[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                   H.R. 5337, THE REFORM OF NATIONAL
                      SECURITY REVIEWS OF FOREIGN
                         DIRECT INVESTMENTS ACT

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE, AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 17, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-93



                    U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California

                 Robert U. Foster, III, Staff Director
Subcommittee on Domestic and International Monetary Policy, Trade, and 
                               Technology

                       DEBORAH PRYCE, Ohio, Chair

JUDY BIGGERT, Illinois, Vice Chair   CAROLYN B. MALONEY, New York
JAMES A. LEACH, Iowa                 BERNARD SANDERS, Vermont
MICHAEL N. CASTLE, Delaware          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California
RON PAUL, Texas                      BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         BRAD SHERMAN, California
MARK R. KENNEDY, Minnesota           LUIS V. GUTIERREZ, Illinois
KATHERINE HARRIS, Florida            MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
TOM PRICE, Georgia                   JOSEPH CROWLEY, New York
PATRICK T. McHENRY, North Carolina   BARNEY FRANK, Massachusetts
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 17, 2006.................................................     1
Appendix:
    May 17, 2006.................................................    35

                               WITNESSES
                        Wednesday, May 17, 2006

Baker, Hon. Stewart A., Assistant Secretary for Policy, Planning 
  and International Affairs, U.S. Department of Homeland Security     8
Fisher, Hon. Alice S., Assistant Attorney General, Criminal 
  Division, U.S. Department of Justice...........................     9
Flory, Hon. Peter C.W., Assistant Secretary for International 
  Security Policy, U.S. Department of Defense....................    10
Holtz-Eakin, Douglas, Director, Maurice Greenberg Center for 
  Geoeconomic Studies, Council on Foreign Relations..............    18
Lowery, Hon. Clay, Assistant Secretary for International Affairs, 
  U.S. Department of the Treasury................................     5
Marchick, David, attorney, Covington and Burling.................    20
Veroneau, John K., partner, DLA Piper Rudnick Gray Cary..........    22

                                APPENDIX

Prepared statements:
    Baker, Hon. Stewart A........................................    36
    Fisher, Hon. Alice S.........................................    38
    Flory, Hon. Peter C.W........................................    42
    Holtz-Eakin, Douglas.........................................    45
    Lowery, Hon. Clay............................................    49
    Marchick, David..............................................    53
    Veroneau, John K.............................................    62


                   H.R. 5337, THE REFORM OF NATIONAL
                      SECURITY REVIEWS OF FOREIGN
                         DIRECT INVESTMENTS ACT

                              ----------                              


                        Wednesday, May 17, 2006

             U.S. House of Representatives,
                       Subcommittee on Domestic and
                     International Monetary Policy,
                             Trade, and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:00 p.m., in 
room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[vice chairwoman of the subcommittee] presiding.
    Present: Representatives Pryce, Biggert, Manzullo, 
Fossella, Campbell, Maloney, Lee, Sherman, and Crowley.
    Mrs. Biggert. [presiding] The Subcommittee on Domestic and 
International Monetary Policy, Trade, and Technology will come 
to order. Thank you all for being here. I will recognize myself 
for an opening statement.
    I would like to welcome everyone here to this hearing on 
H.R. 5337, the Reform of National Security Reviews of Foreign 
Direct Investments Act. I want to thank Chairwoman Pryce for 
holding this hearing, and thank Majority Whip Blunt, Chairwoman 
Pryce, Ranking Member Maloney and Mr. Crowley for introducing 
the bill that provides commonsense reform of the CFIUS process.
    I am honored to be an original cosponsor of this bill, 
which is designed to strengthen national security while 
promoting foreign investment and the creation and maintenance 
of jobs.
    In order to enhance our members' understanding of the 
current CFIUS process and determine how best to reform it, this 
subcommittee has already held two hearings on this issue. In 
those other hearings, one recurring theme was the need to 
reform the so-called ``Byrd rule'' which triggers whether 
transactions go to investigation. This legislation now requires 
the investigation of any transaction that is foreign-
government-controlled. It also requires investigation where the 
threat to national and homeland security has not been mitigated 
during the 30-day review period.
    The subcommittee also has heard how important it is for 
senior officials within an Administration to be aware of 
transactions moving through the CFIUS process. This bill makes 
it clear that an investigation is not considered complete until 
the findings and reports are approved by a majority vote of the 
CFIUS members. Following that vote, the reports must be signed 
by the Chair and Vice Chair of CFIUS.
    Under this legislation, sitting members of CFIUS will be 
accountable and responsible. Language in the bill prohibits the 
Chair and Vice Chair from delegating the signing of these 
reports to any person other than the Deputy Secretary of those 
agencies.
    Currently, when a transaction moves through the CFIUS 
process, there is a lead agency assigned to negotiate assurance 
agreements and mitigate any security concerns. This legislation 
strengthens that process by increasing the enforcement 
responsibilities of the lead agency.
    In our previous hearings, Chairwoman Sue Kelly of the 
Oversight Subcommittee brought to our attention the need for 
codifying the process by which CFIUS checks in with the 
Financial Crimes Enforcement Network and the Office of Foreign 
Assets Control to ensure that a transaction isn't just being 
funded with terrorist financing. This legislation includes a 
DNI directive to do just that.
    As for reporting to Congress, this legislation would 
require that CFIUS notify majority and minority leaders of the 
Senate, the Speaker and Minority Leader of the House, and the 
Chair and Ranking Member of the House and Senate of any 
committee with jurisdiction over any aspect of the covered 
transaction when an investigation has been completed.
    Any Senator or Member of Congress can receive a classified 
CFIUS briefing on a transaction. The bill requires a semiannual 
report to Congress on all reviews and investigations conducted 
during the previous 6 months.
    CFIUS was designed in our pre-9/11 world, and in this post-
9/11 environment, national and homeland security have never 
been more important. Under this legislation, the Vice Chair 
position is created and is designated by the Secretary of 
Homeland Security.
    And finally, this bill authorizes increased funding levels, 
and it gives CFIUS flexibility in the definition of critical 
infrastructure which is so important in a world of rapidly 
changing technologies.
    I look forward to hearing from our witnesses today on how 
this legislation reforms the process and what effects the 
changes will have on foreign investment and national and 
homeland security.
    And with that, I am happy to recognize Ranking Member 
Maloney for her opening statement.
    Mrs. Maloney. I would like to thank Acting Chairwoman Judy 
Biggert for holding this hearing, and I welcome all of the 
witnesses. I am very interested to hear what you have to say 
today about H.R. 5337, bipartisan legislation we have 
introduced to reform and strengthen the CFIUS process.
    From my perspective, this legislation is a commonsense 
approach that makes the CFIUS process more transparent and 
accountable. While protecting our national security, it 
strengthens the process without delaying or politicizing the 
decisions.
    Over the past several months, I have been pleased that this 
committee has taken a balanced and deliberative approach to 
drafting substantive bipartisan legislation, and I am very 
pleased that H.R. 5337 builds on the legislation, H.R. 4915, 
that I introduced in March when our committee held our first 
hearing on CFIUS.
    Both bills are based upon recommendations made by the 
Government Accountability Office before the Dubai Ports fiasco. 
Specifically, H.R. 5337 will ensure that there will be a full 
review of any government-owned or -controlled company by 
mandating an additional 45-day review of any foreign government 
company going through the CFIUS process.
    And we expand and add to the role of the Director of 
National Intelligence. Our goal is to have a more timely and 
more completely reviewed process, and we require a formal 
analysis from the DNI.
    We increase the role of the Department of Homeland Security 
to really reflect 9/11 realities by designating the Secretary 
as the Vice Chair of the process, and we ensure proper tracking 
of mitigation agreements and withdrawals. This will make 
companies unable to just fly off the radar screen.
    There has to be an agreement between the Chair and the Vice 
Chair about how they are removed from the process and when they 
go back into the process. And we create the board and provide 
funding solely for the CFIUS process. We elevate certain 
decisions to the Deputy Secretary level and we increase the 
reporting requirements to Congress, striking, we hope, a better 
balance between exerting proper oversight while making sure 
that we do not politicize the process.
    Again, I thank the chairwoman for holding today's hearing 
and I look forward to hearing from our witnesses. Thank you.
    Mrs. Biggert. Are there any other opening statements?
    The gentleman from New York is recognized for 3 minutes.
    Mr. Crowley. Thank you, Madam Chairwoman.
    First, I would like to thank the Chair, particularly the 
ranking member, my friend and colleague from New York, Mrs. 
Maloney of the subcommittee, not only for calling this hearing 
today on H.R. 5337, but also for their hard work in helping to 
craft this bipartisan bill along with myself and Representative 
Roy Blunt. With the assistance of Chairman Oxley and Ranking 
Member Frank, we introduced H.R. 5337, the bill that we are 
discussing here today.
    I believe that this bill represents a commonsense solution 
to the concerns raised earlier this year regarding the CFIUS 
process. As we all know now, the CFIUS Committee on Foreign 
Investments in the United States was a little-known committee, 
operating under the Treasury Department, dealing with accruals 
of acquisitions of U.S. companies by foreign purchasers. This 
winter's controversy over the Dubai Ports World's deal brought 
this committee and the CFIUS process into daylight.
    I think most of us can agree that the actions taken by the 
Administration both leading up to and after the Dubai situation 
caused serious concern about the process and the secrecy that 
surrounded that process. Stating that we, the authors of H.R. 
5337, also firmly believe that the CFIUS process has generally 
worked well and that while some legislative changes are 
necessary, the process by which foreign investors can purchase 
U.S. companies should not be completely derailed by this one 
case or by the select action of this Administration.
    The hearing today focuses on our bill, the Reform of 
National Security Reviews of Foreign Direct Investments Act, 
that will reform the CFIUS process while ensuring that our 
national security concerns are met and, at the same time, will 
not stop direct foreign investment into the United States.
    H.R. 5337 codifies the Committee on Foreign Investment into 
law and mandates that it ensures the protection of America's 
national security. The bill mandates regular reporting to 
Congress, timely, but after-the-fact reporting so that we are 
knowledgeable in our oversight capabilities, but not involved 
in transactions' specific decisionmaking.
    The bill also allows for a clean process for mitigation 
agreements to be monitored and enforced. This bill cleans up 
some of the problems of CFIUS, while not radically altering a 
committee that has, by and large, worked well for decades.
    I look forward to the testimony of our witnesses today.
    I thank the chairwoman for yielding time for my opening 
statement, and I yield back the balance of my time.
    Mrs. Biggert. Thank you. Does the gentlelady from 
California have a statement?
    Ms. Lee. Thank you very much.
    Mrs. Biggert. You are recognized for 3 minutes.
    Ms. Lee. Thank you very much, Madam Chairwoman. I want to 
thank you and our ranking member for holding this very 
important hearing and to thank our witnesses for being here 
today.
    The Dubai Ports deal really revealed a huge gap in 
Congressional oversight of the actions of this Administration. 
As elected Representatives, we have a very critical role to 
play in our system's checks and balances, but ultimately 
without access to information, Congress really can't fulfill 
its constitutional obligation. And unfortunately, I must say 
that this seems to be the way that this Administration really 
likes to play things around here, from WMD's to faulty 
intelligence to NSA wiretapping, we really have been, quite 
frankly, left out in the cold.
    So I appreciate the fact that this subcommittee is willing 
to conduct its oversight role in this instance, and I hope that 
this is a sign of things to come.
    My concerns with the CFIUS process revolve around this 
critical issue, of course, of oversight and I look forward to 
hearing from all of you with regard to how H.R. 5337 addresses 
the question of oversight.
    Thank you and I yield the balance of my time.
    Mrs. Biggert. Does the gentleman from Illinois have an 
opening statement?
    Mr. Manzullo. Yes, I do. Thank you.
    Mrs. Biggert. Three minutes.
    Mr. Manzullo. Thank you.
    I would like to say welcome and thank you to our witnesses 
for appearing today as we continue our examination of CFIUS in 
terms of scope and extent of needed reforms to this critical 
process.
    It is my great pleasure to be an original cosponsor of the 
Reform of National Security Reviews of Foreign Direct 
Investments Act, H.R. 5337, introduced by Majority Whip Blunt, 
Chairwoman Pryce, Ranking Member Maloney and Congressman Joe 
Crowley. I now join this legislation because I firmly believe 
that it strikes the right balance between the need to encourage 
robust and welcoming environment for foreign investors and 
obligation, human assets, and resources.
    Our Congressional district has had several manufacturing 
facilities that have been saved by foreign direct investment 
from Germany, from Italy, and from Israel. Even a Chinese 
enterprise, which is remarkable, bought a manufacturing 
facility in our Congressional district that nobody else wanted 
and there was no other financing available and created new 
jobs. And also Great Britain, Cadbury Schweppes bought the 
doughnut factory in our district. It is the largest known sugar 
gum factory in the world.
    So, Madam Chairwoman, we are very much interested in 
maintaining full foreign direct investments in our State of 
Illinois, and I look forward to your testimony. Thank you.
    Mrs. Biggert. Thank you;
    At this time I would like to introduce our first panel of 
witnesses. First, we have Assistant Secretary Clay Lowery. Mr. 
Lowery advises the Secretary on international economic policy. 
Prior to his work with the Treasury Department, he worked as 
the Director of International Finance at the National Security 
Council. Welcome.
    Assistant Secretary for Policy for the Department of 
Homeland Security, Stewart Baker, is next in line. Mr. Baker 
also serves on the President's Export Council Subcommittee on 
Export Administration and the Commerce Department's Industry 
Trade Advisory Committee. Thank you for coming.
    Peter Flory, the Assistant Secretary of Defense--I have 
skipped over--for International Security Policy. Mr. Flory 
serves as the principal advisor to the Secretary of Defense on 
issues that relate to the development of security cooperation 
strategies with nations of Europe, Eurasia, and the North 
Atlantic Treaty Organizations.
    And then back to Mr. Flory's right is Alice Fisher, who is 
the Assistant Attorney General for the Criminal Division, U.S. 
Department of Justice. Ms. Fisher supervises the enforcement of 
Federal criminal laws and policy. In addition, she supervises 
the prosecutors in the division on matters of national security 
and international affairs. Welcome.
    And we welcome all the witnesses to the hearing today and 
recognize a 5-minute summary of their testimony.
     We will start on the left with Mr. Lowery.

