United States: Ambiguity Persists Over ITAR Brokering Registration Requirements For Non-U.S. Persons

The extraterritorial reach of the United States government over the sale of U.S. defense items—and particularly its aggressive attempt to regulate foreign brokers of U.S. defense articles—remains a subject of ongoing controversy. According to the International Traffic in Arms Regulations ("ITAR"), persons who engage in the business of brokering activities involving U.S. or foreign defense articles or defense services must register as brokers with the U.S. Department of State ("State Department"). The registration requirement applies to U.S. persons and to foreign persons either located in the United States or "otherwise subject to the jurisdiction of the United States." Neither the courts nor the State Department, however, have clearly defined the meaning of the phrase "otherwise subject to the jurisdiction of the United States." As a result, ambiguity and controversy continues to surround the issue of whether foreign persons located outside the United States must register as brokers under ITAR. The purpose of this article is to set forth the current state of the law and practice regarding brokering registration requirements for non-U.S. persons located outside the United States.

In 1996, Congress enacted the Brokering Amendment, which expanded the scope of the Arms Export Control Act ("AECA") registration and licensing requirements to "every person" who engages in brokering activities involving either U.S. items on the United States Munitions List ("USML") or similar foreign defense articles or foreign services. ITAR, which implemented the Brokering Amendment, provides additional clarity as to who is subject to the brokering requirements. Pursuant to ITAR, a broker means any person 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.

ITAR further requires any "U.S. person, wherever located, and any foreign person located in the United States or otherwise subject to the jurisdiction of the United States" (emphasis added) who engages in the business of brokering activities, to register with the Directorate of Defense Trade Controls ("DDTC"). Brokering activities under ITAR include financing, transporting, freight forwarding, or taking any other action that facilitates the manufacture, export, or import of a defense article or defense service, irrespective of its origin. Willful violations of ITAR and the Brokering Amendment may result in fines of up to $1 million per violation, 10 years in prison, or both.

In order to register as a broker, the applicant must submit Department of State Form DS-2032, Statement of Registration, a transmittal letter, and the appropriate fee. In addition, the applicant must provide documentation that demonstrates it is incorporated or otherwise authorized to do business in the United States.

As noted above, ITAR’s broker registration requirement facially applies to "foreign persons…otherwise subject to the jurisdiction of the United States." However, ITAR’s broker registration requirement, and its application to foreign persons, remains controversial. The U.S. Court of Appeals for the District of Columbia Circuit addressed this issue in United States v. Yakou, 428 F.3d 241 (D.C. Cir. 2005). In Yakou, the government alleged that an Iraqi national (who had apparently abandoned his efforts to obtain U.S. citizenship and his permanent residency status), together with his son who was a U.S. citizen, had violated ITAR by arranging the sale, purchase, transfer, and construction of six armored patrol boats to Saddam Hussein’s regime in Iraq. Yakou had lived in the United States from 1986 until 1993, and was issued a green card in 1989. He left the United States in 1993, and never returned to live in the United States. The government argued that Yakou was a "U.S. person" because he never officially changed his lawful permanent resident status through an administrative procedure. Notably, the government did not argue that Yakou was "otherwise subject to the jurisdiction of the United States" because of his green card status.

The court rejected the government’s argument that Yakou was a "U.S. person" subject to ITAR. Further, the court stated that the legislative history of the Brokering Amendment revealed Congress’ intent "to limit the extraterritorial reach of the Brokering Amendment and thus the ITAR to ‘U.S. persons.’" According to the court, the legislative history indicated that "Congress was concerned with both United States brokers of arms and foreign brokers of arms located in the United States, but not with foreign brokers located outside the United States." The court held that extending the reach of ITAR to Yakou would overstep the bounds intended by Congress, stating:

It is important to note that the government did not argue that Yakou was "otherwise subject to the jurisdiction of the United States." Rather, the government contended that Yakou was a "U.S. person." Thus, the court never addressed the meaning of this broader requirement nor considered whether Yakou was "otherwise subject to the jurisdiction of the United States." In fact, on the government’s motion, the court issued a subsequent opinion clarifying that the "otherwise subject to the jurisdiction" issue was not raised or argued.

