[Senate Hearing 115-160]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-160


  CFIUS REFORM: ADMINISTRATIVE PERSPECTIVES ON THE ESSENTIAL ELEMENTS

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

                                 HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING THE ROLE OF THE COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED 
                                 STATES

                               __________

                            JANUARY 25, 2018

                               __________

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                                Affairs
                                
                                
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
JERRY MORAN, Kansas                  DOUG JONES, Alabama

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

        John O'Hara, Chief Counsel for National Security Policy

              Kristine Johnson, Professional Staff Member

                 Elisha Tuku, Democratic Chief Counsel

               Colin McGinnis, Democratic Policy Director

                       Dawn Ratliff, Chief Clerk

                      Cameron Ricker, Deputy Clerk

                     James Guiliano, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       THURSDAY, JANUARY 25, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    27

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     3

                               WITNESSES

Heath P. Tarbert, Assistant Secretary of the Treasury for 
  International Markets and Investment Policy....................     4
    Prepared statement...........................................    28
    Responses to written questions of:
        Chairman Crapo...........................................    37
        Senator Menendez.........................................    37
        Senator Warner...........................................    38
        Senator Cortez Masto.....................................    42
Richard Ashooh, Assistant Secretary of Commerce for Export 
  Administration.................................................     6
    Prepared statement...........................................    31
    Responses to written questions of:
        Chairman Crapo...........................................    45
        Senator Scott............................................    46
        Senator Cotton...........................................    47
        Senator Menendez.........................................    48
        Senator Warner...........................................    49
        Senator Cortez Masto.....................................    52
Eric Chewning, Deputy Assistant Secretary of Defense for 
  Manufacturing and Industrial Base Policy.......................     7
    Prepared statement...........................................    34
    Responses to written questions of:
        Chairman Crapo...........................................    54
        Senator Cotton...........................................    55
        Senator Menendez.........................................    55
        Senator Warner...........................................    56
        Senator Cortez Masto.....................................    58

                                 (iii)

 
  CFIUS REFORM: ADMINISTRATIVE PERSPECTIVES ON THE ESSENTIAL ELEMENTS

                              ----------                              


                       THURSDAY, JANUARY 25, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room 538, Dirksen Senate 
Office Building, Hon. Mike Crapo, Chairman of the Committee, 
presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. This hearing will come to order. This 
morning we will receive testimony for a third time this 
Congress on the role of the Committee on Foreign Investment in 
the United States, or CFIUS.
    The Committee held a general oversight hearing on CFIUS in 
September, and last Thursday the Committee began its review of 
S.2098, the Foreign Investment Risk Review Modernization Act of 
2017, or FIRRMA, a comprehensive reform that significantly 
expands the purview of CFIUS, which has been introduced by 
Senators Cornyn and Feinstein.
    CFIUS authorities cover transactions that result in foreign 
control of a U.S. business that may threaten the national 
security of the United States. The focus is currently on 
inbound investment and technology acquisition.
    Today's hearing brings in witnesses from three of the nine 
Federal agencies and offices that comprise the full voting 
membership of CFIUS: the Department of Treasury, which chairs--
which serves as the chair of the committee; the Department of 
Defense; and the Department of Commerce's Bureau of Industry 
and Security, which administers and enforces the dual-use 
regulations of the U.S. export control regime.
    According to their testimony last week, Senators Cornyn and 
Feinstein, informed by their work on the Senate Intelligence 
Committee, introduced their bill because of growing concerns 
arising from China's multilayered threat to U.S. national 
security, namely threats emanating from a weaponization of its 
foreign investment strategy to acquire, by design, dual-use 
technology and know-how from U.S. companies. Our colleagues 
believe that China has found gaps in both the existing CFIUS 
process and export control regime, and is exploiting each of 
them to the detriment of U.S. national security and the U.S. 
defense industrial base.
    To address these concerns, FIRRMA is specifically designed 
to broaden CFIUS's jurisdiction to review certain high-
technology joint venture and related arrangements, minority 
position investments, and certain types of real estate 
transactions.
    At last week's hearing, a consensus emerged that much of 
the bill is focused on national security threats that need to 
be addressed as China executes its policies borne of its unique 
civil-military integration that effectively blurs the lines 
between military and commercial activities.
    It is also important to note that the overwhelming majority 
of foreign investments and transactions provides significant 
benefit to the United States economy, including those Chinese 
investments that occur in most sectors of the U.S. economy and 
do not impact the national security of the United States.
    It is that point of inflection between the national 
security and economic growth realized from an open investment 
policy that the Banking Committee has been entrusted to debate 
and oversee throughout the now 42-year evolution of the CFIUS 
process.
    The challenge comes in the continued use of foreign 
investment to promote economic growth and the next-generation 
technologies, while shielding those very technologies from 
foreign threats.
    Last week, the panel of witnesses from the private sector 
offered their perspectives on the potential effects of FIRRMA. 
During the hearing's question-and-answer period, there were 
several questions raised that merit feedback from today's 
panel, including one, would the expansion of CFIUS authority to 
unwind or alter outbound joint venture-related international 
commercial activity duplicate or, in any way, undermine the 
current U.S. export control regime and end up chilling this 
type of commercial activity?
    Two, if there are gaps in the export control process, why 
should this Committee, which has jurisdiction over both the 
relevant parts of the U.S. export control regime and CFIUS, opt 
to create a new export control authority for CFIUS, a 
traditionally unilateral inward-bound review process?
    Three, what would the resource burden look like for each of 
your agencies for the type of expansion envisioned by this 
legislation, and what impact would it have on foreign 
investment if the review period were actually increased by 50 
percent to accommodate these new reviews? The three Government 
agencies represented here today provide a spectrum of 
viewpoints necessary to understand where the United States must 
position itself with respect to CFIUS, to assure the national 
security of the United States.
    Given what we have heard in previous hearings, it is 
apparent, on national security grounds, that legislative fixes 
to the current system may be warranted, including expanding the 
authority of CFIUS to monitor certain additional transactions 
that are evading the process. Preservation of the U.S. defense 
industrial base, protection of U.S. critical technology, 
critical infrastructure, and even related American know-how are 
all legitimate areas of concern.
    It is not the intention of the Banking Committee to chill 
direct foreign investment into the United States, but neither 
can this Nation's national security interests be subordinated 
to commercial interests.
    I am certain that these fixes can be made with the help of 
the Administration, the business community, and my colleagues 
from both sides of the aisle on the Banking Committee.
    With that, Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Thanks to our 
witnesses. Mr. Chewning, nice to see you. Welcome to the 
Committee. And Mr. Ashooh and Mr. Tarbert, welcome back to the 
Committee. Nice to see you.
    At last week's hearing we heard several differing views on 
the advisability of making changes to CFIUS. All the witnesses 
agreed the current system is not working. As the people charged 
with making the system work, I look forward to hearing from 
today's witnesses on whether they agree with that assessment 
and, if so, why the current system is not working. There is no 
way we can improve on the current system if we do not 
understand the reasons that it is failing today.
    Some of the questions go to jurisdictions. Senator Cortez 
Masto and others raised the issue of real estate transactions 
that might give rise to national security threats that are 
difficult to reach under the current law. Other issues have 
been raised about access to sensitive information that might 
stem from an ownership interest short of control.
    But even if we are all in agreement on how to redraw the 
proper jurisdiction, I think we would still face substantial 
issues around the appropriate mechanisms for preventing the 
transfer of sensitive technology and intellectual property.
    At last week's hearing, every witness agreed that our 
adversaries use lawful and unlawful means to close the gaps 
where they exist between our technological capabilities and 
theirs. Every witness agreed that China is violating its trade 
commitments. When China cheats, there must be consequences. 
Rules mean nothing if they are not enforced. That is why I urge 
the Administration to take action on unfair dumping by LG and 
Samsung over the last number of years. Because of these steps, 
the Administration finally announced this week Whirlpool will 
add 200 more jobs in a small community south of Toledo, called 
Clyde, Ohio.
    China's cheating also has an impact on our advanced 
technology companies. Not only do they have to compete in the 
marketplace against subsidized foreign competitors, they must 
also defend themselves from cyberattacks, industrial espionage, 
and a whole range of techniques to steal critical technology.
    Last week's witnesses also agreed that the departments with 
us today are lagging in controlling the export of sensitive 
technology to our adversaries. As an example, they cited the 
lack of updates to the militarily critical technologies list, 
which apparently is not being updated by DoD.
    As I mentioned last week, I think our country faces a 
twofold problem. National security is threatened by the 
purchase and export of critical intellectual property and 
technologies. At the same time, our domestic economic security 
is threatened by foreign investment in the U.S. that falls 
outside the scope of CFIUS.
    I have introduced legislation with Senator Grassley--we 
both sit on the Finance Committee--called the Foreign 
Investment Review Act, that would require the Secretary of 
Commerce to review certain foreign investments. Just as we see 
in the national security area, some of these investments, 
especially coming from State-owned enterprises, are not in our 
long-term economic interest here in our country.
    I hope we can tackle both problems in this process, 
revising CFIUS to respond to the developments of the last 
decade, while we also respond to the threats of our economic 
security.
    Thank you.
    Chairman Crapo. Thank you, Senator Brown. We will now 
proceed to the testimony of our witnesses. First will be The 
Honorable Heath Tarbert, Assistant Secretary of the Treasury 
for International Markets and Investment Policy. Following Mr. 
Tarbert we will hear from The Honorable Richard Ashooh, 
Assistant Secretary of Commerce for Export Administration. And 
then we will conclude by hearing from Mr. Eric Chewning, Deputy 
Assistant Secretary of Defense for Manufactured and Industrial 
Base Policy.
    Gentlemen, we appreciate each of you being here. We look 
forward to your statements. I encourage you to follow that 5-
minute clock so the Senators will have time to engage with you 
with their 5 minutes as well. And we look forward to learning 
much from you.
    With that, Mr. Tarbert, please begin.

   STATEMENT OF HEATH P. TARBERT, ASSISTANT SECRETARY OF THE 
    TREASURY FOR INTERNATIONAL MARKETS AND INVESTMENT POLICY

    Mr. Tarbert. Chairman Crapo, Ranking Member Brown, and 
distinguished Members of the Committee, thank you for the 
opportunity to testify in support of FIRRMA.
    During my confirmation hearing, you asked what my top 
priority as Assistant Secretary would be. I will repeat now 
what I said then. My top priority is ensuring that CFIUS has 
the tools and resources it needs to perform its critical 
national security function.
    I believe FIRRMA, a bill introduced with broad bipartisan 
support, is designed to provide those tools and resources. 
FIRRMA will protect our national security and strengthen 
America's longstanding open investment policy.
    The United States has always been a leading destination for 
investors. Alexander Hamilton argued foreign capital is a 
precious acquisition to economic growth. Foreign investment 
provides immense benefits to American workers and families, 
such as job creation, productivity, innovation, and higher 
median incomes.
    At the same time, we know that foreign investment is not 
always benign. On the eve of America's entry into World War I, 
concerned by German acquisitions in our chemical sector, 
Congress passed legislation empowering the President to block 
investments during times of national emergencies. During the 
Depression and World War II, cross-border capital flows fell 
dramatically, and in the boom years of the 1960s and '70s, 
investment in the U.S. was modest compared to outflows, and 
during that time, foreign investment also posed little risk. 
Our main adversaries, the Soviet Union and its satellites, were 
communist countries, economically isolated from our own.
    But when the postwar trend changed in the 1970s, CFIUS was 
born. The oil shock that made OPEC countries wealthy led to 
fears that petrodollars might be used to buy strategic U.S. 
assets. In 1975, President Ford issued an executive order 
creating CFIUS to monitor foreign investments. Then, in 1988, a 
growing number of Japanese deals motivated Congress to pass the 
Exon-Florio Amendment. For the first time, the President could 
block a foreign acquisition without declaring a national 
emergency.
    For the next 20 years, CFIUS pursued its mission without 
fanfare, but in the wake of the new Dubai Ports controversy, it 
became clear that CFIUS needed greater procedural rigor and 
accountability. In 2007, many of you helped enact FINSA, which 
formally established CFIUS and codified our current structure 
and process.
    Now we find ourselves at yet another historic inflection 
point. The foreign investment landscape has shifted more than 
at any point during CFIUS's 40-year history. Nowhere is that 
shift more evident than in the caseload CFIUS now faces. The 
number of annual filings has grown within the last decade from 
an average of 95 or so to nearly 240 last year.
    But it is the complexity, not simply the volume, that has 
placed the greatest demand on our resources. In 2007, about 
four cases went to the more resource-intensive investigations 
stage. In 2017, nearly 70 percent did. This added complexity 
arises from a number of factors: strategic investments by 
foreign Governments, complex transaction structures, and 
globalized supply chains.
    Complexity also results from the evolving relationship 
between national security and commercial activity. Military 
capabilities are rapidly building on top of commercial 
innovations, and what is more, the data-driven economy has 
created vulnerabilities we have never before seen.
    New risks require new tools. The administration endorses 
FIRRMA because it embraces four pillars critical to CFIUS 
modernization. First, FIRRMA expands the scope of transactions 
potentially reviewable by CFIUS, to include certain nonpassive 
investments, joint ventures, and real estate purchases. These 
changes lie at the very heart of CFIUS modernization. Right now 
we cannot review a host of transactions that present identical 
concerns to those we regularly examine.
    Second, FIRRMA allows CFIUS to refine its procedures to 
ensure the process is tailored, efficient, and effective. Only 
where existing authorities, like export controls, cannot 
resolve the risk will CFIUS step in.
    Third, FIRRMA recognizes that our closest allies face 
similar threats and incentivizes our allies to work with us to 
address those threats.
    And finally, FIRRMA acknowledges that CFIUS must be 
appropriately resourced. This last point bears emphasizing. Of 
course, modernizing CFIUS entails a cost. But any job really 
worth doing is worth doing right. Besides, we have also got to 
consider the cost of doing nothing: the potential to lose our 
military and technological edge, which could cost American 
lives. That is simply unacceptable.
    There is but one conclusion here. CFIUS must be modernized. 
In so doing, we must preserve our longstanding open investment 
policy. We must also protect our national security. These twin 
aims transcend party lines and demand urgent action.
    I look forward to working with this Committee and improving 
and advancing FIRRMA. Thank you very much.
    Chairman Crapo. Thank you very much. Mr. Ashooh.

 STATEMENT OF RICHARD ASHOOH, ASSISTANT SECRETARY OF COMMERCE 
                   FOR EXPORT ADMINISTRATION

    Mr. Ashooh. Thank you, Mr. Chairman. I am grateful for the 
opportunity to testify in support of the Foreign Investment 
Risk Review Modernization Act, or FIRRMA, and the role the 
Department of Commerce plays in supporting U.S. national 
security, both as a member of the Committee on Foreign 
Investment in the United States, or CFIUS, and as an export 
control agency.
    I want to thank Senators Cornyn and Feinstein and Burr, and 
the other cosponsors for their strong leadership on this issue. 
The Commerce Department supports the modernization of the CFIUS 
process and we share Congress' concern about China's policies 
and activities. FIRRMA takes many positive steps in addressing 
those concerns.
    Within the Department of Commerce, the International Trade 
Administration and the Bureau of Industry and Security play 
important roles in Commerce's review of CFIUS matters. BIS, as 
the administrator of the Export Administration Regulations, or 
EAR, has extensive experience in export controls, which are 
often a consideration in CFIUS deliberations.
    I would like to highlight a few specific provisions of the 
legislation.
    The Administration welcomes foreign investment in the 
United States, and the Department supports the affirmations in 
FIRRMA of that policy. We are supportive of the requirement for 
mandatory filings for certain transactions involving foreign 
Government-controlled activities. In fact, we encourage the 
Committee to consider a lower threshold.
    We appreciate that FIRRMA requires an assessment of the 
resources necessary for CFIUS to carry out its critical work 
and that the provisions which would expand CFIUS would not take 
effect until CFIUS has put in place the regulations and has the 
resources it needs to implement its expanded role.
    We encourage the Committee to consider that the provision 
on contributions of intellectual property and associated 
support to foreign parties may duplicate existing export 
control authorities, which I do not believe in the intent.
    We support the provisions of FIRRMA that would facilitate 
greater cooperation and information sharing with our allies and 
partners to permit increased coordination with like-minded 
countries.
    In our role administrating the EAR, BIS's responsibilities 
encompass the entirety of the export control process. We write 
and implement the regulations, issue export licenses, and 
conduct compliance activities, including overseas end-use 
checks. We enforce regulations, which includes preventing 
violations and punishing those who violate.
    The EAR has traditionally been the regulatory authority for 
the control of dual-use items, which are items that have a 
civil end-use but can also be used for military or 
proliferation-related use. The export control system 
administered by BIS is a process that, like CFIUS, involves 
multiple agencies. We work closely with the Departments of 
Defense, Energy, and State, and these agencies review and clear 
any changes to the EAR itself, as well as license applications 
submitted to BIS, and ensure that the export control system is 
robust.
    The export control system benefits from close cooperation 
with our international partners, through four major, 
multilateral export control regimes. Through these regimes, the 
United States and our partners coordinate on which items and 
technologies merit control and how those controls should be 
applied.
    The EAR's authority covers a wide array of transactions and 
technology transfers and governs what are considered 
traditional exports of goods, software, or technology to 
foreign countries, but it also covers the transfers of 
controlled technology within the United States to foreign 
nationals, under what we call deemed exports. It differentiates 
between countries that range from our closest allies to 
embargoed countries, thus allowing the export control system to 
treat exports and technology transfers under different 
licensing review policies, depending on the level of concern 
with the recipient country. The EAR also includes list of end 
uses and end users of concern that trigger extraordinary 
licensing requirements.
    Finally, our export control system includes aggressive 
enforcement capabilities. BIS's special agents are located 
across the United States and overseas with a sole focus on 
identifying violations of the EAR and bringing to justice 
domestic and foreign violators. In fact, last week, BIS, in 
conjunction with other Federal law enforcement agencies, 
announced a prosecution against two individuals conspiring to 
violate export control laws by shipping controlled 
semiconductor components to a Chinese company that was also on 
Commerce's entity list.
    In sum, the export control system and CFIUS are both vital 
authorities and complementary tools that the United States 
relies upon to protect our national security. Strengthening 
CFIUS through FIRRMA, while ensuring that CFIUS and export 
control authorities remain distinct, will enable even stronger 
protections of U.S. technology.
    The Department of Commerce looks forward to working with 
the Committee and the bill cosponsors on this important effort, 
and I would be pleased to take your questions. Thank you.
    Chairman Crapo. Thank you very much. Mr. Chewning.

