B-200227.OM, OCT 15, 1980

B-200227.OM: Oct 15, 1980

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FOR THE REASONS DISCUSSED BELOW WE ARE OF THE OPINION THAT (1) SAAC HAS LEGAL AUTHORITY TO ENTER INTO FINANCIAL ARRANGEMENTS WITH FOREIGN COUNTRIES ALLOWING THEM TO DEPOSIT FUNDS IN COMMERCIAL BANKS. FMS AGREEMENTS AND DOD POLICY NORMALLY REQUIRE FOREIGN GOVERNMENTS TO DEPOSIT FUNDS IN THE TRUST FUND IN ADVANCE OF THE TIME THE MONEY IS NEEDED TO PAY DEFENSE CONTRACTORS. IS GENERALLY RESPONSIBLE FOR THE BILLING. DEFENSE SECURITY ASSISTANCE AGENCY (THE "DIRECTOR"). - THE DEPOSITOR AUTHORIZES THE DIRECTOR TO MAKE WITHDRAWALS FROM THE ACCOUNT BY ORDERS IN WRITING AND AUTHORIZES THE BANK TO TRANSFER THE FUNDS. - THE BANK SHALL ADVISE THE DEPOSITOR AND THE DIRECTOR OF ALL TRANSACTIONS TO THE ACCOUNT. - THE BANK SHALL RENDER A MONTHLY STATEMENT OF THE ACCOUNT TO THE DEPOSITOR AND THE DIRECTOR. - THE ACCOUNT WILL NOT BE SECURED BY ANY COLLATERAL.

B-200227.OM, OCT 15, 1980

SUBJECT: USE OF COMMERCIAL BANK ACCOUNTS FOR FOREIGN MILITARY SALES CUSTOMERS (B-200227-O.M., CODE 903008)

DIRECTOR, FGMSD:

THIS RESPONDS TO YOUR MEMORANDUM DATED SEPTEMBER 3, 1980, REQUESTING AN OPINION ON THE LEGALITY OF THE SECURITY ASSISTANCE ACCOUNTING CENTER'S (SAAC) INVOLVEMENT IN CERTAIN FINANCIAL ARRANGEMENTS WITH FOREIGN COUNTRIES RESPECTING THEIR MAKING PAYMENTS UNDER FOREIGN MILITARY SALES AGREEMENTS. UNDER THESE ARRANGEMENTS FOREIGN COUNTRIES MAY ESTABLISH INTEREST BEARING ACCOUNTS IN COMMERCIAL BANKS IN LIEU OF DEPOSITING THE FUNDS IN THE FOREIGN MILITARY SALES (FMS) TRUST FUND. YOU ALSO ASKED WHETHER THE UNITED STATES GOVERNMENT COULD BE HELD LIABLE FOR ANY FINANCIAL LOSSES RESULTING FROM THESE FINANCIAL ARRANGEMENTS. FOR THE REASONS DISCUSSED BELOW WE ARE OF THE OPINION THAT (1) SAAC HAS LEGAL AUTHORITY TO ENTER INTO FINANCIAL ARRANGEMENTS WITH FOREIGN COUNTRIES ALLOWING THEM TO DEPOSIT FUNDS IN COMMERCIAL BANKS, AND (2) THE UNITED STATES COULD NOT BE HELD LIABLE FOR ANY FINANCIAL LOSSES THAT A FOREIGN COUNTRY MAY INCUR AS A RESULT OF DEPOSITING FUNDS IN THE COMMERCIAL BANKS.