STATEMENT OF THE HONORABLE CLAY LOWERY, ASSISTANT SECRETARY FOR 
     INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Lowery. Madam Chairwoman, Ranking Member Maloney, 
Representatives Lee and Manzullo, I appreciate the opportunity 
to appear before you today on behalf of the Administration, the 
Department of the Treasury, and the Committee on Foreign 
Investments in the United States.
    While we do not have a formal Administration position at 
this time on any pending legislation, I would like to lay out 
the key principles that would guide us as we work with the 
Congress to update the CFIUS process.
    We believe that reform should address two broad principles: 
U.S. national security imperatives in the post-9/11 environment 
and the need to continue investment in the United States that 
creates good jobs for American workers. In the context of these 
broad principles, we have listened carefully to the concerns of 
Congress, and I would like to highlight five specific areas 
that we believe address these concerns--most of these concerns 
and issues that you have raised in our opening statements.
    First, the Administration shares the view that we need to 
improve our communication with Congress to help Congress meet 
its oversight responsibilities. We are already taking steps to 
improve this process. For instance, we are now promptly 
notifying Congress of every transaction upon its completion, 
and we are committed to conducting quarterly briefings for any 
concern on CFIUS matters.
    The Administration is also actively preparing a 2006 
quadrennial report on amendment. We regret a quadrennial report 
has not been prepared since 1994, and the Administration will 
issue the 2006 report in a timely and thorough manner.
    We are also open to other suggestions on how to foster 
better communication.
    While reforms in the CFIUS process should advance our 
shared goal of improved communication, we must always keep in 
mind that they should ensure that proprietary information will 
be adequately protected so that companies are encouraged to 
file with CFIUS; they should preserve the integrity of the 
Executive Branch's decisionmaking process; and they should 
avoid possible exposure to politicization of intelligence and 
security reviews. We are confident that CFIUS can provide 
Congress with the information it requires to fulfill its 
oversight role while respecting these principles.
    Second, we should look at ways to increase Congress's 
confidence in the process of enhancing accountability in terms 
of CFIUS decisions and in terms of monitoring mitigation 
agreements. The Administration is committed to ensuring that 
senior Senate-confirmed officials play an integral role in 
every transaction presented to the committee; we have already 
taken steps in this direction.
    For instance, I know that CFIUS agencies are briefing 
transactions at the highest levels in their respective 
agencies. However, requiring the Presidential determination or 
Cabinet-level certification with respect to every transaction 
would introduce unnecessary delays and divert high-level 
attention from the transactions that raise possible national 
security issues. It is these transactions that could pose 
security risks where we should be focusing our most senior 
officials' enhanced detection.
    At the same time, CFIUS process agencies feel the need to 
put in place mitigation agreements to implement security 
measures that vary in scope and purpose according to particular 
national security concerns raised by the specific transaction. 
Monitoring parties' adherence to mitigation agreements after 
the conclusion of the CFIUS process is an important part of 
protecting the national security. The Administration, 
therefore, supports reforms that reinforce the authority and 
provide resources for agencies to negotiate mitigation 
agreements to improve existing enforcement practices.
    Third, members of this committee know very well that we 
must also continue to emphasize the importance of preserving 
the attractiveness of the United States to overseas investment. 
Foreign direct investment is critical to the U.S. economy. 
Majority-owned U.S. affiliates of foreign companies employ over 
5 million Americans. These jobs, on average, are higher-paid, 
and roughly 40 percent of these jobs are in the manufacturing 
sector, which is roughly 4 times the national average. If the 
foreign companies were to reduce their spending in the United 
States as a result of perceptions that the United States was 
less welcoming of FDI, lower investment would cost American 
workers good jobs, reduce innovation, and lower the growth of 
the U.S. economy.
    Fourth, the Administration supports efforts to update CFIUS 
to reflect the post-9/11 security environment. The committee 
should continue to consider a broad range of national security 
issues when reviewing transactions. Two factors that should 
always be taken into account in CFIUS assessments are the 
nature of the acquiring entity and the nature of the assets to 
be acquired. The Administration supports requirements for CFIUS 
to consider ultimate ownership of the acquirer in the possible 
foreign acquisition of critical infrastructure or any other 
sensitive assets when reviewing any transaction.
    Let me be clear. There is a misperception about how CFIUS 
operates. The initial 30-day period is a thorough investigation 
in which a comprehensive threat vulnerability assessment is 
conducted by professionals across the agencies. If there are 
national security concerns raised that cannot be addressed 
during that time frame, extended investigation becomes 
necessary. However, requiring expanded investigations in which 
no national security concerns are present would divert 
resources and thereby diminish feasibility to protect national 
security.
    Fifth, the Administration also believes that CFIUS can 
carry out its duties more effectively by strengthening the role 
of the intelligence community in the CFIUS process. We have 
taken steps in this area by formalizing the role of the Office 
of the DNI which is participating in CFIUS meetings, examining 
every transaction notified to the committee, and provides broad 
and comprehensive threat assessments through the National 
Intelligence Council. The DNI does not, and should not, vote on 
CFIUS matters because the role is to provide intelligence 
support and not to make policy judgments. The DNI has already 
contributed greatly to the CFIUS process through threat 
assessment.
    Mrs. Biggert. Mr. Lowery, if you can sum up.
    Mr. Lowery. Formalizing the process is vital to our 
national security interests.
    Madam Chairwoman, I would like to reiterate in closing that 
the Administration supports reforms to the CFIUS process and 
will continue to work with Congress toward that end.
    Thank you.
    [The prepared statement of Mr. Lowery can be found on page 
49 of the appendix.]
    Mrs. Biggert. Thank you.
    Before I forget, without objection, all of your written 
statements will be made part of the record.
    Mr. Baker.

    STATEMENT OF THE HONORABLE STEWART A. BAKER, ASSISTANT 
SECRETARY FOR POLICY, PLANNING AND INTERNATIONAL AFFAIRS, U.S. 
                DEPARTMENT OF HOMELAND SECURITY

    Mr. Baker. Thank you, Madam Chairwoman.
    Mrs. Biggert. If you could turn on your microphone and pull 
it a little bit closer.
    Mr. Baker. Thank you, Madam Chairwoman, Ranking Member 
Maloney, distinguished members of the committee, I appreciate 
being here, having an opportunity to give an explanation of the 
Department of Homeland Security's role in CFIUS.
    We are the newest member of CFIUS. We joined in March of 
2003. Since then, we have participated in about 170 
transactions, and I think there are three or four things that 
you can say about the role that we have carved out for 
ourselves.
    First, we have taken the lead in addressing critical 
infrastructure, national security, and homeland security issues 
because that is one of our fundamental requirements as a 
department, to guarantee the safety of the critical 
infrastructure.
    But I think it is also fair to say that having been formed 
as a result of September 11th and the attacks on that day, we 
have had to be rather creative about the kinds of national 
security, homeland security concerns that we have tried to 
address, and that has led us to have a very broad view of what 
national security and homeland security requires in these 
circumstances.
    We have often used the authority to enter into mitigation 
or national security agreements. I think we have entered into 
more than 30 already in the few years that we have been part of 
the CFIUS process, and I think it is also fair to say that we 
have been pretty aggressive in defining the kinds of threats 
that require some sort of action on the part of CFIUS. And 
while I think our forward-leaning stance on security issues 
sometimes gives rise to debate in CFIUS, I hope and believe 
that the other members of CFIUS believe that it has, in the 
end, contributed to better decisionmaking on CFIUS's part.
    Just in case it is not clear from these remarks, the 
Department has made CFIUS one of its highest priorities. I 
became Assistant Secretary in the fall of last year and just 
about the first staff person that I went out to recruit was 
somebody to head up our CFIUS office. We have plans to 
substantially expand that office and continue to be very 
aggressive both in entering into agreements and in enforcing 
them.
    With respect to CFIUS reform, very briefly three points. 
First, I really want to thank this subcommittee for its 
engagement on this issue. You have produced a very responsible 
and thoughtful mission to the debate. We appreciate the 
opportunity to talk about it here today.
    Second, I fully subscribe to what Secretary Lowery said 
about CFIUS reform. We take it very seriously, and we want to 
make sure that it is handled in a responsible and careful way.
    And finally, we are really delighted to be part of this 
debate and we look forward to the opportunity to talk with the 
committee members and staff about ways to improve the bill.
    Thank you.
    [The prepared statement of Mr. Baker can be found on page 
36 of the appendix.]
    Mrs. Biggert. Thank you very much.
    And Ms. Fisher, you are recognized for 5 minutes.

