By John Herzo, Senior Associate, FD Associates, Inc.
Edited by Jenny Hahn, President, FD Associates, Inc.
September 20, 2023
Did you know that the International Traffic in Arms Regulations (“ITAR”) has an entire chapter devoted to non export activities?? ITAR Part §129 relates to brokering activities performed by U.S. Persons (individuals and companies), foreign companies owned by U.S. persons and foreign persons conducting brokering activities in the U.S. The ITAR’s brokering requirements are some of the most challenging aspects of the ITAR to understand and comply with. This article will provide you with a quick guide to the brokering requirements.
Before we step into this discussion, we explore a recent Department of State consent agreement levied on a U.S. company who did not appreciate the complexities of the ITAR’s brokering requirements. On August 25, 2023, Island Pyrochemical Industries Corp (“IPI”) entered into a 3 year consent agreement with the Department of State (“DOS”) regarding certain violations of the ITAR, including brokering violations. They received a civil penalty and have committed to a monitored compliance program for 3 years. The Charging Letter, Consent Agreement and Order (Link here) are for public display on the Department of State website.
IPI is a small, privately held corporation with less than 100 employees and a manufacturer and supplier of specialty chemicals and related materials with a variety of applications in both the commercial and military sectors, including rocket propellants and precursor chemicals used in explosive ordnance. IPI has affiliates in Brazil and the People’s Republic of China (“PRC”). IPI engages in both domestic and foreign sales.
After registering as a broker in March, 2015, on or around April 2015, IPI contacted three companies to discuss the procurement of ammonium perchlorate (“APC”). APC is listed on the US Munitions List and is considered a defense article. IPI, including IPI’s President and Chief Executive Officer (“CEO”), met with representatives from Avibras Industria Aeroespacial SA (“Avibras”), a Brazilian company, to discuss a transaction to procure APC for Avibras’ use in manufacturing certain rockets for its client, the Kingdom of Saudi Arabia.
At the same time, IPI contacted Dalian Gaojia Chemical Co., Ltd (“Dalian”), a PRC manufacturer of APC, and an export company, Aerospace Long-March International Co., Ltd. (“ALIT”), a subsidiary of China Aerospace Science and Technology Corporation, about the supply of APC to Brazil from China.
By undertaking these activities, IPI, engaged in brokering activities, as described in ITAR Part §129.2)\, by facilitating communications and engagement between Avibras. Brazil and ALIT, China. On May 27, 2015, IPI entered into an agreement with Avibras for the procurement of APC from ALIT. The underlying communications validated that IPI was taking an action on behalf of another, coordinating the sale and delivery of the APC from ALIT, China to Avibras, Brazil.
In addition to this activity, IPI also engaged in multiple brokering activities in this transaction involving the solicitation, promotion, negotiating, contracting for, arranging, and otherwise assisting in the purchase of APC from China. All of this was done without obtaining a broker authorization from the Department of State, after having attempted to secure an export license for the transaction.
IPI’s brokering activities included:
(1) Recommending courses of action to Avibras on obtaining the APC from the PRC and assisting in arranging meetings with suppliers during a planned trip to the PRC, thereby negotiating for, arranging for, and otherwise assisting in and facilitating the purchase of APC by Avibras and the transfer of the APC from the PRC to Brazil;
(2) IPI finalizing an arrangement to supply Avibras with APC manufactured in the PRC thereby facilitating the manufacture and intended export of a foreign defense article from the PRC to Brazil on behalf of Avibras;
(3) IPI arranging for shipment of APC from the PRC to Brazil on behalf of Avibras;
(4) IPI issuing Dalian the final specifications for the APC thereby facilitating, on behalf of Avibras, the manufacture of the APC;
(5) IPI providing a down payment to Dalian to enable Dalian to begin manufacturing the APC thereby facilitating on behalf of Avibras Dalian’s manufacture of APC; and
(6) IPI arranging for Avibras to send a purchase order to ALIT with pricing specified by IPI for shipment of APC from the PRC to Avibras in Brazil demonstrating that IPI assisted in the export and transfer of APC from the PRC to Brazil on behalf of Avibras.