THE DEPARTMENT OF DEFENSE (DOD) ESTABLISHED THE FMS TRUST FUND TO FACILITATE FMS CASH SALE OF DEFENSE ARTICLES AND SERVICES BETWEEN THE UNITED STATES AND FOREIGN GOVERNMENTS UNDER SECTIONS 21 AND 22 OF THE ARMS EXPORT CONTROL ACT (22 U.S.C. SEC. 2761 AND SEC. 2761, AS AMENDED). WITH RESPECT TO SECTION 22 PROCUREMENT FOR CASH SALES, FMS AGREEMENTS AND DOD POLICY NORMALLY REQUIRE FOREIGN GOVERNMENTS TO DEPOSIT FUNDS IN THE TRUST FUND IN ADVANCE OF THE TIME THE MONEY IS NEEDED TO PAY DEFENSE CONTRACTORS. SAAC, AS PART OF THE DEFENSE SECURITY ASSISTANCE AGENCY (DSAA), IS GENERALLY RESPONSIBLE FOR THE BILLING, COLLECTION AND DISBURSEMENT OF THE FUNDS.

IN THE CASE OF PROCUREMENT FOR CASH SALES, SAAC HAS ENTERED INTO FINANCIAL ARRANGEMENTS WITH CERTAIN FOREIGN COUNTRIES WHICH PERMIT THEM TO DEPOSIT THE FUNDS IN INTEREST-BEARING ACCOUNTS IN COMMERCIAL BANKS RATHER THAN IN THE FMS TRUST FUND. TWO FOERIGN COUNTRIES SEND THE FUNDS DIRECTLY TO THE BANKS, WHILE THE OTHER COUNTRIES SEND THE FUNDS TO SAAC WHICH IN TURN FORWARDS THE FUNDS TO THE BANKS. THESE ARRANGEMENTS INVOLVE TWO SEPARATE AGREEMENTS, ONE BEING BETWEEN THE FOREIGN COUNTRY AND THE COMMERCIAL BANK AND THE OTHER BETWEEN THE FOREIGN COUNTRY AND SAAC.

ALL OF THE AGREEMENTS BETWEEN THE FOREIGN COUNTRIES AND THE COMMERCIAL BANKS GENERALLY SET FORTH THE FOLLOWING TERMS AND CONDITIONS:

- THE ACCOUNT SHALL REMAIN OPEN UNTIL TERMINATED AT THE DISCRETION OF THE BANK OR THE DEPOSITOR SUBJECT TO THE WRITTEN CONSENT OF THE DIRECTOR, SECURITY ASSISTANCE ACCOUNTING CENTER, DEFENSE SECURITY ASSISTANCE AGENCY (THE "DIRECTOR").

- THE DEPOSITOR AUTHORIZES THE DIRECTOR TO MAKE WITHDRAWALS FROM THE ACCOUNT BY ORDERS IN WRITING AND AUTHORIZES THE BANK TO TRANSFER THE FUNDS.

- THE BANK SHALL ADVISE THE DEPOSITOR AND THE DIRECTOR OF ALL TRANSACTIONS TO THE ACCOUNT.

- THE BANK SHALL RENDER A MONTHLY STATEMENT OF THE ACCOUNT TO THE DEPOSITOR AND THE DIRECTOR.

- THE ACCOUNT WILL NOT BE SECURED BY ANY COLLATERAL.

THE AGREEMENTS BETWEEN THE FOREIGN COUNTRIES AND SAAC ARE SIMILAR IN THE FOLLOWING WAYS:

- THE CENTER WILL CONTINUE TO REQUEST QUARTERLY PAYMENTS THROUGH THE NORMAL BILLING PROCESS.

- THE CENTER WILL MAINTAIN A 30 DAY LEVEL OF DISBURSEMENT REQUIREMENTS IN THE TRUST FUND ACCOUNT.

- THE FOREIGN GOVERNMENTS CERTIFY THAT THE COMMERCIAL BANK ACCOUNTS ARE BLOCKED ACCOUNTS IN THAT DEPOSITS INTO THE ACCOUNTS CANNOT BE UNILATERALLY WITHDRAWN BY THEM. FN1

- THE CENTER WILL MAKE WITHDRAWALS FROM THE ACCOUNTS ONLY TO REPLENISH THAT COUNTRY'S TRUST FUND ACCOUNT.

