[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
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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
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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
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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
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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.
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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.
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\1\ The prepared statement of Ms. Tillipman appears in the Appendix
on page 32.
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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.
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\1\ The prepared statement of Dr. Doshi appears in the Appendix on
page 42.
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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.
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\1\ The prepared statement of Mr. Packard appears in the Appendix
on page 56.
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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.
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\1\ The prepared statement of Mr. Riley appears in the Appendix on
page 92.
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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.
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\1\ The USAF FOIA request appears in the Appendix on page 97.
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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.]
A P P E N D I X
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