Page 1 Brokering Part 129 Working Group Comments to DDTC Proposed Rule (December 4, 2009) Defense Trade Advisory Group

Page 2 Deliverables Line-in and Line-out revisions to the proposed rule Deep dive into the wording and substance Presentation High level overview of the deep dive

Page 3 General Assessment Improvement over existing regulations The proposed regulations are understandable Unlike the existing regulations, the decision tree of the proposed regulations can be charted. There is still yet room for more improvement Improvement in substance – where overbroad, unclear or ambiguous Improvement in structure and logic or work flow

Page 4 Structure & Flow - Brokering Decision Tree

Page 5 Brokering Decision Tree

Page 6 Brokering Decision Tree

Page 7 Brokering Decision Tree

Page 8 Brokering Decision Tree

Page 9 Brokering Decision Tree

Page 10 Brokering Decision Tree

Page 11 Brokering Decision Tree

Page 12 Brokering Decision Tree

Page 13 The Structure of the Proposed Regulations Does Not Match the Decision Tree Flow

Page 14 Provisions for Determining Jurisdiction are Misplaced §129.2(a) - Broker §129.2(b) - What are Brokering Activities §129.2(c) - Jurisdiction §129.2(d) - What are not Brokering Activities

Page 15 Solution - Restructure §129.2(a) - Broker §129.2(b) - What are Brokering Activities §129.2(c) - What are not Brokering Activities § Jurisdiction

Page 16 § Requirement to Register § Submission of Registration § Policy on Embargoes § Requirement for Prior Approval § Exemptions from Prior Approval § Procedures for Obtaining Prior Approval Decision Flow is Interrupted

Page 17 Brokering Decision Tree §129.5 & §129.6

Page 18 § Requirement to Register § Requirement for Prior Approval § Exemptions from Prior Approval § Procedures for Obtaining Prior Approval § Policy on Embargoes Solution - Restructure

Page 19 If the model is -

Page 20 Choose Easy Consolidate Registration in Part 122 And the objective is -

Page 21 One Form One Registration One Fee Registrant’s option to include Foreign Affiliates Electronic Payment One Record Keeping Requirement

Page 22 Suggested Substantive Changes & Examples

Page 23 A manufacturing company located in Great Britain manufactures troop carriers that incorporate U.S.-origin parts and components. The manufacturing company hires an Egyptian national to perform translation services during the negotiation of a sales contract of troop carriers to the Egyptian military. It should be clear that translation services are not a brokering activity.

Page 24 {§129.2} y to facilitate Such action includes, but is not limited to (b) Brokering activities means any action of an intermediary nature undertaken by one person on behalf of another person to facilitate, or undertaken on one’s own behalf when the transaction is not otherwise subject to the requirements of this Subchapter and which action [directly] facilitates the manufacture, export, re- export, import, transfer or retransfer of a defense article or defense service. 1 Such action includes, but is not limited to Actions that facilitate the manufacture, export or import of a defense article or defense service include any of the following: 1 1 The proposed change tracks the language of the statute: “... taking any action that facilitates the manufacture, export, or import of a defense article or defense service.” 18 U.S.C. § 2778 (b)(1)(A)(ii)(II). Additional language suggested by a DTAG member is shown in brackets.

Page 25 {§129.2(b)} (3) Activities that are for the person’s own benefit, when not acting as an intermediary for others, such as a distributor who acquires title to defense articles or provides after sales support service or warranty services for defense articles; provided that such person is a party to the transaction (as defined in §126.7(e)) that is licensed or otherwise authorized under this Subchapter Addition of this language is suggested to make it clear that persons acting for their own benefit are not engaging in activities of an intermediate nature. A person who acquires title to a defense article and uses that article in a manufacturing or assembly process is not engaging in a brokering activity even when the end-item is sold to a third party, provided that all the parties to the transaction are licensed or otherwise authorized pursuant to Subchapter M.

Page 26 A manufacturing company located in Great Britain manufactures troop carriers that incorporate U.S.-origin parts and components. The manufacturing company hires an Egyptian national to identify for the manufacturer the Egyptian politicians and the Egyptian military officers that might have a need for or be involved in a procurement of troop carriers. The Egyptian national is prohibited from contacting any of the politicians or officers so identified. It should be clear that these services are not a brokering activity.

Page 27 Acting as a finder of {§129.2(b)- Activities that are Brokering Activities} (3) Acting as a finder of Interacting with potential suppliers or purchasers of defense articles or defense services on behalf of another person, or

Page 28 §129.2(b)-the following are brokering activities} y For the purposes of this subchapter, engaging in the business of brokering activities requires only one action as described above. ( 4) Taking any other action of an intermediate nature and for the benefit of another person 1 to directly assist a 2 transaction involving a defense article or defense service. For the purposes of this subchapter, engaging in the business of brokering activities requires only one action as described above. 3 1 The word “any” of “any action” is subject to overbroad interpretation. Although the proposed definition does closely track the language of AECA Sec. 2778(b)(1)(A)(ii)(II)), it is overly broad and imprecise and misses an opportunity to tell the regulated industry what activities clearly fall within the definition. Leaving the word “any” could be viewed as inconsistent with the Federal Register notice itself, which identifies important activities that do not constitute brokering activities. The suggested language is intended to appropriately limit the application of “any” consistent with the other provisions of Part The word “directly” is inserted to distinguish activities that are directly connected with the transaction as opposed to those that are indirect and remote. 3 This sentence is unnecessary because it is clear that any of these activities would be a brokering activity.