FGMSD STAFF MEMBERS HAVE QUESTIONED THE FINANCIAL ARRANGEMENTS ON BOTH MANAGEMENT AS WELL AS LEGAL GROUNDS. THEY BELIEVE THAT THE ARRANGEMENTS MAY BE UNAUTHORIZED UNDER THE ARMS EXPORT CONTROL ACT OR MAY BE IN VIOLATION OF 31 U.S.C. SEC. 547A. THE LATTER STATUTE REQUIRES THAT ALL FUNDS HELD IN TRUST BY THE UNITED STATES (INCLUDING THE INTEREST THEREON) SHALL BE INVESTED IN STOCKS OF THE UNITED STATES. AS INDICATED, THE FOREIGN COUNTRIES' FUNDS IN THE COMMERCIAL BANKS (INCLUDING INTEREST) ARE NOT INVESTED IN STOCKS OF THE UNITED STATES. GIVEN THE LESSER DEGREE OF CONTROL THAT SAAC HAS OVER THESE FUNDS (AS COMPARED WITH HAVING THE FUNDS BEING DEPOSITED IN THE FMS TRUST FUND), THE EXTENT OF THE UNITED STATES POTENTIAL LIABILITY FOR FINANCIAL LOSSES (E.G., IN THE EVENT THE COMMERCIAL BANK BECOMES INSOLVENT) IS ALSO QUESTIONED. YOU THEREFORE HAVE SUBMITTED THE FOLLOWING QUESTIONS FOR OUR CONSIDERATION:

QUESTION 1: DOES SAAC HAVE THE LEGAL AUTHORITY TO ENTER INTO FINANCIAL ARRANGEMENTS WITH FOREIGN COUNTRIES ALLOWING THE COUNTRIES TO DEPOSIT FUNDS IN INTEREST-BEARING ACCOUNTS IN COMMERCIAL BANKS RATHER THAN IN THE FMS TRUST FUND?

ANSWER 1: YES.

UNDER EXISTING LEGISLATION GOVERNING PROCUREMENT FOR CASH SALES (22 U.S.C. SEC. 2762), FOREIGN COUNTRIES ARE REQUIRED TO MAKE FUNDS AVAILABLE TO SAAC IN SUCH AMOUNTS AND AT SUCH TIMES AS MAY BE REQUIRED TO MEET CONTRACT PAYMENTS TO DEFENSE CONTRACTORS (AND ANY DAMAGES AND COSTS THAT MAY ACCRUE FROM THE CANCELLATION OF SUCH CONTRACT) IN ADVANCE OF THE TIME SUCH PAYMENTS ARE DUE. IN ORDER TO FACILITATE THE PROCESSING OF THESE PAYMENTS DOD HAS ESTABLISHED THE FMS TRUST FUND UNDER THE AUTHORITY OF 31 U.S.C. SEC. 725(S). FN2 FMS AGREEMENTS AND DOD POLICY NORMALLY REQUIRE FOREIGN COUNTRIES TO TO DEPOSIT MONEYS IN THE TRUST FUND IN ADVANCE OF THE TIME THE MONEY IS NEEDED TO PAY DEFENSE CONTRACTORS.

THE ARMS EXPORT CONTROL ACT DOES NOT MANDATE OR OTHERWISE REQUIRE THE ESTABLISHMENT OR EXCLUSIVE USE OF THE TRUST FUND; NOR DOES IT REQUIRE A FOREIGN COUNTRY TO PAY THE ENTIRE CONTRACT PRICE AT THE TIME THE PROCUREMENT FOR CASH SALES AGREEMENT IS ENTERED INTO. IT SIMPLY REQUIRES THE PAYMENT OF SUFFICIENT FUNDS IN ADVANCE OF TIME SAAC MUST PAY THE DEFENSE CONTRACTOR UNDER THE TERMS OF THE PROCUREMENT CONTRACT. IN DOD'S LETTER TO THE CHAIRMAN OF THE SENATE ARMED SERVICES COMMITTEE DATED MAY 1, 1979, RELATING TO ITS LEGAL AUTHORITY TO EXPEND FUNDS FROM THE IRANIAN'S FMS TRUST FUND, DOD STATED: FN3

