```

[Senate Hearing 118-437]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 118-437

                  SAFEGUARDING THE HOMELAND: EXAMINING
                    CONFLICTS OF INTEREST IN FEDERAL
                CONTRACTING TO PROTECT AMERICA'S FUTURE

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 24, 2024

                               __________

        Available via the World Wide Web: http://www.govinfo.gov
        
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]        

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs
        
                                __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
57-032 PDF                  WASHINGTON : 2024                    
          
-----------------------------------------------------------------------------------            

        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                    GARY C. PETERS, Michigan, Chair
THOMAS R. CARPER, Delaware           RAND PAUL, Kentucky
MAGGIE HASSAN, New Hampshire         RON JOHNSON, Wisconsin
KYRSTEN SINEMA, Arizona              JAMES LANKFORD, Oklahoma
JACKY ROSEN, Nevada                  MITT ROMNEY, Utah
JON OSSOFF, Georgia                  RICK SCOTT, Florida
RICHARD BLUMENTHAL, Connecticut      JOSH HAWLEY, Missouri
LAPHONZA BUTLER, California          ROGER MARSHALL, Kansas

                   David M. Weinberg, Staff Director
                      Alan S. Kahn, Chief Counsel
                  Michelle M. Benecke, Senior Counsel
             Stephanie T. Rosenberg, Investigative Counsel
              Daniel M. LaBonte, Professional Staff Member
   Tiffany Ann Shujath, U.S. Department of Homeland Security Detailee
           William E. Henderson III, Minority Staff Director
              Christina N. Salazar, Minority Chief Counsel
               Phillip A. Todd, Minority Chief Economist
                     Laura W. Kilbride, Chief Clerk
                   Ashley A. Gonzalez, Hearing Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Peters...............................................     1
    Senator Paul.................................................     3
    Senator Hawley...............................................    17
    Senator Hassan...............................................    20
Prepared statements:
    Senator Peters...............................................    29

                               WITNESSES
                       TUESDAY, SEPTEMBER 24 2024

Jessica Tillipman, Associate Dean for Government Procurement Law 
  Studies, and Government Contracts Advisory Council, 
  Distinguished Professional Lecturer in Government Contracts 
  Law, Practice, and Policy, George Washington University Law 
  School.........................................................     5
Rush Doshi, Ph.D., C.V. Starr Senior Fellow for Asia Studies, 
  Council on Foreign Relations and Assistant Professor, 
  Georgetown University..........................................     7
Clark Packard, Research Fellow, Herbert A. Stiefel Center for 
  Trade Policy Studies, Cato Institute...........................     9
Bryan Riley, Director, Free Trade Initiative, National Taxpayers 
  Union..........................................................    11

                     Alphabetical List of Witnesses

Doshi, Rush Ph.D.:
    Testimony....................................................     7
    Prepared statement...........................................    42
Packard, Clark:
    Testimony....................................................     9
    Prepared statement...........................................    56
Riley, Bryan:
    Testimony....................................................    11
    Prepared statement...........................................    92
Tillipman, Jessica:
    Testimony....................................................     5
    Prepared statement...........................................    32

                                APPENDIX

Senator Hawley's chart...........................................    96
    USAF FOIA Request............................................    97

 
                       SAFEGUARDING THE HOMELAND:
                   EXAMINING CONFLICTS OF INTEREST IN
            FEDERAL CONTRACTING TO PROTECT AMERICA'S FUTURE

                              ----------                              

                      TUESDAY, SEPTEMBER 24, 2024

                                     U.S. Senate,  
                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SD-342, Dirksen Senate Office Building, Hon. Gary Peters, Chair 
of the Committee, presiding.
    Present: Senators Peters [presiding], Hassan, Blumenthal, 
Ossoff, Paul, Scott, and Hawley.

             OPENING STATEMENT OF SENATOR PETERS\1\

    Chairman Peters. The Committee will now come to order.
---------------------------------------------------------------------------
    \1\ The prepared statement of Senator Peters appears in the 
Appendix on page 29.
---------------------------------------------------------------------------
    Federal contractors are a key part of our government's 
operations. The services and products they provide play a 
critical role in delivering services to the American people, as 
well as keeping our nation safe. From advanced defense systems 
to cutting-edge cybersecurity, contractors are entrusted with 
information and responsibilities that can impact the national 
and economic security of our Nation.
    From modernizing and enhancing the safety of our 
infrastructure and power grid to providing critical 
intelligence that safeguards our nation from foreign and 
domestic threats, the scope of government contractors' support 
is immeasurable.
    To ensure that government contractors are working in the 
best interests of Americans, we must ensure they are meeting 
the highest standards of integrity, impartiality and 
transparency, by removing conflicts of interest from their 
work. Conflicts of interest are not minor infractions. They 
pose threats that undermine our national security and economic 
competitiveness and can dangerously erode the American people's 
trust in their government.
    Over the past decade, there have been alarming reports of 
Federal contractors who are simultaneously promoting competing 
interests, including those of foreign adversaries, interests 
that directly contradict our national security needs and hurt 
our economic competitiveness.
    For example, in the summer of 2023, in one of the largest 
intrusions of U.S. Government (USG) cloud services, Chinese 
state-backed hackers gained access to the emails of high-level 
officials, compromising the information security of U.S. 
officials who work on national and economic security matters. 
This attack has raised serious concerns that China-backed 
hackers were able to steal this information because of the 
service provider's partnership with a Chinese entity while they 
were providing services to the U.S. Government at exactly the 
same time.
    In 2015, a consulting firm responsible for advising the 
U.S. Government on national security strategy, cybersecurity, 
and cutting-edge technology was simultaneously advising Chinese 
state-run enterprises. This consulting work for Chinese 
enterprises involved China's naval fleet and Chinese government 
efforts to raise its profile and strengthen its position and 
power globally, a goal in direct competition with American 
interests.
    In another example, the same firm's research and 
recommendations allegedly assisted in the creation of the 
Chinese government's Made in China 2025 industrial plan in 
opposition to U.S. foreign policy objectives and our national 
and economic security.
    These examples demonstrate the need to strengthen our laws, 
specifically around disclosure of foreign ties, particularly 
where Federal contractors are providing services to 
authoritarian governments who seek to bolster their economic 
and geographic assets in competition with our Nation.
    In sectors like defense and cybersecurity, the stakes are 
incredibly high. Just last week, the Federal Bureau of 
Investigation (FBI) Director Wray announced the FBI had 
successfully disrupted a malware attack targeting over 200,000 
devices in the United States and worldwide by a Chinese-backed 
hacking group called the Flax Typhoon.
    The Chinese cyber actor exploited known vulnerabilities, 
including in a major U.S. cloud service provider that receives 
billions in U.S. taxpayer dollars each year, to support the 
Federal Government's information technology (IT) services. It 
goes without saying that major U.S.-based technology service 
providers working for foreign adversaries while performing 
multibillion-dollar contracts for the U.S. Government risk 
exposing vulnerabilities that can be exploited by our 
adversaries.
    We can and must stop this.
    In 2022, my bipartisan bill, the Preventing Organizational 
Conflicts of Interest in Federal Acquisition Act, was signed 
into law. The bill seeks to end conflicts of interest from 
Federal contracts that provide critical services to the 
American people. It directed the Federal Acquisition Regulatory 
(FAR) Council, to provide clear guidance to agencies and 
Federal contractors on ways to identify, mitigate, and even 
avoid conflicts of interest.
    Despite being signed into law nearly two years ago, the FAR 
Council is late on issuing guidance required by my law, which 
is why yesterday I led the cosponsors of this legislation in a 
letter pressing for quick action to issue this desperately 
needed guidance.
    I continue to call on the FAR Council, which includes the 
General Services Administration (GSA), National Aeronautics and 
Space Administration (NASA), the Department of Defense (DOD), 
and the Office of Federal Procurement Policy (OFPP) to provide 
better guidance to agencies on how to handle conflicts of 
interest.
    Earlier this year, I also worked with Senator Hawley on his 
bill, the Time to Choose Act of 2024, which would add 
guardrails to prevent consulting firms that are under contract 
with foreign adversaries from simultaneously providing services 
to the Department of Defense and other Federal agencies. I 
joined the bill, along with Senators Rick Scott and Marco 
Rubio, to ensure contracting firms are using taxpayer funds 
responsibly and to help prevent foreign adversaries from 
exploiting business relationships with contractors to interfere 
with American interests.
    I am confident that we can all agree that Americans deserve 
full assurance that Federal contractors are providing 
transparency and avoiding any potential conflicts before they 
are awarded taxpayer dollars.
    That is why we still have work to do.
    Today's hearing will help us better identify and mitigate 
conflicts of interest in an ever-evolving global landscape. Our 
witnesses will examine inadequacies within existing Federal 
contracting rules as well as explore steps that can be taken to 
mitigate future risks.
    I thank each of them for being here today and look forward 
to a very productive conversation.
