On May 26, 2015, the US Department of State Directorate of Defense Trade Controls (DDTC) issued a proposed rule (80 Fed. Reg. 30,001) that would amend the International Traffic in Arms Regulations (ITAR) to clarify requirements for the registration and licensing of US person individuals, whether located in the United States or abroad, who provide defense services while employed by foreign, non-US persons (e.g., entities or organizations).  DDTC will accept comments for 60 days until July 27, 2015.  In particular, DDTC has requested comment from foreign persons who currently employ or are contemplating engaging US persons as regular employees or long-term contract employees (one year or more), as well as from current or future employees and contractors themselves.

Some of the more significant changes or clarifications in the proposed rule include:  (1) a clear requirement that US persons employed by foreign persons in the United States or abroad, unless they are already employed by an ITAR-registered entity or a subsidiary or affiliate identified on the registration statement, must individually register (i.e., as an exporter of defense services); (2) absent an exemption, the natural US person must obtain a DSP-5 license to provide defense services to a foreign person, or otherwise be employed by a foreign affiliate or subsidiary of a US ITAR-registrant that has valid TAA or MLA in place where the US-registrant can demonstrate its ability to ensure compliance by the natural US person with the ITAR; and (3) the establishment of exemptions from licensing for US persons (a) working in support of an active Foreign Military Sales (FMS) contract, or (b) employed by foreign persons who are providing defense services exclusively in North Atlantic Treaty Organization (NATO) and European Union member countries as well as Australia, New Zealand, Japan, and/or Switzerland  (so called “NATO-plus” countries). 

Under the proposed rule, the registration requirement would apply to commercial activities “by any person who engages in the business of furnishing defense services wherever located,” even though there is no further explanation or commentary about the scope of this language and a previous DDTC proposed rule regarding defense services in 2013 (which has not yet been implemented) notes that mere employment of a natural US person by a foreign person is not itself a defense service.  Additionally, the NATO-plus licensing exemption, set forth in proposed section 124.17, would have a number of conditions, including that no ITAR-controlled technical data be transferred in the process of providing the defense service.  The same restriction would apply in the context of the FMS contract exemption, as well as a requirement that the defense services be identified in the Letter of Acceptance (LOA).

Before publication of this proposed rule, US persons working abroad for commercial entities occasionally would register under the ITAR.  (An exemption applies where a US person performs defense services when drafted as a member of the regular military forces of a foreign nation.)  That is because “defense services” can be performed by a US person furnishing technical assistance with non-US origin defense article goods, equipment, technical data, and software or in connection with providing military training or advice to a foreign person.  Thus, US persons’ activities, even if undertaken wholly outside the United States on behalf of a foreign employer, could be subject to the ITAR under §120.9.  However, there is currently no explicit provision in the ITAR that sets forth this requirement.  Consequently, it is possible that a number of US persons who might expect to register under the proposed rule are not currently registered.  Therefore, by establishing requirements explicitly, and providing several scenarios in the preamble to the proposed rule highlighting when DDTC believes it may be applicable, the State Department is proposing to clarify when US person individuals must register if providing defense services while employed by non-US companies while at the same time offering new exemptions to licensing for activities that take place wholly within NATO plus countries or in support of an active FMS contract. 

In addition, although the proposed rule does not require US persons who are employed by “affiliates” of DDTC registrants to obtain licenses for the provision of defense services, it narrows the definition of affiliate to include only entities that a registered entity controls, with “control” meaning that the parent has the authority or ability to establish or direct the policies or operations of the firm with respect to ITAR compliance.  Previously, an entity could be an affiliate if the parent simply had general authority to establish or direct the policies of the related entity.  However, as in the past, control is presumed to exist where there is ownership of 25 percent or more of the outstanding voting securities if no other person controls an equal or larger percentage.  The new rule also states that entities that cease to meet the definition of affiliate must immediately be removed from the registration.

The proposed rule would have potential consequences for natural US persons employed by entities providing services in the Middle East, South Asia, and Southeast Asia in particular. Not only do these rules mean that certain US individuals employed by many foreign companies would need to register under the ITAR if they are engaged in the business of providing defense services to foreign persons (abroad), but also such persons will need to obtain licenses to furnish defense services unless their activities are provided solely within the NATO-plus countries proposed in section 124.17.  Moreover, if their actions do fall within section 124.17, such persons would still be subject to individual recordkeeping obligations.  Finally, persons who do not meet the definition of “regular employee” currently set forth in section 120.39 – e.g., persons on short term assignments or consultants – would not be able to take advantage of the exemption.

Therefore, the rule, if implemented, would result in potentially significant individual compliance requirements for US natural persons abroad as well as their employers.  It may also cause many individuals and companies to carefully assess whether in fact their activities constitute ITAR-regulated defense services.