"AS A MATTER OF POLICY, THE DEPARTMENT OF DEFENSE NORMALLY REQUIRES A FOREIGN COUNTRY TO PROVIDE FUNDS WELL IN ADVANCE OF THE TIME THEY ARE NEEDED TO MAKE PAYMENTS UNDER CONTRACTS ENTERED INTO PURSUANT TO SECTION 22(A) OF THE ACT. *** IT WOULD BE LEGALLY SUFFICIENT UNDER THE ARMS EXPORT CONTROL ACT FOR THE DEPARTMENT OF DEFENSE TO RECEIVE FUNDS FROM A FOREIGN COUNTRY IMMEDIATELY BEFORE NORMAL CONTRACT PAYMENTS OR TERMINATION CHARGES BECOME PAYABLE TO A CONTRACTOR. WHILE IT WOULD NOT BE PRUDENT TO DO SO, A FOREIGN MILITARY SALES PROGRAM COULD LEGALLY BE CONDUCTED WITH A ZERO BALANCE IN A COUNTRY'S TRUST FUND.

"THE FUNDS RECEIVED BY THE UNITED STATES TO MEET A FOREIGN COUNTRY'S DEPENDABLE UNDERTAKING ARE DEPOSITED IN THE TREASURY AS TRUST FUNDS. THE FOREIGN MILITARY SALES ACT DOES NOT REQUIRE THE ESTABLISHMENT OF A TRUST FUND. THE REQUIREMENTS OF THAT ACT COULD BE MET BY A FOREIGN COUNTRY'S MEETING ITS COMMITMENTS BY USE OF LETTERS OF CREDIT OR OTHER ARRANGEMENTS, WITHOUT MAKING CASH ADVANCES TO THE UNITED STATES ***"

TURNING TO THE FINANCIAL ARRANGEMENTS IN QUESTION, THE FOREIGN COUNTRIES HAVE DECIDED THAT RATHER THAN DEPOSITING LARGE SUMS OF MONEY IN THE TRUST FUND WHICH MAY NOT BE IMMEDIATELY REQUIRED TO MAKE PAYMENTS TO DEFENSE CONTRACTORS, THAT ANY SUCH EXCESS FUNDS ARE TO BE DEPOSITED IN COMMERCIAL BANKS. THESE ARRANGEMENTS WOULD NOT APPEAR TO BE PRECLUDED BY OR OTHERWISE INCONSISTENT WITH THE ARMS EXPORT CONTROL ACT SO LONG AS THE UNDERLYING AGREEMENTS INSURE THAT FUNDS CONTINUE TO BE MADE AVAILABLE TO MEET THE CONTRACT PAYMENTS. UNTIL SUCH TIME AS PAYMENTS ARE REQUIRED TO BE MADE TO THE DEFENSE CONTRACTORS, FOREIGN COUNTRIES HAVE EVERY RIGHT, SUBJECT TO ANY CONTRACTUAL AGREEMENT WITH DOD, TO USE AND INVEST THEIR FUNDS AS THEY SEE FIT.

BOTH OF THE AGREEMENTS AUTHORIZE THE DIRECTOR OF SAAC TO UNILATERALLY WITHDRAW FUNDS FROM THE FOREIGN COUNTRIES' BANK ACCOUNTS. THESE WITHDRAWALS ARE TO BE MADE ONLY FOR THE PURPOSES OF REPLENISHING THE COUNTRIES' TRUST FUND ACCOUNTS. THE COMMERCIAL BANKS ARE REQUIRED TO FURNISH SAAC WITH MONTHLY STATEMENTS OF THE FOREIGN COUNTRIES' ACCOUNTS. THE AGREEMENTS BETWEEN SAAC AND THE FOREIGN COUNTRIES STIPULATE THAT SAAC IS TO MAINTAIN A 30 DAY LEVEL OF DISBURSEMENT REQUIREMENTS IN THE TRUST FUND. THE AGREEMENTS ALSO PROVIDE THAT SAAC IS TO CONTINUE TO REQUEST QUARTERLY PAYMENTS FROM THE FOREIGN COUNTRIES THROUGH THE NORMAL BILLING PROCESS ON THE BASIS OF PREDETERMINED PAYMENT SCHEDULES, AS CITED WITHIN THE APPLICABLE CONTRACTUAL DOCUMENTS.