As stated earlier, IPI registered with the DOS as a broker in March, 2015. Such registration implies that IPI understood the requirements of the ITAR, particularly related to brokering. IPI then applied for a DSP5 permanent export license for unclassified materials and technical data in July, 2015 in connection with the sale of the APC material to Avibras, listing itself as the manufacturer and ALIT, China as an intermediary party. Apply for a DSP-5 license implied that the APC was being exported from the United States to Brazil, not the transfer from China to Brazil of APC. The DOS rejected the DSP-5 application seeking an explanation on the roles of the parties. In a resubmission of the DSP-5 license, in August, 2015, ALIT was no longer listed, but IPI was still listed as the manufacturer. The application was DENIED because it was not consistent with U.S. national security and foreign policy objectives. This was because China is an ITAR 126.1 sanctioned country. The facts described herein were described in a Directed Disclosure response by IPI to DOS. (meaning that IPI did not voluntarily report these actions to the DOS).
IPI was charged with 3 violations of the ITAR, count one – unauthorized brokering without a license, counts 2 and 3, misrepresentation or omission of facts in an export control document.
DOS determined that IPI’s unauthorized brokering activities demonstrated a disregard for its export compliance responsibilities.
IPI was fined $850,000 by the Department of State, required to appoint a Special Compliance Officer, complete a Classification Review, obtain an Audit by an outside auditor, allow onsite reviews by the Department of State and obtain export compliance training, among other remedial measures. The fine and remedial measures are significant for a small company with less than 100 employees.
Provided below is guidance to assist your company’s compliance with the ITAR’s brokering requirements found at § 129 of the ITAR.
The first step is registration with the Department of State specifically as a broker. It is a precondition for applying for broker prior approval licenses (when needed). Registration is required for only one brokering activity. Registration as a broker is separate from registration as a manufacturer or export.
Pursuant to §129.3, the following persons must register as a broker:
- U.S. and foreign persons meeting the definition of a broker must register with the Department of State as a broker per the ITAR at §129.3(a); and
- Broker registrations are submitted via the Department of State’s DECCS electronic licensing system using form DS2032 and checking the box for broker.
The ITAR at §129.3(b) includes the following exemptions from the broker registration requirements:
- Foreign governments or international organizations, including their employees, acting in an official capacity; and
- Persons exclusively in the business of financing, insuring, transporting, customs brokering, or freight forwarding, whose activities do not extend beyond financing, insuring, transporting, customs brokering, or freight forwarding. Examples include air carriers or freight forwarders that merely transport or arrange transportation for licensed defense articles, and banks or credit companies who merely provide commercially available lines or letters of credit to persons registered or required to register in accordance with §122 or 129.
Who Is A Broker
Before you register as a broker, you need to know who the ITAR defines as a broker and how it defines brokering activities. The ITAR at §129.2(a) defines who a broker is as follows:
- Broker means any person who engages in the business of brokering activities:
- Any U.S. Person wherever located;
- Any foreign person located in the United States; or
- Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. Person.
The key point to remember regarding the ITAR’s definition of a broker is that it only captures foreign persons when they are located in the U.S. or foreign person located outside the United States where the foreign person is owned or controlled by a U.S. Person. Therefore, most foreign persons are NOT subject to the ITAR’s brokering regulations and do NOT need to register as a broker.
What Is Considered ITAR Brokering
The next step is to define what constitutes what the ITAR considers is brokering as it may differ from the traditional brokering activities. The ITAR at §129.2(a) defines brokering activity as follows:
- 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;
- Such action includes, but is not limited to: financing, insuring, transporting, or freight forwarding defense articles and defense services; or
- Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.
As you can see, a company can perform a brokering activity that does not involve the export from the United States of ITAR controlled technical data, hardware or defense services. In IPI’s case it was the transfer of material described in the ITAR’s U.S. Munitions List from China to Brazil at the heart of the broker violation.
“Any action on behalf of another” is broad and applicable to any actions that facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service. The phrase “any action” has been interpreted to mean several different things, for instance:
- Exactly what it says, any action. This could be as simple as providing an email address or phone number of prospective foreign buyer of a U.S. or foreign defense article to the seller of the defense article;
- Letting a purchase order for the drop shipment of a foreign defense article from one foreign country to another foreign country;
- Initiating the manufacturing activity, caused when the purchase order is let, which starts the manufacturing process for a defense article that will be shipped from one foreign country to another foreign country; or
- Initiating or supporting the shipping arrangements to have the material finalized for the drop shipment from one foreign country to another foreign country.
