Archive for the ‘Part 129’ Category



First Thing We Do, Let’s Register All the Lawyers

Posted by at 11:44 pm on September 11, 2013
Category: DDTCPart 129

Daumier Lawyers [Public Domain]One of the issues that has haunted the efforts by the Directorate of Defense Trade  Controls (“DDTC”) to amend its brokering rules has been what to do with lawyers. Are lawyers that assist their clients with transactions involving defense articles brokers or not? Do they need to pony up registration fees? Worse, are there situations where they must get permission from DDTC before counseling clients on defense related transactions?

To be fair about the issue, DDTC is trying to fix an issue that arises from the overly broad definition of brokering services in the current rules. The current definition covers anyone who acts “as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee.” The minute a lawyer calls the lawyers for the other side, the issue arises as to whether the lawyer has become a broker. It’s easy to say that the lawyer isn’t in that case an “agent” for his client in the traditional sense, except for the fact that DDTC has made clear that “agent” here is meant in a very broad sense that goes beyond the notion of an agent under the common law of agency. No lawyers have been registering as brokers, and DDTC has so far never suggested that it had any interest in pursuing lawyers.

The newly released “interim final” rule attempts to address this issue, and by explicitly raising the issue may make the situation even worse than it was when the rules were silent on the issue. The “interim final” rule says that brokering activities do not include “activities by an attorney that do not extend beyond the provision of legal advice to clients.” Not surprisingly, there is no definition of “legal advice” but DDTC tries to clarify it with this comment at the beginning of the Federal Register notice on the “interim final” rule:

The Department has clarified that “activities by an attorney that do not extend beyond the provision of legal advice to clients” is not within the definition, and notes that “legal advice” includes the provision of export compliance advice by an attorney to a client.

Two problems now are posed by the “interim final” rule. First, the exemption applies only to the extent that a lawyer is communicating with his own client. If he or she talks to the other lawyers in a transaction, the lawyer has arguably become a broker. Second, lawyers in a transaction involving defense articles are going to provide legal advice far beyond the “provision of export compliance advice.” Simple advice to the client about whether the contract should include an arbitration clause, or whether the law of New York or California applies. Those might be clear examples of legal advice but what if the lawyer provides his or her thoughts on certain risks that the transaction might pose?  Is that business or legal advice?  Has the lawyer stepped over the line and become a broker?

And here’s the most terrifying thought. If the transaction involves a “foreign defense article,” then under the “interim final” rule, a lawyer will need State Department approval before advising his or her client on whether to include an arbitration clause or before the lawyer calls opposing counsel to discuss contractual issues. I suspect that many lawyers will ignore these requirements but that is going to be harder to do under the new language in this rule when (and if) it goes into effect on October 25 of this year.

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Miracle on E Street

Posted by at 10:24 pm on August 28, 2013
Category: DDTCPart 129

M1200 Armored Knight source: [Public Domain]It seems like the Directorate of Defense Trade Controls (“DDTC”) has been working on the amendments to the brokering rules in Part 129 of the International Traffic in Arms Regulations since sometime during the Taft Administration. So when the latest iteration of these rules, oxymoronically labelled as the “Final Interim” Rule, appeared early this week I wearily clicked through to the Federal Register notice, fully prepared to revisit the horror that I had experienced some many times before. But, but, I soon realized that the lengthy gestation of the rules and the numerous rounds of public comment had borne fruit. Although not perfect, this new version fixes a number of the problems that plagued the previous versions.

I will over the next several days review various parts of the new rules, but I want to start with the best news. Cue music for a happy dance: DDTC has finally gotten the jurisdictional scope of the rules right.  As many of you know far too painfully, DDTC had, starting with some improvident remarks made by at least one former staffer at the agency, argued that the brokering rules, even before any proposed amendment, covered foreign persons in foreign lands if a U.S. origin defense article was involved. The earlier versions of the proposed rules made this explicit, covering U.S. persons, all persons in the United States and

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

The Final Interim rule completely eliminates this last category and, at last, returns to the original intent of the Brokering Amendment to the Arms Export Control Act, the authority for the brokering rules in the first place. As DDTC says in its comments on the Final Interim rule:

In conformance with the statutory requirements for the brokering of defense articles and services, the Department has revised the proposed changes to these definitions to clarify their scope. In particular, the Department has clarified that foreign persons that are required to register as brokers are those that are in the United States and those foreign persons outside the United States that are owned/controlled by a U.S. person. And the Department has removed from the definition of ‘‘brokering activities’’ the activities of any foreign person located outside the United States acting on behalf of a U.S. person.

