[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE NEED FOR CFIUS TO ADDRESS
HOMELAND SECURITY CONCERNS
=======================================================================
FULL HEARING
before the
COMMITTEE ON HOMELAND SECURITY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 24, 2006
__________
Serial No. 109-79
__________
Printed for the use of the Committee on Homeland Security
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COMMITTEE ON HOMELAND SECURITY
Peter T. King, New York, Chairman
Don Young, Alaska Bennie G. Thompson, Mississippi
Lamar S. Smith, Texas Loretta Sanchez, California
Curt Weldon, Pennsylvania Edward J. Markey, Massachusetts
Christopher Shays, Connecticut Norman D. Dicks, Washington
John Linder, Georgia Jane Harman, California
Mark E. Souder, Indiana Peter A. DeFazio, Oregon
Tom Davis, Virginia Nita M. Lowey, New York
Daniel E. Lungren, California Eleanor Holmes Norton, District of
Jim Gibbons, Nevada Columbia
Rob Simmons, Connecticut Zoe Lofgren, California
Mike Rogers, Alabama Sheila Jackson-Lee, Texas
Stevan Pearce, New Mexico Bill Pascrell, Jr., New Jersey
Katherine Harris, Florida Donna M. Christensen, U.S. Virgin
Bobby Jindal, Louisiana Islands
Dave G. Reichert, Washington Bob Etheridge, North Carolina
Michael McCaul, Texas James R. Langevin, Rhode Island
Charlie Dent, Pennsylvania Kendrick B. Meek, Florida
Ginny Brown-Waite, Florida
II
C O N T E N T S
----------
Page
Statements
The Honorable Peter T. King, a Representative in Congress From
the State of New York, and Chairman, Committee on Homeland
Security:
Oral Statement................................................. 1
Prepared Statement............................................. 2
The Honorable G. Thompson, a Representative in Congress From the
State of Mississippi, and Ranking Member, Committee on Homeland
Security
Oral Statement................................................. 2
Prepared Statement............................................. 3
The Honorable Donna M. Christensen, a Delegate in Congress From
the U.S. Virgin Islands........................................ 21
The Honorable Peter A. DeFazio, a Representative in Congress From
the States of California....................................... 24
The Honorable Charlie Dent, a Representative in Congress From the
State of Pennsylvania.......................................... 22
The Honorable Norman D. Dicks, a Representative in Congress From
the State of Washington........................................ 16
The Honorable Bob Etheridge, a Representative in Congress From
the State of North Carolian.................................... 20
The Honorable Sheila Jackson-Lee, a Representative in Congress
From the State of Texas........................................ 49
The Honorable James R. Langevin, a Representative in Congress
From the State of Rhode Island................................. 25
The Honorable Bill Pascrell, Jr., a Representative in Congress
From the State New Jersey...................................... 17
The Honorable Mike Rogers, a Representative in Congress From the
State of Alabama............................................... 16
The Honorable Loretta Sanchez, a Representative in Congress From
the State of California........................................ 15
The Honorable Rob Simmons, a Representative in Congress From the
State of Connecticut...........................................
The Honorable Mark E. Souder, a Representative in Congress From
the State of Indiana........................................... 13
WITNESSES
PANEL I
The Honorable Stewart Baker, Assistant Secretary for Policy,
Planning, and International Affairs, Department of Homeland
Security:
Oral Statement................................................. 9
Prepared Statment.............................................. 10
The Honorable Clay Lowery, Assistant Secretary for International
Affairs, Department of Treasury:
Oral Statement................................................. 4
Prepared Statement............................................. 5
PANEL II
The Honorable Stuart Eizenstat, Partner at Covington and Burling
and Former Deputy Secretary of the Treasury:
Oral Statement................................................. 31
Prepared Statement............................................. 34
Ms. Daniella Markheim, Jay Van Andel Senior Analyst in Trade
Policy, Center for International Trade and Economics, The
Heritage Foundation:
Oral Statement................................................. 26
Prepared Statement............................................. 28
PANEL III
The Honorable Roy Blunt, a Representative in Congress from the
State of Missouri:
Oral Statement................................................. 42
Prepared Statement............................................. 44
The Honorable Carolyn B. Maloney, a Representative in Congress
From the State of New York:
Oral Statement................................................. 45
Prepared Statement............................................. 46
APPENDIX
The Honorable Stewart Baker:
Questions and Responses........................................ 55
The Hononorable Clay Lowery:
Questions and Responses........................................ 58
The Honorable Ginny Brown-Waite:
Prepared Statement............................................. 55
THE NEED FOR CFIUS TO ADDRESS HOMELAND SECURITY CONCERNS
----------
Wednesday, May 24, 2006
U.S. House of Representatives,
Committee on Homeland Security,
Washington, DC.
The committee met, pursuant to call, at 1:38 p.m., in Room
311, Cannon House Office Building, Hon. Peter King [chairman of
the committee] presiding.
Present: Representatives King, Smith, Souder, Lungren,
Gibbons, Simmons, Rogers, Reichert, McCaul, Dent, Thompson,
Sanchez, Dicks, DeFazio, Lofgren, Jackson-Lee, Pascrell,
Christensen, Etheridge, and Langevin.
Chairman King. [Presiding.] The Committee on Homeland
Security will come to order.
The committee is meeting today to hear testimony on the
need for reforms to the Committee on Foreign Investments in the
United States, or CFIUS, to adequately address homeland
security concerns.
Let me at the outset apologize to our witnesses for the
delay. Certainly, the previous hearing went on longer than we
expected, and I want to thank you for your patience and thank
you for being here today, and also thank you for the service
you give to our country. Because of the delays we have had, I
will make my opening remarks very brief.
All of us went to the Dubai ports issue, and on one side of
the issue we happened to come out on, the reality was that it
showed a need, I believe, for reform of the process to
adequately take into account the unique homeland security
concerns that we have in the post-9/11 era. There has been
legislation introduced. We will be hearing from Congressman
Blunt and Congresswoman Maloney who will be testifying on that
legislation, in addition to other experts that we have here
today.
I will limit my remarks to again thanking the witnesses for
being here today, expressing my belief that there is a need for
legislation, and also to express to all the members of the
CFIUS panel, even if it is reconstituted, we will be working
closely with them.
I now recognize the gentleman from Mississippi, the ranking
member, Mr. Thompson.
Prepared Statement of Hon. Peter T. King
Despite the horrific attacks of 9/11 being over four years behind
us, we continue to find processes in government that fail to recognize
the difference between threats to national security and threats to
homeland security.
These processes were created before 9/11, but have not yet
transformed to acknowledge that we live in a new and different world.
The Committee on Foreign Investment in the United States is such a
process.
When I first heard of the pending purchase of P&O by Dubai Ports
World, I thought it was a joke. Who would allow such a purchase to go
forward? Weren't the United Arab Emirates one of only three nations to
recognize the Taliban government of Afghanistan as legitimate? Didn't
the terrorists from 9/11 funnel their money through the UAE? It simply
didn't add up.
I then learned of this mysterious entity called CFIUS, which it
seemed few, if anyone, ever heard of.
As we moved forward, I asked many questions about the Dubai Ports
World acquisition, and slowly the information began to flow.
Let me take a moment to recognize our first panel. This afternoon
we have:
Mr. Clay Lowery, Assistant Secretary for International Affairs
at the Department of the Treasury; and
Mr. Stewart Baker, Assistant Secretary for Policy at the
Department of Homeland Security.
I want to thank Assistant Secretaries Lowery and Baker for coming
to testify on the record before my Committee. We first spoke in my
office over three months ago when this issue first raised its ugly head
during the Dubai Ports World acquisition, and I'm pleased to see that
despite some heavy punches from Members of Congress, myself included,
you both appear to be holding up rather well.
Thank you for answering our Committee's inquiries and providing the
files I requested. After reviewing the intelligence data gathered by
the Director of National Intelligence following his 4-week
investigation, I can honestly say that I feel comfortable that the
Dubai Ports World acquisition was not a threat to our national
security.
Unfortunately, it took a thorough assessment conducted by the
Intelligence Community to convince me of this--an assessment that was
not conducted to any great detail prior to April of this year. It begs
the question, why wasn't this thorough investigation conducted
beforehand?
I am concerned that the current CFIUS process does not adequately
consider homeland security threats and I support reforms that will
address these CFIUS shortcomings. That said, I believe Congress must
work to ensure that we do not deter foreign investment. I have always
supported free trade and will continue to do so. However, in the post-
9/11 world, there are other factors we must take into account.
Since 1998, the Committee on Foreign Investment in the United
States has conducted over 1,600 reviews, of which some 25 posed some
level of national security concern. Of these 25, over half were
withdrawn before the investigation was completed, and only one went to
the President for a decision in accordance with the Exon-Florio
provisions.
How is it possible that only one purchase in 1,600 actually raised
sufficient national security concerns to be forwarded to the President
for action?
I suspect much of it revolves around how you define national
security. How does CFIUS define it?
I look forward to your testimony this afternoon as I seek the
answer to these and other questions.
Mr. Thompson. Thank you very much, Mr. Chairman.
I, too, will limit my remarks in that we have three panels
for this afternoon, and we are some 40 minutes late getting
started. We all know that this process came to light because of
the Dubai concerns as to whether or not the due diligence
required under the existing legislation was performed. And what
we all want at the end of the day is for any of these
transactions, not only to have the financial security, but we
want to make sure that from a terrorist standpoint or security
standpoint also we have not created a vulnerability by
approving these processes.
So in the interest of time, I will submit my written
statement for the record and yield back and I look forward to
the testimony.
Prepared Statement of Hon. Bennie G. Thompson
Good afternoon.
I want to thank Chairman King for agreeing to hold these hearings.
When I sent you that letter in February, the CFIUS process was just
starting to come to light. Though CFIUS hasn't been in the news a lot
recently, I still believe that it's a vital issue for this Congress and
our Committee to consider, and I thank you for putting it on our
agenda.
Mr. Chairman, when Congress passed the Exon-Florio statute in 1988,
we vested the authority to investigate and review mergers,
acquisitions, and takeovers with the President of the United States.
At the time, Congress believed that the President was the only
one who could adequately balance the country's need for foreign
investment with our demands for national security.
The President is in a unique position to be able to assess both
sides and make a judgment about whether our national security
will be threatened by such acquisitions.
President Reagan designated CFIUS to be the Committee to review
these deals. The Secretary of the Treasury became the enforcer
of Exon-Florio.
But it has become painfully clear that in the 18 years since Exon-
Florio, the President's designee has failed to conduct the kind of
careful, thoughtfull review that the drafters of Exon-Florio
envisioned.
The President has ceded his authority to a Committee that has
repeatedly violated the provisions of Exon-Florio.
First, according to statute, CFIUS is required to conduct a
mandatory investigation in any instance in which a foreign government
acquires a company that affects national security.
It is clear to me that the acquisition of 6 major ports by DP
World, a UAE-owned company, would meet that standard.
Unfortunately, it was only after the CFIUS process became
public and Congressional pressures were exerted upon the
Committee that a more rigorous investigation began.
We know from a GAO report that only 8 investigations have taken
place since 1997. Given the facts that have recently come to
light over DP World, I wonder how many mandatory investigations
has CFIUS failed to under take during these years?
How many times has this Committee failed to undertake careful
scrutiny if a acquisition affecting our national security?
Second, CFIUS failed to comply with Sec. 2170(k) of Exon-Florio
which requires a quadrennial review to Congress.
Only one report has ever been submitted under this provision,
and that was back in 1994.
How can this Congress or the American people trust CFIUS to do
the kind of careful, intelligent review of these deals when the
Committee has failed to live up to its statutory requirement?
How do we know whether there has been a coordinated strategy by
one or more countries or companies to acquire United States
companies involved in research, development, or production of
critical technologies?
More importantly, how can the President--our Commander in
Chief--trust this Committee as his designee to carry out the
statutory demands of the Exon-Florio Act?
Mr. Chairman, I want to be clear when I say that we need to have a
fair and balanced policy when it comes to promoting foreign investment
and ensuring our national security in this country.
Foreign investment in this country drives our economy. Foreign
nations have invested billions in America--it is neither sound
economics nor sound politics to place blanket limitations on
foreign investment.
But foreign investors need to know that this country follows a fair
but rigorous balancing test that ensures the safety of the American
public, while promoting foreign investment in the United States.
I have my doubts about whether it's happening today. But I hope
that we can come to some solution in the upcoming months as we consider
legislation to reform the process.
I'd like to thank the witnesses for appearing before us today, and
I look forward to hearing their testimony.
Chairman King. The gentleman yields back.
If we could just take a moment to recognize the first panel
and to ask them to begin their testimony. First is Mr. Clay
Lowery, the assistant secretary for international affairs at
the Treasury Department, and Mr. Stewart Baker, the assistant
secretary for policy at the Department of Homeland Security.
Your statements will be made part of the record. If you
could possibly limit your remarks to 5 minutes. As you can see,
the committee runs very much on time, but we do ask our
witnesses to.
Mr. King. But seriously, Secretary Lowery, you are
recognized.
STATEMENT OF THE HONORABLE CLAY LOWERY, ASSISTANT SECRETARY OF
INTERNATIONAL AFFAIRS, DEPARTMENT OF TREASURY
Mr. Lowery. Mr. Chairman, Ranking Member Thompson and
distinguished members of the Homeland Security Committee, first
of all, I appreciate the opportunity to be here today.
Secondly, I want to thank you for your indulgence and
Secretary Baker for letting me go first. This is sort of the
batting order we have been using for a while when our testimony
is involved. It has not always been a lucky batting order, but
it has been ours.
I am here speaking on behalf of the administration, the
Department of Treasury, and the Committee on Foreign
Investments in the United States. While we do not have a formal
administration position on pending CFIUS legislation, I will
address the two principles that guide us as we work to update
CFIUS process.
We believe that reforms should address two broad
principles. First, U.S. national security imperatives in the
post-9/11 environment; and secondly, the need to continue
welcoming investment in the United States, which creates good
jobs for American workers. In that context, I would like to
highlight some specific areas that we believe get at some of
the concerns of Congress.
First, the administration supports efforts to update CFIUS
to reflect the post-9/11 security environment. 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. In other words, CFIUS must consider the
ultimate ownership and control of the acquirer and the possible
foreign acquisition of critical infrastructure or other
sensitive assets when reviewing any transaction.
Second, CFIUS's focus must remain national security. A wide
range of agencies comprise CFIUS and each brings its own unique
expertise and perspective on national security. I want to be
clear about how CFIUS operates. The initial 30-day review
period is a thorough investigation in which a comprehensive
threat and vulnerability assessment is conducted across
agencies. If national security concerns are raised that cannot
be addressed, CFIUS undertakes a 45-day extended investigation.
However, many transactions do not raise national security
issues and requiring extended investigations in such cases
would divert resources and thereby diminish CFIUS's ability to
protect national security.
Third, the administration believes we should strengthen the
role of the intelligence community in the CFIUS process. We
have formalized the role of the DNI, but we do not think that
the DNI should vote on CFIUS matters because the DNI's role is
to provide intelligence support, not to make policy judgments.
Fourth, we must also continue to emphasize the importance
of preserving the attractiveness of the United States to
overseas investors. FDI 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 paying
jobs and roughly 40 percent of these jobs are in the
manufacturing sector, about four times the national average.
Fifth, the administration shares the view that we need to
improve our communication with Congress to help Congress meet
its oversight responsibilities. We are now promptly notifying
Congress of every transaction upon completion and are committed
to conducting quarterly briefings on CFIUS matters.
While reforms of the CFIUS process should advance our
shared goal of improved communication, we must always keep in
mind that proprietary business information must be adequately
protected. The integrity of the executive branch's decision-
making process must be preserved, and security reviews must not
expose intelligence information or become politicized.
Finally, we should look at ways to increase Congress'
confidence in the process by enhancing accountability in terms
of CFIUS decisions and monitoring mitigation agreements. The
administration is committed to ensuring that senior, Senate-
confirmed officials play an integral role in examining every
transaction. CFIUS agencies are now briefing transactions at
the highest levels. However, requiring a Presidential
determination or Cabinet-level certification on every
transaction would introduce unnecessary delays and divert
attention from transaction that raise possible national
security issues.
Mr. Chairman, I would like to reiterate in closing that the
administration supports reforms of the CFIUS process. We
believe that CFIUS can best serve U.S. interests through
examinations that protect the national security, while
maintaining the credibility of an open investment policy and
the confidence that U.S. investors abroad will not be subject
to retaliatory discrimination.
I thank you for your time and would be happy to answer any
questions.
[The statement of Mr. Lowery follows:]
Prepared Statement of Hon. Clay Lowery
Mr. Chairman, Ranking Member Thompson, and distinguished members of
the Homeland Security Committee, I appreciate the opportunity to appear
before you today. I am here speaking on behalf of the Administration,
the Department of the Treasury, and the Committee on Foreign Investment
in the United States (``CFIUS'' or the ``Committee'') to discuss our
work and ways to improve the CFIUS process.
Improving the CFIUS Process
The Homeland Security Committee and CFIUS share the common
objective to protect our national and homeland security. In my recent
testimony before the House Financial Services Committee's Subcommittee
on Domestic and International Monetary Policy, Trade and Technology, I
laid out the key principles that will guide CFIUS as we work with the
Congress to integrate further America's national and homeland security
interests. Reforms should address two broad principles: U.S. national
security imperatives in the post-9/11 environment and the need to
continue welcoming investment in the U.S. and creating good jobs for
American workers.
To advance those principles, the Administration supports improving
communications with Congress on CFIUS matters. The Administration also
welcomes other reforms to the CFIUS process, including those that
ensure due consideration of the nature of the acquirer and assets to be
acquired, focus resources on transactions that present national
security issues, strengthen the role of the intelligence community,
improve CFIUS monitoring of mitigation agreements, preserve the
attractiveness of the United States for foreign investment, and enhance
accountability. The CFIUS process should first and foremost ensure U.S.
national security but should not unnecessarily discourage legitimate
investment in U.S. businesses that will provide income, innovation, and
employment for Americans. In today's testimony, I plan on addressing
these reform principles. Of particular interest to the Homeland
Security Committee will be our focus on those transactions that raise
national and homeland security issues. The Administration looks forward
to a dialogue with Congress regarding reforms to the CFIUS process. Let
me first provide a paragraph or two on the historical context.
The Committee examines foreign acquisitions of U.S. companies
pursuant to section 721 of the Defense Production Act of 1950. Commonly
known as the Exon-Florio Amendment, section 721 gives the President the
authority to investigate such acquisitions and to suspend or prohibit a
transaction if credible evidence leads him to believe that the acquirer
might take action that threatens to impair the national security and
if, in his judgment, existing laws, other than the International
Emergency Economic Powers Act and the Exon-Florio Amendment, do not
provide adequate and appropriate authority for him to protect the
national security. After the enactment of the Exon-Florio Amendment,
the President delegated certain of his authorities to the Committee.
Pursuant to an Executive Order of the President and subsequent Treasury
regulations, the Committee receives notices of transactions subject to
the Exon-Florio Amendment and conducts thorough interagency reviews and
investigations to identify potential national security issues. The
President retains the authority to suspend or prohibit transactions.
Focusing on the Nature of the Acquirer and the Assets to be Acquired
The Exon-Florio Amendment is nearly two decades old, and the
Administration supports efforts to update it to reflect the post-9/11
security environment. The Committee considers a broad range of national
security issues when reviewing transactions, and its assessment of
threats and vulnerabilities should remain flexible in order to meet
changing circumstances and conditions that relate to national security.
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. These are essential in weighing the national
security implications of any acquisition. The Administration does and
will continue to support the Committee's consideration of the ultimate
ownership and control of the acquirer and the possible foreign
acquisition of sensitive assets when reviewing any transaction under
the Exon-Florio Amendment, both of which are factors the Committee
already considers when reviewing transactions.
Focusing on Transactions that Raise National Security Issues
CFIUS's appropriate focus is and will remain national security. One
of the focuses of the Exon-Florio amendment is, indeed, on transactions
that could impact the U.S. defense industrial base. There is a wide
range of agencies involved in CFIUS, including DHS, each bringing its
own unique perspective and its own definition of national security.
This enables us to consider all aspects of transactions ranging from
energy and transportation to information technology and
telecommunications. The intelligence community also provides thorough
threat assessments as part of its analysis.
This process allows us to focus the most resources and highest
level of oversight on those cases that pose the greatest potential
threat to national security. Many transactions notified to the
Committee do not raise national security issues. In other cases, the
national security issues are mitigated by the end of the 30-day review
so do not require an extended investigation. Requiring an investigation
of every transaction involving a foreign government-controlled acquirer
would result in scores of investigations each year in which no national
security concerns are present. This would diminish the Committee's
ability to protect the national security and send the wrong message
that the United States does not welcome foreign investment.
Strengthening the Role of the Intelligence Community
The Administration also believes that the Committee can carry out
its role more effectively by strengthening the role of the intelligence
community in the CFIUS process, which is essential in a complex and
changing national security environment. The Director of National
Intelligence (DNI) has begun to do so by assigning an all-threat
assessment responsibility to the National Intelligence Council and
ensuring that all relevant intelligence community agencies and
activities participate in the development of final intelligence
assessments provided to the Committee. The Committee recently
formalized the role of the Office of the DNI, which plays a key role in
all CFIUS reviews and investigations by participating in CFIUS
meetings, examining every transaction notified to the Committee, and
providing broad and comprehensive threat assessments. The DNI already
contributed greatly to the CFIUS process through reports by the
Intelligence Community Acquisition Risk Center concerning transactions
notified to the Committee, but formalizing its place in the process--
and strengthening the threat assessments provided to the Committee--
represent an enhancement of the intelligence community's role. The DNI
does not vote on CFIUS matters and should not, because the role of the
DNI is to provide intelligence support and not to make policy judgments
based upon that intelligence.
Improving the Monitoring of Mitigation Agreements
A further key to improving the CFIUS process is to strengthen the
monitoring of mitigation agreements entered into between entities
filing notice under the Exon-Florio amendment and members of the
Committee. Typically, the members of the Committee with the greatest
relevant expertise assume the lead role in examining any national
security issues related to a transaction and, when appropriate,
developing appropriate mechanisms to address those risks. Mitigation
agreements implement security measures that vary in scope and purpose
according to the particular national security concerns raised by a
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 supports
reforms that reinforce the authority and provide resources for agencies
that negotiate mitigation agreements to improve existing enforcement
practices.
