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It’s no secret that the US defense market is shrinking; as companies look to sell their military goods and
services outside of the US, FMS is a topic that comes up all the time. So what we’re going to present is a
multi-part series on FMS, the process, Foreign Military Financing, and how everything works. This is
general (hopefully simple to understand) information for individuals who just don’t know how the process
works or what it is. This is geared more towards BD professionals and/or companies thinking about exports.
I’m no export attorney, nor am I a contracting officer. Our firm has offices overseas and we do this a lot, but
we often reference attorneys and other experts. This is not intended to be a substitute for expert or legal
advice. As we have discussed previously, failure to comply with the myriad of regulations can be extremely
costly and even lead to jail time.

Part I: Understanding the FMS Process

In the world of defense exports, two topics often discussed are Foreign Military Sales (FMS) and the Foreign
Military Finance Program (FMFP). Often, the two terms are incorrectly used interchangeably. They are
different programs with the same core processes. For the purpose of this discussion, I’m going to use the term
FMS whether or not the project is financed by the US Government (USG).

FMS is simply the sale of USG equipment to a foreign country, while FMFP is when the USG finances the
sale of the equipment. Think of it this way: if a foreign country wants to buy American defense articles, it’s
FMS. FMFP is an FMS that is financed by the USG.

For businesses engaged in the export of military equipment, it is important to understand the process from the
USG’s perspective in order to set correct expectations, not only for the benefit of the customer, but also for
your own business.

Neither FMS or FMFP are sales tools. I hear people say all the time, “Country X can’t afford this so we’ll just
use FMS.” Not only will FMS not pay for anything, FMS is a serious government-to-government process and
can only happen when it is determined by the USG that the process is above board and benefits national
security. FMS and FMFP aren’t for small items, either. These are programs designed for multi-million dollar
purchases.

When you read this, you’re going see a lot of acronyms. FMS has a lot of them. FMS also involves a lot of
different people, agencies, and organizations, which is why it is tricky and more of an art than science. The
primary USG entities to keep in mind are the following:

 Embassy: Local, boots-on-the-ground in-country team that have primary interaction with the
customer
 Implementing Agency (IA): This is the organization implementing the sale. Each branch of service
has an implementing agency. If the country wants to buy Navy Helicopters, the Navy’s IA is
involved.
 Combatant Command: In FMS terms, this has to do with where the sale is taking place
geographically. For instance, if a European country wants to buy US defense equipment, EURCOM
is the relevant combatant command.
 Defense Security Cooperation Agency (DSCA): This is the parent, joint FMS agency that deals with
inter-department coordination and Congressional notification and approval. DSCA also signs the
final approval documents.

The FMS Process: An Overview of the Initial Steps

The FMS process commences when the country begins to develop requirements for a defense article or
service. Often a country says, “We need new _____” and they begin a path to determine requirements based
on their own guidelines and national security requirements. They collect members of the military, academics,
and experts to conduct research and give recommendations as to which ___ best suits their needs. While this
process may vary from country to country, generally speaking, it is similar to the way things are done in the
US.

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Based on their determinations, they may find three or four different possible solutions to their stated
requirement, some of which may be American products. At that point, they contact the local US Embassy or
Consulate. The US military and embassy’s in-country team then actively works with the customer to help
them refine their requirements as there may be multiple potential solutions to choose from. The high-level
joint discussions address topics like acquisition programs, training plans, financing, CONOPS, and support,
among others. Complex negotiations involving certain items or requirements may lead to a memorandum of
understanding (MOU) or other letter of intent (LOI).

As the customer begins their down-select process, they will submit a Letter of Request (LOR) to the USG.
The LOR follows a specific format, addressing specific questions, often simply asking for pricing and
availability (P&A). The LOR outlines the customer’s requirements in as much detail as possible. This is what
we need because…

The LOR goes from the country, to the US Embassy, to the implementing agency. DSCA, the Dept of State,
and the Combatant Command are provided informational copies of the LOR from the embassy.

