FOREIGN MILITARY SALES

By

Derek Gilman, General Counsel

Defense Security Cooperation Agency

DIRECT COMMERCIAL SALES

By

Robert Nichols, Partner

Jade C. Totman, Associate

Christine Minarich, Associate

Covington & Burling LLP

September 30, 2014
DISCLAIMER

None of the content herein, nor the participation of the authors, implies U.S. government, 

Department of Defense, or Defense Security Cooperation Agency endorsement of any private 

entity or enterprise. Opinions expressed in this article are those of the authors, and do not 

necessarily represent those of the U.S. government, Department of Defense, or Defense Security 

Cooperation Agency.
i

TABLE OF CONTENTS

Page

INTRODUCTION .....................................................................................................................1

FOREIGN MILITARY SALES ...................................................................................................2

I. An Overview of FMS...............................................................................................2

A. FMS Legal Authorities ................................................................................3

B. The FMS Letter of Offer and Acceptance ...................................................4

C. Foreign Military Financing for Purchases ...................................................6

D. Other Financial Issues..................................................................................7

E. Nonrecurring Costs......................................................................................9

II. Other Programs Associated with FMS ..................................................................10

A. Other Security Assistance Programs – Leases and Excess Defense 

Articles..................................................................................................10

B. Building Partner Capacity Programs .........................................................11

C. End Use Monitoring...................................................................................12

D. Special Defense Acquisition Fund.............................................................13

III. Challenges for FMS and Developments................................................................13

A. Competitions and FMS Offers...................................................................13

B. Offsets........................................................................................................14

C. International Armaments Cooperation Programs and FMS.......................15

D. Standby Letters of Credit and FMS ...........................................................16

E. Using Leases to Leverage Funds ...............................................................16

F. Alternative Financing Structures and FMS................................................17

G. Defense Exportability Program..................................................................17
ii

IV. FMS Conclusions...................................................................................................18

DIRECT COMMERCIAL SALES..............................................................................................19

I. An Overview of DCS.............................................................................................19

A. The Range of DCS Options.......................................................................19

1. Traditional DCS.............................................................................20

2. Hybrid Sales—i.e., DCS + FMS....................................................20

3. Direct Commercial Contracting—i.e., DCS + Foreign 

Military Financing .........................................................................21

4. DCS + Outsourced Contract Management ....................................22

5. DCS + Offsets................................................................................22

6. DCS + Articles or Services Supplied by the U.S. 

Government....................................................................................22

B. The Negotiable Terms of a DCS Transaction............................................23

II. The Legal Framework for DCS: U.S., Foreign & International Law...................25

A. U.S. Law ....................................................................................................25

1. Promoting U.S. National Security and Foreign Policy..................25

a) U.S. Export Control Laws..................................................26

b) U.S. Economic Sanctions...................................................28

c) U.S. Anti-Boycott Laws and Regulations..........................28

2. Averting Corruption, Fraud, and Waste.........................................29

a) Foreign Corrupt Practices Act ...........................................30

(1) FCPA Anti-Bribery Provisions..............................30

(2) FCPA Bookkeeping and Accounting 

Requirements .........................................................31

(3) FCPA Fines and Penalties......................................31

b) Money Laundering Control Act.........................................31
iii

c) Suspension and Debarment................................................32

d) Risks and Exposure Attributable to Third-Parties.............33

B. Foreign Law...............................................................................................33

1. United Kingdom Bribery Act of 2010 ...........................................33

2. Foreign Government Offset Requirements....................................34

3. Other Foreign Laws .......................................................................35

C. International Law.......................................................................................35

SELECTING BETWEEN FMS AND DCS ................................................................................37

I. U.S. Government Restrictions...............................................................................37

II. Preferences of Foreign Customers.........................................................................38

III. Other Important Considerations.............................................................................39

REFERENCES .......................................................................................................................41
INTRODUCTION

International military sales are on the rise. While the United States and European 

Union are cutting their defense expenditures, several countries—particularly in East Asia, 

South Asia, the Middle East, and South America—are increasing expenditures. Hence, 

U.S. Contractors are increasingly seeking to sell products and services to these markets. 

There are two primary methods for doing so: government-to-government sales through the 

U.S. Government’s Foreign Military Sales (“FMS”) program and similar mechanisms, and 

Direct Commercial Sales (“DCS”) negotiated directly between the contractor and the 

foreign customer. Both methods have existed for decades, but a novice to international 

sales has a steep learning curve regarding the complexities of each.

Just how big is this market? From 2003 to 2006, government-to-government sales 

administered by the U.S. Defense Security Cooperation Agency (“DSCA”), of which FMS 

sales are greatest part, were approximately $10-$12 billion per year; since 2006, however, 

annual sales have repeatedly exceeded $21 billion, hitting $69 billion in 2012. And 

available data indicates that DCS sales are even greater. In 2005, the value of DCS 

deliveries eclipsed that of FMS deliveries by nearly a 3:1 margin.1

 From 2005 to 2009, 

DCS is estimated to have accounted for almost 60% of exported U.S. military 

articles—almost $60 billion out of $101 billion.2 Of this total, DCS was responsible for 

roughly 66% (i.e., $17 billion) of aircraft equipment and parts exports; roughly 80% (i.e., 

$15 billion) of satellites, communications and electronic equipment, and parts exports; and 

roughly 40% (i.e., $7 billion) of aircraft exports.3 

Of course, whether U.S. Contractors will retain their market share of international 

sales is another question. Foreign defense firms have become significant competitors for 
2

the U.S. defense establishment.4 This competition makes it even more important for U.S. 

Contractors to understand and actively navigate the rules governing FMS and 

DCS—alternatives that are complementary, not rivals, but that have unique attributes. 

Accordingly, two threshold considerations for a foreign country Purchaser or U.S. 

Contractor contemplating an international purchase/sale are (a) which option is available 

for a particular sale, whether FMS or DCS (or both); and (b) the advantages and 

disadvantages of each option. As discussed below, FMS offers a “total package” approach 

that appeals to many Purchasers; alternatively, for eligible defense articles and services, 

savvy U.S. Contractors and Non-U.S. Purchasers might find greater flexibility in DCS to 

structure, negotiate, and execute contract terms that are tailored to their respective needs 

and goals. A decision as to whether to pursue FMS, DCS, or a combination of both, will

likely depend upon the unique circumstances of each transaction, as well as the risks and 

challenges created by a complicated patchwork of relevant U.S., foreign, and international 

laws. 

This paper is divided into three sections. The first section, authored by Derek 

Gilman, the General Counsel of DSCA, presents an overview of the FMS process and legal 

issues relevant to FMS. The second section, authored by the Government Contracts 

practice group at the law firm Covington & Burling LLP, discusses the DCS process and 

legal issues relevant to DCS. The final section summarizes some of the considerations that 

Purchasers and U.S. Contractors may consider when choosing between FMS and DCS. 

FOREIGN MILITARY SALES5

I. AN OVERVIEW OF FMS

The Foreign Military Sales (as defined above, “FMS”) program has been a key 

component of U.S. foreign policy and national security for the last several decades. In 
3

recent years, it has taken on increased importance, as the United States has sought to build 

the capabilities of foreign partners to participate in counter-terrorist operations, and in 

operations in Afghanistan and Iraq. Further, the enactment of various “building partner 

capacity” authorities has resulted in increased reliance on the FMS process to implement 

so-called “FMS pseudo cases.” As noted above, sales by the U.S. Department of Defense 

(“DoD”) have increased substantially over the past decade.

The FMS program exists, not necessarily for the purpose of providing a market for 

U.S. Contractors, but for the purpose of building relationships with foreign countries. This 

overriding purpose is codified into the statute governing the FMS program, the Arms

Export Control Act (“AECA”),

6 which provides:

Accordingly, it remains the policy of the United States to 

facilitate the common defense by entering into international 

arrangements with friendly countries which further the 

objective of applying agreed resources of each country to 

programs and projects of cooperative exchange of data, 

research, development, production, procurement, and 

logistics support to achieve specific national defense 

requirements and objectives of mutual concern. To this end, 

this chapter authorizes sales by the United States 

Government to friendly countries having sufficient wealth to 

maintain and equip their own military forces at adequate 

strength, or to assume progressively larger shares of the 

costs thereof, without undue burden to their economies, in 

accordance with the restraints and control measures 

specified herein and in furtherance of the security objectives 

of the United States and of the purposes and principles of the 

United Nations Charter.

A. FMS Legal Authorities

The specific authorities permitting DoD to sell defense articles7 and services8 to 

foreign countries and international organizations are in section 21 and 22 of the AECA.

9

 

Section 21 of the AECA authorizes the President to sell defense articles and services from 

the stocks of the DoD. This authority is often described as an authority to sell excess 
4

defense articles (Section 516 of the Foreign Assistance Act10 provides an authority to grant 

excess defense articles to foreign countries). Section 22 of the AECA provides the 

President with authority to enter into contracts for the procurement of defense articles or 

services for sale for U.S. dollars to eligible foreign countries and international 

organizations. These authorities have been delegated to the Director of the Defense 

Security Cooperation Agency (as defined above, “DSCA”).

11 

Of course, DSCA does not exercise these authorities in isolation. Pursuant to 

section 2 of the AECA, the U.S. Department of State must approve sales of defense articles 

and services to foreign countries.12 Furthermore, prior to the initial export to a country or 

international organization, the President must determine that the foreign country is eligible 

to receive exports of defense articles and services under the AECA.

13 

Sanctions and export control laws also come into play. The recipient country must 

be eligible for exports at the time of the proposed export. Sanctions may be imposed under 

a variety of laws that prohibit exports for a range of reasons, including trafficking in 

persons and failure to make timely payments on debts owed the United States. In addition 

to the country being eligible to receive exports, the defense article or defense service must 

also be approved for export; in that regard, the U.S. Government must determine that the 

technology can be exported to the country in question.

B. The FMS Letter of Offer and Acceptance

Foreign countries wishing to purchase defense articles and services through FMS 

must first provide a “Letter of Request,” or “LOR.”14 There is no required form for the 

LOR, and it may take the form of a letter, request for proposal, or other written format 

containing sufficient information to provide a response.15 Thus, the LOR can be issued as 

a sole source request, a single supplier request, or as part of a competition. Depending 
5

upon the request in the LOR, the response may be Pricing and Availability (“P&A”) 

information or a Letter of Offer and Acceptance (“LOA”).

An LOA is a government-to-government agreement governed by U.S. law. It is 

signed by representatives of the DoD and the foreign government.16 Each LOA contains a 

set of Standard Terms and Conditions that provide the U.S. Government and foreign 

country obligations, as well as the general financial terms of the transaction.17 Of note, the 

LOA Standard Terms and Conditions provide that the foreign country agrees that it will 

only use the defense articles or services for purposes of legitimate self-defense, internal 

security, and other purposes allowed under section 4 of the AECA.

18 Additionally, the 

Standard Terms and Conditions provide that the foreign country agrees to allow the U.S. 

Government to conduct end use monitoring inspections, to not transfer title or possession 

without the consent of the U.S. Government, to maintain security for the defense articles 

equivalent to what the United States would provide, and to pay the total cost for the defense 

articles and services, even if the cost exceeds the price listed in the LOA.19 It is important 

to note that the price in the LOA is an estimate. Under U.S. law, the price listed in the LOA 

cannot be a not-to-exceed price, as an increase in cost not paid for by the foreign country 

would be an unfunded obligation of the U.S. Government that is not authorized by law.

