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Chapter 9

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Revised by DSCA 16-40 - DISAM to ISCS name change.

Chapter 9, Financial Policies and Procedures, describes legal, regulatory, and policy requirements relating to security cooperation sales and grants.

Section Title
C9.1. Purpose - Financial Policies And Procedures
C9.2. Financial Management Legal Provisions
C9.3. General Financial Policies
C9.4. Specific Line Item Pricing Information
C9.5. FMS Charges
C9.6. Pricing Waivers
C9.7. Methods Of Financing
C9.8. Letters Of Offer And Acceptance - Terms Of Sale
C9.9. Payment Schedules
C9.10. Billing
C9.11. FMS Payments From Purchasers
C9.12. Disbursement For FMS Agreements
C9.13. Performance Reporting
C9.14. Financial Reviews
C9.15. Foreign Military Sales (FMS) Trust Fund Administrative Surcharge Safety Level.

C9.1.1. There are many key financial functions performed during the life cycle of a Foreign Military Sales (FMS) case. Development of pricing estimates for Letter of Offer and Acceptance (LOA) documents and billing and reporting of Security Assistance (SA) costs incurred and collected are two critical financial functions. This chapter provides an overview of SA policies and procedures for financial management. See DoD 7000.14-R, DoD Financial Management Regulation (FMR), Volume 15, for detailed SA financial policy and procedures.

C9.2.1. Table C9.T1. provides a summary of the legal references for financial management of the SA program.

Table C9.T1. Financial Management Legal References

Legislation Subject

Arms Export Control Act, as amended (AECA), Section 3(c)(1)(A) (22 U.S.C. 2753(c)(1)(A))

Financing Eligibility

AECA, Section 21 (22 U.S.C. 2761)

Payment terms for FMS sales from stock

AECA, Section 22 (22 U.S.C. 2762)

Payment terms for FMS sales from procurement

AECA, Section 23 (22 U.S.C. 2763)

Foreign Military Financing (FMF) credits

AECA, Section 23 (22 U.S.C. 2763)

Guaranties (used with old Federal Financing Bank (FFB) credits)

AECA, Section 29 (22 U.S.C. 2769)

Design and Construction Services

AECA, Section 34 (22 U.S.C. 2774)
Executive Order (E.O.) 13637

Credit Standards and Criteria

AECA, Section 37 (22 U.S.C. 2777)

Fiscal Provisions - FMS Credits

AECA, Section 42(b) and (c) (22 U.S.C. 2791)

Coproduction/Licensed Production; Offshore Procurement

Foreign Assistance Act of 1961, as amended, Section 503 (22 U.S.C. 2311)

Military Assistance - General Authority

FAA, Section 541 (22 U.S.C. 2347)

International Military Education and Training (IMET)

FAA, Section 632 (22 U.S.C. 2392)

Allocation and Reimbursement Among Agencies

FAA, Section 644 (22 U.S.C. 2403)

Definitions

Annual Foreign Operations and Related Appropriations Acts

Authority and appropriated amounts for FMF and other FMS-related accounts

Restrictions/controls on the ability to execute FMS sales Congressional Notification

Some broad financial policies that should be noted early in the FMS process include the following:

C9.3.1. Recovery of Cost. The FMS program must be managed at no cost to the USG (with certain exceptions specifically identified in the AECA). The LOA mandates that the purchaser pay the full program cost regardless of terms of sale specified for the individual case or the estimated values provided. Modifications and Amendments are used to update case values as necessary when changes to the program occur. See Section C6.7. for more information on when these documents should be used.

C9.3.2. Payment in U.S. Dollars. Sales may be made under FMS only if the eligible purchaser agrees to pay in U.S. dollars (AECA, sections 21 (22 U.S.C. 2671) and 22 (22 U.S.C. 2762) ). AECA, section 21(h) (22 U.S.C. 2761(h)) authorizes reciprocal arrangements under limited circumstances.

C9.3.3. U.S. Guaranties. The USG may guarantee financing by any individual, corporation, partnership, or other judicial entity doing business in the United States (excluding USG agencies other than the Federal Financing Bank) if such financing is in connection with FMS or direct commercial sales of defense items. Fees will be charged for such guaranties (AECA, section 24 (22 U.S.C. 2764).

C9.3.4. Pre-LOR and Case Development Activities. Pre-LOR activities are those necessary to assist the purchaser in defining requirements in sufficient detail to produce a complete LOR. A complete LOR is one that contains all of the information necessary for the Implementing Agency (IA) to develop an LOA response. Pre-LOR activities include research and analysis, meetings, briefings, responses to requests for proposals and participation in international competitions, equipment demonstrations, and travel directly related to those efforts. Case development activities are those required to prepare LOAD quality data after an LOR is complete. Case development activities are complete when the LOA has been signed by the purchaser.

C9.3.4.1. Priority to Case Execution. IAs must make prudent choices when expending FMS Administrative Surcharge funds. In budgeting FMS Administrative Surcharge funds, priority should be placed upon providing support to IA case execution activities.

C9.3.4.2. Limits on Pre-LOR Expenditures. No more than 8% of the total FMS Administrative Surcharge funds allocated to an IA in a fiscal year may be expended on pre-LOR activities. Requests for an exception to policy to exceed the 8% limit on IA expenditure of FMS Administrative Surcharge funds on pre-LOR activities require DSCA Director approval. Requests for an exception to policy must include an accounting of expended and remaining funds and priorities for the remainder of the year.

C9.3.4.3. Pre-LOR and Case Development Notifications to DSCA. IAs will notify DSCA Business Operations and Strategy Directorates of planned pre-LOR and case development activities in the annual FMS administrative funds Program Objective Memoranda (POM) and budget process. Thereafter, IAs must notify DSCA Business Operations and Strategy Directorates when:

C9.3.4.3.1. There are any changes to information presented in the budget process and the change will result in a new or increased cost greater than 1% of the total IA pre-LOR budget approved by DSCA.

C9.3.4.3.2. Expenditure of FMS Administrative Surcharge funds for case development activities associated with a potential FMS case (to include groups of closely related cases) are expected to exceed $1,000,000.

C9.3.4.4. FMS Administrative Surcharge funding associated with these thresholds is all-inclusive (civilian pay, contracts, travel, etc.) and must be reported. Notifications should include an analysis of IA capability to fund other pre-LOR/case development efforts for the remainder of the current fiscal year. A notification memo template is provided at Figure C9.F1.

C9.3.4.5. DSCA will reply to IA notifications within ten (10) working days if additional information or clarification is required.

Figure C9.F1. Notification Memo Template

C9.3.4.6. Use of Appropriated Funds. Should IAs have additional pre-LOR and case development efforts that are not funded in the FMS administrative funds budget, on an exceptional basis and at the discretion of the IA, in accordance with AECA section 43(a) (22 U.S.C. 2792), these efforts may be funded with funds available to the IA for operations. AECA Section 43(a) provides: "Funds made available under other law for the operations of United States Government agencies carrying out functions under this Act shall be available for the administrative expenses incurred by such agencies under this Act." IA funds for operations may not be used to confer a subsidy on the foreign customer in violation of AECA sections 21 (22 U.S.C. 2761) and 22 (22 U.S.C. 2762). FMS administrative funds or case funds that subsequently become available may be used, as appropriate, to reimburse the IA funds.

C9.3.5. LOA Pricing. When pricing FMS case items, the price depends on the source of supply (e.g., available from stock, ordered from procurement, Working Capital Fund (WCF)), and whether the item is to be replaced with a similar or improved item, or involves manpower or training. DoD 7000.14-R, Volume 15, Chapter 7, provides detailed information on how prices are computed.

C9.3.6. Direct and/or Indirect Charges. All FMS program expenses are recovered from the purchaser through direct charges (included in the materiel and/or services cost) or indirect (accessorial) charges and/or surcharges (usually computed as a percentage of costs) on the FMS case. Charges included within the materiel and/or services line may be referred to as “above-the-line” charges. This term is a holdover from the rescinded LOA form (DD Form 1513) where a line divided the direct charges from the accessorial (surcharge) charges. Accessorials and/or surcharges that are not included within a line item value may be referred to as “below-the-line” charges (e.g., transportation surcharge and packing, crating, and handling (PC&H)).

C9.3.7. Single Selling Price. DoD policy is to provide a single unit estimated price for articles offered under FMS. If the purchaser desires, a detailed description of the major components of cost included in estimated prices may be provided with the LOA as supplemental information or via separate report, unless such information may be considered proprietary and not releasable to the purchaser.

C9.3.8. Use of Estimated Prices. To assure that all costs are covered, quotations for defense articles/services are cited as estimated prices, with final adjustments established during case execution or after delivery of articles and/or services. The LOA indicates that prices for articles and/or services are estimates. See DoD 7000.14-R, Volume 15, Chapter 7, for details on those instances when firm prices may be quoted on an LOA.

C9.3.9. FMS Trust Fund. The FMS Trust Fund is used for payments received from purchasers and disbursements made against implemented FMS cases. This fund is cited directly on contracts for the procurement of defense articles and/or services for the purchaser, or is used to reimburse DoD Component appropriations for deliveries from DoD stocks or services performed by DoD employees. The Defense Security Cooperation Agency (DSCA) manages the FMS Trust Fund and is responsible for the solvency of each purchaser's FMS Trust Fund account. See Section C9.11.1.

C9.3.10. Refund of FMS Administrative Surcharge Funds to the FMS Administrative Surcharge Account. There are specific circumstances when FMS Administrative Surcharge funds may be used to initially provide services (e.g., site survey) with subsequent reimbursement of the FMS Administrative Surcharge Account once the case is signed/implemented. The following outlines the process for an FMS case to refund FMS Administrative Surcharge funds to the FMS Administrative Surcharge Account for the specific instances where authorized. See Table C9.T2.

C9.3.10.1. The IA will establish a method of identifying all disbursement vouchers citing FMS Administrative Surcharge funds that will require subsequent refund to the FMS Administrative Surcharge Account by the FMS case when implemented.

C9.3.10.2. Upon case implementation, either a journal voucher (i.e., OF 1017-G, Journal Voucher, or other agency-approved form) or SF 1081, Voucher and Schedule of Withdrawals and Credits, may be used to transfer the prior disbursements from the FMS Administrative Surcharge fund cite to the FMS case fund cite. Refer to the DoD FMR, Volume 10, Chapter 10, paragraph 100201, Completion of Intra-governmental Reimbursement and Transfer Vouchers.

C9.3.10.3. The journal voucher or SF 1081 must be supported by and reference prior disbursement vouchers being refunded to the FMS Administrative Surcharge Account by the FMS case. This provides adequate documentation for the certification of transfer voucher (i.e., journal voucher or SF 1081 ) being processed and provides an adequate audit trail to the original obligation and disbursement transaction.

C9.3.10.4. If the refund is processed against current year FMS Administrative Surcharge fund budget authority, the funds would be available for obligation upon posting of the refund transaction. If the refund is processed against prior year FMS Administrative Surcharge fund budget authority, the excess budget authority made available as a result of posting the refund transaction, is to be returned to DSCA.

C9.4.1. Government-Furnished Engineering Services. The purchaser may request U.S. Government (USG)-furnished engineering services, or costs may be incurred, when providing these services as part of production. These services are offered on FMS cases and are reported and/or billed the same as other services. Estimated costs to provide engineering services are included in the estimated unit cost of the purchased item. Such costs also include the pro-rata share of government-furnished testing and evaluation services. If requested, a break-out of USG cost is provided to the purchaser. USG-furnished engineering services are charged directly to an FMS case as follows.

C9.4.1.1. Performance of the service is necessary for production, configuration control, or reliability of the procured item. The charge is based on the proportionate share of work years needed for the FMS items. The charge is pro-rated based on the ratio of items produced for FMS purchasers to the total items produced in the same time frame.

C9.4.1.2. The services are recurring in nature and are related to a current production run in which the FMS materiel is produced. Nonrecurring costs (NC) are recoverable via policies and procedures included in DoD Directive 2140.2 and DoD 7000.14-R, Volume 15, Chapter 7.

C9.4.1.3. The services are allocable to a specific purchaser or purchaser’s program rather than performed to benefit the program in general. Some engineering work years may be required for general FMS administration. When the costs of such work years cannot be allocated to FMS case lines, they may be paid using FMS Administrative Surcharge funds (FMS Admin).

C9.4.2. Manpower in Support of FMS Programs.

C9.4.2.1. Case-Related Manpower Functions and Funding Sources. Table C9.T2. describes case-related manpower functions and indicates which activities should be included as line items on the case (direct charges) and which activities are covered under the FMS Administrative Surcharge (indirect charges).

C9.4.2.2. Standard Level of Service (SLS). SLS activities are case-related activities covered by the FMS Administrative Surcharge. SLS activities/functions listed in Table C9.T2. under the “FMS Admin” column represent indirect charges funded by the FMS Administrative Surcharge and should not be included and/or priced as direct charges on the LOA. Requests to deviate from the funding sources shown on this table or requests for clarification regarding this table must be coordinated with the DSCA (Business Operations Directorate, Financial Policy and Internal Operations Division).

C9.4.2.3. Program Management Services. The IA may determine that USG program management services, beyond those indirect activities covered under the “Standard Level of Service,” are necessary for successful program implementation and execution.

C9.4.2.3.1. Cases “Accepted” After August 1, 2006. For LOAs or case line items “accepted” after August 1, 2006, any program management services will be included on well-defined, services line items on the case. The tailored line item description note for each of these line items must include details describing exactly what services will be provided and the length of time they will be performed.

C9.4.2.3.2. Cases “Accepted” Prior to August 1, 2006. For cases “accepted” prior to August 1, 2006, program management services were included on Program Management Lines (PMLs) on the cases. Table C9.T3. identifies the types of sales where PMLs may have been used. PMLs were identified on LOA documents using Generic Code R6B. Generic Code L8A was used on older cases to identify Case Management Lines. While R6B and L8A may no longer be added to cases, PMLs and Case Management Lines that were “accepted” prior to August 1, 2006 may be used until closure of those cases as long as the activities are within the scope of the line as written as of August 1, 2006. Adjustments may be made to these existing PMLs via LOA Modifications or LOA Amendments as long as these adjustments are within the current scope of the PML; no adjustments will be made to increase the scope of these line items. Any additional scope required may be added as new line items in accordance with Section C9.4.2.3.1. The FMS Administrative Surcharge is not applied to PMLs. The following must be included on all LOAs, Amendments, or Modifications that include PMLs: “Subtotal Cost of Ordered Articles and Services and PML total value.” The total of these two values is the block (8) value of the document.

Table C9.T2. Case-Related Manpower Functions and Funding Source Manpower Matrix

Table C9.T3. Historical Rules for Use of Program Management Lines (PMLs)

NOTE: FMS cases “accepted” prior to August 1, 2006 may have included PMLs. This table provides historical information for the rules that governed the use of PMLs on those cases. No new PMLs may be included on cases (or new case lines) “accepted” on or after August 1, 2006. Program management costs may be included on cases after August 1, 2006, if justified. Inclusion of these costs should follow the same general guidelines on this table.

