FOCI Compliance Just Became a Top Priority for Small Defense Contractors—Here’s What You Need to Know
If your small business works—or wants to work—in the defense industrial base, you can’t afford to ignore Foreign Ownership, Control, or Influence (FOCI) requirements. Recent rule changes and heightened scrutiny mean FOCI compliance isn’t just about classified contracts anymore; even unclassified defense R&D and tech projects now face review. Here’s what’s happening, why it matters for government contracting businesses, and what you should do to stay eligible for federal contracting opportunities.
FOCI: The New Gatekeeper for Defense Contracting
In plain terms, FOCI exists whenever a foreign entity (person, company, investor, or government) has the power—direct or indirect—to steer your company’s business decisions, management, or operations. Think equity stakes, board seats, foreign loans, joint ventures, licensing deals, or even heavy reliance on foreign customers or supply chains. The Department of Defense (DoD) sees FOCI as a potential security risk, since foreign leverage could mean unauthorized access to sensitive technology or classified info.
That’s why every company seeking a facility security clearance (FCL)—a must-have for classified work—has to disclose all foreign ties up front. But here’s the twist for 2025: Even if you’re chasing “just” an R&D award or an unclassified contract over $5 million, DoD is likely to conduct a FOCI review before award. They want to know your company is free from undue foreign influence—especially from adversary nations.
Why FOCI Rules Matter for Small and Growing Businesses
Here’s the deal: Small businesses, especially innovative tech startups, often need outside capital and partners to grow. That’s exactly where FOCI risk sneaks in:
Taking Foreign Venture Capital? Even a minority stake, board seat, or “observer” rights for a foreign investor triggers FOCI scrutiny. Under new SBIR/STTR rules, all foreign affiliations must be disclosed, or you risk automatic rejection.
Foreign Board Members or Key Officers? Control isn’t just about stock ownership. If a foreign party sits on your board or appoints a manager, you’re in FOCI territory.
Joint Ventures, Licensing, or International Partnerships? Formal business relationships with foreign entities, or heavy dependence on foreign suppliers or customers, can flag you for review.
Planning an M&A Exit? If a foreign company wants to buy your firm (even from an allied nation), the deal requires FOCI mitigation—sometimes restructuring, new independent directors, or even creating a U.S.-only subsidiary.
Failure to report foreign influence—intentionally or by oversight—can sink your clearance and take you out of the running for contracts you’ve spent months (or years) pursuing.
FOCI Mitigation: Tools and Solutions
If you do have foreign influence, don’t panic—it’s not always a dealbreaker. DCSA (the Defense Counterintelligence and Security Agency) offers several “mitigation” options, from simple Board Resolutions for minor foreign stakes, to more restrictive Special Security Agreements (SSA) or Proxy Agreements when foreign control is high. Each comes with its own compliance and governance requirements, like U.S.-only security committees, outside directors, or segregated subsidiaries for sensitive work.
The golden rule: The more foreign power over your company, the stricter the safeguards you’ll need to maintain access to government contracting opportunities. DCSA will work with you, but they expect honesty and proactive planning.
Action Steps for Small Businesses Navigating FOCI
Assess Every Investment for FOCI Risk: Before bringing on new investors, partners, or significant foreign customers, ask: Does this create foreign influence or control? Vet foreign backers carefully, and consider deal structures that limit their formal control.
Disclose Early and Often: Notify DCSA immediately about any ownership, board, or management changes involving foreign parties. Use the latest Standard Form 328, and keep thorough records.
Structure Your Company for Compliance: If you’re aiming for classified or sensitive contracts, consider separating your defense work into a U.S.-controlled entity. Build in buyout or non-voting clauses for foreign investors, and make clear that security compliance comes first.
Educate Your Team: Appoint a Facility Security Officer (FSO) who understands FOCI issues. Train execs and board members on what to report and when. Build security into your company culture—don’t wait for a problem to arise.
Use the Resources: Leverage DCSA’s templates and tools for mitigation agreements. Reach out to DCSA’s FOCI Operations team, your local Industrial Security Rep, or the DoD’s Office of Small Business Programs for guidance.
Stay Transparent in Proposals: Being upfront about foreign ownership—and already having a mitigation plan—can set you apart in the bid process. The SBA clarifies you can be a small business with foreign investors, but you have to play by the FOCI rules.
Big Picture: Compliance as a Competitive Advantage
In today’s defense procurement landscape, FOCI compliance isn’t just another box to check—it’s a business risk and a differentiator. The government is watching foreign ties more closely than ever, and companies that get caught flat-footed could lose out on 8a contracts services, SBIR Grant Assistance, or even basic eligibility for women owned small business certification and other federal contracting certifications.
Smart small businesses treat FOCI as a core business issue, not just a paperwork hassle. By building compliance into your growth strategy, you not only protect your eligibility—you signal to DoD that your company can be trusted as part of the defense supply chain.
If you want a deeper dive on how foreign ownership, contractor NAICS code, and other compliance factors affect your government contracting business, check out our related post:The Most Competitive Federal Contracting NAICS Codes of 2024 (and How Small Businesses Can Still Win). It’s packed with practical tips and real-world examples.
If you aren't a Squared Compass partner, what are you waiting for? From getting your business set up with specific government set aside programs at both the State and Federal level, to being empowered by a Fractional Capture team to win government contracts, to receiving tailored government contract opportunities Squared Compass delivers immense value which helps propel our partners to success. Schedule a chat with our team today.
