TRADE AGREEMENT: Airmen from the 436th Aerial Port Squadron at Dover Air Force Base, Delaware, were on hand to load cargo bound for Ukraine on a DOD contracted aircraft June 16, 2020. The U.S. and Ukraine work to improve their interoperability and military readiness through foreign military sales cases. (Photo by Sr. Airman Christopher Quail, U.S. Air Force)
Unraveling the competition requirements associated with foreign military sales and international agreements.
by Dennis Longo
The sixth article in the On Contracting series, based on the Competition in Army Contracting course developed by the author for the Office of the Deputy Assistant Secretary of the Army for Procurement.
The Competition in Contracting Act (CICA) of 1984 requires, with limited exceptions, full and open competition in soliciting offers and awarding U.S. government contracts. But when the government receives a request from a foreign country for U.S. items or services under a foreign military sales agreement, and that agreement requests the items or services from a sole-source U.S. vendor, should CICA apply? One may reason that if the government is responsible to manage the transaction under federal regulations and the sole-source vendor is a U.S. company doing business directly with the U.S. government and not the foreign country, then CICA would apply and the foreign country’s requirement should be competed.
That is not necessarily the case.
There are a few key elements of a foreign military sales action that will assist the acquisition official to determine when the competitive procedures to fulfill CICA’s requirement for full and open competition may apply.
Security assistance programs:
“Security assistance” is a group of programs authorized by the Foreign Assistance Act and the Arms Export Control Act, by which the U.S. may provide defense articles and defense-related services by grant, loan, credit, cash sales or lease in furtherance of national policies and objectives. Foreign military sales (FMS) is the largest security assistance program.
FOREIGN MILITARY SALES
The U.S. provides military equipment and services to foreign partners and allies to enable them to build or enhance their security capability. FMS is a mutually beneficial program. It nurtures long term relationships with the U.S. military and foreign partners, including access to joint training and doctrine and increases opportunities for interoperability with U.S. forces.
Foreign military sales are often referred to as “FMS cases” and are conducted through formal contracts or agreements between the U.S. government and an authorized foreign government or international organization. The program includes government-to-government sales of defense articles or defense services from DOD stocks or through new procurements under DOD-managed contracts, regardless of the source of financing, according to the 2019 Security Cooperation Billing Handbook. Government-to-government sales are implemented by DOD, and the Federal and DOD Acquisition Regulations apply to all programs.
The three categories of cases that are executed via the FMS process are:
Partner nation-funded cases, whereby a partner nation submits a request to purchase U.S. defense articles or services. These represent the majority of cases.
Building Partner Capacity programs. These are security cooperation and security assistance activities that are funded with U.S. government appropriations and administered as cases within the foreign military sales structure. These programs provide defense articles and services to other government departments and agencies under the authority of the Economy Act or other transfer authorities for the purpose of building the capacity of partner nation security forces and enhancing their capability to conduct counterterrorism, counter-drug and counterinsurgency operations, or to support U.S. military and stability operations, multilateral peace operations and other programs.
Foreign military financing-funded cases. Foreign military financing is a multiyear Title 22-authorized State Department program executed by DOD that provides grants and may provide loans to partner nations for the purchase of defense equipment produced in the United States, as well as for acquiring U.S. defense services and military training.
FMS Trust Fund:
The foreign military sales country trust fund is a separate account held by the U.S. Treasury and used to fund foreign military sales programs. Funds are deposited into the account by foreign countries or may be deposited from government appropriations.
FMS country issues a letter of request (LOR) for U.S. defense articles or services.
U.S. government responds with a letter of offer and acceptance (LOA).
LOA is signed, funds are deposited into the trust fund and executed as a government-to-government contract.
The foreign military sales process begins when an eligible foreign country or international organization requests by way of submitting an LOR for information on defense articles or services, including training, being considered for purchase.
After determining that the government may accommodate the articles or services requested in the LOR, the U.S. responds to the foreign country with an LOA.
The LOA is the legal instrument used by the government to sell defense articles or services to a foreign country or international organization under authorities provided in the Arms Export Control Act (AECA). Signed LOAs are also referred to as “FMS cases.”