   STATEMENT OF ERIC CHEWNING, DEPUTY ASSISTANT SECRETARY OF 
      DEFENSE FOR MANUFACTURING AND INDUSTRIAL BASE POLICY

    Mr. Chewning. Mr. Chairman, Ranking Member Brown, and 
Members of the Committee, thank you for the invitation to share 
the Department of Defense's role in CFIUS. The protection of 
our national security innovation base from strategic 
competitors, like Russia and China, is an increasingly 
important priority for the Department, and I appreciate the 
opportunity to speak with you this morning.
    The Department of Defense strongly supports the 
modernization of the CFIUS process to ensure the interagency 
committee has the authorities required to address the evolving 
risks to our national security. We are thankful for the strong 
leadership of Senator Cornyn, Senator Feinstein, and Senator 
Burr on this issue, and appreciate the bipartisan support for 
the FIRRMA legislation.
    To quote Secretary of Defense Mattis, who stated this 
Department's position in his letter of support to Senator 
Cornyn, ``The DoD depends on critical, foundational, and 
emerging technologies to maintain military readiness and 
preserve our technological advantage over potential 
adversaries. FIRRMA would help close related gaps.''
    I have spent the last 17 years working at the intersection 
of national security, industry, and finance, in both the 
private and public sectors. It is important that this bill not 
be considered an additional regulation on business. Under this 
bill, the United States should and will likely continue to 
welcome the vast majority of foreign investment that does not 
present a threat to our national security.
    Rather, this bill should be considered a whole of 
Government response to a critical national security challenge, 
an insurance policy on the hundreds of billions of dollars per 
year we invest in our defense industrial base, but most 
importantly, this bill will help safeguard our sons and 
daughters who volunteer to step into harm's way, armed with the 
weapons that our industrial base produces.
    Simply put, the United States military fights and wins wars 
through the unmatched performance of our men and women in 
uniform and through our superior military technology. Knowing 
this, our competitors are aggressively attempting to diminish 
our technological advance through a multifaceted strategy, by 
targeting and acquiring the very technologies that are critical 
to our military success, now and in the future.
    China, in particular, publicly articulates its policy of 
civil-military integration, which ties to its intention to 
become the world's leader in science and technology and to 
modernize its military, in part, by strengthening its own 
defense industrial base.
    While some methods, like industrial espionage and 
cybertheft are clearly illegal, other approaches, including 
technology and business know-how, transferred through 
acquisition of U.S. companies, may not be. Acquiring or 
investing in U.S. companies offers an opportunity for our 
competitors to gain access and control over technologies with 
potential military applications, enabling them to create their 
own indigenous capabilities, eroding our technological edge, 
and ultimately, our military advantage.
    The current CFIUS authorities are limited to investments 
that would result in a foreign controlling interest. There are 
other nontransaction types, such as certain joint ventures and 
nonpassive, noncontrolling investments that could pose national 
security concerns. Additionally, the purchase of real estate by 
a foreign person provides opportunities to potentially 
establish a persistent presence near sensitive facilities, 
which would currently fall outside of CFIUS's current scope of 
review.
    The Department of Defense does not view CFIUS as a panacea. 
Instead, it is a layered defense that can, along with export 
controls, stem the flow of critical technology to our 
competitors. In order to do that, however, CFIUS authorities 
need to adjust to keep pace with the rapid pace of technology.
    Let me add one more point as I conclude my remarks. While 
the Department of Defense believes defensive measures like 
CFIUS modernization are important, they alone are not 
sufficient for winning a technology race. We must be proactive 
to ensure we improve our technology and innovation base, 
because our future economic security will be a key determinant 
of our national security.
    I would like to close with another statement from Secretary 
Mattis, in his letter of support to Senator Cornyn. ``I 
strongly support FIRRMA. The Department of Defense continues to 
support foreign investment, consistent with the protection of 
national security. However, as the national security landscape 
changes, the existing processes and authorities must be 
updated.''
    Thank you very much for the opportunity to testify on this 
important topic. I look forward to working with this
    Committee on improving and advancing FIRRMA.
    Chairman Crapo. Thank you very much, Mr. Chewning, and Mr. 
Ashooh, I am going to go to you first with my question.
    Many concerns have been raised around the need to safeguard 
critical technologies, in particular, those referred to as 
emerging or development technologies. Can you discuss to what 
extent our export control system is equipped to address these 
concerns? And what I am kind of getting at, specifically, is, 
does our system include controls on the export of development 
technology, which is the know-how or the secret sauce that 
allows for the development of critical capabilities of concern.
    Can Commerce, after identifying uncontrolled know-how of 
concern, control the release of such development information 
without the need of additional authority?
    Mr. Ashooh. Thank you, Mr. Chairman. The short answer to 
your three questions is yes. Let me go into detail.
    Chairman Crapo. OK.
    Mr. Ashooh. Certainly the emerging technology issue is one 
that is the crux of this matter, and it is important to note 
that our export control system is not a new system. It has been 
in place throughout the cold war, and in technologies that we 
consider today to be widely available or commonly known were 
once emerging, and it has been our export control system that 
has gone a long way to maintaining U.S. technological 
leadership.
    Having said that, there is a challenge here, and the 
challenge is two-fold. One is identifying those emerging 
technologies, and that is not specifically relegated to one 
agency. That is a shared burden that the interagency faces. But 
once the technology is identified, the export control system 
can accommodate it and is flexible enough to deal with it. Let 
me speak in more detail about that.
    Under the current system, we can place controls on 
individuals, on uses, on technology. The Export Administration 
Regulation defines technology to include nontangible items that 
most of us would consider to be know-how, not just the product 
but the design that goes into the product, the design process, 
the research that goes into the design. So the nontangibles 
that we would consider know-how are included in the EAR.
    Where the challenge exists is that we identify those. Once 
we have identified them, we have many tools to apply, including 
almost immediate controls that we can place on technologies 
once they have been identified.
    Chairman Crapo. So for export control purposes, we do not 
need to look at new legislative authorities.
    Mr. Ashooh. I do not believe we need new legislative 
authorities, but I do not want to suggest any complacency here. 
The rapid pace of emerging technologies that we are seeing, 
predominantly in the private sector, requires us to be ever-
vigilant to evolving threats, but I do not believe new 
authorities are necessary to do that.
    Chairman Crapo. Thank you. Mr. Tarbert, there is some 
concern that CFIUS, under FIRRMA, could become a de facto, one-
stop shop for all inbound and outbound investment activity. Can 
you think of any circumstances where a transaction is permitted 
under export control authorities but then should be prohibited 
by CFIUS?
    Mr. Tarbert. We have seen certain examples, even during my 
first 100 days there, where a specific technology may be EAR99, 
but in the hands of a specific threat actor that technology, 
along with the threat actor purchasing the U.S. business, 
raises significant national security concerns.
    Now at that point we have often seen the Commerce 
Department step in and issue an informed letter, but there have 
been situations where, at least not in advance, we have seen 
that need. So there is a current overlap but there are many 
situations where export controls are adequate and appropriate, 
and FIRRMA envisions that.
    Chairman Crapo. And so you would not see FIRRMA has 
creating a complete overlap.
    Mr. Tarbert. Not at all. We view the two as very much 
complementary, and we view FIRRMA as strengthening export 
controls, and not substituting CFIUS for them.
    Chairman Crapo. All right. Thank you. And Mr. Chewning, the 
Defense Department understandably has concerns with the current 
CFIUS process regarding the transfer of know-how pertaining to 
a wide range of emerging technologies, such as artificial 
intelligence, robotics, and driverless vehicle technology. The 
exists the OY521 authority and the Export Administration 
Regulations that can control the export of previously 
uncontrolled technology, which can also be applied to know-how, 
at any stage of development, if there is a national security or 
foreign policy reason to do so, without a proposed rule or any 
agreement of our allies.
    Has Defense ever asked Commerce to use this authority to 
control the export of know-how of concern in emerging 
technologies?
    Mr. Chewning. Thank you, Senator. I think it raises a good 
point around the complementary nature of export controls and 
CFIUS, and my colleague from Commerce I think raised a good 
point in saying that export controls can step in once we have 
identified the threat. And I think it is important to 
understand, with the CFIUS process we identify a three-part 
litmus test for identifying threats. So it is understanding 
what the exact threat is, which is an assessment that is 
informed by the intelligence community, understanding the 
vulnerability, and then understanding the consequences.
    And so if we are able to go through that process and 
identify what exactly we need export controls to step in and 
do, our colleagues from Commerce are able to do that. In the 
absence of having those authorities already in place, CFIUS 
becomes the last line of defense in order for us to stop a 
transaction.
    And so I think a useful frame for thinking about the 
interplay between CFIUS and export controls is export controls 
is the first line of defense, CFIUS is the last line of 
defense.
    Chairman Crapo. All right. Thank you. Senator Brown.
    Senator Brown. Thanks, Mr. Chairman. I would like to, Mr. 
Ashooh, go back to, on the Chairman's first question, and ask 
you a little bit more about that. Explain how the 
identification process would differ from what you seek today 
through the Export Administration Regs.
    Mr. Ashooh. The notification process?
    Senator Brown. How--if you would explain how the 
identification process. The FIRRMA bill updates the definition 
of critical technologies, as you know.
    Mr. Ashooh. Right.
    Senator Brown. CFIUS is charged with identifying emerging 
technologies that could be important to maintaining our 
national security advantage. So how does the identification 
process--how would it differ from what you seek today through 
the Export Administration Regulations?
    Mr. Ashooh. Well, again, I would suggest that that is 
another complementary area, because under the EAR, we are 
looking for emerging and critical technologies all the time, 
and we work through advisory committees to help us do that, and 
rely on industry to inform us as well.
    When CFIUS considers a case, Commerce, as the administrator 
of the EAR, we utilize that process to then inform our own 
processes and whether or not action needs to be taken under the 
EAR. And so that is the way that the processes complement each 
other, and any expansion of the number of transactions would, 
in fact, help us understand the landscape relative to emerging 
and critical technologies.
    Senator Brown. OK. Mr. Chewning, you were nodding. When it 
was written a year ago--and I wanted to go somewhere else--the 
DIUx report made about a dozen recommendations for actions to 
be undertaken by DoD, apart from what we should do, what 
Congress might do legislatively. Describe what--could you 
describe what actions have been taken to date by Defense on 
these recommendations?
    Mr. Chewning. Yeah, happy to. So we are currently going 
through a broader understanding of how we need to approach the 
issues around countering China, with respect to access to our 
defense industrial base. The immediate set of recommendations 
that we have implemented has been strengthening what we have 
been able to do within the Department of Defense more broadly, 
in terms of our role within the CFIUS committee and resourcing 
of that effort. Then we are looking at how to evaluate the 
broader set of things that DIUx has looked at, as part of that 
broader campaign.
    Senator Brown. Thank you. Witnesses at last week's hearing 
were critical of DoD's failure to maintain the militarily 
critical technologies list, as you know, and I would like your 
view on whether that criticism last week was fair and why we 
should not use existing approaches to control technology rather 
than creating yet another new set of rules.
    Mr. Chewning. Sure. So my understanding of the criticism 
from last week focused on the munitions list, which was a 
State-derived list used for ITAR. The concerns here are 
primarily around emerging technologies, which are more 
appropriately handled under the Commerce authorities. And so 
the munitions list itself is not where we are seeing the threat 
right not. It is with the emerging technologies that would fall 
under the Commerce's control of export controls.
    Senator Brown. And their criticism was confined to the 
munitions list?
    Mr. Chewning. It is my understanding, Senator.
    Senator Brown. OK. One more question, Mr. Chairman. Mr. 
Tarbert, you and your office work close with the FBI. Correct?
    Mr. Tarbert. Correct.
    Senator Brown. Have you found the men and women of the FBI 
to be dedicated professionals performing a central role in our 
national security?
    Mr. Tarbert. I have.
    Senator Brown. OK. Thank you.
    Chairman Crapo. Thank you. Senator Shelby.
    Senator Shelby. Thank you. Mr. Tarbert, welcome back to the 
Committee. You were here at a critical time a number of years 
back and we have missed you for a long time but we are glad you 
are back today in your present role.
    Could you describe how the evolution of many foreign 
Governments' acquisition strategies has caused both the 
Congress and the Administration to want to reexamine and reform 
CFIUS? The world has changed. Manufacturing has changed. Our 
threats around the world have changed.
    Mr. Tarbert. That is absolutely right, Senator, and it is 
great to be back.
    We are seeing radical changes. I mentioned the shift in 
foreign investment that we have not seen, that is the largest 
shift in the 40-year history of CFIUS, and one of the things we 
are seeing are State-owned enterprises that are funded and 
subsidized by the State specifically pursuing critical U.S. 
technologies that are meant to be deployed in either a very 
competitive way, and even, in some cases, for military means.
    We are also seeing, as of recently, and as the Defense 
Department mentioned the military-commercial fusion, that even 
non-State-owned enterprises are being called upon to purchase 
technology so they can share that technology at some point with 
their Government.
    Senator Shelby. How do we challenge that, in legislation 
and in implementing the legislation, which all three of you all 
have been doing?
    Mr. Tarbert. As I just explained, there are gaps in CFIUS. 
Within CFIUS's current jurisdiction, I think CFIUS is doing a 
fine job and has done a fine job throughout the years, 
especially since the FINSA legislation. But there are key gaps 
where we cannot look at transactions.
    Senator Shelby. That was 11 years ago, though.
    Mr. Tarbert. That was 11 years ago, and, in fact, Senator 
Shelby, if you look at the actual jurisdictional basis for 
CFIUS, that stems from the 1988 statute, Exon-Florio. So the 
fundamental jurisdiction of CFIUS has not been updated in 30 
years.
    Senator Shelby. Could you expand a few minutes on the 
challenge of joint ventures between companies overseas that 
would enter into a joint venture with some of our companies to 
get inside America?
    Mr. Tarbert. Sure. One of the things that I have noticed is 
people have been saying, ``Well, CFIUS only looks at inbound 
investments.'' That is actually technically not true. We have a 
provision right now that has existed for nearly a decade in our 
regulations that allows CFIUS to look at any situation where a 
U.S. business is taken out and deposited into a foreign joint 
venture, where that foreign person would have control over the 
U.S. business. So in many ways the FIRRMA bill simply 
modernizes that provision to address some other issues that we 
are seeing in joint ventures.
    But what we are seeing today is that the original statute 
of 1988, says merger, acquisition, or takeover resulting in 
foreign control of a U.S. business. So we can review those 
transactions, and we have had very specific circumstances where 
a party was going through a merger, acquisition, or takeover. 
It was very clear CFIUS was either going to impose mitigation 
or recommend that the President block the transaction, and 
those individuals have said, ``Well, you know what we can do? 
We can take the important bits out of the business, so it is 
not a U.S. business we are putting in a JV, but the essential 
capabilities of the U.S. business. We will stick them in a 
foreign JV and they will be outside of your jurisdiction.''
    So it is very problematic, and then we are left with a 
situation where we have a national security mandate that we 
have to block or mitigate a certain transaction, but the 
parties themselves are saying, ``We are going to do this 
because we know you do not have jurisdiction to stop it.''
    Senator Shelby. I would like to move over to the Defense 
side of this for a minute. How important is critical 
infrastructure to us, and why would we not want somebody, that 
maybe not be our real friend and ally but a competitor, to be 
involved in that?
    Mr. Chewning. That is a terrific question, Senator. We 
would be concerned with potential foreign acquisition of 
critical use infrastructure, which is why, within the CFIUS 
process, we do a risk-based analysis, looking at the context of 
a specific transaction through three lenses, looking at the 
specific threat, the vulnerability, and the consequences 
associated with that. And after we have gone through that 
process, if we think that that risk cannot be unmitigated, that 
is when we would have a problem.
    Senator Shelby. Commerce, you got anything to add to this? 
You agree with both of them?
    Mr. Ashooh. Thank you, Senator. Yes, I do. Commerce spends 
so much time in the dual-use world, while we do not regulate--
--
    Senator Shelby. Well, basically, we want to do business in 
the world.
    Mr. Ashooh. Yes.
    Senator Shelby. But we do not want to give away something 
that would do us harm--do harm to national security. Is not 
that the bottom line?
    Mr. Ashooh. It is the bottom line, and our export control 
system is designed around that. It works best when it is very, 
very targeted, so that we are not over-controlling and 
restricting commerce where it needs to, but we are paying 
attention to the national security implications.
    Senator Shelby. Thank you. My time is up.
    Chairman Crapo. Thank you. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Let me thank you 
and the Ranking Member for taking on this issue. I think some 
of the--getting this right is one of the most important 
national security requirements we have. As Vice-Chair of the 
Intelligence Committee I have really seen, in a very 
comprehensive way, how some of our near-peer adversaries, 
specifically China and Russia, are using theft of intellectual 
property, use of joint ventures. They have a much, much more 
comprehensive approach than we have. And I think we have seen, 
in the past, where you would steal secrets and, mysteriously, a 
peer company would end up having that technology, mysteriously 
enough.
    You have got efforts that Mr. Tarbert made mention of, in 
terms of direct acquisition. But you have also seen now, with 
State enterprises and near-State enterprises, using our JV laws 
in ways that are pretty sophisticated, and I am not sure we 
have got--well, I conceptually am supportive of the reform 
legislation, whether we have got it fully right yet.
    I want to raise an area that I do not believe is covered. 
With our open markets, what happens when we have a, 
particularly in emerging technology fields, where we have a 
company that may enter into our market, in an open fashion, and 
it may not trigger any of the CFIUS or traditional export 
control or import control barriers. I would point out some that 
have received some attention. Kaspersky Labs, a Russian-based 
technology firm, that made its way all the way onto the select 
GSA vendor list, even though large swaths of the American 
Government realize that there was huge, huge potential 
problems. And we are now in the process of trying to 
disentangle with that entity. It will take us years and it will 
keep us vulnerable during those years.
    What I see is an issue that people are not speaking too 
much about is if you look in China right now, and with their 
remarkable investments in AI, machine learning, if you look at, 
just over the last 4 or 5 years the emergence of a dozen-plus 
Chinese tech companies that all have north of $10 billion 
valuations. We have heard of the Huaweis and the Alibabas. 
There are a dozen more that may not come off--maybe you guys 
know, but most of our colleagues do not know.
    And how are we going to ensure that as these companies, who 
are already starting to kind of be pervasive across Asia, as 
they enter into the American marketplace, with pricing that is 
lower than our competitors, because often times they have zero 
cost of capital, they become ubiquitous. You know, they 
penetrate around, like, Internet of things where the next level 
of connectivity that is coming up. We could wake up and--my 
fear is that many of these companies, when push comes to shove, 
are not pure economic plays but directly or indirectly have 
ties back to the Chinese Government, yet none of the 
traditional regime of the last 60 years would address that 
issue.
    Does anybody want to take it on? Mr. Tarbert, do you want 
to take a shot?
    Mr. Tarbert. I would say it is a great point, Senator, and 
I think it highlights the need for a comprehensive approach to 
the strategic competition that we face. CFIUS deals with a 
certain set of issues. Export controls deals with complementary 
issues. But there are other tools available to the U.S. 
Government, from procurement, from other things, that should be 
considered in addressing the overall threat. I do not think we 
can look at specific threats in isolation.
    Mr. Ashooh. Thank you, Senator. It is perhaps worth 
sharing, as someone who came into this job about 5 months ago, 
I spend the majority of my day, one way or the other, dealing 
with the threats you mentioned. They are first and foremost in 
what we are dealing with. And we need to be evolving with these 
threats. There is no question. And I really do reinforce 
Heath's comments about it is a comprehensive solution. It is 
very important that we, in the agencies with varied 
responsibilities, not only work together but, in particular, 
with our Members of Congress where authorities fall short.
    I believe we have the authorities to tackle the challenges 
in front of us, but I do not want to suggest that that is 
somehow not attentive to the vigorousness of this challenge. 
China has publicly announced this strategy, and we need to be 
aggressive in responding to it.
    Senator Warner. I want to make one last point. I know my 
time is up. I agree with Senator Shelby. We need to make sure 
America is open for business. But I do not think, over the last 
few years, I have come to understand, particularly in China and 
Russia, not only their whole of Government but their whole of 
society approach about how they intend to wage this economic 
warfare and competition, with a very different set of rules. 
And I am really concerned--I am glad to hear--I would love to 
follow up with each of you.
    But I know from the intel community side, I do not feel 
that there is appropriate responsibility in any single entity 
that the number of folks I have sat in SCIFs with who say, 
``Yes, Senator, this is a problem but it is really not our 
area,'' and sorting through not only the traditional 
intellectual property theft or traditional acquisition, or, you 
know, next-generation JV. But just through the normal course of 
business, companies that are entering into our marketplace that 
may have back doors, or that may have made--that may have made 
agreements with their host Government in a way that they come 
into this marketplace in a way that could be long-term 
compromising to our national security. We have to get to it in 
a much, much higher level of priority.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Warner. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. Thank you, 
gentlemen, for being here.
    I have only a couple of questions. I have got several that 
I am going to submit for the record, because I think that they 
could go long and they could have details that I would like to 
get to.
    But one question that I have is, when we think about the 
global supply chains, the sort of global networks now that come 
into ultimately producing a technology or a finished good, how 
much insight do we have? If I were China and it looks like we 
are doing a good job of really tracking and identifying what 
may be a maligned intent in terms of some sort of a direct 
investment in the United States, I would go figure out how to 
get involved in the supply chain somewhere else, where 
tangentially I can benefit. How do we deal with that?
    Mr. Chewning. Senator, if you do not mind, I am happy to 
take a first cut at it, if you like. So right now we do not 
have a formal mechanism in place for international cooperation 
with allies. Per the 2017 National Defense Authorization Act, 
the Department of Defense was asked to establish the NTIB, or 
the National Technical and Industrial Base, which is a 
partnership with Canada, the U.K., and Australia. We are in the 
process of developing that framework, and one of the pathfinder 
projects we have identified for that is a thing you have 
identified, is a way we can jointly work through a protection 
regime around foreign direct investment into that collective 
industrial base.
    Senator Tillis. Thank you. The concern that I have, if you 
take a look--we just passed tax reform, we are seeing economic 
activity. We are clearly making ourselves more attractive to 
build investment in the United States. I think we are somewhere 
around $7 trillion foreign investment, maybe $6.5 trillion 
investment in the United States. I do not want the productive 
deal flow to slow down. I actually want it to increase.
    And so I think we have to be very careful, particularly 
with a Nation like China. I am not going to talk about the 
specific company but there was a proposed acquisition that 
ostensibly was to purchase a problem asset in the United 
States, not so much for the asset, because it is not 
performing, but because of the underlying infrastructure that 
applied to areas of the Chinese infrastructure that they needed 
help on. And this had to do with a financial services 
instrument.
    But it sounded like they were getting pushback because they 
would have majority ownership in a company that also managed 
personal information of American citizens. So it was not 
necessarily a national security threat, in terms of defense 
systems or military applications, but information about our 
citizens.
    How are we going to strike the balance, over time, when 
China is going to look around and realize that as their economy 
continues to modernize and grow that they have still got these 
underlying infrastructures, things like insurance and other 
infrastructures that they are going to build on. It is easier 
to buy than build. And how do we make sure that we do not 
disadvantage a very large base of proven capabilities from 
being able to fill that need in China? How do we do that right, 
versus having people say, ``We are not even going to pursue any 
kind of discussion with a Chinese firm on this sort of 
acquisition because we do not think we could actually get the 
deal done''?
    Mr. Tarbert. I will comment from the Treasury perspective. 
First of all, we totally agree. We have no intention of 
stopping deal flow. We would like to see it increased.
    Senator Tillis. And I am going to submit some questions for 
the record on the deal flow, specifically to you.
    Mr. Tarbert. Last year, even from a country like China, 
dozens of transactions were, in fact, cleared through CFIUS. So 
I think that is an important point. When we see a national 
security issue, in most circumstances we can figure out a way 
to mitigate that and get the transaction through. So again, we 
very much favor foreign investment.
    Senator Tillis. And I want to talk more about some the--the 
ones that you would never see because they just think that it 
could either be costly or get caught up. So it is really the--
it is not--you can tell me about the ones that came through. 
What we need to do is figure out what ones are not even being 
discussed because they think it would wade into this area and 
the deal is just not such that they want that--to me it is 
another regulatory burden. A lot of M&A activity never occurs 
because of the anticipated regulatory burden and the time to 
execute the deal.
    And so I am trying to get a better sense of, you know, how 
we can actually promote more. I want more foreign direct 
investment from all countries. I want you all to do a good job 
of tracking down the maligned intent.
    Mr. Tarbert. On that note, Senator Tillis, one of the 
things that I think FIRRMA does that we at Treasury really like 
is this idea of the short-form declaration. So if there are 
people out there that want to do a deal, they can file, 
probably on a computer data base, something around five pages 
instead of the long notice, to just get a sense as to whether 
this is something where we would want to require notice or we 
could approve it--the committee could approve it within 30 
days. So that is a way to streamline the process to encourage 
more deals coming through CFIUS.
    Senator Tillis. And I am going to submit several questions 
for the record around FIRRMA and kind of get a good, the bad, 
and the ugly response on some of the attributes and some of the 
problematic provisions of FIRRMA.
    I am sorry. Were you going to comment?
    Mr. Ashooh. No. I would only say that with us, I think the 
way we should approach it, in all things, Senator, is to focus 
on the specific area of concern and tailor our system to do 
that so that we leave unencumbered the very large segment of 
the economy that is not an area of concern.
    Senator Tillis. The key here is we need lean regulations 
everywhere. We need to make sure that we got to addressing the 
problem or the risk, like any regulatory risk, even outside of 
