FY24 NDAA: Navigating Expanded Restrictions on DoD Contracting, Buy American Provisions, and Other Key National Security Provisions

On December 14, the United States Congress passed the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2024.

The FY24 NDAA contains numerous provisions that impose new or expanded prohibitions on Department of Defense (DoD) procurement activities, including an effort to ascertain and limit the potential nexus to “countries of concern,” such as China and Russia. Major changes in the FY24 NDAA include a requirement that companies providing consulting services to the DoD make certifications regarding potential conflicts of interest involving “covered foreign entities,” including the Chinese and Russian governments, a prohibition on the use of DoD funds to procure batteries produced by certain entities, and the new “American Security Drone Act of 2023” that, among other things, prohibits the procurement of any “covered unmanned aircraft system” that is “manufactured or assembled by a covered foreign entity.”

The FY24 NDAA also furthers the recent focus on increased preference for U.S. sources of supply through numerous provisions, including increased domestic content requirements, and a new requirement to provide DoD premerger notification. Finally, the FY24 NDAA includes requirements to conduct new studies and assessments that might result in the imposition of additional restrictions in future NDAAs.

This Advisory offers an overview of key provisions from the FY24 NDAA.

Restrictions on Dealings With Entities That Have Ties to China

The FY24 NDAA imposes additional restrictions on dealings with entities that have ties to China. Key provisions include:

• Section 805: Prohibition of DoD procurement related to entities identified as Chinese military companies operating in the United States
• Section 812: Preventing conflicts of interest for entities that provide certain consulting services to DoD
• Section 825: Countering adversary logistics information technologies

Section 805 prohibits DoD from contracting with, or entering into contracts that include goods or services produced or developed by, the Chinese military companies that are identified by DoD pursuant to Section 1260H of the FY21 NDAA. Notably, Section 805 creates exceptions for DoD’s “procurement of goods, services, or technology to provide a service that connects to the facilities of a third party, including backhaul, roaming, and interconnection arrangements.” Section 805 also lays out an exception for “components,” defined in 41 U.S.C. § 105 as “an item supplied to the Federal Government as part of an end item or of another component.” The prohibition on use or procurement is otherwise broad, banning not only new contracts, but also renewal and extension of existing contracts with the covered entities, with the exception of those contracts entered into with the Chinese military companies before June 30, 2026, or with other contractors before June 30, 2027. While the specifics will likely be laid out in the implementing regulations, this prohibition may require DoD contractors to conduct diligence to ascertain whether goods or services produced or developed by the identified Chinese military companies are included in their supply chain in order to confirm compliance with associated restrictions and obligations.

Section 812 seeks to prevent conflicts of interest for companies providing consulting services to DoD and assigned a North American Industry Classification System (NAICS) code beginning with 5416 (management, scientific, and technical consulting). Specifically, Section 812 requires that the Secretary of Defense amend the Defense Federal Acquisition Regulation Supplement (DFARS) to require such companies to certify that (1) neither the company nor any of its subsidiaries or affiliates holds a consulting services contract with “covered foreign entities,” including the Chinese government or (2) the company maintains an auditable Conflict of Interest Mitigation plan. That plan must identify any covered foreign entity that the company provides services to, a written course of action for avoiding, neutralizing or mitigating the actual or potential conflict of interest with DoD, and other related information.¹

Section 825 targets logistics information technologies affiliated with the Chinese government. First, it prohibits DoD from contracting with entities that provide data to “covered logistics platforms,” which include LOGINK, the national transportation logistics public information platform provided by the Chinese government. Covered logistics platforms also include other national transportation logistics information platforms affiliated with the Chinese government. Second, “covered entities,” i.e., federally funded port authorities, commercial strategic seaports, federal and state agencies and instrumentalities, and private maritime terminal companies operating in federally regulated seaports, that accept federal grant funding are prohibited from using a “covered logistics platform.”

