Clarified definition of 'brokering activities'
Streamlined registration process
Simplified brokering approval requirements
Public comments requested

On December 19 2011 the US State Department's Directorate of Defence Trade Controls proposed long-awaited changes to the rules governing the brokering of defence articles and defence services under the International Traffic in Arms Regulations (ITAR). Comments on the proposed changes are due by February 17 2012.

The proposed rule entails far-reaching changes to the ITAR brokering provisions, as well as certain related provisions applicable to manufacturers and exporters of defence articles and defence services. This update summarises the principal changes proposed by the directorate.

Clarified definition of 'brokering activities'

The proposed rule would clarify the definition of "brokering activities" in several respects. As an initial matter, the directorate proposes to revise the definition to track more closely the Arms Export Control Act, which provides that brokering activities include the financing, transportation, freight forwarding or taking of any other action that facilitates the manufacture, export or import of a defence article or defence service. The proposed rule would delete the phrases "who acts as an agent for others" and "in return for a fee, commission, or other consideration" which appear in the current regulatory definition, but do not appear in the act. The deletion of these phrases would expand the activities subject to the brokering provisions of the ITAR, as companies have often relied upon this language when determining whether certain activities constitute brokering.

However, the proposed rule would also limit the applicability of the brokering provisions in certain respects. Specifically, 'brokering' expressly would not include activities limited to:

  • administrative services (eg, providing or arranging office space and equipment);
  • hospitality;
  • advertising services;
  • clerical services;
  • visa services;
  • translation services; and
  • the provision of legal advice.

This clarification is consistent with the industry's current understanding of the ITAR brokering provisions.

In addition, the proposed rule clarifies the situations in which the activities of foreign persons constitute ITAR-controlled brokering, which has been the source of some confusion under the current regulatory definition. Specifically, the proposed rule specifies that foreign persons are engaged in ITAR-controlled brokering when they undertake brokering activities while they are:

  • physically located in the United States; or
  • located outside the United States and:
    • dealing in US-origin defence articles or defence services;
    • involved in the import into the United States of a defence article or defence service of any origin; or
    • acting on behalf of a US person.

Streamlined registration process

The proposed rule would streamline the registration process to ameliorate the administrative burden associated with the expanded definition of 'brokering activities'. Entities such as banks, freight forwarders and insurance companies would continue to be exempted from the registration requirement. In addition, a separate broker registration would no longer be required for a company registered under the ITAR as a manufacturer or exporter, so long as the registration statement identified certain information related to brokering activities. A single registration statement could also cover the brokering activities of all entities in a single corporate or control group, so long as the entities involved in brokering activities were identified in the registration statement and their brokering activities involved only:

  • the registered entity's licensed defence articles or defence services; or
  • transactions on behalf of the registered entity relating to licensed US-origin defence articles or defence services exported from the United States.

For example, if a US manufacturer or exporter of defence articles used a network of US affiliates to sell its licensed products, these affiliates could be included in its ITAR registration. The affiliates would not have to be registered separately as brokers. Similarly, the US manufacturer's or exporter's foreign brokers (which could include foreign affiliates) could also be covered by the manufacturer's or exporter's registration statement, thereby avoiding the separate broker registration requirement. Such foreign brokers must be 'exclusive' to the US manufacturer or exporter, but it is unclear whether this undefined exclusivity requirement applies to US entities included in a US manufacturer's or exporter's ITAR registration.

Importantly, if additional entities were included in a US manufacturer's or exporter's registration statement, the certification accompanying the statement would have to cover all of these entities. This certification requires the registrant to disclose any convictions, indictments or other charges under certain US laws which involve any of the covered entities, as well as their senior officers and directors. Under the proposed rule, certifications for registrations covering brokering activities would also require – with respect to the same entities and individuals – disclosure of convictions, indictments or charges under the foreign analogues of the US laws.

Moreover, both registrants and entities exempted from registration requirements (eg, banks, freight forwarders and insurance companies) would be subject to the directorate's policy concerning defence trade embargoes. This policy requires such entities to refrain from engaging in or proposing to engage in ITAR-controlled brokering activities involving countries, areas or persons subject to defence trade embargoes.

Simplified brokering approval requirements

The proposed rule would also simplify brokering approval requirements. Prior notification of certain brokering activities, which was confusing to the industry and difficult to administer, would be eliminated. Instead, prior approval (ie, an authorisation) would be required for all brokering activities, unless an exemption applied. In addition to clarifying certain existing exemptions (eg, the exemption applicable to banks, freight forwarders and insurance companies), the proposed rule would add two new exemptions. First, brokers identified in a US manufacturer's or exporter's registration would be exempt from prior approval requirements. This change recognises that the transactions in which these brokers would be involved would necessarily be subject to export licensing requirements, rendering redundant a separate prior approval for brokering activities. Second, brokering activities outside North Atlantic Treaty Organisation member countries, Australia, Japan, New Zealand and the Republic of Korea would be exempt from prior approval if they involved only:

  • US-origin defence articles that do not constitute significant military equipment; and
  • foreign government or international organisation end users.

Brokering activities involving certain enumerated categories of defence articles would be ineligible for this exemption. A $25 million cap for defence articles and defence services would also apply.

In addition, the proposed rule would clarify the procedures for requesting prior approval (as well as advisory rulings). The proposed rule recognises that in certain instances, all of the information required in a request for prior approval may be unavailable. Brokers would have the opportunity to explain the omission of the information, which the directorate would have the discretion to take into account when evaluating the request for prior approval.

Public comments requested

The directorate has requested public comments concerning its proposed changes to the ITAR brokering provisions. Comments are due by February 17 2012.

For further information on this topic please contact Robert Torresen or Lisa Crosby at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email ([email protected] or [email protected]).