National Defense Authorization Act (NDAA): How it Works

What Is the National Defense Authorization Act (NDAA)?

The National Defense Authorization Act (NDAA) is legislation that Congress passes each year to make changes to the policies and organization of United States defense agencies and provide guidance on how military funding can be spent.

Understanding the National Defense Authorization Act

The NDAA is an annual bill that lets Congress set guidelines for defense policy. Though funding for the U.S. military must be approved through appropriations bills, Congress uses the NDAA to establish defense priorities, make organizational changes to military agencies, and provide guidance on how funding should be used.

In addition to the Department of Defense, the legislation also covers military-related programs run by other agencies, such as the Department of Energy’s nuclear weapons programs and the Federal Bureau of Investigation's counterintelligence activities.

A relatively rare example of bipartisanship in Congress, the NDAA has been passed for 60 straight years. That consistency has also made the bill a popular vehicle for tacking on legislation that has little to do with defense.

How Defense Spending Is Approved

Before 1961, the U.S. defense budget was the sole domain of the House and Senate Appropriations committees. But that year, legislating defense spending became a two-step process—involving both authorization and appropriation—to give the committees that oversee defense policy more control over the purse strings. 

The process typically begins in February, when the White House sends the federal budget to Congress for the fiscal year, which runs from October to September. At that point, the House and Senate Armed Services committees start the process of creating the NDAA. Each committee typically establishes subcommittees that focus on specific areas, such as military personnel, force readiness, or cybersecurity.

After the various committees hold hearings, the House and Senate Armed Services committees will each typically draft and pass its own version of the NDAA bill and send it to the floor for a full vote in their respective chambers. Sometimes, however, the Senate may choose to debate and vote on the House version of the bill. If the two bills are different, the House and the Senate appoint a conference committee to close the gaps and agree on a conference report for both chambers to approve. When passed, the legislation goes to the president’s desk to be signed into law.

The Only Veto Override of the Trump Administration

The $741 billion NDAA for the 2021 fiscal year—covering the period from Oct. 1, 2020, to Sept. 30, 2021—was the first time that Congress successfully overrode a veto by President Donald Trump. The president listed a range of objections to the bill, including issues not related to defense, such as a demand to include a provision that would strip social media companies of protections from lawsuits under Section 230 of the Communications Decency Act. Trump also opposed measures in the bill that would set up a commission to rename military bases honoring Confederate leaders, limit the president’s use of emergency declarations to divert money to non-defense purposes such as the border wall, and delay the withdrawal of U.S. troops from Afghanistan, South Korea, and Germany.

The House voted to override the veto in December by a 322–87 margin, achieving the necessary two-thirds majority, and the Senate followed suit in January by a vote of 81–13. The bill contained a number of other key defense-related provisions, including:

• A 3% pay raise for troops
• Paid family leave
• Protection against discrimination
• A new Pacific Deterrence Initiative aimed at countering growing Chinese military power in the Indo-Pacific region
• An initiative to support a national security innovation base to help the U.S. high-tech industry compete globally in areas such as artificial intelligence, quantum computing, and biotechnology.
• Measures to bolster protections against cyberattacks, including establishing a National Cyber Director at the White House and improving coordination at the Cybersecurity and Infrastructure Security Agency within the Department of Homeland Security.

Tougher Rules Against Money Laundering and Terrorism Financing

The NDAA for fiscal year 2021 also takes aim at money laundering and terrorism financing, including the use of shell companies to hide financing sources. The inclusion of the Corporate Transparency Act in the bill means that corporations and limited liability companies (LLCs) will now have to disclose information about the owners of the business. The companies will need to provide information to the U.S. Treasury Department about “beneficial owners,” which includes anyone who has “substantial control” or owns at least a 25% stake. Treasury’s Financial Crimes Enforcement Network (FinCEN) will maintain the database, and only national security or law enforcement agencies will have access. 

The new transparency rules could have a substantial impact on the use of LLCs to conduct all-cash purchases of real estate, long considered a loophole for illicit financing given the lack of reporting requirements. A study of a more targeted program by FinCEN requiring title insurers to provide information on beneficial owners of LLCs that purchased luxury real estate in New York, Miami, and other cities found that the amount of all-cash purchases by corporations fell 66%.

Another piece of legislation included in the NDAA, the Money Laundering Control Act, also attempts to strengthen FinCEN’s campaign against illicit financing by improving the agency’s analytical capabilities and coordination with other agencies and the financial sector.