The Committee on Foreign Investment in the United States better known as (CFIUS) was established by an Executive Order from President Ford in 1975. According to an article by the Congressional Research Service, CFIUS was originally established in order to dissuade Congress from enacting new restrictions on foreign investment. This was due to growing concerns at the time from rapid increase in investments by Organization of the Petroleum Exporting Countries (OPEC). The concerns were largely driven by the OPEC investments being centered around political, rather than by economic motives.
CFIUS is comprised of nine cabinet members, two ex officio members, and other members as appointed by the President. The nine cabinet members assist the President in overseeing the national security aspects of foreign direct investment in the U.S. economy.
Traditionally the U.S. policy approach to international investment has been centered around an open rules-based system that is in line with U.S. economic and national security interests. However, some congressional members have questioned how CFIUS reviews cases.
This paper will discuss FIRRMA’s scope and the need for adequate resource consideration. Additionally, this paper will discuss the consequences of increasing the staff resources for CFIUS review cases and the overall impact it will have on foreign direct investment.
Overview of Problem
CFIUS statue has undergone various changes that include the “Exon Florio” provision; Byrd Amendment; FINSA, and the recent FIRRMA amendment to CFIUS. According to an article by congressional research service policymakers have argued that certain foreign investment transactions, particularly by entities owned or controlled by a foreign government, are compromising U.S. national economic security, and therefore have argued for greater CFIUS scrutiny of foreign investment transactions which includes consideration for a mandatory approval process.
These concerns are largely due to CFIUS performance, and the way the committee reviews cases involving foreign governments, particularly with the emergence of state-owned enterprises. Furthermore, several policy makers are concerned that some governments give preferential treatment to State Owned Enterprises (SOE’s), this may give a competitive edge to their overseas activities, and result in anti-competitive effect in the global market place.
In addition, SOE’s may engage in foreign investment activities that could compromise national security objectives related to investment activity of firms that are owned or controlled by foreign governments raising concerns over economic security implications of the firms.
Therefore, SOE’s face a potential conflict between engaging in economic activities that serve the competitive interest of the firm vs. activities that mainly benefit goals and ambitions of foreign government.
It is important to highlight that issues related to state owned enterprises and other area of conflict related to foreign investment in United States are not country specific, but case specific.
The New Law
With bipartisan support President Trump signed in to law the Foreign Investment Risk Review Modernization Act widely known as FIRRMA on August 13, 2018. FIRRMA was incorporated into the John S. McCain National Defense Authorization Act, for Fiscal Year 2019. This new reform expands the foreign investment review process of the Department of Treasury’s Committee on Foreign Investment in the United States.
FIRRMA now establishes mandatory CFIUS filing requirements for certain categories of transactions, introduces filing fees, and expands most transactions subject to CFIUS jurisdiction widely referred as “covered transactions”.
Additionally, FIRRMA also reinforces the Committee’s already broad authority to both block and delay transactions that impair the United States national security. The reforms that promulgated
under FIRRMA was largely motivated by increased concerns over foreign investment, particularly with respect to investment by specific countries and foreign parties access to the emerging U.S. technologies.
The purpose of FIRRMA is to protect the United States from foreign influence in the area of critical infrastructure, technology, and not to impair the nations national security. The CFIUS process is governed by a statue referred to as the “Exon-Florio” Provision.
Similar to the Exon – Florio Amendment, FINSA grants the President the authority to block or suspend proposed or pending foreign mergers, acquisitions or takeovers of foreign entities that threaten to impair the national security.
This statue now permitted the President to suspend or block a transaction, however, before giving the President this authority. The President must conclude that:
(1) Other U.S. laws are inadequate or inappropriate to protect the national security.
(2) President must have “credible evidence” that the foreign investment will impair the national security.
Foreign Investment National Security Policies of Foreign Jurisdictions
According to the article by White Case and Law, United Nations national security related concerns have become more prominent in the investment policies of numerous countries. As a result, countries have adopted new measures to restrict foreign investment.
