FMF Leasing: A New Alternative For Foreign Military Sales

Co-authored by Nathaniel E. Castellano

Originally published by Aerospace & Defense Law360, Government Contracts Law360, and International Trade Law360 on April 14, 2016

Government contractors interested in pursuing international sales should also consider the potential availability of foreign military funding (FMF) to their foreign government customers for the lease of defense equipment. Although typically prohibited,[1] in some circumstances, the Defense Security Cooperation Agency (DSCA) has approved the use of FMF funding for equipment leases. As explained below, using FMF funds to facilitate leases of defense equipment can be advantageous to American defense contractors, foreign government customers and the U.S. government. Contractors may be in a position to self-finance these leases, or they may require third-party financing. For the latter, executing these deals will require combining the worlds of FMF transactions and commercial equipment lease financing, which at first blush present mutually conflicting requirements.

The Case For FMF Leasing

With the decline in U.S. defense spending, American contractors are looking abroad to sell their goods and services to foreign customers. At the same time, increasingly unstable geopolitical conditions and rapid growth in emerging economies make some foreign governments eager customers for U.S.-produced defense equipment. Under certain circumstances, the U.S. government facilitates and funds the sale of military supplies and services to friendly countries.

Often, the U.S. government will assist in funding these transactions to further foreign policy and military objectives. The sale of defense equipment to foreign customers generally occurs within the legal framework of either a (1) foreign mlitary sale (FMS) or (2) direct commercial contract (DCC) with a foreign government, assisted with FMF funds.

FMS, which is the more common of the two approaches, involves a foreign government purchasing directly from a U.S. defense agency, with the defense agency contracting through a standard federal government supply contract with a U.S. contractor. The U.S. Department of Defense handles all aspects of the procurement — including contract formation and administration, selection of terms and conditions, quality assurance, payment, and dispute resolution. This relieves the foreign government of a considerable administrative burden, and allows it to capitalize on the DOD's acquisition experience...