This recently unsealed criminal complaint against a Florida man shows that the FBI agents and the federal prosecutors haven’t a clue as to the correct reading of the definition of a “broker” in Part 129 of the International Traffic in Arms Regulations (the “ITAR”). In fact, it appears that the prosecutors and investigators have charged the defendant as an unlicensed broker merely because he had begun to negotiate for the export of a shipment of ammunition before getting the export license. If that’s a criminal offense, there are certainly lots of people who better get their affairs in order and contact a criminal defense attorney.

The defendant, Lance Brooks, had been awaiting sentencing after pleading guilty to the unauthorized export of defense services arising out of a trip he made to the UAE to train customers in the use of a grenade launcher. While Brooks was awaiting sentencing, the FBI obtained a warrant to search a DHL package to Brooks from the Firearms Coastal Security Branch in Jamaica. Inside the package was an End Use Certificate (DSP-83) from Jamaica’s Ministry of National Security pertaining to 270,000 rounds of jacketed soft point ammunition, most of it .38 caliber.

The FBI Joint Terrorism Task Force contacted the Jamaican government to obtain further details about the transaction. According to the Jamaican government, Brooks had bid in response to a government proposal to purchase the ammunition, had won that bid, had faxed an invoice for the ammunition to the government, provided banking information for payment for the ammunition, and requested and received an End User Certificate (DSP-83) from the Jamaican government for the ammunition. The FBI inquired with the Directorate of Defense Trade Controls (”DDTC”) to determine if Brooks had a license to export the ammunition. When it learned that Brooks had not yet applied for the license, it charged him with engaging in unlicensed brokering activities without first having registered as a broker with DDTC.

Significantly there is no evidence alleged in the complaint that Brooks had attempted to export the ammunition without a license or that he had no intention of applying for the license. Indeed, his request that the Jamaican Government execute and send to him the End User Certificate (DSP-83) — a document that had to be obtained before a license could be granted — suggested that Brooks had every intention of obtaining a license prior to export. Lacking any evidence of an attempted export or a conspiracy to export, it would appear that the FBI and prosecutors cooked up the brokering charge.

The definition of “broker” in section 129.2 of the ITAR doesn’t cover Brooks’s activities with respect to the contemplated sale of ammunition to the Jamaican government. The key part of that definition is that a broker is someone who acts “as an agent for others” in arranging for the sale of defense articles “in return for a fee.” The allegations of the criminal complaint do not provide any evidence that Brooks was acting for anyone other than himself in arranging this contract or that he was going to receive any fee from that other person. Instead, it appears that Brooks was engaged in a transaction on his own behalf and expected a sales profit on the deal rather than a third-party fee or commission.

If what Brooks did — namely, negotiating a contract for a defense article prior to receiving an export license — is brokering, than almost every exporter will be subject to criminal penalties if they haven’t registered as a broker. Worse, those exporters may need to obtain brokering licenses from DDTC before even talking to potential customers with respect to transactions that fall within the brokerage licensing requirements of section 129.6.

Exporters that had such a poor understanding of the ITAR as these federal enforcement officials would likely be fined or worse when their misunderstandings led to rule violations; no such negative consequences, however, await these enforcement officials who appear not to have even a rudimentary understanding of Part 129 or the definition of a “broker” under that Part. One can only hope that Brooks’s public defender reads Part 129 with slightly more care and gets these charges dismissed.

Of course, you didn’t expect that this blog would let a story about an arms company run by a 22-year-old kid and a 25-year-old “professional masseur” escape without comment, did you? The story, which the New York Times broke on Thursday, revealed how AEY, Inc., the company run by 22-year-old Efraim Diveroli and his massage therapist friend, was paid hundreds of millions of dollars by the United States Government to supply sub-standard ammunition to Afghan forces. Some of the ammo supplied by AEY is alleged to have been up to 40-years-old, i.e., manufactured before the AEY executives were even born.

There is at least one export law angle to the story. It arises from the discovery that some of the ammunition delivered by AEY had been procured from China. The Times story noted:

Tens of millions of the rifle and machine-gun cartridges were manufactured in China, making their procurement a possible violation of American law.

