Industry Alerts

ITAR Part 129 Broker Requirements and Attorneys

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Following press coverage of arms sales by an allegedly rogue CIA operative to Libyan dictator Muammar Gaddafi, Congress amended the Arms Export Control Act in 1996 to allow the President to impose a variety of requirements on arms brokers.  These requirements were implemented by the Department of State Directorate of Defense Trade Controls (“DDTC”) at Part 129 of the International Traffic in Arms Regulations (“ITAR”).

Since its initial implementation of the 1996 Amendment in the ITAR, DDTC’s definition of “Brokering Activities” that subject persons, referred to as “Brokers,” to Part 129 registration, prior approval, annual reporting, and record keeping requirements has been broad and subject to varying interpretations.  These activities are generally defined at ITAR Section 129.2(b) as “any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin.”

Application of Part 129 to Attorneys

In 2013, the DDTC revised Part 129 to exclude from the definition of brokering activities “activities by an attorney that do not extend beyond the provision of legal advice to clients.” [FN/1]  While the revision was a welcomed change, a statement made by a high level DDTC official revealed that the DDTC Registration Division still seeks control over certain forms of legal assistance provided by attorneys. [FN/2]

Imposing Part 129 requirements on legal assistance by attorneys is problematic because attorneys must comply with individual state and District of Columbia laws on maintaining client confidentiality and, in most cases, application of Part 129 to attorneys requires that attorneys disclose confidential client information to DDTC. Client consent to such disclosures is further problematic because of state and District of Columbia rules on conflicts of interest.  In addition, application of Part 129 to legal services may require attorneys to provide federal law enforcement agents with law firm records without a warrant or other legal process subject to judicial review; and imposition of Part 129 on attorneys can substantially undermine independence of the bar, an arm of the Judiciary, from the influence of DDTC, an executive branch agency.

Not surprisingly, the American Bar Association’s Section of International Law (“ABA SIL”) filed a public comment to the Part 129 revisions on October 10, 2013, warning DDTC that application of Part 129 to attorney legal assistance is outside the authority conferred to DDTC under the Arms Export Control Act, will violate the Separation of Powers Doctrine and core concepts of federalism, and that imposing the requirements on attorneys will unnecessarily interfere with the public’s ability to obtain legal assistance in a complicated area of law. [FN/3]

In response to the ABA SIL comment, DDTC issued FAQs that exclude from the definition of “brokering activities” those “[a]ctivities conducted by an attorney, consultant, or any other professional that do not extend beyond the provision of legal or consulting advice to clients on ITAR compliance.” [FN/4]

Of course, the scope of legal services provided by attorneys involves much more than ITAR compliance assistance and legal assistance often entails communicating with persons other than clients.  Here, the DDTC FAQs go on to state that the Registration Division may apply Part 129 to a variety of legal services routinely provided by attorneys that the Division deems “beyond providing consulting or legal advice.”  According to the FAQs, these activities may include:

“introducing or recommending specific parties, structuring the transaction, marketing, promoting, and/or negotiating ITAR-controlled defense articles and services on behalf of their clients beyond contract terms of already identified foreign parties by your client…”

Open Questions

The FAQs create more questions than they answer, to include:

– Does providing assistance to clients in finding reputable freight forwarders, customs brokers, financial institutions experienced in issuing letters of credit, and other necessary parties to exports of defense articles subject attorneys to Part 129?

– What activities will DDTC interpret as constituting “structuring a transaction” for sales of defense articles and services on behalf of a client beyond contract terms of already identified foreign parties?  Do they include advising how to structure sales, mergers, acquisitions, and divestitures that involve the transfer of defense articles and defense services?

– What activities will DDTC interpret as constituting “marketing or promoting” sales of defense articles and services on behalf of clients beyond contract terms of already identified foreign parties?  Do they include corresponding and meeting with U.S. government personnel regarding licensing policy and on specific requests to export defense articles and defense services?

– What activities will DDTC interpret as constituting “negotiating” sales of defense articles and services on behalf of a client beyond contract terms of already identified foreign parties?  Do they include providing assistance in negotiating limitation of liability, applicable law, and other contract terms?  What about assistance in preparing letters of intent, nondisclosure, and other documents incidental to contracts for sale, mergers, acquisitions, and divestitures?

– Does providing assistance in drafting sales contracts and other documents for general use in sales of defense articles and defense services to future foreign customers subject attorneys to Part 129

Future of the Requirement

The many unanswered questions highlight the problems inherent in future administration of the requirement.  Moreover, considering how attorney legal advisements are already subject to extensive regulation by the individual states and the District of Columbia, DDTC has apparently failed to comply with Executive Order 13132 on Federalism, which required DDTC consultation with individual state judiciaries and bar associations before imposing DDTC requirements that effectively seek to preempt state laws on client confidentiality and conflict of interest.

In addition to the administrative and Constitutional problems caused by DDTC imposition of the Part 129 requirements on attorneys, it’s difficult to see a foreign policy interest served by interfering with the attorney-client relationship, especially considering how attorneys are ethically bound to advise clients on how to comply the law.  It’s also difficult to imagine that Congress expected DDTC would use the 1996 Amendment to regulate the practice of law.

It will be interesting to see if DDTC further revises Part 129, whether it complies with Executive Order 13132, whether it will issue further guidance on the application of Part 129 to legal assistance by attorneys, whether attorneys will begin registering with DDTC, whether attorneys will disclose otherwise confidential client information required by the Registration Division, and whether judges will strike down application of Part 129 requirements to attorneys upon interpleader or constitutional challenges.

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[1] “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] “Some Lawyers Could Get Caught under Coming Brokering Rules,” Washington Trade & Tariff Newsletter, June 1, 2013; “Coming ITAR Brokering Rules Could Capture Some Lawyers Who Do More than Give Advice,” The Export Practitioner, July 2013.

[3] American Bar Association Public Comment to “Amendments to the International Traffic in Arms Regulations: Registration and Licensing of Brokers, Brokering Activities, and Related Provisions,” October 10, 2013.

[4] See DDTC FAQ’s , last updated October 25, 2013, available at https://www.pmddtc.state.gov/registration/faqs_reg.html#27 (“Activities conducted by an attorney, consultant, or any other professional that do not extend beyond the provision of legal or consulting advice to clients on ITAR compliance is not within the definition of brokering activities. For example, advising on the legality of a transaction, such as advising whether a transaction is ITAR compliant, tax rates or other laws may be preferential, drafting of contract terms where parties to the transaction have already been identified by the client, representing your client to a client-identified foreign party, conducting ITAR audits, and/or providing training or assistance with ITAR compliance procedures, are outside the scope of brokering activities. However, this does not mean that there are no circumstances where an attorney, consultant, or any other professional would be a broker. If these persons engage in activities that go beyond providing consulting or legal advice, including being a third party to the transaction, or are engaged in soliciting, locating a buyer or seller, introducing or recommending specific parties, structuring the transaction, marketing, promoting, and/or negotiating ITAR-controlled defense articles and services on behalf of their clients beyond contract terms of already identified foreign parties by your client, then such activities may constitute brokering activities under ITAR Part 129.2(b).”).

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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 April 14, 2014. 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.  He can be reached at (202) 550-0040 and Matthew@GoldsteinPLLC.com.