[Senate Hearing 109-805]
[From the U.S. Government Publishing Office]
S. Hrg. 109-805
A REVIEW OF THE CFIUS PROCESS
FOR IMPLEMENTING
THE EXON-FLORIO AMENDMENT
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
ON
THE IMPLEMENTATION OF THE EXON-FLORIO PROVISION BY THE COMMITTEE ON
FOREIGN INVESTMENT IN THE UNITED STATES (CFIUS), WHICH SEEKS TO SERVE
U.S. INVESTMENT POLICY THROUGH REVIEWS THAT PROTECT NATIONAL SECURITY
WHILE MAINTAINING THE CREDIBILITY OF OPEN INVESTMENT POLICY
__________
OCTOBER 6 AND 20, 2005
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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senate05sh.html
______
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Skip Fischer, Senior Staff Professional
John V. O'Hara, Senior Investigative Counsel
Stephen R. Kroll, Democratic Special Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
C O N T E N T S
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THURSDAY, OCTOBER 6, 2005
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Stabenow............................................. 7
Senator Bayh................................................. 9
Senator Sarbanes............................................. 13
WITNESS
Katherine Schinasi, Managing Director, Acquisition and Sourcing
Management; accompanied by: Ann Calvaresi Barr, Director,
Industrial Base Issues, U.S. Government Accountability Office.. 2
Prepared statement........................................... 23
----------
THURSDAY, OCTOBER 20, 2005
Opening statement of Chairman Shelby............................. 93
Opening statements, comments, or prepared statements of:
Senator Schumer.............................................. 95
Senator Allard............................................... 96
Senator Hagel................................................ 115
Senator Sarbanes............................................. 136
WITNESSES
James Inhofe, A U.S. Senator from the State of Oklahoma.......... 97
Prepared statement........................................... 137
Robert M. Kimmitt, Deputy Secretary, U.S. Department of the
Treasury....................................................... 100
Prepared statement........................................... 138
Response to written questions of:
Senator Schumer.......................................... 162
Senator Allard........................................... 163
Senator Inhofe........................................... 164
Senator Sarbanes......................................... 168
David A. Sampson, Deputy Secretary, U.S. Department of Commerce.. 102
Prepared statement........................................... 143
Response to written questions of:
Senator Inhofe........................................... 175
Senator Sarbanes......................................... 176
Stewart Baker, Assistant Secretary for Policy, U.S. Department of
Homeland Security.............................................. 103
Prepared statement........................................... 145
Response to written questions of:
Senator Inhofe........................................... 178
Senator Sarbanes......................................... 178
E. Anthony Wayne, Assistant Secretary, Business and Economic
Affairs, U.S. Department of State.............................. 103
Prepared statement........................................... 146
Response to written questions of:
Senator Inhofe........................................... 180
Senator Sarbanes......................................... 180
Peter C.W. Flory, Assistant Secretary for International Security
Policy, U.S. Department of Defense............................. 105
Prepared statement........................................... 147
Response to written questions of:
Senator Inhofe........................................... 183
Senator Sarbanes......................................... 183
Robert D. McCallum, Jr., Acting Deputy Attorney General, U.S.
Department of Justice.......................................... 107
Prepared statement........................................... 149
Response to written questions of Senator Sarbanes............ 185
Patrick A. Mulloy, Commissioner, United States-China Economic and
Security Review Commission..................................... 126
Prepared statement........................................... 151
David Marchick, Partner, Covington & Burling..................... 130
Prepared statement........................................... 156
Additional Material Supplied for the Record
Letter submitted by United States-China Economic and Security
Review Commission dated October 21, 2005....................... 189
A REVIEW OF THE CFIUS PROCESS
FOR IMPLEMENTING
THE EXON-FLORIO AMENDMENT
----------
THURSDAY, OCTOBER 6, 2005
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:04 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will now come to order.
Senator Sarbanes will be here as soon as he can.
This morning, we are meeting to hear testimony on the role
of the Committee on Foreign Investment in the United States.
This hearing was to include representatives from the Federal
agencies that comprise that Committee, commonly known by its
acronym, CFIUS. Unfortunately, some of those agencies were not
able to present their cases here today, nor were they prepared
to do so on September 29, when this hearing was originally
scheduled. It is the Banking Committee's hope that we will be
able to hear from those agencies in the very near future, as no
examination of the process by which foreign acquisitions of
U.S. companies are reviewed for potential national security
implications can be complete without their testimony.
Neither the public nor the agencies that comprise CFIUS
should be under any misunderstanding about this Committee's
position on the current process. Evidence and analysis
indicates that improvements are needed. The extent to which
changes are warranted, however, is unclear. The current process
for reviewing proposed acquisitions remains excessively murky.
It is too opaque to allow for the appropriate level of
Congressional oversight into a process established by Congress
with passage in 1988 of the Exon-Florio Amendment to the
Defense Production Act. That is why Congress has repeatedly
tasked its investigative arm, the Government Accountability
Office, GAO, to conduct studies on this subject.
The process by which the CFIUS reviews proposed foreign
acquisitions for national security implications may remain too
opaque, and the Committee understands and acknowledges the
legitimate need for the protection of proprietary information.
We have enough insight, though, from anecdotal information
emanating from press accounts of individual cases, GAO reports
dating from 1992, and Committee research, to hold firm the
belief that improvements to the current system are warranted.
I would like to note my concerns regarding the difficulties
the Committee has encountered in arranging for the relevant
Federal agencies to appear to address the GAO report. While I
recognize that protection of proprietary information is
important, and that there are sensitivities involved with
Congressional oversight of a body created by Executive Order,
Congress has a legitimate need to scrutinize the efforts of
agencies of the Federal Government responsible for national
security.
This morning, GAO will testify as to its findings. We will
hold another hearing at which Federal agencies will again be
asked to appear to comment on these findings.
The GAO report is not trivial in its implications. It
suggests that implementation of the Exon-Florio Amendment may
not protect national security. It discusses the need to address
the distinctions component agencies make in how they define
``national security,'' a term deliberately left vague so as not
to overly constrain the review process. It discusses problems
with the current timeline that arise when agencies with a
national security focus lack adequate time to collect and
analyze intelligence on foreign corporations and the
governments that may back them. It discusses the very difficult
issue of when companies withdraw their paperwork from CFIUS
review, either at their suggestion or on their own initiative.
And it addresses the issue of transparency. The Treasury
Department may believe that the process is sufficiently
transparent as it currently exists. This is the U.S. Senate
Committee with jurisdiction over the process in question, and
we most certainly do not agree with Treasury.
With us here today to speak to their findings are Katherine
Schinasi, Managing Director for Acquisition and Sourcing
Management, U.S. Government Accountability Office, and Ms. Ann
Calvaresi Barr, Director of Industrial Base Issues for the GAO.
Ladies, welcome to the Committee. Your written statements
will be made part of the record. We know this is a very
important study, and you take as much time as you wish. Who
wants to go first?
STATEMENT OF KATHERINE SCHINASI, MANAGING DIRECTOR,
ACQUISITION AND SOURCING MANAGEMENT;
ACCOMPANIED BY: ANN CALVARESI BARR,
DIRECTOR, INDUSTRIAL BASE ISSUES,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Schinasi. I will. Thank you, Mr. Chairman.
Thank you for the opportunity today to appear before the
Committee to discuss GAO's work on the Committee on Foreign
Investment in the United States, and as you noted, I am
accompanied by Ann Calvaresi Barr, who directed our most recent
report, which was done at the request of this Committee and
issued on September 28. I will submit my full statement for the
record and take this opportunity to summarize my remarks.
But before I turn to the findings in our most recent review
of CFIUS, I would like to put that review in the broader
context of GAO's reporting on the process. Our knowledge of
this CFIUS process is both broad and deep. Our recent review
builds on and incorporates knowledge gained during more than a
dozen evaluations, which, as you noted, date back to the early
1990's.
Recommendations we made in earlier reports, in 2000, and
again in 2002 were directed toward improving the CFIUS process.
For example, we recommended that all member agencies have
access to data needed to assess risk. We also made
recommendations to improve company compliance with agreements
that are negotiated as the basis for CFIUS approval. The
agencies have made some changes based on our recommendations,
and we have seen some improvements in the process.
In responding to a draft of our most recent report,
however, the Treasury Department, which indicated that its
comments reflected the position of all CFIUS agencies,
disagreed with our findings and recommendations. I would be
happy to address the specifics of the Treasury Department's
comments in response to your questions, but let me state for
the record that Treasury's assertions, both in their comments
and in later press interviews first, assume a policy position
that is not in the report. We deal with the CFIUS process, not
the policies inherent in CFIUS decisions. Second, the Treasury
comments are not substantiated with any opposing evidence. And
third, they apparently do not actually reflect the position of
all CFIUS agencies, as evidenced by the fact that there are no
Administration witnesses at the hearing today.
Let me also add that the Department of Justice provided
independent comments, which we have appended to our report, as
is our practice, that reflect a different position than that
provided by Treasury. Further, let me suggest that the actions
taken by the CFIUS agencies subsequent to our providing them a
draft of our reported findings and recommendations might be
seen as a further indication that significant disagreements
exist within the CFIUS member agencies.
As we state in our report, our review of case files and our
discussions with officials at both the staff and policy levels
reveal fundamentally differing views about what constitutes a
threat to
national security, what criteria should be used to go to
investigation, and the sufficiency of time to address potential
risks. Any interagency process, by its very nature, is messy,
as each agency is included in the process to ensure that their
competing and sometimes conflicting positions receive full
vetting.
The overwhelming majority of foreign transactions bring
benefits to the U.S. economy, but the Exon-Florio Amendment was
established to ensure that those limited number of
transactions, which do pose a threat to national security, are
identified and mitigated to the fullest extent possible.
And now, let me turn to a summary of our report. First, let
me address the differing views of the scope of Exon-Florio
among committee members on how risk is defined. The statute
establishing the Exon-Florio provision lays out a number of
factors that can be considered in defining a threat to national
security, but that issue is not addressed in implementing
regulations. Our finding is based on the practices we observed
in going through the different case files.
Some members view national security threat as one that is
tied to export controls, classified contracts or specific
derogatory intelligence. Other members' expanded definition
includes the vulnerabilities that can result from foreign
control of critical infrastructure or critical inputs to the
defense systems because of the potential for longer term harm.
Why does this matter? Well, for example, in one proposed
acquisition, DoD raised concerns about the security of its
supply of specialized integrated circuits, which the Defense
Science Board has identified as essential to a number of
defense systems such as unmanned aerial vehicles.
However, some committee members, including the Department
of the Treasury, the Council of Economic Advisers, and the
Office of Science and Technology Policy, argued that DoD's was
an industrial policy concern and as such fell outside the scope
of Exon-Florio. As a result, an enforcement provision between
the acquiring company and the Departments of Defense and
Homeland Security was removed from the ensuing agreement. In
removing the provision, the committee eliminated the
President's authority under Exon-Florio to divest a company
that has not complied with the agreement, thereby weakening its
impact.
The second type of disagreement that we saw in reviewing
the cases occurs when the committee decides whether or not to
initiate an investigation, which is the second period of fact-
finding laid out in the statute. The CFIUS chair applies a
standard that there must be evidence that a credible threat
exists, and no other laws are appropriate or adequate to deal
with it. This is also the criteria that ends an investigation
with a finding to the President. Other agencies, which, in our
case review, included the Departments of Justice, Defense, and
Homeland Security argue that the purpose is in fact to
determine whether or not a credible threat exists. So using
that as a reason to go into an investigation seems
counterintuitive.
A third area of disagreement revolved around whether there
is a sufficiency of time to assess potential risks. Most
initial reviews of company-notified transactions are completed
in the legislated 30-day time frame, either because the
transactions do not pose a risk to national security, the
transactions are adequately covered by other laws, or the
committee quickly reaches an agreement with the acquiring
company that sufficiently mitigates any potential risk.
However, case documentation shows that Departmental staff
can actually have as little as 3 to 10 days to conduct their
analysis. For complicated cases, agencies may not be able to
fully explore the
potential risks of a transaction, and in at least one instance,
an agency was unable to provide input with in the allotted time
and therefore was not able to affect the decision. In its
comments on our report draft, let me just note that the
Department of Justice did note that any additional time to
analyze cases would be helpful.
Finally, I would like to draw the Committee's attention to
the practice of allowing or promoting company withdrawal of the
notification of a transaction. Because of the reluctance by
some CFIUS agencies to enter investigation, a point I made
previously, committee members have encouraged companies to
withdraw their applications to allow more time for agency
assessments. As in our 2002 review, we found, again, a number
of cases where companies were encouraged or permitted to
withdraw their notification of both pending and completed
acquisitions. When an acquisition is pending, the Government
maintains some leverage in conditioning company behavior during
this period of time of withdrawal. Therefore, the additional
time may be productive in mitigating risk. However, when the
transaction has already been completed, the Government loses
transparency of company activities and also loses the leverage
provided by Exon-Florio to condition those activities. We found
at least four cases where companies that withdrew refiled at a
much later date or not at all.
In cases where national security issues have been raised,
this is perhaps the area that provides the greatest potential
for harm. Additionally, without an investigation, there is no
Presidential decision to allow, suspend, or prohibit
acquisitions. As you know, Mr. Chairman, it is a Presidential
decision that triggers reporting to the Congress.
In closing, let me say that the recommendations we make in
our report are directed to ensuring that the practices that we
have found in our review do not impede the United States'
ability to identify and mitigate risks that might be posed by a
few select but critical acquisitions. We make our
recommendations fully aware of the need to implement Exon-
Florio in the context of the continuing benefits to this
country of foreign investment. An open investment policy,
however, need not be compromised by a reexamination of the laws
and regulations of a national security structure that was
established decades ago.
This concludes my summary, Mr. Chairman, and I would be
happy to take your questions.
Chairman Shelby. Thank you. This report is very detailed
and very much in need, and I want to thank you and the others
at GAO that worked on this. This is more than worth reading.
Ms. Schinasi. Thank you.
Chairman Shelby. We know a lot of the issues that come
before this Committee are very complex, tedious, hard to
understand, but we know they are very important, at least we
think so.
I have a number of questions. The Committee on Foreign
Investment in the United States, that is--CFIUS operates under
a voluntary system. It only reviews acquisitions that are
voluntarily submitted to it by the companies involved in the
acquisition. Does the system of relying on voluntary
submissions, even with the knowledge that the committee will at
times contact companies and suggest they submit to review,
create a vulnerability or a weakness in the system for the
protection of national security? It is a voluntary deal.
Ms. Schinasi. There are provisions under the voluntary
arrangement that are not being used to the fullest extent
possible, and let me give you an example: Under Exon-Florio,
any agency who is a member of the CFIUS committee has the
ability to notify to the committee acquisitions that it
believes raise potential threats to national security. So even
though the process is voluntary, there is a provision for the
agencies to be proactive in doing that. What we have found is
that the agencies do not always do that.
Chairman Shelby. Are you aware, yourself, of any mergers or
acquisitions that were not submitted for review but in your
opinion, your judgment, should have been? If you have, we would
like to know.
Ms. Schinasi. One of the problems, and you raised the issue
of complexity of this process, one of the problems is you do
not know what you do not know.
Chairman Shelby. That is right.
Ms. Schinasi. But there is nothing in our own experience
that I would put in that category.
Chairman Shelby. You have had previous GAO reviews of this.
You have reviewed the implementation of the Exon-Florio
Amendment and the role that the committee plays a number of
times in the past, going back as far as 1992, I believe. Why is
this the first time you are raising issues that get to the very
heart of the process? Should something as fundamental to the
process as reconciling divergent understandings of the meanings
of national security have been neglected for so many years
after the passage of Exon-Florio? In other words, have we
forgotten what national security is and should be?
Ms. Schinasi. I think one of the things that I would say on
that is that defining and protecting national security has
gotten much more difficult as threats have become more varied
and diffuse and technology cycles shorter and those borders,
national borders, have become less relevant for trade and
investment in national security-related industries.
I think we have a context today that is very different than
the one that existed either in 1988, when the Exon-Florio
Amendment was passed but even more significantly when the
entire national security structure was put in place. We have
called for a reexamination of the basis of much of the national
security structure, and I think CFIUS would clearly fall into
that category.
Chairman Shelby. Exon-Florio clearly states, and your
report points this out, that a Presidential determination based
upon the Committee on Foreign Investment review should be the
path of last resort. From GAO's years of studying the
implementation of the Exon-Florio Amendment, how do you believe
that the Committee on Foreign Investment review processes fit
in with other mechanisms for protecting national security? In
other words, has GAO looked at the question of how Exon-Florio
fits in with a broader legal or regulatory framework?
Ms. Schinasi. Yes, Mr. Chairman. As you know, Exon-Florio
was established to be a last resort, a process of last resort,
and there are many other processes that we have in place, for
example, export licensing or the National Industrial Security
Program that deal with mitigating other threats to national
security. But the problem with the way we have seen Exon-Florio
implemented is that it assumes that those other processes are
in fact working the way they were intended, and so, the statute
says for Presidential determination, other statutes have to be
both appropriate and adequate, and it is the assumption of the
adequacy of those other laws that troubles me about the way
some of the determinations have been made.
Chairman Shelby. The GAO report also notes problems with
agencies with national security missions have in completing
their reviews, as you mentioned earlier, within the 30-day
period mandated by law, a problem exacerbated by the fact that
it is in practice a 23-day period. In response, the GAO
suggests removing the distinction between the initial review
and the follow-up 45-day investigation period, making it a 75-
day study phase. What ramifications would you foresee if such a
change were made?
Ms. Schinasi. We are trying to accomplish two things with
that recommendation. The first is to provide more time for
those few cases that are complicated and require additional
time for the agencies to determine potential risk. The second
is to remove that designation of investigation, because the
Treasury Department has been very vocal in its position that
using the term investigation and making companies go through an
investigation could have deleterious effects on their position
in the financial community.
Chairman Shelby. Would the culture change, perhaps?
Ms. Schinasi. That would be something that would be a
welcome outcome. I am not sure if the time, giving more time
would in fact have that effect.
Chairman Shelby. The mission is very close to the Committee
and very close to the issues of regulating dual-use exports, in
a sense, people said. Integral to the mission of regulating
dual-use technologies, and it is explicit in the case of high
performance computers, in the case of tiering, or ranking
countries on a scale of threat to the U.S. national security.
The European Union has been very concerned about what changes
to Exon-Florio Congress might make, and I recall the case of a
Dutch, clearly a benign allied company, seeking to acquire a
U.S. manufacturer of semiconductor lithography, a case that was
reviewed extensively by the Committee on Foreign Investment,
which resulted in changes to the original acquisition.
Should the Committee on Foreign Investment in the United
States apply a tiering concept in its review of proposed
acquisitions where a NATO or other close ally is involved as
opposed to perhaps other risk?
Ms. Schinasi. Mr. Chairman, I would suggest that that is
probably a policy call that certainly goes beyond our work and
probably is better for me to stay away from.
Chairman Shelby. Okay; Senator Stabenow, I believe you were
here first.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman, very much, for
holding this important hearing. We certainly understand that we
need to monitor foreign investment in the United States, and I
appreciate this thorough report and all of the questions that
it raises that we need to address. I appreciate your efforts.
Let me first say that while we know we must protect the
unintentional flow of information and technology through
mergers and acquisitions that could compromise our national
security, we also know, and Michigan is an example, Mr.
Chairman, of a place that has been very open to foreign
investment, we view ourselves as the leaders in advanced
manufacturing technology and engineering and R&D and have, in
fact, major new investments coming into the State, partnering
with us, and we appreciate those.
But that does not take away from the need to address what
we are talking about today, and particularly when we look at
the recent events involving the proposed acquisition of Unocal
and all of the issues that were raised, I think this is a
particularly timely hearing.
Questions regarding your report: As we continue to compete
in a world economy, we are clearly in a world economy right
now, what major industries or sectors do you think we most
likely should be looking at in terms of investigations or
oversight?
Ms. Schinasi. I think I would answer that question in the
context of Exon-Florio being the last resort national security
structure, and I would look not so much at industries, but I
would look at those areas which are not thought traditionally
to pose a threat to national security; for example, we have a
number of laws and regulations in place that deal with
classified information, but there is a lot that is considered
sensitive but unclassified in many of the higher tech
industries that could fall through the cracks, so that would be
one area I would look to.
The other is in the whole communication revolution. Again,
most of our traditional communications are covered by the
regulatory provisions that the FCC applies and others. But all
of the Internet communications and the system that are arising
to support our Internet communications might be one of those
other areas that would fall through the cracks, so that would
be how I would focus our attention.
Senator Stabenow. You focus in your report on the fact that
there are narrow definitions of what a threat is to our
national security. Could you speak more to that and how you
view that definition and ways in which it possibly should be
expanded?
Ms. Schinasi. I think let me first say that the flexibility
that is inherent in Exon-Florio is very important, and each
case needs to be considered on a facts and circumstances basis,
so we are not calling for a definition of national security.
You know, we need to have more flexibility than that.
That said, however, the statute itself lays out a number of
factors that can be considered by the committee in its
deliberations, and some of those, as we point out in the
report, have to do with credible intelligence, derogatory
intelligence about companies having classified contracts, a
rather narrow scope. But there are other factors in the statute
that deal with security of supply, technological preeminence of
our industries that we believe also should come to bear in
making decisions about what constitutes a threat to the
national security.
And in our review of the case files that we have gone
through, we have seen that those factors do not always become
part of the decisionmaking process, despite the fact that some
member agencies think they should be.
Senator Stabenow. So basically, you are saying that there
are flexibilities within the statute, but the committee has
been very narrow in terms of defining the scope of national
security.
Ms. Schinasi. That is correct.
Senator Stabenow. And is it fair to say you would recommend
that they look more broadly at the factors that are in the
statute?
Ms. Schinasi. That was our recommendation.
Senator Stabenow. And then, second, with that, the
committee, you indicate, has been reluctant to initiate
investigations. You show some numbers. You say in your report
that CFIUS recently received more than 1,580 notifications, but
only 25 cases were investigated, and I know you speak to the
negative connotations of an investigation, the need for a
Presidential decision, and so on. Did you look also at issues
related to budget and whether or not this is a question of
staffing or budget, the ability to actually initiate more
investigations?
Ms. Schinasi. We did not ask that question directly, and
that did not come up directly as a reason. However, one of the
things that we did note was that because this is an interagency
process, the accountability for doing that is not always
assigned. And the guidelines give certain responsibilities to
the chair.
The agencies have other responsibilities, but it is not
always clear between the agencies who is supposed to be doing
what, and I would guess that one of the mitigating factors in
how much work the agencies do is, in fact, budget. The other
thing is that it is often ``other duties as assigned'' for the
individuals involved. It is not their primary focus.
Senator Stabenow. So is it fair to indicate or to say that
you believe the committee has been too reluctant to
investigate, too cautious at this point? How would you frame
that?
Ms. Schinasi. I think that for those cases where the 30-day
period is sufficient to determine that there is no potential
risk, and that would be the majority of those cases, we would
not make the point about reluctance. But we would answer that
by saying when companies withdraw their application from the
CFIUS process, and there are those instances, particularly when
an acquisition has already been finalized--the purchase has
already gone through, the new governing structure of the
company is already in place--that in those cases, trying to
prevent going into investigation, we would rather see more time
given to address issues that were raised concerning the
acquisition rather than the opportunity for those companies to
withdraw their application, because that is where you really
lose transparency. You do not know what is going to happen.
Senator Stabenow. Thank you, Mr. Chairman. I am hopeful
that we will have an opportunity to continue to focus on this.
There are so many challenges and questions that we now face as
we compete in the international marketplace, so I appreciate
very much your bringing this up and your leadership in this.
Chairman Shelby. Thank you.
Senator Stabenow. And I look forward to working with you.
Chairman Shelby. Thank you, Senator. Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. I would like to thank the witnesses for their
time today and for their excellent report, Mr. Chairman. I
would like to thank you for your leadership in focusing on
this.
Chairman Shelby. I could add and your leadership, too. It
was you and Senator Sarbanes, me, who asked for this report
together. We thought it was important.
Go ahead.
Senator Bayh. Thank you, Mr. Chairman, and I know you have
been working with Senator Inhofe in trying to strike the right
balance here, so I look forward to learning from this report
and continuing our work together to strike the right balance,
as Senator Stabenow says. This is just another manifestation of
the consequences of globalization, in which we benefit from
direct foreign investment in our country; we welcome foreign
companies who build factories and employ Americans. But at the
same time, there will be very narrow parts of our economy where
our national security interests of necessity will trump our
commercial concerns, and it is striking that right balance and
identifying that very narrow segment that of course brings us
here today and is very important. So, I thank you for your
focus on this.
I have several questions. Some of them will be somewhat
similar to what a couple of my colleagues asked. I hope they
are not totally redundant, but let us go through them and see.
First, talking about the need for notification, why should
that not be required?
Ms. Schinasi. I think there would be a down side to having
a mandatory notification, and it would perhaps get back to the
resource issue that Senator Stabenow raised. The number of
transactions affected could potentionally be large.
Senator Bayh. The resource issue on the part of the
governmental entities involved?
Ms. Schinasi. Yes, on the part of the Government.
Senator Bayh. This reminds me of this whole avian flu
situation we are dealing with right now, where the
responsibility has been spread across governmental entities.
And even for those individuals who have a responsibility, it is
only one of many responsibilities. Would we not solve this
problem by having a single individual with adequate resources
who could focus on this issue assuming that, if we were to move
in that direction, would a requirement of notification not make
sense?
Ms. Schinasi. That is, again, one of those policy questions
that goes beyond our works.
Senator Bayh. Let me phrase it a different way: If we were
to deal with the resource question, would that remove the
principal obstacle to a requirement of notification?
Ms. Schinasi. Voluntary versus mandatory notification is
something that has been an inherent question ever since CFIUS
was put in place. I would want to go back and look at the
number of investigations, the number of, excuse me,
transactions that actually are occurring out there to be able
to give you a good answer of whether or not the costs and the
benefits would be in balance there.
Senator Bayh. Currently, who makes the decision about
whether a notification takes place?
Ms. Schinasi. The companies themselves.
Senator Bayh. Does it strike you as an interesting fact
that the private sector would be making decisions about what
affects the national security interests of our country rather
than the Government?
Ms. Schinasi. What we have called on is the agencies
themselves, we have found when we looked at this issue in
earlier reports that, in fact, there are transactions that do
pose potential threats to national security that have not been
notified to the committee. And we have found that individual
agencies in carrying out their own mission have information
about those.
The process allows for those agencies to come forward and
notify the committee. However, it is uncertain how often those
agencies are doing that. So what I would like to see first is
the agencies themselves to come forward and carry out that
responsibility to notify the committee.
Senator Bayh. Well, I only speak for one Senator, but I
think we should address this resource issue and this focus
issue. This is important. When we are talking about the
national security interests of the country, somebody should be
in charge and be held accountable. We should not have this fall
through the cracks because it is just so diffused, and people
are busy with other things. I am not in favor of big, intrusive
government, far from it, but when it comes to making the final
call about national security matters, it probably should be the
country rather than the private sector making those calls.
Ms. Schinasi. Yes, sir, we would agree with that.
Senator Bayh. My second question, well, it is a subset of
the first. Once a notification does take place, should an
investigation be required? I guess it deals with the whole
stigma and maybe this gets into the realm of the semantic.
Maybe we need to come up with a different word here so we do
not spook the market. Inquiry, maybe that sounds a little too
stigmatizing, too?
Senator Stabenow. Review.
Senator Bayh. Review, excellent. Maybe we can get out our
thesaurus here and come up with something that gets the job
done and does not negatively impact the financial markets. If
we can do that, would that resolve the down side inherent to
requiring the review at that point following a notification?
Ms. Schinasi. What we saw in our review of the cases that
we looked at was that for complicated cases, and there are a
number of those, there just is not enough time to establish
whether or not there is a potential threat and how to mitigate
that threat if, in fact, it is there. And I think it is those
two things that would warrant an extended period of time. What
you call it, I think is review.
Senator Bayh. So that the potential stigma from what may be
an innocuous situation----
Ms. Schinasi. That is correct.
Senator Bayh. The fact that in 30 days, what can you really
do?
Ms. Schinasi. That is correct.
Senator Bayh. Fair enough. We will work on the semantics
and think about the timeframe, and if we could get those two
things resolved, would that then alleviate the concerns about
the requirement of a review over a more meaningful period of
time?
Ms. Schinasi. We believe so, and as importantly, we believe
it would have a difference on the outcome as well.
Senator Bayh. Senator Stabenow touched on the factors that
may be taken into consideration but are not required, even
things like whether the acquiring company comes from a country
that, for example, might be implicated in supporting terrorism
or present proliferation risks for missile technology or a
variety of other things. Should those factors not be required
to be taken into account?
Ms. Schinasi. Yes.
Senator Bayh. The definition of national security, it has
been, and I think Senator Stabenow touched on this as well, and
you answered with regard to the recent energy situation. We had
a situation in my own home State where a company was producing
well more than half of the magnets necessary to make our smart
bombs work. It has been acquired by a company from China.
Should things like that not be taken into account, not just
whether it is a sensitive technology but whether it is an
input, for example, that is critical to a national defense
system or, in the globalized marketplace, access to energy
supplies? I mean, this is a strategic concern. Apparently, the
Chinese have decided it is a strategic concern. I would assume
it is perhaps one of ours as well. Should factors like that not
be required to be taken into account rather than just be merely
advisory?
Ms. Schinasi. Senator, I think when I referenced the
decreasing relevance of national borders in our national
security, particularly in our defense-related industries, it is
in fact the underlying concern, the manufacturing processes and
the technologies that we have invested billions of dollars in
that give us our military superiority that probably are
residing as much in the commercial sector as they are in the
defense sector now, and it is exactly those that are the
underlying concerns.
Senator Bayh. Take this one small example from my State.
Eighty-five percent of the magnets necessary to make the smart
bombs work, if that production is eventually relocated to a
foreign country, does that not place our country in a position
of dependency for a critical input to a weapons system that we
now rely upon to a great extent?
Ms. Schinasi. I will go back to the statute and say both of
those examples are in the statute as factors to be considered.
One is security of supply; another is continuing technological
preeminence in the United States.
Senator Bayh. That they must be considered, or they can be
considered?
Ms. Schinasi. No, they are factors that can be considered.
Senator Bayh. Can or must?
Ms. Schinasi. Can.
Senator Bayh. Should they not be required to be considered?
Ms. Schinasi. The recommendations that we have made, and we
have made them for Congressional consideration because the
agencies have disagreed with us is that there be more guidance
in what factors should be considered in making the decisions
and determinations.
Senator Bayh. So your position is that they should continue
to be advisory only, or they should be required to be taken
into account?
Ms. Schinasi. Our position is that we have suggested that
you look at that decision again.
Senator Bayh. You are reluctant to play referee, huh?
Ms. Schinasi. If moved into the policy, we try to maintain
our----
Senator Bayh. You are the good cops? Is that the deal here?
Well, we are up to the challenge, right.
[Laughter.]
Okay; I think I hear what you are saying. Again, when it
comes to national security and weapons systems, it seems to me
we should err on the side of ensuring supply and therefore
require that these things be taken into account rather than
well, maybe yes, maybe no, because it a dangerous world,
regrettably.
Final thing, and this may be more attitudinal than not. It
has been suggested to me that there are some on the trade side
of this whole thing; some of our trading partners like to raise
this whole process as an example, according to them, about how
we restrain investment into our country, and they use that as a
tissue with which to cover their own much more restrictive
practices that prohibit American direct investment into their
own economies. Anything like that come up in the course of your
report?
Ms. Schinasi. I think that is a position you will hear
given by a number of the member agencies.
Senator Bayh. Our trade officials get aggravated by this,
but I get back to my opening statement: Globalization can work
and work well if we prepare ourselves for the globalized
economy. Part of that is going to be direct investment. That
can be a good thing. But when it comes to that narrow category
of national security interests, I think the Nation's security
has to trump our commercial concerns when it gets right down to
it, and there is a legitimate reason for that.
So, I just hope that we bear that in mind in setting our
priorities and trying to strike the right balance here. And
again, thank you both very much, and Chairman and Ranking
Member Sarbanes, thank you both.
Chairman Shelby. Thank you, Senator Bayh.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. I want
to welcome the representatives of the GAO this morning.
As I think has already been noted, last February, you,
Senator Bayh, and I joined in sending a letter to the GAO,
asking them to build on their earlier work and undertake a
further study of the process for the implementation of the
Exon-Florio Amendment, and we are very pleased to have this
report, and it is very helpful to the Committee.
The questions raised there are serious ones: Substantial
economic benefits can generally flow from investment and from
reciprocal or multilateral agreements that permit free
investment in the U.S. economies of other countries. But Exon-
Florio recognizes that what is true in many situations is not
necessarily true in all situations. And CFIUS has received a
great deal of publicity in recent months. I am concerned about
some of the way it is apparently perceived.
In June, the Financial Times called it an opaque
Government panel, opaque. It seems to me given the importance
of its work and the sensitive issues and information with which
it must deal, it is important that CFIUS be as transparent as
possible, thereby contributing to a higher degree of acceptance
of its decisions. Actually, they have not complied with the
requirements in the Defense Production Act for quadrennial
study for Congress for whether particular countries are engaged
in a coordinated strategy to acquire U.S. companies that
develop or produce critical technology. That is a requirement.
It is in the statute. CFIUS seems to just be ignoring that
requirement, and we ought to, I think, Mr. Chairman, take a
look at that.
Chairman Shelby. Absolutely.
Senator Sarbanes. I understand that the representatives of
the executive departments were invited to this hearing but were
unable to appear, but we hope to have their testimony at a
future hearing.
Chairman Shelby. Absolutely. Senator Sarbanes, we have
worked together on this. I was disappointed with the executive
branch not appearing here today. We are going to call for
another hearing. Also, Senator Inhofe, if you will yield me a
little bit of your time----
Senator Sarbanes. Certainly.
Chairman Shelby. He is very interested in this issue. He
has worked with all of us on it, and he would be very
interested in, as he told me, testifying at another hearing
before the Banking Committee if it meets with all of you--thank
you, Senator Sarbanes.
Senator Sarbanes. The Chairman, Senator Bayh, and I have
outlined the importance of these security concerns, and we
weigh economic considerations, but the security concerns, it
seems to me, are the trump card when we consider these matters.
Chairman Shelby. Should be.
Senator Sarbanes. I am going to be very up front and blunt
with the two witnesses. The Treasury is quoted, an unnamed
official--that is the way it always happens----
[Laughter.]
Senator Sarbanes. --in the Financial Times on September
28--it is a widely read business publication, of course, in
Europe and in this country, and I am going to quote from the
article, and then, I would like to address a question to you:
``However, the Treasury questioned the motives''--motives--
``behind the report which was requested by Mr. Shelby and
others. The Chairman had observed that the GAO report
underscored the need for Congress to have far better insight
into the review process to ensure that national security
considerations are not given short shrift.'' That is an issue
that Senator Bayh has raised on a number of occasions here.
And I am now quoting again from the article. ``An official
said,'' this is a Treasury official, ``GAO's views were well-
formed before talking to Treasury, and GAO failed to ever
interview other members of the CFIUS committee, including the
State Department, the President's Council of Economic Advisers,
and the U.S. Trade Representative. The official added GAO was
selective in its interviews, excluding key Members of the
Committee, and this clearly colors the report. They obviously
had a viewpoint going in and were merely looking to fill in the
blanks. In this regard, the report is sloppy and lacks any
useful evidence to back its conclusions. The report is not
worthy of GAO's reputation for thorough, unbiased analysis.''
Well, first of all, I would say GAO certainly has a
reputation for thorough, unbiased analysis. I do not see that
that reputation is done in by this report, but since your
motives have been put into question here, I thought I should
put it right out front and ask you to address this unknown,
unnamed----
Chairman Shelby. Unnamed.
Senator Sarbanes. Presumably not unknown but unnamed
official who did this--I guess one would describe it as an
anticipatory or preemptive smear job here before you even got
before us to present the report. Could you address that?
Ms. Schinasi. Senator, I welcome your question.
Senator Sarbanes. Yes.
Ms. Schinasi. What I would like to do is go through the
methodology that we did use in this report, if you will have a
few minutes to listen to that.
Senator Sarbanes. I think it is important. I mean, this is
not an idle allegation that has been made here by the Treasury
Department. I must say we expect better of the Treasury, too,
but anyhow, please.
Ms. Schinasi. The work that we did that culminated in this
report is a continuation of work that we began and issued a
report on in 2002, so I would like to start there with what we
have done. In that report, we had 18 cases that we reviewed. We
started with some knowledge of the 451 cases that have been
notified to CFIUS between 1997 and 2004, and from that, we
selected 18 cases to look at more fully and in depth. And we
went through over 1,000 documents in looking at those cases,
and I wanted to make sure I said what those were.
We looked at documents that included handwritten notes of
CFIUS meetings at the staff and policy level, formal minutes of
policy level meetings that were chaired at the assistant
secretary level; looked at communications between CFIUS members
and the companies. We looked at emails between various CFIUS
member agency officials and within agencies that raised their
concerns. We looked at agendas and speaking notes for policy
level meetings. We looked at memos to the under secretaries
concerning the views of various staff levels. We looked at
classified risk assessments by the CIA and DIA. We looked at
final versions and drafts of the mitigation agreements and
emails and memos between the Government and companies setting
those agreements out. We looked at reports that the companies
sent to CFIUS or member agencies in compliance with the
agreements.
As you know, there are confidentiality provisions
associated with CFIUS, and we scrupulously adhere to those, so
I am not at liberty to talk about any individual cases. But
that is to give you a sense of the documents that we looked at.
In discussing what we found in those documents, we had
interviews with all of the member agencies. At that time, there
were 11. That includes the Departments of Commerce, Defense,
State, Treasury, and--I am sorry, I just lost one of the five
there. I will come back to that. We spoke with the six
Executive Offices of the President, the National Security
Council, the National Economic Council, the Office of
Management and Budget, the Council of Economic Advisers, and
the Office of Science and Technology Policy.