This is great news and eliminates an enormous headache for exporters that use foreign reps and agents to distribute their defense articles abroad.

The only downside is that this new language makes clear the foreign subsidiaries may have to register, something that had not been required by previous versions of the rule which covered activities “for others” and which some at DDTC had said informally did not cover companies under the same “corporate umbrella,” although some others at the agency have said informally that all foreign subsidiaries were covered if they were involved in the parent company’s sale of defense articles.

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We’re Not Done Yet

Posted by at 9:01 pm on January 4, 2012
Category: DDTCPart 129

Arms BazaarAnother problem with the arms brokering regulations proposed by the Directorate of Defense Trade Controls (“DDTC”) is their jurisdictional scope, which is impossibly vague and far exceeds the scope of permissible regulation under the Brokering Amendment which was passed by Congress and which permitted DDTC regulation of arms brokers in the first place.

So let’s start with vague. Under the current rules, the rules’ requirements of registration and approval apply to foreign brokers “subject to U.S. jurisdiction.” Normally this would mean foreign persons with sufficient contacts with the U.S. so as to permit jurisdiction over them consistent with the due process clause. DDTC has been arguing that this should also include any foreign person who has any contact with U.S.-origin defense articles. The new rules would codify this remarkable and extraordinary claim for the permissible scope of U.S. jurisdiction. stating that its requirements cover activities of:

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

Notwithstanding the numerous ways that U.S.-origin can be defined the proposed rules are completely silent on what constitutes a U.S.-origin defense article. Is a tank with one lugnut made in Grand Rapids a U.S.-origin article. Or is there a requirement that U.S. parts constitute at least 50 percent of the value of the item? Or does it require that a substantial transformation or tariff classification shift occur in the United States. The new rules provide absolutely no guidance, largely because, I suppose, DDTC sees the United States as having unlimited jurisdiction over foreign persons, and therefore, the agency intentionally wishes to keep this concept vague.

Whether or not the U.S. has such broad jurisdiction, it is quite clear that when Congress passed the Brokering Amendment which authorized these rules in the first place, it didn’t intend to confer such broad jurisdiction. As I detailed in this article (subscription required) back in 2006 in Export Practitioner, the House Report on the Brokering Amendment makes it crystal clear that Congress only intended to cover “U.S. persons (and foreign persons located in the U.S.).” It does not authorize DDTC to try to exert jurisdiction over foreign persons outside the United States that may have some connection to a defense article that has one U.S. part in it.

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And It Just Gets Worse and Worse

Posted by at 5:24 pm on December 21, 2011
Category: DDTCPart 129

TearsOn Monday we talked about the lump of coal the Directorate of Defense Trade Control (“DDTC”) is delivering to export lawyers for Christmas in the proposed new brokering rules that appear to require export lawyers to register as brokers and to get permission from DDTC to provide certain legal services to their clients. But the difficulties don’t stop there and extend to something of even more concern to exporters: their employees. Under the proposed rules, your employees are brokers, and all part-time and many full-time employees will all need to be registered as brokers, and you may need to get prior approval from DDTC before many of them can work on export projects.

Employees are not considered brokers under the current rules because the rules make clear that brokers are persons that provide brokering activities “as an agent for others.” Even under the absurdist position taken by certain DDTC employees that a subsidiary acting for a parent is acting “for others,” there was never even a peep from the agency that an employee working for a company might be working “for others” even though the employee and the company were legally distinct entities.

The new definition eliminates the requirement that a brokering activity be as “an agent for others.” It simply states:

Broker means any person (as defined by § 120.14 of this subchapter) who engages in brokering activities.

And brokering activities are simply defined as:

any action to facilitate the manufacture, export, reexport, import, transfer, or retransfer of a defense article or defense service.

