In April 2005, Finmeccanica acquired BAE Systems Avionics, Ltd. which it renamed SELEX Sensors and Airborne Systems Limited. A notice posted on December 7 on the DDTC website reveals that DDTC’s Office of Defense Trade Controls Compliance (“DTCC”) is not entirely happy with how this acquisition was handled:

The Office of Defense Trade Controls Compliance (DTCC) conducted an extensive review of issues relating to the BAE Systems plc sale to Finmeccanica SpA of a majority interest in the stock in BAE Systems Avionics Limited, since renamed SELEX Sensors and Airborne Systems Limited. As a result of that review, DTCC has received written acknowledgement from BAE Systems that it did not request prior authorization from the Department of State for the sale of stock in SELEX to Finmeccanica. BAE understands that this authorization should have been obtained to address those Department of State licenses and agreements (active and expired) to which BAE Systems Avionics was a party.

You may be scratching your head and wondering where does the ITAR require prior authorization of a merger or acquisition? Section 122.4 of the ITAR requires 60-day advance written notice to DDTC if there is a transfer of control of a registrant to a foreign person, but that’s not a requirement of prior approval.

Or is it? The regulation notes that the purpose for this notification is to provide DDTC “with the information necessary to determine whether the authority of section 38(g)(6) of the Arms Export Control Act . . . should be invoked.” And section 38(g)(6) provides DDTC with the authority to require a license “before any item on the United States Munitions List is sold or otherwise transferred to the control or possession of a foreign person.”

So, although this isn’t technically a prior approval requirement, it is quite close to one. Since BAE Avionics no doubt owned items on the USML at the time of the purchase of its stock by Finmeccanica, DDTC had the right to require a license and approval for the sale. And since apparently BAE and Finmeccanica must not have filed the section 122.4 notice, DDTC never had an opportunity to invoke its discretion to require a license. DDTC seems a bit miffed about this, but not sufficiently miffed to, say, consider a penalty. Perhaps Finmeccanica’s participation in the construction of the new Marine One helicopters for the White House had something to do with DDTC’s disinterest in any enforcement action for noncompliance with section 122.4.

The other interesting part of the Finmeccanica/BAE notice is this:

New Licenses Required: Valid State Department authorizations must be replaced by new licenses reflecting the new ownership structure. Requests for new licenses must be submitted to the Office of Defense Trade Controls Licensing. Note that the transaction involves a change in ownership of an approved party and therefore a DSP-119 (amendment form) cannot be used.

The ITAR provides no guidance on the procedure to be followed with licenses after or merger or acquisition. The SIA Handbook on Mergers, Acquisitions and Divestitures, which was a cooperative effort between DDTC, the defense export industry and a number of export lawyers (including myself), tried to fill that gap. Various officials of DDTC reviewed and participated in the writing of the MAD Handbook, which was quite clear that a DSP-119 was to be used to amend licenses to reflect a change in ownership of the licensed company. That apparently has now changed, meaning that a new license, rather than a DSP-119 license amendment, must be filed for change of ownership.

In an announcement posted yesterday on its website, DDTC chides exporters for a recent increase in “low-quality” applications and says that it will no longer help exporters correct errors in applications but will simply return them without action. If true, this will be the final triumph of form over substance at the agency.

Many applications involve exports to our allies in Iraq and Afghanistan as well as to private contractors providing security services for our troops in both countries. These exports are crucial to the safety of our troops, the outcome of the conflicts in both countries, and the security of the nation. DDTC now says than an application will simply be “returned without action” if there is a discrepancy between “the value on the license application . . . [and] the value on the purchase order.” With the safety of our troops and national security at issue here, to do this without affording the applicant an opportunity to correct the minor discrepancy is nothing short of a scandal.

Further, when an agency finds a decrease in the quality of submissions, perhaps it should look inward to discern the cause rather than reflexively blaming the submitters. Has the agency provided adequate resources for the education of submitters? Are the agency’s rules and application forms clear? Are licensing officers available to assist applicants with respect to questions that they might have prior to submission of applications? We certainly know that, since the DDTC shut down the phone lines to its licensing officers, the answer to the last question is no.

Finally, DDTC singles out problems in “incomplete and deficient” registration applications. It is likely that many of these are now registration applications filed by foreign brokers as a result of DDTC’s widely criticized decision to expand the scope of its jurisdiction to include foreign sales representatives with no contacts with the U.S. other than their dealings with the exporter. For almost all of these brokers, English is not their first language. The registration form (DS-2032) and the instructions, and the accompanying guidance document and “Helpful Hints” are not models of clarity, particularly for someone whose grasp of English may be limited.

Question 7, for example, requires the broker to provide a social security number even though the overseas broker will not have one and will have no idea what is meant by this requirement. Question 8 asks for the foreign broker to list “U.S. Munitions Articles Manufactured and/or Exported and Defense Services Provided” along with requisite USML category numbers. The foreign broker will have no idea whether his brokering services are a “defense service” or what category they should be placed in. Question 12 refers the foreign broker to a complicated provision of the ITAR to determine if it is owned by a foreign person, a question which may be uniquely confusing to an individual (as opposed to corporate) foreign registrant. The Guidelines issued by the DDTC have a “Registration Checklist” which still requires the foreign broker to submit evidence of qualification to do business in the United States even though the regulations have been updated to permit the foreign broker to submit its foreign business license instead. The “Sample Transmittal Letter” in that same guidance document still requires the foreign broker to certify that it is not a foreign person, even though the registering foreign broker necessarily is foreign.

This is all a prescription for disaster that guarantees deficient registration applications from foreign registrants. It seems to me the fault here may well rest with the failure of DDTC to take the time to do its own job properly, not with a foreign broker who fails to understand this confusing morass.