oversight

Defense Industrial Security: Special Security Agreements Permit Foreign-owned U.S. Firms to Perform Classified Defense Contracts

Published by the Government Accountability Office on 1990-03-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United    States General Accounting             Office
                    Testimony
GAO


                      DEFENSE INDUSTRIAL                   SECURITY
For Release
On Delivery
Expected    on        Special    Security     4greements                 Permit
Wednesday             Foreign-owned       U.S. Firms
March 21, 1990
                      to     Perform         Classified        Defense       Contracts




                      Statement    for the                Record
                      National   Security                 and International
                      qffairs   Division

                      For the
                      Committee             on Armed Services
                      House of             Representatives




GAO/T-NSIAD-90-17                      /                                                            rt ' 1
                                                                                         At-3   I
Mr.      Chairman,                Members              of     the      Committee:



We are        pleased                 to     present            the      results               of        our      work         on the              Defense

Department's                    use         of      Special           Security               Agreements                    ( SSAs         .        These

agreements,                    initiated               in     1984,         permit             U.S.            firms         that         have          come

under        foreign              ownership,                  control,                or     influence                  to     con        inue          to

work       on classified                          defense           contracts.                    Prior           to       1984,          those

firms        would             have         had       to     turn      over           management                  control             to       U.S.

citizen           trustees                  under           a proxy         or        voting             trust          agreement                  or     risk
losing           their          U.S.             security           clearances.                      In        practice,              under             an

SSA,       the       foreign                firm       is     permitted                to      retain             a minority                   position

on     the       U.S.          firm's             board       of      directors.                     In        the      view         of       some

Defense           Department                      security            officials,                  this           increases                the

potential                for       inadvertent                  disclosure                   of      classified                 information                      or

undue        pressure                 by         foreign        officials                  on U.S.               management                   or

employees                to     divulge               classified                information.



The       Chairman               of        the      Subcommittee                     on Research                     and     Development,
House        Committee                     on Armed           Services,                 expressed                    concern          that           there

has       been       controversy                      among         security               professionals                       within              the

Defense           Department                      on the        adequacy               of      U.S.            policy          for        protecting

the       nation's               classified                  defense            programs                 performed              in         foreign-

owned        U.S.          facilities.                       Therefore,                as he requested,                              we (1)

reviewed             the         history              of     SSAs,        (2)         determined                     the     extent             to       which

classified                defense                 contracts             are          being          performed                under            these

agreements,                    and         (3)      obtained            the          views          of     current             and         former


                                                                                 1
Defense         Department                officials                  on the               adequacy                of     SSA policy                  and

its      implementation                   for        protecting                      U.S.        classified                   information.



Security          officials               from         the        Office              of        the        Secretary                of        Defense,

the     Defense         Investigative                        Service,                 and        the        military                services             told

us     that     they       were        not       aware              of      any       compromises                       of    classified                 data

under         SSAs.        However,              our         work           ind icates                 that        there            are        widely

differing             views        within            the      defense                 security                community                   on the

adequacy          of    SSAs and                that         the          services               have         implemented                      or    plan

to     implement           policies              and         procedures                     that           appear            more         stringent

than      defense          policy            requires.                      Defense              Department                   policy            states
that        SSAs are          a fully            acceptable                         method            to    protect             classified

information.                  Office            of     the          Secretary                   of     Defense               officials
believe         that       SSAs provide                      flexibility                        in     dealing               with         foreign

parent         firms       that        are       not         will         ing        to     yield           all         management

control         and     that        they         provide                  protection                   to     classified

information             that         is      equal           to        t hat         provided               by alternative

security          arrangements.



On the         other       hand,          current              and          former              Defense                Investigative
Service         and     military                service                  security               officials                 whom we

interviewed             generally                believed                   that          Department                    of    Defense               policy

is     inadequate             to    deal         with            the        number              of     SSAs and                the        sensitivity

of     contract          information                   that              foreign-owned                      contractors                       are

accessi        ng.       Furthermore,                      the         Office              of    the        Secretary                    of    Defense

and      the    military             services                have           approved                  waivers             and        exceptions              to


                                                                                2
existing              policies             and     procedures               that,              in     the     view        of     some

current              and     former         defense         security                officials,                   have         increased               the

risks          of     compromise             of      classified                data.                They       therefore               suggested

that       the        policy          be clarified                to      specify               the         circumstances                    under

which          an SSA may be used,                         and       they       provided                    suggestions                for

tightening                 controls          over         SSAs.