Additionally, the foreign country, recognizing that the U.S. Government will 

procure and furnish the defense articles and services described in this LOA on a non-profit 

basis, must agree to indemnify and hold the U.S. Government, its agents, officers, and 

employees harmless from any and all loss or liability (whether in tort or in contract) which 

might arise in connection with the LOA because of injury to or death of personnel of the 

foreign country or third parties; damage to or destruction of (a) property of DoD furnished 
6

to the foreign country or to contractors specifically to implement this LOA; (b) property of 

the foreign country (including the items it ordered pursuant to the LOA, before or after 

passage of title); or (3) property of third parties, or; infringement of intellectual property 

rights. Further, the foreign country must agree to relieve the contractors and 

subcontractors of the U.S. Government from liability for, and will assume the risk of, loss 

or damage to: the foreign country’s property (including items procured pursuant to the 

LOA, before or after passage of title; and property of DoD furnished to contractors to 

implement the LOA, to the same extent that the U.S. Government would assume for its 

property if it were procuring for itself the items being procured.20 The U.S. Government

will endeavor to procure warranties for the foreign country, if requested. The cost of any 

such warranties would be included in the LOA price.

In an FMS case, title is normally transferred to the purchaser (i.e., the foreign 

country or international organization) at the initial point of shipment, unless otherwise 

specified in the LOA. In the case of items procured for sale, title normally passes at the 

manufacturer’s loading facility, while in the case of items furnished from DoD stocks, title 

normally passes at the U.S. depot.21

C. Foreign Military Financing for Purchases

Funding for FMS purchases is generally provided by the foreign country. 

However, for certain countries, funds are appropriated by Congress for Foreign Military 

Financing (“FMF”).22 By law, Israel and Egypt receive most of the FMF-appropriated 

funds.

23 Other countries receive smaller amounts, based upon a justification provided to 

Congress by the U.S. Department of State. Section 23 of the AECA provides authority to 

finance the procurement of defense articles and services by friendly foreign countries 

through credit sales. However, in recent years, the legislation appropriating FMF has 
7

stipulated that it is provided on a non-repayable basis (i.e., FMF is now provided as a grant 

and not a loan).

24 Furthermore, the appropriations language states that the funds are 

“obligated upon apportionment”25; the effect of this language is that the funds do not 

expire at the end of the fiscal year are available for expenditure in future years so long as 

they have been apportioned, even if they have not yet been obligated.

Certain countries have been approved to use FMF to make direct commercial sales 

purchases. These purchases, known as “direct commercial contracts” (a “DCC”),

26 are 

discussed in more detail in the next section of this paper. DSCA approves DCCs on a 

case-by-case basis pursuant to a set of guidelines published on the DSCA website.27

D. Other Financial Issues

The general rule for payment for an FMS case is that payment is due upon 

signing.28 However, payment may be made at a later time if a country is able to give a 

“dependable undertaking” to pay the full amount of the contract and to make funds 

available in such amounts and at such times as may be required by the contract. The time 

of payment for countries that are able to give a dependable undertaking will be a matter of 

negotiation, but generally, the payment due date will not be delayed beyond the delivery 

date, although there are rare exceptions.29 Whether the terms of sale of an FMS LOA will 

be able to include a dependable undertaking will depend upon the country’s Interagency 

Country Risk Assessment System (“ICRAS”) rating. If a country does not have an ICRAS 

rating, DSCA may determine eligibility using the DSCA Dependable Undertaking 

Assessment Tool. In general, a country with an ICRAS rating of “C” or better at the time 

of receipt of the LOR is presumed to be eligible to have the term of sale for dependable 

undertaking included in its FMS LOA, unless other factors override that eligibility 

determination.30
8

In general, purchasing countries pay with their national funds, unless they have 

been allocated, and are using, FMF. However, it is possible that a third source could 

provide funding to the purchasing country, which the purchasing country could use to pay 

for its FMS case. The AECA provides that purchases using FMS must be in U.S. dollars, 

regardless of the source of the payment.31

The FMS program does not receive appropriations (although some countries are 

receive an allocation of FMF), and therefore must be managed at no cost to the 

U.S. Government. Hence, the LOA mandates that the purchaser pay the full program cost. 

The LOA will be modified or amended from time-to-time as necessary to reflect changes to 

the FMS case.

The FMS Trust Fund is used for receiving payments from purchasing countries and 

international organizations and for making disbursements against implemented FMS cases. 

This fund is cited directly on contracts for the procurement of defense articles and services, 

and is used to reimburse DoD Components for sales from DoD stocks or services 

performed by DoD employees. DSCA manages the FMS Trust Fund managed in 

accordance with the DoD Financial Management Regulation (“FMR”) and guidance from 

the Office of Management and Budget (“OMB”).32

Certain countries have been approved to use FMF to make direct commercial sales 

purchases. These purchases are known as “direct commercial contracts” (“DCCs”).33 

DSCA approves DCCs on a case-by-case basis pursuant to a set of guidelines published on 

the DSCA website.34Termination liability (“TL”) reserves generally must be maintained in 

the purchaser’s FMS Trust Fund account. TL is the potential cost for which the U.S. 

Government would be liable if an FMS case is terminated prior to completion. 35 If 
9

approved by DSCA a standby letter of credit may be used instead of, or to reduce, 

termination liability to guarantee termination payments.36

Some countries may establish an account with the Federal Reserve Bank of New 

York (“FRB NY”) for their FMS deposits. For this to occur, the foreign country’s defense 

organization, its central bank (or acceptable equivalent), FRB NY and DSCA must enter 

into an agreement setting forth the terms, conditions, and procedures for the operation of 

the account.37

Other countries may establish an account with a commercial bank for their FMS 

deposits. For this to occur, two agreements are required: an agreement between the foreign 

country and the participating commercial bank, and a separate agreement between the 

foreign country and DSCA.38

E. Nonrecurring Costs

Certain nonrecurring costs of research, development, and production must be 

recovered on FMS sales unless they are waived. Section 21(e)(1) of the AECA provides 

that LOAs shall include charges for a proportionate amount of nonrecurring costs of 

research, development, and production of major defense equipment. 39 Major defense 

equipment is defined as any item of significant military equipment on the United States 

Munitions List (“USML”) having a nonrecurring research and development cost of more 

than $50,000,000 or a total production cost of more than $200,000,000.40 Significant 

military equipment is identified in the USML with an asterisk. Nonrecurring costs may be 

waived if the sale would significantly advance U.S. Government interests in 

standardization with NATO, Japanese, Australian, South Korean, Israeli, or New Zealand 

forces.41 Additionally, charges may be waived if the Director, DSCA determines that 

imposition of the charges likely would result in loss of the sale or if he determines that in 
10

the case of a sale of major defense equipment that is also being procured for the use of the 

U.S. Armed Forces, waiver of the charges would (through a resulting increase in the 

quantity of the equipment purchased that causes a reduction in the unit cost) result in a 

savings to the United States that substantially offsets the revenue foregone as a result of the 

waiver.42 Detailed rules regarding nonrecurring costs are provided in the Code of Federal 

Regulations and in the DoD Financial Management Regulation.43

It should be noted that in certain cases a foreign country may have incurred 

nonrecurring costs in the development of a defense article, or of a specific version of a 

defense article. In such cases, if the costs qualify as recoverable nonrecurring costs and the 

foreign country’s nonrecurring cost investment exceeds $50 million, then the United States 

will collect the nonrecurring cost recoupment for the foreign country. Such recoupment 

cannot be waived.

II. OTHER PROGRAMS ASSOCIATED WITH FMS

A. Other Security Assistance Programs – Leases and Excess Defense 

Articles

DoD may lease defense articles from its stocks to eligible foreign countries or 

international organizations. In general, the period of the lease may not exceed 5 years.44 

There must be compelling foreign policy and national security reasons for providing such 

articles on a lease basis, and the articles must not be needed for public use at the time. The 

effects of the lease on the national technology and industrial base must be considered, 

particularly the extent, if any, to which the lease reduces the opportunity of 

U.S. manufacturers to sell new equipment to the lessee.45

DoD and U.S. Coast Guard may provide excess defense articles (“EDA”) to 

eligible foreign countries or international organizations on a sale or grant basis. EDA are 
11

offered on an “as is, where is” basis. In order to be eligible to receive grant EDA, foreign 

countries must have agreed to blanket end-use, security, and retransfer assurances. These 

assurances track the verbiage of section 505 of the Foreign Assistance Act and are 

generally made in the form of an exchange of diplomatic notes.46 Sales of EDA are 

pursuant to the authority provided by section 21 of the AECA. The FMS LOA for such 

EDA sales contains similar assurances, as explained earlier in this article. Pricing of EDA 

items to be sold is in accordance with DoD FMR.47

B. Building Partner Capacity Programs

In contrast to FMF and the FMS program are the various “Building Partner 

Capacity” (“BPC”) programs. These programs authorized under a number of different 

authorities and are funded with U.S. Government appropriations.48 They are executed 

through the FMS process, but they are not true FMS cases.49 To enable BPC program 

execution through the FMS infrastructure, the DoD Implementing Agency (“IA”) develops 

a “pseudo LOA,” which is not signed by the foreign country, but serves to document the 

transfer of articles and services to the U.S. Government organization that will ultimately 

provide the defense articles and services to the foreign country (often this will be the 

Security Cooperation Office (“SCO”) in the U.S. Embassy in the foreign country). 

Further, rather than relying on an LOR, the BPC process is initiated from the requesting 

agency, which is often the Geographic Combatant Command or the U.S. Embassy in the 

foreign country. The requesting agency will provide a Memorandum of Request 

(“MOR”).50 The Office of the Under Secretary of Defense for Policy (“OUSD(P)”) is 

responsible for oversight of DoD-funded BPC programs, although certain authorities (for 

example section 1206 of the National Defense Authorization Act for Fiscal Year 2006, as 

amended) require concurrence by the U.S. Department of State.51 The SCO, if it is the 
12

recipient of the defense articles, will, after inventory—and provided there are no sanctions 

prohibiting provision of assistance—transfer custody and responsibility of the defense 

articles and services to the benefitting foreign country, and will begin end use monitoring 

(“EUM,” further discussed below), as applicable.

BPC programs may provide defense articles and/or services for the purpose of 

building the capacity of partner nation security forces and enhancing their capability to 

conduct counterterrorism, counter drug, and counterinsurgency operations, or to support 

U.S. military and stability operations, multilateral peace operations, and other programs.

C. End Use Monitoring

EUM is intended to verify that defense articles or services transferred by the U.S. 

Government to foreign recipients are being used in accordance with the terms and 

conditions to which the transfer of defense articles or services is subject.52 Transfers made 

through the FMS program are subject to EUM under DoD’s Golden Sentry program. 

Transfers made through direct commercial sales are subject to EUM under the State 

Department’s Blue Lantern program. Recipients must agree to use U.S.-provided defense 

articles, training, and services only for their intended purpose; not to transfer title to, or 

possession of, any defense article or related training to anyone not an officer, employee, or 

agent of that country or of the U.S. Government without prior written consent of the U.S. 

Government; to maintain the security of any article with substantially the same degree of 

protection afforded to it by the U.S. Government; and to permit observation and review by, 

and to furnish necessary information to, representatives of the U.S. Government with 

regards to the use of such articles.53 EUM provides U.S. Government oversight to ensure 

that these conditions are met.
13

D. Special Defense Acquisition Fund

The Special Defense Acquisition Fund (“SDAF”) is a revolving fund that finances 

the acquisition of defense articles and services in anticipation of their future sale to foreign 

governments and international organizations. It is authorized under section 51 of the 

AECA.

54

Initially capitalized with a transfer of $100 million, the SDAF is self-funding. The 

value of the SDAF is capped at $1.07 billion. 55 The SDAF enhances the U.S. 

Government’s ability to meet the urgent military needs of its foreign partners by 

facilitating faster delivery of items and services once FMS LOAs are signed.

