NAS Statement on the Deterrent Act

National Association of Scholars

The National Association of Scholars (NAS) is pleased to see the introduction of the DETERRENT Act, a new bill by Education and the Workforce Committee Chairwoman Virginia Foxx and California representative Michelle Steel. The bill attempts to fix higher education foreign gift reporting requirements by closing loopholes and increasing penalties. 

The requirement to report foreign gifts and contracts appears in Section 117 of the Higher Education Act (HEA). It was added in the 1986 amendments to the HEA to address concerns of rising foreign influence at elite universities. Higher education institutions, however, ignored disclosure requirements for years. A 2020 Department of Education (ED) report found several universities failed to report more than $6.5 billion in foreign funds, primarily from China, Saudi Arabia, and Qatar. At the NAS, we continue to investigate failed reporting and have found egregious violations even after the crackdown under the Trump administration.  

The NAS is pleased to see many of our policy proposals adopted in this bill. But we also believe the Act could do more to ensure that universities obey the law. 

Strengths

Schools must disclose more foreign funds

The Act reduces the reporting threshold for universities from $250,000 to $50,000 per calendar year. Universities, furthermore, also must report gifts and contracts of any amount if they are made with “countries and entities of concern.” Universities with high levels of research activity ($50 million+) must also require individual faculty and staff to disclose foreign money they’ve received if it is over $5,000. Each of these universities would be required to present this information through its own online database. Finally, the ED would require universities to report their investments in other countries under this bill. 

Reducing the reporting threshold ensures Americans will know how much foreign money is going to universities and, in turn, how much influence it might be buying. Smaller grants can still be influential, as illustrated by a University of Maryland professor who accepted $125,000 from Alibaba to help build China’s surveillance state. That amount was not required to be disclosed under current law but would need to be reported under the Act.  

Harsher penalties for non-compliance

One of the central flaws of the current version of Section 117 is its minimal penalties for non-compliance. Currently, universities that fail to comply with reporting requirements are only required to pay enforcement costs to the government. This amounts to nothing more than a slap on the wrist, considering how much funding these universities receive. On the other hand, this amendment provides a detailed list of serious fines imposed for non-compliance. These fines provide universities a clear incentive to report funds and penalties are harsher for subsequent violations.

The Act, on the other hand, imposes serious fines on universities for non-compliance. It therefore provides a clear incentive for schools to report funds, with even harsher penalties for subsequent violations.

Type of Violation

Fine

Failure to disclose gift/contract, non-country of concern

First time: Minimum $50K, maximum monetary value of gift

Subsequent: Minimum $100K, maximum twice the monetary value of the gift

Failure to disclose gift/contract, country of concern

First time: 5-10% of HEA federal funds institution receives

Subsequent: At least 20% of HEA federal funds institution receives

Failure to disclose gift/contract, institution substantially controlled by foreign funds

First time: At least 10% of HEA federal funds institution receives

Subsequent: At least 20% of HEA federal funds institution receives

Failure to disclose gift/contract, institution-level database

First time: Minimum $250K, maximum total of required disclosure

Subsequent: Minimum $500K, maximum twice the total of required disclosure

Failure to report foreign investments

First time: 50-100% of the sum of the aggregate fair market value of investments and the combined value of all investments sold in a calendar year

Subsequent: 100-200% of the sum of the aggregate fair market value of investments and the combined value of all investments sold in a calendar year

The maximum fines for failure to report foreign gifts and contracts are equal to the dollar amount of the gift or contract, with a minimum fine of $50,000 for first-time offenses. This is a welcome change. But we would encourage lawmakers to further reduce the discretion that this type of fine structure allows the ED. A set fine of above 100% of the value of the gift or contract along with a minimum penalty would create a clearer incentive for universities to comply (e.g. Pennsylvania law 24 P.S. 6301-6307 imposes a civil penalty of 105% of the amount for each undisclosed report). It would also prevent a lax administration, such as the current one, from imposing low fines to protect the interests of higher education lobbying groups. 

Tying disclosure compliance with access to federal student aid

Universities that wish to keep access to federal funds through the Higher Education Act must comply with these disclosure requirements. The ED would cut a university’s access to programs such as federal student aid for two years if an institution disregards the new disclosure requirements for three consecutive years. Universities could regain eligibility if they proved they have followed requirements for two years after being deemed ineligible. Given that federal student aid is a key source of revenue for most universities, as we explored in our report Priced Out, tying federal funds eligibility to disclosure requirements is also a strong incentive for universities to comply.