Promoting Legitimate Investment in the United States
The Administration also emphasizes the importance of preserving the
attractiveness of the United States to overseas investors. The intent
of the Exon-Florio Amendment is not to discourage foreign direct
investment (FDI) generally, but to provide a mechanism to review and,
if the President finds necessary, to restrict investment that threatens
the national security. FDI is critical to the U.S. economy. Majority-
owned U.S. affiliates of foreign companies employed 5.1 million U.S.
workers in 2004. Capital expenditures in 2004 by these affiliates
totaled $108 billion and their sales totaled $2,302 billion. In 2003,
these affiliates spent $30 billion on R&D and accounted for 21 percent
of total U.S. exports. Roughly 40 percent of those jobs were in
manufacturing, four times the national average. If foreign companies
were to reduce their spending in the U.S. 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.
Reforms to the CFIUS process should send a signal that the United
States is serious about national security and welcomes legitimate FDI.
The Committee must examine each transaction thoroughly, but the
timeframes for examination should not be unnecessarily long. In
addition, the process should not require investigation of transactions
that could not possibly impair the national security. Last year, the
Committee received 65 notices of transactions under the Exon-Florio
Amendment. This year, CFIUS filings are on a pace to total roughly 90.
Improvements to the CFIUS process should promote filing of notice with
respect to appropriate transactions but should not delay or deter FDI
with no nexus to the national security. The Committee can best serve
U.S. interests through thorough examinations that protect the national
security while maintaining the credibility of the U.S. open investment
policy for overseas investors and the confidence of U.S. investors
abroad that they will not be subject to retaliatory discrimination.
Improving Communication with Congress
It is clear that improvements in the CFIUS process are still
required, particularly with respect to communication with Congress and
political accountability. The Administration is committed to improving
communication with Congress concerning CFIUS matters and shares the
view that Congress should receive timely information to help meet its
oversight responsibilities. Treasury is now promptly notifying Congress
of every review upon its completion, and the Administration is working
hard to be responsive to Congressional inquiries. The Administration
has committed to conducting quarterly briefings for Congress on CFIUS
matters. These quarterly briefings were scheduled to begin before the
issues with respect to the DP World transaction became the subject of
Congressional and media attention. The Administration is also actively
preparing the 2006 quadrennial report on possible foreign efforts to
conduct economic espionage in the United States or acquire critical
U.S. technologies. We regret that a quadrennial report has not been
prepared since 1994, and the Administration will issue the 2006 report
in a timely and thorough manner. I look forward to your suggestions on
how to foster better communication.
While reforms of the CFIUS process should advance our shared goal
of improved communication, they should also reflect the importance of
protecting proprietary information and the integrity of the executive
branch's decision-making process. First, reforms to the CFIUS process
should encourage companies to file with the Committee by ensuring that
proprietary information they provide to the Committee is protected from
public disclosure and will not be used for competitive purposes. Full
disclosure of information by companies is critical to the Committee's
ability to analyze thoroughly the national security risks associated
with a transaction. Second, it is important to protect both the
executive branch's deliberative process and classified methods and
sources, and avoid possible politicization of CFIUS reviews and
investigations for partisan purposes or at the behest of special
interests. Third, reporting requirements should take into account the
need for CFIUS member agencies to focus their limited resources on
examining transactions notified to the Committee. I am confident that
the Committee can provide Congress with the information it requires to
fulfill its oversight role while respecting these important principles.
Enhancing Accountability
The Administration supports a high level of political
accountability for CFIUS decisions and is committed to ensuring that
senior, Senate-confirmed officials play an integral role in examining
every transaction notified to the Committee. Improvements to the CFIUS
process should also ensure that senior U.S. officials are focused on
national security issues. I know that CFIUS agencies are now briefing
at the highest levels in their respective agencies. However, the
President and Cabinet-level officials should focus their attention on
the cases that merit the greatest scrutiny. The President should focus
on transactions that at least one member of the Committee recommends he
suspend or prohibit. Requiring the President to make a determination
when all CFIUS members agree that a transaction does not threaten to
impair the national security would potentially divert his attention
from transactions that could pose security risks.
Similarly, requiring Cabinet-level certification of CFIUS decisions
on transactions that do not raise potential national security concerns
would lengthen and delay the process, presenting an unnecessary
impediment to legitimate investment. Such a requirement would also
dilute the resources that the most senior U.S. officials could devote
to transactions that do pose national security risks. This would impede
the Committee's ability to protect the national security as effectively
as possible. I am confident that the Committee can carry out its
obligations in a manner that guarantees high-level political
accountability while focusing senior officials on transactions that
raise possible national security threats.
Conclusion
Mr. Chairman, the Administration appreciates your leadership and
attention to the protection of America's national and homeland security
both in terms of the CFIUS role and more broadly. To reiterate, the
Administration does and will continue to support CFIUS considering the
ultimate ownership of the acquirer and the possible foreign acquisition
of sensitive assets when reviewing any transaction, both of which are
factors the Committee already considers when reviewing transactions.
The Administration has taken a number of steps to improve the CFIUS
process and to address concerns raised by Congress, and supports
continued reforms to the CFIUS process. Sound legislation can ensure
that the Committee reviews transactions thoroughly, protects the
national security, conducts its affairs in an accountable manner, and
avoids creating undue barriers to foreign investment in the United
States. All members of CFIUS are committed to working with Congress to
improve the process, understanding that their top priority is to
protect our national security.
I thank you for your time today and am happy to answer to any
questions.
Chairman King. Secretary Baker?
STATEMENT OF THE HONORABLE STEWART BAKER, ASSISTANT SECRETARY
POLICY, PLANNING, AND INTERNATIONAL AFFAIRS, DHS
Mr. Baker. Thank you, Chairman King, Ranking Member
Thompson, members of the committee. It is a pleasure to be here
to talk about this very important issue.
We are the newest member of CFIUS, joining in March of
2003, but I think it is fair to say we have already carved out
a unique role as the Department of Homeland Security in CFIUS.
Just three points about that.
First, given the origins of the department, the attacks of
September 11, we have had to take a very different and
untraditional view of what national security is. We have had to
define it in terms of homeland security and in terms of
unconventional threats. We have done that. We have looked very
hard at a wide range of transactions.
I think the second point that I would make is that we have
been very aggressive compared to many members of CFIUS in
saying we see a homeland security element to this transaction,
and we want some kind of protection. Either we want to stop the
transaction or more often we want to enter into some kind of
mitigation agreement that addresses the concerns that we have.
I think we have participated in about 170 transactions, and
in more than 30 of them we have joined or been the sole parties
participating in some form of national security agreements. So
about one-fifth of them have led us to ask for additional
protections for homeland security.
The third point is that CFIUS is a very high priority for
the Department of Homeland Security and has been since it
started. As this committee knows quite well, our office, the
policy office was just created in October. I just was confirmed
in October. One of my highest priorities was to stand up a
CFIUS policy office, and the first person that I hired to be a
career employee in the policy department was someone who is a
specialist in CFIUS. So we have made it a high priority within
the department and within the policy office.
Three additional points about CFIUS reform, very quickly.
It is quite obvious from the House bill dealing with CFIUS that
this committee and many of the members here are cosponsors have
already had a substantial impact on that bill. We appreciate
it. It is a responsible and thoughtful bill and we look forward
to working with you as it moves through Congress.
Two other points. I completely agree with Assistant
Secretary Lowery about the principles that ought to govern
CFIUS reform. We have had a very cooperative working
relationship with the Treasury Department. We have gone through
a lot together in the last several months.
Finally, I would extend to this committee a pledge of all
the cooperation you would like in terms of information about
our practices under CFIUS or our views on details of the
legislation as it moves through.
Thank you very much.
[The statement of Mr. Baker follows:]
Prepared Statement of Hon. Stewart Baker
I thank Chairman King, Ranking Member Thompson, and all of the
distinguished members of this Committee.
I appreciate the opportunity to speak briefly today regarding the
Department of Homeland Security's role as a member of the Committee on
Foreign Investment in the United States and DHS's support for CFIUS
reform.
DHS's CFIUS Background
The Department of Homeland Security is the newest member of CFIUS.
We became a member in March 2003, soon after DHS began as an
organization of 22 diverse agencies whose common mission is the
protection and security of our nation and people. Since that time, we
have participated in the review of more than 170 foreign acquisitions
involving some of the nation's critical infrastructure, technology, and
other assets vital to our national security.
I mention our origins to stress what I believe is a key strength of
the Department--we bring to the CFIUS a diversity of viewpoints,
expertise, and skills. The government agencies from which we were
formed give DHS a broad perspective, informed by an understanding of
infrastructure threats, vulnerabilities and consequences. DHS generally
leads CFIUS reviews of transactions involving critical infrastructure,
and we also have entered into dozens of agreements to mitigate national
security risks that may arise from CFIUS transactions. When we enter
into these important agreements, DHS is careful to monitor compliance,
and we do so in coordination with other CFIUS agencies who are parties
to the agreements.
I think my CFIUS colleagues will vouch for the fact that we take
our role in CFIUS seriously and interpret our security mandate broadly.
We ensure that components throughout DHS review each and every
transaction. DHS's forward-leaning stance on security issues sometimes
gives rise to debate within CFIUS, but it is a healthy debate that
ultimately enhances national security and investment. A substantial
portion of DHS was formed out of the Treasury Department and we have no
doubt our dual mission requires us to protect homeland security while
maintaining an open investment policy.
In case it is not clear from my remarks so far, I should say
explicitly that the CFIUS process is one of DHS's highest priorities,
and senior officials in the Department are involved in every case. We
are also cognizant of the fact that the number of CFIUS cases is on the
rise, and our staffing plan is responsive to that fact. When I became
Assistant Secretary for Policy, one of the first individuals I hired
was someone whose primary responsibility is to help manage the
Department's CFIUS program, and we are continuing to build our CFIUS
staff.
CFIUS Reform
As to reform of the CFIUS process, I'll briefly make three points.
First, let me commend the members of this committee for your thoughtful
and productive work in your efforts to balance national security and
open investment principles.
Second, DHS fully subscribes to the principles for further
improvement that were articulated by my Treasury colleague. While DHS
functions as an autonomous agency within CFIUS, the Treasury reform
principles have our complete support.
Third, DHS is pleased to be involved in this dialog about the
reform of the CFIUS process and to lend our expertise and experience in
the reform process. We hope that you will continue to reach out to us,
and we stand ready to provide our technical expertise in helping to
ensure that national security and open investment principles are
balanced in a manner that benefits our nation.
Chairman King. Thank you, Secretary Baker.
Mr. Lowery, on February 21 of this year, I requested a copy
of the CFIUS review relating to Dubai Ports. I received the
documents yesterday. As I go through them, it was 500 pages of
background material, but no actual report.
Is that the way it is usually done? Is there no actual
report done for the transaction, no official report?
Mr. Lowery. No, sir. The documents that you received are
background on the filing itself, and the report is usually
internal oral discussions and written discussions through e-
mails between agencies, and then eventually a decision is made.
The key issue was that there were some security concerns
that were raised and the Department of Homeland Security had
worked out an agreement between Dubai Ports World and the
United States government. That was one of the key documents.
After that, the CFIUS Committee decided that this transaction
did not raise national security concerns that had not been
addressed, and therefore there was a letter that basically told
the companies that we were fine with the transaction.
Chairman King. Is that going to be the continued policy?
There will be no reports made, no final reports, no official
report?
Mr. Lowery. I think that basically one of the key things
that we want to do going forward is to make sure that Congress
does receive reports after transactions are completed. That is
something that we are broadly supportive of. I mentioned it in
my testimony, and we want to work very closely with this
committee and other committees on how best to do that.
Chairman King. Thank you.
Secretary Baker indicated that he has looked at
legislation; the main sponsors are Congressman Blunt and
Congresswoman Maloney. I would ask Secretary Lowery if he has
had a chance to look at that legislation and what he thinks of
it, and also compare it to the other two main pieces of
legislation. Congressman Barrow, I believe, has legislation,
and also Senator Shelby.
So. Secretary Lowery, if you could comment on Congressman
Blunt's legislation, and if the two of you could then comment
on the other two, Congressman Barrow's and Senator Shelby's.
Mr. Lowery. Yes, sir. We have not taken a specific position
on each of the different pieces of legislation. I think there
is some other legislation out there as well. I agree with
Secretary Baker that the legislation that we have seen from
Representatives Blunt and Maloney is very constructive. We look
forward to working with the committees on that legislation.
I actually have not read Congressman Barrow's legislation.
I have read Senator Shelby's and we are also making sure that
we are working very closely with the Senate. But in terms of
comparison, I think what we have tried to do is lay out the
different types of principles that we have. We would like to
work with Congress through those principles, and what is the
best way to structure legislation around them.
Chairman King. Secretary Baker?
Mr. Baker. Yes, I also would say that I would not like to
get into the specifics of the other body's legislation. We
believe there are a lot of commonalities between that and the
bill that was cosponsored by Mr. Blunt. We think that the
commonalities in many cases are constructive. We would like to
work with both committees to try to resolve them in a way that
is workable for the future for CFIUS.
We do have to have a functioning process that meets certain
deadlines and is responsive to both Congress and to investors,
as well as national security.
Chairman King. Thank you, Secretary.
Now, I would recognize the gentleman from Mississippi, Mr.
Thompson, who actually was one of the main impetus for this
meeting and requested it several months ago. The gentleman from
Mississippi?
Mr. Thompson. Thank you, Mr. Chairman. I appreciate the
opportunity to have the witnesses before us today.
Mr. Pascrell raised a question about human capital and the
fact that there is always this revolving door happening. Have
you had that problem with your department, Mr. Baker?
Mr. Baker. I am too new to leave, so I have not seen a lot
of departures. Inevitably in government, there is turnover. By
and large, my experience has been very good in terms of people
being willing to stay when we have asked them to stay.
Mr. Thompson. Well, in respect to the CFIUS process, how
many people in your office work on that process?
Mr. Baker. Of the staff, I would say three at this point
are working on CFIUS principally. That is an increase from one
a few months ago, so we have been increasing the staff. We have
a request for 10 in the administration's budget for next year,
so this was something that we asked for even before the Dubai
Ports World episode. So we have intended to expand that pretty
substantially.
Mr. Thompson. So how many compliance agreements does the
department enter into with other companies?
Mr. Baker. We have entered into a little over 30 in the
last 3 years, so 10 a year.
Mr. Thompson. Ten a year, using somewhere between one to
three staffers?
Mr. Baker. Yes. Because my office didn't exist prior to
October of last year, much of the CFIUS work was done by other
offices prior to the reorganization. But I think drawing on a
couple of lawyers in the general counsel's office, we probably
have had three to six people working on CFIUS over the years.
Mr. Thompson. So your testimony is based on budget requests
and your own analysis that you really need more people than
what you have right now to adequately do the job?
Mr. Baker. Yes. I think that that is right.
Mr. Thompson. Thank you.
Now, taking the chairman's comment about this voluminous
information we received at 4 o'clock yesterday afternoon, Mr.
Lowery, it is very difficult for us to conduct oversight
getting that much information less than 24 hours before a
hearing.
Mr. Chairman, I would hope that however we can enforce any
rules that it really is not enough time for us to go through
that much information, and then we find that it is not as
complete as we need.
So I am not certain how we work on that, but it limits our
ability and effectiveness as members of Congress when we get it
so late.
Chairman King. If the gentleman would yield?
Mr. Thompson. Yes.
Chairman King. I would work with the ranking member to
ensure that we get more compliance in the future, and also I
would note that we made the initial request back on February
21.
Mr. Thompson. That is correct.
Mr. Lowery. Can I comment?
Chairman King. Yes, sure, Secretary Lowery.
Mr. Lowery. We apologize for the delays in getting that
documentation to you. Just to make sure that everyone is clear,
we have to be very careful sometimes because of some of the
proprietary information and the deliberative documents that
were involved. So because of that, it was a fairly extensive
process that was handled by the general counsel's office.
Because CFIUS is made up of 12 different agencies, we have
to clear it with every single one of those agencies. That does
take time. We apologize, though, for the delays. We should have
gotten it up faster than we did. Just so you know, I received
that telephone book full of information just last week, and I
was traveling. I got back and got it soon as I possibly could.
Mr. Thompson. Thank you very much, Mr. Chairman.
I yield back.
Chairman King. The gentleman from Indiana, Mr. Souder?
Mr. Souder. Perhaps one legislation we could look at is how
to expedite executive branch clearance processes. Over in
Government Reform, we very seldom get documents prior to the
night before a hearing. Often, it is this multi-agency internal
discussions. We deal with classified material all the time. If
it needs to be classified, it should be classified. If it is
proprietary, tell us it is proprietary. But we can't do our
work in oversight, and this is building to a crisis in multiple
committees that I am part of.
I have a more particular question. Does this cover leases
and management, as well as purchase?
Chairman King. If the gentleman would yield? The gentleman
from Washington actually asked the question. We can keep going
with the questions, but so maybe we will go vote, and then we
will come back and take the hearing back. We will have to move
quickly on that.
The gentleman from Indiana?
Mr. Souder. Does the process include leases and management
contracts, as well as purchases?
Mr. Lowery. To my knowledge, no. I think that it is about
acquisitions.
Mr. Souder. Because in Indiana, we are having a big
discussion about Cintras and Macrey, Australian and Spanish
companies, are managing the Indiana toll road for 75 years.
They took a lease. They manage the Chicago Skyway. So for that
infrastructure, none of the legislation, nor your process,
would impact a lease arrangement?
Mr. Lowery. I am not an attorney, but to my knowledge, no,
it would not. It is specifically about acquisitions.
Mr. Souder. All right. So the similar thing would be if it
is an airport, because the British are managing the
Indianapolis Airport, looking at once again leasing it to a
management. Would the Department of Homeland Security be
looking at something like that?
I don't have a problem with it. I am thrilled that they are
bringing investment to Indiana, quite frankly. I am just
wondering what kind of process goes through lease management
because particularly a major airport would be critical
infrastructure.
Mr. Baker. Certainly the Department of Homeland Security
would have an interest, particularly in who is operating
airports, but I agree with Assistant Secretary Lowery that
CFIUS would not by itself cover that unless the company that is
actually administering that lease is then acquired by another
foreign company.
The question from our point of view would be what other
legal authorities might we have to deal with a company that is
running an airport, and typically to draw on the experience of
the ports, we have some regulatory authority over security
activities. That does not necessarily allow us to exclude a
particular foreign company, but it can allow us to look closely
at their security practices.
Mr. Souder. General Electric, Magnavox, many American
companies were downsizing over the years. In my district, BAE
bought the GE aircraft controls that does defense contracting
in the Air Force. USSI bought what was Magnavox-Raytheon-
Sonavoys operation, which is a British company making defense
parts, which conceivably, depending on how the structure goes,
could be impacted here.
Michelin is the largest employer in my district, which is
French, making tires that go into all sorts of equipment, not
to mention that I have Dreyfus building the largest biodiesel
plant in the United States, second-largest in the world, in my
district, which is also French, while Bruna Steel from Italy
bought a company from Canada in my district that makes steel.
Now, some of these companies are structured where they have
an American division. Some of them are straight ownership.
Could you explain a little bit where the lines here are on
military, parts that go into military, steel that would go into
military, or even energy structures there where Dreyfus is
actually impacting. Because without this investment, we are
going to really dry up American jobs.
Mr. Lowery. I don't know all of those transactions, but
many of them, I would guess, have actually gone through the
CFIUS process. What happens is that companies, especially in
the defense industrial base, but also in critical
infrastructure, realize that they need to come in and do CFIUS.
I know that BAE has come through CFIUS many times. I can't
speak for the specific transactions in your district.
We agree with you. It is very important to the U.S. economy
that we continue to get this foreign direct investment. That is
why we have tried to keep the CFIUS process as professional and
rigid with timelines as it possibly can be so that we can
address these issues. If there is a national security concern
with a CFIUS case, we can address those issues through means of
the CFIUS process.
But a lot of times, these transactions do not raise those
national security concerns. We should look at them from the
national security perspective and get them out of the system,
quite frankly.
Mr. Souder. Does steel qualify as a national security
concern? Obviously military parts would directly, but what
about the raw products that go into those parts?
Mr. Lowery. I think that it probably would. I know that in
my time we have actually looked at some steel cases.
Mr. Souder. In Homeland Security, do energy companies
constitute something that Homeland Security would review?
Mr. Baker. Yes, sir, they do. They are part of the critical
infrastructure.
Mr. Souder. Okay. Thank you.
I yield back.
Chairman King. The gentleman yields back.
There is about 6 minutes to go on the vote, so the
gentlelady from California can begin her questioning. The
gentlelady is recognized for 5 minutes.
Ms. Sanchez. Thank you, Mr. Chairman.
This whole Dubai issue obviously brought this to the
forefront. I think the really big issue of Dubai was what is so
critical to the United States that we have to hold it in our
own hands, and what is it of the assets that we hold that would
be available for lease or operation or sale to foreign
companies?
This is an incredibly important issue, given the trade
deficit and the desire of our American companies to own assets
around the world. I think Europeans, well anybody, Asian,
anybody is looking at this and saying, you know what, what is
the United States going to do? So obviously, we have this
process now.
Under the critical infrastructure protection arena, as the
law currently is, could you go through what would fall under
that as far as a review process?
Mr. Baker. We define the critical infrastructure the way
the Homeland Security Act does, which is very broadly. It
includes agriculture, food production, power production,
telecommunications, a wide variety of industries. We have
tended to take the lead in taking a look at transactions that
affect those sectors.
When we find a transaction that falls into one of those
sectors, the first question we ask is is there some other
authority that would allow us to regulate the national security
risks, the homeland security risks, without blocking the
transaction? If there is, then we don't need to use CFIUS.
But if there isn't, then if we see a risk in the
transaction, what we will do is ask the companies that are
engaged in it to come in and sit down with us and to negotiate
an agreement in which they will agree to take actions that will
minimize the risk that we see in the transaction. In fact, that
is what we did in the Dubai Ports World case, where we
identified some risks that we wanted to protect against.
