Foreign Ownership, Control, and Influence

1
Foreign Ownership, Control, and Influence

• Donna Nichols
• Director, Security Ethics
• Aiken, South Carolina

2
What We Will Discuss About FOCI

• What is it?
• When is it important?
• How do you know if you have it?
• How can you get rid of it?
• Who is responsible?
• Are there standard procedures to follow?
• Discussion

3
FOCI What is it?

• Foreign involvement in classified US industry
  contracts
• Involvement may be in varying degrees
• Ownership
• Control
• Influence
• Involvement may occur during
• Foreign purchase of a US company
• Merger between a US and a foreign company
• Foreign national participation in US company
  management

4
There is Foreign Involvement. So?

• USG policies
• Allow foreign investment in the US industrial
  base, consistent with the National Security
  interests of the US.
• The effect of such foreign involvement cannot
  represent a matter of National Security
  significance.
• FOCI is resolved through a risk management
  approach.
• Resolved on a case-by-case basis.
• USG Cognizant Security Agency (CSA) makes the
  final determination of how to resolve the FOCI.
• See NISPOM Chapter 2, Section 3.

5
When Is It Important?

• A US company is obtaining a Facility Clearance
  (FCL) to bid on classified contracts.
• A cleared US company plans or suddenly develops
  foreign involvement.

6
Obtaining a FCL
FCL Eligibility Requirements
Complete SF 328 and Provide KMP list
Valid Need for FCL Be a US company in good
standing FCL Sponsor No FOCI
Yes answers on SF 328? Foreign Nationals as KMPs?
Positive FOCI. Must be resolved.
YES
NO
CSA issues favorable determination letter and
grants FCL.
7
Cleared Company Change

• Change Occurs to
• Cleared Company

Company Submits FOCI Update to CSA
Yes answers on SF 328? Foreign Nationals as KMPs?
Positive FOCI. Must be resolved.
YES
Tell your CSA before it happens!
FCL may be suspended pending resolution.
NO
CSA denotes change and continues FCL.
8
Definition of FOCI

• When a foreign interest has the power
• direct or indirect
• whether or not exercised
• whether or not exercisable

to direct or decide matters affecting the
management or operations of that company in a
manner which may result in unauthorized access to
classified information or may affect adversely
the performance of classified contracts. Foreign
ownership which cannot be so manifested, is
generally insignificant.
9
How Do You Know If They Have the Power?

• Complete SF 328, Certificate Pertaining to
  Foreign Interests
• Ten questions, answered yes or no
• Yes answers must be explained
• Include Key Management Personnel (KMP) list
• Form, instructions, and definitions available
  online at www.dss.mil
• Submit to CSA

10
The Ten Questions

• Foreign ownership of stock/securities or capital
  commitment (gt 5)
• US ownership of foreign interest (gt10)
• Foreign persons as Key Managers
• Foreign control of Key Managers
• Contracts, agreements, etc. with a foreign
  interest

11
The Ten Questions

• Indebtedness or obligations to a foreign interest
• 5 or more total revenue/net income from single
  foreign person, or 30 or more total revenue/net
  income from all foreign persons
• 10 or more of voting securities held in manner
  which does not identify the beneficial owner
• KMPs hold positions with foreign persons
• Any other factors that indicate foreign control
  or influence.

12
How Can You Get Rid Of It?

• CSA considers several factors
• Foreign Intelligence Threat
• Risk of unauthorized technology transfer
• Type and sensitivity of information being
  protected
• Nature and extent of FOCI
• Record of compliance with US laws regulations
• Nature of agreements between US and foreign
  country
• CSA reviews yes answers, determines which
  elements require negation
• Company develops a FOCI negation plan

13
Ways to Negate FOCI

• Board Resolution
• Voting Trust Agreement or Proxy Agreement
• Security Control Agreement (SCA)
• Special Security Agreement (SSA)

Voting Trust/ Proxy Agreement
Board Resolution
SCA
SSA
Simple
Complex
14
What Negation Means In Practical Terms

• Physical separation of employees
• Organizational separation
• Separate badging, access requirements, visitor
  logs
• Increased employee training
• Assignment of specific security duties
• Manage access to information
• Increased reporting requirements to CSA

15
FOCI Negation by Board Resolution

• Formal resolution that excludes foreign person
  from access to classified and export controlled
  information, and from any influence over
  classified contracts
• Company distributes resolution to Board Members
  and Principal Officers
• Resolution filed as a company record
• Company provides annual certification to CSA
  acknowledging effectiveness of resolution
• MAY NOT be used in a case where foreign ownership
  is sufficient for election to the board (even if
  it is not a foreign board member)

