On 26 August 2013 the U.S. Department of State issued its long-awaited brokering regulations as an interim final rule (78 FR 52680). The amendments to the International Traffic in Arms Regulations (ITAR) are broad and significantly alter the rules related to brokers and brokering activities (Part 129). The rule incorporates and responds to comments filed in response to the proposed rule related to brokering of 19 December 2011 (76 FR 78578), including many helpful changes to the brokering provisions. The interim final rule also makes a number of additional revisions to other parts of the ITAR (not specific to brokering), including registration requirements, proscribed countries, eligibility requirements, and enforcement.
The revised regulations will become effective 25 October 2013, and interested parties may comment by 10 October 2013. Because of the broad implications of these changes and the significant related obligations, companies should carefully review and update their compliance procedures accordingly.
Part 129 of the ITAR revises the requirements on “brokers” of defense articles and defense services, including registration, reporting, and licensing requirements. The interim final rule includes a number of significant changes to Part 129, including the following:
- Narrower applicability to foreign persons: The term “broker” (Section 129.2) was revised to cover foreign persons only when located in the United States or when owned or controlled by a U.S. person. As a result of this change, foreign persons located outside the United States that are not owned or controlled by U.S. persons will no longer need to be registered as brokers. This change still places a burden on foreign persons with no other nexus to the United States besides U.S. ownership. This is an example of the increasingly broad reach of trade-related regulations to foreign incorporated entities.
- Elimination of dual registration requirements: A new Section 129.3(d) was added to specify that an entity that is registered as a manufacturer and/or exporter in accordance with Part 122, and those subsidiaries and affiliates owned or controlled by a registrant, are not required to register separately as a broker when they are identified as brokers within the entity’s manufacturer/exporter registration. The Department notes that while these entities are not required to separately register, all other requirements of Part 129 do apply to them (e.g., they are still subject to the prior approval and annual reporting requirements applicable to brokers).
- Until 2014 25 October (one year after the effective date of the Interim Final Rule), changes to combine an existing broker registration with an existing manufacturer/exporter registration must be made with the annual renewal of the manufacturer/exporter registration statement (not within five days of the effective date of this rule. (See the new Note 2 to Section 129.8(d)).
- Clarification regarding activities on behalf of affiliates: The new rule clarifies that activities by an affiliate on behalf of another affiliate in the same corporate family do not constitute brokering activities. The term “affiliate” is now defined in Section 120.40 to mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with another entity.
- Exclusion of administrative services and legal advice: The new rule also revises the definition of “brokering activities” to clarify that this term does not include administrative services, such as providing or arranging office space and equipment, hospitality, advertising, or clerical, visa, or translation services, collecting product and pricing information to prepare a response to Request for Proposal, and generally promoting company goodwill at trade shows. Moreover, this term does not include activities by an attorney that do not exceed providing legal advice.
- Expanded reporting obligations: Annual reporting requirements (Section 129.10) were expanded to include reporting of all persons who participated in the brokering activities, including each person's name, address, nationality, and country where located and role or function; the quantity, description, and U.S. dollar value of the defense articles or defense services; the type and U.S. dollar value of any consideration received or expected to be received, directly or indirectly, by any person who participated in the brokering activities, and the source thereof.
- More limited prior approval requirements: The interim final rule limits prior approval requirements for engaging in brokering activities to apply only to specific list of U.S.-origin defense articles set forth in Section 129.4. The interim final rule also removes the current notification requirements in Section 129.8. The ITAR currently requires notification or approval for nearly all brokering activities, unless exempted under current 129.6(b).
Other Changes (Not Specific to Brokering)
In addition to the significant revisions to the brokering provisions described above, the interim final rule also made a number of additional changes to other parts of the ITAR.
Any person who engages in the United States in the business of either manufacturing or exporting defense articles or furnishing defense services is required to register with the Directorate of Defense Trade Controls (DDTC). The interim final rule made the following changes to those requirements:
- An addition to Section 122.1(a) requiring those who engage in temporarily importing defense articles to register.
- Section 122.2(a) was clarified to state that the Statement of Registration may include subsidiaries and affiliates when more than 50% of the voting securities are owned by the registrant or the subsidiaries and affiliates are otherwise controlled by the registrant.
- Section 122.2(b)(1) was expanded to require that the Statement of Registration include whether the registrant, parent, subsidiary or other affiliate has ever been indicted, otherwise charged, or convicted of violating any of an expanded list of U.S. criminal statutes or a foreign criminal law on exportation of defense articles where conviction carries a minimum term of imprisonment greater than one year. More specifically, this change involves:
- Addition of “parent, subsidiary, or other affiliate listed in the Statement of Registration” to those that must identify violating certain statutes or being ineligible for contracts or licenses;
- Addition of “or otherwise charged (e.g., charged by criminal information in lieu of indictment…”;
- Addition of “or violating a foreign criminal law on exportation of defense articles…” to those convictions or violations that must be reported.
- Section 122.2(b)(2) was revised to require an explanation of ownership or control (including the identities) for foreign-owned or foreign-controlled registrants. We note that many registrants previously provided such explanations as a matter of best practice.
- The requirement in Section 122.4(a)(2) that a registrant must notify the DDTC of a material change in the information contained in the Statement of Registration was replaced with a requirement for notification in case of a change to the following:
- Registrant's name;
- Registrant's address;
- Registrant's legal organization structure;
- Ownership or control;
- The establishment, acquisition, or divestment of a U.S. or foreign subsidiary or other affiliate who is engaged in manufacturing defense articles, exporting defense articles or defense services; or
- board of directors, senior officers, partners, or owners.
This helpful amendment means that other changes generally should be provided as part of the annual registration renewal.
- With respect to organizations that may be exempt from registration, the changes to the regulations reaffirm DDTC current practice that such organizations, including certain universities, remain subject to licensing requirements and generally may not receive an export license or approval unless registered.
The State Department has expanded the types of behavior that constitutes a violation of Section 126.1 of the regulations with respect to arms embargoed countries and activities for which there is a duty to notify DDTC.
- Section 126.1(e)(1) was revised such that proposals and presentations to sell, export, transfer, re-export, or retransfer any defense article or service to the listed countries may not be undertaken without a license or prior written approval of DDTC. A new note to paragraph (e) explains that “proposal” and “presentation” would include communicating information on the equipment's performance characteristics, price, and probable availability for delivery.
- Section 126.1(e)(2) was expanded to include a requirement to notify DDTC of proposals.
Eligibility and Enforcement
- The definition of “U.S. criminal statutes” (Section 120.27) was expanded to include additional statutes. For example, this list now includes 18 USC § 1001, relating to false statements or entries where the underlying offense involves a defense article, including technical data or violations related to the Arms Export Control Act (AECA) or ITAR. This language appears to be broad enough to exclude from ITAR-regulated activities any person who has been indicted, or otherwise charged or convicted of making false statements to any government agency regarding a defense article, even if the activity did not involve exporting, importing, or brokering. Accordingly, this would affect manufacturers of defense articles supplying to the U.S. government where no violation of the ITAR was at issue.
- Section 127.1 was broadened to include attempting or soliciting the commission of any act prohibited by, or the omission of any act required by the AECA, the ITAR, or related licenses, approvals, or orders.
- Section 127.8, regarding interim suspensions, was removed.