March 31, 2022
With the flurry of activity in response to the Russian invasion of Ukraine, we thought it a good time to put out a refresher on the brokering controls within the International Traffic in Arms Regulations (ITAR), located in Part 129 of Title 22 of the Code of Federal Regulations. Perhaps you have been contacted by a customer requesting certain weapons and equipment for use in Ukraine, and due to timing and availability, you will be sourcing from outside the United States for direct delivery to the foreign destination. You may think this kind of transaction does not trigger U.S. export controls because it is completely offshore. However, it would be a mistake to jump to that conclusion without carefully reviewing your transaction, U.S. export control regulations, and U.S. foreign policy concerns.
Depending on what items you will be arranging for delivery and for whom, and the countries involved in your transaction, your activities may indeed trigger the ITAR brokering rules, as well as restrictions based on prohibited end user, end use, or sanctions. So, while there is dire need and the strongest desire to act quickly, do not sacrifice due diligence and care for speed. Mistakes may result in license application delays at best, and in the worst case could result in regulatory violations and undermine U.S. foreign policy or national security. The purpose of the brokering rules is to ensure transparency of international dealings and allow the U.S. Government insight to prevent potential harm to the United States.
Today’s alert will focus on the ITAR brokering rules, including when the rules are triggered, what they require, and country policies applicable to brokering activities. As a reminder to our readers, it is very important to consult the current version of the regulations in Part 129, as the brokering rules have gone through significant revisions, including those that were part of the changes made to the export rules governing small arms and ammunition in 2020.
Who Is Subject to the Brokering Rules?
ITAR section 129.2 sets forth who can be a broker subject to the ITAR brokering rules:
- Any U.S. person, wherever located. A U.S. person can be an individual citizen or permanent resident, or entity organized or authorized to operate in the United States.
- Any foreign person located in the United States.
- Any foreign person located outside the United States where the foreign person is owned (more than 50 percent of the outstanding voting securities owned by a U.S. person) or controlled by a U.S. person (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 U.S. persons own 25 percent or more of the outstanding voting securities unless one foreign person controls an equal or larger percentage.
Scope – What is Brokering?
The ITAR defines “brokering activities” 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.” ITAR § 129.2(b)(1) (emphasis added). To illustrate, the ITAR provides the following non-exclusive list of examples of brokering activities:
- Freight forwarding defense articles and defense services
- Contracting for
- Assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service
This list is broad, non-exclusive, and whether a person is engaging in brokering activities is not dependent on payment or a promise for compensation. In addition, the brokering activities identified above apply equally to those articles and services captured on the ITAR's U.S. Munitions List (USML) and items designated on the Bureau of Alcohol, Tobacco, Firearms and Explosives' (ATF) import control list known as the U.S. Munitions Import List (USMIL) in 27 C.F.R. § 447.21. The USMIL includes firearms and ammunition, even though such commodities are no longer ITAR-controlled for export purposes (i.e., subject to the Export Administration Regulations as listed on the Commerce Control List). One need engage in only one instance of brokering activities to trigger the ITAR brokering controls.
The good news is that not all activities are controlled as brokering activities. ITAR Section 129.2(b)(2) lists several exclusions, but that list is exhaustive. Consequently, if your activity is not on that list and you are taking 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, you are likely subject to the ITAR brokering rules.
NOTE: The ITAR brokering rules contain both a registration requirement and a prior approval (licensing) requirement. These are separate processes and we explore both below. Although not every brokering activity will trigger a license requirement (this will depend on what is being brokered and the countries involved), a brokering license cannot be obtained without first registering with DDTC as a broker. In addition, if the activity qualifies for an exemption to the approval requirement, one must be registered to use an exemption.
Any person who engages in brokering activities must register with DDTC pursuant to ITAR section 129.3. There is a small list of exemptions to the registration requirement, including persons exclusively in the business of financing, insuring, transporting, customs brokering, or freight forwarding, whose activities do not extend beyond financing, insuring, transporting, customs brokering, or freight forwarding. For example, air carriers or freight forwarders that merely transport or arrange transportation for licensed defense articles, or banks/credit companies who merely provide commercially available lines or letters of credit to persons registered or required to register in accordance with the ITAR parts 122 or 129. However, banks, firms, or other persons who provide financing for defense articles or defense services must register under certain circumstances, such as when the bank or its employees are directly involved in arranging transactions involving defense articles or defense services or hold title to defense articles, even if such activity does not involve physical custody of the defense articles. In these circumstances, the banks, firms, or other persons providing financing for defense articles or defense services are not exempt from the registration requirement.
Registration is accomplished by completing and submitting the DS-2032 Statement of Registration Form through the Defense Export Control and Compliance System (DECCS), DDTC's online licensing portal. The fee for the broker registration is $2,250, and once approved, the registration is valid for one year. For more information about the registration process, including what changes must be reported to DDTC, visit the DDTC website registration page.
