A new proposed rule has come out from the Federal Acquisition Regulation Council for the Defense part of the FAR. It would give Defense Department contracting officers more discretion in dealing with services companies who do business in certain other countries. The change was part of the National Defense Authorization bill back in 2018. For details, the Federal Drive with Tom Temin spoke to the executive vice president for policy at the Professional Services Council, Stephanie Kostro.

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Interview transcript: 

Tom Temin And this rule applies to a pretty specific slice of the whole question of organizational conflict of interest. Tell us more.

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Stephanie Kostro Thanks, Tom, and it’s great to be speaking with you. So we have long anticipated a rule here from the Department of Defense in response to a section, specifically Section 812 of the fiscal year 2024 National Defense Authorization Act. And this is really targeted at consulting services provided by contractors to not only the Department of Defense, but potentially China, Russia, other countries that are on the lists of thou shalt not do business with for a State Department or the Department of Commerce. And so we’ve been eagerly anticipating to see what shape this proposed rule takes. And I’m grateful that it’s been released. We do see that it does apply to particular NAICS code, which is 5416, and that is management, scientific, technical, consulting services. And it does impact any company that might be doing business with those countries that I mentioned earlier. There is waiver authority, which we were eager to see sort of how the department couched that ability to apply for a waiver, to get a waiver and also a conflict of interest mitigation plan, which we are also grateful to see incorporated into the proposed rule.

Tom Temin Right. In other words, this would somehow give contracting officers a little bit more discretion and that the fact that a certain company is doing business, say, with China, is not I don’t know what the legal word is, prima fascia, that they cannot do business with the United States.

Stephanie Kostro Exactly. So when I look at language like a conflict of interest mitigation plan, it allows the company to take a look at the work that it’s doing for the department, but also for those other governments and saying, all right, so where is the potential for conflict of interest here? What am I, what steps are we taking to mitigate that COI, and is that mitigation plan acceptable to the contracting officer? I will say the threshold for getting the waiver is pretty high. It is the secretary of defense, the undersecretary or anybody within that chain who is Senate confirmed. And so it is a very high bar to get to that waiver. It’s not just the contracting officer. And so I appreciate that there are two elements here, the COI mitigation plan and the potential for waiver.

Tom Temin Right. And does this, in a practical sense, only apply to the large consulting firms, the giant ones that we all know their names that are also among some of the largest federal contractors, or are there small companies that also may have a niche work and they’re helping design a boat ramp in China somewhere?

Stephanie Kostro It’s a great question, Tom. So to unpack this proposed rule a little bit. So the offer has to certify that themselves, their subsidiaries and their affiliates don’t do these consulting services with the covered foreign entities. In addition, this does apply for contracts below the simplified acquisition threshold. So for services. And so as we move forward, it is going to impact not just the big guys, but anybody who does these kinds of services or provides these kinds of services within that NAICS code in particular.

Tom Temin All right. And what is PSC’s kind of official position representing so many services contractors that you’re okay with the high bar required?

Stephanie Kostro We appreciate the fact that the conflict of interest mitigation plan can be reviewed by the contracting officer. We very much like the fact that not everyone at the highest of levels needs to look at these in what can be very lengthy mitigation plans. The waiver authority, it’s a great question. I understand why it’s written this way. I suspect this is an area where we may say, can we have a little bit more discretion here? To be honest, this is a wait and see how often would a waiver be invoked? Who’s going to be the canary in the coal mine here, in terms of who’s going to get the first waiver and for what kinds of services? And so as this proposed rule makes its way through the process, and we’ve got 60 days to comment on it, PSC will pull our members like we usually do, and and see what they would like us to represent as far as comments.

Tom Temin We are speaking with Stephanie Kostro. She’s executive vice president for policy at the Professional Services Council. And as you noted, this was in the 2018 National Defense Authorization Act. You wonder what took them so long.

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Stephanie Kostro So this particular proposed rule is a direct result of the 2024 Authorization Act. There was a similar, there was a foci mitigation and foci is that foreign ownership and control and influence. That was in the 2018 bill. This kind of is in parallel with not only that, but a broader act called the Preventing OCI in Federal Acquisition Act, which was the action items for that were headed to the Office of Management and Budget. So it’s the 2018 NDAA, the 2024 NDAA, and this preventing OCIs organizational conflicts of Interest and Federal Acquisition Act. And in fact, GAO, the Government Accountability Office, did an assessment of where we stood with all three of these acts, and released a report this summer. And I’m glad to see that we’re finally seeing action, this has been long anticipated. How is the government going to tackle these things? Is it just going to be China or are we going to add Russia? We now have answers to those questions. And again, the waiver authority and the conflict of interest mitigation plans, these are essential for us. So we appreciate that they were included.

Tom Temin I would think the complication comes from the fact that it’s unlikely that the big companies, and I don’t want to name anyone in particular, but it seems likely they would have a subsidiary overseas staffed by local nationals that would do the work there, and somehow the profits get back to the partners here, as opposed to sending Americans from the McLean office, over to Beijing and then from thence to some distant province where they’re designing underground bunkers to help them with the architecture. I’m making an extreme example. But isn’t that the reality you think of the practical quality of this?

Stephanie Kostro Yeah. When you mentioned earlier some of the smaller firms, and those are not the ones you’re giving in your examples here. The large firms oftentimes would have a subsidiary. You think of the large management consulting firms and you realize that they are global, and they have offices in all of the major cities around the world, Beijing, Shanghai to be included, Moscow even. And so what the expectation here is from the government, I understand the expectation is that those companies would have conflict of interest mitigation plans in place to make sure that there’s a bright line distinction between the work being performed by local hires in those capitols or elsewhere. And then the Americans who are doing work for the Department of Defense. And so it’s just a matter of laying out what’s in that mitigation plan, and making sure that there is that bright line distinction.

Tom Temin It works in reverse, too, for companies from countries that we’re actually friendly with. Even so, if they want to have a defense business, there’s all kinds of rules that create subsidiaries in effect with almost a firewall between the board running the U.S. piece, and the French or the Belgian or the Canadian piece. And it’s pretty common.

Stephanie Kostro It is common. And I mentioned earlier this FOCI, this foreign ownership control and influence. There are foreign companies that have U.S. subsidiaries, and there are U.S. companies that have foreign subsidiaries. And oftentimes it’s not just the U.S. law, but if you’re operating in a foreign country, they have their own laws about bright line distinctions. And so, again, global economy, global industry, making sure that we are being responsive to what the U.S. government wants, but in a common sense way.

Tom Temin So and again, in a practical sense, we’re more worried about China taking over Taiwan, than we are about Canada taking over Long Island.

Stephanie Kostro I don’t know. I’m a Long Islander, I don’t know if I agree with that assessment, but fair enough.

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