Transcript

Senior Defense Leaders Brief on Trusted Capital Digital Marketplace

Jan. 13, 2021
Ellen M. Lord, Undersecretary Of Defense For Acquisition And Sustainment; Katie Arrington, Chief Information Security Officer, Office Of The Under Secretary Of Defense For Acquisition And Sustainment

STAFF:  Good morning.  Thank you for joining us today.

Today, we have Undersecretary Lord and Chief Information Security Officer for A&S Katie Arrington.  They are here to discuss the trusted capital program and the digital marketplace launch.

Following some opening remarks from Ms. Lord, they will take questions.  We ask that you keep your questions within the scope of today's topic.  We have about 30 minutes for today's presser.  And with that, I will turn it over to Ms. Lord.

USD(A&S) ELLEN M. LORD:  Thank you, Jessica, and I appreciate everyone joining us today, Katie Arrington and me.  So we're very excited to be here, talking about our Trusted Capital Marketplace -- it's actually our Trusted Capital Digital Marketplace.

So the Defense Industrial Base, or the DIB, as we call it, really represents the nexus of economic and national security in the U.S.  In addition to supporting and encouraging small businesses, our responsibilities in A&S includes establishing policies to maximize United States' competitive advantage and ensuring robust, secure and resilient national industrial base capabilities.

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 security can be undermined by acquisition of companies in the defense and dual use sectors by entities that are U.S.-based but are actually owned or controlled by adversarial foreign entities.  Although DOD will always have a diverse domestic and international supply chain, we recognize that this supply chain diversity comes with some risk.

One of the risk archetypes identified in the Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States Report written in response to the Executive Order 13806 was dependency on foreign capital and supply chains.

COVID-19 magnified that risk and the difficulties of identifying and appropriately addressing adversarial off-shore sources of capital during times of global emergencies.  For instance, 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 other key allies, according to the source globaldata.com.

The department has three main tools to combat this area of economic and national security concern.  Number one, our mergers and acquisitions team, which works closely with the Department of Justice and Federal Trade Commission counterparts.  Number two, the interagency Committee on Foreign Investment in the United States, or CFIUS.  And now, DOD's new trusted capital program, which is what we're here to discuss today.

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.  Trusted capital works by providing opportunities for trusted financial institutions and qualifying companies to explore mutually beneficial partnerships in support of national security goals.

Aligned with the National Defense Strategy, the trusted capital program provides a more lethal force by creating new partnerships in order to reform the way the government will provide opportunity for innovation.  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.

TCM launched in December 2020 and both companies and capital providers are beginning to sign up.  Each will undergo a rigorous due diligence process before they are accepted into the marketplace to ensure foreign ownership, control, and influence is non-existent.

Specifically, trusted finance partners will be able to apply via the trusted capital landing page and technology innovation providers will be required to receive a recommendation once going through our security screening processes.

We need to collectively work to bring all the relevant resources together at the right time.  Congress has created some very effective tools to assist in this effort, such as the opportunity zones created in the Tax Code and Jobs Act of 2017, but we also need to do more to maintain our national security.

One such proposal would create National Security Qualified Companies and National Security Qualified Funds.  We abbreviate those, as we always abbreviate things here at DOD, as NSQC and NSQF.  These new designations in the tax code for capability providers, NSQC, and capital providers, NSQF, would allow private investment in companies working on technology critical to national security, under certain conditions, to be eligible for preferential tax treatment.

Both National Security Qualified Companies and Funds would be required to meet the trusted capital program requirements.  This would include national security and supply chain due diligence checks performed at least annually on capital and capability providers that opt into the program via the Trusted Capital open enrollment in Gov Cloud IL4 online platforms.

The intent of this proposal is to incentivize additional domestic investment from trusted sources of capital and diminish reliance on capital offered by adversaries within the National Security Innovation Base.

As you can tell, this system of systems is focused on using market incentives to build broader relationships within the innovation ecosystem, and drive behavior within that ecosystem to crowd out adversarial capital to defend both our economic and national security.

Before taking your questions, I would like to take a moment to announce the release of F.Y. 2019 report on defense spending by state from the Office of Local Defense Community Cooperation, formerly known as the Office of Economic Adjustment.

This report, which will be published today -- here is the report -- presents the results of a state-by-state analysis of U.S. Department of Defense, or DOD, contract and personnel spending during Fiscal Year 2019.  The report's graphs, maps, and tables present a range of findings such as total spending figures, categories of contracted goods and services, major defense spenders, and numbers and types of defense personnel.

State and local officials may use this information to assess a region's dependence on defense spending, and to target assistance to support more resilient communities and companies.