 

What Types of Sales MAY Include Program Management Lines?
  • System sales of aircraft, ships, shipboard equipment, missiles, combat vehicles, radars, or communications electronics which include the major end item and necessary logistical and training support

  • Modifications that improve the operational capability of systems already in purchaser inventories

  • Non-standard equipment, systems, or services

  • Sales that include program acceleration

  • Coproduction programs

What Types of Sales MAY NOT Include Program Management Lines?
  • Sales from stock other than weapon systems

  • Follow-on support, including publications, maps, and charts

  • Entirely for services

  • Individual major end item sales

  • Modifications other than those that improve the operational capability of systems

  • Routine non-Major Defense Equipment (MDE) sales

C9.4.2.4. Manpower Reporting Requirement. When forwarded to DSCA for countersignature, the LOA Manpower and Travel Data Sheet (MTDS) must accompany any LOA that contains case-funded manpower. An MTDS is also required for Amendments that change the scope (increase or decrease) of lines involving manpower, as well as for Modifications that increase the value of lines involving manpower. Table C9.F2. is the MTDS format for manpower pricing. The MTDS may be provided to purchasers upon request. The following services are exempt from the MTDS requirement:

  1. Services provided as a membership in the USG-sponsored groups identified in Row #101 of Table C9.T2.;

  2. Services provided by the Working Capital Fund (WCF) as long as the services are part of the final material total cost and cannot be separated from the unit price, i.e., organic costs. If only services are being provided by the WCF, an MTDS is required;

  3. Lines involving blanket order CONUS training, OCONUS Security Assistance Teams, or schoolhouse-provided training where manpower costs are embedded within the course/tuition rates;

  4. Contractor Logistics Support using Military Articles and Services List (MASL) number R9A-0761000000CLS,

  5. Repair and Return programs;

  6. Refurbishment/Overhaul programs; and

  7. Any embedded labor (e.g., pro-rata share of engineering support) that is part of the materiel cost and cannot be separated from the unit price.

The MTDS for Amendments must reflect the total personnel, travel, and support costs for lines that include manpower, not just the differences between the previous and revised amount; this applies to all lines being revised, whether an increase or decrease in scope. The MTDS for Modifications must reflect the total personnel, travel, and support costs for lines that include manpower, not just the differences between the previous and revised amount; this applies only to lines being revised due to price increases.

Figure C9.F2. LOA Manpower and Travel Data Sheet (MTDS)

C9.4.2.5. Manpower Funding Sources. Manpower for FMS case-related programs is funded from one of two sources: the FMS Administrative Surcharge or FMS case lines. See Table C9.T2. for a description of case manpower functions and how each function should be funded. Requests to deviate from these funding sources must be coordinated with the DSCA (Business Operations Directorate, Financial Policy and Internal Operations Division).

C9.4.2.6. Program Management Services - Tracking Costs. An auditable methodology must be used to document work each individual performs on a program management services line (for cases “accepted” on or after August 1, 2006) or a Program Management Line (for cases “accepted” prior to August 1, 2006). Personnel charges must be identifiable by position number, employee identification number, or other traceable means.

C9.4.3. Training. DoD 7000.14-R, Volume 15, Chapter 7, provides detailed guidance for the pricing of training on FMS cases and under the International Military Education and Training (IMET) funded program. The following paragraphs provide additional policy applicable to the various tuition rates (Rates A – E). See Chapter 10 of this Manual for information on Travel and Living Allowance (TLA) charges for the IMET funded program.

C9.4.3.1. Change in Status if IMET-Recipient Country.

C9.4.3.1.1. Under AECA, section 21(a)(1)(C) (22 U.S.C. 2761(a)(1)(C)), countries purchasing education and training via an FMS case and using national funds are to be charged the incremental rate (Rate C) if they are concurrently in receipt of IMET funds (receiving IMET funds in the same fiscal year as the case). If a country is not concurrently in receipt of IMET, it is not eligible for incremental pricing of education and training paid on LOAs accepted/signed after the end of the fiscal year of its IMET funding allocation.

C9.4.3.1.2. The rate to be charged for education and training is established at the time of sale, not at the time that the education and training begins or periods to which it may extend. The rate, whether incremental or full, will continue to apply to all education and training provided under the LOA, or Amendments to it, until the total value of the training line has been obligated. Note: Incremental pricing and full pricing rates may not be mixed on the same training line.

C9.4.3.1.2.1. If a country is concurrently receiving IMET funding at the time an LOA is accepted/signed, then the LOA should be priced using the incremental rate (Rate C) for education and training, as referenced in DoD 7000.14.-R, Volume 15, Chapter 7, paragraph 0710.

C9.4.3.1.2.2. If a country is not in receipt of IMET funding at the time of LOA acceptance/signature, then the full rate (Rate A) for education and training is to be charged.

C9.4.3.1.2.3. If a country is no longer in receipt of IMET yet has an LOA/Amendment that has been accepted/signed using incremental pricing and there is a requirement to increase the dollar value of a training line for an adjustment, e.g., a student’s training on that line exceeded the programmed training time by one week to which additional costs were incurred, the incremental pricing applicable to the line when the case was accepted/ signed is the appropriate pricing to charge to the line. If, on the other hand, there is a requirement to increase the dollar value of training on the original LOA/Amendment for other than an adjustment, e.g., adding another course or adding additional students (change in scope), a new line will need to be established that prices the new requirement at the full cost (Rate A).

C9.4.3.1.2.4. If an LOA/Amendment has been accepted/signed using full pricing (Rate A) and a country subsequently begins to receive IMET funding during any fiscal year in which training is still to be performed under the case, then that case may be amended to delete any unobligated funds from the full-priced education and training line and a new line added on the LOA which may then be priced at the incremental rate (Rate C) for future education and training requirements. There will be no retroactive/backward adjustments for training already started or scheduled (student in the “training track”). Students that began education and training with the full rate cannot retroactively receive the incremental rate when the case is amended. Only those students starting education and training on or after the Amendment is accepted/signed are eligible to receive the incremental rate.

C9.4.3.2. Civilian Personnel Acceleration Factors.

C9.4.3.2.1. Leave and Holiday Factor. The leave and holidays acceleration factor of 18 percent is applied to the base salary only when the employee is not reimbursed on a full time basis.

C9.4.3.2.2. Fringe Benefits Factor. The civilian personnel fringe benefits factor is applied to the base salary, with leave and holiday acceleration when applicable, to recover the USG's contribution of civilian employee benefits such as retirement, insurance and health plans, cash awards, and, when applicable, the USG's share of social security taxes and leave and holidays. The Civilian Fringe Benefit Rates are published annually at the OUSD(C) reimbursable rates Web site.

C9.4.3.2.3. Unfunded Civilian Retirement (UCR). The unfunded civilian retirement factor is applied to the base salary, with leave and holiday acceleration when applicable, to recover retirement, post-retirement health benefits, and post-retirement life insurance costs incurred by USG. The UCR factor is published annually with the Civilian Fringe Benefit Rates. These factors may be found at Department of Defense FY 2015 Reimbursable Rates webpage. The UCR factor is applicable to full cost tuition rates and not applied to incremental tuition rates. It is also not applied to Building Partner Capacity cases nor when calculating personnel costs to be reimbursed by the FMS Administrative Surcharge Budget.

C9.4.3.3. Military Fringe Benefits. Military personnel services are priced using the applicable DoD Military Personnel Composite Rate plus an acceleration factor that covers medical health care costs of active duty personnel and their dependents. In addition rates include a per capita normal cost for Medicare-Eligible Retiree Health Care (MERHC) accruals. These factors are published annually by OUSD(C) at Department of Defense FY 2015 Reimbursable Rates web page. Military fringe benefits consist of quarters (family housing), subsistence, medical (hospital), and other personnel support (e.g., commissary and exchanges). The costs are applicable to both direct and indirect military salaries and are computed by applying the acceleration factors for officer and enlisted personnel. These costs are included for all military personnel allocated to the training course. Tuition rates D and E exclude both direct and indirect military salaries; therefore, military fringe benefits are excluded as well. Military fringe benefits costs, used as part of base operating support (BOS) costs and allocated to training courses, are used as indirect costs in the tuition rates. The costs must not be duplicated in the tuition rates by also being included as direct and indirect costs under Pay and Fringe Benefits.

C9.4.3.4. Maintenance and Repair of Facilities. These costs are part of the normal base operating costs. When training facilities are used for SA courses, the costs are included as indirect costs in the tuition rates.

C9.4.3.5. Attrition Charges for FMS Training. Attrition charges are included in tuition Rate A for flying and/or non-flying training courses whenever the training or educational course includes the use of training equipment or operational equipment used as training aids. For all other FMS tuition rates (e.g., Rates B, C, and D) and non-tuition based training that includes the use of training/operational equipment as training aids, the liability statement, as provided in DoD 7000.14.-R, Volume 15, Chapter 7, is applied. For dedicated training programs, provisions of the LOA must state whether an attrition factor is charged or some other arrangement has been made concerning the destruction of equipment in the liability statement. Attrition charges are recorded directly into the attrition account. DSCA must approve use of these funds. When equipment is damaged beyond repair due to FMS student error, a report of the loss and request for funding to cover procurement of the replacement items is submitted for DSCA (Business Operations Directorate) approval. After DSCA approval is obtained, the MILDEP forwards a request (with a copy of the DSCA approval) to DFAS Indianapolis to process the payment from the attrition account to the appropriate recipient(s).

C9.4.4. Asset Use, Tooling Rental, or Facility Rental.

C9.4.4.1. Charges for Use of USG-Owned Facilities. Fair pricing legislation removed the requirement to apply asset use, tooling rental, or facilities rental charges on FMS cases using USG property. Commercial sales of defense articles to any foreign country or international organization include charges for use of USG-owned facilities, plants, and production or research equipment in connection with the production of the defense articles. Collections of these costs are deposited into the Miscellaneous Receipts Account 3041.

C9.4.4.2. Rental Charges for Use of DoD Assets. Commercial sales of defense articles produced in Government-owned facilities or with Government-owned industrial plants and production or research equipment for which a rental charge is assessed in accordance with the Federal Acquisition Regulation (FAR) Part 52.245-9 and the Defense Federal Acquisition Regulation Supplement (DFARS) Part 245.4 must include the rental charge in the sales price. The rental charge in commercial contracts may be waived on a case-by-case basis. See Section C9.6.4.

C9.4.4.3. Use of U.S. Industrial Plant Equipment or Production and Research Property for Foreign Countries or International Organizations. Non-Government use of industrial plant equipment or production and research property requires prior written approval of the contracting officer or Departmental level approval, depending upon the percentage of usage, in accordance with provisions in the DFARS Part 245.405 and Part 245.407. Such approval may be granted only if use does not interfere with U.S. requirements, and the work is in support of FMS or a direct commercial sale approved under the AECA. The rental charges in commercial contracts can be waived on a case-by-case basis. See Section C9.6.4.

C9.4.5. Nonrecurring Cost (NC) Recoupment Charges. Title 32 Code of Federal Regulations (CFR) Part 165, DoD 7000.14.-R, Volume 15, Chapter 7, and DoD Directive 2140.2 provide detailed guidance on establishing NC charges and pricing these costs on LOA documents. These costs do not apply to cases that are fully financed with non-repayable Foreign Military Financing (FMF) or non-repayable Military Assistance Program (MAP) funds. See Section C9.6.3. on NC waiver requirements and processes. For questions regarding the NC charges contact DSCA (Strategy Directorate). See Appendix 6 for LOA notes relating to NC charges.

C9.4.5.1. NC Approval Process. The DoD Components submit requests to establish an NC to the DSCA (Programs Directorate) using the formats and pricing methodology in DoD 7000.14.-R, Volume 15, Chapter 7. Detailed worksheets accompanying NC recoupment charge establishment requests will be marked “For Official Use Only (FOUO)” unless circumstances require formal classification. DSCA (Programs Directorate) staffs the package within DSCA, Under Secretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)), and Under Secretary of Defense (Comptroller) (USD(C)). After coordination, the Director, DSCA approves or disapproves the NC charge and the Defense Security Assistance Management System (DSAMS) NC table is updated.

C9.4.5.2. Estimated NC Charges. There may be instances when an NC charge is being developed at the same time that an LOA is being prepared to sell the item in question. If there is not enough time to complete the NC approval process, an estimated amount for NC should be included in the unit price of the item on the LOA. The LOA should also include a note informing the purchaser that NC charges on the applicable line are estimates only and advising that a modification shall be done to adjust the price once the approved NC value is known. See Appendix 6 for exact note wording.

C9.4.5.3. Determining NC Charges When Documentation is Not Available. In cases when historical documentation cannot be found, the MILDEP will calculate the pro rata NC at 5 percent of the last known DoD acquisition cost. The MILDEP is required to submit the proposed NC calculation and the basis for concluding that the SME item would have met the MDE threshold to DSCA (Strategy Directorate). Refer to DSCA Policy Memo 12-09, dated February 14, 2012.

C9.4.5.4. Reporting. NC collections are reported on the DSCA(Q)1112 report prescribed in DoD 7000.14.-R, Volume 15, Chapter 7. The report is submitted quarterly by each of the DoD Components, to the DSCA (Business Operations Directorate, Financial Policy and Internal Operations Division Operations Directorate) within 45 days of the end of each quarter.

C9.4.6. Royalties. As a general rule, the FMS purchasers are treated similar to other Federal Agencies when assessing royalties to a purchase.

C9.4.6.1. Royalties for use of intellectual property that is not subject to contractor proprietary rights restrictions normally are not allowed to be collected on FMS cases. If the USG is required to pay a royalty to a contractor for intellectual property that is subject to contractor proprietary rights restrictions, then it is a legitimate charge to the FMS case and should be included in the end item price. In any situation where a royalty is being considered for collection against an FMS procurement, and the same royalty would not be collected against a U.S. Federal Agency procurement, the IA should contact the DSCA (Business Operations and Strategy Directorates) for guidance.

C9.4.6.2. FMS cases implemented prior to January 1, 1998, contained charges (referred to as royalty fees) for the use of technical data packages (TDPs) used to manufacture or produce items for non-USG use. These charges were reflected on a separate line on the LOA. For those FMS cases, financial accounting processes and reporting continue until case closure. Cases implemented on or after January 1, 1998, do not include royalty fees for use of TDPs that are not subject to contractor proprietary rights restrictions.

C9.4.7. Small Case Management Line (SCML). From August 1, 2006 through July 2, 2012, DSCA implemented an effectiveness measure to reduce the volume of small dollar cases. It was recognized that a certain level of FMS administrative support was required in the implementation and execution of these cases. Based on analysis of data, the amount determined appropriate to charge was $15,000. Subsequent review of the initiative indicates that the SCML has served its intended purpose - a reduction in the number of small dollar cases. DSCA rescinded the application of the SCML effective with cases accepted on/after July 3, 2012. DSCA reserves the right to reinstitute the application of the SCML.

C9.4.7.1. SCML Rescission Information.

C9.4.7.1.1. Cases "Accepted" between August 1, 2006 and July 2, 2012. All cases "Accepted" between August 1, 2006 and July 2, 2012 that contain an SCML will retain the SCML in effect at the time those cases were accepted unless the current or future case value changes to preclude its application.

C9.4.7.1.1.1. Cases that decrease in dollar value below $400,000 will not be required to add the SCML.

C9.4.7.1.1.2. Cases with an existing SCML where the case value increases such that the SCML value is reduced to $0 will not have an SCML value reapplied when the case is subsequently decreased in value below $400,000.

C9.4.7.1.1.3. Cases with an existing SCML where the case value decreases will not have the SCML value increased.

