How The Trade War With China Is Changing The Rules For Foreign Investment In The U.S.

Over the last few years, Congress as well as U.S. businesses have raised concerns over the risks to U.S. technological leadership, national defense, and economic security due to growing foreign direct investment (FDI), primarily by Chinese firms, in U.S. high-tech companies.

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee authorized to review certain transactions involving foreign investment in the United States in order to determine the effect of such transactions on the national security of the United States. 

CFIUS is chaired by the Secretary of the Treasury and includes representatives from 16 U.S. departments and agencies, including the Defense, State and Commerce departments, as well as the Department of Homeland Security.

Just recently, Congress passed the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) to reform and modernize the CFIUS review process. It represents the first update to the CFIUS statute in more than a decade and implements a number of major institutional and operational changes to CFIUS so the U.S. can better keep pace with changes in the national security environment that have increased the risks created by some forms of foreign investment.

Changes to CFIUS

Institutional Changes

• FIRRMA allows the chairperson to centralize certain CFIUS functions in the Treasury Department
• Two new Senate-confirmed positions in the department were created that are responsible for overseeing CFIUS operations, and there must be a dedicated CFIUS staff, including an assistant secretary or equivalent position, at all other member agencies.
• The bill requires CFIUS to establish procedures for members to recuse themselves in the case of a conflict of interest and to publish dissenting opinions if CFIUS cannot reach consensus
• The bill significantly increases the reporting requirements for CFIUS, including addressing both finance and intelligence Congressional committees
• No later than 180 days after the bill’s enactment (February 9^th, 2019), the CFIUS chair must submit a report to Congress and provide in-person testimony that describes the timeline and process for implementing the bill, as well as any additional staff and resources required
• Biennial reports, through 2026, on Chinese investment in the U.S., including how it comports with the objectives of the Made in China 2025 plan, how it compares to U.S. investment in China, and any data collection difficulties
• A report, within a year, assessing national security threats related to foreign direct investment in the U.S. by foreign-state-owned or -controlled entities in manufacturing assets required for rail systems, and how CFIUS can respond to any such threats
• A briefing to the congressional finance committees on CFIUS investigations in the past five years that would have allowed foreign persons to influence domestic and foreign democratic institutions and processes and any actions taken as a result of those investigations.

Operational Changes

FIRRMA identifies several factors that Congress wants CFIUS to take into account when considering the national security risks posed by foreign investments. These include:

• Whether a transaction involves a country of special concern that has a strategic goal of acquiring technologies that would affect U.S. technological leadership in that area
• The national security effects of cumulative market share control by foreign persons
• Whether a foreign person involved in a transaction has a history of complying with U.S. law
• How the control of U.S. industries and commercial activity affects the capability and capacity of the United States to meet the requirements of national security, including the reduction in employment of United States persons whose skills are critical to national security and the continued U.S. production of items necessary for national security
• The extent to which a transaction is likely to expose sensitive data of U.S. citizens to exploitation by foreign persons and governments
• Whether a transaction exacerbates cybersecurity vulnerabilities or allows a foreign government to gain new capabilities to engage in malicious cyber activities against the U.S., including activities designed to affect the outcome of any federal election.
• One of FIRRMA’s most substantial changes is to the scope of “covered transaction,” which defines much of CFIUS’s jurisdiction. The bill expands covered transactions to include:
  • The purchase or lease by foreign persons of certain U.S. real estate near a U.S. port, military facility, or other “sensitive” government property;
  • All non-passive foreign investments in any company that deal with “critical technology,” “critical infrastructure,” or “sensitive personal data of United States citizens that may be exploited in a manner that threatens national security.” Covered investments are those that provide corporate control, any position on the board of directors, a role in sensitive decision-making, or access to “material non-public technical information,” with detailed exemptions for investment funds;
  • Changes in existing ownership rights that could result in foreign ownership or control of a U.S. business
  • Any other transactions structured to evade CFIUS review.

• The also bill amends the CFIUS process in several ways, including extending the timeline (e.g. initial review is extended from 30 calendar days to 45 calendar days), adding a new “declarations process” for companies to notify CFIUS of transactions and offer a path to expedited approval, and expanding CFIUS’s authority to mandate reviews or take unilateral action

Considerations for User Fee Implementation

• The bill establishes a CFIUS fund which may receive both appropriated funds and fees for a variety of CFIUS-related functions. Between FY19 and FY23, $20,000,000 will be appropriated to this fund.
• Any fees are to be deposited into a fund exclusively for CFIUS use, although the chair may transfer money to CFIUS member agencies if necessary for them to perform CFIUS duties.
• The total amount of fees collected from administering Sec. 1723 cannot exceed the cost of administering said section, the committee will periodically reconsider and readjust to ensure that the fee does not exceed the cost of administering the section
• The fee amount charged must be less than the lesser of either a) 1% percent of the value of the transaction, or b) $300,000 (adjusted for inflation)
• The fee will take into account the burden on small businesses, the expenses of the Committee in conducting activities mandated in this section, the impact of foreign investment, and other matters deemed appropriate by the committee
• The bill also authorizes CFIUS to study the implementation of a “prioritization fee” which no later than 270 days after the passage of the act (May 10^th 2019), the Chairperson to the committee will complete a study on the on the feasibility and merits of establishing a fee or fee-scale, and will submit a report on the findings of said study to Congress

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