    I would now like to recognize Ranking Member Paul for his 
opening statement.

               OPENING STATEMENT OF SENATOR PAUL

    Senator Paul. In a speech in 1985, Ronald Reagan addressed 
an audience of business and trade leaders, stating, ``I, like 
you, recognize the inescapable conclusion that all history is 
taught. The freer the flow of world trade, the stronger the 
tides of human progress and peace among nations.''
    While today's topic is about conflicts of interest, this 
hearing is yet one more opportunity for Washington to reject 
this conclusion in its insatiable desire to impose sanctions on 
China and to restrict trade.
    While it is clear that we have an adversarial relationship 
with China, there is another way. In the past 30 years it is 
undeniable that the economic interaction between the United 
States and China has been a substantial driver of both Chinese 
and American economic growth.
    As President Reagan pointed out, nearly 40 years ago, trade 
will not only strengthen the tides of human progress but also 
increase prospects for peace. The London School of Economics 
recently found that trade with China has boosted the average 
American household purchasing power by $1,500, just since 2001. 
These effects are substantially higher among low-income 
households, reaching as high as an additional $1,700 per year 
in purchasing power.
    Studies by Oxford and Harvard have found that trade with 
China has led to a net job creation. In 2019 alone, trade with 
China was directly responsible for 1.2 million American jobs. 
We should think twice before ending relations and ending trade 
with China. Despite the tense relationship we have had with 
China since 2017, China remains the U.S.'s third-largest 
trading partner behind Mexico and Canada, accounting for about 
10 percent of all American trade in 2024. China also remains 
the world's second-largest consumer market, only behind the 
United States.
    Even so, many in the Senate and across Congress fail to 
recognize the tradeoffs that come with the antagonistic and 
extreme restrictions of foreign trade of goods and services. It 
is not just China that suffers from these policies but also 
American households, American small business owners, and even, 
at times, America's strategic objectives.
    Some argue that we should prioritize domestic contractors. 
A recent report from the Peterson Institute found that in 2017 
alone, Buy America requirements cost the U.S. taxpayer $94 
billion. This is effectively a $715 tax per American family. To 
make matters worse, the same study found that the mandates had 
little to no effect on net job growth. So even American workers 
who are also consumers are made poorer by these requirements.
    Another recent study found that repealing all Buy American 
mandates on U.S. procurement would even generate an additional 
300,000 jobs and lead to significant advancements in U.S. 
infrastructure goals. Unserious legislation that seeks to 
comprehensively ban firms that sell to foreign markets from 
Federal contracts not only harms our competitiveness and 
dynamism of the U.S. business contracting with the Federal 
Government but also the strategic aims and interests of the 
U.S. Government itself.
    People worry that contractors who work for the Chinese 
government will be influenced by Chinese communism. It is also 
that the reverse may be true, that American contractors, 
contracting for the Chinese government, may be bringing in 
influence from America and from American capitalism, as well.
    I look forward to hearing from our witnesses about how 
simultaneously to mitigate the risks that may come from 
conflicts of interest, while still maintaining the 
competitiveness and dynamism brought about by the free markets 
and free trade that makes all Americans more prosperous.
    Chairman Peters. Thank you, Ranking Member Paul.
    It is the practice of the Homeland Security and 
Governmental Affairs Committee (HSGAC) to swear in witnesses, 
so if each of you would please stand and raise your right hand.
    Do you swear the testimony that you will give before this 
Committee will be the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Ms. Tillipman. I do.
    Dr. Doshi. I do.
    Mr. Packard. I do.
    Mr. Riley. I do.
    Chairman Peters. Thank you. You may be seated.
    Our first witness is Jessica Tillipman. She is the 
Associate Dean for Government Procurement Law Studies and a 
Distinguished Professorial Lecturer in Government Contracts 
Law, Practice and Policy. Dean Tillipman is an internationally 
recognized expert and prolific author on government procurement 
integrity and compliance issues. She is also a senior advisor 
to the American Bar Association (ABA), International 
Anticorruption Committee, a faculty advisor to the Public 
Contract Law Journal, and an advisory board member of The 
Government Contractor.
    Dean Tillipman, you are now recognized for your opening 
remarks.

     TESTIMONY OF JESSICA TILLIPMAN,\1\ ASSOCIATE DEAN FOR 
  GOVERNMENT PROCUREMENT LAW STUDIES AND GOVERNMENT CONTRACTS 
   ADVISORY COUNCIL, DISTINGUISHED PROFESSIONAL LECTURER IN 
    GOVERNMENT CONTRACTS LAW, PRACTICE, AND POLICY, GEORGE 
                WASHINGTON UNIVERSITY LAW SCHOOL

    Ms. Tillipman. Thank you. Chair Peters, Ranking Member 
Paul, and Members of the Committee, thank you for inviting me 
to testify before the Committee today. I am Jessica Tillipman, 
the Associate Dean for Government Procurement Law Studies at 
the George Washington University (GWU) Law School.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Tillipman appears in the Appendix 
on page 32.
---------------------------------------------------------------------------
    Over the past several years, organizational conflicts of 
interest (OCIs), have received an increasing amount of 
attention, given high-profile incidents that have highlighted 
weaknesses in this area of the law. Although I was very pleased 
to see the enactment of the Preventing Organizational Conflicts 
of Interest in Federal Acquisition Act, which addresses several 
gaps in the current OCI framework, the Federal Acquisition 
Regulatory Council has yet to issue a proposed OCI rule in 
response to that legislation. This hearing provides an 
opportunity to renew focus on the issues that continue to 
hinder Federal agencies' ability to effectively address OCIs.
    Today's hearing focuses primarily on a specific type of 
OCI, impaired objectivity, which may arise where a contractor's 
outside business interests and relationships create an economic 
incentive to provide biased advice under a government contract. 
Although OCIs have been regulated since the 1960s, they have 
become more frequent in recent decades due to industry 
consolidation and the outsourcing of services traditionally 
performed by the government.
    OCIs are more likely to occur in contracts involving 
professional services, including management support, 
consultant, or advisory services, which is notable given the 
hundreds of billions of dollars the U.S. Government spends each 
year on these professional services.
    Despite widespread acknowledgement for the past several 
decades that this could create fertile ground for conflicts of 
interest, government regulation of these potential hazards has 
not kept pace. The decades-long absence of an update to the 
Federal Government's approach to OCIs has weakened U.S. 
procurement system and left it vulnerable to integrity and 
national security risks.
    Today's hearing is focused on a potential national security 
concern that may stem from companies that maintain intelligence 
or defense contracts with the United States while 
simultaneously contracting with foreign adversaries. If these 
interests are neither disclosed nor mitigated, it increases the 
risk that sensitive information may be exploited or fall into 
the wrong hands. It also increases the risk that contractors 
may be unable to provide impartial assistance or advice due to 
their competing relationships with certain foreign governments.
    The current framework governing OCIs, which has remained 
largely unchanged since 1984, is outdated, inconsistent with 
modern procurement practices, and fails to address the growing 
risks associated with the government's increasing reliance on 
contractors to provide services, including advice and the 
exercise of judgment.
    This has led some contracting officials to treat OCI 
assessments as a rote, check-the-box exercise rather than a 
meaningful, thorough, and rigorous analysis. Moreover, the lack 
of a standard FAR OCI solicitation provision or contract clause 
has left agencies to fill this vacuum with their own provisions 
and clauses, leading to severe inconsistencies in agency 
approaches to this area of the law.
    Most glaringly, the FAR lacks critical definitions and does 
not thoroughly address compliance, disclosure, or mitigation 
obligations. This absence of guidance has led to a paradoxical 
issues of both over-and under-compliance. Some contracting 
officials may never even consider OCI risks, whereas other may 
reflexively and improperly exclude a contractor from 
competition.
    A new OCI rule should provide clarity, more expansive 
definitions, greater guidance for contracting officers, updated 
illustrated examples, and enhanced disclosure and compliance 
requirements for relevant contractors. This effort should be 
buttressed by robust training requirements for contracting 
officials, as well.
    As this Committee and the FAR Council consider remedies to 
these issues, a cautionary approach is necessary. Draconian 
approaches to addressing concerns cannot only undermine the 
goals of legislative and regulatory reform but create new 
problems.
    Striking a balance between necessary and excessive 
regulation is never easy, but it is critical, and it is my hope 
that a thoughtful and nuanced approach to OCI reform will 
address integrity and security concerns, bring greater clarity 
to the existing regulations, and create a more uniform approach 
across the Federal Government.
    Thank you for the opportunity to share these thoughts with 
you. I would be pleased to answer any questions you have for 
me.
    Chairman Peters. Thank you.
    Our next witness Rush Doshi, is the C.V. Starr Senior 
Fellow for Asia Studies and Director of the China Strategy 
Initiative at the Council of Foreign Relations. His expertise 
includes China's foreign policy, U.S. strategy toward China, 
cross-strait issues, and Indo-Pacific security.