SSAs and              other        arrangements                for        negating                   or     reducing            risk         from
foreign              ownership             and     influence              have         increased                 in      number         as

foreign              investment             in     U.S.      firms          with          defense               contracts              has

increased.                   Ten      SSAs have            been         approved                since           the      beginning              of

1988.            As of         about        November             1989,         20 foreign-owned                           U.S.         firms          had

been       cleared             under        SSAs and           were           working                under       about          325

classified                 contracts             and      subcontracts.                         One company                    had     100
contracts               and      a second            had     84.          As of           mid-March                   1990,      the         Office

of      the         Secretary          of     Defense          obtained                  for         us information                    showing
that       SSA firms               had      classified               contracts                  and         subcontracts                with          an

estimated               value         of    almost         $1.3         billion.



Defense              Department             policy         normally                limits             the       classification

level          of      contracts            under         an SSA to                the         Secret           level,          provided

that          the      foreign         control            emanates             from            a country               with      which          the

United              States       has       a bilateral                 industrial                    security            arrangement.1

If      the         United       States           does     not         have        such             an arrangement,                    the


lclassified    information      that                               is    releasable   to                        those   governments
can be released      to contractors                                     who are cleared                           by those
governments.
                                                                          3
policy        limits            contracts             to     the       Confidential                     level.               The Defense

Department               has      approved            waivers             to        this      policy             in    some instances.



Today,        three           SSAs allow              contractors                    to      access            Top     Secret

information.                    Under         three        other          SSAs,            U.S.        firms          owned          by parent

firms       from         countries             with        which          the        United            States          does          not       have
bilateral               reciprocal             clearance               agreements                   are        cleared              to    access

Secret        information.                     Under         some         of        the      SSAs,         approvals                 have         been

granted           to     allow          access        to     compartmented                        and      special             access

information--such                        as    communications                         security              information                    (COMSEC)

controlled               by     the      Yational            Security                 Agency--much                    of     which          is     not

releasable               to     governments                 or     contractors                    in      allied            countries.

Companies              with       SSAs are            performing                    classified                 work         on the          stealth

bomber,           the      Strategic             Defense              Initiative,                   and        other          sensitive

programs.



ORIGIiO AND EXTENT OF SSAS



Foreign           ownership              of    U.S.         companies                 that        perform             classified

defense           contracts              is    not         new but            has         become          more        of     a concern                as

foreign           companies              increasingly                  buy          into      U.S.          firms.             Officials                 of

the      Office          of      the     Secretary               of    Defense               stated            that         from         the

1950s        until            SSAs were            instituted                  in     1984,         a military                 command

could        permit            a foreign-owned                     U.S.         firm         that         would            rather          give       up

its      clearance               than      yield           management                 control             to     continue                working

on classified                    contracts            in     some         instances.                      This        was      permitted


                                                                          4
only       if     the        cornman            certified                  that           it      needed              the      product                and

would           assume         full          responsibility                         for         security               of      all        classified

material              involved.                 We were              told           that          this          exception                 was made

infrequently--                   perhaps           only           12 times                     during           a 30-year                 period.

This       method            was discontinued                          and          replaced                   by     SSAs because                     the
Office           of     the      Secretary                of      Defense                 believed                  that       SSAs offered

more       control             over          classified                material.



The      methods              currently             used          to       keep           foreign               owners            from          accessing

classified               information                     on defense                  contracts                      performed              by         their

U.S.       subsidiaries                      include            SSAs,           voting                 trust          agreements,                     and
proxy           agreements.                   Under         the        voting                  trust           agreement,                 voting

shares           of     the      U.S.         company's                stock              are          transferred                   to    U.S.

citizen           voting              trustees            who acquire                          the      same          rights          and        authority

as stockholders.                             As of        November                  1989,              eight          voting            trust

agreements               were          in      effect.               Under           proxy              agreements,                     foreign

owners           appoint              U.S.      citizen              proxy           holders,                   who have                the       same
authority               as     the       voting           trustees.                       As of             November              1989,           there
were       20 active                  proxy       agreements.                        Proxy              holders              and        trustees               can

be     removed           by      the         foreign            parent              firm             only       for         gross         negligence

or     willful           misconduct.                      These            two       arrangements                           are      designed                 to

isolate            the        cleared           U.S.           facility               from             the      foreign              owners.