III. CHALLENGES FOR FMS AND DEVELOPMENTS

A. Competitions and FMS Offers

The DoD Federal Acquisition Regulation (“FAR”) Supplement (“DFARS”)

specifically provides that, upon request from a purchaser, contracting for FMS can be done 

on a sole source basis.56 In the past, many countries have identified a requirement for a 

specific defense article and that particular defense article through FMS. However, 

recently, a number of foreign countries have decided instead to define a set of requirements 

and to hold a competition in which one or more FMS offers would be submitted. In some 

cases, this is the result of the prospective purchaser being subject to new legal requirements 

emphasizing competition in defense contracting. 57 In other cases, the purchaser’s 

acquisition authorities believe that a competition will result in a lower price for the defense 

article or more attractive offset packages – including in the area of technology transfer. 

The FMS offers in these competitions may be, but are not always, defense articles that can 

be sold only through the FMS process. In other cases, the FMS offer may be the result of a 

desire for a “total package approach” or the desire to leverage existing production lines or 
14

sustainment for U.S. requirements. In still other cases the offer may be a hybrid, with the 

main defense article being provided through direct commercial sales and classified 

systems, weapons, and/or upgrades being provided through FMS.

Regardless of the reason for a competition involving an FMS offer, various 

challenges may arise in such a competition. First, an FMS offer is from one sovereign to 

another sovereign. Many countries have rules for competitions that are oriented towards 

evaluating a proposal from a private company, and some of these rules are inappropriate 

for a sovereign-to-sovereign offer. For example, rules that the offeror and its personnel 

must be subject to the foreign country’s law in case of dispute are not appropriate in the 

sovereign-to-sovereign context. Additionally, because the FMS program is self-funded 

and the U.S. Government may not incur an unfunded obligation, requirements that the 

FMS offer itself be a firm fixed price offer, or that the U.S. Government itself guarantee the 

price or the delivery date are requirements that the U.S. Government cannot agree to in an 

FMS offer. However, the U.S. Government can attempt to contract for a firm fixed price, 

guaranteed delivery schedule, or various warranties on behalf of the purchaser. There may, 

of course, be an increase in the price of a contract that contains such provisions. If these 

provisions needed to be relied on, the U.S. Government would exercise them on behalf of 

the purchaser, and any compensation provided by the contractor as a result would be 

passed on to the purchaser.

B. Offsets

Offsets have become an increasingly important and costly part of international 

armaments competitions. U.S. policy, as set forth in statute, provides that the U.S. 

Government shall not encourage, commit to, or enter into an offset arrangement, and that 

offset arrangements are matters for the contractor.58 Further, the law provides that the 
15

decision whether to engage in offsets and the responsibility for negotiating and 

implementing offset arrangements, resides with the companies involved.59 However, the 

U.S. Government does determine what technology may be transferred should the 

contractor decide to offer an offset package, and the contractor’s cost for the offset may be 

included in the price of the FMS offer. However, FMF cannot be used to pay for offsets.60

Offsets present an increasing challenge as, on the one hand, foreign countries 

require increasing offsets, in particular in the area of technology transfer, while on the 

other hand, offsets can cause the price of an FMS offer to increase significantly, thereby 

potentially making such offers less competitive. Furthermore, a foreign country attempt to 

may seek commitments to offset concessions from the U.S. Government if an FMS offer is 

made, and complying with U.S. policy, as set forth in statute, while trying to address 

foreign government concerns, can be a significant challenge. Depending upon the 

circumstances, senior level DoD or U.S. Department of State engagement with the foreign 

country may be appropriate.

C. International Armaments Cooperation Programs and FMS

Another area in which the FMS program faces challenges is the increasing 

interaction between FMS and international armaments cooperation programs. These 

programs, carried out under different authorities than FMS sales, generally require 

equitable contributions and an equitable sharing of results.61 This concept of equitable 

sharing is quite different from FMS, in which the foreign country is purchasing a defense 

article or service. When foreign countries purchase defense articles developed through 

international armaments cooperation programs, the interplay of the FMS rules and 

international cooperation rules can be confusing to foreign countries, and requires a careful 
16

legal approach to ensure results are perceived as providing FMS purchasers and 

international armaments cooperation participants with the fairest treatment possible.

D. Standby Letters of Credit and FMS

A current concern for many countries is expanding or upgrading forces to meet 

their national security requirements at a time of fiscal constraint. As a result, not only are 

competitions involving FMS offers increasing, but so are requests by foreign countries for 

standby letters of credit and requests for leasing of defense articles and for consideration of 

alternative financing structures. A standby letter of credit enables a foreign country to 

reduce or eliminate the termination liability payments it would need to provide for FMS 

contracts.62 The rules and procedures regarding eligibility for, and use of a standby letter 

of credit in support of FMS are complex and beyond the scope of this article. Preliminary 

guidance regarding standby letters of credit can be found in the Security Assistance 

Management Manual (“SAMM”), and specific questions should be directed to the 

DSCA.

63

E. Using Leases to Leverage Funds

Under section 61 of the AECA, DoD may lease defense articles in its stocks under 

certain conditions. Those conditions include ensuring that the Director, DSCA,

64

determines that there are compelling foreign policy and national security reasons for 

providing the defense articles on a lease rather than sales basis; the articles are not needed 

for public use; and the effects of the lease on the national technology and industrial base are 

considered, particularly the extent to which the lease reduces the opportunities of entities in 

the national technology and industrial base to sell new equipment to the country the articles 

are leased. Additionally, the country or international organization must pay all costs 

incurred by the U.S. Government in leasing the articles, including reimbursement for 
17

depreciation, the costs of restoration or replacement if the articles are damaged while 

leased, and, if the articles are lost or destroyed, the replacement cost (less depreciation) if 

U.S. intends to replace the articles or actual value (less depreciation) if the U.S. does not 

intend to replace the articles. If the defense article has passed three-quarters of its useful 

life, the cost of depreciation may be waived. There are also certain categories of leases for 

which there is no charge.65 A lease agreement may not exceed five years, and a specified 

period of time required to complete major refurbishment work to be performed prior to the 

delivery of the leased articles. Further, at any time during the duration of the lease, the 

President may terminate the lease and require the immediate return of the leased articles.

F. Alternative Financing Structures and FMS

As indicated earlier, on an increasing basis contractors are seeking to use 

alternative financing structures in conjunction with an FMS offer in order to provide a 

method in which the foreign country can fulfill its requirements with fewer funds. These 

structures come in a variety of forms, and in some cases, the contractor considers them 

proprietary. It is important that contractors work closely with DSCA, as the AECA and 

other statutes to which the U.S. Government is subject may affect the legal viability of any 

proposed structure.

G. Defense Exportability Program

Another challenge facing FMS is the cost of exportability. Historically, the first 

purchaser paid the highest price for an exportable version of a defense article. However, 

not all of increased cost might qualify as a recoupable non-recurring cost. To address this, 

DoD sought and obtained legislation to use DoD to establish a pilot program to develop 

and incorporate technology protection features in designated systems during the research 

and development phase of such systems.66 The legislation was subsequently amended by 
18

Congress to require cost-sharing by industry. Specifically, the legislation provides that 

contracts for the design or development of systems resulting from activities under the pilot 

program to enhance or enable the exportability of the system shall include a cost-sharing 

provision requiring the contractor to bear at least one-half of the cost of such activities.67

The pilot program was extended by 5 years in 2014, and now terminates on October 1, 

2020.68

The goal of the program is to build in potential exportability “up front,” through a 

cost-sharing arrangement between industry and DoD, which is intended to reduce costs for 

both DoD and foreign purchasers, thereby increasing commonality and interoperability, 

and strengthening relationships between the United States and its foreign partners.69

IV. FMS CONCLUSIONS

Recent experience has shown that demand for defense articles through FMS 

continues to be strong, although fiscal constraint and increased competition on a global 

scale is requiring the FMS program to adapt. As foreign countries seek to address defense 

requirements in an economically efficient manner, the challenges for FMS are becoming 

increasingly complex. As a result, creative but careful approaches are needed to ensure 

that FMS continues to be valuable tool in building relationships between the United States 

and its foreign partners.
19

DIRECT COMMERCIAL SALES70

I. AN OVERVIEW OF DCS

In addition to the U.S. Government’s FMS program, U.S. Contractors

71 can sell 

U.S. defense articles and services to Non-U.S Purchasers

72 without the direct involvement 

of the U.S. Government, subject to certain regulatory hurdles and U.S. Government 

oversight. This type of transaction is typically referred to as a Direct Commercial Sale

(“DCS”). DCS is like FMS in that it is as “an integral part of safeguarding U.S. national 

security and furthering U.S. foreign policy objectives.”73 Both FMS and DCS facilitate the 

interoperability of foreign military partners and U.S. forces, and thus they are seen by the 

U.S. Government as complementary, not competing.74

Still, the laws and process for DCS differ from FMS. Furthermore, avoiding 

tripwires and successfully conducting a DCS transaction demands a holistic and realistic 

understanding of how DCS works, how it differs from FMS, and how it can be safely 

structured—to include, where appropriate, how it can be combined with FMS in hybrid 

transactions. This section of paper tackles these topics, focusing on the most relevant and 

pressing nuances and possible pitfalls.75

A. The Range of DCS Options

DCS typifies the adage “you get what you negotiate.” A U.S. Contractor and a 

Non-U.S. Purchaser have several options for structuring the DCS transaction, with the 

option selected determining the relative level of involvement by the Non-U.S. Purchaser 

and the U.S. Government, respectively, in negotiating, executing, and administering the 

DCS contract. Whatever the structure, though, through DCS the parties may have the 

flexibility to negotiate terms suiting their goals and circumstances to a greater extent than 

FMS might allow.
20

1. Traditional DCS

In a traditional DCS transaction, the U.S. Contractor and the Non-U.S. Purchaser 

directly negotiate almost all contract elements and terms; the U.S. Government is largely 

sidelined. Hence, of all the DCS forms, traditional DCS has the most direct, significant 

involvement by Non-U.S. Purchasers. But by extension, the Non-U.S. Purchaser must 

accept a significant responsibility for contract negotiation, administration, quality control, 

inspection, acceptance, and auditing. In the same way, the U.S. Contractor must directly 

address its concerns with the Non-U.S. Purchaser—to include a lack of payment or 

problems with contract performance.

2. Hybrid Sales—i.e., DCS + FMS

A hybrid sale might include separate DCS and FMS components. DCS and FMS 

can both be used when there is a package of U.S. military articles or services with one or 

more FMS Only items. Alternatively, a Non-U.S. Purchaser might use DCS to acquire 

sustainment support for military articles that it acquired through FMS. Or vice versa, as 

with a Non-U.S. Purchaser that uses DCS to purchase certain military articles, but requires 

FMS support to obtain airworthiness certifications, training in U.S. military schools, or 

military transportation services.

In any event, if a hybrid sale is desired, “advance planning and coordination” are 

“essential.”76 For one thing, the U.S. Contractor and Non-U.S. Purchaser must ensure that 

the DCS and FMS components will interface seamlessly. Also, because it is not authorized 

to represent or to commit the U.S. Government, the U.S. Contractor should advise the 

Non-U.S. Purchaser of any necessary, corresponding articles or services that must be 

purchased through FMS. And as necessary, as early as possible in the DCS process, the 

Non-U.S. Purchaser should request FMS support from the U.S. Government.
21

3. Direct Commercial Contracting—i.e., DCS + Foreign Military 

Financing

In limited circumstances, through transactions referred to as Direct Commercial 

Contracts (as defined above, “DCC”), some countries can use Foreign Military Financing

(as defined above, “FMF”) to finance DCS transactions. As was discussed in the first half 

of this paper, FMF typically is used in FMS, with the U.S. Government granting funds to a 

foreign country that then are spent in an FMS transaction. Nonetheless, ten foreign 

countries—Israel, Egypt, Jordan, Turkey, Greece, Portugal, Morocco, Tunisia, Pakistan, 

and Yemen—can participate in DCC.

