The sale of defense articles worldwide is typically straight forward – the buyer coordinates with the seller, and each party secures the proper government licenses to facilitate the sale.  In the case of brokers and brokering the U.S. regulations are not nearly as straightforward.  If the potential ramifications were not serious, the situation could almost be comical.  Instead, failure to abide by the brokering regulations can lead to serious civil and criminal liabilities.

Background on Brokering
Why is brokering regulated?  The Arms Export Control Act (AECA) was amended in 1996 via Public Law 104-164.  Specifically, 18 U.S.C. § 2778 describes the activities defined as “brokering:”

“… every person (other than an officer or employee of the United States Government acting in official capacity) who engages in the business of brokering activities with respect to the manufacture, export, import, or transfer of any defense article or defense service… shall register with the United States Government…

[B]rokering activities shall include the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import of a defense article or defense service.”

18U.S.C.§2778 (b)(1)(A)(ii)(II)
The 1996 amendment to AECA allowed creation of ITAR Part 129 as the means of creating a regulatory and statutory structure to govern brokering activity.  Simply, ITAR Part 129 governs the actions of parties responsible for the sale and transfer of U.S. and foreign made goods in international trade.

The original intent of the 1996 amendment was to govern U.S. based brokers that engaged in the sale of foreign defense articles (that is, non-US based goods) from one foreign country to another foreign country.  Prior to 1996, there was no mechanism for the U.S. State Department to oversee, let alone deny the transaction if the action was in conflict with U.S. foreign policy.  With the brokering registration requirement, the U.S. State Department was given authority over the actions of U.S. citizens engaged in business abroad.  Brokering of U.S. made goods by foreign nationals was never a foreign policy issue because a U.S. export license has always been required for the export of U.S. made goods.

What is Brokering?
A broker is currently defined under ITAR Section 129.2(a) as “any person who acts as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee, commission, or other consideration.”  The “fee or commission” element within the definition of a “broker” is important – if a fee or commission is not paid to the agent, the agent cannot be considered a broker under the explicit terms of the regulation.

Brokering activity is currently defined as “acting as a broker as defined in §129.2(a), and includes the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import or a defense article or defense service, irrespective of its origin.”  ITAR Section 129.2(b).

Proposed Changes to the Broker Definition
The Defense Trade Advisory Group (DTAG), an advisory group made up of industry representatives, worked with DDTC to further define and “clarify” the definition of a broker.  Rather than create a simple and narrow definition, the proposed changes broadens the definition of brokering and brokering activity.  The proposed regulatory change states that brokering activities subject to the jurisdiction of the United States include:

• brokering activities by any U.S. person wherever located;
• brokering activities by any foreign person located in the United States;
• brokering activities involving a U.S.-origin defense article or defense service by any foreign person located outside the United States; or
• brokering activities by any foreign person located outside the United States acting on behalf of a U.S. person.

Brokering activities is further defined as “any action of an intermediary nature undertaken by one person on behalf of another person, and which action materially facilitates the manufacture, export, re-export, import, transfer or retransfer of a defense article or defense service.”

Clear as mud?  Where there were originally three elements that defined a broker, the proposed regulation expands the scope of activities under the broker definition.

The proposed changes eliminate the term “agent,” and instead try to describe the actions that an agent would typically perform.  Similarly, the term “negotiation” in the original regulation has been eliminated and replaced with the phrase “any action of an intermediary nature.”  Finally, under the proposed change, a “fee or commission” is no longer required as an element of the transaction.  In publicly commenting on the proposed changes, DDTC notes:

“The proposal would delete the phrase “who acts as an agent for others” that is in the current regulatory definition of “broker,” but is not in the definition of “brokering activities” in the Arms Export Control Act.  The proposal would clarify that brokering activities consist of “any action of an intermediary nature” to facilitate a defense article or defense service transaction.”

Prior to release of the proposed changes, DDTC asserted that foreign nationals brokering the sale of U.S. made goods must be registered as brokers.  Registration was required even where the foreign national was not physically within the United States, and did not take physical possession of the U.S. made goods – the mere fact that U.S. goods were involved in the transaction were enough for the U.S. State Department to assert jurisdiction over the activity.  Under the proposed changes, the foreign national issue has been written into the regulation, thereby expanding the jurisdiction for broker registration to those that have traditionally been outside of the registration requirement.

While the changes to the regulation may appear to be innocuous, the potential ramifications have the potential to affect scores of parties that (prior to the amendment) were not considered “brokers.”

The first objection over the proposed regulatory changes comes via the Congressional intent of the 1996 amendment.  The original intent of the brokering requirement was to govern U.S. based brokers that engaged in the sale of foreign defense articles (that is, non-US based goods) from one foreign country to another foreign country.

