December 14, 2017

House Financial Services Subcommittee on Monetary Policy and Trade “Examining the Operations of the Committee on Foreign Investment in the United States (CFIUS)”

Key Topics & Takeaways

  • Role of Capital Markets: Rep. Andy Barr (R-Ky.) asked why U.S. capital markets are not sufficiently robust to provide alternative financing to meet U.S. company needs (e.g. to preclude the need for foreign direct investment to fill gaps). OFII’s McLernon stated that U.S. borders should not be closed to FDI even if funding needs could be met domestically.  She added that foreign companies bring innovation, world-class workforce training, and technical know-how that improves U.S. economic vitality.
  • CFIUS Reform Bill: Rep. Robert Pittenger (R-N.C.) explained that his bill—the Foreign Investment Risk Review Modernization Act of 2017—does not impose a ban or automatically block Chinese investments in the U.S., does not require consideration of investment reciprocity, does not list countries of special concern, and does not list specific technologies to be safeguarded. He underscored the importance of moving forward with reform of the Committee for Foreign Investment in the U.S. (CFIUS) to ensure America’s interests are protected.

Speakers

  • Robert Kimmitt, Senior International Counsel, WilmerHale, and former Deputy Secretary and General Counsel, U.S. Department of the Treasury
  • Alan F. Estevez, Deloitte Consulting LLP, and former Principal Deputy Under Secretary of Defense for Acquisition, Technology and Logistics, Department of Defense
  • Kevin J. Wolf, Partner, Akin Gump Strass Hauer & Feld LLP, and former Assistant Secretary of Commerce for Export Administration, U.S. Department of Commerce
  • Adam Segal, Ira A. Lipman Chair, Emerging Technologies and National Security, Director, Digital and Cyberspace Policy Program, Council on Foreign Relations
  • Nancy McLernon, President and Chief Executive Officer, Organization for International Investment 

Opening Remarks

Rep. Andy Barr (R-Ky.), Chairman, House Financial Services Subcommittee on Monetary Policy and Trade

Barr stated that the free flow of capital is a “bedrock tenet” of the U.S. economy. He underscored the benefits of foreign direct investment (FDI) for U.S. economic growth and job creation.  Yet he acknowledged that FDI must not be welcomed “unthinkingly” to prevent investment that might weaken the U.S. economy relative to others or pose a threat to national security.  To that end, Barr noted that the Committee on Foreign Investment in the US (CFIUS) reviews inbound investments to determine whether they pose a threat to U.S. national security, in which case the President has the authority to block the transaction or order divestments.  Recognizing the new threats faced by terrorism, economic competitors, and potential military competitors, Barr explained that the statute has not been updated since 2007 and should be modernized to address emergent threats. Barr added that a series of hearings will be held on this topic to inform members to make wise and cautious decisions on CFIUS reform.

Rep. Denny Heck (D-Wash.), Ranking Member, House Financial Services Subcommittee on Monetary Policy and Trade

Heck stated that, while CFIUS generally works well for private commercially motivated transactions, it needs to be equipped to deal with efforts by certain countries to “dominate” strategically important technologies or sectors.  Heck argued that more resources for CFIUS are “urgently needed” to keep pace with growing demands.  He added that policymakers need to strike a balance between allowing robust foreign investment given its importance to the economy, while protecting against “very legitimate security concerns” that are growing in velocity and complexity.

Testimony

Robert Kimmitt, Senior International Counsel, WilmerHale, and former Deputy Secretary and General Counsel, U.S. Department of the Treasury

Kimmitt highlighted growing concern about inbound Chinese investment, specifically by state-owned-enterprises (SOEs) in the technology sector. He added the concern that Chinese are using creative legal structures to evade CFIUS scrutiny on transactions that could compromise national security. Kimmitt cautioned against expanding CFIUS reach outside the U.S., and added that the greatest challenge facing CFIUS today is a “lack of resources” given the growing volume of workload.

Alan F. Estevez, Deloitte Consulting LLP, and former Principal Deputy Under Secretary of Defense for Acquisition, Technology and Logistics, Department of Defense

Estevez explained that CFIUS is critical to national security from a defense perspective because it helps protect the country, company and commodities (technologies) from potential adversaries that could jeopardize U.S. national security. Estevez highlighted concerns around some joint-venture arrangements that jeopardize national security, as well as liquidation of assets (including sensitive technologies) during bankruptcies, as well as increased concentration of an industry segment being under foreign control.  He also underscored the need for additional resources to address growing needs.

