The very last section of the International Traffic in Arms Regulations, Part 130, establishes rules about political contributions, fees and sales commissions related to defense trade.
It’s an odd-duck piece of the ITAR, because it appears to have less to do with export controls than with enforcement of a different law altogether: the Foreign Corrupt Practices Act (FCPA) of 1977.
The FCPA prohibits U.S. entities from making payments to foreign officials for the purpose of obtaining or retaining business. The anti-bribery law isn’t limited to arms sales; it can apply to anything.
It was the first law of its kind globally, and was initially seen by many as putting U.S. businesses at a disadvantage by prohibiting what was then a common business practice around the world. But over time, other countries have enacted their own anti-corruption statutes, changing standards for the conduct of global business.
As that has happened, enforcement of the FCPA has increased—as measured both by enforcement actions and the average size of the associated penalties. While the Department of Justice and the Securities and Exchange Commission, which enforce FCPA, brought only two or three cases a year prior to 2000, the numbers have grown steadily since—with a peak in 2016 of 60 cases and total penalties in excess of $6 billion, according to data from Stanford Law School.
So where does the ITAR – administered by the Directorate of Defense Trade Controls (DDTC) – come into the picture?
It’s a useful mechanism for the federal government to collect information about potential infringements of the FCPA involving defense trade.
A tool for interagency cooperation
Part 130 of the ITAR doesn’t outlaw bribery; it requires that some applicants for a license or other approval to export, reexport or retransfer defense articles or services provide information to the DDTC about related political contributions, fees or commissions—whether offered, agreed upon or actually paid. These payment categories, of course, are the ones where FCPA violations are most likely to occur.
As the State Department reviews these disclosures, it shares noteworthy findings with the Justice Department and/or SEC.
For a long time, Part 130 was a seldom-referenced piece of the ITAR, and enforcement didn’t seem to be a priority.
Further, most companies are never affected by the rule because fees and commissions of the size stipulated in the rule are uncommon. It’s a small universe of exporters that have these kinds of relationships.
But as enforcement of the FCPA increases, it’s clear that DDTC is paying attention to Part 130. Some of the highest profile FCPA actions have come out of defense trade, including:
- A 2010 guilty plea by BAE Systems that resulted in a $400 million fine;
- A 2014 case against Esterline Technologies Corp. resulting in a consent agreement and a $20 million fine;
- A 2020 bribery case in which Airbus agreed to pay $3.9 billion in penalties
Proceed with caution
The regulation is not one of the better written sections of the ITAR, and DDTC has published very little guidance on it. So it’s an area where companies need to be cautious.
The rule applies to an entity that submits an application for a license or approval to export, reexport or retransfer defense articles or defense services worth at least $500,000 for the use by the armed forces of a foreign country or international organization. The definition of armed forces is more expansive than some might suppose, encompassing national police and national guard, in addition to typical military services.
Part 130’s reach isn’t limited to exports of items on the United States Munitions List from the U.S.; it also applies to reexports of foreign-made articles that contain ITAR-controlled content, as the enforcement actions against BAE Systems and Airbus illustrate.
The rule focuses on payments made to win business in foreign countries, and covers two types of payments:
Fees or commissions: Defined as a loan, gift, donation or other payment of $1,000 or more to facilitate the sale of defense articles or defense services to a foreign country or international organization. This is a common type of payment and is usually legitimate, as many companies work with independent reps or agents around the world to help them cultivate business.
If aggregate fees or commissions in a transaction or contract exceed $100,000, they must be reported by the applicant.
Political contributions: Defined as a loan, gift, donation or other payment of $1,000 or more that benefits a foreign governmental or political official, candidate or political party. This type of payment is more obviously suspicious and has a lower threshold – just $5,000 in aggregate – at which the payment must be reported to DDTC.
An example would be a U.S. company trying to earn a contract with a foreign army, and making a contribution to the defense minister’s parliamentary reelection campaign fund. It doesn’t come up very often—in part because it’s brazen, and in part because many countries prohibit such payments from foreign nationals under their own laws.
The most common license application to export under the ITAR, Form DSP-5, contains a mandatory section that requires the applicant to make a statement regarding Part 130 compliance.
However, the rules of Part 130 apply not only to Direct Commercial Sales but also to Foreign Military Sales (FMS). [See related post: Export License Requirements of Direct Commercial Sales vs. Foreign Military Sales.] Since an export license application isn’t always required under FMS, there’s no built-in reminder to disclose qualifying payments. FMS exporters (referred to as suppliers in Part 130) simply need to know Part 130 and be proactive in making any called-for disclosures.
Vendors who provide defense articles to license applicants and FMS suppliers valued at $500,000 or more also need to be familiar with the rules, even though those vendors may not be exporting anything themselves. Applicants and suppliers are expected to ask their vendors if they’ve made any payments that qualify for disclosure. If that information isn’t provided within 25 days, the applicant or supplier may move forward by reporting information on its own payments, but must also inform DDTC that the vendor failed to respond.
One of the most common troubles with the Part 130 is interpreting the relevant portion of the DSP-5 application itself—something that could certainly be improved.
The section verifying compliance with Part 130 offers four options:
1. This transaction does not meet the requirements of 22 CFR 130.2.
Applicants often understand this to have the opposite of its intended meaning. They think it means their transaction is in violation of Part 130. What it really means is that the transaction doesn’t qualify for disclosure under Part 130 because it’s too small or doesn’t involve a foreign military.
2. This transaction meets the requirements of 22 CFR 130.2. The applicant or its vendors have not paid, nor offered, nor agreed to pay, in respect of any sale for which a license or approval is requested, political contributions, fees or commissions in amounts as specified in 22 CFR 130.9(a).
This “negative certification” means the transaction does require a certification because it is valued at $500,000 or more and is for a foreign armed force or international organization, but that no fees were paid that meet the aggregate threshold for reporting.
3. The applicant or its vendors have paid, or offered, or agreed to pay, in respect of any sale for which a license or approval is requested, political contributions, fees or commissions in amounts as specified in 22 CFR 130.9(a).
This “positive certification” means the transaction requires disclosure, with one or more payments by the applicant or its vendors exceeding the reporting threshold, and the complete details are attached.
4. I am not authorized by the applicant to certify the conditions of 22 CFR 130.9(a). Please see the attached letter for such certification.
This option is used when the person signing Form DSP-5 is different from the person who is providing details of the required disclosures.
If you’re looking for a simple takeaway, it’s this: Part 130 only affects a small number of entities, especially those who engage the services of sales representatives or agents in other countries, but it should always be considered in a careful export compliance program.
Do you have questions about the ITAR, Part 130? Visit 1ow.8855aa.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars in the U.S., Europe and elsewhere, and live webinars and browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.