I’d say that’s more than a “possible” violation. When AEY arranged the export of ammunition from China to Afghanistan it would have been acting as a broker under Part 129 of the International Traffic in Arms Regulations (the “ITAR”). Section 129.5 of the ITAR notes that “no brokering proposals involving any country referred to in § 126.1,” e.g. China, “may be carried out by any person without first obtaining the written approval of” the Department of State’s Directorate of Defense Trade Controls. And we know that AEY would not have had such written approval because section 126.1 says that it is the policy of DDTC to deny licenses involving China.

On December 3, Philip Cheng from Cupertino, California, was sentenced to a two-year prison term for his involvement in a scheme to export night vision equipment to China. Cheng, an export broker, had been involved in a transaction in which Night Vision Technology, a U.S. company, agreed to sell Panther thermal imaging cameras to two Chinese companies — North China Research Institute of Electro-Optics and the China National Electronics Import & Export Corporation. As a result, Cheng was indicted in 2004 for illegal exports, illegal defense brokering activities and money laundering. After a hung jury, Cheng pleaded guilty to the brokering charges under 22 U.S.C. § 2778(b)(1)(A)(ii)(III) and 22 C.F.R. § 129.6.

The DOJ press release on the guilty plea concentrates on the Department’s proof that the night vision exports to China were illegal. But, of course, that doesn’t demonstrate why Cheng’s activities were violations of the requirements of Part 129 of the International Traffic in Arms Regulations (”ITAR”) to obtain licenses or provide prior notification for certain brokering activities. The evidence seems clear that Cheng was involved in brokering under Part 129. But not all brokering activities require a license. Nor does brokering of illegal exports violate the brokering rules, even though such activity would support a conviction for conspiracy.

Section 129.7 of the ITAR sets forth those situations in which a broker must obtain a license. First, of course, the brokering must involve significant military equipment (”SME”), and it seems clear that the night vision in question was SME under the ITAR. Additionally, in order to require a license, a brokering transaction must meet one of four criteria: (1) the value of the transaction must exceed $1 million; (2) the same significant military equipment had not been license for export to the armed services of the country involved; (3) the agreement would require the manufacture of SME abroad; or (4) the items involved were being sold to non-governmental entities. Alternatively, prior notification might be required under section 129.8 for transactions involving SME valued at less than $1 million.

It seems likely that at least the notification requirement was breached. Arguably, the license requirement was also breached on the grounds that the Panther thermal imaging camera had never been licensed to the Chinese military. Even so, the DOJ press release on the conviction seems not to have understood that more than an illegal export is required to support a conviction for illegal brokering.

Earlier this month, the the House of Commons’ Quadripartite Committee released a report entitled Strategic Export Controls: 2007 Review. In the report, the Committee recommends that the U.K. adopt a broker registration system that is interesting both in itself and in comparison to the current treatment of brokers in the United States under the provisions of Part 129:

We accept that the EU Council Common Position on the control of arms brokering, adopted on 23 June 2003, does not call for the registration of arms brokers. Article 4 suggests that Member States “may” establish a register of arms brokers, and that “registration or authorisation to act as a broker would […] not replace the requirement to obtain the necessary licence or written authorisation for each transaction”. We conclude that the EU Common Position on the control of arms brokering sets the best practice and we recommend that the Government follow best practice to establish a register of arms brokers. We conclude that a register will help to ensure that brokers meet defined standards, requirements and checks as well as deterring those—for example, with a relevant criminal conviction—for applying for registration. We also recommend that any brokering or trafficking in arms by a person in the UK or a British citizen abroad who is not registered be made a criminal offence.

The report doesn’t address, or even seem aware of, the difficulty of defining what activities in connection with the sale of a defense article constitute brokering. But leaving aside that question, it approaches the registration issue in ways that are significantly different from Part 129.

First, under Part 129, the registration process is purely informational. There is no endorsement by the DDTC when it issues a registration number that it has made a determination that the registrant is indeed qualified to act as a broker. The Committee’s proposal, however, clearly contemplates the enforcement of certain standards, including background checks, that more closely resemble a professional licensing system.

Second, the U.K. proposal relating to brokers requires registration only. There is no suggestion that broker participation in particular transactions may require specific licenses as is the case under Part 129 of the ITAR.

Third, one of the most significant controversies relating to Part 129 has been its jurisdictional scope. Part 129 requires registration by brokers “otherwise subject to” U.S. jurisdiction. The question here has been whether “otherwise subject to U.S. jurisdiction” covers brokers who are outside the United States, have no contacts with the United States and are not U.S. citizens but who are engaged in brokering with respect to U.S. origin defense articles. The U.K proposal applies only to British citizens engaging in brokering in the United Kingdom and throughout the world and to citizens of other countries engaging in brokering in the United Kingdom. It does not apply to parties that are not British citizens and are brokering outside the United Kingdom.

