2002/12/30
By: Maarten Sengers
You don’t think you have a brokering compliance issue? Think again. ’97’s Christmas present from the Office of Defense Trade Controls (ODTC) unwrapped the latest exemplar of muddled yet sweeping regulatory writing: the ITAR Part 129 brokering provisions. The thrust of the provision is to require that people and companies that act as paid agents for others in negotiating the sale of defense articles or services (a.k.a. brokers) register with ODTC. In addition, such brokers must frequently obtain prior approval to conduct brokering activity.
Little did we know about the ODTC gift under our tree. Figuring out the nitty gritty – how and when you must to comply with the brokering provisions in the context of your business – was extraordinarily difficult. The writing and structure of this provision is so horrendously twisted a regulatory scholar could write a treatise on what these few pages could possibly mean. Rather than figuring it out, many companies coped instead by dismissing the provisions out of hand as inapplicable to them with a “we’re not brokers” attitude.
Increasingly, however, ODTC is becoming more assertive in enforcing brokering provisions, and in the process is confirming that the broad language was no accident. It’s become clear that our gift is really a lump of coal. In this article, we’ll deal with one aspect of the provision: when you ought to register as a broker. For now, we’ll punt on the question on how and when to obtain brokering prior approval or provide notice, as well as the befuddling analysis of what constitutes brokering activity.
129.3 requires that US persons, wherever located, register if they act as a broker. In short, acting as a broker can mean anything from negotiating the sale of a defense article to being a paid translator in a defense sales meeting. For example, the litany of US Government defense sales specialists probably are brokers who ought to be registered.
But your company may be acting as a broker too.
Your Alpha division gets a commission for helping with the sale of defense products or services for another manufacturer, foreign or domestic. Alpha division, or Alpha’s parent, ought to be registered as a broker. If Alpha division is similarly marketing products for your foreign division Bravo, Alpha should probably register if Bravo is separately incorporated in the foreign country. Likewise, if Alpha division is marketing for US sister division Charlie, the brokering rules appear to require Alpha to register if Charlie is incorporated separately.
Foreign persons located in the US must also register if they act as a broker. If you are an Irish citizen in the US working as an agent for a manufacturer, foreign or domestic, in selling products to US defense companies, you ought to be registered. The registration requirement appears to trigger even if the Irish national was only in the US for a three day marketing trip.
True to ODTC form, they didn’t stop giving here. The rules leave open the possibility that others who act as brokers and are “otherwise subject to the jurisdiction of the United States” must register as well. What constitutes subject to the jurisdiction of the US is, conveniently for ODTC, undefined. But based on a review of letters ODTC has been mailing to potential brokers worldwide, its becoming clear that ODTC views any person in the galaxy who directly or indirectly deals with US defense companies or US origin defense articles and services as subject to US jurisdiction. Surprise, surprise!
Many US companies use overseas agents or representatives to help market defense articles or services. In most cases, these agents should register with ODTC, pay the $1,200 registration fee for four years, and obtain prior brokering approval where required. Again, based on letters mailed out by ODTC to such representatives, ODTC seems to consider all of these persons as subject to the brokering provisions, even if they have never set foot in the US and think the ITAR is a driveway sealing contractor.
How does ODTC catch wind of potential foreign brokers? ODTC appears to be looking for intermediate consignees or other third parties who appear on license applications or related documentation, and begins by sending those parties a copy of part 129 and a US jurisdiction determination questionnaire. Don’t be surprised if your bewildered foreign representative calls at some point wondering what the heck you got them into after they get one of those friendly letters from brokering compliance.
One wonders when ODTC is going to tire of dealing directly with these far flung foreign parties and start putting the heat on the US manufacturers who engage them. It seems inevitable that ODTC will start forcing US companies to take a more active role in getting their reps registered. It’s a lot easier for ODTC to get their arms around a US company then your Korean rep working out of an apartment in Seoul.
Okay, so you’ve done nothing on brokering compliance at your company. Where do you begin? Aside from trying to pick through Part 129, you may want to go ahead and register as broker even if you’re not sure you have any brokering issues within your corporation, because you probably have them whether you know it or not. A parent could register all divisions. That way if you do find that any division is brokering defense articles for somebody, including another division, you are at least registered and can work next on getting whatever approvals or making notifications without a registration delay.
A more difficult issue is all the persons out there who may be acting as a broker for you. A prudent minimum step would be including brokering compliance language in contracts with all your representatives who are helping you get defense business here or abroad. They need to understand that they may have compliance issues with ITAR brokering, and in many cases they won’t ever know until you tell them.
Finally, you will have to decide how much support you will provide your representatives in getting them registered, as well as all the other requirements that go along with being a registered broker. Given that many here don’t understand the brokering provisions, can you imagine what it would be like for your Korean rep who got the letter from ODTC? Though it may be fun to be cc’d on the correspondence between your Korean rep and ODTC, at some point ODTC may make their registration your compliance problem. It may make more sense to address the brokering issue proactively.