B-217660, Sep 8, 1987, 66 Comp.Gen. 634

B-217660, Sep 8, 1987, 66 Comp.Gen. 634

Miscellaneous Topics - National Security/Internation Affairs - Foreign Air Programs - Funding Restrictions - Military Assistance DIGEST: The use of Economic Support Fund (ESF) monies by Egypt to pay Foreign Military Sales (FMS) debt was improper. Section 531(e) of the Foreign Assistance Act of 1961, as amended, 22 U.S.C. Sec. 2346(e) (Supp. III 1985), prohibits the use of ESF funds for "military or paramilitary purposes." Here, there is no dispute that the FMS loan funds were used to purchase military services and equipment and that the ESF disbursement was used to pay the FMS loan. Because the military equipment was both provided and financed by the United States Government, there is too close a nexus between the military equipment and services and the ESF monies.

To The Honorable Lee H. Hamilton, House of Representatives:

You have requested our legal opinion on the use of Economic Support Fund (ESF) monies by the Egyptian Government to pay its Foreign Military Sales (FMS) debt owed the United States. As explained below, we conclude that the use of ESF monies to pay Egypt's FMS debt was improper.

BACKGROUND

Foreign Military Sales

The United States in recent years has financed a number of "credit sales" of military equipment to foreign countries, including Egypt, under the FMS program, authorized by section 23 of the Arms Export Control Act, 22 U.S.C. Sec. 2763 (1982). Section 23 provides that the President is authorized to "finance the procurement of defense articles ... by friendly foreign countries." Historically, this financing has taken the form of either direct U.S. Government loans or federally guaranteed Federal Financing Bank (FFB) loans.

Economic Support Fund

Section 531 of the Foreign Assistance Act of 1961, as amended, 22 U.S.C. Sec. 2346 (Supp. III 1985), authorizes the provision of "economic support" to foreign countries "in order to promote economic and political stability." For that purpose, the Congress annually appropriates for the Agency for International Development (AID) monies to make ESF grants. See, e.g., Foreign Assistance and Related Programs Appropriations Act, 1987, as enacted by Pub.L. No. 99-591, 100 Stat. 3341, 3341-220 (1986). ESF grants are provided either in the form of project assistance (e.g., the supplying of equipment, services, etc.), commodity import financing, or, as in the instant case, the transfer of cash to the grantee's designated bank account.

Subsection (e) of section 531 provides:

"Amounts appropriated to carry out this part shall be available for economic programs only and may not be used for military or paramilitary purposes."

22 U.S.C. Sec. 2346(e) (Supp. III 1985).

Prior to 1987, it usually was difficult to determine the actual use to which ESF cash transfer funds were put, because there was no practical way for AID to track the funds in question once they were disbursed to the recipient government and commingled with that government's own funds. The fiscal year 1987 Foreign Assistance appropriation act, Pub.L. No. 99-591, 100 Stat. 3341 (Oct. 30, 1986), however, included in the ESF appropriation a requirement that after February 1, 1987, countries receiving cash transfer assistance in excess of $5 million maintain those funds in a separate account. Pub.L. No. 99-591, 100 Stat. 3341, 3341-221- 3341-222 (1986). This provision is intended to permit better monitoring by AID of the ultimate end-use of cash transfer assistance. In the case at hand, AID was able to determine that ESF funds disbursed to Egypt were used to service Egypt's FMS debt.

FACTS

On March 9, 1987, AID electronically disbursed $115 million in ESF grant funds to Egypt's Citibank account in Cairo. The account was established by the Central Bank of Egypt specifically to maintain ESF cash transfers in a segregated account, as required by the 1987 appropriation act, discussed above.

However, it appears that Egypt later withdrew the entire sum and deposited it in a commingled account from which the funds were spent. When Egypt was unable to account for the specific purposes for which the funds were spent, as required by the statute and the grant agreement, AID required Egypt to deposit an equivalent amount of funds back into the separate account and to re-spend them, this time accounting for their use. As of June 17, 1987, Egypt had redeposited $85 million to the separate account. Documentation on its disbursements which Egypt provided to AID to date shows that $51.8 million of the redeposited funds was used to service Egypt's FMS debt to the United States.