Based on the contents of the LOR (ie, what the customer wants to buy), it falls into two categories:
Significant Military Equipment (SME) or Non-Significant Military Equipment (non-SME). SME items are on
the US Munitions List (USML) and warrant special export controls – this is when ITAR, licenses, and export
control issues come up. Some SME equipment can be further identified as Major Defense Equipment (MDE)
which is even further controlled. MDE is defined as “any item of significant military equipment on the U.S.
Munitions List having a nonrecurring research and development cost of more than $ 50,000,000 or a total
production cost of more than $ 200,000,000.”

If SME equipment is required, the embassy’s country team assessment (CTA) will explain why the customer
wants these particular items. Questions answered will be things like:
 Reasoning behind the request – Why do they need it?
 Employment/Deployment – How will they use it?
 Operational ability – Are they capable of operating it?
 Maintenance ability – Are they capable of maintaining it?
 Finance – How are they going to pay for it?
 The embassy’s plan for monitoring the use of the equipment – How can we be sure it is used
appropriately and doesn’t fall into the wrong hands? Is the country capable of maintaining positive
control?
 Generally, whether the embassy thinks the USG should approve the sale – Is this a good idea?

In the case of non-SME equipment, no CTA is required and, typically, within 5 days, the USG gives the sale a
preliminary go or no-go. In general, once the LOR is submitted, regardless of whether of no it is for SME or
non-SME, this is the period where the sale will be disapproved. But to be realistic, most items acquired
through FMS are SME. Most likely, if the items weren’t SME they would be acquired by the customer
through a less complicated method.

Once the LOR has been received, there are two primary responses from the USG:
 Notice of Price and Availability: A ROM is submitted to provide information for planning purposes
only, but is not an approval for any sales; or
 A Letter of Offer and Acceptance (LOA): This is the formal USG document authorizing the sale.
This is the official offer by the USG to sell the items stated in the LOR.

For USG purposes, once the LOR is received, it is given a unique identifying case number and the clock starts
ticking.

In order to process the LOR, and prior to release of an LOA, the country director (part of the IA) has a
checklist of tasks or questions that must be answered. This is very important for businesses to know because
this is where things are overlooked and/or mistakes are made. Often, if there are problems it’s because one of
these issues or items were overlooked or not answered properly.

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 Did copies of the LOR go to the proper USG review organizations?

 Does the LOR contain an identifiable customer reference or serial number?
 Is the LOR a result of a foreign solicitation?
 Are there any additional LOR references, such as a MOU or a pre-negotiated response?
 Does the request comply with total package approach (TPA) policy?
 Is the request a valid military requirement?
 Is this a sensitive technology request?
 Will the request result in the transfer of classified information?
 Has DSCA been provided with the congressional notification data within 10 days?
 Is the request for missile related technology or classified information?
 Will production be in-country?
 Will any production be used for third country sales?
 If the request is for standard U.S. materiel, is a valid national stock number (NSN) provided?
 How many initial spare parts are required to be delivered with the end items?
 Does a sole source request contain the proper justifications?
 If the request is for non-standard materiel has a military specification (MILSPEC) package or
engineering data description been included?
 Has the request been screened to determine if there is a concurrent commercial bid in process?
 Does a quality inspection team need to inspect the material upon delivery to the customer?
 Does the customer require any special USG or contractor services?
 Does the customer require a not to exceed (NTE) or firm fixed price (FFP) response?
 Does the LOR contain any unique customer budget or payment schedule requirements?
 Is there enough information to properly identify all the requirements?
 Is a site survey required?
 Has a negative response been coordinated with DSCA?

The USG takes a Total Package Approach (TPA) for FMS. The TPA includes training, technical assistance,
publications, initial support, follow-on support, and at least one year of spare parts. If you really think about
it, this makes the most sense – it benefits the supplier, the USG, and the customer. And it’s important to note
that most IAs will require a significant portion of the spare parts be in country before they will release the
primary end items for delivery. The LOA will be for a total package to include the above items.