this subject, but we need to do it in the leanest manner 
possible so that we are attracting as much foreign direct 
investment as possible, because it is key to actually driving 
the GDP growth that we need to get our economy back on sound 
footing.
    Thank you, Mr. Chair.
    Chairman Crapo. Thank you. Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Thank you, gentlemen, for 
being here. Thank you, Chair and Ranking Member for this 
important discussion.
    Let me start with this perspective. I come from Nevada, and 
in Nevada, as you well know, Mr. Chewning, we have Naval Air 
Station. We have Nellis Air Force Base. We have Creech Air 
Force Base. We have Hawthorne Army Depot. And I have been to 
all of those facilities. Born and raised there. Live there, 
grown up with them.
    One of the things I hear constantly from many there, both 
at Creech and Nellis, and Naval Air Station, is the concern, 
national security concerns, because if you have been there you 
know they are in the middle of the desert, and there is 
property being purchased near those military installations by 
foreign nationals, and the concerns that that impact has on our 
national security.
    So I know you talked a little bit about this, but could you 
also talk about--and I am curious, all three--in the current 
law, the way it stands, is it--can you prevent somebody from 
coming in--and this is vacant land that is being purchased. No 
businesses being put on it. It is vacant land, near a military 
installation, for purpose of obtaining, I believe, and I think 
they have concerns about, some of our national security assets 
and information about it. Can, under the current law, that type 
of acquisition be stopped?
    Mr. Tarbert. Senator, I can speak to CFIUS, and the answer 
is no. In fact, even during my first 100 days on the job we saw 
an example. I cannot get into specifics but it was in a rural 
area and there was vacant land, and, therefore, CFIUS did not 
have jurisdiction. Now if someone had put a farmer's market on 
that land, then it would have been a U.S. business, so we could 
assert jurisdiction. But I think the fact that you could have 
put a farmer's market on it and had jurisdiction, but the fact 
that it was vacant, you could not review it, points out one of 
the concerns we have about the current jurisdiction.
    Senator Cortez Masto. And that is true for----
    Mr. Chewning. Yes, Senator, and just to build on the point, 
it is great, wide-open country there, and it provides terrific 
observation to certain sensitive military activities that we 
may not want observed by certain actors, and that is definitely 
a concern of ours.
    Senator Cortez Masto. And under FIRRMA, this is covered, 
this would be covered. You would be able to prevent that type 
of acquisition. Is that correct?
    Mr. Chewning. Yes, Senator. Yes, it is my understanding.
    Senator Cortez Masto. OK. And let me just say, this is not 
something that happens sporadically. I was literally there over 
the summer, at Creech. We were just having this conversation. 
And if you know where Creech Air Force Base is, it is in the 
middle of nowhere. But at the entrance of Creech there was a 
number of foreign nationals that had stopped, trying to access, 
and with cameras. This happens all the time. And so it is a 
concern, I think, for our national security.
    At the same time, I think we need to balance that. I hear 
this conversation where we need to balance, I believe--and I 
echo my colleagues--this national security with our economic 
security. And I know last week, at the CFIUS hearing with 
businesses, investors, a witness from IBM said, ``If FIRRMA 
passes, IBM would move its labs outside the U.S.'' And I am 
curious. What is your response to industry's concern that 
FIRRMA would make it more difficult to finance their 
operations? And I will start with you, sir.
    Mr. Tarbert. I do not think that is what the industry 
argues. In fact, many in industry support this bill because 
they understand that it helps to protect both American national 
security but also intellectual property. We have had a CFIUS 
regime now, as I mentioned, for close to 40 years, and we 
continue to be an innovation hub. People still want to do 
business here. They want to innovate here, because we protect 
intellectual property and we have a number of legal safeguards.
    Senator Cortez Masto. And so let me ask you this question, 
because I think that balance is important. But, more 
importantly, to achieve that balance, we have to have all of 
the agencies and actors that are looking at this in an 
oversight coordinating and working together. And because there 
is not one agency looking at all of these, I think our concern 
is how do we ensure that there is that coordination, that 
collaboration, and that something is not falling through the 
cracks here? And I think my concern, like many of my 
colleagues, is how do we ensure that happens?
    Mr. Tarbert. CFIUS was created to bring to bear all of 
those resources throughout the Government, and one of the great 
things about CFIUS is because it is not a singular agency, but 
rather a committee of 16, effectively, at least 11 but 16 when 
you include all the observers, it brings to bear all of that 
expertise. So if we see a transaction that requires experts at 
the Department of Energy, at our laboratories, we can bring 
them in.
    So I think CFIUS is really meant to do exactly that, and we 
value that close coordination. We have weekly meetings, monthly 
meetings at various levels within the organization, where all 
of those departments and agencies are represented.
    Senator Cortez Masto. And do you feel the same way, 
gentlemen?
    Mr. Ashooh. Yes, and Senator, I might add, our export 
control process also is interagency. In fact, we work very 
closely with the Department of Defense and Department of State 
in processing our license applications.
    But I think that one of the positives about FIRRMA that I 
do think bears mentioning is, certainly from an export control 
perspective we are living in a global environment, and it is 
important that, under this legislation, we are allowed to 
collaborate more than we are currently with friendly Nations. 
That is something we do in the export control world. We have 
multilateral regimes that work all the time, because when we 
get together on things it is far more impactful. That needs to 
apply in CFIUS as well.
    Senator Cortez Masto. OK.
    Mr. Chewning. Yes, Senator. We support the committee 
approach as being holistic.
    Senator Cortez Masto. Thank you. I notice my time is up and 
I have gone a little bit over. Thank you very much for your 
being here today and, Chair, for the Committee hearing.
    Chairman Crapo. Thank you. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman, and Ranking 
Member, for the recognition, and I want to thank you all for 
being here.
    I just--I guess I will start out with a general question 
since we are working something not CFIUS related but something 
I think deals with national security, and that is the Farm 
Bill. Would you agree that food security and national security 
are connected? Any one of you.
    Mr. Tarbert. Yes.
    Mr. Ashooh. Yes.
    Senator Tester. Did CFIUS play a role in Bayer's purchaser 
of Monsanto?
    Mr. Tarbert. By law we are unable to talk about any 
particular transaction publicly, but we can provide briefings 
to any Member of Congress.
    Senator Tester. Can you give me a nod of the head, then, if 
you cannot talk about it?
    Mr. Tarbert. I am not sure if we are permitted, under the 
statute, to speak publicly about anything, but what we can 
provide a confidential briefing on any particular case.
    Senator Tester. Well, let me ask this.
    Mr. Tarbert. Sure.
    Senator Tester. Do you believe that CFIUS--and this can be 
for anybody up there--do you believe that CFIUS currently has 
enough power to protect the food system here in the United 
States, currently?
    Mr. Tarbert. I would say that it has enough for those 
transactions that implicate the food system under its 
jurisdiction. So cases that would implicate food security that 
come before CFIUS, I would say yes. What I do not know, 
Senator, is whether there are issues with respect to food 
security that fall outside the kinds of transactions that we 
look at.
    Senator Tester. Do you--would the Cornyn bill have an 
effect on agribusiness transactions?
    Mr. Ashooh. It could, possibly.
    Senator Tester. OK. Well just--I do not--it is kind of odd 
in this Committee. I mean, it is odd in any committee when we 
cannot talk about the kind of transactions that you guys deal 
with. I mean, I do not understand--I get it if you are talking 
about a potential military conflict, but if you think food 
security is national security, to ask if you dealt with the 
Bayer-Monsanto merger and to say you cannot respond to any 
specific cases, that tells me you dealt with it. Otherwise you 
would say no, because you did not deal with that case. Enough 
said.
    Mr. Tarbert. I am just going to smile.
    Senator Tester. OK. That is good. Well, I will just tell 
you that I really--I think one of the reasons we have a Farm 
Bill and we put out billions of dollars in subsidies is for 
food security, and I think food security is critically 
important in this country, and I think it is a national 
security issue. And I will also tell you that Bayer is a big 
dog, internationally, and so is Monsanto, and for them to be 
able to combine, I would really love to know the thought 
process that went into that, because from a national security 
standpoint, I think it makes us less secure. It gives control 
of our food to a select few people.
    Mr. Tarbert. And just to be clear, Senator, we are not 
permitted to speak publicly about a particular transaction, but 
every Member of Congress and your staff has the ability to 
request a briefing on a transaction.
    Senator Tester. I got it.
    So let us talk about the Chicago Mercantile Exchange. I 
know that the SEC plays a role. Potentially the Department of 
Agriculture would play a role in that kind of deal. Maybe the 
Department of Agriculture would play a role in the Bayer-
Monsanto deal. I guess the question is, do you get enough 
support from agencies in your decision making? Is there 
adequate reason to adding more input from agencies as you guys 
make your administrative decisions?
    Mr. Tarbert. Sure. On transactions, at least during my 
first 100 days, there----
    Senator Tester. Yes.
    Mr. Tarbert. ----where we have seen cases, let us say, that 
have dealt with food security issues----
    Senator Tester. Yes.
    Mr. Tarbert. ----we have always involved the Department of 
Agriculture.
    Senator Tester. OK. So you do not--is there any downside to 
adding more administrative agencies to CFIUS?
    Mr. Tarbert. Here is what I would think.
    Senator Tester. Yeah.
    Mr. Tarbert. If we added--so, basically, any transaction 
that comes through CFIUS--and keep in mind we had nearly 240 
last year----
    Senator Tester. Right.
    Mr. Tarbert. ----every single agency has to review the 
transaction and sign off, a Senate-confirmed official. So if we 
have only three cases per year, let us say----
    Senator Tester. Yeah.
    Mr. Tarbert. ----that deal with food security----
    Senator Tester. Yeah.
    Mr. Tarbert. ----we would be asking the Department of 
Agriculture to commit all sorts of resources and their time and 
effort to deal with a bunch of cases that have nothing to do 
with food security.
    Senator Tester. I got you.
    Mr. Tarbert. So that would be the only----
    Senator Tester. So you think it is much more effective to 
bring them in on an ad hoc basis.
    Mr. Tarbert. They absolutely should be brought in when food 
security is an issue, and we do.
    Senator Tester. OK. And the same thing with agencies like 
the SEC and things like that.
    Mr. Tarbert. Yes, sir.
    Senator Tester. OK. Very good. I have got more questions 
for the record. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you. Senator Menendez.
    Senator Menendez. Thank you. Mr. Secretary, last year, NeST 
Technologies, a New Jersey-based company, had agreed to be 
purchased by HNA, a Chinese conglomerate, on the condition that 
the transaction received approval from CFIUS. According to a 
lawsuit filed last month by NeST Technologies, the deal fell 
apart because HNA, the Chinese conglomerate, provided knowingly 
false, inconsistent, and misleading information about its 
ownership and ties to the Chinese Government during the CFIUS 
review of the acquisition.
    But HNA's interest in the United States is not limited to 
the New Jersey company. They have received CFIUS approval to 
purchase a California technology distributors, they are 
actively working to purchase a controlling stake in Skybridge 
Capital, the investment firm owned by Anthony Scaramucci.
    So should not there be severe consequences for parties that 
either mislead or fail to provide accurate information to 
CFIUS?
    Mr. Tarbert. Yes, there should be. If there are situations 
where we see a notice that is filled with misleading 
statements, there is the ability to take action. FIRMA 
specifically requires a certification for that very----
    Senator Menendez. And in that respect, then, should not 
consequences flow to any previously approved or pending 
transactions? For example, should CFIUS reopen previously 
cleared HNA transactions or modify their approach to reviewing 
pending transactions involving companies like HNA, in light of 
the information? If they have shown themselves to be a bad 
actor, and they move from one transaction to the other, should 
not there be a heightened scrutiny of their efforts to acquire 
U.S. companies that would fall under the rubric of the CFIUS 
review?
    Mr. Tarbert. I will not specifically--talk to any specific 
case, but what I will say is----
    Senator Menendez. I am not asking about any specific case. 
I am asking about any other follow-on, regardless of what the 
transaction is.
    Mr. Tarbert. Yes.
    Senator Menendez. Should not--whether it is HNA or a 
similarly situated foreign company that is, in essence, seeking 
to deceive, because their real purpose is not for a commercial 
transaction but to create a transfer to the Government that 
they are ultimately backed by. Should not that raise a higher 
scrutiny for you?
    Mr. Tarbert. Well, it definitely raises scrutiny when you 
look at the specific tests we use, threat plus vulnerability 
equals consequence. That plays into the threat issue. If they 
are materially misleading and misrepresenting who they are, and 
there are ties to a Government, for example, if we see a 
company doing that, then that would play into our analysis.
    Senator Menendez. Well, I certainly am glad to hear that, 
and I hope--commend to your attention that this is one company 
that, in fact, seems to be doing that.
    Mr. Ashooh. Senator, if I might----
    Senator Menendez. Yes.
    Mr. Ashooh. ----and again, not to speak to a specific case, 
but Bureau of Industry and Security within Commerce routinely 
uses information gleaned from CFIUS process to provide 
appropriate follow-up for our separate authorities, under the 
export control regime, but that is a common occurrence.
    Senator Menendez. Let me ask, Mr. Secretary, I have been 
closely following, and raised in this Committee several times, 
a situation in Venezuela, particularly the loan, in 2016, by 
the Russian State oil company, Rosneft, to Venezuela State-
owned oil company, PDVSA. As collateral for the loan, PDVSA 
pledged a nearly 50-percent ownership stake in U.S.-based Citgo 
to Rosneft. And I remain deeply concerned about the potential 
for a hostile adversary like Russia to have ownership of 
critical U.S. energy infrastructure.
    Last May, Secretary Mnuchin told me, in a hearing, that any 
Rosneft acquisition of Citgo would be reviewed by CFIUS. I 
followed up in an inquiry to Treasury in September of last 
year, but 4 months later I have not had a response.
    In your opinion, does CFIUS require any additional 
statutory authorities to conduct a thorough review of this 
possible acquisition?
    Mr. Tarbert. I will not speak to the specific case, but I 
will say that FIRRMA has a couple of provisions in there that 
would ensure that any similar type of transaction would be 
covered. For example, it specifically talks about assets 
purchased in bankruptcy, and it also has a provision that 
addresses nonpassive investments. So if you had a situation 
where bonds were being converted but there was not control, I 
believe that FIRRMA would address that situation.
    Senator Menendez. Oh, if I took Rosneft out and I just 
described the nature of the possibility, would you say that you 
have the authorities necessary, under CFIUS, to review such a 
transaction?
    Mr. Tarbert. I would say that just on the facts provided, I 
am not able to say that we do.
    Senator Menendez. Well, you need to tell the Committee 
that. You need to let us know.
    Mr. Tarbert. Well, again, not the specific, but just based 
on----
    Senator Menendez. Mr. Secretary, please do not play word 
games with me. I am asking you whether you have the 
authorities, under any such transaction, whether it be a 
bankruptcy someplace else, where shares are held, to any 
critical infrastructure in the United States. If you do not 
have the authorities then you need to tell----
    Mr. Tarbert. No, I would say if it results in a situation 
where there is not control, then we do not have the authority, 
and we would need it.
    Senator Menendez. Where there is not control.
    Mr. Tarbert. Where there is not control.
    Senator Menendez. So if--so their pledge, 50 percent, it 
would have been easy for them to get another percent or two on 
the open market so they would be over 50 percent and, 
therefore, a controlling interest. In that case, you are saying 
you do have the authority.
    Mr. Tarbert. If that--if they had--if they had----
    [Overlapping speakers.]
    Mr. Tarbert. ----that allows them to----
    Senator Menendez. ----less than a controlling authority, 
you need new authority.
    Mr. Tarbert. Exactly. That is exactly right.
    Senator Menendez. I appreciate that. Yeah, I have other 
questions but I will submit them.
    Mr. Tarbert. And we can--for specific inquiries, again, we 
make ourselves available to Members of Congress, where we 
cannot speak publicly on----
    Senator Menendez. OK. Well, I hope my request of 4 months 
ago eventually gets an answer. Thank you.
    Chairman Crapo. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman, and thank you to 
our witnesses for being here today.
    So we are here to talk about CFIUS, which reviews 
acquisitions by foreign companies to ensure that they do not 
threaten our national security, because we know that our 
adversaries are particularly interested in acquiring emerging, 
early stage technologies and they may be structuring their 
transactions in order to avoid CFIUS review.
    So to prevent that from happening, we have to be able to 
identify what are our most critical technologies. But GAO found 
that the Pentagon is no longer updating the military critical 
technologies list that has the technologies listed that we need 
to maintain our military superiority.
    The CFIUS reform bill that we are discussing would 
significantly expand the category of covered transactions to 
include ``other emerging technologies that could be essential 
for maintaining or increasing our technological advantage.'' I 
know that both the Chair and the Ranking Member talked a little 
bit about this, but I want to dig in just a bit more and ask 
the question, given how rapidly technology is advancing, how do 
you think your agencies should identify emerging technologies 
and identify the transactions involving these technologies for 
CFIUS review?
    If you could all just give me a short bite on this it would 
be helpful. Maybe I could start with you, Secretary Tarbert.
    Mr. Tarbert. I think we would want to rely on the 
interagency process and particularly those experts on all those 
individual technologies by sector, to really get a thorough 
idea.
    Senator Warren. So you say go to the experts, ask the 
experts, and develop a list out of that?
    Mr. Tarbert. As well as making use of the notice and 
comment rulemaking process, after which time we would update 
the list frequently.
    Senator Warren. OK. It sounds like it is further on down 
the list, though.
    Mr. Ashooh, could you add more?
    Mr. Ashooh. I take your question to be how do we identify--
--
    Senator Warren. Right.
    Mr. Ashooh. ----those emerging technologies, and----
    Senator Warren. Right. How do you know an emerging 
technology to know to watch out? That is what I am really 
trying to ask.
    Mr. Ashooh. That is certainly the crux--emerging 
technology, especially critically technology used to be led by 
the national security establishment. It is not now, so it is a 
challenge, so there is no one way.
    I will tell you, within Commerce, we lean heavily on what 
we call technical advisory committees, which are made up of the 
folks who are representative of where those emerging 
technologies come from. And one of the priorities of the Under 
Secretary of BIS has been to revisit those advisory committees, 
to make sure they are fresh, they have got the right people. 
But that is not the only way.
    Senator Warren. Right.
    Mr. Ashooh. It is just one key way that I thought I would 
mention.
    Senator Warren. And I worry about it not being systematic, 
that they are more episodic rather than regularly built in, so 
that they are alert to the fact that they are the ones that you 
are counting on.
    Mr. Ashooh. We share that. Yeah, we share the systematic 
need to do this, and it has to be regimented and are working on 
ways to do that.
    Senator Warren. Good. And, Mr. Chewning, would you like to 
add anything to that?
    Mr. Chewning. Yes, Senator. I think I would just say that 
the lists are important. They need to be updated. I also would 
like to point out the complementary nature of the list with the 
CFIUS process that takes a holistic view on risk, based on 
threat, vulnerability, and consequence. I think that is a nice 
interplay between the two, because there are some threats we 
may not know, that would not be on a list, and that we would 
want to be able to catch through the RBA process, as well.
    Senator Warren. Fair enough. I am just trying to get this 
back so you know even the areas to be alert in, and I would be 
interested in any follow-up you have on that----
    Mr. Chewning. I would be happy to provide that.
    Senator Warren. ----about how we might be doing this.
    I think it is really important for CFIUS to be proactive 
and not just reactive in identifying these emerging 
technologies, and the foreign adversaries, I guarantee, are 
looking at and trying to figure out how they might be able to 
acquire.
    I also would emphasize that if we are going to expand CFIUS 
mandate for 21st-century economy and the security environment 
we now face, we have to make sure it has a 21st-century level 
of resources available to you, to effectively handle the 
growing volume and complexity of these transactions. You have 
to grow along with the threat here.
    The discussion of CFIUS focuses on protecting our national 
security while preserving foreign investment, but I want to 
touch on one other issue that I think affects both priorities, 
and that is our investment in basic research. Jim Lewis, a 
former official with the Department of State and Commerce, 
testified in this Committee last year that CFIUS reforms should 
be paired with policies that drive innovation here at home, and 
that means investing in research that helps our economy and 
helps our military.
    He said, our underinvestment in scientific research creates 
a self-imposed disadvantage in military and economic 
competition with China, and that maintaining our economic and 
military superiority requires investment both by encouraging 
private-sector investment and by governing in those areas, like 
basic research, where the private sector spending is likely to 
be insufficient.
    So let me just ask this in the quickest possible way, and I 
will start with you, Mr. Chewning. Would more Government 
investment in scientific research support the core objectives 
of CFIUS in protecting strategic industries from foreign 
competition and maintaining our technological----
    Mr. Chewning. Absolutely, Senator, yes.
    Senator Warren. And would you agree with that?
    Mr. Ashooh. Yes.
    Senator Warren. And would you agree with that, Secretary 
Tarbert?
    Mr. Tarbert. Yes.
    Senator Warren. Thank you very much, Mr. Chairman. I 
appreciate it. I hope that we will push hard on this research 
point as well, when we are talking about revisions to CFIUS.
    Chairman Crapo. That is an excellent point, and thank you 
very much for focusing on that.
    That concludes the questioning. I have a couple of quick 
announcements for those Senators who want to ask questions, to 
follow up on this for the record. Those questions will be due 
by Thursday, February 1st. And, witnesses, you will be probably 
asked some follow-up questions too. I ask you to respond to 
them promptly.
    And I am going to take the Chairman's prerogative and give 
you the first one to put on your list right now. It is one we 
did not get to. It is one that Senator Warren just alluded to. 
This question, which I would like you to put first on your list 
to respond to, is that the legislation, FIRRMA, authorizes 
CFIUS to impose filing fees on transactions to cover the 
committee's funding needs. Will these fees be sufficient to 
address the increased caseload anticipated with FIRRMA, and 
what new resources will your agencies need to carry out these 
reforms? How many more cases do you anticipate CFIUS would 
review as a result of FIRRMA?
    So there is your first question.
    Senator Shelby. Mr. Chairman?
    Chairman Crapo. Yes. I do not want to start too much here, 
but go ahead.
    Senator Shelby. No, no. I hope they have sufficient funds. 
If they do not have sufficient funds--I am putting on my 
appropriator's hat now--we will get you the sufficient funds, 
because I congratulate you and Senator Brown for bringing this 
hearing together. This is of utmost importance to this country, 
what you guys do, and you have got to have the resources to do 
it. Thank you.
    Chairman Crapo. Thank you, Senator. And with that, this 
hearing is adjourned. Thank you again for being here.
    [Whereupon, at 11:19 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    This morning, we will receive testimony for a third time this 
Congress on the role of the Committee on Foreign Investment in the 
United States, or ``CFIUS''.
    The Committee held a general oversight hearing on CFIUS in 
September, and last Thursday, the Committee began its review of S. 
2098, the Foreign Investment Risk Review Modernization Act of 2017, or 
FIRRMA, a comprehensive reform bill that significantly expands the 
purview of CFIUS, introduced by Senators Cornyn and Feinstein
    CFIUS's authorities cover transactions that result in foreign 
``control'' of a U.S. business that may threaten the national security 
of the United States. The focus is currently on inbound investment and 
technology acquisition.
    Today's hearing brings in witnesses from three of the nine Federal 
agencies and offices that comprise the full voting membership of CFIUS: 
the Department of the Treasury, which serves as Chair of the Committee; 
the Department of Defense; and the Department of Commerce's Bureau of 
Industry and Security, which administers and enforces the dual use 
regulations of the U.S. export control regime.
    According to their testimony last week, Senators Cornyn and 
Feinstein, informed by their work on the Senate Intelligence Committee, 
introduced their bill because of growing concerns arising from China's 
multilayered threat to U.S. national security.
    Namely, threats emanating from a weaponization of its foreign 
investment strategy to acquire, by design, dual-use technology and 
know-how from U.S. companies.
    Our colleagues believe that China has found gaps in both the 
existing CFIUS process and export control regime, and is exploiting 
each of them to the detriment of U.S. national security and the U.S. 
defense industrial base.
    To address these concerns, FIRRMA is specifically designed to 
broaden CFIUS's jurisdiction to review certain high technology joint 
venture and related arrangements, minority-position investments and 
certain types of real estate transactions.
    At last week's hearing, a consensus emerged that much of the bill 
is focused on national security threats that need to be addressed as 
China executes its policies born of its unique civil-military 
integration that effectively blurs the lines between military and 
commercial activities.
    It is also important to note that the overwhelming majority of 
foreign investments and transactions provide significant benefit to the 
U.S. economy, including those Chinese investments that occur in most 
sectors of the U.S. economy and do not impact the national security of 
the United States.
    It is that point of inflection, between national security and 
economic growth realized from an open investment policy, that the 
Banking Committee has been entrusted to debate and oversee throughout 
the now 42-year evolution of the CFIUS process.
    The challenge comes in the continued use of foreign investment to 
promote economic growth and next generation technologies while 
shielding those very technologies from foreign threats.
    Last week, the panel of witnesses from the private sector offered 
their perspectives on the potential effects of FIRRMA.
    During the hearing's question and answer period, there were several 
questions raised that merit feedback from today's panel:
    One, would the expansion of CFIUS authority to unwind or alter 
outbound joint venture-related international commercial activity 
duplicate or in any way undermine the current U.S. export control 
regime and end up chilling this type of commercial activity?
    Two, if there are gaps in the export control process, why should 
this Committee, which has jurisdiction over both the relevant parts of 
the U.S. export control regime and CFIUS, opt to create new export 
control authority for CFIUS, a traditionally unilateral, inward bound 
review process?
    Three, what would the resource burden look like for each of your 
agencies for the type of expansion envisioned by this legislation, and 
what impact would it have on foreign investment if the review period 
were actually increased by 50 percent to accommodate these new reviews?
    The three Government agencies represented here today provide a 
spectrum of viewpoints necessary to understand where the United States 
must position itself with respect to CFIUS to assure the national 
security of the United States.
    Given what we have heard in previous hearings, it is apparent on 
national security grounds that legislative fixes to the current system 
may be warranted, including expanding the authority of CFIUS to monitor 
certain additional transactions that are evading the process.
    Preservation of the U.S. defense industrial base, protection of 
U.S. critical technology, critical infrastructure, and even related 
American know-how are all legitimate areas of concern.
    It is not the intention of the Banking Committee to chill direct 
foreign investment into the United States, but neither can this 
Nation's national security interests be subordinated to commercial 
interests.
    I am certain that these fixes can be made with the help of the 
Administration, business community, and my colleagues, from both sides 
of the dais, on the Banking Committee.
                                 ______
                                 
