FOREIGN OWNERSHIP, CONTROL OR INFLUENCE (FOCI)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87S00869R000200100001-3
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: May 21, 2010
• Sequence Number: 1
• Publication Date: September 8, 1983
• Content Type: REGULATION

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ROUTING AND TRANSMITTAL SUP
TO:
1.
(Name, office symbol, room number,
building, Agency/Post)
Initials
Date
1.
on
File
Note and Return
proyal
For Clearance
Per Conversation
Requested
For Correction
Prepare Reply
irculate
For Your InfoNnation
See Me
mint
Investigate
Si nature
Inatlon
Justi
FROM: (Name, org. symbol, Agency/Post)
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OFFICE OF THE DEPUTY UNDER SECRETARY OF
DEFENSE FOR POLICY
3 U AU 1983
Memo for
As promised, attached
non pol is a copy of the new
icy dealin
or influence g with foreign ownership, control
about which General Stilwell spoke at
the 22 August meeting of the IG/CM. Please let
me know if you have any questions regarding this
new policy.
Attachment
STAT
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otCi syrntl,'room number,
fns. Agency/post)
initials
Date
:
Pale
Noteat~d Return.
-a1
For Cieilrance"~ .
Per Converlsation
ed
For Cofrdction
For Your ,Info action
Prepare epl'
See Me
invests to
~ nature
t-~,=
Ju
fire ?this: form as a RECORDof approvals, concurrences, disposals,'
clearances, and sims ar actions_
f e.__o' .aynttfol, Agency/Post) Room Na.--Bldg:
Phone No.>
OPTIONAL FORM 41 (Rev. 7 76)
_"byy.GSA
1FPMR (44 CFR 101-11.206
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U.S. FACILITIES THAT ARE FOREIGN OWNED CONTROL'
TART 2.
OR INFLUENCED
lication. This Part establishes the policy concern-
2 - 20 0 . AP___P ____
control
ing the clearance of facilities under foreign ownership, deter-
or influence (FOCI); provides criteria to be considered for
Puerto
mining whether facilities located in the United States,
Rico and U.S. possessions or trust territories are under FOCI;
' rocedures for the clearance of facilities determined
prescribes p
to be under FOCI; and outlines responsibilities in FOCI matters.
2-201. General Polic .
t a. A facility will be considered under FOCI when a reason-
able basis exists to conclude that the nature and extent of
foreign ownership, control or influence is such that foreign
dominance over the management or operations of the facility
may result in the compromise of classified information or
impact adversely the performance on classified contracts.
b. A facility that is owned, controlled or influenced by
a foreign national or a commercial or governmental entity from
communist country or a country overtly hostile to the United
a
States shall not be eligible for a facility security clearance.
c. A facility that is owned, controlled or influenced by
y
foreign interests other than those included in b above, ma
be eligible for a facility security clearance provided action
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can be taken to effectively negate or reduce associated
FOCI risks to an acceptable level.
2-202 Factors. The following factors will be considered in
determining whether a business entity is under FOCI:
a. Foreign interest ownership or beneficial ownership of
five percent or more of the organization's securities;
b. Ownership of any foreign interest in whole or in part;
c. Management positions held by foreign interests such
as directors, officers or executive personnel;
d. Foreign interests control or influence or are in a
,position to control or influence the election, appointment, or
tenure of directors, officers, or executive personnel of the
organization;
e. Contracts, agreements, understandings or arrangements
with foreign interest(s);
f. Indebtedness to foreign interests;
g. Any income derived from Communist countries,
or countries overtly hostile to the U.S., or income in excess of
10 percent of gross income from other foreign interests;
h. Five percent or more of any class of the entity's
securities are held in "nominee shares" in "street names" or in
some other method which does not disclose the beneficial owner
of equitable title;
i. Interlocking directors with foreign interests; or
j. Any other factor that indicates or demonstrates a
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capability on the part of foreign interests to control or
influence the operations or management of the business
organization concerned.
2-203 Procedures.
a. If any of the factors outlined in paragraph 2-202 are
present, the cognizant security office shall review the case to
determine the relative significance of each factor in assessing
the firm's initial or continued eligibility for a facility
security clearance. The cognizant security office may be
delegated authority to grant or continue ~ facility security
clearance where one or more of the following circumstances are
present, provided there is a favorable finding by the Director.;
of Industrial Security:
(1) Interlocking directorates involving firms located in
non-Communist countries, provided that a General Security of
Information Agreement exists with the country involved.