STATEMENT OF THE HONORABLE ALICE S. FISHER, ASSISTANT ATTORNEY 
     GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

    Ms. Fisher. Thank you, Madam Chairwoman, Ranking Member 
Maloney, and members of the committee. Thank you for inviting 
me here today on behalf of the Department of Justice, and thank 
you for your efforts to reform the CFIUS process.
    We appreciate all of the efforts that will ensure the 
confidence of both Congress and the public in the CFIUS 
process. Of course, the number one priority of the Department 
of Justice is ensuring national security and protecting 
national security; and that means to ensure public safety, both 
foreign--against threats foreign and domestic; and the 
Department is keenly aware of its role and its responsibilities 
under Exon-Florio as a member of the CFIUS process, and we work 
hard to meet these responsibilities.
    We are able to draw upon our resources throughout the 
Department, and have a lot of engagement with the FBI and other 
divisions throughout the Department. For example, the FBI will 
call on its resources for analysis in investigation, using all 
of its techniques to the counterintelligence section, the 
counterterrorism division, and the cyber division within the 
FBI and all of the expertise that they bring to bear with 
regard to these national security issues and the communications 
and cyber issues.
    In addition, we have experts within the Department in our 
Computer Crime Section on communications and infrastructure 
protection. We have a Counterespionage Section and a 
Counterterrorism Section also within the Department that will 
bring unique expertise to this process, and routinely does 
bring unique expertise to this process.
    We will call on other sections--whether it is the Antitrust 
Division, the Office of Intelligence and Policy Review--but the 
point is that whatever expertise we need, whatever information 
we need, we have that resource available within the Department, 
and we make sure that we collect that information and discuss 
it and bring it to the CFIUS committee to discuss as a whole.
    We also review the DNI threat assessments and vulnerability 
analyses that are submitted by the DNI, and if we have 
additional questions, we will go back and engage in that 
process as well.
    By bringing all these resources to bear, the Department of 
Justice has maximized its ability to participate in the 
effective implementation of Exon-Florio.
    And I would also like to comment on the importance of the 
security agreements that have been negotiated, and I know it is 
part of the legislation that you have been considering. We 
believe that the security agreements and the mitigation 
agreements are a very important part of the CFIUS process, and 
we look at them on a case-by-case basis. But the fact that we 
have that available, the fact that they are enforceable through 
our contract remedies and remedies in the agreements 
themselves--I know that you all are considering other things 
with regard to these agreements, and we do find that to be a 
very critical tool in the CFIUS process.
    We have also engaged using those agreements and audits, or 
third-party audits, on-site visits, and engage with the 
companies that sign up with these agreements. So I appreciate 
your deliberations and your consideration with regard to those 
agreements.
    We work with the other agencies through the CFIUS process, 
and where necessary, we enjoy a good debate with regard to the 
national security interest.
    At the end of the day, that is what we are there to 
protect, and we appreciate the opportunity to discuss that here 
with you today. Thank you.
    [The prepared statement of Ms. Fisher can be found on page 
38 of the appendix.]
    Mr. Campbell. [presiding] Thank you, Ms. Fisher.
    Mr. Flory.

    STATEMENT OF THE HONORABLE PETER C.W. FLORY, ASSISTANT 
SECRETARY FOR INTERNATIONAL SECURITY POLICY, U.S. DEPARTMENT OF 
                            DEFENSE

