Earlier this year, the Defense Security Cooperation Agency (“DSCA”) issued updated policy guidance implementing a significant expansion of the universe of countries authorized to use Foreign Military Financing (“FMF”) for direct purchases of U.S. defense items. Previously, only ten countries were eligible for use of FMF for direct commercial contracting, and under the new guidance, all NATO countries and major non-NATO allies – a total of 52 countries – are now eligible. The change creates additional pathways for foreign countries to finance purchases from the U.S. defense industrial base and comes at a time when U.S. foreign defense sales, and direct commercial sales in particular, are growing rapidly.
Background on Foreign Military Sales, Direct Commercial Sales, and Foreign Military Financing
Seasoned defense industry operators will know that there are two pathways for foreign ministries of defense to purchase new U.S. defense articles and services. The first is the Foreign Military Sales (“FMS”) program. This is the traditional government-to-government channel for such purchases. Under the FMS system, the foreign purchaser enters into a Letter of Offer and Acceptance with the U.S. Government, and the U.S. Government then generally procures the relevant articles or services from a defense contractor. This structure gives the U.S. Government a central role in contracting, payment, delivery, and oversight. The second pathway is through Direct Commercial Contracts (“DCCs”). DCCs are sales contracts between a foreign purchaser and a U.S. defense contractor, where the U.S. Government is not a party to the transaction but serves in a regulatory capacity, including in overseeing compliance with export controls requirements.
While sometimes used interchangeably, FMF is distinct from FMS and a source of grant or loan financing that eligible foreign partners may use to acquire U.S. defense articles, services, and training through either the FMS program or through DCCs. Naturally, the availability of U.S. financing assistance can affect whether a foreign government can move forward with a transaction, how quickly it can do so, and whether it chooses an FMS case or a direct commercial purchase.
Expansion of FMF Authority for Direct Commercial Sales
Historically, use of FMF for DCCs was statutorily authorized for only 10 countries: Israel, Egypt, Jordan, Morocco, Tunisia, Türkiye, Portugal, Pakistan, Yemen, and Greece. In the Consolidated Appropriations Act of 2023 (Public Law 117-328), Congress amended the authorization to utilize FMF to includes all NATO members and Major Non-NATO Allies (“MNNAs”). The recent DSCA policy update implements this statutory authorization.
Currently, NATO has 32 member countries, and it is noteworthy that of the NATO countries, only Greece, Portugal, and Türkiye previously qualified for FMF assistance for DCCs. In addition to the NATO members, there are currently 19 designated MNNAs, including major buyers of U.S. defense exports such as Australia, Japan, and South Korea. The Consolidated Appropriations Act of 2023 authorizes MNNAs “designated by section 517(b) of the Foreign Assistance Act of 1961” to utilize FMF for DCCs. Notably, Taiwan is not among these designated MNNAs; however, Taiwan received specific authorization for treatment as an MNNA for FMF purposes in the Foreign Relations Authorization Act for FY 2003 (Public Law 107-228), notwithstanding any other provision of law, including the Foreign Assistance Act of 1961. Thus, there is a reasonable argument that Taiwan, while not a designated MNNA under the Foreign Assistance Act, is also now eligible to utilize FMF for DCCs.
Explosion in FMS and DCC Transaction Volume
This change in FMF authority for DCCs comes against the backdrop of sustained growth in foreign defense sales. FMS activity has increased substantially in recent years, and direct commercial sales have also expanded as allied and partner governments seek to replenish stocks, modernize capabilities, and respond to changing security conditions. In FY 2020, FMS transactions totaled $50.8 billion, while DCC sales totaled $124.3 billion. By FY 2025 (the most recent year of data published by the Department of State), FMS transactions had more than doubled to $104.38 billion, and DCC sales had increased to $226.8 billion.
For U.S. defense contractors, the expanded FMF pathway for direct commercial sales could be significant. DCCs may offer a more direct route to the foreign customer than FMS, while FMF may help address financing constraints that otherwise could slow or prevent a transaction. Contractors pursuing opportunities with NATO members or major non-NATO allies should monitor both how DSCA implements the expanded policy, including any conditions on eligible items, U.S. content, certifications, approvals, and payment mechanics, and how much FMF funding Congress appropriates to support these transactions.