    Before joining the Council of Foreign Relations, Dr. Doshi 
was Deputy Senior Director for China and Taiwan on the National 
Security Council, where he served from 2021 to 2024, and helped 
manage the Security Council's first China directorate.
    Dr. Doshi is an Assistant Professor in Georgetown's School 
of Foreign Service. He is the author of The Long Game: China's 
Grand Strategy to Displace American Order. Dr. Doshi is also a 
coeditor of Global China: Assessing China's Growing Role in the 
World.
    Dr. Doshi, welcome, and you are recognized for your opening 
statement.

STATEMENT OF RUSH DOSHI,\1\ Ph.D., C.V. STARR SENIOR FELLOW FOR 
   ASIA STUDIES, COUNCIL ON FOREIGN RELATIONS AND ASSISTANT 
                PROFESSOR, GEORGETOWN UNIVERSITY

    Dr. Doshi. Thank you. Chair Peters, Ranking Member Paul, 
distinguished Members of the Committee, I appreciate the 
opportunity to testify today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Doshi appears in the Appendix on 
page 42.
---------------------------------------------------------------------------
    I will focus my remarks on four questions related to China. 
First, what are Beijing's ambitions? Second, how does Beijing 
create conflicts of interest for U.S. companies? Third, how do 
those conflicts threaten U.S. national security? And fourth, 
what can we do about it?
    First, what are Beijing's ambitions? The People's Republic 
of China's (PRC) has a grand strategy to displace U.S.-led 
order. It seeks to catch up and surpass the U.S. 
technologically, to reduce dependence on others while 
increasing their dependence on China economically, and to 
acquire the capability to defeat U.S. military forces in the 
region. It is the leading industrial power globally and the 
first U.S. competitor to surpass 70 percent of the United 
States. Gross Domestic Product (GDP) in a century. It is 
mounting a campaign to compromise U.S. critical infrastructure 
and steal U.S. data and technology, aided in part by conflicts 
of interest among U.S. companies.
    Second, how does Beijing create conflicts of interest? 
Unlike in the Cold War, U.S. companies are deeply involved in 
the PRC economy. One source of these conflicts is PRC threats 
to deny market access unless U.S. companies take steps against 
their interests or national interests, like to transfer 
intellectual property, enter joint ventures, censor their 
speech, or even refrain from taking China to court if they are 
treated unfairly. The PRC even threatens foreign executives 
with exit bans to keep them in China, and their companies with 
costly regulatory action, all without due process.
    But there is another source of conflicts that is new and 
expansive, and that is PRC national security legislation, and I 
will list three broad trends.
    First, the China's Communist Party (CCP) is pushing to 
embed Chinese Communist Party cells into foreign companies, and 
it wants them to play a role in corporate governance, strategic 
decisionmaking, personnel management, corporate charters, and 
even board processes.
    Second, the PRC's National Intelligence Law and 
Counterespionage Law would require U.S. subsidiaries, their 
employees, and their PRC partners to cooperate with PRC 
intelligence services and not to tell anyone. According to the 
Department of Homeland Security (DHS), that could mean 
supporting efforts to install back doors or steal U.S. data.
    Third, these new PRC National Security Laws pry open the 
networks, encryption keys, and data of U.S. companies in the 
PRC and to the PRC. The Cybersecurity Law requires U.S. company 
data to be stored in China and accessible to the security 
services. The Encryption Law requires companies to turn over 
their encryption keys to the Chinese government. The Data 
Security Law says Beijing must approve cross-border data flows 
even for answering subpoenas from committees like this one. The 
State Secrets Law expands the definition of covered data to 
virtually anything the PRC wants it to be.
    How do these conflicts harm U.S. national security? As we 
all know, PRC cyber actors have compromised sensitive U.S. 
sectors, the USG email systems, defense companies, and critical 
infrastructure providers for gas and water and other systems. 
Yet the very companies that serve these sectors also operate in 
China in ways that could put those services here at greater 
risk.
    Take software. The U.S. Government relies on Microsoft 
software, but to access China's market, Microsoft turned over 
source code for that software to the PRC. So did International 
Business Machines Corporation (IBM) and others. And that could 
plausibly create cybersecurity risks, and those risks should be 
accounted for in contracting.
    Take cloud services. Microsoft and Amazon provide cloud 
services to the USG. But to enter China they had to turn over 
operation of their cloud services to a Chinese joint venture 
that is legally required to cooperate with PRC intelligence. 
That means the PRC can learn a good deal about the topology, 
architecture, and the vulnerabilities of these systems, and 
that too needs to be accounted for in contracting.
    Take research. Many tech companies operate research centers 
in China. The PRC can access all that research. If those 
researchers discover what are called zero-day vulnerabilities, 
they have to turn those over to the PRC before they tell anyone 
else. Microsoft believes that the PRC uses this regulatory 
process to stockpile and weaponize its zero-day exploits 
against the United States.
    Finally, take consulting. Companies that contract with the 
USG or U.S. companies should not use that knowledge and 
expertise to help the PRC government, and yet McKinsey 
affiliates helped China structure its industrial policy 
programs to do just that. Other consulting firms in China were 
rated by the PRC--Bain, Capvision, the Mintz Group. All of that 
also needs to be reflected in contracting.
    What do we do about this? That is where I will end. I think 
Time to Choose is very important legislation, but it could be 
broader than consulting, and it could apply to the serious 
risks posed by technology service providers that I have 
discussed today.
    In addition, Congress could prohibit firms that contract 
with the USG from hosting CCP cells, from complying with PRC 
national security laws, or from entering any arrangements with 
PRC entities that could plausibly threaten U.S. national 
security, from sharing source code to entering certain joint 
ventures. All this actually helps our companies do business in 
China by pushing back on unfair PRC demands.
    I will end by noting that profits in China, for some of 
these companies, are falling, even as the risks to the United 
States are growing. China, for example, is only 1.5 percent of 
Microsoft's revenue. IBM is pulling out already.
    The solutions that we are considering today are 
commonsense. They are less costly and disruptive today than 
they would have been years earlier. I think now is the time to 
consider them, and I thank you for your time.
    Chairman Peters. Thank you.
    Our next witness is Clark Packard. Mr. Packard is a 
Research Fellow at the Herbert A. Stiefel Center for Trade 
Policy Studies at the Cato Institute. Prior to joining the Cato 
Institute, Mr. Packard was a Resident Fellow at the R Street 
Institute, focusing on international trade policy. He 
previously worked at the National Taxpayers Union, doing the 
same, and prior to those roles he served as an attorney and 
policy advisor to two South Carolina Governors. Earlier in his 
career he spent three years in private legal practice.
    Mr. Packard is a contributor to Foreign Policy and has 
written for National Review, Lawfare, LawWorks Business 
Insider, The National Interest, and other publications.
    Mr. Packard, welcome. You are recognized for your opening 
comments.

  TESTIMONY OF CLARK PACKARD,\1\ RESEARCH FELLOW, HERBERT A. 
    STIEFEL CENTER FOR TRADE POLICY STUDIES, CATO INSTITUTE

    Mr. Packard. Thank you. Chair Peters, Ranking Member Paul, 
Members of the Committee, thank you for the opportunity to 
testify today. My name is Clark Packard. I am a Research Fellow 
at the Cato Institute.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Packard appears in the Appendix 
on page 56.
---------------------------------------------------------------------------
    My work at Cato focuses on U.S. international trade and 
investment policy with a specific focus on the U.S.-China 
economic relationship. For that reason, I am especially 
grateful for the opportunity to testify today.
    Let me state unequivocally at the outset that China does 
engage in abusive, and at times coercive, international trade 
and investment practices. Many of those activities are done in 
support of widespread industrial policy.
    My testimony will focus on the potential, though, for abuse 
of national security-based protectionism and provide 
suggestions for outcompeting China in the 21st Century.
    Free traders from Adam Smith to Milton Friedman have 
understood the need for limited exceptions for national 
security. An American firm providing consulting services to the 
Department of Defense, for example, should not also be advising 
the Chinese government or the Chinese Communist Party. At the 
very least, American firms should be required to disclose 
potential conflicts of interest when bidding on U.S. Government 
contracts for close scrutiny by American procurement officials.
    To the extent that I have suggestions about legislation 
with such aims, it would be to ensure stringent guardrails are 
established to avoid stifling legitimate business practices. 
Too often national security is invoked as a pretext for simple 
protectionism.
    The Trump Administration's national security tariffs on 
steel and aluminum imports, imposed despite President Trump's 
defense secretary at the time, nothing the U.S. military 
required only three percent of domestic steel and aluminum 
production, is a case in point. Indeed, the tariffs still apply 
to steel and aluminum from North Atlantic Treaty Organization 
(NATO) members and other long-standing allies like Japan and 
South Korea. Those tariffs are extremely costly to the U.S. 
economy, harming industries that use steel and aluminum as 
inputs, U.S. consumers, and Americans targeted by foreign 
retaliation such as farmers and ranchers.
