Preparing For DoD's Upcoming DFARS Rule On Beneficial Ownership And FOCI Vetting

The Department of Defense (DoD) is preparing to roll out new requirements that will significantly expand how it evaluates and mitigates foreign ownership, control, or influence (FOCI) across its contractor base. Under Section 847 of the Fiscal Year 2020 National Defense Authorization Act (NDAA), the DoD must establish procedures to assess and mitigate FOCI risks for both cleared and uncleared contractors involved in unclassified defense contracts, subcontracts, or research awards valued at $5 million or more. In May 2024, the DoD took its first formal step toward implementation by issuing DoD Instruction 5205.87, which sets policy for evaluating beneficial ownership and identifying potential foreign control early in the contracting process.

The Defense Counterintelligence and Security Agency (DCSA) has since begun building the Section 847 program, signaling that the related Defense Federal Acquisition Regulation Supplement (DFARS) clause, which will make these requirements enforceable, could arrive within the next 12 to 18 months. Once finalized, the rule will function much like the FOCI review process for cleared contractors but applied on a contract-by-contract basis, marking a major shift toward proactive risk mitigation across the defense industrial base.

Section 847 of the FY20 NDAA

Section 847 marks a significant change in how the DoD evaluates foreign ownership, control, and influence within its contractor base. Historically, vetting for FOCI was limited to classified contracts handled through the National Industrial Security Program. This requirement is an expansion of existing FOCI vetting requirements to pre-award contract activities and unclassified contracts. The goal is to identify and mitigate potential foreign control before contract award by moving oversight to the front end of the procurement process.

Section 847 includes assessing whether contractors and subcontractors disclose their beneficial ownership and if they are under any FOCI to the DCSA. This helps the DoD mitigate security risks and ensure foreign entities cannot compromise sensitive defense operations or classified information. Although Section 847 contains exemptions such as a COTS exemption, DoD retains authority to override the exclusion where risks to national security or sensitive data exist.

DCSA is the primary DoD agency tasked with reviewing and adjudicating all contractors that meet the criteria of Section 847. The agency has created a Section 847 webpage to provide guidance and resources.

DoD Instruction 5205.87

In May 2024, DoD issued Instruction 5205.87, the first formal step toward implementing Section 847. The Instruction outlines how DoD components will evaluate beneficial ownership and determine whether mitigation measures are necessary. Although the Instruction remains in its implementation phase and is not yet enforceable, it establishes the framework for conducting FOCI reviews during the source selection process.

Under the Instruction, DCSA is charged with creating a dedicated Section 847 program and submission process that conducts complete case reviews of beneficial ownership and FOCI, provides findings to the appropriate DoD components, and oversees the implementation of FOCI mitigation measures. It also notifies officials of any changed conditions or non-compliance, updates case reviews as necessary, and maintains a designated system of record.

It also establishes a dual-track approach to FOCI assessments and decisions. DCSA will continue conducting evaluations; however, the final determination on whether mitigation measures are necessary will rest with the DoD contracting officer. Once such measures are required, the contractor must put them in place within 90 days of receiving the contract award. DCSA has provided a helpful diagram to describe the pre-award process:

FOCI/Beneficial Ownership Pre-Award Lifecycle

Upcoming DFARS Rule

DoD is proposing a DFARS rule to implement this policy relating to section 847 NDAA for FY20 and section 819 of the NDAA for FY 2021. As discussed above, Section 847 enhances the process for assessing and mitigating risks related to FOCI and requires contract clauses providing for and enforcing changes in FOCI or beneficial ownership during performance of a contract or subcontract.

Section 819 amends section 847 of the NDAA for FY 2020 to:

• Require DoD to examine, assess, and report on covered contractor and subcontractor compliance with FOCI requirements.
• Identify procedures to respond appropriately to changes in covered contractor or subcontractor beneficial ownership status.

While the proposed rule has not been released, it will likely introduce the following two key requirements:

• A new solicitation provision and a contract clause requiring offerors to submit beneficial ownership data and undergo FOCI screening prior to award.
• Ongoing disclosure obligations by requiring contractors to notify DoD of any material changes in ownership or control during performance and to flow down to covered subcontractors.

The proposed rule will undergo the standard process of publication in the Federal Register with a window for public comments before it becomes effective.

Looking Ahead

These changes have several practical consequences. Contractors will need to prepare beneficial ownership documentation and FOCI narratives early in the contracting process, integrating them into proposal preparation. Prime contractors must develop a repeatable process for collecting ownership information from subcontractors and ensuring compliance across the supply chain. During contract performance, contractors will be responsible for monitoring ownership changes and promptly notifying DoD; failure to do so could lead to delays, disqualification, or even termination. Even companies that primarily supply COTS items should evaluate potential exposure, as DoD may determine certain procurements pose elevated risks. Legal and compliance teams should also integrate Section 847 assessments into due diligence and transaction planning. Finally, organizations should enhance internal change control policies to ensure that compliance officers are notified of any ownership or governance changes before they occur.

In short, Section 847 is moving DoD's contractor FOCI vetting process from a reactive model to a preventative one, ensuring foreign influence risks are addressed before contract award rather than after. The forthcoming DFARS rule will formalize these obligations, requiring proactive disclosure, continuous monitoring, and coordinated compliance across the supply chain. Contractors who begin preparing now by establishing internal ownership tracking systems will be far better positioned to compete in this new environment once the rule takes effect in the next year or so.

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