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May 24, 2010
By Barbara Werther
Howrey LLP
Non-U.S. companies frequently ask whether they are eligible to compete for U.S. government construction and renovation projects, whether within the United States or on U.S.-owned facilities abroad.
The answer is a simple “yes” in the great majority of cases -- unless the project requires access to secure or classified information. Much of the work on U.S. Embassies, for example, requires such access (and some is restricted to U.S. firms).
To work on a secure/classified project, the contractor must possess an Industrial Facility Clearance (FCL), issued in accordance with the National Industrial Security Program Operating Manual (NISPOM). To be eligible for an FCL, NISPOM ¶2-102 requires that a company:
|  | Need access to the classified information.
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| | Be organized under the laws of the United States.
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| | Have a reputation for integrity and lawful conduct.
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| | Not “be under foreign ownership, control, or influence (FOCI) to such a degree that the granting of the FCL would be inconsistent with the national interest.”
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Factors considered in deciding the last point include the amount of foreign ownership, the type and sensitivity of information that will be accessed, and the company’s record of compliance with U.S. laws and regulations. NISPOM ¶2-301.
The second requirement, be organized under the laws of the United States, means that the contractor needs to be a U.S. corporation, but that corporation can be foreign-owned or controlled (that is, a U.S. subsidiary) so long as it complies with FOCI mitigation rules.
FOCI mitigation rules are security measures to mitigate the extent of foreign control. One of the most commonly used measures is a Special Security Agreement (SSA), as provided in NISPOM ¶2-303(c).
An SSA allows the foreign owner to place inside directors on the board of the U.S. subsidiary/contractor while excluding them from all decisions affecting the firm’s classified work. A Government Security Committee of independent, outside directors, approved by the U.S. government, oversees and ensures the proper handling of classified materials.
What this means as a practical matter is that the foreign parent can have no influence or control over any decisions relating to the secure/classified project. For example, during the bidding phase, the costs of the potential project can be discussed generally with the foreign parent, but the parent cannot be told of the security issues or the potential costs to comply with the security issues. Similarly, during performance, the parent can be told in general terms how the project is going but cannot be told about a specific issue, such as a blast-proof security wall that is causing a project delay.
Another mitigation method sometimes used is the establishment of a Proxy Agreement (PA) or Voting Trust Agreement (VTA). NISPOM ¶2-303(b). Under a PA or VTA, the voting rights regarding the foreign-owned stock of the U.S. subsidiary are vested in U.S. citizens approved by the U.S. government. These proxy holders or trustees serve as directors of the corporation and act independently from the foreign parent. Although the proxy holders must obtain approval from the foreign parent for major decisions, such as the sale of corporate assets or a corporate merger, the proxy holders or trustees otherwise retain complete control, but the foreign parent still gets the financial benefit of its subsidiary’s operations.
Approval of FOCI mitigation measures is at the discretion of the government agency letting the contract, so there is no guarantee of success. But, by working with the government and being willing to implement FOCI mitigation measures suggested by the government, it usually is possible to obtain an FCL and compete for secure/classified U.S. government projects.
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For more information about the issues covered in this report, please contact Barbara Werther in our Washington office at 202-383-6852 or at wertherb@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2010 Howrey LLP
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