    In addition, the tariffs undermine confidence in the United 
States as a reliable trading partner. Imposed under the guise 
of national security, the tariffs inflicted considerable 
economic damage--the expected result of protectionist 
measures--while doing nothing to bolster our national defense.
    Likewise, national security-based arguments are being 
invoked as the rationale to block Nippon Steel's acquisition of 
U.S. Steel, but there is no security risk at all. Japan is the 
largest provider of foreign direct investment (FDI) in the 
United States, and U.S. Steel has no security contracts. For 
more than 60 years, Japan has been one of the United States' 
strongest allies and currently hosts more than 55,000 U.S. 
military personnel. It is incongruent that the United States 
would deploy nuclear weapons if necessary to defend Japan from 
attack, yet simultaneously claim Japanese investment is a 
national security risk to the United States. Today, Japan 
receives 90 percent of its defense-related imports from the 
United States. Simply put, Nippon would not be paying a premium 
to purchase U.S. Steel only to shutter it. Indeed, Nippon would 
most likely provide the investment necessary to strengthen the 
firm.
    Turning to Beijing, it is worth noting that the Chinese 
economy is struggling and faces significant short-and longer-
term headwinds that will surely constrain future growth. We 
should not overestimate its strength. Right-sizing the 
challenge is imperative to sound policy. That said, Beijing 
does pose very serious challenges to the United States, both 
economically and strategically.
    The United States, however, should not respond to those 
challenges by turning inward and hiding behind protectionist 
walls. Instead, policymakers should work to strengthen trade 
and investment ties with close allies, particularly those in 
the Asia-Pacific region. While flawed, the Trans-Pacific 
Partnership (TPP) would have created an American-led trade bloc 
to offset China's gravitational pull in the region economically 
and established higher-quality trade and investment rules and 
norms.
    In the absence of U.S. re-engagement in TPP, the United 
States should build on its successful bilateral agreement with 
South Korea, known as Korea Free Trade Agreement (KOR-US). 
Given the thawing in relations between Seoul and Tokyo, adding 
Japan and other allied countries to KOR-US presents a next-best 
option.
    Likewise, policymakers should adopt the House's Select 
Committee on the Chinese Communist Party's wise recommendation 
to expedite Committee on Foreign Investment in the United 
States (CFIUS) review of FDI from trusted allies like Japan and 
South Korea.
    The U.S.-China relationship is increasingly complex and is 
the top geopolitical issue facing the world. How these two 
countries will manage this relationship will greatly affect 
global peace, prosperity, and stability in the 21st Century. 
The guiding principle of our economic policy, vis-a-vis China, 
should focus on affirming market incentives that boost the 
performance and competitiveness of American firms and those of 
our allies.
    I look forward to answering any questions the Committee may 
have. Thank you.
    Chairman Peters. Our last witness is Bryan Riley. Mr. Riley 
is Director of the National Taxpayers Union Free Trade 
Initiative. His background includes service in the Reagan 
Administration and years of research on the impact that trade 
has had on people in the United States. He has led grassroots 
campaigns in support of initiatives like the North American 
Free Trade Agreement, and has been quoted in publications, 
including The Washington Post, The New York Times, and The Wall 
Street Journal. He is an in-demand speaker who travels the 
country explaining the benefits of international trade and the 
investment that it brings to Americans.
    Mr. Riley, welcome. You are recognized for your opening 
comments.

 TESTIMONY OF BRYAN RILEY,\1\ DIRECTOR, FREE TRADE INITIATIVE, 
                    NATIONAL TAXPAYERS UNION

    Mr. Riley. Thank you, Chair Peters. Thank you, Ranking 
Member Paul.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Riley appears in the Appendix on 
page 92.
---------------------------------------------------------------------------
    Founded in 1969, National Taxpayers Union (NTU) is the 
oldest taxpayer group in the United States. We serve as the 
``Voice of America's Taxpayers'' and strive to represent their 
best interests before governments at all levels. NTU 
appreciates your Committee's important work in protecting our 
national security and the opportunity to be here today.
    With respect to Federal contracting specifically, NTU 
encourages Congress to make the best use of taxpayer dollars. 
Chair Peters, I duly noted your mention of the importance of 
using taxpayer funds responsibly in your introductory remarks.
    With respect to Buy American laws, former President and 
Supreme Allied Commander Dwight Eisenhower observed it is 
unfair to the taxpayer for the government to pay a premium on 
its purchases. Senator Paul has already pointed out that in 
2017, these Buy American restrictions cost taxpayers an 
estimated $94 billion, an amount that is certainly higher 
today.
    Improving these Buy American laws would help control 
spending. This is especially important in a year in which the 
Federal Government is projected to spend more on interest 
payments than on the military for the first time in U.S. 
history. Removing barriers to goods and services provided by 
U.S. allies would also strengthen our national security.
    We submit the following considerations with respect to the 
proposed Time to Choose Act and similar proposals. As a 
disclaimer, these comments are based on the text available on 
the publicly available version of the text. There have been 
some modifications which may mitigate some of these concerns, 
but I believe they still broadly apply, and are even more 
broadly applicable to similar efforts.
    This legislation, in particular, does not appear to require 
a demonstration of a specific national security threat 
resulting from covered transactions. It is simply, you provide 
a service to the Chinese government, you get banned here.
    Such legislation could represent a slippery slope. For 
example, China is the largest export market for U.S. 
agricultural producers, with products often purchased by State-
owned enterprises in China. This does not necessarily mean that 
it would be wise for the government to ban the purchase of farm 
products by the Department of Agriculture (USDA) or school 
lunch programs.
    In addition, in the future it is possible that a company 
that contracts with the Federal Government could conceivably be 
penalized for doing business in a country with different 
environmental, labor, or social practices that go far beyond 
the scope of this particular law.
    These are not just hypothetical concerns. As Clark Packard 
has already pointed out, we already restrict purchases of steel 
and aluminum from friendly countries, including Israel, the 
United Kingdom (UK), based on dubious national security 
grounds. I welcome thoughts from anyone who can explain to me 
how these national security tariffs and quotas strengthen our 
security.
    Moreover, when some politicians and policymakers are 
seeking to reduce the U.S.-China trade deficit, it should be 
noted that any restrictions on U.S. firms being able to provide 
goods and services to China or other countries would tend to 
increase that deficit, exacerbating calls for tariffs and other 
restrictions.
    To be clear, National Taxpayers Union supports efforts to 
protect our national security interests, but we urge you to 
keep these risks in mind.
    My final point, with respect to efforts from many to 
decouple the United States and China economies, keep in mind 
that perhaps the strongest link between our economy and China's 
is not from the private sector but is represented by the $776.5 
billion that the Federal Government owes China. Reducing that 
debt would be a good starting point in distancing our economy 
from China's, as would adopting tax and regulatory measures 
that would make us the best place in the world to do business.
    Thank you again for your time and for your work and for the 
opportunity to testify today, and I would be glad to answer any 
questions. Thank you.
    Chairman Peters. Last Congress my bill, the Preventing 
Organizational Conflicts of Interest in Federal Acquisition 
Act, was signed into law. It requires modernizing the Federal 
Acquisition Regulation to make it easier for agency contracting 
officers to identify and to address conflicts of interest.
    Unfortunately, the updated guidance that was due in June of 
this year has yet to be issued, and yesterday I sent a letter 
to the Federal Acquisition Regulatory Council urging them to 
swiftly implement my law to ensure that taxpayer dollars are 
used in the best interests of the American people.
    Dean Tillipman, until the FAR issues updated guidance, 
based on this law that has passed, would you explain to the 
Committee how Federal agencies are currently addressing 
potential conflicts of interest involving their contractors?
    Ms. Tillipman. Thank you, Senator. Unevenly is the best way 
to describe it. Without a standardized FAR clause or 
solicitation provision, each agency is basically left on their 
own to come up with their own approach to organizational 
conflicts of interest, which has led to severe inconsistencies 
among agency approaches.
    Moreover, given the failure of the Federal Acquisition 
Regulatory Council to update the FAR in several decades, we 
have outdated definitions and guidance that have not 
appropriately captured the many risks that continue to grow and 
create more conflicts of interest, ranging from the security 
concerns we are talking about here, to commercial conflicts of 
interest, to even the risks associated with emerging 
technology.
    So by not providing those updated definitions or 
illustrated guides, we are lacking that additional information 
to give contracting officers not only the awareness to approach 
this proactively, but the comfort to look to guidance to 
support their decisionmaking.
    Chairman Peters. If you could give us perhaps a little more 
detailed answer as to what tools specifically do you believe 
are needed for agency contracting officers to more effectively 
identify, in the first place, those conflicts of interest, and 
why.
    Ms. Tillipman. Sure. Currently, the FAR provides very 
minimal guidance when it comes to how contracting officials 
should approach OCIs. Most of the guidance that they turn to 
comes from decisions that come from Government Accountability 
Office (GAO) and from the Court of Federal Claims. It is not 
necessarily the FAR itself. The FAR could truly benefit from 
providing greater procedural directives and guidance for the 
contracting officials.