(2) If licensing, patent, sales or trade secret agreements
exist or are entered into with any foreign interest, including
a subsidiary of the contractor, and the contractor's Standard
Practice Procedures includes adequate provisions to insure that
representatives of the foreign interest who are parties to such
agreements shall be effectively denied access to all classified
records, information, and material and to controlled areas.
In all such cases the contractor shall be informed of the
obligation to comply with the State Department's ITAR (reference
(i)) as it pertains to such agreements with foreign interests.
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(3) If income from Communist countries does not exceed 5
percent of gross income, and income from other countries does
not exceed 20 percent of gross income.
(4) If the contractor has ownership in foreign subsidiaries
or affiliates which are located in non-Communist countries.
(5) If information disclosed regarding securities held in
"nominee shares" and "'street names" reveals no indication of
foreign beneficial ownership.
(6) If indebtedness to foreign interests does not exceed
5 percent of current assets.
b. If the cognizant security office determines that the
firm may be ineligible for a facility security clearance or that
additional action would be necessary to nullify or negate the
effects of FOCI, the firm shall be promptly advised and requested
to submit a plan of action to preclude foreign interests from
access to classified information. Assistance shall be provided
to the facility in formulating such a plan in accordance with
2-L04. In addition, management shall be advised that failure
to submit the requested plan within the prescribed period of
time will result in termination of facility security clearance
processing action or initiation of action to revoke an existing
facility security clearance, as applicable.
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c. Whenever the cognizant security office is unable to
resolve the FOCI factors present or has not been delegated
authority to grant or continue a facility security clearance
as provided for in paragraph a., above, the facility case file
shall be referred to the Director, DIS, ATTN: Deputy Director
(Industrial Security) for determination as to eligibility for
a facility security clearance. The facility case file shall
be documented to set forth the FOCI factors present, as well
as the facility's proposed plan of actions to effectively reduce
associated FOCI risks to an acceptable level. The case file
shall also contain the cognizant security office's evaluation
and recommendation, and as appropriate, an opinion of legal
counsel. If legal advice is required to process the case, the
Director of Industrial Security should consult with the Office
of Counsel of the DCASR servicing the area. Cases in which a
foreign interest has acquired a majority of the voting stock
of a cleared U.S. firm will be reported immediately to the
Director, DIS, ATTN; Deputy Director (Industrial Security),
concurrent with invalidation of the facility clearance in ac-
cordance with paragraph 2-118k.
~ A facility's proposed plan of action may consist of one of the
methods prescribed by 2-205, below, or any combination thereof, as
appropriate. It may also consist of measures which provide for
the physical or organizational separation of the facility component
performing the classified work; modification or termination of
agreements with foreign interests; diversification or reduction of
foreign source income; assignment of specific security duties and
responsibilities to Board members; formulation of special executive-
level security committees to consider and oversee classified matters;
and other actions to negate or reduce FOCI to acceptable levels.
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d. Upon receipt of a referral from the cognizant security
office, the Director, DIS will cause a review to be made of
the case. If, after such review, it is determined that unacceptable
risk associated with foreign ownership, control or influence
is present, and that the facility's proposed plan to negate
or eliminate s~xch risk is inadequate, the Director, DIS shall
advise the facility, through the cognizant security office,
of the measures required to become eligible for a facility
security clearance. The facility shall be advised that failure
to adopt the recommended or other acceptable measures shall
preclude final determination of the facility's eligibility for
a facility security clearance and will result in denial or
revocation of the facility security clearance. If, however,
the facility's proposed plan is viewed as adequate by the
Director, DIS, or the modifications suggested by DIS are sub-
sequently accepted by the facility, the Director, DIS shall
determine the facility to be eligible for a facility security
clearance.
e. In the event of an adverse determination by the Director,
DIS, the facility shall be advised that the decision may be
appealed in writing to the Deputy Under Secretary of Defense
(Policy), ATTN; Director, Security Plans and Programs, whose
decision in such matters shall be final.
2-204. Assistance. Whenever requested by the facility, or on
receipt of the report required by paragraph 6a(4) (f) ISM, the
cognizant security office or the Deputy Director (Industrial
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Security), HQ DIS, will provide the facility, in writing, the
DoD policy regarding FOCI and will consult with the facility as
needed to provide additional advice and guidance regarding the
facility's proposed action plan. Documents relating to these
discussions and reports made pursuant to the foregoing are
presumptively proprietary when appropriately designated by the
facility and shall be protected from unauthorized disclosure and
handled on a strict need-to-know basis. When such reports
are submitted in confidence, exemptions to DoD Directive 5400.7
(reference (1)), to the extent applicable, shall be invoked to
withhold them from public disclosure. Such reports shall be
marked "FOR OFFICIAL USE ONLY".