As mentioned, registration is not an authorization to engage in a brokering activity, but it is a prerequisite to obtaining such approval. If DDTC approval is required, this can only be obtained through a license application.
Not all brokering activities require DDTC prior approval (license). Whether a brokering license is required will depend on the article(s) being brokered. ITAR section 129.4 lists out the articles that trigger the prior approval requirement. It includes any foreign defense article or defense service (defined in ITAR section 120.44) identified on the USML or ATF’s USMIL (see 27 CFR 447.21). If the articles are U.S. origin, only certain defense articles and defense services require licensing, as listed in ITAR section 129.4(a)(2). There are limited exemptions from the approval requirement, which we discuss below.
DDTC approval for a brokering activity is obtained by submitting a Form DS-4294 application for brokering license through DECCS. The application must include a description of the brokering activity to be taken by the applicant, the names and addresses of all persons who may participate in the brokering activity, the commodity description and estimated quantity, the end user(s), and end use. In addition, the application must specify whether the brokering activities are under the U.S. Foreign Military Sales program or other activity in support of the U.S. Government or related to a direct commercial sale.
NOTE: Operating under FMS or other U.S. Government authority is not an automatic exemption from the prior approval requirements. We discuss the approval exemptions further below.
Please note that DDTC will not issue approval for brokering retroactively. In other words, if you will be engaging in a brokering activity that requires approval from DDTC, you must obtain that approval prior to doing the brokering. Under ITAR section 129.4(a), no person who is required to register as a broker may engage in the business of brokering activities pursuant without first obtaining DDTC approval. At times this tenet may seem at odds with the need to provide enough information on a license application for DDTC to issue a determination. After all, how do you find out the end-user, articles, quantities, sources, and end use without engaging in at least the beginnings of a brokering activity, such as soliciting, promoting, or negotiating? This is often one of the most challenging aspects of dealing with the ITAR brokering rules, and great care must be taken to prevent venturing too far into a transaction.
TIP 1: It is often better to err on the side of caution and go in early for brokering approval, even if you do not have all the information about the potential transaction. The Form DS-4294 application includes a place where the applicant can identify what information is not yet known and why. Pursuant to ITAR section 129.6(d), DDTC will take this into consideration when reviewing the application.
TIP 2: Negotiating prices or entering into purchase contracts may be construed as brokering activity. If you have received a broad wish list of items or a request for quote or proposal, you should explain to DDTC in your request for brokering approval how those were received to avoid a presumption that you have already engaged in a brokering activity to develop the wish list or request.
TIP 3: Be sure to complete the license application correctly, truthfully, and with as much detail as possible, to the extent known, and be on the lookout for red flags. This includes the flow of weapons to the end-user in Ukraine. Identifying an airport or a freight forwarder as the destination point is a red flag and will not be approved.
Brokering Activities Exempt from the Approval Requirement
ITAR section 129.5 states that brokering activities undertaken for an agency of the U.S. Government pursuant to a contract between the broker and that agency are exempt from the requirement for approval. However, to qualify for this exemption, the transaction must meet the following criteria (129.5(a)):
(1) The brokering activities concern defense articles or defense services solely for the use of the agency; or
(2) The brokering activities are for carrying out a foreign assistance or sales program authorized by law and subject to control by the President by other means, but at least one of the following conditions must be met:
i. The U.S. Government agency contract with the broker contains an explicit provision stating the contract supports a foreign assistance or sales program authorized by law and the contracting agency has established control of the activity covered by the contract by other means equivalent to that established under the ITAR; or
ii. DDTC provides written concurrence in advance that the condition is met.
If you will be carrying out brokering activities at the request of the U.S. Government, you must meet the above criteria to qualify for the approval exemption. As mentioned above, brokering activities undertaken for a U.S. foreign assistance or sales program are not automatically exempt from the prior approval requirements. The documentation must satisfy the conditions in ITAR section 129.5(2)(i), or prior written concurrence from DDTC must be obtained.
ITAR Section 129.5 also provides an exemption from the approval requirement for instances when the brokering activity will be arranged wholly within and destined exclusively for the North Atlantic Treaty Organization, any member country of that organization, Australia, Israel, Japan, New Zealand, or the Republic of Korea, unless the defense article or defense service is specified in ITAR § 129.4(a)(2), in which case approval is required. For example, firearms or other weapons listed in USML Cat. I(a)-(d) (inclusive), II(a) and (d), Cat. III(a), or on ATF’s USMIL Cats. I(a)-(c) (inclusive), II(a) or III(a), or rockets, bombs, and grenades, or launchers listed in USML Cat. IV(a) and launch vehicles and missile and anti-missile systems in USML Cat. IV(b). Refer to ITAR section 129.4(a)(2) for other listed defense articles and defense services.
