The National Industrial Security Program was established in 1993 for the protection of classified information. DSS administers the National Industrial Security Program on behalf of DOD and 23 other federal departments and agencies. DSS is responsible for providing oversight, advice, and assistance to more than 11,000 U.S. contractor facilities that are cleared for access to classified information. Contractor facilities can range in size, be located anywhere in the United States, and include manufacturing plants, laboratories, and universities. About 221 industrial security representatives work out of 25 DSS field offices across the United States and serve as the primary points of contact for these facilities. DSS is responsible for ensuring that these contractors meet requirements to safeguard classified information under the National Industrial Security Program. Contractors must have facility security clearances under this program before they can work on classified contracts. To obtain a facility security clearance, contractors are required to self- report foreign business transactions on a Certificate Pertaining to Foreign Interests form. Examples of such transactions include foreign ownership of a contractor's stock, a contractor's agreements or contracts with foreign persons, and whether non-U.S. citizens sit on a contractor's board of directors. DSS's industrial security representatives provide guidance to contractors on filling out the certificate. If a contractor declares no foreign business transactions on the certificate, DSS places the certificate in the contractor's file located in the field. When U.S. contractors with facility security clearances have changes in foreign business transactions to report, they are required to complete the certificate again and resubmit it every 5 years, even if no foreign transactions take place. Because a U.S. company can own a number of contractor facilities, the corporate headquarters or another legal entity within that company is required to complete the certificate. When contractors declare foreign transactions on their certificates and notify DSS, industrial security representatives are responsible for ensuring that contractors properly identify all relevant foreign business transactions. They are also required to collect, analyze, and verify pertinent information about these transactions. For example, by examining various corporate documents, the industrial security representatives can determine corporate structures and ownership and identify key management officials. The representatives may consult with DSS counterintelligence officials, who can provide information about threats to U.S. classified information. If contractors' answers on the certificates indicate that foreign transactions meet certain DSS criteria or exceed thresholds, such as the percentage of company stock owned by foreign persons, the representatives forward these FOCI cases to DSS headquarters. DSS headquarters works with contractors to determine what, if any, protective measures are needed to reduce the risk of foreign interests gaining unauthorized access to U.S. classified information. DSS field staff are then responsible for monitoring contractor compliance with these measures. Figure 1 shows highlights of the FOCI process. On a case-by-case basis, DSS headquarters can approve the use by contractors of one of six types of protective measures: voting trust agreements, proxy agreements, special security agreements, security control agreements, board resolutions, and limited facility clearances. These protective measures are intended to insulate contractor facilities from undue foreign control and influence and to reduce the risk of unauthorized foreign access to classified information. Protective measures vary in the degree to which foreign entities are insulated from classified information and are not intended to deny foreign owners the opportunity to pursue business relationships with their U.S.-based contractor facilities working on classified contracts. Table 1 provides a general description of each of these protective measures. In addition to these measures, DSS can also require contractors to take certain actions to mitigate specific FOCI situations such as termination of loan agreements or elimination of debt owed to a foreign entity. For contractors operating under voting trust, proxy, special security, or security control agreements, industrial security representatives are supposed to conduct annual FOCI meetings with contractor staff who are responsible for ensuring compliance with these protective measures. In preparation for these annual meetings, contractors are required to produce and submit to DSS annual FOCI compliance reports that can describe specific acts of noncompliance with protective measures, changes in organizational structure or changes in security procedures at the contractor, and other issues that have occurred over the course of a year. Industrial security representatives should then review the reports to determine how contractors are fulfilling their obligations under the protective measures. In addition, DSS generally conducts security reviews annually for facilities that store classified information or every 18 months for facilities that do not have classified information on site. However, for contractors operating under voting trust, proxy, special security, or security control agreements, industrial security representatives are required to conduct a security review every 12 months whether the contractor has classified information on site or not. These reviews are designed to determine security vulnerabilities and contractor compliance with National Industrial Security Program requirements and to evaluate the overall quality of the facility's security program, including compliance with protective measures to mitigate FOCI. DSS will not grant a new facility security clearance to a contractor until all relevant FOCI have been mitigated. In addition, DSS shall suspend an existing clearance if FOCI at a contractor facility has not been mitigated. A contractor with a suspended facility clearance can