Due to           foreign-owned                    U.S.           firms'             criticism                   of     the        voting              trust

and       proxy         agreements                and          internal              agency                 concern,              the      Defense

Department               formed              a panel            in        the       early              1980s          to     review             its      policy


                                                                                5
on how to               deal           with          foreign             ownership,                       control,                and      influence
over       U.S.         defense                 contractors.                       It      was concerned                            that        its         policy

was      not        flexible                  enough           to       satisfy            defense                 needs            under        unusual

circumstances.                             In      November              1983,           the          panel            developed                the         SSA as

a new type                    of    agreement                  and       viewed               it      as a fully                    acceptable
means          to      protect                classified                 information                        when         U.S.        firms

performing                    classified                 contracts                 came under                      foreign              influence,

control,               or      ownership.                      In       March           1984,             the      Defense              Department

approved               its         first           SSA,        after           a Hritish                    parent            company            had

rejected             voting                trust         and        proxy          arrangements                          as        imposing

unacceptable                       impediments                     to    operations.



Unlike           the          voting            trust          and       proxy           agreements,                         an SSA allows                     the

foreign             parent               company              to    have          representation                             on the          board           of

directors                of        the        U.S.        firm          and       to     maintain                  a degree                of     control

over       the       business                   operations                 of      the             U.S.         firm.             However,             in

practice,                the        chairman                and         a legal               quorum              of     the        board        of

directors                must            be     resident                U.S.       citizens.                       To justify                   an SSA,

Defense             Department                     policy           requires                  that          the         Army,        Navy,            Air

Force,          or       other             user         agency           and       the             Office          of        the     Secretary                 of

Defense             determine                   that          retaining                 the         foreign              owned          firm's

services               will          "serve             the        national              interest."                          In     exchange,                the
firm       agrees              to        certain            controls:                   disinterested                         U.S.         citizens               are

appointed                as outside                     directors                 of     the          firm         and         serve         on a

security               committee                   as Defense                  Department                       watchdogs               to      ensure             that
U.S.       classified                      information                   is       not         provided                  to     representatives                          of


                                                                                   6
the     foreign        parent              firm.         Visits           to    or        from      the       parent         firm   must

be    approved             in    advance           and     recorded             by the             security            committee,

and     the     facility              is    subject           to    security               inspections.                  As with

U.S.-owned            facilities,                  all    management                 officials                and      employees         who

access         classified               information                must        be    U.S.          citizens           with      a

security          clearance.



Table         1 summarizes                 data      furnished             by       the     Defense            Department           on

the     20 active               SSAs,       the      number         and        classification                    of     contracts

involved,           and         the     country          of    the        parent           firm.




                                                                      7
Table 1: Numbers of Contracts               Being Performed               by SSA firms,     as
of Novenber 1989

                                            Number         of contracts

Country      of                  Top                                                                 Special
parenta                         Secret         Secret                Confidential         Total      Accessb

Canada                            4                 94                     2               100          (64)
Canada                            5                  0                     0                  5           (4)
Qnadac                            0                   0                    0                  2           (0)
France                            0                   0                    1                  1          (0)
United     Kingdom                0                  6                     6                12
United     Kingdom                0                 64                    20                84           19";
United     Kingdom                0                  4                     0                 4           (0)
United     Kingdom                0                  7                     0                370          (7)
United     Kingdom                0                  18                   12                            (12)

United Kingdom                       0                98                   00                 98         2,
United Kingdom                       0               29                     3                32          (0)
United Kingdom                       0                 0                   6                   6         (3)
United Kirqdcxnc                     0                 1                   0                   2          (1)
Israel                               0                 1                   0                 1            (0)
MultiMtionale                        0                 1                   0                 1            (0)
MultinatioMlf                        0                 1                   0                 1            (1)
Netherlands                          3                7                    0                10            (0)
Switzerland                       0                   8                    3                11            (1)
Switzerland                      -0                 - 0                   -1               - 1          (0)
   Total                         g                  258
                                                    =
                                                                          54
                                                                          =
                                                                                           327
                                                                                           =
                                                                                                       (107)

aCountries        shown represent        majority          foreign      mnership.

bcontracts        involving    special     access          programs are part        of the total.

cClassification         was not provided for                three     contracts:    therefore,      the three
classification         columns do not add.

dInformation        not available.

eFtance,      Great Britain,         West Germany, Italy.

flrance,      Great Britain,         West Germany.