    The next is that the illustrative definitions and 
illustrated guidance in the FAR does not reflect modern 
procurement practices, so it does not have additional guidance 
to help contracting officials even identify potential OCIs, or 
the growing risks that may be out there.
    At a baseline, there needs to be a standard FAR clause or 
provision to guide agencies across the Federal Government. The 
way that they are currently approaching it, with agencies using 
their own clauses, again, has led to severe inconsistencies.
    I think this also needs to be buttressed by robust training 
requirements. Too many contracting officials, frankly, do not 
understand this issue, are not aware of this issue, and as I 
noted before, it has led to an issue where some contracting 
officials may be nervous about the threat, for example, of a 
bid protest, and they reflexively eliminate a contractor from 
competition. Whereas, other contracting officials may not even 
be aware that they are looking at an OCI risk and may do 
nothing at all.
    Again, having greater guidance, having greater definitions, 
and greater directives, I think will really do a lot to further 
this area of the law.
    Chairman Peters. In addition to all those changes and 
clauses, what specifically should be put into Federal 
contracts, do you believe, to ensure that the issues that you 
raise are addressed?
    Ms. Tillipman. Sure. I think, at a baseline, having a 
standard OCI provision or clause is going to be key. Currently 
agencies rely on their own guidance, so again that has led to 
different approaches, depending on which agency a contractor is 
working with at that time. We appreciate uniformity in the 
Federal procurement space, and this clearly lacks it.
    The other thing, when we are talking about clauses, you 
really do not need to reinvent the wheel. A lot of agencies 
have fairly robust contracting clauses that they already use. I 
think it should be fairly broad. There is language that would 
basically require contractors to identify any facts that any 
reasonably prudent person may cause them to question a 
contractor's impartiality or potential bias. Something very 
broad I think is important. Something that gets flowed down 
throughout the supply chain I think would be critical.
    Again, we have that there. I think the other key component 
is to make sure that it is an ongoing assessment. The concern 
is that if you have contractors basically only disclosing, 
potentially, OCI risks at the outset, it does not necessarily 
capture any OCIs that may occur during performance of a 
contract. The U.S. procurement system is not great at ongoing 
oversight during contract performance when it comes to these 
issues, but it could truly benefit from having at least that 
component of the clause, because it places the onus or the 
burden on the contractor to make those affirmative disclosures.
    Chairman Peters. In your testimony you mentioned the 
concept of impaired objectivity, a type of conflict of 
interest. If you could give the Committee some examples of what 
you mean by this type of conflict. Second, why are Federal 
contracts with consulting firms or technology service providers 
particularly susceptible to this conflict?
    Ms. Tillipman. So impaired objectivity OCIs can arise in a 
variety of contexts. Commonly, within the Federal space, it 
would be a scenario where, for example, a contractor would be 
required to review its own performance or the performance of an 
affiliate on a separate contract. That happens fairly 
frequently where it might have to evaluate its own performance. 
Clearly, there could be bias there.
    In the context of what we are discussing here, and even in 
the context of what we were discussing in 2022, before the 
House Oversight Committee, we are dealing with competing 
interests. There is a competing commercial interest or a 
competing foreign interest, or frankly, even with emerging 
technologies, there can be competing interest and bias there, 
as well. Because of that there is a concern that the advice 
that is given to the government might be biased in some way 
because of that external competing interest.
    How these contracts, in particular, pose a greater risk, 
well, now we are relying on contractors to provide advice and 
something that requires the exercise of judgment. Here there is 
much greater risk rather than, buying a pen or buying a boat, 
that somebody could give advice that is tainted because of that 
competing interest or because they are put in the position to 
evaluate their own performance.
    Chairman Peters. Thank you. Ranking Member Paul, you are 
recognized for your questions.
    Senator Paul. Over the years I have been an outspoken 
critic of socialism, in general, Chinese socialism, Mao, the 
history of trying to get to absolute socialism in China. I 
wrote a book, The Case Against Socialism. I wrote a book 
recently called Deception: The Great Coronavirus Disease 2019 
(COVID-19) Coverup, talking about how the Chinese government 
encouraged this gain-of-function research, which we also 
funded, but also that there was a coverup in trying to discover 
the cause of the origin of the virus.
    That being said, I am worried about legislation that begins 
to ban trade with China. If you sell, we are going to only ban 
consultants that do consulting for the Chinese communist 
government. We do not want them doing business with our 
government then. We are not going to prevent them from doing 
business, but they can still do it, but they lose government.
    The problem with that is the government is such a big 
consumer in our country of it, they probably will have to give 
up one or the other. The other thing is, let's say they decided 
to keep doing work in China. It damages their ability in the 
private marketplace because you have now given them a scarlet 
letter. You have decided that, like the McCarthyites of old, 
you are going to brand them as communist friendly. This could 
be consulting, but, we have mentioned some big companies. 
Microsoft has done business. Maybe a little less than they used 
to, but they have done business in China.
    So has Apple. They agree to things that we might disagree 
with. We might say they should not accept these things where 
they give the Chinese access to their data, which is primarily 
to spy on Chinese citizens because people buying Apple phones 
over there realize that all those data and all those services 
are run by the Chinese. You can disagree with it, but it really 
is not any of your business. You can say, well, we are going to 
ban Apple then from doing work with the U.S. Government. Half 
the people on this dais have Apple phones. Are we going to 
prevent anybody in government from having Apple phones because 
Apple has made this compromise to do business in China?
    I think that Mr. Riley mentioned the slippery slope. The 
slippery slope goes on and on and on, and where do you end.
    There also is a real question whether or not, Apple, that 
sells a lot of cellphones, or McKinsey or any of these other 
American companies that work in China, are they being 
influenced by Chinese communism or worried they are going to 
come over here and then be a conduit to steal our stuff? You 
know, McCarthy would be proud. He would love to be part of this 
conversation to ban stuff, go after the communists in our 
government.
    But it is also possible that the complete opposite is true, 
that they actually influence the Chinese more toward American 
ways, that the more we do business in China, the more they see 
and deal with Americans on a one-to-one basis, the better it is 
to try to influence the communist culture.
    Look, we tried this in Cuba. Let's get those commies. Let's 
quit trading with communist China. We will defeat the Castros. 
Well, guess what? It did not work. It objectively did not work. 
Over a 40-, 50-year period, communism did not necessarily 
thrive but continued under the iron fist of the Castros. Trade 
embargos do not work. Sanctions, frankly, do not work.
    And you say, well, the Chinese do all this stuff. What are 
they doing? Are they doing it de novo out of nowhere? No. And 
we do not like a lot of it, and some of it is theft. Some of it 
is downright illegal, and we ought to do stuff about things 
that are illegal. If any contractor, is coordinating something 
that is illegal they ought to be banned from doing business, 
without question, illegal.
    But the thing is that we put all these sanctions on China. 
Some of the things China does are not de novo. They are not out 
of nothing. They do it in response to the things we do to them. 
This is the way trade wars work. It is not really we have been 
in a trade war, although there is some of that now, but it has 
been the sanctions, sanctions after sanctions. Everybody that 
comes in from the State Department, I say, well, how are those 
sanctions working? Can you name me one Chinese policy where 
they have changed their policy because of a sanction? No. They 
just get annoyed with us, and they go further toward Russia and 
further toward Korea.
    That is what is going to happen from all this. Every day 
there is a new bill banning business with China, and 10 percent 
of our trade is with them. You guys want to end it. People want 
to end it tomorrow; you will have no antibiotics. You will not 
have any pharmaceuticals. Trade is good. I said in my opening, 
the average taxpayer still is saving $1,000 or $1,500 from 
trade with China.
    As you begin to ban things, as you ban consultants there is 
collateral damage to these companies, because you cannot be a 
company, and most of America being banned from U.S. Government 
business, because U.S. Government is a big purchaser. But also 
it kills your private business too. Who wants to do business 
with, communist-loving X company that does business with 
communists?
    So we have to take a breath and step back from all of this.
    Mr. Riley, do you think it is a good idea to end trade with 
China? Are there not benefits that Americans still have from 
trade with China?
    Mr. Riley. I think you could go from extreme as anything 
goes, with no restraints, to we are stopping everything. A lot 
of the discussion seems to be pointing toward that we are just 
going to stop everything and somehow that is going to fix 
everything.
    I think the most recent, and maybe clearest example of how 
these policies do not work in the way they are allegedly 
intended to is our Section 301 tariffs on China, which have 
cost the average household about $1,700 so far, and counting. 
President Biden's U.S. trade representative studied the effects 
of these over four years, and came out with a long report, 
detailing all the ways in which China's policies, not only have 
they not improved, they have gotten worse.
    What we do, we are adding even more tariffs on top of that. 
If the goal of the tariffs is to change China, we have plenty 
of evidence that they do not work in that regard, and I think 
we need to do something smarter. Probably expanding trade with 
our allies would be a really good step in the right direction.
