International Legal Affairs: Volume 1, Number 2
Exporting defense articles or utilizing defense services from the United States? Like it or not, the U.S. State Department controls the export of all defense articles and related defense services from the United States. However, what many individuals in the international arena may not realize is that the U.S. State Department takes a broad view of its powers and ability to regulate the transfer of U.S. manufactured goods in the international marketplace. From a practical standpoint, this includes (but is not limited to) the export of firearms, ammunition, night vision equipment, space craft, aircraft, and avionics equipment. Having knowledge of the U.S. Munitions List and the U.S. International Trade in Arms Regulations (ITAR) can pay dividends for an international arms broker.
At the most basic level, the ITAR requires that all American manufacturers be registered with the U.S. State Department, Department of Defense Trade Controls (DDTC).
ITAR section 122.1(a) reads: “Any person who engages in the United States in the business of either manufacturing or exporting defense articles or furnishing defense services is required to register with the Directorate of Defense Trade Controls. For the purpose of this subchapter, engaging in the business of manufacturing or exporting defense articles or furnishing defense services requires only one occasion of manufacturing or exporting a defense article or furnishing a defense service. Manufacturers who do not engage in exporting must nevertheless register.”
The ITAR defines the term “defense articles.” Defense articles include non-automatic and semiautomatic firearms, as well as barrels, cylinders, receivers, and frames for firearms. Manufacturing of defense articles triggers the ITAR registration requirement. Under the ITAR regulations, an aftermarket barrel manufacturer would be required to register with the U.S. State Department, even though no manufacturing license would be required from the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). Failure of an American manufacturer to register with DDTC will result in the denial of all export permits submitted for goods manufactured by the unregistered manufacturer. When dealing with an American manufacturer, it may be worthwhile to ensure that the manufacturer is ITAR compliant and is registered with DDTC.
As part of the export licensing process, DDTC will require the submission of an end-user certificate, documenting the final end user of the goods. While this may seem like a non-issue, what happens if (or when) the end user decides to dispose of the equipment? What options are available? Any export permit issued by DDTC will almost certainly be issued with provisos, limiting any use or transfer of the goods upon receipt by the end user. The provisos may include a requirement that DDTC be notified prior to any sale of the equipment, or a prohibition on any subsequent sale. The practical effect is that DDTC will seek to limit the transfer and resale of U.S. made goods.
Does DDTC have international jurisdiction? One would presume not, but with recent bilateral agreements between the U.S. and many foreign countries, the answer is unclear. On February 9, 2009, DDTC posted to its website the “End Use Monitoring Report for 2007.” The report describes efforts by the Blue Lantern program, managed by the DDTC Research and Analysis Division. The DDTC report states that the Blue Lantern end-use monitoring program conducts “pre-license, post license or post-shipment checks… to verify the legitimacy of a transaction and to provide “reasonable assurance that – i) the recipient is complying with the requirements imposed by the United States Government with respect to use, transfers, and security of defense articles and defense services; and ii) such articles and services are being used for the purposes for which they are provided.” A full copy of the report may be viewed online at: www.pmddtc.state.gov/reports/documents/End_Use_FY2007.doc.
For the uninitiated, the Blue Lantern program was initiated in 1990, and is operated by DDTC in conjunction with U.S. Embassy personnel to conduct international investigations into suspicious export license requests and post-shipment reports of misuse or diversion. The stated goal of the program is threefold: to deter diversion of defense articles, to aid the disruption of illicit supply networks used by rogue governments and international criminal organizations, and to help DDTC make informed licensing decisions and ensuring compliance with the AECA and the ITAR.
Does Blue Lantern and other investigative efforts by U.S. law enforcement work? On March 17, 2009, The Washington Post reported the arrest of an Iranian businessman accused of diverting helicopter engines and advanced cameras from the United States for eventual use by the Iranian armed forces. While the case has not yet been adjudicated, Mr. Hossein Ali Khoshnevisrad has been accused of ordering 17 Rolls-Royce helicopter engines, (manufactured at a factory in the United States) and 11 aerial-surveillance cameras sold by a U.S. distributor. The helicopter engines were reportedly destined for the Iran Aircraft Manufacturing Industrial Company. The aerial-surveillance cameras were allegedly intended for mounting on Iran’s F-4 fighter jets. What makes the case of particular interest is the routing of the goods around the world. Mr. Khoshnevisrad allegedly routed the helicopter engines and aerial-surveillance cameras to trading companies in Ireland, the Netherlands and Malaysia before ultimately being shipped to Iran. Brokers that interact in international trade are advised that U.S. law enforcement has a very long reach and incredible resources to investigate matters.
While the U.S. may not have any jurisdiction over the acts of foreigners, recall the increased number of bilateral international trade agreements between the U.S. and foreign countries. In countries where a bilateral trade agreement has been made, allegations of illegal or improper transfer of defense articles are likely to result in some form of civil or criminal investigation within the foreign country. In the event that no foreign investigation takes place, the foreign party (whether the broker or reported end user) risks being subject to additional scrutiny when filing future export permits with DDTC, being placed on a watch list of entities suspected of illicit activities and/or requiring special scrutiny, or being barred from receiving any exports from the U.S. End users are cautioned to abide by the provisos issued with the export permit, or potentially risk the wrath of DDTC.
Negotiating and selling military equipment abroad? Part 129 of the ITAR governs the brokering activity by U.S. citizens, and non-U.S. citizens, that sell U.S. made goods and foreign made goods. What exactly does this mean? Sections 129.2(a) defines the term broker: “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.”
Based upon the regulation, DDTC defines a broker based upon activity, and not country of origin or source of the goods.
Must a broker deal in U.S. made goods, or otherwise be subject to U.S. jurisdiction? Presumably not, as described in Part 129.2(b), describing “brokering activities.” Part 129.2(b) reads in part: “Brokering activities includes the financing, transportation, freight forwarding, or taking of any other action that facilitates the manufacture, export, or import or a defense article or defense service, irrespective of its origin. For example, this includes, but is not limited to, activities by U.S. persons who are located inside or outside of the United States or foreign persons subject to U.S. jurisdiction involving defense articles or defense services of U.S. or foreign origin which are located inside or outside of the United States… For the purposes of this subchapter, engaging in the business of brokering activities requires only one action as described above.”
Based upon the definition of brokers and brokering activity, it is presumed that a U.S. citizen living and working abroad that arranges sales of non-U.S. defense articles to countries other than the United States would be required to register as a broker, despite having no contact with the United States. The nexus for registration would be based solely upon the citizenship of the party. If the party were a non-U.S. citizen, the requirement to register may be different.
A foreign party that conducts sales of U.S. made goods may wish to register with DDTC as a broker. While the international jurisdiction of DDTC’s requirements is questionable, DDTC has the ability to control U.S. exports, and deny export permits to unregistered parties; parties brokering U.S. made goods on the international market are advised to research the ITAR requirements to determine if registration with DDTC may be beneficial or advised.
On September 25, 2008, the U.S. State Department published final rules regarding ITAR registration fees. Registration fees currently start at $2,250, and rise according to the three tiered system. Additional information on ITAR registration can be found on the DDTC webpage, located online at: http://www.pmddtc.state.gov/registration/index.html. Parties who deal in defense articles on the world market are advised to be cognizant of U.S. law when dealing with U.S. made goods, or U.S. parties.