International Defense and Security Business DevelopmentThe Inside-Out Model

International Defense and Security Business DevelopmentInternational Opportunity: Where is the Money?

Excludes• China• Russia• North Korea• Iran• Cuba• Syria

International Defense and Security Business DevelopmentInternational Opportunity: Where is the Money?

Top 5:• India• Saudi Arabia• France• UK• Turkey

International Defense and Security Business DevelopmentInternational Opportunity: Where is the Money?

Top 5:• EU• India• GCC• Turkey• Korea

• Largest single long term defense equipment and services market

• Market behavior:

- Increasingly integrated decision making

- Internally harmonized military requirements

- Transnational defense and security policy

- Centralizing procurement authority

• Recommended penetration strategy:

- Create an intra-EU operating presence to become a “local” supplier

- Consider teaming with EU multinationals

International Defense and Security Business DevelopmentEuropean Union

20-year trend closing this market to U.S. bidders will continue

International Defense and Security Business DevelopmentGCC

• Market structure

- Saudi Arabia “leads”

- UAE, Qatar, Kuwait, Bahrain, Oman “follow”

• Broad characteristics

- Stable demand

- Open to U.S. companies

- Role of alliances evolving with changing aspirations (employment, infrastructure development, economic diversification)

International Defense and Security Business DevelopmentUS Security Cooperation

• Policies and Principles

• The U.S. Foreign Military Sales Participants- The Security Cooperation Team- Homeland Security Special Case

• Processes- Licensing: International Traffic in Arms Regulation and Export

Administration Regulation - Contracting: FMS and DCS- Congressional Oversighto Javits Reporto AECA 36(b) and 36(c) Notification

• Offsets

• Foreign Corrupt Practices Act

U.S. Security CooperationPolicies and Principles

“The U.S. Government views the sale, export, and re-transfer of defense articles and defense services as an integral part of safeguarding U.S. national security and furthering U.S. foreign policy objectives.” U.S. Department of State Directorate of Defense Trade Controls

Security Cooperation IS about:• Implementing U.S. Foreign Policy• Strengthening National Security

- Building Coalitions- Burden Sharing- Forward Basing- Supporting the Combatant

Commanders

Security Cooperation IS LESS about:• Industrial Policy• Employment• Economic Development

Policies and PrinciplesArms Export Control Act22 U.S.C. 2778 of the Arms Export Control Act (AECA) provides the authority to control the export of defense articles and services, and charges the President to exercise this authority.

Subchapters: I Foreign And National Security Policy Objectives And Restraints II Foreign Military Sales Authorizations II A Foreign Military Construction Sales< II B Sales To United States Companies For Incorporation Into End Items II C Exchange Of Training And Relate Support III Military Export Controls III A End-Use Monitoring Of Defense Articles And Defense Services IV General, Administrative, And Miscellaneous Provisions V Special Defense Acquisition Fund VI Leases Of Defense Articles And Loan Authority For Cooperative Research And

Development Purposes VII Control Of Missiles And Missile Equipment Or Technology VIII Chemical Or Biological Weapons Proliferation IX Transfer Of Certain CFE Treaty - Limited Equipment To NATO Members X Nuclear Nonproliferation Controls

U.S. Foreign Military Sales ParticipantsSecurity Cooperation Team

Secretary of State

Under Secretary for

Political Affairs

Regional Assistant

Secretaries

Under Secretary for

Arms Control / International

Security Affairs

Assistant Secretary Political-

Military Affairs

Secretary of Defense

Under Secretary of Defense for

Policy

Assistant Secretary of

Defense- International

Security Affairs

Defense Security

Cooperation Agency

“The Secretary of State provides continuous supervision and general direction for SA [Security Assistance], including determining whether what SA programs a given country will have, as well as their scope and content. The Secretary of Defense implements programs to transfer defense articles and services on a government-to-government basis.” Defense Security Cooperation Agency

Security Cooperation TeamDepartment of State / Department of Defense Global Alignment

