As defense manufacturers, exporters, and brokers await the issuance of new brokering rules, many continue to struggle with the very grey areas currently found in Part 129 of the International Traffic in Arms Regulations (ITAR). Much is left to interpretation when it comes to reporting and prior approvals. And, as is often the case, the brokering regulations do not always coincide with industry practice.

ITAR Section 129.2 broadly defines “brokering activities” to 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, irrespective of its origin. Such activities may include preliminary discussions, introductory meetings, and other very basic sales activities by intermediaries. Because so many activities are captured within this definition, we often see exporters struggle with numerous complex scenarios requiring prior approval or notification.

One recurring example is the requirement for prior written approval to broker under Section 129.7 of the ITAR. Section 129.7(a)(2) requires the prior written approval of the U.S. Department of State Directorate of Defense Trade Controls (DDTC) to broker Significant Military Equipment (SME) to non-NATO countries plus Australia, Japan, New Zealand or South Korea when certain factors are present. Such factors generally include:

• SME valued over $1 million;
• SME that has not been previously licensed for export to the armed forces of the country concerned or approved under the Department of Defense Foreign Military Sales (FMS) program;
• SME would be manufactured abroad as a result of the articles or services being brokered; or
• The recipient or end-user is not a foreign government or international organization.

If any one of these factors is present, prior written approval is required for non-NATO countries plus Australia, Japan, New Zealand or South Korea.

Once exporters, manufacturers, and brokers recognize there is a requirement for prior approval, they turn to ITAR Section 129.7 to determine how to request that approval. That section appears to offer a couple of options, although the original intent remains unclear.

Under Section 129.7(b), the requirements for prior approval are met by a license or other approval issued under Parts 123, 124, or 125 for the defense article or technical data, provided all brokers’ names have been identified in an attachment accompanying submission of the initial application. Based on this section some exporters/manufacturers have made known that in practice, their agents are moving forward with brokering and they are simply adding the brokers to their marketing or hardware export licenses on DDTC Form DSP-5. Reconciling this strategy with the concept of prior approval can be problematic because in actuality, brokering typically precedes a final decision on the specific hardware export as well as any technical data release that one could describe with any precision in a license application. Recall that brokering can include even basic discussions by intermediaries, and not all brokering interactions involve technical data or even an agreed-upon end-product. Thus, the DSP-5 approval would not necessarily occur prior to brokering as the concept of prior approval might imply.

The apparent trend of adding brokers to technical data or hardware license applications rather than having the brokers themselves request approval is not at all surprising. Reportedly, Section 129.7 brokering authorizations are processed relatively infrequently. Even when brokers have filed Section 129.7 authorization requests via General Correspondence (GC) as per 129.7(c) and (d), they have at times been met with some surprise.

Nonetheless, under ITAR Section 129.7(c) and (d) brokers are directed to seek their own prior approval in writing – such as via a GC. The letter can be fairly simple – as short as one or two pages – depending on the complexity of the case. Still, it is important to note that even Section 129.7(d) requires several specifics that a broker may not know at the outset of preliminary sales discussions – for example, outlining in detail the defense article and related technical data, the quantity and value, and the specific end-use. So long as brokering is defined to include “the taking of any other action that facilitates the manufacture, export, or import of a defense article or defense service,” the brokering definition captures activities that logically precede this level of detail.

Although we do not see many brokering enforcement cases in the headlines, under the current regulations it appears underreporting and unauthorized brokering are likely prevalent. In the case of ITAR Section 129.7, exporters should review the provisos on any DSP-5 licenses they receive. In some cases the proviso language on marketing licenses states explicitly that the approval does not constitute approval of brokering by any party.

In addition to the example of prior approvals above, it is worth noting that DDTC requires prior notification – not approval – for SME valued at less than $1 million under ITAR Section 129.8. Notification must be made 30 days before making a brokering proposal or presentation. There is an exception for the sharing of basic marketing information, however.

Another challenging risk area in Part 129 is the policy on embargoes and other proscriptions at ITAR Section 129.5. Under Section 129.5(e), any person who knows or has reason to know of any brokering activities involving countries subject to an embargo under Section 126.1 must immediately inform the DDTC. With this section in mind, companies may find themselves weighing whether they have reason to know of any brokering activities that they must report. In practice, reporting third parties’ brokering activities could have a devastating effect on a business.

The ITAR brokering regulations undoubtedly can be a source of frustration for those companies committed to full compliance. The interpretive burden is especially high in this area considering the intangible nature of the controlled activity along with the cumbersome approval and notification provisions. For now, companies should decide on a compliance policy and stand by it. Fortunately the Export Control Reform effort is in full swing, and we can remain hopeful that the new brokering definition and other developments will make life at least a little easier from a business perspective.

By Brenda Cordova