Friday, February 24, 2012

ITAR Brokering and Freight Forwarders

UPDATE: Take a careful look at Jim Dickeson's thoughtful comment on this item. He correctly points out that there is an exception to the requirement that freight forwarders register and seek licenses. And, that exception makes perfect sense in an environment in which the shipper is the exporter and subject to the licensing requirement. Nevertheless, the brokering regulation does list freight forwarders as parties subject to regulation. The distinction appears to be whether their role is limited to forwarding or whether they take the next step and act as an importer. Read what follows with that in mind. And, thanks to Jim for the input.

I don't typically cover exports here, although it is part of my practice. I am making an exception because this issue has now come up from a number of sources. So, I want to do what I can to clear the air. But, I do not have a conclusion for all involved.

The fact is that six prominent freight forwarders have been debarred from government contracting by the Air Force. This action follows guilty pleas by the companies in a federal criminal price fixing case. The companies involved are:

  • EGL Inc.
  • K├╝hne + Nagel International AG
  • Geologistics International Management (Bermuda) Limited
  • Panalpina World Transport (Holding) Ltd
  • Schenker AG,
  • BAX Global Inc.
Here is a link to the Justice Department press release concerning the pleas.

The question for us is whether this has any impact on the trade. It appears that it might, but should not.

The potential problem is that freight forwarding is defined as "brokering" in the International Traffic in Arms Regulations. See 22 C.F.R. 129.2(b), which says, in part: "Brokering activities means acting as a broker as defined in § 129.2(a), and 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."

As ITAR brokers, freight forwarders are subject to registration requirements and, in many cases, must seek a license or approval from the Department of States, Directorate of Defense Trade Controls. That is where the potential problem lies. 

The ITAR provide that only a select class of individual are entitled to licenses or other approvals. According to 22 CFR 120.1(c): 
Foreign persons (as defined in § 120.16) other than governments are not eligible. U.S. persons who have been convicted of violating the criminal statutes enumerated in § 120.27, who have been debarred pursuant to part 127 or 128 of this subchapter, who are the subject of an indictment involving the criminal statutes enumerated in § 120.27, who are ineligible to contract with, or to receive a license or other form of authorization to import defense articles or defense services from any agency of the U.S. Government, who are ineligible to receive export licenses (or other forms of authorization to export) from any agency of the U.S. Government, who are subject to Department of State Suspension/Revocation under § 126.7(a)(1) through (a)(7) of this subchapter, or who are ineligible under § 127.7(c) of this subchapter are generally ineligible.
The question that is causing concern is whether this prohibition on the granting of licenses and approvals to U.S. persons who have been debarred from contracting with an agency are automatically or potentially prohibited from receiving license or approval under the ITAR.

The answer to that is unclear. One important factor is that the Air Force debarment code "A" applied to this situation is specific to antitrust violations. The "treatment" associated with an "A" debarment is somewhat limited in scope. Specifically, it provides that:
Contractors are excluded from receiving contracts and from directly or indirectly receiving benefits under Federal nonprocurement programs, and agencies shall not solicit offers from, award contract to renew or otherwise extend the duration of current contracts, or consent to subcontracts with these contractors, unless the acquiring agency's head or a designee determines that there is a compelling reason for such action. Government prime contractors, when required by the terms of their contract, shall not enter into any subcontract equal to or in excess of $30,000 with a contractor that is debarred, suspended, or proposed for debarment, unless there is a compelling reason to do so. Debarments are for a specified term as determined by the debarring agency and as indicated in the listing.
That is distinct from treatment code UU which states:
Listed persons are prohibited from participating directly or indirectly in the export of defense articles or United States origin related technical data or in the furnishing of defense services for which a Department of State license or approval is required.

Code UU seems much more specific and the fact that it was not applied in this case might indicate an intention to avoid disrupting the defense forwarding business. On the other hand, the language of treatment code A relating to federal nonprocurement programs might be sufficiently broad to include this situation. Furthermore, a UU debarment is appropriate under 22 CFR 126.7(a)(5), which also references the inability to contract with a federal government agency.

Another point to keep in mind is that this exclusion from license only applies to U.S. parties. Foreign parties could not be granted licenses or approval. A foreign person is defined, in part, as "any foreign corporation, business association, partnership, trust, society or any other entity or group that is not incorporated or organized to do business in the United States . . . ." 22 CFR 120.16. It is not clear that any of this would impact the operations of the wholly foreign entities listed separate from possibly U.S. related parties.

All of which creates some ambiguity and a lack of clear guidance for ITAR product exporters who rely on these forwarders. Businesses would be wise to check with these forwarders to determine whether the contract debarment is affecting their business. Further guidance may be available from the Response Team at DDTC.


Jim said...

Hi Larry,

Here’s an interesting contrast. Over in 22 CFR 129.3(b), Requirements to register, Exemptions, it says:

Persons exclusively in the business of financing, transporting, or freight forwarding, whose business activities do not also include brokering defense articles or defense services. For example, air carriers and freight forwarders who merely transport or arrange transportation for licensed United States Munitions List items are not required to register, nor are banks or credit companies who merely provide commercially available lines or letters of credit to persons registered in accordance with part 122 of this subchapter required to register. However, banks, firms, or other persons providing financing for defense articles or defense services would be required to register under certain circumstances, such as where the bank or its employees are directly involved in arranging arms deals as defined in § 129.2(a) or hold title to defense articles, even when no physical custody of defense articles is involved.

Thus, I don’t believe that freight forwarders are subject to registration requirements. And by extension, since one must be registered to receive a license, I don’t believe that freight forwarders are required to obtain a license. UNLESS, that freight forwarder acts as the exporter, by naming itself as the USPPI in a shipper routed export (stupid), or by becoming the exporter, at least by application of BIS regulations 15 CFR 758.3(b) in a consignee routed export (perhaps not a legal assumption since, if we are dealing in ITAR, the EAR should not apply, but the ITAR does not address consignee routed exports). I have always taken the approach that the freight forwarder’s customer is the exporter for both BIS and DDTC purposes, that the freight forwarder is merely an agent for purposes of filing the export declaration, and beyond that, is the equivalent of a carrier.

I believe Clif Burns analyzes this well in "And the Ugly Rumor Becomes a Hideous Fact" over at his Export Law Blog.

You and Clif are both among my top five trade compliance bloggers. And, Larry, I still love you for your Customs work.

Jim Dickeson
Import Export Geeks

Jim said...

My own update:

I happened to speak with someone from the DDTC on this. I didn't ask for permission to use a name, so this person will remain anonymous.

I'm told that the inclusion "freight forwarding" in the 22 CFR 129.2(b) definition of broker activities was, in this person's opinion, never intended, and that is seems that the DDTC's general approach to this is to ignore it.

Elina Kulmala said...

For me i feel bad in this.Jim own update was right.Well still a great article.

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