The ESF grant agreement with Egypt included the following special covenant:

"Section 4.1 No Use for Military Purposes. The parties agree that the grant proceeds will not be used for financing military or paramilitary requirements of any kind, including the procurement of commodities or services for such purpose."

Notwithstanding this covenant and the similar prohibition of subsection 531(e) of the Foreign Assistance Act, an AID "Program Assistance Approval Document" dated March 1987, provided that grant proceeds could be used for, among other purposes, servicing "FMS debt which, by correspondence between USAID/LEG (legal) and AID/GC (general counsel), has been determined not to constitute use of AID funds for military purposes." AID "Program Implementation Letter," dated March 8, 1987, advised that "use of proceeds to service debt to the U.S. Government, arising from transactions under our Foreign Military Sales Act, would not be considered 'military or paramilitary use'."

ANALYSIS

It is clear from the documents described above that ESF funds are being used by the Egyptian Government to pay its FMS debt with AID's concurrence.

In a November 9, 1986 letter from Kevin F. O'Donnell, AID Senior Legal Adviser in Cairo to Herbert E. Morris, AID Assistant General Counsel, it is stated that the enactment in the FY 1987 Foreign Assistance Appropriation Act, id., requiring separate accounts for all ESF cash transfer funds in excess of $5 million provided after February 1, 1987 requires that the question of using ESF funds to service FMS debt must be addressed. Mr. O'Donnell's letter (included in AID's report to the GAO), states:

For now, I want to be sure we do not have a potential problem with the new requirement under the F.Y. 87 legislation that countries receiving CT (cash transfer) assistance ... maintain such funds in a separate account. In Egypt, all previous CT assistance has simply been deposited in the Government of Egypt's general bank account in New York with the funds commingled with other revenues and the expenditures untraceable in any direct sense. ...

A possibly more serious concern, however, would be traceable use by the GOE of CT assistance to service its existing Foreign Military Sales debt to the USG (U.S. Government). ...

"It is our expectation that some significant percentage of upcoming CT assistance from AID will in fact be used to service this FMS debt. Given the legislative requirement for the segregated CT account, such GOE use of the proceeds will be highlighted and the question should therefore be addressed, well in advance of next February, whether such use would somehow constitute 'military assistance' in violation of the AID legislation."

Mr. O'Donnell also pointed out that the long-standing AID "negative covenant," routinely included in all ESF cash transfer grants (that the proceeds will not be used for financing military requirements of any kind), which previously was an academic question since actual CT expenditures were untraceable, will now have to be changed.

AID's current legal position was outlined for us by its General Counsel, Howard M. Fry, in a letter dated May 5, 1987, and is summarized below. Mr. Fry stated that he endorsed Mr. O'Donnell's view that the servicing of FMS loans was not a violation of statute or covenant, and added these points:

1. Any "military purpose" to which the ESF cash transfer funds may be put was exhausted years ago when Egypt purchased the military equipment which gave rise to the FMS debt. Whether the FMS loan is serviced or not, the military establishment can keep the equipment and has nothing more to gain.

2. At the time Egypt purchased the military equipment with FMS credits, it had no reasonable expectation of receiving cash transfers years later when the FMS debt became due. Therefore, there is no reasonable linkage between the earlier military purchase transaction and the subsequent unforeseen availability of cash transfer assistance.

3. The nature of cash transfer assistance is macroeconomic. Foreign assistance purposes are achieved by providing 'developing countries' with the foreign exchange needed to meet their international obligations, including debt payments.

4. Section 531 of the FY 1987 foreign assistance appropriation act provides in pertinent part:

"The Congress declares that it is the policy and the intention of the United States that the funds provided in annual appropriations for the Economic Support Fund which are allocated to Israel shall not be less than the annual debt repayment (interest and principal) from Israel to the United States Government."

There is very little legislative history to help us determine what constitutes a "military purpose." Over the years, however, it appears to have been taken for granted that use of ESF funds for military purchases directly or indirectly by paying off loans received to make such purchases, were equally forbidden under section 531 of the Act. We found no further reference to that provision in congressional reports. However, AID took steps to implement the prohibition soon after enactment by placing what it termed a "negative covenant" on every ESF grant instrument. Unlike the more general language of the statute, the covenant (discussed earlier) prohibited the financing of military or paramilitary requirements of any kind.