Areas of Improvement

Make donor names publicly available

The Act would prohibit the release of foreign donor names to the public, both through Freedom of Information Act (FOIA) requests and through the publicly available database on the ED’s website. We believe this is a grave mistake that will shield universities from public scrutiny and create loopholes that foreign donors would exploit. 

Consider our recent investigation into the failure of nine universities to report $1 million grants from ByteDance, a Chinese company that is incorporated in the Cayman Islands. If these universities reported ByteDance’s funds as required under the Act, the gifts would appear to be coming from the Cayman Islands, not China. ByteDance’s complex corporate structure, furthermore, makes it unlikely that any modification to the bill’s definition of the country of origin would fully capture the nature of these funds. 

Some might argue that since the Secretary of Education would still have access to the donor names under the Act, that this problem could be avoided. This all depends on the ED’s ability and desire to keep close tabs on reported gifts. Some administrations will be better than others, and resource constraints may still stymie even an enthusiastic administration. 

Making the donor names publicly available allows the public and watchdog organizations to monitor suspicious gifts in a more efficient, decentralized fashion. The public can decide whether a gift is of concern when the country of origin is ambiguous.

Clarify the definition of “attributable country” 

One objection to releasing donor names to the public is that American citizens who live abroad in hostile countries could become vulnerable targets if they donate to an American university. Our primary response to this is that even if true, such individuals should avoid donating if they feel it puts them in danger. The right to transparency for American citizens should trump the privilege of foreign nationals and American expatriates to donate to American universities. 

Luckily, such a trade-off is not necessary to consider, given that the bill’s definition of “foreign source” already excludes such individuals from reporting requirements. The definition of foreign source in the Act includes “a natural person who is not a citizen… of the United States,” meaning that a citizen of the United States who lives abroad would not be considered a foreign source for the purposes of this bill. 

It is likely that the reason some have misunderstood this provision is that the bill’s definition of “attributable country” differs somewhat from the definition of foreign source. A small change to the definition of “attributable country” would therefore address this concern and clarify the law. The current version of the bill states that an attributable country is either the country of citizenship or primary residence of an individual, or the country of incorporation or primary place of business of a legal entity (e.g. corporation). We believe it is a mistake to place citizenship on equal footing with primary residence, and incorporation on equal footing with place of business. We recommend lawmakers to specify that citizenship/incorporation should be considered first. Only if citizenship/incorporation results in an ambiguous determination, such as for dual citizens, should the ED use primary residence/place of business. 

This change correctly addresses two situations that the current version does not:

Situation #1: An American citizen who lives abroad and donates to a university. The current definition could classify the country of origin as the American citizen’s country of residence. This kind of donation would instead be viewed as domestic under our definition. 

Situation #2: A foreign national who lives in the U.S. donates to a university. The current definition could classify the country of origin as the U.S. This kind of donation would be viewed as foreign under our definition, and would be reported to the ED as coming from the foreign national’s country of citizenship. 

With this inconsistency corrected, American citizens living abroad would not need to fear their donations being reported at all. Foreigners, additionally, could not funnel their donations through non-citizen family members who happen to live in the U.S. to avoid the disclosure of their country of origin. When the definition of “attributable country” still results in a questionable determination, such as in the case of ByteDance, the release of the donor name allows the public to make up their own minds. 

Expand the definition of “agent”

When defining a “foreign source,” the Act includes an “agent” as one type of foreign source. Agents are defined as subsidiaries or affiliates of foreign legal entities, or entities that operate “primarily for the benefit of… a foreign legal entity.” Thus, funds from such agents would need to be reported to the ED, regardless of whether the agent is a citizen of or incorporated in the U.S. This is advisable, because without such a category of foreign source, foreign donors could potentially funnel money through American entities in order to avoid reporting. However, this definition should be expanded to include entities that do not operate primarily for the benefit of foreign legal entities. American organizations which operate primarily for other purposes should still not be allowed to funnel money for foreign donors without the funds being reported. 

Conclusion

The NAS welcomes these well-needed changes to Section 117 that offer further clarity on terms and enforcement. The DETERRENT Act will enable both the public and the government to mitigate the malign influence of foreign adversaries through the power of information. It will have a chilling effect on universities’ partnerships with bad actors. We hope that lawmakers will fix the remaining oversights in the bill using our suggestions to make sure that all loopholes are closed. Universities have skirted foreign disclosure laws for years, and it is time to hold them accountable. 


Photo by Scott Graham on Unsplash

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