FMS and DCS

On April 9th, President Trump signed an Executive Order titled “Reforming Foreign Defense Sales To Improve Speed And Accountability” (“the FMS EO”).  The FMS EO directs the Departments of Defense and State to reform the foreign defense sales system with the goal of “simultaneously strengthen[ing] the security capabilities of our allies and invigorat[ing] our own defense industrial base.” 

The EO’s policy goals likely will receive bi-partisan support, as both the Biden administration and the first Trump administration oversaw record transfers of U.S. defense articles and services to foreign allies.  Indeed, the FMS EO comes just a few months after the Department of State reported that the final year of the Biden administration saw the “highest ever annual total of sales and assistance provided to our allies and partners,” with a total value of $117.9 billion in sales under the Foreign Military Sales (FMS) program, a 45.7% increase from FY 2023.  Moreover, many of the policy goals align generally with recommendations the House Foreign Affairs Committee’s TIGER Task Force issued last year.

On the other hand, the FMS EO would reduce Congressional review and export restrictions on the transfer of certain sensitive defense articles, expand the ability of foreign allies to procure defense items directly from U.S. contractors through direct commercial contracts, and place a new emphasis on cost and burden-sharing by allies.  These measures are more likely to encounter resistance. Continue Reading New Executive Order Targets Reforms to Foreign Military Sales

On June 13, 2023, the Department of Defense announced that the Secretary of Defense approved recommendations for strengthening the Foreign Military Sales program and instructed FMS-implementing agencies to move forward with these recommendations.  It remains to be seen how the DoD agencies will implement the recommendations, and there is a possibility that legislative action will impact FMS reform and supplement or supersede these recommendations.

Last year, the Pentagon formed a Tiger Team to evaluate the FMS program and consider potential improvements.  As part of that process, the Tiger Team solicited industry input in the form of a November 2022 report compiled by the Aerospace Industries Association, the Professional Services Council, and NDIA, and a follow-on set of seven industry recommendations released in February of this year.  Last month, the Tiger Team released (and the DoD adopted) its own set of six recommendations which largely mirror the broad goals – if not the specific action items – set forth in the industry recommendations. Continue Reading The Department of Defense Targets FMS Program Enhancements

On January 25, 2023, the Defense Security Cooperation Agency (DSCA) announced the U.S. arms transfer figures for FY 2022, showing that U.S. defense sales to foreign militaries bounced back after two years of decline.  Arms transfers through the Foreign Military Sales (FMS) program increased year-over-year by 49% up to a total of $51.9 billion, and Direct Commercial Sales (DCS) transactions increased by the same percentage up to $153.7 billion. 

These enormous single-year jumps in arms transfers reverse declining sales during the two preceding fiscal years, and arms transfers have now returned to nearly match FY 2019 levels.  Unsurprisingly, Russia’s unprovoked invasion of Ukraine was a major driver, as Ukraine’s FMS transactions increased more than fivefold, and several European countries in close proximity to the conflict significantly increased their FMS purchases:Continue Reading U.S. Foreign Military Sales Bounce Back

Given the growing attention in U.S. military assistance to foreign allies and the applicable ground rules, Covington has prepared a primer to understanding the basics of foreign military sales, foreign military financing, and direct commercial sales.  Covington features a multi-disciplinary team of government contracts, export controls, anticorruption, and corporate attorneys…
Continue Reading Covington Primer on Foreign Military Sales and Financing

On December 22, 2021, the Defense Security Cooperation Agency (DSCA) announced the Fiscal Year 2021 transaction figures for the Foreign Military Sales (FMS) Program, reporting $34.8 billion in total transaction value.  FMS declined for the second consecutive year, down 31 percent from $50.8 billion dollars in transactions in FY 2020.  …
Continue Reading U.S. Foreign Military Sales Down Over Thirty Percent in FY 2021

On October 15, 2019, the Defense Security Cooperation Agency (DSCA) announced that foreign arm sales for Fiscal Year (FY) 2019 totaled $55.4 billion.

This amount nearly matches the total from FY 2018 of $55.7 billion, continuing the significant increase in foreign arm sales under the Trump Administration and potentially signaling…
Continue Reading A New Normal for Foreign Military Sales? Total Sales for FY 2019 Nearly Matches FY 2018

On May 23, 2019, multiple news outlets reported that the White House was considering an emergency declaration to permit arms shipments to Saudi Arabia without Congressional approval.  These reports were met with sharp criticism by multiple legislators.  These recent developments shine a spotlight on the contours of the Congressional notice and approval mechanisms set forth in the Arms Export Control Act (AECA).