So we met with all of the agencies and all of the Executive
Offices of the President. That gave us the basis for our
understanding of the CFIUS process. When we moved to this
review, we had that understanding. We picked an additional set
of cases to look at in addition to the ones that we had looked
at in 2002, and we went through the case files on all of those
cases as well. We had discussions with those agencies that we
saw were most active in those cases, and we went back to those
agencies and asked if there were other documents or other
agencies that we should contact, and we were told no. In our
own review, we identified the National Security Council as one
of the agencies we had not preliminarily identified, and we
contacted the National Security Council to ask them if they
wanted to weigh in and make their views known. They declined to
do that.
So the process of data gathering was very extensive and
dare I say exhaustive. We have a process internally with that
data, where we go through a series of fact checking and also an
internal review that includes our division that looks at trade
matters, our attorneys, our economists, to understand not just
whether the facts are correct but whether or not the findings,
the conclusions are logical. We went through that review
process.
We also took our facts back to all of the agencies, and we
go to Treasury as the chair of the committee and let them
manage the process of checking the facts with the other
agencies. And we made any changes that we needed to based on
evidence that came back from the Administration. There were not
a lot of changes.
And then, finally, we have a process, as you know from
looking at the report, where we send out a draft of our report
to the agencies to get their formal comments on our conclusions
and recommendations. And as you see, the Treasury Department,
which said it was speaking for all of the member agencies, sent
us about 19 pages of comments. Some of those addressed issues
in the report. Some of those addressed issues that were not in
the report. And we have seen at least over the last three
reports that we have issued that the Treasury Department
comments assume that we have a policy position that is limiting
the open investment policy in the United States.
Clearly, that is not true. It has not been within the scope
of any of our reports, nor is it within the scope of this one.
But you will see that in the back of this report that the
Justice Department provided individual comments. We go through
a process where we review those comments. We make changes as we
believe necessary, and we answer for those where we do not
believe that changes are necessary why we do not think so. That
is in accordance with the procedures that we have in place for
every review that we do at GAO, and those are the procedures
that we followed here as well.
Senator Sarbanes. What basis is there, if any, for this
Treasury unknown spokesman questioning the motives of the GAO
in making this report?
Ms. Schinasi. Senator, I am afraid you will have to ask
them.
Chairman Shelby. We need to have them here to ask them.
[Laughter.]
I think that is one reason they are not here today.
[Laughter.]
Senator Sarbanes. As I understand, you invited them to this
hearing.
Chairman Shelby. We have. And we have invited them for the
future. We plan to pursue that. I think it is very important
that they appear here before the Banking Committee. I will be
surprised and shocked if they do not in the future.
[Laughter.]
Senator Bayh.
Senator Bayh. Mr. Chairman, if I could just add one
minute's worth of credibility to the report. One of the cases,
Senator Sarbanes, they based their report on was in my home
State, a company called Magnequench. They produced 85 percent
of the magnets that go into our smart bombs that you see on TV.
That plant has now been closed, and the production has been
moved to China.
Senator Sarbanes. Are these magnets that are essential for
the smart bombs?
Senator Bayh. Correct. That plant is now closed, and it has
been moved to China, and this is one of the cases that they
reviewed. So it is a matter of debate, but my point is simply
that this is a very credible example of the kind of questions
that have been raised and deserve to be addressed at a policy
level. So, I commend the GAO for their report and, at least as
far as I am aware of, the facts that went into it.
Chairman Shelby. Senator Bayh, if you would yield, this is
a bipartisan inquiry here. I know Senator Inhofe and I are
working together. You all are working together on this, Senator
Sarbanes and others.
This is not a partisan interest. This is a national
security interest and an economic interest, all of it together.
But as I have said before, I do not believe everything in this
country is for sale. If Senator Bayh talked about earlier, if
we let all of our--just do something for a dollar, for a
profit, to sell something and trump national security. I
thought, and I was always taught that the national security,
the security of the people of this Nation, trumped everything.
Senator Sarbanes. Yes, I see, Senator, maybe this has been
referred to before I was able to arrive at the hearing, Senator
Inhofe, in a story in the Los Angeles Times today said
yesterday that the screening process was broken, leaving the
Nation vulnerable to foreign threats. Pretty strong statement.
Chairman Shelby. Well, from what Senator Bayh was just
talking about the example in his home State, maybe it is
broken, and that is why we are going to try to address it. But
we need Treasury here, too, because this issue is not going to
go away. We are not going to let it go away.
Senator Sarbanes. Right. Treasury is the chair of the CFIUS
interagency group, is it not?
Ms. Schinasi. Yes, sir.
Senator Sarbanes. And does the Secretary himself act in
this chairmanship role, or has he delegated it out to someone?
Ms. Schinasi. There is a provision to escalate issues to
the Secretary, but it has for the most part been delegated
down.
Senator Sarbanes. And how far down has it been delegated in
Treasury?
Ms. Schinasi. The Under Secretary and the Assistant
Secretary.
Senator Sarbanes. I see, Under Secretary Adams, who is the
one who commented on your report, is also the one who has
generally acted as the chairman of the interagency group?
Ms. Schinasi. Yes, at the policy level, yes, sir.
Senator Sarbanes. Now, Treasury asserts these decisions are
made by consensus by policy level officials, is that right?
Ms. Schinasi. Yes.
Senator Sarbanes. So they have no division within the
group? I mean, do they ever get a case where they push it to a
decision and the group is divided?
Ms. Schinasi. Yes, Treasury refers to the process as a
consensus process. The guidelines call for each agency to state
their views, but there is nothing in the guidelines to talk
about how disputes are resolved or whether or not they need to
be resolved.
Senator Sarbanes. Presumably, they have disputes within the
committee when they consider matters.
Ms. Schinasi. Yes, they do.
Senator Sarbanes. Are they all of one mind, marching to one
drummer all the time?
Ms. Schinasi. No, there are many disputes.
Senator Sarbanes. Many disputes within the committee. And
how do they resolve those disputes? Have you been able to
ascertain that?
Ms. Schinasi. In some cases, we believe that they are not
resolved. They are pushed aside but not resolved.
Chairman Shelby. Excuse me, if you would yield.
Senator Sarbanes. Certainly.
Chairman Shelby. What happens when they are pushed aside?
Are they able to sell?
Ms. Schinasi. I will give you a couple of examples, one
that I spoke about in my opening statement, where there was an
agreement that had been worked out by two of the member
agencies and a company about measures that the company would
take to mitigate what had been seen to be potential risks to
national security. And the agencies wanted to put a provision
in that agreement that referenced Exon-Florio and were not able
to because there was not consensus that they could put that
provision in there. So that is one way that consensus works.
Senator Sarbanes. Now, were you able to ascertain which of
the agencies or the Departments seemed to be most rigorous in
questioning these sales, in other words, most protective of the
national security concerns within CFIUS?
Ms. Schinasi. Yes; I think each agency would tell you that
they have national security concerns as they come into this
process, but those whose other responsibilities are more
focused on national security, and those would be the Department
of Defense, the Department of Homeland Security, and the
Justice Department, would be those that we have seen as being
the strongest proponents, for example, of using additional
factors in their consideration of the potential risks, wanting
more time to investigate whether there is a potential risk and
having stronger mitigation agreements, stronger agreements in
place and stronger mitigation factors that are enforceable
within those agreements.
Senator Sarbanes. Now, Adams, in his comment on your
report, Adams being the Under Secretary at Treasury, says
third, the draft report states that in response to
Congressional concerns, GAO met with officials from the
Departments of Commerce, Defense, Homeland Security, Justice,
and Treasury, which in GAO's view are the agencies that are the
most active in the review of acquisitions. GAO apparently did
not solicit any input from other members of GAO, such as the
Department of State, the Office of the U.S. Trade
Representative, nor the Council of Economic Advisers. Despite
GAO's unsubstantiated assertion, these organizations, like the
ones GAO did choose to meet with, are very much engaged in
CFIUS review. If GAO had interviewed senior policy officials
from these organizations, which reflect a broad spectrum of
CFIUS membership, the Committee is confident that GAO would
have gained a more informed perspective on the CFIUS process.
I am beginning to think that maybe Adams is the source of
this----
[Laughter.]
Given that language, the source of this Financial Times
story. But what do you say in response to that?
Ms. Schinasi. I have several points.
Senator Sarbanes. Good.
Ms. Schinasi. It is not our view who is the most active. We
made that determination in going through the case files and
identifying those agencies which attended meetings, which had a
position, which conducted their own fact finding on potential
risk. So the determination of most active is not our view; it
is based in fact. That is the first thing.
The second thing, we had identified on a number of these
cases that had some history to them, we have had discussions
with officials from all of the relevant agencies, as I had said
before, and so, that Financial Times is not correct.
Senator Sarbanes. So it is not accurate to say that you did
not receive input from other members of CFIUS other than the
five departments he named; is that correct?
Ms. Schinasi. We had their positions. We did not interview
during the period of time of this review all member agencies,
because we did not feel that we needed to interview all member
agencies. However, once the report was written and sent to the
Administration for comment, we did meet with those agencies
that wanted to meet with us.
Senator Sarbanes. And which agencies were those?
Ms. Schinasi. The State Department and the Special Trade
Representative.
Senator Sarbanes. And that was in the process of
formulating your final report.
Ms. Schinasi. Yes, sir.
Senator Sarbanes. So the final report would come later in
the report process than this comment from Adams; is that right?
Ms. Schinasi. That is correct.
Senator Sarbanes. And in the interim, there were
discussions with those agencies, at least some of those
agencies as well; is that correct?
Ms. Schinasi. That is correct.
Senator Sarbanes. Mr. Chairman, there is a lot we could
pursue in this report in terms of its substance, and I want to
thank the GAO for preparing it and submitting it to us, but I
must say it seems to me the essential hearing that we need to
have is for the executive departments and particularly the
Treasury, which is the chair of this interagency committee, to
come here at the witness table and give us an opportunity to
examine them quite closely, which I, for one, intend to do.
Thank you very much.
Chairman Shelby. Thank you.
First of all, I want to say again this looks to me like a
very thorough, well-researched report that GAO has done,
building on what you have done in the past, and on behalf of
the Committee I want to thank you for that.
Ms. Schinasi. Thank you, Mr. Chairman.
Chairman Shelby. I have a few other questions.
Could you expand upon the process by which cases are
mitigated? Have the agreed upon measures required by the
committee been sufficient to protect sensitive information or
technology here? You mentioned, of course, sensitivity is
important, but one that was disturbing to me, the one Senator
Bayh brought up, and I am sure there were worse cases.
Ms. Schinasi. One of the findings that we had in an earlier
report that we went back and looked at again in this review
was, in fact, that we did not know the answer to your question.
There had not been responsibility for company compliance with
these agreements given to any individual agency, and there were
a number of cases where there was no monitoring going on.
Chairman Shelby. In other words if they agreed to do
something, we are talking about mitigation in exchange for
getting this sale approved then, there is no oversight to see
that what they agreed to do, which would be in our best
interests, was done.
Ms. Schinasi. That is correct.
Chairman Shelby. Okay.
Ms. Schinasi. We had two issues that we raised: One, that
the mitigation agreements were very vague, ``best effort,'' for
example, and we raised questions about how can you determine
what is actually a best effort. And then, the second point was
the one you raised about who is looking to see what is actually
happening here.
Chairman Shelby. Withdrawn proposals, on the issue of
discretionary withdrawal of paperwork from the committee's
review, Committee on Foreign Investment in the United States,
do you know of any cases when a company withdrew its paperwork
from the Committee on Foreign Investment on its own initiative
and then proceeded with an acquisition that may have resulted
in the transfer of military sensitive technology or knowledge?
Ms. Schinasi. Not those exact circumstances, no, sir.
Chairman Shelby. Will you look through the committee's
record and report to us on that?
Ms. Schinasi. Yes. During the course of our 2002 and 2004
reviews, GAO was not provided unfettered access to committee
files. We were granted access to case files we requested. From
the specific cases we reviewed, GAO is not aware of any
committee cases where a company withdrew its paperwork on its
own initiative and then proceeded with an acquisition that may
have resulted in the transfer of military sensitive technology
or knowledge.
Chairman Shelby. To the best of your knowledge, in cases
where the Committee on Foreign Investment in the United States'
review occurred after the completion of an acquisition of a
U.S. company by a foreign company, was there a transfer of
technology, items of knowledge that you feel should have been
prevented? If so, you can furnish this for the record.
Ms. Schinasi. Okay.
Chairman Shelby. Will you do that?
Ms. Schinasi. Yes.
During our previous reviews, GAO was not given unfettered
access to committee files. We do not know whether there are
cases that the committee reviewed where technology or items of
knowledge that should be protected were transferred. In our
September 28, 2005 report, however, we describe two cases where
the companies completed the acquisition before filing with the
Committee and later abandoned the Committee process, leaving
some member agencies' concerns unresolved.
(Excerpt from GAO, Defense Trade: Enhancements to the
Implementation of Exon-Florio Could Strengthen the Law's
Effectiveness. GAO-05-686 (Washington, DC: September 28, 2005),
pp. 16-17.)
In one case, the company filed with the Committee more than
a year after completing the acquisition. The Committee allowed
it to withdraw the notification to provide more time to answer
the Committee's questions and provide assurances concerning
export control matters. The company refiled and was permitted
to withdraw a second time because there were still unresolved
issues. Four years have passed since the second withdrawal.
In another case, a company filed with the Committee over 6
months after completing its acquisition of an Internet backbone
company. The Committee allowed the company to withdraw the
notification more than 2 years ago because the Committee was
busy with another, high-profile acquisition. The Committee has
not requested that the company refile even though analysts
within one agency had concerns about the acquisition. As a
result, the review process has never been completed. A Treasury
Department official said that the member agency that has
national security concerns about a particular transaction is
responsible for ensuring that the company refiles. However, the
Committee's guidance to member agencies specifically states
that Treasury will manage activities during withdrawal by
specifying time frames and goals to be achieved.
Chairman Shelby. Do you think there are some cases there?
Ms. Schinasi. What I do know is that there are some cases
where we do not know.
Chairman Shelby. It is what you do not know, is it not?
Ms. Schinasi. Yes.
Chairman Shelby. The credible evidence standard in the
definition issue that you alluded to, Exon-Florio employs a
standard of what we call credible evidence that harm may come
to national security in the consideration of a proposed
acquisition; correct?
Ms. Schinasi. Yes, sir.
Chairman Shelby. In GAO's assessment, has this standard
provided for the discretion necessary for full consideration of
the risks to national security of proposed acquisitions?
Ms. Schinasi. Applying a standard of credible evidence
before you go to an investigation precludes your ability to
determine whether or not there is credible evidence.
Chairman Shelby. Given the fact that critical
infrastructure protection and energy security have been an
integral part of the Defense Production Act, which involves
primarily the preservation of the vital industrial base needed
for national defense, national security for a number of years,
why do you feel these areas may not have received the attention
they should have during the Committee on Foreign Investment's
review? You pointed a lot of this out in your report, but you
are here in the Committee now, for the record.
Ms. Schinasi. The way we describe it in the report is
because, again, through this consensus provision that not all
members agree that those should be factors that are considered
in the decisions and deliberations of foreign acquisitions.
Chairman Shelby. Senator Sarbanes, do you have any other
questions? I know some of our other colleagues are going to
have some for the record.
Senator Sarbanes. That is for sure. The earlier report you
did on CFIUS was in 2002; is that correct?
Ms. Schinasi. That was one of the earlier ones, yes, sir.
Senator Sarbanes. Right; was that the most recent earlier
one?
Ms. Schinasi. Yes.
Senator Sarbanes. It is my understanding that subsequent to
that report, actually, a number of your recommendations in
dealing with the situation you examined were adopted by the
CFIUS agencies in an effort to improve their procedures; is
that correct?
Ms. Schinasi. That is correct, yes, sir.
Senator Sarbanes. At that time, you did not get this kind
of demeaning response to the report, did you?
Ms. Schinasi. No, we did not.
Senator Sarbanes. That you encountered in this
circumstance?
Ms. Schinasi. No, sir, this is unprecedented.
Senator Sarbanes. Do you have any inkling as to why we have
gotten this what you just described as unprecedented behavior
or reaction?
Ms. Schinasi. Senator, it would only be speculation on my
part, and I would ask that you ask the Treasury Department.
Senator Sarbanes. Okay; all right.
Thank you very much, Mr. Chairman.
Chairman Shelby. We appreciate your appearance, but more
than that, we appreciate your diligence and your work at GAO,
and we are going to follow up on this with a hearing. As I said
before, it is incumbent upon Treasury to be here. We are going
to give them a lot of opportunities. We will not quit until
they show up.
[Laughter.]
Even if it is a Sunday hearing.
Thank you.
The hearing is adjourned.
[Whereupon, at 11:17 a.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
A REVIEW OF THE CFIUS PROCESS
FOR IMPLEMENTATING
THE EXON-FLORIO AMENDMENT
----------
THURSDAY, OCTOBER 20, 2005
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:05 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
This morning, the Banking Committee continues its
examination of the implementation of the Exon-Florio Amendment
and the role of the Committee on Foreign Investment in the
United States.
In February 2004, Senator Sarbanes, Senator Bayh, and I
asked the Government Accountability Office, GAO, to examine the
process through which the Committee on Foreign Investment in
the United States reviews proposed foreign acquisitions for
potential national security implications.
On October 6, GAO presented the Banking Committee with its
findings. It was GAO's conclusion that the system is flawed and
that improvements can and should be made. Beyond GAO's
findings, the Banking Committee is concerned about its
inability to conduct appropriate levels of oversight of a
process shielded for largely legitimate reasons from public
view.
As the public's representatives, the Congress, invested
with authority by the U.S. Constitution to regulate interstate
commerce, Congress has a need to know. As the Committee of
primary jurisdiction in the U.S. Senate, the Banking Committee
has a responsibility to ensure that the process receives the
appropriate scrutiny.
This is not to suggest this morning that a fundamental
transformation of the manner in which the Committee on Foreign
Investments operates is due; on the contrary, I am confident
that the requisite fixes will be relatively painless for all of
those involved if we work together.
But it has become apparent that fixes may be warranted,
including in the areas of mandating components of national
security that must be considered in any review, far greater
sharing of information with the Congressional Committee of
oversight than heretofore has been the case, less reliance on
withdrawals from the review process for cases with potential
problems, and more time for agencies to study individual cases
without incurring the risk of undermining the Nation's policy
on foreign direct investment.
The Committee approaches its review of Exon-Florio with
full awareness that the issue of foreign direct investment is
not one to be taken lightly. Foreign direct investment is a
vital component of U.S. economic growth, and the principle of
reciprocity is an integral part of our economic policy.
The Banking Committee is further aware that the leading
foreign investors in the United States are among our closest
allies and friends. We are cognizant of the concerns expressed
by the European Union regarding the chilling effect on economic
ties of changes in Exon-Florio that unduly impede investment
flows.
But lost in the mist surrounding the Committee's review of
Exon-Florio is the very serious issue of acquisition of U.S.
corporations that design and manufacture military sensitive
technologies by countries with less benign motivations than
some of the friends and allies that I referred to above or by
countries with weak export control systems, where a risk of
diversion is present.
Preservation of the U.S. defense industrial base,
protection of the resources vital to our future economic well-
being and protection of our critical infrastructure are
legitimate areas of concern. Congress, I believe, needs to be
comfortable with all of these considerations that are integral
to the process by which proposed foreign acquisitions are
reviewed by the Committee on Foreign Investments. That level of
comfort is currently nonexistent.
A Tuesday article in The Hill newspaper mentioned the
concern among the business community that the Committee's
efforts at strengthening what it seems as a flawed process will
have serious ramifications for international trade and
investment. The article noted the concern among some lobbyists
over the recent French uproar over PepsiCo's potential takeover
of Dannon, the prize French-owned yogurt company. Please be
assured here today, with all due respect to the market
fluctuations that accompany takeover bids, the issues in
question here are of far greater importance than yogurt and
involve a very small percentage of foreign acquisitions.
The Banking Committee, I feel confident in stating, will
take no actions that impede international investment. But
national security should never, ever be subordinated to
commercial interests. The Committee on Foreign Investment has a
mandate to review acquisitions for national security
implications, not for potential retaliatory measures by foreign
governments and not with an eye
toward market reactions.
Exon-Florio states that the Committee may consider defense
industrial base requirements, and the Defense Production Act is
explicit in its emphasis on critical infrastructure protection
and energy security. These areas, the GAO report suggests, are
given inadequate attention. Preservation of the Nation's open
investment policy, not addressed in Exon-Florio, is given
measurable emphasis.
The Committee will hear this morning from a high level
panel of Government officials representing the Federal agencies
comprising the Committee on Foreign Investment. It was our
intention to hear from this panel during the October 6 meeting.
That did not occur. I must add here that it is disappointing
that two of the agencies failed to submit prepared statements
in advance of today's hearing, which is unusual in this
Committee.
Following that panel, we will hear testimony from two
eminent experts on Exon-Florio: Patrick Mulloy, who is no
stranger to this Committee, of the United States-China Economic
and Security Review Commission and David Marchick, a Partner at
Covington and Burling, with long Government and private sector
experience in the area of international trade and investment.
But before we begin, we are pleased to have testifying this
morning one of our colleagues, Senator James Inhofe of
Oklahoma. Senator Inhofe has been very active in seeking to
reform the process by which foreign acquisitions of U.S.
companies are reviewed.
Senator, we would welcome you, and do you want to make an
opening statement, Senator Schumer?
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman, and I want to
thank you and Senator Sarbanes for moving so quickly to hold a
second hearing on this important issue. One of the greatest
principles in the United States is that FDI, foreign direct
investment, occurs freely without discouragement from the
Federal Government, and that happens in about 99.9 percent of
the cases.
But even with that rate of success, we still have some
concern, since there are some areas in need of greater
Congressional oversight. CFIUS gained a lot of attention a few
months ago when CNOOC made an $18 billion bid to take over
Unocal. Many of us knew before, and others learned more
recently, that CFIUS plays an extremely important role and may
be the last stop-gap measure to ensure that our U.S. national
security interests are protected, which, in some extreme cases,
may mean recommending that the President block a foreign direct
investment deal.
But I would argue one of the greatest problems with CFIUS
is the narrow definition of what is encompassed in the term
national security. Members of CFIUS in the past have strictly
used the term national security to apply to potential
investment deals which pertain to military goods, national
security sensitive technology, in addition to other goods we
need for our national defense.
I agree that any direct foreign investment deal that
hinders the United States' ability to protect our national
security interests in a traditional sense should be closely
examined, but I believe the recent GAO report requested by you,
Senator Sarbanes, and Senator Bayh, Mr. Chairman, hit the nail
on the head when they said that the Committee absolutely
defines the definition too narrowly.
One of the most important missing pieces of the puzzle
pertains to our country's ability to protect against deals that
hinder our economic security interests. And in this new global
world, economic security is every bit as important as national
security. Economic
security is a U.S. national security issue. That is a fact. Our
economic interests should be aligned with our military security
interests, and that definition should be broadened, and I am
prepared to amend Exon-Florio to do just that.
The other major issue I have with CFIUS is the issue of
reciprocity. On trade issues, the thing I have been most active
in is my work on currency manipulation, but I have a much
longer history from my days in the House on the issue of
reciprocity, when Japan was investing, their financial
companies were investing here, but we could not invest in
Japan, which greatly hurt American companies, and we passed
legislation or moved it through the House that changed all
that.
Today, it is the fact that the United States and China's
relationship is more of a narrow, one-way street than a
multilane interstate highway in all industries. I released a
report a few months ago on the unfair trade practices used by
China to keep United States companies from directly investing
in order to gain market access to China. You cannot invest in
this industry; you can only invest 9 percent in that industry,
and which industries do they keep us out of, American firms?
Owning the most strategic industries, the industries where we
have the greatest advantage, the industries where we have the
greatest technology.
I did not oppose CNOOC, Mr. Chairman. I was not one of the
41 Senators who signed the letter. But I did attach an
amendment saying that we should get a report on whether China
would allow a United States company to buy the Chinese Unocal
in a similar position. They obviously would not.
I should note that this hurts our economic intellectual
property. It hurts the advantages that we have. China has a lot
of advantages in trade. They have lower cost labor. They have
an increasingly well-educated work force. But we have
advantages, and that is our intellectual property and our know-
how and ability how to do things in financial services and high
tech and communications, and we are blocked, American firms are
blocked from investing.
One other point I would make, Mr. Chairman: Our companies
do not say a peep about it, because they are part of the game.
They will say hey, if we make a fuss, we will not even be
allowed to buy the 9 percent that they are allowing us to buy,
so we are quiet. And what is happening is our big multinational
companies do not have the same interests as America has. Their
interest, understandably, is to their shareholders. That is
what it should be.
But our interest on this Committee has to be to the best
for America. And so, I propose to expand the President's
criteria under which he can act to exercise his authority under
Exon-Florio to block a foreign acquisition of a U.S.
corporation to include a provision on reciprocity. We cannot
buy there? Why should they be allowed to buy here?
And I am interested in hearing the witnesses' comments on
these issues, and I am going to ask you with unanimous consent,
Mr. Chairman, my entire statement be read into the record, and
if could get a week for the witnesses to respond in writing,
because I will not be here to be able to--
Chairman Shelby. Without objection, so ordered.
Senator Schumer. Thank you, Mr. Chairman.
Chairman Shelby. Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, I would like to thank you for
holding today's hearing on the CFIUS process for implementing
the Exon-Florio Amendment.
I was fortunate to serve with you when you chaired the
Intelligence Committee, and so, I share many of your concerns
regarding national security. That concern was further
reinforced when I sat on the Armed Services Committee with one
of our witnesses we have here on the first panel, Senator Jim
Inhofe.
While I am a strong advocate for economic growth and
business opportunities, it cannot come at the expense of our
national security. More than ever, we are recognizing new
vulnerabilities and the shifting nature of war and terrorism.
We must be more vigilant than ever in more ways than ever to
keep our Nation safe and strong. The new global economy has
brought with it increased opportunities. We must carefully
evaluate those opportunities to determine what is in the
country's best interests.
CFIUS and the Exon-Florio Amendment is one way in which we
can do that. I appreciate this opportunity to examine the
current functioning of the process to determine what is and is
not working. I look forward to working with my colleagues to
find the appropriate balance between commerce and national
security.
Thank you, Senator Inhofe, for coming to be a witness
today, and I also thank the other witnesses for being here
today, and I look forward to your testimony.
Chairman Shelby. Senator Inhofe, your written testimony
will be made a part of the hearing record in its entirety. I
want to welcome you again to the Banking Committee. You proceed
as you wish.
STATEMENT OF JAMES INHOFE,
A U.S. SENATOR FROM THE STATE OF OKLAHOMA
Senator Inhofe. Thank you, Mr. Chairman.
I chair the Committee on Environment and Public Works, and
we are having a hearing simultaneously, so with your
permission, I would like to make a statement and then be
excused.
Chairman Shelby. Absolutely.
Senator Inhofe. And I would also say, observe, that my very
good friend on panel two, David Sampson, and I have worked
together for many years, and I commented to him when I came in
that this was the first time we had disagreed on anything and
that everyone has the right to be wrong once. I am looking
forward also to making sure that you get the full testimony of
Pat Mulloy. I was with two other people from the China
Commission last night. They have done great work.
Mr. Chairman, I have to say, I know this is not zeroing in
on one country. The CFIUS process affects all negotiations, all
relationships, but this first came to my attention when my
service on the Senate Armed Services Committee drew me to the
conclusion that we had some real serious problems with China.
During the drawdown of the military in the 1990's, we had
the experience that there are great threats out there that we
were not really going to be prepared to handle. At the same
time, China, specifically between the years of 1990 and 2002,
increased their weapons procurement program by 1,000 percent.
So, I have been concerned about this, and that is when CFIUS
came to my attention.
It began last April when I delivered four speeches on the
floor. I am sure you were there. They were each one one hour
speeches, Mr. Chairman.
Chairman Shelby. I was there for part of one.
[Laughter.]
Senator Inhofe. I think you were. As a matter of fact, you
were stuck in the chair, as I recall, at one time.
[Laughter.]
But I have been concerned about this for some time, and
when the Magnequench came along, and they made the acquisition
in China and then piecemeal, it was moved back to China, and I
would like to read from part of the speech that I made on the
floor at that time referencing this, because I think it is
pertinent today. I said,
I believe that CFIUS does not have a broad enough
conception of U.S. security. I understand that Representatives
Hyde, Hunter, and Manzullo expressed similar views in a January
letter to the Treasury Secretary John Snow and chairman of
CFIUS. One example of CFIUS falling short is with Magnequench
International, Incorporated. In 1995, Chinese corporations
bought GM's Magnequench, a supplier of rare-earth metals used
in the guidance system of smart bombs. Over 12 years, the
company has been moved piecemeal to mainland China, leaving the
United States with no domestic supplier of neodymium, a
critical component of rare-earth magnets. CFIUS approved this
transfer.
Senator Schumer talked about the CNOOC. I was a party the
letter that was objecting to that. At the time, it was very
similar. These rare metals, in the case of Magnequench, are
used for smart bombs. It is something we have to have. There is
a closely related metal that was owned by--there is only one
mine in the United States that had it, and that was owned by
Unocal, and of course, CNOOC was trying to buy, at that time,
Unocal. I really believe that when they withdrew their offer,
it was mostly due to the pressure of some of the comments that
were made people on this Committee as well as on the Senate
Armed Services Committee.
So, I think that there is very definitely a national
security issue here. I also testified before the United States-
China Commission on July 21. Of course, you are going to hear
from someone on that Commission in a few minutes. I explained
my concerns with the CFIUS process. At the time, I had
introduced an amendment to the Defense authorization bill that
would have made some of the necessary changes. Now, we know
what has happened in the Senate to the Defense authorization
bill, and because of that, I have introduced a standalone
committee bill which is before your Committee.
Over the past few months, I have pointed out that the CFIUS
process has ignored some major issues which threaten our
national security, and the GAO has recently issued a report on
CFIUS that is right in line. That was referred to both by you,
in your opening statement, and by Senator Schumer.
I would, however, like just to read just one quote out of
that report. It says they have ``limited the definition to
export control technologies or items classified contacts or
specific derogatory intelligence on foreign companies.'' I am
aware of at least one instance where the Department of Defense
and Homeland Security believed national security was at risk,
but they were overruled because the threat did not meet the
narrow definition set forth by Treasury. The language that I
have proposed in this bill requires CFIUS to investigate
transactions of national security concern, including economic
and energy security.
The length of the period of review: Right now, presently,
they have a 30-day that is allotted for CFIUS for a
determination as to whether or not the acquisition should take
place. In my legislation, I have increased that to 60 days, and
I think everyone now agrees that 30 days is not adequate. The
Justice Department, a member agency of CFIUS, agrees with this
stating, quoting now, ``gathering timely and fully vetted input
from the intelligence community is critical to a thorough and
comprehensive national security assessment. Any potential
extension of time available to the participants of the
collection of that information would be helpful.''
I think if you just look at it and realize that there have
been 1,520 notifications investigated. They have only
investigated, out of 1,520, 24. That is all. And only one was
actually stopped by the President. That has to say the system
is broken. It does not work. Some say that this extremely low
number is because there are many opportunities for compensation
to alter the nature of their acquisition, that they are more
right than they realize.
Well, here is one of the problems that you have. In this
system, a company can come back, and if it looks like it is
going to be stalled; they can merely take it out and make some
changes and put it back in at their leisure, and it is not a
disciplined approach. We do not have Congressional oversight,
and I think Congressional oversight is an effective tool to fix
this problem.
My bill that I introduced requires unclassified quarterly
submissions of acquisitions that have occurred over a 90-day
period with a classified section that includes dissenting
views, the findings of the review process to be reported to the
Senate Committee on Banking, Housing, and Urban Affairs and the
House Committee on Financial Services. A layover period of 10
days after a transaction is allowed to proceed, during which
time a resolution of the disapproval can be introduced in
Congress. The power of the Chairman of the ranking committee of
oversight should be intact.
So in conclusion, I would say that the current CFIUS
process is more than opaque. It clearly is broken, and it is up
to the Congress to fix it. I look forward to what this hearing
will reveal and hope that we have the courage to act on what we
learn. A vital part of the understanding of this issue is a
comprehensive analysis of this that have occurred, and I have
two questions along this line that I am requesting be submitted
to the witnesses if not answered here can be answered for the
record. If you would do that for me, Mr. Chairman, I would
appreciate it.
Chairman Shelby. Be glad to. What are the questions,
Senator?
Senator Inhofe. They will be submitted to you.
Chairman Shelby. Okay; you will submit them.
Senator Inhofe. Thank you very much for the opportunity to
be here.
Chairman Shelby. Thank you, Senator Inhofe. I know you have
to chair another Committee that you are the Chairman of, and we
appreciate your work very much in this area.
Senator Inhofe. Thank you.
Chairman Shelby. Our first panel, if you will make your way
to the table, we have Robert Kimmitt, Deputy Secretary of the
Treasury; David Sampson, Deputy Secretary of Commerce; Robert
McCallum, Acting Deputy Attorney General, Department of
Justice; Stewart Baker, Assistant Secretary for Policy,
Department of Homeland Security; E. Anthony Wayne, Assistant
Secretary for Economic Affairs, Department of State; and Peter
Flory, Assistant Secretary of Defense for International
Security Policy.
Gentlemen, I want to welcome all of you on behalf of the
Committee. All of your written testimony will be made part of
the record, and Secretary Kimmitt, we will start with you to
sum up your points you want to make before the Committee.
STATEMENT OF ROBERT M. KIMMITT
DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Mr. Kimmitt. Thank you, Mr. Chairman.
Mr. Chairman, Senator Allard, Senator Hagel, good morning.
Thank you for this opportunity to testify. As the Chairman
mentioned, I am Robert Kimmitt, Deputy Secretary of the
Treasury since August of this year.
This morning, I am speaking on behalf of the Administration
and the Treasury Department and the Committee on Foreign
Investment in the United States, and I am very pleased to be
joined by my colleagues representing the member agencies of
CFIUS.
Mr. Chairman, we regret the delay in scheduling this
hearing, but in light of the significance of the issues we are
discussing, we thought it was important both substantively and
procedurally for officials from the policy levels of the CFIUS
agencies to testify.
As you noted, 2 weeks ago, the Committee heard from the GAO
regarding its most recent report on CFIUS. We appreciate the
time and resources that GAO dedicated to this report, and
although we do not agree with all of the assertions in the
report, we do recognize the need to review current CFIUS
policies and operating procedures, especially those mentioned
in the GAO recommendations.
The witnesses here this morning will endeavor to explain
the current process in order to reassure this Committee, the
Congress, and the American public that CFIUS is committed to
protecting our national security.
Mr. Chairman, we wholeheartedly agree with your recent
comment that national security cannot take second place to
purely economic considerations. Throughout my years of
government service, starting with combat duty in Vietnam 35
years ago, continuing through 8 years of service on the
National Security Council staff, I have based my career on the
belief that protecting and advancing national security is a
Government official's highest priority.
Let me assure you that my colleagues and I fully appreciate
the national security concerns voiced by the Members of this
Committee and other Members of the Congress. In my view, the
concept of national security includes both traditional foreign
policy and defense criteria and also economic considerations.
Indeed, we believe that there is an inherent link between our
national security interests and a strong U.S. economy that
facilitates free and fair trade, market-based exchange rates,
and the free flow of capital across borders.
An open investment policy, as your opening statement, Mr.
Chairman, makes clear is a central pillar of U.S. international
economic policy, because foreign investment in the United
States enhances competition, provides capital, improves
productivity, and creates jobs, over 5 million nationally.
Additionally, picking up on Senator Schumer's point,
promotion of an open investment policy at home enables us to
advocate for similar opportunities for U.S. companies to invest
and expand abroad.
As an interagency group, CFIUS provides a forum for
discussion and, yes, debate among members representing 12
different executive departments and offices. In addition,
important agencies that are not formal members of CFIUS such as
the FBI and offices under the Director of National Intelligence
play a critical role, either by providing CFIUS with
intelligence on international acquirers or by advising CFIUS on
counterintelligence and foreign espionage. Further, the
Departments of Energy and Transportation have actively
participated in the consideration of transactions that have an
impact on the industries under their respective jurisdictions.
The give and take among members leads to a comprehensive
examination of transactions from all relevant agencies. There
is a natural competition of differing perspectives on the part
of CFIUS members, and vigorous debates and constructive
friction among members helps CFIUS ultimately determine the
best possible outcome for our national security. If consensus
cannot be reached, Mr. Chairman, then the President must make
the final determination regarding national security.
As I noted at the outset, the new senior CFIUS team is
involved in an effort to improve the process, drawing on your
comments, the recommendations of GAO, and suggestions I have
received from agency colleagues. First, we believe that CFIUS
requires high level attention from Treasury and the other
members, and the departmental representation at today's hearing
is an important indication of our common commitment in this
regard.
Second, when meeting at the deputies' level, I will chair
CFIUS, while the Under Secretary of Treasury for International
Affairs or his designee will represent the Treasury Department
during consideration of a particular transaction. We think that
this change will enable me to manage the process to ensure that
all viewpoints are identified and given the same equal, careful
consideration.
Third, we are looking carefully at ways to allow more time
to assemble the information needed to develop agency positions
during the CFIUS review process, especially, Mr. Chairman, for
that small number of cases that your opening statement makes
clear raise legitimate national security concerns.
Last, and picking up on your important point regarding the
Congress' oversight role, we support the idea of enhancing the
transparency of the CFIUS process through more effective
communication with Congress, while recognizing our shared
responsibility to avoid the disclosure of proprietary
information that could undermine a transaction or be used for
competitive purposes. We are very open to suggestions on ways
to improve the transparency of the process such as more regular
reports to Congress and Congressional briefings.