                 PREPARED STATEMENT OF HEATH P. TARBERT
   Assistant Secretary of the Treasury for International Markets and 
                           Investment Policy
                            January 25, 2018
    Chairman Crapo, Ranking Member Brown, and distinguished Members of 
the Committee, thank you for the opportunity to testify in support of 
the Foreign Investment Risk Review Modernization Act (FIRRMA), S.2098, 
115th Cong. (2017).
    My top priority as Assistant Secretary is ensuring that the 
Committee on Foreign Investment in the United States (CFIUS) has the 
tools and resources it needs to perform the critical national security 
functions that Congress intended it to. \1\ I believe FIRRMA--a bill 
introduced with broad, bipartisan support--is designed to provide CFIUS 
with the tools it needs to meet the challenges of today and those 
likely to arise in the future. FIRRMA will protect our national 
security and strengthen America's longstanding open investment policy 
that fosters innovation and economic growth.
---------------------------------------------------------------------------
     \1\ See Nomination Hearing before the S. Comm. on Banking, 
Housing, and Urban Affairs, 115th Cong. (May 16, 2017) (testimony of 
Dr. Heath P. Tarbert).
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Importance of Foreign Investment in the United States
    From the early days of our Republic, the United States has been a 
leading destination for investors, entrepreneurs, and innovators. In 
his famous Report on the Subject of Manufactures, Alexander Hamilton 
argued that foreign capital was not something to be feared or viewed as 
a rival to domestic investment, but was instead a ``precious 
acquisition'' in fostering our economic growth. \2\ Throughout the 19th 
and 20th centuries, capital from abroad funded the construction of 
America from our railways to our city skylines, while at the same time 
helping make such innovations as the automobile a reality. \3\ Foreign 
investment has also brought significant benefits to American workers 
and their families in the form of economic growth and well-paid jobs.
---------------------------------------------------------------------------
     \2\ Alexander Hamilton, ``Report on the Subject of Manufactures'' 
(Dec. 5, 1791), available at https://founders.archives.gov/documents/
Hamilton/01-10-02-0001-0007.
     \3\ See Mira Wilkins, ``The History of Foreign Investment in the 
United States to 1914'' (Harvard Univ. Press 1999).
---------------------------------------------------------------------------
    The same is true today, with a total stock of foreign direct 
investment in the United States standing at a staggering $7.6 trillion 
(at market value) in 2016. \4\ Numerous studies have demonstrated that 
the benefits from foreign investment in the United States are 
substantial. Majority-owned U.S. affiliates of foreign entities 
accounted for over 23 percent of total U.S. goods exports in 2015. \5\ 
They also accounted for 15.8 percent of the U.S. total expenditure on 
research and development by businesses. \6\ They employed 6.8 million 
U.S. workers in 2015, and provided compensation of nearly $80,000 per 
U.S. employee, as compared to the U.S. average of $64,000. \7\ One 
study estimated that spillovers from foreign direct investment in the 
United States accounted for between 8 percent and 19 percent of all 
U.S. manufacturing productivity growth between 1987 and 1996. \8\ As 
Secretary Mnuchin--echoing his predecessor, Secretary Hamilton--has 
observed, ``we recognize the profound economic benefits of foreign 
investment'' today and place the utmost value on having ``industrious 
and entrepreneurial foreign investors'' continue to invest, grow, and 
innovate in the United States. \9\
---------------------------------------------------------------------------
     \4\ U.S. Bureau of Economic Analysis, ``U.S. Net International 
Investment Position at the End of the Period'', Table 1.1. (Dec. 28, 
2017), available at https://bea.gov/scb/pdf/2018/01-January/0118-
international-investment-position-tables.pdf.
     \5\ U.S. Dep't of Commerce, Economics and Statistics Admin., 
``Foreign Direct Investment in the United States'', ESA Issue Brief 06-
17, Oct. 3, 2017, at 2.
     \6\ Id.
     \7\ Id.
     \8\ Wolfgang Keller and Stephen R. Yeaple, ``Multinational 
Enterprises, Int'l Trade, and Productivity Growth: Firm Level Evidence 
From the United States'', 91 Review of Economics & Statistics, November 
2009, at 821, 828.
     \9\ Steven T. Mnuchin, Secretary, Dep't of the Treasury, 
``SelectUSA Investment Summit Welcome Address'' (June 20, 2017).
---------------------------------------------------------------------------
Evolution of CFIUS
    Despite its many benefits, we are equally cognizant that foreign 
investment is not always benign. On the eve of America's entry into 
World War I, concerned by German acquisitions in our chemical sector 
and other war-related industries, \10\ Congress passed the Trading with 
the Enemy Act, giving the President broad power to block investments 
during times of war and national emergency. \11\
---------------------------------------------------------------------------
     \10\ Edward M. Graham and David M. Marchick, Institute for Int'l 
Economics, ``U.S. Nat'l Security & Foreign Direct Investment'' 4-8 
(2006). Prior to America's entry into World War I, it was revealed that 
the German Government made a number of concealed investments into the 
United States, including establishment of the Bridgeport Projectile 
Company which ``was in business merely to keep America's leading 
munitions producers too busy to fill genuine orders for the weapons the 
French and British so desperately needed.'' Ernest Wittenberg, ``The 
Thrifty Spy on the Sixth Avenue El'', American Heritage (Dec. 1965), 
available at http://www.americanheritage.com/content/thrifty-spy-sixth-
avenue-el. The company placed an order for five million pounds of 
gunpowder and two million shell cases ``with the intention of simply 
storing them.'' Id. The plot was revealed when a German spy 
inadvertently left his briefcase containing the incriminating documents 
on a New York City train, with the documents being returned to the 
custody of the Treasury Department. Id.
     \11\ 50 U.S.C. 4305. TWEA, originally passed in 1917, empowered 
the President to ``investigate, regulate, direct and compel, nullify, 
void, prevent or prohibit, any acquisition holding, withholding, use, 
transfer, withdrawal, transportation, importation or exportation of, or 
dealing in, or exercising any right, power, or privilege with respect 
to, or transactions involving, any property in which any foreign 
country or a national thereof has any interest.'' Id. 4305(b)(1)(B).
---------------------------------------------------------------------------
    During the Great Depression and World War II, international 
investment flows dropped dramatically. \12\ And in the boom years of 
the 1950s and 1960s--as many countries devastated by World War II were 
rebuilding their economies--investment in the United States from abroad 
was modest compared to outflows. Indeed, for the first time ever, 
America became a net source of investment capital instead of its 
destination. \13\ And what foreign investment did exist posed little 
risk since our main strategic adversaries--the Soviet Union and its 
satellites--were communist countries whose economic systems were 
largely isolated from our own.
---------------------------------------------------------------------------
     \12\ Graham and Marchick, supra n. 10, at xvi, 14, 18.
     \13\ Id. at 9.
---------------------------------------------------------------------------
    When the post-war trend changed in the 1970s, however, CFIUS was 
born. The oil shock that made OPEC countries wealthy led to concern 
that petrodollars might be used to purchase key U.S. assets. In 1975, 
President Ford issued an Executive Order creating CFIUS to monitor and 
report on foreign investments, but with no power to stop those posing 
national security threats. \14\ Then in the 1980s, a growing number of 
Japanese acquisitions motivated Congress to pass the Exon-Florio 
Amendment in 1988. \15\ For the first time, the President could block 
the foreign acquisition of a U.S. company or order divestment where the 
transaction posed a threat to national security without first declaring 
an emergency. That law created Section 721 of the Defense Production 
Act of 1950, which remains the statutory cornerstone of CFIUS today.
---------------------------------------------------------------------------
     \14\ Exec. Order 11,858, 40 FR 20,263 (May 7, 1975).
     \15\ Pub. L. 100-418, Title V, 5021, 102 Stat. 1107 (1988).
---------------------------------------------------------------------------
    Subsequently, in 1992, Congress passed the Byrd Amendment which 
requires CFIUS to undertake an investigation where two criteria are 
met: (1) the acquirer is controlled by or acting on behalf of a foreign 
Government; and (2) the acquisition results in control of a person 
engaged in interstate commerce in the United States that could threaten 
our national security. \16\ In the years that followed, it became 
evident that CFIUS and Congress did not share the same view on when a 
45-day investigation period was discretionary rather than mandatory, a 
rift that was more clearly exposed in the wake of the Dubai Ports World 
controversy. In order to instill greater procedural rigor and 
accountability into CFIUS's process, Congress enacted the Foreign 
Investment and National Security Act of 2007 (FINSA), which formally 
established CFIUS by statute and codified its current structure and 
processes. \17\
---------------------------------------------------------------------------
     \16\ Pub. L. 102-484, 106 Stat. 2315 (1992).
     \17\ Pub. L. 110-49, 121 Stat. 246 (2007).
---------------------------------------------------------------------------
Critical Need for CFIUS Modernization
    Now, more than a decade after FINSA and three decades after Exon-
Florio, we find ourselves at another historic inflection point. Within 
the last few years, the national security landscape as it relates to 
foreign investment began shifting in ways that have eclipsed the 
magnitude of any other shift in CFIUS's 40-year history. Nowhere is 
that shift more evident than in the caseload CFIUS now faces. The 
resources of CFIUS are challenged by increased case volume and 
complexity. The average volume of CFIUS cases has been growing steadily 
from fewer than 100 in 2009 and 2010 (the 2 years following the 
financial crisis) to nearly 240 last year. While it is difficult to 
measure case complexity in real terms, one indicator is the rate at 
which cases have proceeded to CFIUS's investigation stage, which is 
more resource intensive. In 2007, approximately 4 percent of cases went 
to investigation; in 2017, approximately 70 percent did. Another 
potential measure of complexity is the number of cases in which CFIUS 
determines that mitigation or prohibition is necessary to address 
national security concerns, which require significantly more time and 
resources. From roughly 2008 through 2015, such cases represented fewer 
than 10 percent of the total covered transactions CFIUS reviewed; this 
figure has risen to approximately 20 percent of total covered 
transactions CFIUS reviewed in 2017.
    The added complexity CFIUS is confronting arises from a number of 
different factors, including: the way foreign Governments are using 
investments to meet strategic objectives, more complex transaction 
structures, and increasingly globalized supply chains. Complexity also 
results from continued evolution in the relationship between national 
security and commercial activity. Military capabilities are rapidly 
building on top of commercial innovations. Additionally, the digital, 
data-driven economy has created national security vulnerabilities never 
before seen. Today, the acquisition of a Silicon Valley start-up may 
raise just as serious concerns from a national security perspective as 
the acquisition of a defense or aerospace company, CFIUS's traditional 
area of focus.
    CFIUS's exposure to such cases has allowed it to play a critical 
role in protecting against threats to national security, but has at the 
same time highlighted gaps in our jurisdictional authorities. We 
continue to be made aware of transactions we lack the jurisdiction to 
review but which pose similar national security concerns to those 
already before CFIUS. These gaps are widening as more threat actors 
seek to exploit them. The problem lies in the fact that CFIUS's 
jurisdictional grant is now 30 years old, originating with the Exon-
Florio Amendment and maintained in FINSA. Under current law, CFIUS has 
authority only to review those mergers, acquisitions, and takeovers 
that result in foreign ``control'' of a ``U.S. business.'' That made 
sense in the 1980s and even in the first decade of this century, but 
the foreign investment landscape has changed significantly, with 
noncontrolling investments and joint ventures becoming ever more 
popular.
    Consequently, certain transactions--such as investments that are 
not passive, but simultaneously do not convey ``control'' in a U.S. 
business--that the Committee has identified as presenting a national 
security risk nonetheless remain outside its purview. Similarly, CFIUS 
is also aware that some parties may be deliberately structuring their 
transactions to come just below the control threshold to avoid CFIUS 
review, while others are moving critical technology and associated 
expertise from a U.S. business to offshore joint ventures. While we 
recognize there can and should be space for creative deal-making, 
purposeful attempts to evade CFIUS review put this country's national 
security at risk. Finally, we regularly contend with gaps that likely 
never should have existed at all. For example, the purchase of a U.S. 
business in close proximity to a sensitive military installation is 
subject to CFIUS review, but the purchase of real estate at the same 
location (on which one could place a business) is not. These gaps can 
lead to disparate outcomes in transactions presenting identical 
national security threats.
Support for FIRRMA
    The Administration endorses FIRRMA because it embraces four pillars 
critical for CFIUS modernization. First, FIRRMA expands the scope of 
transactions potentially reviewable by CFIUS, including certain 
nonpassive, noncontrolling investments, technology transfers through 
arrangements such as joint ventures, real estate purchases near 
sensitive military sites, and transactions structured to evade CFIUS 
review. The reasons for these changes are twofold: (1) they will close 
gaps in CFIUS's authorities by expanding the types of transactions 
subject to CFIUS review; and (2) they will give CFIUS greater ability 
to prevent parties from restructuring their transactions to avoid or 
evade CFIUS review when the aspects of the transaction that pose 
critical national security concerns remain.
    Second, FIRRMA empowers CFIUS to refine its procedures to ensure 
the process is tailored, efficient, and effective. Under FIRRMA, CFIUS 
is authorized to exclude certain noncontrolling transactions that would 
otherwise be covered by the expanded authority. Such exclusions could 
be based on whether the foreign investors are from a country that meets 
specified criteria, such as having a national security review process 
for foreign investment. FIRRMA also allows CFIUS to identify specific 
types of contributions by technology, sector, subsector, transaction 
type, or other transaction characteristics that warrant review--
effectively excluding those that do not. Additionally, CFIUS can define 
circumstances in which certain transactions can be excluded because 
other provisions of law--like export controls--are determined to be 
adequate to address any national security concerns. Only where existing 
authorities cannot resolve the risk will CFIUS step in to act.
    Third, FIRRMA recognizes that our own national security is linked 
to the security of our closest allies, who face similar threats. In 
light of increasingly globalized supply chains, it is essential to our 
national security that our allies maintain robust and effective 
national security review processes to vet foreign investments into 
their countries. FIRRMA gives CFIUS the discretion to exempt certain 
transactions from review involving parties from certain countries based 
on such factors as whether the country has a mutual defense treaty in 
place with the United States; a mutual arrangement to safeguard 
national security with respect to foreign investment; and a parallel 
process to review the national security implications of foreign 
investment. FIRRMA will also enhance collaboration with our allies and 
partners by allowing information sharing for national security purposes 
with domestic or foreign Governments.
    Fourth, FIRRMA requires an assessment of the resources necessary 
for CFIUS to fulfill its critical mission. FIRRMA would establish for 
the first time a ``CFIUS Fund'' (Fund), which would be authorized to 
receive appropriations. Under FIRRMA, these funds are intended to cover 
work on reviews, investigations, and other CFIUS activities. FIRRMA 
also authorizes CFIUS to assess and collect fees, to be deposited into 
the Fund, for any covered transaction for which a notice is filed. Once 
appropriated, these funds could also be used by CFIUS. Although the 
exact amount will be set by regulation, it would be capped at 1 percent 
of the value of the transaction or $300,000 (indexed for inflation), 
whichever is less. Finally, FIRRMA grants the Secretary of the 
Treasury, as CFIUS chairperson, the authority to transfer funding from 
the CFIUS Fund to any member agencies to address emerging needs in 
executing requirements of the bill. This approach would enhance the 
ability of agencies to work together on national security issues.
    Modernizing CFIUS entails a cost, and FIRRMA does not (and cannot) 
fully address the resource needs of CFIUS and its member agencies. But 
the cost of funding a modernized CFIUS is not the only consideration. 
We must all consider the cost of doing nothing: the potential loss of 
America's technological and military edge, which will have a real cost 
in American lives in any conflict. That is simply unacceptable.
    In sum, CFIUS must be modernized. In doing so, we must preserve our 
longstanding open investment policy. At the same time, we must protect 
our national security from current, emerging, and future threats. The 
twin aims of maintaining an open investment climate and safeguarding 
national security are the exclusive concern of neither Republicans nor 
Democrats. Rather, they are truly American aims that transcend party 
lines and regional interests. But they demand urgent action if we are 
to achieve them. I look forward to working with this Committee on 
improving and advancing FIRRMA, and I am hopeful the bill will continue 
to move forward on a bipartisan, bicameral basis.
                                 ______
                                 
