Podcast - What Are Joint Ventures and When Should They Get Cleared?

Molly O'Casey: Welcome to the 19th episode of Are We All Clear?, the podcast on facilitating security clearances. I'm your host, Molly O'Casey, an international trade associate with Holland & Knight's Washington, D.C., office. Today's episode will discuss joint ventures and how they interact with facility security clearances. Specifically, we'll consider what are joint ventures and what are some of the eligibility requirements for obtaining a facility security clearance. Today's speaker is Andrew McAllister. Andrew is a partner in the International Trade Group based out of Washington, D.C. Welcome back to the podcast, Andrew.

Andrew McAllister: Thanks, Molly. It's great to be back. Wow. Episode 19. That means you've been on 18 previous. You haven't invited me to all of them, but I appreciate being invited back.

Molly O'Casey: I think you've been invited to at least three, so you're getting your numbers up as well. Before we get into how joint ventures interact with facility security clearances, let's consider what a joint venture is. Joint ventures, or JVs if we're going to insist on an acronym, is a business arrangement where two or more parties collaborate on a specific project or business activity, sharing ownership, returns, risks and governance. They are frequently used to access new markets, share risks and resources, combine expertise and achieve objectives that might be challenging if the companies were to attempt them individually. Joint ventures can be conceptualized in terms of their structure. You can have equity joint ventures and contractual or cooperative joint ventures. For equity joint ventures, two or more organizations establish a separate legal entity — so a corporation, a limited liability company or partnership — to serve as the JV. Each partner contributes capital and resources, and ownership shares are determined based on their investment. Profits and losses are distributed accordingly. For contractual or cooperative joint ventures, rather than forming a new legal entity, partners enter into a contractual agreement to work together on a specific project. Each entity remains independent but follows the agreed-upon terms outlined in their contract. Equity joint ventures are usually relied on for long-term collaborations, while contractual joint ventures are used for short-term projects. With that in mind, Andrew, how do joint ventures interact with facility security clearances? And for anyone new to the podcast, a facility security clearance is a determination by the Defense Counterintelligence and Security Agency, or DCSA, that a company is eligible to access classified information based on assessment of national security risks.

Andrew McAllister: Great. Thanks, Molly. So, as you pointed out, there are those two unique, different joint venture vehicles. And so after a joint venture is formed, it may have opportunities to collaborate on government contracts, particularly those involving classified information. In these cases, the JV may be required to obtain a facility security clearance, and that would be an authorization that allows the JV to access, handle and sometimes store classified information. For JVs, obtaining a facility security clearance can be more complex than for standalone companies due to multiple entities involved, as we said, different business structures and evolving regulations and guidance from the government agencies.

Molly O'Casey: Right, and when does a joint venture need an FCL? I imagine it depends on the type of government contract and the structure of the joint venture.

Andrew McAllister: Yeah. So as you said, not every joint venture automatically requires an FCL. It is dependent on some different factors, so again, the nature of the contract. So, sometimes the classified work is primary and vital to the entire contract. And so in certain aspects, sometimes it's sufficient for the lead partner to have an FCL. So that might be particularly in examples where you have a contractual joint venture. There may be aspects of the contract that are really being carried out by that lead partner, and so that lead partner would have an FCL, right? And then in other instances, sometimes the classified work is more prevalent such that either both partners of the joint venture or the joint venture itself may require the facility security clearance. In terms of who handles the classified information, again, if only the JV partners require access to classified information, the JV itself may not need a facility security clearance. However, in instances where the JV is a separately established company, and that company maybe has the specific government contract, and under that specific government contract, there's a requirement to review, store, maintain classified information, then likely the JV itself would need an FCL.

Molly O'Casey: And are all joint ventures able to obtain an FCL? Are there any limitations?

Andrew McAllister: Yeah, so there's sort of two fundamental eligibility requirements for a JV to obtain an FCL, right? One is, is it a legal entity, right? Is it a separately formed company? It could be a corporation, could be a limited liability company, but it's a separate company, for example. And so that would be one of the requirements for the JV itself to have the clearance. If it's JVs formed solely by contract, so maybe the two partners are bidding jointly on a particular government contract, but they haven't created a separate company for that bidding and government work, then likely the joint venture is not eligible for the clearance, and rather it would be the individual partners of the joint venture that would hold the clearance. The other piece to look at is whether the joint venture is populated or unpopulated. And so again, that is usually the second step of the analysis. And so in certain instances, you have what is referred to as an unpopulated joint venture, meaning it was created in terms of a legal structure, a legal company, but it doesn't really have the officers, directors, etc. to manage and run the company. So that would be an unpopulated joint venture, and because there's really no one in the joint venture that's conducting classified work, there wouldn't be a need to know for the joint venture itself. On the contrary, you might have what are referred to as populated joint ventures. Those may have a number of employees, those may have directors, they may have officers, and those individual people are required to carry out classified work. And so they would have personnel security clearances. And then in addition, the company itself would require that clearance in order for those individual employees to conduct the work. The last piece I'll just hit on is depending on the type of legal entity that drives the documentation that's required for DCSA — for instance, we have lots of examples of joint ventures that are organized as limited liability companies — well, they need to have business records that support their existence, business records to support how they're governed and how they're operated. Could be articles of organization, could be an operating agreement, etc. If you just have merely a shell company that doesn't really have a way in which to conduct business, then it likely would not qualify to get its own facility security clearance.