To determine if the activities your company engages in are brokering activities pursuant to the ITAR, first ask yourself, is your company assisting in the transaction in the following types of administrative activities as referenced in §129.2(b)(2):
- Providing or arranging office space and equipment;
- Providing hospitality;
- Providing advertising;
- Providing clerical assistance;
- Providing assistance with obtaining visas;
- Providing translation services;
- Collecting product and pricing information to prepare a request to proposal;
- Promoting company goodwill at trade shows; or
- Providing legal advice to clients.
If your company is performing any of the administrative activities referenced above, it is not performing a brokering activity.
The following are also not brokering activities per §129.2(b)(2):
- Activities performed by an affiliate on behalf of another affiliate; and
- Activities by persons, including their regular employees, that do not extend beyond acting as an end-user of a defense article or defense service exported pursuant to a license or other approval under §123, §124, or §125, or subsequently acting as a reexporter or retransferor of such article or service under such license or other approval, or under an approval pursuant to §123.9.
If the activities your company engages in aren’t listed above, ask yourself is this transaction related to the prospective sale and/or export or import (as applicable) of U.S. or foreign origin ITAR regulated (or enumerated) hardware, technical data or services, and are on behalf of another party, U.S. or foreign? If your answer is yes, ask yourself, is my company taking any of the following actions:
- Soliciting the sale of the ITAR regulated (or enumerated) hardware?
- Promoting the sale of the ITAR regulated (or enumerated) hardware?
- Negotiating the sale of the ITAR regulated (or enumerated) hardware?
- Contracting for the sale of the ITAR regulated (or enumerated) hardware?
- Arranging for the sale and/or export or import of the ITAR regulated (or enumerated) hardware?
- Arranging the transfer of foreign defense articles from the foreign supplier to a foreign purchaser or foreign end user?
- Obtaining a DSP-5 license for the export of the ITAR regulated hardware (or enumerated) or a DSP-61 for the temporary import of ITAR regulated hardware on behalf of another?
- Obtaining an ATF Form 6 Permanent Import Permit for the permanent import of ITAR regulated (or enumerated) hardware that is listed on the ATF’s United States Munitions Import List (“USMIL”), on behalf of another?
- Buying foreign origin ITAR enumerated hardware listed on the ITAR’s United States Munitions List (“USML”) or equipment listed on the USMIL from a foreign manufacturer or foreign owner for delivery to the U.S. for sale to another U.S. party?
If you answer yes to any of the above, brokering is occurring and a broker license will be required from the Department of State prior to ANY brokering activity taking place, for the articles listed below pursuant to §129.4(a)(2), if listed on the USML or the USMIL and for any foreign origin defense articles listed on the USML or listed on the USMIL, unless a license exemption is available:
- Firearms and other weapons described by USML and USMIL Category I(a) through (d), USML and USMIL Category II(a) and (d), and full up rounds of Ammunition described in USML and USMIL Category III(a);
- Rockets, bombs, and grenades as well as launchers for such defense articles described by USML Category IV(a), and launch vehicles and missile and anti-missile systems described by USML Category IV(b) (including man-portable air-defense systems);
- Vessels of war described by USML Category VI;
- Tanks and military vehicles described by USML Category VII;
- Aircraft and unmanned aerial vehicles described by USML Category VIII;
- Night vision-related defense articles and inertial platform, sensor, and guidance-related systems described by USML Categories XII(c) and (d);
- Chemical agents and precursors described by USML Categories XIV(a), (d), and (e), biological agents and biologically derived substances described by USML Category XIV(b), and equipment described by USML Category XIV(f) for dissemination of the chemical agents and biological agents described by USML Categories XIV(a), (b), and (e);
- Submersible vessels described by USML Category XX; and
- Miscellaneous articles described by USML and USMIL Category XXI.
Broker License Exemptions
If you determine that your company is brokering and requires prior approval brokering authorization, the next step of the process is to determine if any of the ITAR’s brokering license exemptions apply to your transaction. The ITAR’s brokering license exemptions are found at §129.5(a) and §129.5(b).
Pursuant to §129.5(a), brokering activities undertaken for an agency of the U.S. government pursuant to a contract between the broker and that agency are exempt from the requirement for approval provided that:
- The brokering activities concern defense articles or defense services solely for the use of the agency; or
- The brokering activities are undertaken for carrying out a foreign assistance or sales program authorized by law and subject to control by the president by other means, as demonstrated by one of the following conditions being met:
- The U.S. Government agency contract with the broker contains an explicit provision stating the contract supports a foreign assistance or sales program authorized by law and the contracting agency has established control of the activity covered by the contract by other means equivalent to that established under this subchapter; or
- The Directorate of Defense Trade Controls provides written concurrence in advance that the condition is met.