continue to work on an existing classified contract unless the government contracting office denies access to the existing contract. In addition, the contractor cannot be awarded a new classified contract until the clearance is restored. DSS does not systematically ask for, collect, or analyze foreign business transactions in a manner that helps it properly oversee contractors entrusted with U.S. classified information, nor does DSS aggregate and analyze information to determine the overall effectiveness of its oversight of FOCI contractors. Notably, DSS does not know if contractors are reporting foreign business transactions as they occur and lacks knowledge about how much time a contractor facility with unmitigated FOCI has access to classified information. Figure 2 shows a general description of gaps in DSS knowledge about the FOCI process. Furthermore, DSS field staff said they lack research tools and sufficient training regarding the subject of foreign transactions and have indicated challenges with regard to staff turnover. DSS does not systematically ask for information that would allow it to know if contractors are reporting certain foreign business transactions when they occur, which begins the process for reducing FOCI-related security risks. DSS industrial security representatives are responsible for advising contractors that timely notification of foreign business transactions is essential. The National Industrial Security Program Operating Manual requires contractors with security clearances to report any material changes of foreign business transactions previously notified to DSS but does not specify a time frame for doing so. DSS is dependent on contractors to self-report transactions by filling out the Certificate Pertaining to Foreign Interests form, but this form does not ask contractors to provide specific dates for when foreign transactions took place. In addition, DSS does not compile or analyze how much time passes before DSS becomes aware of foreign business transactions. DSS field staff told us that some contractors report foreign business transactions as they occur, while others report transactions months later, if at all. During our review, we found a few instances in which contractors were not reporting foreign business transactions when they occurred. One contractor did not report FOCI until 21 months after awarding a subcontract to a foreign entity. Another contractor hired a foreign national as its corporate president but did not report this transaction to DSS, and DSS did not know about the FOCI change until 9 months later, when the industrial security representative came across the information on the contractor's Web site. In another example, DSS was not aware that a foreign national sat on a contractor's board of directors for 15 months until we discovered it in the process of conducting our audit work. Without timely notification from contractors, DSS cannot track when specific foreign business transactions took place and therefore is not in a position to take immediate action so that FOCI is mitigated, if necessary. In addition, DSS does not determine the time elapsed from reporting of foreign business transactions by contractors with facility clearances to the implementation of protective measures or when suspensions of facility clearances occur. Without protective measures in place, unmitigated FOCI at a cleared contractor increases the risk that foreign interests can gain unauthorized access to U.S. classified information. During our review, we found two cases in which contractors appeared to have operated with unmitigated FOCI before protective measures were implemented. For example, officials at one contractor stated they reported to DSS that their company had been acquired by a foreign entity. However, the contractor continued operating with unmitigated FOCI for at least 6 months. In the other example, a foreign-purchased contractor continued operating for 2 months with unmitigated FOCI. Contractor officials in both examples told us that their facility clearances were not suspended. According to the National Industrial Security Program Operating Manual, DSS shall suspend the facility clearance of a contractor with unmitigated FOCI. DSS relies on field office staff to make this determination. Because information on suspended contractors with unmitigated FOCI is maintained in the field, DSS headquarters does not determine at an aggregate level the extent to which and under what conditions it suspends contractors' facility clearances due to unmitigated FOCI. DSS does not centrally collect and analyze information to determine the magnitude of contractors under FOCI and assess the effectiveness of its oversight of those contractors. For example, DSS does not know how many contractors under FOCI are operating under all types of protective measures and, therefore, does not know the extent of potential FOCI- related security risks. Although DSS tracks information on contractors operating under some types of protective measures, it does not centrally compile data on contractors operating under all types of protective measures. Specifically, DSS headquarters maintains a central repository of data on contractors under voting trust agreements, proxy agreements, and special security agreements--protective measures intended to mitigate majority foreign ownership. However, information on contractors under three other protective measures--security control agreements, limited facility clearances, and board resolutions--are maintained in paper files in the field offices. DSS does not aggregate data on contractors for all six types of protective measures and does not track and analyze overall numbers. In addition, DSS does not conduct overall analysis of foreign business transactions reported by contractors on their Certificate Pertaining to Foreign Interests forms or maintain aggregate information for contractors' responses. Consequently, DSS does not know the universe of FOCI contractors operating under protective measures, and DSS cannot determine the extent to which contractors under FOCI are increasing or if particular types