The DSCA has published detailed guidelines describing the requirements for 

DCC,77 and it approves these transactions on a contract-by-contract basis.78 Generally, 

the DCS contract must be worth $100,000 or more. The contract also must be for 

“nonstandard” items that do not have a national stock number, and thus are not currently 

being used by the DoD. The FMF funds cannot be used to finance the costs of offsets. 

Additionally, the U.S. Contractor must be incorporated or licensed to do business in the 

United States, unless the DSCA has approved an offshore procurement per the procedures 

in the SAMM. 

An additional requirement—determining the amount of U.S. content in an end 

item—can be difficult. With certain exceptions, defense articles to be purchased through 

DCC must have been (a) manufactured and assembled in the United States, (b) purchased 

from U.S. manufacturers or suppliers, and (c) composed of U.S.-origin materiel, 

components, goods, and services (commonly referred to as “U.S. content”).79 Thus, a 

U.S. Contractor must maintain and provide, if requested, supporting documentation for the 

value of the U.S. content and non-U.S. content, respectively, in an article to be sold via 
22

DCC. If an item consists of both U.S. content and non-U.S. content, FMF can typically be 

used to finance only the value of the U.S. content.80

4. DCS + Outsourced Contract Management

Alternatively, a Non-U.S. Purchaser can outsource the contract 

administration—e.g., quality control, inspection, acceptance, audits—that it must perform 

in a typical DCS transaction. A Non-U.S. Purchaser might conclude, for example, that it is 

too time-consuming, difficult, or expensive to oversee a U.S. Contractor’s work in multiple 

geographic locations.81 Whatever the motivation, though, these contract administration 

services can be contracted to the Defense Contract Management Agency (“DCMA”). The 

DCMA can develop and issue a Letter of Offer and Acceptance to a Non-U.S. Purchaser 

for the cost of providing these services.

5. DCS + Offsets

Further, a Non-U.S. Purchaser using DCS might require offsets from the U.S. 

Contractor as part of the transaction.82 As explained in the first half of this paper, an offset 

is a quid pro quo arrangement—i.e., a benefit given to a Non-U.S. Purchaser in order to 

induce the acquisition of U.S. military articles or services. In effect, foreign articles or 

services are purchased by the U.S. Contractor as a condition of sale in the DCS transaction. 

An offset can be direct or indirect, involving the purchase of foreign articles or services 

that are related or unrelated to the U.S. military articles or services being exported, 

respectively. 

6. DCS + Articles or Services Supplied by the U.S. Government

Alternatively, the U.S. Government might supply articles or services for a DCS 

transaction. A U.S. Contractor will buy military articles or services from the U.S. 

Government, then sell the articles or services in a DCS transaction. For marketing and 
23

planning purposes, the U.S. Government can provide non-binding cost and delivery 

estimates. But even then, the U.S. Government will sell the articles or services only under 

the following conditions:

• The U.S. Contractor has an approved export license (which this paper 

discusses in greater detail below);

• The U.S. Contractor intends to incorporate the articles or services into end 

items being sold in a DCS transaction;

• The end items are for the armed forces of a friendly country or international 

organization;

• In the case of articles, the U.S. Government would supply the articles as 

government-furnished equipment or material if the end item were being 

procured by the DoD;

• In the case of services, the U.S. Government services must be performed 

within the United States; and

• The articles and services are available only from the U.S. Government, or 

they are not commercially available on the U.S. Contractor’s delivery 

schedule.83

B. The Negotiable Terms of a DCS Transaction

DCS also provides a “greater degree of flexibility” for negotiating contract terms.84 

Indeed, when negotiating a DCS transaction, there is “no structured, regulatory guidance, 

such as the FAR, that must be followed[,] as is the situation with FMS.”85 DCS thus 

appeals to those that “wish to participate actively in tailoring the procurement process.”86 

A DCS contract negotiation could address, any (or all) of the following, among other 

things:

• The type of contract—e.g., fixed-price; cost-reimbursement; 

time-and-materials; and otherwise.

• Basic terms—e.g., language (English or foreign) and currency (U.S. or 

foreign).
24

• Financial terms—e.g., price; payment schedule; method of payment; 

security for payment; use and availability of financing; repatriation of 

funds; and tax planning, including transfer pricing.

• Specific delivery requirements—e.g., risk of loss; passage of title; 

packaging; storing; and other logistical issues.

• Inspection and performance responsibilities, specifications, and standards.

• Post-sale service and support—e.g., training; maintenance; spare parts; and 

repairs—and warranties.

• Issues and choices of law and disputes—e.g., types and methods of breach; 

penalties for breach; applicable law (U.S., foreign, and multinational,

including treaties); local registration and licensing; tariffs and customs; 

domestic preferences; alternative dispute resolution; forum selection; 

sovereign immunity of U.S. and foreign entities; and domestic and 

international force majeure.

• Insurance coverage.

• Intellectual property protection.

• Terms for confidentiality and non-disclosure.

In the end, the parties to a DCS transaction must assume different (and often 

greater) responsibilities and risks. 87 Not only must U.S. Contractors be “very 

knowledgeable about their products,” but they must have the business and legal acumen 

and resources to handle an international transaction, to assume the greater overhead 

management costs of negotiating and closing the contract, and to internationally “deliver 

quality items and services in accordance with the contract provisions.”88 Meanwhile, a 

Non-U.S. Purchaser attracted to DCS is often savvy, with “extensive business ties to the 

West,” and with “knowledge[] of US law and financing[.]”89 Additionally, a Non-U.S. 

Purchaser “must be prepared to address the contractor directly to resolve any issues that 

arise.”90
25

II. THE LEGAL FRAMEWORK FOR DCS: U.S., FOREIGN & INTERNATIONAL LAW

While the FMS process has its own statutory authority, DCS is covered by a

mélange of U.S., foreign, and international laws. This section provides a broad overview 

of these issues.

A. U.S. Law

The U.S. laws that apply to international military sales can be thought of as falling 

within two broad policy goals: (1) promoting U.S. national security and foreign policy; 

and/or (2) averting corruption, fraud, and waste.

1. Promoting U.S. National Security and Foreign Policy

At the outset, “[a]ll sales of defense articles or services, FMS or DCS, must 

promote U.S. strategic and foreign policy interests.”91 For that reason, all FMS and DCS 

transactions are subject to U.S. “trade controls”—i.e., U.S. export controls, economic 

sanctions, and anti-boycott laws and regulations. Trade controls ensure that these 

transactions occur in a manner consistent with U.S. national security and foreign policy.

Still, trade controls compliance can be more complex and risky with DCS than with 

FMS because of the larger and more varied DCS market, and because certain rules that 

apply to FMS, such as the licensing exemption provided by section 126.6 of the 

International Traffic in Arms Regulations (“ITAR”), do not apply to DCS. As discussed 

below, in addition to understanding the applicable trade controls laws and regulations of 

the purchasing country, the parties must understand the U.S. Government’s (a) export 

control laws, (b) international economic sanctions, and (c) anti-boycott laws and 

regulations. This burden is all the more on U.S. Contractors, given the stiff penalties for 

noncompliance.
26

a) U.S. Export Control Laws

As a threshold matter, U.S. export control laws regulate exports and reexports of 

goods, technology, and software based on the destination, end-use, and end-user. This 

includes physical exports from the United States to a foreign country and also includes 

cross-border electronic transmissions of software or technology (e.g., telephone calls, 

e-mail, and downloads from remote computer servers), the disclosure or transfer of 

technical data or software source code to a non-U.S. person in the United States, and 

defense services provided on behalf of, or for the benefit of, a non-U.S. person in the 

United States or abroad. Further, they can adhere to U.S.-origin items even after an initial 

export; in this way, they can regulate reexports and retransfers of certain goods, software, 

and technology from one non-U.S. person to another non-U.S. person, or from one foreign 

country to another foreign country. The applicable requirements vary based on the export 

jurisdiction and classification of the articles or services, the identities of Non-U.S. 

Purchasers, the identities of end-users of the items, and the intended end uses for the items.

Pursuant to the U.S. export control regime, DCS transactions must comply with the 

U.S. Government’s export licensing requirements. Here, the U.S. Department of State, 

Directorate of Defense Trade Controls (“DDTC”), and the U.S. Department of Commerce, 

Bureau of Industry and Security (“BIS”), exercise primary jurisdiction.92 Traditionally, 

DDTC has exercised jurisdiction over transactions involving defense articles and services. 

BIS exercises jurisdiction over transactions involving commercial or “dual-use” (i.e., both 

commercial and military) articles and services. Both agencies could have jurisdiction over 

a DCS transaction. However, as a result of recent U.S. export control reforms, BIS has 

acquired increased jurisdiction over certain defense items. For example, DDTC often 

licenses the export and reexport of key end-items (e.g., fighter aircraft), while BIS 
27

authorizes the export and retransfer of many of the end-items’ parts, components, 

accessories, attachments, and associated equipment (e.g., aircraft tires; filters; brake wear 

pads; and cockpit-panel knobs, indicators, switches, buttons, and dials).

DDTC oversees the export, reexport, or retransfer of defense articles and services 

(including technical data93) to non-U.S. persons and non-U.S. destinations pursuant to the 

ITAR. 94 The ITAR set registration, licensing, and reporting requirements for 

U.S. manufacturers, exporters, and brokers of defense articles. They also impose approval 

requirements on certain transactions by non-U.S. parties (e.g., retransfers of U.S.-origin 

defense articles from one non-U.S. entity to another, including where the U.S. items are 

incorporated in non-U.S. origin products).

With some exceptions, a DDTC license or other approval is required for the export, 

reexport, retransfer, or temporary import of a defense article and service (including 

technical data). U.S. Government arms embargoes and other proscriptions bar some 

foreign countries, including China, 95 from receiving any defense articles or services 

(including technical data) subject to the ITAR. DDTC prohibits the release of any articles 

or services (including technical data) subject to the ITAR to these countries, companies 

incorporated in these countries, or other companies owned or controlled by the government 

or companies of these countries. DDTC also closely restricts exports to any individual that 

is a national of one of these countries, whether that release occurs in the United States or 

abroad, absent a license, approval, or exemption.

Meanwhile, BIS oversees transactions involving commercial and dual-use items, 

exercising its jurisdiction pursuant to the Export Administration Regulations (“EAR”).96 

BIS has broad authority to regulate virtually all exports from the United States that are not 
28

subject to the jurisdiction of another agency (e.g., DDTC), and to regulate reexports from 

one non-U.S. country to another of U.S. items or of non-U.S. products that contain more 

than de minimis U.S. content. That said, BIS controls only a small subset of such exports, 

based on the sensitivity of the item, as well as the nature of the end-use and end-user.

b) U.S. Economic Sanctions

Additionally a DCS transaction must comply with the U.S. trade and economic 

sanctions programs and regulations administered by the U.S. Department of the Treasury, 

Office of Foreign Assets Control (“OFAC”).97 Absent a specific or general license from 

OFAC, U.S. sanctions bar DCS transactions with certain countries, individuals, and 

entities. OFAC programs currently impose strict controls on transactions involving Cuba, 

Iran, North Korea, the Republic of Sudan (but not the Republic of South Sudan), and Syria. 

A U.S. Contractor cannot participate in a DCS transaction with one of these countries, nor 

can it release technology or technical data to a national of one of these countries (with some 

limited exceptions), whether that release occurs in the United States or abroad. Similarly, 

all U.S. persons (including U.S. companies and individuals), wherever they are located, are 

prohibited from engaging in DCS transactions with individuals or entities (e.g., shipping 

vessels, freight transporters or forwarders, end-users, consignees, subcontractors, teaming 

partners, agents, brokers) named on any U.S. Government list of restricted parties, 

including the U.S. Department of Commerce’s Denied Parties List and Entity List and 

OFAC’s list of Specially Designated Nationals.98

c) U.S. Anti-Boycott Laws and Regulations

Further, the U.S. Government anti-boycott requirements that apply to DCS prohibit 

a U.S. Contractor from participating in or cooperating with an international boycott that 
29

has not been endorsed by the U.S. Government. Although it is not the only target, the 

primary aim of these anti-boycott programs is the Arab League boycott of Israel.99

The U.S. Government enforces two separate sets of anti-boycott laws and 

regulations. The first is administered by the U.S. Department of Commerce through the 

EAR.100 The other set is administered by the U.S. Department of the Treasury.