                  PREPARED STATEMENT OF RICHARD ASHOOH
       Assistant Secretary of Commerce for Export Administration
                            January 25, 2018
    Chairman Crapo, Ranking Member Brown, and Members of the Committee: 
I appreciate the opportunity to testify before the Committee today in 
support of the Foreign Investment Risk Review Modernization Act 
(FIRRMA) (S.2098). I would also like to highlight the critical roles 
the Department of Commerce plays in supporting U.S. national security--
both as a member of the Committee on Foreign Investment in the United 
States (CFIUS) and as an export control agency.
    Committee on Foreign Investment in the United States
    Let me start by thanking Senator Cornyn, Senator Feinstein, Senator 
Burr, and the other cosponsors for their strong leadership and 
dedication on this very important issue. We appreciate the work Senator 
Cornyn and Congressman Pittenger have done on FIRRMA. The Commerce 
Department supports the modernization of the CFIUS process to ensure 
that it has the authorities and capacity required to address risks to 
our national security from foreign investment. The Department also 
shares Congress' concern about China's industrial policies and 
activities. We believe FIRRMA takes many positive steps in addressing 
those concerns.
    I have now had experience with the CFIUS review process in the 
public and private sectors. Since becoming Assistant Secretary of 
Commerce for Export Administration last year, I have reviewed almost 
100 CFIUS cases and participated in policy deliberations on many 
sensitive and complex transactions. While in the private sector, I 
worked for a defense company owned by a foreign company, whose 
acquisition by the foreign parent was reviewed by CFIUS. Based on my 
experience, it is clear that CFIUS plays an important role in 
protecting our national security. Together with the International Trade 
Administration (ITA), my organization, the Bureau of Industry and 
Security (BIS), play important roles in Commerce's review of CFIUS 
matters, reviewing every transaction and bringing different expertise 
to CFIUS's deliberations. ITA has extensive expertise on U.S. and 
global market conditions and provides insights into how the foreign 
investments reviewed by CFIUS fit into the overall market. BIS, on the 
other hand, as the administrator of the Export Administration 
Regulations (EAR), has extensive experience in export controls, which 
are often implicated in CFIUS reviews.
    I would like to highlight a few specific provisions in the 
legislation:

