Extraterritoriality and The New Brokering Rule (ITAR Part 129)

on Thursday, 31 October 2013. Posted in ITAR

By Michael JV Bell C.B.

October 25th, 2013 marked the entry into force of a revised ITAR brokering rule, published in ‘interim final’ form as a Federal Register Notice in August. The brokering amendment of the Arms Export Control Act was passed in 1996 and the resulting regulation, embodied in ITAR Part 129, appeared the following year. It was as long ago as 2003 that the Department of State informed the Congress that they were reviewing the rule in the light of experience. Ten years and four attempts later, a new rule is finally with us.

The debate over revision of the brokering rule over the last decade can in part be seen as, and gains much of its interest from, a war of attrition between the Directorate of Defence Trade Controls and expert legal opinion over the extraterritorial intent of the AECA brokering amendment, extraterritoriality (XT) being defined in this context as the assertion of jurisdiction over foreign persons outside the United States.

Following passage of the AECA amendment, ITAR Part 129.2(b) stated that the regulation applied (but was not limited) to activities by US persons located inside or outside of the USA or by ‘foreign persons subject to US jurisdiction’. Similarly, Part 129.3(a) placed a requirement to register on any US person, wherever located, and any foreign person located in the United States ‘or otherwise subject to the jurisdiction of the United States’.

The DDTC issued no guidance on the interpretation of ‘otherwise subject to US jurisdiction’, or indeed on any other aspect of Part 129. Contemporary commentators opined that the language should be interpreted in terms of foreign brokers ‘having a sufficient nexus with the US based on the activities in question’, or ‘employed by US companies or having an unrelated business in the US’. With the passage of time, however, it became clear that the DDTC asserted jurisdiction over foreign brokers outside the US even if their only connection with the US was with involvement in brokering US origin defence articles or defence services.

In 2009, a new draft regulation was put to the Defense Trade Advisory Group (DTAG) which replaced the language of ‘otherwise subject to US jurisdiction’ with the more specific statement that ‘brokering activities include any such activities by…any foreign person located outside the US who engages in brokering activities involving a US-origin defense article or defense service’. The same language was included in draft text published as a Federal Register Notice in December 2011. DDTC had also imposed, in May 2011, a Consent Agreement on BAE Systems plc, a foreign person outside the United States, for 2588 alleged violations of the ITAR brokering regulations involving US origin defence articles and defence services.

Meanwhile, however, informed legal opinion was coming down increasingly heavily against an expansive XT interpretation of the amendment. In the case of US v Yakou, in 2005, Sabri Yakou was charged with offences in connection with brokering patrol boats for Saddam Hussein. The Court, reflecting Supreme Court rulings on extraterritoriality, confirmed that ‘the Congress was concerned with both United States brokers of arms and foreign brokers of arms located in the United States, but not with foreign brokers located outside the United States’. The case, however, ultimately turned on whether Yakou’s ‘green card’ was still valid, and thus whether he was a ‘US person’. The DDTC saved something from the wreckage by successfully appealing that the interpretation of ‘otherwise subject to US jurisdiction’ was not at issue, and chose not to modify their overall stance on the application of this language.

Subsequently, in an unsolicited input of February 2008 to the Department of State’s legal adviser by the American Bar Association (ABA), and in a commentary on the December 2011 FRN from the Section of International Law (SIL) of the ABA, the argument was put that application of standard principles of statutory construction, as confirmed by the US Supreme Court, did not permit an XT interpretation of the AECA brokering amendment.

Under such principles, ‘Congress legislates with a presumption against extraterritoriality. Federal laws apply only within the territorial jurisdiction of the United States unless Congress provides “affirmative evidence” to the contrary. This intention must be “clearly expressed”’. The brokering amendment failed that test.

The December 2011 FRN marked the high noon of the DDTC’s expansive interpretation of brokering. Comments were numerous, forceful, and almost unanimously critical. Foreign governments were also upset. As a result, the DDTC did not proceed with the draft. Instead, after a decent interval, the DDTC adopted a fresh approach, circulated for comment to the DTAG in November 2011. This approach set out a new definition of a broker as ‘any person described below who engages in the business of brokering activities:

1) Any US person wherever located;
2) Any foreign person located in the United States;
3) Any foreign person located outside the United States where the foreign person is owned or controlled by a US person;
4) Any person located outside the United States involving the temporary import into the United States of any defense article or service.’

Thus the DDTC had finally dropped its efforts to extend jurisdiction over foreign persons outside the US involved with US-origin defence articles or services. This was generally welcomed. There was, however, some concern over (4) above from foreign companies, who were unable to see how the US national interest was served by a control over brokering temporary imports, and feared that the provision was an attempt to extend extraterritorial jurisdiction by stealth. After representations, this sub-paragraph was dropped and does not appear in the ‘interim final’ text published in August.

This lengthy saga prompts two questions. First, why did the DDTC persist with their view of the reach of the legislation for so long when the writing was so clearly on the wall after the Yakou judgment? The answer must be speculative but DDTC officials commented at the time that they believed the Yakou decision to be wrong in law. Furthermore, the power to exercise oversight over not only foreign agents of US companies, but also foreign agents of foreign companies, or even the foreign companies themselves, as illustrated by the BAE Systems case, must have been attractive to the Department of State. DDTC does not appear to have the intention of revisiting decisions made under this interpretation. This suggests that the new rule is seen as a change of policy rather than a correction or clarification of the AECA brokering amendment.

Secondly, is this the end of the story? Not quite. The ‘interim final’ status of the latest version permits further amendment. Inclusion of foreign persons owned or controlled by US persons, is also objectionable under international law, as the ABA has already pointed out. While DDTC has yet to publish the comments on the ‘interim final’ text, it may be assumed that there will be proposals to remove or modify this provision.