January 25, 2018
Senate Committee on Banking, Housing and Urban Affairs “CFIUS Reform: Administration Perspectives on the Essential Elements
Key Topics & Takeaways
- Evolving Threats: Treasury Assistant Secretary Heath Tarbert argued that the U.S. has reached a “historic inflection point” in terms of the challenges facing the Committee on Foreign Investment in the U.S. (CFIUS), highlighting the “radical change” in state-backed investments into the U.S. to acquire sensitive dual-use technologies. Tarbert expressed support for FIRRMA, arguing that “new risks require new tools” and cautioned against “doing nothing,” which he said could “cost American lives.”
- Jurisdictional Reach: Tarbert argued that CFIUS technically does not only look at inbound investments into the U.S., since it has the authority to review any situation in which a U.S. sensitive technology is deposited in a foreign market.
- Heath Tarbert, Assistant Secretary for International Markets and Development, U.S. Treasury
- Richard Ashooh, Assistant Secretary of Commerce for Export Administration, Commerce Departmen
- Eric Chewning, Deputy Assistant Secretary for Manufacturing and Industrial Base Policy, Defense Department
Sen. Mike Crapo (R-Idaho)
Crapo highlighted concerns that China is exploiting gaps in the Committee on Foreign Investment in the US (CFIUS) review process as well as export control regime. He explained that the Committee’s consideration of S. 2098 would help address “legitimate areas of concern” by expanding CFIUS’s authority to review transactions involving joint ventures, minority position investments, and certain types of real estate investments to counter emerging national security threats. Crapo also touted the benefits to the U.S. economy of inbound foreign direct investment (FDI) transactions that do not pose national security threats. He expressed interest in learning more about the potential effects of S. 2098, the Foreign Investment Risk Review Modernization Act (FIRRMA), particularly the overlap with and distinctions between it and the existing export control regime, the potential for it to have a “chilling” effect on commercial activity, and the burden that the proposed bill could potentially impose on agency resources.
Sen. Sherrod Brown (D-Ohio)
Brown stated that there is consensus that the current system for CFIUS reviews is “not working” and needs to be reformed. He expressed concern that the export control system is lagging in identifying sensitive technologies, due to the military critical technology list not being updated by the Department of Defense (DoD). Brown also asserted that domestic U.S. economic security is threatened by inbound investment in the U.S. that is not reviewed by CFIUS on an economic benefits basis, and urged the Committee to consider the Foreign Investment Review Act to “respond to threats to [U.S.] economic security.”
Heath Tarbert, Assistant Secretary for International Markets and Development, U.S. Treasury
Tarbert reiterated from his confirmation hearing that his top priority is ensuring CFIUS has the tools and resources it needs to fulfill its duties in protecting national security. While he recognized the “immense benefits” that inbound investment affords American companies and workers, he cautioned that such investments are not always “benign.” Tarbert argued that the U.S. has reached a “historic inflection point” in terms of the challenges facing CFIUS, noting that annual filings have grown from 95 ten years ago to 240 last year. He also underscored the growing complexity of cases, which further strains resources. Tarbert maintained that the cumulative effect of strategic acquisitions of sensitive technologies by foreign governments, increasingly complex transaction structures, globalized supply chains, and blended relationship between military and commercial activities has “created vulnerabilities [the U.S.] has never seen before.” Tarbert expressed support for FIRRMA, arguing that “new risks require new tools” and cautioned against “doing nothing,” which he said could “cost American lives.”
Richard Ashooh, Assistant Secretary of Commerce for Export Administration, Commerce Department
Ashooh expressed support for modernization of the CFIUS process to address the challenges posed by China and other nation-states. Ashooh expressed support for specific provisions in FIRRMA, namely the mandatory filing requirement for certain transactions involving foreign government-controlled entities and increased resources for CFIUS. Yet he expressed caution that the contributions of intellectual property might duplicate existing export control authorities.
Ashooh explained that the Commerce Department, through the Export Administration Regulation (EAR), has traditionally regulated dual-use technologies and coordinates with other agencies including DoD to ensure the export control system is “robust.” He noted that the export control regime affords flexibility in terms of how exports of sensitive technologies and technology transfers are controlled, depending on the level of concern with the recipient country.
Eric Chewning, Deputy Assistant Secretary for Manufacturing and Industrial Base Policy, Defense Department
Chewning explained that the protection of the U.S. national security innovation base from strategic competitors, like China and Russia, is an increasingly important priority for the DoD. He noted Defense Secretary Mattis’s strong support for FIRRMA, and argued that it is important that the bill not be considered “an additional regulation on business.” Instead, Chewning heralded the bill as an “insurance policy” on investments made in the U.S. defense industrial base, to protect it from countries that are trying to undermine the U.S.’s competitive edge through the acquisition or theft of sensitive technologies. Still, Chewning acknowledged that CFIUS reform is not a “panacea,” noting that it can help stem the flow of critical technologies to competitors but should also be addressed through investing to keep pace with rapid advancements in technology to ensure national security.
Question and Answer
Tarbert highlighted the “radical change” in state-backed investments into the U.S. to specifically pursue critical U.S. technologies that are meant to be deployed for military or other competitive uses. He noted that even non-state enterprises are often being directed to purchase sensitive technologies to later share with their government. Tarbert explained that the jurisdictional basis for CFIUS has not been updated in 30 years since the Exon-Florio Amendment, and encouraged expanding the Committee’s authority to close gaps.
Tarbert argued that CFIUS technically does not only look at inbound investments into the U.S., since it has the authority to review any situation in which a U.S. sensitive technology is deposited in a foreign market. He also explained that transactions have been restructured through a foreign JV to circumvent CFIUS review when it was believed that the President would block such a transaction from going forward.
Tarbert reiterated that the U.S. remains open to foreign investment and clarified that the Administration has no intention of stopping deal flow through CFIUS reform. He explained that “dozens” of transactions are cleared through CFIUS by mitigating national security concerns so that deals can be approved.
Additional information about this hearing can be accessed here.