    Senator Paul. Well see, it gets back to how do you convince 
people to do something you want. If you scold them or tell them 
not to do things, they often will do the opposite. For example, 
there was a discussion recently in China. We would like them to 
quit selling dual-use parts to Russia, that Russia is using in 
the war with Ukraine. So you think scolding them works? No, it 
does not work. They do the opposite.
    There are things we could trade. What we have traded is 
tariffs get higher, their tariffs get higher. We could offer to 
lower some of the tariffs on their goods in exchange for better 
behavior. That would be a transaction. That would be we give 
you something, you give us something. But instead, everything 
is about ending trade, stopping business, more sanctions. You 
are going to keep getting the same response. You want better 
relations with China or you just want to end it all. You can 
end it all. It will be a disaster for everybody. Or you can say 
how does it work? Do we do more sanctions? Do we yell at them? 
Do we travel to their country and scold them, or do we say, 
very quietly when we are in their country, hey, what about 
where we might reduce some of our trade barriers, some of our 
sanctions, if you will do X. You would get a lot more with 
honey than you will with vinegar.
    This is a big issue, and bigger than even this particular 
panel. But we have to have these discussions. It goes on and 
on, because every day there is a new bill that bans trade and 
bans companies from China. Many of these employ Americans, in 
my State and other States, and we need to get away from this 
protectionism. Remember what Bastiat said, ``when goods don't 
cross borders, soldiers will''. Thank you.
    Chairman Peters. Senator Hawley, you are recognized for 
your questions.

              OPENING STATEMENT OF SENATOR HAWLEY

    Senator Hawley. Thank you very much, Mr. Chair. Thank you 
for calling this hearing. Thanks to each of the witnesses for 
being here today on this important topic.
    Dr. Doshi, if I could just start with you. Since 2008, the 
McKinsey Company has done nearly a billion dollars in 
consulting work for the United States Government, a billion 
dollars, and its top client has been the Defense Department. In 
fact, it has contracts with the Defense Department, with the 
U.S. Department of the Navy, with the Homeland Security 
Department, with U.S. Customs and Border Patrol (CPB). I think 
in 2021 alone, McKinsey had Defense Department or other 
security agency contracts worth $850 million. It is absolutely 
extraordinary.
    Yet, at the same time, they are also doing business with 
the Chinese government. They are simultaneously taking a 
billion dollars from the United States and its security 
agencies and also getting money from not just China, in 
general, from the Chinese government and Chinese-controlled 
entities.
    Explain to us why that is a problem. I think any normal 
American who is sitting out there and hears that would be 
absolutely outraged by it, and rightly so. Why are they getting 
taxpayer money advising our military and simultaneously 
advising the Chinese military? But just explain to us, why is 
this a national security concern?
    Dr. Doshi. Thank you, Senator Hawley. I agree this is a 
national security concern. I would go further. The nature of 
the work that McKinsey did reportedly involved helping China 
consider how to outcompete U.S. technology firms, how to 
strengthen Made in China 2025. The goal was to help them 
advance their goals for technological dominance. That is 
directly at odds with the interests not just of the U.S. 
Government but also of the corporate clients they had in the 
United States that they were also advising.
    So there is a clear conflict of interest there, and it is 
also the kind of conflict of interest that even if McKinsey had 
exercised better judgment about the projects it took on, other 
firms doing business in China are getting raided by the Chinese 
government. Oftentimes that means that their data is no longer 
secure. If they have U.S. client data on those servers, well, 
that is now Chinese data.
    There are a lot of concerns, I think, that we can raise 
here. One is the nature of the work. Another is being a vector 
for the transfer of information and data. There is a third 
concern too, where is that some of these firms have mutually 
irreconcilable obligations to the United States and to China. 
China is basically saying if you want to comply with the 
subpoena from this Committee, you cannot, because we have a 
data security law saying you cannot. That is three different 
kinds of conflicts beyond the one, Senator, that you just 
identified.
    Senator Hawley. That is terrific. As we think about the 
different things that McKinsey has advised China on, they are, 
for example, a major proponent and promote of China's Belt and 
Road Initiative. So here they are, again, taking a billion 
dollars in contracts from the United States military, 
simultaneously advising China on their Belt and Road 
Initiative, which is meant to undermine our military and also 
to undermine American companies all across the world. McKinsey 
has advised 9 of the top 15 Chinese contractors for the Belt 
and Road Initiative, as of 2018. It is shameless when you think 
about it. It is absolutely shameless.
    Interestingly, I recently obtained a document related to a 
contract, just to give one example involving semiconductors. 
Semiconductors, McKinsey entered into a contract with the U.S. 
Government, our Defense Advance Research Project Agency 
(DARPA), in 2021, related to semiconductors. The DOD asked 
McKinsey if there was any conflict that they might have with 
the Chinese government. According to these documents recently 
released to me pursuant to a Freedom of Information Act (FOIA) 
request,\1\ McKinsey submitted documentation that said that 
there were no conflicts, no conflicts at all. In fact, as we 
now know, they were simultaneously advising the Chinese 
government on a very similar project.
---------------------------------------------------------------------------
    \1\ The USAF FOIA request appears in the Appendix on page 97.
---------------------------------------------------------------------------
    To me, it seems like such common sense. The Chair and I 
wrote to the GAO asking for an analysis of the conflict of 
interest law and analysis of the procurement and contract 
awarding process to see if there were any strictures, 
limitations in current law that would prevent companies like 
McKinsey from simultaneously making billions from the United 
States and making billions from China.
    That report has just come back, just a couple of days ago. 
What it shows is there are no such restrictions in United 
States law currently, which is why our legislation, the Time to 
Choose Act, which the Chair and I cosponsor together, 
introduced, and passed this Committee almost unanimously--I 
think only one no vote--is so important, because it would 
prevent what we see on this poster behind me.
    Ms. Tillipman, do you want to add to this, why this sort of 
commonsense set of restrictions, telling consulting firms you 
cannot consult for the U.S. Government and rake in billions 
from American taxpayers and consult for our chief adversary at 
the same time, why this is important and why it is a matter of 
national security?
    Ms. Tillipman. Thank you, Senator. I read that GAO report, 
and I join you in your concern about the lack of laws and 
guidance right now currently guiding contracting officials on 
this issue.
    One thing I will note is that the FAR provisions related to 
conflicts of interest are quite broad and could capture some of 
this, but most government officials will not feel comfortable 
taking this sort of action without greater guidance and 
directives explicitly giving them something that they can look 
to in taking these sorts of actions.
    I share similar concerns as you. I get nervous when things 
are too restrictive and there are too many absolutes. But you 
raise very good points about why contracting officials need 
better laws and need to be empowered to make these types of 
decisions.
    Senator Hawley. Yes, very good. Mr. Riley, let me just ask 
you, because your exchange with Senator Paul, I thought, was 
illuminating. You said that there is a continuum between 
banning everything, on the one end, and then everything goes on 
the other end. I take it from your testimony today you are on 
the ``anything goes'' side of the spectrum.
    Mr. Riley. No.
    Senator Hawley. So you support this bill then?
    Mr. Riley. As I mentioned in my comments earlier, we 
support the goals, but we are concerned that it leads to a 
slippery slope potentially. We 100 percent support legislation 
that would advance our national security and protect our 
national security.
    I will say based on the conversation I have heard this 
morning, if these companies are giving China advice, either 
they are giving pretty bad advice or China is not taking it 
very well, because their economy is on the downhill slide 
instead of going up.
    Senator Hawley. Wait a minute. They are on the march in the 
Pacific. McKinsey advised them on building out islands in the 
South China Sea, at the same time it was getting defense 
contracts.
    Is your position that you are opposed to--you want 
companies to be able to get taxpayer money from the United 
States and simultaneously get money from the Chinese 
government? That's fine?
    Mr. Riley. My concern, Senator, is how do you differentiate 
between that, how you draw the line between that, and a soybean 
farmer which depends on China for its exports and 
simultaneously----
    Senator Hawley. The soybean farmer is not advising the 
Chinese military on how to take over the United States.
    I come from a State where our No. 1 agricultural product is 
soybeans.
    Mr. Riley. Right.
    Senator Hawley. We are a State of soybean farmers. I can 
tell you, I think they would take great offense to you 
comparing them to a consulting firm that is taking a billion 
dollars in money from the United States military while 
simultaneously advising the Chinese military on how to harm the 
United States. Are you saying that soybean farmers harm the 
security interests of the United States? I think that is a 
ridiculous position.
    Mr. Riley. As I said with respect to 232 national security 
legislation, it starts out here. The next thing you know we are 
restricting trade with the United Kingdom, with Israel, with 
our allies.
    Senator Hawley. That is not this legislation.
    Mr. Riley. How do you know that is not going to happen 
again? That is all I am asking.
    Senator Hawley. Because we wrote the bill.
    Mr. Riley. We need to have guardrails to make sure that our 
soybean farmers and other producers are not harmed like we have 
been in recent years by our trade policy.
    Senator Hawley. Yes, I think that is the most, frankly, 
absurd instance of what-aboutism.
    Mr. Riley. It is history.
