On December 3, Philip Cheng from Cupertino, California, was sentenced to a two-year prison term for his involvement in a scheme to export night vision equipment to China. Cheng, an export broker, had been involved in a transaction in which Night Vision Technology, a U.S. company, agreed to sell Panther thermal imaging cameras to two Chinese companies — North China Research Institute of Electro-Optics and the China National Electronics Import & Export Corporation. As a result, Cheng was indicted in 2004 for illegal exports, illegal defense brokering activities and money laundering. After a hung jury, Cheng pleaded guilty to the brokering charges under 22 U.S.C. § 2778(b)(1)(A)(ii)(III) and 22 C.F.R. § 129.6.

The DOJ press release on the guilty plea concentrates on the Department’s proof that the night vision exports to China were illegal. But, of course, that doesn’t demonstrate why Cheng’s activities were violations of the requirements of Part 129 of the International Traffic in Arms Regulations (“ITAR”) to obtain licenses or provide prior notification for certain brokering activities. The evidence seems clear that Cheng was involved in brokering under Part 129. But not all brokering activities require a license. Nor does brokering of illegal exports violate the brokering rules, even though such activity would support a conviction for conspiracy.

Section 129.7 of the ITAR sets forth those situations in which a broker must obtain a license. First, of course, the brokering must involve significant military equipment (“SME”), and it seems clear that the night vision in question was SME under the ITAR. Additionally, in order to require a license, a brokering transaction must meet one of four criteria: (1) the value of the transaction must exceed $1 million; (2) the same significant military equipment had not been license for export to the armed services of the country involved; (3) the agreement would require the manufacture of SME abroad; or (4) the items involved were being sold to non-governmental entities. Alternatively, prior notification might be required under section 129.8 for transactions involving SME valued at less than $1 million.

It seems likely that at least the notification requirement was breached. Arguably, the license requirement was also breached on the grounds that the Panther thermal imaging camera had never been licensed to the Chinese military. Even so, the DOJ press release on the conviction seems not to have understood that more than an illegal export is required to support a conviction for illegal brokering.

Earlier this month, the the House of Commons’ Quadripartite Committee released a report entitled Strategic Export Controls: 2007 Review. In the report, the Committee recommends that the U.K. adopt a broker registration system that is interesting both in itself and in comparison to the current treatment of brokers in the United States under the provisions of Part 129:

We accept that the EU Council Common Position on the control of arms brokering, adopted on 23 June 2003, does not call for the registration of arms brokers. Article 4 suggests that Member States “may” establish a register of arms brokers, and that “registration or authorisation to act as a broker would […] not replace the requirement to obtain the necessary licence or written authorisation for each transaction”. We conclude that the EU Common Position on the control of arms brokering sets the best practice and we recommend that the Government follow best practice to establish a register of arms brokers. We conclude that a register will help to ensure that brokers meet defined standards, requirements and checks as well as deterring those—for example, with a relevant criminal conviction—for applying for registration. We also recommend that any brokering or trafficking in arms by a person in the UK or a British citizen abroad who is not registered be made a criminal offence.

The report doesn’t address, or even seem aware of, the difficulty of defining what activities in connection with the sale of a defense article constitute brokering. But leaving aside that question, it approaches the registration issue in ways that are significantly different from Part 129.

First, under Part 129, the registration process is purely informational. There is no endorsement by the DDTC when it issues a registration number that it has made a determination that the registrant is indeed qualified to act as a broker. The Committee’s proposal, however, clearly contemplates the enforcement of certain standards, including background checks, that more closely resemble a professional licensing system.

Second, the U.K. proposal relating to brokers requires registration only. There is no suggestion that broker participation in particular transactions may require specific licenses as is the case under Part 129 of the ITAR.

Third, one of the most significant controversies relating to Part 129 has been its jurisdictional scope. Part 129 requires registration by brokers “otherwise subject to” U.S. jurisdiction. The question here has been whether “otherwise subject to U.S. jurisdiction” covers brokers who are outside the United States, have no contacts with the United States and are not U.S. citizens but who are engaged in brokering with respect to U.S. origin defense articles. The U.K proposal applies only to British citizens engaging in brokering in the United Kingdom and throughout the world and to citizens of other countries engaging in brokering in the United Kingdom. It does not apply to parties that are not British citizens and are brokering outside the United Kingdom.

