Offset Agreements are conditions to an export sale of defense systems to other countries where the customer country receives an economic benefit to “offset” the purchase.
While the U.S. government does not endorse or encourage offsets, it does have to approve them in context of Foreign Military Sale export licenses.
Perceptions might sometimes be that offset incentives teeter on the edge of bribery, so it is vital to undertake Foreign Military Sale program[i] proposals having offset benefits with sound proactive procedures. There are three main categories of corruption risk from offsets:
- Improperly influencing the need for a particular defense acquisition in the first place,
- Influencing the competitive decision for the main contract in non-transparent ways, and
- Allowing favors to be repaid to corrupt government officials via the offset contracts [from Transparency International].
For U.S. exporters, these pitfalls can be avoided by observing diligent process for the government review of Direct Commercial Sale exports in support of Foreign Military Sale (FMS) programs.
A proactive approach is critical
The main thing for the exporter is not to get in front of the government about offering offsets. In other words, no promises can be made to the customer country in advance of approvals—which means that the necessary government project approval process has to be well in advance of export license applications.
The recommended cooperative process is for the exporter to create a project white paper. That is, when a viable opportunity is identified including a possible offset benefit, and offset rules, credits, and requirements for the customer country are understood, the defense articles, technology or services in the proposed FMS can be detailed, along with the business development rationale, delivery and implementation programs and plans, proposed service contracts—and the scope of proposed offsets. These are expressed in terms of the defense articles and technology transfers involved, end-user capacity, co-production or co-development programs, and proposed offset candidate projects.
This white paper is then submitted to the Defense Technology Security Administration (DTSA)[ii] for review, with intention on the part of both the exporter and customer country, but without any commitments having been made. DTSA can then assess the proposal for impacts on U.S. national security and technology security, the policy and agreements in effect for the customer country and its history as an end-user, the level of technology involved and its operational impact, and foreign availability of comparable systems.
After this review, if an approval is received (which might include required changes to the offset proposal), the customer country can then be engaged by the exporter to negotiate the final sale and proceed to the necessary license applications.
[i] Defense Security Cooperation Agency website. http://www.dsca.mil/programs/foreign-military-sales-fms
[ii] Defense Technology Security Administration website. https://www.dtsa.mil/SitePages/default.aspx