    Mr. Flory. Thank you, Mr. Chairman, Ms. Maloney, and 
members of the committee. I appreciate the opportunity to 
appear before you today.
    Assistant Secretary Lowery and my colleagues have laid out 
the principles that will guide our CFIUS reform and our review 
of the legislation proposed by the committee. The Defense 
Department shares these principles, and like the other agencies 
here today, we support reform of the CFIUS process.
    I would like to briefly discuss the Department of Defense's 
role as a member of CFIUS, as well as a few improvements we 
have tried to make in the process within the Department as part 
of the broader interagency effort to look at this process and 
find ways to make it better.
    As a member of CFIUS, the Department of Defense weighs a 
number of factors when it considers foreign acquisition of a 
U.S. company. First and foremost, our objective in this process 
is to be sure that the proposed transaction does not pose risks 
to U.S. national security interest. To do this, the Department 
reviews several aspects of the transaction, including the 
importance of the firm being acquired to the U.S. defense 
industrial base, for example, whether it is a sole-source 
supplier.
    We also look at the question of whether the firm to be 
acquired has state-of-the-art or other military-critical 
technologies. We ask whether the company to be acquired is part 
of the critical infrastructure that the Defense Department 
relies upon to accomplish its mission. We ask, is the acquiring 
company involved in sensitive technology or weapons of mass 
destruction and their delivery systems?
    These are not all of the questions we might ask, but these 
are some of the questions we look at in the Department of 
Defense, and the bottom line is, if we find issues, we ask 
ourselves if any potential national security concerns posed by 
the transaction can be addressed by allocation of risk 
mitigation measures under the Department's own regulations or 
through other aspects of the CFIUS process negotiations with 
the parties.
    Recently we have done a few things to incorporate some of 
the lessons learned from recent events. These have focused on 
several areas, one of which was a topic that members of the 
committee have mentioned--and we agree with the need for action 
here--which is to ensure accountability in the CFIUS process at 
the senior leadership levels within the Defense Department and 
across the management of our reviewing organizations.
    Another step we have taken is to add the Assistant 
Secretary for Homeland Defense and the Chairman of the Joint 
Chiefs of Staff to our formal list of CFIUS case reviewers.
    We also bring in additional organizations and experts to 
augment the standard Defense Department review organizations. 
Our standard list, I should point out, is 19 different offices 
and organizations within the Department, but there are cases 
where we feel the need to bring in somebody else; and when we 
feel that need, we do so.
    To continue strengthening our internal CFIUS process, we 
are clarifying the authorities and detailing responsibilities 
of the Department's CFIUS reviewing organizations in a DOD 
instruction. We think this is particularly important for us, 
given the size of the Defense Department and the number of 
reviewing organizations. As I just mentioned, there are 19 of 
them that play a role, and I believe this effort would be 
helpful in ensuring that we are allocating personnel with the 
appropriate programmatic, technical, operational, regional, and 
other expertise to the review of these transactions.
    Again, we are also working actively with other CFIUS member 
agencies represented here as well as others to develop and 
implement further improvements in the interagency review 
process. One important part of this has been the increased 
frequency of interactions at all levels amongst the CFIUS 
committee members.
    Mr. Chairman, the Department of Defense believes that the 
CFIUS process is working effectively to balance the important 
need for foreign investment in the United States with the 
critical need to protect our national security. This concludes 
my formal statement.
    I would be happy to answer any questions that you may have.
    [The prepared statement of Mr. Flory can be found on page 
42 of the appendix.]
    Mr. Campbell. Thank you, Mr. Flory. And thank you, panel.
    Mr. Manzullo, do you have any questions for the panel?
    Mr. Manzullo. I do. Thank you very much.
    I am concerned about several aspects of what CFIUS does. 
But let me just share with you--with regard to follow-up, you 
had mentioned something about that. Do reports exist on follow-
up for compliance with CFIUS in particular situations?
    Ms. Fisher. I am sorry. Excuse me? Reports?
    Mr. Manzullo. With regard to follow-up, to making 
evaluation and monitoring of the requirements that you may set 
forth, do reports exist?
    Ms. Fisher. Well, we have certainly engaged from time to 
time with companies on audits, on-site audits, third-party; we 
have insisted that companies hire third-party auditors to come 
in and audit pursuant to the agreement.
    So we have--the agreements themselves are written. We have 
audits that we have done from time to time. Most regularly we 
might--if something comes to our attention on the monitor and 
it is unfortunate, we are concerned about, we will engage 
directly with the company to try to get them to fix anything 
that we have concerns about.
    Mr. Manzullo. Have there ever been any sanctions for 
noncompliance?
    Ms. Fisher. To date, I am not aware of any, certainly not 
during my period of time at the Department of Justice, where we 
have put a company in breach of a particular security 
agreement.
    The other members of the panel might have more information 
on that. I know that there are certain remedies within these 
agreements that we can enforce as part of the contract itself, 
and in addition, I know that this committee is considering 
other things to enhance and improve our efforts to remedy 
mitigation agreements.
    Mr. Manzullo. The reason I ask that is, the present law 
requires reporting to Congress, and I just want to be very 
blunt with you--CFIUS, I asked them to come to my office to 
have a briefing. And these are rather junior people involved in 
the agencies, and they also said that--well, this is top 
secret, it is classified, and I heard nothing new. I mean, I 
received absolutely nothing in the briefing that CFIUS gave to 
Congress.
    I also expected that more high-level administrative 
officials would have been involved in this. At what level do 
you comprise your review of the different--19 different 
agencies that are involved?
    Mr. Lowery. I am not sure about the particular briefing 
that you received. In terms of--
    Mr. Manzullo. I will tell you, it was the one on IBM.
    Mr. Lowery. Okay. Well, I wasn't in my job at that time, 
but the way we are viewing--one, we believe that it is very 
important for us to increase our communication with Congress. 
If there have been mistakes--
    Mr. Manzullo. I understand. My question is, at what level 
in each agency do you assign people to work on the CFIUS?
    Mr. Lowery. Basically, each agency does things differently, 
but what I can say, what goes on in the Treasury--and I think I 
can speak for all agencies here--all transactions that are 
coming through CFIUS currently are being briefed up to the 
highest levels of the agencies.
    Mr. Manzullo. I am sure they are now.
    Mr. Lowery. Right. And what we are saying is that basically 
we believe that one of the criticisms--there were two 
criticisms that came up.
    Mr. Manzullo. You are not answering the question.
    You know, are these deputy administrators, deputy 
secretaries, assistant secretaries?
    Mr. Lowery. It depends on the initial transaction. But 
everybody can expect that the Deputy Secretary, Under Secretary 
and Assistant Secretary of the Treasury Department is being 
briefed on every single transaction.
    Mr. Manzullo. Really? Every single one?
    Mr. Lowery. Every single transaction is being briefed all 
the way up to the Assistant Secretary.
    Mr. Manzullo. One of the problems when you tell--you are 
not presently following the law when it says to inform 
Congress. The people who came in to give this briefing were 
very sincere, but they were also very young in terms of actual 
experience. I mean, you have to be experienced to understand 
this stuff.
    As a Member of Congress, I want to be briefed by people who 
have a lot of authority, and I don't think that you guys got 
the message that you don't come in and say, this is top secret, 
and you tell me nothing I couldn't read in the newspapers; and 
then you throw out half of my staff because they didn't have a 
security clearance. And the people who did the actual briefing 
were not people who were high up the food chain in the 
different rounds.
    Mr. Lowery. I am not sure about the specific briefing you 
are talking about. But if you would like, I will--we can have 
higher-level briefings. Come anytime you would like.
    Mr. Manzullo. It is kind of late now.
    Mr. Lowery. Sir, I am trying to answer your question, which 
is basically--you asked who is clearing these transactions.
    Mr. Manzullo. Right.
    Mr. Lowery. And I have said that basically everybody, from 
the highest level of the Treasury Department; when we sign off 
on these transactions, the Assistant Secretary, which happens 
to be me, is signing off on those transactions.
    I am a Senate-confirmed position. That is a fairly high 
level, and I am more than willing to come down anytime and talk 
to you about each transaction after a transaction closes, 
because we have to be very careful about proprietary 
information and intelligence sources.
    Mr. Manzullo. Well, nothing--
    Chairwoman Pryce. [presiding] The gentleman's time has 
expired.
    Mr. Manzullo. Thank you.
    Chairwoman Pryce. I want to thank the panel for being here. 
I am sorry for having missed your testimony. I will be sure to 
read it. I have started to read it.
    We are going to have a series of votes, about 50 minutes of 
votes, so we will try to finish with this panel before that.
    So at this time I will yield to my good friend, the 
gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. I would like to ask Deputy Secretary Baker, 
Department of Homeland Security, you mentioned that Homeland 
Security had been part of 170 reviews of CFIUS. Was Homeland 
Security part of the review panel that did Dubai Ports?
    Mr. Baker. Yes, we were.
    Mrs. Maloney. You were. Well, one of the concerns that was 
raised by the General Accountability Office report on which we 
based a lot of our movement in this legislation before us today 
was the narrow definition that CFIUS had used to define 
homeland security. The fact that CFIUS did not consider 
critical infrastructure, i.e., in this case, ports, as part of 
their definition of homeland security, and the legislation that 
we put forth would require CFIUS to consider, quote, ``critical 
infrastructure,'' and what assurances do we have that this 
addition will correct the problem?
    Certainly the American people thought that 5 major ports, 
20 ports in total, was major critical infrastructure. Yet 
Homeland Security, even, did not consider it major critical 
infrastructure.
    And so what assurances do you have that the definition for 
homeland security will no longer be so narrow that obvious 
infrastructure, such as ports, rail, and voting machines, would 
not be considered part of the CFIUS definition?
    Mr. Baker. I can assure you that we have always believed 
that critical infrastructure is part of the definition of 
national security, and even in the Dubai Ports case, although 
we ultimately agreed that transaction could go forward, we made 
it quite clear that we believed that national security was 
implicated. Which is why we entered into a national security 
set of assurances with Dubai Ports and PNO, so--we wouldn't 
have had the authority to do that if we couldn't have justified 
it under CFIUS. So the agreement that we entered into, I think, 
gives you some assurance that we have already been viewing 
critical infrastructure as part of homeland security, part of 
national security.
    We appreciate the clarification that the law will enact, 
which will make sure that everyone is in agreement on that, but 
I believe that the fact is, it will simply solidify our 
existing practice.
    Mrs. Maloney. Some have suggested to us that we might 
broaden our legislation to include some guidance to businesses 
and Congress as to what type of transactions need to be 
reviewed. Do you believe--I will ask this to anyone at the 
desk--that we should have some type of guidelines developed by 
Treasury or CFIUS or Homeland Security or the National 
Intelligence Director as to what we should be reviewing?
    Obviously, buying ice cream stores does not need CFIUS 
review, but do you think that it would be helpful in helping 
the committee focus on what is truly a threat to homeland 
security, as opposed to reviewing absolutely everything?
    And also your comments on the fact that now it is 
voluntary, it is not a mandatory process, and do you believe it 
should, in some cases, be mandatory, say, for a foreign-
controlled ownership?
    Mr. Lowery. We think it is important that it maintain--that 
it continue to be a voluntary process.
    We do welcome foreign investment in this country, and we 
think that if there are transactions that are dealing with 
national security issues--and there are some things that we 
look at that are fairly clear, such as the defense industrial 
base, such as critical infrastructure. And any company that 
comes in looking at those type of transactions, as an acquirer, 
is going to realize that the best thing they can do is to go 
through the CFIUS process, so they can get basically the safe 
harbor at the end of the process, so that they are not open to 
the CFIUS process going back at a later point in time and 
saying, why didn't you file, and you could overturn this 
transaction.
    So it is actually--we believe that if you keep it at a 
voluntary process, this is a way to encourage companies to 
actually file and not try to hide beyond the radar screen, and 
that, we think, is an important part of the process.
    Mrs. Maloney. And secondly, do you think we should develop 
some type of guidance to businesses and Congress as to what 
type of transactions should go before CFIUS?
    Mr. Lowery. I think we could look at that. We need to be 
very careful, because then you could create the wrong type of 
incentives, and you could actually--if you define it too 
narrowly, you might find that there were transactions that fell 
outside of it, outside of the CFIUS base. If you divide it too 
wide, you might be getting too many potato chip-type 
manufacturers.
    So I think putting the words ``national security'' could 
have an effect and basically explaining that we do need to take 
certain factors into consideration, such as critical 
infrastructure, such as defense issues, such as foreign 
government-controlled assets. Those are very important things 
that we should consider as factors.
    Mrs. Maloney. Okay. My time is up.
    Chairwoman Pryce. I would like to ask the panel, and 
especially Treasury and Homeland Security, if this CFIUS 
committee ends up with cochairs as opposed to Treasury chairing 
the body, do you believe there would be extra difficulty or 
extra bureaucracy or redundancy; or do you think that it would 
be a good idea, and we can just let go from there?
    Clay, you go first.
    Mr. Lowery. We think that actually it is best left to the 
Executive Branch to figure out who is on the committee, who is 
chairing it, who is vice chairing it, if a vice chair is 
necessary. Having cochairs could help or harm the process.
    Let me tell you real quickly what the Chair does. The 
Chair--the Treasury Department acts as an executive secretary, 
basically. It makes sure that all agencies are informed of what 
is going on in the process, makes sure that each agency has a 
chance to get its questions understood and answered, so I am 
not sure that having two chairs is going to help in that 
process.
    We basically act as a secretary. We make sure we pass on 
information to the companies, and we chair meetings. It is not 
a humongous role. It is the role of a secretary type.
    Mr. Baker. I share some of those views.
    I think it is an understandable notion that Homeland 
Security should be cochair to balance out a national security 
interest with the investment interests that the Treasury has 
represented.
    The difficulty with assigning that role to any one agency 
is, there is no agency that encompasses all of the national 
security interests that might arise in a particular 
transaction. Many of the cases that arise are cases in which 
the Defense Department has great expertise and a strong 
interest, and the Homeland Security Department really quite 
properly takes a back seat to them. And so picking one of the 
agencies and saying, you will have national security 
responsibility, I think, creates some difficulties.
    Second, I think the national security interests, at least 
Homeland Security as represented in this process has generally 
flourished under what Secretary Lowery described as an 
executive secretariat in which the Treasury's role is quite 
minimal. They move the paper around, make sure the meetings 
happen; they are keepers of the process.
    To the extent that the bill makes the cochair stronger or 
gives them a larger role, there is always the risk that whoever 
that is, the other members' interests won't be represented as 
effectively as they are today.
    Chairwoman Pryce. But you both agree that currently it is 
more an administrative function than any kind of meaningful 
substance?
    Mr. Lowery. Yes.
    Chairwoman Pryce. In the interest of time and because there 
is a vote, I will yield back the balance of my time.
    And Ms. Lee from California.
    Ms. Lee. Let me say, first of all, I think all of you have 
indicated that the process could be enhanced and improved, and 
I am wondering if you could just go back to the Dubai Ports 
CFIUS process and tell me where you think the flaws were. That 
is the first question.
    And then, secondly, I know that the GAO raised the issue 
that the CFIUS felt that a 45-day formal investigation period--
they would be reluctant to initiate this because it would 
discourage foreign investment.
    What is the--I mean, is that real or not?
    Mr. Lowery. In terms of the deepwater case, we think that 
basically we had two major flaws, and when we think that--we 
tried to address this in forms we are looking at.
    First, our communication with Congress; that did not 
happen. And that was a mistake, and that was a problem on our 
part. And we need to improve on that, and we are trying to take 
steps to do that.
    Secondly is that there was not appropriate--to get to 
Congressman Manzullo's point--high-enough-level attention. So 
we basically did probably a fairly good job of clearing this 
transaction on a horizontal basis across the different agencies 
and across all the professional experts, but we didn't do a 
good enough job getting it up the line. So that has been 
something of a concern to us.
    Those are the two things that we feel like we have made a 
mistake on, and we think that some of the provisions of the 
bill help, some of the reforms that you all have suggested.
    In terms of the GAO's point of view, or GAO's point, I 
guess, about whether or not the 45-day investigative period 
creates a problem for investment, our view is that it creates 
discipline within the system to have timelines, and it is 
important because in any government action, timelines do create 
the discipline you sometimes need.
    What we would like: The vast majority of the transactions 
that we see can be cleared out in very timely fashion. Having a 
deadline helps us. If there is a concern regarding national 
security that cannot be addressed, then a 45-day extension of 
that investigative period is a good thing, and that helps us, 
and so our view is that basically--we can kind of clear out 
most of the transactions in a very timely fashion.
    But for the ones that do raise extra concerns, having that 
extended investigation period does help us.
    Ms. Lee. Thank you.
    Chairwoman Pryce. Thank you.
    And Mr. Crowley, you do know there is a vote on?
    Mr. Crowley. Thank you, Madam Chairwoman.
    Mr. Lowery, you just voiced concerns about some of the 
mandates for allocating critical resources away from certain 
acquisitions that posed legitimate problems, as opposed to 
routine transactions with no potential for national security 
concerns. You state this with respect to mandatory 
investigation of acquisitions that do not present national 
security issues that require a Cabinet-level sign-off on 
transactions that do not raise potential national security 
concerns. With this concern, would resources also extend to the 
provision of the bill mandating 30-day-minimum DNI review of 
all transactions?
    Mr. Lowery. I think that it is important for the Department 
of--I mean, the Director of National Intelligence needs time to 
conduct its investigations and do its research work because it 
is a very important input valve into the whole CFIUS process in 
terms of figuring out what are the threats that are coming from 
specific transactions.
    So I think that the DNI, having some time to do its work is 
very important to us, and I think that it can do its work 
during a 30-day review time.
    Mr. Crowley. Congresswoman Maloney's question in regards to 
critical infrastructure and how this book defines that issue--
this is for Treasury as well as DHS. Some of our colleagues in 
the House who are not necessarily on this committee have tried 
to craft definitions for ``critical infrastructure'' so broad 
as to encompass almost everything in our economy and then rule 
out these, quote, ``critical infrastructures'' to any foreign 
investment.
    I believe that the bill we have before us, H.R. 5337, 
establishes a more flexible definition for ``critical 
infrastructure,'' enough so that it is protected, but not 
overly broad as to limit our economy and stifle growth.
    I was wondering if you could give your thoughts on the best 
way to define critical infrastructure with respect to the CFIUS 
process.
    Mr. Lowery. Well, I will defer to Stewart on defining 
``critical infrastructure'' because he knows this a lot better 
than I do.
    But I think that it is important for the CFIUS process to 
look at and take as a factor critical infrastructure, because 
we should; but there are critical infrastructure issues as 
defined broadly that are owned by many different companies all 
over the world, and it does not create any concerns for 
national security, and so that is the key thing.
    We need to focus on what is the most important for national 
security, and we think that that can be done by making sure 
that all agencies--
    Mr. Baker. I think the relatively broad definition of 
critical infrastructure that is referenced in this act is a 
useful one as long as it is not mandatory, so there is some 
room for good judgment on the part of both agencies and 
potential investors.
    Food and agriculture is obviously a critical 
infrastructure. We have to have that delivered, and it has to 
be free from terrorist attack. At the same time, we don't want 
to do CFIUS whenever somebody buys a farm in Iowa, even if they 
are from Germany. So some good sense has to be exercised, even 
after a relatively broad definition of critical infrastructure 
has been properly adopted.
    Mr. Crowley. Even if they are from Germany? That is 
interesting. Thank you.
    Chairwoman Pryce. All right.
    I want to thank the members for hurrying along here, and I 
want to thank this panel. We have about 50 minutes of votes; we 
will be in recess until 10 minutes after the beginning of the 
last vote. Thank you all very, very much.
    [Recess]
    Chairwoman Pryce. All right. Thank you, gentlemen, so much, 
for your patience, but such is the way of the House. You have 
been waiting long, so without further ado, I would like to 
introduce our second panel. Mr. Douglas Holtz-Eakin, director 
of the Maurice Greenberg Center for--excuse me. We will have 
order in this hearing room--for Geoeconomic Studies, Council on 
Foreign Relations; Mr. David Marchick is an attorney with 
Covington and Burling; his practice focuses on international 
trade and investment, and he has advised numerous companies 
seeking approval for foreign investment under their Exon-Florio 
amendments. From 1993 to 1999, he served under the Clinton 
Administration. And Mr. John Veroneau is a partner with Piper 
Rudnick Gray Cary. He joined the firm after serving as General 
Counsel in the office of the U.S. Trade Representative, and as 
Assistant Secretary of Defense.
    Chairwoman Pryce. We welcome the witnesses to the hearing 
today, recognize them for a 5-minute summary of their 
testimony, and without objection, your written statements will 
be made part of the record and we may proceed. We will start 
with you, Mr. Holtz-Eakin.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, MAURICE GREENBERG 
  CENTER FOR GEOECONOMIC STUDIES, COUNCIL ON FOREIGN RELATIONS