101 These 

laws have different, complicated, and occasionally inconsistent requirements.102 Suffice it 

to say, however, that violations of the EAR regulations can result in substantial civil or 

criminal penalties and/or the loss of export trading privileges. The Treasury regulations do 

not prohibit any conduct per se, but they penalize boycott participation and cooperation by 

imposing additional income taxes on a U.S. taxpayer (and members of the taxpayer’s 

controlled group, as defined in Internal Revenue Code (“IRC”) section 993(a)) if it agrees 

to participate in or cooperate with a boycott that is not endorsed by the U.S. Government.

Finally, with limited exceptions, these anti-boycott programs require a U.S. 

Contractor to report boycott requests that it receives (even if it refused to comply with the 

request). Under the EAR, a report must be filed with the U.S. Department of Commerce 

within thirty days after the end of the calendar quarter in which the request was received (or 

within sixty days if it was received outside of the United States). The IRC requires reports 

to the U.S. Department of the Treasury, with the filing of the U.S. Contractor’s annual tax 

return.

2. Averting Corruption, Fraud, and Waste

Furthermore, DCS is subject to U.S. laws and regulations meant to protect the 

integrity of procurements and transaction participants, and, relatedly, to avert corruption, 

fraud, and waste.
30

a) Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act (“FCPA”) establishes strict anti-bribery 

safeguards and also bookkeeping and accounting requirements.103 Both U.S. Contractors 

and Non-U.S. Purchasers must understand how the FCPA applies to DCS transactions, as 

expansive FCPA jurisdiction has been asserted over both U.S. persons and over non-U.S. 

persons. The U.S. Government has applied the FCPA to U.S. companies; U.S. nationals; 

permanent U.S. residents; agents and representatives; foreign affiliates, subsidiaries, and 

joint ventures of U.S. companies; and U.S. affiliates, subsidiaries, and joint ventures of 

foreign companies.

(1) FCPA Anti-Bribery Provisions

The FCPA’s anti-bribery provisions prohibit any act “in furtherance of” the 

“bribery” of a foreign official—i.e., a payment, offer to pay, promise to pay, or 

authorization to pay money or anything of value that is meant to influence the recipient’s 

official duties, or to secure an improper advantage in obtaining or retaining business. On 

these bases, the payment of any currency with a corrupt intent, no matter how small the 

amount, can be a bribe; also, a bribe can be a non-cash gift, charitable contribution, 

donation, expense reimbursement, or a mere promise of future payment. A payment 

intentionally made to influence or win a contract award can be a bribe, but so too can one 

that is meant to buy non-public information, or circumvent laws and regulations, or reduce 

customs duties, taxes, administrative fees, or penalties. Plus, a foreign official can be a 

high-level or low-level officer or employee, a person acting on a foreign government’s 

behalf, a state-owned business, a party official, or a candidate for office.104
31

(2) FCPA Bookkeeping and Accounting 

Requirements

Separately, the FCPA’s bookkeeping and accounting requirements apply to 

“issuers” of securities that are registered under the Securities Exchange Act of 1934. An 

“issuer” can be a U.S. or foreign company, public or private. The FCPA requires that an 

issuer maintain accurate books and records, and it prohibits the falsification of books and 

records. Relatedly, the FCPA requires that an issuer have adequate accounting 

controls—essentially, accounting practices that conform to Generally Accepted 

Accounting Principles and provide a prudent official with reasonable assurances that the 

issuer’s transactions are properly authorized and recorded. Circumventing or failing to 

implement adequate accounting controls is prohibited. An issuer also is responsible for the 

accounting controls and practices of its subsidiaries and affiliates.105

(3) FCPA Fines and Penalties

FCPA fines and penalties are assessed per violation and can compound quickly. A 

company’s violation of the anti-bribery provisions triggers a criminal fine of up to 

$2 million and a civil fine of up to $10,000, plus penalties of twice the amount of the 

pecuniary gain resulting from the FCPA violation. 106 A company’s violation of the 

bookkeeping and accounting requirements is punishable by a criminal fine of up to 

$25 million and a civil penalty of either twice the amount of its pecuniary gain or an 

amount up to $500,000, whichever is greater.107

b) Money Laundering Control Act

Although “money laundering” commonly refers to cleaning money of the taint of 

criminal activity, the U.S. Government’s criminal money laundering statutes outlaw a 

broader swath of conduct. Of these statutes, the U.S. Money Laundering Control Act 
32

(“MLCA”) is the most prominent.108 It prohibits U.S. persons and non-U.S. persons from 

participating in a transaction if knowingly using, depositing, transferring, or concealing 

proceeds from a “specified unlawful activity,” or if knowingly promoting a “specified 

unlawful activity.” A “specified unlawful activity” can be under any of the hundreds of 

federal, state, and foreign laws that the MLCA has incorporated by reference, including the 

FCPA, export-related offenses, and bribery-related offenses. Thus, when a U.S. 

Contractor or Non-U.S. Purchaser is charged with violating one of these statutes, it might 

face criminal charges under the MLCA, as well. And depending upon the section of the 

MLCA that has been violated, an offender faces a fine of up to $500,000 or twice the value 

of the property involved in the transaction, plus twenty years’ imprisonment.

c) Suspension and Debarment

A strict suspension and debarment system bars U.S. Contractors from doing 

business with the U.S. Government if they have been debarred, suspended, or proposed for 

debarment. 109 Similar regulations apply to DCS. For instance, a U.S. Contractor or 

Non-U.S Purchaser that violates the ITAR or EAR can be suspended or debarred, and thus 

prohibited from participating in a DCS transaction.110 In fact, if a U.S. Contractor is found 

to be ineligible for whatever reason by any federal agency, it can be barred from obtaining 

an export license.111 Relatedly, an export license can be denied, revoked, suspended, or 

amended when “any party to the export or agreement, any source or manufacturer of the 

defense article or defense service[,] or any person who has a significant interest in the 

transaction” has been debarred, suspended, or proposed for debarment.112 Regulations 

also prohibit U.S. Contractors and Non-U.S. Purchasers from applying for, obtaining, or 

using an export license to benefit a party that is known to be ineligible, nor can they “order, 

buy, receive, sell, deliver, store, dispose of, forward, transport, finance, or otherwise 
33

service or participate” in a DCS transaction if it could benefit a party known to be 

ineligible.113

d) Risks and Exposure Attributable to Third-Parties

As a final matter, third-party intermediaries, representatives, brokers, and/or agents 

are often used by U.S. Contractors and Non-U.S. Purchasers when pursuing, negotiating, 

or consummating a DCS transaction. These relationships create an additional layer of 

complexity and risk for DCS transactions, as third-party conduct can be imputed to a 

U.S. Contractor or Non-U.S. Purchaser across a range of circumstances.

In the end, DCS participants must appropriately account for these risks in their risk 

management and compliance programs, but also in the manner in which they negotiate, 

structure, and consummate a DCS transaction. As discussed above, third-party conduct is 

relevant to the application of export controls and sanctions. A third party also might 

violate foreign laws, as noted below. Or, as is relevant here, a third party can violate 

U.S. anticorruption laws and regulations. Under the FCPA, an organization can be held 

liable not only for its own actions, but also for actions taken on its behalf, which the 

organization either knew of or (explicitly or implicitly) authorized. Noncompliant 

activities by a third-party intermediary also trigger many bribery cases.

B. Foreign Law

Executed DCS sales are international transactions and thus must comply with 

foreign laws and regulations, as well. The most relevant and pressing of these are 

discussed below. 

1. United Kingdom Bribery Act of 2010

A U.S. Contractor or Non-U.S. Purchaser could violate the United Kingdom 

(“UK”) Bribery Act of 2010 (“UK Bribery Act”). 114 Broader than the FCPA, the 
34

UK Bribery Act prohibits giving, receiving, and failing to stop bribes.115 And even a 

non-UK entity can violate the UK Bribery Act, as can occur when part or all of a bribery 

offense happens in the UK; when an offender maintains a “close connection” with the UK; 

or, in certain circumstances, when a non-UK entity is a “commercial organization”116 that 

conducts business in the UK. 

Specifically, the UK Bribery Act criminalizes giving any offer, promise, or gift of 

any advantage to “another person”117 if done with the intent to induce or to reward the 

improper performance of a function or activity. It criminalizes giving any offer, promise, 

or gift of any advantage to another person if it is known or believed that the mere 

acceptance of the advantage would constitute the improper performance of a function or 

activity. It separately criminalizes giving any offer, promise, or gift of any advantage to a 

“foreign public official”118 if it is intended to influence the official and result in obtaining 

or retaining business or a business advantage. It criminalizes requesting, agreeing to 

receive, or accepting a bribe. And, it criminalizes the failure of a commercial organization 

to prevent a bribe by one of the organization’s agents, employees, or subsidiaries.119 A 

criminal conviction under the UK Bribery Act is punishable by, among other things, 

permanent debarment from public contracts in the European Union.

2. Foreign Government Offset Requirements

Well over one hundred countries use (and often require) offsets. Further, U.S. law 

requires that U.S. Contractors submit an annual report identifying, among other things, all 

offset agreements exceeding $5,000,000 in value.120 In practice, though, a U.S. Contractor 

may find that Non-U.S. Purchasers’ offset requirements are neither uniform, nor practical, 

nor compliant with U.S. law. For example, a developing country might require that a 

majority of a DCS contract’s supplies and services come from firms within that country; 
35

this requirement, however, could overlook serious industrial base or labor market 

deficiencies. A Non-U.S. Purchaser might require that offsets be direct, indirect, or a 

combination of the two, or it might specify foreign firms that are eligible to receive an 

offset award. A Non-U.S. Purchaser might incentivize certain purchases or investments by 

applying a “multiplier” to the value of these offset commitments. Another might stipulate 

that offset commitments must be satisfied within a certain time period, or that offset 

obligations can be transferred to different contract instruments or contracting parties. 

Some Non-U.S. Purchasers impose contractual or financial penalties if a U.S. Contractor 

fails to satisfy an offset commitment. All in all, these divergent systems, requirements, and 

practices create tremendous financial, management, and compliance challenges.

3. Other Foreign Laws

Additionally, a DCS transaction will likely be subject to the national and local laws 

of the Non-U.S. Purchaser. Too numerous and diverse to summarize, foreign laws pose 

unique management and compliance challenges. Indeed, foreign procurement or 

anti-corruption law might conflict with U.S. law. Alternatively, foreign law might 

complicate or conflict with the commercial interests of a U.S. Contractor. There might be 

extensive licensing and registration requirements, tariffs, or import fees. Foreign 

subcontractors, partners, or teammates might benefit from generous immunities. 

Similarly, the foreign labor market might enjoy significant hiring preferences and 

employment benefits. 