Mr. Chairman, we are at a time of both challenge and
opportunity for our national security interests. Through an
improved CFIUS process, we will continue to protect our
national security in the context of an open investment policy
that recognizes the critical link between national security and
economic prosperity.
I thank the Committee for this opportunity to testify, and
I look forward, after my colleagues' statements, to your
questions.
Chairman Shelby. Mr. Sampson.
STATEMENT OF DAVID A. SAMPSON
DEPUTY SECRETARY, U.S. DEPARTMENT OF COMMERCE
Mr. Sampson. Mr. Chairman, Senator Allard, Senator Hagel,
on behalf of Secretary Gutierrez, I want to thank the Committee
for this opportunity to appear before you today. As you know,
the Department of Commerce has been a member of the Committee
on Foreign Investments in the United States since the panel was
created in 1988.
CFIUS reviews are carried out by our Exon-Florio working
group. The International Trade Administration chairs the group
and coordinates departmental responses to CFIUS. ITA brings to
the table extensive knowledge from private industry, from
technological capabilities of individual companies to market
positions and future prospects. This enables ITA to look at
things in the bigger picture when assessing both the commercial
and national defense implications of foreign acquisitions.
Other members of our working group include the Bureau of
Industry and Security, the Technology Administration, the
Economic and Statistics Administration, the National
Telecommunications and Information Administration, and the
Office of General Counsel. As a CFIUS member, a key part of our
work is identifying any business transactions with perceived
national security implications and when appropriate requesting
a review and subsequent action by CFIUS.
We have a formalized process that requires members of our
working group to report any potential acquisitions by foreign
companies that may be of interest to CFIUS, especially those
that involve smaller or privately held U.S. firms that may not
have been reported widely in the media.
In addition to the International Trade Administration,
Commerce's Bureau of Industry and Security is a key player in
the CFIUS process. It assesses the national security, defense
industrial base and export control implications of all proposed
foreign acquisitions of U.S. companies that are under CFIUS
review. The goal is to ensure that the U.S. defense,
industrial, and technology base will not be compromised by
foreign acquisitions.
As a part of this process, the Bureau of Industry and
Security determines whether the parties to an acquisition have
violated U.S. export control laws and whether significant
sensitive technology is being acquired. The Bureau evaluates a
foreign company's plans for managing its compliance with U.S.
export control laws, and it works closely with the Departments
of Defense, Justice, and Homeland Security as well as the
intelligence community in assessing whether national security
would be compromised as a result of foreign access to key U.S.
firms. For example, if an acquisition were in the
telecommunications industry, we would determine the security
implications for the Nation's communications infrastructure.
Finally, Mr. Chairman, let me say that we believe that
while the CFIUS process is working well, we realize there are
opportunities to improve it, and we look forward to working
with you in that effort. I look forward to answering your
questions at the appropriate time.
Chairman Shelby. Secretary Baker.
STATEMENT OF STEWART BAKER
ASSISTANT SECRETARY FOR POLICY,
U.S. DEPARTMENT OF HOMELAND SECURITY
Mr. Baker. Thank you, Mr. Chairman, Members of the
Committee. I represent the newest member of CFIUS, and I will
try to be the briefest, if you will allow me to submit my
prepared remarks.
Chairman Shelby. Your prepared remarks will be made part of
the record.
Mr. Baker. Many thanks.
When we joined the Committee, we certainly noticed that
timing was certainly an issue that we had to be concerned
about.
We have done two or three things in the context of CFIUS
that I think have eased many of the concerns we had. We now do
research well in advance on potential mergers and acquisitions
and takeovers that may come before CFIUS. So well before any
filing has been made, we have already begun to do the research
and share that with other CFIUS members.
Also, we have worked hard to encourage a practice that I
think sophisticated companies and sophisticated counsel have
begun to adopt pretty widely, which is coming in early and
providing briefings well before they have made any filings to
let CFIUS members know what the transaction is and to try to
get some feel for what the CFIUS issues might be. That is a
practice that we think should be encouraged. And finally, on
the mitigation of the national security concerns, we have
looked very hard at that, and one of the concerns that we had
was that we should focus very hard on actually enforcing those
agreements, making sure that there is a consistent and
aggressive approach to enforcement. We have devoted a lot of
resources to that, all of that inside the context of the
existing statute, which is quite flexible, and I agree with
Deputy Secretary Kimmitt: We can do a lot inside the context of
this statute to make it work well.
Chairman Shelby. Secretary Wayne.
STATEMENT OF E. ANTHONY WAYNE
ASSISTANT SECRETARY, BUSINESS AND ECONOMIC AFFAIRS,
U.S. DEPARTMENT OF STATE
Mr. Wayne. Thank you very much, Mr. Chairman, Senators
Allard, and Hagel. It is a great pleasure to be here and talk
about the role of the Department of State in the Committee on
Foreign Investment in the United States.
I think as you all know, a key part of the mission of the
Department of State is to create a more secure, democratic, and
prosperous world for the benefit of the American people and our
friends and partners internationally, and we see the work that
we do in support of the Exon-Florio statute as a very important
part of that, and we take that mission and that job very
seriously.
We bring to the CFIUS process the expertise and experience
that we have in dealing with international economic issues as
well as national and international economic security policy.
And as you yourself said, Mr. Chairman, these are mutually
reinforcing.
Security and prosperity are interdependent, and when one is
lacking, the other will be undermined in time. We believe that
our internal processes in the Department of State ensure that
each and every CFIUS case receives careful scrutiny from a wide
range of offices. We in the Bureau of Economic and Business
Affairs take the lead in coordinating this effort, but we work
with the Bureau of Political and Military Affairs, the Bureau
of International Security and Nonproliferation, the Bureau of
Diplomatic Security, the Bureau of Intelligence and Research,
the Office of the Legal Advisor, and the appropriate regional
bureaus.
We also bring other experts in as needed, so we try to get
an overarching view of both the economic and the security and
the geopolitical aspects behind each and every case, and of
course, in this, we rely tremendously on the expertise of our
embassies overseas, so we can really understand what is the
context, political and economic, of the particular case that is
brought together.
We rely on our colleagues, who have responsibilities on
defense, trade, and nonproliferation, and those who are working
to fight terrorist financing and to counter terrorism. We think
that just to note that, of course, the Department, like many of
our colleagues, have security interests that extend well beyond
CFIUS. In our case, the Arms Export Control Act and its
implementing regulations and the International Traffic in Arms
Control regulations, the role we have there, give the State
Department independent authority to regulate the export of
defense articles and services and provide for criminal and
civil penalties, whether a company operating in the United
States, a U.S. company, is foreign-owned or not if these
provisions of these two key statutes are violated.
And pursuant to that, we do manage a registration system of
all manufacturers, exporters, and brokers of defense articles
and services and track foreign ownership as a part of this
process. And we bring those elements into any CFIUS review
process where we are asked to participate.
All CFIUS members here, I think, share the goal of assuring
that no transaction reviewed by CFIUS leads to a compromise of
national security, and although confidentiality requirements
and other factors prevent me or my colleagues from going into
specific cases in an open hearing, I can assure you that in my
experience, the process has enabled the U.S. Government to take
appropriate action to address potential threats when they have
arisen.
Now, as you said, Mr. Chairman, preserving both economic
security and prosperity in a post-September 11 world is a
pretty complex challenge, but it is critical that we do it
right, that we learn, that we adapt, that we get smarter and
better in doing it. The belief in an open investment policy is
essential to our economic prosperity, and that is a
longstanding belief that goes back to the very origins of our
republic and has been borne out by the facts.
The U.S. openness to foreign investment has helped make the
United States the world's most successful economy, which in
turn provides the wealth and technology needed to support the
world's most powerful and best equipped military that ensures
our security.
Therefore, as you said, Mr. Chairman, and as Secretary
Kimmitt said, we have welcomed, and we continue to welcome
foreign investment. In fact, I think your State and the other
States represented by the Senators here have profited
significantly from foreign investment coming into the United
States, creating well paying jobs.
The free flow of capital also makes the rest of the world
economically stronger. It creates opportunities overseas for
U.S. investors. And this is not just sound economic policy, but
it is also part of our international obligation in many cases.
We have enshrined the principle of providing foreign companies
operating in the United States the same treatment U.S.
companies receive in investment treaties and trade agreements
signed with many foreign companies.
Our openness and the benefits it has provided for us have
been very effective in encouraging others around the world to
emulate us, to open their own markets, and with my colleagues
at Commerce, Treasury, USTR, and at the State Department, we
work very hard on a regular basis to seek to remove the
discriminatory investment barriers in other markets and to put
in place strong protections for American investors and their
investments overseas.
In conclusion, the Department of State believes that Exon-
Florio and its implementation by CFIUS have strengthened our
national security while avoiding unnecessary and detrimental
restrictions on our open investment policy. I think as you
know, Mr. Chairman, the President and Secretary Rice have
instructed all of us at the State Department as well as my
colleagues in other agencies to make sure that we are doing
everything possible to protect the national security of the
United States and the American people and to promote the kind
of global economic policies, including open investment regimes,
that will maximize U.S. prosperity, and I want to assure you
that we take this mission very seriously.
Thank you very much. I look forward to the opportunity to
answer your questions.
Chairman Shelby. Thank you.
Secretary Peter Flory.
STATEMENT OF PETER C.W. FLORY
ASSISTANT SECRETARY,
INTERNATIONAL SECURITY POLICY,
U.S. DEPARTMENT OF DEFENSE
Mr. Flory. Mr. Chairman, Members of the Committee, thank
you for the opportunity to appear today to discuss the impact
of Section 21 of the Defense Production Act, better known as
the Exon-Florio Amendment on National Security.
Mr. Chairman, it is a particular pleasure to be here. I
have spent many hours on hearings on related subjects with you
on the other side of the table and during your time as Chairman
of the Intelligence Committee. I am pleased to be before you
today.
Chairman Shelby. Also with Senator Allard.
Mr. Flory. And Senator Allard indeed and Senator Inhofe as
well. Different perspective but also happy to be here.
Sir, I just would echo what you said at the beginning.
National security cannot take second place. This is something
we in the Defense Department feel very clearly, and I know my
colleagues here all have the same feeling.
Foreign investment is a good thing for the country; in many
cases, it is good for the defense industry. It helps us
maintain the viability and diversity of our supplier base. But
it is important that in dealing with foreign investment that we
protect the technology, the industrial base, and the security
of the critical infrastructures we rely on to carry out our
mission and to keep our war fighters second to none. So again,
this is somebody that we at DoD take very seriously, and I know
all of my colleagues today have the same view.
Just to give you some perspective on the particular role of
the Defense Department in the CFIUS process, when it comes to
reviewing a foreign acquisition of a U.S. company that has been
proposed, there are a number of factors that the Defense
Department looks at before taking a position. Some of these,
although not necessarily all, the significance of the
technologies that are possessed by the firm, are they state-of-
the-art or otherwise militarily critical; the importance of the
firm to the defense industrial base; possible security risks
that might be posed by a particular foreign firm, for example,
is it controlled by a foreign government? If so, by which
government? Does the firm have a record of export control
violations or other troublesome transactions? Whether the
company to be acquired is part of the critical infrastructures
upon which we rely. And, can any potential national security
concerns posed by a proposed transaction be mitigated and
eliminated by the application of risk mitigation measures
either under the Defense Department's own regulations, through
the CFIUS process, and negotiations through the parties?
Within the Department of Defense, there are a number of
offices and agencies that have a part to play in this
decisionmaking together with the military services. I will just
hit some of the main ones. The Defense Technology Security
Administration, DTSA, which works under me in the Office of the
Under Secretary of Defense for Policy, plays a leading role as
our representative on CFIUS and is responsible for the
management, coordination, and formulation of the Department's
position on CFIUS cases. The Office of the Under Secretary of
Defense for Acquisition, Technology, and Logistics, AT&L,
determines if a U.S. company involved, for example, provides a
service or a product that is critical technology and evaluates
the transaction's impact on the defense industrial base.
The Office of the Assistant Secretary of Defense for
Networks, Information, and Integration, better known as NII,
performs vital technical reviews of filings that involve
critical information and telecommunications infrastructures. It
does this in cooperation with agencies such as the National
Security Agency and the Defense Information Systems Agency.
And the Office of the Under Secretary of Defense for
Intelligence, in cases involving defense contractors performing
classified work, it is the Office of the Under Secretary of
Defense for Intelligence, USDI, that assesses whether the
Defense industrial security regulations are adequate to
mitigate potential national security concerns that might arise
as a result of foreign control of U.S. defense contractors.
Mr. Chairman, that concludes my opening statement. I look
forward to your and the Committee's questions.
Chairman Shelby. Robert McCallum, Acting Deputy Attorney
General on behalf of the Department of Justice.
STATEMENT OF ROBERT D. McCALLUM, JR.
ACTING DEPUTY ATTORNEY GENERAL,
U.S. DEPARTMENT OF JUSTICE
Mr. McCallum. Mr. Chairman, Senator Allard, and Senator
Hagel, I appreciate the opportunity to be here and to discuss
the Department of Justice's role in implementing the Exon-
Florio Amendment.
The Department of Justice has worked diligently within
CFIUS to implement Exon-Florio effectively to protect national
security interests, and the effective implementation of Exon-
Florio is obviously critically important to the Department's
national security mission, and it is a responsibility I want to
assure all Members of the Committee that all members of CFIUS
take very seriously.
To fulfill its mission to defend the interests of the
United States to ensure public safety and to prevent crime, the
Department of Justice has set goals to strengthen its
counterintelligence capacities, with a focus on protecting
sensitive U.S. information and technology relating to national
defense and critical infrastructure and to protect the Nation's
communications systems by preventing and combatting cybercrime
and protecting the privacy of U.S. communications.
Currently, the Federal Bureau of Investigation has as its
second and third highest priorities to protect against foreign
intelligence operations and espionage and to protect against
cyber-based attacks and high technology crimes.
The Department must ensure that it has the necessary tools
and resources to accomplish its mission and to meet these
goals, and nothing is more important to our arsenal than the
ability to conduct lawful electronic surveillance without
risking interference by foreign entities and the premature or
unauthorized disclosure of targets of surveillance.
The Department of Justice is using all of its traditional
techniques and resources to address national security risks.
Exon-Florio is a very important national security tool to
protect national security. Through its involvement in the CFIUS
process, the Department of Justice has carefully examined
potential threats to national security posed by specific
foreign acquisitions of U.S. businesses, and where appropriate,
we have developed measures to mitigate those risks.
Along with other interested member agencies of CFIUS, the
Department of Justice has negotiated numerous security
agreements to mitigate potential threats to national security
caused by those transactions. These security agreements are
typically the result of negotiations between companies involved
in the transaction and those CFIUS member agencies whose
national security responsibilities are implicated.
In addition to the Department of Justice, the Departments
of Homeland Security and Defense are often parties to these
agreements. These agreements vary in scope and purpose,
depending on the facts of each particular transaction and are
negotiated on a case-by-case basis to meet the particular
national security interest that is at issue. For transactions
that involve the communications sector, these agreements are
often negotiated in conjunction with Executive Branch review of
applications submitted to the Federal Communications
Commission.
Along with the Department of Homeland Security, the
Department of Justice plays a key role in monitoring and
enforcing the security agreements to which it is a party. The
Department has brought together its diverse resources to
address the complex issues raised by a variety of transactions
coming before CFIUS. The Department's Criminal Division has the
primary responsibility at a policy level for CFIUS matters, and
it closely coordinates the involvement of various Department
components in that process. These components include the FBI,
which both coordinates with the intelligence community and
provides operational and analytical support in the areas of
counterintelligence, critical infrastructure protection,
privacy protection, and electronic surveillance.
The Computer Crime and Intellectual Property Section is
involved and provides expertise relating to the United States
communications systems, cybercrime, and privacy protections. It
is the Office of Enforcement Operation and the Narcotics and
Dangerous Drug Sections which provide expertise related to
electronic surveillance issues as well.
The Counterespionage Section provides legal guidance on
counterintelligence issues. The Office of Intelligence Policy
and Review assists with intelligence community coordination,
and the Counterterrorism Section assists in reviewing
transactions that may implicate terrorist concerns. In
addition, the Antitrust Division has provided support and input
in appropriate cases regarding competition issues, and the
Office of the Chief Information Officer has provided assistance
on occasion in technology matters.
By bringing all of these diverse resources and this
extensive expertise to bear, the Department, we believe, has
maximized its ability to participate in the effective
implementation of Exon-Florio.
Again, I would like to thank you, Mr. Chairman, and the
Committee Members for your interest in ensuring that Exon-
Florio is used as effectively as possible and for giving the
Department the opportunity to explain its role with respect to
this important national security safeguard.
The Department of Justice is keenly aware of the
significance of its responsibilities under Exon-Florio, and we
have and continue to work diligently to meet those
responsibilities. The Nation's security and the safety of our
citizens are always the Department's highest priority, so I
thank you for allowing me to be here, and I will be happy to
try and answer your questions.
Chairman Shelby. Thank you. I thank all of you.
Each of you has had the opportunity to study the GAO
report. The concerns raised in that report, according to the
Treasury-led interagency response, are largely misplaced.
Information gleaned from press accounts of individual cases
over the years, previous work performed by GAO on this issue,
and Committee research, however, all point to a system in need
of improvement.
I understand that there has been considerable effort made
to ensure that each of the Government officials testifying
today supports the status quo, and Secretary Kimmitt, you are
in particular aware of the Committee's concerns with statements
attributed to Treasury Department personnel questioning the
professionalism of GAO as well as its methodologies and
findings. For the record here, I would like each of you to
share with the Committee your views on whether there are
improvements to the current system that should be implemented.
Otherwise, the Committee would be led by this panel to believe
that the system is perfect.
Secretary Kimmitt.
Mr. Kimmitt. Mr. Chairman, I will first start by saying
that the views that were attributed to an unnamed source in a
single newspaper about the GAO report are neither my views nor
the Department's views. As I said in my comments, there are
some assertions made in the GAO report that I would take
exception with. I will mention one.
Chairman Shelby. Okay.
Mr. Kimmitt. But on balance, I think they try to do a very
professional job, and particularly, when one looks at their
recommendations, it is a good starting point for our continuing
discussions on improvements to the process.
I would note that GAO has been involved in this process
ever since the process has existed. They have a wealth of
information on this, and while we might not agree on
everything, I am open to talking to anybody who has good ideas,
especially in an area as important as protecting the national
security.
Chairman Shelby. But you do not think the system is
perfect, is it?
Mr. Kimmitt. The system is not perfect. No system is
perfect, Mr. Chairman.
Chairman Shelby. Do you think this one is close to perfect?
Mr. Kimmitt. This one? No, I do not think it is close to
perfect. I think that there is an opportunity in every
governmental process, frankly, and in every business process to
look for ways every day to make the process better and adapt to
the new realities.
Chairman Shelby. We are focusing on this process now.
Mr. Kimmitt. Right, so let us focus on this one.
I would say that in the three areas that the GAO
recommendations talked about, I think that is a very good
starting point for our discussion. One would be transparency.
National security processes, as you know very well, and your
two colleagues know well from their service both on this
Committee and elsewhere, tend to be somewhat opaque, but I
think we can certainly have a much better line of communication
with the Congress on the CFIUS process.
Chairman Shelby. Do you believe that the Committee of
jurisdiction, which is this Committee, should know what is
going on? To carry out the act that we have oversight
responsibilities for?
Mr. Kimmitt. Exactly. As you said and as I picked up in my
comments, I think that we have an obligation to help you live
up to your oversight responsibilities. We both have an
obligation to discharge our responsibilities.
Chairman Shelby. Right.
Mr. Kimmitt. We will strike a balance.
I think we need to find a better way to communicate more
frequently, more fully with you; also, all of my colleagues
long before this hearing was scheduled have told me that the
timing was a problem. I think that we have to look for ways,
and I think Secretary Baker's comment about what we can do even
before the formal filing to begin a process is good.
Chairman Shelby. Sure.
Mr. Kimmitt. And then, I think it was correct for the GAO
to point to the question of definition of national security,
but that is the one place I have to take major exception with a
point that they made and, frankly, that Senator Schumer made,
this notion that somehow Treasury has narrowed the definition
of national security.
I have been in this business for 30 years. I have not yet
seen a definition of national security. It is a dynamic concept
that defies static definition. For example, we would all agree
that national security and challenges thereto are vastly
different today than they were pre-September 11.
I think the way to ensure that the most current and
comprehensive view of national security is taken into account
in each transaction is to have the agencies at this table and
others who are charged with developing and protecting the
national security of the United States are at the table and
have a fair opportunity to put those views on the table.
That is why the Department of Homeland Security is a member
now and was not before, because its important responsibilities
are integral to the national security, and last, at the same
time, picking up on my first point, I think it is very
important for us to learn from both what GAO has said, what the
Committees of jurisdiction, especially, have said should be
factors taken into account. But again, if you tried to define
national security, I promise you, the day you define it, it
will be out of date. It is a dynamic concept that I think you
would want us, just as you do, to look at it in light of the
facts and circumstances both of the transaction in front of us
and the world in which we live.
Chairman Shelby. Secretary Sampson, do you have any
comment?
Is it perfect?
Mr. Sampson. It is not perfect.
This is the fourth GAO report. I found the report, which I
read, to be professional in nature and scope. I think, first of
all, there is a need for the leadership of CFIUS, at the
highest levels, to be engaged. I think we are making that
commitment to you by our presence here today and our
discussions with each other.
The points that I would make with respect to the GAO report
that I found did not resonate with my experience was that
somehow, Treasury either imposed a definition upon the
agencies; that has certainly not been our experience at
Commerce. And particularly with the Bureau of Industry and
Security, that raises issues with respect to control of
products involved in a transaction, the export of technical
data, or the maintenance of an adequate defense industrial
base.
And the other point that I thought may have missed the mark
to some degree is a connotation that the very robust dialogue
and debate that occurs within CFIUS is somehow indicative of a
system not working or that Treasury is trying to squelch that.
I find that robust debate to be a sign that each agency feels
fully empowered to bring their equities to the table and that
resolution is achieved on a consensus basis, or else, the
decision goes forward to the President.
And so, those would be my observations about the report,
but clearly, there is opportunity for improvement in the area
of communication with Congress.
Chairman Shelby. Secretary Baker, do you have a comment?
Mr. Baker. Yes, I will certainly join the parade of people
who think that the process is not perfect. But I would also say
that it is a very flexible statute. Many of the procedures have
evolved over time. Secretary Kimmitt has suggested another one
in which he would chair the committee to allow a fair umpire
for a debate that can go forward with Treasury expressing its
own views.
All of the procedures that I talked about for improving the
insight into transactions well in advance of a filing are
things that are well within the scope of the current statute.
So, I would suggest that in fact there are improvements that
are possible, but they can take place within the context of
this statute.
Chairman Shelby. Secretary Wayne.
Mr. Wayne. In part to echo my colleagues, but I think what
we have seen over the past several years is that as our sense
of national security has expanded, especially in the post-
September 11 era, the Committee has worked hard to adapt to
those new challenges, to learn new ways of interacting.
Chairman Shelby. Sure.
Mr. Wayne. And part of that vigorous debate that we have
had is really showing the health of the process and the
flexibility of working through these issues as we go forward,
because there is no doubt that we are looking much wider now at
implications than we might have in the past. And the statute
does allow that flexibility. This kind of discussion and the
kind of debate spurred by the GAO report is healthy in that
process, and we will work with you to make it better.
Chairman Shelby. Well, we are all for trade, but should we
subordinate our national security, Secretary Flory, in any way
to economic interests?
Mr. Flory. Mr. Chairman, we should not subordinate our
national security to anything. I think it is a fair point, as
others have pointed out, that economic security is an element
of national security, but we know what we are talking about
here.
Chairman Shelby. We are talking about two different things
here, now, I understand that. My emphasis is national security.
We know we have to buy and sell. We trade and all of this. That
is given, and we should not hide behind national security on
something as long as there is reciprocity out there in the
world with our partners.
Mr. Flory. No, sir, I agree completely with that statement.
With respect to the GAO report, I think it has made a very
valuable contribution. I think that one of the things you see
here today is a high level of attention and a high level of
commitment to work across the membership of the CFIUS to look
at the comments of the GAO, to review them and see what changes
in policies and procedures are required, as Secretary Kimmitt
has committed to do.
I think this is a good thing. I think it would have been a
smart thing to do even if there had not been a GAO report.
Having a GAO report helps focus attention on seizing these
problems early. I know. I have been working this process for 2
months. We have not had a CFIUS case in that time, so Secretary
Kimmitt and some others are also relatively new to their jobs.
Chairman Shelby. But you are not new to the issue.
Mr. Flory. I am not new to the issue, sir, not at all, no.
We were looking at very similar issues a few years ago. But I
have found it valuable, because as I say, it has focused
attention, it has focused attention at a very high level. It
has achieved a commitment to grapple with the issues raised by
the GAO report and others that we may find. I think people are
approaching this in a very constructive and open-minded sense.
I would make one comment beyond that on the report that I
think is potentially misleading.
Chairman Shelby. You are referring to the GAO report.
Mr. Flory. The GAO report, yes, sir. The tone of the report
suggests that the failure to block more transactions, the
failure either to get to the President more transactions or for
the President to actually veto more transactions is in itself a
symptom of the weakness of the process. I do not know for a
fact that it is, or it is not, but I do tend to think that the
purpose of the----
Chairman Shelby. But you are not telling us the process is
perfect.
Mr. Flory. No, sir. I did not want to bore you with another
assertion.
Chairman Shelby. Do not do that.
Mr. Flory. But for the record, I do not think that the
process is perfect. But what I do think is that the purpose of
the process is to make sure that any transaction that goes
forward is one that meets our national security requirements.
Chairman Shelby. Absolutely.
Mr. Flory. And if that can be done through negotiation and
risk mitigation, which appears to be what has happened in the
majority of cases, that is not necessarily a bad thing. I think
it is appropriate for us to scrub the process and look at it
and say is there something that might have gotten through that
maybe should not have?
But I think that the GAO report, maybe by seizing on that
one metric that has the potential to mislead, and I think what
we need to do is look at it and say, look, what we really care
about here is have we made sure that any transactions that take
place are ones that meet our national security needs? And if it
turns out that the answer to that is yes, then, I think I would
say that at least that far, the process seems to have worked
reasonably well.
Chairman Shelby. Mr. McCallum, how does Justice's role play
in this? FBI is part of Justice.
Mr. McCallum. It is, it is, Senator, and just so that i can
answer the first question and get into the area of boring you
with the response that Secretary Flory eventually gave, we at
the Department of Justice agree that the system is not perfect,
and all systems can be improved. And we support Secretary
Kimmitt's call for ways to look within the process to improve
it.
Within the Department of Justice, as you have correctly
pointed out, we do have various components, including the FBI,
and the lead component for CFIUS purposes, as I indicated in my
opening statement, is the Criminal Division. But we bring to
bear within a coordinated effort under the leadership of the
Criminal Division, the FBI, and the various other areas that I
mentioned in my opening statement, Senator.
Chairman Shelby. I am going to recognize Senator Allard
first. Go ahead.
Senator Allard. Thank you, Mr. Chairman.
I would like to have each one of the panel members respond
to this, because you all represent different Departments, but
has, to your knowledge, has the current law on CFIUS come into
conflict with any other existing laws?
Mr. Kimmitt. Senator, the way I would answer that is if you
look at the way Exon-Florio was written. It was written to
ensure that in those instances where national security concerns
were raised but not addressed by other laws that it provided a
backstop to ensure that no transaction went forward that would
harm the national security.
So, I think we have worked very hard, and each of my
colleagues mentioned laws for which they have primary
jurisdiction that are also part of any acquisition process.
CFIUS was really, again, created, and the Exon-Florio provision
was created, really as a backstop to ensure that where other
laws could not successfully address national security concerns
that the CFIUS process was to step in to make sure that those
were fully addressed.
Senator Allard. And how often, then, does the CFIUS come
into play within a year, on average?
Mr. Kimmitt. On average, I think that the formal process
itself is engaged probably about 50 times a year on average
recently. It used to be, in the early days, in 1988, 1989, and
1990, that it was in the hundreds.
What has happened, actually, is there has developed in the
legal community, the investment banking community, in the
business community, an awareness of what one has to do to pass
CFIUS muster. So there is an awful lot of self-correction that
takes place right now. As Secretary Baker and Secretary Flory
said, a lot of informal contact that takes place, including
under those other jurisdictions, even before someone comes to
CFIUS. In many cases, transactions just go away, because people
know that there is a hurdle that they will not be able to
cross.
But again, it is on average about 50 cases a year is what
has been running in the last, let us say, in this
Administration, 50 to 60 a year.
Senator Allard. Do we know how many instances where people
have come in, thought they might go through the CFIUS process,
but then withdraws their application?
Mr. Kimmitt. In this Administration, so if I look real
quickly, one, two, three, four, five, let us say there have
been 250 cases notified since the beginning of President Bush,
Sr's Administration, the information I have available to me,
and I am relying on people who were there long before August of
this year was that there were 12 withdrawals of those 250.
Senator Allard. Okay; and were they, again, those were
withdrawn because of the complication of the process? Is that
why they withdrew?
Mr. Kimmitt. It is a very good question, Senator, and I
think this was actually an issue that the GAO said in their
report had two aspects to it. I think one part of the
withdrawal process is to get around some of the time
constraints, that you are getting close to the end of the 30-
day process; either Departments need more information before
they can make a decision, or the companies and the Departments
need more time to work out mitigation procedures. But you have
a good chance of getting that done so that you do not have to
go into a formal, lengthier investigation, and that is good;
that is, that it allows the time process a little bit of
flexibility.
At the other side, the GAO rightfully pointed out that you
have to be a little bit concerned if someone withdraws and then
does not refile, particularly in the circumstance where the
transaction then goes forward. Now, we have ways, and each of
the Departments and agencies has responsibility for continuing
to monitor transactions, whether they have been approved by
CFIUS or not. But I will just tell you, having sat on boards of
directors both at home and abroad, I cannot imagine in the
post-Sarbanes-Oxley world, with all deference to your Ranking
Member, Mr. Chairman, how any director could give the go-ahead
on a transaction that had been notified, withdrawn, and then
not refiled, because the President's authority to unwind that
transaction is without limit if the person has not received
approval of the process.
So, I actually think that that very powerful nonjudicially
reviewable authority of the President to stop or unwind
transactions acts as a real leavener on the process, especially
in the withdrawal case but even in the voluntary notification
circumstance.
Senator Allard. Now, there was an amendment to be proposed
or possibly was proposed on the Defense authorization bill
pertaining to CFIUS, and then, that has been introduced as a
separate piece of legislation. Have you had a chance to review
that piece of legislation as it was reintroduced as a
standalone bill?
Mr. Kimmitt. I have looked at it, Senator Allard. As
Senator Inhofe had said, he had put one measure in; then,
because of the complexities of the Defense authorization bill,
he has put in another standing bill. I think, again, what I
would say is if you look at this plus the GAO report, it seems
that we are coming to some of the same areas that we need to
look at carefully; for example, the first thing Senator Inhofe
said it does is it changes the CFIUS review period from 30 to
60 days, so it goes back to that time question.
I think we have to think very creatively about how to give
the agencies more time, but remember, about 95 percent of these
cases, as the Chairman said, the vast majority do not present
troubles, get cleared quite easily within the 30 days.
I think what we have to do is to find a way to get those
out of the way and focus in on that small number of cases that
really raise national security concerns. My concern any time in
the Government is if you move something from 30 to 60 days,
then, things are going to get done on day 59 rather than day
29, and I think we are going to spend more time on cases that
do not raise major concerns, and we will have less time on the
ones that raise concerns.
Senator Allard. But we still give them an opportunity to
withdraw voluntarily, and then, if they do not come and
reapply, it raises a big red flag out here is the way I----
Mr. Kimmitt. Again, I just cannot understand how a director
could discharge her or his fiduciary responsibility to allow
that to go through.
Senator Allard. So even though you run into time limit
problems with the 30 days, then, they can withdraw, and then
frequently, they come back and refile.
Mr. Kimmitt. That is my understanding of what the recent
experience has been, although I would mention, as the Chairman
said, you are going to have some practitioners on in the next
panel. I think that would be a very good question to ask Mr.
Marchick who practices in this area, because he will be able to
give you that view from the point of view of somebody who has
to advise the client.
Senator Allard. Now, those that you have turned--how many
of them have voluntarily withdrawn and then come back and
refiled later? Have they all done that, or have those 12 that
you just mentioned just been permanently withdrawn?
Mr. Kimmitt. What I have, my statistics indicate, and
again, I am operating on the basis of transactions that took
place or were proposed before I took office or before most of
us did. Again, in this Administration, roughly 250 cases, 12
withdrawals, 10 refilings.
And there were two that were not refiled, and I would have
to, if I could, for the record, provide you additional
information on those two. What I could say for the record is
that if an agency raises a concern that leads to a withdrawal,
I think I can speak for my colleagues in saying whether that is
refiled or not, that is a concern that is going to be of
continuing interest to the agency, particularly if those
companies decide to go forward without the CFIUS or
Presidential approval.
Senator Allard. Thank you.
I see my time has expired, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Hagel.
STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Mr. Chairman, thank you. Gentlemen, welcome.
Let me ask you, Secretary Kimmitt, and I would welcome
additional response if you feel compelled to do so to this
question from the other witnesses. In your opinion, your
knowledge of CFIUS since its inception, has there ever been a
situation where this country's national security interests have
been jeopardized by CFIUS not acting to break up a foreign
acquisition?
Mr. Kimmitt. Senator Hagel, not to the best of my
knowledge. I was involved in this process even before Exon-
Florio passed, and although I have been out of Government for
12 years, I have continued to watch this very carefully. I
think I can say certainly, the view of the Treasury Department
is that the answer to your question would be no, that there has
never been an instance where a transaction involved in the
CFIUS process compromised or undercut the national security of
the United States.
And I would say, based on my reading also of not only the
most recent GAO report but also their reports going back to the
mid-1990's, there was never an allegation that there had been
harm to the national security, but rather we needed to continue
to have procedural improvements to ensure that the possibility
never occurred.
Senator Hagel. Anyone wish to add to that or take issue
with Secretary Kimmitt?
Mr. Flory. I am not aware of any incidents of that type.
Mr. Kimmitt. Thank you, Secretary. Are any of you aware of
any instances where any member of CFIUS had their national
security interests overruled by Treasury?
Mr. Sampson. No.
Senator Hagel. No? There is not an instance that any of you
can think of?
Mr. Kimmitt. Excuse me, Peter, go ahead.
Mr. Flory. Senator, from my knowledge of the process, which
is based on the GAO report, which recounts a number of debates,
in a number of cases, it suggests that a national security
interest was overruled.
I have talked with my staff who have been working this, and
my understanding is that in any case where the Department of
Defense may have had concerns, or components of the Department
of Defense may have had concerns, that the eventual solution
that was reached on the case had addressed those concerns. So
that does not necessarily prove that in a given--an issue may
have been debated and may have been debated in a fairly
extensive way within the Committee, but the end results were
results that we were satisfied with.
Mr. Kimmitt. And Senator Hagel, I would just note that this
is a legal process based on an Executive Order that created
CFIUS in 1975; updated it with Exon-Florio in 1988; then again
in 1992. It is a legal process. We follow the law. At the same
time, it is an interagency process, one that both you and the
Chairman are very familiar with.
And the fact of the matter is there is only one
decisionmaker in the national security community, and that is
the President of the United States, and if anyone has a
national security concern that cannot be addressed, whether it
be at the staff level or the deputies' level or higher, we do
not have the ability to stop it at that point. We must send it
forward.
As Secretary Flory said, our goal, consistent with the open
investment policy, is to try to find a way to let the
transaction proceed. But each one of us has a Constitutional
responsibility to make sure that we do not give an okay to a
transaction that is going to harm the national security
interest, and Treasury neither can narrow the definition of
national security, because national security is what the
Committee defines it to be, nor, can the Treasury Department
keep any Cabinet secretary from taking his or her view on that
national security issue to the President.
I think it is incumbent upon us to do as much as we can at
the staff level, where a good 75 to 80 percent of the work will
be done; that that cannot will be resolved at the policy level,
but at the end of the day, if that cannot be resolved, and none
of these people, I tell you, will ever give a free pass to a
transaction on national security grounds, it then goes forward.
Senator Hagel. Thank you.
Mr. McCallum. Senator, on behalf of the Department of
Justice, I would like to echo what has been said before in that
having made inquiry, I know of no case where the Department of
Justice had national security concerns with a transaction that
went unaddressed.
Senator Hagel. Thank you. It has been suggested, as you
each know, that Congress be given a final approval role, at
least, in the CFIUS process. What is your assessment of this
proposal, and if you think that is a good idea, I would also
like for you to address, then, the political dynamic that may
well creep into that approval process. Start with you,
Secretary Kimmitt.
Mr. Kimmitt. Oh, I was hoping that you were going to look
somewhere else on that one, Senator.
[Laughter.]
Let me say this: We have a system of government that leaves
to each of the three branches an important set of
responsibilities. You have the legislative; we have the
executive responsibilities.
I think that when it comes to national security, each of us
has very important responsibilities, both individually as well
as institutionally. I will defer to the Acting Deputy Attorney
General on the separation of powers issues that are raised by
that, because I think they are significant. What I would say is
if we do a better job of staying in touch with you than we have
in the past and have an idea of what the issues of concern to
you are, not just procedurally but the factors, as the Chairman
said, of what should be taken into account in the Committee's
deliberations, and then, in the wake of that, if we are open
with you and frankly more open and more frequently open with
you than we have been in the past so that you can be assured
that we are doing this correctly, then, I think we stay away
from the more difficult Constitutional issue of the legislative
branch getting involved in an executive function.
Senator Hagel. Let me ask you a point to clarify this. So,
you would not be enthusiastic about changing the approval
process or Congress being involved in any final approval of a
CFIUS decision.