Restrictions on Dealings With Entities That Have Ties to Russia

The FY24 NDAA imposes additional restrictions on dealings with entities that have ties to Russia. In addition to Section 812, which applies to both Russia and China, key provisions include:

• Section 804: Prohibition on contracting with persons that have fossil fuel operations with the government of the Russian Federation or the Russian energy sector
• Section 5405: Imposition of sanctions under Global Magnitsky Human Rights Accountability Act

Section 804 prohibits DoD from contracting with persons that have fossil fuel operations within Russia or the Russian energy sector. Specifically, DoD may not procure goods or services from an entity that is owned 50% or more by the Russian government, or a fossil fuel company operating in Russia. Section 804 also prohibits DoD from contracting with a person who, on or after the effective date of the FY24 NDAA, has fossil fuel business operations with such entities. This section is set to sunset on December 31, 2029. This prohibition does not apply if the Secretary of Defense and Secretary of State jointly determine that the contract: (1) is “necessary” for purposes of providing humanitarian assistance to the Russian people or for providing disaster relief or other urgent life-saving measures; (2) is vital to military readiness, basing, or operations of the United States or the North Atlantic Treaty Organization (NATO); (3) is vital to national security interest of the United States; or (4) was a business operation with a fossil fuel company in a country other than Russia that was entered into prior to the date of enactment of Section 804. Furthermore, DoD may still contract with a person who holds a valid Office of Foreign Assets Control license to operate in Russia notwithstanding the sanctions.

Section 5405 contemplates the potential for imposing sanctions under the Global Magnitsky Human Rights Accountability Act and, to that end, requires the Secretary of State to submit a report listing “all foreign persons that have engaged in significant corruption in relation to the planning, construction, or operation of the Nord Stream 2 pipeline.” The United States has previously designated NORD STREAM 2 AG to its Specially Designated Nationals and Blocked Persons List (SDN List) in March 2022.

Buy American Provisions

In line with the Biden administration’s Buy American initiative, the FY24 NDAA includes requirements for DoD to source more articles, materials, and technology domestically. Key provisions include:

• Section 833: Amendment to requirement to buy certain metals from American sources
• Section 835: Enhanced domestic content requirement for major defense acquisition programs
• Section 1414: Critical mineral independence

Section 833 amends 10 U.S.C. § 4863, which generally requires the procurement of specialty metals from domestic sources. Under this amendment, the exception relating to agreements with foreign governments is expanded. Under this amendment, DoD may also procure specialty metals as a mill product or as incorporated into a component other than an end item from another country, so long as the specialty metal is melted or produced where the mill product or component was procured or in another country for which the U.S. has a trade agreement. This rule may trigger an amendment to DFARS 252.225-7009, which currently requires domestic purchase of specialty metals incorporated in items delivered pursuant to a DoD contract. Specifically, the DFARS provision may be amended to allow an exception for “specialty metal incorporated into a component other than an end item … [that is] melted or produced … in the country from which the mill product or component is procured.” In addition, Section 833 also requires suppliers of any flight-related system or component using aerospace-grade materials to inform DoD if any such materials were manufactured or processed in China, Iran, North Korea, and Russia.

Section 835 establishes domestic content requirements for major DoD programs for the purpose of administering the Buy American Act. Under the new rule, the domestic source content standard for procurements in connection with a major defense acquisition program will become increasingly stringent, rising from 60% of the cost to 75% in 2029. The provision also establishes an exclusion for certain manufactured articles and contemplates a fallback threshold for certain foreign end products. DoD is also directed to submit a report within one year of enactment of the NDAA assessing the domestic source content of procurements carried out for a major defense program This provision may have significant impact on certain entities in the defense procurement supply chain, depending on current lines of business and sourcing.

Section 1414 requires the Under Secretary of Defense for Acquisition and Sustainment to submit, within one year of enactment of the NDAA, a strategy for the development of supply chains for DoD that are not dependent on the mining or processing of critical minerals by “covered countries,” including China, Iran, North Korea, and Russia, in order to achieve critical mineral supply chain independence by 2035.

Other Key Provisions

The FY24 NDAA contains several other provisions that may impact DoD contractors and require DoD and other federal agencies to conduct studies and assessments that may inform future restrictions in furtherance of the federal government’s national security interests. Key provisions include:

• Section 154: Prohibition on availability of funds for procurement of certain batteries
• Section 857: DoD notification of certain transactions
• Section 1312: Analysis of certain biotechnology entities
• Section 1821 to 1833: The American Security Drone Act of 2023
• Section 3523: Study on foreign ownership and control of marine terminals
• Section 7405: Assessment of threat posed to United States ports by cranes manufactured by countries of concern

Section 154 states that, beginning on October 1, 2027, no funds appropriated or made available for DoD may be obligated or expended to procure a battery produced by the following Chinese entities or their successors: Contemporary Amperex Technology Company, Limited; BYD Company, Limited; Envision Energy, Limited; EVE Energy Company, Limited; Gotion High tech Company, Limited; and Hithium Energy Storage Technology Company, Limited. Section 154 explains that a battery is considered as “produced” by one of those entities if that entity assembled or manufactured the final product, or created or otherwise provided a majority of the components.