of foreign business transactions are becoming more prevalent. This information would help DSS target areas for improved oversight. According to DSS officials, centralizing and tracking information on contractors under all types of measures would require more resources because information is dispersed in paper files in DSS field offices around the country. DSS does not systematically compile and analyze trends from its oversight functions to identify overall compliance trends or concerns with implementation of protective measures by contractors. DSS industrial security representatives are responsible for ensuring compliance of FOCI contractors under certain protective measures through annual FOCI meetings where they discuss contractors' compliance reports. Industrial security representatives notify headquarters of the results of the meetings and place compliance reports and their own assessments in paper files located in field offices. However, DSS headquarters does not use annual compliance reports to assess trends to evaluate overall effectiveness of the FOCI process. Finally, the use of protective measures at FOCI contractor facilities was designed in part to counter attempts to gather classified information through unauthorized means. DSS does not assess trends from its own counterintelligence data or information gathered by other intelligence agencies to evaluate whether protective measures are effectively mitigating FOCI risk across the board. For example, a 2004 DSS counterintelligence report states that foreign information targeting through e-mail and Internet communication and collection methods is on the rise. However, according to DSS officials, not all protective measures at FOCI contractors include provisions to monitor e-mail or other Internet traffic. By assessing counterintelligence trends to analyze the effectiveness of protective measures in countering foreign information collection attempts, DSS could identify weaknesses in its protective measures and adjust them accordingly. DSS's field staff face numerous challenges: complexities in verifying FOCI cases, limited tools to research FOCI transactions, insufficient FOCI training, staff turnover, and inconsistencies in implementing guidance on FOCI cases. For industrial security representatives, verifying if a contractor is under FOCI is complex. Industrial security representatives cited various difficulties verifying FOCI information. To verify if a contractor is under FOCI, industrial security representatives are required to understand the corporate structure of the legal entity completing the Certificate Pertaining to Foreign Interests form and evaluate the types of foreign control or influence that exist for each entity within a corporate family. DSS officials informed us that tracing strategic company relationships, country of ownership, and foreign affiliations and suppliers, or reviewing corporate documentation--such as loan agreements, financial reports, or Securities and Exchange Commission filings--is complicated. For example, representatives are required to verify information on stock ownership by determining the distribution of the stock among the stockholders and the influence or control the stockholders may have within the corporation. This entails identifying the type of stock and the number of shares owned by the foreign person(s) to determine their authority and management prerogatives, which DSS guidance indicates may be difficult to ascertain in certain cases. According to DSS field officials, verifying information is especially difficult when industrial security representatives have limited exposure to FOCI cases. In some field offices we visited, industrial security representatives had few or no FOCI cases and, therefore, had limited knowledge about how to verify foreign business transactions. Some industrial security representatives in one field office told us they do not always have the tools needed to verify if contractors are under FOCI. As part of their review process, industrial security representatives are responsible for verifying what a contractor reports on its Certificate Pertaining to Foreign Interests form and determining the extent of foreign interests in the company. Industrial security representatives conduct independent research using the Internet or return to the contractor for more information to evaluate the FOCI relationships and hold discussions with management officials, such as the chief financial officer, treasurer, and legal counsel. DSS headquarters officials told us additional information sources, such as the Dun and Bradstreet database of millions of private and public companies are currently not available in the field. However, some industrial security representatives stated that such additional resource tools would be beneficial for verifying complex FOCI information. In addition, industrial security representatives stated they lacked the training and knowledge needed to better verify and oversee contractors under FOCI. For example, DSS does not require its representatives to have financial or legal training. While some FOCI training is provided, representatives largely depend on DSS guidance and on-the-job training to oversee a FOCI contractor. In so doing, representatives work with more experienced staff or seek guidance, when needed, from DSS headquarters. In a 1999 review, DSS recognized that recurring training was necessary to ensure industrial security representatives remain current on complex FOCI issues and other aspects of the FOCI process. DSS headquarters officials said that they have held regionwide meetings where they discussed FOCI case scenarios and responded to questions about the FOCI process. However, we found that the training needs on complex FOCI issues are still a concern to representatives. In fact, many said they needed more training to help with their responsibility of verifying FOCI information, including how to review corporate documents, strategic company relationships, and financial reports. DSS field officials said the DSS training institute currently offers a brief training unit on FOCI covering basic