    As you are aware, the Administration welcomes foreign 
        investment and the Department of Commerce houses SelectUSA, 
        which helps promote foreign investment in the United States. 
        The Department welcomes the affirmations in FIRRMA of that 
        policy. As we consider how to modernize CFIUS, we should be 
        careful that the U.S. Government not send a signal that we have 
        changed our policy of encouraging foreign direct investment. 
        However, we are also very attuned to the need to protect U.S. 
        national security and feel that CFIUS has an important role to 
        play in that regard.

    We are supportive of the requirement for mandatory filings 
        for certain transactions involving foreign Government-
        controlled entities. However, we are concerned that the 25-
        percent threshold in FIRRMA is too high and that transactions 
        could easily be structured to evade it. We encourage the 
        committee to consider a lower threshold.

    We appreciate that FIRRMA requires an assessment of the 
        resources necessary for CFIUS to carry out its critical work, 
        and would both establish a CFIUS Fund and permit filing fees to 
        help achieve that end. We also appreciate that the bill states 
        that the provisions which would expand CFIUS authorities will 
        not take effect until CFIUS has put in place the regulations 
        and has the resources it needs to implement its expanded role.

    Additionally, we support the provisions of FIRRMA that 
        would facilitate greater cooperation and information sharing 
        with our allies and partners. This would permit increased 
        coordination with like-minded countries, particularly on 
        acquisitions that cross borders, as we attempt to address 
        national security concerns.

    The Department of Commerce looks forward to working with the 
Committee as it continues its CFIUS modernization efforts.
Administering Export Controls
    As this Committee well knows, BIS addresses the challenges that 
arise where business and national security intersect. Our mission is to 
advance U.S. national security, foreign policy, and economic interests 
by ensuring an effective export control and treaty compliance system 
and promoting continued U.S. strategic technology leadership.
    In our role administering the Export Administration Regulations 
(EAR), BIS's responsibilities encompass the entirety of the export 
control process--we write and implement the regulations, issue export 
licenses, conduct compliance activities (including overseas end-use 
checks), and enforce the regulations, including by preventing 
violations and punishing those who violate.
    The EAR has traditionally been the regulatory authority for the 
control of ``dual-use'' items, which are items that have a civil end 
use but can also be used for a military or proliferation-related use. 
However, in recent years some less sensitive military items previously 
controlled under the International Traffic in Arms Regulations (ITAR) 
have been transferred to the EAR. The dual-use items subject to control 
and these less sensitive military items are listed on the Commerce 
Control List (CCL) within the EAR. Additionally, commercial items that 
are not determined to merit control on the CCL as dual-use items are 
still subject to the EAR and are controlled to sanctioned destinations 
and parties as well as to prevent sensitive end uses such as those 
relating to developing weapons of mass destruction. We refer to such 
items as EAR99 items.
    It is important to note that the export control system administered 
by BIS is an instrument of national security that, like CFIUS, involves 
multiple agencies. We work closely with the Departments of Defense, 
Energy, and State and these agencies review and clear any changes to 
the EAR itself as well as license applications submitted to BIS. The 
different equities, viewpoints and technical expertise that our four 
agencies bring to the table ensure that the export control system is 
robust and that national security remains at the forefront.
    The EAR's authority covers a wide array of transactions and 
technology transfers. The goods, software, and technology listed for 
control on the CCL are set by using specific technical parameters. The 
interagency decisions on where to set these parameters are national 
security determinations that define when particular items become 
sufficiently applicable to a military end-use to warrant control. The 
EAR governs what are considered traditional exports of goods, software 
or technology to foreign countries, but the EAR also covers the 
transfers of controlled technology within the United States to foreign 
nationals under what we call ``deemed exports.'' It is also important 
to note that the EAR differentiates between countries that range from 
our closest allies to embargoed countries. This differentiation allows 
the export control system to treat exports and technology transfers 
under different licensing review policies depending on the level of 
concern with the recipient country. The EAR also includes lists of end-
uses and end users of concern that trigger extraordinary licensing 
requirements if an export is in support of or destined for such an end-
use or end user.
    In addition to being an interagency national security process, our 
export control system benefits from close cooperation with our 
international partners through the four major multilateral export 
control regimes. Through these regimes--the Wassenaar Arrangement, the 
Nuclear Suppliers Group, the Missile Technology Control Regime, and the 
Australia Group--the United States and our partners agree on which 
items and technologies merit control and how those controls should be 
applied. It has long been our position that export controls are 
significantly more effective when they are implemented multilaterally. 
This helps ensure that these sensitive technologies are controlled by 
all countries that are capable of producing them to make it more 
difficult for them to be acquired by parties of concern.
    The export control system and CFIUS are complementary tools that we 
utilize to protect U.S. national security, with CFIUS addressing risks 
stemming from foreign ownership of companies important to our national 
security, and export controls dealing with transfer of specific goods 
and technologies out of the United States or to foreign nationals, 
regardless of mode of transfer. Some risks, such as the potential 
transfer of sensitive technology from a United States firm by a new 
foreign owner, could fall under the purview of both mechanisms. Each 
mechanism has its strengths, and it is important that each be applied 
in ways that complement, and not duplicate, the other. If implemented 
appropriately, FIRRMA will strike this important balance.
    One issue that has received a lot of attention in recent months is 
the concept of ``emerging'' technologies that may not yet be well 
understood but could potentially be sensitive and present national 
security concerns. Our export control system has been addressing 
technological innovation for decades in light of the rapid pace of 
innovation and the increased overlap between civil and military 
technologies. Moreover, BIS has existing tools to identify and deal 
with emerging technologies through its specialized expertise and the 
EAR. One way that BIS seeks to keep as updated as possible on emerging 
technologies is through our technical advisory committees (TACs), which 
are our primary vehicle for interacting with industry in technical 
areas impacted by our export controls. These TACs cover various 
technology sectors including transportation, information technology, 
and sensors.
    The export control system is flexible and able to address concerns 
about emerging technologies, and the agencies involved in that process 
have experience with these issues. CFIUS deals with individual 
transactions that come before the committee for review. BIS, with the 
interagency, can prohibit the export of specific controlled 
technologies from anywhere in the United States and block their access 
by almost any foreign national.
    Finally, the Bureau of Industry and Security contributes to the 
national security of the United States through its aggressive 
enforcement of the EAR. Our Special Agents are located in 20 cities 
across the United States with a sole focus on identifying violations of 
the EAR and bringing to justice domestic and foreign violators. In 
addition we have export control officers stationed abroad who conduct 
end-use checks. Our enforcement efforts have included everything from 
the successful prosecution of individuals illegally shipping components 
for Improvised Explosive Devices (IED) into Iraq and illegal sales of 
U.S. technology to Iran, to stopping the illegal shipment of shotguns, 
jet engines, night vision equipment, and integrated circuits to 
prohibited end users or for prohibited end uses.
    We in BIS are committed to continuing to identify and control 
sensitive emerging technologies and to ensuring that the export control 
and CFIUS processes relevant to managing security challenges presented 
by emerging technologies are systematic, proactive, and 
institutionalized. We are currently undertaking a review to better 
utilize our authorities to combat threats arising from this kind of 
technology.
Summary
    In sum, CFIUS and export controls are both vital and robust 
authorities the United States relies upon to protect our national 
security. It is important that they remain complementary and not 
overlap unnecessarily, as that has the potential to overburden the 
CFIUS process and partially duplicate the more comprehensive coverage 
of technology transfer under the export control system. Commerce looks 
forward to working with the Congress on the technical aspects of FIRRMA 
to ensure it achieves the intended effect. Commerce is committed to 
working in both forums to protect sensitive U.S. technologies and 
assets that provide key advantages to our industrial base and national 
security.
    The Department of Commerce looks forward to working with the 
Committee and bill sponsors on advancing and improving FIRRMA.
    Thank you.
                                 ______
                                 
                  PREPARED STATEMENT OF ERIC CHEWNING
Deputy Assistant Secretary of Defense for Manufacturing and Industrial 
                              Base Policy
                            January 25, 2018
    Mr. Chairman, Ranking Member Brown, and Members of the Committee, 
thank you for the invitation to share the Department of Defense's role 
in the Committee on Foreign Investment in the United States (CFIUS) and 
the national security risks to America arising from inbound foreign 
direct investment. The protection of our national security innovation 
base from strategic competitors, in the national security realm like 
China and Russia, is an increasingly important priority of the 
Department and I appreciate the opportunity to speak with you this 
morning.
    The Department of Defense strongly supports modernization of the 
CFIUS process to ensure that the interagency Committee has the 
authorities required to address the evolving risks to our national 
security from transactions that are currently uncovered. We are 
thankful for the strong leadership of Senator Cornyn, Senator 
Feinstein, and Senator Burr on this issue and appreciate the bipartisan 
support for the Foreign Investment Risk Review Modernization Act 
(FIRRMA), S.2098, 115th Cong. (2017). The Department shares Congress' 
trepidations about strategic competitors' use of predatory economics 
and believes FIRRMA will take many positive steps to address these 
concerns. To quote Secretary of Defense Jim Mattis, stating this 
Department's position, in his letter of support to Senator Cornyn, the 
``DoD depends on critical, foundational, and emerging technologies to 
maintain military readiness and preserve our technological advantage 
over potential adversaries. FIRRMA would help close related gaps . . . 
.''
    As the National Security Strategy and the National Defense Strategy 
make clear, the Department's direction is to compete, deter, and win 
alongside our allies and partners in conflict and preserve peace 
through strength. Our defense industrial base is an extension of our 
military force structure. Only a defense industrial base that is 
robust, secure, and resilient, is able to support the needs of our 
military, innovate to retain our technological edge, surge when 
necessary, and keep our systems safe in cyberspace. As the Deputy 
Assistant Secretary for Manufacturing and Industrial Base Policy, my 
role within the Department of Defense is to ensure the United States 
maintains a superior industrial base that supports the Secretary's 
three priorities, namely (1) enhancing warfighter lethality, (2) 
strengthening alliances and attracting new partners, and (3) reforming 
the Department's business practices. In this capacity, I represent the 
Department in the interagency CFIUS process.
    I've spent the last 17 years working at the intersection of 
national security, industry, and finance, in both the private and 
public sectors. It is important that this bill not be considered an 
additional regulation on business. Under this bill, the United States 
should and will likely continue to welcome the vast majority of foreign 
investment that does not present any threat to our national security. 
Rather, this bill, should be considered a whole-of-Government response 
to a critical national security challenge--an insurance policy on the 
hundreds of billions of dollars per year we invest in our defense 
industrial base. Most importantly, this bill will help safeguard our 
sons and daughters who volunteer to step into harm's way, armed with 
the weapons that our industrial base produces.
Challenge to Technological Advantage
    Simply put, the United States military fights and wins wars through 
the unmatched performance of our men and women in uniform and our 
superior military technology. Knowing this, our competitors are 
aggressively attempting to diminish our technological advantage through 
a multifaceted strategy by targeting and acquiring the very 
technologies that are critical to our military success now and in the 
future. China, in particular, publicly articulates its policy of civil-
military integration, which ties into its intentions to become the 
world leader in science and technology and to modernize its military in 
part by strengthening the industrial base that supports it. \1\ These 
plans are backed by hundreds of billions of dollars in Chinese State 
funding. For example, China's efforts to create an indigenous 
semiconductor capability alone enjoy approximately $150 billion in 
State-connected funding. \2\ In addition to semiconductors, our long-
term strategic competitors have a clear focus in investing in the 
critical future technologies that are foundational for both commercial 
and military applications: artificial intelligence, autonomous 
vehicles, robotics, augmented reality, directed energy, and 
hypersonics. We see a notable increase in Chinese interest in each of 
these nascent technology areas, with Chinese entities participating in 
about 16 percent of all U.S. venture deals in 2015, up from a 6-percent 
average participation rate during 2010-2015. \3\
---------------------------------------------------------------------------
     \1\ Please see China's ``Report on the Work of Government, 2016''.
     \2\ ``Ensuring Long Term U.S. Leadership in Semiconductors''. 
Executive Office of the President, President's Council of Advisors on 
Science and Technology, January 2017. Retrieved at https://
obamawhitehouse.archives.gov/sites/default/files/microsites/ostp/PCAST/
pcast_ensuring--long-term_us_leadership_in_semiconductors.pdf.
     \3\ Michael Brown and Pavneet Singh, ``China's Technology Transfer 
Strategy: How Chinese Investments in Emerging Technology Enable a 
Strategic Competitor To Access the Crown Jewels of U.S. Innovation'', 
Defense Innovation Unit Experimental, January 2018.
---------------------------------------------------------------------------
    While some facets of our competitors' strategy, like industrial 
espionage and cybertheft, are clearly illegal, other approaches, 
including technology and business know-how transferred through 
acquisition in U.S. companies, may not be. Acquiring or investing in 
U.S. companies offers an opportunity for our competitors to gain access 
and control over technologies with potential military applications, 
enabling them to create their own indigenous capabilities, eroding our 
technological edge, and ultimately our military advantage. 
Additionally, some investments in the U.S. may also limit the 
availability of certain capabilities within the U.S. industrial base, 
potentially depriving our warfighters of access to important 
technological solutions needed to maintain our overmatch on the 
battlefield. We believe that the loss of critical technology to a 
competitor can inflict irreparable damage on our national security in 
the long term.
Department of Defense Role in CFIUS
    CFIUS is designed to address the national security risks arising 
from foreign investments that could result in foreign control of a U.S. 
business. Of the defined factors to be considered when determining the 
requirements of national security under the current Foreign Investment 
and National Security Act (FINSA) statute, several are directly related 
to defense, military requirements, and technological leadership as it 
relates to national security. In addition, seven of the fifteen 
coordinators of the National Security Threat Assessment (NSTA), which 
is relied upon in every CFIUS case, are DoD intelligence organizations. 
Moreover, the Defense Intelligence Agency (DIA) makes the statutorily 
required assessment of the risk of diversion of defense critical 
technology.
    As one of nine voting members of CFIUS, DoD provides significant 
input related to the impact of foreign investment on U.S. defense 
requirements and readiness, military competitiveness, and critical 
technology development, among other things. As such, DoD has been the 
co-lead alongside the Department of Treasury on a yearly average of 44 
percent of all CFIUS cases filed since 2012, the highest percentage of 
any committee member other than Treasury.
Examples of Limitations of CFIUS
    Since CFIUS was first instituted in the 1970s, our competitors have 
discovered methods beyond the committee's authorities and successfully 
acquire U.S. technologies and critical business know-how. Our national 
security competitors' ability to evolve, outpaces our ability to adapt 
under the current statutory and regulatory system. What's more, the 
current CFIUS authorities only cover some of the relevant transactions 
because deals that do not result in a foreign controlling interest are 
beyond its jurisdiction. There are other transaction types, such as 
certain joint ventures, and nonpassive, noncontrolling investments, 
that can pose national security concerns, such as transferring 
technology and critical capabilities. Additionally, the purchases of 
real estate by a foreign person provides opportunities to potentially 
establish a persistent presence near sensitive facilities, which would 
currently fall outside of CFIUS's scope to review.
CFIUS Modernization Needed
    The Department of Defense does not view CFIUS as a panacea. 
Instead, it is part of a layered defense that can, along with export 
controls and other regulatory mechanisms, stem the flow of critical 
technologies to our competitors. In order to do that, however, CFIUS's 
authorities need to adjust to keep pace with the rapid change of 
technology and nimble, long-term competitors.
    The Department is particularly supportive of the proposed 
adjustments in the FIRRMA legislation that gives CFIUS the discretion 
to broaden the scope of covered transactions to include certain 
contributions of intellectual property with associated support by a 
U.S. critical technology company to a foreign person through a joint 
venture or other similar arrangement. In addition, the Department 
appreciates the inclusion of foreign purchases or leases of certain 
real estate located in close proximity to sensitive facilities and the 
bill's recognition that enhanced international cooperation is necessary 
to ensure important technology does not flow to our competitors through 
our allies and partners.
Conclusion
    Let me add one important point as I conclude my remarks. While the 
Department of Defense believes defensive measures like CFIUS 
modernization are necessary, they alone are not sufficient for winning 
a technology race with our long-term strategic competitors. We must be 
proactive to ensure we improve our technology and innovation base 
because our future economic security will be a key determinant of our 
national security.
    I would like to close with another statement from Secretary Mattis 
in his letter of support to Senator Cornyn. ``I strongly support the 
Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA). The 
Department of Defense (DoD) continues to support foreign investment, 
consistent with the protection of national security. However, as the 
national security landscape changes, the existing process and 
authorities must be updated.''
    Thank you very much for the opportunity to testify on this 
important topic. I look forward to working with this Committee on 
improving and advancing FIRRMA.
        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
                     FROM HEATH P. TARBERT

Q.1. The legislation FIRRMA authorizes CFIUS to impose filing 
fees on transactions to cover the committee's funding needs.
    Will these fees be sufficient to address the increased case 
load anticipated with FIRRMA and what new resources will your 
agencies need to carry out these reforms?

