In April 2005, Finmeccanica acquired BAE Systems Avionics, Ltd. which it renamed SELEX Sensors and Airborne Systems Limited. A notice posted on December 7 on the DDTC website reveals that DDTC’s Office of Defense Trade Controls Compliance (“DTCC”) is not entirely happy with how this acquisition was handled:

The Office of Defense Trade Controls Compliance (DTCC) conducted an extensive review of issues relating to the BAE Systems plc sale to Finmeccanica SpA of a majority interest in the stock in BAE Systems Avionics Limited, since renamed SELEX Sensors and Airborne Systems Limited. As a result of that review, DTCC has received written acknowledgement from BAE Systems that it did not request prior authorization from the Department of State for the sale of stock in SELEX to Finmeccanica. BAE understands that this authorization should have been obtained to address those Department of State licenses and agreements (active and expired) to which BAE Systems Avionics was a party.

You may be scratching your head and wondering where does the ITAR require prior authorization of a merger or acquisition? Section 122.4 of the ITAR requires 60-day advance written notice to DDTC if there is a transfer of control of a registrant to a foreign person, but that’s not a requirement of prior approval.

Or is it? The regulation notes that the purpose for this notification is to provide DDTC “with the information necessary to determine whether the authority of section 38(g)(6) of the Arms Export Control Act . . . should be invoked.” And section 38(g)(6) provides DDTC with the authority to require a license “before any item on the United States Munitions List is sold or otherwise transferred to the control or possession of a foreign person.”

So, although this isn’t technically a prior approval requirement, it is quite close to one. Since BAE Avionics no doubt owned items on the USML at the time of the purchase of its stock by Finmeccanica, DDTC had the right to require a license and approval for the sale. And since apparently BAE and Finmeccanica must not have filed the section 122.4 notice, DDTC never had an opportunity to invoke its discretion to require a license. DDTC seems a bit miffed about this, but not sufficiently miffed to, say, consider a penalty. Perhaps Finmeccanica’s participation in the construction of the new Marine One helicopters for the White House had something to do with DDTC’s disinterest in any enforcement action for noncompliance with section 122.4.

The other interesting part of the Finmeccanica/BAE notice is this:

New Licenses Required: Valid State Department authorizations must be replaced by new licenses reflecting the new ownership structure. Requests for new licenses must be submitted to the Office of Defense Trade Controls Licensing. Note that the transaction involves a change in ownership of an approved party and therefore a DSP-119 (amendment form) cannot be used.

The ITAR provides no guidance on the procedure to be followed with licenses after or merger or acquisition. The SIA Handbook on Mergers, Acquisitions and Divestitures, which was a cooperative effort between DDTC, the defense export industry and a number of export lawyers (including myself), tried to fill that gap. Various officials of DDTC reviewed and participated in the writing of the MAD Handbook, which was quite clear that a DSP-119 was to be used to amend licenses to reflect a change in ownership of the licensed company. That apparently has now changed, meaning that a new license, rather than a DSP-119 license amendment, must be filed for change of ownership.

In an announcement posted yesterday on its website, DDTC chides exporters for a recent increase in “low-quality” applications and says that it will no longer help exporters correct errors in applications but will simply return them without action. If true, this will be the final triumph of form over substance at the agency.

Many applications involve exports to our allies in Iraq and Afghanistan as well as to private contractors providing security services for our troops in both countries. These exports are crucial to the safety of our troops, the outcome of the conflicts in both countries, and the security of the nation. DDTC now says than an application will simply be “returned without action” if there is a discrepancy between “the value on the license application . . . [and] the value on the purchase order.” With the safety of our troops and national security at issue here, to do this without affording the applicant an opportunity to correct the minor discrepancy is nothing short of a scandal.

Further, when an agency finds a decrease in the quality of submissions, perhaps it should look inward to discern the cause rather than reflexively blaming the submitters. Has the agency provided adequate resources for the education of submitters? Are the agency’s rules and application forms clear? Are licensing officers available to assist applicants with respect to questions that they might have prior to submission of applications? We certainly know that, since the DDTC shut down the phone lines to its licensing officers, the answer to the last question is no.

Finally, DDTC singles out problems in “incomplete and deficient” registration applications. It is likely that many of these are now registration applications filed by foreign brokers as a result of DDTC’s widely criticized decision to expand the scope of its jurisdiction to include foreign sales representatives with no contacts with the U.S. other than their dealings with the exporter. For almost all of these brokers, English is not their first language. The registration form (DS-2032) and the instructions, and the accompanying guidance document and “Helpful Hints” are not models of clarity, particularly for someone whose grasp of English may be limited.

