CFIUS Update Backed, With Differences Over Details; Some Seek Economic Reviews
Congress should update the Committee on Foreign Investment in the United States national security mandate to review foreign investments in U.S.-located companies, lawmakers and witnesses said at a House Digital Commerce Subcommittee hearing Thursday. There were differences over details of the administration-backed Foreign Investment Risk Review Modernization Act's (FIRRMA, HR-4311/S-2098) proposed CFIUS expansion to probe more investments, including in "critical" technology or infrastructure companies. Some said CFIUS should also examine key economic issues. CFIUS is chaired by the Department of Treasury and includes eight other executive branch departments and offices (five others have observer status and participate as appropriate).
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FCC Commissioner Mike O'Rielly didn't appear but asked that "Team Telecom reform" be considered in the legislation, referring to DOJ, DOD and the Department of Homeland Security. They review foreign takeovers of U.S. communications assets, and often ask the FCC to defer action on license transactions while they examine national security, law enforcement and public safety issues. The lack of structure and deadlines creates a "procedural black hole" and delays for companies and the commission, O'Rielly said a submitted statement. "Entities stuck in this regulatory abyss all too often have no ability to determine which agency has concerns or how to locate a point of contact to help facilitate a resolution." While backing legislation, O'Rielly has said an FCC order is coming on Team Telecom participation in commission reviews, and the executive branch also is apparently considering changes (see 1804250045).
Foreign direct investment in the U.S. in 2016 was more than double 10 years before, said Subcommittee Chairman Bob Latta, R-Ohio. Such investment is generally good, he said, but there are increased concerns foreign governments seek to acquire advanced U.S. technology. Ranking member Jan Schakowsky, D-Ill., said current review mechanisms are inadequate and should also target unfair trade practices.
CFIUS case volume and complexity increased, said Assistant Treasury Secretary Heath Tarbert. Cases grew from 100 in 2009 and 2010 to almost 240 in 2017, with those reaching an investigation stage rising dramatically and those resulting in "mitigation" steps also up. Added complexity comes from foreign government "strategic" investments, "more complex transaction structures and increasingly globalized supply chains," plus the increased integration of commercial and military activities, he said. The "digital, data-driven economy" creates new national security vulnerabilities, he said.
"New risks require new tools," said Tarbert. "CFIUS must be modernized." He lauded FIRRMA's provisions, including (1) expanding CFIUS's scope to include reviews of "certain non-passive, non-controlling investments, technology transfers through arrangements such as joint ventures, real-estate purchases near sensitive military installations, and transactions to evade CFIUS review"; (2) authorizing procedural streamlining, (3) allowing certain transactions to be exempted from review if reviewed by allies with effective vetting; and (4) ensuring adequate resources through a "CFIUS Fund." Assistant Commerce Secretary-Export Administration Richard Ashooh urged strengthening export controls, the target of HR-5040. The two regimes are "complementary and mutually reinforcing," said Tarbert.
The debate involves two basic camps, said Kevin Wolf, Akin Gump attorney. One says CFIUS should have expanded authority to examine more transactions, particularly for Chinese technology threats, while the other believes government should identify threats and narrow the focus, he said. Clay Lowery, Rock Creek Global Advisors managing director, supported FIRRMA, but said "vague" language, "duplicative authority" and "overly burdensome" requirements would make it difficult to implement.
The expanded scope would hike CFIUS' caseload to "multiples" of last year's 240, Tarbert said. He and Ashooh said government employees wouldn't need to increase by the same ratio, citing the proposed streamlining to ease reviews for most cases and the ability of CFIUS departments to "leverage" employees working on other matters. Tarbert said the treasury secretary would have to certify the resources and regulations are in place before the requirements take effect, possibly in about a year, though "pilot" enforcement would be allowed before then. The administration is pursuing "technical corrections," he said.
Schakowsky and Rep. Gene Green, D-Texas, voiced concern key economic issues weren't considered in CFIUS reviews. "It's a jobs issue for us," agreed Celeste Drake, a union trade analyst. Tarbert said the administration believes CFIUS focus should remain on national security, but Schakowsky and Drake said economic security is key to that.
Rep. David McKinley, R-W. Va., voiced concern CFIUS is a voluntary process, in which parties choose whether to file notifications of deals. Tarbert said CFIUS has authority to demand parties file notifications or issue notifications on its own, but he also supports FIRRMA's proposal to require mandatory notifications by certain state-owned entities planning acquisitions. He said most acquirers prodded by CFIUS on notifications involved China or Russia.
The U.S. needs to extend its regulatory reach overseas, though that's hard, said American Enterprise Institute scholar Derek Scissors. Much technology transfer extracted by China comes from U.S. companies seeking to do business in China, he said.