April 17, 2008 By Roxana Tiron
Lawmakers are likely to focus attention on foreign investors and multinational defense companies when debating the fiscal 2009 defense authorization bill, a reaction to a string of contracts recently awarded in part to European companies.
A key question this year will be whether to seek additional oversight of the Pentagon’s processes and entities tasked with ensuring the security of the U.S. defense industrial base and the technology that gives the American military an edge over other countries.
Just weeks after a highly lucrative Air Force contract to build new refueling tankers was awarded to a partnership between the U.S.’s Northrop Grumman and the European Aeronautic Defence and Space Company (EADS), and not Chicago-based Boeing, some lawmakers have raised concerns that the Pentagon is “outsourcing” national security.
They are wary of the ability of the Pentagon to keep tabs on a rapidly globalizing defense industry and a new trend in which investment vehicles such as sovereign wealth funds, hedge funds and private equity firms have created new means for foreign investments in U.S. defense firms. Many remember 2006, when a major controversy erupted in Congress and across the country over a United Arab Emirates company’s attempt to take over operation of several U.S. ports. Pressure from Congress led Dubai Ports World to withdraw from the deal.
Some of the Pentagon’s top defense contractors are foreign-owned companies, such as EADS, Rolls-Royce, BAE Systems, Thales, Alenia Aeronautica and Finmeccanica. These companies have invested significantly in U.S. firms, including acquisitions in the last few years of firms such as United Defense, which was bought by BAE Systems.
Over the last several years, top defense contracts were awarded to some of these companies, including for Mine Resistant Ambush Protected vehicles, the new presidential helicopter, the Joint Cargo Aircraft, engines for the Joint Strike Fighter and, most recently, the Air Force’s new refueling tanker contract. In most of these cases, the firms partnered with large U.S. contractors.
The Noth American subsidiaries of the European companies, however, have gone through security checks and have instituted a firewall between themselves and their European parent companies or mitigated their foreign ownership through steps that include special security agreements, among several others. On programs that do not have any classified portions, the technology is subject to rigorous export-control laws.
Meanwhile, the Department of Defense also complies with the Buy America Act, the Berry amendment, and other laws that require domestic materials or parts in certain purchases. For contracts involving classified information, foreign firms typically participate through U.S. subsidiaries, joint ventures with U.S. companies or as subcontractors on major programs.
Nevertheless, some lawmakers are asking questions.
“How do we ascertain who the real owners are?” asked Rep. Duncan Hunter (R-Calif.), the ranking member of the House Armed Services Committee.
The trend of foreign interest in U.S. defense contracts is likely to grow because the large U.S. defense budget attracts more foreign companies at a time when the defense spending has declined in most European countries.
On Wednesday, panel Chairman Ike Skelton (D-Mo.) for the first time convened a hearing on the so-called National Industrial Security Program (NISP). One of the most important features of NISP is how it manages contractors that are under foreign ownership, control or influence.
The Department of Defense is the executive agent for the program, which spans across other federal agencies. More specifically, the Defense Security Service (DSS) is the primary agency for implementation of NISP not only at the Pentagon but also for 23 other federal agencies.
The growth of foreign investments could present a serious challenge for DSS, which has gone through organizational turmoil recently in a much-publicized breakdown regarding its handling of security clearance for contractor personnel. That function has now been outsourced to the Office of Management and Budget.
The Government Accountability Office (GAO) several years ago found that DSS does not have sufficient oversight to reduce the risk of foreign interests gaining unauthorized access to U.S. classified information. Testifying in front of the House panel, GAO’s Ann Calvaresi-Barr on Wednesday said that the security personnel have difficulty navigating through the intricacies of ownership.
According to GAO, DSS does not collect and track the extent to which classified information is accessible to a contractor before measures are taken to reduce the risk of unauthorized foreign access.
For instance, contractors may have had access to classified information for months before any protected measures were implemented.
Recently DSS has taken steps to address many of the issues raised in the GAO report, said Kathleen Watson, the DSS director. DSS is hiring additional specialists dealing with companies that have foreign owners, investors or control.
There are 8,710 companies and 12,000 facilities that have been cleared for access to classified information. Half of DSS security personnel, about 350 people, work on industrial security cases, she said. But DSS also has a shortage of about 100 people, she said. DSS has a budget of $416 million for 2008. Watson reviewed the entire agency for the past year and has implemented a plan to address the critical problems.