Ms. Sanchez. Let's say a telecom company like AT&T or one
of these, has a buy-out proposed. Would we look at that as a
critical infrastructure piece?
Mr. Baker. We would indeed. We have and we have negotiated
national security agreements with a number of foreign buyers of
telecommunications companies.
Mr. Sanchez. Okay. Do you have anything to add?
Mr. Lowery. I agree completely.
Ms. Sanchez. Okay. After 9/11, the criteria changed for
national security and what we were looking at in
infrastructure. Right? Do you think that is adequate? Or do you
think we have to look at one of these bills that would address
a broader scope of what might be included as critical to our
national security as far as assets, any type of assets?
Mr. Baker. DHS, working within the existing statute, has
made it clear that we take a very broad view of what our
national security requires. The bills that we are looking at
tend to include homeland security as part of national security.
We are fully supportive of that idea. So in our view, our
current practice is that, but it would be very helpful to have
the law match our practice.
Ms. Sanchez. Thank you, Mr. Chairman.
Chairman King. Yes. The gentlelady yields back.
I am going to call a recess of the committee for about 5
minutes. The committee stands in recess.
[Recess.]
Mr. Rogers. [Presiding.] I would like to call the hearing
back to order.
At this time, I recognize Mr. Dicks for any questions he
may have.
Mr. Dicks. Let me ask you a question about this letter, Mr.
Lowery, that you wrote to the committee. In the letter, it
says, ``CFIUS member agencies provide their position on a
transaction to Treasury staff, informing Treasury whether the
CFIUS member agency will request an extended investigation with
respect to the reviewed transaction.''
Is that done in writing?
Mr. Lowery. Yes, sir, usually via e-mail.
Mr. Dicks. Is that part of the information that you sent to
the committee?
Mr. Lowery. I don't think so, sir.
Mr. Dicks. Why is that?
Mr. Lowery. I would have to ask the general counsel, but I
believe that there was some concern about deliberative process,
sir.
Mr. Dicks. So you are claiming executive privilege here, is
that correct?
Mr. Lowery. I believe so, sir.
Mr. Dicks. Mr. Chairman, I think the committee has a right
to see this. I would hope that we would at least consider what
ever steps we can. I think without that, all we have is a
series of e-mails and documents that don't seem to mean very
much.
I am also surprised, by the way, and we may have to change
the legislation here, I think there ought to be a report
written about the decision of the CFIUS group. The secretary or
whoever is in charge of this should have to write a report that
could be reviewed.
Why is that not done?
Mr. Lowery. Sir, we actually think that that is a good
thing to look at going forward. Right now, basically, the
report that we would do to Congress would be in any cases that
go to the president. There was a recent case where we did a
report to Congress on a transaction.
On a regular basis, we have not done that, but we think
that it is something that should be explored because we do want
to improve communications with Congress. We do realize that
this has been a problem, and we need to correct it. That is one
of the reforms that we are looking at very carefully.
Mr. Dicks. I am trying to find my notes here. There is a
report that you are supposed to do on a quadrennial basis, and
there has only been one of them submitted, and that was in I
believe 1994. Why is it that this quadrennial report has not
been filed in the last 12 years?
Mr. Lowery. Sir, we regret that the quadrennial report has
not been filed in 1998 and 2002. We are committed to getting it
done.
Mr. Dicks. Then why isn't it done, if you are committed to
it? Did you just figure out before this hearing that it wasn't
done? You must have known it wasn't done.
Mr. Lowery. Sir, basically we looked and found out that it
hadn't been done for all this time, and what we have done is
put together an interagency working group, as well as working
with the DNI. It is a very labor-intensive report to get a lot
of data and do the analysis of that data. We are committed to
getting that report done in 2006.
Mr. Dicks. In the fiscal year or calendar year?
Mr. Lowery. This year, sir, as soon as possible.
Mr. Dicks. Okay. So this in your mind is an oversight?
Mr. Lowery. Yes, sir.
Mr. Dicks. Well, Congress should have maybe proper
oversight, we should have asked for this report to be
submitted. What kind of information would be in this report?
Can you characterize it?
Mr. Lowery. Yes. There are two parts to the report. One is
about counter-espionage issues, which actually is a report that
has been picked up and been done on an annual basis by the
national counterintelligence unit of DNI. So that actually has
been going on on an annual basis.
The part that has not been going on is analysis of trends
in mergers and acquisitions to see if there has been anybody
that has been specifically targeting. That part has not been
happening and that is the part that we need to address during
this quadrennial report, the one that we are working on right
now.
Mr. Dicks. Does the administration, even though they
haven't sent the report up, does the administration follow
these trends, and what these other countries like the Peoples
Republic of China and others?
Mr. Lowery. We do follow these trends in the general sense.
We just haven't done it with the type of data analysis that
would be needed in order to do the quadrennial report.
If you look over most of the transactions that have been
done, some involve Japanese companies, but European and
Canadian companies constitute the bulk of the transactions. We
have not really found any definitive trends that show any
targeting by specific countries.
That said, we do need to do a deeper analysis than we have
done before. That is why it is going to take us a while, but we
are committed to getting it done this year.
Mr. Dicks. I appreciate that.
I thank you, Mr. Chairman, and I yield back.
Mr. Rogers. The gentleman yields back.
The gentleman from New Jersey is recognized for any
questions he may have.
Mr. Pascrell. Mr. Lowery, you mentioned in your testimony
that typically the members of the committee with the greatest
relevant expertise assume the lead role in examining any
national security issues which are related to the particular
transaction, and when appropriate, developing appropriate
mechanisms to address those risks.
Would the Department of Homeland Security not take the lead
on many of these transactions? And do you think that they have
the personnel capable to fulfill this duty?
Mr. Lowery. In terms of your question about lead agencies,
there are a variety of agencies that take lead
responsibilities. Sometimes it is the Department of Homeland
Security; sometimes it is the Department of Defense; sometimes
it is Justice; and sometimes it is the Energy Department, which
is actually not a CFIUS agency, but we bring them in if there
is an energy asset at stake.
There have been times where others like Commerce or the
Treasury Department will take some of the lead
responsibilities, but it is usually those agencies. I would
have to defer to Secretary Baker as to the abilities of the
Department of Homeland Security to conduct their business. In
the CFIUS process, they are always very active and very
rigorous about their job, but in terms of all the follow-up, I
would have to defer.
Mr. Pascrell. Do these members of the committee inquire? Do
they ever discuss this with Homeland Security? Would they reach
out, the members of the committee that are reviewing these
transactions? Or are the members of the committee who are
expert in the specific area, they are looked to examine the
proper activities of the transaction?
Mr. Lowery. Each agency reviews the transaction. It is just
that there is sometimes deference because of the specifics of a
transaction. For instance, if there is a defense part that is
being purchased by an acquisition firm, we are going to look to
the Department of Defense because they are going to know things
a lot better than the rest of us.
However, Homeland Security, Justice and Treasury and others
on the committee are also reviewing it and they are making sure
that it addresses any concerns that they might have about that
specific transaction.
Mr. Pascrell. Did Homeland Security review the Dubai
transaction?
Mr. Lowery. Absolutely. In fact, they were the lead agency,
basically.
Mr. Pascrell. And they concluded?
Mr. Lowery. It is probably better for Secretary Baker to
speak on behalf of his group.
Mr. Baker. I am glad to. Thank you, Clay.
We looked at that and for the first time in any port deal,
we decided we wanted additional security guarantees from what
we ordinarily would ask for in a transaction. We asked for
assurances. We were able to get them from the company.
So we did look at it closely. We did ask for assurances to
go beyond what the other members of CFIUS would have asked for
because it was a part of the critical infrastructure.
Mr. Pascrell. Reports have it, Mr. Secretary, that you were
the sole dissenter in the beginning in reviewing the Dubai
transaction. What made you change your mind to go along with
the other members of the committee in unanimously accepting
this transaction as not being in any manner, shape or form a
reflection on the security of this nation? What is it that got
you over the top?
Mr. Baker. I think the reports are a little misunderstood.
We did not object to the transaction, but we did raise our hand
and say we would like to look at this more closely. We believed
that it would be appropriate to ask for additional assurances
from the company.
Mr. Pascrell. Why?
Mr. Baker. Because we wanted to make sure, this was a
government-owned corporation, we wanted to make sure that the
companies which up to that point had a very good security
reputation, didn't change that policy later on. We wanted to
lock them in in their current relatively high level of
security.
Mr. Dicks. Would the gentleman yield just for a brief
moment?
Mr. Pascrell. Sure.
Mr. Dicks. One of the things that, there was an
unclassified Coast Guard report that said that there were
intelligence gaps concerning the potential for DPW or PNO
assets to support terrorist organizations, which preclude an
overall threat assessment of the potential DPW and PNO merger.
Were you concerned about this Coast Guard report?
Mr. Baker. The Coast Guard was asked for its evaluation of
the transaction. The Coast Guard internally commissioned that
intelligence report. It was not actually sent to DHS
headquarters. It was for their own purposes in deciding how
they would vote on the transaction.
Once we had the assurances, with the assurances in hand, as
well as that intelligence report, which actually came to the
conclusion that while there were gaps, the transaction should
go forward, the Coast Guard voted to let the transaction go
forward.
So I didn't actually see the report.
Mr. Pascrell. Can I reclaim my time, Mr. Chairman?
Mr. Secretary, I want to ask you a question. I want you to
explain to everybody in this room what you see as the
difference between a foreign company running the operations at
any of our ports, which happens right now, and a foreign
company owned by a foreign country running the operations of a
port.
Because the administration confused that and melded the two
together in trying to defend their decision about Dubai. I want
you to tell us if you see any essential, not quantitative
differences, essential differences between the one and the
other, and why we should be concerned in our oversight
capacity.
Mr. Baker. I do see a difference. A foreign company is
likely to be acting out of profit motivation most or the time,
not always, but most of the time. You might still have
concerns, but the profit motivation often allows you to predict
how they will behave.
When it is a foreign government-owned corporation, you
sometimes worry that the government will take actions that are
not profit-motivated. And so it is important to take a look at
that particular risk.
Mr. Pascrell. How do you know if the country is not going
to interfere in the operations of that particular company since
they are on our soil?
Mr. Baker. One of the thing that we did in this transaction
was to try to lock in some things that had been done by the
companies, as private companies, to provide good security and
to maintain high security standards so that if there were a
change in policy that was not profit-motivated, but motivated
by a government policy, we would be able to say that is a
violation of the agreement.
Mr. Rogers. The gentleman's time has expired.
The gentleman from North Carolina is recognized for 5
minutes.
Mr. Etheridge. Thank you, Mr. Chairman.
Mr. Baker, let me follow that line a little bit further
because we were talking about foreign versus domestic, what
works out. How do you evaluate the risk of a foreign-owned
company when these days there is really no clear designation of
what companies are foreign?
Let me say what I am talking about, for instance, most
large companies are multi-international today. I am told both
Exxon-Mobil and BP have almost half of their ownership is
American, is U.S. now, and a lot of it overseas.
How does the department weigh the risk of these so-called
foreign-owned companies?
Mr. Baker. I am not sure I would characterize Exxon-Mobil
yet as foreign-owned.
Mr. Etheridge. But if you look at the ownership within the
corporation?
Mr. Baker. Yes. There is no doubt that the long-term trend
is toward a lot more confusion about what country a particular
company is from. The number of governments who have the ability
to influence the behavior of a company continues to grow.
We are not the only ones who are seeing that. The
Canadians, who used to have very aggressive inward investment
programs, have begun to recognize that they can't maintain
that. So that confusion is going to continue to grow.
Mr. Etheridge. So how do you evaluate the risk?
Mr. Baker. We must nonetheless ask in particular
transactions, is the risk so significant that even though it is
harder to tell whether someone is influenced by foreign
governments or an outsider, we can't take the risk of letting
the transaction go forward, perhaps because of tight relations
between the buyer and a foreign government, so that we have
every reason to believe that this particular company is very
beholden to a foreign government, and they are buying into a
particularly sensitive sector.
So there are still cases where the risks and the
relationship with the government is quite significant. In many
cases, though, in fact almost all the time, it is better to
rely on regulations than trying to block transactions. As we
talked about earlier, there are many ways in which foreign
companies can come to exercise control over assets in the
United States without ever buying a U.S. company.
So in most cases, having regulations such as our port
security regulations is a better way to control what happens by
way of port security than trying to block transactions on an
individual basis.
Mr. Etheridge. That being said, then, I guess leads to the
next question. Did you consider the UAE's ties to the Taliban
to be a red flag? Was that something you considered in the
deal?
Mr. Baker. There is no doubt that before September 11 the
United Arab Emirates did have close ties to the Taliban, or at
least they recognized the government. We said at the time that
we thought that was a very bad idea. We have reiterated that
view since September 11. They did make substantial changes in
policy after September 11 and they have been enormously helpful
to the United States in a wide variety of ways on an
international basis.
Mr. Etheridge. So the answer is yes?
Mr. Baker. We took that into account. It was not a positive
factor, obviously. What that shows is they are not the United
States and never will be, and we have to take that into account
as one of the reasons we said that we want some assurances
about the policies on security that you are going to follow up.
Mr. Etheridge. So do I gather from that that the answer is?
Mr. Baker. All I can say is, you have to take these things
into account and make a decision after weighing all of them.
Mr. Etheridge. Are you telling me it was one of the factors
that was considered?
Mr. Baker. Certainly. It was.
Mr. Etheridge. Okay.
Thank you, Mr. Chairman. I yield back.
Mr. Rogers. The gentleman's time has expired.
The gentlelady from the Virgin Islands, Ms. Christensen, is
recognized for any questions she may have.
Mrs. Christensen. Thank you, Mr. Chairman.
I would like to ask a question based on the purpose of the
program being to identify those foreign investments in U.S.
critical infrastructure and industrial-based technology
companies that may pose a national security risk. I have seen
some of our early critical infrastructure lists, and then you
would have been reviewing golf courses, country clubs and all
of those kinds of things.
Do you think we have sufficiently come to a point where our
critical infrastructure is identified specifically enough and
accurately in a relevant fashion so that it gives the proper
guidance to this process?
Mr. Baker. I think that is a very good question. We have
taken a very broad view of what is critical infrastructure. It
depends on what purpose you are asking the question for, or
what you want to put in there. We, for example, treat
agriculture and food production as critical infrastructure, as
they would be if someone wanted to insert ricin into the food
supply.
That does not mean that we should be reviewing every
transaction in which a European buys a farm in Iowa. So how you
define ``critical infrastructure'' for purposes of reviewing an
inward investment may be quite different from how you would
interpret it if you were worried about a terrorist attack on a
particular facility.
So in this case, we keep the definition broad so that we
can respond to new threats or particular intelligence that we
may receive about a buyer, but generally we are focused on
transactions that could give a foreign company or foreign
government insight into very important technology or an ability
to influence the way our infrastructure works in a fashion that
could hurt us.
Mrs. Christensen. Okay. How do you evaluate the risk of a
foreign company when these days sometimes there is not a clear
designation of what companies are foreign?
For example, large-scale companies are multinational. I
could talk about Exxon-Mobil or I could talk about Hovensa in
my district, which has half U.S. ownership, both of them. So
how does the department weigh the risk of these kinds of so-
called ``foreign-owned'' companies?
Mr. Baker. Again, we try to leave ourselves a lot of room
so that we have not locked out a case that we clearly want to
meet. There are circumstances where just 25 percent ownership
interest in a large publicly held company would be enough to
give a foreign government or person control of the company. We
would not want to say, well, it has to be 51 percent foreign
before we decide that the transaction ought to be reviewed.
But in many cases, all we have to decide in the end, if we
think that there is not a risk to homeland security and
national security, is that the transaction does not need to be
further reviewed. We don't say it is because you are not
foreign. We simply say that is fine; we are not going to review
this transaction further. And that allows us some discretion in
a later case where we think there is a risk of abuse, to say
this transaction needs to come in and be reviewed.
Mrs. Christensen. Mr. Lowery, would you have anything to
add to this?
Mr. Lowery. No, I think the secretary described it very
well.
Mrs. Christensen. I have no other questions of this panel,
Mr. Chairman. Thank you.
Thank you for your responses.
Mr. Rogers. The gentleman from Pennsylvania, Mr. Dent, is
recognized for any questions he may have.
Mr. Dent. Thank you, Mr. Chairman.
Mr. Baker, my question is really directed to you. At what
point in this process do you typically receive the intelligence
review from the Community Action Risk Center?
I noticed from the timeline on these yellow sheets that
this assessment was completed on December 6, but the parties
did not officially file until December 16. The question is, how
is that possible? How does that process work?
Mr. Baker. That is a little unusual. It is a very good
question. Typically, it will take the intelligence community
several weeks, 3 weeks to put together a report.
We were actually lucky in the Dubai Ports World case
because the company was well advised and they did something
that we very strongly encourage companies to do, which is they
came in well before they filed with CFIUS and said, ``we are
thinking about doing this transaction.'' They briefed the
transaction. They answered our questions. We were able to get
the intelligence community started on the assessment well
before the actual filing of the CFIUS petition.
Usually, we don't have that much time. And usually, if we
don't have too much time, it will take us until day 21, day 22,
day 23 in the 30-day process before we see the fruits of the
intelligence analysis.
Mr. Dent. Thank you.
Mr. Lowery, do you have anything to add to that?
Mr. Lowery. No, I think that that is correct. I know that
there was a lot of criticism of us in the Dubai Ports World
case, that we didn't take the extra 45 days. We actually took
75 days in the case of Dubai Ports World, or closer even to 90,
just because they came in very early and gave us a lot of
information, and then we just were able to get the intelligence
people working in advance.
This is something that we have been trying to get. There is
kind of a small community of people that represent companies on
these cases, and we have been trying to get the word out that
coming in early helps the process along. I know that for
instance in the last seven cases that have been filed with us,
five of them have come in early. So we are able to get the
intelligence community doing its work in advance because
obviously their work is vital to us.
Mr. Dent. And my follow-up question is this. Some
legislation has been proposed limiting the time for the
director of national intelligence to review these acquisitions
to 15 days. Are you supportive of those proposals, and how
would that improve or affect our national security?
Mr. Baker. I am not aware of proposals to limit it to 15
days. I would say that the intelligence community analysis of
the transaction is vital, but it is only part of what we have
to do. If we have a 30-day review window, and the intelligence
community takes 29 days, there really isn't time for us to do
the analysis that we need to do, or to ask for the protection
measures that we need to take.
So there is always a tension. I think it is probably a bad
idea to try to set it legislatively. We push the intelligence
community to give us preliminary or as much information as they
can as early as possible so we can begin deciding whether we
want to ask for additional assurances. But it is going to be a
tension no matter how that particular issue is resolved,
legislatively or administratively.
Mr. Dent. And finally, what changes have been made to the
CFIUS process since the post-9/11 world? I would just be
curious to get your take on that.
Mr. Lowery. Yes, sir. I think there have been a few things,
a lot of it based on the lessons we learned from 9/11 and then
Dubai Ports World. The first big change was we added the
Department of Homeland Security.
Mr. Dent. Other than that.
Mr. Lowery. What we are now doing is we have much more
formalized the process of using the intelligence community.
They are at every meeting. They are observers. They are an
input valve. It was always kind of an informal process that has
become much more formalized.
Secondly, I think each agency is briefing up at the highest
levels of their agencies because of the concern that there was
not as much accountability as there should have been in the
Dubai Ports World case.
Thirdly, we are trying to work with the oversight
committees on keeping them informed about how the cases are
coming out, with some notifications obviously. This is
something that is in a variety of different legislative bills.
We are going to work with Congress to try to keep you better
informed about how the process works and also the results of
the process. So those are a few off the top of my head.
Mr. Rogers. The gentleman's time has expired.
The gentleman from Oregon, Mr. DeFazio, is recognized for
any questions he may have.
Mr. DeFazio. Thank you, Mr. Chairman.
I would assume on the list of critical infrastructure would
be our airline industry. Would that be correct?
Mr. Baker. Which industry?
Mr. DeFazio. Airline.
Mr. Baker. Yes, sir.
Mr. DeFazio. Yes, especially since they provide the
civilian reserve air fleet. What would trigger a review?
The administration is currently proposing that foreign
interests, despite the legal restrictions on ownership in the
Federal Aviation Act, they want to creatively reinterpret the
meaning of ``control'' to allow foreign interests to actually
have a controlling interest in a U.S. airline, but somehow
internally draw some firewalls and say, well, you can hire and
fire the management; you can set the schedules; you can buy or
sell equipment; choose routes; use your personnel, the existing
personnel, foreign pilots, whatever. But we are going to wall
off safety and security.
Now, the most credible analysts say that doesn't really
seem like it is going to work too well, especially since we had
the director of security from Continental say, well, look, I
mean the President say, ``I hire the head of security and
safety. The board of directors tells me they want something, I
am going to deliver it. I will fire him and get someone who
will do what I want.''
So I guess the question is, if this rule goes through, they
won't technically be buying more than a 50 percent share, but
they will be buying under the rules that are being proposed a
controlling interest in a substantial portion of the airline
through super-voting majorities of certain kinds of stock,
otherwise they won't make the investments.
Would that trigger a review?
Mr. Baker. A couple of thoughts on that.
The first, I think CFIUS, as I said earlier, is kind of a
blunt instrument in that in this case it seems to me that we
have a great deal of much more specific regulatory authority,
including the authority under the provisions of law that you
were just talking about. So that the debate will take place,
rather than in CFIUS, about how to interpret and apply the
airline-specific rules.
We are aware of the proposal that you are talking about,
and of the tensions that you just described, and are still
examining that proposal to see whether we believe that it will
protect homeland security and the security generally
sufficiently. We are in the midst of that, so I would not like
to comment in more detail.
Mr. DeFazio. Okay. So you have been asked to review the
proposed rule?
Mr. Baker. Yes.
Mr. DeFazio. Okay. In what venue will that review be made
available? Will it be made available to members of Congress on
a need-to-know basis, on a secure basis? Is it being made
public? What will you do with that?
Mr. Baker. The administration will arrive at a conclusion
and then once that conclusion is arrived at, I am sure that we
are not going to be the principal interlocutor on that issue
because it is not our regulation, but I expect that it will
then be explained in whatever supporting detail is necessary
and made available.
