 126.1 of the ITAR, such as Iran, China, and Afghanistan. The three carve outs are:

• Activities of a US person in the United States limited exclusively to US domestic sales and transfers.
• Activities by employees of the US government acting in an official capacity.
• Activities that do not extend beyond administrative services, such as providing or arranging office space and equipment, hospitality, advertising, or clerical, visa, or translation services, or activities by an attorney “that do not extend beyond providing legal advice to a broker.”

Third: It creates exemptions from brokering registration and in some cases brokering approvals and reporting. But watch out! These exemptions are complicated and narrower than they first appear, and they never apply to activities involving the proscribed countries.

Who is exempt from registration, approvals and reporting? The following categories of individuals and entities are exempt:

• 129.3(b)(1) – Employees of foreign governments or international organizations acting in their official capacities.
• 129.3(b)(2) – Persons exclusively engaged in the business of financing, insuring, transporting, or freight forwarding, such as air carriers and freight forwarders.
• 129.3(b)(3) – This is the exemption the US defense industry has been pushing for. and it helps but likely comes up short in many circumstances. Under this exemption, a US defense manufacturer/exporter already registered under part 122 of the ITAR as a manufacturer or exporter can simply add US person subsidiaries, joint ventures, and other affiliates and foreign person brokers listed and identified as their exclusive brokers in their part 122 Statement of Registration. This sounds like it might help reduce the duplication caused by two registrations and two approvals for a single transaction, but it does not work if the broker is (1) working for a company other than the US registrant on a particular transaction, (2) assisting to sell foreign defense articles, or (3) assisting to sell US defense articles procured outside the United States (even if properly licensed).
• 129.3(d) – This exempts some companies that would not meet the 129.3(b)(3) exclusivity requirements, BUT it exempts only US and foreign affiliates listed on the part 122 registration – not unrelated foreign brokers. Plus the exemption is from registration only: prior approval, reporting, and recordkeeping provisions all still apply.
• 129.3(b)(4) – This “end-user” focused provision exempts end-users who received defense articles or services pursuant to a license or other approval both for their own use and when they subsequently reexport or retransfer such defense articles as long as they do so pursuant to a regular license or other approval.

Fourth: It creates exemptions from brokering approval for certain activities. But only one exemption is new, and modifications to previously existing exemptions actually reduce their scope. The new exemption does not require prior approval for transactions, provided the items are:

1. US origin;
2. Not Significant Military Equipment (SME);
3. Not listed in 129.7(e);
4. Not equal or greater than $25 million; AND
5. For end-use by an international organization or foreign government.

Fifth: The proposed regulation would add onerous new certification requirements.

The proposed regulation imposes a certification requirement that must be met not only by the registrant, but also by its foreign parent (if added to the registration), affiliates and any “other person{s} required to be listed.” For foreign brokers, the revised certification requirement includes not only indictments or charges (information) and convictions under the US criminal statutes enumerated in §120.27 of the ITAR, but also: “foreign criminal statutes dealing with subject matter similar to that in the US criminal statutes enumerated in §120.27.”

Sixth: The proposed regulation confirms what those of us who tried to get brokering guidance under the prior regulation already knew: you need to provide all the information required in an approval application to get guidance from DDTC, limiting the benefits of the guidance option.

Conclusion

The proposed regulation appears to be a sincere attempt to provide clarity to a murky topic and reduce to some extent the duplication of registration and prior approvals created by having two different licensing regimes for exports/reexports/transfers and the brokering of such activities. Unfortunately, the added clarity of the proposed rule in most cases confirms the previously unwritten but widely known expansive interpretation by DDTC of what constitutes brokering, both in terms of activities and in terms of jurisdictional reach. Likewise, the provisions that attempt to avoid duplicate registration and approvals have been narrowed to such a degree that they are likely to help only large defense contractors with exclusive foreign brokers or affiliates. Even those companies who can take advantage of this might be loath to sign onto the certification requirements.

On the positive side, DDTC has reduced its practice to writing and invited notice and comment, thereby beginning a dialogue with industry and the ITAR practitioners’ bar. One can only hope that DDTC takes into account what are likely to be numerous comments on its proposed rule in formulating a final brokering regulation. Comments are due to DDTC by February 17, 2012, so there is still plenty of time to express your thoughts.

Should you have any questions regarding this Alert, please contact members of Arent Fox’s International Trade Group, or the Arent Fox attorney who handles your matters.