Consulting Contracts Risks: GAO Report Highlights National Security Concerns posed by Consultants who Contract with both the U.S. Government and China

The U.S. Government Accountability Office (GAO) recently released a report that scrutinizes the growing national security risks posed by consultants who contract with both the U.S. government and China. Between 2019 and 2023, over $500 billion in federal contracts were obligated for consulting services, with the Departments of Defense (DOD) and Homeland Security (DHS) accounting for over half of this amount. This expenditure highlights the significant reliance of national security-related agencies on private consultants. However, as the U.S. faces rising tensions with China, lawmakers have expressed concern that consultants working for both governments may pose a threat to U.S. national security by introducing conflicts of interest.

The U.S. National Security Strategy identifies China as the country’s most potent adversary, with the capacity and intention to reshape global power dynamics. The possibility that U.S. contractors who consult for both the U.S. and China could have divided loyalties raises alarms. Members of Congress have asked whether such relationships might result in organizational conflicts of interest (OCI), which could undermine the impartiality of contractors and expose sensitive U.S. information to Chinese interests.

The GAO report identifies several gaps in the federal government's oversight regarding these dual-loyalty consultants. The most glaring issue is that current acquisition regulations do not require agencies to assess whether contractors that work for the U.S. government are also engaged in contracts with the Chinese government. Consequently, acquisition personnel typically lack the guidance, data, and processes needed to mitigate the potential risks that these dual relationships pose. While the Department of Defense (DOD) has implemented processes to evaluate foreign relationships for contracts involving classified information, these assessments generally occur after contracts have been awarded. This reactive approach leaves an information gap in the early stages of contract negotiations, especially for contracts that do not involve classified materials.

The report points to recently enacted legislation that aims to address some of these gaps. Multiple ongoing efforts are seeking to update acquisition regulations, such as the Defense Federal Acquisition Regulation Supplement (DFARS), to reflect concerns about foreign influence. However, these efforts are still in the early stages of implementation, and it remains unclear how effective they will be in mitigating the risks posed by consultants who work for both the U.S. and Chinese governments. The report emphasizes the need for prompt updates to the DFARS and recommends that both the DOD and the Office of Management and Budget (OMB) prioritize these changes.

Interestingly, the report also highlights that the Federal Acquisition Regulation (FAR) does not provide a specific definition of consulting services. This lack of clarity makes it difficult to track the full scope of consulting work being done for the U.S. government. While the FAR generally defines advisory and assistance services, which includes consulting, the term covers a broad range of activities, such as advice, analysis, and technical support. The data used in the GAO's study showed that agencies procure consulting services from thousands of contractors annually. However, many of these contractors are not categorized as consulting firms in federal procurement data, further complicating the identification of potential risks.

Two major concepts that dominate the report are organizational conflicts of interest (OCI) and foreign ownership, control, or influence (FOCI). OCI refers to situations where a contractor's objectivity or impartiality may be compromised due to external relationships. FOCI, on the other hand, arises when foreign interests, such as a government, have the power to influence a contractor's operations or decisions. The GAO found that neither OCI nor FOCI requirements specifically address the issue of contractors consulting for both the U.S. and Chinese governments. Furthermore, acquisition personnel within the DOD and DHS indicated that they lacked the necessary guidance to assess these types of risks adequately.

To improve oversight, the GAO reviewed a selection of DOD and DHS policies related to the management of FOCI risks. The Defense Counterintelligence and Security Agency (DCSA), which is responsible for assessing FOCI risks, conducts investigations into contractors’ foreign relationships when they are awarded contracts involving classified information. However, the report emphasizes that these investigations occur only after contracts are awarded and are limited to classified contracts, thus excluding many consulting agreements. The GAO also notes that some acquisition officials within DOD and DHS were unaware of any instances where current regulations were applied to assess the national security risks associated with consultants’ relationships with China.

The GAO highlights several laws that were recently enacted to address the risks of foreign influence in contracting. For example, the National Defense Authorization Act (NDAA) for Fiscal Year 2024 includes provisions that aim to prevent DOD from contracting for consulting services with vendors that also provide services to foreign governments, such as China. While these legislative efforts mark an important step forward, the report criticizes the slow pace of implementation. As of July 2024, only two of the five relevant laws had been fully implemented, and others remain in the rulemaking process despite statutory deadlines having passed.

The implications of these delays are significant. Without clear regulations and timely implementation of existing laws, the federal government remains exposed to potential risks posed by consultants with ties to foreign adversaries. The GAO report concludes by recommending that the Secretary of Defense and the Director of the Office of Management and Budget take immediate action to establish milestones for updating the DFARS and FAR to address these concerns. Only by doing so can the government ensure that its contracting personnel are adequately equipped to safeguard U.S. national security.