What Is FOCI? A Guide for Government Contractors

Foreign ownership is common across American businesses, including companies that provide products and services to the federal government. However, certain foreign investments, ownership arrangements, and business relationships can introduce additional security and compliance requirements.

These concerns are generally evaluated under the concept of Foreign Ownership, Control, or Influence (FOCI).

For government contractors, understanding FOCI is important when pursuing a Facility Clearance (FCL), accepting foreign investment, undergoing an acquisition, or competing for contracts subject to foreign ownership reviews.

This guide explains what FOCI means, how it is evaluated, and what contractors can do when foreign ownership concerns arise.

What Does FOCI Mean?

FOCI stands for Foreign Ownership, Control, or Influence.

Under the National Industrial Security Program (NISP), a company may be considered under FOCI when a foreign interest has the ability, directly or indirectly, to influence its management or operations in ways that could compromise classified information or adversely affect classified contract performance.

Importantly, foreign ownership alone does not necessarily mean a company is ineligible for government contracts.

The nature of the foreign interest, its level of control, and the potential security risks all factor into the government's assessment.

The Defense Counterintelligence and Security Agency (DCSA) provides official guidance on how these determinations are made.

What Types of Foreign Interests Can Raise FOCI Concerns?

FOCI is not limited to companies that are majority-owned by foreign investors. Foreign influence can arise through several different business arrangements, including:

• Foreign equity ownership: Shares or ownership interests held by foreign individuals, corporations, or investment funds.
• Board representation: Foreign shareholders with the ability to appoint directors or influence corporate governance.
• Voting rights: Agreements that give foreign interests control over important corporate decisions.
• Financial relationships: Loans, guarantees, or other arrangements that create significant dependence on foreign entities.
• Parent companies and affiliates: Foreign corporate relationships that may influence business operations or access to information.
• Contractual arrangements: Agreements that provide foreign entities with unusual management rights or operational control.

These factors are not automatically disqualifying. FOCI assessments consider the overall ownership structure, the rights held by foreign interests, and the potential impact on national security.

For companies with international investors or complex ownership structures, understanding these relationships early can prevent complications later in the contracting process.

Can Foreign-Owned Companies Receive Government Contracts?

Yes. Foreign-owned companies can participate in U.S. government contracting, although eligibility depends on the specific contract, applicable regulations, and the company's ownership and control structure.

For contracts requiring access to classified information, companies generally need an FCL. As part of the clearance process, DCSA evaluates whether foreign interests could create unacceptable security risks.

When FOCI concerns are identified, the government may require mitigation measures before granting or maintaining an FCL.

Companies pursuing unclassified contracts may also encounter foreign ownership reviews under certain procurement requirements.

Related article: Can a Foreign-Owned Company Win U.S. Government Contracts? [Link when published]

How Does DCSA Evaluate FOCI?

DCSA evaluates foreign ownership and influence as part of the facility clearance process.

The assessment considers the company's ownership structure, foreign affiliations, governance arrangements, and the potential influence foreign interests may exercise over business operations.

The government may also consider factors such as:

• The identity and nationality of foreign owners
• Direct and indirect ownership percentages
• Voting rights and board representation
• Relationships with foreign governments
• Foreign financial or contractual dependencies
• The nature of the company's classified work
• The potential for unauthorized access to sensitive information

A key document in this process is the SF-328, Certificate Pertaining to Foreign Interests.

The SF-328 collects information about foreign ownership, relationships, and other interests that may be relevant to a FOCI determination.

Companies should carefully review their ownership and corporate records before completing the form. Incomplete or inconsistent disclosures can create additional questions during the review process.

Related article: How to Complete the SF-328: A Step-by-Step Guide [Link when published]

For contractors needing assistance with ownership assessments or disclosures, Industry FSO provides FOCI consulting and SF-328 support.

What Happens if a Company Is Determined to Be Under FOCI?

A FOCI determination does not automatically prevent a company from obtaining or maintaining an FCL.

Depending on the nature and extent of foreign influence, DCSA may determine that appropriate mitigation measures can address the identified security risks.

Common mitigation instruments include:

• Board Resolution: Addresses certain foreign ownership interests that do not provide significant control over corporate governance.
• Security Control Agreement (SCA): Establishes security safeguards when foreign interests have board representation but do not effectively own or control the company.
• Special Security Agreement (SSA): Provides additional safeguards for companies effectively owned or controlled by foreign interests.
• Proxy Agreement or Voting Trust Agreement: Transfers specified voting or management authority to approved U.S. citizens to mitigate foreign control.

The appropriate arrangement depends on the company's ownership structure, governance rights, and security requirements.

Some mitigation agreements also involve ongoing responsibilities, including security committees, technology control plans, reporting requirements, and compliance reviews.

DCSA provides additional information on its FOCI Mitigation Agreements page.

Related article: FOCI Mitigation Explained: How Companies Address Foreign Ownership Concerns [Link when published]

Does FOCI Apply to Contractors Without Classified Contracts?

FOCI requirements have historically been most closely associated with companies seeking or maintaining facility clearances. However, foreign ownership scrutiny is not necessarily limited to classified contracting.

Section 847 of the FY2020 National Defense Authorization Act established requirements to improve foreign ownership risk assessments for certain DoD contractors and subcontractors, including those performing unclassified work.

The legislation addresses covered contracts and subcontracts exceeding $5 million, subject to applicable exceptions. Implementing requirements are being developed through the federal acquisition regulatory process.

As these requirements take effect, companies that have never needed an FCL may encounter additional beneficial ownership disclosures and FOCI reviews during procurement.

Contractors should distinguish these Section 847 requirements from the separate FOCI processes that apply under the NISP. Other federal agencies may also impose foreign ownership restrictions or reviews under their own authorities.

For additional information, see DCSA's Section 847 guidance.

Related article: NDAA Section 847 Explained: What Government Contractors Need to Know [Link when published]

When Should a Contractor Evaluate Potential FOCI Concerns?

Companies should consider reviewing their foreign ownership exposure when:

• Pursuing an FCL or classified contract
• Accepting investment from a foreign individual or entity
• Undergoing a merger, acquisition, or corporate restructuring
• Adding foreign shareholders or board members
• Preparing or updating an SF-328
• Pursuing a contract subject to foreign ownership disclosure requirements
• Responding to government questions about ownership or control

Identifying potential concerns early gives companies more time to collect documentation, evaluate applicable requirements, and address issues before they affect a clearance or procurement.

Not every situation requires a formal mitigation agreement or extensive legal engagement. In many cases, the initial step is simply understanding the ownership structure and determining what disclosures or compliance measures may be necessary.

Getting Help With FOCI Compliance

FOCI requirements can become complicated when ownership structures involve multiple entities, foreign investors, or overlapping governance arrangements. However, many issues can be addressed through careful documentation, accurate disclosures, and appropriate security procedures.

Industry FSO works with government contractors on foreign ownership assessments, SF-328 preparation, FOCI mitigation, and related government compliance requirements. Our team provides practical industrial security support and can coordinate with legal counsel when necessary.

If your company is evaluating foreign investment, preparing an SF-328, or responding to FOCI-related questions, learn more about our FOCI consulting services or contact our team to discuss your situation.