Financing and the Trust Fund · 1 of 3
The manual states a preference before it describes any alternative. "Foreign Military Sales (FMS) partners are encouraged to use national funds (cash) for security assistance (SA) payments" (SAMM C9.7.1). Everything that follows in the section is an accommodation around that starting point.
The category is wider than the word cash suggests. Where a partner pays with donations, with private financing that carries no American guarantee, or with money from the NATO International Staff, the government treats those funds as national funds (SAMM C9.7.1). What matters is how the money is handled once it reaches the account, not where it began.
Third party funds are defined broadly. The definition reaches loans or donations from another country, payments from commercial companies, loans from an international lender, and funding from the NATO staff (SAMM C9.7.1.1). A partner using any of them has to accept one limit. The third party gets no access and no rights to the articles or services provided under the offer document without advance approval from the state department.
There is also a list of places the money may not come from. Restricted sources include the countries named at section 126.1 of the arms regulations, and the consequence is stated plainly: "Attempts to use, or actual use of, a restricted source may raise concerns, impede, or stop the progression of an FMS sale" (SAMM C9.7.1.1.1). Documented violations are adjudicated by the state department, and the decision on whether an arrangement raises a concern sits with its political military bureau.
A bank letter of credit lets a partner pay with a commercial bank, an export credit agency or another lending institution standing behind it. The agency treats those payments the same as national funds, with one hard requirement: "In all cases, the LC must be in U.S. dollars" (SAMM C9.7.1.2).
The letter is issued by the bank to the purchaser, but the agency is named as its sole beneficiary, which is what gives the agency the ability to draw on it (SAMM C9.7.1.2.5.1). A memorandum of understanding between the agency and the partner governs the arrangement and has to be negotiated and signed before the letter is implemented (SAMM C9.7.1.2.5.2).
One thing the letter does not do is change the underlying exposure. "The use of an LC does not change the requirements for termination liability as required under the term of sale for which the LC is being applied" (SAMM C9.7.1.2.2). The instrument changes who transmits the money, not what is owed. The terms of sale themselves are set out in the term of sale and the dependable undertaking.
The first use replaces national funds held in the trust fund for routine quarterly payments. Eligibility is narrow. A partner has to qualify for a dependable undertaking or a risk assessed payment schedule. It must also hold a letter at a value the agency sets, and keep a cash reserve in the trust fund on top of it (SAMM C9.7.1.2.1.1.1).
The second use supplements national funds rather than replacing them. There the letter has to be worth at least the difference between the total case value and what the partner intends to pay directly. The partner also holds six months of available cash at all times, measured on a twelve month average of disbursements (SAMM C9.7.1.2.1.2.1). A partner billed under a special arrangement instead holds half the cash reserve that arrangement already builds in.
The value is not a round number chosen by the partner. The agency weighs the average monthly disbursement over twelve months, the largest monthly payment in the preceding year, and how often payments fall due. It also weighs the size of the whole program and the time the partner and the bank need to pay and restore the letter (SAMM C9.7.1.2.1.1.1).
Once it is drawn on it has to be restored quickly. "Within 15 days of drawdown, the partner must replenish the LC to the original dollar value" (SAMM C9.7.1.2.1.1.2). Repeated failure to do so costs the partner the right to use a letter at all, and can prompt a demand on the bank for the remaining balance of the case values.
The size is revisited at least once a year. Where the letter and the cash reserve have stopped covering the program, the partner has thirty days from notification to increase them. The finance director has fifteen days from finishing the assessment to issue that notification (SAMM C9.7.1.2.1.1.3). Declining to increase the letter is treated as withdrawal from the arrangement rather than as a breach, and the partner reverts to the payment method it used before.
Billing does not change. The quarterly statement or the special bill goes to the purchaser rather than the bank, and "It is the responsibility of the purchaser to ensure the bank makes payments to the FMS Trust Fund in a timely manner" (SAMM C9.7.1.2.3).
If payment is not made within thirty days of that bill, the agency may issue a demand letter to the bank (SAMM C9.7.1.2.1.1.4). The mechanism is deliberately simple. "The demand for payment letter shall be the only document necessary for DSCA to request payment from the bank" (SAMM C9.7.1.2.5.3.1), and it is used only where payment was missed on its due date.
Ending the arrangement runs on a longer clock than starting it. "In all cases, the termination of the LC prior to its expiration date or non-renewal requires written notification to DSCA no later than 90 days prior to termination or expiration" (SAMM C9.7.1.2.10). If the issuing bank stops meeting the eligibility criteria, the agency may draw the remaining value, require a new letter from a qualifying bank, or modify the case so the balance is paid from national funds (SAMM C9.7.1.2.10.2).
Closing one out has its own sequence. Within thirty days of termination or expiry the bank is asked to confirm in writing that the letter is closed and off its books. Within fifteen days of that notice the agency confirms the same to both the bank and the partner (SAMM C9.7.1.2.11).
| National funds | Cash from the partner, and by treatment donations, unguaranteed private financing and NATO staff money. SAMM C9.7.1. |
|---|---|
| Bank letter of credit | A commercial instrument, always in dollars, with the agency as sole beneficiary. |
| Replenishment | Restoring the letter to its original value within fifteen days of a drawdown. |
| Demand for payment | The single document the agency needs to call on the bank after a missed payment. |
| Restricted source | A funding origin that can stop a sale, including the countries named at ITAR 126.1. |
Every statement above links to the document behind it. The full source list for this piece is on the sources page.
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