Transfer of Defense Articles: Direct Commercial Sales (DCS)

Transfer of Defense Articles: Direct Commercial Sales (DCS)

March 2, 2020
Transfer of Defense Articles: Direct Commercial Sales (DCS)
United States firms received licenses to export more than
mechanisms, Congress may limit or prohibit DCS to certain
$136 billion of defense articles and services in FY 2018
countries, or encourage the use of DCS in other cases.
directly to eligible foreign entities, be they governments,
corporations, or individuals. Such transactions are
Administration policy is found in National Security
conducted as Direct Commercial Sales (DCS), for which
Presidential Memorandum 10 (NSPM-10) on “U.S.
the U.S. government (USG) issues export licenses to U.S.
Conventional Arms Transfer Policy,” published in 2018.
firms through a process that includes a review for
Federal regulations, 22 C.F.R. 120-130, contain the
adherence to U.S. law and policy. DCS is distinct from
International Traffic in Arms Regulations (ITAR) and the
Foreign Military Sales (FMS), in which the U.S.
U.S. Munitions List (USML), both of which regulate the
government procures U.S. defense articles as an
items restricted under the AECA.
intermediary for foreign partners. (See CRS In Focus
IF11437, Transfer of Defense Articles: Foreign Military
Pursuant to the AECA, section 38, (22 U.S.C. §2778), all
Sales (FMS), by Nathan J. Lucas and Michael J. Vassalotti.
persons (other than USG personnel performing official
duties) engaging in manufacturing, exporting, or importing
Congress authorized DCS licensing in the Arms Export
defense articles and services must register with the U.S.
Control Act (AECA) of 1976 (22 U.S.C. §2751 et. seq.) and
Department of State under the ITAR. The law also requires
provides active oversight of the program through annual
the President to review the USML and to notify the House
Department of State and Foreign Operations Appropriations
Foreign Affairs Committee, the Senate Foreign Relations
Acts and the National Defense Authorization Acts. It also
Committee, and the Senate Banking Committee if any items
exercises oversight in the response to executive branch
no longer warrant export controls.
notifications of foreign arms sales. Through these

Figure 1. Direct Commercial Sales (DCS) Licensing Process In Comparison With Foreign Military Sales (FMS)

Source: GAO, “Conventional Arms Transfer Policy: Agency Processes for Reviewing Direct Commercial Sales and Foreign Military Align With
Policy Criteria,” GAO-19-673R, September 9, 2019. Annotated by CRS.
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Transfer of Defense Articles: Direct Commercial Sales (DCS)
In DCS, registered U.S. firms sell defense articles directly
Combatant Command, Military Department, and the
to authorized foreign customers under licenses received
Defense Security Cooperation Agency (DSCA).
from the State Department. As with FMS, where the USG
acquires the articles for delivery to foreign customers, firms
DOD may sell articles or services via FMS to a commercial
engaged in DCS must first obtain U.S. Department of State
firm or to the DCS purchaser in support of DCS but it needs
(DOS) approval. U.S. Department of Defense (DOD)
a Letter of Request from the purchaser pursuant to an
review and congressional notification may also be required.
approved export license. FMS implementing agencies may
Similar USG Review Process to FMS
not participate in FMS-commercial comparison. If the
For a U.S. firm to export defense articles or services on the
purchaser's national policy or specific circumstances require
USML, it must first register with the State Department’s
that FMS and commercial data be obtained for purchase,
Directorate of Defense Trade Controls (DDTC). While
the purchaser submits a request for exception to DSCA via
DCS originates between registered U.S. firms and foreign
the SCO.
customers, an application for an export license goes through
a review process similar to FMS (Figure 1). DOS and DOD
Firms Can Request a DCS Preference Generally, the USG
have agency review processes that assess proposed DCS
supports arms sales to allies and partners for legitimate
transfers for foreign policy, national security, human rights,
defense and is neutral as to use of FMS or DCS. Unless the
and nonproliferation concerns.
foreign entity requests a purchase be made through FMS
(with DOD as its agent), DOD tries to accommodate a U.S.
defense firm’s preference for DCS if articulated. DOD does
A DCS transaction may originate between a U.S. firm and a
foreign entity, may be initiated through a U.S. embassy
not normally provide price quotes for comparison of FMS
overseas, or may arise between foreign diplomatic or
to DCS. If a party prefers that a sale be made commercially
defense personnel stationed in the U.S. DCS licenses and
and when a company receives a request for proposal from a
FMS cases differ in that in DCS, the USG does not
country, the company may request that DSCA issue a DCS
participate in the sale or procure the defense articles or
preference for that particular sale. DCS preferences are
services.
valid for one year.
Firms May Consult With USG Officials
Congressional Notification Requirements
Before Applying for DCS Licenses
for DCS
Prior to a firm’s submission of a DCS license application,
The AECA, Section 36(c) (22 U.S.C. §2776(c)), specifies
officials from DOS and DOD may work with a foreign
reporting to Congress on the fol owing:
entity to review the needs of the country and the type and
intended use of defense articles to determine if a sale would

30 calendar days before issuing an export license for
be consistent with U.S. national security interests.
major defense equipment valued at $14 mil ion or more,
or defense articles or services valued at $50 mil ion or
Pursuant to Title 22, United States Code, foreign arms sales
more.
are subject to the continuous supervision and general

15 calendar days before issuing an export license for
direction of the Secretary of State, to best serve U.S.
NATO member states, NATO, Japan, Australia, South
foreign policy interests. Within DOS, the Bureau of
Korea, Israel, or New Zealand for sale, enhancement, or
Political-Military Affairs (PM) is the main administrator for
upgrading of major defense equipment valued at $25
arms transfers, including DCS. PM implements DCS
mil ion or more, defense articles or services at $100
through the Directorate of Defense Trade Controls (DDTC).
mil ion or more, or design and construction services of
PM manages DCS applications, submitting the proposed
$300 mil ion or more.
sale for internal and interagency review and consultation
Congress reviews formal notifications pursuant to procedures
with Congress in order to receive approval to grant a
described in the AECA. See CRS Report RL31675, Arms Sales:
license.
Congressional Review Process, by Paul K. Kerr.
The Security Cooperation Office (SCO) chief (within the
U.S. embassy) and other members of the country team
Firms Obtain Export Licenses
normally meet with visiting U.S. defense industry
Firms must obtain export licenses for all defense articles
representatives regarding their experiences in country. The
and must follow the International Traffic in Arms
SCO chief responds to follow-up inquiries from industry
Regulations. Licenses are valid for four years.
representatives regarding host country officials’ reactions or
subsequent marketing efforts by foreign competitors. The
In some cases involving major weapons systems,
SCO chief and embassy staff observe host country officials’
comprehensive export authorizations under 22 CFR 126.14
reactions to U.S. defense industry marketing efforts. He/she
allow exports and technical data transfer to certain nations
may pass these reactions to the U.S. industry
without having to go through the licensing process. The F-
representatives, but the SCO may not work on behalf of any
35 Joint Strike Fighter program is an example.
single U.S. firm; the only preference can be for purchasers
to “buy American.” If the SCO chief believes that a firm’s
Nathan J. Lucas, Section Research Manager
marketing efforts do not coincide with U.S. security
interests or may damage U.S. relations with the country, he
Michael J. Vassalotti, Section Research Manager
or she is to relay these concerns, along with a request for
IF11441
guidance, throughout the country team and to the
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Transfer of Defense Articles: Direct Commercial Sales (DCS)

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https://crsreports.congress.gov | IF11441 · VERSION 1 · NEW