2-205 Methods to Negate or Reduce Risk in Foreign Ownership
Cases. Under normal circumstances, foreign ownership of a
U.S. firm under consideration for a facility security clearance
becomes a concern to the Department of Defense when the amount
of foreign owned stock is at least sufficient to elect represen-
tation to the U.S. firm's Board of Directors or foreign interests
are otherwise in a position to select such representatives (equiv-
alent equity for unincorporated business enterprises). Foreign
ownership which cannot be so manifested is not, in and of itself,
considered significant and, therefore, shall not be considered
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as the sole criteria for processing under this paragraph.2
a. Board Resolution. When the amount of stock owned by the
foreign interest is sufficient to elect representation to the Board
or an agreement exists whereby the foreign interest is permitted
representation on the Board, the effects of foreign ownership will
ordinarily be mitigated by a resolution of the Board of Directors
whereby the cleared firm recognizes the elements of FOCI and ac-
knowledges its continuing obligations under the DoD Security
Agreement (DD Form 441). The resolution must identify the
foreign shareholders and their representatives, if any, and
note the extent of foreign ownership, to include a certification
that the foreign shareholders and their representatives shall
not require, shall not have, and can be effectively excluded
from access to all classified information in the possession of
the cleared facility and will not be permitted to occupy positions
that would enable them to influence the organization's policies
and practices in the performance of classified contracts. Copies
2 Instances involving less significant foreign stockholdings
are analyzed to assess source and to determine possible significance
when considered in conjunction with other aspects of foreign
involvement which may be present in a particular case.
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of such resolutions shall be furnished to all board members
and principal management officials. In addition, the substance
of the foregoing resolutions shall be brought to the attention
of all cleared personnel by publication in the firm's standard
practice procedures. Moreover, an annual certification shall
be provided to the cognizant security office acknowledging
the continued effectiveness of the resolutions. Compliance
with the resolutions should be verified during periodic security
inspections. There are circumstances when it may become
necessary for the Board of Directors to adopt further resolutions
and take additional administrative actions in order to assure
the Government that the existing facility security clearance
remains clearly consistent with the national interest. The
following criteria must also be satisfied in order for a Board
Resolution to be utilized as the sole method required to negate
or effectively reduce the risk of compromise arising from
foreign ownership within the levels prescribed herein.
(1) U.S. interests can be identified as owning a majority
of the stock and the nature and distribution of the minority
stockholdings and the composition and structure of management
do not permit foreign interests to control or dominate the
business management of the U.S. firm; and
(2) The Chairman and Chief Executive Officer of the U.S.
firm are United States citizens;
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b. Voting Trust Agreement. A Voting Trust Agreement is
an acceptable method to eliminate risks associated with foreign
ownership when a foreign interest owns a majority of the voting
securities of the U.S. firm ar, if less than 51 percent foreign
owned, it can be reasonably determined that the foreign share-
holder or his representative(s) is in a position to effectively
control or have the dominant influence over the business manage-
ment of the U.S. firm. Under this arrangement, the foreign
stockholder(s) must transfer legal title of foreign-owned stock
to the Trustees. The Voting Trust arrangement must unequivocally
provide for the exercise of all prerogatives of ownership by
the Trustees with complete freedom to act independently without
consultation with, interference by or influence from foreign
stockholders. Except, however, the trust agreement may limit
the authority of the Trustees by requiring that approval be
obtained from the foreign stockholder(s) with respect to: (i)
the sale or disposal of the corporation's assets or a substantial
part thereof; (ii) pledges, mortgages or other encumbrances on
the capital stock which they hold in trust; (iii) corporate
mergers, consolidations, or reorganization; (iv) the dissolution
of the corporation; and (v) the filing of a bankruptcy petition.
The Trustees must assume full responsibility for the voting
stock and for exercising all management prerogatives relating
thereto in such a way as to ensure that the foreign stockholders,
except for the approvals just enumerated, will be effectively
insulated from the cleared facility and continue solely in the
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status of beneficiaries. The facility must be organized,
structured and financed so as to be capable of operating as a
viable business entity independent from the foreign stockholders.
