Audit Finds Pentagon Waived Requirement to Repay Taxpayers $16 Billion to Advance Foreign Military Sales

Under the law, when a foreign government buys U.S. weapon systems through the Department of Defense those governments are required to reimburse the Department for research, development, and other one-time costs for those systems. A recent audit by the Government Accountability Office (GAO) found the Department has waived $16 billion it could have recovered for taxpayers on $250 billion worth of weapons sold under the Foreign Military Sales program from 2012 to 2017.

Under the law, foreign governments can request a waiver from repaying these costs, which the Department can grant for factors like interoperability or to avoid the loss of a sale. Defense contractors argued this requirement for foreign governments to repay the U.S. taxpayers raises the price of our weapon systems, making it more difficult to complete a sale. When the Department waives these repayments, that usually gives a competitive edge that defense contractors benefit from enormously. The contractors invest very little of their own money in research and development—those costs are generally paid by the taxpayers as part of the original acquisition process. The contractors are then able to sell these weapons, developed at taxpayer expense, to foreign governments at a significant profit and only a minimal corporate investment. Allowing foreign governments to skate on the legally required repayments is little more than welfare for defense contractors, and this audit makes a compelling case for why Congress should close this loophole.

Under the Arms Export Control Act the Defense Security Cooperation Agency (DSCA), the Pentagon’s “point person” for all foreign military sales, evaluates waivers. As Bill Hartung, the Director of the Arms and Security Project at the Center for International Policy explains, that office has perverse financial incentives to prioritize sales over what’s best for taxpayers or U.S. national security:

In a typical sale, the US government is involved every step of the way. The Pentagon often does assessments of an allied nation’s armed forces in order to tell them what they “need”—and of course what they always need is billions of dollars in new US-supplied equipment. Then the Pentagon helps negotiate the terms of the deal, notifies Congress of its details, and collects the funds from the foreign buyer, which it then gives to the US supplier in the form of a defense contract. In most deals, the Pentagon is also the point of contact for maintenance and spare parts for any US-supplied system. The bureaucracy that helps make all of this happen, the Defense Security Cooperation Agency, is funded from a 3.5 percent surcharge on the deals it negotiates. This gives it all the more incentive to sell, sell, sell.

Given DSCA’s incentives to promote foreign military sales, it’s unsurprising DSCA approved 810 of the 813 waivers it reviewed from 2012 to 2017—an approval rate of 99 percent. When it came to waivers for loss of sale, the GAO found “none included any additional information on competing offers or spending limits” as evidence that the sale would be lost if the payment wasn’t waived. As Hartung notes, the Obama Administration brokered more weapons sales than any other administration since World War II.

For most of the duration of the GAO’s audit, the head of DSCA was Vice Admiral Joseph Rixey. Before he left that position, The Intercept reported he was the guest of honor at a reception co-hosted by the Senate Aerospace Caucus and the Aerospace Industries Association, the latter representing contractors like Lockheed Martin, Boeing, Northrop Grumman, and Raytheon. “Thank you admiral for all that you do…in helping us to sell our products,” Lockheed Martin CEO Marilyn Hewson said at the event. Perhaps unsurprisingly, shortly after his retirement Rixey joined Lockheed Martin as Vice President for International Program Support for Lockheed Government Affairs.

The Trump Administration may be on track to increasing foreign military sales even more. The Security Assistance Monitor found that foreign military sales in the first year of the Trump Administration slightly surpassed sales in the last year of the Obama Administration. Waivers cost taxpayers approximately $1.3 billion in 2016 and $6 billion in 2017.

Costs to taxpayers may increase further without more oversight. In January Reuters reported plans to increase the role of diplomats and military attaches to promote U.S. weapons sales. As part of that effort the State Department sent Ambassador Tina Kaidanow, Principal Deputy Assistant Secretary of State for Political-Military Affairs and the top diplomat for overseeing arms sales, to the Singapore Airshow to promote U.S. weapons, including the F-35 Joint Strike Fighter.

Congress shares plenty of blame for betraying taxpayers, as well, by continually revising the Arms Export Control Act to further subsidize weapon sales. For instance, the law didn’t always allow loss-of-sale waivers from recouping research and development costs. But in 1996—at the urging of the Aerospace Industries Association—the law was changed to allow such waivers if not recouping those costs could result in the loss of a sale. The Project On Government Oversight fought the change and other efforts to get rid of recoupment payments, calling it “corporate welfare at its worst.” The GAO found that change alone resulted in substantial losses for taxpayers, since 338 loss-of-sale waivers totaling almost $9.2 billion were given under that authority between 2012 and 2017.

In POGO’s 2017 Baker’s Dozen of recommendations to Congress we noted more must be done to make the Pentagon financially accountable. Reimbursing taxpayers must be part of the equation. Taxpayers invest a lot of money in the research and development of weapon systems—the Pentagon’s most recent budget request asks for $92.4 billion for research, development, test, and evaluation—and they deserve a fair return on their investment. It’s time to revise the Arms Export Control Act to get rid of this multi-billion crony-capitalism loophole.