Kevin J. Wolf, Partner, Akin Gump Strass Hauer & Feld LLP, and former Assistant Secretary of Commerce for Export Administration, U.S. Department of Commerce

Wolf explained that the export control system and CFIUS complement one another. He added that the export control system regulates the transfer of technology regardless of whether a transaction took place (particularly for dual use technology that has benign commercial application as well as military applications). He added that investments that trigger CFIUS review include concerns about colocation, technologies that can pose cybersecurity vulnerabilities or those that can reveal personally-identifiable information, supply issues for government agencies or law enforcement, or compromise critical infrastructures.

Adam Segal, Ira A. Lipman Chair, Emerging Technologies and National Security, Director, Digital and Cyberspace Policy Program, Council on Foreign Relations

Segal explained that China has a comprehensive strategy to move up the value chain to stay competitive economically and in defense. He added that China’s strategic interests are advanced by increased investments in research and development, industrial policy, semiconductors, artificial intelligence, and its “Made in China 2025” initiative. Segal cautioned that China’s investment climate requires companies to transfer technology and fails to protect intellectual property rights. He encouraged U.S. policymakers to address rising threats by China through a “broad and comprehensive approach.”

Nancy McLernon, President and Chief Executive Officer, Organization for International Investment

McLernon underscored the importance of FDI to U.S. economic growth and vitality, employment and wage growth, and domestic manufacturing. She highlighted the U.S.’s commitment to the rule of law and predictability in the regulatory climate as key aspects that make the economy competitive internationally, which includes carefully balanced implementation of the Foreign Investment and National Security Act of 2007 (FINSA).

McLernon acknowledged that the CFIUS review process is “under stress” given resource constraints, adding that staff members persevere long hours to keep pace with their current workload.  She highlighted the international business community’s support for efforts by CFIUS to keep America safe, but stated that CFIUS reform should not be viewed as a panacea to address all concerned raise. McLernon emphasized the need to ensure fairness and predictability in the national security review process.

Question and Answer

Role of Capital Markets

Barr asked why U.S. capital markets are not sufficiently robust to provide alternative financing to meet U.S. company needs (e.g. to preclude the need for FDI to fill gaps). McLernon stated that U.S. borders should not be closed to FDI even if funding needs could be met domestically.  She added that foreign companies bring innovation, world-class workforce training, and technical know-how that improves U.S. economic vitality.

CFIUS Reform Bill

Rep. Robert Pittenger (R-N.C.) explained that his bill—the Foreign Investment Risk Review Modernization Act of 2017—does not impose a ban or automatically block Chinese investments in the U.S., does not require consideration of investment reciprocity, does not list countries of special concern, and does not list specific technologies to be safeguarded. He underscored the importance of moving forward with CFIUS reform to ensure America’s interests are protected.

Rep. Brad Sherman (D-Calif.) referenced the Dubai ports case and suggested that CFIUS’s purview is too narrow when it examines investments that give ownership or control of an enterprise. He expressed concern that the U.S. has a “weak position with China” and that Chinese investments are used to “control corporate decisions.”

Security and Investment

Rep. Emmer (R-Minn.) asked whether security or investment is the foremost priority for CFIUS investment reviews.  Kimmitt clarified that CFIUS solely screens investments for national security concerns.  He added that each agency represented on CFIUS examines covered transactions to ensure that no elements of transaction would raise concerns from a national security perspective, and if such concerns are raised, they are properly mitigated in perpetuity.

Wolf added that no transactions were cleared by CFIUS if any of the participating agencies had an unresolved national security concern.  He clarified that there is “never” a balance between luring investments and protecting national security to be made, but rather that security interests are the sole focus of CFIUS reviews.

Resource Constraints

Several panelists underscored the need to address resource constraints at CFIUS given the rising work load.  Kimmitt expressed concern that CFIUS may not have enough resources to ensure mitigation agreements are faithfully executed going forward, given the rising workload for new complex transactions.

McLernon added that the need for resources is not only important for national security purposes but also for economic competitiveness. She explained that foreign companies are concerned about the length of time it takes to clear CFIUS review.

Additional information about this hearing can be accessed here.