Security Cooperation TeamDefense Security Cooperation Agency

Joint Staff Military Services

Combatant Commands

Defense Security Cooperation

Agency

CSTC-ANTM-A

US Forces - Iraq

Office of the Defense Representative-

Pakistan

US EmbassiesSecurity Cooperation

Organizations

US Agency for International Development

Typical Industry Points of Contact

Policy Assistant Secretaries of Defense

Under Secretary of Defense for Acquisition,

Technology, and Logistics

Defense Technology and Security

Administration

Office of the Secretary of Defense - Comptroller

Office of Management and Budget

State Department

US CongressCommerce

DepartmentUS Industry

• CSTC-A Combined Security Transition Command– Afghanistan

• NTM-A NATO Training Mission- Afghanistan

}

Security Cooperation TeamTypical Industry – USG Early Points of Contact

U.S. Country Team • Office of Defense Cooperation

• Commercial Service• Defense Attaché

• Counselor for Political Affairs• Counselor for Political Military Affairs• Counselor for Economic Affairs

Defense Department

Military Services • US Army Security Assistance Command (USASAC) • Air Force International Affairs (SAF-IA) • Navy International Programs Office (Navy IPO)

Combatant Commands • J3 Director Operations• J4 Director Logistics• J5 Director Strategic Plans & Policy• J7 Director Operational Plans and Joint Force Development• J8 Director Force Structure, Resources and Assessment

Defense Technology and Security Administration

• Licensing Directorate• International Security Directorate

Commerce Department

• Export Advocacy Center• Bureau of Industry and

Security (Licensing)

State Department • Bureau of Political Military Affairs

• Office of International Security Operations (PM/ISO)• Directorate of Defense Trade Controls (DDTC)

(Licensing)

Export Compliance Regulations

State Department International Traffic in Arms Regulations

Executive Order 11958, as amended, delegated this AEC statutory authority to the Secretary of State. The International Traffic in Arms Regulation (ITAR) implements this authority.

Parts:120 Purpose and Definitions121 The United States Munitions List122 Registration of Manufacturers and Exporters123 Licenses for the Export of Defense Articles124 Agreements, Off-Shore Procurement and Other

Defense Services125 Licenses for the Export of Technical Data and

Classified Defense Articles126 General Policies and Provisions127 Violations and Penalties128 Administrative Procedures129 Registration and Licensing of Brokers130 Political Contributions, Fees and Commissions

Commerce Department Export Administration Regulations

The Bureau of Industry and Security develops, implements and interprets U.S. export control policy for dual-use commodities, software, and technology through Export Administration Regulations codified at Title 15 of the Code of Federal Regulations Parts 730 through 774. (Dual-use items subject to BIS regulatory jurisdiction have predominantly commercial uses, but also have military applications.)  

Key Regulatory Areas• High Performance Computers• Encryption• Deemed Exports• Antiboycott Regulations• Regional Considerations• Multilateral Export Regimes• Technical Advisory Committees• Wassenaar Arrangement

ITAR and EARLicensing

Defense Article or Service?

ITAR: State DepartmentDirectorate of Defense

Trade Controls

YES

On the CCL

(“dual use”)?

EAR: Commerce Department Bureau of

Industry and Security

ITAR – International Traffic in Arms Regulation

EAR – Export Administration Regulation

USML - U.S. Munitions ListCCL – Commerce Control

List

Is this an

Export?

YES

Is a License Required?

YES

Action Steps: Secure qualified export compliance counsel, andRegister with online licensing sites as required

State Department• DTrade website (for

nearly all applications) http://www.pmddtc.state.gov/DTRADE/index.html

Commerce Department• Simplified Network

Application Process Redesign (SNAP-R) website http://www.bis.doc.gov/snap/index.htm

International Traffic in Arms RegulationExports

Sending or taking a defense article out of the United States; transferring registration, control or ownership to a foreign person of any aircraft, vessel, or satellite covered by the U.S. Munitions List, whether in the United States or abroad; Disclosing or transferring any defense article to an embassy, any agency or subdivision of a foreign government (e.g., diplomatic missions) in the U.S.; or (disclosing or transferring technical data to a foreign person, whether in the United States or abroad; or performing a defense service on behalf of, or for the benefit of, a foreign person, whether in the United States or abroad.

Out of the

Country?

To a Foreign Person?

YES

YES

It’s an Export

Caution!

Examples of unintended exports: • Technical data posted to a web site• Technical data attached to an email

International Traffic in Arms RegulationForeign Person, U.S. Person, Defense Article or ServiceForeign Person Any natural person who is not a U.S. citizen, or an

alien who is lawfully admitted for permanent residence, or certain persons admitted temporarily. Any foreign corporation, business association, partnership, trust, society or any other entity or group that is not incorporated or organized to do business in the United States. International organizations, foreign governments and any agency or subdivision of foreign governments (e.g diplomatic missions).

