JUST IN: Pentagon Tackling Adversarial Capital with New Trusted Marketplace

By Yasmin Tadjdeh

The Defense Department recently launched what it calls a “trusted capital digital marketplace” that officials hope will deter problematic investment in the U.S. defense industrial base, said the Pentagon’s chief weapons buyer Jan. 13.

The defense industrial base “really represents the nexus of economic and national security in the U.S.,” said Undersecretary of Defense for Acquisition and Sustainment Ellen Lord. “Many small- and mid-sized companies in the DIB are vulnerable to adversarial capital. So we need to make sure companies can stay in business without losing their intellectual property — the foundation of so many critical technologies.”

Economic and national security can be undermined by the acquisition of companies in the defense and commercial sectors that develop key technologies, by organizations that are U.S.-based but are actually owned or controlled by hostile foreign entities, she said during a briefing at the Pentagon days before President-Elect Joe Biden’s team is set to take charge.

Companies are even more vulnerable now due to the ongoing COVID-19 pandemic, Lord noted. For example, from January to April 2020, China announced 57 outbound mergers and acquisitions worth $9.9 billion and 145 outbound investments worth $4.5 billion in the United States and allied nations, she said. The U.S. government views China as a great power competitor.

There are multiple lines of defense to mitigate this type of unwanted investment, she noted. This includes the department’s mergers and acquisitions team which works closely with the Justice Department, Federal Trade Commission and the Committee on Foreign Investment in the United States to review proposed M&A to determine if they raise concerns.

The Trusted Capital initiative is an effort to help connect capital providers that don't pose security risks with U.S. companies in need of funding.

“The Trusted Capital initiative is a DoD-led, whole-of-government system of systems that supports trusted partnerships between critical capability companies and capital providers,” she said. “Trusted capital works by providing opportunities for trusted financial institutes and qualifying companies to explore mutually beneficial partnerships in support of national security goals.”

The program creates a “more lethal force” by establishing new partnerships in order to reform the way the government will provide opportunity for innovation, Lord said.

“To make the Trusted Capital program an enduring capability, we created the Trusted Capital Marketplace or TCM, which is a digital market platform for both companies and capital providers,” she said.

The marketplace — which Lord likened to a speed-dating app — launched in December, and companies and capital providers have begun to sign up. They will undergo a rigorous vetting process before they are accepted to ensure foreign ownership, control and influence is non-existent, she said.

Katie Arrington, chief information security office for acquisition and sustainment, said about 128 capability providers and 30 capital providers have already used the platform.

Arrington noted that there are 27 areas that the department is focused on for capability providers. They include advanced computing, advanced manufacturing, artificial intelligence, autonomous systems, biotechnologies, communication and networking systems, quantum information, semiconductors and space technologies, according to a Pentagon document.

Finance partners will be able to apply via a trusted capital landing page. Technology providers will be required to receive a recommendation after going through the Pentagon’s security screening processes, Lord said.

Meanwhile, there is a need to offer special tax incentives, she said. For example, one proposal under consideration would establish national security qualified companies — or NSQC — and national security qualified funds — or NSQF — in the tax code.

“These new designations … would allow private investment in companies working on technology critical to national security under certain conditions to be eligible for preferential tax treatment,” she said. “Both national security qualified companies and funds would be required to meet the Trusted Capital program requirements.”

Topics: Acquisition, Defense Department, Industrial Base

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