16
FOCI Negation by Proxy or Voting Trust

• Foreign voting rights are vested in cleared (or
  clearable) US citizens approved by the CSA
• Voting trust - Foreign interest transfers legal
  title to trustee
• Proxy Foreign interest transfers voting rights
  via an irrevocable proxy agreement, but maintains
  legal title
• Choose 3 trustees/proxies, who represent the
  foreign interest in MOST voting matters
• Trustees/proxies may have no prior involvement
  with either party
• USG does allow trustee/proxy consultation with
  foreign interest where otherwise allowable by
  law
• Appropriate in cases of majority foreign
  ownership or where foreign country is not a close
  US ally
• Foreign interest becomes a passive equity
  beneficiary
• Periodic report-back to CSA required

17
FOCI Negation by SCA

• Formal, substantial procedures implemented
  throughout the US organization
• Allows participation at Board level by foreign
  interest, to have direct voice in business
  management of company
• Appointment of cleared Outside Director(s), with
  no prior involvement with either company,
  approved by CSA
• Formation of a Board-level Government Security
  Committee (GSC), required to periodically and
  formally report to CSA.
• For use where the US company is NOT effectively
  owned or controlled by the foreign interest.
• No limitations on classified access with a
  company cleared under an SCA

18
FOCI Negation by SSA

• All the elements of an SCA, plus
• Company cleared under an SSA granted access to
  classified ONLY after a favorable National
  Interest Determination (NID) is performed and
  specific authorization is granted by the CSA.
• NID may be done only for cases where the USG has
  entered into a General Security Agreement with
  the foreign government involved
• NID will be program/project/contract specific
• Assistant Secretary level of CSA or above must
  make the determination
• For use where the US company IS effectively owned
  or controlled by the foreign interest.

19
Requirements of a NID

• Must show compelling evidence that release of
  proscribed information advances the National
  Security Interests of the US
• Identify national security interests involved,
  explain how proposed contract will advance those
  interests
• Availability of any other US company with
  capacity, capability, and technical expertise to
  satisfy contract requirements, and why any such
  company should be denied the contract
• Description of any alternate means to satisfy the
  contract.
• Prepared and sponsored by the USG Agency.
• May require coordination with multiple USG
  organizations.

20
Use of Technology Control Plans

• TCPs are required for Voting Trust/Proxy
  Agreements, SCAs, and SSAs
• TCPs address and prescribe measures to reasonably
  foreclose possibility of inadvertent access to
  non-US citizens and visitors
• TCPs contain measures to ensure that foreign
  owner representatives are only given access to
  what has been previously authorized
• Requires a Technology Control Officer (TCO)

21
Government Security Committee

• A permanent committee of approved, cleared Board
  Members
• Voting trustees or proxy holders
• Outside Directors
• Other officers/directors who hold security
  clearances
• Facility Security Officer (advisor)
• Responsible for oversight of negation policies
  and procedures
• Reports formally at least annually to CSA
• Annual certification report

22
Boilerplates are Available!

• Boilerplate documents are available for
• Security Control Agreement
• Special Security Agreement
• Technology Control Plan

23
Tell your CSA before It Happens!

• US President authorized to investigate, suspend,
  or prohibit a foreign acquisition, merger, or
  takeover of a US company, if the foreign Interest
  might threaten national security (Exon-Florio
  Act)
• Delegated to the Committee on Foreign Investment
  in the US (CFIUS)
• Perform a mandatory investigation during specific
  timelines written report to Congress on
  Presidential decision
• Members are Treasury (Chair), DoD, DoS, DoJ, DoC,
  OMB, OSTP, and several others
• Carried out in parallel with CSA review for
  facility clearance
• DSS recommendation considered by CFIUS

24
What About a Limited Facility Clearance?

• Granted on a rare basis, only where the USG has
  entered into an Industrial Security Agreement
  with the foreign government in question.
• Access to classified limited ONLY to performance
  on a specific contract or program that involves
  the country from which the foreign ownership is
  derived.
• Access to classified must conform with US
  National Disclosure Policy.
• May allow issuance of Limited Access
  Authorizations (limited personnel clearance) to
  non-US citizens

25
Summary

• Ensure that your company understands the
  importance of early notification or potential
  foreign involvement in your cleared company.
• Work closely with your DSS (or other agency)
  representative.
• Ask for assistance from other FSOs who have lived
  under FOCI negation programs.
• Questions?