Pursuant to §129.5(b), brokering activities regarding a foreign defense article or defense service are exempt from the requirement for approval when arranged wholly within and destined exclusively for the North Atlantic Treaty Organization, any member country of that organization, Australia, Israel, Japan, New Zealand, or the Republic of Korea, except in the case of the defense articles or defense services specified in § 129.4(a)(2) (see above), for which a broker license is required.
In order to use the broker license exemptions at §§ 129.5(a) and 129.5(b), pursuant to §129.5(c), brokers engaging in brokering activities described in §§129.5(a) or (b) are not exempt from obtaining a broker license from the Department of State if:
- The broker is not registered as required by §129.3; or
- The broker or any person who has a direct or indirect interest in or may benefit from the brokering activities, including any related defense article or defense service transaction, is ineligible as defined in §120.1(c)(2); or
- A country or person referred to in §126.1 of this subchapter is involved in the brokering activities or such activities are otherwise subject to §129.7.
If your company is performing brokering activities and does not meet the requirements of the broker license exemptions referenced above, your company will need to submit a broker license (DS4294) to the Department of State, after it has secured a Broker registration code and before it undertakes any brokering activity. Below are the steps to file a broker license request:
- The broker license request must be filed via the DS4294 form utilizing the Department of State’s DECCS electronic licensing system detailing the known specifics of the transaction, refer to §129.6(b);
- Must identify the applicant’s name, address and PM/DDTC broker registration code;
- Identify the specific brokering activity to be approved;
- Identify the name, nationality, address, and place of business of all persons who may participate in the brokering activities;
- Requires the ITAR 126.13 certification;
- Must identify the specific defense article(s) or defense services involved as follows:
- The USML/USMIL category;
- The name or military nomenclature of each defense article;
- Whether the defense article is Significant Military Equipment;
- Estimated quantity of each defense article;
- Estimated U.S. Dollar value of defense articles and defense services;
- Security classification;
- End-user and end-use; and
- Identify whether the brokering activities are related to a sale through Direct Commercial Sale or under the U.S. Foreign Military Sales program or other activity in support of the U.S. Government.
Brokering Items On The USML Not Listed In ITAR §129.4?
Provided the defense articles, technical data or defense services are U.S. origin, and not described in ITAR §129.4, no prior brokering approval is required, unless a sanctioned country or party is involved. If no prior brokering approval is required, the broker is required to report the brokering activity specifics with each annual broker registration renewal.
As you will now conclude, the ITAR brokering regulations are complex and compliance is critical to avoid fines and compliance remedial measures as described for IPI. Some key points to remember are:
- Anyone who engages in a brokering activity, even a single brokering activity, must register with the Department of State as a broker before undertaking the brokering activity;
- Foreign persons must register as brokers if they are to conduct a brokering activity when they are located in the U.S. or when they are owned or controlled by a U.S. Person;
- The brokering of ANY foreign defense article requires prior brokering authorization approval, unless an ITAR broker exemption applies;
- Even though most small arms and full up ammunition has moved to the export jurisdiction of the Export Administration Regulations (“EAR”), the brokering of U.S. or foreign origin small arms or full up ammunition enumerated on the ATF’s USMIL require prior ITAR brokering authorization approval;
- Your company can perform a brokering activity without making an export of ITAR controlled technical data, hardware or defense services;
- If your company is brokering any U.S. defense articles enumerated in 129.4(a)(2) your company will require a prior approval broker license or the utilization of a broker license exemption;
- If your company is brokering any foreign defense article enumerated on the USML or the USMIL, your company will require a prior approval broker license or the utilization of a broker license exemption.
- If your company is brokering a foreign defense articles enumerated in 129.4(a)(2) your company can utilize the NATO, Australia, Israel, Japan, New Zealand, or the Republic of Korea broker license exemption at §129.5(b) if the transaction is wholly within these countries including the country of manufacture; and
- Annually all brokering activities, licensed or unlicensed, must be reported to DOS with the annual registration renewal.
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 China is an ITAR 126.1 arms sanctioned country
 ITAR Regulated = Controlled by the ITAR.
 ITAR Enumerated = Foreign origin equipment, no U.S. content, included in the ITAR’s United States Munitions List (USML) or the ATF’s United States Munitions Import List (USMIL).