Financing and the Trust Fund · 2 of 3
Credit enters the picture at a defined point. It is available "When the purchase cannot be financed by other means" and only where American law allows it or the state department has allocated it within the annual financing ceiling (SAMM C9.7.2). It is a fallback rather than a first resort.
Two separate statutory powers sit behind that fallback, and they do different things. Section 23 of the Arms Export Control Act authorizes the President to finance procurement of defense articles and services for foreign countries and international organizations. That power, with the exception of charging below market interest, has been delegated to the head of the agency in consultation with the state and treasury departments (SAMM C9.7.2.1).
Section 24 does something quite different. It "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" (SAMM C9.7.2.2). The first lends money to the buyer. The second protects a lender against the buyer failing to pay.
The rules for both are not written by the defense department alone. Section 34 of the Act "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 U.S." (SAMM C9.7.2.3). Executive Order 13637 hands that job to the state department, with a condition. Where the standards rest on national security policy the defense secretary must concur first, and where they rest on financial policy the treasury secretary must (SAMM C9.7.2.3).
Cash received on a sale is walled off from all of this. Payments taken under sections 21, 22 and 29 are available only for paying suppliers and refunding purchasers, and are not available for financing credits and guaranties (SAMM C9.7.2.4). Repayments on direct loans move to named treasury accounts rather than back into the sales system.
Eligibility to buy and eligibility for credit start from the same place. "Foreign governments and international organizations eligible for FMS are eligible for FMS Credit" (SAMM C9.7.2.7.1). The route by which a country becomes eligible in the first place is set out in who may buy and how eligibility works.
From there the assessment widens well past the transaction. "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" (SAMM C9.7.2.7.1). Whether the country can maintain and support what it is buying counts as well.
One sentence rules out the most obvious commercial use. "FMS credit assistance is not extended solely to consummate a sale" (SAMM C9.7.2.7.1). Credit offered to close a deal that would otherwise fail is not what the authority is for.
"Credit financing to purchasers may be suspended or terminated for legal and/or policy reasons" (SAMM C9.7.2.7.2), and the manual lists the legal ones. Section 3 blocks credits and guaranties where a country has used articles or services in substantial violation of an agreement, transferred them without consent, or failed to keep them secure (SAMM C9.7.2.7.2.1).
The Foreign Assistance Act adds terrorism. It "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" (SAMM C9.7.2.7.2.2).
Section 5 addresses discrimination, stating that no credits or guaranties should go to a country whose laws, regulations or practices stop American persons from supplying defense articles on grounds of race, religion, national origin or sex (SAMM C9.7.2.7.2.3). Section 6 "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" (SAMM C9.7.2.7.2.4).
Two provisions deal with seized property. Assistance is suspended where a country has nationalized or expropriated property owned by American citizens or entities, imposed discriminatory taxes, or moved to repudiate agreements without proper compensation (SAMM C9.7.2.7.2.5). A separate provision stops American money being used to compensate the owners of nationalized property (SAMM C9.7.2.7.2.6).
The last bar is simple arithmetic. Under section 620(q), "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 six calendar months of principal or interest on any loan made to such country under this act" (SAMM C9.7.2.7.2.7).
"There are legal restrictions on the use of FMS credit monies" (SAMM C9.7.2.8), and the security cooperation office is made responsible for ensuring the partner knows them. Exceptions have to be justified and routed through the chief of mission to the agency for interagency coordination.
The first restriction is economic. Financing is generally unavailable where the transaction would burden the buyer's foreign exchange, create excessive claims on future budgets, or otherwise interfere with its development (SAMM C9.7.2.8.1). The test is stated without qualification: "Credit financing is not considered unless there is a reasonable expectation of loan repayment" (SAMM C9.7.2.8.1).
The second protects American production. Section 42(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 effect on employment and production at home (SAMM C9.7.2.8.2).
The third restriction is the one industry meets most often. Section 42(c) bars the use of funds made available under the Act to buy outside the United States, unless the President determines that doing so will not harm the American economy or the industrial mobilization base (SAMM C9.7.2.8.3). That determination has been delegated to the defense secretary and then, after the state and commerce departments concur, to the head of the agency.
A waiver determination is needed in three situations (SAMM C9.7.2.8.4). The first is a sole source request from a partner to buy from a foreign company. The second is where the prime contractor is not incorporated in the United States and does not have its principal place of business there. The third catches an American prime where half or less of the value of the work is performed at home.
Financed cases above a threshold also carry their own notice to Congress, which runs alongside the ordinary review of an arms sale. That process is described in how financing is appropriated and notified.
| Credit | A direct loan to the buyer under section 23 of the Arms Export Control Act. |
|---|---|
| Guaranty | Protection for a lender doing business in the United States against nonpayment, under section 24. |
| Standards and criteria | Set by the state department, with defense or treasury concurrence depending on the policy at stake. |
| Statutory bar | A legal ground on which credit is suspended or terminated, listed at SAMM C9.7.2.7.2. |
| Offshore procurement waiver | The exceptional determination needed to spend financed funds outside the United States. |
Every statement above links to the document behind it. The full source list for this piece is on the sources page.
This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.
Credit decisions are made in Washington and felt at a delivery site thousands of miles away. Sentfore provides secure transport, protective security, facilities and life support for defense programs in complex environments. Requirements can be sent through the contact page.