C. International Law

Lastly, international agreements such as the World Trade Organization 

Government Procurement Agreement (“GPA”) and the Organisation for Economic 

Co-operation and Development (“OECD”) Anti-Bribery Convention (“Convention”) 
36

could apply to DCS transactions. Over forty members of the WTO have signed the 

GPA,121 a framework of rights and obligations for non-discrimination and transparency in 

government procurements. But even so, the GPA unevenly applies to sales of military 

articles and services; for one thing, although it prohibits offsets, two frequently-invoked 

exceptions—offsets can be used by developing countries, or by any country if necessary to 

protect its national security interests—can swallow the rule. Likewise, the OECD 

Convention is meant to criminalize bribing a foreign public official, but it leaves the 

Convention’s implementation and enforcement to the forty signatories, not to the 

OECD. 122 These country-by-country efforts have been described as lax and 

inconsistent.123 In short, along with the GPA and the Convention, other international 

procurement and anti-corruption agreements might apply,124 but with debatable influence 

and efficacy.125
37

SELECTING BETWEEN FMS AND DCS

Plainly, whether to pursue an international sale through FMS or DCS is a 

complicated decision. U.S. laws and regulations set certain restrictions. Additionally, a 

foreign purchaser might expect certain features available only through FMS or DCS. And 

even where these factors do not dictate that FMS be used, the flexibility of DCS must still 

be weighed against significant countervailing concerns. 

This section describes these issues.

I. U.S. GOVERNMENT RESTRICTIONS

The U.S. Government can designate that certain military articles and services are 

for sale on an FMS Only basis. This designation bars the use of DCS, and it is assigned 

based on four criteria: (1) legislative/Presidential restrictions; (2) DoD policies, directives, 

or regulatory requirements; (3) government-to-government agreements; and 

(4) interoperability/safety requirements of the U.S. military.126

Accordingly, an FMS Only designation is based on the U.S. Government’s 

political, military, and/or national security concerns, and it gives the U.S. Government 

exclusive control over the sale of certain military articles or services to Non-U.S. 

Purchasers. Sales of major weapon systems, even if done through DCS, will often require 

an accompanying FMS case. Advanced military technology is often designated as FMS 

Only. Man-portable air defense missiles, cryptographic equipment, precise geo-locational 

positioning technologies, and airborne early warning and control systems have been 

designated as FMS Only, as well.127

By contrast, for articles and services that have not been designated as FMS Only, a 

U.S. Contractor can request a DCS Preference from the DSCA. On the surface, a DCS 

Preference functions like an FMS Only designation, but to the benefit of a U.S. Contractor. 
38

When a DCS Preference has been awarded, the U.S. Government should not make the 

articles and services available through FMS; rather, the U.S. Government should re-direct 

any purchase requests that it receives to the U.S. Contractor with the DCS Preference. But 

a DCS Preference differs from an FMS Only designation in two ways: (1) it is valid for 

only one year, subject to renewal; and (2) it does not categorically bar the U.S. 

Government from opening an FMS transaction. The U.S. Government gives only a “best 

efforts” commitment to honoring a DCS Preference, and its failure to comply with a DCS 

Preference “will not invalidate any resultant FMS transaction.”128

Generally, the U.S. Government will stop work (or will not commence work) on a 

proposal for an FMS offer with a Non-U.S. Purchaser that has requested or that is 

negotiating a DCS contract for the same articles or services from the same provider. 

Likewise, the U.S. Government asks that a Non-U.S. Purchaser cancel any requests for 

FMS data if it will pursue the same articles or services through DCS.129

II. PREFERENCES OF FOREIGN CUSTOMERS

Foreign customers may wish to use the FMS process over DCS based on a number 

of considerations. These may include “system cost, performance, delivery schedule, life 

cycle logistics support, interoperability, and industrial utilization as well as the political 

relationship with the selected source nation.”130 Furthermore, the FMS process can also 

allow countries to leverage existing DoD contracts, and thereby get lower prices resulting 

from larger production runs. Some countries also prefer to allow the DoD to perform the 

contract negotiations, others prefer the transparency provided by the U.S. acquisition 

system, and many prefer the “total package approach” provided by FMS.131 The total 

package approach can provide a foreign country not only with a weapon platform such as a 
39

fighter aircraft, but also with the weapons, sustainment, and training needed for operational 

use of that weapon platform.

III. OTHER IMPORTANT CONSIDERATIONS

As noted, for DCS-eligible services and articles, a DCS sale might offer greater 

flexibility to structure, negotiate, and execute contract terms that are tailored to the parties’

respective needs and goals. Many contractors gravitate to these advantages. Still, there are 

countervailing considerations that must be considered, as summarized below132:

Potential Contracting Advantage of DCS Countervailing Consideration

With DCS, the parties can freely structure the 

transaction and negotiate more appropriate cost 

and contract terms.

The U.S. Contractor and Non-U.S. Purchaser 

must have sufficient business and legal 

resources and acumen.

As a commercial transaction, DCS is not subject 

to many of the legal and regulatory

requirements of FMS, and thus might be 

negotiated and finalized more flexibly and 

rapidly.

Again, the U.S. Contractor and Non-U.S. 

Purchaser must have the resources and acumen 

to bear these responsibilities and risks; further, 

if the Non-U.S. Purchaser actually desires a 

closer military relationship with the U.S. 

Government, then FMS (and its unique 

requirements) might be more attractive. And 

even with DCS, the U.S. Government must still 

approve an export license, as discussed further, 

below.

DCS allows a Non-U.S. Purchaser to acquire 

nonstandard, uniquely-tailored packages of 

articles and services that are not available via 

FMS.

Nonstandard, unique items articles and services 

might need to be integrated and/or standardized 

with other articles or services, or require a 

greater degree of follow-on support services 

from the U.S. Contractor or U.S. Government. 

Some Non-U.S. Purchasers prefer the “total 

package” approach available through FMS. 

With DCS, the Non-U.S. Purchaser has greater 

freedom to insist on offsets.

As explained in the first half of this paper, FMS 

also permits offsets—although, they must be 

negotiated directly with the U.S. Contractor, not 

the U.S. Government.

DCS may obviate many costs that increase the 

price of FMS transactions—e.g., administrative 

surcharges. However, administrative costs of 

DCS can be significant, depending upon the 

facts of the proposed transaction.

Depending upon the ability of the negotiating 

parties, DCS prices can rival or exceed those of 

FMS; also, DCS still might demand follow-on 

services, support, and article integration.
40

At bottom, a U.S. Contractor wishing to begin selling (or to expand sales) of 

articles or services through international sales to foreign buyers must consider these issues, 

as well as the full range of other issues set forth in this paper. As the international military 

sales market continues to expand, having the expertise to navigate these highly-regulated 

waters is essential. While a single paper cannot provide complete coverage for topics as

complex and dynamic as these, the authors hope that this paper will be a good starting point 

for U.S. Contractors looking to this international market.
41

REFERENCES

 1 See DSCA, Fiscal Year Series (as of Sept. 30, 2012) at 2, 

http://www.dsca.mil/sites/default/files/fiscal_year_series_-_30_sep_2012.pdf. (reflecting 

$30.15 million for DCS compared to $11.49 million for FMS).

2 These are data for unclassified exports of military articles. See GAO-10-952 

Report at i. Data are not available for DCS’s contributions to classified export 

transactions, or to sales of military services. Id. at 2, 13, 17.

3 Id. at 7-8. DCS and FMS were used in roughly equal measure for the next largest 

categories—e.g., vehicles, weapons and parts; other equipment and parts; missiles and 

parts; ammunition, explosives, and parts; firearms and parts; and ships and parts. Id.

4 E.g., Sandra I. Erwin, U.S. Firms Rule Global Arms Market, But Dominance May 

Not Last, National Defense Magazine Blog (December 8, 2013), 

http://www.nationaldefensemagazine.org/blog/lists/posts/post.aspx?ID=1359. Even 

sterner competition can come from foreign firms that are unimpeded by the complicated 

U.S. laws and regulations that govern U.S. Contractors participating DCS transactions. 

5 This section was authored by Derek Gilman, General Counsel, Defense Security 

Cooperation Agency.

6 22 U.S.C. § 2751.

7 Defense articles include any item or technical data designated on the U.S. 

Munitions List (“USML”) contained at 22 C.F.R. § 121.1. 

8 Defense services include: (1) the furnishing of assistance (including training) to 

foreign persons, whether in the United States or abroad in the design, development, 

engineering, manufacture, production, assembly, testing, repair, maintenance, 

modification, operation, demilitarization, destruction, processing or use of defense articles;

(2) the furnishing to foreign persons of any technical data controlled under the USML, 

whether in the United States or abroad; or (3) military training of foreign units and forces, 

regular and irregular, including formal or informal instruction of foreign persons in the 

United States or abroad or by correspondence courses, technical, educational, or 

information publications and media of all kinds, training aid, orientation, training exercise, 

and military advice. See 22 C.F.R. § 120.9.

9 22 U.S.C. § 2761 and 22 U.S.C. § 2762.

10 22 U.S.C. § 2321j.

11 See Executive Order 13637, March 8, 2013 (superseding Executive Order 11958, 

as amended of January 18, 1977, delegating the President’s authority with respect to these 

matters to the Secretary of Defense); DoD Directive 5105.65, October 26, 212 (further 

delegating the authority to the Director of the Defense Security Cooperation Agency).

12 22 U.S.C. § 2752.

13 Article 3 of the AECA, 22 U.S.C.§ 2753.
42

 14 An LOR may be preceded by marketing activities by the contractor. If the 

contractor requests an advocacy letter from the Department of Commerce and there is no 

other U.S.-origin defense article that is anticipated to compete, the Department of Defense 

may advocate for that defense article. If there is more than one U.S.-origin defense article 

that may compete, DoD may only provide generic advocacy (e.g., either U.S. defense 

article offered in the competition would address the country’s requirements). Further, the 

DoD may undertake certain pre-LOR activities in anticipation of receiving an LOR. 

Pre-LOR activities are those necessary to enable the foreign country to define requirements 

sufficiently to produce a complete LOR. See SAMM, C9.3.4.

15 In Section C5.1.2, the SAMM states that an LOR should: 

1. Identify the desired defense articles and/or services 

in sufficient detail for the United States Government (U.S. 

Government) to prepare an accurate cost estimate.

2. Indicate whether Price and Availability (P&A) data, 

a Letter of Offer and Acceptance (LOA), an LOA 

Amendment, or an LOA Modification is desired.

3. If for a blanket order LOA, include the desired 

materiel and services value or the desired total case value.

4. Indicate the proposed method of financing.

5. Identify any anticipated involvement in the 

requested case by anyone not a duly appointed officer or 

government civilian employee of the requesting 

government—i.e., a “third party”—so that the receiving 

Military Department/Implementing Agency may initiate 

appropriate reviews and approval requests.

6. Contain the name and address of the originator and a 

traceable reference number, e.g., letter serial number.

7. Identify the intended/anticipated recipient unit for 

any defense articles and/or services to be purchased with 

FMF, recognizing such unit designations may change as the 

case is implemented and equipment is delivered to the host 

nation. 

16 For DoD, the LOA is signed by a representative of the Implementing Agency and 

the Director of the DSCA.

17 See SAMM, C5.F.4.

18 Paragraph 2.2. of the LOA Standard Terms and Conditions tracks Section 4 of the 

AECA (22 U.S.C. § 2754) and provides: 

The Purchaser agrees, except as may otherwise be mutually 

agreed in writing by the Purchaser and the U.S. Government, 

to use the defense articles sold hereunder only: 2.2.1. for 
43

 

internal security; 2.2.2. for legitimate self-defense; 2.2.3. for 

preventing or hindering the proliferation of weapons of mass 

destruction and of the means of delivering such weapons; 

2.2.4. to permit the Purchaser to participate in regional or 

collective arrangements or measures consistent with the 

Charter of the United Nations, or otherwise to permit the 

Purchaser to participate in collective measures requested by 

the United Nations for the purpose of maintaining or 

restoring international peace and security; or 2.2.5. for the 

purpose of enabling foreign military forces in less developed 

countries to construct public works and to engage in other 

activities helpful to social and economic development. 

2.2.6. for purposes specified in any Mutual Defense 

Assistance Agreement between the U.S. Government and 

the Purchaser; or, 2.2.7. for purposes specified in any other 

bilateral or regional defense agreement to which the U.S. 