In yesterday’s edition of The Daily Bugle, the excellent daily newsletter distributed by Jim Bartlett from Northrop Grumman, Carolyn Lindsey and I wrote a piece on the recent message on registration applications that DDTC released last week on its website. We said:

Registration of foreign sales representatives for U.S.-origin defense articles is mandatory. If a foreign sales representatives application is not filed, delayed or rejected, even for minor mistakes, a U.S. exporter risks civil fines and criminal penalties if that exporter utilizes the services of the unregistered foreign sales representative.

This was a reference to the broker registration requirements contained in Part 129 of the ITAR. To be clear, although most FSRs will meet the definition of a broker under part 129, some will not. Part 129 defines a broker as someone 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.” That is, obviously, an extremely broad definition but, equally obviously, there may be some FSRs that won’t fit within it. An FSR that only provides after-sales support for a defense article would seem to be outside this definition. Also, the FSR wouldn’t be a broker if he or she isn’t an “agent for others,” although the scope and meaning of that phrase isn’t altogether clear.

If an FSR is a broker, then under section 129.3 of the ITAR he is required to register with DDTC if he is a “U.S. person, wherever located, [or] any foreign person located in the United States or otherwise subject to the jurisdiction of the United States.” The meaning of the phrase “otherwise subject to” U.S. jurisdiction has been the cause for some debate.

Several years ago DDTC tried to short-circuit the debate by saying informally at industry conferences that a foreign person outside the United States performing brokering services with respect to U.S.-origin defense articles or defense services was, in DDTC’s view, “otherwise subject to” U.S. jurisdiction. They further announced that they would issue guidelines to make this clear but emphasized that this was not a change in interpretation (although arguably it was). They have continued to take this position publicly including, most recently, at the Fall 2006 conference of the Society for International Affairs and at the March 21, 2007 meeting of the Defense Trade Advisory Group (“DTAG”)

DDTC Compliance Director David Trimble was quoted in The Export Practitioner (subscription required) as saying at the March meeting of DTAG the following with respect to planned revisions of Part 129:

As you know, the reg has always said foreign person ‘otherwise subject to U.S. jurisdiction’. In our past practices, we’ve made it clear that a foreign person dealing in U.S.-origin defense articles is subject to U.S. jurisdiction clearly by virtue of all the retransfer controls we have on defense articles.

We will be specifically including that in the regulation just to call it out so that it leaps off the page and grabs the reader.

DDTC has implemented this position in a number of ways. First, it began to “return without action” license applications that listed unregistered companies or individuals as intermediate consignees unless they clearly fell within the category of parties exempt from registration under section 129.3(b)(3), e.g., freight forwarders, air carriers, etc.

Second, DDTC amended the ITAR to make some problematic provisions consistent with the new interpretation. In April 2006, DDTC amended the provision of section 129.4 which had required broker registration applicants to submit documentation that the applicant “is incorporated or otherwise authorized to do business in the United States.” Section 129.4 was amended to contain the following language:

Foreign persons who are required to register shall provide information that is substantially similar in content as that which a U.S. person would provide under this provision (e.g., foreign business license or similar authorization to do business).

The 2006 amendment also added section 127.1(a)(6) which made clear that the activities of brokers outside the United States would be deemed a violation of the ITAR.

Third, DDTC has amended the registration procedures on its website to accommodate the registration of foreign brokers with no contacts with the U.S. other than engaging in brokering activities with respect to U.S. origin defense articles and defense services. In the most recent update, the website now makes clear that foreign brokers need not comply with the requirement that checks used to pay registration fees be drawn on U.S. banks.

Now, admittedly, the ITAR simply says “otherwise subject to” U.S. jurisdiction and the DDTC’s informal “interpretation” of this may not have the force of law. Indeed, I have argued in an article in The Export Practitioner (subscription required) that this interpretation of “otherwise subject to” is contrary to the legislative history of the statute under which these rules were promulgated. But there seems to be no question that in the view of the agency that interprets these regulations that a foreign person dealing in U.S. origin defense articles is “otherwise subject to” U.S. jurisdiction and is required, if performing brokering services, to register with DDTC.