information. DSS established a working group of DSS field and headquarters staff to look at ways to improve the training program, including more specific FOCI training. The group submitted recommendations in March 2005 to field managers for their review. DSS is also planning to work with its training institute to develop additional FOCI courses to better meet the needs of the industrial security representatives. According to field staff, industrial security representatives operate in an environment of staff turnover, which can affect their in-depth knowledge of FOCI contractors. Officials from one-third of the field offices we reviewed noted staff retention problems. DSS officials at two of these field offices said that in particular they have problems retaining more experienced industrial security representatives. Field officials said that when an industrial security representative retires or leaves, the staff member's entire workload is divided among the remaining representatives, who already have a substantial workload. In addition, DSS guidance advises field office officials to rotate contractor facilities among industrial security representative every 3 years, if possible, as a means of retaining DSS independence from the contractors. DSS officials told us the rotation can actually occur more frequently because of staff turnover. DSS headquarters officials said they are formulating a working group to help improve staff retention in the field. Compounding these challenges are inconsistencies among field offices in how industrial security representatives said they understood and implemented DSS guidance for reviewing contractors under FOCI. For example, per DSS guidance, security reviews and FOCI meetings should be performed every 12 months for contractors operating under special security agreements, security control agreements, voting trust agreements, and proxy agreements. However, we found that some industrial security representatives were inconsistent in implementing the guidance. For example, one representative said a contractor under a special security agreement was subject to a security review every 18 months because the contractor did not store classified information on-site. In addition, two industrial security representatives told us they did not conduct annual FOCI meetings for contractors that were operating under a proxy agreement and security control agreement, respectively. We also found that industrial security representatives varied in their understanding or application of DSS guidance for when they should suspend a contractor's facility clearance when FOCI is unmitigated. The guidance indicates that when a contractor with a facility clearance is determined to be under FOCI that requires mitigation by DSS headquarters, the facility security clearance shall be suspended until a protective measure is implemented. However, we were told by officials in some field offices that they rarely suspend clearances when a contractor has unmitigated FOCI as long as the contractor is demonstrating good faith in an effort to provide documentation to DSS to identify the extent of FOCI and submits a FOCI mitigation plan to DSS. Officials in other field offices said they would suspend a contractor's facility clearance once they learned the contractor had unmitigated FOCI. The protection of classified information has become increasingly important in light of the internationalization of multibillion-dollar cooperative development programs, such as a new-generation fighter aircraft, and a growing number of complex cross-border industrial arrangements. Although such developments offer various economic and technological benefits, there can be national security risks when foreign companies control or influence U.S. contractors with access to classified information. Given the growing number of DOD contractors with connections to foreign countries, it is critical for DSS to ensure that classified information is protected from unauthorized foreign access. In carrying out its responsibilities, DSS is dependent on self-reported information from the contractors about their foreign activities, creating vulnerabilities outside of DSS's control. Within this environment, unless DSS improves the collection and analysis of key information and provides its field staff with the training and tools they need to perform FOCI responsibilities, DSS will continue to operate without knowing how effective its oversight is at reducing the risk of foreign interests gaining unauthorized access to U.S. classified information. To improve knowledge of the timing of foreign business transactions and reduce the risk of unauthorized foreign access to classified information, we recommend that the Secretary of Defense direct the director of DSS to take the following three actions: clarify when contractors need to report foreign business transactions determine how contractors should report and communicate dates of specific foreign business transactions to DSS, and collect and analyze when foreign business transactions occurred at contractor facilities and when protective measures were implemented to mitigate FOCI. To assess overall effectiveness of DSS oversight of contractors under FOCI, we recommend that the Secretary of Defense direct the director of DSS to take the following three actions: collect and analyze data on contractors operating under all protective measures as well as changes in types and prevalence of foreign business transactions reported by contractors; collect, aggregate, and analyze the results of annual FOCI meetings, contractors' compliance reports, and data from the counterintelligence community; and develop a plan to systematically review and evaluate the effectiveness of the FOCI process. To better support industrial security representatives in overseeing contractors under FOCI, we recommend the Secretary of Defense direct the director of DSS to formulate a human capital strategy and plan that would encompass the following two actions: evaluate the needs of representatives in carrying out their FOCI responsibilities and determine and implement changes needed to job