C9.4.7.2. SCML General Information. All cases "Accepted” between August 1, 2006 and July 2, 2012 must collect a minimum amount of FMS Administrative Surcharge unless otherwise exempt. For cases "Accepted" between August 1, 2006 and July 2, 2012, if the case value is so small that the FMS Administrative Surcharge amount calculated is less than $15,000, a separate line item (an SCML) will be added to the case so that the FMS Administrative Surcharge and the SCML, combined, total $15,000. [Example: For a case where the calculated FMS Administrative Surcharge is $500, the SCML value would be $14,500.]

C9.4.7.2.1. The value of the SCML line item will be adjusted accordingly as a result of changes in case value when the case is amended or modified.

C9.4.7.2.2. Once an SCML has been added to a case, it cannot be deleted. It can be reduced to $0 if the calculated FMS Administrative Surcharge reaches $15,000, but the SCML line item will remain on the case.

C9.4.7.2.3. When the FMS Administrative Surcharge is waived for a case, the SCML will be considered part of that waiver and will not be charged.

C9.4.7.2.4. The FMS Administrative Surcharge is not assessed against the SCML.

C9.4.7.3. SCML Scope.

C9.4.7.3.1. The SCML requirement applies to all cases (both FMS and BPC) "Accepted" between August 1, 2006 and July 2, 2012 where the case is being financed with any type of funding (e.g., national funds) other than Foreign Military Financing (FMF); or the case is being financed using multiple sources of funding (one of which may be FMF); or the case is being financed wholly using FMF monies and the purchaser received more than $400,000 in FMF funds in the previous Fiscal Year.

C9.4.7.3.2. The SCML requirement does not apply to cases where the purchaser is using FMF monies to wholly fund the case and received between $1 and $400,000 in FMF funds in the previous year. Any exceptions to this policy require the approval of the Director, DSCA.

C9.4.7.3.3. The SCML requirement does not apply to Excess Defense Articles (EDA) cases that are written solely for the purpose of transferring the grant item. These cases will have $0 case value. If the EDA case includes support (e.g. transportation or refurbishment services), the SCML will apply.

C9.4.7.3.4. The SCML requirement does not apply to any case established for Presidential Drawdowns using the "S9" country code.

C9.4.7.4. SCML Case-Writing Requirements.

C9.4.7.4.1. The Military Articles and Services List (MASL) line and generic code used for the SCML is: (R6C) SMALLCASESUPT SMALL CASE SUPPORT EXPENSES

C9.4.7.4.2. A one (1) month availability for the SCML will be used on the LOA (block (5) SC/MOS/TA). This will ensure that the entire value of the SCML is included in the initial deposit. Source of supply code "S" must be used for this line. The Delivery Term Code (DTC) and Offer Release Code (ORC) for this line should both be left blank (which will print as a dash on the LOA document).

C9.4.7.4.3. Primary Category Code (PCC) CE1 must be used when pricing this line in DSAMS. No Indirect Pricing Components (IPCs) should be used against this line. DSAMS line type must be entered as CE (case expense).

C9.4.7.4.4. The SCML note must be included on all cases that include an SCML. See Appendix 6 for specific note wording.

C9.4.7.5. Case Closure Requirements for SCMLs.

C9.4.7.5.1. Increases in Case Value. Cases with deliveries that exceed the current case value require an Amendment or Modification to increase the case value before the case can be closed. See Section C6.7.2.1.2. These Amendments and Modifications must include an appropriate reduction to an existing SCML. If the net case value is increased above the amount needed to achieve $15,000 in calculated FMS Administrative Surcharge value, the SCML value will be reduced to $0. The SCML will not be deleted as it must remain on the case and in the DIFS system to provide an audit trail to the supporting data for previously billed amounts.

C9.4.7.5.2. Reductions in Case Value - SCML Already On the Case. Any case which is proposed to close at a value less than its current value will not have an increase made to an existing SCML. The case will be certified for closure using the current value of the SCML.

C9.4.7.5.3. Reductions in Case Value - SCML Not On the Case. Any case “Accepted” between August 1, 2006 and July 2, 2012 which is proposed to close at a value less than its current value, where the corresponding FMS Administrative Surcharge would now be below $15,000, does not require the addition of an SCML. The case will be certified for closure at the current FMS Administrative Surcharge value.

C9.4.7.5.4. SCML Delivered Amount Adjustments. When the delivered FMS Administrative Surcharges on non-SCML lines result in the need to adjust the SCML delivered amount upward and that adjustment would result in the delivered value exceeding the ordered value on the SCML line by less than $1.00 (usually as a result of rounding), DFAS-IN is authorized to process an FMS Administrative Surcharge flat charge to the first, viable non-SCML line item on the case for any amount under $1.00. In this circumstance, a modification to the case is not required.

Table C9.T4. is a list of charges used in FMS pricing. This list is not all-inclusive. DoD 7000.14.-R, Volume 15, Chapter 7, contains detailed guidance.

Table C9.T4. Table of Charges

C9.6.1. Waiver of FMS Administrative Surcharge. Costs associated with administering the FMS program must always be paid and/or collected (AECA, section 21(e)(1)) (22 U.S.C. 2761(e)(1)). If a waiver of the FMS Administrative Surcharge for the purchaser is approved in one of the circumstances described below, it must still be recouped from another funding source.

C9.6.1.1. Waiver by the Implementing Agency. DoD 7000.14-R, Volume 15, Chapter 7, and AECA, section 21(e)(2)) (22 U.S.C. 2761(e)(2)) allow the IA to waive or reduce FMS Administrative Surcharges that should be assessed to the purchaser on the LOA as long as the IA obligates its own operation and maintenance appropriations to pay the FMS Administrative Surcharge Account the waived and/or reduced amount. Any FMS Administrative Surcharge waivers approved apply to the SCML as well.

C9.6.1.2. Waiver of Administrative Surcharges for NATO Support Organization and its executive agencies (NSPO) FMS Programs. AECA, section 21(e)(3) (22 U.S.C. 2761(e)(3)), allows the waiver of FMS Administrative Surcharges for NSPO programs under very specific circumstances. Waiver of FMS Administrative Surcharges on these cases is not retroactive; only LOAs implemented after October 1, 1988, are eligible for consideration. The waiver value includes the calculated FMS Administrative Surcharge amount and any SCML value included on the LOA. Only NSPO LOAs in support of support partnership agreements or NATO Supreme Headquarters Allied Powers, Europe (SHAPE) projects (i.e., common-funded projects supported by allocated credits from NATO bodies or by host nations with NATO infrastructure funds) qualify for FMS Administrative Surcharge waivers. FMS Administrative Surcharges waived under this program must be reimbursed to the FMS Administrative Surcharge Account from Major Force Program (MFP) 10 funds controlled by the U.S. Mission to NATO. The following procedures apply.

C9.6.1.2.1. NSPO includes a statement in its Letter of Request (LOR) indicating the LOA qualifies for an FMS Administrative Surcharge waiver under AECA, section 21(e)(3) (22 U.S.C. 2761(e)(3)). NSPO identifies the specific NATO/SHAPE project supported by the request and includes the following statement:

"This is a joint coordinated request with the U.S. Mission to NATO. The U.S. Mission to NATO certifies intent to reserve and obligate MFP 10 funds for FMS Administrative Surcharges waived over the life of the LOA. It further certifies that MFP 10 funds have been obligated in the amount of one-half of the FMS Administrative Surcharges computed based on the dollar value of items or services estimated to be reported as delivered in the first year for all LOAs."

C9.6.1.2.2. NSPO provides an information copy of the LOR to the U.S. Mission to NATO when an FMS Administrative Surcharge waiver is requested. For budgeting purposes, NSPO provides a yearly estimate of the amount of FMS Administrative Surcharge waivers to the U.S. Mission to NATO.

C9.6.1.2.3. The IA reviews the waiver request to ensure it supports projects cited in AECA section 21(e)(3) (22 U.S.C. 2761(e)(3)). The IA provides a copy of the request to the DSCA (Operations Directorate) and ensures that the U.S. Mission to NATO has agreed to reimburse DoD. The IA includes a statement in the LOA notes indicating the FMS Administrative Surcharge, to include any SCML value, has been waived. See Appendix 6 for the specific wording of this note. The IA includes relevant correspondence when the LOA document is sent to DSCA for countersignature.

C9.6.1.2.4. DSCA determines applicability to specific requests and approves waivers during final staffing of the LOA document prior to countersignature.

C9.6.1.2.5. The U.S. Mission to NATO budgets for waived FMS Administrative Surcharges, advises DSCA of agreements to reimburse DoD for waived FMS Administrative Surcharges before the LOA is issued to NSPO, and develops an understanding with NSPO concerning programs for which waivers are supported. The U.S. Mission reserves and obligates MFP 10 funds for waived FMS Administrative Surcharges under this legislation for the life of the FMS case. For cases where the calculated FMS Administrative Surcharge value is greater than $30,000, one half of the FMS Administrative Surcharge is recouped as part of the initial deposit. The remaining half is recouped based on the dollar value of items."

C9.6.2. Waiver of Contract Administration Services (CAS). The AECA, section 21(h) (22 U.S.C. 2761(h)) allows the USG to provide quality assurance, inspection, contract administration services, and contract audit defense services without charge to certain foreign governments who have reciprocal agreements. Tables C9.T5., C9.T6., and C9.T7., list approved CAS waiver agreements. The waiver under each agreement applies only to new FMS LOAs with implementation dates (as recorded in DSAMS) on or after the effective date of the reciprocal agreement. See Appendix 6 for CAS Waiver LOA note wording.

C9.6.2.1. Table C9.T5. provides a listing of approved reciprocal country agreements. USD(AT&L) is responsible for negotiating these agreements. These waivers apply to LOAs as a whole and not to individual LOA lines.

C9.6.2.2. Table C9.T6. provides a listing of approved agreements relating to participating groups, organizations, or projects. Changes to this listing should be submitted to the DSCA (Business Operations Directorate).

C9.6.2.3. Table C9.T7. provides a listing of approved NATO CAS reciprocal agreements. Changes to this listing should be submitted to the DSCA (Business Operations Directorate).

Table C9.T5. Approved Reciprocal Country Agreement Listing
(Office of Primary Responsibility (OPR): USD(AT&L))

Country/Security Assistance
Country Code
Effective
Date
Cost Waived

Australia (AT)

April 11, 2013

Quality Assurance and Inspection

Belgium (BE)

April 26, 1983

Quality Assurance and Inspection

Canada (CN)

July 27, 1956

Contract Audit

April 1, 1984

Quality Assurance and Inspection

Czech Republic (EZ)

May 7, 2004

Quality Assurance and Inspection

Denmark (DE)

April 3, 1985

Quality Assurance and Inspection

France (FR)

July 17, 1981

Contract Audit

April 23, 1986

Quality Assurance and Inspection

April 23, 1986

Contract Administration Services

Germany (GY)

December 6, 1983

Quality Assurance and Inspection

December 6, 1985

Contract Audit

Greece (GR)

September 23, 1992

Quality Assurance and Inspection

Israel (IS)

May 7, 2008

Quality Assurance and Inspection

Italy (IT)

January 7, 1983

Quality Assurance and Inspection

Korea (KS)

December 13, 2011

Quality Assurance and Inspection

Netherlands (NE)

April 9, 1982

Quality Assurance and Inspection

April 18, 1985

Contract Audit

Norway (NO)

November 23, 1986

Quality Assurance and Inspection

Poland (PL)

June 22, 2007

Quality Assurance and Inspection

Romania (RO)

December 1, 2015

Quality Assurance and Inspection

Spain (SP)

June 12, 2000

Quality Assurance and Inspection

Turkey (TK)

March 12, 2001

Quality Assurance and Inspection

United Kingdom (UK)

October 30, 1979

Contract Audit

December 30, 1985

Quality Assurance and Inspection

 

Table C9.T6. Approved Agreements Relating to Participating Groups, Organizations, or Projects
(OPR: DSCA (Business Operations Directorate, Financial Policy and Internal Operations))

Groups/Organizations/Projects Effective Date Cost Waived

European Participating Governments (EPG)*:

 

 

Follow-On Buy

Country Codes = F1, F2, F3, F4 (Case Designator = SVI), and F4-SXC

December 19, 1980

Contract Audit

Quality Assurance and Inspection

Mid-Life Update. Production Phase Cases and new F 16 LOAs implemented on or after the effective date.

 

 

Country Codes = F1, F2, F3, F4 (Case Designator = NMP)

April 5, 1993

Contract Audit

PT (New F-16 LOAs implemented on or after the effective date) (Case Designator = NAE)

June 21, 2000

Contract Audit

Polaris Project: United Kingdom Polaris Project (UZ)

USD(C) memo October 27, 1995

Contract Audit

DoD GC memo October 24, 1995

Quality Assurance and Inspection
Contract Administration Services

*The remainder of the F-16 LOAs for BE, DE, NE, and NO get the CAS waivers reflected in Table C9.T5.

 

Table C9.T7. NATO Reciprocal CAS Agreements
(OPR: DSCA (Business Operations Directorate, Financial Policy and Internal Operations))

Agreement Effective Date Cost Waived

NATO (NATO Command or NATO Agency administered program funded by the NATO Security Investment Program (NSIP) (formerly infrastructure))

September 30, 1981
October 28, 1980

Contract Audit
Quality Assurance and Inspection

NATO (All other infrastructure programs administered by a host country)

February 10, 1981

Quality Assurance and Inspection

NATO E-3A

Program Conception (10 USC 2350e)

Full waiver of all contract administration to include:

  • Contract Audit
  • Quality Assurance and Inspection
  • Contract Administration Services

NATO Integrated Communication System Management Agency (NICSMA)

September 30, 1981
May 6, 1980

Contract Audit
Quality Assurance and Inspection

C9.6.3. Waiver of NC Recoupment Charge.

C9.6.3.1. Basis for NC Waiver and/or Reduction. NC charges may be waived or reduced as follows.

C9.6.3.1.1. For sales that would significantly advance U.S. interests in North Atlantic Treaty Organization standardization; standardization with the Armed Forces of Japan, Australia, the Republic of Korea, Israel, New Zealand; or foreign procurement in the United States under co-production arrangements (refer to AECA 21(e)(2) (22 U.S.C. 2761(e)(2)).

C9.6.3.1.2. For the sale of MDE also being procured for U.S. Armed Forces and resulting in a cost savings to the U.S. on the U.S.-procured equipment that substantially offsets the revenue lost as a result of the waiver.

C9.6.3.1.3. For sales when imposition of the charge would likely result in the loss of the sale.

C9.6.3.1.4. For the sale of MDE at a reduced price due to age or condition, the NC is reduced by the same percentage.

C9.6.3.2. NC Waiver Process. Waivers are granted on a case-by-case basis; blanket waivers are not considered. In most cases, the purchaser’s request must be submitted to the USG prior to acceptance of the LOA (or Amendment for increased quantities); however, some waiver requests for NATO interoperability may be approved after the LOA (or Amendment for increased quantities) is accepted.

