If you didn’t know where to look, it could take a long time to stumble across the U.S. rule that limits arms brokering.
No such rule even existed until 1996, when Congress amended Section 38 of the Arms Export Control Act to require people involved in the brokering of U.S. and non-U.S. defense equipment and technology to register with the government, and often obtain approval for their activities.
At the time, a report from the House Committee on International Relations stated:
“…in some instances, U.S. persons are involved in arms deals that are inconsistent with U.S. policy. Certain of these transactions could fuel regional instability, lend support to terrorism or run counter to a U.S. policy decision not to sell arms to a specific country or area. The extension of U.S. legal authority under this provision to regulate brokering activities would help to curtail such transactions.”
The legislation was implemented the following year with the addition to the ITAR of Part 129–Registration and Licensing of Brokers.
Arms brokering background
The ITAR deals primarily with the movement of U.S. defense articles and equipment from the United States to the rest of the world, even placing controls on reexports and retransfers of ITAR-controlled goods and technologies after they’ve been legally exported.
But given the United States’ role as the world’s leading arms exporter, the ITAR prior to 1996 didn’t cover some sensitive private-sector activities that could impact U.S. foreign policy.
For example, someone could work from an office anywhere in the United States and take a fee to arrange the sale of arms between two foreign entities—perhaps a seller of ammunition from Estonia and a buyer in Iraq. As long as the ammunition didn’t come from or enter the United States, and was not otherwise subject to the ITAR, there was nothing to give the U.S. State Department authority to review such a transaction or, for that matter, the opportunity to even know it was taking place.
But when Part 129 was tacked onto the ITAR, it gave the State Department a process to monitor brokered transactions for conflicts with U.S. foreign policy.
The initial rule has been revised several times since and was overhauled in 2013 to the essential form in which it exists today.
Identifying a defense broker
Being an arms broker isn’t as exciting as Hollywood makes it out to be; it covers a range of activities, most of which are desk jobs.
There are more companies than individuals that are registered as arms brokers. But the rule is intentionally broad—and that’s why it merits caution. Here’s the order of analysis to understand who is subject to the brokering rules and how to navigate them.
Who you are: Part 129 applies to:
- Any U.S. person, corporation, government unit or other entity, anywhere in the world, that engages in brokering activity;
- Any foreign person or entity located in the United States that conducts brokering activity;
- Any foreign person or entity outside the United States that is owned or controlled by a U.S. person or entity and conducts brokering activity.
What you do: The ITAR defines brokering 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.” (For the purpose of Part 129, the term “defense article or defense service” includes any hardware, technical data or services covered by the U.S. Munitions List, regardless of its origin, as well as items designated on the U.S. Munitions Import List.)
Brokering can involve, but isn’t limited to:
- Financing
- Insuring
- Transporting
- Freight forwarding
- Soliciting
- Promoting
- Negotiating
- Contracting
- Arranging
Brokering activities for items subject to the EAR rather than the ITAR are excluded; so are strictly administrative services that arms brokers might use in the course of business, such as renting office space and buying advertising. So if two parties rent a conference room in a hotel to hammer out an arms deal, the hotel itself isn’t considered a broker.
Fitting an exclusion: There are some meaningful carveouts to the definition of brokering, which can be found at ITAR 129.2(b)(2). They include:
- Activities involving strictly domestic sales or transfers;
- Activities involving items subject to the EAR rather than the ITAR;
- Working in an official capacity for the U.S. government;
- Performing work for an affiliate that is legally permitted to sell arms and other items subject to the ITAR. For instance, if a foreign subsidiary of a U.S. arms manufacturer represents its parent company in negotiating a transaction, that isn’t considered brokering—though the transaction is still subject to other rules in the ITAR.
Registration
If you fit the definition of a broker, and your brokering activities don’t all meet the carveouts, then you’re a broker, which requires registering through the Defense Export Control and Compliance System (DECCS) portal and paying a fee. (Fees currently start at $2,250 per year, and increase based on licensing activity.) The requirements for brokers to renew their registration every year, notify DDTC of certain changes and maintain records are generally the same as for exporters.
Brokering activity approval
Once registered, brokers and exporters alike still need permission to engage in an ITAR-controlled activity. The permission comes in the form of either a license or an exemption.
Brokers are required to get advance approval before arranging deals involving non-U.S. defense articles and services. That’s because such items aren’t typically subject to the ITAR, but they do have potential ramifications for U.S. foreign policy.
However, the requirement for prior approval for U.S.-origin defense articles and defense services doesn’t apply to all items—just certain ones. For example, brokering of complete U.S.-origin aircraft, ships and tanks requires prior approval, while brokering of U.S.-origin defense article components for these platforms generally does not. For other U.S.-origin items on the USML, brokers don’t need to obtain advance approval to broker a deal (probably because the ITAR still requires the exporter or reexporter to obtain a license before the transaction can take place.)
There is one other twist: The brokering rules also apply to items on the U.S. Munitions Import List (see related post: Permanent v. Temporary Imports: Where ITAR Meets the ATF), which is different than the USML and falls under the jurisdiction of the Bureau of Alcohol, Tobacco and Firearms. It’s a rare instance when the ITAR encompasses another agency’s control list. The reason is that many small arms are no longer on the USML, so this allows the State Department to maintain jurisdiction over brokering of those firearms too.
Licenses and exemptions
Advance approval for brokering comes in two forms: a license or an exemption.
There are two license exemptions specifically for brokers:
- You’re brokering a transaction on behalf of the U.S government, under specific contractual authority of an appropriate agency. The reason for this is intuitive: You shouldn’t need to ask the government for permission to do something the government has already asked you to do.
- If you’re in the U.S., another NATO country or a few other select allied nations, and you’re brokering arms exclusively among or between these countries, advance brokering permission isn’t required in most cases involving foreign defense articles or defense services. (However, you’re still required to report the brokering activity in the annual report. It’s an example why recordkeeping discipline is an important part of being a broker.)
If neither of these exemptions apply, a brokering license is required, through Form DS-4294 on the DECCS portal.
Reporting
The annual report that’s required of all registered brokers is typically filed along with the annual registration renewal and fee. All activities must be reported, whether based on a license or an exemption. Details of the report include everyone involved, the articles or services involved and all details of a deal.
These brokering regulations are actively enforced. In March 2022, a U.S. marketing executive was convicted and jailed for arranging the manufacture and shipment of unspecified items on the USML and USMIL between a Chinese manufacturer and one of his clients. According to the Justice Department press release on the criminal finding, he had never registered as a broker. Since 2008, Academi LLC (formerly Blackwater) has paid nearly $50 million in fines in two cases involving unauthorized brokering activities, according to media reports.
And in 2011, BAE Systems agreed to a $79 million civil penalty after it “allegedly committed an estimated 2,591 violations of the ITAR in connection with unauthorized brokering of U.S. defense articles and services, failure to register as a broker, failure to file annual broker reports, causing unauthorized brokering, failure to report the payment of fees or commissions associated with defense transactions, and failure to maintain records involving ITAR-controlled transactions,” according to a State Department media release.
Do you have questions about arms brokering and the ITAR? Visit dog8.icandcocustoms.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars in the U.S., Europe, and elsewhere, and live webinars and browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.