The Certification and Visitation provisions of paragraph 2-206
and 2-207 are required under this arrangement. There shall be
three trustees, and at least one must become a member of the
Board of Directors. In addition, Trustees must:
(1) Be responsible U.S. citizens residing within the United
States, and be capable of assuming full responsibility for voting
the stock and exercising the management prerogatives relating
thereto in such a way as to ensure that the foreign stockholders
will be effectively insulated from the cleared facility.
(2) Be completely disinterested individuals with no prior
involvement with either the facility or the corporate body in
which it is located, or the foreign interest.
(3) Be eligible for and issued a personnel security
clearance to the level of the facility security clearance.
When a vacancy occurs, a successor Trustee shall be appointed by
the remaining Trustees. Prior to being accepted as Trustees by
the Director, DI5, the Trustees must be advised in writing by
the cognizant security office of the duties and responsibilities
they are undertaking on behalf of the U.S. Government to insulate
the cleared facility from the foreign interests. Moreover, the
Trustees must indicate, in writing, their willingness to accept
this responsibility.
c. Proxy Agreement. Under this arrangement, the voting
rights of stock owned by foreign interests are conveyed to the
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Proxy Holders by means of an irrevocable Proxy agreement.
Legal title to the stock remains with the foreign interests.
All other provisions of the Voting Trust as applies to Trustees
and the terms of the agreement shall apply to the Proxy Holders
in the case of a Proxy Agreement. Conditions for consideration
of use are the same as required for the above.
d. Reciprocal Clearance.
The Department of Defense has
entered into Reciprocal Industrial Security Agreements with
certain of its allies. These agreements establish arrangements
whereby a contractor facility located in either signatory
country, which is under the ownership, control or influence of
an entity from the other country may be declared eligible for
access to classified information. This arrangement also provides
for the clearing of foreign nationals who occupy a position
'required to be cleared in connection with the issuance of a
facility security clearance. Facility security clearance action
is based on the receipt of an assurance from the government of
the country from which the FOCI emanates that the parent firm
has been cleared to the necessary level under that government's
security laws and procedures. Since clearance action in such
cases rely, in part, on the investigative and clearance procedures
of the other signatory government, such reciprocal agreements
are negotiated only with countries whose security laws and pro-
cedures are substantially equivalent to those of the United
States. If a facility is to be processed for a Reciprocal
Facility Security Clearance, the procedures outlined in paragraph
2-117 shall be followed. A Reciprocal Facility Security Clearance
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may be granted upon satisfaction of the following criteria and
conditions:
(1) There is a Reciprocal Industrial Security Agreement
with the foreign government concerned;
(2) A foreign business entity enjoys majority or controlling
ownership of the U.S. firm;
(3) The facility does not require access to classified
information which is not releasable to the foreign government
from which the ownership stems.
e. Special Security Agreement.
(1) This arrangement may be considered for use in instances
when the foreign interest owns a majority of the voting securities
of a U.S. firm or, if less than majority owned, such stockholdings
are sufficient to reasonably conclude that the foreign shareholder(s)
or his representative(s) is in a position to effectively control
or have the dominant influence over the business management of
the U.S. firm, and the foreign shareholder(s) elects to retain
control or dominance of operations and management.
(2) Eligibility for processing under this paragraph also
requires a User Agency or OSD determination that issuance of a
facility security clearance will serve the national interest.
Such determinations shall be forwarded to the Deputy Under
Secretary of Defense for Policy (DUSD(P)), ATTN; Director,
Security Plans and Programs, Pentagon, Washington, D.C. 20301
for confirmation in coordination with appropriate OSD staff
elements. Following confirmation of national interest consider-
ations and coordination with non-DoD departments or agencies,
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as appropriate, DUSD(P) will direct DIS to initiate development
of a Special Security Agreement and inform DIS regarding any
prohibited categories of classified information (see paragraph
2-117a), access to which is not required by the U.S. firm, and
which will not be authorized for release after issuance of the
facility security clearance. Categories of such information
not approved for release, if any, shall be reflected on DIS
Form 553, FL-381-R, and DISCO Form 560.