Page 29 A Swedish company manufactures military aircraft, which are sold to Air Forces of various NATO member nations and South Africa. The aircraft incorporate U.S.-origin defense articles. The Swedish company maintains a logistics support center that provides maintenance and spares to the Air Force customers, including spares of the U.S.-origin defense articles which are purchased by the Swedish company. The Swedish company has periodic meetings with the South African Air Force for the purpose of increasing sales of the aircraft and increase sales from the logistics support center. All US-origin defense article sales to South Africa by the Swedish company are authorized by DDTC. It should be clear that the activities of the Swedish company in S.A. are not brokering activities.

Page 30 {§129.2(b)- the following are not brokering activities} (3) Activities that are for the person’s own benefit, when not acting as an intermediary for others, such as a distributor who acquires title to defense articles or provides after sales support service or warranty services for defense articles; provided that such person is a party to the transaction (as defined in §126.7(e)) that is licensed or otherwise authorized under this Subchapter. 1 1 Addition of this language is suggested to make it clear that persons acting for their own benefit are not engaging in activities of an intermediate nature. A person who acquires title to a defense article and uses that article in a manufacturing or assembly process is not engaging in a brokering activity even when the end-item is sold to a third party, provided that all the parties to the transaction are licensed or otherwise authorized pursuant to Subchapter M.

Page 31 A manufacturing company located in the United States manufactures military aircraft. The US manufacturing company is owned by an Italian holding company. The Italian holding company has a subsidiary that markets internationally all of the products of the subsidiaries of the Italian holding company. The Italian marketing company has an employee located in the UAE who markets the military aircraft produced by the US manufacturer in the UAE. The exports of the aircraft from the US to the UAE are the subject of a license obtained from DDTC by the US manufacturer. It should be clear that the activities of the Italian company and its employee in the UAE are not brokering activities because they are for the benefit of the group owned by the Holding company.

Page 32 {§129.2(b) – the following are not brokering activities} (5) Activities that are undertaken by a subsidiary for a parent, by a parent for a subsidiary or by one affiliate for another affiliate This addition is proposed to make it clear that an activity undertaken on behalf of a parent, subsidiary or affiliate is not an intermediate activity but is an activity for the benefit of the group. See proposed definition of affiliate in §

Page 33 A London based law firm is hired to represent a consortium of middle-eastern countries in the purchase of a commercial communications satellite from a U.S. satellite manufacturer. The attorney is expected to participate directly in the negotiations on behalf of the consortium. Communications satellites need to be treated differently than other defense articles because the sale of such articles is handled internationally as a commercial transaction.

Page 34 {§129.3(b)-Persons not required to register.} (3) Persons conducting brokering activities relating to the manufacture, export, import or transfer of commercial communications satellites; 1 1 It is recommended that persons engaging in brokering activities relating to commercial communications satellites not be required to register because commercial communications satellites are a special case. Commercial communications satellites, unlike other defense articles, are sold primarily to commercial customers and the transactions involve sophisticated and complicated arrangements. Attorneys and other specialized advisors regularly are involved in the negotiation and arrangement of the sales, launch and insurance transactions for commercial communications satellites. Specialized insurance brokers handle the placement of insurance with multiple underwriters often involving multiple tiers of insurance and reinsurance with leaders and followers from around the globe. Financing of commercial communication satellite purchases often are complex and may involve sale and leaseback transactions with banks or other financial institutions or specialized leasing companies holding title. Special purpose companies may be formed for the purpose of holding title, while operating companies operate the satellites and communications providers sell the communications capacity; often involving multiple national jurisdictions. Requiring all of these parties to register would not serve any regulatory purpose as none of these transactions involve the brokering of arms or munitions and would only increase the paperwork for DDTC.

Page 35 A German company manufacturers military aircraft in Germany. The aircraft incorporate U.S.-origin defense articles. The German manufacturer hires a national of Pakistan located in Pakistan to market the aircraft to the Air Force of Pakistan. All sales of the aircraft to Pakistan are contingent on DDTC authorization to reexport/retransfer the U.S.-origin parts and components incorporated into the aircraft. The national of Pakistan should not be required to register with DDTC.

Page 36 {§129.3(b) – Persons not required to register} (5) Persons conducting brokering activities involving foreign defense article end-items that incorporate U.S.-origin parts or components on the U.S. Munitions List; provided that the retransfer or reexport of the U.S.-origin defense article parts or components is authorized by DDTC.

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