Supplier ownership should be considered in assessing supply chain risk

The Defense Department supply chain has become an attractive target to adversaries looking to compromise U.S. military capabilities, critical infrastructure, national security intelligence and intellectual property.

By attacking suppliers -- even those many tiers deep in the supply chain -- adversaries can install intentionally harmful or counterfeit hardware or software into a government system, disrupt production or distribution of critical products or steal valuable intellectual property.

The National Counterintelligence and Security Center warned in its 2018 report, Foreign Economic Espionage in Cyberspace, of "pervasive threats posed by foreign intelligence services and other threat actors" against U.S. research, development and manufacturing sectors. China, Russia and Iran, the report says, stand out as three of the most capable and active cyber actors tied to economic espionage and the potential theft of U.S. trade secrets and proprietary information, and it adds that "software supply chain infiltration already threatens the critical infrastructure sector and is poised to threaten other sectors."

Consequently, policy makers have installed numerous policy directives and guidelines to make cybersecurity a key component of supply chain risk management (SCRM) for government agencies. The biggest recent development has been the Defense Department's effort to develop a standardized, accredited risk assessment regime, called the Cybersecurity Maturity Model Certification (CMMC).

Per the first version of the CMMC, which was released on Jan. 31, 2020, vendors at all tiers of the DOD supply chain will be audited and certified by independent third-party organizations as adhering to various cybersecurity standards and best practices. Moreover, it will certify suppliers across five maturity levels, each certifying that a given vendor meets a certain mix of cybersecurity controls and processes that, when implemented, will reduce risk against a specific set of cyber threats.

It was not long ago that the Defense Department relied on prime contractors to ensure their own supply chains were secure from cybersecurity threats. But that approach has not been effective, and as cyberattacks against U.S. military supply chains have grown more sophisticated, frequent and successful, that strategy is now being replaced by one more stringent and rigorous: the CMMC.

This initiative is sorely needed. It can harden suppliers' compliance around expected cybersecurity standards, practices and protocols to help avoid supply chain attacks that can potentially cause significant harm to national security. All suppliers at every level of the supply chain will be affected and must assess their own cybersecurity risk as well as those of their own sub-tier vendors.

Many details about the CMMC remain to be seen, but a key question to be answered is whether ownership of suppliers will be considered a factor for future CMMC assessments at some level. There is a strong argument that it should be a factor, at least for higher-level CMMC assessments.

Here's why: A big problem is that many vendors lack transparency into their own supply chains. So how can vendors – as well as their government customers — be assured that their sub-tier suppliers do not pose threats or vulnerabilities? How can they know whether a supplier four or five tiers down has an owner with direct or indirect business connections to known adversaries? One way to help do that is to make sure vendors at all tiers have been thoroughly vetted for potential ownership conflicts of interest.

This is a growing concern today because many companies in the defense industrial base -- especially smaller companies -- are increasingly stressed by the ongoing COVID-19 pandemic and associated economic fallout. DOD is concerned that, just like other businesses impacted by COVID-19, suppliers, particularly the smaller ones, are exploring options for staying in business -- options that may include lifelines in the form of loans or investments from interests that are known or unknown affiliates of U.S. adversaries.

This is a concern already being voiced within the Pentagon. Ellen Lord, the Defense Department's top acquisition official, said in a recent press conference that hundreds of defense suppliers have had to close to due the financial stresses of the COVID-19 pandemic and that she is very concerned about U.S. adversaries targeting financially struggling suppliers for mergers and acquisitions. "We've talked a lot with other nations, particularly in Europe, and we've seen a lot of shell companies coming in where the beneficial owner ends up being one of our adversaries. I'm particularly concerned about that," Lord said.

The CMMC initiative is critical because it makes cybersecurity a far more prominent factor when assessing supply chain risk. But that, by itself, is not sufficient at a time when there is so little visibility into who actually owns the sub-tier suppliers of our defense industrial base. Given the financial stresses bearing down on many of those companies, supplier ownership should be tracked and assessed as a factor in today's supply chain risk assessments.