Issues in Foreign Military Sales Programs

By Joseph G. Miller Esq.,

Lieutenant Colonel, U.S. Army

Is your client involved in foreign military sales? That does not necessarily mean the “Big-ticket” item that we all easily relate to a military sale, such as fighter planes and tanks. Your client might be providing a service such management consulting, accounting, even English education classes. Many of these contracts are funded by the United States though the Foreign Military Funding (FMF) Program managed by The Defense Security Cooperation Agency (DSCA).

Why are these different than any other type of contract or sale? There are a myriad of rules regarding these contracts and sales, such as content requirements, export licensing, payment of commissions, and anti-fraud provisions to name a few. There are also several other funding sources that might be utilized by your clients for payment for their products or services. This article will briefly discuss Foreign Military Sales and aspects of the U.S. funding of foreign purchases.

Foreign Military Funding (FMF)

What is FMF? FMF is the Congressionally appropriated money that is allocated to many countries of the world which allows them to purchase U.S. military goods and services. FMF is basically a grant, administered by DSCA, to the foreign country. The U.S. spends FMF on behalf of the foreign country to which it is allocated. FMF can beused to purchase goods or services for use by the foreign country, and the U.S. (through DSCA) acts as the contracting entity, not the foreign government. There are several obstacles that can arise to the use of FMF by the receiving country.

Money is allocated to countries in two basic ways. First, Congress earmarks specific dollar amounts for some countries, such as Israel, Egypt, Jordan, Armenia, and several others. These earmarked funds reduce the total amount available to the remaining countries.1 The State Department allocates the remaining funds to other countries based on foreign policy and national security goals.2 Funds are normally only spent on countries that are unable to pay for the goods and services required, thus, first world countries do not normally receive FMF.3

DSCA is an interagency organization that coordinates with both the State Department and the Department of Defense (DoD). It is the organization that normally will handle the contracting for goods or services that are paid with FMF. The country, in conjunction with DSCA, normally identifies a need and DSCA then contracts with the U.S. company to fill that need.4 5 Your client may often be involved in “making the sale” to the foreign government. Clients will often make presentations to the Ministry of Defense of a foreign country on their product or service, with the intention of the contract being completed by DSCA. DSCA allows considerable latitude to the foreign countries in the selection of how they spend their allocated FMF.6 This is one of the first areas to caution you client since the temptation of bribes is very real and often expected in many countries, but the U.S. Foreign Corrupt Practices Act carries very stiff penalties to both the individuals and corporations involved.7 The important thing to remember is that most FMF contracts are between your client and the U.S. Government. All the U.S. contracting rules apply (FAR and DFARS), although the DSCA receives the export license, not your client. The Defense Finance and Accounting Service makes the payment to the contractor after the U.S. is billed.

Foreign Military Sales (FMS)

Foreign Military Sales are funded by a foreign government going through the U.S. Government. As with the FMF, FMS are usually for U.S. made products, or U.S produced contract services.8 There will be a letter of agreement between the U.S. Government and the foreign government for the procurement of a good or service. The U.S. Government then contracts directly with the U.S. company and takes an administrative fee for handling the sale.9 This is beneficial to the U.S. Government because the purchase is usually added to an existing U.S. Government contract, thus lowering the per item cost since the fixed cost is distributed over more end items.

The foreign country is not a party to the contract, and has redress only against the U.S. Government per the letter of agreement. Again, FAR and DFARS apply to the contract with the U.S. Government as it did in FMF sales. Therefore, even though disputes and/or arbitration will be between the U.S. Government and the foreign country (not the contractor), the USG will most likely come back to the contractor to correct any deficiencies.

Other U.S. funding sources provided to assist in SecurityCooperation.

There are several other sources of U.S. Government funding available that function in similar ways to FMF. Most of them were approved in the 1990’s to assist the transition of the former Warsaw Pact countries and the Newly Independent States of the former Soviet Union. These are called Warsaw Initiative Funds (WIF) and Cooperative Threat Reduction (CTR). WIF funds are available to countries that have joined NATO’s Partnership for Peace (PfP). The PfP is a program designed as a step towards NATO membership during which the military and political structures of the country are reformed to fit the NATO country model. WIF funds are U.S. funds designed to help with that process. 10 CTR is used to lessen the risk of Weapons of Mass Destruction, and has been used to purchase such things as radars to monitor air and sea space, and for border security equipment. Some other sources of funding are listed below, but are not normally encountered in the procurement or contracting arena.

A major funding change has been brought forward in the 2006 Defense appropriation.11 It appears that DoD has been allocated $200 million that may be used to train and equip foreign militaries in the war on terror, and to enhance stability.12 At this time, it is not clear how this funding source will be utilized, but any procurement for foreign governments will go through U.S. Government channels, with DSCA being the natural choice.

