In an age of amplified global tensions and heightened cybersecurity threats, the U.S. government has sharpened its focus on eliminating foreign influence in the federal contracting space. For contractors planning to acquire and maintain government business, understanding and preparing for this increased scrutiny is no longer optional—it’s a necessity. This article explores the current landscape, potential challenges and strategies for contractors to navigate this complex environment effectively.
The Evolving Landscape
Recent years have seen a significant shift in how the U.S. government approaches foreign influence in its supply chains and contractor base. High-profile incidents of intellectual property theft, various forms of espionage and concerns about technology transfer have driven policymakers to implement stricter regulations and oversight mechanisms.
Key developments include:
Enhanced Supply Chain Security: The implementation of Section 889 of the 2019 National Defense Authorization Act (NDAA), which prohibits the use of certain Chinese telecommunications equipment. Additionally, a recent Notice of Proposed Rulemaking (NPRM) from the Department of Commerce focuses on securing the information and communications technology and services (ICTS) supply chain for connected vehicles.
This proposed rule, with a major focus on China and Russia, aims to address national security concerns related to foreign-connected vehicle technologies. It would establish procedures to identify, assess and address ICTS transactions that pose undue risk to national security, particularly those involving connected vehicle technologies from these countries of concern.
Increased Due Diligence: More rigorous background checks and continuous monitoring of contractors, their key personnel and subcontractors.
Expanded CFIUS Authority: The Committee on Foreign Investment in the United States (CFIUS) continues to broaden its jurisdiction to review foreign investments in U.S. companies and assets. A significant expansion was announced in July 2024, focusing on real estate transactions near military installations. The U.S. Department of Treasury issued a Notice of Proposed Rulemaking that would add over 50 military installations across 30 states to CFIUS’s jurisdiction. This includes expanding review authority to transactions within one-mile and 100-mile radius of numerous additional military sites. The proposed rule aims to enhance national security by allowing CFIUS to scrutinize more foreign real estate transactions that could potentially pose risks to sensitive military locations. This development reflects the government’s ongoing efforts to adapt its foreign investment screening tools to evolving national security concerns, particularly those related to proximity to critical defense assets.
Foreign Risk Management in SBIR/STTR Programs: The 2022 SBIR Reauthorization Act introduced new foreign risk management requirements for SBIR/STTR programs. Agencies must implement due diligence practices to assess potential risks from applicants’ foreign ties. This includes evaluating business ownership, supply chains, cybersecurity and employee backgrounds. Applicants must disclose connections to “foreign countries of concern.” Failure to properly vet risks can lead to application denials. These changes were prompted by a 2021 Pentagon report revealing instances of SBIR recipients receiving Chinese investments or moving SBIR-funded technologies overseas.
Stricter Export Controls: Tightened restrictions on the export of sensitive technologies, affecting contractors involved in research and development.
As these regulations evolve, many contractors are partnering with firms that have deep expertise in national security and federal policy, such as The Chertoff Group, to stay ahead of regulatory changes and their implications.
Challenges for Contractors
This ever-changing landscape presents several challenges for federal contractors:
Compliance Complexity: Keeping up with rapidly changing regulations and ensuring compliance across all aspects of operations.
Supply Chain Transparency: Maintaining visibility into multi-tier supply chains to identify and mitigate potential foreign influence risks.
Talent Management: Balancing the need for skilled personnel with increased scrutiny of employees’ and subcontractors’ foreign ties.
Technology Control: Implementing robust measures to protect sensitive data and intellectual property from unauthorized access or transfer.
Financial Implications: Absorbing the costs associated with enhanced compliance measures and potential contract losses due to foreign influence concerns.
Navigating these challenges often requires a nuanced understanding of both the regulatory landscape and the federal marketplace. Identifying seasoned advisors to provide critical insights and expertise in both areas is difficult. That’s where The Chertoff Group comes in.