U.S. Person A natural person who is a U.S. citizen, or is an alien who is lawfully admitted for permanent residence, or certain persons admitted temporarily. Any corporation, business association, partnership, society, trust or any other entity, organization or group that is incorporated to do business in the United States. Any U.S. governmental (federal, state or local) entity.

Defense Article or Service (a) Is specifically designed, developed, configured, adapted, or modified for a military application, and (i) Does not have predominant civil applications, and  (ii) Does not have performance equivalent (defined by form, fit and function) to those of an article or service used for civil applications; or (b) Is specifically designed, developed, configured, adapted, or modified for a military application, and has significant military or intelligence applicability such that control under § 120.3 is necessary.

Caution!

Definitions can be confusing, so get expert compliance advice

International Traffic in Arms RegulationPublic Domain

Public Domain Information which is published and which is generally accessible or available to the public through sales at newsstands and bookstores, through subscriptions which are available without restriction to any individual who desires to obtain or purchase the published information; through second class mailing privileges granted by the U.S. Government; at libraries open to the public or from which the public can obtain documents; through patents available at any patent office; through unlimited distribution at a conference, meeting, seminar, trade show or exhibition, generally accessible to the public, in the United States; through public release in any form after approval by the cognizant U.S. government department or agency; through fundamental research in science and engineering at accredited institutions of higher learning in the U.S. where the resulting information is ordinarily published and shared broadly in the scientific community.

Caution!

“Leaked” information that has not been approved by the U.S. government for public release is not necessarily in the public domain.

ContractingSelected FMS and DCS Comparisons

Defense Institute of Security Assistance Management DISAM

FMS DCS

Nature of Relationship

US prime contracts with US Government; US Government contracts with customer government

US prime contracts with customer government

US Government Approvals

USG approvals are identical; minor differences in export license process

Contract Negotiation

USG negotiates, but applies relatively inflexible FAR terms and conditions

Contractor negotiates within export license authority

Contract Administration

USG administers Customer administers

Pricing Estimated Fixed or other pricing agreements permitted

Support USG usually proposes comprehensive package

More tailoring possible

Program price Often benefits from larger procurement quantities; FMS case management fees added; Non-recurring charges required by may be waived

May benefit from more pricing flexibility; some contractors add risk premiums; no FMS case management fees; Non-recurring charges not required

Through Life Logistics Support

Provided through USG system Contractor responsibility

Contracting: FMS and DCS FMS Sales Process

DISAM, Chapter 5

Phase(Duration)

Event

Preliminary(Indefinite)

• Customer determines requirements• Customer obtains specific systems information

Definition (Indefinite)

• Customer and U.S. exchange technical information

Request(Indefinite)

• Customer prepares and submits an LOR for price• and availability (P&A) data• Customer prepares and submits LOR for• an LOA

Development of Offer (Policy for the response to LOR by LOA is 120 days for 80% ofLORs)(Congressional review if required is from 15-50 days.)

• Implementing agency (IA) receives the LOR• IA develops an LOA data (LOAD)• DSCA-CWD writes LOA• DoS/DSCA/Congress review LOA• DSCA countersigns LOA• IA issues LOA to customer

Acceptance of the Offer(Policy is 60 days to accept a LOA)

• Customer signs LOA• Customer sends signed copy of LOA and• initial deposit to Defense Finance Accounting• Service-Indianapolis Center (DFAS-IN)• Customer sends signed copy of LOA to IA

Congressional OversightJavits Report and Congressional Notification

Javits Report

Annual, 1 February report to Congress regarding expected arms sales for the current calendar year (subject to specified U.S. Dollar thresholds)

Arms Export Control Act Notification

36(b) FMS or 36(c) Commercial Threshold Days

Most customer countries • Major defense equipment $14M• Defense articles or services $50M• Design and construction services

$200M

Informal- 20Formal- 30

NATO member states, NATO, Japan, Australia, South Korea, Israel, or New Zealand

• Major defense equipment $25M• Defense articles and services $100M• Design and construction services

$300M

Informal- 20Formal- 15

Remember to Build Congressional Notification Into Your Program Plan

OffsetsDefinitions

“… the practice by which the award of defense contracts by foreign governments or companies is conditioned upon commitments from the defense contractor to provide some form of compensation to the purchaser.”  Commerce Department Bureau of Industry and Security Definition

Common Forms• Direct:  Transactions directly related to the articles or services exported under

the sales agreement.