Question 7, for example, requires the broker to provide a social security number even though the overseas broker will not have one and will have no idea what is meant by this requirement. Question 8 asks for the foreign broker to list “U.S. Munitions Articles Manufactured and/or Exported and Defense Services Provided” along with requisite USML category numbers. The foreign broker will have no idea whether his brokering services are a “defense service” or what category they should be placed in. Question 12 refers the foreign broker to a complicated provision of the ITAR to determine if it is owned by a foreign person, a question which may be uniquely confusing to an individual (as opposed to corporate) foreign registrant. The Guidelines issued by the DDTC have a “Registration Checklist” which still requires the foreign broker to submit evidence of qualification to do business in the United States even though the regulations have been updated to permit the foreign broker to submit its foreign business license instead. The “Sample Transmittal Letter” in that same guidance document still requires the foreign broker to certify that it is not a foreign person, even though the registering foreign broker necessarily is foreign.

This is all a prescription for disaster that guarantees deficient registration applications from foreign registrants. It seems to me the fault here may well rest with the failure of DDTC to take the time to do its own job properly, not with a foreign broker who fails to understand this confusing morass.

Probably most of the people who read this blog were at the Fall Conference of the Society for International Affairs this Monday and Tuesday. For those few who were not, let me share a few of the more interesting things said by various officials from DDTC who were on panels today.

Brokering.

As usual, DDTC continues to promise that this year we’ll finally see the updated brokering regulations. We’ve been, of course, hearing this promise for years. Literally. So I’m not holding my breath.

But one tantalizing suggestion was made about the future regs — namely, that some differentiation might be made between overseas sales representatives (who assist defense contractors with licensed exports from the U.S. to foreign governments) and traditional arms brokers. No hint was given of how to distinguish the two or what the different treatment might be, but this might address many concerns of defense contractors who have hundreds of overseas sales reps.

Notwithstanding DDTC’s new interpretation of its brokering rules, which requires the registration of all overseas sales representatives, the DDTC reports that currently they have only 600 overseas brokers registered. Needless to say that suggests that either few overseas sales reps are complying or that there must be a huge number in a backlog of registration applications.

Exemptions.

Another DDTC official advised that if exporters aren’t sure that a particular exemption applies that they should simply apply for a license. The official admitted that certain of the exemptions — particularly the Canadian exemption — are daunting and difficult to interpret and apply. The official noted that exporters can always ask for a license when they aren’t certain if an exemption applies. Then in the same breath, he admitted that licensing officers were sometimes returning applications without action and with a notation that the applicant should use an exemption. That leaves one to wonder why DDTC can’t effectively communicate its own licensing policies to its licensing officers.

Additionally, the official noted that a well-loved and often-used exemption is going away. The exemption under section 123.16(b)(1) for export of defense articles in furtherance of approved technical assistance agreements and manufacturing license agreements will go away when agreements can be filed through D-Trade. The target date for filing agreements through D-Trade is May 2007. After that date, the exemption will only apply to exports in furtherance of previously-filed agreements.

According to a leaked memo prepared by the Canadian Defence Department, Canada is upset about DDTC’s rules regarding transfer of technical data to Canadian dual nationals. This threatens a planned purchase by the Canadian government of U.S. helicopters, airplanes and other military equipment destined for Canadian troops in Afghanistan.

Under the Canadian exemption in the ITAR (22 C.F.R. § 126.5), technical data required to maintain U.S. defense articles may be transferred to “Canadian-registered” individuals. Canadian-registered is defined to include Canadian dual nationals except for dual nationals where the second country is one of the embargoed countries listed in § 126.1 — e.g. Cuba, Iran, China, etc. The Canadian Defence Department claims that “to undertake discriminatory employment practices based on nationality is contrary to Canada’s Charter of Rights and Freedoms.” As a result, Canadian firms cannot provide maintenance on U.S. exported products and, in response, Canada is threatening to purchase military equipment from non-U.S. sources.

Greg Suchan, Deputy Assistant Secretary and Acting Assistant Secretary of the Bureau of Political-Military Affairs at State, is negotiating this matter with the Canadians, but he doesn’t appear to be particularly swayed by Canada’s Charter of Rights and Freedoms:

Suchan, the senior State Department official leading the current negotiations, said he hoped a solution could be found but stressed his government controls access to its military technology because ”we have a feeling in our gut” about the link between nationality and possible threats.

”I understand there is concern here in Canada about the treatment of nationality,” Suchan told a symposium on Canada-U.S. military co-operation. ”If somebody is a citizen of a country that is very, very problematic for export-control purposes, we need to take that into account.”

Canada is hoping to persuade Suchan otherwise by proposing to establish a special security clearance procedure for affected dual nationals. My guess is that the State Department will be sceptical of any procedure that gives clearance to Canadians with dual citizenship given the dim view that the State Department gives to providing security clearances to U.S. citizens with dual nationality.