CAUTION! The 129.5 exemption to prior approval cannot be used if any of the following are true:
- The broker is not registered with DDTC; or
- The broker or anyone who has a direct or indirect interest in or may benefit from the brokering activities, including any related defense article or defense service transaction, is ineligible (defined in ITAR section 120.1(c)(2)); or
- The brokering activity will involve a country or person referred to in ITAR section 126.1, or the activities are otherwise subject to ITAR section 129.7.
ITAR section 129.7 prohibits a person from engaging in or making a proposal to engage in brokering activities that involve any country, area, or person referred to in ITAR section 126.1 without first obtaining the approval of DDTC. ITAR section 126.1 prohibits the sale, export, transfer, reexport, or retransfer of, as well as the proposal or presentation to sell, export, transfer, reexport, or retransfer, any defense articles or defense services without first obtaining a license or written approval from DDTC. However, because of a policy of denial, DDTC will likely deny such license applications pursuant to ITAR section 126.1(e)(1). DDTC's website contains detailed information on its country policies.
NOTE: ITAR section 126.1(e)(2) requires any person who knows or has reason to know of a proposed, final, or actual sale, export, transfer, reexport, or retransfer of articles, services, or data to a 126.1 to immediately inform DDTC. Failure to do so is itself a violation of the ITAR.
ITAR section 129.7 also prohibits persons, including those otherwise exempt from a license requirement, from engaging in or making a proposal to engage in brokering activities without first obtaining approval of DDTC if such activities involve countries or persons identified by the Department of State through notice in the Federal Register, with respect to which certain limitations on defense articles or defense services are imposed for reasons of U.S. national security, foreign policy, or law enforcement interests (e.g., an individual subject to debarment pursuant to ITAR section 127.7). It is the policy of the Department of State to deny licenses and approvals in these cases as well.
Broker Reporting & Recordkeeping Requirements
Registered brokers are required by ITAR section 129.10 to provide to DDTC annual reports of its brokering activities conducted during the previous twelve months. The report must be signed by an empowered official who certifies the report is complete and accurate. If there were no brokering activities, you still must submit an annual report to certify that there were no such activities.
In addition to the reporting requirements, remember to maintain records of each brokering transaction in accordance with the requirements of ITAR section 122.5.
How Does this Apply to Brokering Arms for Ukraine?
If you have been approached to help supply weapons and equipment to or on behalf of Ukraine, before you start working on the transaction and possibly engaging in a controlled brokering activity, we recommend the following:
- Is it brokering? Review ITAR section 129.2 to determine if the activity constitutes brokering. Remember, even though many firearms and ammunition are no longer controlled on the USML, they are still listed on the USMIL and are therefore captured by the ITAR brokering requirements.
- Are you registered? If your actions will be brokering activities, confirm you are currently registered as a broker with DDTC. If you have never registered before or your registration has lapsed, you must register with DDTC before engaging in the brokering activity by submitting the DS-2032 Statement of Registration (fee: $2,250.00).
- Do you need approval or are your activities exempt? Once you are registered with DDTC as a broker, check to see if your transaction requires prior DDTC approval (ITAR section 129.4). If a license is required and you have confirmed your registration is current, check if your activities qualify for an exemption from the approval requirement.
- Apply for the approval. If you do not qualify for an exemption, submit a license application Form DS-4294 through DECCS. To ensure the fastest review time, ensure your application is complete, accurate, and fully describes the activity and flow of weapons (see above).
- Remember the annual reporting requirement. Maintain a record of the brokering activity for the annual report that will be due at the time of renewing your registration with DDTC.
- Keep required records. Maintain records of the brokering activity for five years from the expiration of the approval or date of the transaction (if a brokering approval is not required by ITAR section 129.4).
As we noted at the beginning of this alert, while there is dire need and desire to act quickly to support Ukraine, do not sacrifice due diligence and care for speed. Mistakes could be costly and come in the form of license processing delays and potential export control violations.
The above alert is for informational purposes only and is not intended to be construed or used as legal advice. The receipt of this alert does not establish an attorney-client relationship.
Questions about this alert may be directed to:
Johanna Reeves: 202-715-9941, email@example.com
Katherine Heubert: 202-715-9940, firstname.lastname@example.org
About Reeves & Dola
Reeves & Dola is a Washington, DC law firm that specializes in helping clients navigate the highly regulated and complex world of manufacturing, sales and international trade of defense and commercial products. We have a deep understanding of the Federal regulatory process, and use our expertise in working with a variety of Federal agencies to assist our clients with their transactional and regulatory needs.