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 USdefense 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, largelythrough grants of

surplus military equipment to Western Europe.From the1960s to the 1980s, the US export

portfolio broadened to include salesof advanced equipment, technology, and technical

assistance. These exportssolidifiedalliances, standardizedUSweapons systems, and mobilized

the USdefense industrial base.Today, the US governmentis using export programs to

strengthen partnerships andtobuild international coalitions capable of confronting majorthreats

to regional and global security.1

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

Title22 of the US Code,2putting them under thecontinuous supervision and general direction of

the USDepartment of State(“State”).Such security assistanceprograms 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 (SectionII).We provide focused overviews ofFMS

(SectionIII);DCS (SectionIV);variations of FMS and DCS, including “hybrid” sales

(Section V); and FMF (SectionVI).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 aregovernment-to-government sales overseenby State, yet

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

contracting parties arethe 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 referencesare “FMS case” and “case.”The US governmentcan sell items

that it pulls fromDoDstocks or that it acquires from a contractorusing a procurement regulated

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

the buyer/recipientpaysallcostsof an FMS case, even the US government’s procurement costs,

except in limited instances involvinga “Pseudo-LOA” (explainedin SectionIII) orFMF

(explained in SectionVI).

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

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

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

the licensing and registration requirements foundin theInternational Traffic for Arms

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

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

the use of FMF.

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

Only” designation, which prohibits the use of DCS.Conversely, a defense contractorcan 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.