Mr. Kimmitt. I would not, Senator, any more than I think
the Justice Department would want the Congress more deeply
involved in Hart-Scott-Rodino antitrust review or the FCC on
communications review. You have a range of powers and
authorities available to you that the CFIUS process does not
touch: This hearing, your ability at any point to call people
up before you, either private sector or public sector; that, we
understand. I think, though, I would say let us make these
improvements to the process, let us assure you that we can
handle this thing properly. Then, we do not have to get into
the Constitutional debate.
Senator Hagel. Are there any contrary opinions on the panel
to what Secretary Kimmitt noted?
Thank you. I know my red light is on, Mr. Chairman.
Chairman Shelby. Go ahead.
Senator Hagel. May I ask another question thank you.
Chairman Shelby. Yes, sir.
Senator Hagel. Did the GAO interview all of your agencies
before their final report? Each of you had opportunities, or
representatives of your Departments were interviewed?
Mr. Sampson. Yes.
Mr. Kimmitt. I think, Senator, what took place, if I read
the GAO response to the Treasury comments correctly, was that
there were some agencies who were not interviewed during the
process, but I think all agencies received a copy of the draft
report before it was submitted.
I will be candid: I think it would have been good for GAO
to have interviewed all of the agencies, both at the
professional staff level but also engage us at the policy
level. They may have had some time constraints of which I am
not aware, but I think in the end, each of us did have an
opportunity to comment on the report before it came forward to
you.
Senator Hagel. I am not aware of this part of the CFIUS
review, so here is the question to you: Does a regular CFIUS
review include bringing in outside agencies or departments
within the intergovernmental process? The Department of Energy,
for example, obviously energy is a critical part of our
national security, and that is done on a regular basis?
Mr. Kimmitt. Yes, Senator, I mean, just as you had Senator
Inhofe in before your Committee today, the only way that we
work well is on an interagency basis. There are some people, as
I mentioned in my opening statement, in the intelligence
community whom we immediately involve in any notification to
get their full intelligence on the transaction involved.
I might note that that creates a little bit of a time
problem in terms of responsiveness, and we are working on that.
But beyond that, any department or agency, I mentioned
specifically Energy and Transportation in my remarks, but
really, any department or agency who will bring a perspective
to the table that will better inform us on the national
security implications will be invited.
And I might say, as both you and the Chairman know, when
the National Security Council meets, although technically, it
just comprises the President, the Vice President, the Secretary
of State, Secretary of Defense, the Chairman of the Joint
Chiefs, and the Director of Central Intelligence, you will not
be surprised to know that Treasury is there very frequently,
Commerce, DHS, Justice, and others, and so, again, I think just
as the concept of national security is a dynamic concept, the
representation has to be dynamic and tied to the transaction in
question.
Senator Hagel. Mr. Chairman, may I ask one last question?
Chairman Shelby. Go ahead.
Senator Hagel. I appreciate your patience.
Chairman Shelby. It is important.
Senator Hagel. And it is this: It has been referred to this
morning in various ways, but the issue of the review period
being extended, could I get a quick answer from each of you
whether you think that is a good idea or not a good idea?
Let us start with you, Secretary Baker.
Mr. Baker. I think it would not be a good idea, because of,
as Secretary Kimmitt suggested, we would be extending a lot of
routine transactions to day 59 instead of day 29, and the
impact on foreign investment and investors' expectations would
be significant. And as I said earlier, there are other ways to
achieve early warning about the transactions we are
particularly concerned about.
Senator Hagel. Thank you.
Mr. Sampson. I would fully concur with DHS.
Senator Hagel. Thank you.
Mr. Flory. I agree, sir.
Mr. Kimmitt. I agree both with what Stewart said, and we
are going to have a meeting as early as next week to see if
there are any other better ideas.
I mentioned to my colleagues, and as you know, Senator
Hagel, when someone does a notification in the European Union,
they also have a 30-day review process, and if they are not
quite ready to go at 30 days, they just stop the clock.
Now, maybe the Europeans are cleverer than we about that,
but it allows them to maintain jurisdiction, take a little bit
more time to get the information. I am not sure that we have
the ability to do that, but as Stewart says, I think we do have
the ability to make a lot better use of the preformal
notification process.
Mr. McCallum. Yes, as Secretary Baker stated, for most
transactions, the 30-day review period is enough, and it is
that small number of transactions with complex and sensitive
issues that put the stress on the resources that are available
within that time period. But as I indicated previously, the
Department of Justice has not seen any situation in which the
national security issues were not addressed and addressed
appropriately.
Senator Hagel. Thank you.
Secretary Wayne.
Mr. Wayne. I concur with Secretary Kimmitt and Secretary
Baker and the others on this.
Senator Hagel. Gentlemen, thank you.
Mr. Chairman, thank you.
Chairman Shelby. Thank you, Senator Hagel.
I have a number of questions, but before this, Sarbanes is
tied up in some other areas, but he has a number of questions
that he would like to submit to all of you for the record, and
we will keep the record open for that.
Mr. Kimmitt. Thank you, Mr. Chairman.
Chairman Shelby. Secretary Kimmitt, you and the rest of the
witnesses on this panel all operate at what we call the upper
stratum of government policymaking. At the policy level, how
does the Committee on Foreign Investment resolve disagreements
that could be resolved at the staff level? What additional
kinds of information are brought to bear, and how are policy
considerations reconciled? What kind of guidance does the White
House provide in these instances? How is consensus reached? In
other words, how do you work?
Mr. Kimmitt. Well, I will describe how I would like the
process to work.
Chairman Shelby. Yes. Tell us how the process works
basically and how you would like for it to work.
Mr. Kimmitt. Well, I think that the way the process works
right now is that the vast majority of the cases, and therefore
the vast majority of the work, is done by an exceptionally
capable professional staff representing not just the
Departments at the table but the other six agencies involved.
Chairman Shelby. The vast majority of cases dealing with
trade and buying companies and so forth and here and abroad,
direct investment is not concerned generally with national
security.
Mr. Kimmitt. Right, exactly, and my point would be that I
think what that staff level work has done is to develop a
process that identifies very clearly as the time permits what
the policy level national security questions are that need to
be considered. And if they can resolve them at their level,
largely by working with the companies on mitigation procedures
and so forth, then, I do not think it would have to go any
higher.
But certainly, before one would go to an investigation that
could lead to a Presidential decision, that is where I think
we, on behalf of the Cabinet secretaries for whom we work, have
to have those issues brought to our attention. We have to make
sure that we have the information that we need to make that
critical judgment of whether the national security will be
protected and discuss it in the context of the broader policy
responsibilities each one of us deals with every day in other
national security forums.
Again, to the extent that we can work it out there and get
the companies to accept it so that we are all confident that
the transaction can proceed in a manner that is not harmful to
national security, I think we can get it resolved at this
level. But in the end, as I said earlier, this is not a
consensus-driven process in which consensus is the goal. It is
a consensus-driven process that creates a presumption in favor
of the person who thinks a national security question has not
been answered, and if that has not been answered, it can only
go forward to the President.
Chairman Shelby. Mr. Secretary, what is the Committee on
Foreign Investment's procedure for maintaining control over
cases that have been withdrawn, especially those cases where an
acquisition has already been completed? Because the
notification to the Committee is voluntary, as I understand it,
and because companies are routinely permitted to withdraw their
paperwork, what mechanism is in place to ensure that
acquisitions are monitored for national security implications
and blocked, blocked if necessary before damage is done?
Who is responsible, in other words, for ensuring that the
companies refile, and each agency has the opportunity to
complete a full review? As I understand it, the guidelines
state that Treasury has responsibility for setting up a
timeline. In how many instances has that been done?
Mr. Kimmitt. Well, no, I think, and again, I think it was a
good point made not only in your comments Mr. Chairman but also
by the GAO. I think we have to watch these withdrawals very
carefully. Again, the percentages, at least as I have them,
would suggest that only about 5 percent of the cases notified
over the past 5 years have been withdrawn, and 10 of those have
been resubmitted.
So what the statistics would suggest is that 1 percent of
the cases that have been notified in the past 5 years were
notified, withdrawn, and then not renotified. It is a small
number of cases, but going back to my earlier point, those are
probably precisely the ones that we have to look at very
carefully.
Although Treasury, in its role as chair of the process,
sets up procedures and has to keep people generally informed of
whether a company has refiled, whether the transaction has gone
forward, I would defer to each of my colleagues to say how they
do it, but we also look at the agency that raised the objection
or agencies that raised the objections that led the company to
withdraw the filing to have a continuing watch over that issue
that caused the concern, with particular attention on
transactions that close without coming back to CFIUS.
Chairman Shelby. Basically, we cannot afford where national
security is involved to let anything slip through or slip by.
Mr. Kimmitt. No, absolutely not. And then, again, that is
why Exon-Florio is just one of the many laws available to us.
It is a process that helps identify, really do a triage, a
screening out, but on a going forward basis, if those companies
come together and begin to operate in the United States without
addressing the concern, whether it be of Justice, the Defense
Department, DHS, or anyone else, I would imagine that that
Department has the ability, using its existing statutes, to
make life very difficult for that company, and that is why,
again, it is hard for me to see how a board of directors could
ever let that happen.
Chairman Shelby. Secretary Kimmitt, the bid by the China
National Offshore Oil Company to buy Unocal entailed a number
of factors that may or may not have contributed to a
determination by the Committee on Foreign Investments had it
reached that stage. For example, there was the question of
control over oil and natural gas deposits as well as concerns
about deep sea mapping technologies and other sensitive
technologies that we might have wanted to protect.
I know you cannot address that case in any detail, but it
did bring to mind here on the Committee concerns that the
Banking Committee has over how the review process, as we keep
talking about it, unfolds. For purposes of paragraph B of Exon-
Florio, mandating investigations in the case of state-owned or
controlled entities where national security could be affected,
is it your assessment that the China National Offshore Oil
Company would have qualified?
Mr. Kimmitt. Again, that case both took place before I was
in this position, and as you indicated, it had been withdrawn
but----
Chairman Shelby. Well, it brought a lot of this to the
attention of the American people.
Mr. Kimmitt. Let us talk about the public facts. The fact
is it was a state-owned company receiving concessional
financing, according to reports, wanting to make an investment
into a sensitive sector, sensitive by their definition, since
they will not let United States companies invest in that in
China.
Chairman Shelby. Absolutely.
Mr. Kimmitt. So it would seem to me that had a case like
that----
Chairman Shelby. Reciprocity, no reciprocity.
Mr. Kimmitt. Right, had a case like that, and frankly,
whether the state-owned entity was China or in another country,
it would seem to me that it falls squarely within Section B,
which was the Byrd Amendment in 1992.
I think the factors that you mentioned, you said they were
outside the CFIUS purview; I would not think so. I would think
that the Energy Department or other Departments would have
brought precisely those kind of factors into play if a case put
forward by a state-owned company of any nationality in that
particular sector were to come before us. But in this case, as
you said, Mr. Chairman, the bid was withdrawn.
Chairman Shelby. Sure; if a case is not reviewed prior to
an acquisition process being in what we call an advanced stage,
does that mean that there is no consideration of the case at
all? When precisely does the 30-day clock start ticking?
Mr. Kimmitt. My understanding is that under the
regulations, Mr. Chairman, there is an information requirement
from the parties to the transaction that has to be submitted to
the Treasury Department to begin the 30-day process. Now, I
think in almost every case, my experience has been, and my
briefings have suggested, as Secretary Baker said, that that
process of interaction begins long before that formal filing.
And I would imagine, for example, if a European
manufacturer looking to make an investment into the U.S.
defense industry, Treasury would not be the first to hear about
that. My guess is that Secretary Flory and his colleagues would
have heard about that first, because that is the customer. We
are not the customer. And I think any smart company and smart
advisers to companies would try to get as much done as possible
before making the formal filing to help us get around the time
issues that have been raised.
Chairman Shelby. I would like to direct the next question
to Acting Deputy Attorney General Secretary Flory, Secretary
Baker, and Secretary Sampson.
Has the credible evidence standard that you all are all
familiar with in Exon-Florio limiting when the President can
use the authorities of the statute to suspend or to block a
transaction been flexible enough to allow the Committee on
Foreign Investment to block a transaction or to impose
sufficient risk mitigation measures when needed when the
foreign company in question is government owned or controlled?
When that government is neither a NATO or a non-NATO major
ally, how is a determination made on whether credible evidence
exists that an acquisition could harm national security? What
factors are used in making such a determination? Mr. McCallum,
we will start with you.
Mr. McCallum. Well, Senator, I think we posed a very broad
and general question, and each particular case is, in fact,
unique.
I think the best way for me to address that is to indicate
the fact that according to the Department of Justice and those
who have been involved in this process for many years, there
has never been a situation that the Justice Department was
dissatisfied with the mitigation issues or the mitigation
activities and requirements that were instituted and agreed to.
So in each one of the situations that the Department of Justice
has had national security concerns, those national security
concerns were, in fact, addressed. And the issue, the legal
issue of credible evidence is, I guess, less one for the
Committee than it is for the President, and the reason I say
that is, as Secretary Kimmitt has indicated, the standards that
are used within the Committee are whether any particular
component or agency that is acting either as a Committee member
or is invited to participate in the process asserts that there
are unaddressed concerns that they have, we then send it
forward.
And the Committee then, at the end of the investigation
stage, will make its determination on whether or not it
believes that there is credible evidence. And there is
ultimately the decision to be placed before the President, and
on that Presidential decision, there is no judicial review. So
each case will stand on its own unique basis, if you will,
given the facts and circumstances.
And I can hypothetically, as a law academic exercise,
imagine transactions 10 years ago that would not have
implicated national security to the same degree that they do
today.
Chairman Shelby. Secretary Flory, do you have anything to
add on that?
Mr. Flory. Senator Shelby, I do not. I indicate, as I
indicated earlier, we are not aware of any cases where our
concern, any concerns that we had were not ultimately
addressed, whether as a function of a dispute over what
constituted credible evidence or anything else.
But described by the Department of Justice, the way the
process works here, I think that gives you a good idea. If DoD
or Homeland Security or anybody has an issue that they think is
a problem, we put that on the table, and that will get the
process going, and the matter will be assessed.
Chairman Shelby. But DoD is part of this process for a real
reason, is it not?
Mr. Flory. Absolutely.
Chairman Shelby. And Homeland Security, the same way, and
of course, Commerce is. All of you are to a point. The Justice
Department says that it shares GAO's concern about the time
constraints we keep talking about in the review process. It
stated, Justice did, that any potential extension of time
available to the participants for the collection and analysis
of that information would be helpful to Justice. Where is the
process in trouble? What period of time is too short for an
effective completion of a comprehensive review? Should there be
a one 75-day period to complete all of the Committee's business
before a vote is taken to refer to the President? Does the
Justice Department know of any instance where the Committee
asked a corporation to withdraw an application to allow the
Committee more time to finish its review?
Mr. McCallum. Well, Your Honor, Senator--lawyer's habit,
Your Honor.
Chairman Shelby. I know.
Mr. McCallum. Senator, I do not know of particular
instances, particular cases that I can point to.
Chairman Shelby. Could you check the record and furnish
that information.
Mr. McCallum. I do have general information on that, and in
certain circumstances, in a small minority of cases----
Chairman Shelby. We would like some specific information.
Mr. McCallum. But the confidentiality of the filings before
the Committee on Foreign Investments and----
Chairman Shelby. We are not asking for everything.
Mr. McCallum. I do understand that, but I do think I can
respond on a general basis to say that there have been
situations in which withdrawals did occur in order to allow
both the companies involved in the transaction and the
Committee itself additional opportunities to obtain information
and to review that information.
So, I return to the ultimate result of all of those is that
within the Department of Justice, there is no instance in and
of itself or particular case in which the national security
concerns were not able to be addressed and addressed adequately
in the views of the Department.
Chairman Shelby. Secretary Kimmitt, dealing with mitigation
and how they are monitored, how exactly does that work? Does
the Committee on Foreign Investment, send people out into the
field to investigate compliance with mitigation agreements? Do
any of the other witnesses after him, do you want to comment?
Do you send people out in the field, and do you follow up the
mitigation stuff ? Do you know?
Mr. Kimmitt. Mr. Chairman, this is a response primarily for
my colleagues, because the role of the Committee is to ensure
that the Committee members are sufficiently satisfied by the
mitigation result that the process can either be completed
within the 30-day period or in some cases beyond.
But once the mitigation agreement is in place, it is the
responsibility of the agency or agencies who negotiated that
mitigation agreement with the parties to ensure on an ongoing
basis that the party, probably now the united entity, lives up
to its responsibilities, and although I will defer to my
colleagues, I think they have worked out some arrangements
where, for example, in the area of network security agreements,
the Department of Homeland Security takes a responsibility on
an interagency basis.
But in short answer to your question, the Committee does
not have an ongoing responsibility in terms of effective
implementation of the arrangements, but if any member of the
Committee, as it follows up on it, reports to us a problem in
that regard, that is an issue that could come back to the
Committee.
Chairman Shelby. Secretary Flory, do you know of any cases
where an acquisition or merger was resolved through mitigation
yet resulted in the loss of sensitive technology or know-how?
Mr. Flory. No, sir, I do not.
Chairman Shelby. Mr. McCallum, do you?
Mr. McCallum. I do not, Senator.
Chairman Shelby. Anybody?
Transparency issue. In the Department of Justice's letter
to the Government Accountability Office, Justice's position
stressed that should any regulations be amended to make the
Committee process more transparent to Congress, those changes
should not impeded the confidentiality, you refer to that, now
afforded companies under the statute.
How exactly would you see that confidentiality being
compromised? If it is compromised, Justice opines that it could
reduce the number of voluntary applications, and that without
corporate confidence in the system, meaningful reviews could
not be undertaken. What, then, is the opinion of the Justice
Department on the nature of these voluntary applications?
Should legislation instead provide for mandatory initial
filings?
Mr. McCallum. Your Honor, the Department of Justice would,
if there was a proposal, a particular legislative proposal for
mandatory filing requirements, we would, of course, like to see
the specifics of it and review it.
In general terms, though, although filings are voluntary,
the Committee itself does have the power to go into and to
effect transactions even if there is not a particular filing.
And Secretary Kimmitt has previously indicated that there is
contact between the Committee and companies that are involved
in transactions in which prior to filing, there are
communications, and in fact, there have been, to my
understanding, through members of the Department of Justice,
situations in which companies were encouraged to file or
contacted and notified that the Committee thought filing was
appropriate and then did so.
Chairman Shelby. Because Exon-Florio is based on voluntary
notification by the parties to a foreign acquisition, have
there been any cases where you have discovered a defense-
related foreign acquisition after the transaction closed and
where you were concerned that any subsequent Committee on
Foreign Investment Review was too late to prevent harm to U.S.
national security? And do you think some defense-related
foreign acquisitions are perhaps passing under that radar?
Secretary Flory.
Mr. Flory. Mr. Chairman, I am not aware of any cases of
that type. When you are talking about things that are under the
radar, I guess by definition, you are talking about things that
you do not see. But I am not, I certainly am not aware of any
case.
I think that, as a number of witnesses have pointed out,
there is a dynamic out there. There is a network out there of
people who pay attention to this process and to its
requirements and there is also a substantial motivation on the
part of corporations----
Chairman Shelby. But the people that should pay most
attention would be your Committee, would it not?
Mr. Kimmitt. Well, and I think most people do, Mr.
Chairman. Again, if a person does not avail themselves of the
protection that comes to the company by subjecting themselves
to our review, they leave themselves open not only to us
through the President later unwinding the transaction, but it
also seems to me that it would sharpen the focus of the Justice
Department using the United States, the Commerce Department,
using our export control laws, any number of authorities
available to the Defense Department. I am not saying that
people do not do those kinds of things. I think our process is
an important part of a broader mosaic of laws and regulations
that are set up to make sure that our national security is
protected.
Chairman Shelby. Anybody got any other comment on that?
We thank you, gentlemen, for appearing, and we are going to
keep the record open. Some Members, Senator Sarbanes included,
have a number of questions for the record.
Thank you very much.
Mr. Kimmitt. Thank you, Mr. Chairman.
Chairman Shelby. We will next hear from our third and final
panel. Today, we have two experts on the history of Exon-Florio
and the role of the Committee on Foreign Investment in the
United States. Patrick Mulloy is a known face around the
Banking Committee, having spent a good part of his life here,
including as General Counsel and Chief International Trade
Counsel. He has served as Assistant Secretary for Market Access
and Compliance in the Department of Commerce's International
Trade Administration and currently serves on the United States-
China Economic and Security Review Commission.
David Marchick is a partner at the law firm of Covington &
Burling, specializing in international trade and investment. He
is one of the country's leading authorities on the Committee on
Foreign Investment, having served on a variety of Government
positions involved in international trade and foreign
investment matters, including the Departments of State and
Commerce. He has been active since leaving Government in
advising U.S. corporations on the Committee on Foreign
Investment and its review process. He has also just returned to
Washington from a trip to the Caucasus in time to accommodate
us here today, and for that, we are grateful.
Gentlemen, your written testimony will be made part of the
record in its entirety. We appreciate your indulgence through
the hearing of the first panel, second panel today. Mr. Mulloy,
we will start with you. Welcome again to the Banking Committee,
where you spent many years.
STATEMENT OF PATRICK A. MULLOY
COMMISSIONER, UNITED STATES-CHINA ECONOMIC AND
SECURITY REVIEW COMMISSION
Mr. Mulloy. Mr. Chairman, thank you very much.
I commend you and the Committee for holding this important
oversight hearing, and I am really honored by the invitation to
come here and testify. I take great pride, and it is a source
of enormous personal satisfaction to have served in a
bipartisan manner on the staff of this Committee from 1983 to
1998.
During the period of 1987 and 1988, when the Exon-Florio
provision was being formulated by the Congress, I served as the
Committee's General Counsel and was directly involved in the
negotiations which led to its enactment. I want to make
absolutely clear, Mr. Chairman, I have no clients other than
the public interest on this issue, and I have never been paid
by any company of any party to advise it on CFIUS matters. I am
telling you exactly what my experience and what I get out of my
experience in dealing with this.
The Committee on Foreign Investment in the United States
was not established by the law Exon-Florio. That preexisted. It
was put in place by an Executive Order in 1975, because a lot
of the oil producing countries suddenly had a lot of new money
because of the increase in oil prices, and there was a desire
to understand more about waves of foreign investment that were
starting to come into the country. CFIUS was set up by the
President by an Executive Order.
Treasury chaired it. Commerce had a major role in actually
tracking the information on what was coming into the country.
So the two agencies had a key role. In the 1988 trade bill,
this Committee reported major provisions dealing with exchange
rates, trade promotion. We did a lot of hearings. Your
provision, dealing with Toshiba and export controls, all that
was in a bill formulated; we got out of the Committee and it
went to the floor.
Exon-Florio was actually developed in the Commerce
Committee, but when it was coming through the process, we said
foreign investment, that is Banking Committee jurisdiction; we
appealed to the parliamentarian. He ruled in our favor. He put
us in charge of it. Senator Exon was brought in as a special
conferee to work with us in formulating the final compromise.
Now, it should be noted that Treasury was absolutely
opposed to Exon-Florio. They led the opposition, and in fact,
they even got the President to put it on their veto list. They
were going to veto the whole omnibus trade bill developed by
all of the Committees in the Congress working over almost a
year, and this was one of the provisions they would veto it
over.
So then, we were told, work, see if we could come up with a
compromise. One of the elements that they wanted out of the
bill was the term essential commerce. The second thing they
wanted out of the bill was they did not want--originally, it
was putting the authority in the Commerce Secretary, who would
make a recommendation to the President, and the President could
overrule the Commerce Secretary. But they did not want Commerce
getting control of this, they wanted to keep control. I think
that may have driven part of their opposition. Also, they
wanted the open investment climate. I think that was another
thing that drove their opposition.
We finally agreed to put the authority solely in the
President, and we agreed to take out the term essential
commerce. The members of the conference were Senators Sarbanes,
Danforth, Exon, Heinz, and Dickson. But we did then say this
should then go into the Defense Production Act, because we do
not want some little, narrow interpretation of national
security, and the conferees put in the statute itself that they
wanted the capability and capacity of domestic industries to
meet national defense requirements to be considered, and they
wanted the capacity of the United States to meet the needs of
its national security be considered.
Okay; it goes into the law; the President signs it; and
then, I am sure there were some inner workings of how that--
they issued a new Executive Order putting the new authority
into the hands of the pre-existing CFIUS, chaired by the
Treasury Department. So the Department that was most opposed to
this new authority ended up chairing the Committee to implement
it.
I think that is part of the problem. In their regulations,
which they took 3 years to get out, they were the ones who put
in this idea there should only be voluntary notifications, Mr.
Chairman, not required; voluntary.
Let me just give you a couple other things that have
happened here.
Chairman Shelby. You take your time.
Mr. Mulloy. In 1992, this Committee held some oversight
hearings on how this was being implemented, because there were
out there. One of the witnesses we brought in, and it was done
by Senators Sarbanes and Mack--Senator Mack was here--there was
a worry that a French-controlled government company was going
to buy an American defense contractor, LTV, missiles. And the
Committee, Senator Mack said we do not want any foreign
government to be owning U.S. defense contractors.
The head of Semitech, which was a special consortium set up
by the U.S. Government to make sure that a industry-government
consortium that we maintained, the semiconductor industry,
because it was so essential to our national security, he came
in and testified, and he told the Committee, foreign interests
have targeted key U.S. technologies, and the present CFIUS law
or its implementation is ineffective in presenting this.
He also voiced concern--this was very important--that CFIUS
was not considering the cumulative effect of multiple foreign
purchases of U.S. companies, and he urged that the chairmanship
of CFIUS be moved out of the Treasury Department, into the
Commerce Department, where they had people who work on
technology. They have a Technology Administration in the
Commerce Department. And I urge the staff, you might want to
look at pages 70, 73, and 74 for that hearing. There is some
really good testimony in that 1992 hearing.
Now, there were a couple of changes that Congress, in 1992,
based on those hearings, put into law. First, it put into law a
new provision requiring Treasury to move beyond the 30-day
period into a full 45-day investigation if it was a government-
controlled company that was going to do the purchase; like
CNOOC, government-controlled, we would have had to under that
provision do it.
Second, it said that there should be a quadrennial study
done by the President, using the intelligence community: Does
any country have a strategy of buying up U.S. key technologies?
And that study was to be done every 4 years.
The Administration, led by the Treasury, did that report
once in 1994 and never again. You look at the law; that
provision is there. It is just being ignored.
Now, in the first report, they said okay, we do not find
any evidence that there is a big strategy out there, but then,
they add the absence of credible evidence demonstrating a
coordinated strategy should not be viewed as conclusive proof
that a coordinated strategy does not exist.
They went on further to say in some cases, foreign
governments give indirect assistance and guidance to domestic
firms acquiring companies. Also, they give them financial
assistance. I urge the staff to read that 1994 report, pages 13
and 14, pages 31 and 32. They point out specific countries that
give subsidies to their companies to come here, buying U.S. key
technologies, and I think if it was happening in 1994, it is
going to be happening in a much more major way now, because
countries like China now have huge amounts of U.S. dollars due
to the fact that we have these enormous trade deficits, because
Treasury, among other things, is really not enforcing the
exchange rate provisions that we put in that 1988 trade bill as
well to identify currency manipulators.
Okay; now, the GAO, in its most recent report, says that
the mandatory investigation that the Congress put into the law
in 1992 is being read out of the statute. How do they do it?
They say if you do not, in the first 30 days, find credible
evidence that there is inappropriate behavior, then, you do not
do the 45-day, even when it is a government-controlled company.
So they are essentially reading a mandatory requirement out of
the law.
The second thing is that GAO says they have narrowly
defined national security to export controlled technologies,
classified contracts, or special derogatory intelligence on the
foreign company. That is not what Congress intended. If we
wanted that kind of thing, we could have put this kind of
authority in the Export Administration Act, over which we have
jurisdiction. We did not. We put it in the Defense Production
Act, because we wanted them to look at the large industrial
base issues that are so important to this country's national
strength.
I think if you give an honest review of the record,
Treasury Department opposed the enactment of the Exon-Florio
provision and has sought to stymie its effectiveness ever since
it was enacted. I know Mr. Kimmitt. I like Mr. Kimmitt. Mr.
Kimmitt is unusual, in fact. Most of these Treasury people come
out of the finance community, not the national security
community, and they do not have quite the appreciation for
technology and the importance of that for an industrial base.
The Chinese do. They even talk about the importance of
building the scientific and technological base of that society.
It is the highest priority. We on the China Commission, of
which I am a member, and I am not testifying for the
Commission, but in 2004, in our report, unanimous, bipartisan,
every commissioner recommended that the chairmanship of CFIUS
be transferred from the Treasury Department to the Commerce
Department.
It is the culture. The culture of the Treasury Department
does not work in this situation. In 1979, the Congress--you
know the group in the Government that deals with dumping cases,
dumping, Treasury used to have that authority. They did not
implement it. In 1979, Congress took it right out of the
Treasury Department and put it in the Commerce Department,
because Treasury's psyche, their whole mode, their culture does
not want to do these kinds of things.
Mr. Chairman, let me just sum up. There are very few rules
on foreign investment. People say we have these WTO rules. On
trade, we do have some, a lot. On investment, there are very
few WTO rules, so we can do what we want to do.
In the WTO, there is a national security exception. The
Schumer-Graham bill is based on that. He bases his bill on the
national security exception. So the Committee can really look
at this, and I think it is very important that they do and come
up with some changes to the law that will really protect the
national security interests.
Thank you, Mr. Chairman.
Chairman Shelby. Thank you, Mr. Mulloy.
Mr. Mulloy. And thank you.
Chairman Shelby. Mr. Marchick.
STATEMENT OF DAVID MARCHICK
PARTNER, COVINGTON & BURLING
Mr. Marchick. Thank you, Mr. Chairman. Thank you for the
opportunity to be here, and I do hope that I hold the record
for coming the farthest way for one of your hearings. I was in
Azerbaijan yesterday, and I am sitting today, not standing.
Chairman Shelby. I hope you slept on the plane.
Mr. Marchick. I slept on the plane. I also want to
compliment you on your opening statement. I thought it
highlighted the critical issues and had an appropriate balance,
and as a result, I am going to take a big segment out of my
statement and put it aside because you said the same thing,
including talking about the yogurt example.
I thought I would focus on three issues: First, how CFIUS
has operated in recent years; second, some of the ideas that
GAO and other Members of Congress have put forth to change
CFIUS, and third, some of the ideas that I would like to offer
for improvements in the process that you and the CFIUS agencies
can consider.
First, trends and application of the Exon-Florio Amendment:
since September 11, 2001, the Bush Administration has applied
greater scrutiny to transactions, has imposed tougher
requirements as a condition for approval, and has enhanced
enforcement of security agreements negotiated through the Exon-
Florio process.
Now, Senator Inhofe mentioned the fact that the President
has only formally blocked one transaction and investigated two
dozen out of more than 1,500 reviews. But these statistics, Mr.
Chairman, obscure the true impact of Exon-Florio. A large
number of investments have been abandoned or substantially
modified because of the CFIUS process. In the last 3 years
alone, there have been more investigations and more withdrawals
than there were during the previous 10 years combined. So
scrutiny has increased. I will come back to the withdrawal
question in a second.
CFIUS has also imposed tougher terms as a condition for
approving transactions. You can just look at the
telecommunications industry. Even foreign-owned
telecommunications companies that do not hold Government
contracts have been required to sign up to many of the same
provisions that DoD traditionally uses for foreign-owned
companies that have Government contracts that are classified
contracts. In other words, CFIUS is starting to use the same
mitigation methods to protect critical infrastructure as DoD
has long used to protect its supply chain.
Now, on the ideas to amend Exon-Florio, let me offer some
thoughts. I am concerned that a number of these changes would
have the impact of chilling inward investment, blocking those
investments that we do want to come to the United States and
simultaneously encouraging other governments around the world
to erect obstacles to investment abroad, and these obstacles
would hurt U.S. companies more than any other country, because
we are the largest investor abroad.
A few examples: The term economic security, in my view,
that term is extraordinarily vague. It would be extremely hard
to implement. And one could imagine that we would get into
situations like the French of seeing yogurt as a strategic
industry, because the yogurt lobby or some other lobby would
say this is in our economic interests.
Chairman Shelby. That is not my goal.
Mr. Marchick. I know it is not, sir, but it may be others'.
Again, I compliment you on the balance of your statement.
Second, allowing Congress to override the President's
approval of a particular transaction would place Congress in
the role of a regulatory agency and create uncertainty for
investors. I think it also, as the previous panel mentioned,
creates some separation of powers issues and may have problems
under the Chadha decision.
On timing, my view is that timelines work. As the
representative from Homeland Security suggested, most this are
actually prevetted with CFIUS. I would never advise a company
just to file on the day that they announce a transaction. You
always go through a preconsultation process, so there is a
period of time before the 30-day clock starts.
On withdrawals, I think withdrawals are a healthy part of
the process. I have been involved in advising a number of
clients on withdrawals myself. They have come up for a number
of reasons. First, we have been told the transaction is not
going to be approved, and if we keep the process going, the
President will reject it. Well, companies in that circumstance
typically say, well, I will just withdraw rather than force the
President to make a decision that would adversely affect our
reputation.
Second, we have been told that CFIUS does not have enough
time, so we withdraw and refile. And third, we have negotiated
an agreement that successfully mitigates a national security
concern, and in order to avoid a transaction going to the
President, you withdraw and then refile.
I do agree with you, Mr. Chairman, that there can be
improved transparency with Congress while at the same time
protecting proprietary business information. We all recall the
dire predictions of the 1980's about Japanese investing in the
United States. These predictions occurred at a time when Japan
had huge trade surpluses and a need to invest its significant
foreign currency earnings, much like China does today.
Congress reacted to the concerns about growing Japanese
investment by adopting Exon-Florio. Looking back, all of our
fears about Japan, I think, appear to be misguided. At the same
time, Exon-Florio has been a useful tool to ensure that
national security is protected in the context of an open
investment policy. Now, to ensure that this continues, I hope
the Committee refrains from amending the statute and instead
works with CFIUS to improve the way that it is implemented.
And let me just throw out very briefly a few ideas, Mr.
Chairman. First, I think that the CFIUS can clarify the
criteria that they use in assessing national security issues.
Your legislation, frankly, has some good ideas. I would
recommend that those be put into regulations or into a
statement of policy as opposed to legislation, because national
security priorities change.
Second, there has to be greater transparency with Congress,
while protecting proprietary information. If CFIUS does not
have the confidence of this Committee and the Congress, it is
not going to be effective in the way it is implemented, the
Exon-Florio statute is implemented.
Third, as the representative from Homeland Security
suggested, there are ways that companies and the Committee can
improve the advance work before a formal filing.
Fourth, I think that there should be earlier involvement by
the White House in resolving differences. Treasury cannot tell
another agency what to do. Only the White House can. And
earlier involvement by the White House can help resolve
differences among agencies and formulate a cohesive----
Chairman Shelby. How do we work that?
Mr. Marchick. Well, right now, for example, in a number of
cases that I have had, which are difficult cases--most
transactions sail through, frankly. I mean, you think about an
auto investment in Alabama, or my daughter's favorite, a Dutch
acquisition of Ben and Jerry's, they pose no problems. But for
those difficult transactions, you often find differences
between Justice, the security agencies, and the economic
agencies, and until those differences get raised to a high
enough level or until the White House gets involved, you get
deadlock, and there is no movement.
So the two ways to improve that are, one, to have higher
level involvement, which, frankly, your hearings have inspired,
and second, to get the White House involved earlier, even
before a formal investigation takes place.
We know which transactions are going to be difficult before
we file them, and the agencies know. Earlier involvement,
higher level involvement can avoid problems in the future and
improve implementation.
Let me just close by saying two things: First, Mr. Mulloy
said that he does not have any clients, and these are his own
opinions. I do have clients. These are my own opinions. My
clients' views are all over the map. I hope after today, I
still have some clients, but I want to assure you that these
are my views. And second, I just want to compliment you and
your staff on the leadership you have shown, because these
hearings have brought focus to the process and will improve the
process just by having the hearing themself.
Chairman Shelby. Thank you so much, Mr. Marchick.
One of the central questions at issue in the GAO report
concerns the disparate approaches different agencies bring to
the concept of what we call national security. It should not
surprise anybody that the Office of the U.S. Trade
Representative or the Department of the Treasury should bring a
different perception onto the issue than the Department of
Defense or Department of Homeland Security. Mr. Mulloy, you
alluded to that a few minutes ago.
Mr. Mulloy. Yes.
Chairman Shelby. Taking into account that the Committee
operates under a consensus arrangement--their Committee, not
this Committee--operates under a consensus arrangement, have
these differences adversely affected the ability of the
Committee on Foreign Investment to carry out its mission of
protecting national security?
Mr. Mulloy.
Mr. Mulloy. Here is what I see, Mr. Chairman. I have been
in the executive branch. I have been in the State Department
and the Justice Department, and I was a political appointee in
the Commerce Department.
These agencies have cultures and interests that they
represent in these processes. The problem in the export control
area, we have was built in, timeframes, and you can get things
up to the President. The problem with this process, as I see
it, we have a credible evidence test that the President has to
meet before he blocks a transaction.
They are using that test to knock out most of these
transactions in the first 30 days, so we never even get to the
formal investigation, because they say that you have to have
credible evidence. And the way that I understand it, the
Treasury, which staffs the Committee, that they are the ones
that push for using that as the approach.
They have kind of knocked out this whole provision that in
a government acquisition, and I do not think that things get
elevated. I think that things, up until this point, and I think
Mr. Marchick even referred to it, these have been handled by
people who have no political legitimacy. They are not appointed
and confirmed by the Congress. These things are getting knocked
out at a lower level. And the authority that the Congress put
in for the President is being handled by people who do not have
political legitimacy.
Chairman Shelby. There have been proposals to place the
concept of what we call economic security under the realm of
the issues for which a Committee on Foreign Investment review
would be mandated or encouraged. Could you comment on the
ramifications, Mr. Marchick, for U.S. economic competitiveness
and economic growth of having transactions reviewed for
concerns broader than even the broadest definitions of national
security? That is not my proposal, as you know.
