Infotech and the law: A confluence of influence

John Jensen

The Defense Department cannot ensure adequate control of foreign influence over contractors with security clearances, according to a July report of the Government Accountability Office. Steering clear of unmitigated influence ? known as foreign ownership, control and influence ? is crucial to contractors in the federal marketplace.

GAO, however, has identified lapses of unmitigated influence and has said that the Defense Security Service does not have sufficient knowledge or controls in place to address the risks it presents.

The issue is whether a contractor's connections with a foreign entity or person creates an unacceptable risk of unauthorized access to classified information or adversely affects the performance of classified contracts. To assess risk, contractors generally must report to the Defense Security Service:

  • Foreign ownership of 5 percent or more of any of class of its stock

  • Direct or indirect ownership of 10 percent or more in any foreign interest

  • Non-U.S. citizens serving as senior managers or on the board of directors

  • Contracts with a foreign entity

  • Indebtedness or liability to a foreign entity

  • Five percent or more of its revenue or net income deriving from a single foreign entity

  • Employees on its board of directors or in senior management, consulting or other positions with any foreign interest.

The National Industrial Security Program Operating Manual states that contractors have an ongoing obligation to report "any material change" in this information. Contractors must report discussions that "may reasonably lead to effective ownership or control by a foreign interests." A contractor can attempt to negate unmitigated influence by negotiating with DSS one of six corporate controls, such as a board resolution or a voting trust.

GAO's audit found instances where contractors did not report material changes to DSS for several months. DSS also does not have a handle on the extent of contractor noncompliance. For example, from a modest sample of 27 contractors, GAO's audit found:
  • One contractor did not report until 21 months after awarding a subcontract to a foreign entity.

  • One contractor hired a foreign national as corporate president but did not report to DSS, which discovered it nine months later when reading the contractor's Web site.

  • DSS was unaware that a foreign national sat on a contractor's board for 15 months, until GAO discovered it.

GAO reports that the operating manual does not state clearly how quickly a contractor must report material changes. It also found that DSS does not know the extent to which contractors actually report changes, nor how long contractors operate under unmitigated influence before it is negated.

Also, the operating manual states that when a company with facility clearance is found to be under unmitigated influence, the clearance will be suspended. DSS, however, seems to interpret this regulation loosely. GAO found two instances in which a contractor reported that it had been acquired by a foreign entity but then operated under unmitigated influence for several months without suspension of its clearances. The prevailing view seems to be that suspension is optional despite the operating manual's language.

GAO also found that DSS field representatives may be inadequately equipped to oversee complex business arrangements that may involve unmitigated influence. The Defense Department has rejected this finding, contending that its entire field staff doesn't have to be specialists in unmitigated influence. In fact, the Defense Department "non-concurred" with essentially all of GAO's recommendations.

GAO's report raises legitimate concerns that DSS may not be satisfactorily controlling foreign access to U.S. classified information.

John Jensen co-chairs the government contracts practice at Pillsbury Winthrop Shaw Pittman LLP in McLean, Va. He can be reached at john.jensen@pillsburylaw.com.

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