Mr. DeFazio. I mean, their attempt to end-run Congress has
been very specific. They are saying the word ``control'' means,
you know, something else, which means they are going to create
this artificial fire wall.
Are you saying, what about the idea that a foreign interest
can appoint all the management; board of directors direct the
company, and yet somehow internally within this corporate
structure we are going to say, oh, safety and security are over
here, don't worry, despite what we have heard from airline
execs saying that is not really the way an airline works.
You are saying, what about this? Do you think this is?
Mr. Baker. If I said I was saying that, I would probably be
making a decision. It is a little early.
Mr. DeFazio. Well, it isn't early. Any day, they could pop
this rule out. They proposed it. They get a little flak. They
just changed it cosmetically. It is still the same rule. They
are trying to end-run Congress because they couldn't get this
in the last Federal Aviation reauthorization. And there is
obviously somewhat of a reluctance on the part of the
Republican leadership to challenge the White House on this
issue, and some of the financial interests involved.
But this would include any country with an open skies
agreement, which just in case you don't know that, it would
include Indonesia, for instance. I don't think that would be a
really good idea.
Mr. Baker. I think we understand precisely the tensions you
are describing, and are building those into our analysis of the
proposal.
Mr. DeFazio. Okay. And your analysis is only going to be
available to the executive and not to Congress? Or if Congress
asks?
Mr. Baker. I am not suggesting that we are writing a 500-
page report. We are examining this and the legal and factual
issues that go into it because we have been asked for our
views.
Mr. DeFazio. Thank you, Mr. Chairman.
Mr. Rogers. The gentleman yields back.
The gentleman, Mr. Langevin, is recognized for any
questions he may have.
Mr. Langevin. Thank you, Mr. Chairman.
Actually, in addition to my committee work here, I also sit
on the House Armed Services Committee. Mr. Lowery and Mr. Baker
appeared before me there, and I have had the opportunity to
question them. So I don't have any questions for the panel at
this time. I will hold those for the record potentially.
I will just say that during the consideration of the SAFE
Ports Act, I offered an amendment to require more transparency
in the CFIUS process. The amendment that I offered would
require CFIUS to notify congressional leaders of both parties
of any foreign acquisition dealing with critical
infrastructure. In addition, it would have ensured open lines
of communication between Congress and CFIUS.
So I am going to continue to work for those opportunities
to enhance those reporting requirements, but at the time
Chairman King had indicated that he would work with me to
address this issue, and so I am proud to be a part of this
hearing today and I want to thank the panel for their
testimony.
Thank you. I yield back.
Mr. Rogers. I thank the gentleman.
Are there any additional questions by the Members?
I want to thank both of you for your time. It has been very
helpful.
At this time, we will dismiss this panel and call up our
second panel.
Thank you very much.
Joining us today is Daniella Markheim, the Jay Van Andel
senior analyst in trade policy at The Heritage Foundation's
Center for International Trade and Economics; and Mr. Stuart
Eizenstat, a legal expert on CFIUS and former deputy secretary
of the Treasury.
Welcome to both of you. We look forward to hearing your
testimony.
The chair now recognizes Ms. Markheim for any statement she
may have.
STATEMENT OF DANIELLA MARKHEIM, JAY VAN ANDEL SENIOR ANALYST IN
TRADE POLICY, CENTER FOR INTERNATIONAL TRADE AND SECONOMICS
Ms. Markheim. Thank you, Mr. Chairman and distinguished
members. I am honored to testify before the House Committee on
Homeland Security today.
In my testimony, I would like to describe the contribution
of foreign investment to the U.S. economy, discuss the efficacy
of the current foreign investment approval process, and
recommend improvements to the CFIUS process to preserve both an
open investment climate and America's national security.
Today, the United States is the world's dominant economy.
Because of the promise of America's economic potential and the
openness of its markets, the U.S. is a major destination for
foreign direct investment or FDI. Foreign investment introduces
new technologies and skills to America's economy, helping to
promote U.S. competitiveness abroad.
FDI also supports over 5 million U.S. jobs from California
to New York, and Texas to Ohio. Moreover, the benefits of FDI
extend beyond the industries receiving investment and into the
American economy as a whole. Increased investment and
competition generate higher productivity and more efficient
resource use.
Ultimately, this culminates in greater economic growth, job
creation and higher living standards for all. Any new rules
that restrict, delay or politicize foreign investment will
result in the loss of FDI as greater uncertainty and delays add
to the cost of foreign firms doing business in the U.S.
Consequently, America will pay for higher investment barriers
with lower growth and fewer jobs.
The CFIUS process serves as an objective nonpartisan
mechanism to review, and if the president finds necessary, to
restrict or prohibit foreign investment that may threaten
America's security. With a few exceptions, the current CFIUS
process minimizes the cost of such legislation on the U.S.
economy, while preserving the intent: protecting America from
those that would cause the country harm.
The process is effective in that it is nonpartisan and
nonpolitical. It concludes its reviews in a timely manner, and
because it extends an investigation only if merited, rather
than as a rule or for bureaucratic convenience. While today's
CFIUS process is generally effective, it could be improved. The
recent Dubai Ports controversy is the latest example
demonstrating that the investment approval process needs to be
better defined and more transparent.
First, successful congressional oversight of the CFIUS
process relies in part on having reliable information
describing the extent of foreign commercial misconduct in the
U.S. As such, the administration should immediately resume the
practice of providing quadrennial reports to Congress of
credible evidence of foreign efforts to acquire critical U.S.
technologies or commercial secrets.
Second, CFIUS investigations that result in presidential
action are also subject to reporting to Congress. However,
because firms may withdraw and re-file notifications in order
to avoid extended reviews, few reports are actually submitted.
As a result, Congress has little insight into the effectiveness
of the CFIUS process during investigations. To fill this gap,
Congress should receive regular general reports of committee
investigations in addition to the required case-by-case reports
on any extended examinations.
Third, while the option to withdraw and re-file provides
additional time for companies to resolve national security
concerns, the option may actually increase those risks if the
transaction is completed during the withdrawal period and the
foreign firm inappropriately gains control of a U.S. asset
until it re-files with CFIUS. To mitigate this risk, provisions
should be incorporated into the process that establish interim
protections in cases where security issues have been raised,
and to specify clear and reasonable time limits to limit the
duration between withdrawal and re-filing.
Finally, left undefined in the Exon-Florio provision,
member agencies have generally determined that a risky
transaction involves a U.S. company that possesses export-
controlled technologies or products, a company that has
classified contracts, or specific derogatory intelligence on
foreign companies. This narrow definition of what is a threat
should be more explicitly and firmly incorporated into the
process. Leaving ``threat'' undefined in the legislation keeps
the door open for mis-using the process to protect domestic
industry from foreign competition.
In conclusion, the notion that precluding foreign ownership
of U.S. assets offers a measure of security or saves American
jobs is flawed. Erecting barriers to foreign investment would
stifle innovation, reduce productivity, undermine economic
growth, and cost jobs, all without making America any safer.
The government's role is not to decide how the marketplace
operates, but to perform due diligence to ensure that vital
national interests are looked after.
Thus, reform should address the heart of the CFIUS problem:
appropriate reporting and transparent, well-defined rules,
without opening the door to protectionism and without chancing
the economic and political consequences of politicizing foreign
investment in the U.S.
A successful strategy for improving national security must
include an ongoing commitment to free trade and investment
policy.
Thank you for the opportunity to address the committee. I
do look forward to any questions you may have on this issue.
[The statement of Ms. Markheim follows:]
Prepared Statement of Daniella Markheim
Mr. Chairman, and other distinguished Members, I am honored to
testify before the House Committee on Homeland Security today.\1\ In my
testimony, I would like to (1) describe the contribution of foreign
investment to the U.S. economy; (2) discuss the efficacy of the current
foreign investment approval process; and (3) recommend improvements to
the CFIUS process to preserve both an open investment climate and
America's national security.
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\1\ The Heritage Foundation is a public policy, research, and
educational organization operating under Section 501(C)(3). It is
privately supported, and receives no funds from any government at any
level, nor does it perform any government or other contract work.
The Heritage Foundation is the most broadly supported think tank in
the United States. During 2005, it had more than 275,000 individual,
foundation, and corporate supporters representing every state in the
U.S. Its 2005 income came from the following sources:
Individuals 63%
Foundations 21%
Corporations 4%
Investment Income 9%
Publication Sales and Other 3%
The top five corporate givers provided The Heritage Foundation with
2% of its 2005 income. The Heritage Foundation's books are audited
annually by the national accounting firm of Deloitte & Touche. A list
of major donors is available from The Heritage Foundation upon request.
Members of The Heritage Foundation staff testify as individuals
discussing their own independent research. The views expressed are
their own, and do not reflect an institutional position for The
Heritage Foundation or its board of trustees.
Foreign Investment in the United States
Today, the United States is the world's dominant economy. Because
of the promise of America's economic potential and the openness of its
markets, the U.S. is a major destination for foreign investment.
According to the Commerce Department's Bureau of Economic Analysis, net
inflows of foreign direct investment (FDI) increased by almost 50
percent between 1996 and 2005, growing from $86 billion to $128
billion. Between 2004 and 2005 alone, the level of FDI in the U.S.
increased by $21.8 billion, or 20 percent.\2\
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\2\ Bureau of Economic Analysis, U.S. International Transactions,
at http://www.bea.gov/bea/newsrel/transnewsrelease.htm (May 21, 2006).
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Foreign investment introduces new technologies and skills to
America's economy, helping to promote U.S. competitiveness abroad.
About 20 percent of all U.S. exports originate from U.S. affiliates of
foreign-owned companies.\3\
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\3\ William J. Zeile, ``U.S. Affiliates of Foreign Companies:
Operations in 2003,'' Bureau of Economic Analysis, at http://
www.bea.gov/bea/ARTICLES/2005/08August/0805_Foreign_WEB.pdf (May 21,
2006).
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FDI supports about 5.3 million U.S. jobs from California to New
York, and Texas to Ohio.\4\ U.S. subsidiaries support an annual payroll
of $317.9 billion with average compensation per employee worth almost
$60,000--more than one-third more than the average American salary.
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\4\ Organization for International Investment, Insourcing
Statistics, at http://www.ofii.org/insourcing-stats.htm (May 21, 2006).
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Moreover, the benefits of FDI extend into the American economy as a
whole. Increased investment and competition generate higher
productivity and more efficient resource use. Ultimately, this
culminates in greater economic growth, job creation and higher living
standards for all.
Any new rules that restrict, delay, or politicize foreign
investment, will result in the loss of FDI as greater uncertainty and
delays in investment transactions add to the cost of foreign firms'
doing business in the U.S. Consequently, America will pay for higher
investment barriers with lower growth and fewer jobs. FDI restrictions
would undermine America's chances of remaining an economic superpower
in an increasingly competitive global economy.
Moreover, there may be secondary consequences of enacting new
foreign investment barriers. America could face less market access and
opportunity abroad, as countries enact retaliatory policies that result
in ever higher barriers to global investment. With over $2 trillion of
direct investment abroad the U.S. is the world's biggest investor--
foreign retaliation to new U.S. investment restrictions would be costly
for many Americans.\5\
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\5\ Bureau of Economic Analysis, Balance of Payments and Direct
Investment Position Data,
at http://www.bea.gov/bea/international (May 21, 2006).
The CFIUS Process Today
The United States generally welcomes foreign investors and provides
them equitable and nondiscriminatory access to investment
opportunities. While the bulk of foreign investment in America
generates no threat to national security, the Exon-Florio provision was
implemented in 1988 to insure that FDI remain benign.\6\ The intent of
Exon-Florio is to provide an objective, non-partisan mechanism to
review and, if the President finds necessary, to restrict or prohibit
foreign investment that may threaten America's security.
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\6\ 50 U.S.C. app 2170.
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The Exon-Florio provision is implemented by the Committee on
Foreign Investment in the United States (CFIUS), an inter-agency
committee chaired by the Secretary of Treasury. The Departments of
Defense, Justice, Commerce, and Homeland Security are part of the 12
agencies that participate in CFIUS. The Committee's task is ``to
suspend or prohibit any foreign acquisition, merger or takeover of a
U.S. corporation that is determined to threaten the national security
of the United States.'' In 1992, Congress amended the statute through
section 837(a) of the National Defense Authorization Act for Fiscal
Year 1993, requiring CFIUS to also review transactions where the
acquirer is controlled or acting on the behalf of a foreign government.
Once notified of a potential transaction, the CFIUS process begins
with a 30-day review of the planned foreign acquisition, followed by an
additional 45-day review for exceptional cases. At the end of an
extended review, a report is provided to the President, who then has up
to 15 days to announce whether the investment is approved. In total,
the process can not exceed 90 days.
The amending legislation set in 1992 requires the President to
report every 4 years to Congress on whether there is credible evidence
of foreign efforts to acquire critical U.S. technologies or commercial
secrets. Additionally, a report is to be made to Congress regarding any
transaction that required Presidential action.
Through the Exon-Florio provision, CFIUS is directed to consider
the following factors in evaluating the security risk of a foreign
acquisition or merger:
domestic production needed for projected national
defense requirements;
the capability and capacity of domestic industries to
meet national defense requirements, including the availability
of human resources, products, technology, materials, and other
supplies and services;
the control of domestic industries and commercial
activity by foreign citizens as it affects the capability and
capacity of the United States to meet the requirements of
national security;
the potential effects of the proposed or pending
transaction on sales of military goods, equipment, or
technology to any country that supports terrorism or
proliferates missile technology or chemical and biological
weapons; and,
the potential effects of the proposed or pending
transaction on United States international technological
leadership in areas affecting United States national
security.\7\
---------------------------------------------------------------------------
\7\ Ibid.
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A transaction may be voluntarily notified to CFIUS by the companies
involved in the acquisition, or by CFIUS member agencies. The incentive
for firms to voluntarily notify the CFIUS process is strong; firms that
should, but do not notify CFIUS of an acquisition remain subject
indefinitely to divestment or other negative actions by the President.
In order to protect proprietary commercial data, notifications to CFIUS
are confidential.
Balancing Act
With a few exceptions, the current CFIUS process minimizes the cost
of such legislation on the U.S. economy, while preserving the intent--
protecting America from those that would cause the country harm.
Favorably, the process:
Is designed to be non-partisan and non-political
because these decisions should not be based on political
considerations, but solely on the merits of the transaction and
appropriate security concerns consistent with U.S. policies.
Congress does not receive comprehensive notification in any
other administrative procedure. Congress sets the law,
establishes procedures to implement and enforce the law, and
oversees the successful fulfillment of those procedures. As
such, Congress plays no collaborative role in anti-trust
decisions, patent and trademark awards, or International Trade
Commission reviews. Likewise, a successful CFIUS process
depends on Congress playing its oversight role, without
becoming a part of procedure.
Reduces the risk and economic cost of delayed foreign
investment by concluding its reviews in as timely a manner as
possible.
Subjects investment transactions involving foreign
government-owned companies to additional investigation only if
merited, rather than as a rule. Transactions involving
companies where the foreign government is a minority
shareholder should not necessarily be evaluated with the same
scrutiny as those transactions involving companies that are
wholly owned and operated by foreign governments. Likewise, the
potential threat to U.S. national security interests by foreign
governments is not the same around the world. CFIUS is, and
should remain, flexible enough to differentiate the level of
investigation needed for each case. The foreign government-
owned company headquartered in an ally country that competes
fairly and according to market-based rules should not
automatically face a more stringent investment approval
process.
Relies on a traditional and narrow definition of what
constitutes a threat to national security. Left undefined in
the Exon-Florio provision, member agencies have generally
associated risky transactions with those involving, (1) a U.S.
company that possesses export-controlled technologies or items;
(2) a company that has classified contracts and critical
technologies; or (3) specific derogatory intelligence on the
foreign companies.\8\ This narrow definition of what
constitutes a threat reduces the likelihood that barriers will
be erected, inappropriately protecting domestic industries from
foreign competition. Investigations should remain focused on
evaluating security concerns.
---------------------------------------------------------------------------
\8\ United States Government Accountability Office, ``Defense
Trade: Implementation of Exon-Florio,'' GAO-06-135T, October 6, 2005.
---------------------------------------------------------------------------
While today's CFIUS process is generally effective in balancing an
open investment climate with national security, it could be improved.
The recent Dubai ports controversy is the latest example demonstrating
that the investment approval process needs to be better defined and
more transparent.
Amendments to Exon-Florio set in 1992 require the
President to provide quadrennial reports to Congress of
credible evidence of foreign efforts to acquire critical U.S.
technologies or commercial secrets. In 1994, the first and last
4-year report was provided to Congress.\9\ Successful
Congressional oversight of the CFIUS process relies, in part,
on having reliable information describing the extent of foreign
espionage and attempts to circumvent sensitive technology
controls. The administration should immediately resume the
practice of providing this report.
---------------------------------------------------------------------------
\9\ Ibid, p.9.
---------------------------------------------------------------------------
Any CFIUS investigations that result in presidential
action are also subject to reporting to Congress; however, few
reports are actually submitted.\10\ As a result, Congress has
little insight into the CFIUS process and deliberations that
occur during investigations. Few reports are made to Congress
because firms are allowed to withdraw a notification that would
result in an extended investigation. Companies may then refile
the notification of acquisition after previously identified
security concerns are addressed. Refiling restarts the clock on
the duration of the investigation and reduces the chance that
the transaction will fall under presidential review. While this
allows greater flexibility in the process and promotes
investment, it has resulted in less information reaching
Congress about CFIUS operations. To fill this gap, Congress
should receive regular, general reports of Committee
investigations, in addition to the required reports on any
extended investigations. The content of these reports should
focus on CFIUS proceedings, without compromising confidential
information.
---------------------------------------------------------------------------
\10\ Ibid, p.9.
---------------------------------------------------------------------------
While the option to withdraw and refile provides
additional time for companies to resolve national security
concerns pertaining to an acquisition, withdrawal may increase
national security risks if the transaction is completed during
the withdrawal period. In this scenario, a foreign firm may
inappropriately gain control of a U.S. asset until it refiles a
notification with CFIUS. To mitigate this risk, provisions
should be incorporated into the process that, (1) establish
interim protections in cases where security issues have been
raised, (2) specify clear and reasonable time tables to limit
the duration between withdrawal and refiling, and (3) establish
penalties for non-compliance.\11\
---------------------------------------------------------------------------
\11\ Ibid, p.8.
---------------------------------------------------------------------------
The current definition of what foreign investment may
constitute a threat to national security should be formally
incorporated into the CFIUS process. Leaving ``threat''
undefined in the legislation keeps the door open for misusing
the process to erect protectionist barriers to foreign
investment. The CFIUS process is solely concerned with
identifying the national security risks of foreign investment.
CFIUS should not be used as a vehicle for conducting industrial
policy.
Conclusion
A strong economy, bolstered by free trade and investment, is a
pillar of national defense. The Bush Administration's National Security
Strategy correctly identifies ``free markets'' as the key to a secure
America and a necessary component of our national security strategy.
The notion that merely precluding foreign ownership of U.S. assets
offers a measure of security or saves American jobs is flawed.\12\
Erecting barriers to foreign investment would stifle innovation, reduce
productivity, undermine economic growth and cost jobs--without making
America any safer. The government's role is not to decide how the
marketplace operates, but to perform due diligence to ensure that vital
national interests are looked after.
---------------------------------------------------------------------------
\12\ James J. Carafano, Tim Kane, Dan Mitchell, and Ha Nguyen,
``Protectionism Compromises America's Homeland Security,'' Heritage
Backgrounder No. 1777, July 9, 2004.
---------------------------------------------------------------------------
Thus, improving the transparency of the CFIUS process is
appropriate; provoking a wave of anti-trade, anti-investment policy is
not. Reform should address the heart of the CFIUS problem--appropriate
reporting and consideration of investment by government-owned firms--
without opening the door to protectionism and without chancing the
economic and political consequences of politicizing foreign investment
in the U.S.
Protectionism would endanger U.S. prosperity--the very cornerstone
of security--as well as strain relationships with important allies in
the war on terror, and make it more difficult to use open markets to
spread American values and bolster U.S. interests around the world. A
successful strategy for improving national security must include an
ongoing commitment to free trade and investment policies.
Thank you for the opportunity to address this vital issue.
Mr. Rogers. I thank you, Ms. Markheim.
The chair now recognizes Mr. Eizenstat for any statement he
may have.
STATEMENT OF THE HONORABLE STUART EIZENSTAT, PARTNER AT
COVINGTON AND BURLING AND FORMER DEPUTY SECRETARY OF THE
TREASURY
Mr. Eizenstat. I appreciate the bipartisan way in which
this committee is proceeding. We are at a strategic crossroads
on international investment around the world, and we live in
what threatens to be a protectionist era.
There is a clear and present danger that the recent Dubai
Ports World controversy will be used as a platform to
fundamentally change the rules governing foreign investments in
the United States in ways that will in my opinion threaten
investments that are a lifeblood for a healthy economy.
Little direct foreign investment comes from the Middle
East. Ninety-four percent of the foreign assets in America are
owned by the companies from 25 OECD industrialized democracies,
and 73 percent of all foreign investments in the U.S. are made
by European companies. At a time when we are all concerned
about outsourcing, foreign investment represents a vote of
confidence, in-sourcing in the United States.
In-sourcing foreign companies employ more than 5 million
people, and at a time when our manufacturing employment is
hemorrhaging, 35 percent of all foreign investment is in the
manufacturing sector. When we have a 7 percent current account
deficit, we need to keep the arteries of foreign investment
open to fund this record deficit.
As former ambassador to the European Union, under secretary
of commerce, under secretary of state and deputy treasury
secretary, I want to make one point very clear. That is, what
you do in the next several weeks will reverberate around the
world. It will not be isolated. Congressional action to tighten
restrictions on foreign investment in this country will invite
and encourage similar action abroad. This is not an idle
concern.
Already in response remarkably to PepsiCo's attempt to buy
Group Danone, which manufactures Dannon yogurt, the prime
minister of France called the Dannon Group a jewel of French
industry that had to be defended, and his government has
proposed legislation establishing 11 strategic sectors to be
shielded from foreign investment.