                                                              8
CRITICISMS            OF SSA P3LICY



The     general          consensus                  of        current            and        former         military             service            and

Defense         Investigative                       Service              security              officials              we interviewed

and     who have           had         responsibility                          for       administering                  SSAs is             that

the     Industrial               Security                 Regulation                  does         not     provide           adequate

guidance.              For       example,                 although               policy            contained            in      the        Defense

Department's               Industrial                     Security               Regulation                requires             the        defense

user        agency       and       the         Office             of     the         Secretary             of     Defense             to    make a

determination                   with       supporting                    documentation                     that       the       issuance                of

a facility             clearance                 will           "sewe            the        national            interest,"                 these
officials            believe              that           the      policy             does      not        adequately              define           "the

national          interest"                as       it         relates           to      the       approval           of     an SSA.               In        a

March        1984      Industrial                   Security                 Bulletin,              the      Defense            Department

determined             that         the        national                interest              criterion              would         be met           if

there        was,a       critical                need           to     use       a     contractor               under        foreign

ownership            when        cleared                 or     clearable                U.S.-owned               companies                were

unavailable              or      could           not           meet      the         Department's                 needs.              Security

officials            from        the       military                   services              told         us that        their

contracting              officers                are           often         reluctant               to     terminate             ongoing

contracts            and        therefore                 tend         to      propose             National            Interest

Determinations                   to       retain               the     contractor's                      sewices,            without
always        attempting                  to     find           other          U.S.-owned                 suppliers.                  Service
security            officials              told           us that              more         specific            guidance              on when            a

determination                   would          be        justified               and        what         documentation                 would            be
required            to       support           a determination                              would          help        them          to         evaluate

procurement                  offices'               proposals.



As of        February                1990,        only            the         Army         had       issued           formal           policy               an3

procedures                on SSAs.                  The Navy                  is      operating                under          informal

written           procedures,                  an3          the         Air         Force         is    developing                   procedures.

Generally,                officials                 of      the         three            military              services              and         the

Defense           Investigative                      Service                  that         we interviewed                         stated            that

because           of      the        lack      of         a clear,                  unified,            an3          adequate               policy           on

SSAs,        contractors                    can      play          off             one     user        agency          against                  another.
For       example,              in    a recent                  case          for        which         an SSA was being

considered,                  Air      Force          acquisition                         officials              and        several               Navy        an3

Army       commands                stated           that          they             would       not      be      able          to     perform                some
missions            if       they       had         to      seek          new suppliers                        for      the         contracts

being        performed                by     the          U.S.          contractor.                       The Air             Force             sponsored

a Top        Secret             SSA with                 this      contractor.                         During           its         consideration
of    an SSA,             several            Navy           commands                  raised           serious             concerns                 about

using        an SSA for                 the         same          contractor                   due        to    the        highly               classified

nature         of        some of            their           contracts.                      Army        and          Navy         officials
stated         that          the      Air      Force              action              restricted                their             ability              to    seek

a more         stringent                agreement,                      such          as a proxy                or      voting              trust

agreement.                   The      Army          and         Navy          later         agreed             to     the         SSA but              limited
the       contractor's                  access              to     the             Secret         level         and         for       up to            5

years;         at        that        time         the       need          for         the      SSA will               be reviewed.                          The

Air       Force's            participation                        under             the     SSA was approved                              for       10
years        at        the      Top     Secret              level.                  Officials              of        the      Office              of       the


                                                                                    10
Secretary                 of     Defense                noted         that           SSA sponsorship                        by one          user

agency            does          not         obligate             other          user           agencies               to    award         classified

work         to     the         firm          involved.



Some military                         service            and        Defense              Investigative                       Service           officials

do     not         agree             that      an SSA is                  a fully              acceptable                  alternative               to       a

proxy         or      voting                trust        agreement                 because               under         the      SSA (1)            the

foreign             owners                 retain        some control                      of     the        U.S.          subsidiary              through
membership                 on the              board           of     directors                  and       (2)        the     U.S.        directors

and     company                 employees                owe their                   positions               to       the     foreign            owners

and     may therefore                          be subject                  to        pressure.                   Each        service           has
indicated                 that             SSAs are            the        least          desirable                method           and      should            be

used         only         as a last                   resort.              For          example,             an Army            policy
memorandum                     issued           in      1989         states             that      "...           under        an SSA,            FOCI2            is

not     negated,                     but      rather           accepted                 as a risk/hazard                        due       to     the       lack

of     alternative                         cleared            sources             for      a critical                  product,             service,

or     technology.                          Because            an SSA does                      not      negate             FOCI     it     can        only

be used             when             all      other           means         fail."