(3) The Special Security Agreement concept may be considered
as a fully acceptable alternative to Voting Trust or Proxy Agree-
ment arrangements, provided the ownership stems from a country
in which the U.S. has entered into a formal Reciprocal Security
Agreement and all personnel required to be cleared in connection
with the facility security clearance are U.S. citizens, except
that the facility shall normally be ineligible for a Top Secret
facility security clearance. This arrangement may also be con-
sidered when the ownership stems from countries in which the
U.S. has not entered into formal reciprocal arrangements, pro-
vided a General Security of Information Agreement (GSOIA) or
other similar bilateral security agreement exists with the
country concerned, all personnel required to be cleared in con-
nection with the facility security clearance are U.S. citizens,
and the facility security clearance is limited to the Confidential
level.
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(4) This agreement will ordinarily include annual FOCI
meetings with the principals, Visitation Agreements (appropriately
modified), assignment of specific security duties and respon-
sibilities to Board members, formulation of special executive-level
security committees to consider and oversee classified matters,
and the execution of any board resolutions deemed necessary.
A facility under FOCI may be granted a facility security clearance
under this arrangement only when the terms and conditions of the
Special Security Agreement, in conjunction with ISM requirements,
are determined to reasonably and effectively preclude the un-
authorized disclosure of classified information to foreign interests.
The measures taken to accomplish necessary security safeguards
will depend upon the nature and extent of FOCI in each particular
case. Accordingly, each such Special Security Agreement is con-
sidered unique and its contents must be developed and tailored
on a case-by-case basis, wholly .dependent on the facts and cir-
cumstances present in each instance. The Special Security
Agreement shall generally prescribe responsibilities, obligations,
limitations and other security safeguards and mechanisms concerning
personal, physical and organizational aspects deemed necessary by
the parties to the Agreement. The U.S. firm, the foreign interest(s)
and the DoD shall be parties to the Agreement.
(5) The granting of a facility security clearance under this
arrangement, or any request for an exception to the policy pre-
scribed herein, requires the approval of the DUSD(P).
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2-206 Visitation Agreements. In every case where a Voting
Trust Agreement, Proxy Agreement or Special Security Agreement is
employed to eliminate risks associated with foreign ownership,
a Visitation Agreement shall be executed between the facility,
the foreign interest, the cognizant security office, and as
appropriate, Trustees, Proxy Holders or other designated
individuals, hereinafter referred to collectively as Trustees.
Visitation Agreements must identify who may visit, for what
purposes, when advance approval is necessary and the approval
authority. The Trustees shall have approval authority. The
facility shall submit individual requests to the approval
authority for each visit. The Visitation Agreement shall
provide that, as a general rule, visits between the foreign
stockholder and the cleared U.S. firm are not authorized; how-
ever as an exception to the general rule, the Trustees, may
approve such visits in connection with regular day-to-day
business operations pertaining strictly to purely commercial
products or services and not involving classified contracts.
2-207 Certification and Compliance.
At the inception of any method, agreement or similar arrangement
entered into pursuant to paragraph 2-205 above, and at least once
each year thereafter, representatives of the cognizant security
office, DIS HQ, the Trustees, Proxy Holders, facility management
or, as appropriate, other designated individuals, and if requested,
the foreign interest(s), will meet to review the purpose of the
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pertinent arrangement and to establish common understanding of
the operating requirements and how they will be implemented
within the firm. These FOCI reviews will be expressly aimed
at insuring compliance with all board resolutions, special
controls, practices and procedures established to insulate
the facility from the foreign interest generally, and to discuss
matters pertaining to the compliance or acts of non-compliance
with the terms of Voting Trust, Proxy or Special Security
Agreements specifically. These reviews also provide the oppor-
tunity for DIS to furnish the principals with any necessary
guidance or assistance regarding problems or impediments as-
sociated with the practical application or utility of the
approved arrangement, e.g., foreign disclosure determination
delays, non-acceptance of visit requests, etc. In addition, at
the end of each year of operation, the Trustees, Proxy Holders
or other principals, as appropriate, shall submit to the cognizant
security office an annual implementation and compliance report.
Any indication of noncompliance must be explained, in writing,
by the firm for evaluation by the cognizant security office.
Failure on the part of the U.S. firm to assure compliance with
the terms of the applicable arrangement in the best interests
of the U.S. Government, may constitute grounds for termination
of the Department of Defense Security Agreement (DD Form 441)
and revocation of the facility security clearance.
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2-208 Effects of This Part on Prior Facility Security Clearances.
U.S. firms granted facility security clearances under
previous policy shall not be affected by this Part. Such firms
may, as appropriate, however, request modification of existing
arrangements in accordance with this Part.
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