Mr. Marchick. No, I understand, Mr. Chairman, and with your
permission I would like to respond to your previous question
and offer some thoughts in contrast to Pat's, to Mr. Mulloy's.
As I mentioned, I think it would be very hard to implement
a criteria that focuses on economic security. It is very hard
to define. But a national security criterion which has and
should be broadly used, broadly defined by CFIUS, can encompass
those industries and those technologies that are so important
for the United States' vitality and for our economic security
that they do affect national security.
For example, one could think of right now with the avian
flu or with other threats to our national security technologies
or intellectual property that are so important that they need
to be retained in the United States, that they do affect and do
implicate our national security. And I think that the law as
drafted now does reach those issues and should reach those
issues, but broadening it to economic security, I know that is
not your proposal, would just invite domestic industries that
do not want additional competition----
Chairman Shelby. Well, we would have chaos in the
international market.
Mr. Marchick. I am sorry, say it again.
Chairman Shelby. We would have chaos out there, would we
not?
Mr. Marchick. We would, sir. We would. I mean, if you look,
right now, the French, the Russians, and Canada are all coming
up with their own----
Chairman Shelby. We would be worried about the yogurt
syndrome, would we not?
Mr. Marchick. That is right, sir.
Chairman Shelby. And that is something--we are not
interested in that.
Mr. Marchick. That is right, as much as I like yogurt.
Chairman Shelby. Absolutely.
Mr. Mulloy. Mr. Chairman.
Chairman Shelby. Yes, sir.
Mr. Mulloy. Can I just comment briefly?
Chairman Shelby. Go ahead.
Mr. Mulloy. In 1992, the Congress did one other change in
the law. They added a provision under the factors they wanted
looked at the potential impact on U.S. technological leadership
in areas affecting national security.
I personally agree with what Mr. Kimmitt said. The term
national security can, if you encompass what Congress tells
should be included under that, I think you get essentially
national economic security, because Congress has told them in
the law itself, in the conference itself, the term national
security is intended to be interpreted broadly, without
limitation to particular industries.
I think you can take care of this problem. I just think it
is the culture of the lead agency, and I think it is one other
thing: The way they require agencies to really act on these
things in 30 days, because they do not want to get into the 45-
day. And so what happens, these agencies are enormous places.
You get the notice; you farm it out; people cannot even get
their views together and get them up saying I got a problem
here, because the time has passed by the time the guys who
really understand these things get them up to the decision
makers.
I think you have a real problem with that 30-day thing in
which most of these things are falling out of the process.
Mr. Marchick. Can I respond to that?
Chairman Shelby. Go ahead, Mr. Marchick.
Mr. Marchick. Let me just respond to a few statements that
Mr. Mulloy offered just to ffer a different perspective. And
Pat and I have worked together for years. I have enormous
respect for him. We do have a slight disagreement on some of
these issues, which we have debated.
First, CFIUS is driven by consensus, but the agencies with
the greatest power in a consensus-driven process are the
agencies that object because of a particular national security
concern that a particular agency has. And so, any agency can
force a transaction to go to an investigation or be on the 30-
day process. And so, there is great deference to those agencies
that do have national security concerns in order to find a way
to address those concerns.
Second, I do want to take exception to one statement that
Pat made about the people involved in this process do not have
political legitimacy. The people who run the CFIUS process are
professionals in each of their fields. At Treasury, they may be
economists or lawyers. In other agencies, they are defense
experts, for example, and these are exceptionally competent
people. And in recent years, the Department of Justice, the
Department of Homeland Security, for example, has brought in
new people with new expertise, former prosecutors, intelligence
officials, people with extraordinary levels of experience who
are frankly tough as nails, and my partners and I have the
scars to show for it because of some of the difficult
negotiations we have gone through.
I do think that, as Pat said, the process would benefit
from higher level involvement and higher level focus.
Chairman Shelby. Of course, this is still a voluntary
process. Should it remain a voluntary process? What happens in
the case of companies that manufacture items that are on the
commodity control list? Are they automatically covered under
other statutes so that foreign takeover bids receive the proper
scrutiny in the event that the Committee on Foreign Investments
fails to discover a pending or completed transaction?
How are such cases currently handled, and is the withdrawal
option abused or exploited for purposes that are not in the
national security interests of this country?
And let me ask Mr. Mulloy that first. Do you want to
comment?
Mr. Mulloy. No, you take it, please, and then, I will
comment.
Mr. Marchick. I think the voluntary nature of the process
is very important and should be retained, because as you said
in your opening statement, 99 percent of investments do not
affect national security at all.
Chairman Shelby. But some do, and they are very important.
Mr. Marchick. Some do, and they should be filed, and CFIUS
should be very aggressive in making sure that any transaction
that might implicate national security should be filed.
A lot of the transactions, for example, other agencies have
existing authority to regulate those; for example, an
acquisition of a defense company that may not get a lot of
press or may fall under the radar, DoD can control that company
already through its existing regulations and through deciding
not to award contracts to them. Similarly, the State
Department, the Commerce Department, and the other agencies
that are part of the export control regime have authority to
ensure that there is not an illegal or inappropriate transfer
of export control technologies.
On the withdrawal issue, I do not think it has been abused.
I am not part of the CFIUS process, but I will tell you that no
responsible counsel will ever advise their clients to withdraw
and not refile if they are going to close that transaction.
Chairman Shelby. Pat, do you have any comment?
Mr. Mulloy. Here is my point, Mr. Chairman, and I see
Senator Sarbanes here. Thank you for being here, Senator. The
gentleman from Semitech who came in in 1992--Semitech, again,
was a joint government-industry consortium set up to maintain
the semiconductor industry in this country, because it was so
important--he said this: Our foreign competitors are picking
off our technology jewels one by one.
We did a hearing out in Palo Alto on the China Commission
in April to look at high tech, what is going on? What you find
out is we have a lot of young, entrepreneurial companies
building very important new discoveries. They need financing,
and the foreign investors can find it for them, and they
maintain pretty good surveillance on what these technologies--
that is why we wanted that report, the Congress wanted that
report done every 4 years.
You cannot look at this one transaction at a time, as the
Administration wants to do. The importance of that quadrennial
report was to get a pattern and look at who is buying what in
what industries in this country. And if you look at that
report, even though it was done in 1994 and only once, they
have very good charts showing which countries are after which
industries in this country.
And so, I think this idea of the voluntary requirement, you
may be missing a lot of stuff, because if you are a smaller
company, maybe you do not even know about these requirements.
Chairman Shelby. A lot of things slip by.
Mr. Mulloy. How many foreign takeovers have there been
since 1988? I think there have been 1,570 filed. I would expect
there are at least four or five times that many that have not
been filed.
Chairman Shelby. Senator Sarbanes, I know you have been
tied up.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. I know, and I have been in another
hearing, and I know we have a vote on, Mr. Chairman. But I just
wanted to come to, one, thank you for holding this hearing. I
think it is very important. I commend you for the oversight you
are exercising. I know you have had three very good panels this
morning, and I particularly wanted to thank our old friend and
staff member, Pat Mulloy, for this excellent review of the
history of the emergence of Exon-Florio, yes. We appreciate it
very much.
Chairman Shelby. Thank you, Senator Sarbanes.
We have to make a vote. Our time is up. Thank you.
Mr. Mulloy. Thank you for having me, Mr. Chairman.
Chairman Shelby. The hearing is adjourned.
[Whereupon, at 12:27 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional mterial supplied for the record follow:]
PREPARED STATEMENT OF JAMES INHOFE
A U.S. Senator from the State of Oklahoma
October 20, 2005
The current CFIUS process for reviewing foreign acquisitions leaves
our Nation vulnerable to foreign threats. In our modern day global
economy threats to our national security assume many different forms.
CFIUS has not accounted for this dynamic.
My attention to the CFIUS process began last April when I delivered
four speeches on China. My concern was with the growing threat China is
posing to our military, economic, and energy security. While examining
this issue I came across a
disturbing example of China buying a United States company,
Magnequench, and moving it piecemeal back to mainland China. Let me
read from the floor speech I gave on April 4, 2005.
I believe that CFIUS does not have a broad enough conception of
U.S. security. I understand that Representatives Hyde, Hunter,
and Manzullo expressed similar views in a January letter to
Treasury Secretary John Snow, the Chairman of CFIUS. One
example of CFIUS falling short is with Magnequench
International Incorporated. In 1995, Chinese corporations
bought GM's Magnequench, a supplier of rare earth metals used
in the guidance systems of smart-bombs. Over 12 years, the
company has been moved piecemeal to mainland China, leaving the
United States with no domestic supplier of neodymium, a
critical component of rare-earth magnets. CFIUS approved this
transfer.
The United States now has no domestic supplier of rare earth
metals, which are essential for precision-guided munitions. I would say
that is a clear national security concern.
More recently, I was concerned with China's state-owned CNOOC
attempted to buyout Unocal, a United States oil company. This
demonstrates the kind of foreign acquisition that requires a deep
examination in terms of national energy security.
I also testified before the United States-China Commission on July
21, 2005, explaining my concerns with the CFIUS process. At the time I
had introduced an amendment to the Defense Authorization Bill that
would have made some of the necessary changes. With that bill stalled,
I chose to introduce the changes as a stand-alone bill (S. 1797) which
has been referred to this Committee.
Over the past months, I have been pointing out that the CFIUS
process has ignored some major issues which threaten our national
security. The Government Accountability Office has recently issued a
report on CFIUS that is right in line with this (September 28, 2005).
Non-Traditional Security Concerns
One of the biggest problems that I have been trying to draw
attention to is the inadequate definition of ``national security.''
CFIUS, under the leadership of Treasury, has chosen to define national
security in the most limited of terms.
The GAO report details how, `` . . . they have limited the
definition to export-controlled technologies or items and
classified contacts, or specific derogatory intelligence on the
foreign company.''
I am aware of at least one instance where the Departments of
Defense and Homeland Security believed national security was at
risk, but were overruled because the threat did not meet this
narrow definition set forth by Treasury.
The language I have proposed in the bill requires CFIUS to
investigate transactions of national security concern,
including economic and energy security.
Length of Review Period
The length of the review period is also of concern. Presently,
there are only 30 days allotted for CFIUS to determine if an
acquisition needs to enter the 45-day investigation process. Now some
say that this is sufficient because if the investigating agencies need
more time, CFIUS has the company withdraw and refile.
Besides being intellectually dishonest, this method shows how
interrupted and inconsistent the process is. I believe we need to
extend the review process to a maximum of 60 days.
The Justice Department, a member agency of CFIUS, agrees with this,
stating, ``gathering timely and fully vetted input from the
intelligence community is critical to a thorough and comprehensive
national security assessment. Any potential extension of time available
to the participants for the collection of that information would be
helpful.''
Withdrawn Acquisitions
CFIUS has received over 1,520 notifications and investigated only
24. Of those, only one acquisition has been stopped by the President.
Now some say this extremely low number is because there are many
opportunities for companies to alter the nature of their acquisition.
They are more right than they realize. CFIUS is less a strict procedure
and more a porous and open-ended process by which companies can enter
and leave whenever they feel the transaction may be threatened. This is
the reason for the low number of investigations and single prohibition.
Worse, there has been no enforcement or tracking of these companies
once they withdraw. I know of one example, cited in the GAO report,
where a company was allowed to withdraw from the review process. After
4 years, that company still has not refilled despite security concerns
raised by some CFIUS agencies. They are, for all intents, free to
continue with the acquisition without any review.
Congressional Oversight
I believe Congressional oversight is an effective tool to fix this
problem. The bill I introduced requires:
Unclassified quarterly submissions of acquisitions that have
occurred over a 90 period with a classified section that
includes dissenting views.
The findings of the review process to be reported to the Senate
Committee on Banking, Housing, and Urban Affairs and the House
Committee on Financial Services.
A layover period of 10 days after a transaction is allowed to
proceed, during which time a resolution of disapproval can be
introduced in Congress.
The power for a Chairman or ranking member of an oversight
committee (Banking/Finance) to initiate a review.
Conclusion
The current CFIUS process is more than ``opaque.'' It is clearly
broken. And it is up to us in Congress to fix it. I look forward to
what this hearing will reveal and hope we have the courage to act on
what we learn.
A vital part of understanding this issue is a comprehensive
analysis of transactions that have occurred. I have two questions along
this line that I request be submitted to the witnesses that they can
answer for the record.
Thank you for your time.
----------
PREPARED STATEMENT OF ROBERT M. KIMMITT
Deputy Secretary, U.S. Department of the Treasury
October 20, 2005
Chairman Shelby, Ranking Member Sarbanes, and distinguished Members
of the Senate Committee on Banking, Housing, and Urban Affairs, I
appreciate the opportunity to appear before you today to discuss the
Committee on Foreign Investment in the United States (CFIUS), and how
CFIUS conducts national security reviews of foreign acquisitions of
companies as required under the Exon-Florio Amendment. I am here
speaking on behalf of the Administration, the Treasury Department, and
the Committee on Foreign Investment in the United States (CFIUS).
National Security
I wholeheartedly agree with your recent comments that national
security cannot take a second place to purely economic considerations.
Throughout my years of Government service, starting with combat duty in
Vietnam 35 years ago and including over 8 years with the National
Security Council staff, I have built a career
premised on the belief that protecting and advancing the national
security is a Government official's highest priority. Let me assure you
that my colleagues and I fully appreciate the national security
concerns voiced by the Members of this Committee and Congress.
This is a demanding time for our Nation as we seek to provide for
the security of our country. Indeed, no responsibility of Government is
more important than protecting the national security, which is also a
prerequisite for advancing economic prosperity. In our view, these
missions--protecting national security and advancing economic
prosperity--are inherently linked.
Safeguarding our national security depends on protecting defense-
related information, maintaining our technological edge, protecting the
defense industrial base, and securing our critical infrastructures,
such as the U.S. telecommunications network and related communications
systems. We believe that the Exon-Florio Amendment is sufficiently
flexible to provide CFIUS and the President the necessary tools to
protect these national security assets. CFIUS brings together twelve
agencies with diverse expertise and equities to ensure that
transactions are considered from a variety of perspectives so that all
national security issues are identified and considered in the review of
a foreign acquisition. To provide just a few examples, CFIUS assesses
whether the foreign investment under review might threaten the national
security by harming the Nation's communications systems, fostering
cyber-crime, or violating the privacy of users of the U.S.
communications systems, and seeks to ensure the protection of sensitive
U.S. information and technology relating to national defense and
critical infrastructure.
Member agencies bring particular expertise essential to the
assessment of the potential national security implications of specific
foreign investments in the United States. This expertise includes
knowledge of the level of technological sophistication of the
transaction participants, the market position of alternate suppliers,
the financial and product service track record, and the future outlook
for transaction participants. This expertise gives CFIUS the broad
perspective needed for a comprehensive assessment of the national
defense, competitive performance, trade and investment policy, and
commercial issues involved in each transaction. It also enables CFIUS
to ensure that the national security is safeguarded in a manner
consistent with longstanding U.S. policy regarding foreign investment
in the United States. In addition, since certain member agencies
administer U.S. export control programs for both dual use and military/
defense items, CFIUS is able to evaluate the compliance record of the
foreign acquirer and can offer guidance to ensure that any relevant
export control issues are taken into account when the foreign
acquisition is completed.
Economic Prosperity
In my view, the concept of national security includes both
traditional foreign policy and defense criteria and economic
considerations. Indeed, I believe there is an inherent link between our
national security and a strong U.S. economy that facilitates free and
fair trade, market-based exchange rates, and the free flow of capital
across borders. We are mindful of the positive benefits of foreign
investment to our country and therefore seek to maintain the
traditional U.S. open investment policy.
Indeed, we cannot protect the national security without a strong
economy, and foreign investment strengthens the U.S. economy. Foreign
companies bring in new technology, managerial expertise, and capital.
Foreign companies buy some U.S. companies that would otherwise go out
of business or move overseas. Foreign investment enables the United
States to import new ways of doing business that revive our industries
and increase productivity. Foreign investment in the United States
keeps jobs and technology in the United States.
A strong world economy enhances our national security by advancing
prosperity and economic freedom in the rest of the world. Economic
growth supported by free trade and free markets creates new jobs and
higher incomes, spurs economic and legal reform, promotes democratic
political systems, and helps lift large numbers of people out of
poverty.
The international economy performs best when large economies
embrace free trade, the free flow of capital, and flexible currencies.
Obstacles in any of these areas prevent smooth adjustments to changes
in international conditions. At best, such obstacles result in less
than maximum growth; at worst, they create distortions and increase
risks.
In the recent past, the United States has placed considerable
emphasis on promoting global free trade and investment, multilaterally
through its support for the resumption of negotiations in the Doha
Round and regionally and bilaterally through the negotiation of Free
Trade Agreements, including most recently CAFTA, and bilateral
investment treaties. In addition, the United States has urged
countries, including China, to adopt more flexible currency policies.
However, we also need to promote policies that encourage the global
free flow of capital. Too many countries maintain barriers that keep
needed foreign portfolio and direct investment out while preventing
domestic capital from seeking better returns in overseas financial
markets.
If the United States maintains its openness to foreign direct
investment, we have the credibility internationally to promote similar
investment regimes in other countries. Open investment regimes based on
the free flow of capital are crucial to the U.S. economy both because
of the benefits provided domestically, including job creation, and
because of the reciprocal opportunities such policies in other
countries provide for U.S. firms seeking to invest abroad.
Investment Policy
U.S. policy toward foreign investment in the United States provides
the context in which Exon-Florio is implemented. U.S. investment policy
welcomes foreign direct investment and provides national treatment--
treating foreign companies like we would treat U.S. companies. In
return, the United States seeks to promote reciprocity in similarly
open investment regimes in other nations around the world.
When capital is free to flow in response to market demand, it is
channeled into its most efficient use. When the United States makes the
best use of capital, as determined by the market, we achieve greater
productivity and enhanced international competitiveness. This has
direct benefits for our economy, and indirect but clear benefits for
our national security.
To illustrate the benefits of foreign direct investment, last year
foreign investors invested over $115 billion in U.S. companies in the
United States. Further, according to data from the Department of
Commerce's Bureau of Economic Analysis, in 2003 foreign firms operating
in the United States:
Employed 5.3 million Americans, 4.7 percent of employment in
nonbank private industries;
Had payrolls of $318 billion, an average of $60,527 per
employee, 31 percent higher than the average of all companies;
Accounted for 5.8 percent of U.S. gross domestic product
originating in private industries compared to 4.3 percent a decade
ago (an increase of more than 30 percent);
Accounted for over 20 percent of all U.S. exports; and
Spent $30 billion on research and development.
I have discussed foreign direct investment, but portfolio
investment is another key engine of economic growth. The free flow of
capital is one reason for the strong performance of the U.S. economy,
and it is gratifying to see that countries around the world
increasingly recognize the benefits to be gained from liberalized
capital accounts. Openness to capital inflows creates avenues for
foreign investors to contribute to economic development. At the same
time, it decreases the cost of capital to local entrepreneurs,
especially in the small- to medium-sized enterprise sector.
Exon-Florio
Our open investment policy has always recognized the need to
protect the national security, a need that is internationally
recognized as a defensible exception to an open investment regime. The
United States has numerous laws and regulations that provide this
critical protection.
CFIUS was established in 1975 by Executive Order of the President
with the Secretary of the Treasury as its chair. Its main
responsibility was ``monitoring the
impact of foreign investment in the United States and coordinating the
implementation of United States policy on such investment.'' It
analyzed foreign investment trends and developments in the United
States and provided guidance to the President on significant
transactions. However, it had no authority to take action with regard
to specific foreign investments.
The Omnibus Trade and Competitiveness Act of 1988 added Section 721
to the Defense Production Act of 1950 to provide authority to the
President to suspend or
prohibit any foreign acquisition, merger, or takeover of a U.S. company
that the President determines threatens to impair the national security
of the United States. Section 721 is widely known as the Exon-Florio
Amendment, after its original Congressional cosponsors.
Specifically, the Exon-Florio Amendment authorizes the President,
or his designee, to investigate foreign acquisitions of U.S. companies
to determine their effects on the national security. It also authorizes
the President to take such action as he deems appropriate to prohibit
or suspend such an acquisition if he finds that:
(1) There is credible evidence that leads him to believe that the
foreign investor might take action that threatens to impair the
national security; and
(2) Existing laws, other than the International Emergency Economic
Powers Act (IEEPA) and the Exon-Florio Amendment itself, do not in
his judgment provide adequate and appropriate authority to protect
the national security.
The President may direct the Attorney General to seek appropriate
judicial relief to enforce Exon-Florio, including divestment. The
President's findings are not subject to judicial review.
Following the enactment of the Exon-Florio Amendment, the President
delegated to CFIUS the responsibility to receive notices from companies
engaged in transactions that are subject to Exon-Florio, to conduct
reviews to identify the effects of such transactions on the national
security, and, if necessary, to undertake investigations. However, the
President retained the authority to suspend or prohibit a transaction.
The Secretary of the Treasury is the Chair of CFIUS, and the
Treasury's Office of International Investment serves as the Staff Chair
of CFIUS. Treasury receives notices of transactions, serves as the
contact point for the private sector, establishes a calendar for review
of each transaction, and coordinates the interagency process. The other
CFIUS member agencies are the Departments of State, Defense, Justice,
and Commerce, OMB, CEA, USTR, OSTP, the NSC, the NEC, and the newest
member, the Department of Homeland Security.
The CFIUS process is governed by Treasury regulations that were
first issued in 1991 (31 CFR part 800). Under these regulations,
parties to a proposed or completed acquisition, merger, or takeover of
a U.S. company by a foreign entity may file a voluntary written notice
with CFIUS through Treasury. Alternatively, a CFIUS member agency may
on its own submit notice of a transaction. The CFIUS process starts
upon receipt by Treasury of a complete, written notice. Treasury
determines whether a filing is in fact complete, thereby triggering the
start of the
30-day clock, and CFIUS may reject notices that do not comply with the
notice requirements under the regulations. Treasury sends the notice to
all CFIUS member agencies and to other agencies that might have an
interest in a particular transaction, for example, the Departments of
Energy and Transportation, or the Nuclear Regulatory Commission. CFIUS
then begins a thorough review of the notified transaction to determine
its effect on national security. In some cases, this review prompts
CFIUS to undertake an ``investigation,'' which must begin no later than
30 days after receipt of a notice. The Amendment requires CFIUS to
complete any investigation and provide a recommendation to the
President within 45 days of the investigation's inception. The
President in turn has up to 15 days to make a decision, for a total of
up to 90 days for the entire process.
CFIUS Implementation
Exon-Florio notices are voluntary. Many acquisitions by foreign
investors do not implicate the national security, and parties to those
transactions choose not to notify. However, companies know that failure
to notify leaves their transaction subject to Presidential action
indefinitely, and there is no statute of limitations. Companies also
know that any CFIUS member may notify a transaction to the Committee.
During the initial 30-day review, each CFIUS member agency conducts
its own internal analysis of the national security implications of the
notified transaction. As part of the review, agencies with particular
areas of competence, such as export controls, protection of classified
information or critical infrastructure, examine whether existing laws
other than International Emergency Economic Powers Act (IEEPA) are
adequate and appropriate to protect the national security with respect
to the transaction. The U.S. Intelligence Community provides input to
CFIUS reviews. For instance, the Intelligence Community Acquisition
Risk Center (CARC) now under the office of the Director of National
Intelligence may be called on by CFIUS to provide intelligence support
to CFIUS' review process, including threat assessments on the foreign
acquirer. Further, the Department of Energy and the Department of
Transportation have actively participated in the consideration of
transactions that impact the industries under their respective
jurisdictions. CFIUS agencies, through the Treasury Staff Chair, can
seek clarifications of and supplements to the information provided in
the notice by submitting additional questions to the parties to the
transaction. In some cases, the parties are asked to meet with CFIUS
agency staff.
If within the initial 30-day period CFIUS determines that there are
no national security concerns, or any national security concerns have
been mitigated, thereby obviating an investigation, Treasury, on behalf
of CFIUS, writes to the parties notifying them of that determination.
This concludes consideration of the acquisition for Exon-Florio
purposes. However, when the Committee believes that unresolved national
security issues remain at the end of the 30-day period, CFIUS conducts
an investigation that ends with a report and recommendation to the
President.
Depending on the facts of a particular case, CFIUS agencies that
have identified specific risks that a transaction could pose to the
national security may, separately or through CFIUS auspices, develop
appropriate mitigation mechanisms to address those risks when existing
laws and regulations alone are not adequate or appropriate to protect
the national security. Agreements implementing mitigation measures vary
in scope and purpose, and are negotiated on a case-by-case basis to
address the particular concerns raised by an individual transaction.
Publicly available examples of the general types of agreements that
have been negotiated include: Special Security Agreements, which
provide security protection for classified or other sensitive
contracts; Board Resolutions, which, for instance, require a U.S.
company to certify that the foreign investor will not have access to
particular information or influence over particular contracts; Proxy
Agreements, which isolate the foreign acquirer from any control or
influence over the U.S. company; and Network Security Agreements
(NSA's), which are used in telecommunications cases and are imposed in
the context of the Federal Communications Commission's (FCC) licensing
process.
These examples in no way represent an exhaustive list of the kinds
of agreements or mitigation measures that have been negotiated by CFIUS
agencies. Moreover, because the facts of and issues raised by each
transaction are unique, additional or varied mitigation measures will
undoubtedly be required to resolve agencies' national security concerns
in future transactions. In such cases, once an agreement to implement
the mitigation measures is executed by the parties to the agreement and
all CFIUS members are satisfied that the national security issues have
been adequately addressed. CFIUS concludes its review. When mitigation
measures are agreed to during an investigation, companies may request a
withdrawal and refile. CFIUS then concludes its review.
As noted, publicly available NSA's provide some insights into the
kinds of concerns that arise in the telecommunications sector. Also, in
recent years, CFIUS has taken a close look at transactions involving
technologies for either military/defense or dual use applications. For
foreign acquisitions in this sector, CFIUS has analyzed the acquiring
and acquired firms' records on compliance with U.S. export controls and
the potential for unauthorized diversion of these technologies. In
addition, in the post-September 11 environment, factors in the review
have expanded to include terrorism-related issues. Finally, while CFIUS
was always mindful of the potential
national security impact of foreign acquisitions of U.S. companies in
critical infrastructure, especially in the telecommunications sector,
the addition of Homeland Security to the Committee's membership has led
to an even closer focus on infrastructure vulnerabilities as they
relate to foreign acquisitions under review.
When CFIUS completes a full 45-day investigation, it must provide a
report to the President stating its recommendation. If CFIUS is unable
to reach a unanimous recommendation after the investigation period, the
Secretary of the Treasury, as Chairman, must submit a CFIUS report to
the President setting forth the differing views and presenting the
issues for decision. The President then has 15 days to announce his
decision on the case and inform Congress of his determination.
The Exon-Florio Amendment requires that information furnished to
any CFIUS agency by the parties to a transaction shall be held
confidential and not made public, except in the case of an
administrative or judicial action or proceeding. This confidentiality
provision does not apply to Congress. Treasury, as chair of CFIUS, upon
request of Congressional committees or subcommittees with jurisdiction
over Exon-Florio matters, has arranged Congressional briefings on
transactions for which CFIUS has completed a review. These briefings
are conducted in closed sessions and, when appropriate, at a classified
level. CFIUS members with equities in the transaction under discussion
have also been invited to participate in these briefings.
Since the enactment of Exon-Florio in 1988, CFIUS has reviewed over
1,570 foreign acquisitions of companies for potential national security
concerns. In most of these reviews, CFIUS agencies have either
identified no specific risks to national security or risks have been
addressed during the review period. However, 25 cases in total have
gone to investigation, 12 of which reached the President's desk for
decision. In 11 of those, the President took no action, leaving the
parties to the proposed acquisitions free to proceed. In one case, the
President ordered the foreign acquirer to divest all its interest in
the U.S. company. In another case that did not go to the President, the
foreign acquirer undertook a voluntary divestiture. Of the 25
investigations, 6 were undertaken since 2001 with one going to the
President for decision. However, these statistics do not reflect the
instances where CFIUS agencies implemented mitigation measures that
obviated an investigation or where, in response to dialogue with CFIUS
agencies, parties to a transaction either voluntarily restructured the
transaction to address national security concerns or withdrew from the
transaction altogether.
An important aspect of the Exon-Florio process is the requirement
that governmental action be concluded within specified time limits.
Those limits--for instance, the initial 30-day review period--
necessitate that the Government act efficiently to assess all factors
relating to the case. At the same time, the short timeframe does not
significantly hold up transactions, which should be driven by the
market and can be time-sensitive.
Improving CFIUS
Two weeks ago, this Committee heard from the GAO regarding its
recent report, ``Defense Trade: Enhancements to the Implementation of
Exon-Florio Could Strengthen the Law's Effectiveness.'' I appreciate
the time and resources that the GAO dedicated to this report, and,
although I do not agree with all of the assertions in the report, I do
recognize a need to review current CFIUS policies and operating
procedures, especially those mentioned in the GAO recommendations. The
new senior CFIUS team represented at this hearing is involved in an
effort to improve the CFIUS process, drawing on comments from Members
of Congress, the recommendations of the GAO, and the recommendations I
have received from the member agencies of CFIUS.
First, I believe that CFIUS requires high-level attention from
Treasury and the other members. You have my commitment that I will
work hard to bring that high level of attention going forward. The
departmental representation at today's hearing is an important
indication of our common commitment in this regard.
Second, when meeting at the deputies level, I will chair CFIUS
while the Under Secretary of Treasury for International Affairs or
his designee will represent the Treasury Department during
consideration of a particular transaction. I think that this change
will enable me to manage the process to ensure that all viewpoints
are identified and given the same equal, careful consideration.
Third, we are looking carefully at ways to allow more time to
assemble the information needed to develop agency positions during
the CFIUS process.
Last, I support the idea of enhancing the transparency of the
CFIUS process through more effective communication with Congress,
while recognizing our shared responsibility to avoid the disclosure
of proprietary information that could undermine a transaction or be
used for competitive purposes. I am open to suggestions on ways to
improve the transparency of the process, such as more regular
reports to Congress and Congressional briefings.
Conclusion
We are in a time of both challenge and opportunity for our national
security interests. Through an improved CFIUS process, we will continue
to protect our national security in the context of an open investment
policy that recognizes the critical link between national security and
economic prosperity.
Thank you for the opportunity to appear before you today.
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PREPARED STATEMENT OF DAVID A. SAMPSON
Deputy Secretary, U.S. Department of Commerce
October 20, 2005
On behalf of Secretary Gutierrez, I would like to thank the
Committee for giving me the opportunity to appear before you today. As
you know, the Department of Commerce is a member of the Committee on
Foreign Investment in the United States (CFIUS), which was established
in 1975 and was delegated authority by the President in 1988 to review
and, as appropriate, investigate foreign acquisitions under the Exon-
Florio Amendment to the Defense Production Act of 1950.\1\ My testimony
will describe the participation by the Commerce Department's
International Trade Administration (ITA) and Bureau of Industry and
Security (BIS) in CFIUS's Exon-Florio reviews of proposed mergers,
takeovers, and acquisitions of U.S. firms by foreign parties.
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\1\ See 50 U.S.C. app. Sec. 2170. CFIUS's activities are pursuant
to Executive Order 11858, 40 Fed. Reg. 20263 (May 7, 1975), as amended
by Executive Order 12188, 45 Fed. Reg. 989 (Jan. 2, 1980), Executive
Order 12661 of December 27, 1988, 54. Fed. Reg. 779 (Jan. 9, 1989),
Executive Order 12869 of September 30, 1993, 58 Fed. Reg. 51751 (Oct.
4, 1993), and Executive Order 13286 of February 28, 2003, 68 Fed. Reg.
10619 (Mar. 5, 2003). The Treasury Department regulations implementing
Exon-Florio are at 31 CFR Part 800 (Office of International Investment
Regulations Pertaining to Mergers, Acquisitions, and Takeovers by
Foreign Persons).
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ITA's Role
ITA was established in 1980 to carry out the international trade
and investment-related functions of the Secretary of Commerce. In this
capacity, ITA promotes trade and export expansion pursuant to
Reorganization Plan 3 of 1979, and promotes and develops the foreign
and domestic commerce of the United States pursuant to the Secretary's
organic authority found in Title 15, United States Code.\2\ Commerce
participation in CFIUS and other international investment fora is led
and coordinated by ITA. ITA has industry expertise essential to the
assessment of the potential national security implications of specific
foreign investments in the United States. This expertise includes
knowledge of the level of technological sophistication of the
transaction participants, the market position of alternate suppliers,
the financial and product service track record, and the future outlook
for transaction participants. This expertise gives ITA the broad
perspective needed for a comprehensive assessment of the national
defense, competitive performance, trade and investment policy and
commercial issues involved in each transaction, and for ensuring that
the national security is fully safeguarded in a manner consistent with
longstanding U.S. policy regarding foreign investment in the United
States.
---------------------------------------------------------------------------
\2\ See, for example, 15 U.S.C. Sec. 1512.
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Within Commerce, CFIUS reviews are carried out by members of the
Department of Commerce Exon-Florio Working Group. ITA chairs the group
and coordinates the Department responses to the CFIUS. Members include
representatives from ITA and BIS, the Technology Administration, the
Economic and Statistics Administration, the National Telecommunications
and Information Administration, and the Office of the General Counsel.
As provided in Treasury's regulations implementing CFIUS' delegated
authority under Exon-Florio, Commerce, as a CFIUS member, may also
notify CFIUS about any transactions with perceived national security
implications that have not been notified by the parties to the
transaction, with a request for review and subsequent action by CFIUS.
ITA has a formalized process of identifying such transactions, and asks
Working Group members to identify and report any potential acquisitions
by foreign companies that may be of interest to CFIUS, especially those
transactions that involve smaller and/or privately held U.S. firms that
may not have been reported widely in the media.
BIS's Role
The Bureau of Industry and Security (BIS) supports ITA in the
development of the Commerce Department position on proposed foreign
acquisitions and takeovers. The overall mission of BIS is to advance
U.S. national security, foreign policy, and economic security
interests. While BIS is best known for developing export controls for
dual use items, issuing export licenses and enforcing export controls,
BIS also conducts programs designed to ensure a strong, technologically
superior U.S. defense industrial base. For example, BIS administers the
Defense Priorities and Allocations System program that provides for
expedited shipment of critical materials and services from the U.S.
industrial base to meet urgent national security needs. BIS has been
very active in using this authority to support the Department of
Defense in Operation Enduring Freedom and Operation Iraqi Freedom.
With respect to the CFIUS process, BIS assesses the national
security, defense industrial base, and export control implications of
all proposed acquisitions of U.S. companies by foreign entities that
have been notified to CFIUS. In so doing, BIS seeks to ensure that the
U.S. defense industrial and technology base will not be compromised by
such foreign acquisitions.
In reviewing each proposed acquisition, BIS reviews internal
databases to determine whether the parties to the acquisition have
violated U.S. export control laws. BIS also checks its CFIUS database
for previous acquisitions by the foreign company and other acquisitions
in the industry. In addition, BIS assesses whether there is significant
sensitive technology being acquired, and evaluates the foreign
company's plans for managing its compliance with U.S. export control
laws.
In order to address potential industrial base concerns, BIS works
with the Department of Defense to determine the importance of the firm
that is being acquired to the Nation's defense manufacturing and
technology infrastructure. BIS also works with the Departments of
Justice and Homeland Security, and with the intelligence community, to
investigate potential problems with the acquiring firm and the possible
damage to national security and homeland security that might occur as a
result of foreign access to key firms in the United States. For
example, if the acquiring company was in the telecommunications
industry, BIS would work with Department of Homeland Security and other
agencies to resolve concerns about the safety of the Nation's
communications infrastructure.
In addition, BIS compares companies involved in filings with CFIUS
against a series of lists of individuals, companies, and organizations
that may have acted in ways that jeopardize, or have the potential to
jeopardize, U.S. national security. BIS reviews classified and
unclassified lists including the Bureau's Entity List, our Unverified
List, our Denied Persons List, and the Treasury Department's Specially
Designated Nationals and Blocked Persons List. In sum, BIS's review of
CFIUS transactions focuses on the national security impact that such
proposed acquisitions may have on the release of sensitive technologies
and on the defense industrial base.
Mr. Chairman, the expertise that the various Commerce agencies
bring to the CFIUS process is unique and important to the success of
CFIUS reviews. Thank you for asking me to appear before you today, and
I would be happy to answer any questions you may have at this time.
PREPARED STATEMENT OF STEWART BAKER
Assistant Secretary for Policy
U.S. Department of Homeland Security
October 20, 2005
Mr. Chairman, Ranking Member Sarbanes, and distinguished Members of
the Committee. Thank you for the opportunity to speak briefly today on
the Department of Homeland Security's role as a member of the Committee
on Foreign Investment in the United States.
The Department of Homeland Security is the newest member of CFIUS.
We became a member in March 2003, soon after standing up as an amalgam
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 125 foreign acquisitions or
investments involving some of the Nation's most critical infrastructure
assets and components as well as technology companies vital to the
defense technology base.
I mention our origins in order to stress what I believe is a key
strength of the Department--we bring to 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.
You have already heard some of my colleagues speak about achieving
a balance between the desire for free and open markets and our
responsibility to provide for the Nation's security in the post-
September 11 environment. DHS is well-aware of the importance of free
and open markets; it must maintain a close partnership with private
industry in addressing critical infrastructure protection. Although our
mission and expertise lead us to focus primarily on the security
issues, we can never ignore the important role that foreign investment
plays in our economy and, ultimately, in our national security. Indeed,
we consider our CFIUS colleagues whose missions and expertise are
traditionally in the economic arena to be crucial allies in the
endeavor to protect and secure our Nation, and we welcome the vigorous
debates that sometimes arise as opportunities to better assess and
articulate the risks that these transactions may represent.