requirements, guidance, and training to meet FOCI responsibilities and explore options for improving resource tools and knowledge-sharing efforts among representatives. In commenting on a draft of our report, DOD disagreed with our conclusions that improvements are needed to ensure sufficient oversight of contractors under FOCI, and it also disagreed with our recommendations to improve oversight. Overall, DOD's comments indicate that it believes that the actions DSS takes when it learns of FOCI at contractors is sufficient. However, DOD has not provided evidence necessary to support its assertions. In fact, we found two cases in which contractors appeared to have operated with unmitigated FOCI before protective measures were put into place. Unmitigated FOCI at contractors increases the risk that foreign interests can gain unauthorized access to U.S. classified information. Further, DOD states that we did not establish a link between collecting and analyzing FOCI data and the effectiveness of DSS's oversight or the protection of classified information. We found that DSS lacks fundamental FOCI information--including information on the universe of FOCI contractors and trends in overall contractor compliance with protective measures--that is needed to determine the effectiveness of the FOCI process and the sufficiency of oversight. Ultimately, without making this determination, DSS cannot adequately ensure it is taking necessary steps to reduce the risk of foreign interests gaining unauthorized access to classified information. Unless our recommendations are implemented, we are concerned that DSS will continue to operate on blind faith that its FOCI process is effective and its oversight is sufficient. DOD did not concur with seven of our recommendations and only partially concurred with the eighth. Regarding our first three recommendations, which aim to improve DSS's knowledge of the timing of foreign business transactions and reduce the risk of unauthorized foreign access to classified information, DOD argues that having such information will not help protect classified information. However, as we noted in our report, without this information, DSS is not in a position to know when FOCI transactions occur so that timely protective measures can be implemented to mitigate FOCI as needed--the purpose of the FOCI process. Regarding our next three recommendations, which aim to enable DSS to assess the overall effectiveness of its oversight of contractors under FOCI, DOD argues that it does not need to collect and analyze information on the universe of contractors under FOCI and trends in foreign business transactions, or aggregate compliance and counterintelligence information. However, without this information, DSS limits its ability to identify vulnerabilities in the FOCI process and to target areas for improving oversight of contractors, including potential changes to protective measures. DOD also argues that it has three mechanisms to systematically evaluate DSS's processes: DSS's Inspector General, a management review process for industrial security field office oversight, and a standards and quality program. However, DOD has not provided evidence in its comments that these mechanisms are focused on systematically reviewing and evaluating the effectiveness of the FOCI process. Regarding our last two recommendations--to formulate a human capital strategy and plan that would better support industrial security representatives in overseeing FOCI contractors--DOD does not believe that its industrial security representatives need additional support. DOD supports this belief with two points. First, DOD states that because less than 3 percent of the approximately 12,000 cleared companies overseen by DSS have any FOCI mitigation, most DSS industrial security representatives do not oversee such contractors. Yet it is unclear how DOD arrived at these figures because DSS does not collect and analyze information on all contactors operating under protective measures. Regardless of the number of these contractors, industrial security representatives must have adequate support--including training and guidance--to verify if contractors are under FOCI and to ensure contractors comply with any protective measures put in place. In the course of our review, we found that industrial security representatives are not sufficiently equipped to fulfill their FOCI responsibilities. Second, DOD noted that DSS is under new leadership and is exploring operational improvements as well as implementing a new industrial security information management system. While it is too early to assess the effect of these proposals, it is also unclear how these efforts will bring about any needed changes to industrial security representatives' job requirements, guidance, tools, and training. As we concluded in our report, DSS's dependence on self-reported information from contractors about their foreign activities creates vulnerabilities outside of DSS's control. Given these vulnerabilities, it is imperative that DSS improve the collection and analysis of key information on the FOCI process and provide its industrial security representatives with the training and tools they need to perform their FOCI responsibilities. If DSS continues to operate without knowing how effective its oversight is and does not support the representatives in carrying out their FOCI responsibilities, then the value of DSS's management and the FOCI process should be open for further examination. Therefore, we did not modify our recommendations. DOD also provided technical comments, which we addressed. DOD's letter is reprinted in appendix II, along with our evaluation of its comments. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Director, Defense Security Service; the Assistant to the President for National Security Affairs; and the Director, Office of Management and Budget. We will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-4841. Major contributors to this report are Anne-Marie Lasowski, Maria Durant, Ian A. Ferguson, Suzanne Sterling, Kenneth E. Patton, Lily J. Chin, and Karen Sloan. To assess the Defense Security Service's (DSS) process for determining and overseeing contractors under foreign ownership, control, or influence (FOCI), we reviewed Department of Defense (DOD) regulations and guidance on FOCI protective measures included in the National Industrial Security Program Operating Manual, and the Industrial Security Operating Manual, as well as DSS policies, procedures, and guidance for verifying contractors under FOCI and for overseeing them. We discussed with DSS officials at headquarters and field locations how they use DSS guidance to oversee FOCI contractors. We also discussed DSS roles and responsibilities for headquarters and field staff and challenges in overseeing contractors that report FOCI and the use of FOCI information to evaluate effectiveness of the process. We reviewed DSS training materials to learn about the type of training DSS offers industrial security representatives in meeting their FOCI responsibilities. We also examined FOCI studies conducted by DSS to determine the results of earlier DSS reviews of the FOCI process. We visited nine field offices that varied in how many FOCI contractors they monitored and in their geographic location. Through discussions with DSS officials at headquarters in Alexandria, Virginia, and from nine field offices, we identified FOCI contractors operating under various protective measures and examined DSS actions to verify FOCI and oversee the implementation of protective measures at contractor facilities. We collected information on a nonrepresentative sample of 27 contractor facility case files reviewed by DSS for FOCI. In addition, we visited 8 of the 27 contractor facilities and spoke with security officials, corporate officers, and board members to obtain additional clarification on the types of protective measures and the FOCI process. We spoke with DSS headquarters and field staff regarding actions taken to implement protective measures and reviewed supporting documentation maintained by DSS and contractor facilities. During our visits to nine field offices, we discussed the contents of selected contractor facility file folders to understand how DSS oversees contractors' implementation of protective measures, determines unmitigated FOCI, and assesses the effectiveness of the FOCI process. Because we did not take a statistical sample of case files, the results of our analyses cannot be generalized. However, we confirmed that the data used to select the files that we reviewed were consistent with the information in the facility files that we reviewed. The following are GAO's comments on the Department of Defense's letter dated June 29, 2005. 1. It is unclear how DOD came to the conclusion that our report lacks an understanding of the national policy governing contractors' access to classified information, given that our description of the policy and process in the background of our report is taken directly from documentation provided by DSS. Further, DOD did not provide in its technical comments any suggested amendments to remove perceived misunderstandings from our report. 2. Cleared U.S. citizens need not break the law for foreign interests to gain unauthorized access to classified information or adversely affect performance of classified contracts. Classified information can be at risk when foreign nationals at a cleared FOCI contractor facility are not identified and timely protective measures are not established to mitigate their influence. 3. DOD's position that there is little in our report that would enable DSS to improve the FOCI process or justify the cost of implementing our recommendations underscores the department's failure to grasp the gravity of our findings. DOD has neither systematically evaluated the effectiveness of its FOCI process nor identified opportunities to strengthen its oversight for contractors under FOCI. Our recommendations specifically target correcting these weaknesses. Further, raising concerns about cost without evaluating the effectiveness of its FOCI process is shortsighted. 4. According to the National Industrial Security Program Operating Manual, contractors are required to report material changes to FOCI information previously reported and every 5 years, even if no change occurs. We added a footnote to further clarify the definition of foreign business transactions used in our report. 5. DOD's response concerning self-reporting underscores the department's complacency regarding its responsibility to take actions needed to prevent foreign interests from gaining unauthorized access to U.S. classified information. While we recognize that DSS is dependent on self-reporting and that some vulnerabilities are outside of DSS's control, there are numerous steps DOD could take to mitigate these vulnerabilities. For example, if DSS implemented our recommendation to clarify when reporting should occur and require reporting dates when specific foreign business transactions took place, then DSS could monitor whether contractors are reporting foreign transactions on time and put mitigation measures in place, as appropriate. 6. While DOD maintains that contractors are to report material changes concerning FOCI information as they occur, we found that the National Industrial Security Program Operating Manual does not state this. As we reported, DSS field staff told us that while some contractors report transactions as they occur, some do not report transactions until months later, if at all. Specifying a time frame for contractors could result in more timely reporting of these transactions. 7. As we reported, the FOCI process begins when a contractor reports FOCI information. Having information on when foreign transactions occur would enable DSS to take timely action to impose safeguards or restrictions authorized by the National Industrial Security Program Operating Manual. 