AECA (22 U.S.C. § 2751 et seq.) is the authorizing statute for the Foreign Military Sales (FMS) program.  AECA and the implementing guidance from the Defense Security Cooperation Agency (DSCA) set forth the procedures for the development of a transaction under the FMS program, referred to as an FMS case.

Once an FMS case has been negotiated between the U.S. Government and the foreign government purchaser, the White House is required submit a formal notification to the Speaker of the House of Representatives, the House Committee on Foreign Affairs, and the Senate Committee on Foreign Relations (although this requirement is subject to country- and defense article-specific dollar value thresholds).  Congress then has 30 days (or 15 days for certain proposed sales to a NATO county, Australia, Japan, South Korea, Israel, or New Zealand) to enact a joint resolution opposing the sale.  Unless a joint resolution is passed within the time period, Congress is considered to have consented to the sale.Continue Reading Congress Braces for a Fight Over Executive Authority Under the Arms Export Control Act

Earlier this month, the FAR Council issued a proposed rule to expand the definition of “commercial item” under the Federal Acquisition Regulation (FAR) to include certain items sold in substantial quantities to foreign governments.  This new rule implements section 847 of the National Defense Authorization Act (NDAA) for FY 2018 (Pub. L. 115-91), and has the potential to extend commercial item status to defense articles that have been sold to foreign militaries, including sales under the Foreign Military Financing program.

Ensuring the commercial item status of products and services has long been a key point of federal contracting compliance for many businesses, as commercial item contracts typically avoid many of the more burdensome provisions imposed by the FAR.  While the term “commercial item” is often generalized to refer to items offered for sale to the general public for non-governmental purposes, the definition of “commercial item” under FAR 2.101 includes certain items used for governmental purposes and sold in substantial quantities to multiple state and local governments.  See FAR 2.101.  This provision permitted products like protective equipment used by police and fire departments to be deemed commercial items.Continue Reading Proposed Rule Offers Foreign Military Sales as a Potential Pathway to Commerciality

Last month, the Department of Defense Inspector General announced that it was undertaking an audit of the Foreign Military Sales (FMS) Agreement Development Process.  The audit will assess how the Defense Security Cooperation Agency (DSCA), Military Departments, and other organizations coordinate foreign government requirements for defense articles and services and whether DoD maximizes the results of the FMS agreement development process.

The audit is in response to a congressional reporting requirement included in the House Report to the National Defense Authorization Act for Fiscal Year 2019.  The House Report noted Congressional concern that the FMS process is “slow, cumbersome, and overly complicated,” and that the acquisition decisions supporting the FMS process are “stovepiped,” leading to an FMS program that is “not coordinated holistically across [DoD] to prioritize resources and effort in support of U.S. national security objectives and the defense industrial base.”  Consequently, Congress directed DoD to conduct this audit of the FMS program and submit a final report to Congress.  The tone and language of the House Report indicates that Congress is seeking to streamline the process for all stakeholders, including the U.S. military, foreign partners, and industry.  The House Report specifically calls out precision guided munitions as a focal point for additional foreign military sales that may mitigate risk to the U.S. industrial base.Continue Reading Inspector General Audit of the FMS Program Underway

The Court of Appeals for the Fourth Circuit recently published a decision that expanded on its prior Trimble ruling that a foreign government customer cannot sue a U.S. contractor in the Foreign Military Sales (“FMS”) context (at least in U.S. courts).  In BAE Sys. Tech. Solution & Servs., Inc. v. Republic of Korea’s Def. Acq. Program Admin., 884 F.3d 463 (4th Cir. 2018), the Korean government claimed that BAE Systems Technology Solutions & Services, Inc. (“BAE”) breached a side agreement that BAE executed with Korea (the “BAE-Korea Agreement”).  The BAE-Korea Agreement, which was separate from the FMS agreement between the U.S. and Korea (the “U.S.-Korea Agreement”), required BAE to use its best efforts to negotiate favorable pricing terms in the FMS transaction between the U.S. Government and Korea, and permitted the courts in Korea to hear disputes arising under the agreement.

BAE secured a favorable declaratory judgment from a U.S. district court to the effect that it had complied with the best efforts undertaking, and the Fourth Circuit affirmed on the broader ground that enforcing the BAE-Korea agreement would be contrary to the policy of the Arms Export Control Act (“AECA”) and the principles laid down by the Fourth Circuit in the 2007 Trimble decision, which held that foreign customers in an FMS transaction cannot sue U.S. contractors under a third-party beneficiary theory.  However, both courts declined to enjoin Korea’s lawsuit in the Korean courts.

The Fourth Circuit’s decision suggests some guidance for U.S. contractors about entering into similar FMS side agreements in light of both U.S. and foreign litigation risks.
Continue Reading Fourth Circuit Further Defines Scope of Contractor Risks in the FMS Sales Context