So let’s start with vague. Under the current rules, the rules’ requirements of registration and approval apply to foreign brokers “subject to U.S. jurisdiction.” Normally this would mean foreign persons with sufficient contacts with the U.S. so as to permit jurisdiction over them consistent with the due process clause. DDTC has been arguing that this should also include any foreign person who has any contact with U.S.-origin defense articles. The new rules would codify this remarkable and extraordinary claim for the permissible scope of U.S. jurisdiction. stating that its requirements cover activities of:

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

Notwithstanding the numerous ways that U.S.-origin can be defined the proposed rules are completely silent on what constitutes a U.S.-origin defense article. Is a tank with one lugnut made in Grand Rapids a U.S.-origin article. Or is there a requirement that U.S. parts constitute at least 50 percent of the value of the item? Or does it require that a substantial transformation or tariff classification shift occur in the United States. The new rules provide absolutely no guidance, largely because, I suppose, DDTC sees the United States as having unlimited jurisdiction over foreign persons, and therefore, the agency intentionally wishes to keep this concept vague.

Whether or not the U.S. has such broad jurisdiction, it is quite clear that when Congress passed the Brokering Amendment which authorized these rules in the first place, it didn’t intend to confer such broad jurisdiction. As I detailed in this article (subscription required) back in 2006 in Export Practitioner, the House Report on the Brokering Amendment makes it crystal clear that Congress only intended to cover “U.S. persons (and foreign persons located in the U.S.).” It does not authorize DDTC to try to exert jurisdiction over foreign persons outside the United States that may have some connection to a defense article that has one U.S. part in it.

Employees are not considered brokers under the current rules because the rules make clear that brokers are persons that provide brokering activities “as an agent for others.” Even under the absurdist position taken by certain DDTC employees that a subsidiary acting for a parent is acting “for others,” there was never even a peep from the agency that an employee working for a company might be working “for others” even though the employee and the company were legally distinct entities.

The new definition eliminates the requirement that a brokering activity be as “an agent for others.” It simply states:

Broker means any person (as defined by § 120.14 of this subchapter) who engages in brokering activities.

And brokering activities are simply defined as:

any action to facilitate the manufacture, export, reexport, import, transfer, or retransfer of a defense article or defense service.

The new section 129.2(e) provides some exemptions from the definition of brokering activities but the only “employees” exempted are U.S. government employees. The new section 129.2(e)(3) exempts certain clerical and administrative tasks from brokering activities and would cover some clerical and administrative employees.

There is also an exemption of sorts for employees in the proposed section 129.3(b)(3) which states that “bona fide and full-time regular employees” of manufacturers registered under Part 122 of the ITAR (as manufacturers) are exempt from the requirement of registration and prior approval in two situations. This exemption does not cover part-time employees and does not clearly cover temporary employees working a full-time schedule.

The two conditions may also be problematic for full-time employees. Those conditions to exemption from registration and prior approval are:

brokering activities [which] (A) involve only such registered persons’ defense articles or defense services that are currently subject to an export approval under this subchapter obtained by the part 122 registrant or will require such an approval prior to their export, or (B) are on behalf of the part 122 registrant and involve only defense articles and defense services that are located and obtained from a manufacturer or source in the United States for export outside the United States under an export approval under this subchapter.

Both of these conditions require a prior export license, meaning that even full-time employees will need to be separately registered and obtain prior approval to work on the item to be exported if that work occurs prior to obtaining an export license.

What these convoluted new regulations mean are that non-clerical part-time and full-time employees working on items not yet approved for export will need to register and to obtain prior approval their employment by DDTC unless their involvement with exports fits within the narrow exemptions in the new section 129.7, which I discussed on Monday — e.g., NATO+4 only, FMS and non-SME equipment for foreign governments.

If this regulation stands as written, many manufacturers of defense articles might seriously consider whether it would be safer and easier for them to switch their production facilities to making some item over which DDTC has no arguable jurisdiction whatsoever, such as malted milk balls or shower curtain rings.

As a reminder, comments are due on February 17, 2012.