The new section 129.2(e) provides some exemptions from the definition of brokering activities but the only “employees” exempted are U.S. government employees. The new section 129.2(e)(3) exempts certain clerical and administrative tasks from brokering activities and would cover some clerical and administrative employees.

There is also an exemption of sorts for employees in the proposed section 129.3(b)(3) which states that “bona fide and full-time regular employees” of manufacturers registered under Part 122 of the ITAR (as manufacturers) are exempt from the requirement of registration and prior approval in two situations. This exemption does not cover part-time employees and does not clearly cover temporary employees working a full-time schedule.

The two conditions may also be problematic for full-time employees. Those conditions to exemption from registration and prior approval are:

brokering activities [which] (A) involve only such registered persons’ defense articles or defense services that are currently subject to an export approval under this subchapter obtained by the part 122 registrant or will require such an approval prior to their export, or (B) are on behalf of the part 122 registrant and involve only defense articles and defense services that are located and obtained from a manufacturer or source in the United States for export outside the United States under an export approval under this subchapter.

Both of these conditions require a prior export license, meaning that even full-time employees will need to be separately registered and obtain prior approval to work on the item to be exported if that work occurs prior to obtaining an export license.

What these convoluted new regulations mean are that non-clerical part-time and full-time employees working on items not yet approved for export will need to register and to obtain prior approval their employment by DDTC unless their involvement with exports fits within the narrow exemptions in the new section 129.7, which I discussed on Monday — e.g., NATO+4 only, FMS and non-SME equipment for foreign governments.

If this regulation stands as written, many manufacturers of defense articles might seriously consider whether it would be safer and easier for them to switch their production facilities to making some item over which DDTC has no arguable jurisdiction whatsoever, such as malted milk balls or shower curtain rings.

As a reminder, comments are due on February 17, 2012.

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DDTC Releases New Proposed Brokering Rules

Posted by at 11:58 pm on December 19, 2011
Category: DDTCPart 129

Sea Dragon HelicopterThe Directorate of Defense Trade Controls (“DDTC”) finally released its much anticipated (or dreaded, depending on your point of view) new proposed rules on brokering of defense articles and defense services. Although I intend to look at these proposed rules in more detail in subsequent posts, I wanted to talk first about one issue of particular concern to me.

Naturally I first looked at how the new rules handled export lawyers who provide advice to defense manufacturers. The language of the old rules was broad enough that arguably all export lawyers were brokers and needed to register under part 129 of the International Traffic in Arms Regulations (the “ITAR”) because brokering was defined to include any action that facilitated the manufacture or export of defense articles. Notwithstanding the breadth of that language, lawyers and law firms have not been registering under Part 129, using the well-accepted principal of statutory construction: hic lex non comprehendo mihi. And DDTC had not been rattling any sabers about their not registering.

The proposed rule now specifically exempts “activities by an attorney that do not extend beyond providing legal advice to a broker.” This exemption would seem to require the conclusion that all export lawyers need to register unless they are only providing advice to brokers, although it’s hard to imagine this is what DDTC actually intends.

But it gets worse. Not only will law firms with export lawyers have to file a registration application and pay the annual registration fee, but they also will have to obtain prior approval from DDTC prior to providing many legal services to defense manufacturers. The new rules require prior approval for all brokering activities unless they are specifically exempted from that requirement in the new section 129.7, which exempts brokering (a) conducted for a government agency, (b) brokering of certain defense articles (excluding, for example, night vision) wholly within NATO countries, Japan, New Zealand, Australia or South Korea, or (c) brokering of defense articles that are not “Significant Military Equipment” (“SME”) for end use by foreign governments or international organizations. So, if a law firm provides advice to a defense manufacturer about exporting night vision to France, the law firm will need DDTC approval before providing that advice.

This, of course, is either pernicious policy or unbelievable sloppy drafting by DDTC. The agency takes great pains to exclude banks, insurance companies and freight forwarders from the scope of the new brokering rules but leaves them fully applicable to law firms and requires law firms to obtain agency permission to provide legal services. I cannot think of another instance (other than cases involving blocked parties) where federal agency permission is needed as a precondition to the provision of legal services to clients.

Comments are due on February 17, 2012.

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