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DOD Rule Guides Clearances With Foreign-Owned Contractors
By Zachary Zagger

Law360, New York (April 8, 2014, 3:31 PM EDT) -- The U.S. Department of Defense issued an interim final rule Tuesday establishing requirements related to the National Industrial Security Program and clearance guidance to keep classified information out of the wrong hands when a contractor has foreign ownership, control or influence.
The interim rule, scheduled to be published in the Federal Register on Wednesday, provides measures for determining whether a contractor has foreign ownership, control or influence, or FOCI, and guidance on providing facility security clearances for those contractors in order to safeguard classified information, according to the rule notice.

The DOD said that without this rule, the department and its components “face an elevated risk of unauthorized disclosure of classified information to foreign interests resulting in potential economic losses or damage to U.S. national security.”

“If the U.S. company has a foreign owner and is awarded a contract requiring access to classified information, these procedures provide actions for the [U.S. government] to take to keep that foreign owner from having direct authority over the disclosure of and access to classified information,” the notice said.

Under the rule, if a U.S. contractor has FOCI, then trustees, outside directors or proxy holders would be required to provide business management of the U.S. contractor.

The DOD does not currently have uniform procedures to assess risks and potential adverse impacts from companies with FOCI seeking facility security clearances on performance of contracts requiring access to classified information, according to the notice.

The new rule should provide uniform procedures for the DOD to determine and assess risks with changes to the FOCI of contractors, which is reported annually, the notice said.

“This proposed rule provides the baseline requirements for the [government] to evaluate the foreign owner's rights and determine whether those rights can be mitigated to effectively protect classified information and preclude its unauthorized disclosure,” the notice said. “Depending upon what a foreign-owned U.S. company is working on, unauthorized disclosure of classified information could have an adverse impact on national security.”

The DOD said it would be accepting comments on the interim rule for 60 days after its publication in the Federal Register.

The interim rule comes as lawmakers in Congress have been moving to increase scrutiny for government clearances. The Security Clearance Oversight and Reform, or SCORE, Act, introduced in July, would sanction contractors found to have engaged in improper or fraudulent conduct in performing security clearance background investigations.

Last month, Defense Secretary Chuck Hagel said the DOD will improve security clearance procedures for its employees and contractors in the wake of September's deadly Washington Navy Yard shooting, after newly released reviews found a number of "troubling" shortfalls.

--Additional reporting by Daniel Wilson. Editing by Christine Chun.

https://www.law360.com/articles/526142/dod-rule-guides-clearances-with-foreign-owned-contractors