Naturally I first looked at how the new rules handled export lawyers who provide advice to defense manufacturers. The language of the old rules was broad enough that arguably all export lawyers were brokers and needed to register under part 129 of the International Traffic in Arms Regulations (the “ITAR”) because brokering was defined to include any action that facilitated the manufacture or export of defense articles. Notwithstanding the breadth of that language, lawyers and law firms have not been registering under Part 129, using the well-accepted principal of statutory construction: hic lex non comprehendo mihi. And DDTC had not been rattling any sabers about their not registering.

The proposed rule now specifically exempts “activities by an attorney that do not extend beyond providing legal advice to a broker.” This exemption would seem to require the conclusion that all export lawyers need to register unless they are only providing advice to brokers, although it’s hard to imagine this is what DDTC actually intends.

But it gets worse. Not only will law firms with export lawyers have to file a registration application and pay the annual registration fee, but they also will have to obtain prior approval from DDTC prior to providing many legal services to defense manufacturers. The new rules require prior approval for all brokering activities unless they are specifically exempted from that requirement in the new section 129.7, which exempts brokering (a) conducted for a government agency, (b) brokering of certain defense articles (excluding, for example, night vision) wholly within NATO countries, Japan, New Zealand, Australia or South Korea, or (c) brokering of defense articles that are not “Significant Military Equipment” (“SME”) for end use by foreign governments or international organizations. So, if a law firm provides advice to a defense manufacturer about exporting night vision to France, the law firm will need DDTC approval before providing that advice.

This, of course, is either pernicious policy or unbelievable sloppy drafting by DDTC. The agency takes great pains to exclude banks, insurance companies and freight forwarders from the scope of the new brokering rules but leaves them fully applicable to law firms and requires law firms to obtain agency permission to provide legal services. I cannot think of another instance (other than cases involving blocked parties) where federal agency permission is needed as a precondition to the provision of legal services to clients.

Comments are due on February 17, 2012.

From the indictment it appears that O’Toole was mostly involved in arranging transportation of the rifles to Sudan, whereas Miller was in charge of procuring and selling the AK-47s. In exchange for O’Toole’s services, Miller was going to pay him a commission. This, of course, if true, appears to fit within the definition of brokering under section 129.2 of the ITAR. In particular, the definition of brokering in section 129.2(b) includes arranging for the transportation of defense articles.

What’s interesting here is that because of the brokering offenses, O’Toole is being charged with more counts than Miller, even though it’s not clear that a broker should be more culpable than an exporter. Both O’Toole and Miller are charged with an attempted export and a conspiracy to export. Miller can’t be charged with brokering on top of that because brokering requires an action taken “as an agent for others,” which is not the case for Miller because he bought the rifles himself and was acting on his own behalf in selling them. But what sensible policy would make O’Toole more culpable than Miller when Miller was selling the rifles and was just paying O’Toole to help him transport them?

[Hat tip to Laura Rozen for bringing the indictment to my attention]

The regulation created a new, and frankly obtuse, ECCN designated as 0A919 which, to the extent any sense can be made of it, covers military items produced outside the United States which incorporate certain thermal imaging devices and which are “not subject to the International Traffic in Arms Regulations.” Don’t go rushing now to your copy of the ITAR to find a definition of items “subject to the ITAR,” because you won’t find it. The Export Administration Regulations (“EAR”) administered by BIS talks about “items subject to the EAR” but the ITAR at times focuses instead on what people are subject to its jurisdiction, particularly in respect to Part 129′s brokering regulations which intersect uncomfortably with the new ECCN.

Let’s now look at a specific example and see what happens. Consider a military vehicle which incorporates a thermal imaging camera controlled by BIS and which was manufactured outside the United States. If a U.S. person sought to export that vehicle from its country of manufacture to another country, that person (depending on the value of the vehicle and its export destinations) could be required to get permission from the Directorate of Defense Controls (“DDTC”) which regulates brokering in Part 129 of the ITAR. And given the new ECCN, that person might also require an export license from BIS (depending, of course, on the destination of the exported vehicle).