I urge you to view the report, once published, by visiting the Office of Economic Adjustment to Office of Local Defense Community Cooperation's website at OEA.gov.

With that, I want to thank you for allowing me to take this time to discuss these important issues with you, and I will mention that we do have trifolds on Trusted Capital that are a great ready reference.

All right, thank you very much, back to you, Jessica.

STAFF:  If anybody is interested in the trifolds, we can certainly send you a copy over e-mail.

So let's go ahead and take some questions.

We will start with Tony Capaccio.

Q:  Hi, Ms. Lord, thanks for doing this and we appreciate the access you've given over the last few years and wish you well in your next endeavors.

Can you give a sense of how many companies, both providers and companies seeking financial assistance, have been identified?  And can you give us the names of some of the companies and a couple success stories?

MS. LORD:  So I'm going to vector over to Katie Arrington to talk specifics, but I will tell you that her team is processing a number and there are a number of both capacity or capability providers as well as capital providers in there.

Katie?

CISO KATIE ARRINGTON:  So good morning, Tony.  We have about -- before I came up to the press conference this morning, we had about 128 capability providers logged into the system already, and we just launched it just before the holidays.  So people are just getting into it.

We have, on average, 30 of the capital providers.  We -- the prior Trusted Capital program, we're actually taking those capital provide -- partners and bringing them on.  Some of the names, you know, of the capital providers would be, like, ACORN or Veritas, companies that we're looking at, that are entered into the program, Blue Sky being one of them.

So they're varied.  What they do, the -- the capability providers, in the trifolds, you'll see we have sector areas.  We have 27 sector areas that we're really focused on.

We're working across the department and the -- the COCOMs, but also looking outward to other federal agencies so that we can really bring together the best, what NASA is looking for, DARPA is looking for, and doing the best to bring the capital providers that are very interested in supporting our national defense, and getting them directly in line with those people with the most innovative, cutting-edge technologies.

MS. LORD:  And, Tony, building --

(CROSSTALK)

Q:  Could I ask you one follow-up?  Has the Biden -- has the Biden transition team been briefed on the -- the program?

MS. LORD:  We have had a whole series of very productive briefings to the Biden team, but I need to vector to them to share with you what we are working on with them, as that's really their purview.

I did want to make the point, Tony, just building on what Katie said, that obviously we know especially small companies bring the most innovation to the department, so we are really hoping to diversify our defense-industrial base to bring on a lot of nontraditional companies to work with us.

And this is a fantastic way for those companies, not only to identify themselves to the Department of Defense, but really almost get into a speed-dating app with all kinds of capital providers that are very interested in finding those innovation providers for the department's critical technologies.

Q:  Thank you and good luck.

MS. LORD:  Thank you.

MS. ARRINGTON:  Thank you.

STAFF:  All right, Mike Stone, Reuters?

Q:  Hi, thanks for doing this.  Just wanted to address the insurrection from the other day.  As it pertains to some of the members of the House Armed Services Committee, who work hand-in-hand with the Pentagon on allowing for the NDAA to go through and so forth.

Does the -- does the voting by some of the members of the House Armed Services Committee not certify the 2020 election, does that create a problem for the Pentagon moving forward as it looks to procure new weapons systems?  Create a way the Biden administration would potentially hinder the Pentagon's agenda?

MS. LORD:  So, Mike, thank you for the question.  However, I would not want to opine on what the Biden administration will do.  With all due respect to the incoming administration, I want to let them speak for themselves.  Thank you.

STAFF:  All right, we'll go to Jared from Fed News.

Q:  Hey, good morning, thanks for doing this.  I wanted to ask about the vetting process for both capital providers and capability providers, and specifically I'm interested in how you're thinking about striking the balance between having a process that you feel confident in, and not making it so onerous that nobody wants to take part in the thing.

MS. LORD:  Yes, that's a great question and I think supply chain illumination and understanding who we are working with has become all the more important now that, with our National Defense Strategy, we are focusing on near-peer competition and we know that there is some economic warfare, so to speak, going on.

So we have thought about that, and we are very clear on the process.  So I will hand over to Katie to talk a little bit about the tools we use, and frankly the speed with which we do this because we need to do it at the speed of relevance.

Katie?

MS. ARRINGTON:  Thank you, ma'am.

So, at the start of the pandemic actually, we, in the Department of Defense -- thank you to the Honorable Ms. Lord because we were able to change the game on supply chain with using commercially available tools.

So one of them for the trusted capital program is a company called Exiger DDIQ.  We go through, we run the company through, we can look at their financial -- anything on the company from who is working on the boards of the company, where their financing has come from, legal issues, etc.  We generally run those reports, they take about a day to get through.