Early Warning Program and Information Sharing
To that end, we have established a program that enables us to
identify transactions of potential concern well before they are
formally filed with CFIUS, and we both produce and share with our
colleagues on the Committee detailed summaries and assessments to
inform our discussions.
Soon after joining the Committee, DHS developed a rigorous in-house
process of formal reviews for individual CFIUS filings and began
producing detailed assessments for each filing, bringing to bear the
full scope of unclassified and classified resources available. During
this process, DHS studies any consequences, vulnerabilities, and
threats that may be present and makes a determination on the total risk
to national security. If the risk is at an unacceptable level, DHS,
together with other interested CFIUS parties, will develop tailored
risk mitigation measures that are often memorialized in formal
agreements.
In the past 2 years, DHS, along with DOD, DOJ, and the other CFIUS
agencies, has made great efforts to share as much information as
possible. We believe that bringing together each agency's unique
resources spanning law enforcement, national intelligence, and open
source information produces the best quality analysis. As part of this
effort, DHS implemented an early warning program soon after joining the
Committee. The purpose of this 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. We share this information with Treasury and our
other partners. In many cases, prior to any CFIUS filing, we reach out
to the companies involved in these transactions to ask for technical
and financial briefings. We believe that this early outreach helps all
parties concerned. CFIUS members get more information earlier, while
the private parties have an early opportunity to explain the
transaction and to allay national security concerns.
In fact, we find that sophisticated companies and experienced
counsel increasingly do not wait for our outreach. Instead, they often
approach DHS or other CFIUS members to offer briefings and discuss
Government interests before they file. This provides more information
to the Government and greater certainty to the companies involved. It
sometimes allows us to agree on more effective risk management and
mitigation, without the strict timelines that Exon-Florio imposes. This
is particularly important for large, complex transactions, and we are
pleased that counsel in such transactions also see the benefits of
early consultation.
Compliance Monitoring
DHS has made another contribution to the CFIUS process--systematic,
predictable enforcement. When we enter into an agreement, we expect all
sides to carry it out as written. To ensure compliance, DHS takes a
disciplined approach to monitoring risk mitigation agreements that it
enters into. DHS 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. DHS uses
both passive and active compliance verification strategies to ensure
that foreign companies continue to abide by the terms of their
agreement. In sum, we believe that the Department is providing an
effective, credible, and capable program to deter or promptly resolve
actions that a foreign company might take to endanger the national
security.
Closing Statement
In closing, I would like to observe that the occasionally differing
views among the agencies within CFIUS are not signs that the process is
broken. Rather, they are signs that the process is working. The best
way to get to the truth is a healthy debate. CFIUS is a diverse group
of executive agencies. The balance between an open investment policy
and protecting national security is a delicate one, and each CFIUS case
deserves to be thoroughly analyzed from all angles in order to get the
best overall, comprehensive determination. Spirited discussions mean
that the right people are talking to each other, and they are more
likely to produce the right result.
Thank you again for the opportunity to address this important
issue. I look forward to your questions.
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PREPARED STATEMENT OF E. ANTHONY WAYNE
Assistant Secretary, Economic and Business Affairs
U.S. Department of State
October 20, 2005
Chairman Shelby, Ranking Member Sarbanes, and distinguished Members
of the Committee, thank you for the opportunity to discuss the
Committee on Foreign Investment in the United States (CFIUS), the role
of the Department of State in reviewing the acquisition of U.S.
companies by foreign investors.
Mr. Chairman, part of the Mission Statement of the Department of
State says ``Create a more secure, democratic, and prosperous world for
the benefit of the American people and the international community.''
An important part of our effort to create a secure and prosperous world
is the Department's role in implementing the Exon-Florio statute, and
it is an effort we take extremely seriously.
We bring to the CFIUS process expertise and experience in
international economic issues as well as national and international
security policy. We consider them to be mutually reinforcing elements
of our work. Security and prosperity are interdependent and where one
is lacking, the other will be undermined in time.
I believe our internal processes at the Department of State ensure
that each and every CFIUS case receives careful scrutiny by offices
responsible for both economic, foreign, and national security policy.
The Bureau of Economic and Business Affairs, the Bureau of Political-
Military Affairs, the Bureau of International Security and
Nonproliferation, the Bureau of Diplomatic Security, the Bureau of
Intelligence and Research, the Office of the Legal Adviser, and the
appropriate regional bureau participate in the review of notifications
received by CFIUS and forwarded to us by the Department of the Treasury
as CFIUS chair. Other experts are also brought in, as needed.
The State Department brings to the CFIUS process background and
insight into the political and economic context abroad in which
particular foreign investors operate and the aims and motivations of
governments around the world. This expertise is gained through the hard
work of our Embassy personnel, from the Department of State's statutory
responsibilities on defense trade and nonproliferation, and by our
roles in terrorist financing and counter-terrorism policy.
This work extends far beyond CFIUS. The Arms Export Control Act
(AECA) and its implementing regulations, and the International Traffic
in Arms Regulations (ITAR) give the State Department independent
authority to regulate the export of defense articles and services and
provides for civil and criminal penalties, whether a U.S. company is
foreign-owned or not, when provisions of the AECA and ITAR are
violated. Pursuant to these authorities, the State Department manages a
registration system of all manufacturers, exporters, and brokers of
defense articles and services, and tracks foreign ownership as part of
this process.
As Deputy Secretary Kimmitt has noted in his testimony, Congress,
in crafting Exon-Florio, provided that the extraordinary authority to
prohibit foreign ownership or control in a particular transaction
should be used only when there is credible evidence that those
acquiring ownership or control might pose a threat to national security
and when it is judged that other existing U.S. legal authority is
inadequate to address the potential threat.
All CFIUS members share the goal of assuring that no transaction
reviewed by CFIUS leads to a compromise of national security. Although
the confidentiality requirements of Exon-Florio and other factors
prevent me from going into cases in an open hearing, I can assure you
that the process has enabled the U.S. Government to take appropriate
action to address potential threats when they have arisen.
Preserving both economic security and prosperity in a post-
September 11 world is a complex challenge, but it is critical to
America's future. The belief that an open investment policy is
essential to our economic prosperity is long-standing and dates to the
founding of the Republic. It is a policy principle borne out by the
facts. U.S. openness to foreign investment has helped make the United
States the world's most successful economy, which in turn provides the
wealth and technology needed to support the world's most powerful and
best-equipped military that ensures our security.
Therefore, we have welcomed and continue to welcome foreign
investment, and indeed, most State governments in the United States
spend considerable time and effort to attract it. Many have been very
successful in doing so, and I congratulate you, Mr. Chairman, because
Alabama has been a real success story in attracting high quality
foreign investment. Just like people in Alabama, we understand that
foreign investment brings quality jobs that pay relatively high wages.
The free flow of capital also makes the rest of the world
economically stronger, and creates overseas opportunities for U.S.
investors. This is not only sound economic policy, but also our
international obligation in many cases. We have enshrined the principle
of providing foreign companies operating in the United States the same
treatment U.S. companies receive in investment treaties and trade
agreements signed with many foreign countries.
Our openness, and the benefits it has produced for us, has been
very effective in encouraging others to emulate us, and open their own
markets to our investors. Together with our colleagues at USTR,
Treasury, and Commerce, the State Department negotiates investment
agreements that seek to remove discriminatory investment barriers in
other markets, and contain strong protections for American investors
and their investments.
In this regard, our open investment policy is an important asset,
giving us greater credibility when we seek to open other markets. At
the same time, this open investment policy must be implemented in a
manner that reinforces our security interests.
In conclusion, Mr. Chairman, the Department of State believes Exon-
Florio and its implementation by CFIUS have strengthened our national
security, while avoiding unnecessary and detrimental restrictions on
our open investment policy.
Mr. Chairman, the President and Secretary Rice have entrusted all
of us at the Department of State with making sure we do everything
possible to protect the national security of the United States and the
American people, and to promote the kind of global economic policies,
including open investment climates, that will maximize U.S. prosperity.
I want to assure you that we take this mission seriously and
personally.
Thank you for the opportunity to appear before you today. I would
be pleased to answer your questions.
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PREPARED STATEMENT OF PETER C.W. FLORY
Assistant Secretary, International Security Policy
U.S. Department of Defense
October 20, 2005
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee, thank you for the opportunity to appear before you today to
discuss the impact of Section 721 of the Defense Production Act (50
U.S.C. App. Sec. 2170 and also known as the Exon-Florio Amendment) on
national security. We in the Department of Defense (DoD) take very
seriously our role in protecting technology, the defense industrial
base, and the security of those critical infrastructures we depend upon
to accomplish our mission. Foreign investment in the United States
generally is desirable. In terms of the defense sector, foreign
investment has been helpful in maintaining the viability and diversity
of the defense industry.
When it comes to reviewing a foreign acquisition of a U.S. company,
there are a number of factors which we in the DoD consider before
taking a position. These include five major areas of interest:
First, the significance of the technologies possessed by the firm
to be acquired (for example, are they ``state of the art'' or otherwise
militarily critical? Are they classified, export controlled, or
otherwise security sensitive?);
Second, the importance of the firm to the U.S. defense industrial
base (for example, is it a sole-source supplier and if so, what
security and financial costs would be incurred in finding and/or
qualifying a new supplier, if required?);
Third, possible security risks or concerns that might be posed by
the particular foreign acquiring firm (for example, is it controlled by
a foreign government? Does the firm have a record of export control
violations?);
Fourth, whether the company to be acquired is part of the critical
infrastructures that the Defense Department depends upon to accomplish
its mission; and
Fifth, can any potential national security concerns posed by the
transaction be eliminated by the application of risk mitigation
measures either under the Department's own regulations or through
negotiation with the parties?
DoD Participants and their Roles in CFIUS
Within the Department of Defense, there are a variety of DoD
offices and agencies involved in the CFIUS review of each case. The
Defense Technology Security Administration (DTSA) plays an important
role as our representative to the Committee on Foreign Investment in
the United States (CFIUS). DTSA is responsible for the management,
coordination, and formulation of the Department's position for all
CFIUS cases. DTSA is also the focal point within the Department for
technology security policy as regulated by the Export Administration
Regulation, International Traffic in Arms Regulation and the National
Disclosure Policy. The Office of the Under Secretary, Acquisition,
Technology, and Logistics (USD/AT&L), determines if the U.S. company
involved in a CFIUS case provides a product or service that is a
critical technology. That office also evaluates the transaction's
impact on the defense industrial base, including whether the firm is a
sole-source provider, and what the costs would be if we were required
to find a new supplier.
The Office of the Assistant Secretary of Defense for Networks
Information and Integration (ASD/NII), with input from subject matter
experts such as the National Security Agency and the Defense
Information Systems Agency, performs vital technical reviews of filings
that involve critical information and telecommunications
infrastructures. In its CFIUS review of cases involving defense
contractors performing classified work, the Office of the Under
Secretary for Intelligence assesses whether the Defense Industrial
Security Regulations are adequate to mitigate potential national
security concerns of foreign control of U.S. defense contractors. The
National Industrial Security Program is a separate, but parallel
process to the CFIUS review that protects classified information in
U.S.-located firms owned/acquired by foreign companies.
The three military services (Army, Navy, and Air Force) identify
and assess the impact of the transfer of technology relevant to the
particular military service, especially when cases involve current or
former defense contractors. Specifically, the services review cases to
determine if commodities or technologies involved in a given
transaction may affect warfighters' capabilities and technological
advantages. The Defense Logistics Agency assesses the effect of the
transaction on defense procurement and planning. The Defense Advanced
Research Projects Agency evaluates the technology to be transferred,
its relationship to defense programs, and its potential impact on
future defense capabilities. The Defense Intelligence Agency prepares
intelligence assessments and analyzes the risk of diversion. The Office
of General Counsel provides positions on legal issues, including
adequacy of other laws to protect national security, and other legal
assistance.
Changing Nature of DoD Suppliers
I would now like to address an issue that is gaining increasing
importance for DoD, that is, the growing role of nontraditional,
commercial, and dual-use suppliers to the Department. As part of
defense transformation, the Department is focusing on real-time
communication between those systems and personnel responsible for
finding enemy targets and those systems and personnel responsible for
destroying or incapacitating those targets. This goes under the name of
network-centric warfare or sensor-shooter integration, and is essential
to the Department's transformational efforts. This transformation
increasingly involves the use of technologies from commercial markets
in such fields as information technology, telecommunications, and
electronics, among others. Many of the suppliers are at the component
and subsystem level and may not even have classified contracts.
Mitigation Measures and Security Agreements
Mitigation agreements, negotiated in conjunction with a CFIUS
review, vary in scope and purpose, and are negotiated on a case-by-case
basis to address the particular concerns raised by an individual
transaction.
When we find potential national security concerns with a foreign
acquisition, we normally use the risk mitigation measures available to
us under the National Industry Security Program's Foreign Ownership,
Control, and Influence Program (FOCI). The DoD imposes special
mitigation/negation measures for companies that are cleared for access
to classified information when they are acquired by a foreign source.
These security agreements specify procedures to ensure protection of
classified and export-controlled information. The Department's Defense
Security Service enters into negotiations with the parties of such
cases and develops specifically tailored agreements, which are designed
to provide for the necessary level of security for such classified,
export-controlled information and technologies.
The Department and other agencies occasionally negotiate risk
mitigation measures for acquisitions where there are no classified
contracts. As previously
addressed, this is becoming more common as we increasingly rely on dual
use and primarily commercial suppliers. As we review foreign
acquisitions when FOCI does not apply, we have to enter a negotiation
process with the parties to the transaction to develop appropriately
tailored risk mitigation measures.
In the telecommunications sector, conditions have been imposed in
the context of the Federal Communications Commission's (FCC) licensing
process. Transactions involving the foreign acquisition of a U.S.
telecommunications company usually are subject to regulation by the
FCC, which is an independent regulatory agency. The FCC has, in some
cases, agreed to place conditions on the transfer of licenses to a
foreign company subject to compliance with the Network Security
Agreement that CFIUS member agencies have negotiated with that company
before the transaction is finalized. The Network Security Agreement
includes actions the commercial parties agree to undertake (during the
initial review or during the investigatory period) in order to mitigate
the national security risk. CFIUS members, in turn, agree to not object
to the transaction if the companies have implemented the negotiated
mitigation measures.
Conclusion
Mr. Chairman that concludes my formal statement. I would be happy
to answer any further questions you may have regarding this subject.
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PREPARED STATEMENT OF ROBERT D. McCALLUM, JR.
Acting Deputy Attorney General, U.S. Department of Justice
October 20, 2005
Introduction
Mr. Chairman, Ranking Member Sarbanes, and Members of the
Committee, I appreciate the opportunity to discuss the Department of
Justice's role in implementing the Exon-Florio Amendment to Section 721
of the Defense Production Act of 1950 (Exon-Florio). The Department of
Justice has worked vigilantly within CFIUS to implement Exon-Florio
effectively to protect national security. The effective implementation
of Exon-Florio is critically important to the Department's national
security mission and is a responsibility we take very seriously.
Implementation of Exon-Florio Implicates Key Elements of
the Department of Justice's National Security Mission
To fulfill its mission to defend the interests of the United
States, ensure public safety, and prevent crime, the Department of
Justice has set goals to strengthen its counterintelligence
capabilities, with a focus on protecting sensitive United States
information and technology relating to national defense and critical
infrastructure, and to protect the Nation's communications systems by
preventing and combating cybercrime and protecting the privacy of U.S.
communications. Currently, the Federal Bureau of Investigation's (FBI)
second and third highest priorities are to protect against foreign
intelligence operations and espionage and to protect against cyber-
based attacks and high-technology crimes. The Department must ensure
that it has the necessary tools and resources to accomplish its mission
and meet these goals, and nothing is more important in our arsenal than
the ability to conduct lawful electronic surveillance without risking
interference by foreign entities and the premature, unauthorized
disclosure to targets of the surveillance.
Acquisitions by foreign persons of U.S. businesses can have the
potential to implicate these key areas of national security concern to
the Department, particularly: counterintelligence, U.S. communications
system protection, privacy protection, and the ability to conduct
effective electronic surveillance. The Office of the National
Counterintelligence Executive has reported in its Annual Report to
Congress on Foreign Economic Collection and Industrial Espionage that
in 2004 persons or entities from nearly 100 foreign countries made
attempts to acquire sensitive U.S. information or technology, such as
information systems, sensors, aeronautics, electronics, and armaments
materials. One method used for this collection was foreign direct
investment in U.S. businesses. There has also been a rise in foreign
acquisitions of U.S. companies in the telecommunications sector, which
directly implicates the Department's protection of the U.S.
communications infrastructure, privacy interests, and law enforcement's
electronic surveillance capabilities. The risks presented by these
acquisitions vary according to the particular communications assets at
issue and their interconnection with other portions of our critical
infrastructure. However, certain foreign control over certain U.S.
infrastructure components, absent mitigation measures, could augment
the opportunities for foreign entities to disrupt U.S. communications,
deny Internet or voice services to significant portions of the country,
and compromise the privacy of users of the U.S. communications system.
The Department of Justice is using all of its traditional
techniques and resources to combat these risks; however, Exon-Florio is
an important national security tool when no other statutory authority
exists, apart from the International Emergency Economic Powers Act,
that is adequate to protect national security. Through its involvement
in the CFIUS process, the Department has carefully examined potential
threats to national security posed by specific foreign acquisitions of
U.S. businesses, and where appropriate, we have developed measures to
mitigate those risks. Along with other interested member agencies of
CFIUS, the Department of Justice has negotiated numerous security
agreements to mitigate potential threats to national security caused by
those transactions.
These security agreements are typically the result of negotiations
between the companies involved in the transaction and those CFIUS
member agencies whose national security equities are implicated. In
addition to the Department of Justice, the Departments of Homeland
Security and Defense often are parties to these agreements. The
agreements vary in scope and purpose, depending on the facts of a
particular transaction, and are negotiated on a case-by-case basis to
meet the particular national security risks at issue. For transactions
that involve the communications sector, these agreements are often
negotiated in conjunction with executive branch review of applications
submitted to the Federal Communications Commission. Along with the
Department of Homeland Security, the Department of Justice plays a key
role in monitoring and enforcing the security agreements to which it is
a party.
The Department of Justice has been Vigilant to Ensure Effective
Implementation of Exon-Florio
Effective implementation of Exon-Florio is critical to the mission
and goals of the Department of Justice. Therefore, the Department has
brought together its diverse resources to address the complex issues
raised by the variety of transactions coming before CFIUS. The
Department's Criminal Division has primary responsibility at a policy
level for CFIUS matters and closely coordinates the involvement of
various departmental components in the process. These components
include: The FBI, which both coordinates with the intelligence
community and provides operational and analytical support in the areas
of counterintelligence, critical infrastructure protection, privacy
protection, and electronic surveillance; the Computer Crime and
Intellectual Property Section, which provides expertise related to the
U.S. communications system, cybercrime, and privacy protection; the
Office of Enforcement Operations and the Narcotic and Dangerous Drug
Section, both of which provide expertise related to electronic
surveillance issues; and the Counterespionage Section, which provides
legal guidance on counterintelligence issues. The Office of
Intelligence Policy and Review assists with intelligence community
coordination, and the Counterterrorism Section assists with reviewing
transactions that may implicate terrorism concerns. In addition, the
Antitrust Division has provided support and input in appropriate cases,
and the Office of the Chief Information Officer has provided assistance
on occasion. By bringing all of these diverse resources and this
extensive expertise to bear, the Department of Justice has maximized
its ability to participate in the effective implementation of Exon-
Florio.
Conclusion
In conclusion, I again would like to thank you, Mr. Chairman, and
the Committee for your interest in ensuring that Exon-Florio is used as
effectively as possible and for giving me the opportunity to explain
the Department of Justice's role with respect to this important
national security safeguard. The Department of Justice is keenly aware
of the significance of its responsibilities under Exon-Florio, and we
have worked extremely hard to meet those responsibilities with the
utmost vigilance, diligence, and professionalism. This Nation's
security and the safety of our citizens are always the highest priority
for the Department of Justice. Thank you, and I am happy to answer any
questions you may have.
----------
PREPARED STATEMENT OF PATRICK A. MULLOY
Commissioner, United States-China Economic and Security Review
Commission
October 20, 2005
Introduction
Mr. Chairman, Senator Sarbanes, and Members of the Committee, thank
you for providing me with this opportunity to speak before you today on
this crucial issue.
My name is Patrick Mulloy and I have been a member of the twelve
member bipartisan, bicameral United States-China Economic and Security
Review Commission since it was established by the Congress in the year
2000. The Commission's charge from the Congress is, among other things,
to examine the ``national security implications of the bilateral trade
and economic relationship between the United States and the People's
Republic of China.'' I also teach International Trade Law and Public
International Law as an Adjunct Professor at the Law Schools of
Catholic University and George Mason University.
I commend the Banking Committee for holding this important
oversight hearing and I am honored by the invitation to testify. I take
great pride and it is a source of enormous personal satisfaction to
have served in a bipartisan manner on the staff of this Committee from
1983-1998. During the period of 1987-1988, when the Exon-Florio
Provision was being considered by the Congress, I served as the
Committee's General Counsel and was directly involved in the
negotiations which led to its enactment. Chairman Shelby, Ranking
Member Sarbanes, and Senator Dodd are the only Members of this
Committee today who were involved in crafting the Omnibus Trade and
Competitiveness Act of 1988--in which the Exon-Florio Provision was
included as Section 5021.
I was invited today to give the Committee my understanding of the
background which led to the enactment of Section 5021 of Public Law--
418 which was codified in Title VII of the Defense Production Act of
1950 (50 U.S.C. App 2158).
I should note that, while a member of the United States-China
Economic and Security Review Commission, I am not testifying on its
behalf and the views I present will be my own. I will, however, set
forth the two recommendations the Commission adopted unanimously in its
2004 Report on the Exon-Florio/CFIUS matter which is the subject of
today's hearing.
CFIUS Established in 1975
The Committee on Foreign Investment in the United States (CFIUS)
was not established by the Exon-Florio Provision in the Omnibus Trade
Bill of 1988. The CFIUS, rather, was established some years earlier in
1975 by President Ford in Executive Order 11858 issued on May 7, 1975.
That order, which created CFIUS and made the Secretary of the Treasury
its Chairman, charged the Committee to ``have the primary continuing
responsibility within the Executive Branch for monitoring the impact of
foreign investment in the United States, both direct and portfolio, and
for coordinating the implementation of United States policy in such
investment.''
While the Treasury Secretary was given the Chairmanship of CFIUS,
the Executive Order also gave the Department of Commerce a key role,
charging it to, among other things, submit ``appropriate reports,
analyses, data, and recommendations relating to foreign investment in
the United States, including recommendations as to how information on
foreign investment can be kept current.''
My own recollection is that in 1975, there were concerns about the
fact that, because of the establishment of OPEC and the spike in oil
prices in the 1972-1975 period, many oil producing countries suddenly
had substantial amounts of money to buy assets in this country and
CFIUS was established to help monitor such acquisitions. I had
occasion, when I served as an attorney in the Antitrust Division of the
Justice Department, to attend some meetings of CFIUS in the 1981-1982
period. One matter in particular I remember is when the Kuwait
Petroleum Company wanted to buy the Santa Fe International Company.
This raised concerns within the executive branch because apparently
Santa Fe had some technologies that U.S. authorities did not want
transferred in such a merger. Since the President then lacked the
authority given to him by the Exon-Florio Provision in 1988, the
Antitrust Division was asked to hold up the merger on antitrust
grounds. This was done and I believe an acceptable solution was
negotiated by which the Santa Fe Company sold off to a third party some
technologies which our Government did not want transferred to the
Kuwait Petroleum Company.
Enactment of the Exon-Florio Provision
In 1987, the leadership of the Congress, troubled by our Nation's
rising trade deficit, decided to craft an Omnibus Trade Bill and
charged each relevant Committee in the House and Senate to craft
different portions of such a bill. Senator Proxmire, then Chairman of
the Banking Committee, asked the International Finance Subcommittee,
led by Senators Sarbanes and Heinz, to develop the Banking Committee
portions of such a bill. Chairman Proxmire asked me as his General
Counsel to work closely on the process and to keep him informed of
developments. I thus worked closely with Senator Sarbanes and was
personally involved in the development of all facets of the Banking
Committee's contributions to the Omnibus Bill.
The Banking Committee on May 19, 1987 marked up and ordered to be
reported S. 1409, the United States Trade Enhancement Act of 1987,
which dealt with export controls, trade promotion, exchange rates,
third world debt, the Foreign Corrupt Practices Act and better access
for U.S. financial institutions to foreign markets. The Committee
Report stated:
The cumulative trade deficits of over $500 billion, built up by
the United States since 1982, have made this country the
world's largest debtor Nation and underscore the need of our
economy to compete internationally.
The bill reported by the Banking Committee did not have any
provision giving the President the authority to block certain takeovers
of U.S. companies by foreign purchasers. The so-called Exon-Florio
Provision, which contained that authority, appeared in the bills
reported by the Commerce Committee in the Senate, on which Senator Exon
served, and the Energy and Commerce Committee in the House, where
Congressman Florio served. After the Senate Commerce Committee reported
the provision, the Banking Committee appealed to the Parliamentarian
that the investment matters covered by its provisions were properly
within Banking Committee jurisdiction. The Parliamentarian ruled in
favor of the Banking Committee and thus the Banking Committee took the
lead on the provision. It worked very closely with Senator Exon and his
staff in doing so.
The various portions of the Omnibus Trade Bill, reported by each
Senate Committee, were merged into one bill, each Title of which was
considered sequentially on the Senate floor during the summer of 1987.
The House followed a similar procedure and in fact passed its bill H.R.
3 first. This was because the trade bill was considered a revenue
measure on which the House had to act first. The Senate at the
conclusion of its work took up H.R. 3, substituted the text of the
Senate bill and asked for a conference with the House. Senate
conferees, appointed to deal with the Exon-Florio Provision were
Senators Sarbanes, Dixon, and Heinz of the Banking Committee, along
with Senators Exon and Danforth of the Commerce Committee.
Section 905 of the House bill provided that the Secretary of
Commerce should ``determine the effects on national security, essential
commerce, and economic welfare of mergers, acquisitions, joint
ventures, licensing, and takeovers by or with foreign companies which
involve U.S. companies engaged in interstate commerce.'' It also
charged the Secretary of Commerce (not the Treasury Secretary) to
determine whether such takeovers would ``threaten to impair national
security and essential commerce.'' If such a determination were made by
the Secretary of Commerce the President would block the transaction,
unless the President determined there was no threat to ``national
security and essential Commerce.'' The Senate provision was quite
similar and said the criteria to block a takeover was ``national
security or essential commerce that relates to national security.''
The Department of the Treasury, then headed by Secretary Baker, led
the executive branch opposition to enactment of the Exon-Florio merger
review authority. Some contend it was both protection of its
jurisdiction over investment policy and championing an open investment
policy that led to Treasury's opposition. At any rate, the
Administration put the item on its ``veto list'' and threatened to veto
the whole Omnibus Trade bill if the provision stayed in the bill. At
that point, I was directly involved in negotiations with Treasury
officials as to how to make the provision acceptable to the
Administration. I advised the Senators for whom I worked what I had
seen regarding the Kuwait Petroleum Company/Santa Fe merger and said it
was my belief that the President needed the authority given to him by
the Exon-Florio Provision. Our Senators charged us in our staff
negotiations to keep the provision but to try to get an agreement
acceptable to the Administration.
The Treasury was adamant that the term ``essential commerce'' had
to come out of the bill because it was not clear what that entailed.
Conferees agreed to delete those words but added language to the
statute and the Conference Report that they did not want the term
``national security'' to be narrowly interpreted. To make this
absolutely clear the statute itself was revised to read:
The President or the President's designee may, taking into
account the requirements of national security, consider among
other factors:
(1) domestic production needed for projected national defense
requirements;
(2) 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; and
(3) the control of domestic industries and commercial
activities by foreign citizens as it affects the capability and
capacity of the United States to meet the requirements of
national security.
They also decided to put the provision into law under Title VII of
the Defense Production Act. This was done to indicate that the Exon-
Florio Provision should be interpreted as dealing with the broad
industrial base issues addressed by that statute not the more narrow
national security controls dealt with in export control matters. The
Conference Report on the provision states:
The standard of review in the section is ``national security.''
The Conferees recognize that the term ``national security'' is
not a defined term in the Defense Production Act. The term
``national security'' is intended to be interpreted broadly
without limitation to particular industries.
On August 23, 1988, the Exon-Florio Provision, as modified in the
Conference, became law as Title VII of the Defense Production Act.
Treasury Charged to Lead New Merger-Review Authority
On December 27, 1988, President Reagan issued Executive Order
12661. That order amended Executive Order 11858 which established the
Committee on Foreign Investment in the United States and effectively
put the President's new authority to review and block mergers for
national security reasons into the hands of the Treasury-chaired CFIUS.
So the Executive Department that most strongly opposed the blocking
authority ended up chairing the Committee charged to implement its
provisions. I think that has led to the concerns in Congress and
elsewhere about the provision not being implemented as Congress
intended.
Because it now had the lead for implementing the statute, the
Treasury Department also took the lead in the notice and comment
rulemaking that developed the regulations under which it would be
administered. It took the Treasury Department almost 3 years until
November 21, 1991 to promulgate the final regulations. (56 F.R. 58774-
01 (1991)). Those regulations, not the Exon-Florio Provision,
established the voluntary system of merger notification that has been
criticized as inadequate by many.
1992 Oversight Hearing by Banking Committee
On June 4, 1992, the Senate Banking Committee's Subcommittee on
International Finance and Monetary Policy, under the leadership of its
Chairman, Senator Sarbanes and Ranking member Mack, held an oversight
hearing on the implementation of the Exon-Florio Provision. In opening
that hearing Senator Sarbanes stated:
Of particular interest this morning are the criteria for review
of Exon-Florio cases that have been developed by the
Interagency Committee on Foreign Investment in the United
States, which has been charged by the President with
responsibility for implementing the statutory provision.
In his opening statement Senator Mack, who also served on the Armed
Services Committee, stated:
My interest this morning is to better understand how the
Administration determines the U.S. national security interest
through the CFIUS process.
He then referred to a matter, which was, then, of public concern,
that is the acquisition of the Missile Division of the LTV Aerospace
and Defense Company by Thomson-CSF, a French firm controlled by the
French Government. He then stated, ``We don't want any foreign
government to own major U.S. defense contractors.
Senator Riegle, the Chairman of the full Banking Committee, in his
opening statement said:
The Administration examines takeovers on an isolated basis and
is missing the cumulative impact such takeovers are having on
our technology base. The President's science adviser, Dr. Alan
Bromley, has voiced concerns about this matter. He warned
policymakers that ``our technology base can be nibbled from
under us through a coherent plan of purchasing entrepreneurial
companies.''
The Assistant Secretary of the Treasury for International Affairs,
Olin Wethington in his testimony told the Committee:
After almost 4 years of experience in implementing the so-
called Exon-Florio Provision we believe the statute is
achieving its national security objectives, and that it has
done so without compromising our open investment policy.
Mr. Peter Mills, the first Chief Administrative Officer of
SEMATECH, also testified at that June 1992 hearing. SEMATECH was a
joint DoD/Industry consortium which was established in the 1980's to
ensure our Nation maintained the ability to make advanced semiconductor
products deemed essential to our national defense needs. In that
hearing, Mr. Mills voiced his concerns and frustration about the
failure of CFIUS to prevent foreign interests from buying U.S.
semiconductor equipment and materials suppliers. He told the Committee:
. . . foreign interests have targeted key U.S. technologies and
the present CFIUS law or its implementation is ineffective in
preventing these transactions.
He also voiced concerns that CFIUS was not considering the
cumulative effect of multiple foreign purchases of U.S. companies and
urged that the Chairmanship of CFIUS be moved from the Treasury
Department to the Commerce Department.
Subsequent to that hearing the Congress in 1992 enacted two key
changes to Section 721 of the Defense Production Act. First, it put
into the law a new provision requiring CFIUS to move beyond the 30-day
review period and do a 45-day investigation in any instance in which an
entity controlled by or acting on behalf of a foreign government is
making the acquisition of a U.S. entity. It also put in a provision
requiring the President and such agencies as the President designates
to do a report in 1993 and each 4 years thereafter as to whether any
foreign government has a coordinated strategy to acquire U.S. companies
involved in research development or production of critical
technologies. It also added additional criteria to the statute that it
wanted considered during reviews of foreign takeovers.
The Treasury Department Has Failed To Implement Congressional
Mandates
In 1994, the Administration submitted to the Congress its first and
only report under the required quadrennial report statutory provision
of the DPA. The Report stated on page 13:
Despite examples of government involvement, the working groups
did not find credible evidence demonstrating a coordinated
strategy on the part of foreign governments to acquire U.S.
companies with critical technologies. The absence of credible
evidence demonstrating a coordinated strategy, nevertheless,
should not be viewed as conclusive proof that a coordinated
strategy does not exist.
The Report then went on to say:
In some cases, however, foreign governments give indirect
assistance and guidance to domestic firms acquiring U.S.
companies. The main methods of government involvement include:
extending tax credits to promote foreign M&A activity;
exercising controlling government interest in major
firms to influence foreign M&A activity, and
identifying technologies that are critical to national
economic development, and thus prime targets for acquisition
through M&A's.
After this one report the Treasury Department, which is charged by
Executive Order to implement the requirements of Section 721 of the DPA
in which the quadrennial report mandate is placed, has ignored this
requirement of law, and no more reports on this most important matter
have been prepared and given to the Congress as required by law. This
means neither the CFIUS nor the Congress has the background information
Congress wanted both of them to have in looking at patterns in
takeovers or considering their cumulative effect.
The GAO in its most recent report on the implementation of Exon-
Florio, submitted to this Committee in September 2005, notes that the
statutorily required 45-day investigation of foreign government
purchases of U.S. firms has been stymied by the Treasury's insistence
that any such investigations can be conducted only if, during the 30-
day initial review, there is ``credible evidence'' that the foreign
controlling interest may take action to threaten our national security
(page 3). This means the Treasury has effectively read the 45-day
mandated investigation of foreign government acquisitions of U.S.
companies right out of the statute.
In addition, GAO on page 3 of its September 2005 Report to this
Committee points out that the Treasury Department as Chair of CFIUS has
``narrowly defined what constitutes a threat to national security.''
The GAO tells us ``they have limited the definition to export
controlled technologies or items, classified contracts, or specific
derogatory intelligence on the foreign company.'' This does not carry
out the statutory criteria Congress has mandated be considered. GAO on
page 13 of its recent report tells us that the Treasury insists that
Defense Department concerns about foreign acquisitions of integrated
circuits essential to national defense is an industrial policy concern
and not a ``national security'' concern. This flies in the face of the
statute and legislative history of the Exon-Florio Provision of law.
That law that was deliberately placed in the Defense Production Act to
indicate Congress did want defense industrial base issues considered in
Exon-Florio reviews.
Conclusion
I believe a review of the record demonstrates that the Treasury
Department opposed the enactment of the Exon-Florio Provision and has
sought to stymie its effectiveness ever since it was enacted. It is in
a position to do this as it chairs and staffs the Interagency Committee
that the President charged to implement the statute. The agency is so
wedded to its open investment policy that it leans over backward to
protect that interest over legitimate national security concerns.
The China Commission, on which I serve, in its 2004 Report to
Congress unanimously recommended:
(1) that Congress explicitly provide in statute that the term
``national security'' in the Exon-Florio Provision includes
``national economic security''
(2) that the chairmanship of CFIUS be transferred from the
Treasury Department to the Commerce Department.
Under the Constitution, the Congress has the authority to regulate
Interstate and Foreign Commerce. The Congress has under Exon-Florio
given to the President, not the Treasury Department, the authority to
block certain foreign takeovers of U.S. companies that may threaten our
Nation's security. As Chairman Shelby stated at this Committee's
October 6 oversight hearing on this matter, ``Not everything in America
is for sale.'' Senator Sarbanes at that hearing cited an article that
appeared in the Los Angeles Times on October 6 that said the foreign
investment ``screening process was broken, leaving the country
vulnerable to foreign threats.'' I strongly agree with the points made
by both Senators.
Our Nation is facing new challenges as we find ourselves in a
globalized economy where other countries have clear national strategies
on how to compete and raise the standard of living of their people and
their national power. We must take such matters into account when
administering our open investment policy and ensure we not sacrifice
technologies and industries important to our national defense by taking
an ideological approach on open investment. China over the last 10
years has run massive and ever increasing trade surpluses with this
country. This year alone our bilateral deficit with China will be over
$200 billion. That Government has acquired a vast cache of dollars by
forcing companies earning dollars to turn them in for yuan. Since China
does not buy very many U.S.-made goods in comparison with what we buy
from them, it can use these dollars earned through trade surpluses to
buy important U.S. assets and it is now starting to do so.
Part of the reason we have run these massive trade deficits with
China is because that country has for a number of years been engaged in
currency manipulation to keep the yuan undervalued against the dollar.
This subsidizes Chinese exports here, makes our goods more expensive
there, and gives our companies incentives to move operations to China.
Another of this Committee's contributions to the 1988 trade bill gave
the Treasury Secretary major responsibilities in the exchange rate
area. The Treasury is charged to identify currency manipulators and to
persuade them, by bilateral negotiations and efforts in the IMF, to
halt such practices that are deleterious to the international trading
system and unfair to American companies and workers. As this Committee
is well-aware the Treasury has failed to carry out its responsibilities
in that area as well. Its failure there has contributed to Chinese
trade surpluses and has helped China accumulate vast amounts of U.S.
dollars. We will thus soon see a lot more proposed takeovers of
American companies by Chinese companies. We need a serious,
functioning, CFIUS process that takes account of our national security
interests.
