We Can’t Keep this Crucial Foreign Investment Panel in the Dark

Interpretation of the world wide  problems in the financial world

By: General Norton A. Schwartz, USAF (ret.) & Ivan A. Schlager

In 1988, Congress codified the creation of CFIUS, the little-known Committee on Foreign Investment in the United States. CFIUS, as named by the few who know it, was charged with making a thumbs up, thumbs down or in-between call if the purchase of a US firm by a foreign company would create a national security risk.  Fast forward and this once little-known process, recently in the news due to political allegations around the sale of American uranium, is at the tip of the US trade policy spear with decisions and actions felt across the entirety of the global digital and information economy.  It is, however—as some in Congress and the Executive branch have recognized—ill-equipped to fulfill its role.

The CFIUS role was relatively uncomplicated during its initial 20 years, rarely intervening in a deal and usually only when a foreign company indicated interest in especially sensitive military-related equipment, such as semiconductors or aerospace.  Importantly, all agreed that CFIUS was intended to promote an open investment climate which strengthened our alliances, provided the economy with much needed capital while preserving technologies developed in the US that were central to our global economic leadership. Also of note, CFIUS was specifically intended to be driven by senior policy makers who were responsible for strategically shaping our security and economic policy.

The CFIUS apparatus created almost 30 years ago is now in dire need of thoughtful reform, reform that will more efficiently and effectively protect US national security interests and simultaneously better serve American business interests. The mechanism put in place decades ago has failed to keep pace with globalization and rapid technological change that has radically altered the links between US industry and US national security. 

Globalization is already severely overwhelming the CFIUS process. In 2015, the most recent year for which we have data, CFIUS not only received 140 filings–requests by a foreign investor and US target company for a CFIUS review–but also a record 66 investigations. All indications are that 2017 was another record year for filings and investigations, with the latter taking longer and longer to complete.   And today, CFIUS is not just about sensitive technologies; its decisions have an immense impact on every aspect of our economy and national security. 

The CFIUS review process is now carved into separate stages with each given a fixed number of days for completion. Because the opaque interagency process that underpins CFIUS cannot keep up, it can, and usually does, opt for automatic extensions. US companies wait for answers that may or may not come, foreign participants’ interest wanes, ends, or seek a route around CFIUS, and opportunities to grow domestic businesses with foreign capital are lost.  Without reforming the CFIUS structure and process, this unhealthy condition will deteriorate further. 

Any CFIUS reform must recognize that the system now in place, despite best efforts of those doing its work, suffers from a lack of the expertise and staff needed to function effectively and in a timely manner. The increasingly complex processes of unraveling the corporate linkages of both the foreign investor and US business, determining the sensitivity of a US business’ technology, and understanding how a US company supports US national security programs,  are making staff findings harder and longer to prepare. Unfortunately, as its docket has grown, CFIUS staff has not. And the expertise needed, not only on technologies, but on such matters as capital flows, market dynamics, and business practices, is rapidly ratcheting up and must be accommodated if decisions are to be both well informed and timely.

In considering reform, the consensus outside government is that CFIUS lacks transparency and the clear process necessary to promote trust and provide the market with the predictability it craves. Even accepting the inevitability of some secrecy given the consideration of classified material, CFIUS operates in the deepest shadows compared to every regulatory counterpart. Parties have no definitive opportunity to present their case to politically-accountable decision makers and even less for judicial review. 

This problem has worsened over the years as initial decision-making on CFIUS filings has been relegated to the lower echelons of the respective USG agencies. Making matters yet worse is the compunction to go forward only when a multi-agency “consensus” is reached, which forces agencies with national security equities affected by a transaction to present inflated risk analyses to garner the assent of all of their CFIUS colleagues to a recommended course of action.

Leaders in Congress are now moving to modernize CFIUS, most recently with the proposed Foreign Investment Risk Review Modernization Act.   Although imperfect, the reform trajectory is positive.  Whatever reform eventually emerges, lawmakers should keep their eye on strategic needs:

First, Congress should consider moving CFIUS from Treasury to a part of the Executive Office of the President with sufficient operational authority to ensure that the full range of issues—both security and economic—are effectively integrated into the process.

Second, wherever it sits, CFIUS must be staffed to adequately review–within well-defined statutory time periods–the plethora of cases it will assess.  To support this, a filing fee, similar to that charged by antitrust and securities regulators, should be required.

Third, relevant cabinet level officials should be involved early in the process rather than at the end (as is currently custom) to assure that US national security and economic equities are considered, and CFIUS decisions are being made, by accountable policy makers.

Fourth, US target firms doing business with US Government agencies with national security responsibilities should be required to report intended foreign investments to CFIUS, reversing the current “voluntary” reporting standard.

Fifth, reform must adequately address the licensing of intellectual property and joint ventures, without overly regulating enormous swaths of vital economic activity such as U.S. companies’ routine overseas partnerships.

And finally, in those cases where foreign investment does pose a national security risk, CFIUS should be charged with seeking conditions that mitigate the risk arising from the transaction in the context of the risk environment in which the US business already operates.

Foreign investment in the United States and national security can go hand in glove with an effective, efficient, and timely CFIUS review process. Reform of our 30 year old mechanism is badly needed and should be initiated in a partnership between Congress and the Administration. The current system is not meeting our nation’s needs. 

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