There are many opportunities as well as pitfalls to your client in foreign military sales. Follow the steps outlined in the procurement regulations and make sure that each step is being vetted internally along the way. The U.S. Government offices tasked with compliance of these programs are often good sources of answers to your questions, and they usually cite to regulations or guidelines that can be used to clarify any questions that might arise.

SOME COMMON ACRONYMS AND WORDS IN THE MILITARY SALES GAME

AECA-Arms Export Control Act (http://ww.pmdtc.org/aeca.htm) U.S. Law relating to the export of defense articles and services. Implemented by the ITAR.

Co-production-When the military produced is done with an ally, or in their country. Examples are Israel producing unmanned aerial vehicles with the U.S., or the U.S producing helicopter radars for the British variant of the Apache Attack Helicopter.

CTR- Cooperative Threat Reduction- Funds that were appropriated for WMD control in the countries of the former Soviet Union. Controlled by DTRA.

DCC-Direct Commercial Contracts- Foreign government contracts directly with U.S. contractor.

DFARS- Defense Federal Acquisition Regulation Supplement (http://www.acq.osd.mil/dpap/)

DFAS-Defense Finance and Accounting Service

DoD- Department of Defense

DSCA- Defense Threat Reduction Agency (www.dsca.osd.mil)- The U.S. agency that manages the multi-billion dollar FMF budget with input from DoD and the State Department.

DTRA- Defense Threat Reduction Agency (www.dtra.mil)- DoD & State Dept organization that deals primarily in the control and elimination of nuclear Biological and Chemical weapons in the former Soviet Union.

EDA- Excess Defense Articles- Surplus military equipment that is supplied to other countries for free or at a nominal cost.

FAR- Federal Acquisition Regulation (http://www.acqnet.gov/far/) Regulations dealing with al contracts with USG

FMF-Foreign Military Financing- Military sales funded by the United States. Most funds are appropriated by Congress for specific countries, with the remainder being spread out over the remaining countries. Subject to Article 98 limitation. Top 4 recipients: Israel, Egypt, Jordan, Iraq.

FMS- Foreign Military Sales-U.S. contracts for foreign government. Military sales through DoD that are usually funded by the end using country. Think of DoD as a broker of the service or equipment.

HA- Humanitarian Assistance- A DoD program that funds humanitarian, non-military projects in developing countries, such as schools and medical clinics.

IMET- International Military Education and Training- A program to pay for foreign military personnel to attend U.S. military schools.

ITAR- International Trafficking in Arms Regulation (http://www.pmdtc.org/reference.htm#ITAR)- The comprehensive regulation dealing with anything that is interpreted to be arms related. This includes consulting, teaching, and items or information that do not appear to have a readily identifiable military use.

NATO- North Atlantic Treaty Organization. (www.NATO.int) A military alliance on both sides of the Atlantic designed for mutual defense. Developed out of the Cold War.

PfP-Partnership for Peace- The candidacy step for NATO where Political and military systems are brought to NATO standards.

WIF- Warsaw Initiative Funds- U.S. funding to assist PfP countries in meeting NATO standards prior to accession to NATO.

 

Footnotes

1 Currently, over 80% of the FMF available is allocated in this way to Israel and Egypt as part of the continuing support to the Camp David Peace accords.

2 Goals are set by the President. Foreign policy goals are refined by State Department, and national security goals are refined by the Department of Defense, leading to some

disagreements between USG agencies in the apportionment of the funds.

3 An example is FMF that is provided to an Eastern European ministry of defense that is reorganizing to better align with modern military structures such as The North Atlantic Treaty Organization, or NATO.

4 10 countries can use Direct Commercial Contracts (DCS) utilizing FMF, where the country actually contracts with the supplier directly, not the U.S. Government. Israel

accounts for 85% of these. Designed for items & services that are not in the DoD procurement system. Country needs to show proof of competition, and they are reviewed at any amount over 750K. DCS has a minimum of 100K value per contract (30K for Israel). In many ways these are similar to FMS cases, but the contractor is responsible for more requirements that are not completed by the USG, such as procurement of an export license.

5 What is a U.S. company is becoming harder to determine as defense mergers increase with foreign companies.

6 I am aware of a DSCA approved sale of modern military radios to a country that had received a very convincing pitch from a manufacturer, while they did not possess functioning vehicles to put the radios into.

7 Until recently, many European governments allowed the deduction of bribes paid as business expenses. This has changed, but foreign manufacturers do not always play at the same level of integrity as U.S. corporations are expected to.

8 There is an exception to allow for procurement of foreign made goods or services if it is already procured for U.S. services under an existing contract.

9 U.S. Code Title 22.

10 “Graduates” of the PfP include Latvia, Lithuania, Estonia, Poland, Czech Republic, Hungary, Slovenia, Slovakia, Bulgaria, and Romania. These countries are now full members of NATO, and no longer eligible for WIF.

11 Section 1206 of The 2006 of the Defense Authorization Act.

12 Pentagon Can Now Fund Foreign Militaries, The Washington Post, January 29, 2006 page A10.