A.1. The largest portion of increased work burden resulting 
from FIRRMA is likely to be in connection with transactions 
that are much smaller than the mergers and acquisitions 
currently within the scope of CFIUS. These transactions may 
generate little, if any, revenue. Thus, while fees may offset 
some of the costs of administering the CFIUS process, they are 
unlikely to cover the increased load across the committee. The 
funds derived from the filing fees are more likely to serve as 
a supplemental funding source that would enable CFIUS to be 
better positioned to deal with unexpected increases in case 
volume, along with ensuring CFIUS's additional functions of 
monitoring of mitigation agreements and transactions that are 
not voluntarily notified with CFIUS are sufficiently resourced.

Q.2. How many cases do you anticipate CFIUS would review as a 
result of FIRRMA?

A.2. The total number of cases under FIRRMA is hard to 
estimate, but it could be several multiples of CFIUS's current 
caseload. FIRRMA provides several mechanisms to ensure that the 
process remains efficient. For example, FIRRMA would give CFIUS 
the authority to issue regulations to focus the expanded 
jurisdiction on the technologies and sectors that most warrant 
application of CFIUS authorities. It also creates a streamlined 
``declarations'' process, which would lower the burden on many 
parties seeking review of transactions and allow CFIUS to 
calibrate the resources that it devotes to a transaction based 
on the likelihood that a particular transaction may pose a 
national security risk.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
             SENATOR MENENDEZ FROM HEATH P. TARBERT

Q.1. At the CFIUS hearing on January 18, a witness raised the 
concern that the committee should also consider the national 
security implications of investments by foreign companies that 
are not technically owned by a foreign Government, but perhaps 
show other signs of Government influence--such as loans from 
State-owned banks, close ties between corporate management and 
political leaders, or other methods that Governments use to 
influence corporate behavior.
    What are reforms that you would advise the Committee to 
consider so that we account not only for the national security 
risks of investments by overtly State-owned companies, but also 
from foreign firms that may be otherwise influenced or 
controlled by foreign Governments?

A.1. You raise an important point: foreign firms may not be 
State-owned but are nonetheless influenced or controlled by 
foreign Governments. While this is an issue that regularly 
confronts CFIUS, we believe that CFIUS has the authority 
necessary now to consider any factors relevant to assessing 
whether a particular covered transaction poses a national 
security risk. This includes consideration of formal and 
informal ways in which a foreign Government or possible threat 
actor, even beyond actual ownership, may be able to influence a 
foreign person that is acquiring a U.S. business. Factors such 
as prior Government affiliations of corporate management, 
Government financing, and Government practices of compelling 
private company cooperation with strategic State interests, 
among other factors, are regularly considered in the assessment 
of the threat posed by acquirers. CFIUS will continue to be 
able to consider these same analytical factors when reviewing 
transactions under FIRRMA. Moreover, FIRRMA's coverage of 
nonpassive investments would give CFIUS the authority to review 
some investments that do not meet the current threshold for 
control.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                     FROM HEATH P. TARBERT

Q.1. As we search for the most appropriate remedy to the very 
real problem of foreign countries gaining access to critical 
U.S. technologies, there are some suggesting that we should be 
pursuing other changes instead of or in addition to the CFIUS 
reform.
    What role should export controls play in addressing this 
problem?

A.1. Treasury believes that CFIUS and export controls both play 
a role in addressing this problem. CFIUS and export controls 
are complementary and mutually reinforcing processes. Even 
today, CFIUS does not act when it determines that the national 
security risk posed by the transaction can be adequately 
addressed by other laws, including export control laws.
    This would continue to be the case under FIRRMA. In 
circumstances where export controls prove adequate and 
appropriate to address risks that FIRRMA would allow CFIUS to 
cover (e.g., involving a specific license granted by the 
Department of Commerce following appropriate disclosure of 
information related to the transaction), we would expect to 
carve those circumstances out of CFIUS's jurisdiction via 
rulemaking.

Q.2. Could the export control system be modified to address the 
concern that know-how--not just intellectual property--is being 
transferred through joint ventures and other partnerships?

A.2. Treasury defers to the export control agencies regarding 
the extent to which export controls could be modified to 
address some of the types of risks that the joint venture 
provision of FIRRMA is intended to address.

Q.3. Are there other changes outside of CFIUS and export 
controls that should be considered to address this security 
challenge?

A.3. Ensuring that we have the tools necessary to protect 
national security is only one element of what is necessary to 
address this security challenge. As I stated during my 
testimony, the United States has been a leading destination for 
investors, entrepreneurs, and innovators. It is important that 
this remains the case and that we continue to invest in our 
companies and innovators. The President's National Security 
Strategy specifically identifies in Pillar II that we must 
promote American prosperity, which includes leading in 
research, technology, invention, and innovation, along with 
promoting the U.S. national security innovation base. One of 
the strengths of the United States is our ability to foster 
innovation and develop new technologies.

Q.4. One of the strengths of the U.S. is our ability to foster 
innovation and develop new technologies.
    Would increasing filing times and additional fees for 
expanded CFIUS jurisdiction, as proposed by the Foreign 
Investment Risk Review Modernization Act (FIRRMA) significantly 
inhibit venture capital investments and hurt entrepreneurship 
by creating excessive barriers, such as prolonged wait times, 
to foreign investment?

A.4. The United States has remained a leading destination for 
foreign investment, notwithstanding a robust CFIUS process. 
Treasury does not anticipate that the addition of 15 days to 
the first-stage ``review'' period or an optional one time 
extension of 30 days in extraordinary circumstances would be a 
material deterrent to foreign investment. In fact, these 
changes may allow more transactions to be cleared in the 
initial ``review'' period, which would create additional 
predictability in the process, and still would keep the 
duration of the CFIUS process well below the duration of 
similar processes in most other countries. What is more, the 
option for filing short ``declarations'' of transactions and 
the ability of CFIUS to clear a transaction within 30 days 
based on such a streamlined submission would likely reduce the 
burden that many investors currently face under the CFIUS 
process. Finally, CFIUS does not expect to set filing fees in 
regulations at a level that is likely to have a material impact 
on investment decisions.

Q.5. Would significantly expanding CFIUS's jurisdiction 
negatively affect our investment relationship with Europe and 
other traditional economic allies, who could get caught up in 
an expansion of CFIUS's scope of review?

A.5. As noted above, CFIUS's current ability to review 
transactions involving Europe and our other traditional 
economic partners for national security concerns has not 
affected the long-standing status of the United States as a 
leading destination for foreign investment. Today, transactions 
from these countries that do not warrant CFIUS review are 
either not filed with CFIUS or, if they are, are cleared by 
CFIUS within the initial review period. FIRRMA generally 
maintains the voluntary filing system and provides companies 
with the option for a more streamlined declarations process in 
the event they would like formal clearance from CFIUS. FIRRMA 
also gives CFIUS the discretion to exempt certain transactions 
from allied countries in certain circumstances.

Q.6. Do you think that significantly expanding CFIUS's 
jurisdiction and identifying ``countries of particular 
concern'' for purposes of CFIUS review could be considered a 
discriminatory measure by trade partners?

A.6. FIRRMA would not require CFIUS to identify ``countries of 
special concern,'' and the legislation expressly states that 
CFIUS is not expected to maintain such a list. Nor would FIRRMA 
mandate any outcome with respect to countries of special 
concern or alter CFIUS's existing practice of reviewing each 
transaction on its merits and solely for national security 
purposes. CFIUS would continue to exercise its authority 
consistent with existing trade agreements. Therefore, we do not 
believe FIRRMA would be considered a discriminatory measure for 
trade law purposes.

Q.7. What would be the potential consequences of doing so from 
a trade perspective?

A.7. Please see the previous answer.

Q.8. Should we expect retaliation?

A.8. CFIUS can reduce the chances of any retaliation by 
continuing its focus exclusively on national security risks, 
examining only those risks posed by the transaction under 
review, and clearing transactions, regardless of origin, that 
do not pose national security concerns.

Q.9. What forms could that retaliation take?

A.9. Please see the previous answer.
    Recent proposed legislation, the Foreign Investment Risk 
Review Modernization Act (FIRRMA), broadens the Committee on 
Foreign Investment in the United States' (CFIUS) purview so 
that the Committee would review transactions that involve 
critical technologies. According to the bill's definition of 
``critical technologies'', this includes ``emerging 
technologies that could be essential for maintaining or 
increasing the U.S. technological advantage with respect to 
national security.'' And there is an open question as to 
whether widely available advanced technology made by multiple 
companies, in many different countries should be covered by 
this definition given that CFIUS is a unilateral, not 
multilateral, tool. I have heard from some that this definition 
may be too broad a category, effectively forcing hundreds, if 
not thousands, of transactions to be subject to CFIUS review. A 
related concern is that the term ``U.S. business'' is not 
defined, and it is unclear whether a wholly owned foreign 
subsidiary of a U.S. headquartered company would be considered 
a ``U.S. business'' and whether CFIUS would apply to 
transactions between the U.S. company and its foreign 
subsidiary.

Q.10. Recent proposed legislation, the Foreign Investment Risk 
Review Modernization Act (FIRRMA), broadens the Committee on 
Foreign Investment in the United States' (CFIUS) purview so 
that the committee would review transactions that involve 
critical technologies. According to the bill's definition of 
``critical technologies'', this includes ``emerging 
technologies that could be essential for maintaining or 
increasing the U.S. technological advantage with respect to 
national security.'' And there is an open question as to 
whether widely available advanced technology made by multiple 
companies, in many different countries should be covered by 
this definition given that CFIUS is a unilateral, not 
multilateral, tool. I have heard from some that this definition 
may be too broad a category, effectively forcing hundreds, if 
not thousands, of transactions to be subject to CFIUS review. A 
related concern is that the term ``U.S. business'' is not 
defined, and it is unclear whether a wholly owned foreign 
subsidiary of a U.S.-headquartered company would be considered 
a ``U.S. business'' and whether CFIUS would apply to 
transactions between the U.S. company and its foreign 
subsidiary.
    Is there a way to narrow the scope of the definition so 
that it becomes more manageable for CFIUS to monitor?

A.10. Yes. FIRRMA explicitly provides CFIUS with the authority, 
through the rulemaking process, to narrow the scope of certain 
definitions and create exemptions, which would ensure that the 
number of transactions reviewed by CFIUS is manageable. The 
declarations process included in FIRRMA would also permit 
streamlined filings that can be reviewed more efficiently, 
thereby enabling CFIUS to focus its resources on the 
transactions most likely to raise concerns.

Q.11. Or do you believe that it should be this expansive?

A.11. Treasury believes that there are certain clarifications 
that can be accomplished through revisions to FIRRMA, and we 
look forward to working with this Committee on such 
clarifications. However, Treasury believes that the rulemaking 
process is a necessary tool in ensuring that the process 
remains efficient and effective over time.

Q.12. Do you have a sense of how many transactions this 
legislation would bring into CFIUS's scope?

A.12. The total number of cases under FIRRMA is hard to 
estimate, but it could be several multiples of CFIUS's current 
caseload. As mentioned above, FIRRMA offers a number of 
mechanisms by which CFIUS can ensure that the process remains 
administrable.

Q.13. And how many new employees you would need?

A.13. We are working to estimate the resource requirements 
under FIRRMA, but will not have firm estimates on the overall 
cost or number of covered transactions until any required 
implementing regulations have been formulated. While there are 
many unknowns about the impact of the proposed bill, Treasury 
expects the number of covered transactions to increase 
significantly. However, certain efficiencies will be gained 
over time in the processing of cases, partially offsetting the 
additional resource requirements through a reduction in the 
per-case processing cost. I will keep you updated on the 
development of our estimates and look forward to working with 
you to strengthen and modernize CFIUS.

Q.14. And how much that would cost?

A.14. As mentioned above, Treasury will not have firm estimates 
on the overall cost or number of covered transactions until any 
required implementing regulations have been formulated.

Q.15. How long do you think it would take to get that many 
employees in place?

A.15. As currently drafted, FIRRMA includes direct hiring 
authority to allow agencies to resource the CFIUS function 
quickly. This authority will be critical for agencies to 
implement FIRRMA in a timely manner. Given the unknowns 
surrounding the number of covered transactions and therefore 
the number of new employees required, it is difficult to 
provide a specific timeframe. However, we expect that 
recruiting would begin immediately upon the enactment of FIRRMA 
and hiring would commence as soon as appropriations are 
available.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
           SENATOR CORTEZ MASTO FROM HEATH P. TARBERT

Q.1. Gaming and Tourism--Foreign companies are beginning to 
expand into new industries, including gaming and tourism in the 
State of Nevada. As an example, foreign companies have been 
investing in and developing properties on the Las Vegas Strip. 
In the context of CFIUS reviews, hotel deals previously 
examined by the committee include the acquisition of New York's 
Waldorf-Astoria Hotel by Anbang Insurance group in 2014.
    Given the importance of the tourism industry to Nevada, 
could you elaborate on the concerns associated with foreign 
acquisition of hotels or tourism companies in the United 
States? How does CFIUS review such transactions, and what is 
the committee's track record on approving or denying these 
types of deals?

A.1. An acquisition of land or a building is currently 
reviewable by CFIUS if it involves the acquisition of a ``U.S. 
business,'' as defined in CFIUS's regulations. As it pertains 
to CFIUS's review of any specific transaction involving one or 
more hotels, Treasury can provide a classified briefing to 
answer your questions. However, as a general matter, in 
reviewing such transactions, CFIUS considers the national 
security ``vulnerabilities'' related to activities that occur 
at the property (e.g., does the hotel house or host sensitive 
U.S. Government operations?) or near the property (e.g., is the 
hotel near a sensitive training facility?). CFIUS also 
considers the threat posed by the foreign party (i.e., the 
capability and intent of the foreign acquirer to harm the 
national security of the United States) and the national 
security consequences should a threat actor exploit the 
vulnerabilities. If CFIUS identifies a risk, then it can seek 
to enter into an agreement with the parties to mitigate the 
risk and allow the transaction to proceed. If the risk cannot 
be mitigated, then it would recommend to the President that he 
prohibit the transaction.
    FIRRMA would expand CFIUS's jurisdiction to allow it to 
look at certain real estate acquisitions even if a given 
transaction does not involve the acquisition of a ``U.S. 
business.'' As was highlighted during our colloquy in the 
hearing, the proximity risk associated with vacant land that 
can be rapidly developed is not necessarily significantly 
different than the risk associated with land that already 
houses a business. As a reflection of its general ``track 
record,'' however, CFIUS has historically cleared the majority 
of transactions that it has reviewed.
    As mentioned above, I would be happy to provide you with a 
classified, confidential briefing on specific transactions.

Q.2. Greenfield Acquisition--In Nevada, we're home to a number 
of technology startups, including drone technology.
    Can you discuss the potential positive and negative 
consequences of expanding CFIUS review to ``greenfield'' 
projects--or those involving start-ups?