France is not alone. Spain, Poland and Germany all have
restrictions. President Putin has recently proposed a new law
to protect what he called ``strategic industries'' in Russia
from foreign investment, and China has many restrictions
already in important sectors.
We obviously should never compromise national security, but
please realize that any restrictions you impose on foreign
investments in the U.S. will invite similar restrictions on our
companies investing abroad.
I will also ask you to recognize as you look at the
legislation that even now, because of the aftershocks from
Dubai Port World, that the administration is changing in a
profound way, as is the private sector, the way in which the
CFIUS process is proceeding. Applications are being filed by
companies that would have never thought that there was any
national security concern.
In addition, more of the CFIUS cases are going to the
second 45-day phase simply because of fear that there will be
political criticism, even though few of them have national
security implications. Senior officials are more directly
involved now than ever before.
I believe that the fundamental principle that should guide
you as you look at the legislation is that CFIUS should be
given by the Congress all the tools and all the time to
identify, scrutinize and act upon the tough cases that present
real national security issues, while ensuring that the
overwhelming number who do not can proceed efficiently with a
process that will not be clogged down.
With few adjustments, I believe that the reform bill before
the House Financial Services Committee that has been
cosponsored by Chairman King and I believe Congressman Thompson
has also been involved in this, but I know Congressman Crowley
and Maloney have as well, will do much to restore confidence in
the integrity of CFIUS, reassure our global allies, but at the
same time keep America open for business.
Having said that, permit me to briefly suggest a few
modifications that the committee might consider if it gets a
sequential referral from the Financial Services Committee to
this legislation.
First, I understand the political concerns about
government-owned companies, but all government-owned companies
are not created alike. And yet this legislation, like the
Senate legislation, lumps all government-controlled companies
together and would impose additional time requirements upon
them.
Since time is money, it puts them at a disadvantage. Now,
certainly there are certain government-controlled companies
that are subsidized or from less friendly governments that
should go into that type of extended process, but there are
others from friendly governments which operate purely by market
principles and shouldn't be arbitrarily lumped together with
government-owned firms that otherwise raise national security
concerns. Therefore, optimally all transactions by companies
that operate on market principles and don't raise national
security concerns, should go through a 30-day review.
Second, I understand the desire for additional
accountability. Having served at senior levels in three
departments, may I say that the requirement that secretaries or
deputy secretaries at Treasury and Homeland Security should
personally approve and sign each and every review and
investigation is unnecessary. It will create bureaucratic
delays and overload CFIUS for those cases where it ought to be
focusing senior-level attention.
Third, CFIUS should never act if the director of national
intelligence doesn't have adequate time to analyze and correct
intelligence relating to a particular transaction. However, by
creating, as the legislation does, a 30-day minimum for the
DNI's intelligence review and requiring that the DNI review be
completed no less than 7 days before the end of the CFIUS
review period, the bill effectively establishes a de facto 37-
day process even for transactions raising no national security
issues, and I hope this can likewise be attended to in the
legislative process.
And last, I believe that the existing review and
investigation periods are appropriate for CFIUS to do its work.
If an extension is necessary, this bill gets it right. Instead
of adding it to the front end, put it at the back end, and that
is a better way of proceeding.
The last point is critical infrastructure. This has become
a very sensitive issue, and of course something that this
committee is particularly concerned about. But what may be
important to protect critical infrastructure from terrorism is
a very different set of issues from what should be involved in
the CFIUS process for foreign investment.
There are three approaches. The first is offered by
Chairman Hunter in H.R. 4881, which essentially would prohibit
foreign investment in critical infrastructures defined so
broadly that 25 percent of the entire U.S. economy would be
walled off. This is a duplication of what French Prime Minister
Villepin is doing. I cannot conceive that we would want to go
down the French road. They have proven that they do not have
the kind of viable, flexible economy we do, and we hardly
should be emulating what the French prime minister is doing.
The Senate bill, the Shelby-Sarbanes bill, creates a de
facto presumption that all foreign investment in critical
infrastructure creates a security risk and also should go to
the 45-day period, and I think this is ill-advised. The bill
that Chairman King and Congressman Crowley and others have
cosponsored has it right. It requires CFIUS to consider whether
a public transaction has a national security-related impact on
critical infrastructure in the U.S. as a factor in
deliberations, and that is the way it should go.
I would also suggest to members of this committee that
additional work needs to be done by this committee with the
administration to define what is meant by ``critical
infrastructure.'' There are varying definitions in the Patriot
Act and by the Department of Homeland Security. Before one
legislates in this area, we ought to make sure we know what we
mean by ``critical infrastructure.''
So let me close by applauding your contribution to the
process. I believe that Chairman King and Ranking Member
Thompson have done a great service by taking a very careful
bipartisan look, and I will be glad to take your questions.
Thank you.
[The statement of Mr. Eizenstat follows:]
Prepared Statement of Hon. Stuart E. Eizenstat \1\
Chairman King, Ranking Member Thompson and Members of the
Committee:
Thank you for the opportunity to testify today. It is a privilege
to appear before you. I applaud your leadership, Mr. Chairman, and that
of Ranking Member Thompson, on the vital issues affecting our nation's
homeland security. In particular, I want to thank you for your
contribution to the careful, considered, prudent approach that the
House of Representatives is taking towards reform of the Exon-Florio
Amendment and CFIUS. This is a very heated political environment in an
election year. Because of your leadership, I believe that the House is
moving towards adopting tough, effective, and truly bi-partisan
legislation that would restore Congress's confidence in CFIUS, enhance
protection of national security, and maintain the United States'
longstanding open investment policy.
---------------------------------------------------------------------------
\1\ Stuart E. Eizenstat, was President Carter's Chief White House
Domestic Policy Adviser, and in the Clinton Administration was U.S.
Ambassador to the European Union, Under Secretary of Commerce for
International Trade, Under Secretary of State for Economic, Business &
Agricultural Affairs, and Deputy Secretary of the Treasury, as well as
Special Representative of President Clinton on Holocaust-Era Issues. He
heads the international trade and finance practice at Covington &
Burling, and has and continues to represent U.S. and foreign companies
before CFIUS. Mr. Eizenstat is also co-chair of the European American
Business Council, an organization with 58 American and European
businesses committed to an open investment climate, and is appearing on
the Council's behalf.
Importance of Foreign Direct Investment
We live in what threatens to be a protectionist era. There is a
clear and present danger that the recent Dubai Ports World controversy
will be used as a platform to fundamentally change the rules governing
foreign investments in the U.S., in ways that will threaten investments
that are a lifeblood for a healthy economy.
We need to be clear-eyed about our vital national interests. Little
direct foreign investment comes from the Middle East: 94% of foreign
assets in America are owned by companies from the 25 industrialized,
democratic OECD member countries, and 73% of all foreign investments in
the U.S. are made by European companies. Our traditionally open
investment climate has greatly benefited the American people. At a time
when concerns are raised about the ``outsourcing'' of jobs abroad,
foreign investment represents ``in-sourcing,'' a vote of confidence by
foreign firms and investors in the openness, flexibility and strength
of the U.S. economy.
In-sourcing foreign companies employ more than five million
Americans, some 5% of private industry employment. At a time when U.S.
manufacturing employment is hemorrhaging, almost 35% of the jobs
created by foreign firms in this country are in manufacturing. Foreign
direct investment often saves a struggling American company, which
might otherwise be shut down or moved abroad. Foreign-owned U.S.
operations account for 21% of our total exports and in 2004 plowed $45
billion in profits back into the American economy. Foreign-owned
affiliates purchase 80% of their intermediate components from U.S.
firms; they also spend $30 billion on R&D and over $100 billion on
plant and equipment annually in the U.S.
Moreover, we also need to keep the arteries of foreign investment
open to fund our record current account trade deficit, now at 7% of our
GDP, and compensate for our low savings rates; foreign capital flows
keep long-term interest rates lower.
Global Impact of CFIUS Reform
As Congress looks at changing the rules for foreign investment I
hope you will recognize that your actions will reverberate around the
world. Congressional action to tighten restrictions on foreign
investment in the United States could invite similar action abroad,
limiting opportunities for outward investment by American companies.
This is not an idle concern:
Last summer, French politicians reacted to mere rumors
of PepsiCo's potential interest in acquiring Danone, the French
yogurt and water company. French Prime Minister Dominique de
Villepin made the extraordinary statement that ``The Danone
Group is one of the jewels of French industry and, of course,
we are going to defend the interests of France.'' The French
government has followed up by publicly opposing the purchase of
the steelmaker Arcelor by Mittal Steel, and pushing for the
recent merger of the water utility Suez and the national gas
company GDF to pre-empt an Italian energy company from
acquiring Suez. Most recently, the de Villepin's government has
proposed legislation establishing a list of eleven ``strategic
sectors'' that will be shielded from foreign investment.\2\ It
is hard to see how yogurt is a strategic industry.
---------------------------------------------------------------------------
\2\ See Patrick Sabatier, Globalization a la carte, Int'l Herald
Trib., May 18, 2006.
---------------------------------------------------------------------------
France is not the only European nation engaging in
such protectionist machinations. Since the beginning of the
year, the Spanish government has prevented a German company
from taking over a Spanish energy concern; the Polish
government has blocked Italians from acquiring several Polish
banks, while Italy has done the same for some time; and Germany
continues to insist on its ``Volkswagen law,'', which insulates
its auto industry from foreign competition.\3\
---------------------------------------------------------------------------
\3\ Id.
---------------------------------------------------------------------------
In his State of the Union speech, President Putin
called for a new law to protect ``strategic industries'' in
Russia, including the oil sector. A draft of that law is
expected to be put forward shortly.
The Canadian Parliament is now considering amendments
to the Investment Canada Act to permit the review of foreign
investments that could compromise national security.
China continues to restrict investment in a number of
important sectors.
Permit me to give you a recent, and more tangible, example in which
a foreign government's proposed restrictions on U.S. investors seems to
be directly linked to security commitments imposed by CFIUS on a
company from that country. Specifically, the Indian government,
recently announced its intention to impose extremely broad security
restrictions on foreign investments in the telecommunications sectors.
These security restrictions were announced alongside a proposal to
raise the ceiling on permitted foreign investment in the
telecommunications sector, from 49% foreign ownership to 74% foreign
ownership. In this case, it appears that the Indian government's
proposed new restrictions were provoked in part by the experience of an
Indian company, VSNL, which itself had a difficult time clearing CFIUS,
and ultimately signed a Network Security Agreement related to one of
its investments in the United States. In a letter publicly filed with
Indian regulatory officials, VSNL wrote, ``[we] propose that TRAI [the
Indian regulatory authority] consider whether, in the interests of a
level competitive playing field as well as regulatory symmetry, a
similar security agreement process should exist in India for U.S. and
other foreign carriers who desire a license to provide domestic or
international services.'' VSNL further wrote, ``While we certainly do
not recommend that the Indian Government force foreign carriers to wait
as long as VSNL has been made to wait for its license to enter the U.S.
telecommunications market, we believe that the existence of these
agreements in India and other countries will have a beneficial result
by moderating the willingness of the U.S. government to impose
burdensome conditions and requirements in their own security
agreements, which of course hinder the ability of VSNL and other
foreign carriers to compete fairly against U.S. carriers who are not
subject to such requirements.'' \4\
---------------------------------------------------------------------------
\4\ Edward M. Graham and David M. Marchick, US National Security
and Foreign Direct Investment 164 (2006).
---------------------------------------------------------------------------
Mr. Chairman, this letter proves the old maxim, ``what goes around,
comes around.'' We should never compromise national security, but
Congress needs to realize that restrictions imposed on foreign
companies in the United States will invite similar restrictions in
foreign countries against U.S. companies. We need to be careful not to
encourage other countries to impose restrictions that hurt American
investors, nor should we chill the foreign investment that is so vital
to the American economy.
Comments on H.R. 5337
I believe that the fundamental principle that should guide Exon-
Florio reform is to ensure that CFIUS has all the tools and all of the
time it needs to identify, scrutinize, and act upon the tough cases
that present real national security issues, while ensuring that CFIUS
has the necessary flexibility to recognize and efficiently process the
majority of transactions that present no national security concerns.
Ensuring that the overwhelming majority of transactions that do not
raise national security issues can obtain Exon-Florio approval in 30
days is essential to avoid discriminatory treatment of foreign
investors that would chill the investment our economy needs. American
companies that make acquisitions need to secure antitrust approval
under the Hart-Scott-Rodino Act, which also has an initial 30-day
review period. Preserving two 30-day, parallel regulatory processes for
both domestic and foreign acquisitions of U.S. companies ensures that
foreign bids for U.S. companies are not discounted or ignored because
of longer regulatory timeframes.
With a few adjustments, I believe that the CFIUS reform bill
currently before the House Financial Services Committee, and that you
co-sponsored, Chairman King, is the right way to reform Exon-Florio.
The bill will implement structural reforms that address Congress's DP
World-related concerns, restore confidence in the integrity of the
CFIUS process, and reassure our global allies and partners that America
is still open for business. Specifically, the bill facilitates
identification of the tough cases by requiring CFIUS to consider
additional factors during the review and investigation process,
including whether a transaction has a security-related impact on
critical infrastructure.
The House bill ensures that CFIUS will have the information it
needs by giving the Committee greater investigatory authority. It
defines the appropriate role of the intelligence agencies as an
information resource, as opposed to a policy role. It enhances
accountability for both CFIUS and the transacting parties by requiring
certification of notices, reports, and decisions, and by establishing
procedures for control and continued monitoring of withdrawn
transactions. The bill ensures CFIUS is focused and competent to
fulfill its mission by maintaining Treasury leadership of the Committee
and authorizing the designation of competent agencies to take the lead
on particular transactions: investments in critical infrastructure, for
example, should principally be reviewed by the Department of Homeland
Security. It maintains voluntary, as opposed to mandatory, notices. And
it enhances transparency of the process by requiring CFIUS to collect
and share more data, on an aggregate basis, through semi-annual reports
to Congress, without creating unduly burdensome notice and reporting
requirements that will politicize the process or risk leakage of
business proprietary data. Congress needs to recognize that imposing
excessive reporting requirements on CFIUS may actually complicate and
distract CFIUS's focus from its principal mission of protecting U.S.
national security through efficient review of foreign investments. The
House bill's provisions represent important substantive and procedural
improvements to the CFIUS process.
I do, however, have several concerns with specific provisions of
the bill in its current form.
First, I understand the dynamics that led to the provision in the
bill tightening the so-called ``Byrd Amendment'' for government-owned
companies, particularly in the wake of the Dubai Ports Controversy. In
my view, acquisitions by some government-owned companies raise unique
national security issues and should receive enhanced scrutiny. U.S.
companies are put at a competitive disadvantage against those
government-owned companies that receive subsidized or concessional
government financing. But not all government acquisitions create the
same national security risk, and CFIUS should have discretion to
distinguish between transactions that raise issues and those that do
not. Companies affiliated with friendly governments which operate by
market principles should not be arbitrarily lumped together with
government-owned firms that otherwise raise substantial national
security concerns. Optimally, all transactions that involve parties
that operate on market principles and do not raise national security
concerns should be considered by CFIUS in the same, existing 30 day
review period. But if political realities are such that mandatory
investigations of all foreign government-controlled transactions are
necessary, I think it would be useful for Congress to clarify the
intent of the legislation, perhaps in its report, that CFIUS can allow
such acquisitions to go straight to the investigation stage and that
CFIUS has discretion to close the investigation if no real issues exist
or if any national security concerns have been mitigated.
Second, I also understand Congress's desire for additional
accountability. But the requirement that the Secretaries or Deputy
Secretaries of both the Treasury and Homeland Security personally
approve and sign each and every review and investigation may create
bureaucratic delays and impede CFIUS's ability to efficiently implement
Exon-Florio. Perhaps the Congress could explore ways to require a high-
level sign-off for transactions that raise real national security
issues, while allowing an Undersecretary or Assistant Secretary to
approve other transactions. From my own experience in public service,
very important decisions are regularly made at the Undersecretary and
Assistant Secretary level.
Third, CFIUS should never act if the Director of National
Intelligence does not have adequate time to collect and analyze
intelligence relating to a particular transaction. But again, the
policy underpinning CFIUS reform should be to create a process that is
tough enough for the complex cases and flexible enough for the easy
cases. Some intelligence reviews might take 30, 45 or even 60 days.
Reviews of companies that frequently go through the CFIUS process could
simply be updated in a matter of days. But by creating a 30-day minimum
for the DNI's intelligence review, and requiring that the DNI review be
completed no less than 7 days before the end of the initial CFIUS
review period, the bill establishes a de facto 37 day process, even for
transactions that raise no national security issues. Time is money; the
longer a deal takes to approve, the more it costs and the more
variables can affect the underlying transaction. I am confident that a
provision can be fashioned to allow the DNI to do his job well without
slowing down the entire process with a requirement for extended
analysis of cases that present no national security concerns.
Finally, I believe the existing review and investigation time
periods are appropriate for CFIUS to do its work. But if some extension
is inevitable, it is much preferable to add additional time to the end
of the investigation period, as the bill does, rather than extending
the process after the initial 30-day period. Thus, the Senate Banking
Committee bill would extend the initial 30 day review period if only
one CFIUS agency requests it. This House bill would allow an extension
of the 45 day investigation period if requested by either the President
or two-thirds of the agencies involved in the CFIUS process. Generally,
CFIUS can determine in the initial 30 day period if a transaction is
likely to cause significant concerns from a national security
standpoint.
Protection of Critical Infrastructure
The final subject I would like to address is protection of
``critical infrastructure.'' I know that this is a topic that this
Committee has a particular interest and expertise in, and that
``critical infrastructure'' has also become a significant issue in the
debate over CFIUS reform. It will continue to be an important subject
as any House bill moves into conference committee work with the Senate.
The focus on protection of critical infrastructure is a relatively new
and evolving national security objective, and may have different
implications in different regulatory contexts. CFIUS needs the
flexibility to focus its scarce attention, time, and resources on those
foreign direct investments that create real national security risks.
Forcing CFIUS to scrutinize every foreign investment in critical
infrastructure will compromise CFIUS's ability to focus on the
transactions that matter from a national security perspective. Three
different approaches have been proposed with respect to the protection
of ``critical infrastructure.''
H.R. 4881, offered by Chairman Hunter and other Members, would
essentially prohibit foreign investment in critical
infrastructure unless the particular investment is put in a
``US Trust'' run by American citizens and walled off from the
foreign parent. If the Department of Homeland Security's (DHS)
current list of ```critical infrastructure'' activities were
used, close to 25 percent of the U.S. economy would be off
limits to foreign investment under this proposal. This bill is
the mirror image of Prime Minister Villepin's legislation
shielding 11 sectors of the French economy from foreign
investment, which I described earlier. I believe that the last
thing we need to do with CFIUS reform is emulate the French
government and move our economy closer to the French statist
model.
The Senate bill, offered by Chairman Shelby and
Senator Sarbanes, requires that foreign investments in critical
infrastructure go to the ``investigation'' stage unless CFIUS
determines that ``any possible impairment to national security
has been mitigated by additional assurances during'' the review
period. This approach creates a de facto presumption that all
foreign investment in critical infrastructure creates a
security risk because it must go to an ``investigation'' unless
the risk is mitigated. In my view, some investments in critical
infrastructure do create real national security risks; but
other investments should not even be filed with CFIUS because
they create no risk whatsoever.
The bill you co-sponsor, Mr. Chairman, requires CFIUS
to consider whether a ``covered transaction has a national
security-related impact on critical infrastructure in the
United States'' as a factor in its deliberations. I think you
have it right. It should be a factor CFIUS should consider. How
significant a factor it should be will vary on a case-by-case
basis.
One of the reasons that your approach makes sense is because the
focus on protection of critical infrastructure is a relatively new and
evolving security objective. In contrast to the area of foreign
investments in the defense sector, an area where DOD has extensive
institutional experience and protocols dealing with what aspects of
foreign investments present security issues (and which do not),
``critical infrastructure'' remains a relatively fluid regulatory
concept. Additional work needs to be done, in my view, to define what
exactly is meant by critical infrastructure. For example, the Patriot
Act defines ``critical infrastructure'' to be
``[S]ystems and assets, whether physical or virtual, so vital
to the United States that the incapacity or destruction of such
systems and assets would have a debilitating impact on
security, national economic security, national public health or
safety, or any combination of those matters.'' \5\
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\5\ Section 1016(e) of the Patriot Act, codified at U.S.C. 5195c.
---------------------------------------------------------------------------
This definition creates a high threshold and implies a relatively
narrow list of assets that would ``have a debilitating effect'' on
security. By contrast, the Department of Homeland Security has
identified twelve extremely broad sectors that it considers to be
critical infrastructure, including agriculture and food, water, public
health, emergency services, the defense industry, telecommunications,
energy, transportation, banking and finance, chemicals, postal services
and shipping, and information technology.\6\ This definition may work
for physical protection of critical infrastructure; it does not work
for foreign investment considerations.
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\6\ See National Strategy for the Physical Protection of Critical
Infrastructure and Key Assets, (February 2003), available at
www.whitehouse.gov (last visited May 20, 2006); HSPD-7 (December 2003),
available at www.whitehouse.gov (last visited May 20, 2006).
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But beyond specifying these sectors, the Department of Homeland
Security has not publicly identified the types of companies, or even
subsectors, for which acquisition by a foreign firm would be deemed a
high risk to national security. Nor has anyone explained why foreign
ownership of these sectors would necessarily create a national security
risk. Thirty percent of value added in the U.S. chemical sector is
already produced by U.S. affiliates of foreign owned firms. In the
energy sector, it would seem fairly clear that foreign acquisitions of
US nuclear energy companies should be reviewed by CFIUS. What about
foreign acquisitions of US firms operating in other segments of the
energy sector? Many foreign companies own electric distribution
companies. Do these raise national security issues? What about foreign
ownership of a wind farm? Similar questions certainly apply in the
other sectors, including the food, transportation (including ports),
and financial sectors, where foreign ownership of US firms is common.
In my view, the Administration and Congress should work together to
determine how best to protect critical infrastructure, regardless of
who owns a particular company. Security policies and guidance could be
developed on a sector-by-sector basis. A baseline level of security
requirements should be established. If there are particular national
security issues associated with foreign ownership in a particular
asset, CFIUS is well equipped to mitigate that risk--or block the
investment.
