Foreign Gifts to U.S. Educational Institutions Under Increased Scrutiny

The U.S. Department of Education has started investigations into whether U.S. colleges and universities have complied with Section 117 of the Higher Education Act (HEA) regarding reporting gifts from, or contracts with, foreign sources. This is part and parcel of the Trump Administration's efforts to track potential national security issues involving foreign activities in the United States, especially with respect to China and the Middle East.

Background

Section 117 of HEA requires a two-year and four-year post-secondary school to report to the Secretary of Education if it "receives a gift from or enters into a contract with a foreign source, the value of which is $250,000 or more, considered alone or in combination with all other gifts from or contracts with that foreign source within a calendar year."¹

Although the reporting obligation can be triggered by both gifts from and contracts with foreign sources, the law applies only to certain contracts with foreign sources – specifically those contracts that involve the "acquisition by purchase, lease, or barter of property or services by the foreign source." Similar to other national security-based disclosure regimes (such as the Foreign Agents Registration Act), Section 117 imposes more extensive reporting obligations on gifts from and covered contracts with foreign governments than it does for gifts and covered contracts from non-governmental foreign sources.

Under HEA, institutions need to file the required disclosure on the following Jan. 31 or July 31, whichever occurs first after the reporting threshold is crossed.

According to Section 117, a "foreign source" broadly covers both government and private entities and their agents, and includes:²

1. a foreign government, including an agency of a foreign government
2. a legal entity created solely under the laws of a foreign state or states
3. an individual who is not a citizen or a national of the United States
4. an agent, including a subsidiary or affiliate of a foreign legal entity, acting on behalf of a foreign source

Lack of Guidance from the Education Department

Although the reporting requirements have been in place for more than 30 years, the Education Department has never issued regulations implementing Section 117. According to the American Council on Education (ACE), the Department has issued only two "Dear Colleague" letters, one in 1995³ and the other in 2004⁴, which provided limited guidance on how to comply with the reporting requirements. ACE, together with other five educational associations, has sent two letters to the Department in the first half of 2019 requesting clarification on the reporting rules.⁵

On July 3, 2019, the Department wrote in response to ACE's inquiries providing instructions on how to file the application electronically.⁶ On July 12, 2019, ACE wrote back to the Department, claiming the guidance was still not clear.⁷ Specifically, ACE emphasized that there is a lack of clarity regarding whether a gift to a university's foundation should be reported.

U.S. Government's Mounting Concerns

Not surprisingly, China has drawn special attention from the Education Department. According to Mitchell Zais, the Deputy Secretary of Education, the most recent data on the 2017-2018 school year shows that 91 educational institutions reported receiving more than $1.3 billion in gifts and contracts from foreign governmental and non-governmental sources from 105 countries.⁸ Of this amount, $222 million, or 17 percent, was from China.

The influence of the Chinese government on the U.S. higher education system is a particular concern to the U.S. government. Since 2004, the Chinese government has been sponsoring Confucius Institutes around the world, with the stated aim of promoting Chinese language and culture and facilitating cultural exchange. As of July 2019, there are approximately 90 Confucius Institutes in the United States.⁹ A Senate report published earlier this year, "China's Impact on the U.S. Education System," cited the growth of Confucius Institutes and the failure of U.S. institutes of higher education to properly report Confucius Institute gifts to the Education Department.¹⁰

Based on public information, the Education Department has initiated investigations into at least four prominent universities. This may be just the beginning of a series of investigations into U.S. educational institutions regarding reporting foreign gifts and contracts under Section 117.

Conclusion and Considerations

Colleges and universities should be cognizant of the increased regulatory scrutiny (which includes not only foreign funds but also export controls and immigration) of the higher education sector. Implementing a more robust compliance program can help prevent potential investigations and associated negative publicity.

Attorneys from Holland & Knight's International Trade Group, Public Policy & Regulation Group and Education Team are well-suited to help colleges and universities navigate these complex regulatory waters.  

Notes

¹ 20 U.S.C. 1011f

² Id.

³ "To inform postsecondary educational institutions how to report ownership or control by, contracts with, or gifts from, foreign sources," U.S. Department of Education, Dear Colleague Letter, Feb. 1, 1995.

⁴ "Reporting of Foreign Gifts, Contracts, and Relationships by Institutions," U.S. Department of Education, Dear Colleague Letter, Oct. 4, 2004.

⁵ See ACE letters of Jan. 18, 2019, and June 21, 2019.

⁶ See U.S. Department of Education response letter of July 3, 2019.

⁷ See ACE response letter of July 12, 2019.

⁸ Statement of Mitchell Zais, Deputy Secretary of Education, Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, Feb. 28, 2019.

⁹ "How Many Confucius Institutes Are in the United States?", National Association of Scholars, updated July 15, 2019.

¹⁰ "China's Impact on the U.S. Education System," Staff Report, Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.