Recent developments continue to signal that risks relating to beneficial ownership and foreign ownership, control, or influence (FOCI) should be a critical focus for all government contractors. As we recently highlighted, the U.S. Government’s continuing implementation of Section 847 of the National Defense Authorization Act for Fiscal Year 2020 (Section 847) will increase the scope and frequency with which those FOCI reviews occur.  The Government’s expansion and increasing use of its authority to screen contractors for FOCI is likely to become a pivotal gating element for defense contractors far beyond the classified contracting context, as highlighted by a proposed rule that would implement Section 847 to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to add new provisions relating to FOCI mitigation.  As the July 6 deadline to comment on the proposed rule approaches, contractors should understand that FOCI can be a real threat to their business.

FOCI reviews used to be largely the domain of classified contracts, but in recent years, other programs have expanded to include elements of FOCI review.  The Small Business Innovation Research (SBIR) program is just one such example.  As we wrote in Law360.com, the SBIR program has been updated over the years, most importantly in 2022, to require agencies to perform due diligence security risk reviews, which consider certain FOCI concerns, before making an SBIR award.  This is part of a larger trend of increasing scrutiny on commercial engagements through a national security lens, such as the increased number of transactions reviewed by the Committee on Foreign Investment in the United States (CFIUS) and the implementation of Section 847.

More recent developments suggest that federal courts will continue to afford the U.S. Government significant deference with respect to its discretionary FOCI determinations.  This diminished chance of recourse after the fact makes proactive measures to address these risks even more critical.  For example, on June 8, 2026, the U.S. Court of Federal Claims ruled that the Department of Defense’s ability to deny a SBIR program award to an applicant based on a FOCI review of its beneficial owners should be afforded “additional deference where matters of national security are implicated,” citing Supreme Court precedent to this effect (see also Department of the Navy v. Egan).  Notably, the decision was not predicated upon the Government’s determination that the contractor was owned or controlled by foreign individuals or entities—it was not disputed that the company was owned by naturalized U.S. citizens resident in the United States.  Rather, it was entirely predicated on the Government’s discretionary determination that the Company’s founders and executive had connections to a foreign jurisdiction that posed a potential national security concern.  And that determination alone was sufficient to deny the award.  This ruling, especially the deference the court provided to the Executive Branch in matters of national security, highlights the increasing stakes of Executive Branch FOCI reviews.

Key Takeaways

As Section 847 and its proposed implementing Defense Federal Acquisition Regulation Supplement (DFARS) provision get closer to implementation, contractors should consider a few key takeaways:

  • Make FOCI Assessment Part of Standard Compliance Review: As noted above, the Government’s focus on FOCI risks is likely to continue unabated.  Accordingly, government contractors should make an assessment of FOCI risk part of their standard compliance review, including in circumstances where the potential FOCI risks may not be obvious.  Although each program will weight different attributes of FOCI, the then-Deputy Secretary of Defense Kathleen Hicks memorandum on implementing enhanced SBIR due diligence is a good explainer of how some of the factors may be assessed.
  • FOCI Concerns are in the Eye of the Beholder (the Pentagon): Effectively assessing FOCI exposure does not mean just looking at whether the contractor itself believes it has FOCI of concern but instead assessing how the Pentagon might view any foreign connections. Looking at the facts of the recent decision, the SBIR program applicant may have reasonably believed that its foreign connections (e.g., connections to a foreign bank and university that had been sanctioned after the applicant had ceased engaging with them) did not amount to FOCI, or at least not FOCI of major concern.  But, as the court detailed, significant deference will be granted to the Executive Branch entity conducting the assessment when it relates to issues of national security—and the Government may rely on classified information.  It is often difficult for a contractor to objectively assess how its foreign connections might be viewed by the Pentagon or how a competitor or third-party might portray these foreign connections.  Engaging with outside experts, especially those with experience in Government national security roles, can help provide insight into how the Government may perceive foreign connections and potential FOCI concerns.
  • Proactive Steps Can Help: Proactive mitigation steps, enhanced transparency when appropriate, and a full understanding of the processes involved in the various FOCI and security reviews is essential to safeguarding future contracts and awards. For example, understanding that third parties can provide the Government with information, including misleading information, about a company’s foreign connections, it may be beneficial to disclose information proactively to dispel potential misunderstandings. Additionally, the Hicks SBIR memo shows how disclosed FOCI and undisclosed FOCI will be treated differently.
  • The Rules are Not Final: Public comments may still shape the final DFARS provision implementing Section 847 which could make a meaningful difference to contractors. Accordingly, submitting well-crafted comments ahead of the July 6 deadline may shape the final rule to address some of the concerns identified above or preserve litigation space later.

Now is the time for a preliminary FOCI self-assessment. This is especially critical for organizations that plan to comment on the Section 847 rule, are pursuing an SBIR award, participate in defense programs through non-traditional contracting vehicles, or anticipate awards exceeding $5 million. Where the stakes warrant it, outside counsel can provide an objective review. Contact Fluet’s experienced International Trade and Government Contracts Practices for help navigating these emerging requirements.