Government and the Purchaser are both parties.

19 LOA Standard Terms and Conditions, ¶¶ 2.3-2.6 and 4.4.

20 LOA Standard Terms and Conditions, ¶¶ 3.1-3.2.

21 LOA Standard Terms and Conditions, ¶ 5.1.

22 FMF is appropriated in the annual U.S. Department of State, Foreign Operations, 

and Related Programs Appropriations Act. 

23 See, e.g., Foreign Military Financing appropriation under International Security 

Assistance in U.S. Department of State, Foreign Operations, and Related Programs 

Appropriations Act, 2014, P.L. 113-76, Division K, Title IV.

24 See id.

25 See id.

26 The ten countries eligible for DCCs are: Israel, Egypt, Jordan, Morocco, Tunisia, 

Turkey, Portugal, Pakistan, Yemen, and Greece.

27 “Guidelines for Foreign Military Financing of Direct Commercial Contracts” at 

http://www.dsca.mil/resources/foreign-military-financing-direct-commercial-contracts-f

mf-dcc. See also SAMM, C.9.7.3.

28 Section 21(b) of the AECA (22 U.S.C. § 2761(b)).

29 Section 22(a) and (b) of the AECA (22 U.S.C. §§ 2762(a), (b)) and Section 21(d) 

of the AECA (22 U.S.C. § 2761(d)). 

30 SAMM, C9.8.3; see also, DSCA Policy Memo 09-07, published July 17, 2007, 

available at http://www.samm.dsca.mil/policy-memoranda/dsca-09-07.

31 AECA Sections 21 (22 U.S.C. § 2761) and 22 (22 U.S.C. § 2762).
44

 32 DoD Financial Management Regulation 7000.14-R, Volume 15; OMB Circular 

A-11.

33 SAMM C9.7.3.

34 The DCC Guidelines can be found at: 

http://www.dsca.mil/resources/foreign-military-financing-direct-commercial-contracts-f

mf-dcc

35 See SAMM, C9.9.1.5.3. If available, contractor termination schedules are used to 

calculate TL for a specific FMS case. If contract schedules are not available, the TL 

component of the payment schedule curve is used. If that is not available either, the “DoD 

Standard Curve” is used. See DoD Financial Management Regulations 7000.14-R, 

Volume 15, Chapter 7.

36 Detailed information on standby letters of credit is available in SAMM, C9.9.1.5.4. 

FMF programs are not eligible for standby letters of credit.

37 SAMM, C9.11.2.

38 SAMM, C9.11.3. 

39 Section 21(e)(1) of the AECA (22 U.S.C. § 2761(e)(1)).

40 Section 47(6) of the AECA (22 U.S.C. § 2794(6)).

41 Section 21(e)(2) of the AECA (22 U.S.C. § 2761(e)(2)).

42 Id.

43 32 C.F.R. Part 165; DoD FMR Vol. 15, Chap 7, ¶ 070305. See also DoD Directive 

2140.02.

44 Section 61 of the AECA (22 U.S.C. § 2796). The lease may extend to a specified 

period of time required to complete major refurbishment work prior to delivery. The 

foreign country or international organization must be eligible for FMS in order to be 

eligible to lease defense articles.

45 Id.

46 Foreign Assistance Act Section 505 (22 U.S.C. § 2314). Additionally, to receive 

grant EDA, a country must be justified to Congress for the fiscal year in which the transfer

is proposed via the annual notification letters to Congress with U.S. Department of State

concurrence. Justification to Congress and eligibility does not guarantee that any EDA 

offers will be made on a grant basis, as each request for EDA is considered individually. 

See SAMM, C11.3.2.2.

47 DoD FMR 7000.14-R, Volume 15, Chapter 7

48 Congress generally appropriates funds for BPC programs carried out using DoD 

authorities through the annual Department of Defense Appropriations Act. In certain 

cases, Congress will make appropriations for BPC programs through other legislation. For 

example, for several years Congress appropriated funds for the BPC authorities for Iraq 

and Afghanistan in annual “supplemental appropriations.” Congress appropriates funds 
45

 

for BPC programs carried put using U.S. Department of State authorities in the annual U.S. 

Department of State, Foreign Operations, and Related Programs Appropriations Act.

49 For BPC programs authorized under DoD authorities (such as section 1206 of the 

National Defense Authorization Act for Fiscal Year 2006, as amended) are executed using 

the FMS infrastructure under the authority of the Economy Act (31 U.S.C. §§ 1535, 1536). 

BPC programs authorized under U.S. Department of State authorities (most notably 

programs using Peacekeeping Operations funds) are executed under the authority of 

Section 632(b) of the Foreign Assistance Act.

50 SAMM, C15.1.2.1.

51 SAMM, C15.1.3.2.

52 See SAMM, Chapter 8.

53 See Section 505 of the Foreign Assistance Act and Sections 3 and 4 of the AECA

(22 U.S.C. §§ 2753, 2754); the LOA Standard Terms and Conditions.

54 22 U.S.C. § 2795.

55 10 U.S.C. § 114.

56 DFARS 225.7304

57 See, e.g., European Commission Directive 2009/81/EC on Defence and Security 

Procurement.

58 Defense Production Act Amendments of 1992, P.L. 102-558, Sec. 123.

59 Id.

60 Defense Production Act Amendments of 1992, P.L. 102-558, Sec. 123. Additional 

information on offsets is available on the Defense Procurement and Acquisition Policy 

website: http://www.acq.osd.mil/dpap/cpic/ic/offsets_of_foreign_military_sales.html.

61 See 10 U.S.C. § 2350a and section 27 of the AECA (22 U.S.C. § 2767).

62 See SAMM, C9.9.1.5.4 (discussing standby Letters of Credit).

63 Id.

64 Section 61 provides the authority to the President. However, the President

delegated this authority to the Secretary of Defense through Executive Order 13637. The 

Secretary of Defense, in turn, delegated this authority to the Director, DSCA, through DoD 

Directive 5105.65.

65 See Section 61 of the AECA (22 U.S.C. § 2796). There is no charge for leases 

entered into for purposes of cooperative research or development, military exercises, or 

communications or electronics interface projects. Additionally, the President may waive 

the requirement for reimbursement of depreciation for any defense article which has 

passed three-quarters of its normal service life if the President determines that to do so is 

important to the national security interest of the United States. The President may waive 

the requirement for payment with respect to a lease which is made in exchange with the 
46

 

lessee for a lease on substantially reciprocal terms of defense articles for DoD, provided 

notification is made to Congress

66 Section 243 of the Ike Skelton National Defense Authorization Act for Fiscal Year 

2011 (P.L. 111-383).

67 Section 252 of the National Defense Authorization Act for Fiscal Year 2012 

(P.L. 112-81).

68 Section 264 of the National Defense Authorization Act for Fiscal Year 2014 

(P.L. 113-66).

69 See “Defense Exportability Features,” available at

http://www.acq.osd.mil/ic/DEF.html. The website indicates that the defense exportability 

program “is a key feature identified in ‘Control Costs Throughout the Product Lifecycle’

section of (USD)AT&L’s Better Buying Power Initiative 2.0.” More information about 

the Better Buying Power initiative is available at the following website: 

http://bbp.dau.mil/.

70 This section was authored by Robert Nichols, Partner, Jade C. Totman, Associate, 

and Christine Minarich, Associate, of Covington & Burling LLP.

71 Unless otherwise specified, the term “U.S. Contractor” can refer to any “U.S. 

person,” as defined under 22 C.F.R. § 120.15:

U.S. person means a person (as defined in § 120.14 of this 

part) who is a lawful permanent resident as defined by 

8 U.S.C. 1101(a)(2)) or who is a protected individual as 

defined by 8 U.S.C. 1324b(a)(3). It also means any 

corporation, business association, partnership, society, trust, 

or any other entity, organization or group that is 

incorporated to do business in the United States. It also 

includes any governmental (federal, state or local) entity. It 

does not include any foreign person as defined in § 120.16 of 

this part.

72 As discussed in the first half of this paper, FMS can be used by a foreign country or 

international organization, not by a private company or similar entity. But in this half of 

the paper, as used for the purpose of describing DCS, the term “Non-U.S. Purchaser” can 

refer to any “foreign person,” as defined under 22 C.F.R. § 180.16:

Foreign person means any natural person who is not a 

lawful permanent resident as defined by 

8 U.S.C. 1101(a)(20) or who is not a protected individual as 

defined by 8 U.S.C. 1324b(a)(3). It also means any foreign 

corporation, business association, partnership, trust, society 

or any other entity or group that is not incorporated or 

organized to do business in the United States, as well as 

international organizations, foreign governments and any 

agency or subdivision of foreign governments (e.g., 

diplomatic missions).
47

 73 U.S. GOVERNMENT ACCOUNTABILITY OFFICE (“GAO”) REPORT TO THE 

COMMITTEE ON FOREIGN AFFAIRS, HOUSE OF REPRESENTATIVES, DEFENSE EXPORTS:

REPORTING ON EXPORTED ARTICLES AND SERVICES NEEDS TO BE IMPROVED, GAO-10-952 

(Sept. 2010) (“GAO-10-952 Report”), at 1.

74 FOREIGN MILITARY SALES, “FREQUENTLY ASKED QUESTIONS,”

http://www.dsca.mil/sites/default/files/fms_faq2_0.pdf (last visited March 13, 2014) 

(noting that the official U.S. policy is “neutral” as to “whether countries purchase U.S. 

defense articles or services commercially or through FMS”). Formerly, the official U.S. 

policy was to limit the use of FMS to specified situations, and to actively encourage DCS. 

See Garry S. Grossman, Foreign Military Sales, 87-12 Briefing Papers 1, 6 (Nov. 1987) 

(citation omitted).

75 This article is not intended to create an attorney-client relationship. DCS’s 

considerable complexity cannot be unwound in just one article, and specific concerns or 

questions should be referred to experienced counsel. 

76 U.S. DEFENSE INSTITUTE OF SECURITY ASSISTANCE MANAGEMENT (“DISAM”),

THE MANAGEMENT OF SECURITY COOPERATION (32d ed. Jan. 2013)) (“DISAM MANUAL”),

at 15-3 (citing DSCA Policy Memorandum 09-32, “Responses to Industry Requests for 

FMS Support Relating to DCS”).

77 See DSCA website, available at 

http://www.dsca.mil/resources/foreign-military-financing-direct-commercial-contracts-f

mf-dcc.

78 DISAM MANUAL at 15-4 (“[A]ll FMFP financed purchases must be approved by 

DSCA on a contract-by-contract basis using Guidelines for Foreign Military Financing of 

Direct Commercial Contracts and the contractor certification provided at 

http://www.dsca.mil.”).

79 Similarly, defense services to be purchased via DCC must be performed by U.S. 

manufacturers and suppliers.

80 See DSCA Guidelines for Foreign Military Financing of Direct Commercial 

Contracts, August 2009. On the one hand, an important exception to this general rule is 

that FMF may be considered for non-U.S. content if it is an integral part of a commercially 

available off-the-shelf (“COTS”) item. A COTS item may be eligible for FMF if it is 

manufactured and assembled in the United States by a U.S. manufacturer or supplier and is 

composed of at least 51% U.S. origin content. To approve the use of this exception, the 

DSCA requires a detailed description of the COTS item, to include information about sales 

of the COTS item in the commercial marketplace. On the other hand, computation of U.S. 

content can become even more complex when accounting for intellectual property, content 

provided by foreign subsidiaries and subcontractors, and sources of compensation of the 

workforce.

