Last week, I had the very real pleasure of attending the Fall 2013 Advanced Conference hosted by the Society for International Affairs (the “SIA”), which provided attendees – industry (manufacturers, exporters, and brokers), compliance professionals, and U.S. Government regulatory personnel – with the rare opportunity to share and exchange ideas and information related to export compliance and export controls.
This year’s Fall Advanced Conference was entitled “It’s a Brave New World” in recognition of the fact that the first phases of the U.S. Government’s far-reaching Export Control Reform policy (known as “ECR”) went into effect just a few weeks ago, on October 15, 2013. As explained here (http://export.gov/%5C%5C/ecr/index.asp), the Obama Administration launched the ECR Initiative in response to a review of the U.S. export control system ordered by President Obama in August of 2009. The review identified several issues, including the fact that, “the current export control system is overly complicated, contains too many redundancies, and, in trying to protect too much, diminishes our ability to focus our efforts on the most critical national security priorities.”
That conclusion led the Administration to fundamentally reform the U.S. export control system, which reform will occur in three phases. According to the Administration’s ECR page (http://export.gov/%5C%5C/ecr/index.asp), “Phases I and II reconcile various definitions, regulations, and policies for export controls, all the while building toward Phase III, which will create a single control list, single licensing agency, unified information technology system, and enforcement coordination center.”
As part of Phase I, the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”), which regulates the export and temporary import of defense articles, technical data, and defense services, under the Arms Export Control Act, 22 U.S.C. § 2778 (the “AECA”), made several changes to the International Traffic in Arms Regulations, 22 C.F.R., parts 120-130 (the “ITAR”), which implements the AECA. Of relevance to attorneys in the Export Bar – such as myself and my colleagues here at FH+H – are the changes made to the brokering regulations in Part 129 of the ITAR.
On August 26, 2013, the State Department published an Interim Final Rule (RIN 1400-AC37) in the Federal Register (78 F.R. 52680), which amended those provisions in the ITAR related to brokering and brokering-related activities. According to the Federal Register, the amendments therein clarified “registration requirements, the scope of brokering activities, prior approval requirements and exemptions, procedures for obtaining prior approval and guidance, and reporting and recordkeeping of such activities,” 78 F.R. 52680, and made certain other technical changes to the ITAR regarding those subjects. Id.
Of relevance to attorneys in the Export Bar is the scope of those activities now considered to be “brokering activities” within the meaning of ITAR § 129.2. According to the new § 129.2, “brokering activities” now includes “any action [taken] on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin,” § 129.2(b), and “includes, but is not limited to…(ii) Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.” § 129.2(b)(ii).
This sounds awfully similar to what attorneys do when we represent our clients in international transactions that involve, say, the export of defense articles, technical data and/or defense services…
In line with the “catch-and-release” philosophy at work in the new ECR-related regulations (e.g., things are brought into the ambit of control of, or are “caught,” by the ITAR, but then are excluded – “released” – by the ITAR by an exclusion or exemption), § 129.2 tries to “release” certain activities from the definition of “brokering activities.” These include “[a]ctivities that do not extend beyond administrative services, such as…activities by an attorney that do not extend beyond the provision of legal advice to clients.” § 129.(2)(b)(iv).
My problem here lies in the sheer breadth and vagueness of the terms “administrative services,” “activities by an attorney” and, especially, what the State Department/DDTC might consider to be “the provision of legal advice.” Id. None of these are defined in the ITAR, and the FAQ provided by DDTC on this matter, located here (http://www.pmddtc.state.gov/registration/faqs_reg.html#27) is only marginally helpful. Here’s what the FAQs prepared by DDTC has to say about attorneys and brokering (current as of November 4, 2013):
“Activities conducted by an attorney, consultant, or any other professional that do not extend beyond the provision of legal or consulting advice to clients on ITAR compliance is not within the definition of brokering activities. For example, advising on the legality of a transaction, such as advising whether a transaction is ITAR compliant, tax rates or other laws may be preferential, drafting of contract terms where parties to the transaction have already been identified by the client, representing your client to a client-identified foreign party, conducting ITAR audits, and/or providing training or assistance with ITAR compliance procedures, are outside the scope of brokering activities. However, this does not mean that there are no circumstances where an attorney, consultant, or any other professional would be a broker. If these persons engage in activities that go beyond providing consulting or legal advice, including being a third party to the transaction, or are engaged in soliciting, locating a buyer or seller, introducing or recommending specific parties, structuring the transaction, marketing, promoting, and/or negotiating ITAR-controlled defense articles and services on behalf of their clients beyond contract terms of already identified foreign parties by your client, then such activities may constitute brokering activities under ITAR Part 129.2(b).”
I raise this issue for one simple reason: if an attorney’s services could be considered to be “brokering activities” under Part 129.2, then the attorney may, in certain circumstances, need to obtain a brokering license from DDTC prior to providing legal services to his or her client, ITAR § 129.4(a), regardless of whether that client is a U.S. person or not. If you don’t…then you have a potential ITAR violation on your hands, and a voluntary disclosure might be in order. (Except, of course, there’s that little matter of privileged communications that you have to consider…) The possibilities here are truly frightening.
It is for these and other reasons that I join the position taken in a letter from the American Bar Association of October 10, 2013, to the Office of Defense Trade Control Policy at DDTC, and especially the section of that letter entitled, “Overbreadth Issues Relating to the Phrase ‘Any Action on Behalf of Another.’”
Of course, I think that DDTC can avoid all of this by creating an Export Bar, and then licensing attorneys to practice before it as “Export Attorneys,” and laypersons as “Export Examiners,” similar to the way that the U.S. Patent and Trademark Office licenses Patent Attorneys and Patent Examiners… but that’s a post for a different day.