BIS tries unsuccessfully to avoid this overlapping jurisdiction with an awkwardly worded note to the new ECCN:

Brokering activities (as defined in 22 CFR 129.9) of military commodities that are subject to the ITAR are under the licensing jurisdiction of the Department of State.

That note doesn’t work because under part 129 all defense articles, irrespective of U.S. content, “are subject to the ITAR.” The brokering regulations in part 129 cover U.S. persons and foreign persons in the United States or otherwise subject to U.S. jurisdiction if they engage in brokering a defense article even if not one single component of that article was produced in the United States.

The note, and indeed the entire ECCN, only makes sense if whether something was subject to the ITAR depended on U.S. content in the same way that “subject to the EAR” under the EAR’s definition depends on the amount of U.S. content. And that’s apparently what somebody at BIS was thinking. If we had one export agency handling both dual use items and military items, this kind of basic confusion would be much less likely to occur.

The Statement of Facts detailed subsequent transactions that involved the attempted sale of night vision goggles, machine pistols, M4 rifles and gas grenades among other items. Significantly, however, there is no allegation in the Statement of Facts that any of the sales ever occurred. Instead, in each instance, the Statement of Facts said that Papathanassiou “attempted” to sell the items. Notwithstanding that the only charges against Papathanassiou related to transactions that were attempted but uncompleted, he was charged with arms brokering without registering with DDTC as an arms-broker or obtaining necessary licenses for arms-brokering. Apparently just discussing a potential transaction requires registration.

The problem with this theory is, of course, the definition of “broker” in Part 129 of the International Traffic in Arms Regulations under which Taipan was charged. Under that definition, found in section 129.2(a), “broker” is defined 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.

It’s probably safe to say that Taipan didn’t receive a fee or commission from the manufacturers of the defense articles for proposed sales that never occurred. Even if Taipan did receive a fee or commission for these attempted sales, the receipt of the fee or commission from the manufacturers is a necessary element of the charged criminal violation and needed to be alleged in the Statement of Facts in order to support the plea.

The controversy over these rules has centered on the meaning of “otherwise subject to the jurisdiction of the United States.” Most exporters and export lawyers interpret this to be a reference to traditional concepts of jurisdiction, so that foreign brokers with pervasive contacts with United States would be covered but foreign brokers with few or no contacts with the United States would be excluded.

DDTC had claimed, however, that this language also referred to foreign brokers involved in transactions involving U.S.-origin defense articles. The proposed rules now explicitly state that the rules cover:

any foreign person located outside the United States who engages in brokering activities involving a U.S.-origin defense article or defense service, by any foreign person located outside the United States who engages in brokering activities involving the import into the United States of any defense article or defense service, or by any foreign person located outside the United States who on behalf of a U.S. person engages in brokering activities involving any defense article or defense service.

One of the objections to such an expanded jurisdictional scope of Part 129 was that it departed from the intent of Congress in passing the Brokering Amendment to the Arms Export Control Act in the first place. The House Report on the Brokering Amendment made clear that the intent of Congress was to close a loophole that allowed brokers in the United States to be engaged in the export of defense articles from one foreign country to another in ways that might be inimical to the foreign policy interests of the United States but which could not be prevented because no export license was required. Brokering activities by foreign persons with respect to U.S.-origin defense articles, however, aren’t subject to that loophole because the export of the U.S.-origin defense article will ultimately require an export license.

The new rules attempt, sort of, to address this issue by providing an exemption from the requirement for brokers to obtain a license where the transaction involves activities by a registered broker involving U.S.-origin defense articles as long as the registered U.S. manufacturer

has obtained a license or other approval to authorize the broker to participate in the export of such defense articles or defense services associated with the brokering activities, and the brokering activities are carried out in accordance with the license or other approval

This is presumably a reference to the exporter having obtained an export license where the broker is listed as an intermediate foreign consignee on the license application. The problem here is, of course, that, as a practical matter, the foreign broker often begins its activities prior to the license being granted. Another problem is that not all brokers are foreign consignees of the exported articles and won’t be listed on the license application. In both of those cases, exporters are back in the position of having to get two separate authorizations for one export transaction where a foreign broker is involved.

