FOCI mitigation agreements

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1. Measures for FOCI not based on ownership

The National Industrial Security Program Operating Manual (NISPOM), 32 CFR part 117, offers a range of tools for foreign ownership, control or influence (FOCI). When the FOCI factors present are not related to ownership, the cognizant security agency (CSA) decides whether positive measures can effectively mitigate the foreign interest (32 CFR 117.11(d)(1)). The measures must also ensure the interest cannot otherwise adversely affect performance on classified contracts.

Examples include modifying or terminating loan agreements, contracts and other understandings with foreign interests, and diversifying or reducing foreign-source income (32 CFR 117.11(d)(1)(i) and 32 CFR 117.11(d)(1)(ii)). Others are showing financial viability independent of foreign interests and eliminating or resolving problem debt (32 CFR 117.11(d)(1)(iii) and 32 CFR 117.11(d)(1)(iv)). Board members may be given specific oversight duties, and special executive-level security committees may oversee classified contract issues (32 CFR 117.11(d)(1)(v) and 32 CFR 117.11(d)(1)(vi)).

The component performing classified contracts may be physically or organizationally separated, and special board resolutions may be adopted (32 CFR 117.11(d)(1)(vii) and 32 CFR 117.11(d)(1)(viii)). Other negating or mitigating actions, or a combination of these methods as the CSA determines, may also be used (32 CFR 117.11(d)(1)(ix) and 32 CFR 117.11(d)(1)(x)).

2. Board resolutions

Where FOCI is based on ownership, the CSA chooses from methods that include the following (32 CFR 117.11(d)(2)). A board resolution may be adequate when the foreign interest lacks voting interests sufficient to elect, or is otherwise not entitled to, representation on the governing board (32 CFR 117.11(d)(2)(i)(A)). The resolution identifies the foreign shareholder and describes the type and number of foreign-owned shares. It acknowledges the entity’s obligation to comply with all program requirements. It certifies that the foreign owner does not require, will not have and can be effectively precluded from unauthorized access to all classified information held by the entity.

The board provides for annual certifications to the CSA that the resolution remains effective (32 CFR 117.11(d)(2)(i)(B)). The entity distributes copies to its board members and key management personnel and records the distribution in its corporate records (32 CFR 117.11(d)(2)(i)(C)).

3. Security control agreements

A security control agreement may be adequate when the foreign interest does not effectively own or control the entity, but is entitled to board representation (32 CFR 117.11(d)(2)(ii)). In that case the entity is under U.S. control. At least one cleared U.S. citizen must serve as an outside director on the board. There are no access limitations under this type of agreement.

4. Special security agreements

When a foreign interest effectively owns or controls the entity, a special security agreement (SSA) may be adequate (32 CFR 117.11(d)(2)(iii)). An SSA imposes industrial security measures within an institutionalized set of entity practices and procedures, based on an assessment of the source and nature of the FOCI. It preserves the foreign owner’s right to board representation and a direct voice in business management. It denies the foreign owner majority representation and unauthorized access to classified information.

Unless law or regulation prohibits it, the CSA must decide whether access to proscribed information under an SSA is consistent with national security, with concurrence from controlling agencies where applicable (32 CFR 117.11(d)(2)(iii)(A)). This is the national interest determination (NID). It is made as part of an eligibility determination, or after a changed condition, when a government contracting activity (GCA) needs the entity to have proscribed access and the CSA proposes an SSA. A NID can be specific to a program, project or contract. Proscribed information means TOP SECRET information, Restricted Data, special access program information, Sensitive Compartmented Information and communications security information or material, with an exception for certain unkeyed controlled cryptographic items (32 CFR 117.3).

5. How a NID is made and kept

The CSA makes the NID for TOP SECRET or special access program information (32 CFR 117.11(d)(2)(iii)(B)). Where another agency controls a category, the CSA asks it to concur. They are the Office of the Director of National Intelligence for Sensitive Compartmented Information, the Department of Energy for Restricted Data and the National Security Agency for communications security information. The entity may begin accessing a category once the CSA tells it and the GCA that the controlling agency concurs, even if other categories are still pending.

Access to those three categories continues while the entity remains eligible and the requiring contract or program remains in effect (32 CFR 117.11(d)(2)(iii)(B)). It can end if adverse information affects eligibility, if a threat assessment shows risk, if the FOCI changes materially, or if the compliance record becomes less than satisfactory. The CSA then decides whether the entity stays eligible, must change its mitigation, or must lose access. The same paragraph points to Department of Energy Order 470.4B for Restricted Data requests.

Under the same paragraph, a new concurrence is not needed if the access requirements and terms stay the same for a contract renewal, new task orders, a new contract with the same provisions, or a renewed SSA. Some categories may not need a NID at all under CSA guidance, and the CSA records them in its system of record.

6. Voting trusts and proxy agreements

A voting trust and a proxy agreement both vest the voting rights of foreign-owned stock in cleared U.S. citizens approved by the government (32 CFR 117.11(d)(2)(iv)). Under a voting trust, the foreign owner transfers legal title to its ownership interests to the trustees. Under a proxy agreement, the voting rights are conveyed to proxy holders. Neither restricts the entity’s eligibility for access or its ability to compete for classified contracts.

Trustees or proxy holders all become board members and exercise all prerogatives of ownership with complete freedom to act independently (32 CFR 117.11(d)(2)(iv)(A)). The arrangement may require the foreign owner’s approval for the sale or disposal of the entity’s assets or a substantial part of them, encumbrances, mergers, consolidations and reorganizations, dissolution and bankruptcy filings. Consultation with the foreign owner is allowed where consistent with law and the agreement (32 CFR 117.11(d)(2)(iv)(B)). The foreign owner keeps only the status of a beneficiary, and the entity must be able to operate as a viable business independent of it (32 CFR 117.11(d)(2)(iv)(C)). The CSA may also combine these measures or use similar ones (32 CFR 117.11(d)(2)(v)). Governance under these agreements is covered in FOCI governance, plans and limited clearances.

Key terms

Board resolution	An ownership measure for a foreign owner without board representation.
Security control agreement	A measure for an entity under U.S. control with foreign board representation.
SSA	A special security agreement for a foreign-owned or controlled entity.
NID	A national interest determination allowing proscribed access under an SSA.
Voting trust and proxy agreement	Measures that vest foreign voting rights in cleared U.S. citizens.

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This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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Mitigated ownership is common among defense suppliers. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.