In sum, until policies and doctrines with respect to critical
infrastructure have been further developed, it is both unsound and
unnecessary to do anything beyond adding ``critical infrastructure'' as
a factor that CFIUS should consider. Creating an outright ban on
foreign investment in ``critical infrastructure'' would both harm job
creation and undermine national security, because foreign investment in
these sectors has both increased research and development and spurred
additional competition and innovation. Further, it would be unwise to
create a presumption that foreign investment in critical infrastructure
creates a national security risk. Rather, CFIUS should be given the
discretion to deal with these issues on a case-by-case basis, examining
both the trustworthiness of the acquirer and the sensitivity of the
asset being acquired.
Conclusion
Let me close by applauding your contribution to this reform
process, Mr. Chairman and Ranking Member Thompson, along with the
efforts of so many of your colleagues. Doing Exon-Florio reform right
is critically important. The open character and continued vibrancy that
define our national economy is at stake. These are among the
fundamental characteristics of our great nation, which I know this
Committee is dedicated to securing. The bi-partisan bill that you are
co-sponsoring is the correct approach to the problem at hand. I am
grateful for the opportunity to testify and look forward to working
with you as you deliberate on this important subject.
Mr. Rogers. I thank both of you. Those are very good
opening statements.
I would make the point that I agree wholeheartedly with
your observation about the French. I don't think we ought to be
emulating France in anything. But I do want to talk a little
bit about the length of the review period.
In the previous panel, you heard Mr. Lowery talking about
how there was a relatively small universe of folks that brought
these petitions, and that they had been encouraging them to
pre-file early. What do you think we can do to facilitate this
pre-filing?
Both of you have addressed this length of review as an
issue. I would ask you, Mr. Eizenstat, what do you think we can
do to encourage pre-filing?
Mr. Eizenstat. It is already being encouraged, but
certainly because all those representing companies before the
CFIUS process now realize that if they don't go through a pre-
filing formula where they sit down before they file to find out
where the kinks are, where the problems are, whether the
transaction is likely to pass muster, they know that they face
in this current environment the likelihood of rejection or at
the very least going to the 45-day period.
I certainly would have no opposition at all, quite the
contrary, to committee report language or even bill language
which would encourage companies to do this pre-filing so that
you don't jam the CFIUS process and force them to act within 30
days. The fact is, as Mr. Baker and Mr. Lowery said, that
already most transactions go through a much longer pre-filing
process before the first 30-day review process. But if you
wanted to reinforce that and encourage it, it certainly would
be a sound thing to do.
Mr. Rogers. In your opinion, if we did put in some bill
language that required a pre-filing period, what would you
think the appropriate time length would be?
Mr. Eizenstat. I am not sure I would require a pre-filing
period, because then you are adding additional time. If you
give 30 days or 45 days, then the CFIUS process will take that
long, and you don't want to, again, have elongated processes
for most of these cases which don't really involve national
security. So I would simply encourage the pre-filing with
sufficient time for the intelligence agencies to make an
initial determination.
Mr. Rogers. What is a sufficient time for the DNI?
Mr. Eizenstat. It can vary. I think sometimes 30 days;
sometimes 45 days; sometimes 15 days. It depends on the
complexity of the issue. But again, what is happening now is
many transactions are being filed simply out of fear that with
the current political environment, the transaction is going to
be turned down and unscrambled later on national security
grounds when there is no national security interest.
So rather than put a specific time, I would simply
encourage the pre-filing to give the agency sufficient time
before the 30-day review process starts.
Mr. Rogers. Ms. Markheim, I want to talk to you for a
minute about congressional notification. In a recent Web note
you coauthored with James Carafano, you argue that any
congressional notification prior to approval of the acquisition
would ``politicize the approval process.''
In the intelligence community, select Members are briefed
on highly sensitive programs. What would the downside be to
having a similar process in place whereby the chairmen and
ranking members from select committees were briefed prior to
approval? Your thoughts on that?
Ms. Markheim. The concern that we have with that is fairly
simple. These are business transactions. And frankly, at time
it might be the case that American firms, a U.S. firm has lost
out in the fight to take over that transaction or what have
you. By incorporating Congress into the process, by pre-
notifying them or including them along with the investigation,
that opens the door to allowing information, proprietary data,
what have you, to potentially be leaked or be used in a way
that would then be counterproductive to the most effective
result for what we would hope for from foreign investment
coming in.
Our concern wasn't so much that no one should be pre-
notified. Our concern was that the breadth of or the amount of
notification would extend such that it could actually cause a
threat to allowing the investigation to be conducted
appropriately. If the Congress were to become a part of the
process, ideally the members that would be notified of this and
briefed on this would be kept to an extreme minimum.
Mr. Rogers. That is my point. If it was chairmen and
ranking members, that is pretty restrictive of select
committees. What I found striking is you use the word that it
would ``politicize'' the process. In my view, if that practice
had been used in this Dubai Port situation, you would have
defused a political problem.
Ms. Markheim. Aside from the Dubai Ports issue, in general
this could politicize the problem simply because members are
bringing in their own interests and their own incentives that
are part of their agenda. By opening this door to allowing
their input into the investigation, that might taint the
overall objective way the CFIUS does handle investigations now.
I am not saying that it would, but that it could. This is
looking at the process over time, not just today and in one
instance, but over all types of cases that could come up.
So we could see down the road a reversal of what happened
when we saw Pepsi Company looking at buying Danone in France.
What if this were reversed? If there was some sort of concern
of a French company buying Pepsi from America would be a
problem, that could become an issue that it wouldn't
necessarily become had CFIUS remained external from Congress.
Mr. Rogers. I thank you. My time has expired.
The Chair recognizes the Ranking Member of the Full
Committee, Mr. Thompson of Mississippi.
I just went blank. I am looking at your name. Thank you.
Mr. Thompson. It might be that French wine.
[Laughter.]
Mr. Rogers. That is right.
[Laughter.]
Mr. Thompson. Thank you both, witnesses.
Mr. Eizenstat, you talked a little bit about how it might
be necessary to have a parallel process going for the process
of review of foreign and domestic acquisitions. Do you foresee
the time, especially for foreign transactions, that we might
need to provide a little more time for that process to take
place?
Mr. Eizenstat. No, sir, only if there is a national
security threat and it goes into the second phase. Otherwise,
the 30-day period should be the same. Under the Hart-Scott-
Rodino, a domestic company has to go through that process with
the Justice Department to see if there is any competition
issues, any antitrust issues.
The CFIUS process has been structured to try to give
foreign companies that same window in most cases. In 90
percent, 95 percent of the cases, Congressman Thompson, that is
sufficient. And that 10 or 15 percent where there is a
sensitive issue, the additional 45 days is appropriate.
I want to just make another point, if I may. With our
current account deficit, that means that we are sending a
tremendous amount of excess dollars abroad, petro-dollars to
the Arab countries, additional dollars to the Chinese. What are
they going to do with those dollars? There are two things they
can do with them. One is they are investing them in treasury
bills, and that helps lower our interest rates.
It also means, however, that huge percentages of our debt
are held by foreign countries that may decide to unload them at
some point. It is far better to have them recycle those excess
dollars that we are sending abroad for everything from T-shirts
to cars, back into fixed assets in the United States where it
actually creates jobs. That is why we have to be so careful not
to have different processes for foreign acquisitions of U.S.
assets, except again in the rare situations where there is a
national security threat, than domestic acquisitions.
Mr. Thompson. But you do see that the public would want to
know that there is an assurance that this process takes into
consideration any extenuating circumstances on the acquisition
itself. I am talking about the Dubai dilemma that more or less
precipitated a lot of discussion here on the Hill, and whether
or not the process that was used in that situation provided as
much transparency as was needed, because when questions started
bubbling up, it was not as clear-cut in the eyes of the public
as one would want.
I think for whatever reason we have to have a process that
is thorough and complete, but also has to stand the scrutiny of
the public at some point. I think part of it is the public felt
that the process was a little less transparent than perhaps one
would want.
Mr. Eizenstat. You are quite right. I think that the
Treasury and other departments, and I say this in a completely
bipartisan way because I sat in the same seat that they did,
and I know the pressures that they were under. I think they
realized that they didn't do the kind of base-touching that
they should of, and that had they done so, and had they
explained the transaction; had they explained that this was not
the ownership of a port; it was the ownership of a terminal,
and done a more thorough education process, that we wouldn't be
sitting here today.
So yes, the public has a right to be concerned about
national security. The current CFIUS process provides for that.
I think with the kinds of additional provisions that you have
put in here, by and large in the House bill, you are giving an
additional assurance without at the same time shutting down
foreign investment in a way that I fear the Senate bill will
do.
Again, I think even here, as I have suggested with
government-owned companies, don't consider all government-owned
companies the same. If a British company is owned by the
government, or from another ally, and they are run purely by
private market principles, they shouldn't be necessarily
automatically extended into the 45-day period unless there is a
real national security threat. So I think you are headed in the
right direction. You are going to give more transparency to the
process.
But I want to say, as Ms. Markheim said, one has to be very
careful about the notice requirements. What is good about the
House bill is the notice requirements are given after the deal
is done, so you could judge and then grill the agencies if they
didn't do their job. But by doing it, as the Senate bill does,
before the deal, what it will encourage, and I can assure you
as soon as I am sitting here that it will, the losing bidder in
an acquisition will go to his member of Congress, his governor,
and lobby you to try to block that deal. That politicizes the
investment process in ways we don't want.
Mr. Thompson. Thank you very much.
I yield back.
Mr. Rogers. We need to ask for unanimous consent to bring
up Representatives Blunt and Maloney out of order. They are
going to be out of here before 4 o'clock. I know we would like
to hear their statements and ask them some questions before
they have to leave. So I would ask unanimous consent to call
them up out of order.
Mr. Eizenstat. Should we stay, or are we excused?
Mr. Rogers. No, you are not excused. We would like for you
to move back one row. We want to ask you some more questions.
There being no objection, the next panel is called up.
Thank you. The Chair now calls on Mr. Blunt from Missouri
for any statement he may have.
STATEMENT OF THE HONORABLE ROY BLUNT, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSOURI
Mr. Blunt. Mr. Chairman, thank you, and thank you for the
consideration the committee, based on the other schedule we are
on, and certainly I am appreciative of the assistance we are
all getting from the testimony you heard and the questions
being answered by the people who were at the table before and
will be again.
I am also very pleased to be here with Carolyn Maloney, who
is the ranking member on the subcommittee in Financial
Services. Ms. Maloney, along with the chairman of that
subcommittee, Ms. Price, and Mr. Crowley and I, were the
principal sponsors, are the principal initial sponsors of this
legislation, but Chairman King and Chairman Hoekstra and others
have joined us. I certainly appreciated the positive comments
made about our legislation by the earlier witnesses.
Obviously, this is a process where we want to have input
from outside. I do think that the legislation we have filed is
a good response to what we all saw happen, and I think was
well-explained again by the earlier witnesses, in the Dubai
Ports situation. I thought particularly at that time when the
chairman of this committee, along with the president, appeared
to learn the information he got from the news media that there
needed to be a new look at this. Obviously, in a post-9/11
world, the world has changed. At the same time, protectionism
is not the answer, getting into a situation where other
countries decide they have to reciprocate by making it
difficult for American companies to invest in their country is
not the answer.
I think that the work that Chairman Price and Congresswoman
Maloney and Congressman Crowley and I have done is a reasonable
response and meets the needs of a post-9/11 world without
providing the troubles that we could get into if we go further
than we need to to secure the country.
Let me make three or four points here, and then I am sure
we want to hear from Carolyn and have some time to answer
questions.
I think, as has been stated earlier today, our legislation
really clarifies the so-called ``Byrd rule'' that was in CFIUS.
I do think there is a difference in a government-owned entity
and that that 45 extra days is a reasonable thing to expect.
Government-owned entities have many advantages in an
acquisition. The extra 45 days may be a slight disadvantage to
them, but I think generally they have advantages and this 45
days will not offset those advantages, and clearly would have
provided the additional time that Dubai Ports World did not
have or that deal didn't take.
Secondly, what happened exposed a lack of accountability. I
think because of that, we maintained the structure where the
secretary of the treasury is the chairman of CFIUS, but we have
added to that as the vice chair the secretary of homeland
security. We have required that that be delegated no lower than
the deputy secretary level, so this is clearly a high-level of
accountability in those two critical departments, and both of
those individuals or their designee have to sign-off on the
CFIUS process as it develops.
We develop a regular order process for notifying CFIUS
records and we record and monitor withdrawals from the process.
Our legislation develops a process for any needed extension of
an investigation. You have a process to extend an
investigation. If there is an investigation, any member of the
CFIUS panel can require the decision be made by the president.
Any member on that panel can say, we don't agree with the
decision that has been made after the investigation, if that
was triggered during the review, and the president has to look
at this. I don't think that will happen often, but clearly it
is important that that capacity be there to happen.
Our legislation establishes a formal analysis by the
director of national intelligence for every transaction. There
is a formal method for tracking and enforcing post-transaction
compliance, where we have asked mitigation to occur. This
legislation for the first time really develops a system where
you follow that mitigation and see that it did occur. We give
formal enforcement authority for compliance to the agreements
in a way that allows that the committee members of the relevant
committees keep track of the general trend.
I do, as Mr. Eizenstat mentioned earlier, the idea that
this is in virtually all cases post-decision, but very
responsive to the committees so the committees have an
opportunity if CFIUS is headed in the wrong direction to say,
look, we don't like the report that we received; we question
these specific moves you are taking; and we want to have that
explained to us further. I think that is the right way to
approach that.
Congressional oversight is more important than a
congressional veto. Involving the Congress too early in this
process I think would be a mistake, and I think the nature of
that mistake has been well explained by the earlier panel
already today.
Lastly, the CFIUS process post-Dubai Ports World will
create a degree of certainty that was not there. This bill
creates statutory protection of proprietary business
information and certainly has the potential to see an extended
investigation when that is necessary. Chairman King and Mr.
Thompson were both actively involved, particularly Chairman
King, before the bill was finally filed. We benefited from
having that input and hope that we continue to have that kind
of a relationship with your committee as this bill moves
forward.
Thank you, Mr. Chairman.
[The statement of Mr. Blunt follows:]
Prepared Statement of Hon. Roy Blunt
Many Americans were outraged when they first learned of the Dubai
Ports World (DPW) deal to take over the management of commercial
operations at six ports along the Eastern seaboard and Gulf of Mexico.
CFIUS, the Committee on Foreign Investment in the United States, an
inter-agency panel designed to review and investigate mergers and
acquisitions from foreign investors taking America's national security
into account, approved the Dubai Ports World acquisition on behalf of
the Bush Administration, yet no cabinet officer was willing to be held
accountable for the approval. Equally concerning, the President learned
of the deal through press reports rather than agency briefings. No one
in Congress seemed to have any answers either. When Homeland Security
Committee Chairman King was caught off guard by the lack of
coordination with Congress, it became clear to me that the CFIUS
process needed to be updated. As you might expect, Congress reacted to
their constituents concerns and voted to scuttle the deal by forcing a
vote on a free standing amendment to the Emergency Supplemental
Appropriations Act.
The attacks of September 11th changed the world we live in. Any
reform in CFIUS must take this into account. Congress has no more
important duty than to ensure the security of our nation. However,
protectionism is not the answer. Chairman Pryce, Congresswoman Maloney,
Congressman Crowley and I have introduced a responsible bipartisan bill
which addresses the problems exposed in the CFIUS process during the
Dubai Ports World incident. Striking the right balance between
protecting America from those who wish to harm us, while preserving our
open engagement with the global economy was our goal. Avoiding
unintended consequences by not creating new burdens for normal business
acquisitions or new diplomatic or business problems for the United
States is equally important.
H.R. 5337 deals specifically with the main political issues the
Dubai Ports World incident exposed.
First, it reaffirms Congressional intent relating to the ``Byrd
Rule'', which mandates a 45-day investigation for companies controlled
by foreign governments. Any state owned enterprise will trigger an
automatic CFIUS investigation. DPW a United Arab Emerites owned
enterprise falls into this category. However, due to the Byrd loophole,
the acquisition failed to trigger a more intensive investigation by
CFIUS. Blunt, Pryce, Maloney, Crowley would solve this problem.
Secondly, DPW exposed a lack of accountability. It was widely
reported that President Bush, and Secs. Snow, Rumsfeld and Chertoff
were all unaware of the CFIUS approval of DPW. H.R. 5337, our
legislation establishes CFIUS in statute and adds the Secretary of
Homeland Security as vice-chair. Additionally, the signature of the
chair (Secretary of Treasury) and vice chair are required for all
decisions. This signature requirement cannot be delegated below the
Deputy Secretary level, ensuring accountability. Blunt, Pryce, Maloney,
Crowley develops a regular-order process for notifying CFIUS; records
and monitors withdrawals from the process; develops a process for any
needed extension of investigation (roll-call votes of 2/3 of
Committee); and after investigation sends the decision to the President
with the dissenting vote of any single Committee member.
Our legislation establishes a formal analysis by the Director of
National Intelligence of every transaction. If for any reason the DNI
is unable to complete its threat assessment within the 30 day review
process, a 45-day CFIUS investigation is triggered.
Additional requirements relating to CFIUS accountability include:
A formal method for tracking and enforcing post-
transaction compliance with mitigation agreements and for
tracking any post-transaction changes in such agreements.
Gives formal enforcement authority for compliance with
such agreements to Committee member with greatest expertise in
subject.
Assures an objective review of a proposal, followed by
certain notification of responsible presidentially-appointed
officials.
Thirdly, DPW highlighted the lack of Congressional oversight in the
CFIUS process. I strongly feel that the CFIUS process should not be
politicized by a Congressional veto. However, certain committees and
Members need to be aware of the impact of foreign investment as it
relates to our national security. H.R. 5337, ensures that notices be
sent to bipartisan Members of leadership and to every committee with
jurisdiction over any aspect of a transaction after each investigation.
Any Member receiving such notice may request a classified briefing on
the transaction. Blunt, Pryce, Maloney, Crowley requires thorough and
regular (semi-annual) reporting to Congress on activities of CFIUS,
including trend analysis of foreign investments and of industrial
espionage or attempts to control a type of asset or sector.
Lastly, the CFIUS process post DPW has created a lack of certainty
and predictability for our potential global business partners. More
than ever it is important that we provide clarity and regular-order
certainty in consideration of applications. H.R. 5337 does exactly this
by mandating statutory protection of proprietary business information
and certainty on the potential for any extensions of CFIUS
investigations.
In sum, H.R. 5337 would have prevented the political fallout
associated with the Dubai Ports World fallout.
1. DPW a state owned enterprise would have automatically
triggered an intensive 45 day investigation by the CFIUS panel.
Unfortunately, no such investigation ever took place.
2. As Chair and Vice Chair, Secs. Snow and Chertoff would have
been required to sign a certification that CFIUS completed and
approved of the DPW deal. The DPW acquisition only rose to the
assistant secretary level.
3. Had just one CFIUS member expressed concerns related to the
DPW transaction, relevant congressional leaders and Committee
Members would have received notification of the approved DPW
deal 15 days prior to Presidential signature. This would have
given Congress the ability to request classified briefings and
learn of the intricacies of the transaction before jumping to
conclusions. In the case of DPW, every Member learned more from
press accounts than from the administration.
Chairman King, thank you for taking a leadership role on this
issue. I appreciate your support of H.R. 5337. Your contributions have
made it much stronger legislation. I would also like to thank Ranking
Member Thompson. It would be easy to allow CFIUS Reform to become a
politically charged issue. It is my hope to continue to work with the
Committee on Homeland Security in a bipartisan fashion to pass a bill
the United States House of Representatives can be proud of.
Mr. Rogers. I thank the gentleman from Missouri.
The chair now recognizes the gentlelady from New York, Ms.
Maloney.
STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW YORK
Mrs. Maloney. Thank you, Mr. Chairman and Ranking Member
Thompson, for inviting us to testify before the committee today
on the bipartisan CFIUS bill that we have introduced with
Majority Whip Blunt and Representatives Price and Crowley.
As a ranking member on the Financial Services subcommittee
that has jurisdiction over the CFIUS process, we have held
three hearings to date on it. At these hearings, we have heard
from the administration, the business community, and experts in
academia about the need to reform the process and their
suggestions on how to accomplish it.
At our hearings, especially the first hearing that focused
on the Dubai Ports World transaction, it was astonishing how
tone-deaf the CFIUS board was as they reviewed national
security concerns related to this transaction. The fact that
CFIUS did not consider critical infrastructure as a factor
potentially impacting national security certainly does not
represent a post-9/11 view of the world and backs up the GAO's
prior finding that CFIUS was too narrowly defined in what
constitutes a threat to national security.
In March following our first hearing, I introduced H.R.
4915. The Committee on Foreign Investment in the United States
Reform Act. This legislation enacts reforms suggested by the
GAO in a report they prepared before the Dubai Ports problem.
So they were very concerned about the problem even before Dubai
Ports.
Following the introduction of this legislation, I was very
pleased to work in a bipartisan manner with the chair of the
committee, Deborah Price and Mr. Crowley and Mr. Blunt, on H.R.
5337, which is under consideration today. This legislation
incorporates many of the provisions included in my first bill
and the GAO report.
I believe it is a very strong common sense approach that
makes the process more transparent and accountable, while
protecting our national security. I am pleased to note that one
of my colleagues from New York, Chairman King, has joined as a
cosponsor of this legislation. He has been deeply involved in
the post-9/11 recovery of New York and the steps that we have
taken as a state to become more secure, and 30 of our
colleagues have joined us on this bill.
The remainder of my testimony really went through the
various provisions that ensures national security needs are met
and restores accountability and transparency, and the bill
improves congressional oversight, but my colleague Mr. Blunt
went through those points. I don't think I should go through
them again. I will put them into the record.
Dubai Ports surely showed that we need to reform the CFIUS
process, and our legislation is a balanced and deliberative
piece of legislation that will examine the national security
risks of all transactions, while making sure we do not chill
foreign investment in the United States. I believe that the
bill strikes an appropriate balance of protecting our national
security, while increasing transparency and accountability in
the process.