    Senator Hawley. Just listening to you say it refutes 
itself.
    Mr. Riley. I am not talking about hypotheticals. I am 
talking about what has actually happened, and I do not want to 
see that repeat.
    Senator Hawley. You are talking about something that is not 
in this bill, and you are equating soybean farmers with a 
consulting firm that is advising the Chinese military. It is 
absolutely absurd.
    Mr. Riley. I am equating national security.
    Senator Hawley. Here you are opposing--in the name of--you 
represent taxpayers, you are here testifying in favor, 
apparently, of allowing a company to take tax money--this is 
tax money--this is a billion dollars in taxpayer money McKinsey 
is raking in while also going to our chief adversary, selling 
our secrets, essentially, and making money from them. What 
could be worse for the American taxpayer? I cannot think of 
anything, which is why this bill passed overwhelmingly in this 
Committee.
    I thank you all for your testimony today. Thank you, 
Senator Peters, again for your hard work on this and support. I 
appreciate it. Thanks for holding this hearing.
    Chairman Peters. I appreciate your leadership on the issue, 
as well, Senator.
    Senator Hassan, you are recognized for your questions.

              OPENING STATEMENT OF SENATOR HASSAN

    Senator Hassan. Thank you, Mr. Chair, and I want to thank 
you and Ranking Member Paul for holding this hearing. I want to 
thank the witnesses for providing your testimony and expertise 
on this topic.
    Dr. Doshi, I understand you are here stepping away from 
parental leave, that you have a brand new baby, so we are 
appreciative of you taking the time, and congratulations on 
your expanding family. That is wonderful.
    I am going to ask questions, some of which have been 
touched on earlier, but I just wanted to kind of get into a 
dialog with all of you on some of these issues. I am going to 
start with you, Dean Tillipman, following up on a line of 
questions that I understand Senator Peters asked you about.
    McKinsey & Company, a well-known consulting firm, advised 
Purdue Pharma on how to influence the Food and Drug 
Administration's (FDA) process for evaluating drug safety, 
while at the same time advising the Food and Drug 
Administration on how to evaluate the safety of the powerful 
opioids produced by Purdue Pharma.
    In 2022, the President signed into law the bipartisan 
Preventing Organizational Conflicts of Interest in Federal 
Acquisitions Act, which Senators Peters, Grassley, Ernst, and I 
introduced, to strengthen Federal protection against conflicts 
of interest in response to McKinsey's really egregious 
behavior.
    We are pushing the Federal entity responsible for 
implementing this bill to take swift action to fully implement 
it as soon as possible. Once it is fully implemented, how will 
this law help prevent private companies from exploiting their 
relationships with Federal agencies to benefit their other 
clients, as we saw McKinsey do with the Food and Drug 
Administration and Purdue Pharma?
    Ms. Tillipman. Thank you, Senator. At a baseline it is 
going to help inform them that this is, in fact, a conflict of 
interest. I think prior to this hearing, there was confusion, 
even among the procurement community, that a commercial 
conflict could create the type of organizational conflict of 
interest that we are concerned about. The hearing alone brought 
attention to the fact that the law is broad but needs to be 
broader, and there needs to be additional guidance and 
directives for the contracting community to make these 
determinations.
    But more importantly, it needs to put contractors on notice 
that these types of conflicts are not acceptable. They need to 
put compliance programs in place to better disclose these types 
of conflicts of interest so that procurement officials can make 
educated, informed business decisions about this, and how best 
to mitigate the risks or, frankly, avoid contracting with those 
entities in the first place.
    Senator Hassan. From my perspective as somebody whose State 
has been extraordinarily hard hit early on by the opioid 
epidemic, the notion that any entity would serve both the FDA 
and Purdue Pharma on this issue just is extraordinary. I expect 
when somebody contracts with the Federal Government that they 
will put the people of the United States interests first. That 
is very hard to do when you are also talking to the very 
manufacturer who, through lies and greed and malevolence, have 
harmed so many people. I thank you for the feedback and will 
continue to work on it.
    Dr. Doshi, following up on this same question, because of 
congressional oversight that we did, the Food and Drug 
Administration no longer contracts with McKinsey because of 
McKinsey's work for Purdue Pharma. However, several other 
Federal agencies continue to work with McKinsey in other 
capacities. For example, the Department of Defense recently 
awarded two exclusive contracts to McKinsey, including to 
evaluate the Army's ammunition supply chain and provide advice 
to the Space Force.
    We also know that McKinsey contracts with the Chinese 
government, again following up on Senator Hawley's line here, 
and advised the Chinese on how to develop an intimidating 
military presence in the South China Sea.
    Does it concern you that the United States continues to 
work with McKinsey despite this track record? Do you think it 
is in the best national security interests of the United States 
to continue contracting with McKinsey?
    Dr. Doshi. Thank you, Senator. I think that it is important 
for this legislation to be widened to address exactly the 
question that you have raised. One is that it is not just a 
question of whether they contract with the Department of 
Defense. It is a number of Federal agencies that are going to 
contract with these consulting firms. All of that should be 
considered.
    The second thing that I am worried about is not just our 
consulting firms that are doing contracting with the Federal 
Government and the Chinese government. It is our technology 
service providers. Because the U.S. Government relies on these 
technology service providers for critical services. The 
Department of Defense, our defense industrial base, our water 
sector, our power sector, transportation, telecommunications. 
If we have a conflict of interest where those companies go to 
China, share their source code, or enter into a joint venture, 
which can compromise that service, it affects all of us.
    I do have a concern, Senator, to address your question 
directly, with that ongoing work, and I think that concern 
could apply to other companies, as well.
    Senator Hassan. Thank you. Another question for you, Dr. 
Doshi. As part of last year's National Defense Authorization 
Act (NDAA), some Department of Defense contractors will now be 
required to certify that they do not have similar contracts 
with China or other foreign entities. Once the Department of 
Defense fully implements this law it will provide additional 
safeguards against conflicts of interest that compromise our 
national security.
    How could Congress expand this requirement to agencies 
other than the Department of Defense? Are you concerned about 
workarounds or waivers that can undermine the intent of this 
law?
    Dr. Doshi. Thank you, Senator. I am concerned about the 
possibility that if the legislation were written in such a way, 
or if contracting guidelines were scoped in such a way that 
companies could find loopholes, then that would be disastrous 
for us.
    Again, when it comes to technology service providers, the 
stakes are so high that we want these companies to think, from 
a risk perspective, that the risk of partnering with the PRC or 
working with the PRC or giving into their demands is not going 
to be worth it given the significant revenue hit that they will 
take from being cutoff not just from the Department of Defense 
but a number of U.S. Government agencies. I want that balance 
to be in a more conservative direction.
    Senator Hassan. Thank you for that.
    Last question, and it is to Dean Tillipman. Earlier this 
year, in violation of U.S. law, consulting companies McKinsey, 
Boston Consulting Group, M. Klein & Company, and Teneo, all of 
whom are based in the United States, initially refused to 
comply with subpoenas issued by the Senate Permanent 
Subcommittee on Investigations (PSI). Those subpoenas sought 
information on the relationship between these companies and the 
Saudi Arabian government's attempts to influence U.S. policy.
    While refusing to comply with our subpoenas, these 
companies chose to follow a ruling from a Saudi court rather 
than follow U.S. law. It is outrageous that these companies--
and let's be clear, they are American companies. They benefit 
from being able to be based in the United States, with all the 
privileges and opportunities that that brings to citizens and 
to businesses--it is outrageous that they are putting profiting 
off of their deals with the Saudis over protecting the national 
security interests of the United States.
    Simply put, if you want to contract with the U.S. 
Government, the world's largest buyer of goods and services, 
then at a bare minimum you need to comply with U.S. law, which 
includes complying with subpoenas from Congress.
    How can Congress or the Federal Acquisition Regulation 
Council make clear that U.S. law supersedes the law of a 
foreign country in the event of a conflict between the United 
States and the law of the foreign country, especially in cases 
involving Federal contractors that work with our adversaries?
    Ms. Tillipman. I think you have put your finger, Senator, 
on the complexities of multinational companies in doing 
business with many countries at the same time. I do not have a 
significant amount of faith that the FAR Council, even with its 
talented members could come to an exact solution for that 
precise problem.
    But I think you have put your finger also on the fact that 
this is what occurs when you have contractors encountering 
these competing interests. There is a reason that you named the 
bill the Time to Choose, right?
    Senator Hassan. Right.
    Ms. Tillipman. I think this is one of the inherent problems 
with empowering this type of activity, and I think it is why, 
as the FAR Council continues to hopefully, and more speedily, 
consider these issues, it will come down with some more 
guidance about what a contracting official should be 
considering.
    I am not sure I would empower a contracting official to 
speak directly to the issue that you raise. I do agree with you 
that if companies want to benefit from doing business with the 
United States or benefit from doing business at all in the 
United States, that this needs to become a priority.
    Senator Hassan. Thank you very much. I really appreciate 
all of you. Thank you, Mr. Chair.