C9.6.3.2.1. Purchasers submit NC waiver or reduction requests to the MILDEP (preferably with the LOR). If the MILDEP concurs, it endorses the request and submits it to DSCA (Programs Directorate) for approval. The package must include: a copy of the purchaser’s written NC waiver request (including reason and/or justification), MILDEP concurrence (or non concurrence), FMS case identifier, description and quantity of items, NC amounts to be waived (pro rata and total), and any information about cost deviation (i.e., if the proposed pro rata waiver cost does not match the approved pro rata NC charge). DSCA (Programs Directorate) staffs the package within DSCA, Under Secretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)), and Under Secretary of Defense (Comptroller) (USD(C)); additionally, if the basis of the NC waiver is “loss of sale”, the package is staffed within the Office of the Under Secretary of Defense (Policy) (OUSD(P)). After coordination, the Director, DSCA approves or disapproves the NC Waiver and the MILDEP is notified.

C9.6.3.2.2. Waiver requests based on loss of sale must clearly state that denial of the waiver request will result in the loss of the sale. A competing item and its cost, if known, should be identified in the waiver request. The purchaser’s representative authorized to accept (sign) LOAs should sign the request. For loss of sale waivers, the waiver must be approved and NC charges deleted before the purchaser accepts the LOA or Amendment. Acceptance by the purchaser of the LOA or Amendment, which includes the NC charges, negates this basis for a waiver request based on loss of sale.

C9.6.3.2.3. Waiver requests based on offsetting USG costs must be validated by the MILDEP to determine if U.S. cost savings would be realized. The savings must substantially offset the revenue given up by the waiver. The MILDEP determination is coordinated with the MILDEP's Comptroller organization and is provided to DSCA (Programs Directorate) prior to submitting the LOA or Amendment for countersignature. This waiver authority does not apply to sales from stock unless the equipment is to be replaced by current DoD procurement of additional equipment for the U.S. Armed Forces.

C9.6.3.2.4. Section C5.5.4. specifies classification requirements for response documents when waiver requests require congressional notification pursuant to AECA, section 36(b) (22 U.S.C. 2776(b)).

C9.6.3.2.5. An NC charge may be collected as part of a cooperative project or consortium of which USG is a member. If a waiver of these costs is permitted, a special note is included in the LOA. See Appendix 6 for wordings on NC notes.

C9.6.4. Waiver of Tooling Rental Charges for Use of DoD Assets. A contractor may use Government property on work for foreign governments and international organizations only when approved in writing by the contracting officer having cognizance of the property. Requests for waiver or reduction of charges for the use of Government property in cases of direct commercial sales to FMS eligible countries and international organizations should be submitted to the contracting officer, who is authorized to approve the requests in consultation with the appropriate functional specialist. For more information, please refer to the Defense Federal Acquisition Regulation Supplement (DFARS) Part 245, Government Property.

C9.7.1. National Funds. Purchasers are encouraged to use national funds (cash) for Security Assistance (SA) payments. If a purchaser cannot use cash, private financing (without U.S. Government (USG) guaranty) should be considered.

C9.7.2. FMS Credit Sales and Guarantees. When the purchase cannot be financed by other means, credit financing or credit guarantees can be extended if allowed by U.S. law, or if allocated by the Department of State (DoS) within the annual Foreign Military Financing (FMF) ceiling imposed by U.S. law.

C9.7.2.1. FMS Credits. The AECA, section 23 (22 U.S.C 2763), authorizes the President to finance procurement of defense articles and services for foreign countries and international organizations. With the exception of charging below market rates of interest, this authority has been delegated to the Director, DSCA, in consultation with the Secretary of State and Secretary of the Treasury. The FMF program is a source of financing and may be provided on either a grant (non-repayable) or direct loan basis. See Section C9.7.2.7. for additional information on FMF.

C9.7.2.2. FMS Credit Guarantees. The AECA, section 24 (22 U.S.C 2764), authorizes the President to guarantee any individual, corporation, partnership, or other juridical entity doing business in the United States (excluding USG agencies other than the Federal Financing Bank (FFB)) against political and credit risks of nonpayment arising out of their financing of credit sales of defense articles, defense services, and design and construction services.

C9.7.2.3. FMS Credit Standards. The AECA, section 34 (22 U.S.C 2774), requires the President to establish standards and criteria for credit and guaranty transactions in accordance with the foreign, national security, and financial policies of the United States. E.O. 13637 delegates this authority to the Secretary of State with the qualification that, to the extent the standards and criteria for credit and guaranty transactions are based upon national security and financial policies, the Secretary of State shall obtain the prior concurrence of the Secretary of Defense and the Secretary of Treasury, respectively.

C9.7.2.4. Fiscal Provisions Relating to Foreign Military Sales Credits. The AECA, section 37 (22 U.S.C. 2777), specifies that cash payments received under section 21 (22 U.S.C. 2761), section 22 (22 U.S.C. 2762), and section 29 (22 U.S.C. 2769), and advances received under section 23 (22 U.S.C. 2763)shall be available solely for payments to suppliers (including the Military Departments (MILDEPs)) and refunds to purchasers, and are not available for financing credits and guaranties. Amounts received from foreign governments and international organizations as repayments for credits extended pursuant to AECA, section 23 (22 U.S.C 2763) (FMF direct loans), are transferred to either account 11X4121 ("Foreign Military Loan Liquidating Account, Funds Appropriated to the President" - for pre-FY1992 loans) or account 11X4122 ("Foreign Military Financing, Direct Loan Financing Account, Funds Appropriated to the President" - for post-FY1991 loans). If Guaranty Reserve (AECA, section 24(c) (22 U.S.C 2764(c))) funds have been used for a borrower’s overdue payment to the FFB, subsequent amounts received from the borrower shall be merged with the Reserve and shall be available for any purposes for which funds are normally available.

C9.7.2.5. Cash Flow Financing. AECA, section 23(g)(1) (22 U.S.C. 2763(g)(1)), requires Congressional notification of LOAs, Amendments, and commercial contracts for $100M or greater that are partially or totally funded with FMS credit cash flow financing. These notifications (Figure C9.F3.) are developed by DSCA (Operations Directorate) based on data provided for LOA or Amendment countersignature or for review of commercial contracts. Notifications are provided to Congress by DSCA (Legislative and Public Affairs Office). Cash flow financing notifications occur concurrently with formal AECA, section 36(b) (22 U.S.C. 2776(b)) notifications and at least 15 days prior to countersignature of LOAs and Amendments or funding clearance for commercial contracts.

Figure C9.F3. Cash Flow Financing Notification Format

C9.7.2.6. Who May Receive FMS Credit?

C9.7.2.6.1. Eligibility for FMS Credit. Foreign governments and international organizations eligible for FMS are eligible for FMS Credit. The decision to extend credit financing takes into account the suitability of the items, the U.S. military and economic assistance that the country receives, indigenous private financing, U.S. foreign policy interests (including human rights), and other proposed arms purchases by the country. The level of weapons sophistication and the country’s ability to maintain and support the items are also considered. FMS credit assistance is not extended solely to consummate a sale.

C9.7.2.6.2. Changes in FMS Credit and Guarantee Eligibility Status. Credit financing to purchasers may be suspended or terminated for legal and/or policy reasons. Following are some of the reasons why purchasers may not currently be eligible for FMS credit and guarantees.

C9.7.2.6.2.1. Violation of Agreements. The AECA, section 3(c)(1)(A) (22 U.S.C. 2753(c)(1)(A)), states that credits (including participation in credits) may not be issued, and guarantees may not be extended to countries that use the defense articles or services, furnished under the AECA, in substantial violation of any agreement under the AECA, by using such articles or services for a purpose not authorized under Section 4, by transferring or permitting the use of the articles or services without the appropriate consent from the United States, or by not maintaining the security of the articles and/or services.

C9.7.2.6.2.2. Terrorism. The FAA, section 620A (22 U.S.C. 2371), requires the President to terminate all sales, credits, and guaranties to any country that aids or abets (by granting sanctuary from prosecution) any individual or group that has committed an act of international terrorism unless the President finds that national security requires otherwise.

C9.7.2.6.2.3. Discrimination. The AECA, section 5 (22 U.S.C. 2755), states it is the policy of the United States that no sales should be made, or credits or guaranties to any foreign country that through its laws, regulations, official policies, or governmental practices prevents U.S. persons from furnishing defense articles or services on the basis of race, religion, national origin, or sex.

C9.7.2.6.2.4. Foreign Intimidation and Harassment of Individuals in the United States. AECA, section 6 (22 U.S.C. 2756), prohibits offering credits or guaranties to any country determined by the President to be engaged in a consistent pattern of acts of intimidation or harassment directed against individuals in the United States.

C9.7.2.6.2.5. Nationalization of U.S. Property. Assistance shall be suspended for countries that have nationalized, expropriated, or seized properties owned by U.S. citizens or entities, or have imposed discriminatory taxes. Assistance shall also be suspended if a country has initiated steps to repudiate or nullify existing agreements with U.S. citizens or entities without taking proper compensatory action (FAA, section 620(e) (22 U.S.C. 2370(e))).

C9.7.2.6.2.6. Compensation for Nationalized Property. The FAA, section 620(g) (22 U.S.C. 2370(g)), states that no monetary assistance shall be provided to any government, political subdivision, or agency of such government for use in compensating owners for expropriated or nationalized property.

C9.7.2.6.2.7. Failure to Make Payments. The FAA, section 620(q) (22 U.S.C. 2370(q)), states that no assistance shall be provided to any country that is in default of its payments to the United States, during a period in excess of 6 calendar months of principal or interest on any loan made to such country under this act.

C9.7.2.7. Restrictions on the Use of FMS Credit. There are legal restrictions on the use of FMS credit monies. Security Cooperation Organizations (SCOs) must ensure that the foreign government is aware of U.S. restrictions for use of FMS credit financing. Any requests for exceptions must be fully justified and submitted, through the Chief of the U.S. Mission, to DSCA for interagency coordination and approval or disapproval.

C9.7.2.7.1. Economic Considerations. The AECA, section 34 (22 U.S.C. 2774), requires that standards shall be set for FMS credit financing transactions. In general, FMS credit financing may not be used if the transaction would place an undesirable burden on a purchasing country’s foreign exchange resources, create excessive claims on future budgets (e.g., induce burdensome expenditures for maintenance, spare parts, replacement, and indirect support and organizational costs), or otherwise materially interfere with its development. Credit financing is not considered unless there is a reasonable expectation of loan repayment.

C9.7.2.7.2. Co-Production and/or Licensed Production. The AECA, section 42(b) (22 U.S.C. 2791(b)), states that direct credits and guaranteed loans may not be used to finance co-production or licensed production of any defense article of U.S. origin outside the United States unless the Secretary of State notifies Congress in advance of the proposed transaction’s potential impact on employment and production within the United States.

C9.7.2.7.3. Offshore Procurement (OSP). The AECA, section 42(c) (22 U.S.C. 2791(c)), prohibits using funds made available under this Act for procurement outside the U. S. unless the President determines that such procurement does not have an adverse effect on the economy of the United States or the industrial mobilization base. The President’s functions under AECA, section 42(c) (22 U.S.C. 2791(c)), have been delegated to the Secretary of Defense by E.O. 13637. The authority for issuance of OSP Determinations, following concurrence by the DoS and Department of Commerce, has been further delegated to the Director, DSCA. An OSP Determination is an exceptional procedure and should be requested or recommended only when all of the conditions in Table C9.T8. are met.

Table C9.T8. Offshore Procurement Conditions

Condition Number Offshore Procurement Determination Mandatory Requirements
1

The project otherwise qualifies for financing from funds made available by the USG.

2

Either:

  1. One-half or more of the dollar value of the acquisition is of foreign origin, after subtracting from total costs the costs of items that the FAR or DFARS exclude from Buy American Act or Balance of Payments Program consideration, or

  2. the vendor or prime contractor is a business not incorporated in the United States, not a subsidiary of a parent foreign business incorporated in the United States, or an unincorporated business not having its principal place of business in the United States or its outlying areas as defined in the FAR. DFARS 225.101(a);

3

The procurement supports mutual United States and country interests.

4

The defense article or service must be obtained from foreign sources in order to meet the requirement.

5

A U.S. source item or service cannot be modified to meet the requirement.

6

It is cost prohibitive to procure the item or service in the U.S. (e.g., a special production run).

7

There is no negative impact on the U.S. industrial mobilization base (e.g., dissolution of a company doing U.S. defense business) or on an area of U.S. labor surplus (e.g., increased unemployment) if the proposed procurement were from foreign sources.

8

There is no negative impact on general U.S. trade patterns or trends if the proposed procurement were from foreign sources.

9

An OSP Determination in this particular instance would not establish a precedent that weakens the USG ability to be even-handed in future requests from the same or other countries.

C9.7.2.7.3.1. OSP Determination Process. When submitting an OSP recommendation, the MILDEP provides justification and details to the DSCA (Operations Directorate). DSCA reviews and coordinates the recommendation with the DoS and the Department of Commerce. Following concurrence by the DoS and Department of Commerce, a formal OSP Determination is signed as shown in Figure C9.F4. An FMS credit financed LOA may be offered or an FMS credit financed direct commercial contract may be approved, after the OSP Determination is signed.

Figure C9.F4. Offshore Procurement Determination

C9.7.2.7.3.2. OSP Cost Increase Notification. DSCA provides an informal notification to the DoS and Department of Commerce when the value of an OSP project exceeds that originally anticipated by 50 percent or $1,000,000, whichever is greater. The IA provides details to the DSCA (Operations Directorate) for processing the increase notification. An informal memorandum of phone conversations with appropriate officials in the DoS and the Department of Commerce may document these notifications.

C9.7.2.7.4. Transporting FMS Credit Funded Cargoes.

C9.7.2.7.4.1. Ocean Transportation. All items purchased with FMS credit must be transported by U.S. flag vessels when ocean transportation is used. FMS credit agreements may contain provisions for certain waivers that, if approved, permit shipment of up to 50 percent of FMS credit funded cargo on vessels of the borrowing country, and in certain instances such cargo may be transported on vessels of a third country. Such waivers are discussed in Chapter 7 FMS credit funds cannot be used to pay the cost of transportation provided by a vessel of non-U.S. registry.

C9.7.2.7.4.2. Air Transportation. FMS credit may be used to pay air transportation costs only if U.S. flag aircraft are used.

C9.7.2.8. Loan Guarantee Sources.

C9.7.2.8.1. Foreign Military Financing (FMF) Loan Guarantees. The Federal Credit Reform Act of 1990 requires that the President's budget reflect the costs of loan guarantee programs. The loan guarantee is considered Federal Credit and under the requirements of OMB Circular A-11 requires a subsidy. The subsidy funds are to be paid from the program account – the current Foreign Operations Appropriations Act. There is specific guidance on how to calculate the amount of the subsidy, for which OMB is the decision authority. The Congressional Budget Office (CBO) is responsible for scoring the guarantee(s) against the program account; therefore, specific legislation is required for FMF to finance a loan guarantee.

C9.7.2.8.2. Defense Export Loan Guarantee (DELG). Section 1321 of Public Law 104-106 (the National Defense Authorization Act for Fiscal Year 1996) directed the Secretary of Defense to establish a loan guarantee program. USD(AT&L) administers the DELG program; however the program is not currently funded.

C9.7.2.8.3. DoD Loan Guarantee Program. The DoD loan guarantee program with the Federal Financing Bank (FFB), established in 1975, was discontinued in 1984. Repayments to the FFB by debtor countries continue until those loans reach maturity.

C9.7.2.9. FMS Credit Sources.