    Mr. Holtz-Eakin. Madam Chairwoman, members of the 
committee, thank you for the chance to be here to talk about 
H.R. 5337. I think Congress is to be commended for its quick 
and timely actions in revisiting the national security issue in 
the inbound foreign investment, particularly after the Dubai 
Ports World transaction. I intend to make only four points. You 
are well familiar with the issues.
    Point number one is that national security is paramount, 
but it is often framed as a tradeoff with economic policy, and 
indeed, in the vast majority of instances, they go hand in 
hand. As I indicated in my written statement and, as the 
experience that the Congressional Budget Office indicated, the 
United States may place tremendous demands in the form of 
military spending and other national security imperatives on 
the U.S. economy, and even in the presence of doing that, they 
will consume an ever smaller fraction of the output under 
typical economic growth. So keeping growth going is actually 
something that is good for national security.
    And my second point is that financial markets are central 
to the prowess of the United States in superior economic 
growth. Post 1995, the United States has been unique among 
developed economies in having an acceleration of productivity 
growth. There are many who point to the IT industries and the 
success of smart and crafty engineers in beating Moore's law. I 
would point toward another set of imperatives central to that, 
the openness of the United States to global competition in 
goods, services, and capital, and the role of capital markets 
in funneling money to new technologies, new markets, and 
otherwise choosing wisely where to invest the Nation's dollars 
to enhance productivity.
    For that reason, because financial markets are the nerve 
center of a modern economy, and permeate a vast fraction of the 
economy, the risk of policy mistakes in this area is quite real 
and very difficult to quantify.
    But my third point would be that given the past track 
record on economic and national security success, I don't think 
that we should be too concerned. There are obvious places where 
new considerations have raised the importance of targeted and 
tougher forms in the CFIUS process, areas like transparency and 
monitoring and improving expertise. A concentration on those 
areas will minimize the risk of intended consequences.
    Point number four is because capital markets are allergic 
to uncertainty, it could very well be the case that a 
beneficial set of targeted reforms in this area would, in fact, 
improve overall capital market performance by removing the 
uncertainty that surrounds certain transactions at this time 
and allowing the business community to go forward in a more 
timely fashion on things that they would like to do anyway.
    So in looking at this bill in particular, and this 
important issue in general, I think that it is desirable for 
the Congress to focus on national security and to, where 
possible, keep that on a very targeted basis to find those 
situations where transactions impair our ability to defend 
ourselves against our enemies or enhance the ability of our 
enemies to do harm to us, and by taking that as the guiding 
principle, it will lead to areas of critical infrastructure, it 
will lead to areas of important technologies, and it will lead 
to defense production capabilities that are important for 
national security by itself, and broad definitions of economic 
security or broader definitions in national security will be 
unnecessary with that kind of a focus.
    I think it is entirely desirable to clarify timing so that 
parties to transactions know that for those without an 
essential national security component, they have a quick and 
timely exit from the process and can move forward, and it has 
been suggested this be parallel to the Hart-Scott-Rodino 
timing. I think that is entirely desirable.
    I think the part of H.R. 5337 that focuses on expertise, 
funding where it is actually available for staff, follow-up in 
the success and mitigation agreements and the development of 
expertise and a track record for those mitigation strategies 
that are effective is entirely desirable, and the notion of 
improving transparency to Congress with regular reporting after 
the fact, not during investigations, and by embedding in 
statute the CFIUS process itself so that it is transparent not 
to the United States, but to the entire world, that will be a 
desirable outcome of this process.
    In going forward, I think it is important to remember that 
the things that are done in the United States are important to 
global capital markets. Part of what is at stake here is the 
fact that our investments abroad are an important platform for 
U.S. exports. The acquisition of subsidiaries in other 
countries enhances the business communities in the United 
States. By undertaking targeted but tough desirable reforms 
here we will set the stage for our countries to do this in the 
same fashion and provide benefits on a global basis.
    Anyway, I thank you for the chance to be here today.
    [The prepared statement of Mr. Holtz-Eakin can be found on 
page 45 of the appendix.]
    Chairwoman Pryce. Thank you. Mr. Marchick, welcome back.

