The Business Environment
Purchasers of end products in the defence and homeland security sectors tend to be governmental and international organisations, which are relatively few in number and have powerful negotiating positions. Competition is fierce, with large multinational corporations often securing the cream of government prime contracts, then outsourcing various tasks to subcontractors and service providers that are offered little opportunity to negotiate favourable terms of business. Many products acquired in these fields are highly complex and often require a great deal of time and expense to develop and produce. Intellectual property protection is therefore crucial to a business. However, government purchasers often insist on expansive rights to use the intellectual property underlying the products and to share the intellectual property with other government contractors, who will normally be the supplier’s competitors. Special care and consideration is therefore needed to minimise a dilution of intellectual property rights.
The Regulatory Environment
The defence and homeland security sectors are highly regulated with the export of many goods defined as military goods or dual-use goods requiring appropriate export licenses. Businesses receiving these products will normally also be limited in what they may do with them and how they can sell them on, even where there are parts and components incorporated into a higher level system.
The consequences of not complying with terms of government contracting or with export controls and other regulations affecting the sectors can often be very serious and many times failure to comply is regarded as a criminal offence.
The U.S. Foreign Military Sales (FMS) and Foreign Military Funding (FMF) programs are forms of U.S. Government security assistance and fundamental tools of U.S. foreign policy. Under the FMS program, the U.S. Government sells defense articles and services to certain allied countries and international organizations.
Under the FMF program, the U.S. Government provides funding to certain foreign governments to assist with their military purchases. In limited cases, including in the case of Israel, FMF funds may be used to finance purchases directly from the suppliers rather than from the U.S. Government.
The FMS and FMF rules set out the type of transactions that the Israeli Government must enter into directly with the U.S. Government and the type of transactions that may be made directly with commercial enterprises. The rules provide how FMF funds may be spent, what they may fund and the processes and procedures to be followed to obtain U.S. Government approval for the funding.
FMF funds must generally be spent on U.S. made products and services and there is only very limited scope for Israeli businesses to participate in the transactions.
Ady Kaplan & Co. is experienced advising businesses in the tough defense and homeland security environment. The firm advises prime contractors and subcontractors at various levels of the subcontracting chain. We know where there is flexibility in negotiating on government defence procurements and understand how to best look out for the interests of the client in such a difficult environment.
