Reporting fees, commissions and political contributions

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1. What the statute requires

Section 39 of the Arms Export Control Act makes the Secretary of State collect information on money paid to win defense sales. The Secretary "shall require adequate and timely reporting on political contributions, gifts, commissions and fees paid, or offered or agreed to be paid" in connection with covered sales to foreign armed forces or international organizations (22 U.S.C. 2779(a)). Covered sales are government sales under the procurement authority, construction service sales, commercial sales licensed under section 38, and exports under the defense trade treaties.

The reports must name the sales agents and others who receive the payments, and the Secretary sets the record keeping required. The President may also prohibit, limit or set conditions on such payments by regulation (22 U.S.C. 2779(b)). Part 130 of the International Traffic in Arms Regulations carries out the section.

2. Who has to report

Three roles are defined. An applicant is anyone applying for a license or approval to export, reexport or retransfer defense articles or services worth $500,000 or more sold commercially to foreign armed forces or an international organization (22 CFR 130.2). A supplier is the counterpart on a government sale made through a Department of Defense contract. A vendor is a distributor or manufacturer that furnishes an applicant or supplier with end-items, major components, or articles or services worth $500,000 or more destined for such a sale (22 CFR 130.8(a)).

Armed forces is read widely. It covers the army, navy, marine, air force and coast guard, and also the national guard and national police, of a foreign country, together with units under an international organization (22 CFR 130.3).

3. What counts as a fee or a contribution

Both terms start at $1,000. A fee or commission is any loan, gift, donation or other payment of $1,000 or more, in cash or in kind, with or without a written contract. It is paid to any person to solicit, promote or otherwise secure a sale to foreign armed forces (22 CFR 130.5(a)). Normal salaries, general advertising, and fair payments for specific goods or advisory services actually furnished are excluded (22 CFR 130.5(b)).

A political contribution is a payment of $1,000 or more to or for a foreign candidate, party, faction, government or official, made to secure such a sale. "Taxes, customs duties, license fees, and other charges required to be paid by applicable law or regulation are not regarded as political contributions" (22 CFR 130.6).

4. The reporting thresholds and deadlines

An applicant must tell the Directorate of Defense Trade Controls whether it or its vendors have paid, offered or agreed to pay reportable amounts on the sale. The thresholds are political contributions of $5,000 or more, or fees or commissions of $100,000 or more (22 CFR 130.9(a)(1)). If so, the details or a satisfactory explanation of why they cannot yet be given are "a condition precedent to the granting of the relevant license or approval" (22 CFR 130.9(a)(1)).

A supplier reports on the same thresholds no later than 30 days after contract award, or earlier if the Defense Department specifies (22 CFR 130.9(b)). Contributions made by an agent who is paid a fee count toward the payer’s total (22 CFR 130.9(c)). A company that reported nothing and later learns of reportable payments must report within 30 days, with a statement of why it did not report at the time (22 CFR 130.9(d)).

The report gives the contract price, the parties, and each payment with its date, recipient, payer and form, and each recipient’s relationship to the parties (22 CFR 130.10(a) and 22 CFR 130.10(b)). Payments up to $2,500 in contributions and $50,000 in fees may be reported as aggregate miscellaneous amounts rather than in detail (22 CFR 130.10(c)).

5. Getting the numbers from vendors

An applicant or supplier must obtain full disclosure from each vendor of the payments the vendor made on the sale (22 CFR 130.12(a)). The vendor must answer within 20 days of the request (22 CFR 130.12(b)). Where full disclosure would unreasonably risk its commercial interests, a vendor may give only aggregate figures, certifying that it has reported the detail directly to the Directorate (22 CFR 130.12(c)).

Silence does not excuse the applicant. If no statement has arrived by the 25th day, the applicant or supplier files a signed statement describing its efforts and the vendor’s failure, and must still make its own report (22 CFR 130.12(d)). Everyone involved keeps the records behind the reports for at least five years (22 CFR 130.14).

6. Who sees the reports

Information marked as confidential business information is protected as the law allows, and no applicant or supplier may disclose what a vendor has so marked (22 CFR 130.15). The reports are nonetheless available on request to congressional committees and authorized agencies, and they feed reports to Congress under section 36 of the Act (22 CFR 130.17(a) and 22 U.S.C. 2779(d)).

7. Two statutory limits on what may be paid

On government procurement contracts for foreign sales, the statute limits what can be passed into the price. A fee may be included only if it is reasonable, allocable to the contract, and not paid to someone who secured the sale through improper influence. The statute defines that as influence on the purchasing government’s officials on any basis other than the merit considerations of comparable United States procurements (22 U.S.C. 2779(c)). Contingent fees on government sales are also covered in agents, commissions and contingent fees.

Section 39A adds a prohibition on offset incentives. No American supplier, employee, agent or subcontractor may make incentive payments to satisfy an offset agreement with the purchasing country (22 U.S.C. 2779a(a)). Incentive payments means direct monetary compensation to another American person to induce purchases from that country. The statute sets the ceiling: "the civil penalty for each violation of this section may not exceed $500,000 or five times the amount of the prohibited incentive payment, whichever is greater" (22 U.S.C. 2779a(c)).

Key terms

Fee or commission	A payment of $1,000 or more to any person to secure a sale to foreign armed forces.
Political contribution	A payment of $1,000 or more to a foreign political or government recipient to secure such a sale.
Vendor	A supplier to an applicant of end-items, major components, or $500,000 or more in articles or services.
Incentive payment	Money paid to induce another American person to buy from the offset country, which section 39A prohibits.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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