This is actually (as far as I can tell) the normal way that Congress buts into the actions of an agency. NSA would be covered on a separate budget, and in any

This is actually (as far as I can tell) the normal way that Congress buts into the actions of an agency. NSA would be covered on a separate budget, and in any event there are at least theoretical reason why you'd want the foreign intelligence arm of the nation to be able to weaken encryption abroad, especially when that foreign intelligence agency has the statutory duty to be able to break the codes of the U.S.'s adversaries. NIST has no such statutory duty, and their budget is handled as part of the normal public Congressional budget process. So what this would do is to prevent the use of NIST-funded activities (e.g. crypto competitions, labor time of NIST employees, etc.) to consult with NSA to deliberately weaken encryption standards. Even though NSA could fund such actions internally to them, they wouldn't be able to publish such a subverted standard under the imprimatur of NIST the way that Dual EC DRBG was done. As far as the loophole, the option "Agency A could just claim to be doing legal thing X instead of illegal thing Y" applies to almost all agencies for nearly all illegal things. Fraud is still a crime, even for the NSA; if you're going to assume that NSA will simply break the law then legal changes as a way to stop NSA are irrelevant anyways. In the case of Dual EC DRBG it appears to have been obvious early on that it was weak and even probably backdoored. Schneier wrote as much about it in a Wired article back in 2007. It's notable that NIST complicity was evident here, which is why something like this amendment is needed. But I can't find anything that claims NSA flat-out lied either, and much of Snowden's own leaks have revealed an NSA studiously trying to stay within (but only barely within) the lines.