 STATEMENT OF DAVID MARCHICK, ATTORNEY, COVINGTON AND BURLING; 
      AND JOHN VERONEAU, PARTNER, PIPER RUDNICK GRAY CARY

    Mr. Marchick. Chairwoman Pryce, Ranking Member Maloney, and 
members of the committee, thank you for the opportunity to 
testify. Let me start by applauding your leadership, Madam 
Chairwoman and Ms. Maloney, as well as that of Chairman Oxley, 
Ranking Member Frank, and Representative Crowley, for offering 
this bill.
    I believe the committee is now considering a very tough but 
effective bill that will restore Congress's confidence in the 
CFIUS process, enhance protection of national security, and at 
the same time, will maintain the United States' longstanding 
commitment to open investment.
    I would like to cover three topics. First, the Exon-Florio 
process and your bill. The most important principle, in my 
view, that should guide Exon-Florio reform is to ensure that 
CFIUS has all of the tools and all of the time needed to 
scrutinize cases that present real national security issues 
while allowing the cases that do not raise national security 
issues to proceed through CFIUS in the initial 30-day period.
    With a few minor tweaks, Madam Chairwoman, I believe your 
bill meets these objectives. The bill requires CFIUS to 
consider additional factors, and it adds additional time to the 
end of the investigation period rather than at the initial 30-
day period, as in the Senate bill. The bill enhances 
accountability for both the Government and CFIUS and for 
transaction parties; it appropriately maintains Treasury 
leadership of the committee; it clarifies the security 
agencies' role in negotiating and enforcing security 
agreements; and it enhances transparency in the process, 
transparency that is much needed as your previous hearings have 
demonstrated.
    I would like to point out a few issues that I would 
encourage the committee to continue to consider. First, 
acquisitions by some government-owned companies unquestionably 
raise unique national security issues and should therefore 
receive heightened scrutiny. But not all government-owned 
acquisitions create the same national security risk, and CFIUS 
should have the discretion to distinguish between transactions 
that raise issues and those that don't.
    I would encourage the committee to clarify that CFIUS can 
allow acquisitions by government-owned companies to go straight 
to the investigation stage, and also CFIUS has discretion to 
close an investigation if no real issues exists, or if any 
national security issues have been mitigated.
    Second, I also understand the committee's desire for 
additional accountability; it is very important. But I urge you 
to consider whether every single transaction needs to be 
approved at the Secretary or Deputy Secretary level. Some that, 
frankly, are not very significant deals, probably don't need 
secretarial level sign-off.
    Third, CFIUS should never act if the DNI does not have 
adequate time to collect and analyze intelligence related to a 
particular transaction. But by creating a 30-day minimum for 
intelligence reviews and requiring that the reviews be 
completed no less than 7 days before the end of the initial 30-
day period, the bill creates a de facto 37-day process, even 
for transactions that raise no national security issues.
    I am confident that a provision could be fashioned to allow 
DNI to do its job well without slowing down the entire process.
    Second, the impact of Congressional scrutiny on CFIUS, on 
the operations of CFIUS. There should be, and frankly your 
leadership is important in this, additional Congressional 
oversight of, and transparency into, the CFIUS process, but too 
much scrutiny may result in paralysis of the process. In the 
current political environment, frankly, no agency official 
wants to be the person to sign off on the next Dubai Ports 
World transaction, and so there is real danger that deals that 
should be approved will be rejected or that unnecessary and 
burdensome conditions will be imposed on companies simply to 
provide cover for the bureaucracy.
    The private sector has already responded to this more 
cautious regulatory environment by filing many more cases. 
There have been 32 filings this year, and at this pace, there 
could be up to 85 or 90 filings, a 30- to 40-percent increase.
    A few numbers will illustrate the danger of overwhelming 
the system. Since President Bush went into office, there have 
been some 285 or so filings, 52 of these involved foreign 
government-controlled acquisitions. Ten transactions went to 
the investigation stage or the extended phase, the second 
phase. With the tightening of the Byrd rule, which is done in 
both the House and the Senate bill, each of these 52 
government-controlled acquisitions would have required a full 
investigation and on top of that, the Senate bill contains a 
provision that creates a de facto presumption that all foreign 
investments in critical infrastructure creates a national 
security risk. If that provision is adopted on top of the Byrd 
rule tightening, one can imagine a scenario where up to 60 
percent of the filings have to go through the full 
investigation phase and this could completely overwhelm the 
system.
    Again, no one is arguing against tough scrutiny, it is 
critical for our national security, but it is just that 
allowing CFIUS to focus on those transactions that raise real 
issues is critical.
    Third, the protection of critical infrastructure. This is a 
very important issue, particularly as you move into the 
conference committee stage with the Senate. CFIUS should be 
given the flexibility to spend its scarce time and resources to 
focus on those transactions that create real risks.
    I think your bill, Madam Chairwoman, and Ms. Maloney, has 
it exactly right, that is, you have required critical 
infrastructure to be a factor to consider in the CFIUS 
consideration, but nothing more, nothing less. Creating an 
outright ban on foreign investment critical infrastructure, as 
Chairman Hunter's bill would do, would both harm job creation 
and undermine national security. And it would similarly be 
unwise to create a presumption that all foreign investments in 
critical infrastructure pose a national security risk.
    Again, the important thing is to give CFIUS discretion to 
deal with those transactions on a case-by-case basis, focusing 
on those cases which raise real issues and dispensing of those 
that don't.
    Let me close by applauding your work once again. This has 
been an extremely deliberate and careful process, one that you 
started with hearings. Your staff has been terrific and very 
diligent in seeking out advice and input on the issues, and it 
has been as bipartisan a process as I have seen in my 15 years 
in Washington, so I am grateful for the opportunity to testify 
before you today and look forward to working with you and your 
staff as you continue this process.
    Chairwoman Pryce. Thank you very much.
    [The prepared statement of Mr. Marchick can be found on 
page 53 of the appendix.
    Chairwoman Pryce. Mr. Veroneau.

