Pentagon hopes small business engagement staves off 'adversarial capital'

The Defense Department is hoping steadily engaging small businesses will help shield them from shady foreign investments during the global COVID-19 crisis.

Jennifer Santos, DOD’s deputy assistant secretary of defense for industrial policy, said the organization has teamed with the Small Business Administration to host webinars spanning an array of topics such as cyber hygiene, telework, cash flow and adversarial capital.

"Adversarial capital" is the latest buzzphrase used to describe the security problem that can occur when foreign rivals, especially China, take advantage of the relatively open U.S. investment marketplace to support nascent technology firms whose work may have security applications but don't yet fall under the aegis of the cross-agency Committee on Foreign Investment in the United States (CFIUS).

"We simply cannot afford this period of economic uncertainty to lead to loss of American know-how on critical technologies," Santos said during an April 28 webinar on coronavirus supply chain challenges hosted by the Intelligence and National Security Alliance.

Additionally, DOD has been hosting teleconferences multiple times per week with industry trade associations and continued to host virtual Trusted Capital Marketplace events to help ensure companies have access to "clean capital" and avoid foreign investment conflicts.

Ellen Lord, DOD’s acquisition chief, warned in March that the defense industry base, their technology, and intellectual property were vulnerable to "nefarious" foreign investors.

As the coronavirus pandemic worsened, DOD has struggled with multiple plant closures -- 93 out of 10,509 prime companies with 141 that closed and reopened and 427 out of 11,413 vendors, with 237 that have closed and reopened. Those closures have significantly affected aviation, shipbuilding and small space launch supply chains.

Santos said several companies in Mexico have "impacted our major primes" and DOD is working to identify those companies and work with the Mexican government supporting various technologies, including airframe production.

But foreign investment remains one of the more pressing priorities in defense acquisition, Santos said, adding that suspicious transactions in vulnerable areas are mitigated or blocked if a risk is found regardless of the pandemic.

That is an acute problem for small manufacturers, Lord said.

"Typically the most problematic areas we have now are some of the smaller manufacturers who, maybe from a dollar value, don't do huge numbers but they are providing critical components across aircraft and naval applications. That's where my biggest concern is; sort of the weakest link in the system," Lord told reporters April 30.

The acquisition chief also worried some smaller companies "might end up with some significant financial fragility" and is looking across interagency and in the Trusted Capital Marketplace, a partnership that links private investors with defense companies, to keep those with "critical technology, talent, and facilities together with those investors."

Lord's concern extends overseas, as well, particularly in Europe, regarding what Lord called “nefarious” mergers and acquisition, where shell companies have known U.S. adversaries as beneficial owners. To protect against that, the Pentagon wants stronger foreign legislation from Congress to make the CFIUS process more stringent, Lord said.

In addition to pursuing stronger legislation, DOD has bolstered and expanded national security investment reviews, which can take 45 days and are reviewed by the Director of National Intelligence, and increased engagement with businesses using the newly stood up industrial base council.

Santos said the council helps address the industry base’s existing gaps and risks by aligning their priorities with DOD’s, identifying authorities that can be used to solve any issues, and drawing up policy as needed.

"We need to protect our industrial base from what could be adversarial capital and during COVID, we maintain the same due diligence," Santos said, "It’s what keeps me up at night most nights."

This article first appeared on FCW, a partner site with Defense Systems.