C9.7.2.9.1. Military Assistance Program (MAP) Merger Funds. Prior to FY 1982, defense articles and services provided to allied governments or international organizations by grant aid were administered through the MAP. In FY 1982, unused MAP funding was merged into the purchaser’s FMS Trust Fund account. The funds are identified within the purchaser’s account as MAP Merger and may only be used to finance FMS cases. There are still open FMS cases that cite these “MAP Merger” funds. See Section C11.HR.1. of this Manual for more information.

C9.7.2.9.2. Foreign Military Financing (FMF) Program. FMF is used to finance FMS through direct credits, either repayable (direct loan) or non-repayable (grant).

C9.7.2.9.2.1. FMF Funding Process.

C9.7.2.9.2.1.1. Congressional Budget Justification (CBJ) for Foreign Operations. In accordance with the AECA, section 25 (22 U.S.C. 2765), no later than February 1st of each year the President transmits to Congress, as part of the annual presentation of SA programs proposed for the next fiscal year, a report that provides an estimate of the aggregate dollar value and quantity of defense articles and services, military education and training, grant military assistance, and credits and guaranties to be furnished by the United States to each foreign country and international organization in the next fiscal year. DSCA annually consolidates input into the SA planning process. See Chapter 14. An Executive Branch position is included in the CBJ recommending FMS credit programs for individual countries.

C9.7.2.9.2.1.2. Congressional Authorization and Appropriation. Upon receipt of the executive branch proposed position and the CBJ, Congress may conduct hearings on the SA program - to include FMF. When the authorization and appropriation acts are enacted, they include a dollar amount ceiling for FMF with some constraints, specified amounts, or special provisions.

C9.7.2.9.2.1.3. Determination of FMF Amount (Allocation). Within the legislatively mandated constraints in any fiscal year, the DoS, with input from the DoD and the Department of Treasury, determines the grant amounts that individual countries shall receive. In this process, the pertinent economic, military, and political factors are considered. The President has delegated to the Secretary of Defense the authority to issue grants and loans to eligible recipients in accordance with the AECA. The Secretary of Defense has further delegated this authority to the Director, DSCA to be exercised in consultation with DoS and the Department of Treasury.

C9.7.2.9.2.1.4. Apportionment. Upon receipt of the DoS program approval and apportionment request document, the Office of Management and Budget (OMB) issues an apportionment document to DSCA. For FMF direct loans, the apportionment document provides DSCA with an apportionment of appropriated funds equal to the principal amount of the loan. FMF grant funds are obligated upon apportionment. FMF loan funds are obligated when the loan agreement with the borrower (purchaser) is signed.

C9.7.2.9.2.2. Implementation and Management of FMF Loans and Grants. Within DSCA, DSCA (Business Operations Directorate) implements and manages loans and grants. DSCA (Business Operations Directorate) prepares the loan and grant agreements (See Appendix 3) and obtains signatures. DFAS Indianapolis disburses loan and grant funds, bills the borrower, and collects payments.

C9.7.2.9.2.2.1. Terms of sale for FMF Loan Funds.

C9.7.2.9.2.2.1.1. For all FMF loans, the IAs must use a stand-alone LOA for the initial implementation and utilization of funds.

C9.7.2.9.2.2.2. Commitment of FMF Funds.

C9.7.2.9.2.2.2.1. DSCA commits FMF funds to approved purchases. DSCA policy requires the FMF funds to be committed to loans and grants in their order of issuance. This encourages commitments within the normal expiration period of each loan/grant, reduces the volume of loan/grant records that must be maintained in an active status, and permits older loans/grants to be closed out.

C9.7.2.9.2.2.2.2. DSCA records commitments against a specific Fiscal Year loan, grant, or MAP-merger program. This information is maintained in DSCA records but does not appear on LOA documents.

C9.7.2.9.2.2.2.3. For new LOAs, DSCA immediately commits FMF (or MAP-merger funds) during the countersignature process. DSCA adjusts commitments as required based on Amendments or Modifications or case closures.

C9.7.2.9.2.3. Disbursement of FMF Loan Funds.

C9.7.2.9.2.3.1. General Policy. While DSCA records and maintains commitments of FMF funds by specific loan, this commitment by specific loan is used as a planning function and does not mean that the borrowing country must cite that specific loan when disbursement of funds is required.

C9.7.2.9.2.3.2. Expiration of Disbursement (Federal Financing Bank (FFB) Loan Commitment) Period. Section 1.1 of FFB and DoD loan agreements (See Appendix 3) define the period through which funds may be disbursed under the loan. In the case of FFB loans, this is called the loan commitment period. The term "commitment period," in this context, means the period through which the FFB is committed to disburse loan funds. Loan funds remaining undisbursed after the expiration date are lost from the borrower's use.

C9.7.2.9.2.3.3. Requests for Disbursement of Loan Funds. All requests for disbursement of FMF funds must be submitted to DFAS Indianapolis by the borrowing country in the letter format set forth in the applicable FMF agreement. Each request for disbursement of FMF funds for amounts due on FMS cases must indicate the FMS case designator(s) and the dollar amount(s) to be disbursed for each case. Procedures for requesting disbursements to commercial suppliers are discussed in Section C9.7.3.

C9.7.2.9.3. Expenditure of FMF Funds. Transfers of FMF funds to the FMS Trust Fund account are expenditure transfers. Once transferred, FMF funds are expended and remain available indefinitely within the FMS Trust Fund for disbursements consistent with the purposes for which they were appropriated, obligated, and expended.

C9.7.2.9.4. FMF Loan Repayment Process.

C9.7.2.9.4.1. Interest Rates. All loans are repaid with interest unless Congress waives payment.

C9.7.2.9.4.1.1. Interest on FMF Direct Loans. Interest charged on direct loans is at a single fixed rate determined by the Department of Treasury. The rate is specified in the FMF loan agreement. Interest rates at less than the cost of money to the USG must be in the national interest and must be identified in enabling legislation.

C9.7.2.9.4.1.2. Interest on DoD Guaranteed Loans Issued by the Federal Financing Bank (FFB). The issuance of FFB guarantee loans was discontinued in 1984; however, borrowing countries continue to repay the outstanding balance of those loans. Interest rates on FFB guaranteed loans are based on the cost of money to the USG. Fees shall be charged for guarantees.

C9.7.2.9.4.2. Repayment Period. The AECA requires that direct loans be repaid over a period not to exceed 12 years unless legislated otherwise by Congress. A 12-year limitation also applies to guaranteed loans except for countries specified by statute. Congress can authorize longer repayment terms for specific countries and authorize a grace period before requiring repayment of the principal. Semi-annual interest payments are required on the principal amount of loan funds disbursed during the grace period.

C9.7.2.9.4.3. Frequency and/or Timing of Payments. Repayments of FMF loans are made in semi-annual installments. Billing statements are sent by DFAS Indianapolis to borrowing countries 30 - 45 days prior to payment due dates. Repayments on FMF loans are due on or before the dates specified in the promissory notes and are repeated in both the FFB and the DFAS Indianapolis billing statements. Repayments falling due on a Saturday, Sunday, holiday, or other day on which the Federal Reserve Bank (FRB) of New York is not open for business, must be made on the first business day thereafter. This extension is used to compute interest for the affected payment, but excluded from the next interest period.

C9.7.2.9.4.4. Late Repayments. If the borrower fails to make a repayment when due, the amount payable is the overdue installment of principal or interest, plus interest thereon, at the rate specified in the promissory note, from the due date to the actual payment date.

C9.7.2.9.4.5. Brooke Amendment. Repayments that continue in arrears for more than one year are subject to Brooke Amendment sanctions. The Brooke Amendment is an annual provision in the Foreign Operations, Export Financing, and Related Programs Appropriations Act, which states, “No part of any appropriation provided under titles III through VI in this Act shall be used to furnish assistance to the government of any country which is in default during a period in excess of one calendar year in payment to the United States of principal or interest on any loan made to the government of such country by the United States pursuant to a program for which funds are appropriated under this Act unless the President determines, following consultations with the Committees on Appropriations, that assistance for such country is in the national interest of the Unites States.” This annual provision includes the FMF appropriation and so makes the Brooke Amendment applicable to FMS guaranteed loans made after 1980 subsidized with FMF. Brooke Amendment sanctions are activated by arrearages of more than one year on either United States Agency for International Development (USAID) loans, Export-Import Bank guaranteed loans, and direct guaranteed loans made under the AECA. Once invoked, the restrictions apply to most U.S.-funded foreign aid programs (economic and military). Table C9.T9. summarizes activities that are affected by Brooke Sanctions.

Table C9.T9. Brooke Sanctions

Activities Not Permitted Under Brooke Sanctions
  • New loan agreements or guaranties cannot be offered or issued.

  • LOAs financed with FMF (FMS Credit) or MAP Merger funds that are accepted on or after the effective date of the sanction is not implemented.

  • New or pending FMF or MAP Merger financed LOAs are not countersigned or issued to the country for acceptance.

  • Direct commercial contracts that require new FMF funds are not approved.

  • New IMET students may not travel to the U.S. or other locations to start training unless funds have already been obligated. Mobile Training Teams (MTTs) and Language Training Detachments (LTDs) will not commence unless funds have already been obligated.

  • IMET students already in training before sanctions were enacted may continue with their training to include follow on training, but no additional sequential courses may be added on or after the effective date of the sanctions. MTTs or LTDs already funded may continue.

  • IMET funded MTTs and LTDs may not be dispatched or extended beyond their scheduled termination date.

  • IMET funded training aids may not be issued from supply nor placed on contract by the supplying agency.

  • For countries that are in default of payment in excess of 1 calendar year, all grant EDA transactions for the affected country are cancelled.

Activities Still Permitted Despite Brooke Sanctions
  • Cash FMS purchases are not subject to these restrictions. Cash payments from national funds may be used to sustain existing FMS cases or fund new cases. It is preferred that a country under the Brooke Amendment use its available national funds to eliminate the arrearage rather than undertake new programs. If a purchaser uses national funds to finance a training case after Brooke Sanctions apply, full cost FMS pricing must apply to the entire case in accordance with AECA, section 21(a)(1)(C) (22 U.S.C. 2761(a)(1)(C)) provisions.

  • Pipeline deliveries on materiel blanket open-ended cases implemented prior to the effective date of sanctions are allowed to continue regardless of term.

  • Requisitions on materiel blanket open-ended cases may be processed.

  • FMF financed cases accepted prior to effective date of sanctions remain in force and are executed. Modifications or Amendments to existing implemented FMS cases are not allowed if they involve new obligations of funds other than foreign country national funds.

  • IMET or FMF-financed students whose course of study or training program has begun may complete such courses, including already funded sequential courses.

  • Sales of EDA continue to be permitted under these sanctions.

C9.7.2.9.5. DSCA Role as Guarantor of FFB Loans. DSCA pays (using the Guaranty Reserve Fund) overdue repayments on FFB (guaranteed) loans that remain unpaid 10 days after the payment due-date. The borrowing country is still obligated to repay the loan and interest continues to accrue on the overdue amount until the repayment is received from the borrowing country.

C9.7.2.9.6. Restrictions on the Use of FMF. Expenditure of FMF funds is subject to legal (See Section C9.7.2.7.) and policy restrictions. Security Cooperation Organizations (SCOs) must ensure that the foreign Government is aware of U.S. policies for the use of FMF. SCOs should generally discourage partner nations from using FMF funding for those items identified in Table C9.T10. However, in certain circumstances these items may be permitted to be purchased with FMF funds if the State Department determines that providing such items is critical to the mission, the bilateral relationship, or the defense articles or services are in direct support of coalition operations where U.S. forces are present. SCOs should initiate an early discussion of requests to use FMF funds with DSCA(Operations Directorate) and DoS(PM). To facilitate review of these requests, SCOs should submit a detailed justification and rationale for purchasing each item with FMF funds rather than host-nation funds and any other relevant facts in support of the request. This guidance applies to FMF used for standard FMS cases and Direct Commercial Contracts (DCCs). The guidance does not affect DSCA management of FMF administrative accounts nor does it apply to Packing, Crating, Handling, and Transportation (PCH&T) cost s associated with equipment transferred to partner nations via the Excess Defense Article (EDA) program.

Table C9.T10. Generally Restricted Items for Purchase with FMF

Defense Articles and Services That Should Not be Purchased with FMF
  • Petroleum, oil, lubricants, and fuel, other than for DoS-funded training events or related to the procurement and initial set-up of new equipment

  • Resupply of small caliber ammunition (i.e., .50 cal and below), other than for formal DoS-funded training events or initial acquisition with new weapons systems

  • Food

  • Office supplies

  • Routine clothing/uniform items, other than those necessary for coalition or peacekeeping deployments

  • Gym equipment (except for rehabilitation purposes)

  • Care of animals

  • Construction and refurbishment projects that are not integral to the provision of a broader package of military articles

  • Headquarters support services, including janitorial services, academic research, personal computers, printers, and accessories; generic software and software maintenance

  • Support for non-U.S.-origin equipment and systems

  • National budget support, including salaries

  • Lease of defense article

C9.7.3. Foreign Military Financing of Direct Commercial Contracts (DCCs). DCCs are contracts where the purchaser enters into a contract directly with a vendor, and the USG is not a party to the contract. The AECA allows the ten countries justified in the Fiscal 1989 Congressional presentation to use their FMF allocation to finance DCCs. The ten countries eligible are: Israel, Egypt, Jordan, Morocco, Tunisia, Turkey, Portugal, Pakistan, Yemen, and Greece. DSCA (Operations Directorate, Direct Commercial Contracts Division) approves DCCs to be financed with FMF on a case-by-case basis. For further details on the DCC process, contractor eligibility, types of items, and certifications required, see "Guidelines for Foreign Military Financing of Direct Commercial Contracts" at http://www.dsca.mil/.

Terms of Sale indicate when payments are required and whether the sales agreement is financed with purchaser’s national funds (cash), FMS Credit (repayable or non-repayable), MAP Merger, or other funding. The Term of Sale is documented on the first page of the LOA. Table C9.T11. provides the Terms of Sale for use on LOAs. Figure C5.F5. provides a list of applicable Type of Assistance codes.

Table C9.T11. Terms of Sale

Term of Sale Application

Cash with Acceptance

  • Used when the initial cash deposit equals the amount in the "Estimated Total Costs" line of the LOA.
  • Used for FMSO I even though the initial deposit is less than "Estimated Total Costs" (it must equal the FMSO I Part A value).
  • Used if the purchaser is not authorized Dependable Undertaking, unless specific DSCA approval is obtained.

Cash Prior to Delivery

  • Used if the purchaser is authorized Dependable Undertaking and the USG authorizes purchaser cash payment in advance of delivery of defense articles and rendering of defense services and design and construction services from DoD resources. AECA, sections 21(b) and 29 (22 U.S.C. 2761(b) and 2769) apply.

Dependable Undertaking

  • Used if the purchaser is authorized in accordance with AECA section 22.

Payment on Delivery

  • The USG issues bills to the purchaser at the time of delivery of defense articles or rendering of defense services from DoD resources. The first sentence of AECA, section 21(d) (22 U.S.C. 2761(d)) applies. The IA may use this term only pursuant to a written statutory determination by the Director, DSCA, who must find it in the national interest to do so. If AECA, section 21(d) is applicable based on Director or Deputy Director, DSCA action, modify to read “Payment 60 days after Delivery.” If AECA, section 21(d) is applicable based on Presidential action, modify to read “Payment 120 days after Delivery.”

