Dept. of State Issues New ITAR Regulations
on “Brokering” Activities

August 29, 2013

On August 26, 2013, the Department of State released its long-awaited revisions to part 129 of the International Traffic in Arms Regulations (ITAR) relating to “brokers and brokering activities.” See Federal Register notice (78 F.R. 52680). The new rule, issued as an interim final rule, is effective October 25, 2013.

In 1996, the Arms Export Control Act or AECA was amended (Pub. L. 104–164) to provide for the regulation of brokering activities. In December 2011, the Department of State published a proposed rule (76 FR 78578) to modify the provisions relating to brokering and brokering activities, and in the view of some, overly expanding the scope of persons engaged in “brokering” or otherwise required to register as a “broker” of defense articles or services under section 129 of the ITAR.

Who Falls Under the New Rule?

The new rules on “brokering” now limit the scope to:

(1)       Any U.S. 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 U.S. person.

Under the interim final rule, foreign persons who are outside the United States and engaged in brokering activities but not owned or controlled by a U.S. person are outside the scope of the rule. The new rule provides a definition of “owned or controlled by a U.S. person” as:

‘‘owned by a U.S. person’’ means more than 50 percent of the outstanding voting securities of the firm are owned by a U.S. person, and ‘‘controlled by a U.S. person’’ means one or more U.S. persons have the authority or ability to establish or direct the general policies or day-to-day operations of the firm. U.S. person control is rebuttably presumed to exist where the U.S. person owns 25 percent or more of the outstanding voting securities unless one foreign person controls an equal or larger percentage. 

What Is “Brokering”?

Under the ITAR, persons who act 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, are “brokers.” The new provision deletes the reference in the current definition to ‘‘who acts as an agent for others.’’
Section § 129.2(b)(1) defines the term ‘‘brokering activities” to include (but not limited to):

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

Section 129.2(b)(2) identifies several categories of activities which are excluded from the definition of “brokering.” These categories include:

• Activities by a U.S. person in the United States that are limited exclusively to U.S. domestic sales or transfers (e.g., not for export);
  
• Activities by regular employees (see § 120.39) acting on behalf of their employer, including those regular employees who are dual nationals or third-country nationals that satisfy the requirements of § 126.18;
  
• Activities performed by an affiliate, as defined in § 120.40, on behalf of another affiliate; or
  
• Activities by persons, including regular employees (see § 120.39), that do not extend beyond acting as an end-user of a defense article or defense service exported pursuant to a license or other approval, or subsequently acting as a reexporter or retransferor of such article or service under such license or other approval, or under an approval pursuant to § 123.9.

Registration Requirements: Exemptions

Most persons that are engaged in “brokering activities” are required to register with the Department of State and the Directorate of Defense Trade Controls (DDTC) before engaging in such activities. See section 129.3.

While not excluded from “brokering,” persons exclusively in the business of financing, insuring, transporting, or freight forwarding, and whose activities do not extend beyond financing, insuring, transporting, or freight forwarding, are exempt from registration.  

Examples given in section 129.3(b)(2) include air carriers or other freight forwarders who merely transport or arrange transportation for licensed U.S. Munitions List items, and banks or credit companies who merely provide commercially available lines or letters of credit to persons registered or required to register under the ITAR. Persons exempt from registration are also exempt from the requirements in sections 129.5 and 129.6 for prior approval for brokering activities, as well as reporting and record-keeping requirements related to “brokers.”

Additionally, under section 129.3(d), U.S. persons who are registered as a manufacturer or exporter, including their U.S. or foreign subsidiaries and other affiliates listed on the Statement of Registration who are required to register, are not required to submit a separate broker registration or pay a separate broker registration fee when more than 50 percent of the voting securities are owned by the registrant or such subsidiaries and affiliates are otherwise controlled by the registrant, and they are listed and identified as brokers within their manufacturer or exporter Statement of Registration.

The Department has added a provision to the regulations instructing registrants to apply for a consolidated registration covering manufacturers/exporters and brokers, as applicable, during their registration renewal rather than upon the effective date of this rule.

Section 129.8 covers the submission of registration statements, registration fees, and notification of changes in information furnished by registrants.

Prior Approval by DDTC of Brokering Activities

Section 129.4 requires prior approval by DDTC before a person can engage in brokering activities involving certain articles and services, such as: foreign defense articles or defense services, and articles described in specified subcategories of I, II, III, IV, VI, VII,  VIII, XII, XIV XX, and XXI of the Munitions Control List. Section 129.5 identifies those situations when prior approval to engage in brokering activities is not required.

A copy of the Federal Register notice can be viewed on our website at www.tuttlelaw.com/customs_material/2013-20743.pdf.

If you are interested in how this rule will affect your company or your activities, please contact George Tuttle III at george.tuttle.iii@tuttlelaw.com or (415) 986-8780. 

George R. Tuttle, III, is an attorney with the Law Offices of George R. Tuttle in San Francisco.

The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.

Copyright © 2013 by Tuttle Law Offices. 

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