81 DISAM MANUAL at 15-14.

82 See SAMM C6.3.9. regarding offsets. As noted above, however, a DCS contract 

funded by FMF “cannot include an offset agreement.” U.S. offset policy is contained in 

Sec. 123 of the Defense Production Act Amendments of 1992 (P.L. 102-558) , which 
48

 

provides: “no agency of the United States Government shall encourage, enter directly into, 

or commit United States firms to any offset arrangement in connection with the sale of 

defense goods or services to foreign governments” and “the decision whether to engage in 

offsets, and the responsibility for negotiating and implementing offset arrangements, reside 

with the companies involved.”

83 See SAMM C4.3.11., C11.5., section 30 of the AECA (22 U.S.C. 2770), and 

DISAM Manual at 15-5.

84 DISAM Manual at 15-7.

85 Id.

86 Id.

87 The flexibility inherent in DCS explains why some U.S. Contractors and Non-U.S. 

Purchasers might be drawn to DCS, not to FMS (e.g., a Non-U.S. Purchaser comfortable 

negotiating with a U.S. Contractor may see DCS as providing negotiating opportunities). 

Or vice versa, where the a party does not desire this flexibility (e.g., a U.S. Contractor may 

not want to subject itself to foreign law, or a Non-U.S. Purchaser may prefer the security 

afforded by FMS). 

88 Id. at 15-6, 15-14.

89 Id. at 15-7.

90 Id. at 15-15.

91 Id. at 15-5. See also, section 1of the AECA (22 U.S.C. § 2751).

92 Other agencies may exercise jurisdiction, as well, including the U.S. Department of 

Energy and the U.S. Department of the Treasury, Office of Foreign Assets Control.

93 Technical data includes: (1) information, other than software required for the 

design, development, production, manufacture, assembly, operation, repair, testing, 

maintenance or modification of defense articles, including information in the form of 

blueprints, drawings, photographs, plans, instructions, or documentation; (2) classified 

information relating to defense articles and defense services on the USML and 600-series 

items controlled by the Commerce Control List; (3) information covered by an invention 

secrecy order; and (4) software directly related to defense articles. See ITAR § 120.10.

94 22 C.F.R. Parts 120-130.

95 These embargoed or “proscribed” countries currently are Afghanistan, Belarus, 

Burma, China, Cote d’Ivoire, Cuba, Cyprus, the Democratic Republic of the Congo, 

Eritrea, Fiji, Guinea, Haiti, Iran, Iraq, Lebanon, Liberia, Libya, North Korea, Somalia, Sri 

Lanka, the Republic of Sudan (but not the Republic of South Sudan), Syria, Venezuela, 

Vietnam, and Zimbabwe.

96 15 C.F.R. Parts 730-775.

97 These regulations include those set forth in 31 C.F.R. Parts 500-598.

98 The U.S. Government’s consolidated screening list is available at 

http://export.gov/ecr/eg_main_023148.asp. 
49

 99 On a quarterly basis, the Treasury Department publishes a list of countries 

participating in this boycott of Israel. The most recent list includes: Iraq, Kuwait, 

Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and Yemen. 

100 See 15 C.F.R. Part 760.

101 See Internal Revenue Code, Section 999.

102 Covering all of the complex prohibitions and penalties in the U.S. anti-boycott laws 

is beyond the scope of this paper. In general, though, the following activities could raise 

anti-boycott issues: refusing or agreeing to refuse to do business with or in a boycotted 

country or with its government, nationals, or companies; refusing or agreeing to refuse to 

do business with a boycotted/blacklisted person, insurer, or vessel; agreeing to refuse to do 

business with a company whose ownership or management is made up of individuals of a 

particular nationality, race, or religion; furnishing or agreeing to furnish information 

concerning the business relationships of the company, or its parent or affiliate companies, 

with Israel, companies, residents, or nationals of Israel, or with regard to any person or 

company on a blacklist; furnishing information, in deference to a boycott requirement or 

request, about the race, religion, sex, nationality, or national origin of a U.S. person; and 

refusing or agreeing to refuse to hire or otherwise discriminating against a U.S. person, in 

deference to a boycott requirement or request, on the basis of that person’s race, religion, 

sex, nationality, or national origin.

103 14 U.S.C. §§ 78m, 78dd-1, 78dd-2, 78dd-3, 78ff. The FCPA is the most pressing 

anti-corruption law wielded by the U.S. Government. Other relevant laws have been 

passed by the U.S. Government—such as those that address wire and mail fraud, 

accounting and certifications, and taxes and securities—and might apply to a DCS 

transaction, but they are beyond the scope of this paper. 

104 For all that, there are a few narrow, case-by-case exceptions and defenses to FCPA 

liability. “Grease payments”—i.e., payments to expedite or facilitate the performance of a 

routine action—might not violate the FCPA’s anti-bribery provisions. That said, they still 

must comply with foreign laws and the FCPA’s bookkeeping provisions. Also, a person 

accused of violating the FCPA can attempt to show that a payment was legal under foreign 

law, or that a payment was a reasonable, bona fide expense directly related to promoting a 

product or performing a contract. 

105 Still, where an issuer holds less than a majority interest, it must only exercise good 

faith efforts towards promoting the use of proper accounting controls and practices by the 

subsidiary or affiliate.

106 An individual that violates the anti-bribery provisions faces a civil fine of up to 

$10,000 and a criminal penalty of up to $250,000, plus five years’ imprisonment, per 

violation. 

107 An individual that violates the bookkeeping and accounting provisions faces a civil 

penalty of up to $100,000 and a criminal fine of up to $5 million, plus twenty years’

imprisonment, per violation. 

108 18 U.S.C. §§ 1956-57. Among the other criminal money laundering statutes 

enforced by the U.S. Government, the Travel Act, 18 U.S.C. § 1952, prohibits interstate or 
50

 

foreign travel that is conducted with the intent to distribute any proceeds of certain illegal 

conduct, or to promote or carry on any such conduct. Offenses are punishable by five 

years’ imprisonment. 

109 See generally FAR Subpart 9.4 (procurement); 2 C.F.R. Part 180 

(nonprocurement).

110 See 22 C.F.R. § 127.7 (identifying bases for statutory and discretionary debarment 

by U.S. Department of State such that the agency “may prohibit any person from 

participating directly or indirectly in the export, reexport and retransfer of defense articles, 

including technical data, or in the furnishing of defense service”); 22 C.F.R. § 127.8 

(identifying bases for interim suspension of “any person” by U.S. Department of State); see 

also 2 C.F.R. Part 1326 (implementing suspension and debarment procedures for 

Department of Commerce).

111 See, e.g., 22 C.F.R. § 126.7(a)(5) (allowing U.S. Department of State to deny, 

revoke, suspend, or amend a license when “[a]n applicant is ineligible to contract with, or 

to receive a license or other authorization to import defense articles or defense services 

from, any agency of the U.S. Government”).

112 Id. § 126.7(a)(6).

113 Id. § 127.1(d).

114 Bribery Act, 2010 (UK).

115 For one thing, the Bribery Act does not contain an exception for grease payments.

116 A “commercial organization” is an entity incorporated under the law of any part of 

the UK which carries on business in the UK or elsewhere; a UK partnership which carries 

on business in the UK or elsewhere; or any other corporate body or partnership 

incorporated or formed under any foreign jurisdiction, but which carries on business in any 

part of the UK.

117 Because the UK Bribery Act prohibits bribes of “another person,” it can have 

broader application than the FCPA, which prohibits bribes of a foreign official.

118 A “foreign public official” is any elected or unelected individual holding a 

legislative, administrative, or judicial position outside of the UK; any individual who 

exercises a public function for a country, territory, public agency, or public enterprise 

outside of the UK; or any individual who is an official or agent of a public international 

organization.

119 This is a strict liability offence, subject to a defense that the organization had 

adequate procedures in place that were designed to prevent bribery.

120 See 15 C.F.R. Part 701. The Department of Commerce recently published a notice 

reminding U.S. Contractors of this reporting obligation. See 79 Fed. Reg. 18,886, 18,887 

(Apr. 4, 2014). U.S. Contractors also must annually report information on offset 

transactions completed in performance of existing offsets commitments for which offsets 

credits of $250,000 or more have been claimed from a foreign representative. Id.
51

 121 In alphabetical order, the forty-two GPA signatories are: Armenia; Canada; the 

European Union’s twenty-eight member states (Austria, Belgium, Bulgaria, Croatia, 

Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Hungary, Germany, Greece, 

Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Poland, Portugal, 

Romania, Slovak Republic, Slovenia, Spain, Sweden, and the UK); Hong Kong, China; 

Iceland; Israel; Japan; Korea; Liechtenstein; the Netherlands with respect to Aruba; 

Norway; Singapore; Switzerland; Chinese Taipei, and the United States.

122 The OECD’s thirty-four member countries have adopted the Convention: 

Australia; Austria; Belgium; Canada; Chile; Czech Republic; Denmark; Estonia; Finland; 

France; Germany; Greece; Hungary; Iceland; Ireland; Israel; Italy; Japan; Korea; 

Luxembourg; Mexico; Netherlands; New Zealand; Norway; Poland; Portugal; Slovak 

Republic; Slovenia; Spain; Sweden; Switzerland; Turkey; the UK; and the United States. 

So too have six non-members: Argentina; Brazil; Bulgaria; Colombia; Russia; and South 

Africa. A forty-first country, Latvia, is in the process of acceding to the Convention. 

123 See Transparency International Report, Exporting Corruption? Country 

Enforcement of the OECD Anti-Bribery Convention, Progress Report 2012 (2d ed. 2012) 

http://issuu.com/transparencyinternational/docs/2012_exportingcorruption_oecdprogress

_en?e=2496456/2042485.

124 Consider as well the United Nations (“UN”) Arms Trade Treaty (“ATT”), adopted 

by the UN General Assembly on April 2, 2013. A multilateral treaty, the ATT is meant to 

regulate the international export, import, transit, trans-shipment and/or brokering of 

conventional weapons, including battle tanks, armored combat vehicles, large-caliber 

artillery systems, combat aircraft, attack helicopters, warships, missiles and missile 

launchers, and small arms and light weapons. It will enter into force after it has been 

ratified by 50 states; to now, though, only 32 states have ratified it. It was signed (but is not 

yet ratified) by the United States on September 25, 2013. 

125 Other international procurement and anti-corruption agreements are overseen by 

the UN, including the UN Convention on Corruption and the UN Declaration Against 

Corruption and Bribery in International Commercial Transactions; the Council of Europe 

(“COE”), including the COE Civil and Criminal Law Conventions on Corruption, the 

COE Model Code of Conduct for Public Officials, and the COE Convention on the Fight 

Against Corruption Involving Officials of the European Communities or Officials of 

Member States of the European Union; the Organization for American States (“OAS”), 

including the OAS Inter-American Convention Against Corruption; and the African Union 

(“AU”), including the AU Convention on Preventing and Combating Corruption.

126 SAMM C4.3.5, C4.3.5.2. and section 2 of the AECA (22 U.S.C. 2752).

127 SAMM C4.3.5.3. and DISAM Manual at 15-2.

128 SAMM C4.3.6., C4.3.6.1., C4.3.6.2., and C4.3.6.3.

129 SAMM, C4.3.7., C4.3.7.1., C4.3.7.2, and DISAM MANUAL at 15-4.

130 DISAM Manual at 15-1.
52

 131 “Total Package Approach” is defined as: “A means of ensuring that FMS 

customers are aware of and are given the opportunity to plan for and obtain needed support 

items, training, and services from the U.S. Government contractors, or from within the 

foreign country’s resources which are required to introduce and operationally sustain 

major items of equipment or systems.” Glossary, SAMM, DSCA Manual 5105.38-M, 

available at http://www.samm.dsca.mil/listing/esamm-glossary.

132 See DISAM Manual at 15-17; see also Catherine M. Cortes, Direct Commercial 

and Foreign Military Sales, Chemical Defense Equipment: An Introductory Brochure

(June 1991), at 6.