[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


      Available at: http: //www.access.gpo.gov /congress /senate/
                            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

                              ----------                              

                       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.

                               ----------

                 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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    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.

                               ----------

                 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.

                               ----------

                 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.

                               ----------

             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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.





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