Section 857 states that parties required to file a premerger notification and supplementary information with the Department of Justice or Federal Trade Commission under Section 7A of the Clayton Act must concurrently submit such information to DoD, if the proposed merger or acquisition would require DoD review. Generally, DoD reviews mergers or acquisitions involving major defense suppliers or non-defense contractors for which DoD is a significant customer.

Section 1312 requires the Secretary of Defense to conduct an analysis within 180 days of enactment of the NDAA regarding whether any biotechnology entities or their subsidiaries, parents, affiliates, or successors should be identified as a Chinese military company or military-civil fusion contributor. The results of the analysis may inform the designation of certain biotechnology entities as Chinese military companies and result in additional prohibitions.

Sections 1821 to 1833 were passed under the title American Security Drone Act of 2023. These provisions contain numerous prohibitions, including the Section 1823 ban on the procurement of any “covered unmanned aircraft system” that is “manufactured or assembled by a covered foreign entity,” which includes “[a]ny entity domiciled in the People’s Republic of China or subject to the influence or control by the Government of the People’s Republic of China or the Communist Party of the People’s Republic of China, as determined by the Secretary of Homeland Security.” Section 1822 provides definitions for the terms used throughout these provisions. These provisions also require that executive agencies account for existing inventories of covered unmanned aircraft systems within one year of enactment of the NDAA.

Section 3523 requires the Secretary of Transportation to contract with a federally funded research and development center to evaluate how foreign state-owned enterprises with leases, long term concessions, partial-ownership, or ownership of marine terminals at the fifteen largest United States container ports may affect United States economic and national security. The results of this evaluation may inform future restrictions on marine terminal operators and other contractors whose operation involves large container ports.

Section 7405 requires the Director of National Intelligence to assess the threat posed to United States ports by cranes manufactured by countries of concern and commercial entities of those countries, including those made by Chinese companies such as Shanghai Zhenhua Heavy Industries Co. The results of this assessment may inform potential future restrictions on foreign-made cranes.

Status of the Outbound Investment Review

In addition to discussing key provisions of the FY24 NDAA, it bears mention that several proposed provisions involving national security were left out. Notably missing from the FY24 NDAA is a specific provision regarding outbound investment review.

By way of background, President Biden passed an Executive Order on August 9 to review national security-related investments to foreign countries. The Executive Order’s goal was to curb China-based military, intelligence, surveillance, and cyber-enabled advancements by targeting United States investment in the semiconductors and microelectronics, quantum computing, and artificial intelligence (AI) sectors in China, Hong Kong, and Macao. Pursuant to the Executive Order, the Department of the Treasury that same day issued an advance notice of proposed rulemaking, its first step in establishing the program introduced in the Executive Order, which is not immediately effective until implemented by the Department of the Treasury. (For discussion of the Executive Order on outbound investment review and related advance notice of proposed rulemaking, please read our Advisory.)

Despite early deliberations included in legislative proposals for the FY24 NDAA, the NDAA does not include a specific provision regarding outbound investment review. While other standalone bills include legislative proposals on this point, the likelihood that such bills will pass in the near future is uncertain. Therefore, for now, the outbound investment review program will likely be governed by President Biden’s Executive Order and forthcoming regulations from the Department of the Treasury. It remains to be seen whether provisions regarding outbound investment review will make their way into the FY25 NDAA — as the House Financial Service Committee Chairman Patrick McHenry (R-NC), who prevented the outbound investment review provision from being included in the FY24 NDAA, is retiring in 2024.

Please contact the authors of this Advisory or other members of Arnold & Porter’s Government Contracts, National Security, or White Collar Defense & Investigations practices for more specific guidance on the potential impact of FY24 NDAA.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.