The Skinny on Political Contributions & Fees

Each year, thousands of license applications enter the processing queue at the Office of Defense Trade Controls (ODTC). Each application, from DSP-5s to Agreements, all require a certification that the application is in compliance with Part 130 of the ITAR regarding payment of political contributions, fees and commissions (hereinafter collectively referred to as “PCFs”). Almost as a matter of routine, companies assert “Neither the applicant nor its vendors have paid, or offered or agreed to pay, in respect of any sale for which a license approval is requested, political contributions, fees or commission in amounts as specified in 22 CFR 130.9(a).” Given that you have to include a painstaking report if you did in fact pay PCFs, rubber stamping this “no payments” box is certainly a tempting thing to do.

But considering the wide net cast by Part 130, this may not be a safe practice.

Political contributions are broadly defined to include virtually any gift, loan, payment or other compensation made to virtually any kind of foreign political actor or group valued at $1,000 or more (see 130.6). Agreements to pay, even if a payment hasn’t been made yet, are also included in the definition. Fees and commissions are likewise broadly defined and, with few exceptions, include the same kinds of payments as with political contributions (see 130.5). Moreover, a fee or commission can include payments to virtually anybody, regardless of nationality. Included are payments not only by the license applicant, but anybody in the food chain under the license applicant, including their vendors. Any payment must be made for “solicitation or promotion or otherwise secure the conclusion of a sale of defense articles or services for armed forces” (see 130.3, 5 &6).

For example, paying an in country representative something other than normal salary is usually a fee or commission. If that representative makes a payment to a political party, that would likely be a political contribution by the applicant. If you have a subcontractor who also pays a success bonus to an in country agent, that frequently is considered a fee or commission by the applicant. Part 130 puts the obligation on the applicant to find out what vendors and their representatives are paying. As in country representatives are standard fare in many foreign defense transactions, along with multiple vendors with agents, the Part 130 requirements should be thoroughly understood by all munitions exporters.

• But there are always those who want quick guidelines and answers on how to get out of the Part 130 requirements. There are a few quick Part 130 “outs” that safely allow you to check the “no payments” box on your license application without much further thought:

  If the license application is for defense articles and services valued under $500,000 or,

• If the license application is for licensees/end users who are not “armed forces.”

All the PCF definitions and therefore subsequent obligations are tied to these two conditions. So if you can duck under them, the ITAR doesn’t require you to report any PCF’s no matter how many you made or how large the payment. Note, however, that the Foreign Corrupt Practices Act and/or other regulations may impose other obligations. If the application is valued at $500,000 or more and involves the sale to “armed forces,” you can still safely check the “no payments” box on your license application if:

· The aggregate political contributions (including those made by your agents, vendors or vendors agents, or anyone receiving your fee or commission) are valued under $5,000.
· The aggregate fee or commissions (including those made by your agents or vendors) are valued under $100,000.

For example, take the case where you are the license applicant for a sale of defense articles worth $1 million to overseas armed forces. Assume you paid your in country rep a $40,000 success fee to get the business, and your two major component vendors each paid a $40,000 success fee to their respective in country reps. You cannot check the “no payments” box, as your aggregate fees and commissions exceed $100,000. Instead you must provide the detailed report with the license application. If your in country rep also paid $10,000 of their success fee to a foreign political party in connection with the business, you must also report that political contribution with your license application, as the payment exceeded $5,000.

Ignorance of what your vendors or agents are doing is no excuse. In fact, Part 130 places an affirmative obligation on the applicant to find out what payments have been made. For example, 130.12 requires you to make a written request to your major component vendors to provide a statement on what they or their agents paid. If your vendor does not respond within 25 days, you must notify ODTC of their failure to respond (130.12(d)(1)).
Similarly, 130.13 requires applicants and their major component vendors to obtain information on any political contribution make by any recipient of a fee or commission.

If you are required to make a report, you must follow the report guidelines as per 130.10. The reports should include, among other things, the total contract price, names and addresses of all parties and recipients as well as payment amounts and types of payments. Note that 130.10(c) is a classically confusing ITAR mess. On the one hand it appears to state that you do not have to report details for individual payments under a di-minimis threshold. On the other hand it seems to open the door for reporting PCF’s below the clear 5,000/100,000 PCF threshold set in 130.9. Probably the best approach is to ignore the 130.10(c) confusion altogether and provide full report details for all individual payments of $1,000 or more that together exceed the 5,000/100,000 PCF threshold in 130.9.

Note that you have continued obligations to report political contributions after you submit the license application. If you agree to make payments exceeding the $5,000/$100,000 PCF thresholds after you submit the license application, you must report it to ODTC within 30 days of learning it. If you already filed a report, you must report again with if you make further PCFs exceeding a $2,500/$50,000 threshold.

A further word of caution on all PCF reporting: Part 130 requirements are essentially a method by which the Government can track potential Foreign Corrupt Practices Act (FCPA) violations. The FCPA essentially prohibits US companies from making bribes to foreign government officials. If you do find that you, your agents, your vendors, or your vendor’s agents are making political contributions, you should contact your Counsel or other FCPA specialist to ensure you don’t have even bigger problems before you submit your report.