The New Brokering Rule FAQ (ITAR Part 129)

on Monday, 25 November 2013. Posted in ITAR

By Michael JV Bell C.B.

The aim of the brokering rule set out in ITAR part 129 is to define and identify brokers and to regulate their activities. A revision of the rule has just come into effect.

My previous blog discussed the debate over the extraterritorial reach of the Arms Export Control Act brokering amendment. This one focuses on the nuts and bolts of the new rule.

What is a Broker?

 A Broker is any person who engages in the business of brokering activities, in the following categories:

(1) Any U.S. person wherever located;
(2) Any foreign person located in the United States; or
(3) Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person.

(As elsewhere in the ITAR, ‘person’ means both an individual and a corporate entity. ‘Controlled’ is defined in the rule.)

As noted in the earlier blog, the new rule does not apply to foreign persons outside the US when their activities involve US-origin defence articles or services. This is a change from previous Department of State interpretation of the ‘otherwise subject to US jurisdiction’ language in the previous rule.

 

What are Brokering Activities?
Brokering Activities are defined as any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin. Such action includes, but is not limited to:

- Financing, insuring, transporting, or freight forwarding defense articles and defense services; or
- Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.

This definition applies even

- When there is no agent or intermediary relationship as normally understood, or payment made (this is a widening of the definition in the previous rule); and
- When there is only one action taken.

There are a number of important exclusions from the definition of brokering including:

- Activities performed by an affiliate on behalf of another affiliate;
- Activities by regular employees on behalf of their employer (except US persons involving embargoed countries listed in ITAR 126.1);
- Administrative services, such as translation services or organising trade shows;
- The provision of legal or consultancy advice.

 

Who must register?
Anyone listed above who engages in a brokering activity and is not exempted as
- A foreign government or international organisation, or
- A person exclusively in the business of financing, insuring, transporting, customs brokering or freight forwarding.

Registration fee is $2250. Material changes must be reported within 5 days. US registrants may include subsidiaries and affiliates on their registration forms.

 

What transactions require prior approval?
Certain brokering activities require prior State Department approval, ie those involving:

- More sensitive US-origin defence articles, such as fully automatic firearms, platforms such as vessels, tanks, aircraft and UAVs, but also night-vision, inertial platform sensor or guidance systems, and chemical agents and precursors;
- Same categories of foreign defence articles if inside NATO-plus;
- All foreign defence articles/ services if outside NATO-plus.

This is a change from the previous rule which focussed on whether items were Significant Military Equipment (SME) and based on value. The rule sets out in detail the information required for prior approval. Applications involving embargoed countries listed in ITAR 126.1 or denied parties will be refused.

 

What transactions require prior notification?
None. This feature of the previous rule was felt to be confusing, and to add little value.

Annual Reports?
An annual report of brokering activity is required of all registered brokers (including nil returns). The report must cover quantity, type, US dollar value, and purchaser(s) and recipient(s), all individuals involved, payments received, licence numbers for approved activities and any exemptions utilised. Records should be retained for at least five years after the last controlled activity.


To sum up
The new rule is much clearer on who is, and who is not, covered, and on what is required of those who are. Additional helpful guidance is provided by FAQs on the DDTC website.
The narrowing of the rule’s scope by excluding foreign persons, other than those owned or controlled by US persons, plus the exemption of regular employees and of affiliates acting on behalf of other affiliates, will result in a considerable reduction in coverage. The DDTC forecasts a significant fall in the number of broker registrations, by 1300, plus another 300 incorporated into the registrations of US companies. There may be further reductions as a result of transfers of defence articles from the USML to the CCL ‘600 series’ as a result of Export Control Reform.
On the other hand, for those who are covered, the definition of brokering activity is both broader and vaguer than before. As noted above, the new definition does not retain the sense of acting an agent or intermediary, or the requirement for a fee or commission; it can also be triggered by just one transaction. Uncertainty will remain in many cases as to whether certain activities constitute brokering.

Thus the definition may apply to activities on behalf of other entities such as:
- Providing logistic support by arranging for the procurement and shipping of defence articles from the OEM to the customer, or arranging support contracts with third parties;
- Managing the movement of sub-systems between contractors on international defence programmes.
- Promotion of exports by the foreign subsidiaries of US companies, even when there is no US content; this could particularly affect companies offering packages of equipment to foreign customers.
- Contracting out defence acquisition, as is currently under consideration by the UK MOD. The sole remaining bidder is a consortium led by Bechtel, a US company. It is difficult to see how Bechtel could avoid the obligations of Part 129, including those for prior authorisation, when procuring equipment on the MOD’s behalf.

For this reason, companies which may be affected should consider taking expert advice from those familiar with developing ‘case law’ on the subject. Furthermore, para 129.9 of the new rule permits ‘any person desiring guidance on whether an activity constitutes a brokering activity within the scope of this part 129 may request in writing guidance from the DDTC’. The information to be provided is set out in detail. ‘The guidance will constitute an official determination by the Department of State’. It will often be prudent to take advantage of this offer.