Acceptance of the LOA occurs when the foreign country’s official signs the document and provides any required funding to the corresponding FMS Trust Fund. Once accepted, the FMS case is implemented and becomes a government-to-government contract between the purchaser government or international organization and the United States.
Example—Government-to-government contract (sometimes “country-directed contract”):
An LOR has been submitted to the U.S. government by a foreign government for the purchase of an advanced military collective protection system. As detailed in the LOR, the prime contractor for the system designated by the foreign government is ABC Industries. The government responds with an LOA.
Five phases for the FMS process:
- Partner country identifies requirements and drafts LOR with input from U.S. combatant commands, security cooperation organizations and implementing agencies.
- Implementing agency prepares security assistance agreement with input from partner country.
- Defense Security Cooperation Agency (DSCA) and implementing agency obtain needed U.S. approvals and, when authorized by State, DSCA notifies Congress of proposed cases if required.
- DSCA reviews security assistance agreement and authorizes implementing agency to forward it to partner country for acceptance.
- Partner country agrees to LOA and provides required funding or rejects LOA.
- Implementing agency manages contracting or requisition of equipment and services specified in signed agreement.
- Partner country provides equipment delivery addresses.
- Partner country may use freight forwarder or pay to use the U.S. military transportation system.
- An FMS case may be closed when all materiel has been delivered, all ordered services have been performed and no new orders exist or are forthcoming.
- Partner country and government meet to resolve outstanding issues and close case.
- Implementing agency certifies case for closure and residual funds are made available for reuse.
International Agreement Competitive Restrictions memo:
Because CICA applies to the award and administration of contracts to fulfill the US government’s requirements and not the needs of a foreign country, a DOD agency is not required to provide for full and open competition when competition is restricted under an international agreement or treaty.
A contracting officer is prohibited from executing a contract action without providing for full and open competition unless the action is justified and approved. Under current Defense Federal Acquisition Regulation Supplement (DFARS) procedures, a justification and approval is not required when an LOA is executed between the foreign country and the government.
The requirement for a justification and approval to limit competition for contracts awarded under an international agreement was changed in the National Defense Authorization Act for Fiscal Years 1990 and 1991 under Section 817(a) of Public Law 101-189. That law permitted preparation of a document, rather than a justification and approval, to limit full and open competition, that describes the terms and directions of a sole-source action requested by a foreign country or international organization. (Section 817(a) essentially relaxed the administrative burden of preparing a justification to limit competition that otherwise would have been required under the Competition in Contracting Act.)
Implementing Section 817(a), the DFARS explains that a justification and approval is not required for international agreements if the head of the contracting activity prepares a document describing the sole source procurement for the partner nation.
In the Army FAR Supplement (AFARS), the document describing the sole source procurement for the partner nation referred to in the DFARS is “International Agreement Competitive Restrictions.”
DOD and other agencies may have statutory authorization under the Foreign Assistance Act (FAA) of 1961, the Arms Export Control Act (AECA) of 1976 or related programs to expend U.S. appropriated funds on “pseudo” FMS cases. These pseudo or “simulated” cases are so named because they are usually administered under the FMS structure, except that the U.S. government, not the partner nation, is the purchaser.
Building Partner Capacity, one of three FMS categories discussed previously, is composed of missions, programs, activities and authorities intended to improve the ability of other nations to achieve security-oriented goals shared with the United States. It is a crucial tool used by DOD and other government agencies in furtherance of U.S. national security objectives.
Building Partner Capacity programs are funded with U.S. government appropriations and administered within the FMS structure. These programs may provide defense articles or services to other government departments and agencies under the authority of the Economy Act or other authorities to build the capacity of partner nation security forces and enhance their capability to conduct counterterrorism, counter drug and counterinsurgency operations, or to support U.S. military and stability operations, multilateral peace operations and other programs.
Building Partner Capacity programs:
To execute the Building Partner Capacity program through the foreign military sales structure, a U.S. government “requesting authority,” usually a combatant command, defines the Building Partner Capacity requirement composed of defense articles or services for a partner nation in a memorandum of request (MOR) and submits it to the DOD “implementing agency,” such as the State Department, that will have overall responsibility to create the pseudo FMS case, execute it and ensure it is properly completed. A foreign military sales case is a “pseudo FMS case” when the implementing agency or other executive agency of the federal government executes a pseudo (or simulated) LOA to provide defense articles or services to another U.S. government department or agency. That department or agency will then deliver the articles or services identified in the original MOR to the partner nation.