Brokering of U.S. made goods by foreign nationals was never a foreign policy issue because a U.S. export license has always been required for the export of U.S. made goods.  Under the proposed regulatory changes, an export license is still required, but the foreign broker must now pay an annual registration fee to the U.S. State Department to continue doing business as a broker.  In simple terms, the foreign national registration scheme smacks of a revenue generating activity on the part of DDTC.  There is no requirement that the foreign broker be registered, as the broker will likely be listed on the DSP-5 export permit as a foreign intermediary or consignee.  DDTC will already be aware of the parties involved within the transaction.  With the added requirement of brokers to register, DDTC has an additional means to deny export permits (if the broker is not registered), oversee the parties engaged in export activities, and collect an annual registration fee of $2,250.

The second objection over the proposed rules comes via the change in regulatory language that defines brokering activity.  By eliminating the “fee or commission” element of the regulatory definition (and taken to ridiculous extremes) there is potentially no activity to which a party may be excluded from registration as a broker.  As pointed out by a colleague, a hotel that provides meeting facilities used to negotiate a transaction involving the sale of defense articles has performed an action that may “materially facilitate the… transfer of a defense article.”  In theory, the hotel would need to register as a broker under the new proposed regulation.  Under the proposed regulation, there is virtually no limit to which DDTC could require broker registration.

Criminal Liability Examples
Ignorance is no excuse for non-compliance.  As noted in prior articles, serious criminal and civil liabilities have been pursued against parties that have willfully (or negligently) ignored ITAR requirements.  The regulations on brokering are no different than any other section of the ITAR.

Mr. Ioannis Papathanassiou, president of Taipan Enterprises, LTD., was detained upon return to the United States after visiting Brazil.  Papathanassiou told the Customs agent that he had been in Brazil meeting with nationals of Yemen, but falsely stated that he had been attempting to sell them farm equipment.  Further examination of Papathanassiou’s luggage by Customs officials revealed handwritten notes referring to “weapons,” and product literature for military vehicles made by Agrale, a military vehicle manufacturer in Brazil.  When confronted about the military vehicle brochures by a Customs officer, Papathanassiou falsely stated that the vehicles were intended for agricultural purposes.

Further examination revealed that Papathanassiou and Taipan Enterprises attempted to sell night vision equipment manufactured in Canada by Obzerv Technologies, Inc. to the Libyan Government, attempted to arrange the sale of Canadian armored vehicles manufactured by Armet Armored Vehicles through a Chilean company to the Chilean marine corps, and attempted to arrange the sale of a number of military armored vehicles from Sabiex International, a Belgian defense manufacturer, to Magna Technologies, a Missouri-based company, for final use in Vietnam.

Within court documents filed on January 7, 2010, the U.S. Government and Taipan Enterprises, LTD entered into an agreed Statement of Facts governing alleging a failure to register as a broker under ITAR Section 129.2.

As a U.S. citizen, Papathanassiou and Taipan Enterprises were clearly subject to the ITAR requirements, and were required to register as a broker if their actions met the regulatory definition of a “broker.”  Nevertheless, there was no evidence within the court documents that any of the transactions had actually resulted in a sale.  More importantly, there was no allegation by the U.S. Government that Papathanassiou or Taipan Enterprises actually received any fee or commission for their efforts.  As you may recall, the current definition of brokering requires that a fee or commission be received in exchange for the activities performed.  If no fee was received for the negotiations, the actions of Papathanassiou and Taipan Enterprises did not meet the definition of a broker or brokering activity under ITAR Section 129.2.

Clearly, this incident would not be reported if the issue was that simple.  Papathanassiou and Taipan Enterprises ultimately plead guilty to the charges, and agreed to pay a $15,000 fine.  It is uncertain whether Papathanassiou and Taipan Enterprises had competent legal counsel or whether the parties agreed to pay the fine in lieu of protracted (and expensive) legal battle.  In either case, the facts did not meet the registration requirements currently proposed under the regulation.

The proposed changes to the brokering regulations have not yet been published within the Federal Register.  Upon publication in the Federal Register, interested parties will have an opportunity to submit written comments and propose amendments to the proposed changes prior to implementation.  While an announcement within Small Arms Defense Journal would be ideal, due to the publication time, there may not be sufficient time to provide notice to all readers.  Those interested in any potential changes to the brokering regulations are advised to watch the DDTC website for an official announcement.  The publication of the proposed regulatory change will be posted on the DDTC website at www.pmddtc.state.gov.

Brokering can be greatly rewarding, allowing an individual to conduct business on a worldwide basis.  Those engaged in brokering activities should be aware of the limitations and requirements prior to entering into negotiations for defense articles or defense services, with the knowledge that a fee or commission need not be paid for the U.S. Government to take an interest in the activity.