So I thank the committee for their concern and for having
us today.
Prepared Statement of Hon. Carolyn B. Maloney
I would like to thank Chairman King and Ranking Member Thompson for
inviting me to testify before the committee today on the bipartisan
CFIUS (Committee on Foreign Investment in the United States) reform
legislation that I have introduced with Majority Whip Blunt and
Representatives Pryce and Crowley.
As Ranking Member of the Financial Services Subcommittee on
Domestic and International Monetary Policy, Technology and Trade, we
have held three hearings into the CFIUS process. At these hearings we
have heard from the Administration, the business community, experts and
academia about the need to reform the CFIUS process and their
suggestions on how to accomplish this.
At our hearings, especially the first hearing that focused on the
Dubai Ports World transaction, it was astounding how tone-deaf the
CFIUS board was as they reviewed national security concerns related to
this transaction. The fact that CFIUS did not consider ``critical
infrastructure'' as a factor potentially impacting national security
certainly does not represent a post-9/11 view of the world and backs up
the GAO's prior finding that CFIUS can too narrowly define what
constitutes a threat to national security.
In March, following our first hearing, I introduced H.R. 4915, the
Committee on Foreign Investment in the United States Reform Act. This
legislation enacts reforms suggested by the Government Accountability
Office (GAO) in a report they prepared before Dubai Ports World was a
household name.
Following the introduction of this legislation, I was pleased to
work in a bipartisan manner to develop H.R. 5337, the Reform of
National Security Reviews of Foreign Direct Investments Act. This
legislation incorporates many of the provisions included in H.R. 4915
and the GAO report.
H.R. 5337 is common sense legislation that makes the CFIUS process
more transparent and accountable while protecting our national
security.
Specifically, H.R. 5337:
Ensures that National Security Needs are met by:
Mandating a 45-day investigation for all transactions
that would result in control by a foreign government.
Adding the Department of Homeland Security as the
vice-chair of the CFIUS board.
Establishing a formal analysis by the Director of
National Intelligence of every transaction. This legislation
gives the DNI 30-days to complete his review, but requires the
review to be completed 7-days before the end of the 30-day
review.
Expanding the definition of homeland security by
requiring the CFIUS board to consider ``critical
infrastructure'' as a factor in any review.
This legislation also restores accountability and adds transparency
to the process by:
Establishing CFIUS in statute.
Requiring the signature of the chair and vice chair on
all decisions and only allows this authority to be delegated to
the deputy secretary at each agency.
Requiring that withdrawal requests are in writing and
that they receive the approval of the Chair in consultation
with the Vice Chair.
Establishing a formal method for tracking and
enforcing post-transaction compliance with mitigation
agreements and for tracking any post-transaction changes in
such agreements.
Providing specific funding to the process ($10 million
over four years) to make sure that reviews are not abbreviated
for lack of resources.
This legislation also improves Congressional Oversight by:
Requiring notice to bipartisan leadership and to every
committee with jurisdiction over any aspect of a transaction
after each investigation.
Allowing any Member receiving such notice to request
that his or her chamber receive a classified briefing on the
transaction.
Requiring thorough and semi-annual reporting to
Congress on activities of the Committee, including trend
analysis of foreign investments and of industrial espionage or
attempts to control a type of asset or sector. These provisions
strike the appropriate balance between proper oversight while
not politicizing the process.
As the Dubai Ports World deal showed, the CFIUS process is in
desperate need of reform. It is our responsibility to ensure that this
is done in a deliberative manner that will effectively examine the
national security risk of all transactions, while making sure we do not
chill foreign investment in the United States.
As I said at the beginning of my testimony, I believe H.R. 5337
strikes the appropriate balance of protecting our national security
while increasing the transparency and accountability of the CFIUS
process.
I thank the Committee for allowing me to testify, and I look
forward to your questions.
Mr. Rogers. I thank the gentlelady.
I would like to state for the record how much I appreciate
the bipartisan nature in which you have worked on building this
piece of legislation, and note that the Chairman of this
Committee, the Full Committee Chairman, who is not present, Mr.
King, is a cosponsor.
The fact that this Committee works on a regular basis in
such a bipartisan nature, I know that everybody shares my view
that it is good to see this come to us in this fashion.
I have no questions. I would be happy now to call on the
Ranking Member for any questions he may have.
Mr. Thompson. Thank you very much, Mr. Chairman.
I, too, want to thank the two witnesses for bringing their
piece of legislation forward. I just wish we could do more
things in a similar manner.
I yield back.
Mr. Rogers. The Chair recognizes the gentleman from
Washington, Mr. Dicks.
Mr. Dicks. Do you want any questions or not? I am trying to
get the read on this thing. I want to get back to Mr.
Eizenstat. But let me ask you two quick things, since I can't
resist.
You feel that there should be a 40-day additional
investigation on all transactions where there is a foreign
government involved. Shouldn't there be some threshold?
Shouldn't there be some thought about if it doesn't have
anything to do with national security, why would you have an
additional 45-day investigation?
Mr. Blunt. Yes. In response to your first question about
whether we wanted questions or not, we only want easy questions
and we will glad for Mr. Eizenstat and the other panel to take
the hard questions.
As I said, Mr. Dicks, the government-owned entities I think
are harder in many ways to evaluate the impact that that
governmental entity has in this kind of transaction. I think
they have advantages in the process and this may in fact be a
slight disadvantage, but I think it is only that. Frankly, this
is I think almost a minimal response to the concern about a
government-owned entity running a port, even though it was a
terminal facility rather than owning the port, as has well been
explained.
I think it is a reasonable thing, and frankly as we look at
the Senate alternative, I believe it is a step we need to take.
Carolyn, do you have a comment?
Mrs. Maloney. I feel that when a foreign government buys
the infrastructure of the United States, it should be held to a
higher standard. The requirement really grew out of the Dubai
World example where the committee made the decision that having
the terminals owned and operated by a foreign government was
not a national security concern.
I would think that everyone on your committee and certainly
on our committee believed that it was a national security
concern and should have been reviewed the additional 45 days.
So it takes out any decision-making and requires a 45-day
review.
Mr. Dicks. What if it was clearly not? What if it was
something that was involved in an agriculture facility in Iowa?
If I have an additional 45 days, you have two of these things
every week and you have the top people in the government now
you are going to make review them. I mean, there has to be some
tie-in with national security, I think.
Mrs. Maloney. Mr. Dicks, that is why the CFIUS process is
maintained as a voluntary process so that if you are buying an
ice cream station, you obviously will not go before the CFIUS
process. And 45 days is the maximum, not the minimum.
Mr. Dicks. So what you are saying is if the company thinks
there is a national security implication, that is the only
reason they would go through the CFIUS process.
Mrs. Maloney. Yes. And also I think that businesses want
certainty. By going through the CFIUS process, you have more
certainty. They cannot dissolve it. They cannot revoke it. It
is looked at. I think most businesses would like the stamp of
approval from the government going forward with an investment.
I must mention something that came out in Financial
Services that was a concern to many members, which was the
advantage that foreign-owned governments have in buying
infrastructure. In this case they did 20 percent more than
anyone else because they were a government; they could afford
to do it. And so there was a sense that there should be a
higher standard for a foreign-owned entity buying
infrastructure.
Mr. Dicks. What about critical infrastructure in the United
States? How do you deal with that in your bill?
Mrs. Maloney. We very loosely define it because it is
changing every day. One of the things that we do is we kick up
the decision-making to the secretary of homeland security and
treasury so that they are making the decisions, not assistant
secretaries which was the case in the prior CFIUS decision with
Dubai World Ports.
Mr. Blunt. I think the point to emphasize there, too, is
that we specifically thought it was best not to try to define
``critical infrastructure,'' that that has such changing
potential that the CFIUS board itself, particularly a board
that includes the director of homeland security, as well as a
representative of the Department of Defense and the others on
the CFIUS board, are better at any moment to determine what is
the current critical infrastructure of the country than a
Congress might be trying to determine how that definition will
work in the future. I would hope that the flexibility stays
with the CFIUS board as opposed to be firmly defined in
legislation, as some would argue.
Mr. Dicks. Thank you.
Thank you, Mr. Chairman.
Mr. Rogers. Do any other Members have questions for these
Members?
The gentlelady from Texas is recognized.
Ms. Jackson Lee. Thank you.
Let me thank both of the members for their presence and
also acknowledge that I think in this business it is necessary
to be tedious and meticulous. And so the timeframe that you
have, or the framework that you have, may in some instances
seem to be prolonged, but I think it is crucial. I particularly
think it is important that you have a balance between the flow
of commerce, but also our security.
The provisions that you have regarding inclusion of the
Secretary of Homeland Security, does that then provide
jurisdiction to the Homeland Security Committee?
Mr. Blunt. I would assume it does. I am not an expert on
jurisdiction and don't purport to be the parliamentarian, but I
assume it does and I think it would be valuable for this
committee to have a level of jurisdiction.
Carolyn?
Mrs. Maloney. I believe there should be a level of
jurisdiction from the Homeland Security Committee.
Ms. Jackson Lee. And with the provisions that deal with the
signatures of both the Secretary of Treasury and Homeland
Security, do you think those provisions are particularly secure
enough? I don't know if it is going out of Financial Services,
but will they last the passage to the floor? If this bill gets
to the floor, will those provisions stay in tact the dual
signatures of the chair and the vice chair as you have
constructed it?
Mrs. Maloney. I believe they will. Yes.
Ms. Jackson Lee. Okay. Let me just thank you.
I do, Mr. Chairman, want to ensure Homeland Security
jurisdiction. I think this is a very good effort, and I hope we
will have the opportunity to mark it up and have the
opportunity to support it.
I yield back. Thank you.
Mr. Rogers. I thank the gentlelady.
I thank the Members for this effort. I appreciate your
time, and I am glad we were able to get you out of here before
your 4 o'clock deadline.
This panel is dismissed, and we re-call the second panel.
The gentleman from New Jersey, Mr. Pascrell, is recognized
for any questions he may have.
Mr. Pascrell. Thank you, Mr. Chairman.
Ms. Markheim, Article I, Section 8 of the Constitution of
the United States says that the Congress shall have the power
to lay and collect the taxes, et cetera, to regulate commerce
with foreign nations and among the several states and with
Indian tribes. The Constitution is a very important document to
you, to me, to everybody here in this room. I carry it with me
at all times.
But when I read your testimony, and particularly on page
four, I am aghast. You say that this process is designed to be
nonpartisan and nonpolitical because these decisions should not
be based on political considerations, but solely on the merits
of the transaction and appropriate security concerns consistent
with the United States' policies. Congress does not receive
comprehensive notification in any other administrative
procedure. This is what you wrote.
I have to take exception with that because it would seem to
me that we have relegated the potential of political
interference with the Congress, while we have not even
suggested the contrary with the administration. It is
unacceptable. And unless the business community understands
that we are all in this together trying to find ways for
security as well as investment, and that we are not
isolationist, those of us who ask questions about such things
as the Dubai incident like we kind of disrupted business, when
we have as our oversight capabilities, the entire Congress that
is, a duty, in fact indeed an obligation and responsibility to
check into these matters.
The fact that so few of these transactions ever have come
in front of us and that all of them except one have been
rejected before us I find to be incredible. I think we have a
right in this Congress to know what in God's name is going on.
And that is why we are having these hearings.
If I take what you say, I would ask you this question.
Foreign companies and CFIUS want the entire process to be
settled in 30 days, and usually settle matters in negotiations
before the official review. I even heard that today. What kind
of oversight can the Congress have over this process when there
is such a lack of transparency? You tell us.
Ms. Markheim. I think Congress has not had the opportunity
to have the appropriate level of oversight of these
transactions. That is why we are here today. What is important
here, and I think what I was trying to say in that particular
memo and in the brief was that fundamentally Congress needs to
have greater oversight, without however becoming part of the
process itself.
So the important thing is to determine where is the process
and where does oversight begin. The problem is that over the
years, oversight has not been facilitated by the CFIUS process.
Congress has not received regular reports; has not received the
quadrennial reports even. That is a problem, as I did state.
What we would like to see and what we do recommend is that
Congress do start receiving regular reports on these sort of
non-special cases that don't go before the president so that
Congress does get some insight as to what does go on.
Mr. Pascrell. But wouldn't you agree, Ms. Markheim, if we
did not have the Dubai situation, we still wouldn't know what
was going on out there. This kind of crystallized it, and that
is why we are having this hearing, or else we wouldn't be
having this hearing. Wouldn't you agree?
Ms. Markheim. I do agree with that. However, I do think,
again going back to a report that was referenced that was out
in October, the problem with CFIUS transparency has been known
and it has been something that has been discussed, but it
certainly has not been the focus of attention that it is today.
Mr. Pascrell. When you understand that when we talk about
port security, we are concerned about the relationships we have
with other countries so that those items in those containers
are checked before they leave the other country, before they
leave the other ports, and before they come into the United
States. It makes things a lot easier.
So we have to have cooperation. We must have, all of us
now, we are talking about a global strategy. You know, chapter
12 of the 9/11 Commission report, we are talking about a global
strategy. And we need to be very protective of the people in
this country who are wondering what is coming into this country
and what is coming over our borders. And that is why we want to
take the extra added precaution of finding out what is in these
containers and who is in charge.
Now, when we said who is in charge of operations at the
ports, the administration was very, very adamant in saying
these companies owned by these countries don't own the ports,
we understand that, they control the operations and manage the
ports, and they don't even take care of security at the ports.
But they do name who is in charge of security at the ports.
If I may, Mr. Chairman, I have one more question, if I can
ask it this go-round. I have to leave.
Mr. Simmons. [Presiding.] I will yield 1 more minute, but
mindful that Charlie Allen is also waiting to testify at the
next hearing.
Mr. Pascrell. I am sorry?
Mr. Simmons. Secretary Allen is waiting to testify for the
next subcommittee hearing. So you are making excellent points.
Mr. Pascrell. There is another subcommittee after this?
Mr. Simmons. Yes, there is. It was scheduled for 3:30, but
we are postponing it, waiting to finish.
Mr. Pascrell. Okay. Just a quick question, Mr. Eizenstat.
You mentioned in your testimony the difficulty in
determining what is critical infrastructure in the United
States, and how foreign investment in critical infrastructure
should be determined you suggest by a case-by-case basis.
Should the purchase of American port operations by a Dubai-
owned company have received more intense scrutiny by CFIUS? And
the second question is, should this deal have gone to the
investigative level?
Mr. Eizenstat. Let me answer two questions at once here,
your last question and then the one you just asked.
On the transparency, congressional oversight, H.R. 5337
goes a long way to accomplishing what you are properly
concerned about, because it requires that CFIUS give the
Congress a written report on any findings of actions that they
make on any investigation they do. You can have personal
briefings for the members who get that, and then there are
semiannual reports that will have to be issued to the Congress
on what has happened during the previous 6 months, which
transactions have been approved, what were they like and so
forth. That will give you the opportunity to determine if you
think CFIUS is doing the right job.
Now, in terms of the DP World issue, optimally what should
have happened, I believe, is that this should have raised a lot
of red flags. I do not believe it was a national security
threat. But I do believe that it would have been better to take
to the 45-day investigation period. I think had that been done,
it would have satisfied a lot of people in Congress who felt
that by not taking it to the second phase, that the process was
somehow rushed through.
The fact is, it wasn't because there was a long pre-
application period, but in terms of optics, optics certainly
for the public and for Congress which had no information about
it, seemed to indicate that it was being rushed through. So I
think in an optimal way, it might have gone to the 45-day
period and diminished some of the political opposition. I think
ultimately the result might have been the same from my
perspective.
Mr. Pascrell. Thank you both.
Mr. Chairman, I would contend that if it wasn't for the
Dubai incident coming before the Congress of the United States,
that many in the Congress of the United States would not have
known that countries like China control and operate many of our
ports. Now, I will make that statement and I will stand by it
unless I hear different information.
So I am aghast when people talk about the possibilities of
politics in these issues.
Thank you.
Mr. Simmons. I thank the gentleman for his questioning. For
the record, I will yield my 5 minutes to him, and that 5
minutes has now expired.
The Chair recognizes the distinguished gentlelady from the
Virgin Islands, Dr. Christensen.
Mrs. Christensen. Thank you both, Ms. Markheim and Mr.
Eizenstat, for your patience with us this afternoon. Mr.
Eizenstat, it is nice to see you again.
You noted in your testimony, Mr. Eizenstat, that the bill,
H.R. 5337, which requires that the secretaries or deputy
secretaries of both Treasury and Homeland Security personally
approve and sign each review and every review and
investigation, that it could create bureaucratic delays and
impede the CFIUS's ability to efficiently implement Exon-
Florio.
So my question is, what would be the solution to the
problem that we saw during the Dubai Ports World deal when no
high-ranking official, Rumsfeld, Chertoff, claimed to have ever
signed-off on the deal? They were where the buck stopped, but
they didn't sign off. So shouldn't they have some show of
having knowledge of the investigatory process and the outcome
before it goes to the president?
Mr. Eizenstat. That is a very good question. I would just
start by saying that I have spent an enormous amount of time in
the Virgin Islands. It is a wonderful part of the United
States.
A couple of things. First, if I may just say one way to
deal with this government-owned company issue, permit the
companies to try to go directly to the 45-day investigative
process if they are going to be put into that. If you are going
to insist that even a British government-owned company has to
go through this, and I am urging you to distinguish between
friendly governments with companies that are owned by those
governments that operate on market principles from those that
don't. But if you have to insist on treating them all alike,
let them go straight to the 45-day period rather than going to
the 30-day period.
Now, second, on the signature issue, one of the first
things we learn on the first day of law school is bad facts
make bad law. And we had a bad series of facts with the Dubai
Ports World issue. This should have had more scrutiny. It
should have gone to the secretary or deputy secretary level
simply because of the optics, not the reality, of the deal.
Had that been done, optimally the deputy secretary or
secretary might have looked at it. But what I am urging is
because of that one isolated issue, don't require, as this
legislation does, that every single one of these transactions
has to be checked off by the deputy or the secretary. It will
clog them down from doing much more important work. It only
should be in the most sensitive cases where there is really a
national security impact. This is much broader than that. It
requires it in virtually every case.
Mrs. Christensen. Thank you. I don't have any other
questions. Thank you for the answer.
Mr. Simmons. I thank the gentlelady for her questions.
Do any other members have questions for this panel?
Hearing none, I would like to thank the witnesses for their
valuable testimony.
And I thank the members, of course, for their questions.
The members of the committee may have some additional
questions for all of the witnesses, and I will ask that you
respond to these in writing. The hearing record will be held
open for 10 days, and again the chair thanks the members of the
committee and our witnesses.
Without objection, the committee stands adjourned.
Mr. Eizenstat. May I just ask that my full testimony be put
in the record? Thank you.
Mr. Simmons. Without objection.
[Whereupon, at 4:03 p.m., the committee was adjourned.]
A P P E N D I X
----------
For the Record
Prepared Statement of the Honorable Ginny Brown-Waite
Thank you Chairman King for holding this important hearing. Like
many of my colleagues here today, I was appalled at the missteps in the
recently failed Dubai Ports World transaction. A United Arab Emirates-
owned company, DPW's proposed buyout of the British-owned Peninsular
Oriental Steamship Navigational Company (P&O) raised serious security
concerns, not the least of which was that the UAE was one of the few
governments to officially recognize the Taliban. Yet this proposed
takeover somehow did not trigger the thorough 45-day investigation that
should occur whenever there is a question of our nation's security at
critical infrastructure.
To be perfectly frank, when I first read about this takeover in a
news story, I thought it was a hoax. I could not believe that officials
at the Department of Defense or Department of Homeland Security could
be so careless as to play Russian roulette with port security for the
sake of a smooth business transaction. I was further appalled to read
that the Coast Guard expressed serious concerns in a report to DHS
officials, yet even that did not jumpstart the additional
investigation.
At the time, I wrote to Department of Homeland Security Secretary
Michael Chertoff, Department of Treasury Secretary John Snow, and
President Bush to demand an immediate investigation. However, instead
of assurances that they would carefully scrutinize the deal before
continuing forward, I received bland letters. Congress had to rely on
the Dubai Ports World company itself to ask for an investigation, and
then to later stop the transaction. To me, that indicates something is
wrong with our vetting system.
As a member of this Committee I have a responsibility to keep
Americans safe, and I take that responsibility very seriously. When our
government makes poor decisions, I want an accounting. There is no
excuse for ceding management of our ports to a foreign nation with as
questionable of a record as the United Arab Emirates, despite their
recent attempts to play nice. So today, I would like to hear from our
witnesses how the CFIUS process has been improved to address these
issues, as well as your thoughts on legislation to give homeland
security a more prominent role in CFIUS deliberations.
Thank you Mr. Chairman and I look forward to hearing from our
witnesses today on this vital issue.
Questions from Hon. Peter King
Responses from Hon. Stewart Baker
1 You have described the Department's engagement in the CFIUS
process in previous hearings. You told the Senate Banking Committee
that the Department analyzes each agreement to which it is a signatory
and extracts the timetables, policies, and deliverables that must be
tracked to determine the companies' current compliance status.
Unfortunately, we know from previous hearings that the Department has a
serious human capital problem. The following questions are designed to
address those concerns:
How many people in your office work on CFIUS?
Response: Under my supervision, there currently are six people who
work on CFIUS matters full-time. Of these, three are contractors and
two are temporary detailees. We are in the process of hiring three more
government employees to work full-time on CFIUS matters. Others in my
office provide CFIUS support as needed. Outside my office, the offices
of Intelligence Analysis and Infrastructure Protection in their joint
fusion center, the Homeland Infrastructure Threat and Risk Analysis
Center (HITRAC), have another team of three full-time individuals
analyzing the risks associated with CFIUS transactions and providing
analytical support to my office. In addition, there are dozens of
people throughout DHS who review and provide input on CFIUS
transactions.
How many compliance agreements does the Department enter
into with other companies?
Response: Since DHS began operations in 2003, DHS has entered into
twenty CFIUS mitigation agreements and an approximately equal number of
risk mitigation agreements in the context of the Federal Communications
Commission's telecommunications licensing process.
