ITAR Brokering Activities Demystified
Alex Cotoia, Regulatory Manager at The Volkov Law Group, rejoins us for a posting on ITAR brokering activities. Alex can be reached at [email protected].
Part 129 of the International Traffic in Arms Regulations (“ITAR”) requires certain persons engaged in “brokering activities” to register with, and pay a fee to, the U.S. Department of State Directorate of Defense Trade Controls (“DDTC”).
ITAR Part 129.2 broadly defines “broker” as any person engaging in “brokering activities” (discussed in greater detail below) fitting within any of the following three categories: (1) U.S. persons wherever located; (2) foreign persons located in the United States; and (3) foreign persons located outside of the United States, where such foreign person is “owned or controlled by” a U.S. person.
Persons subject to registration under Part 129 are required to register annually by submitting a completed statement of registration (DS-2032) and paying the applicable fee, published on the DDTC’s website.
Notably, ITAR Part 129.3 specifically exempts U.S. persons already registered as manufacturers or exporters of defense articles from the broker registration requirements provided that either (a) more than 50 percent of the voting securities are owned by the registrant; or (b) the registrant’s affiliates and subsidiaries are “controlled by” the manufacturer or exporter within the meaning of ITAR Section 120.40. Notwithstanding the waiver of the broker registration requirement, however, Section 120.40(d) is explicit that all other requirements of Part 129 apply to such brokers and their brokering activities.
Although defined by ITAR Part 129.2(b) 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,” the precise contours of the post-ECR “brokering activities” definition continues to be a perennial source of confusion for those in the international trade community (and somewhat of a Rorschach test for those involved in its daily application).
However, to abide by both the letter and spirit of Part 129’s requirements, companies should consider virtually any activity enumerated in Part 129.2(b) as potentially subject to the ITAR’s brokering activities registration. Such activities may include, but are not limited to: (1) utilizing an intermediary or other agent to negotiate the terms under which an defense article or defense service is to be sold, transferred, loaned or leased to a foreign person; (2) financing and/or insuring defense articles or defense services in furtherance of a transaction with a foreign person; or (3) facilitating the transport and freight forwarding of defense articles to consignees abroad. Under Part 129.3(b)(2), however, persons engaged “exclusively in the business of financing, insuring, transporting, customs brokering, or freight forwarding, whose activities do not extend beyond [such activities]” are exempt from broker registration. Additionally, Part 129.2(b)(2) specifically exempts what would otherwise be considered brokering activities from the regulation’s definition, if the transaction is conducted by a U.S. person in the United States and is exclusively limited to domestic sales or transfers (e.g., transactions without the requirement of an export). Therefore, routine negotiations involving the provision of defense services or the sale of defense articles between U.S. companies in the aerospace and defense industries, for instance, are not covered by Part 129’s requirements.
Notably, DDTC has specifically exempted activities by attorneys, consultants, and other trade professionals “that do not extend beyond the provision of legal or consulting advice to clients on ITAR compliance” from the definition of brokering activities. However, in the same guidance provided via the DDTC’s FAQs in relation to brokering registration, the DDTC noted that there may be circumstances where such professionals are required to register in accordance with ITAR Part 129.2(b). For instance, if the lawyer’s, consultant’s or other professional’s activities extend to “soliciting, locating a buyer or seller, introducing or recommending specific parties, structuring the transaction, marketing, promoting, and/or negotiating ITAR-controlled defense articles and services on behalf of  clients beyond contract terms of already identified foreign parties” then registration under Part 129 may indeed be required.
Persons required to register by virtue of Part 129 are subject to certain approval and reporting requirements. Except as otherwise provided by Part 129, no person who is required to register as a broker may engage in brokering activities without first obtaining the approval of DDTC if involved (1) in the brokering of foreign defense articles or services enumerated in ITAR Section 121; or (2) in the brokering of certain U.S. origin defense articles or defense services across a broad range of USML categories—from firearms to rockets, bombs, grenades and launch vehicles, to vessels of war, tanks, aircraft, unmanned aerial vehicles, to chemical agents and other miscellaneous articles. Reports of all brokering activities conducted by Part 129 registrants in the twelve-month period preceding the report must be filed with the DDTC annually, even if no activities were conducted. In such an instance, Part 129.10(c) requires that the registrant certify that no such activities occurred during the relevant period.
Whether a contemplated action meets Part 129’s definition of “brokering activities” is a factually-sensitive matter that requires the advice of competent trade counsel. Ignorance of—or failure to abide by—the requirements of Part 129 carry a host of consequences for potential violators, including but not limited to, substantial fines and penalties; to say nothing of the unquantifiable reputational damage likely to be caused by a government enforcement action. Accordingly, those involved in international trade are advised to familiarize themselves with Part 129 and seek advice when necessary to avoid the potential for a regulatory infraction.