Fixing a Broken Brokering Definition: DDTC Eases ITAR’s Regulatory Burden for Brokers and Brokering Activities

by Sheppard Mullin Richter & Hampton LLP
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On August 26, 2013, in yet another move geared toward streamlining the U.S. export control regulatory landscape, the U.S. Department of State’s Directorate of Defense Trade Controls (DDTC) published its long-awaited interim final rule on arms brokers and brokering activities.  The revamped International Traffic in Arms Regulation (ITAR) Part 129 directly addresses industry concerns regarding the scope and applicability of the current brokering requirements.  Although the rule comes nearly two years after the most recent proposed brokering rule, the new rule significantly narrows the universe of persons and activities that are subject to the ITAR’s brokering regulations.

The major changes in Part 129 can be summarized as follows:

Narrows Part 129’s Applicability to Foreign Persons. 

Previously, Part 129 provided that the ITAR’s brokering regulations applied to the activities of “foreign persons subject to U.S. jurisdiction involving defense articles or defense services of U.S. or foreign origin which are located inside or outside of the United States.”   This expansive definition, on its face, effectively placed foreign persons with even the most tangential jurisdictional connections within the scope of the ITAR’s brokering registration requirements.

The newly-published interim final rule, however, sensibly narrows the scope of the brokering registration requirements to include only foreign persons owned or controlled by a U.S. person, and foreign persons located within the U.S.  As we learned from Raytheon and Meggitt, subsidiaries of U.S. companies are expected to be aware of and fulfill their obligations under the ITAR.

Overhauls Part 129’s Definition of “Brokering Activities.”

The current version of Part 129 defines “brokering activities” to include “financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import of a defense article or defense service, irrespective of its origin.”  Further, the 2011 proposed brokering rule would have covered activities of foreign persons located outside the U.S. if the activities involved U.S.-origin defense articles or services (including the importation thereof), or if the foreign person acted on behalf of a U.S. person.  By including these activities, Part 129 appeared to stretch the definition of brokering to “any activity related to” defense articles or services.

The new rule defines brokering to mean something more akin to traditional brokering.  The rule requires that brokering activities be “on behalf of another,” and specifically covers activities such as soliciting or promoting defense articles or defense services.  Interestingly, the new definition of brokering activities includes a broad list of activities that specifically do not constitute “brokering activities.”  The rule lists excluded activities such as: activities by regular employees acting on behalf of their employer; basic administrative activities; promoting company goodwill at trade shows; and activities by an attorney that do not extend beyond the provision of legal advice to clients.

Perhaps most importantly, DDTC’s new rule specifically excludes from the definition of “brokering activities” those activities performed by an affiliate on behalf of another affiliate.  In a change that directly addresses the concerns of multinational corporations, the scope of “brokering activities” no longer reaches those activities undertaken within the corporate family of a single registrant.  Thus, foreign subsidiaries of U.S. parent companies who promote their parents’ defense products and services abroad (i.e., act on behalf of the U.S. parent) are no longer considered to be engaged in brokering activities.  It should be noted, however, that foreign subsidiaries of U.S. parent companies that promote the defense products and services of third parties would be required to register.

Clarifies and Streamlines Registration Requirements.

In keeping with the broad changes outlined above, the newly published ITAR Part 129.3(d) allows U.S. and foreign subsidiaries and affiliates that are engaged in brokering activities and are owned or otherwise controlled by a registrant to be listed as brokers on the registrant’s manufacturer and exporter registration.  In other words, a separate broker registration and, notably, a separate broker registration fee are not required.  In addition, DDTC notes that the registrant’s manufacturer and exporter registration should only include subsidiaries and affiliates that are more than 50% owned or controlled by the registrant.

Conclusion.

It should be noted that the interim final rule does not go into effect until October 25, 2013, so the burdens of the current regulatory landscape remain in place for now.  Nonetheless, the changes embodied in the forthcoming rule clearly indicate that DDTC continues to work toward its ultimate goal of making the world of export control regulations a far friendlier place.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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