FROM A LEGAL STANDPOINT WE BELIEVE THAT THE AGREEMENTS ADEQUATELY INSURE THAT THE FOREIGN COUNTRIES' FUNDS WILL CONTINUE TO BE MADE AVAILABLE TO MEET THE CONTRACT PAYMENTS. ON THIS BASIS WE CONCLUDE THAT THE FINANCIAL ARRANGEMENTS ARE NOT PRECLUDED BY OR OTHERWISE INCONSISTENT WITH THE ARMS EXPORT CONTROL ACT.

WE ALSO DO NOT BELIEVE THAT THE FINANCIAL ARRANGEMENTS IN QUESTION ARE IN VIOLATION OF 31 U.S.C. SEC. 547A. THAT SECTION REQUIRES THAT ALL FUNDS HELD IN TRUST BY THE UNITED STATES (INCLUDING THE INTEREST THEREON) SHALL BE INVESTED IN STOCKS OF THE UNITED STATES. THE REASON FOR OUR CONCLUSION IS THAT 31 U.S.C. SEC. 547A PERTAINS ONLY TO FUNDS HELD IN TRUST BY THE UNITED STATES AND THE FOREIGN COUNTRIES' FUNDS IN QUESTION ARE BEING HELD BY COMMERCIAL BANKS. OF COURSE THE FOREIGN COUNTRIES' FUNDS ARE SUBJECT TO THAT STATUTE ONCE THEY ARE IN FACT DEPOSITED IN THE FMS TRUST FUND, FOR AT THAT TIME SAAC HOLDS THE FUNDS IN TRUST FOR THOSE COUNTRIES.

QUESTION 2: COULD THE UNITED STATES GOVERNMENT BE HELD LIABLE FOR ANY FINANCIAL LOSSES RESULTING FROM THE DEPOSIT OF FOREIGN COUNTRIES' FUNDS IN THE COMMERCIAL BANKS?

ANSWER 2: NO.

UNDER THE FINANCIAL ARRANGEMENTS IN QUESTION THE FOREIGN COUNTRIES' FUNDS WHICH ARE NOT IMMEDIATELY REQUIRED TO MEET PAYMENTS TO DEFENSE CONTRACTORS (I.E., THOSE FUNDS IN EXCESS OF A 30 DAY LEVEL OF DISBURSEMENT REQUIREMENTS) REMAIN ON DEPOSIT WITH THE COMMERCIAL BANKS. THE UNDERLYING AGREEMENTS BETWEEN THE COMMERCIAL BANKS AND THE FOREIGN COUNTRIES AND BETWEEN THE FOREIGN COUNTRIES AND SAAC, DO NOT CONTAIN ANY PROVISIONS SPECIFYING THE EXTENT OF THE UNITED STATES' LIABILITY FOR ANY FINANCIAL LOSSES RESULTING FROM THE DEPOSIT OF FUNDS IN THE COMMERCIAL BANKS (I.E., THE AGREEMENTS DO NOT GUARANTEE, LIMIT, OR DISCLAIM THE UNITED STATES' LIABILITY).