I have a team inside the Pentagon here of very qualified, experienced professionals that range from lawyers to accountants.  We go through -- and security analysis people -- and we vet the companies for adversarial impact.

It takes about a week to get through the process.  We're trying to make that as expedited as possible.  Anyone entering into the program does fill out an application and give us permissions to do these -- these verifications on them, both the capital providers and the capability providers.

MS. LORD:  And just again, building on what Katie said, one of the areas of focus in Acquisition & Sustainment is understanding all of the tools out there.  In fact, I just had a very productive conversation with Bob Work over the last couple days about all of the different capability to illuminate beneficial ownership of companies and the genesis of capital.  He had actually started on a little bit of that work during the last administration.  So this is an ongoing effort and we really are building on what's come before us.

One of the silver linings of COVID was as DOD supported HHS with the medical supply chain, we had an enormous volume of contracting we needed to do in a relatively short period of time, and that really was the catalyst for us beginning to use these tools on a routine basis and now we've obviously brought that back to our Defense Industrial Base.

Jessica?

STAFF:  Okay.  Aaron Mehta, Defense News?

Q:  Yes, thanks, ma'am, appreciate you doing this, and echoing others comments, appreciate over the last couple of years your openness.  A quick question for Ms. Arrington -- is there a number you can put on adversarial capital, that you actually know, like, other countries are investing X billions of dollars in U.S. defense firms?

And for Ms. Lord, just looking ahead, what are the key milestone decisions or key choices that your successors are going to have to focus on in the coming, you know, 12 to 18 months?  I know you don't want to say what they should do but what are just the things that need to get done that they need to prioritize in their first part of the term?

MS. LORD:  Katie, over to you to answer the first.

MS. ARRINGTON:  So Ms. Lord, actually, in her opening statement -- between January and April, we -- we saw at least $4.5 billion.  We're still going through all of that.  Things were happening so quickly.  Companies were, you know, concerned about the capability of staying in business and were taking loans from places they weren't 100 percent certain, the -- the origins.  We're working through that but it definitely has happened and, you know, $4.5 billion would be an easy start.

MS. LORD:  So to answer your question, Aaron, there are a number of key MDAP decisions coming up.  Obviously the Army has integrated air and missile defense -- very, very important -- coming up, as well as their future vertical lift.

From the Air Force and Navy, we continue to look at F-35 and finishing up in the joint simulation environment.  Those are a few of the keys.  I'd say Missile Defense Agency looking at next generation interceptor, trades that we need to make.

We know that our budgets are flat or going down, so our purchasing power is coming down.  The world hasn't gotten any safer so we need to make smart decisions.  And it is my objective and A&S's objective to allow the next administration to make extremely data-driven decisions.

I'm very proud of the work we've done, from pulling from authoritative data sources into Advana so that now we no longer fat finger all kinds of information into monthly scorecards but we actually can go into systems.  We don't develop PowerPoints, we go into the Advana system and actually look at, you know, cost, schedule, performance, any cybersecurity issues.

So I hope to leave our successors with a very, very data-driven process that allows them to make the best decisions, given the resources they have.  Thank you.

STAFF:  Okay.  Paul McLeary, Breaking Defense?

Q:  Hi, good morning, thank you for doing this, and like -- as others have said, thanks for doing this over the last several years.  Also, I want to look forward a little bit here.  You know, given the insurrection and the domestic -- potential for domestic terrorism, how can you deal with that from a security perspective, from U.S. contractors, the potential for sabotage or you know, perverse actors inside the industrial base?

MS. LORD:  Well I think the one area that has evolved the most in my time here at DOD has been the whole realm of cyber warfare, cybersecurity, and we have made it a focus of A&S to make sure we put systems into place that again can quantify what actions and reactions are.

So I think our CMMC, which I always say is like ISO standards are for quality, CMMC is to cybersecurity the same way.  We have really developed a framework and an implementation schedule over five years, which we think is very reasonable, to give our Defense Industrial Base the tools to ensure that they are secure.

On the other hand, we work very, very closely with Joint Staff and NSA, looking at our fielded weapons systems and making sure that we cyber-harden them.  From a proactive point of view, as we've re-written 5000, we now have many more requirements and policies around cyber-secure systems.  So the way to deal with this is to really design it in, design cybersecurity in.