STATEMENT OF JOHN K. VERONEAU, PARTNER, DLA PIPER RUDNICK GRAY 
                              CARY

    Mr. Veroneau. Thank you, Madam Chairwoman, and Ranking 
Member Maloney. Before I offer my brief prepared remarks, let 
me just say how much we appreciate your commitment to getting 
this right. This is an important issue, and it is clear that 
you are both committed to getting this right.
    My testimony represents the views of the Business Round 
Table, the Organization for International Investment, the 
Financial Services Forum, and the U.S. Chamber of Commerce. 
First and foremost, we appreciate the deliberative and 
bipartisan manner in which this legislation has been developed. 
The bill takes important steps to protect against foreign 
acquisitions that might threaten national security including 
creating a clear statutory role for the DNI, extending the 
investigation period if necessary, and allowing CFIUS to reopen 
previously approved transactions if security agreements are 
seriously breached.
    We support strong measures to assure that national security 
interests are protected. We hope to work with the committee, 
however, to address concerns with certain regulatory burdens in 
the bill that may serve no national security interest.
    The Government has a duty to assess security risks of a 
transaction but should not presume foreign ownership to be an 
inherent threat. No president should ever hesitate to block an 
acquisition that truly threatens national security, but it is 
important that the process by which such risks are considered 
does not hamper legitimate foreign investment.
    While CFIUS has adapted itself to the post-9/11 threat 
environment, and for the most part has worked well, we 
appreciate the goal of this legislation to restore public and 
Congressional confidence in it.
    We believe that legislating in this area should be guided 
by four key principles. First, national security relies heavily 
on economic security. All prudent steps must be taken to reduce 
risk but regulatory systems that impose burdens serving no 
national security purpose undermine U.S. competitiveness.
    Second, the focus of CFIUS must be risks created by the 
acquisition. There is baseline risk associated with the misuse 
of any company or its people. The essential question for CFIUS 
is whether foreign ownership itself creates new and definable 
risk.
    Third, CFIUS must have the time to vet thoroughly any 
security risk, but there should be clarity and certainty for 
approving in a timely manner transactions that pose no threat. 
Non-controversial acquisitions should be approved on the same 
30-day time line as the Hart-Scott-Rodino process for anti-
trust reviews; otherwise, foreign investors would be unfairly 
discriminated against and sellers would be denied the 
opportunity to get best value for their assets.
    Fourth, CFIUS should not become politicized. Foreign direct 
investment in the United States is an important engine for job 
creation; we should welcome it.
    On balance, we believe that these four principles were 
taken into account in drafting this legislation, and we 
appreciate you and your staffs' commitment for this. The bill 
strengthens CFIUS's focus on national security and excludes 
provisions like a legislative veto that, if enacted, would hurt 
investment and provide no security benefit.
    We do, however, hope to work with the committee in three 
areas. First, the bill's preservation of the 30-day review 
period is undermined to some extent by the provision that 
prevents the DNI from completing its analysis in less than 30 
days. The DNI must have sufficient time to complete its work, 
but in cases where this analysis can be done in less than 30 
days, it should be allowed to do so.
    Second, mandating that certain classes of acquisitions must 
go to the 45-day investigation can be counterproductive by 
forcing CFIUS to spend time and resources on matters posing no 
security risk. For purposes of this mandate, we believe a 
distinction can be made between companies wholly owned and 
controlled by foreign government from those where the foreign 
government is simply a minority investor.
    Finally, we encourage the committee to use great caution 
with regard to notice and reporting requirements as they can 
divert scarce resources away from the national security focus.
    In recent months, the Administration has taken a number of 
steps to build confidence in the CFIUS process. To the extent 
that Congress believes that statutory changes are necessary to 
assure that CFIUS is protecting national security while 
maintaining an open investment policy, we believe this 
legislation achieves this goal.
    I thank the Chair and welcome any questions at the 
appropriate time.
    [The prepared statement of Mr. Veroneau can be found on 
page 62 of the appendix.]
    Chairwoman Pryce. Thank you very much to our panel. I would 
like you to talk to me a little bit about the timing, and not 
being a practitioner myself, how it works now and how the 
changes that we have made could affect it now. Does the 
committee ever release these cases before the time periods are 
up, or do they run their whole course? That is one question. Do 
you think that these time frames that were created with Hart-
Scott-Rodino are at all arbitrary, do you think time should be 
the qualifying agent here, that we use time as opposed to 
thoroughness or--let's just talk to that because it seems 
fairly arbitrary that we just decide these 15-day increments, 
and if they work, why do they work, and take it from there. Any 
of you.
    Mr. Marchick. That is an excellent question, and I would 
say that the issue that has been most intensively discussed in 
this whole CFIUS reform process are the time periods. It is an 
arbitrary number, 30 days, and one could easily pick 45 days, 
60 days. There is no magic. But as John and Doug said, the 
Hart-Scott-Rodino process which applies for both domestic 
acquisitions and foreign acquisitions has a 30-day initial time 
period, and it is critical to create a parallel process so 
there is not discrimination against foreign acquisitions.
    The important thing in any process is to make sure that the 
process is flexible enough so that they can scrutinize, 
dissect, and work through the tough cases, and I have had cases 
that have taken up to 11 months, even though there is a 90-day 
clock. Frankly, if CFIUS wants you to push a case, if they 
don't have enough time, they have lots of levers to force you 
to withdraw. And other cases where frankly they could complete 
the review in 15 days.
    So time periods are important to create discipline and to 
create a level playing field for foreign and domestic 
investors, but you also want enough flexibility for the tough 
cases, and I think your bill improves that process.
    Mr. Holtz-Eakin. I think that is basically where I come 
down. I guess the things I would emphasize are, number one, the 
Hart-Scott-Rodino timing is both arbitrary, but has also 
worked, and so to tie yourself to that has some merit. There is 
no great feeling out there that somehow those time frames, 
while arbitrary, are wrong. They seem to work just fine. I 
think there is some virtue to making it both parallel and 
picking something that has worked.
    The second thing is, I think, Assistant Secretary or Deputy 
Assistant Secretary Lowrey was pretty clear in saying that 
having a maximum time for reviews which are really going to be 
uncontested, there is no great national security threat, having 
something that drives the process to completion within a 
certain time frame, 30 days, is valuable. So framing it, it 
will take no more than 30 days for those reviews that are not 
controversial, I think, is important to make sure that the 
parties to the transaction have some clarity about what they 
are getting into when they start. I think that is important. I 
think--then I will stop.
    The real question is whether you want to have this big 
asymmetry between the different variations of government-
controlled versus those which are not, and that is going to be 
the hard question on the timing.
    Chairwoman Pryce. And you don't think the increased 
scrutiny and the higher levels in each agency will require more 
time? You don't think this is an unrealistic time as we--even 
if we don't legislate it, it is required by the atmosphere. 
Comment?
    Mr. Veroneau. Madam Chairwoman, from my perspective as 
someone serving on CFIUS, there were clearly times when there 
were complicated issues and we were all being pushed to sort of 
get our homework done, but I honestly never felt there was an 
instance where we were being forced to make decisions without 
the full benefit of being able to digest the information and 
the analysis. And as Dave alluded to, in those cases where the 
government just can't get its work done, we tell parties that 
they need to withdraw, and we need more time on this, and it 
has worked. I think it has the benefit of providing flexibility 
to the system, but frankly, also discipline. You need a 
disciplined process, and you need deadlines. I know that in 
college, I got a lot more papers done by having a deadline than 
I would have otherwise. I think you need a deadline.
    Mr. Holtz-Eakin. I think the way you structure the bill has 
some interactions that should be recognized. By having enhanced 
reporting of mitigation agreements and how successful they are, 
you build a track record internally to the CFIUS process so 
that when Administrations change and new people come to this, 
they can build on that expertise, and it won't take as much 
time as it might have in the past.
    Even if the time frames might look optimistic at the 
moment, as you build expertise, they won't be as hard to reach.
    Chairwoman Pryce. Thank you. My time has expired. Ms. 
Maloney.
    Mrs. Maloney. I want to thank all of you for your 
testimony. I believe in the Dubai Ports deal, one of the 
reasons we put the time frame requirement of 45 days is that 
the CFIUS board made a decision that it wasn't a threat to 
national security and many Americans believe, and I believe 
also, that selling 20 ports and 5 major ports which the 9/11 
Commission says are the most prone for terrorist activity, 
merited the 45 days.
    I think also there is a concern about a government-
controlled acquisition and that they have certain advantages 
that really undercut the free market capitalistic system. They 
are able to pay more, they are able to control the finances, in 
many cases, of their country. By some accounts, Dubai Ports 
World was paying 20 percent more than anyone else, and some 
professionals were quoted as saying it was not a realistic 
amount that they were paying, it wasn't tied to reality, it was 
tied more to the fact that a government-owned entity could pay 
more.
    And so I personally believe that a government-owned 
situation should have greater scrutiny and we should look at it 
more carefully. My question is what is a government-controlled 
transaction? Obviously, in Dubai Ports, it was very upfront; 
this is United Arab Emirates, we are buying it. But oftentimes, 
the government may give to a private company 99 percent of 
their money, at which they are now, quote, ``private'' and they 
are out buying American firms and American infrastructure.
    So my question to you is what is your definition of a 
government-controlled entity, or what definition do you think 
it should be and could you respond to the allegations that some 
governments are not upfront. What they do is they create a 
shell corporation, even put 90 percent of the money into an 
American--to a shell company that is now ``independent'' and 
that company then goes and buys.
    What oversight do you think we should have for that type of 
situation?
    Mr. Marchick. It is an excellent question, and let me start 
by complimenting you for, first, introducing H.R. 4915 and for 
the work you have done, and I was pleased to see that 
Chairwoman Pryce incorporated a significant amount of that bill 
into your collective bill.
    First of all, from an economic perspective, I think that 
there should be a strong U.S. Government policy that encourages 
foreign governments to privatize state-owned companies. We have 
pursued that in trade agreements; we should continue to do 
that.
    Second, there are times when foreign government-owned 
entities do have access to preferential financing or subsidies 
that put U.S. companies at a disadvantage, and there should be 
a strong and robust economic approach to that. Whether that 
creates national security issues is another question. But there 
are times when foreign companies, foreign government owned 
companies do have benefits and advantages that frankly are 
discriminated against U.S. companies.
    The question of government control and when a company is 
controlled by the government is a very complicated one, it is a 
very difficult one. CFIUS has, in their regulations, a very 
expansive view of what control is. If there is an investment of 
over 10 percent, there is a presumption of government control, 
but there are times when they found government control even 
when there is less than 10 percent. For example, if there is a 
case where the government provides 99.9 percent of the 
financing, approves the CEO, has veto rights over significant 
corporation transactions, then it is clear that's a government-
controlled company.
    And so CFIUS has utilized a very expansive definition of 
control in which they look at the totality of the evidence, not 
just in terms of ownership stakes but also other indicia of 
control like the number of board seats, the type of contracts 
they have, and whether the government is the main customer, and 
I think that is an appropriate approach for it.
    Mrs. Maloney. I would say that in trade, many American 
businesses have come to this committee and testified that they 
feel they are sometimes disadvantaged in our exports because 
other foreign countries will subsidize to a huge degree, even 
50 percent, whereas they are a private company. They say when 
you are not subsidized, which they are not in our country, it 
puts them at a tremendous disadvantage.
    I am wondering if a totally subsidized government company 
is coming in to buy parts of America, should that be part of 
the process to point out the amount of subsidy from the 
government, if you follow my point. Because if the government 
decides they really want to buy something, they can totally 
subsidize it to a point that no one can compete. I mean, no 
foreign country can compete, no American company can compete.
    So do you think that the amount of government subsidy from 
a foreign country should be part of the decision in the CFIUS 
process. Because if it is heavily subsidized, there is no way 
any other country or American company can compete.
    Mr. Veroneau. Ms. Maloney, if I can answer that. I think 
you raise an important policy question, and I would analogize 
it to, as you know, we have the trade remedy laws, the 
countervailing duty that allows us through the Customs Service 
to put additional duties on imports if they are coming from a 
subsidized source.
    So the theory that you mentioned, and the concern that you 
raise is one that has precedent in our trade laws. Personally, 
I would be concerned about blending some of those economic 
concerns, regardless of the merit, into the CFIUS process. I 
think the CFIUS process, since its origins in the mid 1970's, 
has stayed true to its focus of national security. Now, 
reasonable minds can disagree as to whether CFIUS has come down 
on the right side of the line, but I do think there has been 
great effort and correct effort to make sure the focus of CFIUS 
remains security concerns, not other concerns, not economic 
concerns, regardless of their merit.
    Chairwoman Pryce. The gentlelady's time has expired. Mr. 
Manzullo.
    Mr. Manzullo. Thank you very much. I am sorry I didn't have 
an opportunity to listen to your testimony. I guess the 
question that Mrs. Maloney was asking, perhaps it has no 
answer, at what point does impaired economic status on behalf 
of a competitor of a CFIUS petitioner rise to the level of 
national security interests? If you have a company coming in 
that is a state-owned enterprise that say corners the market on 
a commodity, titanium, for example, copper, in the United 
States, I think we are reaching a point in this inquiry where 
there has to be some guidance from those of you who have been 
involved in this thing for years to try to address the 
question, at what point does economic security become a 
question of national security.
    If you don't have the answer to it, I don't expect it, but 
at least I would like to have your thoughts, because I know 
everybody is grappling with that question.
    Mr. Holtz-Eakin. I think you should focus on national 
security and get the right answer. I think in the example you 
gave, the national security issue is defense production with a 
scarce material like titanium and the focus on that would lead 
you to be comfortable or not comfortable with the transaction, 
regardless of the level of subsidy. I think that there is an 
appropriate concern about level playing field in international 
investments, but that is not a problem for the CFIUS problem.
    It is a real problem, one that the United States needs to 
be constantly engaged in with other countries, and we can 
perhaps get level playing field rules across the globe, but 
that is not a CFIUS problem. The CFIUS problem is keeping us 
safe and keeping the eye on the ball there will get you the 
right answer.
    Mr. Manzullo. Anybody else?
    Mr. Marchick. I agree with that, and I think the CFIUS 
process is equipped to deal with those issues through 
conditioning investments in materials or in technology that is 
critical for our national defense or for our national security. 
For example, you can go back to World War I and World War II 
when there was significant German investment in the chemical 
industry and other sectors, and there is actually evidence that 
shows the fact that the investment was here and the technology 