Since the courts have not addressed the meaning of "otherwise subject to the jurisdiction of the United States," DDTC has acted based on its own broad interpretation. A standard interpretation of the phrase generally would require some form of minimum contacts between the non-U.S. person and the United States to establish proper jurisdiction under U.S. federal constitutional norms. It appears, however, that DDTC has not relied on a minimum-contacts analysis in addressing the issue of jurisdiction under the brokering regulations. Instead, DDTC has decided that a non-U.S. person engaged in any brokering activity involving U.S.-origin items satisfies jurisdictional defense requirements.

Beginning in 2004, DDTC apparently began issuing form letters requesting additional information for ITAR license applicants who listed foreign persons located outside the United States on the application. Reportedly, these letters stated that DDTC required additional information to be able to determine whether the foreign third party must register as a broker under ITAR. Thus, it appears that despite Yakou’s limited interpretation of ITAR’s extraterritorial reach, the DDTC currently requires intermediary foreign persons to register as brokers. Public statements by DDTC further indicate that it now considers "otherwise subject to the jurisdiction of the United States" to apply to anyone dealing with U.S.-origin defense articles or services, including foreign persons who do not have any contacts with the United States. At the same time, DDTC apparently has acknowledged the uncertainty surrounding this issue and expressed its intention to issue new guidance to explain its brokering requirements, although it has yet to do so.

DDTC’s broad interpretation of its registration requirement has major ramifications for non-U.S. persons. To begin with, once a non-U.S. person "subject to the jurisdiction of the United States" registers as a broker with DDTC, that person must obtain licenses from DDTC for certain export activities, including the export of foreign defense articles and foreign defense services (other than those that are arranged wholly within and destined exclusively for the North Atlantic Treaty Organization, Japan, Australia, or New Zealand). Second, ITAR establishes certain prior notification and annual reporting requirements for all registered brokers. Lastly, once a non-U.S. person registers as a U.S. broker under ITAR, that person will be responsible for obtaining a DDTC license for any brokering activities involving foreign defense articles and defense services. The extraterritorial reach of ITAR broker requirements are such that a non-U.S. person theoretically would require an ITAR license for the export of foreign defense articles, even if those items contained no U.S.-origin parts or components.

The plain language of ITAR, the possible $1 million penalty and prison time, and DDTC’s recent actions provide a strong incentive for foreign persons to register as brokers of U.S. defense items. While according to ITAR, a foreign person is required to register as a broker when he is "otherwise subject to the jurisdiction of the United States," the scope of this requirement remains ambiguous and controversial. If a foreign person maintains even limited contacts with the United States, such interactions by themselves may be sufficient to satisfy the U.S. jurisdiction requirements. Even absent such minimum contacts, the DDTC’s unpublished registration policy strongly suggests that a foreign person’s brokering activities involving U.S.-origin items trigger the broker registration requirement.

A counter argument can be made, however, that until such time that DDTC clarifies the phrase "otherwise subject to the jurisdiction of the United States" and issues an official policy, a foreign person not "otherwise subject to U.S. jurisdiction," remains beyond the operation of the broker registration requirements. Yakou supports this position, although the decision deliberately leaves unresolved the broader jurisdictional issues discussed above. The increased burdens associated with registration (i.e., licensing of foreign transactions) may further convince foreign persons to refrain from registering until such time that DDTC publishes its official policy and clarifies which non-U.S. persons are required to register as a broker. Nevertheless, despite this persistent uncertainty, foreign persons must weigh the pluses and minuses before deciding whether they need to register as a broker under current DDTC requirements.

This article is presented for informational purposes only and is not intended to constitute legal advice.