Psst. Have I got a deal for you. For only $65 million you can be the owner of a military landing hovercraft — complete with guns, compartments for three tanks, space for 170 troops and nuclear and CBW shelters. It can be yours in just 4-5 months and will ship from Eastern Europe. And it’s for sale on the website of Portland Yacht Sales, which bills itself on the site as engaged in “International Yacht and Ship Brokerage.”

To be clear, of course, I’m not really trying to promote the sale of this landing vehicle to any of my readers. In fact, you’ve probably guessed that my reason for bringing up this unusual web offer would be to wonder whether the State Department’s Directorate of Defense Trade Controls (“DDTC”) has thrown the book — or rather thrown Part 129 of the International Traffic in Arms Regulations (“ITAR”) — at Portland Yacht yet.

Part 129 requires that companies acting as brokers of defense articles — and this is pretty clearly a defense article under USML Category VI(a) — must register with DDTC, and I have a sneaking suspicion that Portland might not have done that. But there’s more. There is that pesky requirement that you have to obtain a license from DDTC before you can broker “significant military equipment” (“SME”) valued at more than $1 million. Category VI(a) naval vessels are clearly defined as SME and $65 million is more than a few dollars north of $1 million. And I’m guessing that Portland doesn’t have the brokerage license either.

I’m sure that Portland Yacht will say it never even heard of this ITAR-thingy and never dreamed in its wildest dreams that selling a $65 million dollar vessel with anti-aircraft artillery, nuclear shelters, and room for 3 tanks and 170 troops to foreign governments would be, er, subject to some silly regulations. I mean, really, it’s not that different from selling an SUV to the French Embassy, right?

[Hat tip to reader Garrett Steele for pointing this sale out to me.]

UPDATE: Portland Yacht took down the webpage offering the military hovercraft for sale. We took a pdf snapshot of the page before it disappeared, which you can see by clicking here.

Let’s take the good news first.

It comes from Andrew J. Shapiro, Assistant Secretary, Political-Military Affairs at State, in his Keynote Address to ComDef 2009, earlier this month:

I am also happy to report that we are making significant strides in the administration of defense trade, which I know has been a focus of our industry partners over the years. In 2006, DDTC adjudicated just over 70,000 cases in the entire year — with an average processing time of 43 days. In the past eight months, DDTC staff have already acted on nearly 60,000 license applications — and the processing time for each now averages just over two weeks. While we are proud of this improvement, it does not mean we will become complacent. I am committed to ensuring that we continue to be as efficient and transparent as possible in reviewing and processing export license applications.

A similar effort is now being made in the review of Commodity Jurisdiction (CJ) requests. One of the first actions of the new Administration was to streamline CJ adjudication procedures. I now meet with my counterparts at DoD, Commerce, and the National Security Council on a weekly basis to review and resolve outstanding CJ cases. DDTC is building on this process by developing new implementation procedures, including the use of new submission criteria and electronic staffing and adjudication processes that should cut determination time in half by the end of the year.

And Shapiro also had interesting things to say about the U.K. and Australia Defense Cooperation Treaties:

Finally, I would like to give you a brief update on the U.S.-UK and U.S.-Australia Defense Cooperation Treaties — a priority for the Obama Administration. These are a critical element of my defense trade agenda. I am fully engaged with key Members and Senate Foreign Relations Committee staff in seeking a way forward and I’m working to address their concerns about implementing legislation, which the Administration believes is unnecessary. As former Senate staffer, I’m particularly appreciative of the important role that the legislative branch plays in our foreign policy, and I will continue to work closely with Committee staff on a way forward on these treaties.

In other words, the Obama administration has pretty much adopted the position of the former Bush administration on the two defense cooperation treaties and will, if necessary, pass its own rules to implement these treaties even if Congress won’t ratify them. Or at least the White House threatening to do that.

Now for the bad news.

Several reliable sources have contacted this blog and said that they’ve heard someone over at DDTC saying that “for others” in the definition of “broker” found in section 129.2(a) of the International Traffic in Arms Regulations (“ITAR”) doesn’t mean what you think it means. Traditionally that phrase has been read by the export bar to mean, in a corporate context, unrelated companies or individuals. Now it appears that DDTC may be saying that “for others” applies to other companies in a corporate group. If a company has a wholly-owned foreign subsidiary that assists it in the sale of a defense article, that would, under this strained reading of the definition, mean that the foreign subsidiary is a broker for the parent company.

