As the saying goes, more tears are shed over answered prayers than unanswered ones. And a sad example of this may be the amendments that the Directorate of Defense Trade Controls (“DDTC”) has proposed to the definition of brokering activities contained in Part 129 of the International Traffic in Arms Regulations. The export community has been clamoring for some time for DDTC to amend the definition of brokering to clarify its scope. DDTC’s response was to amend the regulations, but instead of clarifying the scope of the regulations, it has demonstrably made things worse by making the scope of the regulations even broader and the boundaries even more unclear.

Under the current definition, a broker is defined as a person that (1) acts as an agent for others (2) in negotiating transfers of defense articles (3) in exchange for a fee or commission. The new definition changes (1) and (2) and eliminates (3). Under the new definition a broker is a person that (1) acts as an intermediary (2) to facilitate the manufacture, export, re-export, import, transfer or retransfer of a defense article or defense service.

“Acts as an agent” was fairly specific, whereas taking an “action of an intermediary nature” is much less so and arguably covers a broader and less-easily defined class of activities. Any hopes otherwise are dashed by fourth example that the regulations give of brokering activities: “taking any other action to assist a transaction involving a defense article or defense service.” And that is so broad that it covers activities that aren’t even close to what Congress had in mind when it passed the Brokering Amendments.

A hotel that provides conference facilities used to negotiate a contract involving the sale of a defense article is now a broker. The taxicab driver that drives the participants to the meeting is a broker. Because no fee need be paid under the new definition, your Aunt Harriet is a broker if she drives you to that meeting. Accounting firms that provide advice on how to structure the transaction are brokers. The catering company that provides sandwiches for the meeting also fits in the definition. Probably the public utility that provides the electricity that powers the lights and the computers at the meeting is a broker as well. Microsoft, which supplied the software, had better get its DS-2032 on file. The list is pretty much endless if a broker is anyone who assists a transaction involving a defense article or defense service.

It gets worse when you consider that the new definition broadens the definition to include facilitating the manufacture of defense articles. If you work at a defense contractor and your wife drives you to work, she’s a broker. All the manufacturer’s vendors are brokers too.

The elimination of the phrase “for others” in the definition of brokering brings corporate subsidiaries back into play as well. A specific exemption is provided for “U.S. person subsidiaries listed in their [parent companies’] Statements of Registration. Pointedly this exemption is not provided for foreign subsidiaries. For defense exporters who had been subjected to claims by DDTC officials that they had to register foreign subsidiaries this comes as no big surprise. But now the argument that the subsidiary wasn’t a broker because it didn’t receive a fee for brokering is gone. (DDTC had been making the fairly risible argument that any payments made to a foreign subsidiary, even if unrelated to defense articles, satisfied the fee requirement.)

Does anybody else sniff a revenue measure here?

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