Export Compliance

Registration and Licensing of Arms Brokers

The expression “arms dealer” might bring to mind images from motion pictures of intrigue and espionage. In the real world there is a keen difference between arms trafficking, or gunrunning, and lawful arms brokering.

Trafficking involves contraband weapons and ammunition. Brokerage involves government-approved defense trade. A registered broker of defense equipment, technologies, or services is, in short, the middleman to an authorized transaction—who, equipped with a computer, telephone, and bank account, has the connections to negotiate or facilitate a sale. What makes an arms broker legitimate is their ongoing compliance with ITAR regulations, specifically the Brokering Rule in Part 129.

Brokers and brokering were challenging for regulators to define. A new Brokering Rule was published in the ITAR in November 2013, which clarified the base issues of “what is a broker” and “what are brokering activities” under the ITAR.

The importance of clear definitions and procedures is that, in general, arms brokers operate independently, but in an activity that impacts U.S. foreign policy objectives and national security interests. A 1997 House Report stated the issue: “… in some instances U.S. persons are involved in arms deals that are inconsistent with U.S. policy. Certain of these transactions could fuel regional instability, lend support to terrorism, or run counter to a U.S. policy decision not to sell arms to a specific country or area.”

The broker-related definitions are made in ITAR 129.2. The basics are that “Broker” means any person, as follows, who engages in the business of brokering activities:

  1. Any U.S. person wherever located,
  2. Any foreign person located in the United States, or
  3. Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person.

“Brokering activities” means “any action 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. This includes, but is not limited to: Financing, insuring, transporting, or freight forwarding defense articles and defense services; or soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.”

There are a number of actions that are not included. For example, activities by a U.S. person in the United States that are not for export, activities by employees of the U.S. Government acting in an official capacity, administrative services (such as providing or arranging office space and equipment), activities performed by an affiliate on behalf of another affiliate, and others detailed in 129.2(2).

If you’re a broker under the definition, and fall within the regulated brokering activities, there are two key requirements. First, that you register with the Directorate of Defense Trade Controls (DDTC). Then, as a registered broker, you need to get advance approvals from DDTC for the sale or facilitation of most USML items. While not yet the export of goods or services, these approvals are effectively a licensing arrangement for broker involvement, and have an annual reporting requirement (including exempt activity).

In the next section of the ITAR, Part 130, the possibly-related matters of political contributions, fees, and commissions are regulated, which overlap with the Foreign Corrupt Practices Act (FCPA). These regulations entail a reporting requirement for certain payments (paid, offered, or agreed) “for the solicitation or promotion or otherwise to secure the conclusion of a sale of defense articles or defense services” in relation to license or agreement applications and Foreign Military Sale (FMS) contracts involving defense articles or services valued at $500,000 or more for use by the armed forces of a foreign country or international organization.

For companies retaining the services of a broker, the responsibilities are clear. Perform anti-corruption due diligence. Ensure the party is registered, if required. Then ensure they have the required approvals before starting. Monitor payments. And include any offers, agreements, or payments in your own reporting.


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