• Indirect:  Transactions unrelated to the articles or services exported

• Multiplier:  A factor applied to the actual value of certain offset transactions to calculate the credit value earned. 

• Co-production/Licensed Production:  Foreign manufacture all or part of U.S.-origin defense articles. 

• Investment:  Investment in the customer country.

• Countertrade:  Procurement of items from the customer country.

• Technology Transfer:  Technology concession to the customer country. 

OffsetsReal World Considerations

• The primary purpose is to create a favorable political climate for a major procurement.

• The offset authority should always be treated like a customer.

• Commitments and credits may be denominated in currency, but are not “cash.”

• Cost-to-credit ratios vary widely by market and offset project type

• Offset programs are expensive to implement:

- Competitive environment may allow offset costs to be priced

- Pricing approaches may differ between FMS and DCS contracting methods

Caution!

Beware potentially corrupt transactions masquerading as offset projects.

Foreign Corrupt Practices ActOverview

“The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. ("FCPA"), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.”

http://www.justice.gov/criminal/fraud/fcpa/

Foreign Corrupt Practices Act “Red Flag” Examples

• Third Party refuses to certify compliance with anti-bribery or FCPA requirements• Third Party refuses to complete agent/ consultant/third party questionnaire regarding

relationship with or interests involving foreign government officials• Third Party does not appear to be qualified to perform the duties for which it is

engaged to assist your company• Third Party is related to a government official• Country has a reputation for corruption and bribery• The industry has a history of FCPA and anticorruption problems• Breakup of a company or association with one or more foreign companies is

unexplained or inadequately explained• Requests for commissions to be paid in a third party country, to a third party, or in

cash or untraceable funds• Heavy reliance by party on political or government contacts as opposed to

knowledgeable staff and investment of time to promote the Company’s interests• Refusal or inability to develop or implement a market strategy• A desire to keep third party representation secret• Relationship problems with other foreign companies

“Identification of ‘Red Flags’ for Possible Violations of Key U.S. Laws for Companies Operating Overseas,” Corporate Compliance Insights, September 9, 2009, by Sharie Brown, partner at DLA Piper (US) LLP

Foreign Corrupt Practices ActProvisions and PenaltiesAnti-Bribery Provisions

• Prohibit making a bribe or promising to give anything of value in an attempt to influence the action or inaction of a foreign official is strictly prohibited

• This includes payments to consultants, agents, or any other intermediary or representative when the party making the payment knows or has reason to believe that some part of the payment will be used to bribe or influence a foreign official

• Severe penalties may be imposed for violations of the FCPA, both against individuals and companies

Books and Records Provisions

• Two Sets of Requirements:

- Accuracy of books and records

- Internal accounting controls

• Apply to publicly traded companies and their employees and agents

• Enforced by the SEC

Published Source: “Understanding the FCPA,” Mark Rush, K&L Gates LLP, Henry W. Oliver Building, 535 Smithfield Street, Pittsburgh, PA 15222

Action Steps: Secure qualified FCPA compliance counsel, andModel compliance while training your team regularly

“If you aren’t working on sales or the things that enhance the profitability of this

company, then you are working on the wrong things.”

Inscribed above the main employee exist at Wal-Mart Headquarters in Bentonville, Arkansas.

International Defense and Security Business DevelopmentLeadership!

Rule One – Do everything that could or should be done to win. Rule Six – For each significant customer, know what he thinks, how he thinks,

what sort of information is best supplied to him, understand his past, present and future, understand where he is going and what our proposal means to his probable future.

Rule Seven – Every key decision maker needs a champion to lead the way and do his work for him.

Rule Ten – Staff marketing strong enough to stand up to senior executives, program managers, engineering and others who command respect… Totally self-motivated and self-reliant.

Rule Eleven – Engineering should engineer, manufacturing should manufacture, marketing should sell

Rule Twenty-one – Ultimately present a proposal with a competitive price from which you are the logical winner.

GUNNSIGHTS: Taking Aim on Selling in the High Stakes Industry of International Aerospace

International Defense and Security Business DevelopmentSelected “Gunn’s 21 Rules for Winning”

“The Best Listener Wins”