I strongly urge this Committee to look at the record and recognize
the Treasury Department has not been a good steward of the Exon-Florio
responsibilities given to it. The Chairmanship of CFIUS should be moved
out of that Department and this Committee should remain active in its
oversight of that interagency operation. I have no clients other than
the public interest on this issue and have never been paid by any
company or any other party to advise it on CFIUS matters.
Again, thank you very much for inviting me, and I am happy to
answer any questions.
----------
PREPARED STATEMENT OF DAVID MARCHICK
Partner, Covington & Burling
October 20, 2005
Mr. Chairman, Senator Sarbanes, and Members of the Committee, thank
you for the opportunity to testify before the Senate Committee on
Banking, Housing, and Urban Affairs on the subject of implementation of
the Exon-Florio Amendment. It is a privilege to appear before you.\1\
---------------------------------------------------------------------------
\1\ David Marchick is a Partner in Covington & Burling, an
international law firm based in Washington, DC. He has an active CFIUS
practice and is co-authoring a book on Exon-Florio with Edward M.
Graham, Senior Fellow at the Institute for International Economics.
---------------------------------------------------------------------------
I applaud your leadership, Mr. Chairman, and that of the Committee
for calling these hearings. Protecting U.S. national security has to be
the United States' top priority. I believe we can protect our security
interests and simultaneously maintain an open investment policy,
including through the effective implementation of the Exon-Florio
Amendment.
You have already heard testimony from the GAO, Senator Inhofe and a
distinguished panel of executive branch officials. I am here to offer
the perspective of a private sector adviser who works closely with the
twelve members of the Committee on Foreign Investment in the United
States (CFIUS). I plan to speak to four particular issues:
First, the critical importance of foreign investment to the
U.S. economy. Encouraging inward investment is essential to both
our economic security and our national security.
Second, trends in the application of the Exon-Florio
Amendment. Since September 11, 2001, the Bush Administration has
applied greater scrutiny to foreign investments on national
security grounds, imposed tougher security requirements as a
condition for approving specific transactions, and enhanced
enforcement of security agreements negotiated through the Exon-
Florio process.
Third, the suitability of the Exon-Florio process to address
potential security issues presented by investments from China.
While certain investments by Chinese firms may present unique
national security considerations, experience has shown that the
President and CFIUS have adequate authority and flexibility under
Exon-Florio to assess and, if necessary, mitigate any national
security risks such investments may pose.
Fourth, the myriad initiatives to amend Exon-Florio. Simply
put, the Exon-Florio Amendment in its present form is more than
adequate to protect our national security and still preserve our
economic interests. Many of the changes being discussed in Congress
would risk chilling inward investment and encouraging other
governments to erect new obstacles to U.S. investment abroad. At
the same time, there can and should be greater transparency with
Congress while protecting proprietary business information.
The Importance of Foreign Investment to the U.S. Economy
Few would disagree that foreign investment plays a critical role in
the U.S. economy. Today more than ever, the vibrancy and vitality of
the U.S. economy depends on the inflow of direct foreign investment.
Foreign investment supports approximately 5.3 million jobs in the
United States. These typically are highly skilled, well-paying jobs;
indeed, U.S. affiliates of foreign firms on average pay wages higher
than the U.S. industrial mean.\2\ Foreign investors also invest heavily
in manufacturing operations in the United States--investment that is
critically important given the present competitive pressures on the
U.S. manufacturing base. It is precisely for these reasons that each of
our 50 governors devotes a significant amount of time and resources to
attract foreign investment to their States.
---------------------------------------------------------------------------
\2\ See Edward M. Graham and Paul R. Krugman, Foreign Direct
Investment in the United States 71-72 (Institute for International
Economics 1995).
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Perhaps most important, because the United States spends more than
it produces and saves, and because of the deteriorating current account
deficit ($197 billion in the second quarter of 2005, or some 6.3
percent of annualized GDP), our country is now literally dependent on
inflows of direct and portfolio investment to cover the gap between
what we consume and produce.
Of course, if foreign investors make investments in the United
States, it is preferable that they do so in plant, equipment and other
fixed assets that drive economic activity, rather than solely in the
debt market. Subjecting our economy to the whims of foreign central
banks--which today hold more than one-third of the overall public U.S.
debt--creates much more risk than does foreign ownership of fixed
assets in the United States.
The United States has long embraced a policy of encouraging foreign
investment. Indeed, Presidents Carter, Reagan, and George H.W. Bush
each issued executive statements of policy on the subject and President
Clinton actively promoted inward investment. In 1983, President Reagan
issued the first public statement in which a U.S. President expressly
welcoming foreign investment. In this statement, President Reagan said
``the United States believes that foreign investors should be able to
make the same kinds of investment, under the same conditions, as
nationals of the host country. Exceptions should be limited to areas of
legitimate national security concern or related interests.'' \3\
---------------------------------------------------------------------------
\3\ President Ronald Reagan, Statement on International Investment
Policy, Sept. 9, 1983, available at http://www.reagan.utexas.edu/
archives/speeches/1983/90983b.htm.
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U.S. foreign investment policy has long been consistent with
President Reagan's formal statement on the issue. In fact, apart from
the narrow exception of a few World War I-vintage restrictions on
foreign investment in aviation, shipping, and the media, the United
States has maintained an open investment policy. Hand-in-hand with that
policy, laws such as the Exon-Florio Amendment, the International
Emergency Economic Powers Act, and, previously, the Trading with the
Enemy Act have empowered Presidents to block foreign investment or to
seize foreign-owned assets (as the United States did in World Wars I
and II) when U.S. national security is threatened by a particular
foreign acquisition or involvement in the U.S. economy.
As a result, with the exception of 2003, when China briefly was the
largest recipient of direct foreign investment, the United Stated has
for many years attracted more foreign investment than any other country
in the world. In addition to our open investment policy, the size of
the U.S. market, the quality of our workforce and the ease with which
foreign investors can operate here have all contributed to this
remarkable record.
Moreover, the vast majority of foreign acquisitions do not
implicate U.S. national security interests in any respect. It is hard
to see a national security issue with a Daimler-Chrysler auto assembly
plant, a Japanese investment in a film studio, or, my children's'
favorite, Ben & Jerry's, which is owned by a Dutch company. For the
narrow set of transactions that genuinely implicate U.S. national
security interests, the Exon-Florio Amendment provides the President
with ample authority to block a transaction or otherwise mitigate any
concerns raised by a particular acquisition, and CFIUS agencies have
demonstrated their willingness to use the full authority of the law.
Trends Toward Greater Scrutiny of Transactions in the Exon-Florio
Review Process
The Exon-Florio Amendment created a statutory framework that is
unique in a number of respects. First, there is no time bar on Exon-
Florio reviews; CFIUS can review a transaction at any time, including
after a transaction has closed. Second, unlike Hart-Scott-Rodino or
other governmental reviews of mergers and acquisitions, Presidential
decisions pursuant to Exon-Florio are not reviewable by U.S. courts
because they involve national security, an inherently ``Presidential''
function. Third, the statute gives the CFIUS agencies broad discretion
to interpret several key statutory criteria, including ``foreign
control,'' ``credible evidence,'' and ``national security.'' In my
experience, particularly in the past few years, CFIUS has chosen to
interpret these terms very broadly.
CFIUS has significantly broadened the scope of its ``national
security'' reviews since September 11, 2001--a development that partly
reflects the addition of the Department of Homeland Security to the
Committee and the attendant strengthening of the security focus within
CFIUS. More importantly, whereas prior to September 11 CFIUS focused
primarily on (i) the protection of the U.S. defense industrial base,
(ii) the integrity of Department of Justice investigations, and (iii)
the export of controlled technologies, CFIUS has intensified its focus
on an additional goal: The protection of critical infrastructure.
Criticism against CFIUS has focused on the fact that the President
has only formally blocked one transaction of more than 1,570 reviewed
by CFIUS. However, this statistic obscures the manner in which CFIUS
actually operates and ignores the larger number of transactions
abandoned or substantially modified by parties because of the CFIUS
process. There have been more investigations and withdrawals in just
the past 3 years than there were during the previous 10 years combined.
In the last 3 years, I personally have been involved in two
investigations, one proposed investment that was withdrawn when it
became clear that CFIUS approval would not be forthcoming, and multiple
negotiations of extremely tough security agreements with CFIUS
agencies.
The tougher terms now imposed by CFIUS as a condition for approving
particular transactions are another indicator of the enhanced scrutiny
applied to recent transactions. For many years, the security agencies
within CFIUS (DOJ/FBI, DoD and now DHS) have negotiated agreements
designed to mitigate the national security impact of a particular
transaction. These security agreements have traditionally been
negotiated by DoD for foreign acquisitions of defense companies, by the
DOJ and FBI for foreign acquisitions of telecommunications companies,
and by multiple agencies for acquisitions in other sectors. Since 2003,
DHS has joined DOJ, DoD and the FBI in playing a central role in the
negotiation and enforcement of security agreements.
By way of illustration, take the Network Security Agreements
(NSA's) negotiated to mitigate the risk of foreign investment in the
telecommunications sectors. (Unlike security agreements negotiated in
other sectors, NSA's in the telecommunications sector are made public
via the grant of FCC licenses, which often are conditioned on the
agreements.)
Before September 11, NSA's for foreign acquisitions of U.S.
telecommunications companies typically focused on the ability of U.S.
law enforcement to conduct electronic surveillance and wiretaps and
prevent foreign governments from accessing call-related data. In the
last few years, NSA's have become much tougher. Some recent NSA's have
become more intrusive, limiting foreign-owned telecommunications firms'
freedom of action in key areas in which American-owned
telecommunications firms face no similar restrictions.
For example, to varying degrees, recent NSA's have:
permitted only U.S. citizens to serve in sensitive network and
security positions (for example, positions permitting access to
monitor and control the network);
required third party screening of senior company officials and
personnel having access to critical network functions;
restricted or prohibited the outsourcing of functions covered
by the NSA, unless such outsourcing is approved by the Department
of Homeland Security;
given U.S. Government agencies the right to inspect U.S.-based
facilities and to interview U.S.-based personnel on very short
notice (as short as 30 minutes);
required third party audits of compliance with the terms of
the NSA;
required the implementation of strict visitation policies
regulating foreign national access (including by employees of the
acquiring company) to key facilities; and
required senior executives of the U.S. entity, and certain
directors of its board, to be U.S. citizens approved by the U.S.
Government and responsible for supervising and implementing the
NSA.
Many of these provisions reflect concepts typically utilized by the
Department of Defense to mitigate security concerns associated with
foreign-owned companies that have classified contracts with the
Pentagon. In other words, CFIUS now imposes on foreign companies
handling nonclassified telecommunications work many of the same
requirements that DoD has traditionally required for foreign companies
handling the Government's most sensitive defense-related classified
contracts. These security commitments for companies not handling
classified contracts can impose substantial costs. For global
communications companies, for example, the limitations on outsourcing,
routing of domestic calls, storage of data, and location of network
infrastructure can create significant competitive burdens.
Finally, I should note that the CFIUS security agencies have
increased the vigor with which they monitor and enforce these
agreements. Unfortunately, in my view, some provisions required by
CFIUS in these agreements can be overly intrusive and regulatory,
unnecessarily limit companies' operations, and impose significant costs
without commensurate security benefits. Notwithstanding this concern,
it is important for the Committee to know that, in the past few years,
CFIUS's scrutiny of transactions has increased, security agreements
have become tougher, and enforcement and monitoring has been more
rigorous.
National Security Issues Associated With Investments From China
Acquisitions of U.S. companies by Chinese firms have presented
CFIUS with unique issues and concerns. Of the United States' 10 largest
trading partners, China is the only one not considered a strategic or
political ally. China also stands out among the largest trading
partners in other important respects, including the high levels of
state ownership and control of its largest (and often publicly traded)
companies \4\ and the espionage threat assigned to China by our
intelligence and law enforcement agencies.
---------------------------------------------------------------------------
\4\ One recent study estimated that at the end of 2001, the Chinese
Government exerted ultimate ownership control over 81.6 percent of the
1,136 publicly listed Chinese companies. As of 2005, there were more
than 1,300 publicly traded companies. China has made important steps to
privatize and eliminate state ownership and control of some former
state-owned enterprises, particularly small and medium-sized companies.
At the same time, however, the Chinese Government has retained control
over industries considered ``strategic.'' See Exit the Dragon,
Privatization and State Control in China (Stephen Green & Guy S. Liu
eds., 2005).
---------------------------------------------------------------------------
For these reasons, Chinese investments have drawn, and will likely
continue to draw, close scrutiny. Even with the concerns by some
agencies, CFIUS is well equipped to make national security assessments
of Chinese investment in the United States on a case-by-case basis.
While protection of U.S. national security should always be our
highest priority, we can fulfill this objective while simultaneously
integrating China into the global economy, including through Chinese
investment in the United States. For close to 25 years, through
Republican and Democratic Administrations, the United States has
encouraged China to lower tariffs, eliminate nontariff barriers to
trade, privatize state-owned enterprises and to participate in--and
play by the rules of--the global economy. Moreover, the United States
has continually pressed China to eliminate barriers to foreign direct
investment by United States and other foreign companies. Successive
U.S. Administrations have correctly pursued these policies not only for
the economic and commercial benefit of U.S. companies and workers, but
also based on the belief--correct, in my view--that market reform will
facilitate democratic reform in China. A democratic China is, of
course, very much in the national security interests of the United
States.
Thus, as the United States Government utilizes the Exon-Florio
process to assess carefully those investments from China that present a
national security risk, the United States should also send a clear
signal that we welcome inward investment from China. We should make
clear that Chinese investments in most sectors of the United States
economy present no national security issues at all. It is in the Untied
States' interest to continue to support China's integration into the
global economy. In addition, there should be a high threshold for
rejecting proposed transactions, in part because of the myriad tools
available to mitigate any perceived threats, including the use of
security agreements. At the same time, if mitigation measures do not
adequately protect U.S. national security, the President can and should
block an investment.
Recent Proposals to Amend Exon-Florio
Recent proposals to amend Exon-Florio would, among other things:
expand the definition of national security to include the
economic and/or energy security;
give Congress the power to force an investigation or block a
transaction already approved by the President;
extend the statutory time limits for CFIUS reviews; and,
transfer chairmanship of the process from the U.S. Treasury to
the Department of Defense or Department of Commerce.
In my view, these proposals not only are unnecessary to protect
U.S. national security, but they would also have a negative impact on
the U.S. economy and therefore U.S. national security. More
specifically, they would chill foreign investment, slow job creation,
and provide other countries with a pretext for imposing similar
restrictions on U.S. investment abroad. By chilling inward foreign
investment, which fuels competition and innovation, we would be harming
the vitality of the U.S. economy. A strong economy is essential for
U.S. national security.
Let me take each of the proposals in turn:
First, expanding Exon-Florio's criteria to include ``economic
security,'' or variations thereof, has been proposed close to a half-
dozen times since 1988, including when Exon-Florio became law.\5\
Indeed, the original bill offered by Senator Exon would have authorized
the President to block transactions that threaten the ``essential
commerce'' of the United States. President Reagan threatened to veto
the Omnibus Trade and Competitiveness Act of 1988 because of the
``essential commerce'' clause in the Exon bill; proposals to expand
Exon-Florio to cover ``economic security'' should similarly be
rejected.
---------------------------------------------------------------------------
\5\ See, for example, H.R. 2394, ``The Steel and National Security
Act,'' 107th Cong. (2001); H.R. 2624, ``The Technology Preservation Act
of 1991,'' 102nd Cong. (1991); H.R. 2386, ``The Foreign Investment and
Economic Security Act of 1991,'' 102nd Cong. (1991); H.R. 5225, 101st
Cong. (1990); H.R. 3, ``The Foreign Investment, National Security and
Essential Commerce Act of 1987,'' 100th Cong. (1987).
---------------------------------------------------------------------------
It would be difficult for CFIUS to implement a statutory
requirement to protect ``economic security.'' The term is
extraordinarily vague. I am reminded of the late Commerce Secretary
Malcolm Baldridge, who argued against a similar provision in the
original Exon bill, saying ``you are trying to kill a gnat with a
blunderbuss.'' \6\ Indeed, there is good reason to believe that an
``economic security'' test would simply become a vehicle for domestic
industries seeking to block foreign competition.
---------------------------------------------------------------------------
\6\ Foreign Acquisitions of Domestic Companies: Hearing on H.R. 3
Before the Senate Committee on Commerce, Science, and Transp., 100th
Cong. 17 (1987).
---------------------------------------------------------------------------
Second, the proposals to allow Congress to force an investigation
or to override, through a joint action by Congress, Presidential
approval of a particular transaction raise serious separation of powers
issues under the U.S. Constitution.\7\ In addition, these proposals, if
enacted, would create so much uncertainty about the prospect of
Congressional involvement in the review process that a substantial
number of foreign investors would simply not make investments in the
United States. Congress has a legitimate and important oversight role
ensuring that the Exon-Florio statute is implemented correctly. But
Congress should not itself become a regulatory agency. Congress has
not, and would not, override Hart-Scott-Rodino decisions made by the
Department of Justice or the FTC. It should not assume that power here.
---------------------------------------------------------------------------
\7\ See INS v. Chadha, 462 U.S. 919 (1985).
---------------------------------------------------------------------------
Third, I would recommend against extending the time limits for a
CFIUS review. The existing time limits work well because they balance
the need for the agencies to have sufficient time to conduct reviews
with the concomitant need for parties to an acquisition to have the
certainty that they will receive a decision--up or down--from CFIUS
within a reasonable period of time. In addition, most companies that
file with CFIUS--thereby starting the statutory clock--do so only after
engaging in informal consultations with CFIUS. Through these informal
consultations, CFIUS agencies have additional time to assess the
national security risks and design mitigation strategies, if necessary.
Indeed, it is common for security agreements to be hammered out before
the parties file.
Another reason not to alter the current statutory timeframes is
that the vast majority of transactions reviewed by CFIUS either do not
pose a national security risk or the national security threat has been
mitigated. Therefore, most transactions can appropriately be approved
by CFIUS in 30 days. These investments typically come from companies
located in countries that are our closest allies. There would be no
good reason to prolong the timeframe for approving these transactions--
a timeframe, by the way, that currently corresponds will with the
review period under Hart-Scott-Rodino. Only a small number of
transactions require additional scrutiny through an ``investigation.''
The 45 additional days allowed in the current statutory framework--plus
the informal, prefiling consultation period--are sufficient for CFIUS
to do its job.
Fourth, just as there has been with respect to ``economic
security,'' there have been a number of proposals over the years to
transfer the chairmanship of CFIUS away from Treasury toward the
Department of Defense or the Department of Commerce. Indeed, the
original Exon bill placed the responsibility in the Department of
Commerce. Then-Secretary Baldridge stated bluntly that he did not want
the authority.\8\ While multiple agencies could competently lead the
CFIUS process, placing the chairmanship at Treasury sends an important
positive signal to the rest of the world. Exon-Florio was intended to
give the President a tool to block those rare transactions that truly
threaten national security, not to change our overall open approach
toward foreign investment. Under Treasury's leadership, the presumption
is--and should remain--that foreign investment is welcome unless it
threatens national security. If CFIUS were chaired by an agency with a
security mission, the presumption would be reversed.
---------------------------------------------------------------------------
\8\ Foreign Acquisitions of Domestic Companies: Hearing on H.R. 3
Before the Senate Committee on Commerce, Science, and Transp., 100th
Cong. 14 (1987).
---------------------------------------------------------------------------
Moreover, 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:
This past summer, French politicians balked at 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.'' \9\ Since then, the French Government
has announced that it will establish a list of ``strategic
industries'' that will be shielded from foreign investment. It is
hard to see how yogurt is a strategic industry.
---------------------------------------------------------------------------
\9\ LCI News, July 20, 2005, available at http://np.www.lci.fr/
news/economie/0,,3232812-VU5WX0lEIDUy,00.html.
---------------------------------------------------------------------------
In his State of the Union speech last April, President Putin
called for a new law to protect ``strategic industries'' in Russia.
A draft of that law is expected to be put forward next month.
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.
Other countries are closely watching what we do in the United
States on Exon-Florio. The United States has worked for decades to
reduce barriers to investment abroad. If we act now to restrict
investment into the United States, we will be providing a green light
for other countries to erect their own barriers to inward investment.
Conclusion
I would like to conclude my remarks by recalling the dire
predictions expressed in the 1980's surrounding Japanese investment in
the United States. These predictions of doom occurred at a time when
Japan had huge trade surpluses with the United States, followed an
export-led growth strategy, and needed a place to invest their
significant foreign currency reserves--much like China today. Congress
reacted to the concerns about growing Japanese investment by adopting
the Exon-Florio Amendment.
Looking back, the fears about Japan now appear misguided. Over the
last 20 years, the United States economy has been the engine of growth
for the world and has been strengthened by large Japanese investments
in the auto, information technology, and manufacturing sectors.
For decades, Republican and Democratic Administrations have pursued
a policy of open investment, which has spurred the dynamism that drives
our economy. For those few investments that implicate U.S. security
interests, the Exon-Florio Amendment has given the President and CFIUS
ample authority to block investments or mitigate the national security
impact of such investment. Exon-Florio is a flexible statute in part
because it does not define ``national security.'' And the President
should not hesitate to act to block a transaction if it truly threatens
U.S. national security and the threat cannot be mitigated.
Improvements in implementation can be made, including more
frequent, high-level briefings of Congress by CFIUS agencies (without
compromising proprietary business information supplied by the parties
to a transaction). Yet, for the reasons outlined above, I encourage the
Committee to keep the existing statutory framework in place.
Thank you for the opportunity to appear before you today.
RESPONSE TO A WRITTEN QUESTION OF SENATOR SCHUMER
FROM ROBERT M. KIMMITT
Q.1. In his statement at the beginning of the hearing, Senator
Schumer raised three issues for written comment by the
witnesses: (1) the narrow definition of national security
employed by the Committee on Foreign Investment in the United
States (CFIUS); (2) adding economic security to Exon-Florio;
and (3) expanding the criteria for blocking a foreign
acquisition to include reciprocity.
A.1. Definition of National Security
``National security'' is not defined in the statute or in
the implementing regulations. CFIUS deliberately does not
define national security because a definition would improperly
curtail the President's broad authority to protect national
security and, at the same time, not necessarily result in
guidance sufficiently detailed to be helpful to the parties to
a foreign acquisition. The statute lays out a broad set of
factors that may be considered, but this is not an exhaustive
list. Each transaction has unique characteristics and agencies
are not constrained in examining all facets of a transaction
that could impact national security. This is consistent with
the fact that ultimately the judgment as to whether a
transaction threatens national security rests within the
President's discretion. Treasury's view of national security
has evolved over the years, just as the views of all other
members of CFIUS have evolved. This is to be expected, as the
concept of national security is continuously evolving.
Adding Economic Security to Exon-Florio
Adding ``economic security'' to the Exon-Florio Amendment
would not be advisable. Curtailing foreign investment on this
ground would significantly alter how the United States treats
foreign investment. U.S. investment policy welcomes foreign
direct investment and promotes national treatment--that is,
treating foreign companies and U.S. companies alike, except for
limited circumstances such as national security.
The concept of national security, even as broadly applied
as it is under the Exon-Florio Amendment, affects a relatively
narrow segment of the U.S. economy. However, if Exon-Florio
were expanded to include economic security matters that do not
affect national security, foreign investment in nearly every
sector of the U.S. economy would be subject to CFIUS review.
Such a system would undermine the legal certainty that
investors expect when they invest in the United States.
Investors would either overwhelm the Government with
notifications or would avoid investing in the United States.
This would constitute an extraordinary reversal in the
treatment of foreign investment in the United States. It would
also undermine the U.S. leadership role in international fora,
where we advocate more liberal investment regimes and the
reduction of barriers to the free flow of capital. Finally, it
could be perceived as inconsistent with the United States'
obligations under various international trade and investment
agreements, which generally prohibit discriminatory treatment
of foreign investors except on national security grounds.
Reciprocity
Although I do not believe that reciprocity alone should be
a reason for blocking a foreign acquisition, I do believe that
a country's decision to close a sector to U.S. investment is a
factor that CFIUS could consider when evaluating a particular
transaction. For example, if another country treats a sector as
sensitive because of national security concerns, then CFIUS
could factor that treatment into its analysis of foreign
investment in the same U.S. sector by investors of that
country. The ultimate decision as to our national security
interests in a particular instance, however, must be made by
the United States, consistent with our nondiscrimination
commitments, particularly with respect to our Bilateral
Investment Treaties, Free Trade Agreements, and certain
Treaties of Friendship, Commerce, and Navigation.
It is important that we continue to advocate an open
investment policy through our bilateral and multilateral
discussions with foreign governments. The greatest lever our
negotiators have is to stress how open the American market is
to investment in virtually every sector, provided that the
national security is not adversely affected by such investment.
RESPONSE TO A WRITTEN QUESTION OF SENATOR ALLARD
FROM ROBERT M. KIMMITT
Q.1. Of the 12 withdrawals of notices of foreign acquisitions
provided to CFIUS since 2001, how many were refiled and could
you provide some additional information on those that were not
refiled?
A.1. Of the 12 withdrawals granted by the Committee on Foreign
Investment in the United States (CFIUS) since 2001, 10 were
refiled and 2 were not. In both of these cases, the issues
raised by two CFIUS member agencies were addressed to the
satisfaction of CFIUS. No agency has requested that CFIUS
reopen a review of either transaction.
In one of the cases not refiled, the issues raised in the
initial review involved the foreign company's export compliance
program and a sales office located in a country of concern to
the U.S. Government. Neither of these issues could be resolved
in the initial 30-day review.
Despite the fact that the U.S. Government had some
concerns, the foreign company was in fact in compliance with
the laws and regulations of its host country. In the first
withdrawal period, the foreign company and its host country
made certain commitments to improve their diligence on export
control and the company closed the sales office in the country
of concern to the U.S. Government. The transaction was refiled,
but one agency wanted a track record of compliance with the
agreed commitments before relinquishing its right to object in
the CFIUS process. The transaction was therefore withdrawn a
second time. After some time for further review, the agency
indicated to CFIUS that it had no national security concerns
and saw no need for a refiling.
In the second case that was withdrawn and not refiled, one
agency wanted additional time to address its issues with the
foreign company concerning the transaction. The company
requested a withdrawal, and CFIUS granted it. The agency
continued to work with the company and toured its facilities.
The agency ultimately indicated that there were no further
national security concerns and no need for a refiling.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE
FROM ROBERT M. KIMMITT
Q.1. Can you tell me whether there have been patterns of
foreign acquisition by industry or specialty? Are any countries
concentrating their purchases, and thus targeting our
aerospace, software, materials, energy, electronics, and other
sectors? Is there any sort of cumulative, broad-picture
analysis that would show if a certain country or alliance of
countries was intentionally or unintentionally undermining any
possible aspect of national security?
A.1. The Committee on Foreign Investment in the United States
(CFIUS) has performed a preliminary examination of a limited
set of data on foreign acquisitions. CFIUS examined the notices
of foreign acquisitions of U.S. companies filed between the
years 2001-2004. CFIUS conducted a national security review of
193 foreign mergers and acquisitions of U.S. companies during
this period.
Although we are pleased to provide the results of this
preliminary examination, we caution that this limited set of
data from 4 years of CFIUS reviews is too small a sample of
data to establish any statistically definitive patterns or
conclusions regarding foreign acquisitions by industry or
specialty. A more extensive analysis is tentatively planned for
2006.
Notices to CFIUS of foreign merger and acquisition (M&A)
activity remained fairly constant during the 4 years at between
42 and 55 transactions per year. Of these transactions, 149, or
77 percent, involved either Western European or Canadian-based
companies. United Kingdom companies alone accounted for more
than 39 percent of reviewed merger and acquisition activity in
this period.
Transactions involving the acquisition of critical
technologies were fairly evenly distributed among the various
categories within this study. The categories for computer-
related, professional/scientific instruments, and
communications experienced the most activity. In the computer-
related category, 4 of the 7 reviews by CFIUS involved proposed
acquisitions by companies from Israel.
These data are consistent with the results ofthe 1994
Quadrennial Report on U.S. Critical Technology Companies, which
showed that companies from our major trading partners were also
predominant investors in the U.S. market, with companies from
the United Kingdom leading the way. This pattern holds in the
current analysis, with one notable exception. As a share of
total foreign M&A activity examined by CFIUS, Japanese activity
has declined dramatically from 20 percent to 4 percent.
The following chart shows the percentage of the total M&As
in the 2001-2004 period for each sensitive technology.
Q.2. I also want to know how many United States companies were
purchased by Japan, United Kingdom, Germany, China, and every
other foreign nation in your database. Can you give me a
breakdown by nationality of the top 15 acquiring nations in
regards to the industry areas they are investing in?
A.2. CFIUS does not collect comprehensive data on foreign
direct investment in the United States. It does, however, have
aggregate data based on notices under Exon-Florio. The two
tables that follow illustrate this data.
The following table shows the number of notices of foreign
acquisitions filed with CFIUS in the 2001--2004 period by the
host country of the foreign acquirer.
The following table shows the number of notices of foreign
acquisitions filed with CFIUS in the 2001--2004 period by the
host country of the foreign acquirer by industry area:
New Foreign Investment in the United States: In 2004
In addition to this data derived from notices to CFIUS
under Exon-Florio, the Bureau of Economic Analysis (BEA) in the
Department of Commerce publishes aggregate data on foreign
direct investment.
The attached table is from BEA's Survey of Current
Business, June 2005. It shows that total outlays by foreign
direct investors to acquire or to establish U.S. businesses
were $79.8 billion in 2004. This was up 26 percent from 2003.
In 2004, outlays in finance and insurance accounted for almost
half of the total outlays. Outlays by Canadian investors
accounted for more than 40 percent of the total outlays. The
largest European outlays were from the United Kingdom, followed
by Germany and France. Outlays from Japan declined for the
fourth year in a row.
The following are key terms for the table:
Foreign direct investment in the United States is ownership
or control, directly or indirectly, by one foreign person of 10
percent or more of the voting securities of an incorporated
U.S. business enterprise or an equivalent interest in an
unincorporated U.S. business enterprise.
A U.S. affiliate is a U.S. business in which there is
foreign direct investment.
The ultimate beneficial owner is a person, proceeding up a
U.S. affiliate's ownership chain, beginning with and including
the foreign parent, that is not owned more than 50 percent by
another person.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM ROBERT M. KIMMITT
Q.1. How do you explain the failure of CFIUS to produce, after
1993, the quadrennial report required by Exon-Florio?
A.1. Exon-Florio requires the President, and such agencies as
the President shall designate, to complete and furnish to the
Congress a quadrennial report which:
(A) evaluates whether there is credible evidence of a
coordinated strategy by one or more countries or
companies to acquire U.S. companies involved in
research, development, or production of critical
technologies for which the United States is a leading
producer; and
(B) evaluates whether there are industrial espionage
activities directed or directly assisted by foreign
governments against private U.S. companies aimed at
obtaining commercial secrets related to critical
technologies.
In 1993, the President asked Treasury to coordinate the
preparation of the first report, which was submitted in 1994.
However, a quadrennial report with regard to paragraph (A)
above (regarding acquisitions) has not been produced since
1994, and I can assure you that the Administration plans to
provide a comprehensive report on that subject in 2006.
Although the information required under paragraph (A) has
not been provided to Congress since 1994, the information
required under paragraph (B) has been provided through reports
prepared by the Office of the National Counterintelligence
Executive (NCIX). The Intelligence Authorization Act for fiscal
year 1995 requires the President to submit annually to Congress
updated information on the threat to U.S. industry from foreign
economic collection and industrial espionage. This report,
coordinated by the NCIX, draws on input from all the
intelligence agencies. The Foreign Economic Collection and
Industrial Espionage reports from 1995-2004 can be found at:
http://www.nacic.gov/publications/reports_speeches/reports/
fecie_all/Index_fecie.html.
The NCIX report covers the question of foreign government-
sponsored industrial espionage activities to obtain U.S.
critical technology secrets, and therefore effectively
satisfies one requirement of the quadrennial report pertaining
to economic espionage. The NCIX report is actually more
comprehensive in scope than what the quadrennial report
requires in that it seeks to characterize and assess efforts by
foreign entities--government and private--to unlawfully target
or acquire critical U.S. technologies, trade secrets, and
sensitive financial or proprietary economic information.
Although the NCIX report provides information relating to
the espionage portion of the mandate, we are working toward
producing a report related to foreign acquisitions in 2006.
While we work to complete this report, I think that regular
Congressional briefings will provide you with more information
on CFlUS' s operations and enable you to monitor CFIUS more
effectively.
Q.2. GAO states that ``the office within Treasury that provides
staff support to the Committee--the Office for International
Investment--is also the office responsible for promoting the
open investment policy'' supported by the Department. Would it
be advisable for Treasury to place a greater organizational
separation between these two responsibilities, given the fact
that the work of CFIUS necessarily involves balancing national
security and open investment policy considerations?
A.2. I do not think there is a conflict of interest in housing
the CFIUS staff within the Office of International Investment
(OII). Rather, I believe that the current organizational
structure complements the CFIUS process and enables the staff
to perform a thorough review.
No responsibility is more important than protecting the
national security. It is also a prerequisite for supporting an
open investment policy and advancing economic prosperity. These
missions--protecting national security and advancing economic
prosperity--are inherently linked.
The current organizational structure benefits the national
security analysis because OII has the expertise to help inform
the CFIUS process as to the investment regimes of U.S. trade
and investment partners, including information pertaining to
their national security protections. This can be an important
consideration when a foreign investor acquires a U.S. company
with sensitive technology, for example to help assess the
likelihood that the technology will not be diverted. OII also
draws on the resources of other offices, such as the Office of
Terrorism and Financial Intelligence (TFI) and the Office of
the General Counsel.
The OII staff, which is involved in international
investment issues, is in a position to draw on the in-house
CFIUS expertise. This assures that U.S. negotiators working on
international trade and investment agreements are able to
provide an informed perspective on the implementation of Exon-
Florio to our trading and investment partners.
Q.3. Treasury is devoting increased resources to building a
modern Office of Terrorism and Financial Intelligence (TFI),
headed by Under Secretary Levey. To what extent is TFI
involved, or should it be involved, in the work of CFIUS,
especially given TFI's increasing involvement in national
security issues on behalf of Treasury?
A.3. The Office of Terrorism and Financial Intelligence (TFI)
is closely involved in many national security issues that are
relevant in the CFIUS review of foreign acquisitions of U.S.
companies. TFI's mission is to marshal the department's
intelligence and enforcement functions with the twin aims of
safeguarding the financial system against illicit use, and
combating rogue nations, terrorist facilitators, money
launderers, drug kingpins, and other national security threats.
CFIUS relied heavily on TFI expertise earlier this year
when a transaction under review raised the potential for some
of the above issues to be a factor. We expect that TFI will
continue to participate in future reviews of CFIUS cases that
implicate TFI's specific expertise as well as broader
competence in national security matters.
Q.4. The organizational components of the Treasury Department
have changed considerably since the passage of the Exon-Florio
Amendment, due in part to the transfer of substantial
components of Treasury to the Department of Homeland Security.
What expertise does the Department now bring to the
consideration of ``the effects on national security'' of
acquisitions of U.S. companies by nonU.S. companies?
A.4. While it is true that Treasury has undergone change in
recent years, including the transfer of some of its law
enforcement components, Treasury maintains a strong involvement
in national security issues. Treasury sits on the National
Security Council and the Homeland Security Council, and is a
member of the U.S. Intelligence Community.
Indeed, the establishment and development of Treasury's
Office of Terrorism and Financial Intelligence (TFI), with its
intelligence and national security policy portfolios, has in
many respects enhanced Treasury's involvement in the national
security arena. TFI brings intelligence, enforcement, policy
development, and regulatory capabilities to bear on a full
range of national security issues. Recent priority areas
include terrorism, proliferation of weapons of mass
destruction, rogue regimes such as Iran, Syria, and North
Korea, narcotraffickers, and money launderers, among other
national security threats. We draw on expertise in TFI in the
CFIUS process, as appropriate.
Moreover, the concept of national security includes both
traditional foreign policy and defense criteria as well as
economic considerations. Indeed, there is an inherent link
between our national security and a strong U.S. economy that
facilitates free and fair trade, market-based exchange rates,
and the free flow of capital across borders. We are mindful of
the positive benefits of foreign investment to our country and
therefore seek to maintain the traditional U.S. open investment
policy.
In all of these ways, Treasury is a key participant in
developing and implementing national security policy and brings
that perspective to the CFIUS process.
Q.5. Would CFIUS function more effectively if it were a smaller
body?
A.5. The current membership provides a diverse perspective,
assuring a more thorough analysis of the issues than a less
diverse body would provide. Member agencies bring particular
expertise essential to the assessment of the potential national
security implications of specific foreign investments in the
United States. This
expertise includes knowledge of the level of technological
sophistication of the transaction participants, the market
position of alternate suppliers, the financial and product
service track record, and the future outlook for transaction
participants. This expertise gives CFIUS the broad perspective
needed for a comprehensive assessment of the national defense,
competitive performance, trade and investment policy and
commercial issues involved in each transaction. Any narrowing
of the Committee's expertise could cause the reviews to be less
effective. It would therefore be important to consider this
possibility in any effort to streamline the Committee's
membership.
Q.6. What explains the fact that CFIUS is now composed of six
executive departments and six different components of the
Executive Office of the President, especially in light of the
fact that CFIUS' executive department members must staff out
filings to numerous components within each of those
departments?
A.6. The Committee on Foreign Investment in the United States
(CFIUS) was established by Executive Order 11858 in 1975 mainly
to monitor and evaluate the impact of foreign investment in the
United States. There were originally 6 members: (1) the
Secretary of Treasury, the chair; (2) the Secretary of State;
(3) the Secretary of Defense; (4) the Secretary of Commerce;
(5) the United States Trade Representative; and (6) the
Chairman of the Council of Economic Advisers. In 1988, the
President, pursuant to Executive Order 12661, delegated to
CFIUS some of his responsibilities under Section 721.