    Chairman Peters. Thank you, Senator Hassan.
    Dr. Doshi, in your testimony you specified concerns with a 
U.S. Federal contractor providing similar services to an entity 
with ties to the Chinese Communist Party. My question for you 
is, do these concerns also apply where a U.S. Federal 
contractor provides services to another foreign government 
entity besides China?
    Dr. Doshi. Thank you, Senator. I think they could apply to 
foreign governments that have an adversarial relationship with 
the United States. Let me take a step back, Senator. A lot of 
companies are going to be involved in conflicts of interest by 
the fact that they are involved in multiple jurisdictions.
    What makes China different from other countries is that 
this is a country that is planning for conflict with the United 
States, that is taking American intellectual property, that is 
working to compromise our critical infrastructure. So here the 
stakes of those conflicts are so much higher than they are in 
other cases, including Saudi Arabia or the United Arab Emirates 
(UAE). This is a fundamentally different magnitude of harm.
    Senator, I agree that this could apply to other 
governments. It is just that the Chinese government is the one 
that I am most concerned about.
    Chairman Peters. I want to build on that. You wrote in your 
testimony about what you call the ``China cycle,'' where the 
Chinese government tilts the playing field in their favor when 
contracting with companies that are based here in the United 
States. They are also tilting the playing field in their favor 
in the electric and autonomous vehicle market by heavily 
subsidizing their electric vehicles (EV) and that industry and 
flooding foreign markets with these highly subsidized vehicles.
    Earlier this month, I sent a letter, along with my 
Republican colleague, Senator Blackburn, to several Chinese 
automakers, pressing for more transparency into their ties with 
the Chinese government and highlighting the significant 
national security concerns associated with importing vehicles 
made by companies with ties to the Chinese Communist Party.
    My question for you, Dr. Doshi, is besides imposing tariffs 
or similar measures like that, what else can we do to level the 
playing field, or tilt the field back?
    Dr. Doshi. Thank you for that question, Senator, and maybe 
I will spend a moment briefly on the China cycle. The idea here 
is that multinational companies or U.S. companies are attracted 
by the lure of China's market. It makes sense. They try to do 
well in China. Maybe they do well for a period of time.
    But China has a goal, an industrial policy goal, to 
indigenize those companies and push them out of China after a 
period of time. Even our best companies in China have met this 
fate. Take Apple. They spent decades building China's 
smartphone industry. They spent billions on building China's 
machine tools industry. Now its very suppliers have essentially 
risen in the supply chain to become producers of smartphones. 
They pushed Apple, essentially, to below top five in market 
share in China.
    Take Tesla, as well. It is a similar story. Tesla did very 
well in China. It had a good arrangement with the Shanghai 
government. But its supply chain in China, that it built, 
helped catalyze some of the innovation that helped China's 
electric vehicle manufacturers outcompete Tesla in Europe, and 
potentially down the road in the United States.
    To answer your specific question, Senator, about what we 
can do to tilt the playing field on EVs, I mention just a few 
points. First, I would note that a lot of companies in China, 
90 percent of the top 500 enterprises, have Chinese Communist 
Party cells within them, that are involved in the governance of 
those companies. So strict independence between those companies 
and the Chinese government is very difficult to imagine. We 
cannot mirror image. It is a different system than ours.
    The second point, Senator, that I would make is that 
tariffs really are not going to get the job done. They are an 
important step, but the problem that we face is rules of 
origin. China can partner with other countries to make these 
same EVs in Mexico, Indonesia, or elsewhere.
    What we really need are regulatory solutions, and what the 
Biden administration has recently done, as of yesterday, is 
move forward with an approach that would say for software or 
hardware that goes into these internet-connected vehicles, if 
that is from China then it cannot be sold in the United States. 
It is for a very simple reason, Senator. Internet-collected 
vehicles are a form of critical infrastructure, and we know the 
Chinese are trying to compromise U.S. critical infrastructure 
in power, in water, in telecommunications, and in 
transportation. It stands to reason we should worry about that 
possibility in EVs, as well.
    This regulatory approach is easier to coordinate with 
allies and partners. It is actually something the executive can 
do pretty quickly. I think it is actually more effective than 
tariffs alone.
    Chairman Peters. Another question for you, Dr. Doshi. 
Another important factor we must consider when we aggressively 
combat the China cycle, as you call it, are what the potential 
impacts on the American scientific and technological 
competitiveness would be if we overly restrict U.S. 
collaborations with foreign entities, on basic research, for 
example.
    The question for you is what are the consequences of 
overreach there, and how can we prevent overreach?
    Dr. Doshi. Thank you for that question, Senator, and I 
think nothing that I have advocated today would dramatically 
tamp down on trade with China, nor would it necessarily 
compromise our ability to work with China in science and 
technology (S&T). Those are both important. We are just trying 
to put guardrails in place so that can be done more safely and 
effectively.
    That said, the United States currently has a science and 
technology agreement with China that has been in place since 
normalization. It has lapsed at times and been renewed. One of 
the biggest challenges we face, Senator, is that the ecosystem 
in the United States is very open. Anybody can access it. But 
the ecosystem in China is very closed, so we do not have 
symmetry. We have an asymmetry here.
    What that means in practical terms is that China can 
benefit more from our ecosystem than we can from theirs. Right 
now, the legislation in China on national security that I 
outlined in my testimony makes it very difficult for us to 
continue with scientific research because we cannot get our 
data out. One of the biggest sticking points to renewing the 
science and technology agreement has been the question of 
whether we can come to some kind of agreement with China on 
questions related to data.
    What I would say, Senator, is that what we are talking 
about here, in Time to Choose, will not affect science and 
technology cooperation. If anything, it might give us another 
piece of leverage, another angle, which we can use to pry open 
China's approach on national security to make it a bit more 
symmetrical with our own. I think that is where we want to end 
up, because China is an innovative country. It is not just 
stealing American technology. Its science and technology 
ecosystem is quite advanced. We need to have some exchange with 
it, but we have to make sure it is done in a way that is fair.
    Chairman Peters. Right. Final question I am going to ask 
Dean Tillipman and Dr. Doshi, and we will start with you, Dean. 
Should the Federal contracts that we have include specific 
restrictions and penalties around sharing information and data 
with non-U.S. Government clients related to work that is being 
done for the United States Government? Dean Tillipman first, 
and then Dr. Doshi, and then we will wrap it up.
    Ms. Tillipman. Yes. Resoundingly yes. Absolutely. It is one 
thing for a contracting officer to learn about a potential 
conflict of interest and to consider whether it needs to 
mitigate, avoid, neutralize that particular conflict of 
interest. It is another thing for a contractor to share the 
information that they have obtained during the performance of a 
contractor, particularly with an adversarial government. But 
even just sharing the basic information is problematic.
    So yes, there should be extreme penalties for something 
like that. Frankly, we already have some systems for the 
disclosure of this type of information in existence. But what 
you are describing, it absolutely should be banned.
    Chairman Peters. Thank you. Dr. Doshi.
    Dr. Doshi. Senator, I could not agree more that this is a 
critically important element of any kind of protection we want 
to implement here. Right now we know that there are three ways 
in which China can compromise any data that might be within 
China. First, there are institutions it is putting in 
companies. These include Chinese Communist Party Cells.
    Second, there is the requirement that any employee of a 
U.S. subsidiary that is from China or, quite frankly, any 
Chinese partner of that subsidiary, has to comply with PRC 
intelligence and has to make sure that that compliance is never 
reported. That is an actual legal requirement of the National 
Security Law from 2017.
    Third, of course, as I mentioned, access to networks, data, 
encryption--it is all transparent now under the existing 
regulatory regime in China. You have to turn over your 
encryption keys to the Chinese government. What that means in 
practice, Senator, is that even a company that has the best 
data protections, that is extremely careful, that might put its 
data on the Microsoft cloud in China, cannot be assured that 
that data does not end up in the hands of the Chinese 
government which means that the question of whether or not this 
kind of sensitive information gained from working with the U.S. 
Government, or with U.S. companies, that must be protected. It 
cannot be used in fulfillment of contracts with the Chinese 
government, and probably should not be migrated to China, 
because once it is, it is theirs.
    Chairman Peters. Great. Thank you.
    I would like to thank our witnesses for joining us here 
today to share their testimony and their expertise with the 
Committee. Congress and the entire Federal Government must work 
together to ensure government contracts are awarded in the best 
interests of the American people by removing conflicts of 
interest from contractors' work. Americans certainly deserve 
full assurance that when their tax dollars are spent on Federal 
contracts they get the result that benefits them and not have 
those funds go to contractors who are working on both sides of 
the issue in a way that undermines our national security 
interests. I look forward to our continued work together on 
this issue.
    The record for this hearing will remain open for 15 days, 
until 5 p.m. on Wednesday, October 9, 2024, for the submission 
of statements and questions for the record.
    This hearing is now adjourned.
    [Whereupon, at 11:21 a.m., the hearing was adjourned.]

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