was here actually aided our ability to fight World War I and 
World War II.
    So I think CFIUS can look at if there are critical 
materials or technologies that need to stay in the United 
States, CFIUS can condition the approval of any investment on 
maintaining certain of those technologies, certain assets in 
the United States, which is how you approach it from a national 
security perspective.
    Mr. Veroneau. I would just add, Mr. Manzullo, in agreeing 
with my colleagues here, that your question is precisely why we 
want to have a very broad and flexible definition of national 
security, because the hypothetical you posed, I think, would 
raise security issues and CFIUS needs to have the flexibility 
to look at that stuff.
    Mr. Manzullo. Let me tell you what my concern is. As you 
know, foreign direct investment is down in this country. FDI 
has, as I said in my opening statement, it has saved huge 
numbers of manufacturing facilities in my district. For 
example, the Japanese purchased the last U.S. sewing machine 
company, Union Specialties. If the Japanese had not come in 
with their know-how and management skills, it wasn't so much 
money, but they were the only ones who knew how to run that 
industry.
    And what my concern is, and what I like about Mrs. Pryce's 
bill, I am the co-sponsor on that, is it really takes a good 
look at opening the process but not revealing trade secrets, 
and respecting the fact that without foreign direct investment, 
manufacturing in this country would be imperiled, and any 
attempts I think to, I don't want to use the word 
``strengthen'' the bill, but to make it more restrictive would 
scare away foreign direct investment.
    We are fighting now with the western hemisphere travel 
initiative. I voted against that bill. Our Congress mandates 
that people in the United States literally have to buy a $95 
passport or a $50 passport equivalent card just to go to Canada 
and back. And the Europeans and the Asians are noting with 
great interest, whether or not we work that out because if we 
don't, that is another reason for them not to get involved in 
foreign direct investment.
    Mrs. Pryce has a lot of manufacturing in her district. Ms. 
Maloney, I don't know if you have a lot of manufacturing where 
you are. But the largest county in my district has the second 
most dense manufacturing base of any county in the Nation, with 
a population in excess of 250,000. One out of four jobs is 
directly related to manufacturing.
    And so we are being very, very cautious on crafting that 
bill, and I want to be very careful to make sure that somebody 
doesn't come in there and make it more difficult for foreign 
direct investment to come to this country.
    Mr. Marchick. May I respond to that briefly? First of all, 
Mr. Manzullo, I couldn't agree with you more, and I applaud the 
work that you have done to essentially preserve our 
manufacturing base in the United States. I think, Mrs. Pryce, 
Mrs. Maloney's bill does a lot to strike the right balance in 
terms of defensively dealing with foreign investment to make 
sure that foreign investment doesn't compromise our national 
security, but there is a lot of work that we can do to have an 
offensive strategy to promote foreign investment.
    I can give you a few ideas. First, there is no Federal 
policy to promote foreign investment. President Reagan and 
President Carter before that had actually issued formal 
statements of policy to welcome foreign investment, and I would 
encourage you to encourage this Administration to do so, as 
well.
    Second, we have a huge expert promotion apparatus in the 
Commerce Department. You have done a lot of work on that, Mr. 
Manzullo. There is absolutely no intention at the Federal level 
to promoting inward investment. Every single Governor in the 
States that you represent takes missions and fights like the 
dickens to bring foreign investment in. We should be doing that 
at the Federal level.
    Third, we can be doing a lot of work in the G7 or G8 and 
the OECD and frankly Congressional commissions like the one 
that you have with China to say that we are open to foreign 
investment to develop global policies that will foster more 
foreign investment.
    I think the United States and this committee should 
consider both the defensive strategy with national security and 
an offensive strategy too.
    Chairwoman Pryce. The gentleman's time has expired. Mr. 
Sherman.
    Mr. Sherman. Thank you. A few general questions about the 
situation we find ourselves in, a few comments. We are running 
this huge deficit with the world because we have had failed 
trade policies, not under this Administration only but also 
under the prior administration. A huge amount of dollars that 
are used not to buy our products but rather to buy pieces of 
America and they are either going to buy our securities, which 
are indirect claims to pieces of America, or they are going to 
buy pieces of America directly at our factories or farms, etc.
    The second thing that led to the Dubai problem is that we 
have failed to get our share of the shipping business, and we 
have given it up, just as we have done everything, almost 
everything possible to lose all the jobs that pay between $20 
and $40 or the $20 and $50 an hour. And so since foreign 
interests control all of the shipping that virtually comes in 
and out of our ports, or virtually all, they now want to 
control the ports themselves, and this whole transaction was 
one between the British and the United Arab Emirates company.
    The other reason this became a problem is the phenomenal 
tone deafness of those in the Administration who are handling 
this issue. They really thought that they could sweep it under 
the rug, or worse yet, they didn't even think that Americans 
would care. There isn't a single Member of this House who 
didn't know this thing was going to explode the minute it 
became public, and yet dozens of people in the Administration 
couldn't see it.
    For that reason they didn't--the Administration did not 
quietly tell Dubai not to buy the ports. So instead of quietly 
disappointing them, we have now done irreparable harm to our 
position with the Arab world.
    One of the other reasons why Dubai was fooled into that 
they could go forward with this transaction until it blew up on 
them is that we don't have clearer standards of what factors 
should be considered in determining whether to approve one of 
these deals. And the standards ought to include, and I hope to 
work with the authors of the legislation to achieve this, to 
look at whether the proposed owners themselves, in this case, 
the government was the owner or the ultimate owner, is the 
proposed owner of our sensitive assets cooperating with us in 
dealing with terrorism.
    Second, do they--and they may do this simultaneously, do 
they support terrorism? I think it is relevant to ask whether 
they support the international boycott of Israel.
    But looking at the United Arab Emirates, here that 
government controlled the Dubai Ports company, and at the same 
time that government supported entities on the U.S. terrorist 
list. The president of the country participated in telethons 
for terrorists. No one at Treasury or elsewhere even bothered 
to take note of this. Why? There is no standard in the statute.
    So to tell us that our ports are going to be controlled by 
a government that has telethons for terrorists flies in the 
face of everything that the American people are going to insist 
on. So I would hope that we would write a statute that looks at 
the host government of the proposed buyer in terms of 
cooperating in dealing with terrorism, not allowing its 
citizens to support terrorism, and international boycotts, and 
also looks at the owners and all of its affiliated entities, 
cooperation on the war on terrorism, absence of support for 
terrorism, and the international Israeli boycott.
    Here, that host government was the owner, as I pointed out, 
and that is a government that has supported Hamas and so many 
organizations that are on the terrorist list.
    My question for our panel here is you are familiar with the 
bureaucracies that signed off on this. How could they possibly 
have thought the American people would tolerate having a 
terrorist supporting government? Now I am not saying they don't 
all cooperate at some times. This is a schizophrenic government 
to some extent. But to have a terrorist supporting government 
controlling so many of our major ports, how did they miss this 
one?
    Mr. Holtz-Eakin. I am the economist, so I am the least well 
equipped to understand how everyone will think. I think the 
bill addresses this problem. I think it addresses it in a very 
sensible way, and that is by having the Chair and the Vice 
Chair sign off on all the transaction, you ensure that there is 
a pattern of tone deafness built into this system.
    I know Mr. Marchick disagrees with me, but I think that it 
should be the responsibility of the Chair and Vice Chair to 
ensure that their staffs take really ordinary and mundane 
transactions and get them to them in a timely fashion, they 
sign off, and that they place sufficient confidence in their 
staff.
    So I think the bill gets to this, it might like onerous on 
paper but--
    Mr. Sherman. I agree with you there, but can anybody on the 
panel explain how they blew the Dubai Ports deal? How could 
those bureaus and agencies, even if it wasn't being signed off 
at the highest level, be just so completely ignorant of the 
views of the American people?
    Mr. Veroneau. At the risk of walking into this hornets 
nest, and I speak here for myself, I think the case that was 
made in the Administration was that you have a country that has 
been cooperating since 9/11 with this Administration.
    Mr. Sherman. Did anybody in the Administration and this 
process point out the UAE was having, even after 9/11, 
telethons for terrorists?
    Mr. Veroneau. I am obviously not privy to those questions, 
but I do think there was lots of cooperation with the 
Department of Defense and with DHS with this company and this 
country and there was another side of the argument that this 
didn't pose a national security problem, putting aside the 
communications problem that obviously the company brought upon 
themselves.
    Chairwoman Pryce. The gentleman's time has expired. Mr. 
Crowley.
    Mr. Crowley. Thank you, Madam Chairwoman. I appreciate the 
questioning of my colleague from California. What I really want 
to do is for the record ask a couple of questions to get on the 
record some answers as pertains to the legislation before us 
now, H.R. 5337. Mr. Marchick, there are concerns by some that 
allowing the CFIUS process to continue will weaken our national 
security and allow for more Dubai Ports deals. They argue the 
CFIUS process should be mandatory for all foreign investment in 
the United States.
    What are your thoughts on this, and do you think making 
CFIUS and its process mandatory for all foreign transactions in 
the United States, do you think that will strengthen national 
security, and if not, why not?
    Mr. Marchick. Thank you for the question, and thank you for 
your work with the Chair and with the ranking member on this 
bill. I really appreciate that. My view is the voluntary 
process and maintaining that approach strengthens national 
security and is good economic policy as well. It strengthens 
national security because it allows CFIUS to focus on those 
transactions that really raise national security issues as 
opposed to processing hundreds or even thousands of foreign 
acquisitions that are made every year.
    There are literally thousands of foreign acquisitions of 
pieces of real estate, farms, dry cleaners, you name the 
business, that don't raise any national security issues and 
don't need to be reviewed by the government.
    Second, from an economic policy point of view, the United 
States has literally, for decades, pushed other countries to 
dismantle their foreign investment review boards that are 
unrelated to national security, going back to Reagan and the 
U.S. Canada free trade agreement, all the way up to President 
Bush and the U.S.-Australia free trade agreement.
    So there are very, very strong incentives for those 
companies for which acquisitions could potentially affect 
national security to file. The potential negative ramifications 
of not filing are very, very severe. There is no statute of 
limitations, the transaction can be unwound at any time. There 
are very strong incentives and I think the voluntary filing 
system works and changing it to a mandatory filing system would 
so overwhelm the process that it would actually undermine 
national security.
    Mr. Crowley. Thank you. Mr. Marchick and Mr. Veroneau, in 
the testimony you both raise concerns about the mandatory 
minimum 30-day study for all CFIUS reviews of transactions. 
This provision appears to make all reviews of transactions by 
CFIUS equal in the eyes of the committee.
    I too have been hearing other concerns about this 
provision. Some argue that this provision mandates a thorough 
intelligence investigation of all CFIUS transactions which 
would benefit our national security. Your testimony makes me 
think you do not agree with this assessment and could you 
explain, and I would like to, if I can, I have one other 
additional question in case times runs out, I would like to ask 
the Chair for 1 additional minute.
    Chairwoman Pryce. Go right ahead.
    Mr. Veroneau. Mr. Crowley, I think clearly the legislation 
reflects a very legitimate concern that the intelligence 
analysis has to be thorough and there has to be time to do 
that. So I understand why the 30-day minimum was put in there. 
The only thing I would counsel is there are many times where 
that analysis can be done in a much shorter period of time 
because the transaction is not complicated, doesn't raise 
serious issues, or more likely, it is with parties that have 
been through this process numerous times and are known entities 
to the intelligence agencies, et cetera. So there is no 
national security benefit to insisting that they couldn't turn 
in their assignment before 30 days if the facts and 
circumstances allow it.
    Mr. Marchick. I agree 100 percent.
    Mr. Crowley. Again, with the Chair's indulgence, the issue 
of over politicization of the process, it is my understanding 
the proposed mergers between the French telecommunications 
giant Alcatel and Lucent Technologies, as well as the Japanese 
conglomerate Toshiba and Westinghouse Companies, have raised a 
few eyebrows here in Congress.
    Do you trust the CFIUS process to fairly judge these 
possible mergers or should Congress have a say in these and 
every day controversial CFIUS committees before the committee 
can make a final recommendation, as some Members of Congress 
are demanding, or should it be as we have formulated in this 
bill, post-CFIUS decision.
    Mr. Marchick. I would just refer you back to a statement by 
Ranking Member Frank in one of the earlier hearings where I 
would fully endorse the comments that he made, that it is both 
dangerous and inappropriate for Congress to get too deeply 
involved in a transaction, in a review of a transaction while 
the review is pending.
    In my view, that invites politicization, it risks leakage 
of proprietary information. The mere fact that companies would 
know that significant amounts of transactions specific data 
would be flown to the Hill would actually chill investment 
itself, because they would want their proprietary data up on 
the Hill before the review or after the review. I have been 
involved in transactions where some of that data has gotten to 
the Hill, and then it has gotten to competitors and competitors 
have taken that data and gone to customers of my clients and 
other companies, and basically said this company creates a 
national security risk, CFIUS has concerns about it, you should 
stop buying from them because they are a national security 
risk, and that affects jobs, the stability of the company, and 
it tarnishes the acquiring company's record.
    And so I think that you have--your bill has it right. It 
avoids notice of every transaction, it avoids transmission of 
transaction specific data to the Congress, and rather focuses 
on in a semiannual report aggregate and trend data, which is 
more appropriate and will allow to you do your important 
oversight function better than getting 85 briefings a year on 
85 transactions.
    Mr. Veroneau. The only thing I would add is if you look at 
the history of CFIUS as laid out in Mr. Marchick's book, CFIUS 
is always one step away from being over-politicized and the 
process being, in my view, abused by someone who, for economic 
reasons, wants to queer a deal. I think the bill properly 
reflects that risk, and I think has it right in terms of trying 
to minimize the opportunity for politicization.
    Mr. Crowley. Mr. Holtz-Eakin.
    Mr. Holtz-Eakin. I think on this one the Congress should 
stay out of individual deals, and the best way to see it hold 
the mirror up and think of the advice that we have been giving 
to other countries that want to duplicate our success in using 
private markets to generate good standards of living. We advise 
them to rely on capital flows and the government to allocate 
capital and to put in place rules of law, provide transparency 
and respect property rights. A bill of this type is supportive 
of that sort of environment, a bill that puts every transaction 
in the hands of the Congress is not.
    Mr. Crowley. Thank you, and I thank the Chair.
    Chairwoman Pryce. I want to thank the committee and the 
panel very much. We may have members who have other questions. 
We will leave this record open for 30 days and if they do, we 
will submit them to you and you can get back to us in writing. 
We would appreciate that. And with that, the hearing is 
adjourned. Thank you very much.
    [Whereupon, at 5:04 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                              May 17, 2006


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