The US Department of Education issued a highly anticipated report concluding that US colleges and universities have failed to disclose billions of dollars in foreign funding, as required by federal law.[1] The report provides greater detail on the Department’s ongoing probe of foreign influence in US higher education and highlights new compliance risks faced by colleges and universities.

Context for the Report

It is not illegal for US institutions of higher education (IHEs) to accept foreign funding, but federal law requires IHEs to publicly report to the Department of Education foreign gifts and contracts.[2] Although Congress enacted the relevant legislation—known as Section 117—in 1986, the Department did little for decades to ensure compliance with the reporting requirement or to confirm the information that it received.

More recently, however, Congress and federal law enforcement have increased pressure on the Department to enforce the Section 117 reporting requirements. These stakeholders raised concerns that foreign governments, particularly China and countries in the Middle East, could use their influence in US higher education to conduct espionage or steal intellectual property.[3]

In response to these concerns, and in conjunction with a government-wide focus on foreign influence on higher education, the Department increased its focus on Section 117 and initiated a series of civil investigations starting in June 2019. Last week’s report chronicles the Department’s findings to date and provides greater context for both the Department’s next steps and the compliance environment for US colleges and universities.

Key Findings of the Report

The report clarifies the scope of the Department’s probe and the value of foreign donations and contracts potentially at stake. The Department has opened a series of 12 civil investigations at high-profile IHEs, including six investigations where the Department has completed an initial review of documents provided by the school, four where the school is still in the process of producing documents, and two where the school has not yet provided any documents to the Department.

The Department claims that its investigations have driven US institutions to file “catch up” reporting disclosing nearly $6.5 billion of previously unreported foreign gifts and contracts. The report also notes that 60 institutions filed Section 117 disclosures for the first time for the July 31, 2020 reporting period (going back to 1986), which reports totaled more than $350 million in foreign gifts and contracts.

The report reaches five core “observations,” some of which include highly-charged language. According to the report:

  1. “Nearly all” foreign funding went to “largest, wealthiest, and most sophisticated of America’s institutions of higher education.”
  2. The decision-making of US colleges and universities is sometimes “divorced from any sense of obligation” to US national interests, despite the institutions’ dependence on federal funding.
  3. Various components of institutions of higher education have sought foreign funding through a range of sources and mechanisms, but those solicitations have not always been governed by effective internal controls.
  4. Section 117 reporting is “systemically underinclusive and inaccurate,” despite the Department’s conclusion that reporting is “neither complicated nor burdensome.”
  5. Foreign funding may “buy[] influence or control over teaching and research. ”Notably, the report makes clear that its observations are based on the Department’s initial review and that investigations are ongoing at multiple schools. The Department launched its probes of Fordham and Stanford as recently as August 2020,[4] and it is certainly possible that it will open additional investigations. Finally, the report also makes clear that the Department has collaborated with other federal agencies, including multiple Offices of Inspectors General and the Department of Justice. Ongoing criminal cases against several individuals in connection with their alleged unreported ties to China, including professors at Harvard and Stanford, illustrate the Department’s coordination with DOJ.[5]

Implications for US Colleges and Universities

The report highlights the significant legal, financial, and reputational risks posed by the government’s new focus on foreign funding in higher education. To address these risks, US colleges and universities must build robust compliance programs, stay alert to the changing regulatory landscape, and, if necessary, respond effectively to governmental investigations.

First, colleges and universities must implement robust compliance programs, training, and internal controls to monitor and report foreign funding and foreign contracts under Section 117. These compliance efforts must be tailored to the intricacies of modern institutions of higher education and take into account complex issues, including anonymous donations, overseas operations and satellite campuses, business relationships with state-owned enterprises, exchange programs with foreign universities, and interactions with government-affiliated NGOs. Compliance efforts should also consider the national security context, meaning the risks posed by working with foreign entities known or suspected to pose national security risks, and the technological context, including the risk that certain foreign entities might be targeting R&D and technology essential to critical national and economic security.

Second, colleges and universities must stay alert to changes in the regulatory landscape. For example, the Department said last week that it plans to require schools to comply with Section 117 in order to access federal student loan programs.[6] The Department has already made changes to the process for completing Section 117 disclosures, and the report also makes clear that the Department is considering other steps, including encouraging compliance opinions from institutions’ third party auditors and identifying accounting best practices for foreign cash.

Third, if necessary, colleges and universities must be prepared to conduct thorough (but cost-efficient) investigations and audits and to navigate the complex issues of disclosure and cooperation with the Department and other agencies, including DOJ. To date, colleges and universities have faced civil investigations led by the Department of Education, while DOJ has primarily brought criminal cases against individuals, but the report states that the Department of Education is willing to “[w]ork with [DOJ] regarding potential enforcement against specific institutions.”[7]

[1] US Dep’t of Education, Office of the General Counsel, Institutional Compliance with Section 117 of the Higher Education Act of 1965 (Oct. 2020).

[2] This reporting requirement is currently codified as Section 117 of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1011f.

[3] Federal Bureau of Investigation, Higher Education and National Security: The Targeting of Sensitive, Proprietary, and Classified Information on Campuses of Higher Education (Apr. 2011); US Senate, Permanent Subcommittee on Investigation, China’s Impact on the US Education System (Feb. 2019).

[4] Letter from US Dep’t of Education, Office of General Counsel, to Fordham University Regarding Notice of Investigation (August 10, 2020); Letter from US Dep’t of Education, Office of General Counsel, to Stanford University Regarding Notice of Investigation (August 10, 2020).

[5] Patrick Linehan & James Hobbs, DOJ Continues Its Aggressive Approach in Cases Involving Academics with China Ties (Aug. 12, 2020); Patrick Linehan & James Hobbs, Another Talents Program Indictment Underscores Importance of Strong Compliance Program and Cooperation with Law Enforcement (Aug. 28, 2020); see also Press Release, US Dep’t of Justice, Harvard University Professor and Two Chinese Nationals Charged in Three Separate China Related Cases (Jan. 28, 2020); Press Release, US Dep’t of Justice, Researchers Charged with Visa Fraud After Lying About Their Work for China’s People’s Liberation Army, (July 23, 2020).

[6] Aruna Viswanatha & Melissa Korn, Top Universities Took Billions in Unreported Foreign Funds, US Finds, Wall Street Journal (Oct. 20, 2020).

[7] For more information on other risks posed to IHEs, see Steptoe’s Client Alert, Higher Education Under the Prosecutorial Microscope (June 26, 2020).