For years we have heard the klaxon as to how China has been stealing the advanced technologies of the United States (and others) for the purpose of advancing Chinese interests. The Department of Justices has obtained convictions against individuals operating on behalf of China in the nuclear sector (Alan Ho), the agricultural sector (Rice: Wengui Yan & Weiqiang Zhang and Corn: Mo Hailong), the aviation sector (Dongfan “Greg” Chung), and others. The threat is reality.
Buy in, espionage is risky
Given the number of convictions obtained, the optimist is hoping we’re getting them all. The pessimist thinks it is the tip of the iceberg, the pragmatist simply knows that the effort to acquire information through all available sources will continue. Enter the new wave of technology transfer – buy it.
Buying into US aviation industry
We have previously discussed the Facility Security Officer (FSO) and their need to ensure that ITAR and EARS controlled information is not released to non-US persons without appropriate approvals. The US China Economic Security Commission released their RAND Corporation prepared report on “Chinese Investment in U.S. Aviation” on March 29. The report highlights China’s willingness, dare I say, eagerness to invest in the cutting edge of research and development across a wide swath of start-ups and established companies, some of which are engaged with the US defense sector.
FSOs and Reviews of Foreign Investment
This influx of foreign ownership shines a light on the need for every FSO to have unencumbered access to the CFO and the “cap-table” (Capital Investment Sheet) which highlights ownership/shareholders. The Defense Security Service directs they review any potential foreign investment on a case by case basis.
DSS must determine if the foreign investment causes the company to “be operating under FOCI whenever a foreign interest has the power, direct or indirect, whether or not exercised, and 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 adversely affect the performance of classified contracts.”
DSS looks at a number of “factors relating to a company, the foreign interest, and the government of the foreign interest are reviewed in the aggregate in determining whether a company is under FOCI:
- Record of economic and government espionage against U.S. targets.
- Record of enforcement and/or engagement in unauthorized technology transfer.
- The type and sensitivity of the information that shall be accessed.
- The source, nature and extent of FOCI.
- Record of compliance with pertinent U.S. laws, regulations and contracts.
- The nature of any bilateral and multilateral security and information exchange agreements that may pertain.
- Ownership or control, in whole or in part, by a foreign government.”
The RAND report outlines how China is navigating the US regulatory waters with great dexterity. And while foreign ownership may not reach the level of declaring a US aviation sector under FOCI, the reality exists for the inadvertent technology transfer which “might undermine U.S. national security.” FSO’s should review the The National Industrial Security Program Operating Manual (NISPOM), Chapter 2, Section 3, together with their CFO, so that as investor dollars arrive, the C-suite is aware of FOCI and how it may impact the company’s ability to actively participate in the US defense sector.