FMS Credit

MAP Merger

FMS Credit (Non-Repayable)

EDA Grant

C9.8.1. Terms of Sale Breakouts. If an LOA involves multiple terms, the IA cite all applicable terms on the LOA and include a dollar breakout for each credit term used (it is acceptable to state “Balance” for the final term of sale shown on the LOA document). No attempt should be made to breakout the estimated costs of line items by Terms of Sale; the dollar breakout is shown only at the case level.

C9.8.2. Terms of Sale Revisions.

C9.8.2.1. Changes to Terms of Sale on LOA documents are generally made in accordance with the procedures for Pen and Ink changes, Modifications, and Amendments. See Chapter 5 and Chapter 6.

C9.8.2.2. The purchaser may choose to supplement available MAP Merger and/or FMF with its own national funds. If additional FMF and/or MAP Merger funds later become available, the purchaser may request DSCA approval to amend and/or modify the LOA to convert the cash portion of the case to FMF and/or MAP Merger.

C9.8.2.3. A purchaser may accept an LOA using its national funds as the method of payment and later determine available national funds are inadequate. The purchaser may request DSCA approval to use FMF and/or MAP Merger funds, if available, to finance the remaining payments. If approved, a Modification and/or Amendment is processed.

C9.8.2.4. Changes to Terms of Sale on implemented cases are based on the purchaser’s (someone who has LOA signature authority) written request. The DSCA (Business Operations Directorate) can initiate Terms of Sale revisions via message. For those cases containing a mixture of cash, FMF and/or MAP Merger, excess funds are determined by first releasing the cash portion, followed by FMF and lastly by MAP Merger. Exceptions as desired by the purchaser for a specific FMS case must be approved by DSCA (Business Operations Directorate).

C9.8.2.5. A change to an LOA’s Term(s) of Sale from fully funded FMF and/or MAP Merger to mixed funding impacts the cost of the case. Any Amendment or Modification that reduces non-repayable FMF or MAP Merger funding below 100 percent requires repricing to add military pay, entitlements, and NC to the entire case. See DoD 7000.14-R, Volume 15, Chapter 7, for more details.

C9.8.3. Dependable Undertaking Status.

C9.8.3.1. In accordance with AECA sections 22(a)(22 U.S.C. 2762(a)) and 29 (22 U.S.C. 2769), Dependable Undertaking may be used as a term of sale. Dependable Undertaking represents a firm commitment by the purchaser to pay the full amount of the contract, which assures the USG against any loss on the contract. The purchaser agrees to make funds available, in advance, to meet payments required by the contract as well as any damages and costs that may accrue from cancellation. The determination to authorize Dependable Undertaking as a Term of Sale for a country is based on the country’s Interagency Country Risk Assessment System (ICRAS) rating. For countries and international organizations without an ICRAS rating, DSCA will determine eligibility using the DSCA Dependable Undertaking Assessment Tool. A country with an ICRAS rating of “C” or better at the time of receipt of the Letter of Request (LOR) is presumed to be eligible to use the Dependable Undertaking Term of Sale unless other factors override that eligibility determination. ICRAS ratings themselves are sensitive and are not releasable.

C9.8.3.2. DSCA (Business Operations Directorate, Financial Policy and Analysis Division) is responsible for the list of countries and international organization with their eligibility for Dependable Undertaking. DSCA will include countries and international organizations on the eligibility list based on DSCA's analysis of ICRAS ratings and other factors. Uncertainty about a country's or international organization's Dependable Undertaking status should be addressed with DSCA Country Financial Management Division. See Section C9.8.3.4. for additional information applicable when Dependable Undertaking cases for eligible countries might not be appropriate. Prior to publication of the tri-annual list, DSCA will notify the Department of State of any changes being contemplated to a country's Dependable Undertaking status.

C9.8.3.2.1. DSCA Policy Memo 09-07, as amended by DSCA Policy Memo 16-72, provides policy and procedures used to determine a country's eligibility for Dependable Undertaking. Countries and international organizations included on Table C4.T2., which were listed as eligible for Dependable Undertaking prior to this policy memorandum, were included on the Dependable Undertaking listing as follows:

C9.8.3.2.1.1. Countries and international organizations that were eligible and actively executing cases using the Dependable Undertaking Term of Sale as of the date of DSCA Policy Memo 16-72 were marked on the list as still eligible, regardless of their current ICRAS rating. They will remain eligible for a period of 7 years, which ends December 31, 2023, unless other factors undermine creditworthiness. Those countries whose ICRAS rating is below "C" will be marked with a "#" on the list. After the 7-year "grace period," these counties will be included as eligible only if their ICRAS rating is "C" or better. Should these countries have problems making payments before the 7-year period has expired or other factors undermine creditworthiness, their status may be changed to ineligible and their inclusion under the "grace period" may end.

C9.8.3.2.1.2. Countries and international organizations that were eligible as of the date of DSCA Policy Memo 16-72, but had not used the Dependable Undertaking Term of Sale, were included on the list as eligible only if their ICRAS rating was a "C" or better.

C9.8.3.2.2. Countries and international organizations that were not eligible for Dependable Undertaking were marked as eligible/not eligible in the list based on their ICRAS rating. If their ICRAS rating is “C” or better they will be marked eligible. If their ICRAS rating is “C-” or below they will be marked as ineligible until such time they attain a “C” rating or better.

C9.8.3.2.3. Countries and international organizations that are not currently listed in Table C4.T2. will be added to the Dependable Undertaking list when paperwork is approved to add them to Table C4.T2. Their current ICRAS rating will be used to determine their eligibility for Dependable Undertaking.

C9.8.3.2.4. Countries and international organizations currently listed as eligible, that do not have an ICRAS rating and are actively executing cases, will remain eligible for a period not to exceed 7 years, which ends December 31, 2023, (See DSCA Policy Memo 09-07, as amended by DSCA Policy Memo 16-72) unless other factors undermine creditworthiness. After the 7-year "grace period," these countries and international organizations will have eligibility determined by DSCA based on an assessment using the DSCA Dependable Undertaking Tool.

C9.8.3.3. The IA may request, in writing, an exception to offer a particular case (or Amendment) with the Dependable Undertaking Term of Sale to a country or international organization not otherwise eligible for Dependable Undertaking. DSCA approval of an exception will be based on the results of a second-tier structured analysis which includes factors such as previous FMS experience, Country Information Paper recommendations, Country Team Assessments, and supporting documentation provided by the requesting organization. The Director, DSCA will make the decision upon IA request, but this determination will not be reflected in the next issuance of the tri-annual list. Exceptions granted apply only to the specific case or Amendment scope being developed and do not give the country or international organization blanket eligibility for Dependable Undertaking status. DSCA will notify the Department of State prior to authorizing a Dependable Undertaking for any country or international organization not otherwise eligible under the standard criteria.

C9.8.3.4. A country or international organization may not be offered the Dependable Undertaking Term of Sale, even if it is presumed to be eligible, if other factors and circumstances indicate that another term of sale is advisable for a particular case. Information that may affect a country’s or international organization’s eligibility for the Dependable Undertaking Term of Sale should be communicated to DSCA as soon as possible so that the eligibility determination may be reviewed.

Payment schedules provide forecasted financial requirements for an FMS case and project the timing and/or amounts of purchaser deposits needed to meet the requirements. Payment schedules for LOA documents are prepared by the DSCA (Operations Directorate, Case Writing Division) during the case development process.

C9.9.1. Payment Schedule Preparation.

C9.9.1.1. Payment Schedule Requirement. Payment Schedules are only developed for cases if the country or international organizations is eligible for Dependable Undertaking, unless the Term of Sale is "Cash With Acceptance." Countries and international organizations ineligible for Dependable Undertaking are not authorized payment schedules and must use the "Cash With Acceptance" Term of Sale. No payment schedule is required for FMS cases financed with FMS Credit (Non-Repayable) and/or MAP Merger. The IA may submit requests for policy exceptions to DSCA/CFM. The following paragraphs provide criteria for developing payment schedules.

C9.9.1.2. Line Level. Payment schedules are built, using DSAMS, at the line level (or sub-line or delivery set level) and rolled-up to a case-level schedule.

C9.9.1.3. Information Needed to Prepare the Payment Schedule. Payment schedules are prepared using pricing estimates and estimated dates for when purchasers will accept the LOA, the LOA will be implemented, requisitions will be initiated, contracts will be awarded, payments will be made to contractors, deliveries will occur, and personnel costs will be incurred. Other information required to prepare the payment schedule include contractor termination schedules (used in the termination liability worksheet), lead times and/or availability, periods of performance, and disbursement histories for like-item cases or lines already implemented. This information is needed at the line-level and must be provided by the IA to the DSCA (Operations Directorate, Case Writing Division) for payment schedule preparation.

C9.9.1.4. Timing of Payments. Typically, the payment schedule projects quarterly payments due by the 15th day of March, June, September, and December. Exceptions to these dates must be approved by the DSCA (Business Operations Directorate). Table C9.T12. shows how payment schedule dates should be determined.

Table C9.T12. Payment Schedule Dates

Offer Expiration/Acceptance Dates of LOAs Earliest Payment Date on the Payment Schedule For Period Covering

11 Sep -- 10 Dec

15 Mar

Apr-Jun

11 Dec -- 10 Mar

15 Jun

Jul-Sep

11 Mar -- 10 Jun

15 Sep

Oct-Dec

11 Jun -- 10 Sep

15 Dec

Jan-Mar

C9.9.1.5. Payment Distribution. Each deposit amount covers all costs to be incurred on the purchaser’s behalf during the next quarter, plus a reserve to cover Termination Liability (for sales from procurement). Costs may include such items as anticipated deliveries of services and stock items, and progress payments on contracts.

C9.9.1.5.1. Initial Deposit. Each LOA includes an Initial Deposit to cover the outlays and/or deliveries anticipated until the first quarterly payment is received. The Term of Sale, type of case, projected date of delivery or performance of services, anticipated date of LOA acceptance, and source of supply impact the Initial Deposit. The purchaser forwards the Initial Deposit to DFAS Indianapolis by wire transfer (the preferred method of payment) or by check. The purchaser may use excess FMS Trust Fund Holding Account funds to pay the Initial Deposit. Amendments use the term “Due with Amendment Acceptance” vice Initial Deposit. The amount of the Initial Deposit is determined as shown in Table C9.T13.

Table C9.T13. Initial Deposit Requirements

Condition Initial Deposit Amount

Delivery of the defense article or service is within 90 days of LOA acceptance.

The Term of Sale is “Cash With Acceptance.”

Full case value

Total performance is anticipated to be completed before DFAS Indianapolis can bill and collect additional payments.

The Term of Sale is “Cash With Acceptance.”

Full case value

Cash sale when the purchaser is not authorized Dependable Undertaking.

Full case value

Case is financed wholly with "FMS Credit (Non-Repayable)" or "MAP Merger", and
Country is not authorized Dependable Undertaking or cash flow financing.

Full case value

Case is partially funded by FMS Credit (Non-Repayable) and/or MAP Merger Funds, and not authorized Dependable Undertaking or cash flow financing.

Full case value

Delivery of the defense article or service is longer than 90 days after LOA acceptance.

Any Small Case Management Line (SCML) value; plus dollar value associated with performance until a quarterly payment can be made; plus half of the total FMS Administrative Surcharge. If the calculated FMS Administrative Surcharge value is $30,000 or less, the entire FMS Administrative Surcharge value must be included in the initial deposit.

No performance scheduled on the case and no contractual actions occur during the period prior to the first quarterly payment.

Any SCML value; plus half of the total FMS Administrative Surcharge. If the calculated FMS Administrative Surcharge value is $30,000 or less, the entire FMS Administrative Surcharge value must be included in the initial deposit.

When items are placed on contract before the first quarterly payment and no Standby Letter of Credit (SBLC) applies

Any SCML value; plus half of the total FMS Administrative Surcharge; plus that portion of TL required if the contract is terminated during the period covered by the Initial Deposit; plus contractor holdback. If the calculated FMS Administrative Surcharge value is $30,000 or less, the entire FMS Administrative Surcharge value must be included in the initial deposit.

C9.9.1.5.2. Payment Schedule Curves. Payment schedule curves (most of which are in DSAMS) profile the expenditure patterns for types of cases and/or weapon systems. They are used to estimate how payments for each line should be distributed in the payment schedule. The IA may recommend adding new curves. The IA validates the need for a new curve and verifies how it should be constructed. After its review is complete, the IA sends the proposed new curve package to the DSCA (Business Operations Directorate) for review and approval.

C9.9.1.5.2.1. Materiel from Stock. Payment schedule distributions for materiel sold from stock are based on estimated deliveries during each 90-day period following the quarterly payment. Historical delivery information of specific generic codes and other materiel categories may be used. Payment schedules for stock materiel are only available to purchasers authorized Dependable Undertaking or DSCA/CFM specifically approved exception for purchasers not authorized Dependable Undertaking.

C9.9.1.5.2.2. Materiel from Procurement. Payment schedule distributions for procured materiel requiring progress payments to contractors are based on progress payment schedules or historical cost curves. Payment schedules should include estimated disbursements to contractors, an appropriate contract hold-back percentage, and Termination Liability (if no Standby Letter of Credit (SBLC)) exists that covers the amount of the case). See Section C9.9.1.5.3. and Section C9.9.1.5.4. on Termination Liability and SBLC, respectively.

C9.9.1.5.2.3. Concurrent Spare Parts. Payment schedule distributions for concurrent spare parts are based on estimated dollar deliveries consistent with the delivery of the supported end items.

C9.9.1.5.2.4. Purchaser-Initiated Requisitions. Payment schedule distributions for case lines involving purchaser-initiated requisitions are based on equal quarterly payments unless the USG is aware of a varying requisition activity schedule. See Appendix 6 for exact note wording.

C9.9.1.5.2.5. Services. Payment schedule distributions for services are based on the scheduled performance dates and elements of cost of the provided services.

C9.9.1.5.2.6. Training. Payment schedule distributions for defined order training are based on estimated start date of the training courses. Payment schedule distributions for blanket order training require an Initial Deposit of 25 percent of the line when the case exceeds $25,000. If no other information is available regarding course schedules, blanket order training payment schedules should reflect equal payments for the estimated period (just like any other blanket order case).

C9.9.1.5.2.7. Royalties or Non-Recurring Costs. Payment schedule distributions for royalties or NCs are based on production schedules of the applicable end item.

C9.9.1.5.2.8. FMS Administrative Surcharge and Accessorial Charges. Payment schedule distributions for the FMS Administrative Surcharge and accessorial costs are based on estimated delivery of the primary items or services. Half of the FMS Administrative Surcharge is included in the Initial Deposit. If the calculated FMS Administrative Surcharge value is $30,000 or less, the entire FMS Administrative Surcharge value is included in the Initial Deposit. Any exceptions to this policy must be approved by the DSCA (Business Operations Directorate, Financial Policy and Internal Operations Division).

