When you have a contract with the government, you're required to obtain security clearance for employees working on it. About 12 years ago when AWS challenged IBM's contract with with the CIA, they were offered at least some part of that contract. Few months afterwards, I was invited to interview with them. I was more than glad to accept that invitation and they first they told me: You must be able to pass "top secret" security clearance. I did some checking on the requirements and bowed out. I knew I wasn't going to get top secret clearance because my wife was not yet a citizen at the time.
So now circle back to MS.. how the hell did they get the contract with the DoD without understanding that they're required to get some kind of clearance for their employees, depending on the level of work on the project. More over, China isn't just a foreign country. The DoD considers it an adversary, an enemy when it comes to cyber warfare. To top it off, the Chinese have been hacking and stealing information from US firms since beginning of time. Allowing them to work on DoD projects with little supervision is not just lack of due diligence. It's an act of gross negligence amounting to felony.