Industry Alerts

Continuation of ITAR Broker Requirements on Freight Forwarders: TO COMMENT OR NOT TO COMMENT? *

Following a proposed rule and the consideration of recommendations from a working group of the Defense Trade Advisory Group, the Department of State Directorate of Defense Trade Controls (“DDTC”) recently published an interim final rule amending the ITAR brokering requirements at 22 C.F.R. Part 129.[1]

A copy of the rule is available at federalregister.gov at the citation “78 FR 52680.”  The last day for public comment is October 10, 2013.

The public comment process is an essential part of our representative form of government that offers private industry a say in the federal rulemaking process.  Companies affected by rules should consider submitting comments, especially when a rule would impose unnecessary burdens or have adverse affects on competition, employment, investment, productivity, innovation, or the ability of U.S. businesses to compete with foreign business in domestic and foreign markets.

Because of their impact on many U.S. and foreign persons, the brokering provisions at ITAR Part 129 have been a substantial source of debate over the years.  Overall, the new rule offers significant improvements over the current Part 129 requirements and DDTC has taken great efforts to respond to past industry concerns.  However, specific to companies involved in the freight forwarding industry, literal application of present Part 129 requirements as continued under the new rule includes the following:

Mere shipment of defense articles by a freight forwarder is defined as a “brokering activity.”[2]

This is a very wide net, but it is somewhat limited in effect by an exception from the DDTC broker registration requirement for freight forwarders who merely transport licensed USML items and who are an “arms length” from the underlying transaction (i.e., not making introductions, not arranging the sale, receiving a sales commission, or taking title).[3]  A similar exception exists in the current ITAR brokering regulations.  The continued exception makes sense because it allows DDTC compliance and other export control enforcement agencies to focus resources on activities by persons more directly involved in arms sales.

A freight forwarder must obtain prior approval before making any proposal to perform brokering activities that involve any ITAR embargoed country listed at ITAR Section 126.1 and before performing brokering activities involving Section 126.1 countries.[4]

Regardless of whether otherwise exempted from the Part 129 broker registration requirements, freight forwarders must obtain DDTC prior approval before proposing and performing brokering activities involving 126.1 countries.  There are substantial redundancies in this requirement because ITAR Section 126.1(e) already requires prior DDTC authorization for proposals to sell defense articles involving 126.1 countries;[5] ITAR Section 123.1 requires DDTC authorization for exports of defense articles involving 126.1 countries;[6] DDTC requires that the specific freight forwarder shipping a defense article in a particular transaction be listed on the DSP-5 license authorizing the shipment; and the Department of Commerce’s Foreign Trade Regulations (“FTR”) similarly requires reporting of specific freight forwarders shipping a defense article in a particular transaction on the Bureau of Census Automated Export System (“AES”).  These requirements exist in addition to the Part 129 requirements.  As such, requiring that freight forwarders obtain prior approval before providing proposals to ship defense articles to 126.1 countries arguably presents a redundant burden on the freight forwarding industry.

A freight forwarder must register with DDTC as a broker in order to obtain prior authorization to make a brokering proposal or to perform brokering activities involving a 126.1 country.[7]

Registration with DDTC as a broker is a prerequisite to obtaining any authorization to make a brokering proposal or to perform brokering activities involving a 126.1 country.  Among other things, Part 129 registrants must maintain records of all brokering activities, a requirement that often has substantial implications for information management processes throughout a company.[8]

Following Registration, the Part 129 annual reporting requirements apply to registered freight forwarders.[9]

Specific to the annual reporting requirement, the new rule provides, “the report shall include brokering activities that were received or were exempt from approval.”[10]  This raises the possibility of a very substantial redundancy because DDTC’s use of the word “include” (i.e., “the report shall include…”) instead of “consist of,” leaves open the question of whether all brokering activity must be reported, or whether only those brokering activities falling under prior approval requirements must be reported.  If left unchanged without agency guidance, the provision is fairly read to mean that freight forwarders must provide annual reports to DDTC with detailed information on all shipments of defense articles from the U.S. made by them, regardless of whether the shipments were already reported to DDTC in a DSP-5 license request and to the Department of Commerce on AES.

*  *  *

DDTC has and will likely continue to provide industry with useful interpretations of Part 129 and exercise its authority to grant exemptions to requirements on a case-by-case basis.  However, because of varying interpretations and the changing nature of U.S. laws regulating foreign affairs, assessing application of the interim final rule as written is critical to determining its possible impact on your company’s operations.  If your company believes a different approach is warranted, it should consider making a public comment suggesting a correction and explaining why the correction is needed.