C9.9.1.5.3. Termination Liability (TL). TL is the potential cost for which the USG would be liable if a particular FMS case is terminated prior to completion. It applies to any FMS case that has procurement contracts. Contractor termination schedules are used to calculate the TL that would apply for a specific FMS case. If these schedules are not available, the TL component of the payment schedule curve is used. If no other curve is available, the “DoD Standard Curve” shown in DoD 7000.14-R, Volume 15, Chapter 7, is used. A Termination Liability Worksheet (TLW) to show the amount of TL included in quarterly payments is prepared (using DSAMS). A TLW must be prepared whenever a case contains a Pricing Element Code (PEC) of “CC.” TLWs are maintained in the case file (they are not submitted to DSCA when the case package is forwarded for electronic countersignature). If a specific case or line contains more than one PEC, pro-rate the “CC” component when computing the TL.

C9.9.1.5.4. Standby Letter of Credit (SBLC). A SBLC may be used instead of TL to guarantee termination payments. FMF programs are not eligible to participate.

C9.9.1.5.4.1. The purchaser may request participation in the SBLC program. The purchaser’s request(s) must be sent to DSCA (Business Operations Directorate, Country Financial Management Division), in writing, and signed by an official authorized to accept the SBLC documents on behalf of the purchaser’s government and/or organization. The purchaser must specify the bank(s) it wishes to use. The purchaser is responsible for paying all fees associated with the SBLC to the issuing bank. No fees can be capitalized or included in the dollar amount specified in the SBLC documents. The purchaser must sign the agreement specifying the terms and conditions in order for the associated SBLC to be implemented. The purchaser must notify DSCA (Business Operations Directorate), in writing, if it wishes to terminate the agreement with the bank(s).

C9.9.1.5.4.2. DSCA (Business Operations Directorate) is the beneficiary stated on the SBLC. DSCA (Business Operations Directorate) is also the focal point for SBLC issues and engages the DSCA (Office of the General Counsel), USD(C), DFAS Indianapolis, and the IAs, as appropriate, to ensure effective SBLC execution.

C9.9.1.5.4.3. DSCA (Business Operations Directorate) notifies the IA and the DSCA (Operations Directorate, Case Writing Division) when an SBLC is implemented. The notification includes a list of cases (or indicates that it applies to all cases) governed by the SBLC. DSCA (Operations Directorate, Case Writing Division) and the IA ensure the TL is not included in the payment schedules for any of these cases. If an SBLC is terminated, the payment schedule is revised to include TL as appropriate. DSCA (Business Operations Directorate) also notifies DFAS and the purchaser.

C9.9.1.5.4.4. Drawdowns (sight drafts) from the SBLC are a demand for payment from the SBLC bank. A sight draft may be completed by DSCA (Business Operations Directorate), coordinated and approved by the Director or Deputy Director, DSCA, and sent to the bank for any of the following reasons:

  • The FMS purchaser notifies the USG, in writing, that it is terminating all or a portion of an FMS case.

  • The USG notifies the FMS purchaser, in writing, that it is terminating an FMS case(s) or contracts relating to an FMS case.

  • The USG is aware the SBLC is being either terminated or not extended beyond its expiration date.

  • A contractor presents a bill to the USG for termination charges associated with an FMS case(s).

  • The issuing and/or confirming bank falls below DSCA’s acceptable eligibility thresholds.

C9.9.1.5.4.5. The payment is remitted to the account specified on the sight draft. Upon receipt, DFAS ensures the payment is credited to the FMS case(s) as directed on the wire transfer. DFAS Indianapolis notifies DSCA (Business Operations Directorate) of the deposit date and the FMS case(s) is credited within 3 business days of demand payment receipt.

C9.9.2. Purchaser-Requested Schedules. The purchaser eligible for Dependable Undertaking may request a specific payment schedule for a given case. This schedule may be based on its internal budget allocation, other constraints, or a desire to accelerate payments.

C9.9.2.1. Purchaser requests for specific payment schedules are reviewed by the IA prior to submission of the LOA package to DSCA (Operations Directorate, Case Writing Division) for case preparation. A copy of the purchaser’s request is included in the case preparation request. The IA will approve the schedule as part of the LOA document coordination/countersignature process.

C9.9.2.2. DSCA (Operations Directorate, Case Writing Division) constructs the standard payment schedule (to include any contract termination costs) and compares it to the purchaser’s requested schedule. DSCA (Operations Directorate, Case Writing Division) analyzes the purchaser’s proposed schedule to determine if it provides sufficient funds to meet projected requirements identified on the standard payment schedule. If the purchaser’s requested schedule is sufficient to cover the USG’s forecasted requirements, DSCA (Operations Directorate, Case Writing Division) will proceed with the request. If DSCA (Operations Directorate, Case Writing Division) determines that the purchaser’s requested schedule will not meet forecasted requirements, DSCA (Operations Directorate, Case Writing Division) will notify the IA (with an information copy to DSCA (Business Operations Directorate, Country Finance Director) and return the case document to the IA for further action. The IA may consult with DSCA (Business Operations Directorate, Country Finance Director) to deny the purchaser’s request or may work with the purchaser to redefine the requirements. Part of the payment schedule comparison and analysis includes developing the TLW. The TLW is first based on the USG-developed payment schedule (to include contractor termination costs); it should then be recalculated using the purchaser-requested schedule, if approved.

C9.9.2.3. When a purchaser-requested schedule is approved and used on the LOA, a note is included beneath the payment schedule. See Appendix 6 for exact note wording. The USG-developed standard payment schedule does not appear on the LOA but is maintained in the case file and in DSAMS.

C9.9.3. Payment Schedule Revisions. Payment schedule updates are necessary to reflect revisions to delivery schedules, scope changes, pricing updates, actual contract award dates, contractor payment milestone revisions, etc. To determine whether an update is needed, payment schedule reviews occur at least annually as part of the case review and reconciliation process. Payment schedules must be evaluated for possible changes when a Modification or Amendment is processed. If the contract award date slips, the payment schedule must be adjusted by a Modification within 30 days of contract award. A new payment schedule should be furnished whenever there is a substantive change in payment requirements.

C9.9.3.1. Payment Schedule Revision Format for Amendments. Amendments use the payment schedule format in Table C9.T14. When either the Term of Sale is "Cash With Acceptance;" or the case is fully funded with FMS Credit (Non-Repayable) and/or MAP Merger, and cash flow financing is not authorized, the Amount Due with Amendment Acceptance shall equal the increase in case value.

Table C9.T14. Payment Schedule Revision Format for Amendments

Payment Date Quarterly Cumulative

Previous Payments Scheduled (DD MMM YYYY)

N/A

$

Current USG Financial Requirements

 

$

Amount received from Purchaser

 

$

Due with Amendment Acceptance

$

$

DD MMM YYYY

$

$

DD MMM YYYY

$

$

C9.9.3.2. Payment Schedule Revision Format for Modifications. Modifications use the payment schedule format in Table C9.T15. When either the Term of Sale is "Cash With Acceptance;" or the case is fully funded with FMS Credit (Non-Repayable) and/or MAP Merger, and cash flow financing is not authorized, the next quarterly payment due shall equal the increase in case value.

Table C9.T15. Payment Schedule Revision Format for Modifications

Payment Date Quarterly Cumulative

Previous Payments Scheduled (DD MMM YYYY)

N/A

$

Current USG Financial Requirements

 

$

Amount received from Purchaser

 

$

Revised Payments Scheduled (DD MMM YYYY)

$

$

DD MMM YYYY

$

$

DD MMM YYYY

$

$

C9.9.3.3. Showing Collections on Payment Schedules. In addition to showing quarterly payments, payment schedules on Amendments and Modifications also show the amount already paid by the FMS purchaser. The revised payment schedule is based on the forecasted requirements remaining on the case. Once these requirements are computed, the collections already received from the purchaser are considered.

C9.9.3.4. Purchaser Requests For Payment Schedule Review. Purchasers who wish a review or revision of a specific case payment schedule should forward a request to the appropriate IA.

DFAS Indianapolis bills purchasers. Table C9.T16. shows the FMS case billing timeline.

Table C9.T16. FMS Billing Timeline

Period Ended on FMS Billing Statement Approximate Date of FMS Billing Statements Payment Due at DFAS Indianapolis For Period Covering

December 31st

January 15th

March 15th

April-June

March 31st

April 15th

June 15th

July-September

June 30th

July 15th

September 15th

October-December

September 30th

October 15th

December 15th

January-March

C9.10.1. Billing Procedures. Payments into the FMS Trust Fund, other than Initial Deposits, are based on bills (FMS Billing Statement, DD Form 645, or Special Billing Arrangement (SBA)). DFAS Indianapolis sends the DD Form 645 to the purchaser quarterly. Under DSCA’s oversight, DFAS Indianapolis assures that sufficient cash is available from the purchaser to cover accrued expenditures, costs to be incurred during the remainder of the current quarter, and costs to be incurred during the next quarter (e.g., contractor progress payments, contractor holdbacks, potential termination charges, and deliveries from DoD inventories). DD Form 645-based billings are the amount shown on the current case payment schedule or the quarterly forecast of the financial requirements accompanying the DD Form 645, bill, whichever is greater. The billing, not the payment schedule, contains the required payment amount. IAs refer billing problems and questions to DFAS Indianapolis.

C9.10.2. Special Billing Arrangements (SBAs). If a purchaser has an SBA, total expenditures for the forthcoming billing period are subtracted from total available cash resources to determine the billing amount. SBAs override Column 14 (Amount Due and Payable) of the DD Form 645. SBAs are issued by either the DSCA (Business Operations Directorate) or DFAS Indianapolis and are managed at the country level unless an exception has been granted by the DSCA (Business Operations Directorate).

The AECA normally requires FMS monies to be collected in advance of delivery, service performance, or contractual progress payments. Accumulation of large balances in purchaser Trust Fund accounts for substantial periods should be avoided, except for contract holdbacks and other accrued or potential liabilities, or when the purchaser requests an accelerated payment schedule.

C9.11.1. Trust Fund Accounts. DFAS Indianapolis performs accounting for Foreign Military Sales, account 11X8242, by executing against subsidiary accounts: 978242 (Deposits, Advances, Foreign Military Sales, Defense) – receipt of payments and 97-11X8242 (Advances, Foreign Military Sales, Executive, Defense) – disbursements to suppliers. The purchaser makes payments to DFAS Indianapolis for deposit into the FMS Trust Fund (unless the purchaser has an interest bearing account with the Federal Reserve Bank (FRB) New York. FMS Trust Fund Wire Transfer and Check Mailing Information are found on the Letter of Offer and Acceptance Information attached to each LOA. See Figure C5.F5. Payments must identify the case designator and reason for the payment. IAs refer collection problems and questions to DFAS Indianapolis.

C9.11.2. FRB New York Accounts. Some countries may establish an account with the FRB New York, for their FMS deposits. An agreement between the FMS purchaser’s defense organization, the purchaser’s central bank (or an acceptable equivalent), FRB New York and DSCA identifies the terms, conditions, and mechanics of the account’s operation. FMS purchasers should contact the FRB New York or the DSCA (Business Operations Directorate, Country Financial Management Division) regarding these accounts. Except as authorized by law and/or DSCA policy, the FRB New York accounts do not include FMF funds. See Section C9.7. for information on FMF.

C9.11.3. Commercial Banking Account. Some countries may establish an account with a commercial bank for their FMS deposits. Two agreements are required: an agreement between the FMS purchaser and the participating commercial bank, and a separate agreement between the FMS purchaser and DSCA. FMS purchasers should contact DSCA (Business Operations Directorate, Country Financial Management Division) regarding these accounts. Commercial accounts do not include FMF funds.

C9.11.4. Payment Identification. Each deposit made into the FMS Trust Fund is recorded to the appropriate FMS case. If the payment cannot be identified to a specific case, it is deposited in the FMS purchaser’s Holding Account pending identification.

C9.11.5. Excess Funds. Payments received for an FMS case may exceed the final case value or the highest financial requirement (all financial commitments billed to date, plus all financial commitments not yet billed (e.g., contracts awarded but not delivered), and must include below-the-line surcharges). Upon closure, excess funds are retained in the purchaser’s Holding Account pending further instructions. Excess case collections can be applied only to another case at the purchaser’s request. Payments in excess of the value of a particular case may be transferred into the purchaser’s Holding Accounts under the following conditions.

C9.11.5.1. Excess Funds – National Funds. Excess national funds are transferred to a cash Holding Account upon case closure, case cancellation, or purchaser’s request. At the purchaser’s written request, deposits in cash Holding Accounts may be applied to other FMS cases or refunded if the purchaser is not on the current quarter Arrearage Report, there are no collection delinquencies on other FMS cases, and there is sufficient cash reserve to meet financial requirements (including TL if no SBLC applies) for the next quarter. Cash refunds must be approved by DSCA (Business Operations Directorate).

C9.11.5.2. Excess Funds - FMS Credits. DFAS Indianapolis transfers excess credit funds from closed or cancelled cases to the credit Holding Account. Prior to each billing cycle, DFAS Indianapolis moves excess funds in the credit Holding Account to other FMS credit-financed cases (not to exceed the total credits committed to each case). DFAS Indianapolis applies the funds first to credit cases with overdue payments, and then to credit cases with payments due in the next billing cycle. If there are no remaining candidate cases, funds remain in the credit Holding Account. Prior to transferring credits to or from cases at case closure, DFAS Indianapolis requests (via e-mail or facsimile) approval from DSCA (Business Operations Directorate); credit commitment records are adjusted to reflect the final case value.

C9.11.5.3. Excess Funds - MAP Merger. DFAS Indianapolis transfers excess MAP Merger funds from closed or cancelled cases to the MAP Merger Holding Account. Prior to transferring MAP Merger funds to or from cases at case closure, DFAS Indianapolis requests (via e-mail or facsimile) approval from DSCA (Business Operations Directorate); MAP Merger commitment records are adjusted to reflect the final case value.

C9.11.5.4. Excess Funds - Other Funding. Upon reduction or cancellation of FMS cases financed with funds other than those above, DFAS Indianapolis, with DSCA (Business Operations Directorate) coordination, transfers excess funds to the applicable holding account.

C9.11.6. Movement of Purchaser Funds. DFAS Indianapolis moves national funds to and from Holding Accounts or between cases only when such requests are channeled through the FMS purchaser’s designated representative. The use of notes or other references in LOA documents (Basic, Amendment, or Modification) concerning transfers or refunds of FMS purchaser funds, is not authorized. IAs do not enter any remarks on LOA documents transferring purchaser funds from one case to another except for concurrent documents. See Section C6.7.2.3. Such remarks can be misleading, contradictory to instructions provided to DFAS Indianapolis by the Purchaser, and not effective if cross leveling is required.

C9.11.7. Initial Deposit Follow-Up. If DFAS Indianapolis receives a signed LOA or Amendment without the required Initial Deposit, they shall follow-up within 10 working days per the procedures that follow.

C9.11.7.1. Follow-Up Process. DFAS Indianapolis notifies the SCO, the purchaser’s paying office, and the IA that the Initial Deposit has not been received. This notification states that implementation of the LOA or Amendment is held pending receipt of the Initial Deposit. If the Initial Deposit is not received by the Offer Expiration Date (OED), the IA, in coordination with DFAS Indianapolis and DSCA(DBO), cancels the LOA or Amendment. Once an LOA or Amendment is cancelled, a new LOA or Amendment is required if the purchaser’s requirement is still valid. A cancelled LOA or Amendment cannot be reinstated. These procedures do not apply to offers where DFAS Indianapolis has been notified that the Initial Deposit is with another USG agency, that funds have been wire transferred (with transaction number), or where the LOA or Amendment is financed by MAP or FMS credit funds.