The registration issues caused by this reading aren’t so hard to handle, at least as long as the parent company makes sure that its subsidiaries are listed on its registration form or amends the form to include its subsidiaries using the procedures described in section 122.4 of the ITAR. The problem is that some of these newly-discovered “brokering” transactions by subsidiaries for parents might require either prior approval or prior notice if those transactions meet the criteria set forth in sections 129.7 and 129.8.

The brokering amendment was meant to capture exports of defense articles by U.S. individuals and companies that would otherwise escape licensing requirements because the export was being made between two foreign countries. It was not meant to cover exports from the United States assisted by foreign subsidiaries of the exporter. So this position by DDTC represents not only an unprecedented intrusion into intra-corporate dealings and structure but also represents an unwarranted departure from the agency’s statutory authority.

Has anybody else gotten wind of this? If so, please share your experience, if you feel comfortable doing so, in the comments section. No need for you to identify yourself or your company, of course. And please, please don’t reference or name any specific officials at DDTC.

The defendant, Lance Brooks, had been awaiting sentencing after pleading guilty to the unauthorized export of defense services arising out of a trip he made to the UAE to train customers in the use of a grenade launcher. While Brooks was awaiting sentencing, the FBI obtained a warrant to search a DHL package to Brooks from the Firearms Coastal Security Branch in Jamaica. Inside the package was an End Use Certificate (DSP-83) from Jamaica’s Ministry of National Security pertaining to 270,000 rounds of jacketed soft point ammunition, most of it .38 caliber.

The FBI Joint Terrorism Task Force contacted the Jamaican government to obtain further details about the transaction. According to the Jamaican government, Brooks had bid in response to a government proposal to purchase the ammunition, had won that bid, had faxed an invoice for the ammunition to the government, provided banking information for payment for the ammunition, and requested and received an End User Certificate (DSP-83) from the Jamaican government for the ammunition. The FBI inquired with the Directorate of Defense Trade Controls (“DDTC”) to determine if Brooks had a license to export the ammunition. When it learned that Brooks had not yet applied for the license, it charged him with engaging in unlicensed brokering activities without first having registered as a broker with DDTC.

Significantly there is no evidence alleged in the complaint that Brooks had attempted to export the ammunition without a license or that he had no intention of applying for the license. Indeed, his request that the Jamaican Government execute and send to him the End User Certificate (DSP-83) — a document that had to be obtained before a license could be granted — suggested that Brooks had every intention of obtaining a license prior to export. Lacking any evidence of an attempted export or a conspiracy to export, it would appear that the FBI and prosecutors cooked up the brokering charge.

The definition of “broker” in section 129.2 of the ITAR doesn’t cover Brooks’s activities with respect to the contemplated sale of ammunition to the Jamaican government. The key part of that definition is that a broker is someone who acts “as an agent for others” in arranging for the sale of defense articles “in return for a fee.” The allegations of the criminal complaint do not provide any evidence that Brooks was acting for anyone other than himself in arranging this contract or that he was going to receive any fee from that other person. Instead, it appears that Brooks was engaged in a transaction on his own behalf and expected a sales profit on the deal rather than a third-party fee or commission.

If what Brooks did — namely, negotiating a contract for a defense article prior to receiving an export license — is brokering, than almost every exporter will be subject to criminal penalties if they haven’t registered as a broker. Worse, those exporters may need to obtain brokering licenses from DDTC before even talking to potential customers with respect to transactions that fall within the brokerage licensing requirements of section 129.6.

Exporters that had such a poor understanding of the ITAR as these federal enforcement officials would likely be fined or worse when their misunderstandings led to rule violations; no such negative consequences, however, await these enforcement officials who appear not to have even a rudimentary understanding of Part 129 or the definition of a “broker” under that Part. One can only hope that Brooks’s public defender reads Part 129 with slightly more care and gets these charges dismissed.