All of that being said, we also work very closely with our colleagues at INS to make sure that they have oversight in terms of what the Defense Industrial Base is doing, and there is an ongoing dialogue. I will say on Christmas Eve, I was on the telephone about ransomware.  So we understand there are a lot of attacks.  In that case, we had a really incredibly collaborative discussion in the interagency, working with our Treasury colleagues and others, and we're helping our Defense Industrial Base harden their systems.  But we are there shoulder-to-shoulder with them when adversaries make a move, and we will be with them all the way.  Thank you.

STAFF:  Okay.  Let's go to Marcus from Defense One.

Q:  Hey, so I -- to echo my colleagues again, thank you for continuing to do these briefings.

Since every question I had about Trusted Capital Marketplace has been asked, I'll just ask you, maybe, for a reflection question on M&A.  We've seen a lot of it, everything from, you know, Raytheon, UTC, L3Harris, et cetera.  We've seen a lot of middle-tier M&A lately, and I was wondering if any of this middle-tier M&A is causing any type of concerns about creating less competition within the -- that tier within the Pentagon.  Thanks.

MS. LORD:  So Aaron -- oh, this is --

STAFF:  Marcus.

MS. LORD:  This is Marcus.  I'm sorry.  Marcus, I'll tell you, I always say competition is our friend.  Competition typically brings out the best in everyone.

That being said, I feel very strongly about not interfering in capital markets, and I believe, you know, we need a free marketplace where companies decide themselves what they want to do.  So I am particularly focused on those small, innovative companies and bringing more and more of them up so that we grow them into the middle tier, and I think quite often there is cutting-edge technology.  There are creative ideas.  There are actually solutions to our warfighting gaps.  There are features that can be added to our current platforms and systems, yet the companies, the individuals that actually have that don't know how to translate it into DOD.

So one of the things we're trying to do through this Trusted Capital Marketplace is make it easy for those companies to meet up with capital providers that perhaps can give them the structure, the funding, and the direction to guide them into DOD so that we can quickly incorporate what they have to offer.  And I'm extremely excited and very, very optimistic about our rewrite of 5000, the whole Adaptive Acquisition Framework.  We are finding ways to speed up transactions to make these things happen faster, and I'm hoping that we can really vector towards the offense of bringing this capability downrange to growing companies.

I have spent so much of my time here on CFIUS and working kind of on the defensive side of things.  I want the Department of Defense to go on the offense in terms of working with our Defense Industrial Base, not only those that work with us today, but those that have the potential to join in our national defense because truly, unless we have that healthy, growing, very resilient, very secure industrial base, we cannot only -- we can't achieve both national security, but we can't achieve economic security either, and economic security and national security are so very, very intertwined.

So I'm actually very bullish about what we've done in the department to identify critical technologies to couple very, very tightly between R&E and A&S so that we can translate that technical capability to warfighting advantage, bringing all of those new developments across the valley of death into programs, getting them into the hands of the warfighter very, very quickly.  I'm hoping that we are doing less and less and less of talking around conference room tables and generating PowerPoint decks, and that what we're really doing is very quickly getting prototypes into the hands of the warfighter so that we can get those cycles of learning downrange very quickly.

It's exciting.  Doing that, coupled with, really, a digital environment with what we're doing in terms of software development with our new software pathways.  If we truly embrace digital engineering, we can close that cycle so quickly and get that capability out there.  And these new small companies, most of them understand developing in a cloud environment.  They understand not building models.  They understand going right to CNC machines with their digital designs.  So enormous, enormous ability in the future to take all of this and really move it forward.

STAFF:  All right, thank you.  We have time for one more question, so I will ask Justin Doubleday from Inside Defense.

Q:  Hey, thanks for taking my question.  And as Marcus mentioned, I think all the questions about Trusted Capital of mine have been taken, so I just wanted to ask really quickly, for both of you, have -- do either of you expect to stay on past January 20th?  Have you been asked to?

MS. LORD:  I will answer for both of us and say that we are working with the transition teams, and we leave it to the incoming administration to make any announcements about how they plan to move forward with politicals and so forth, although I can say that Katie is a career employee, so she will definitely be here.

STAFF:  All right.  With that, I wanted to turn it over to Ms. Lord, if you have any closing comment.

MS. LORD:  I just want to say, this will most likely be my last presser here in the Briefing Room, and I so appreciate how all of you have taken the time to listen to what we have had to say over the last few years here, ask very, very good questions and really help echo and amplify the messages we have, because acquisition and sustainment are so very, very critical in terms of making the warfighter successful.  And when we talk about engagement with partners and allies, really, technology and acquisition are the tools of diplomacy that we have.  So I appreciate you covering the issues that we think are so important to us.

STAFF:  All right, thank you, everybody, and please do follow up with me if you have any other questions.

MS. LORD:  Thank you.