C9.11.7.2. FMS Credit (Non-Repayable) or MAP Merger Initial Deposits. If the Terms of Sale are FMS Credit (Non-Repayable) or MAP Merger, DFAS Indianapolis uses funds from the appropriate Holding Account to pay the Initial Deposit.

C9.11.8. Delinquent Accounts. Details on arrearages, indebtedness, delinquent debt reporting formats and frequencies are contained in DoD 7000.14-R, Volume 6A, Chapter 12, and Volume 15, Chapter 5. Most collection problems are caused by late payment, rather than default on payments. It generally takes 45-75 days after the billing statement mailing to receive collection.

C9.11.8.1. Interest on Delinquent Accounts. The AECA requires DoD to assess interest on delinquent FMS program debts. DFAS Indianapolis assesses this interest. Interest is based on the net arrearage owed by a purchaser taking into account cumulative financial requirements and cumulative payments received on each FMS case. The DD Form 645, Quarterly Billing Statement, reflects the amount of interest charged to each applicable case.

C9.11.8.2. Delinquent Accounts Procedures. DFAS Indianapolis is responsible for assessing interest and collecting overdue debts to FMS cash sales. This is accomplished by formal and informal contacts with purchaser representatives, requests for collection assistance from the SCO and DSCA, and contacts with the Department of State to determine additional collection actions. When all collection means have been exhausted, DFAS Indianapolis refers the delinquent account to DSCA (Business Operations Directorate), and provides the following supporting data: the debt history including prior collection efforts; a description of disputes between the purchaser and the United States; a statement that resolution through the normal military channel with responsible foreign officials concerning the collection has failed; and an assessment of any adverse impact on the purchaser if the issue is raised to the diplomatic level. DSCA (Business Operations Directorate) recommends further action to be taken by OSD or refers the debt to the Department of State for diplomatic assistance. DFAS Indianapolis carries delinquent accounts on the accounting records even after primary collection responsibility is passed to DSCA and the Department of State.

C9.12.1. Level of Accounting. FMS monies reimburse U.S. appropriations or are cited directly on payments to U.S. contractors. In accordance with the LOA, cash deposits may be disbursed for the financial requirements of any of that purchaser’s implemented cases. Accounting for FMS transactions is at least at the case level (many accounting transactions are recorded at the line level).

C9.12.2. Expenditure Authority. The total DoD available cash for each FMS purchaser is equal to the amount of undisbursed and/or unreserved monies on deposit for the purchaser in the FMS Trust Fund. The available cash is reduced by all reservations of funds (e.g., termination liability and expenditure authority). Based on the amount of a disbursement request and available funds, DFAS Indianapolis advises the expenditure authority requestor whether the expenditure authority is approved and the disbursement can occur. If a country does not have enough available cash, expenditure authority is not approved and the disbursement is placed on hold. The IA ensures the disbursement limit is not exceeded when paying contractors or reimbursing U.S. appropriations.

C9.12.3. Segregating and Accounting for FMS Costs. The AECA, sections 22 (22 U.S.C. 2762) and 29 (22 U.S.C. 2769) require accurate and prompt segregation and accounting of incremental costs to ensure that DoD appropriations are not adversely impacted by contractual payments on behalf of FMS orders. DoD policy requires contractors to request separate progress payments when more than one purchaser’s requirements (including the United States) are included in the same contract. Payments to contractors are reported by the proponent activity (e.g., IA) to DFAS Indianapolis to ensure that billings reflect the disbursement rate. If scheduled payments are not adequate, the IA modifies the payment schedule using an Amendment or Modification to the FMS case.

C9.13.1. Reporting Performance of FMS Orders.

C9.13.1.1. FMS Integrated Control System (FICS). After an FMS case is implemented, the IA executes the program. The IA reports the nature and financial value of transactions to DFAS Indianapolis. The IA reports accrued expenditures, also referred to as “work-in-process” (e.g., progress payments made to contractors, GFM and/or GFE provided to contractors, and NCs), and physical deliveries within 30 days of the date of shipment or performance. The FICS Delivery Transaction is submitted bi-monthly in accordance with the schedule established by DFAS Indianapolis. The format and instructions for completing the delivery transaction are prescribed in DoD 7000.14-R, Volume 15, Chapter 8. Purchasers direct delivery problems and questions to the IA.

C9.13.1.2. FMS Physical (constructive) Delivery Reporting. Physical (Constructive) delivery is the delivery of materiel to a carrier for transportation to the consignee; delivery of materiel to the customer or the designated forwarder at point of production, testing or storage; delivery at dockside, at airports, or to a U.S. post office for shipment to the consignee. Delivery is evidenced by completed shipping documents or listings of delivery to the U.S. post office (DoD FMR, Volume 6A, Chapter 13). The IA submits FMS physical (constructive) delivery data for all major end items that have a unit of issue of “EA” for the generic codes shown in Table C9.T17. Items are considered delivered when title passes to the purchaser. IAs report, within 30 days, all constructive deliveries for selected materiel lines to DFAS Indianapolis by the 20th of each month in the C1 delivery transaction format (Table C9.T18.), RCS DSCA(M)1141. DFAS Indianapolis, in turn, submits this data to the DSCA (Business Operations Directorate) for inclusion in the DSCA 1200 System. These transactions are not a part of the formal FMS billing system. This information is used to prepare AECA required reports and to respond to inquiries.

Table C9.T17. Constructive Delivery Reporting Generic Codes

Generic Code Description

A1_ - A5_, A9B

Aircraft

B1_ - B4_ (Complete Missile Lines Only)

Missiles

C_ _

Ships

D_ _

Combat Vehicles

E3_

Tactical and Support Vehicles

F2_, F3_, F4_

Weapons

G2_, G4_, G5_ (Less M and Y), G6A

Ammunition

H4_

Communications Equipment

 

Table C9.T18. C1 Delivery Transaction Format

Column Data Element

1-2

C1

3-4

Country Code (CC)

5

Implementing Agency

6-8

Case Designator

9-11

Record Serial Number (RSN)

12-15

Blank

16-21

Cumulative Quantity to Date

22-72

Blank

73-78

Reporting Date (YYMMDD)

79

Blank

80

Originator (must always be “A”)

C9.13.2. Delivery Reporting Timelines. Timely reporting of delivery information to the FMS purchaser is critical. Estimated price codes may be used to report deliveries of major end items if an actual price is not available within 30 days of the shipment date. Estimated price codes must be used to report deliveries of major end items if an actual price is not available within 90 days of the shipment date. All estimated billings must be converted to actual billings prior to closure.

C9.14.1. Financial Management Reviews. DSCA reviews the current and forecasted financial posture of an FMS purchaser’s program and holds a Financial Management Review (FMR), if needed, with the FMS purchaser to: reconcile financial records, review the financial status of FMS cases, ensure continued solvency of the FMS purchaser accounts, improve cycle times, identify cases requiring intensive financial management, and formulate financing strategies for existing and prospective FMS purchases. DSCA works with the IAs, SCOs, DFAS, and the FMS purchaser in planning and executing FMRs. Figure C9.F5. provides a mandatory format for preparing for an FMR. Minor adjustments to this standard format must be authorized by the DSCA Country Finance Director. See Chapter 6 for information on other types of case reviews.

Figure C9.F5. Financial Management Review - Case Financial Status Reporting Format
(Format in use as of March 1, 2011)

C9.14.2. Business Process Reviews.

C9.14.2.1. Background. In 2006, financial reforms were implemented across the security assistance/cooperation (SA/SC) community. This was the result of an increase to the FMS Administrative Surcharge rate (from 2.5% to 3.8%) and renewed efforts to enforce existing Standard Level of Service (SLS) requirements by DSCA and the SA/SC community, to ensure funds were spent appropriately and in a consistent manner. DSCA's responsibility to ensure funds are used correctly is defined in DoD 7000.14-R, Volume 15, and DoDD 5105.65. DSCA must "monitor usage of FMS Trust Funds to include periodic reviews of funding levels and unused balances." Further, DSCA exercises "financial management responsibility for the Foreign Military Sales Trust Fund and reporting functions for SC programs." DSCA began conducting these Business Process Reviews (BPRs) in FY 2011. Effective with the FY 2013 BPRs, the reviews will take into account the decrease in the FMS Administrative Surcharge rate (from 3.8% to 3.5%) effective November 1, 2012.

C9.14.2.2. Purpose. The purpose of each BPR is to evaluate an organization’s business practices as they relate to the use of FMS Administrative Surcharge funds and compliance with SA policies and procedures. The review is not an audit or an inspection, but is a joint effort, with the applicable IA, to assess existing processes to better understand them and assist with any issues. The desired objectives are to identify areas for improvement (in policies, processes, or practices) and take actions necessary to correct as well as to identify best practices to share with the community.

C9.14.2.3. Procedures. DSCA will lead, at a minimum, two reviews on an annual basis; ideally, however, the goal is to conduct one organization/office review per MILDEP. Reviews of other IAs may also be conducted as needed or requested. The lead for these reviews is DSCA (Business Operations Directorate), specifically, the Financial Policy Division. Other DSCA participating offices may include DSCA’s Strategy Directorate and Office of the General Counsel, depending on the location and focus of the specific review. Participation will also include representatives from the MILDEP/IA, and other technical experts, as required.

C9.14.2.3.1. In October of each fiscal year, DSCA (Business Operations Directorate) will issue a call, to the DSCA participants, requesting nominations of organizations where a review would be of benefit. Additionally, input will be solicited from the MILDEPs.

C9.14.2.3.2. Upon receipt and analysis of the nominated organizations, DSCA (Business Operations Directorate) will send a memorandum to the applicable MILDEP/ IA leads, indicating the selection (receiving organization) and request that suggested timeframes be provided for the review.

C9.14.2.3.3. Once the location and time are established for the reviews, DSCA (Business Operations Directorate) will notify the applicable offices and provide a listing of questions to be addressed to the MILDEP for appropriate distribution.

C9.14.2.4. Deliverables. DSCA (Business Operations Directorate) will prepare minutes from the BPRs, to include any action items, and provide to the participants. Further, it will track actions and follow-up to ensure all open action items are completed.

C9.15. Foreign Military Sales (FMS) Trust Fund Administrative Surcharge Safety Level.

C9.15.1. Safety Level General Information.

C9.15.1.1. Prior to June 30, 2012, DSCA conducted a detailed analysis of the FMS Trust Fund Administrative Surcharge Account and the “Safety Level” computation that had been used for the account. This computation is found in the DoD Financial Management Regulation (DoD FMR) archives, Volume 15, Chapter 2, Table 2-5. The computation was based on the assumption that the entire FMS program would cease in two years.

C9.15.1.2. DSCA, with Office of the Under Secretary of Defense (Comptroller) (OUSD(C)) coordination, recognizes the underlying assumption for the Safety Level – that the FMS business would terminate and cease operations within two years – is no longer valid. FMS is a key enabler supporting coalition operations and building partner capacities and thus will remain an integral USG and DoD strategy indefinitely. DSCA is revising the assumptions and methodology for the Safety Level to sustain the FMS enterprise through a change in the FMS business environment. The Safety Level will be a larger amount of funding than the former computation in order to afford greater risk mitigation and flexibility to the FMS enterprise.

C9.15.2. Safety Level Assumptions, Methodology, and Review/Re-validation of Data Sources

C9.15.2.1. Assumptions. The underlying assumption for revising the Safety Level computation is that the multi-billion dollar FMS program will not be terminated and drawn to a rapid two year conclusion. As a result, the continuation of the current computation and its use in business planning for the FMS enterprise is no longer valid. Instead, DSCA is implementing a Safety Level of 18 months of operational funding (based on annual budget requirements authorized under the Foreign Authorization Act) that affords sufficient time to recognize volatility in the FMS business environment and then develop and implement adaptive business strategies to protect the solvency of the FMS Administrative Surcharge Account and allow for the orderly disposition of cases in accordance with active FMS agreements.

C9.15.2.2. Methodology. DSCA will establish the Safety Level using the FMS Administrative Operating Ceiling noted in the Annual State and Foreign Operations Appropriation Act for the upcoming Fiscal Year. The amount under the Annual State and Foreign Operations Appropriation Act will be divided by 12 months to arrive to a monthly operational funding amount. The monthly amount will then be multiplied by 18 months to arrive at the Safety Level. The Safety Level amount will be established before the start of the fiscal year and will be forwarded to the Defense Finance and Accounting Service to ensure the FMS Administrative Surcharge Account maintains the Safety Level amount.

C9.15.2.3. Review and Re-validation of Data Sources. The Safety Level will be evaluated through a focused review of the business environment during the first quarter of each fiscal year. This review will be supported by the Annual Assessment of the FMS Trust Fund Administrative Surcharge Account report, the final report of prior year sales, the FMS forecast, and information from the conclusion of the Budget and Program Objective Memorandum (POM) cycles. In addition to this annual review, DSCA will monitor the FMS program for possible events that necessitate an out-of-cycle/immediate review of the business environment. These events may include a change in bi-lateral relationship(s) with the top FMS customers (e.g., sanctions) relative to sales figures, regional conflict, and/or sales that significantly lag the forecast (e.g., greater than 3 months). For planning purposes, DSCA is using 18 months of expense data based on the most recent year of funding for the Safety Level computation. Lastly, a further comprehensive review of all business measures employed in the conduct of FMS activities will be completed by DSCA no less than every 5 years. This detailed review will include analysis of the FMS Administrative Surcharge Rate as well as the Safety Level.

C9.15.2.3.1. Annual Assessment of the FMS Trust Fund Administrative Surcharge Account. An annual assessment will be conducted during the first quarter of current Fiscal Year. The requirement for this review is defined in the DoD FMR, Volume 15, Chapter 3, Sec 030308.G. For this review, DSCA uses the following information:

DFAS end of year report for the FMS Trust Fund Administrative Surcharge account balance. (Report Name: FMS Cost Charge Account. See “TOTAL ADMIN” column Ending Balance Sep 30, 20XX”)
DFAS end of year report for total undelivered articles and services. (Report Name: Quarterly Undelivered Report (July-Sept 20XX date). Document provides a list of all open cases; date case was implemented, total order value and total delivered and undelivered value of each case.
Forecast FMS sales for current and future year. (Data developed by STR/Plans Division, as prescribed in Security Assistance Management Manual. See Section C14.1.)
Anticipated Budget and POM requirements (projected future expenses). Budget amount provided by DBO/Comptroller Division and POM amounts from STR/Plans Division.
Input above data into DSCA Forecast Model to assess the projected balance of the FMS Trust Fund Administrative Surcharge Account.

C9.15.2.3.2. Quarterly Review. A quarterly review of the business environment will be conducted to determine if the results of the Annual Assessment of the FMS Trust Fund Administrative Surcharge Account remain valid. Data considered in this review will include the following:

Changes in bi-lateral relationship(s) with top five FMS customers (e.g., sanctions) relative to sales
Regional conflicts
Changes in global economy
Forecast FMS sales lagging for greater than 3 months
Asymmetric threats that require new defense articles and services

C9.15.2.3.3. Comprehensive Review. Every five years, a comprehensive review of the FMS Trust Fund Administrative Surcharge Account and the Safety Level will be accomplished to ensure assumptions and reviews continue to be relevant. This review will involve participation from outside agencies (i.e.; Naval Post-Graduate School, private industry, etc.) to provide an independent perspective.