Strategies for Success
To thrive in this new environment, contractors should consider the following strategies:
Enhance Internal Compliance Programs: Develop and maintain robust compliance programs that specifically address foreign influence risks. This should include:
- An adaptable compliance program with broad capabilities capable of addressing emerging compliance requirements across the business
- Regular audits of supply chains and subcontractors
- Thorough employee training on security protocols and export control regulations
- Transparent policies on reporting potential foreign influence concerns
Firms like The Chertoff Group can assist in developing and implementing these compliance programs, leveraging their expertise in national security and federal regulations.
Cultivate Transparency and Enhance Supply Chain Visibility: Proactively communicate with government clients about your efforts to mitigate foreign influence risks. Invest in advanced supply chain management tools that support real-time visibility into your entire supply network. The Supply Chain Product Assurance Playbook, developed in collaboration with Exiger and The Chertoff Group, serves as a model for building public-private partnerships focused on product risk identification and information sharing.
This playbook aims to achieve the common goal of assuring secure, resilient product supply chains. By leveraging such collaborative approaches and advanced risk assessment capabilities, companies can develop effective due diligence processes, ensure compliance with evolving regulations, and demonstrate a commitment to transparency to government clients. This strategy not only builds trust but also helps mitigate concerns before they escalate, while fostering a more secure and resilient supply chain ecosystem through public-private cooperation.
Strengthen Cybersecurity Measures: Adopt a zero-trust security model and implement advanced cybersecurity measures to safeguard sensitive data and intellectual property. Regular third-party security audits can help identify vulnerabilities and demonstrate commitment to security. Expert guidance can be vital to developing a robust cybersecurity strategy aligned with federal requirements.
Diversify Supply Chains: Decrease reliance on suppliers from countries of concern by diversifying supply chains. This may involve reshoring particular operations or finding alternative suppliers in allied nations. Contractors may also want to take into consideration increased scrutiny on traditionally “safe” countries who may increasingly be used by countries of concern to bypass new supply chain controls.
Stay Informed and Engaged: Actively participate in industry associations and maintain open lines of communication with relevant government agencies. This involvement should extend beyond traditional contracting channels. Consider engaging with Information Sharing and Analysis Centers (ISACs) and other government/commercial sector initiatives focused on emerging technologies and regulatory issues, such as the NSA and CISA’s Enduring Security Framework. For contractors dealing with classified information, proactively developing a strong relationship with the Defense Counterintelligence and Security Agency (DCSA) can be beneficial. These engagements not only help you anticipate regulatory changes and contribute to shaping future policies, but also build a network of relationships that can provide quick answers and support when needed. Partnering with firms that have strong relationships in Washington can enhance your ability to stay informed and engaged across these various platforms and initiatives.
Conduct Regular Risk Assessments: Implement a process for regular risk assessments that specifically address foreign influence concerns. This should cover all aspects of your operations, including personnel, technology, and partnerships. Experienced consultants can provide valuable third-party perspectives on potential risks and mitigation strategies.
Develop a Rapid Response Plan: Draft a plan for quickly addressing any foreign influence allegations or concerns. This should include clear communication protocols and steps for conducting internal investigations. Having access to advisors with crisis management experience in the federal space can be crucial in these situations.
Looking Ahead
As geopolitical tensions continue to escalate, the attention on foreign influence in federal contracting is likely to intensify. Contractors who proactively address these concerns and show a commitment to transparency and security will be best positioned to succeed in this challenging environment.
Moreover, this increased focus on security and supply chain integrity may present opportunities for innovative contractors. Those who can offer secure, domestically sourced solutions may find new paths to growth in the federal marketplace.
By implementing strong compliance programs, enhancing supply chain visibility and promoting a culture of transparency and security, contractors can not only mitigate risks but also position themselves as trusted partners in the federal contracting ecosystem.
The future of federal contracting will undoubtedly be shaped by these concerns about foreign influence. Contractors who adapt quickly and effectively to this new situation will be well-positioned to thrive in the years to come. Partnering with experienced advisors like The Chertoff Group can provide the strategic insights and operational guidance needed to navigate these complex waters successfully.
If you’d like to learn more about how The Chertoff Group can help navigate these issues, please contact us info@chertoffgroup.com.
Davi Hayes is a senior director in the Federal Strategy practice.