Specifically, E.O. 12661 designated CFIUS to receive notices of
foreign acquisitions of U.S. companies, to determine whether a
particular acquisition has national security issues sufficient
to warrant an investigation and to undertake an investigation,
if necessary, under the Exon-Florio provision, and to submit a
report and recommendation to the President at the conclusion of
an investigation. In recognition of CFIUS' expanded
responsibilities, this order also expanded CFIUS' membership to
include the Attorney General and the Director of the Office of
Management and Budget.
In 1993, in response to a sense of Congress resolution,
CFIUS membership was expanded by Executive Order 12860 to
include the Director of the Office of Science and Technology
Policy, the Assistant to the President for National Security
Affairs and the Assistant to the President for Economic Policy.
In February 2003, the Department of Homeland Security was added
to CFIUS.
Each member agency brings a particular expertise essential
to the assessment of the potential national security
implications of specific foreign investments in the United
States. This expertise includes knowledge of the level of
technological sophistication of the transaction participants,
the market position of alternate suppliers, the financial and
product service track record, and the future outlook for
transaction participants. This expertise gives CFIUS the broad
perspective needed for a comprehensive assessment of the
national defense, competitive performance, trade and investment
policy and commercial issues involved in each transaction. It
also enables CFIUS to ensure that the national security is
safeguarded in a manner consistent with longstanding U.S.
policy regarding foreign investment in the United States. In
addition, since certain member agencies administer U.S. export
control programs for both dual use and military/defense items,
CFIUS is able to evaluate the compliance record of the foreign
acquirer and can offer guidance to ensure that any relevant
export control issues are taken into account when the foreign
acquisition is completed.
Q.7. How many fillings has CFIUS received in which the acquirer
was either a foreign government or an entity controlled by or
acting on behalf of a foreign government? How many
investigations has it conducted with respect to such filings?
A.7. Since 2001, there have been 42 notices of foreign
acquisitions of U.S. companies where the acquirer was either a
foreign government or an entity controlled or acting on behalf
of a foreign government. Of this total, CFIUS has undertaken a
formal investigation of 3.
CFIUS regularly gives extra scrutiny to transactions
involving foreign governments. However, the statistics
regarding the number of investigations do not tell the whole
story. In the telecommunications sector, many foreign companies
are foreign government-owned or controlled and have entered
into Network Security Agreements (NSAs) when acquiring U.S.
companies, thereby obviating the need for an investigation
under Exon-Florio. (The NSAs are available on the FCC website.)
In addition, we have had some transactions involving foreign
governments that were abandoned because the foreign acquirer
became aware that there were significant national security
concerns and the transaction would give rise to serious
objections by CFIUS.
Q.8. Please describe the factors the Department of the Treasury
takes into account in reviewing an acquisition in the first
stage of the CFIUS process? What factors does the Department
take into account in deciding whether to recommend that a
matter be taken to formal investigation? Please be as specific
as possible.
A.8. At the outset, it is important to stress that each
transaction is unique and CFIUS takes a case-by-case approach.
The Department of the Treasury, while the chair of CFIUS, is
not in a position to dictate the results of the CFIUS process,
since decisions are made by consensus and reflect the views of
its members. However, in general, CFIUS agencies are guided by
the criteria in the Exon-Florio Amendment and, therefore,
initially consider whether the foreign acquirer acting through
the U.S. target company might take action to threaten the
national security and, if a threat is identified, whether
existing laws are adequate and appropriate to deal with it.
The same criteria guide Treasury's own internal review
process. Most importantly, Treasury relies on the views of the
other CFIUS members who may have expertise regarding a
particular sector. In establishing whether the foreign acquirer
may be a threat to national security, Treasury examines the
intelligence reporting and any reports of the foreign acquirer
violating U.S. laws and regulations, such as not complying with
the export control laws. In addition, it is important to
examine the host government of the foreign company for a number
of issues, including whether it maintains an acceptable export
control regime that protects against unlawful U.S. technology
diversion. Treasury also refers to the factors listed in the
statute that the President may consider in a review. Since
these involve the defense industrial base, nonproliferation,
and other issues within the primary responsibility of other
member agencies, these agencies provide CFIUS an analysis of
these issues.
Finally, any agency that requests an investigation is
expected to provide CFIUS a paper stating its national security
concerns and the rationale for an investigation. Treasury and
other CFIUS members review this information to arrive at a
position on whether to support an investigation. In the end,
however, a single agency's request can result in an
investigation.
Q.9. Why are there so few formal Exon-Florio investigations?
A.9. Relatively few acquisitions by foreign entities have the
potential to affect national security. The most active foreign
investors are from close ally countries such as Canada and from
Western Europe, which together account for more than 70 percent
of the foreign direct investment position in the United States.
The vast majority of notified transactions do not require an
investigation either because these transactions do not
potentially threaten national security, or CFIUS is able to
mitigate the national security issues that arise in connection
with these transactions. Exon-Florio requires that CFIUS look
first to the ability of existing laws and regulations to
address national security concerns. To the extent that existing
laws and regulations can accomplish this objective, there is no
need to rely on Exon-Florio.
The existence of Exon-Florio raises the awareness of
foreign investors contemplating acquisitions of U.S. companies
to the importance of national security considerations, and it
helps to ensure that foreign investments are structured in ways
to avoid national security problems. In addition, companies
understand that sometimes their transaction may not be approved
without some type of mitigation. The use of mitigation
agreements enables CFIUS to address concerns without going into
an investigation. In some cases where CFIUS agencies have
identified mitigation measures during the 30-day review period
that would adequately address national security concerns,
companies have withdrawn their CFIUS notices in order to
negotiate mitigation agreements. Once mitigation agreements are
executed, the companies refile with CFIUS, and CFIUS then
concludes the review.
Q.10. When would it be appropriate for CFIUS to recommend
barring or limiting a transaction because the transaction
affected ``domestic production needed for projected national
defense requirements,'' ``the capability and capacity of
domestic industries to meet national defense requirements,'' or
``the capability and capacity of the United States to meet the
requirements of national security.'' Please be as specific as
possible.
A.10. If these factors were relevant in a particular review
under Exon-Florio, CFIUS would weigh them in any decision about
whether to undertake an investigation, and they would be
thoroughly examined along with any other relevant national
security issues before CFIUS fonnulated its recommendation to
the President. Factors in the statute are not an exhaustive
list, but serve as guidance to CFIUS on areas of national
security concern that Congress highlighted in drafting the
legislation. These factors have, in fact, figured into CFlUS
recommendations in past cases, including cases where CFIUS
agencies entered into an agreement to mitigate a perceived
threat. However, it is important to understand that these
factors by themselves do not drive a decision. For the
President to take action under Exon-Florio, he must determine
that there is credible evidence that the foreign person
exercising control might take action that threatens to impair
the national security. While this is a relatively low standard,
it is clearly more than conjecture. The President must have
some reason to believe, based, for example, on the foreign
person's past actions or likely motives, that it will take
action through the acquisition that threatens to impair U.S.
national security. The injury to the national security can
relate to the factors in the statute (for example, by reducing
or eliminating domestic production of a good needed for
national defense) or to other factors the President considers
important (for example, harming critical infrastructure,
terrorism financing, etc.) Likewise, the President must also
find that provisions of law other than Exon-Florio and IEEPA do
not provide adequate and appropriate authority to protect the
national security.
Q.11. At present, filings with CFIUS are voluntary. Would Exon-
Florio work more effectively if fillings were mandatory?
A.11. CFlUS has implemented the Exon-Florio Amendment in a
manner that has achieved the national security objectives as
prescribed in the statute without compromising our open
investment policy. CFlUS's implementation of Exon-Florio has
increased the awareness of investors to national security
issues, brought transactions into conformity with existing laws
where needed, and resulted in investors abandoning transactions
that raised insurmountable national security problems. There is
no evidence to suggest that transactions that are not notified
to CFIUS under the current voluntary system present national
security issues.
Although Exon-Florio notices are voluntary, failure to
notify leaves the transaction subject to Presidential action
indefinitely. In addition, any CFIUS member may notify a
transaction to the staff chair. This ensures that CFlUS may
review any transaction that it believes should be reviewed.
Mandatory notification would hinder U.S. efforts to promote
more liberal investment regimes worldwide. The United States
has consistently opposed mandatory screening mechanisms for
foreign investment, and has sought the removal of such
mechanisms when we have negotiated international trade and
investment agreements.
Moreover, introduction of a mandatory screening process
could conflict with nondiscrimination commitments, particularly
with respect to our Bilateral Investment Treaties and certain
Treaties of Friendship, Commerce, and Navigation and Free Trade
Agreements, potentially exposing the U.S. Government to claims
brought by foreign investors or their governments.
Q.12. What specific steps is Treasury prepared to take in order
to increase the scope of the information that this Committee
receives about the Administration of the Exon-FIorio Amendment
and the work of CFlUS?
A.12. I support enhancing the transparency of the CFIUS process
through more effective communication with Congress, while
recognizing our shared responsibility to avoid the disclosure
of proprietary information that could undermine a transaction
or be used for competitive purposes. I am open to suggestions
on ways to improve the transparency of the process.
In this regard, CFIUS Policy officials recommend that I
meet with you and Senator Shelby, and with Representatives
Oxley and Frank, to inform you and them of the recent
improvements to the CFIUS process. In order to keep Congress
informed adequately and regularly about the CFIUS process, I
would like to offer that Treasury, on behalf of CFIUS, orally
brief the Senate Banking and House Financial Services
Committees generally every quarter on completed reviews. On a
case-by-case basis, CFIUS may suggest that its oversight
committees invite other potentially interested members and
committees with jurisdiction over areas affected by decisions
under Exon- Florio to attend these briefings.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE
FROM DAVID A. SAMPSON
Q.1. Can you tell me whether there have been patterns of
foreign acquisition by industry or specialty? Are any countries
concentrating their purchases, and thus targeting our
aerospace, software, materials, energy, electronics, and other
sectors? Is there any cumulative, broad-picture analysis that
would show if a certain country or alliance of countries was
intentionally or unintentionally
undermining any possible aspect of national security?
A.1. Commerce defers to Treasury on this question. Treasury has
advised that they will provide you with a response to this
question in the near future.
Q.2. How many U.S. companies were purchased by Japan, United
Kingdom, Germany, China, and every other foreign nation in your
database? Can you give me a breakdown by nationality of the top
15 acquiring nations in regards to the industry areas they are
investing in?
A.2. As chair of the Committee on Foreign Investments in the
United States (CFIUS), the Department of the Treasury maintains
records for all CFIUS cases since the statute's enactment in
1988. Therefore, we defer to the Treasury Department on this
question. Treasury has advised that they will provide you with
a response to this question in the near future.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM DAVID A. SAMPSON
Q.1. Please describe the factors the Department of Commerce
takes into account in reviewing an acquisition in the first
stage of the CFIUS process?
A.1. Commerce considers a large number of factors in
determining the national security implications of a proposed
foreign acquisition of a U.S. company or other assets. Major
aspects include the likely effects of a transaction on domestic
production needed for projected national defense requirements,
the compliance record of all involved parties with U.S. and
multilateral export control laws (including the parties' plans
for managing their compliance with export control laws), the
sensitivity of any technology being acquired, the potential
impact on the Nation's telecommunications, energy, and other
critical infrastructure, and other factors that impact the
national security. Commerce agencies work closely with the
Departments of Defense, Justice, State, and Homeland Security,
as well as with the intelligence community, in assessing
whether the national security could be compromised by the
proposed transaction.
Q.2. What factors does the Department take into account in
deciding whether to recommend that a matter be taken to formal
investigation? Please be as specific as possible.
A.2. The Department will recommend that an Exon-Florio filing
proceed to the formal investigation stage only when all
identified national security concerns have not been resolved
during the review stage. Major factors that could lead to such
a recommendation by Commerce include:
Additional information is needed from the companies
engaged in the transaction in order for CFIUS to fully
analyze potential national security risks associated with a
transaction;
There is a need to work out mitigation measures to
address national security concerns;
Highly adverse intelligence identifies serious
national security risks; and
Control of commercial activity by the acquiring party
could adversely affect U.S. capability to meet national
security requirements.
Q.3. Why are there so few formal Exon-Florio investigations?
A.3. There are relatively few instances where foreign
acquisitions of U.S. firms have the potential to affect
national security and those effects cannot be mitigated through
security agreements during the 30-day CFIUS review period.
Additionally, in most CFIUS filings, the foreign purchaser is
headquartered in a country that is a close ally of the United
States.
Q.4. When would it be appropriate for the Department of
Commerce to recommend, in the CFIUS process, barring or
limiting a transaction because: The transaction affected
``domestic production needed for projected national defense
requirements,'' ``the capability and capacity of domestic
industries to meet national defense requirements,'' or ``the
capability and capacity of the United States to meet the
requirements of national security.'' Please be as specific as
possible.
A.4. Commerce might recommend intervening in a transaction when
CFIUS has credible evidence that the foreign person might take
action that adversely affects U.S. Government agencies, defense
contractors, or domestic businesses in ways that threaten to
impair the national security and no other laws are adequate or
appropriate to address that threat. Such action may be
warranted when, among other things:
Access to critical materials, technologies, vendors,
markets, or manufacturing capability might be denied, or
lost.
There are serious national security risks associated
with the transfer of vital or highly sensitive
manufacturing know-how or technology.
Q.5.a. How does the Department of Commerce monitor mitigation
agreements entered into as a condition for approval of
acquisitions?
A.5.a. To date, Commerce has played no formal role in
monitoring mitigation agreements; nor has the Department had
any responsibility in enforcing these agreements. Commerce has
consulted with other CFIUS members on the design and
implementation of mitigation measures employed in some
transactions.
Q.5.b. What part or parts of the Department of Commerce are
involved in such monitoring? Please be as specific as possible.
A.5.b. Commerce has played no formal role in monitoring
mitigation agreements, but other CFIUS agencies on occasion
share information with Commerce relating to compliance with
mitigation agreements.
Q.6. At present, filings with CFIUS are voluntary. Would Exon-
Florio work more effectively if filings were mandatory?
A.6. CFIUS has implemented the Exon-Florio Amendment in a
manner that has achieved the national security objectives as
prescribed in the statute without compromising our open
investment policy.
On balance, CFIUS implementation of Exon-Florio has
increased the awareness of investors to national security
issues, brought transactions into conformity with existing laws
where needed, and resulted in investors abandoning transactions
that raised insurmountable problems.
Although Exon-Florio notices are voluntary, failure to
notify leaves the transaction subject to Presidential action
indefinitely.
Mandatory notice would create a significant added burden
for foreign investors.
In giving the President broad discretion under the Exon-
Florio Amendment, Congress recognized the flexibility that is
needed to protect the national security effectively. This
flexible system would not work with a mandatory system of
filing, which would require clear definitions of such threshold
concepts as national security and foreign control. This would
also make it easier for parties to structure transactions to
avoid the statute's reach.
The consequences of adopting the amendment could be quite
damaging to U.S. interests because it could chill the climate
for legitimate foreign investment in the United States.
Mandatory notification would be seen as screening foreign
investment, would have an adverse impact on U.S. investment
policy, and hinder U.S. efforts to promote more liberal
investment regimes worldwide.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE
FROM STEWART BAKER
Q.1. Can you tell me whether there have been patterns of
foreign acquisition by industry or specialty? Are any countries
concentrating their purchases, and thus targeting our
aerospace, software, materials, energy, electronics, and other
sectors? Is there any cumulative, broad-picture analysis that
would show if a certain country or alliance of countries was
intentionally or unintentionally
undermining any possible aspect of national security?
A.1. The Department of the Treasury previously submitted a
response to this request. DHS defers to Treasury on this
question.
Q.2. I also want to know how many United States companies were
purchased by Japan, United Kingdom, Germany, China, and every
other foreign nation in your database. Can you give me a
breakdown by nationality of the top 15 acquiring nations in
regards to the industry area they are investing in?
A.2. The Department of the Treasury previously submitted a
response to this request. DHS defers to Treasury on this
question.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM STEWART BAKER
Q.1. In your view, what specific steps should be taken to
improve the CFIUS process, the Exon-Florio Amendment, or both,
from the perspective of the responsibilities of the Department
of Homeland Security?
A.1. The Administration is carefully considering whether
changes to the CFIUS process are warranted and, if so, what
changes should be made. While the Administration has not made
any decisions at this time, we believe that any changes to
CFIUS should be guided by the following principles:
Further integration of national and homeland security
interests for a post-September 11 environment;
Continuation of a welcoming stance toward investments
in the United States because it creates good jobs for
American workers;
Preservation of that which works about CFIUS with
improvements and updates where needed, while maintaining
the integrity of the decisionmaking process.
Q.2. Please describe the factors the Department of Homeland
Security takes into account in reviewing an acquisition in the
first stage of the CFIUS process? What factors does the
Department taken into account in deciding whether to recommend
that a matter be taken to formal investigation? Please be as
specific as possible.
A.2. The Department of Homeland Security (DHS) considers
whether the acquisition may affect national security broadly
construed, focusing in particular on the acquisition's
potential impact on critical infrastructure and other homeland
security factors, as well as traditional measures of national
security. In the CFIUS process DHS examines questions such as:
(1) whether DHS already has sufficient legal or regulatory
authority to address any threat to homeland security that might
be raised by the transaction; (2) whether DHS has homeland
security concerns about the parties to the transaction; and (3)
whether the homeland security concerns can be resolved with
binding assurances from the parties to the transaction.
Q.3. Why are there so few formal Exon-Florio investigations?
A.3. The vast majority of notified transactions do not require
an investigation either because these transactions do not
potentially threaten national security, or CFIUS is able to
mitigate the national security issues that arise in connection
with these transactions.
Many companies understand that sometimes their transaction
may not be approved without some type of mitigation. The use of
mitigation agreements enables CFIUS to address concerns without
going into an investigation. In some cases where CFIUS agencies
have identified mitigation measures during the 30-day review
period that would adequately address national security
concerns, companies have withdrawn their CFIUS notices in order
to negotiate mitigation agreements. Once mitigation agreements
are executed, the companies refile with CFIUS, and CFIUS then
concludes the review.
Q.4. When would it be appropriate for the Department of
Homeland Security to recommend, in the CFIUS process, barring
or limiting a transaction because the transaction affected
``domestic production needed for projected national defense
requirements,'' ``the capability and capacity of domestic
industries to meet national defense requirements,'' or ``the
capability and capacity of the United States to meet the
requirements of national security.'' Please be as specific as
possible.
A.4. Questions regarding defense requirements should be
answered by the Department of Defense. In general, DHS would
closely scrutinize a proposed purchase that could threaten the
availability of a good or service that is essential to national
security.
Q.5. How does the Department of Homeland Security monitor
mitigation agreements entered into as a condition for approval
of acquisitions? What part or parts of the Department of
Homeland Security are involved in such monitoring? Please be as
specific as
possible.
A.5. DHS policy with the assistance of the Office of General
Counsel and other assets, as necessary, tracks compliance with
mitigation agreements to which DHS is a party. This monitoring
includes determining whether the parties have provided
information they are required to produce under the agreements,
and, as necessary, making on-site compliance visits, obtaining
certifications and/or audits, and following up with the
companies and other agencies if an issue arises.
Q.6. At present, filings with CFIUS are voluntary. Would Exon-
Florio work more effectively if filing were mandatory?
A.6. DHS does not believe that mandatory filings would improve
the CFIUS process. CFIUS already possesses authority to
initiate a review if a filing is not volunteered, but most
often a filing is made when CFIUS requests one informally.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE
FROM E. ANTHONY WAYNE
Q.1. Can you tell me whether there have been patterns of
foreign acquisition by industry or specialty? Are any countries
concentrating their purchases, and thus targeting our
aerospace, software, material, energy, electronics, and other
sectors? Is there any cumulative, broad-picture analysis that
would show if a certain country or alliance of countries was
intentionally or unintentionally undermining any possible
aspect of national security?
A.1. The Department of State does not maintain statistical data
on cases that have come before the Committee on Foreign
Investment in the United States (CFIUS). We note that an
extensive analysis of the merger and acquisition activity by
foreign investors in the United States is planned for 2006; we
refer you to the Department of the Treasury for more
information on that analysis.
Q.2. I also want to know how many United States companies were
purchased by Japan, United Kingdom, Germany, China, and every
other foreign nation in your database. Can you give me a
breakdown by nationality of the top 15 acquiring nations in
regards to the industry areas they are investing in?
A.2. As Chair of CFIUS, the Department of the Treasury
maintains the database on acquisitions that have come before
CFIUS, and we would refer you to Treasury for the answer to
your question.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM E. ANTHONY WAYNE
Q.1. Please describe the factors the Department of State takes
into account in reviewing an acquisition in the first stage of
the CFIUS process. What factors does the Department take into
account in deciding to recommend that a matter be taken to
formal investigation? Please be as specific as possible.
A.1. The Department of State brings to the CFIUS process
expertise and experience in international economic issues,
export control policy, intelligence, national security, and
foreign policy. Our internal processes at the Department of
State ensure that each and every CFIUS case receives careful
scrutiny by offices with expertise in these areas. The Bureau
of Economic and Business Affairs, the Bureau of Political-
Military Affairs, the Bureau of International Security and
Nonproliferation, the Bureau of Diplomatic Security, the Bureau
of Intelligence and Research, the Office of the Legal Adviser,
and the appropriate regional bureau participate in the review
of notifications received by CFIUS and forwarded to us by the
Department of the Treasury as CFIUS chair.
The Department of State is primarily guided by the criteria
in the Exon-Florio Aamendment. As a result, we consider
international economic implications, factor in the relevant
statutes on export controls (for example, the Arms Export
Control Act), and nonproliferation, etc.
The Department of State is also able to draw upon the local
diplomatic and economic expertise of our embassies to provide
relevant information relating to the specific transaction under
review.
Q.2. Why are there so few formal Exon-Florio investigations?
A.2. The vast majority of acquisitions by foreign entities
generally do not raise the possibility of harm to national
security. Seventy percent of the foreign direct investment in
the United States comes from Canada and Western Europe. CFIUS
has not generally required an investigation in the majority of
these transactions either because these transactions do not
potentially threaten national security, or issues that arise
can be address within current statutes. The statutory language
of Exon-Florio requires that CFIUS look first to the ability of
existing laws and regulations (other than the International
Emergency Economic Powers Act) to address national security
concerns. To the extent that existing laws and regulations can
accomplish this objective, the Department believes there is no
need to rely on Exon-Florio.
Exon-Florio raises the awareness of foreign investors
considering investment in the United States to the importance
of national security, and it helps to ensure that foreign
investments are structured in a way to avoid national security
problems.
Q.3. When would it be appropriate for the Department of State
to recommend, in the CFIUS process, barring or limiting a
transaction because the transaction affected ``domestic
production needed for projected national defense
requirements,'' ``the capability and capacity of domestic
industries to meet national defense requirements,'' or ``the
capability and capacity of the United State to meeting the
requirements of national security.'' Please be as specific as
possible.
A.3. The Department of State thoroughly examines all relevant
factors in assessing the possible impact on U.S. national
security of any transaction. The Department also relies on
input from other CFIUS agencies as to whether they believe a
national security threat exists. Exon-Florio provides wide
latitude to the President, and by extension to CFIUS, on what
to consider in the areas of national security concerns that
Congress highlighted in drafting the legislation. CFIUS
agencies have never viewed the list of factors as a closed
list, and believe the present approach ensures the flexibility
to take into account new issues and concerns.
While domestic production concerns have been a part of past
CFIUS recommendations, including cases where CFIUS agencies
have used agency specific mitigation agreements to address a
perceived threat, it is important to recognize that these
factors by themselves do not drive a decision. For the
President to take action under Exon-Florio, he must determine
that there is credible evidence that the foreign person
exercising control might take action that threatens to impair
the national security. The President must have reason to
believe, based, for example, on the foreign parties' prior
actions, that it will take action through the acquisition that
threatens to impair U.S. national security.
The risk to national security can relate to the factors in
the statute (for example, by reducing or eliminating domestic
production of a good needed for national defense) or to other
factors the President considers important (for example, threat
to critical infrastructure, potential terrorism finance). In
addition, the President also must find that provisions of law
other than Exon-Florio and IEEPA do not provide adequate and
appropriate authority to protect national security.
Q.4. How does the Department of State monitor mitigation
agreements entered into as a condition for approval of
acquisitions? What part or parts of the Department of State are
involved in such monitoring? Please be a specific as possible.
A.4. The monitoring of the mitigation agreements is primarily
the responsibility of the agencies that are party to the
agreements. Most often it is the Department of Justice, the
Department of Homeland Security, and the Department of Defense
that are signatories to these agreements, with Treasury having
overall responsibility as the chair of the CFIUS process. When
issues come before CFIUS where the interests of the Department
of State are involved, the Department does take an active role
in the discussion of the mitigation agreements.
Q.5. At present, filings with CFIUS are voluntary. Would Exon-
Florio work more effectively if the filings were mandatory?
A.5. No. The Department of State believes the existing Exon-
Florio Amendment, as carefully crafted by Congress,
successfully protects national security while maintaining the
U.S. Government's long-standing open investment policy. CFIUS's
implementation of Exon-Florio has made foreign investors more
aware of national security issues, brought transactions into
conformity with existing laws where needed, and resulted in the
abandonment of transactions that raised national security
concerns that could not be mitigated. There is no evidence to
suggest that transactions that have not be reviewed or notified
to CFIUS under the current voluntary system present national
security issues.
Although Exon-Florio notices are ``voluntary,'' failure to
notify leaves the transaction subject to Presidential review
and possible action indefinitely. In addition, the Department
of State or any other CFIUS member may notify a transaction to
the staff chair, Treasury, to ensure that CFIUS may review any
transaction that it believes should be reviewed.
In the Department of State's opinion, mandatory
notification would undercut U.S. Government efforts to promote
more liberal investment regimes around the world. The U.S.
Government and American business have consistently opposed
mandatory screening mechanisms for foreign investment when such
policies have been implemented by foreign governments, and have
sought the removal of such mechanisms when the United States
has negotiated international trade and investment agreements.
Moreover, introduction of a mandatory screening process
could conflict with nondiscrimination commitments, particularly
with respect to our Bilateral Investment Treaties and certain
Treaties of Friendship, Commerce, and Navigation, and Free
Trade Agreements, potentially exposing the U.S. Government to
claims brought by foreign investors or their governments.
RESPOSNE TO WRITTEN QUESTIONS OF SENATOR INHOFE
FROM PETER C.W. FLORY
Q.1. Can you tell me whether there have been patterns of
foreign acquisition by industry or specialty? Are any countries
concentrating their purchases, and thus targeting our
aerospace, software, materials, energy, electronics, and other
sectors? Is there any cumulative, broad-picture analysis that
would show if a certain country or alliance of countries was
intentionally or unintentionally
undermining any possible aspect of national security?
A.1. The Department of the Treasury previously submitted a
response to this request. Defense defers to Treasury on this
question.
Q.2. How many United States companies were purchased by Japan,
United Kingdom, Germany, China, and every other foreign nation
in your database? Can you give me a breakdown by nationality of
the top 15 acquiring nations in regards to the industry areas
they are investing in?
A.2. The Department of the Treasury previously submitted a
response to this request. Defense defers to the Treasury
Department on this question.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM PETER C.W. FLORY
Q.1. In your view, what specific steps should be taken to
improve the CFIUS process, the Exon-Florio Amendment, or both
from the standpoint of the responsibilities of the Department
of Defense?
A.1. The Administration is carefully considering whether
changes to the CFIUS process are warranted and, if so, what
changes should be made. While the Administration has not made
any decisions at this time, we believe that any changes to
CFIUS should be guided by the following principles:
Further integration of national and homeland security
interests for a post-September 11 environment;
Continuation of a welcoming stance toward investments
in the United States because it creates good jobs for
American workers;
Preservation of that which works about CFIUS with
improvements and updates where needed, while maintaining
the integrity of the decisionmaking process.
Q.2. Please describe the factors the Department of Defense
takes into account in reviewing an acquisition in the first
stage of the CFIUS process? What factors does the Department
take into account in deciding whether to recommend that a
matter be taken to formal investigation? Please be specific as
possible.
A.2. There are a number of factors that we in the Department of
Defense (DoD) consider before taking a position when it comes
to reviewing a foreign acquisition of a U.S. company. These
include five major substantive areas of interest and one
procedural area of interest. The substantive areas are:
First, the significance of the technologies possessed by
the firm to be acquired (for example, are they ``state of the
art'' or otherwise militarily critical? Are they classified,
export controlled, or otherwise security sensitive?);
Second, the importance of the firm to the U.S. defense
industrial base (for example, is it a sole-source supplier and
if so, what security and financial costs would be incurred in
finding and/or qualifying a new supplier, if required?);
Third, possible security risks or concerns that might be
posed by the particular foreign acquiring firm;
Fourth, whether the company to be acquired is part of the
critical infrastructures that the DoD depends upon to
accomplish its mission; and
Fifth, can any potential national security concerns posed
by the transaction be resolved by the application of risk
mitigation measures either under DoD's own regulations or
through negotiation with the parties?
The procedural issue we consider is whether there has been
a willingness on the part of the parties to the transaction to
voluntarily negotiate risk mitigation measures when DoD
believes they are necessary and whether there is sufficient
time to do so before the end of the 30-day initial review
period.
Q.3. Why are there so few formal Exon-Florio investigations?
A.3. There are relatively few formal investigations because
most proposed foreign acquisitions of U.S. firms do not have
national security implications. For those transactions that do
raise potential concerns, often the issues can be adequately
mitigated in the course of the CFIUS review process.
For transactions that have required mitigation measures to
protect national security, the parties typically have either
negotiated mitigation measures during the 30-day review period
or the companies have withdrawn their notices (with CFIUS
approval) until mitigation measures were negotiated. The
companies then refiled with CFIUS, with the necessary
mitigation measures in place, thus enabling CFIUS to conclude
its review without a formal investigation. In some cases, the
companies have abandoned the proposed transaction.
Q.4. When would it be appropriate for the Department of Defense
to recommend, in the CFIUS process, barring or limiting a
transaction because the transaction affected ``domestic
production needed for projected national defense
requirements,'' ``the capability and capacity of the United
States to meet the requirements of national security?'' Please
be specific as possible.
A.4. Because each transaction is unique and is addressed on a
case-by-case basis, it is not possible to provide a generalized
standard for when the Defense Department would vote to bar or
limit a transaction. The Defense Department would closely
scrutinize any transaction where U.S. companies: (a) have
classified contracts with the DoD, and (b) when there are
potential national security concerns with a foreign acquisition
which cannot be mitigated through the National Industrial
Security Program's Foreign Ownership, Control, and Influence
Program (FOCI). Recommendations in other transactions (for
example, where no classified contracts are involved) would
depend on the potential impact on national defense and the
ability to mitigate any risks through DoD actions or by
memoranda of agreements with the companies.
Q.5. How does the Department of Defense monitor mitigation
agreements entered into as a condition for approval of
acquisitions? What part or parts of the Department of Defense
are involved in such monitoring? Please be specific as
possible.
A.5. Every signatory agency has the authority and
responsibility to monitor an agreement to which it is a party.
The Department's Defense Security Service (DSS) enters into
negotiations with the parties of cases involving Foreign
Ownership, Control or Influence (FOCI) when classified
contracts are involved. DSS develops specifically tailored risk
mitigation agreements, which it designs to provide for the
necessary level of security for classified data and any export-
controlled information and technologies that may accompany it.
The process for mitigating FOCI for firms with facility
clearances is separate and apart from the CFIUS process. DSS
monitors compliance in such instances involving facility
security clearances and can take actions to protect information
and technology determined to be at risk.
In cases where the agreements are interagency agreements
signed by several CFIUS agencies, other agencies often notify
DoD of issues that arise regarding potential noncompliance.
Q.6. At present, filing with CFIUS are voluntary. Would Exon-
Florio work more effectively if filings were mandatory?
A.6. No. Although Exon-Florio notices are voluntary, there is a
powerful incentive for transactions with national security
implications to be notified to CFIUS. The CFIUS review process
potentially provides these companies with a safe harbor, and
according to Exon-Florio, if a foreign firm concludes a
transaction that may be covered by the statute and does not
file a notification with CFIUS, the acquisition will remain
open to executive branch scrutiny permanently and could be
subject to divestment by order of the President. For cases in
which Defense has concerns about the acquisition of a
particular U.S. firm, Defense would recommend to the companies
that they submit a CFIUS filing. We believe this strategy has
worked effectively to protect national security to date.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES
FROM ROBERT D. McCALLUM, JR.
Q.1. In a letter to GAO, dated July 25, 2005, Deputy Assistant
Attorney General Laura Parsky stated that:
The Department shares the concern expressed in the
draft report with respect to the constraints imposed by
the time limits of the current process. In particular,
gathering timely and fully vetted input from the
intelligence community is critical to a thorough and
comprehensive national security assessment. Any
potential extension of the time available to the
participants for the collection and analysis of that
information would be helpful. (Emphasis added.)
GAO Report at 48.
What would an appropriate extension of time be? How should
it be implemented?
A.1. CFIUS completes the vast majority of its reviews within
the initial 30-day period. For a small number of cases, which
present complex and sensitive issues, more time would, of
course, be helpful. It is these cases in particular to which
the Department of Justice was referring in its letter of July
25,2005. The Administration is carefully considering whether
changes to the CFIUS process are warranted and, if so, what
changes should be made, including with respect to the time for
analyzing transactions.
Q.2. Please describe the factors the Department of Justice
takes into account in reviewing an acquisition in the first
stage of the CFIUS process? What factors does the Department
take into account in deciding whether to recommend that a
matter be taken to formal investigation? Please be as specific
as possible.
A.2. At both the reviewing and the investigation stages, the
Department's principal concerns in the CFIUS context relate to
counterintelligence, cybercrime, U.S. communications system
protection, privacy protection, the ability to conduct
effective electronic surveillance, and in some instances
counterterrorism, although there are other areas of interest
within the Department's purview that may be implicated by a
particular CFIUS transaction. The Department of Justice reviews
each transaction that comes before CFIUS on a case-by-case
basis. Because each transaction is unique, the Department does
not use a one-size-fits-all approach to analyzing transactions.
While the factors mentioned above are of particular concern
to the Department of Justice, as a member of CFIUS, the
Department considers many additional factors when deciding
whether a transaction could affect national security and
consults closely with many different components of the
Department, including the Federal Bureau of Investigation
(FBI), as well as the intelligence community and other CFIUS
agencies to determine the full breadth of factors that may be
relevant in a particular transaction. These additional national
security factors include access to critical infrastructure;
domestic production needed for projected national defense
requirements; the capability and capacity of domestic
industries to meet national defense requirements; 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;
potential effects on sales of export controlled goods,
equipment, or technology to certain countries; and potential
effects on U.S. international technological leadership in areas
affecting U.S. national security. However, this list is not
exclusive, and in accordance with Exon-Florio, the Department
considers a broad array of interests that may affect national
security.
Q.3. Why are there so few formal Exon-Florio investigations?
A.3. There are relatively few acquisitions within the
parameters of Exon-Florio that have the potential to affect
national security. If that potential exists, CFIUS agencies
strive to put in place adequate security measures. If it is not
possible to reach agreement on security measures during the 30-
day review period or if, despite best efforts, there are still
unanswered questions regarding the effects on national security
created by the transaction, CFIUS undertakes investigations or,
in particularly complex transactions, companies withdraw their
CFIUS notices in order to negotiate security agreements. Once
security agreements are executed, the companies refile with
CFIUS, thereby starting a new 30-day review period. CFIUS then
has no reason to investigate the transaction given the security
measures that have been put in place.
Statistics about the number of CFIUS investigations do not
reflect those instances where security agreements were put in
place, thereby obviating the need for an investigation. In a
few cases, as a result of discussions with CFIUS, the companies
realize their transaction will result in a negative
recommendation by CFIUS and therefore decide against proceeding
with the transaction.
Q.4. When would it be appropriate for the Department of Justice
to recommend, in the CFIUS process, barring or limiting a
transaction because the transaction affected ``domestic
production needed for projected national defense
requirements,'' ``the capability and capacity of domestic
industries to meet national defense requirements,'' or ``the
capability and capacity of the United States to meet the
requirement of national security.'' Please be as specific as
possible.
A.4. As stated above, the Department of Justice considers many
factors when deciding whether a transaction could affect
national security and consults closely with its own internal
components, including the FBI, as well as the intelligence
community and other CFIUS agencies to determine the full
breadth of factors that may be relevant in a particular
transaction. Exon-Florio provides CFIUS with the flexibility to
consider any number of national security factors, including
those listed above.
Because the Department of Justice reviews each CFIUS
transaction on a case-by-case basis and must assess the unique
combination of potential threats and vulnerabilities associated
with a given transaction, it is not possible to categorize
those instances when it would be appropriate for the Department
to recommend that a transaction be blocked or limited. The
facts relating to each transaction are unique, and the national
security considerations for each transaction must be based on
these unique facts.
Q.5. How does the Department of Justice monitor mitigation
agreements entered into as a condition for approval of
acquisitions? What part or parts of the Department of Justice
are involved in such monitoring? Please be as specific as
possible.
A.5. The Department of Justice has responsibility for
monitoring mitigation agreements to which it is a party. The
Department's monitoring efforts are tailored to meet the unique
circumstances of each mitigation agreement and may include, but
are not limited to, such activities as conducting on-site
audits, reviewing the reports of third-party auditors, and
meeting with companies to discuss their compliance with
mitigation measures. In instances where other CFIUS agencies
are also parties to an agreement, the Department and these
other agencies coordinate monitoring efforts and allocate
monitoring responsibilities based on their respective expertise
and resources. Since it joined CFIUS in March 2003, the
Department of Homeland Security has made significant
contributions in terms of expertise and resources in monitoring
many of the agreements to which it is a party.
Within the Department, the Criminal Division has primary
responsibility for coordinating the Department's efforts in the
CFIUS context, including coordination of monitoring
responsibilities. The FBI has played a key role in monitoring
mitigation agreements.