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* The above is not intended as an exhaustive list of restrictions that may apply to a particular transaction nor advice for a specific transaction because the specifics of an individual case may implicate application of other U.S. laws as well as foreign laws that carry added or different requirements.  In addition, U.S. export control and sanctions laws are frequently subject to change.  Such changes can affect the continued validity of the information above, which is based on U.S. law existing as of September 6, 2013.  For these reasons, assistance from a qualified attorney competent to advise on such matters is highly recommended.

Matthew A. Goldstein is an International Trade Attorney in Washington D.C. licensed to practice in the District of Columbia and the State of Arizona.  He can be reached at (202) 550-0040 and Matthew@GoldsteinPLLC.com.


[1] See “Amendment to the International Traffic in Arms Regulations: Registration and Licensing of Brokers, Brokering Activities, and Related Provisions,” 78 Fed. Reg. 52,680 (August 26, 2013).

[2] See present ITAR at Section 129.2(b) (“Brokering activities means… includes the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import or a defense article or defense service, irrespective of its origin.”); and Interim Final Rule at Section 129.2(b)(1)(i) (“Brokering activities means…transporting, or freight forwarding defense articles and defense services…”).

[3] See present ITAR at Section 129.3(b)(3) (“Registration under this section is not required for… Persons exclusively in the business of… transporting, or freight forwarding, whose business activities do not also include brokering defense articles or defense services.”); and Interim Final Rule at Section 129.3(b)(2) (“Registration, approval, recordkeeping, and reporting under this section are not required for…Persons exclusively in the business of…transporting… or freight forwarding.”).

[4] See present ITAR at 129.5(b) (“No brokering activities or brokering proposals involving any country referred to in § 126.1 of this subchapter may be carried out by any person without first obtaining the written approval of the Directorate of Defense Trade Controls.”); and Interim Final Rule at Section 129.7(b) (“No person may engage in or make a proposal to engage in brokering activities that involve any country, area, or person referred to in § 126.1 of this subchapter without first obtaining the approval of the Directorate of Defense Trade Controls.”)

[5] See present ITAR at Section 126.1(e) (“No sale, export, transfer, reexport, or retransfer and no proposal to sell, export, transfer, reexport, or retransfer any defense articles or defense services subject to this subchapter may be made to any country referred to in this section (including the embassies or consulates of such a country), or to any person acting on its behalf, whether in the United States or abroad, without first obtaining a license or written approval of the Directorate of Defense Trade Controls.”); the Interim Final Rule does not change 126.1(e).

[6] N.B. The present ITAR Section 129.7(b)(1) provides that prior approval of brokering activities can be accomplished through later issuance of a DDTC license specifically naming the brokers involved (i.e., “The requirements of this section for prior written approval are met by any of the following… A license or other written approval issued under parts 123, 124, or 125 of this subchapter for the permanent or temporary export or temporary import of the particular defense article, defense service or technical data subject to prior approval under this section, provided the names of all brokers have been identified in an attachment accompanying submission of the initial application”).  This provision is removed by the Interim Final Rule.

[7] See present ITAR at Section 129.7(c) (“Requests for approval of brokering activities shall be submitted in writing to the Directorate of Defense Trade Controls by an empowered official of the registered broker…”); and the Interim Final Rule at Section 129.3(a) (“Registration under this section is generally a precondition for the issuance of approval for brokering activities under this part 129 or the use of exemptions.”).

[8] See present ITAR at Section 129.4(c) (“Other provisions of part 122, in particular, § 122.4 concerning notification of changes in information furnished by registrants and § 122.5 concerning maintenance of records by registrants, apply equally to registration under this part (part 129).”); and the Interim Final Rule at Section 129.11 (“A person who is required to register pursuant to this part (including those registered in accordance with § 129.3(d)) must maintain records concerning brokering activities in accordance with § 122.5 of this subchapter.”).

[9] See present ITAR at Section 129.9 (“Any person required to register under this part shall provide annually a report to the Directorate of Defense Trade Controls enumerating and describing its brokering activities by quantity, type, U.S. dollar value, and purchaser(s) and recipient(s), license(s) numbers for approved activities and any exemptions utilized for other covered activities.”); and the Interim Final Rule at Section 129.10 (“Any person required to register under this part (including those registered in accordance with § 129.3(d)) shall provide the Directorate of Defense Trade Controls on an annual basis a report of its brokering activities in the previous twelve months… The report shall include brokering activities that received or were exempt from approval as follows…”).

[10] Ibid.