International Defense Sales

• Author: Jade C. Totman and Brian C. Baldrate
• Pages: 9-29

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Chapter 2

International Defense Sales

Jade C. Totman and Brian C. Baldrate

Exports of US defense articles and services to foreign allies are a pillar of US national

security and foreign policy. The US government used arms export programs in the late 1940s and

early 1950s to fortify a common defense against the Soviet Union, largely through grants of

surplus military equipment to Western Europe. From the 1960s to the 1980s, the US export

portfolio broadened to include sales of advanced equipment, technology, and technical

assistance. These exports solidified alliances, standardized US weapons systems, and mobilized

the US defense industrial base. Today, the US government is using export programs to

strengthen partnerships and to build international coalitions capable of confronting major threats

to regional and global security.1

Many arms export programs have been authorized as foreign “security assistance” under

Title 22 of the US Code,2 putting them under the continuous supervision and general direction of

the US Department of State (“State”). Such security assistance programs include Foreign

Military Sales (FMS) and Direct Commercial Sales (DCS), as well as financing through Foreign

Military Financing (FMF). In this chapter, after an Executive Summary (Section I), we survey

the legal foundation for these programs (Section II). We provide focused overviews of FMS

(Section III); DCS (Section IV); variations of FMS and DCS, including “hybrid” sales

(Section V); and FMF (Section VI). We summarize the relevance of these programs to

contractors (Section VII), and we conclude by suggesting several practical tips for practitioners

(Section VIII).

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I. Executive Summary

FMS transactions are government-to-government sales overseen by State, yet

administered day-to-day by DoD’s Defense Security Cooperation Agency (DSCA). The

contracting parties are the US government (i.e., the seller) and a foreign government (i.e., the

buyer/recipient). An FMS contract is called a “Letter of Offer and Acceptance” (LOA), but

common shorthand references are “FMS case” and “case.” The US government can sell items

that it pulls from DoD stocks or that it acquires from a contractor using a procurement regulated

by the Federal Acquisition Regulation (FAR) and Defense FAR Supplement (DFARS). By law,

the buyer/recipient pa ys all costs of an FMS case, even the US government’s procurement costs,

except in limited instances involving a “Pseudo-LOA” (explained in Section III) or FMF

(explained in Section VI) .

A DCS transaction is a direct commercial sale. The contracting parties are defense

contractors (i.e., the sellers) and foreign governments (i.e., the buyers/recipients). State’s

Directorate of Defense Trade Controls (DDTC) vets and monitors DCS transactions pursuant to

the licensing and registration requirements found in the International Traffic for Arms

Regulations (ITAR),3 regulations promulgated under the Arms Export Control Act of 1976

(AECA).4 Financing generally comes from the buyer/recipient, except for when DSCA approves

the use of FMF.

Often, FMS and DCS are not equally available. The US government can assign an “FMS

Only” designation, which prohibits the use of DCS. Conversely, a defense contractor can request

a “DCS Preference”—a pledge by DSCA to decline FMS inquiries and to direct prospective

buyers towards using DCS. Some multi-item sales combine an FMS portion and a DCS portion,

resulting in a hybrid transaction.