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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.
C126.96.36.199. 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 C188.8.131.52. for additional information on FMF.
C184.108.40.206. 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.
C220.127.116.11. 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. 11958 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.
C18.104.22.168. 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.
C22.214.171.124. 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.
C126.96.36.199. Who May Receive FMS Credit?
C188.8.131.52.1. 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.
C184.108.40.206.2. 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.
C220.127.116.11.2.1. 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.
C18.104.22.168.2.2. 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.
C22.214.171.124.2.3. 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.
C126.96.36.199.2.4. 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.
C188.8.131.52.2.5. 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))).
C184.108.40.206.2.6. 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.
C220.127.116.11.2.7. 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.
C18.104.22.168. 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.
C22.214.171.124.1. 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.
C126.96.36.199.2. 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.
C188.8.131.52.3. 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. 11958. The authority for issuance of OSP Determinations, following concurrence by the DoS and Department of Treasury, 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.
|Condition Number||Offshore Procurement Determination Mandatory Requirements|
The project otherwise qualifies for financing from funds made available by the USG.
The procurement supports mutual United States and country interests.
The defense article or service must be obtained from foreign sources in order to meet the requirement.
A U.S. source item or service cannot be modified to meet the requirement.
It is cost prohibitive to procure the item or service in the U.S. (e.g., a special production run).
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.
There is no negative impact on general U.S. trade patterns or trends if the proposed procurement were from foreign sources.
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.
C184.108.40.206.3.1. 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 Treasury. Following concurrence by the DoS and Department of Treasury, 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.
C220.127.116.11.3.2. OSP Cost Increase Notification. DSCA provides an informal notification to the DoS and Department of Treasury 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 Treasury may document these notifications.
C18.104.22.168.4. Transporting FMS Credit Funded Cargoes.
C22.214.171.124.4.1. 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 of this Manual. FMS credit funds cannot be used to pay the cost of transportation provided by a vessel of non-U.S. registry.
C126.96.36.199.4.2. Air Transportation. FMS credit may be used to pay air transportation costs only if U.S. flag aircraft are used.
C188.8.131.52. Loan Guarantee Sources.
C184.108.40.206.1. 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.
C220.127.116.11.2. 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.
C18.104.22.168.3. 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.
C22.214.171.124. FMS Credit Sources.
C126.96.36.199.1. 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.
C188.8.131.52.2. Foreign Military Financing (FMF) Program. FMF is used to finance FMS through direct credits, either repayable (direct loan) or non-repayable (grant).
C184.108.40.206.2.1. FMF Funding Process.
C220.127.116.11.2.1.1. 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.
C18.104.22.168.2.1.2. 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.
C22.214.171.124.2.1.3. 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.
C126.96.36.199.2.1.4. 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.
C188.8.131.52.2.2. 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.
C184.108.40.206.2.2.1. Commitment of FMF Funds.
C220.127.116.11.18.104.22.168. 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.
C22.214.171.124.126.96.36.199. 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.
C188.8.131.52.184.108.40.206. 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.
C220.127.116.11.2.3. Disbursement of FMF Loan Funds.
C18.104.22.168.2.3.1. 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.
C22.214.171.124.2.3.2. 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.
C126.96.36.199.2.3.3. 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 C9.7.4.
C188.8.131.52.3. 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.
C184.108.40.206.4. FMF Loan Repayment Process.
C220.127.116.11.4.1. Interest Rates. All loans are repaid with interest unless Congress waives payment.
C18.104.22.168.4.1.1. 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.
C22.214.171.124.4.1.2. 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.
C126.96.36.199.4.2. 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.
C188.8.131.52.4.3. 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.
C184.108.40.206.4.4. 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.
C220.127.116.11.4.5. 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.
|Activities Not Permitted Under Brooke Sanctions|
|Activities Still Permitted Despite Brooke Sanctions|
C18.104.22.168.5. 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.
C22.214.171.124.6. Restrictions on the Use of FMF. Expenditure of FMF funds is subject to legal (see Section C126.96.36.199.) 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.
|Defense Articles and Services That Should Not be Purchased with FMF|
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/.
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