“Brokering” under the International Traffic in Arms Regulations (ITAR) is not the same thing as what customs brokers, stock brokers, real estate brokers or other types of brokers do. Under Part 129 of the ITAR “brokering” has a very specific meaning – and one that is changing.
The Directorate of Defense Trade Controls (DDTC), U.S. Department of State, published an interim final rule in the Federal Register of Aug. 13, 2013 with a revision to Part 129 regulations on brokering. It was termed an “interim” final rule because although the revised regulations become effective on Oct. 25, DDTC will have accepted comments up until Oct. 10 and will publish any changes based on comments received. This article is based on the test of the new revised regulations.
The first thing the revised regulations do is to define a “broker” for ITAR purposes. The first part of the definition states that a broker is any person (individual, company or organization) engaging in brokering activities. The person described in the definition may be a U.S. person located anywhere, a foreign person located in the U.S., or a foreign person outside the U.S. who is owned or controlled by a U.S. person (such as a subsidiary). The second part of the definition involves brokering activities. Brokering activities include “any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, re-export, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin.” Examples of brokering activities include “financing, insuring, transporting, or freight forwarding defense articles or defense services” and “soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.”
That is a pretty broad definition. There are exceptions to this definition for activities for domestic sales in the U.S., U.S. government employees acting in an official capacity, and regular employees acting on behalf of their employer. The latter would include contracts administrators negotiating for their employers and marketing employees seeking new sales of defense articles. The exceptions also include personnel performing administrative services on behalf of the exporter, such as arranging office space, visas and translation services. Thus if a U.S. exporter hires a foreign firm to find space for it at a trade show and arrange for computers (not containing controlled technical data) and printers for the exporter’s personnel to use, the firm would come under this exception.
There are three basic requirements for a party falling under the definition of “broker” for ITAR purposes. They must (1) register with DDTC, (2) obtain approval for brokering activities, and (3) file reports.
Registering with DDTC involves filing a registration statement and paying an annual fee. Registration is a prerequisite for obtaining approvals and filing reports. There are several exceptions to this requirement. A U.S. company registered with DDTC as a manufacturer and/or exporter can include foreign subsidiaries and affiliates in its registration. Registration is also not required for foreign governments and international organizations acting in their official capacity. If a party’s activities are limited to financing, insuring, transportation, freight forwarding or customs brokerage, it is exempted from registration. Although not required to register, these parties are still subject to embargoes and prescriptions enforced by DDTC.
Parties registered as brokers must obtain approval from DDTC before engaging in brokering a long list of controlled defense articles. These include weapons, rockets, bombs, tanks and armored vehicles, military vessels, military aircraft and UAVs, night vision systems, chemical weapons and submersibles. There are exemptions to this requirement for brokers under contract to a U.S. government agency where the contract requires the brokering activities. There are requirements and exceptions to this policy, so it is best to read the fine print in the regulations. The application for approval must be signed by an empowered official and should fully describe the proposed brokering activities. Once approved, the broker may only engage in activities described in the application and approved by DDTC.
Brokers must submit reports annually to DDTC. The reports must detail the brokering activities, including those exempt from prior approval. If there were no activities, the party must file a negative report. Finally, the party must keep records of all brokering registrations, approvals and reports for at least five years.
Let’s finish with some examples.
- A U.S. company registered with DDTC has a sales subsidiary in Europe that assists in marketing the U.S. Company’s products in those countries. The U.S. Company can include the European subsidiary on its registration. If the subsidiary engages in marketing any of the defense articles or technical data listed in Part 129 of the ITAR, it will need to apply to DDTC for approval for those marketing efforts. The U.S. Company will also need to ensure that reports are filed annually with DDTC detailing the marketing efforts undertaken by the European subsidiary.
- A freight forwarder incorporated in the U.S. engages in arranging transportation and foreign customs clearance of defense articles for U.S. exporters. It does not perform any services beyond these transportation and logistics functions. The freight forwarder does not need to register with DDTC or seek prior approval for its activities, if they are limited to these functions. The forwarder also does not need to submit annual reports.
Naturally, there are some severe penalties for failing to comply with the brokering regulations. These include civil penalties and criminal sanctions and debarment from exporting for the most egregious examples.
If you or your clients participate in any activity that could be construed as “brokering” under the ITAR, it is best to thoroughly review the new regulations before going any further.