HOWEVER, DURING THE PERIOD OF TIME THAT THE FOREIGN COUNTRIES' FUNDS ARE ON DEPOSIT WITH THE COMMERCIAL BANKS SAAC DOES NOT EXERCISE ANY CONTROL OR CUSTODY OVER THE FUNDS. SAAC ONLY HAS THE PROSPECTIVE RIGHT TO WITHDRAW THE FUNDS FOR PURPOSES OF BEING DEPOSITED IN THE FMS TRUST FUND. ON THIS BASIS WE ARE OF THE OPINION THAT ALTHOUGH THERE IS NO PROVISION IN THE UNDERLYING AGREEMENTS DISCLAIMING THE UNITED STATES' LIABILITY FOR FINANCIAL LOSSES WHICH MAY RESULT, THE LEGAL RELATIONSHIP BETWEEN THE UNITED STATES AND THE FOREIGN COUNTRIES WOULD CLEARLY PRECLUDE SUCH LIABILITY. IF SAAC DOES NOT HAVE CUSTODY OR CONTROL OF THE FUNDS WHILE ON DEPOSIT WITH THE COMMERCIAL BANK THE UNITED STATES SHOULD NOT (AT LEAST IN THE ABSENCE OF AN EXPRESS GUARANTEE) BE HELD LEGALLY RESPONSIBLE FOR ANY ENSUING FINANCIAL LOSSES. OUR INFORMAL DISCUSSIONS WITH DOD'S GENERAL COUNSEL'S OFFICE HAS CONFIRMED THAT THIS WOULD BE DOD'S POSITION IN THE EVENT A FOREIGN COUNTRY SHOULD ATTEMPT TO HOLD THE UNITED STATES LIABLE FOR ANY SUCH FINANCIAL LOSSES.

THE QUESTION OF WHO SHOULD BEAR THE RISK OF FINANCIAL LOSSES BEING INCURRED APPEARS TO BE A MATTER BETWEEN THE FOREIGN COUNTRIES AND THE COMMERCIAL BANKS CONCERNED. THE AGREEMENTS EXECUTED BETWEEN THESE PARTIES ARE ALSO SILENT IN THIS RESPECT, BUT THERE EXISTS VARIOUS FEDERAL AND STATE LAWS DETAILING THE RESPECTIVE RIGHTS AND LIABILITIES OF THE PARTIES IN A BANK-DEPOSITOR RELATIONSHIP.

FINALLY, IN THE EVENT A COMMERCIAL BANK BECOMES INSOLVENT THE DEPOSITOR'S MONEYS MAY BE INSURED AGAINST LOSSES, DEPENDING UPON THE NATURE AND AMOUNT OF THE DEPOSITS AND THE TYPE OF FINANCIAL INSTITUTION INVOLVED. FOR EXAMPLE, THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) PRESENTLY ISSUES UP TO $100,000 OF THE AGGREGATE OF ALL DEPOSITS THAT A DEPOSITOR MAY HAVE IN AN INSURED COMMERCIAL BANK. FDIC DOES NOT OPERATE ON FUNDS APPROPRIATED BY CONGRESS, HOWEVER, SO WE CANNOT SAY THAT THE UNITED STATES ITSELF COULD BE POTENTIALLY LIABLE FOR THE FINANCIAL LOSSES OF FOREIGN COUNTRIES UP TO $100,000. FDIC'S INCOME IS DERIVED FROM ASSESSMENTS ON DEPOSITS HELD BY INSURED BANKS AND FROM INTEREST ON THE REQUIRED INVESTMENT OF ITS SURPLUS FUNDS IN GOVERNMENT SECURITIES.

FN1 THIS PROVISION IS NOT CONTAINED IN ONE OF THE AGREEMENTS. FN2 THAT SECTION REQUIRES, AMONG OTHER AS THINGS, THAT ALL MONEYS RECEIVED BY THE GOVERNMENT AS A TRUSTEE MUST BE DEPOSITED IN THE TREASURY AS TRUST FUNDS.

FN3 AS YOU KNOW, WE AGREED WITH THIS ASPECT OF DOD'S OPINION IN THE COMPTROLLER GENERAL'S REPORT ENTITLED "FINANCIAL AND LEGAL IMPLICATIONS OF IRAN'S CANCELLATION OF ARMS PURCHASE AGREEMENTS," DATED JULY 25, 1979 (FGMSD-79-47). (SEE PAGE 10).