Officials                 from the                  Office           of    the          Secretary                of    Defense            do not

share             these         views           and      believe              that         SSAs provide                      adequate

protection                     for         classified                material.                   They        explained               that        current
Defense             Department                      policy           neither             encourages                   nor     discourages

foreign             investment.                         But      they         believed                that        unreasonably

stringent                 security                   restrictions                    could,           in     some cases,                  lessen           U.S.


2Foreign              ownership,                      control,             or        influence.

                                                                                  11
access          to      foreign               technology                 and      resources                that          are         needed           to

strengthen                the       U.S.         defense               industrial                 base.



Officials               from           the     Office             of     the      Secretary                of         Defense             also        told

us that            they        have           phased         in        a number             of     policy              and      procedural

adjustments                 to         strengthen                 SSAs since                1984.               For      example,                they

indicated               that        a foreign                parent              firm       is      now required                      to     provide

advance            notice              to     the     Defense              Department                if         it     plans          to     remove                a

U.S.        firm's          director                 and      that         termination                    of         SSA safeguards

requires             advance                approval.                  They       also           indicated               that         SSAs

currently               place           oversight                 responsibility                     for             export          of

unclassified                    but          controlled                 technical             data         with          cleared             resident

U.S.        citizens              and         that      the        military               services                   have      the        opportunity

to      review          proposed                SSA safeguards                        and        may require                   additional

controls.                 They          said         that         the      Department                of         Defense              is

continuously                    evaluating                  its         policy          and       may consider                       additional

changes            to     clarify               or    strengthen                  its       practices.



Recognizing                  the        controversy                     and      trade-offs                    involved              in     SSAs,

some current                    and          former         defense              security            officials                      we interviewed

suggested               that           the      Department                 of     Defense            clarify                  the

circumstances                      under            which         an SSA is               acceptable                    or appropriate,

particularly                     for         protecting                 highly          classified                    material.                  In        their

view,         foreign              companies                usually              prefer           an SSA over                   a voting
trust         or     proxy             agreement              because             they           retain              some control                 over

the      U.S.        firm,              They         believe             that,          once        approved,                  a contractor


                                                                                 12
under          an SSA may tend                          to       become              entrenched                   and      treated            like       any

other          cleared             U.S.            contractor.



These          security                officials                  expressed                  concern              that        although               an SSA

was originally                          intended              for           use      only         un3er           exceptional

circumstances                       an3        for      a particular,                           critical             need,           those           foreign

owners           today            are,         in     their             view,           routinely                 rejecting               the        voting

trust          or        proxy          agreement                 in        favor          of     an SSA.                They        stated           that

foreign-owned                       U.S.           firms         are         competing                 for        an3      performing
contracts                  involving                 access             to        highly          classified                  and      sensitive

materials                  that         usually             are         not        releasable                 even         to    the       governments

of      our      closest                allies.               They            therefore                believed               that        the        SSA

policy              needs         to     be        reassessed                     and      that        the        Office         of       the

Secretary                  of     Defense             needs             to        provide           additional                  specific

guidance.                   We noted                 that         some            SSAs have                cleared            contractors                  to

compete              for        any       contracts                    in     one       or      more         broad         program              areas         and

that          lo-year             SSA terms                 may allow                   those          contractors                   to    become

permanently                      incorporated                     into            the      U.S.        industrial                base.

Officials                  of     the       Office            of        the        Secretary                 of    Defense             noted           that

access              to     Top      Secret            an3         special               access             material             by a U.S.

subsidiary                  must          always            be         justified                on a case-by-case                          basis           and

that,          if         release             is     approved,                    the      information                   is     routinely
denied              to     the         foreign             parent             company.



During              our     work,           defense               security                 officials                provided              a number              of

suggestions                      on how the                  Defense               Department%                      policies              and


                                                                                    13
procedures                    for      SSAs coclld                  be      improved            to      strengthen                 security

controls,                including                   (1)       requiring               the        procuring             command               to

submit            a separate                   National                  Interest            Determination                   for        each

classified                    contract               to      be      performed               by a foreign-owned                          company
and      document                   that       the         contract              is    critical             to     performing                  its

mission,                (2)         placing             time         limits           on SSAs and                 requiring              the

procuring                activity                  to      seek          other        U.S.      sources            so as           to    ultimate           lY

replace            the         foreign-owned                         or     influenced               contractor,                   and        (3)

requiring                procuring                  activities                   to    document             the      specific                 steps

they        took         to         identify               U.S.-owned                 suppliers.