8. Unmitigated FOCI at a cleared contractor increases the risk that foreign interests can gain unauthorized access to U.S. classified information. During our review, we found two cases in which contractors appeared to have operated with unmitigated FOCI before protective measures were put in place. Therefore, it is important to know the length of time between when a foreign transaction occurs and when protective measures are put in place to mitigate FOCI. 9. According to the National Industrial Security Program Operating Manual, a contractor under FOCI with an existing facility clearance shall have its clearance suspended or revoked unless protective measures are established to remove the possibility of unauthorized access to classified information or adversely affect performance on classified contracts. DOD's characterization of DSS having the option to suspend the clearance of contractors with unmitigated FOCI seems to differ from what is stated in the manual. 10. It is unclear why DOD does not see the value in collecting information on contractors operating under all six protective measures, when DSS already centrally collects information on contractors operating under three measures. DSS cannot assess the overall effectiveness of its FOCI process unless it has a complete and accurate account of contractors operating under all types of protective measures. 11. It is unclear how DOD determined that less than 3 percent of its cleared contractors are operating under all six protective measures because DSS does not centrally collect and analyze this information for all six measures. In addition, the most recent information provided to us by DSS indicated that there are about 11,000 contractor facilities participating in the National Industrial Security Program, rather than the 12,000 cited in DOD's comments. Further, DOD did not provide technical comments to revise the number of contractor facilities stated in our report. 12. Industrial security representatives may use the results of annual meetings, compliance reports, and counterintelligence data to assess an individual contractor's security posture. However, as stated in our report, DSS does not systematically compile and analyze trends from these oversight activities. Aggregating overall compliance and counterintelligence trends is valuable because it would allow DSS to identify actual or potential weaknesses, evaluate effectiveness, and take actions as needed to improve its FOCI process. 13. Citing how long the program has been in existence misses the point, and DOD does not provide evidence that the needs of representatives are well known. As we reported, industrial security representatives face numerous challenges in carrying out their FOCI responsibilities, which formulates the basis of our recommendation to evaluate the needs of the representatives. Assessing their needs is particularly important given the increasingly complex environment--characterized by international cooperative defense programs and a growing number of cross-border defense industrial relationships--in which industrial security representatives work. 14. As stated in our report, industrial security representatives told us they lacked the training and knowledge they needed to verify complex FOCI cases and oversee contractors under FOCI.

Summary:
The Department of Defense (DOD) is responsible for ensuring that U.S. contractors safeguard classified information in their possession. DOD delegates this responsibility to its Defense Security Service (DSS), which oversees more than 11,000 contractor facilities that are cleared to access classified information. Some U.S. contractors have foreign connections that may require measures to be put into place to reduce the risk of foreign interests gaining unauthorized access to classified information. In response to a Senate report accompanying the National Defense Authorization Act for Fiscal Year 2004, GAO assessed the extent to which DSS has assurance that its approach provides sufficient oversight of contractors under foreign ownership, control, or influence (FOCI). DSS's oversight of contractors under FOCI depends on contractors self-- reporting foreign business transactions such as foreign acquisitions. As part of its oversight responsibilities, DSS verifies the extent of the foreign relationship, works with the contractor to establish protective measures to insulate foreign interests, and monitors contractor compliance with these measures. In summary, GAO found that DSS cannot ensure that its approach to overseeing contractors under FOCI is sufficient to reduce the risk of foreign interests gaining unauthorized access to U.S. classified information. First, DSS does not systematically ask for, collect, or analyze information on foreign business transactions in a manner that helps it properly oversee contractors entrusted with U.S. classified information. In addition, DSS does not collect and track the extent to which classified information is left in the hands of a contractor under FOCI before measures are taken to reduce the risk of unauthorized foreign access. During our review, we found instances in which contractors did not report foreign business transactions to DSS for several months. We also found a contractor under foreign ownership that appeared to operate for at least 6 months with access to U.S. classified information before a protective measure was implemented to mitigate foreign ownership. Second, DSS does not centrally collect and analyze information to assess its effectiveness and determine what corrective actions are needed to improve oversight of contractors under FOCI. For example, DSS does not know the universe of all contractors operating under protective measures, the degree to which contractors are complying overall with measures, or how its oversight could be strengthened by using information such as counterintelligence data to bolster its measures. Third, DSS field staff face a number of challenges that significantly limit their ability to sufficiently oversee contractors under FOCI. Field staff told us they lack research tools and training to fully understand the significance of corporate structures, legal ownership, and complex financial relationships when foreign entities are involved. Staff turnover and inconsistencies over how guidance is to be implemented also detract from field staff's ability to effectively carry out FOCI responsibilities.