Molly O'Casey: So you discuss the circumstances in which a joint venture needs its own facility security clearance and what that looks like. Could you describe how that would apply to the application for the facility security clearance?

Andrew McAllister: Absolutely. So in circumstances where the classified contract is awarded to the JV company, a separate established LLC corporation, etc., the JV itself would need that facility security clearance. In other instances, let's say, for example, it's a joint bid for a project and part of that work is to be conducted by one of the partners. Well, there may be instances where only that one partner of the joint venture would require a facility security clearance, right? And so there are also instances where if all the partners already have an FCL at the required level, it may not be necessary for the JV itself to also have one, but it depends on the particular contracted issue, how the work's being performed, who the work's being performed by. Again, I would say in most instances where one of the partners doesn't have an FCL, but the work is being done by the joint venture, then often the joint venture needs its own full FCL review process. And so again, in the second scenario where the JV is getting its facility security clearance, it goes through the usual steps that we've discussed in past podcasts, right? There's a sponsorship. So that sponsorship either comes from a government contracting activity or a prime contractor that may sponsor the joint venture. Right, so that's step one. Step two is the joint venture submits the necessary business documents, could be articles of organization, LLC agreement, key management personnel, SF-328, DD-441, etc. There also is typically a security plan, right, could be in the form of something like a technology control plan or other sort of DCSA measures to control classified information. And then again, once those documents are created and submitted, then DCSA would review the documents, conduct the necessary assessments to ensure compliance with the security requirements.

Molly O'Casey: What if the joint venture gets a classified contract from a non-Department of Defense agency? Are there any special considerations?

Andrew McAllister: Yeah, so that's actually an interesting one because in certain cases, if a joint venture already has a facility security clearance from the Department of Defense, but then wins a classified contract from a non-Department of Defense agency, often that other agency sponsors the joint venture for a facility security clearance, except in most instances that may not be necessary if all of the partners already have the requisite clearances, right? So in simple terms, if a JV gets a classified contract outside the DOD world, they might need that additional FCL, but if each of the partners already has the clearance, they might be fine without the need for a new facility security clearance.

Molly O'Casey: What are some common issues that joint venturers face when seeking an FCL?

Andrew McAllister: So I think sometimes given the nature of how the joint ventures are entered into, whether it's contractual, whether it's the creation of a new entity, there's sometimes not, sort of, full visibility, in the whole government contracting process by each of the members of the joint venture compliance teams, etc. And so there often is some, I'd say, disconnect, in terms of when a clearance is required. Well, does the FCL itself need a facility security clearance? Wait, the classified work is only being done by JV partner number one, but not JV partner number two. And so I think getting out in front of those issues, understanding how the joint venture is established to begin with and then understanding once that joint venture may be moving into classified work so that both of the partners are prepared as well as the individuals who may be working at the joint venture itself. So that's one issue we see. The other is foreign ownership, control or influence, right? Again, with this joint venture, it adds a layer of complexity. And so JVs are structured in different ways. Sometimes they're 50-50, sometimes they're 60-40, etc. And so depending on how the joint venture is created and whether there is a foreign owner as part of the joint venture, that may require a FOCI mitigation instrument. So you may have joint ventures that, again, they're both joint ventures, but they require different FOCI instruments. For instance, a U.S. company is engaged in a joint venture with a foreign company. The U.S. company owns 60 percent, the foreign company owns 40 percent. You may be able to establish a so-called security control agreement. However, let's flip the percentages: 60 percent foreign and 40 percent U.S. Well, it's still a joint venture, but based on the ownership percentages, that may move you up to a more stringent FOCI mitigation instrument, such as a special security agreement. So those are issues that we often see. And then I guess the last is sometimes a joint venture is sort of a skeleton operation, but when it establishes that it's working on classified contracts, there's sort of an administrative burden that goes along with it. There may be security plans, security instruments, etc. that have to be implemented at the joint venture level. So even if it's a relatively new and small company, it needs to be prepared to handle and deal with administrative burden.

Molly O'Casey: Interesting. Well, thank you for coming on, Andrew.

Andrew McAllister: Of course, thanks for having me.

Molly O'Casey This area is full of acronyms. This week we had JV, or joint venture, FOCI, or foreign ownership, control or influence, DCSA, or Defense Counterintelligence and Security Agency, and GCA, government contracting activity. So each episode we ask our speaker to explain an acronym that featured in the episode with wrong answers only. Andrew, would you like to choose an acronym?

Andrew McAllister: Absolutely. I'm going to go with JV, jumbo vision. My reason for selecting that is, in this area in particular, I think it's important to take a step back, take inventory of exactly what the holistic view is. How is the joint venture established? Is it by contract? Is it a separate entity? Who are the owners? What are the percentage ownership of each? And so I think before getting into sort of the weeds of DCSA and facility security clearances, it's important to have that holistic jumbo vision.

Molly O'Casey: I look forward to having jumbo vision. With that, I hope everyone has a great week.