Congressional Notification and Approval

Before an LOA is officially released to the customer, Congress must approve of the LOA. DSCA is the entity
responsible for Congressional Notification. At the time of writing, an LOA meeting certain monetary
thresholds must be approved by the House International Relations Committee (HIRC) and the Senate Foreign
Relations Committee (SFRC).

USD $14M or more of MDE

USD $50M or more of total case (sale) value
USD $200M or more of design and construction services

Here’s the exception:

The monetary thresholds for NATO members, Japan, Australia, and New Zealand are higher at USD $25M,
USD $100M, and USD $300M respectively.

Government documents say that the congressional notification process takes 50 days. Of this time, 20 days is
for advance notice and 30 days is for statutory notice. At the 20-day mark, the notice becomes statutory when
it is entered into the Congressional Record.

If for some reason Congress objects to a proposed LOA, it must pass a joint resolution prior to the end of the
30-day statutory notice period.

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Once Congress has approved the LOA, it is sent back to DSCA who officially signs it before it goes back to
the customer for the next steps in the process begin: Implementation and Execution. This will be discussed in
Part II.

Part I Summary & Conclusion

From a business standpoint, there are many things to keep in mind when selling military equipment or
services internationally; and while the USG is trying to change certain aspects of the process, primarily as it
relates to licensing and export controls*, the FMS process itself will not change too much, if at all.

FMS starts when the country initiates the process and it’s one piece of a much larger puzzle. Similarly to the
way things are done in the US, companies are conducting business development activities and lobbying to get
programs funded, get their specific product or service acquired, etc. With international defense business
development, the process is roughly the same, with the exception that there are specific rules on what
can/cannot be discussed, what information can/cannot be exchanged, and there are (currently) multiple
agencies, which can possibly require multiple licenses. No one in the USG will tell you what licenses you
will need to obtain. It’s your responsibility to make sure you have them; and many of these licenses need to
be obtained before business development begins.

FMS has more to do with the process by which a foreign country procures weapon systems and controlled
items (weapon systems, fighter jets, tanks, NVGs, etc) than it does with your business’s ability to sell or
export. If you want to export, you need a license and you need to be registered – that is separate from FMS.
FMS is government to government. It involves contractors and suppliers but FMS primarily ensures that the
USG is comfortable with an allied nation obtaining certain defense articles. It is a method of oversight to
protect US national security and foreign policy interests. It will not help you sell anything but you need to
understand it if you do want to sell anything.

The key questions to keep in mind when conducting international sales and marketing activities are:

 Does the US government want Country X to have a specific piece of equipment? Meaning, does the
USG want Country X to have what you’re selling?
 If Country X has this equipment, does it help promote US National Security and Foreign Policy
agendas?
 Does what you’re selling help Country X defend itself or achieve its own national security policy? Is
that policy congruent with US policy?
 Can you be certain the USG can monitor the equipment and ensure it doesn’t fall into the wrong
hands? Are you certain Country X isn’t going to get your equipment and sell it to Country Y?
 Is there any economic incentive for the sale to take place (economic development)?

The FMS process is a massive coordinated effort involving the military, State Department, industry supplier,
Congress, and the foreign customer. There are many obstacles to overcome, including the geopolitical climate
of the country/customer involved. In the end, it’s important to understand how things happen and the
sequence of events in order to prevent the process from failing. Often, the equipment supplier can help move
the process forward by ensuring that all of the USG’s questions are answered, that their pricing is reasonable,
that all of their licenses are in order, and that they can deliver in the required timeframe.

In Part II, we’ll discuss what happens once the USG approves the sale. That’s when things get complicated.

* The Obama Administration’s recent steps to improve export control covers items, lists, and licenses. This does not
change the overarching FMS process. Currently, if a US firm wants to export, there are multiple agencies, offering
multiple licenses, using multiple control lists. The Administration is planning to have a unified agency, with one IT
systems, and with a single export control list. This will make things easier for firms to ensure they have the applicable
licenses.

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