At least as late as 1984, it continued to be AID's position that ESF funds could not be used to pay FMS debt. In 1984, AID officials appeared before your subcommittee /1/ hearings on foreign assistance legislation for fiscal year 1985 to answer questions about a newspaper article which discussed a confidential State Department cable describing a meeting in early January 1984 between M. Peter McPherson, AID Administrator, and Maustafa El Said, Egyptian Minister of Economy and Foreign Trade. According to the article, Mr. McPherson asked the Egyptian minister if $103 million would be enough to enable Egypt to meet its current FMS debt servicing obligations. The AID witnesses agreed that the quotation from the confidential cable was accurate but suggested that its import must have been misunderstood. Ms. W. Antoinette Ford, Assistant Administrator, Bureau for Near East, Agency for International Development, stated:

"I do not in any way believe that the Administrator said or thought that a $103 million cash transfer could be used for FMS debt. It is illegal; he would not do that. That has never been a concept or the construct of any discussions on the cash transfer, and I have been a party to those. "Hearings, id. at p. 149."

Similar statements were made by Bradshaw Langmaid, Jr., Deputy Assistant Administrator, Bureau for the Near East and by Administrator McPherson himself, who wrote to you on March 5, 1984 to deny the charges made in the newspaper article. Mr. McPherson said:

"I did not state or imply, directly or indirectly, that U.S. economic assistance could be used to pay Egypt's FMS indebtedness. Moreover, the Government of Egypt understands there can be no linkage between the two."

As indicated earlier, AID'S position has changed. Our problem is to determine in the absence of specific congressional guidance, whether the use of ESF funds to pay a preexisting FMS debt is consistent with the statutory prohibition.

We recognize that there very well may be strong policy arguments in favor of allowing such use. For example, it would ensure that payments are made on this debt and ESF dollars are spent in the United States. We also recognize that Program Assistance Documents assure Egypt that ESF funds could be used to repay FMS debt. Our difficulty in accepting the AID position is that the debt Egypt is using ESF funds to pay is a debt to the United States incurred specifically to finance the purchase of military equipment. In other words, the military equipment was both provided and financed by the United States Government. In our view, that results in too close a nexus between the purchase of the military equipment and the ESF disbursement to be consistent with the statutory language. There is little distinction between a cash purchase of new military equipment and payment of a vendor-financed purchase-money debt for the same kind of equipment. We do not think the Congress intended that the United States both provide military equipment through the FMS program and ultimately finance that purchase with ESF funds.

Finally, we do not agree that the "special provision" in section 531 of the FY 1987 foreign assistance appropriation act, pertaining to ESF appropriations allocated for Israel (quoted earlier), indicates congressional sanction for use of ESF grant funds to make payments on FMS obligations. This provision, on its face does not specifically authorize Israel or, by implication, any other country to use ESF monies to pay FMS debt. Although we recognize that the inference AID seeks to draw from this provision-- that the use of ESF monies to pay FMS debt is permissible -- is not wholly unreasonable, we conclude that any such inference is too tenuous to overcome the direct statutory prohibition of subsection 531(e) of the Foreign Assistance Act, the close nexus between the FMS debt payment and the military equipment, and AID's previous public position. Accordingly, we conclude that the use of ESF monies to pay Egypt's FMS debt is improper. This letter will be available for release to the public in 30 days, unless released earlier by you or your staff. /1/ Hearings and Markup before the Subcommittee on Europe and the Middle East of the Committee on Foreign Affairs, House of Representatives, 98th Cong., 2d Sess., February 8, 1984.

Accordingly, we conclude that the use of ESF monies to pay Egypt's FMS debt is improper. This letter will be available for release to the public in 30 days, unless released earlier by you or your staff.

/1/ Hearings and Markup before the Subcommittee on Europe and the Middle East of the Committee on Foreign Affairs, House of Representatives, 98th Cong., 2d Sess., February 8, 1984.