2. H.R. 5337 allows for the appointment of ``an appropriate Federal
department or agency'' to negotiate, modify, monitor, and enforce any
mitigation agreement reached by the Committee. Isn't the Department of
Homeland Security, given the breadth of its jurisdiction over domestic
security concerns, the appropriate agency to take on this
responsibility?
Response: DHS believes that there is no single agency that can
negotiate mitigation agreements for every case, and a legislative
requirement that the negotiation and enforcement be carried out by a
single agency would reduce the current protection for homeland and
national security. For some national security concerns raised by a
particular case, DHS may be the appropriate agency; for other national
security concerns raised by the same case, other CFIUS agencies may be
more appropriate. Accordingly, DHS believes that each agency, in
consultation with CFIUS, should be authorized to negotiate mitigation
agreements as each agency deems appropriate. This is consistent with
past practice.
In your opinion, if, under H.R. 5337, the Department of Homeland
Security becomes the Federal entity empowered with negotiating,
modifying, monitoring, and enforcing, mitigation requirements reached
by the committee, do they have adequate personnel and resources to
effectively assume this additional responsibility?
Response: As indicated above, DHS believes that no agency should be
designated to negotiate mitigation agreements for every case; rather,
each agency should be authorized to negotiate mitigation agreements, in
consultation with CFIUS, as each agency deems appropriate. DHS is
increasing its personnel and resources dedicated to negotiating,
modifying, monitoring and enforcing the mitigation agreements to which
DHS decides to become a party. To the extent DHS were required to
assume responsibility for all mitigation agreements, contrary to views
of what constitutes sound policy, substantial additional personnel and
resources would be necessary.
What additional resources would the Department of Homeland Security
require to undertake this potential additional responsibility?
Response: As indicated above, DHS is increasing its personnel and
resources dedicated to negotiating, modifying, monitoring and enforcing
the mitigation agreements to which DHS decides to become a party.
Additional resources beyond those already planned are not required for
DHS to fulfill its responsibilities with respect to those mitigation
agreements to which DHS decides to become a party.
3. You testified before the Senate Banking Committee that the
Department implemented an early warning program soon after joining the
CFIUS. You said that the purpose of the program is to identify those
foreign investments in U.S. critical infrastructure and industrial base
technology companies that may result in CFIUS filings or may pose a
national security risk, and you share this information with CFIUS
members. Unfortunately, as Mr. Eizenstat, a witness on the second
panel, notes in his written testimony, ``critical infrastructure''
remains a relatively fluid regulatory concept, and very difficult to
identify specific ``critical infrastructure'' that may pose a national
security risk. For instance, the Department has identified twelve
extremely broad sectors that it considers to be critical
infrastructure, including agriculture and food, water, public health,
emergency services, the defense industry, telecommunications, energy,
transportation, banking and finance, chemicals, postal services and
shipping, and information technology.
How can the Department really identify foreign investment in
critical infrastructure when it has not yet publicly identified the
types of companies, or even sub-sectors, for which acquisition by a
foreign firm would be deemed a high risk to national security? How can
you make a judgment about foreign ownership of these sectors?
Response: An analysis of which transactions would pose a high risk
to national security must be made on a case-by-case basis, given the
number of factors involved in making such a determination. The current
broad operational concept of ``national security'' gives DHS wide
discretion to act in appropriate cases, and DHS does not believe it is
practical or prudent to assess national security risk other than by
case-specific examination. Creating abstract categories of critical
infrastructure might unhelpfully narrow discretion to mitigate national
security risks.
4. You told Reuters that the Department of Homeland Security could
not find anything concrete that led you to believe that the transaction
ought to be stopped for national security reasons. Yet according to
news reports, you were originally the sole dissenting voice in the
transaction. According to the AP, you eventually changed your mind and
the Committee approved the deal without dissent after Dubai Ports World
agreed to the security conditions that CFIUS negotiated.
How many other times have you voiced dissent on CFIUS only to
change your mind later? Is it problematic for the current process that
CFIUS tries to build universal consensus among all members? Do you ever
feel pressured into changing your dissenting opinion?
Response: The premise of the question is flawed: DHS did not change
its views regarding the Dubai Ports World transaction. DHS determined
that it should get certain risk-mitigating assurances from the
companies and that, with those assurances, DHS would approve the
transaction. DHS's ability to obtain the assurances was never in doubt.
Like each CFIUS agency, DHS determines for itself whether a
transaction may adversely impact national security and whether to
request risk-mitigating assurances.
5. How do you evaluate the risk of a foreign-owned company when,
these days, there is no clear designation of what companies are
foreign? For instance, most large-scale companies are multinationals--
case-in-point: both Exxon-Mobil and BP have about half U.S. ownership.
How does the Department weigh the risk of these so-called ``foreign
owned companies?''
Response: The Treasury Department, as Chair of the CFIUS, is better
positioned to explain the CFIUS determination of whether a company is
or will be subject to foreign control so as to confer CFIUS
jurisdiction over a transaction. As in other matters, the risk
presented by companies that are partly foreign-owned and partly is
analyzed on a case-by-case basis, taking into account factors such as
the nature of the assets at issue and the nature of the foreign
ownership and control, among other factors.
6. What changes have been made to the CFIUS process, aside from
adding DHS as a member agency, to reflect the post-911 world?
Response: In general, the level of scrutiny in the CFIUS process
has increased in the post-9/11 world. The Treasury Department, as Chair
of the CFIUS process, is better positioned to provide a detailed
comparison between the pre-and post-9111 eras, especially in light of
the fact that DHS did not exist before 2003.
7. What changes have been made to the process following the DP
World transaction?
Response: Again, as CFIUS Chair, the Treasury Department is better
positioned to discuss changes. Within DHS, we have hired (and are
continuing to hire) more CFIUS staff and our review process has become
more formal.
8. Considering that the proposed Congressional reforms would
relegate information gathering to the Director of National
Intelligence, would you plan on performing separate analysis on
investigations through DHS?
Response: DHS does not interpret any of the proposed Congressional
reforms to relegate all information gathering solely to the DNI, and
DHS would strongly oppose any effort to do so because such limitation
would impede our ability to fulfill our departmental responsibilities.
DHS does and, under virtually any conceivable circumstances, will
continue to engage in substantial information gathering and analysis.
DHS, through its Office of Intelligence and Analysis, is a key
participant in the development of the Intelligence Community's threat
assessments, prepared by the Office of the DNI with input from all
elements of the Intelligence Community. Although DHS does not develop
an independent threat assessment as part of this process, information
and analysis are fully considered. If DHS (or any other element of the
IC) were to conclude, on the basis of its own analysis, that it should
disagree with the position of the Intelligence Community, then it may
state its dissent in the IC assessment.
In addition to its participation in the development of the IC
threat assessment, DHS, through its Infrastructure Protection and
HITRAC components, performs vulnerability assessments and risk-
mitigation assessments in support of CFIUS.
9. Under the current process, is the Director of National
Intelligence given sufficient time to examine transactions pending
before CFIUS?
Response: The DNI is the appropriate entity to which this question
should be addressed.
10. To what extent do you plan on integrating the policies of DHS
in CFIUS?
Response: DHS has integrated its CFIUS policy process. All DHS
components receive notice of CFIUS transactions, and their analyses and
concerns are consolidated by the DHS Policy Development office.
11. Does Congress have any concerns that an investigation process
that involve Congress, the Senate, and the President, along with
quarterly and semi-annual reports, will slow CFIUS down?
Response: Congress, rather than DHS, is best positioned to
determine whether ``Congress has any concerns. . .'' To the extent the
question is whether DHS has concerns, it is reasonable to think that
additional reporting requirements, whether to the Congress, the Senate,
the President, or any other body, will require resources that might
otherwise be devoted to analysis of CFIUS cases, and that a possible
resultant diminution of resources associated with such analysis would
negatively impact the CFIUS process. In any case, reports to Congress
should be provided only after a CFIUS case is completed. Pre-decisional
reporting would impinge inappropriately upon the Executive Branch
deliberative process.
Questions and Responses from the Hon. Clay Lowery
1. Mr. Lowery, you say in your testimony that the Administration
``supports improving communications with Congress on CFIUS matters.''
Why did this Administration wait until recently to decide to improve
its communications with Congress? What efforts have you made to engage
in outreach with Congress? If communicating with Congress is a
priority, why then has it taken so long to produce documents that have
been requested by this Committee months ago? Would you support a
statute that would increase reporting requirements from CFIUS to
Congress? What would such a regime look like?
Response: The Administration is committed to improving
communications with Congress and agrees that Congress should receive
timely information about CFIUS matters to help meet its oversight
responsibilities. Indeed, CFIUS has met with Members and Congressional
committee staff whenever requested to do so to answer questions about
the CFIUS process. To ensure improved communications, Treasury is
promptly notifying Congress of all CFIUS cases upon completion.
Treasury is also, on behalf of CFIUS, briefing the Senate Banking and
House Financial Services Committees quarterly on completed CFIUS cases.
When appropriate, CFIUS suggests that its oversight committees invite
other potentially interested members and committees with jurisdiction
over areas affected by decisions under to attend these briefings. It
should be noted that these briefings were scheduled to begin before the
issues with respect to the DP World transaction garnered media
attention. We believe that these steps will enable Congress to meet its
oversight responsibilities.
With respect to the provision of information to the committee on
the DP World case, I spoke to this point during the hearing. As I
noted, compiling the information and consulting interagency with those
engaged in CFIUS, as well as providing for the clearance of our General
Counsel's office, takes a certain amount of time. This was also done in
the context of an increasing CFIUS case load. We provided you with
these documents as soon as was possible. I would further note that
Treasury officials participated in 7 hearing with 7 committees and has
conducted approximately 25 briefings with Congressional committees
regarding DP World.
The House CFIUS reform bill, H.R. 5337, would require that CFIUS
provide semi-annual reports to Congress. While we believe that an
annual report would be more appropriate, as it will be more
comprehensive and better identify the trends designated in the
legislation, the reporting requirements would provide Congress
additional information important to conducting its oversight
responsibilities. However, to prepare such reports properly, the
Administration needs sufficient time and resources to conduct a
thorough interagency process.
2. During your testimony, Rep. Collins asked you whether an
adequate review of DP World was done, given recently declassified
portions of a Coast Guard report that highlighted ``many intelligence
gaps, concerning the potential for DPW or [its subsidiary] P&O assets
to support terrorist operations.'' According to the declassified
portions of the report, those gaps precluded ``an overall threat
assessment of the potential DPS and P&O Ports merger.'' How were you
able to close those gaps so quickly? And how can the speed with which
you apparently closed those gaps square with the 2005 GAO report, which
discussed the need for longer periods of time for CFIUS review because
agencies could not conduct timely threat analysis?
Contrary to many accounts, the DP World transaction was not rushed
through the review process in early February. In total, members of
CFIUS staff spent nearly 90 days investigating this transaction due to
early notification of the transition to CFIUS by the companies.
National security issues raised during this process were addressed to
the satisfaction of all members of CFIUS.
During the investigation period, which lasted nearly 3 months,
members of the CFIUS staff were in contact with one another and the
companies. As part of this process, the Department of Homeland Security
(DHS) negotiated an assurances letter that addressed port security
concerns. The companies committed to maintain no less than their
current level of membership in, cooperation with, and support for the
Customs-Trade Partnership Against Terrorism, the Business Anti-
Smuggling Coalition, and the Container Security Initiative (CSI). They
also committed to their current level of membership in, cooperation
with, and support for the March 2005 Memorandum of Understanding with
the U.S. Department of Energy to support CSI by cooperating with other
signatories and restricting trafficking in nuclear and radioactive
materials. The companies committed to provide advance written notice to
DHS before making any material change with respect to their
cooperation/membership support, and to meet with any DHS designated
U.S. Government officials prior to implementation. In fact, the DHS
agreement with DP World provides assurances with respect to law
enforcement, public safety, and national security that DHS does not
currently have with other terminal operators.
The referenced concerns in the Coast Guard report must be placed in
context. While this question is best addressed to the Department of
Homeland Security, DHS considered not only the Coast Guard's
assessment, but also the assessment of the broader intelligence
community as a whole. The U.S. Coast Guard resolved its initial
concerns in the context of the broader dialog about this case; that
dialog took place during the investigation of the transaction, which
ended on January 17,2006.
3. You mentioned in your testimony that ``Typically, the members of
the Committee with the greatest relevant expertise assume the lead role
in examining any national security issues related to a transaction and,
when appropriate, developing appropriate mechanisms to address those
risks.'' Would DHS not take the lead on many of these transactions? Do
you think that they have the personnel capable to fulfill this duty?
Each CFIUS agency determines the resources to be dedicated to its
CFIUS responsibilities and chooses its own staff. Depending on the
nature of the transaction and the business of the U.S. target company,
an agency may utilize resources several offices in its agency to
investigate and analyze the national security implications from its
agency's perspective.
Given DHS's expertise, it takes the lead on many cases, as do the
Departments of Defense and Justice. Questions as to the level of
resources available in DHS to devote to its CFIUS responsibilities are
best directed to DHS. However, DHS has been a valuable addition to
CFIUS and performs its responsibilities thoroughly and diligently.
4. The Byrd Amendment--Sec. 2170(b) of the Defense Protection Act--
States that ``The President or the President's designee shall make an
investigation. . .in any instance in which an entity controlled by or
acting on behalf of a foreign government seeks to engage in any merger,
acquisition, or takeover which could result in control of a person
engaged in interstate commerce in the United States that could affect
the national security of the United States.'' Why didn't CFIUS engage
in an investigation of the Dubai Ports World deal--a foreign
government-owned company engaged in port operations? By not conducting
these investigations, aren't you, in the words of the frustrating the
intent of the legislation?
In February, the State of New Jersey filed a lawsuit challenging
CFIUS's conclusion that the Byrd Amendment did not require a formal
``investigation'' of the DP World acquisition. The Department of
Justice filed a responsive brief in the lawsuit, which set forth the
Administration's interpretation of the Byrd Amendment. The brief states
that ``(1) the Byrd Amendment requires an investigation only when the
transaction at issue is determined to be one that `could affect the
national security of the United States,' and (2) the determination of
whether a particular transaction `could affect the national security of
the United States' is a determination that is anything but ministerial
and non-discretionary--requiring as it does the collection and analysis
of facts regarding both the proposed transaction and the nation's
security.'' The brief further notes that ``this textually compelled,
commonsense reading of the Byrd Amendment has been followed by the
Executive Branch since that provision was first enacted'' in 1992.
The fact that the DP World case did not go into a 45-day extended
investigation period did not affect ability to conduct a thorough
investigation. There is a general misunderstanding that CFIUS conducts
in-depth work only during the 45-day period. This is not the case.
During the 30-day period, CFIUS thoroughly analyzes transactions for
their effects on national security and carefully considers input from
the intelligence community, other CFIUS agencies, and agencies with
relevant expertise. Often a significant amount of analysis is performed
even before the 30-day period begins. In the case of DP World, as
previously noted, members of CFIUS staff spent nearly 90 days
investigating this transaction, and a mitigation agreement was
negotiated with DP World to provide assurances with respect to law
enforcement, public safety, and national security.
5. If changes to CFIUS were made in light of September llth, then
why did it take so long to begin enforcing the legislation, and why did
it take such a case as DP World to jumpstart the legislation?
Actually, CFIUS has reviewed 268 cases since September 11th, 2001,
and made many important changes well before the DP World transaction.
Since September 11th, an important change to the CFIUS process was the
addition of DHS to CFIUS membership. DHS brings to the CFIUS process
its own unique perspective of the potential impacts of cases on our
homeland security. Other efforts have been made to improve the CFIUS
process, drawing on comments Members of Congress, the recommendations
of the GAO, and the recommendations received from the member agencies
of CFIUS.
Some of the changes I would note:
Accountability: All cases in CFIUS are being briefed at
the highest levels at Treasury, and clearances on transactions are at
the Senate-confirmed level.
DNI: The role of the intelligence community has been
formalized. The Office of the Director of National Intelligence (DNI)
plays a key role in all CFIUS cases by participating in CFIUS meetings,
examining every transaction notified to the Committee, and providing
broad and comprehensive threat assessments.
Communications with Congress: We are taking steps to
improve communications with Congress, including promptly notifying
Congress of every CFIUS case upon its completion, and committing to
conducting quarterly briefings for Congress on CFIUS matters, which we
recently conducted for oversight committees.
Pre-filing: CFIUS is encouraging pre-filings
notifications; companies are more frequently informing CFIUS of
transactions well before filing notice, which allows additional time
for the Committee's consideration.
6. Since your two primary goals are to (1) increase Congressional
oversight of CFIUS and (2) maintain a friendly environment for foreign
businesses, would it be possible to have CFIUS report all of its
informal dealings with foreign businesses to Congress rather than deal
away the entire process?
The principles that guide CFIUS are protecting U.S. national
security and maintaining an open investment policy. To advance those
principles, the Administration supports improving communications with
Congress on CFIUS matters, among other process reforms.
We believe it is possible to have increased Congressional oversight
of CFIUS without tightening the rules for foreign investment, if done
correctly. We are taking steps to improve communications with Congress,
including promptly notifying Congress of every CFIUS transaction upon
its completion, and committing to conducting quarterly briefings for
Congress on CFIUS matters. We have recently met with oversight
committees to provide a quarterly report on cases.
CFIUS does not notify Congress until a CFIUS case is complete in
order to protect the Executive Branch's deliberative processes, and
also to avoid the disclosure of proprietary information that could
undermine a transaction or be used for competitive purposes.
7. One of the major problems with the DPW transaction was that
neither the relevant Secretaries nor the President were aware of the
transaction. Yet in recent testimony before the House Financial Service
Committee, you opposed Cabinet-level certification of transactions. If
such certifications were allowed, then wouldn't they ensure that the
transaction receives the proper amount of scrutiny?
The Administration supports the Secretary or the Deputy Secretary
of the Treasury signing the report on a transaction at the conclusion
of a 45-day extended investigation. Furthermore, at the conclusion of a
CFIUS 30-day investigation, the Administration supports requiring the
case to be approved by an official nominated by the President and
confirmed by the Senate, with an assurance that appropriate senior
agency officials received a briefing on the transaction. Mandating the
personal involvement of department heads or deputies in order to
finalize all 30-day investigations is not practical for a process
that--while it needs to be thorough, responsible and accountable--also
needs to be efficient and timely in the disposition of cases that may
vary greatly in degree of complexity and significance to national
security. Under this standard, foreign transactions that do not present
national security issues will be approved in a manner consistent with
our open investment policy, while CFIUS resources and attention will be
focused where they are most needed.
Presently, the Administration is ensuring high-level accountability
in the CFIUS process. Treasury officials at the highest levels are
briefed on a regular basis on all CFIUS cases. Presidentially
appointed, Senate-confirmed officials are responsible for clearing
transactions at the conclusion of CFIUS 30-day investigations.
Officials at the Deputy level make decisions about putting cases into
an extended 45-day investigation. Finally, transactions that need to go
to the President are decided at the Principal level.
8. Considering that foreign firms acquiring US firms accounted for
13% of all mergers and transactions in 2005, how do you seek to
maintain a friendly environment for foreign businesses, while
mitigating the discretion of CFIUS? Is it possible to allow for
increased oversight of CFIUS by Congress, but without tightening the
rules for foreign investment?
The Administration supports the efforts to improve the CFIUS
process in a manner that protects national security and does not
diminish national security by negatively impacting the nation's
economy.
Reforms to the CFIUS process should send a signal that the United
States continues to be serious about national security and welcomes
legitimate foreign direct investment (FDI). CFIUS must examine each
transaction thoroughly, but the timeframes for examination should not
be unnecessarily long and should not be discriminatory. Therefore, the
process should not require 45-day extended investigations of
transactions that do not impair the national security. Improvements to
the CFIUS process should promote filing of notice with respect to
appropriate transactions but should not delay or deter FDI with no
nexus to the national security.
It is possible to have increased Congressional oversight of CFIUS
without tightening the rules for foreign investment, if done correctly.
We are taking steps to improve communications with Congress, including
promptly notifying Congress of every CFIUS case upon its completion,
and committing to conducting quarterly briefings for Congress on CFIUS
matters. We have recently met with Congressional oversight committees
to provide a quarterly report on cases. At the same time, reforms of
the CFIUS process should also reflect the importance of protecting
proprietary information and the integrity of the Executive Branch's
decision making process.
9. Considering the fears that many businesses have of the public
scrutiny that comes with being involved in a CFIUS investigation, what
steps can Congress take to ease these concerns?
Reforms to the CFIUS process should encourage companies to file
with the Committee by ensuring that any information they provide to
CFIUS is protected from public disclosure and will not be used for
competitive purposes. Full disclosure of information by companies is
critical to the Committee's ability to analyze thoroughly the national
security risks associated with a transaction. It is also important to
protect the Executive Branch's deliberative process and to avoid
possible politicization of CFIUS cases.
To keep Congress informed adequately and regularly about the CFIUS
process without causing businesses undue concern, Treasury has offered,
on behalf of CFIUS, to brief the Senate Banking and House Financial
Services Committees quarterly on completed reviews. Treasury is also
promptly notifying Congress of all CFIUS cases upon completion. Federal
law prevents proprietary corporate information from being revealed to
the public, and Congress and the Executive Branch have an excellent
record of protecting this information and preserving confidence in the
process. It is necessary that both continue to treat all such
information as confidential.
10. How frequently are mitigation agreements used to quell national
security concerns? What is the current procedure for monitoring
mitigation agreements?
Mitigation agreements and assurances letters are used on a fairly
regular basis to address potential national security risks.
Typically, members of the Committee with the greatest relevant
expertise take the lead role, in consultation with CFIUS, in
negotiating and ultimately concluding mitigation agreements when
appropriate or requesting assurance letters. Such agreements implement
security measures that vary in scope and purpose according to the
particular national security concerns raised by a specific transaction.
There are remedies built into mitigation agreements to address
concerns that arise after the case concludes. The ``lead'' agency or
agencies are and should be responsible for monitoring the parties'
compliance, in consultation with CFIUS. Procedures for monitoring an
agreement may, for example, include annual reporting by the company to
the lead agency or the authority to conduct on-site visits by the lead
agency.
For a material breach of any representation or commitment in the
mitigation agreement, the lead agency would, in consultation with be
able to seek any available legal remedy.