On February 16, the government added the following freight forwarders, all of which are significantly involved in defense trade, to the Excluded Party List System (“EPLS”): (1) BAX Global, Inc.; (2) Ceva Logistics LLC; (3) EGL, Inc.; (4) Kuhne and Nagel International AG; (5) Panalpina, Inc.; (6) Panalpina Welttransport (Holding) AG; and (7) Schenker AG. The freight forwarders pleaded guilty to federal antitrust charges, which led to debarment from government contracting and grants. There is no indication from the EPLS website that the freight forwarders were debarred from handling defense articles in export contracts. However, the State Department’s Directorate of Defense Trade Controls (“DDTC”) is taking the position that none of these freight forwarders may participate in defense trade without transaction exception requests approved by DDTC, which could pose significant challenges for exporters of defense articles listed on the United States Munitions List (“USML”).
ITAR §120.1(c) states that U.S. persons who are ineligible to contract with any agency of the U.S. Government are generally ineligible to receive licenses or other approvals. And section 127.1(c) makes it a violation of the ITAR for any person to engage in any export related transaction where an ineligible party would receive a benefit from the transaction. This is the case whether or not the ineligible party has been explicitly debarred from defense article exports under the provisions of section 127.7. This ineligibility affects their participation in both licensed exports and exports made pursuant to specific exemptions in the ITAR from licensing requirements.
The most significant problem posed by this debarment is that this could create a significant logistical burden on defense exporters given the prominence of these companies. DDTC just issued a guidance today (February 24) to attempt to clarify some issues regarding the seven freight forwarders. According to the guidance, exporters can ship under current licenses listing these freight forwarders. Applications received by DDTC as of February 18 will be processed in the normal course. However, applications submitted after February 18 will be Returned without Action (“RWA’d”) unless a transaction exception request is “submitted via D-Trade2 within 72 hours from the date of this notice” leaving exporters scrambling to ensure that license applications are not RWA’d. Further, transaction exception requests will be required for all future licensing requests.
Typically, transaction exception requests, which are considered on a case-by-case basis, are only granted where there are overriding U.S. foreign policy or national security interests. DDTC’s web guidance notes that transaction exception requests should explain, among other things, “why the applicant is unable to utilize a different freight forwarder,” which could prove to be a very difficult standard for exporters to meet. Finally, even if approved, submission of transaction exception requests is likely to result in delays in approval of DDTC licensing requests involving these freight forwarders as DDTC typically does not act promptly on transaction exception requests.