Countries have different approaches for reviewing and restricting foreign investment on national security related – grounds. These approaches range from scope of application to provide host country authorities with wide discretion in the review process.
U.N. analysis indicated that countries have adopted different types of investment regulations to protect their foreign investment related national security interests.
For instance, Canada requires investors to provide more information and extend the length of certain time periods for government to coordinate national security review. Consequently, China’s National Security Law requires national security review of foreign commercial investment, technologies, internet services that are deemed to affect national security. However, the credibility and review of foreign investment on national security related grounds in other countries is not explicitly disclosed, mainly due to security reasons.
According to an article by the Congressional Research Service, United States has taken measures to strengthen and mitigate issues related to foreign investment in United States. CFIUS in assessing the risk posed to national security by foreign investments considers the three following issues
1. What is the threat posed by the foreign investment in terms of intent and capabilities?
2. What aspects of the business activity pose vulnerabilities to national security?
3. What are the national security consequences if the vulnerabilities are exploited?
Measures to restrict foreign investment policies
According to and article by White Case and Law, United Nations and other groups, over the past decade stated the increase in national security-related concerns becoming more prominent in the investment policies of numerous countries. As a result, countries have adopted new measures to restrict foreign investment or have amended existing laws concerning investment-related national security reviews.International organizations have considered the legitimate concerns of nations in restricting foreign investment in certain sectors of their economies, but the recent increase in such restrictions has raised a number of policy issues.
FIRRMA expands CFIUS
Prior to FIRRMA, the expanded review of CFIUS only involved review of national security concerns related to mergers, acquisitions, or takeovers that could result in control of a U.S. business by a foreign person.
FIRRMA expands CFIUS purview to include several new types of “covered transactions” such as certain real estate transactions that may present national security concerns. CFIUS will have authority to review transactions for real estate that is located near a U.S. military installation, air or maritime port, or other similarly sensitive site. However, single housing units and real estate in urbanized areas (unless notified further are excluded).
Consequence of shifting CFIUS review process to a mandatory process
The mandatory process requires all foreign investment transactions to be fully reviewed by CFIUS. This approach requires transforming the current CFIUS review process from a “disapproval process” in which only certain investment transactions are subject to a full CFIUS review to an “approval process”. Such a change likely would increase the number of reviews per year. This will more than likely require higher staffing level to adequately conduct the review the cases. Congress has raised concerns regarding resource allocation.
Much consideration has been given to FIRRMA and how it should be implemented. However, the implementation of such a costly legislation requires thorough analysis of the resource considerations. Resource consideration is a key concern to FIRRMA’s scope.
As CFIUS continues to develop its regulations, it will concurrently need to consider its resource needs, including hiring of additional staff to implement adequately meet the challenges of the required for full approval process.
Therefore, as CFIUS drafts its new regulations including the all-important limitations on “covered transactions” it should consider the level of expected funding and staffing levels required to fulfill the conditions set by FIRRMA.
However, continuous resource scarcity, particularly related to staffing issues to meet the full compliance of through foreign investment review can have negative implications on the so called “covered transactions” particularly subject to mandatory filing as it will likely face possible limitations.
Considerably, shifting CFIUS’s current review process to a mandatory process. Will likely increase the number of review cases from a few hundred cases to potentially
several thousand reviews per year. Thereby increasing the demands on the various individuals who are involved in conducting foreign investment case reviews under the current time-frame, and therefore would require additional resources. Therefore, adequate resource allocation is key in fulfilling the requirements set by FIRRMA and improving the overall performance of CFIUS.
Notably, adequate resource allocation and full staffing scale does not guarantee that every foreign investment case that fall under the CFIUS review will receive a thorough review. However, having an adequate resource allocation will mitigate concerns raised by policy makers and improve the posture of CFIUS now that FIRRMA amends CIFUS.