PROCEDURAL WEAKNESSES



Following                are         examples                 of     procedural               weaknesses                that        we found

during         our            work:

--     The     Defense                 Investigative                        Service           developed              interim

       security                measures                 to     provide              some      control            over        management

       of     a company                     from        the        time        a U.S.         contractor                is     acquired
       by     a foreign                    owner           until          safeguards               of    an SSA or                 other

       security                arrangements                        are      in      place.           The      interim              measures

       were        to     cover              only          existing              contracts              and      last        for

       120 days.                     The       interim              measures             have        been        extended               for        up to

       1 year            or         more,       however              , and          waivers          have        been        processed                and
       new contracts                         awarded               in     this        interim           period.              Defense

       Investigative                         Service               officials             indicated               that        extending                the
       interim            measures                  and        approving               new contracts                    reduce           the


                                                                                 14
     Defense         Department's                        leverage            in      negotiating                        the       terms                of    a

     security          clearance                     agreement.



--   The      serv ices'             implementing                     policies              and             procedures                     for

     National          Interest                  Determinations                      require                    procurement

     activities              to      justify              a need            for      a product                    or     service                   that          is

     mission-critical,                           cannot          be obtained                     in         sufficient                     quantity

     from       U.S .-owned                   sources,           and        involves              a unique                    product                  or

     technology.                   Military               service            security                      officials                  we

     interviewed                  indicated               that        supporting                      justification                          for        these

     determinations                      is      sometimes             incomplete                          or    inadequate.                           For       one

     recent        SSA,           several             commands              had      requested                     the        retention                     of

     almost        every           existing               contract                with      the             contractor                     without
     documenting                  the         need       in    each         case.           In             some cases,                     contracting

     officers          did         not         indicate              what         steps,              if        any,     were               taken           to

     identify          U.S.-         owned            suppliers.                   In      another                 case,              the         service's

     files        indicated                   that       several            U.S.         firms               could        fill              the        user’s

     requirements,                  but          an SSA was                 requested                      and     approved.                       In

     another         case,              the      foreign             company             requested                     approval                   of    an

     SSA before              it      bought              out     a    U.S.         firm.                   The     SSA was approved                               by
     the      takeover             date.



--   The      Industrial                 Security              Regulation                  permits                 a foreign-owned

     U.S.       facility                to     be     issued          a security                  clearance                      if         the        risks

     from       foreign            ownership,                  control,              or     influence                     can          be         negated

     or      reduced         to      an acceptable                     level.               It             does        not       specifically


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     require           that             the      user       agencies                 determine                 whether            the       foreign

     company           is         doing          business             with            our      adversaries.                       According                  to

     an Army           counterintelligence                                 specialist,                       in      a specific                 case         of

     concern           to         the         Subcommittee,                     the         foreign            parent           company               was

     doing       business                     with      the      Eastern               bloc,           but        the      extent           of        that

     business              was          not      known.            The          official               told          us that            this

     information                      would          be useful             to         evaluate               a request               for        an SSA

     but     that           it         is     not     normal          Army            procedure                to     check          for        this

     type      of      information.


--   The     Defense                  Department               requires                outside               directors               who        serve         as
     Defense's                   watchdogs              on the           security                  committee               to     be cleared

     U.S.      citizens                      who have          certified                    that       they          have       no prior

     financial                   or         employment           relationship                       with          the      U.S.         firm.

     Financial                   disclosure               statements                   are         not       required.                  During              our

     review           of         the         SSA files,             we noted                 several                instances              in     which

     individuals                       appointed              as outside                    directors                had     prior          dealings

     with       the         U.S.             subsidiary             that          appeared                to      be contrary                    to
     established                       Defense          Department                    policy.
                                                          -------------------

We interviewed                         current          and       former              security               officials               from         the

Defense         Investigative                         Service,             the         Office             of      the       Secretary                  of

Defense,         and             the         three      military                services                 responsible                 for

administering                     the         Defense          Department's                        Industrial                Security

Program.              We also                 reviewed           selected                   SSA files                at     the      Defense

Investigative                     Service             and      the       three              military                services            and


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analyzed       about      half     of   the         20 SSAs existing           as    of   November        1989.

We discussed           this      statement           with    officials        of    the   Office     of    the

Secretary       of     Defense       and      the     Defense       Investigative          Service        and

incorporated           their      comments,           as appropriate.



This   concludes          our     statement           for    the    record.




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