The government uses appropriated funds for the procurement of articles or services that are described in the pseudo LOA. The appropriated funds are placed in the FMS Trust Fund by the Defense Finance and Accounting Service (DFAS) and an authorized representative of the IA will sign the “U.S. Signature” block on the pseudo LOA.
Because the LOA is not signed by the partner nation that will ultimately receive the articles or services, but serves to document the transfer of articles and services to the government requesting authority, it is often referred to as a “pseudo LOA” or a “pseudo FMS case.”
Five phases of the pseudo FMS process:
- S. combatant commands and in-country security cooperation organizations identify requirements and draft a memorandum of request with input from U.S. implementing agencies and partner countries.
- Implementing agency prepares security assistance agreement.
- DSCA obtains needed U.S. approvals; State approves each security assistance agreement.
- DOD notifies Congress of proposed programs.
- DSCA approves final security assistance agreements and implementing agency accepts the offer.
- Implementing agency manages contracting or requisition of equipment and services specified in signed agreement.
- In-country U.S. security cooperation organization provides equipment delivery addresses.
- Transportation is provided through the U.S. military transportation system or other government-procured transportation.
- Implementing agency initiates case closure and certifies case closure.
The pseudo LOA does not represent terms and conditions of an international agreement, but serves to document the purchase and transfer of articles or services to the government requesting authority and must be procured according to DOD acquisition regulations.
Procuring articles or services under a pseudo LOA is subject to the full and open competition rules of the Competition in Contracting Act at FAR Part 6.
Typically, the “only one responsible source” authority at FAR 6.302-1 may apply to pseudo FMS cases. The justification and approval prepared to support the procurement under the pseudo LOA must identify the IA and the type of appropriated funds applied to the procurement as well as the authority, such as the Building Partner Capacity program, by which the pseudo LOA was created. The official approving the J&A should obtain a copy of the pseudo LOA to confirm that the requirements, terms, conditions and articles or services recorded in the pseudo LOA align with those documented in the justification and approval.
When a government-to-government agreement between the purchaser foreign government and the U.S. government occurs, and the international agreement directs the sole-source procurement, FAR 6.302-4 applies and a formal justification and approval is not required. In this case, the head of the contracting activity prepares a document describing the sole-source procurement for the partner nation. The AFARS titles this document “International Agreement Competitive Restrictions.”
When an implementing agency, such as the State Department, executes a pseudo (or simulated) LOA to provide defense articles or services on a sole-source basis to another government department or agency, and that department or agency will then deliver the articles or services to the partner nation, FAR 6.302-1 generally applies and a formal J&A is required.
- Is the procurement funded by U.S appropriated funds or from the FMS country Trust Fund?
- Who initiated the procurement, a foreign country or the U.S. government?
- Are we delivering the item or service to a foreign country or the U.S. government?
For more information on international agreements and their impact on competition in contracting, go to https://go.usa.gov/xAzuu.
DENNIS P. LONGO is advocate for competition, task and delivery order ombudsman and senior procurement analyst at the Army Contracting Command at Aberdeen Proving Ground, Maryland. A member of the Army Acquisition Corps, he holds a Bachelor’s degree from University of Baltimore, he is Level III certified in contracting and acquisition and his assignments include acquisition specialist at the Program Manager for Chemical Demilitarization and procurement analyst at U.S. Army Legal Services Agency. He served in the military from 1971 to 1973 at the Southern European Task Force, Italy and was deployed to Iraq as a civilian in 2003. He authored the DAU Continuous Learning DOD Purchase Card Tutorial in 2002, the DASA(P) Competition in Army Contracting course in 2019 and the Defense Acquisition University CON 0160 Competition in Contracting course in 2020. He has been teaching courses on competition in contracting since 2004. The first of the author’s On Contracting articles appeared in the Winter 2020 edition of Army AL&T.
Read the full article in the Spring 2021 issue of Army AL&T magazine.
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