In yesterday’s edition of The Daily Bugle, the excellent daily newsletter distributed by Jim Bartlett from Northrop Grumman, Carolyn Lindsey and I wrote a piece on the recent message on registration applications that DDTC released last week on its website. We said:

Registration of foreign sales representatives for U.S.-origin defense articles is mandatory. If a foreign sales representatives application is not filed, delayed or rejected, even for minor mistakes, a U.S. exporter risks civil fines and criminal penalties if that exporter utilizes the services of the unregistered foreign sales representative.

This was a reference to the broker registration requirements contained in Part 129 of the ITAR. To be clear, although most FSRs will meet the definition of a broker under part 129, some will not. Part 129 defines a broker as someone 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, commission, or other consideration.” That is, obviously, an extremely broad definition but, equally obviously, there may be some FSRs that won’t fit within it. An FSR that only provides after-sales support for a defense article would seem to be outside this definition. Also, the FSR wouldn’t be a broker if he or she isn’t an “agent for others,” although the scope and meaning of that phrase isn’t altogether clear.

If an FSR is a broker, then under section 129.3 of the ITAR he is required to register with DDTC if he is a “U.S. person, wherever located, [or] any foreign person located in the United States or otherwise subject to the jurisdiction of the United States.” The meaning of the phrase “otherwise subject to” U.S. jurisdiction has been the cause for some debate.

Several years ago DDTC tried to short-circuit the debate by saying informally at industry conferences that a foreign person outside the United States performing brokering services with respect to U.S.-origin defense articles or defense services was, in DDTC’s view, “otherwise subject to” U.S. jurisdiction. They further announced that they would issue guidelines to make this clear but emphasized that this was not a change in interpretation (although arguably it was). They have continued to take this position publicly including, most recently, at the Fall 2006 conference of the Society for International Affairs and at the March 21, 2007 meeting of the Defense Trade Advisory Group (”DTAG”)

DDTC Compliance Director David Trimble was quoted in The Export Practitioner (subscription required) as saying at the March meeting of DTAG the following with respect to planned revisions of Part 129:

As you know, the reg has always said foreign person ‘otherwise subject to U.S. jurisdiction’. In our past practices, we’ve made it clear that a foreign person dealing in U.S.-origin defense articles is subject to U.S. jurisdiction clearly by virtue of all the retransfer controls we have on defense articles.

We will be specifically including that in the regulation just to call it out so that it leaps off the page and grabs the reader.

DDTC has implemented this position in a number of ways. First, it began to “return without action” license applications that listed unregistered companies or individuals as intermediate consignees unless they clearly fell within the category of parties exempt from registration under section 129.3(b)(3), e.g., freight forwarders, air carriers, etc.

Second, DDTC amended the ITAR to make some problematic provisions consistent with the new interpretation. In April 2006, DDTC amended the provision of section 129.4 which had required broker registration applicants to submit documentation that the applicant “is incorporated or otherwise authorized to do business in the United States.” Section 129.4 was amended to contain the following language:

Foreign persons who are required to register shall provide information that is substantially similar in content as that which a U.S. person would provide under this provision (e.g., foreign business license or similar authorization to do business).

The 2006 amendment also added section 127.1(a)(6) which made clear that the activities of brokers outside the United States would be deemed a violation of the ITAR.

Third, DDTC has amended the registration procedures on its website to accommodate the registration of foreign brokers with no contacts with the U.S. other than engaging in brokering activities with respect to U.S. origin defense articles and defense services. In the most recent update, the website now makes clear that foreign brokers need not comply with the requirement that checks used to pay registration fees be drawn on U.S. banks.

Now, admittedly, the ITAR simply says “otherwise subject to” U.S. jurisdiction and the DDTC’s informal “interpretation” of this may not have the force of law. Indeed, I have argued in an article in The Export Practitioner (subscription required) that this interpretation of “otherwise subject to” is contrary to the legislative history of the statute under which these rules were promulgated. But there seems to be no question that in the view of the agency that interprets these regulations that a foreign person dealing in U.S. origin defense articles is “otherwise subject to” U.S. jurisdiction and is required, if performing brokering services, to register with DDTC.