A.2. Your question raises an important distinction regarding 
CFIUS's authority to review ``greenfield'' projects versus 
investments in ``start-ups.''
    First, CFIUS currently has the authority to review the 
foreign acquisition of a U.S. business, which includes 
acquisitions of early-stage start-ups. However, CFIUS cannot 
review a non-controlling foreign investment in such a company, 
even if the foreign investor is not passive and can influence 
or gain access to the company in ways that pose national 
security concerns. FIRRMA would address this issue by providing 
CFIUS the authority to review such transactions.
    Second, FIRRMA would allow CFIUS to review certain real 
estate transactions based on proximity concerns even if there 
is no existing business. We believe that such broad authority 
is warranted by the current and expected investment landscape 
as it pertains to national security risks. FIRRMA would not, 
however, give CFIUS general authority to review the 
establishment of a new business (commonly referred to as a 
``greenfield'') in the United States by a foreign person.

Q.3. Can you discuss the use of ``mitigation agreements''--or 
conditions placed on acquisitions approved by CFIUS?

A.3. Mitigation agreements are an important tool available to 
CFIUS to address identified national security concerns arising 
from a covered transaction that are not otherwise adequately or 
appropriately addressed by other provisions of law (e.g., 
export controls, Government procurement authorities). 
Consistent with the open investment policy of the United 
States, mitigation agreements enable CFIUS, in most instances, 
to allow a transaction in which CFIUS identifies national 
security concerns to proceed by addressing those concerns 
through tailored and effective mitigation measures in lieu of 
recommending to the President that he prohibit a transaction.

Q.4. Are they being used appropriately?

A.4. Yes. CFIUS accepts mitigation only if we think the 
measures will be (1) effective at addressing the national 
security risk(s) and (2) capable of being monitored and 
enforced.

Q.5. Does CFIUS have the resources and staffing to ensure 
adherence to these mitigation agreements?

A.5. Treasury is committed to ensuring that CFIUS has the 
resources necessary to fulfill its responsibilities to ensure 
compliance with mitigation agreements. Generally, compliance 
monitoring is performed by the co-lead agency (alongside 
Treasury) that negotiated the given mitigation agreement (e.g., 
the Department of Defense, Department of Homeland Security, 
etc.).

Q.6. What are the pros and cons of making the filing of CFIUS 
reviews mandatory--rather than discretionary--for State-
controlled acquiring firms?

A.6. Treasury believes that CFIUS should remain a generally 
voluntary process. We believe that a mandatory process would 
likely divert CFIUS resources to transactions that do not 
warrant examination. As it is, CFIUS has the authority to 
initiate a review where warranted. However, transaction parties 
should be required to inform CFIUS about certain types of 
transactions before they consummate the transaction. FIRRMA 
accomplishes this by requiring mandatory declarations in two 
circumstances: (1) certain covered transactions with foreign 
Government interests; and (2) other covered transactions 
identified by CFIUS in regulations. This ensures that CFIUS 
would be aware, in advance, of covered transactions that may be 
more likely to pose national security concerns or could cause 
national security harm that is more difficult to remediate 
after completion of the transaction. As you imply in your 
question, we believe that transactions involving State-
controlled acquiring firms are of the kind that we would like 
to see subject to an advance notification process. CFIUS can 
then determine whether such transactions require a review.

Q.7. Should they be reviewed differently than private-firm 
mergers or acquisitions, or firms that are in part-owned by 
Nation States?

A.7. The Foreign Investment and National Security Act of 2007 
(FINSA), CFIUS's current statute, establishes special 
procedures for CFIUS review of transactions that could result 
in foreign Government control of a U.S. business. Specifically, 
it requires that CFIUS proceed from the ``review'' stage (30 
days) to the ``investigation'' stage (up to 45 additional days) 
for foreign Government-controlled transactions unless a 
determination is made at least at the Deputy Secretary level 
that the transaction ``will not impair the national security of 
the United States.'' FIRRMA also would establish a mandatory 
declaration requirement for certain transactions involving 
foreign Government investors, as noted above. Treasury believes 
that this framework provides appropriate authority for CFIUS to 
address national security risks posed by foreign Government 
investments.

Q.8. It has been 10 years since Congress last comprehensively 
considered the statutory framework for CFIUS. As practitioners 
that have worked in this space for long tenures, has any 
consensus emerged about what budget, regulatory, or statutory 
changes may be needed?

A.8. As I outlined in my testimony, the Administration endorses 
FIRRMA because it embraces four pillars critical for CFIUS 
modernization. First, FIRRMA expands the scope of transactions 
potentially reviewable by CFIUS, including certain non-passive, 
non-controlling investments, technology transfers through 
arrangements such as joint ventures, real estate purchases near 
sensitive military sites, and transactions structured to evade 
CFIUS review.
    Second, FIRRMA empowers CFIUS to refine its procedures to 
ensure the process is tailored, efficient, and effective. Under 
FIRRMA, CFIUS is authorized to exclude certain non-controlling 
transactions that would otherwise be covered by the expanded 
authority.
    Third, FIRRMA recognizes that our own national security is 
linked to the security of our closest allies, who face similar 
threats. In light of increasingly globalized supply chains, it 
is essential to our national security that our allies maintain 
robust and effective national security review processes to vet 
foreign investments into their countries. FIRRMA will also 
enhance collaboration with our allies and partners by allowing 
information-sharing for national security purposes with 
domestic or foreign Governments.
    Fourth, FIRRMA requires an assessment of the resources 
necessary for CFIUS to fulfill its critical mission, so that 
Congress has full understanding of the needs required to 
fulfill CFIUS's expanded scope. FIRRMA would establish for the 
first time a ``CFIUS Fund,'' which would be authorized to 
receive appropriations. FIRRMA also authorizes CFIUS to assess 
and collect fees, which would be set by regulation at a level 
we anticipate would not affect the economics of any given 
transaction. Once appropriated, these funds could also be used 
by CFIUS. Finally, FIRRMA grants the Secretary of the Treasury, 
as CFIUS chairperson, the authority to transfer funding from 
the CFIUS Fund to any member agencies to address emerging needs 
in executing requirements of the bill. This approach would 
enhance the ability of agencies to work together on national 
security issues.

Q.9. Can you delineate the appropriate role for export controls 
versus CFIUS?

A.9. CFIUS and export controls are complementary and mutually 
reinforcing processes. Even today, CFIUS does not act when it 
determines that the national security risk posed by the 
transaction can be adequately addressed by other laws, 
including export control laws.
    This would continue to be the case under FIRRMA. In 
circumstances where export controls prove adequate and 
appropriate to address risks that FIRRMA would allow CFIUS to 
cover (e.g., involving a specific license granted by the 
Department of Commerce following appropriate disclosure of 
information related to the transaction), we would expect to 
carve those circumstances out of CFIUS's jurisdiction via 
rulemaking.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
                      FROM RICHARD ASHOOH

Q.1. The legislation FIRRMA authorizes CFIUS to impose filing 
fees on transactions to cover the committee's funding needs.
    Will these fees be sufficient to address the increased case 
load anticipated with FIRRMA and what new resources will your 
agencies need to carry out these reforms?

A.1. The largest portion of increased work burden resulting 
from FIRRMA is likely to be in connection with transactions 
that are much smaller than the mergers and acquisitions 
currently within the scope of CFIUS. These transactions may 
generate little, if any, revenue. Thus, while fees may offset 
some of the costs of administering the CFIUS process, they are 
unlikely to cover the increased load across the committee. The 
funds derived from the filing fees are more likely to serve as 
a supplemental funding source that would enable CFIUS to be 
better positioned to deal with unexpected increases in case 
volume, along with ensuring CFIUS's additional functions of 
monitoring of mitigation agreements and transactions that are 
not voluntarily notified with CFIUS are sufficiently resourced.

Q.2. How many cases do you anticipate CFIUS would review as a 
result of FIRRMA?

A.2. The total number of cases under FIRRMA is hard to 
estimate, but it could be several multiples of CFIUS's current 
caseload. FIRRMA provides several mechanisms to ensure that the 
process remains efficient. For example, FIRRMA would give CFIUS 
the authority to issue regulations to focus the expanded 
jurisdiction on the technologies and sectors that most warrant 
application of CFIUS authorities. It also creates a streamlined 
``declarations'' process, which would lower the burden on many 
parties seeking review of transactions and allow CFIUS to 
calibrate the resources that it devotes to a transaction based 
on the likelihood that a particular transaction may pose a 
national security risk.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                      FROM RICHARD ASHOOH

Q.1. On January 22, Secretary Ross stated that, ``The CFIUS 
process must be strengthened to protect our national security, 
including expanding it to cover joint ventures, and respond to 
an unprecedented stream of investment from China.'' My 
understanding is that CFIUS does not currently cover such joint 
ventures in places like China.
    Please answer the following with specificity:
    Do you agree with Secretary Ross' view on the need to 
expand CFIUS's jurisdiction to cover these joint ventures? Why 
or why not?

A.1. CFIUS jurisdiction should be periodically reviewed, and if 
necessary, amended to allow CFIUS to address developments in 
global markets, in technology, in forms of investment, in 
foreign policy, and in threats to the national security. 
Commerce supports efforts to expand CFIUS's visibility into a 
broader range of investments.
    At the same time, we are cognizant that other national 
security authorities, notably export controls, can also be used 
to address specific national security risks posed by specific 
transactions. For example, we believe that export controls are 
better positioned to address national security issues 
pertaining to technology transfers given that the export 
control system is a well-established interagency system that 
covers all modes of technology transfer.

Q.2. Does the Foreign Investment Risk Review Modernization Act 
(FIRRMA) enact this expansion of CFIUS jurisdiction in a manner 
that balances national security and economic interests?

A.2. I believe that it does. As I stated in my testimony, 
Commerce supports the statement in FIRRMA that the United 
States retains its longstanding policy of welcoming foreign 
investment. Even though FIRRMA would expand the scope of CFIUS, 
it is clearly intended to do so in a manner that maintains the 
United States' position as a prime destination for foreign 
investment. Additionally, even with the expanded scope of 
FIRRMA, CFIUS will remain sharply focused on the small 
percentage of transactions that present national security 
concerns.

Q.3. What unique challenges are posed to our export control 
system with China, a nonmarket economy?

A.3. Many of China's industrial policies pose challenges for 
the U.S. export control system. For instance, China's policy of 
civil-military integration is a particular concern. The 
agencies involved in our export control system take these 
policies into consideration when reviewing exports of 
controlled items to China. The agencies must balance these 
policies and the concerns they raise with the significant 
amount of legitimate commercial business that takes place in 
China when reaching decisions on such reviews.

Q.4. What additional prudential and consumer protection 
requirements, if any, would you consider as part of the 
approval process of an ILC application from a FinTech company?

A.4. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                      FROM RICHARD ASHOOH

Q.1. If someday, many years from now, there was a President (an 
American ``Karl Marx'') who actively sought to interfere in the 
U.S. investment climate, who considered Government involvement 
in private investment to be a virtue, what guardrails, if any, 
are written into the bill that would constrain such an anti-
free market Administration?

A.1. CFIUS by law is narrowly focused on national security 
issues and FIRRMA would maintain that focus. As a result, I 
believe that it would be very difficult for any President or 
Administration to be able to unduly intervene in the private 
sector as the national security focus that is part of CFIUS's 
statutory mandate provides key limitations in that area.

Q.2. Who involved in the CFIUS would lose their job, or at 
least have a poor annual review, if CFIUS unnecessarily 
interfered in private enterprise?

A.2. One of the key aspects of CFIUS, an area that was 
specifically addressed by Congress in the FINSA legislation in 
2007, is the requirement that political-appointee level 
officials engage in CFIUS's review of each transaction. As 
such, an official appointed by the President, by and with the 
advice and consent of the Senate (i.e., at Commerce, an 
Assistant Secretary-level official) from each co-lead agency 
must sign and submit to Congress a certified notice at the 
completion of each CFIUS review stating that there are no 
unresolved national security concerns. If the case has included 
an investigation by CFIUS, the report on the investigation must 
be signed by the Secretary or Deputy Secretary, or a person 
serving in an equivalent position, from each lead agency. This 
ensures that there is accountability in the CFIUS process in 
all cases.

Q.3. What automatic processes are in place to gather 
information on if the CFIUS process is outside its 
jurisdiction, is taking too long to look at transactions, or is 
unnecessarily taking up more of the private sector's time and 
resources?

A.3. I defer to the Department of the Treasury, as CFIUS chair, 
on this question. However, I will note that CFIUS endeavors in 
all cases to complete its review in the most expeditious manner 
possible. Further, CFIUS annually reports to Congress on its 
activities and is subject to its oversight.

Q.4. My understanding is that CFIUS typically does not cover 
joint ventures that are based overseas. The sponsors of this 
bill have circulated a list of endorsements of the bill, 
including one from Wilbur Ross, the Secretary of Commerce. Sec. 
Ross said that CFIUS must be strengthened to protect our 
national security ``including expanding it to cover joint 
ventures.''
    Do you agree with Sec. Ross (quote below)?
    Secretary of Commerce Wilbur Ross (quote provided on 1/22/
18): ``The CFIUS process must be strengthened to protect our 
national security, including expanding it to cover joint 
ventures, and respond to an unprecedented stream of investment 
from China. Senator Cornyn's and Representative Pittenger's 
FIRRMA legislation takes many positive steps in that regard, 
and I look forward to its eventual passage. FIRRMA envisions a 
robust CFIUS review process that complements our strong current 
export control regime. It is also important for Congress to 
fully fund CFIUS's expanded responsibilities and provide a 
sufficiently stringent threshold of review of transactions that 
may threaten our national security.''

A.4. CFIUS jurisdiction should be periodically reviewed, and if 
necessary, amended to allow CFIUS to address developments in 
global markets, in technology, in forms of investment, in 
foreign policy, and in threats to the national security. 
Commerce supports efforts to expand CFIUS visibility into a 
broader range of investments.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
              SENATOR MENENDEZ FROM RICHARD ASHOOH

Q.1. Judging from the Committee's previous CFIUS hearing on 
January 18, I sense that there is broad agreement among 
bipartisan members of Congress as well as industry stakeholders 
that investments by foreign State-owned enterprises in 
sensitive U.S. technologies warrant a higher level of scrutiny 
than similar investments made by private foreign companies.
    In your testimony, you stated that the 25-percent threshold 
that would require a foreign controlled entity to file a 
mandatory filing in the FIRRMA is too high, and that 
transactions could easily be structured to evade it.
    Could you expound on this thought?

A.1. The Department of Commerce is supportive of the 
requirement in FIRRMA for mandatory filings for certain 
transactions involving foreign Government-controlled entities. 
Our concern over the 25-percent threshold in FIRRMA centers on 
Commerce's belief that CFIUS must have enhanced visibility into 
transactions that could raise national security concerns. Under 
the existing statute, we sometimes see transactions in which 
the foreign acquirer obtains less than 25-percent ownership 
interest in the U.S. company but still obtains control through 
governance rights or other mechanism. In those cases, the 
transaction is appropriately subject to CFIUS review under 
existing law. Given the national security concerns that may 
arise from foreign Government ownership of a U.S. firm, it is 
important that CFIUS be made aware of foreign Government-owned 
entities acquiring significant stakes in U.S. companies, 
particularly if those shares are so significant as to allow the 
foreign Government to control the U.S. company. We believe that 
requiring mandatory filings for such transactions to be in the 
U.S. national security interest.

Q.2. In your opinion, what would be an appropriate threshold?

A.2. One way to address this concern would be to lower the 
mandatory filing threshold to 10 percent, which corresponds to 
U.S. Securities and Exchange Commission filing requirements 
under Section 16 of the Securities Exchange Act of 1934. We are 
also open to alternative ways to meet the stated objective of 
strengthening CFIUS's ability to learn of, and potentially 
review, the acquisition of significant interests in U.S. firms 
by foreign Government-owned entities, a type of transaction 
that can raise heightened national security concerns.

Q.3. At the CFIUS hearing on January 18, a witness raised the 
concern that the committee should also consider the national 
security implications of investments by foreign companies that 
are not technically owned by a foreign Government, but perhaps 
show other signs of Government influence--such as loans from 
State-owned banks, close ties between corporate management and 
political leaders, or other methods that Governments use to 
influence corporate behavior.
    What are reforms would you advise the committee to consider 
so that we account not only for the national security risks of 
investments by overtly State-owned companies, but also from 
foreign firms that may be otherwise influenced or controlled by 
foreign Governments?

A.3. CFIUS considers all types of foreign Government influence 
and control in determining whether the transaction is subject 
to CFIUS review and in conducting its national security review, 
and should retain this ability. CFIUS has existing mechanisms 
to assess the extent and degree of foreign Government influence 
over a foreign acquirer, including through the support of the 
Intelligence Community. This information is considered as CFIUS 
makes the determinations described above and assesses whether 
the transaction is foreign Government controlled (a requirement 
under the Foreign Investment and National Security Act of 2007) 
and, thus, poses an attendant risk.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                      FROM RICHARD ASHOOH

Q.1. As we search for the most appropriate remedy to the very 
real problem of foreign countries gaining access to critical 
U.S. technologies, there are some suggesting that we should be 
pursuing other changes instead of or in addition to the CFIUS 
reform.
    What role should export controls play in addressing this 
problem?

A.1. CFIUS and export controls are both vital and robust tools/
processes/systems the United States relies upon to protect our 
national security. CFIUS is a process to review whether certain 
business transactions present a risk to U.S. national security, 
with technology transfer being one of several possible factors 
which may be of concern. The export control system governs 
technology transfer itself, irrespective of mode of transfer, 
to protect sensitive U.S. origin goods, software, and 
technology. As such, these two authorities are complementary 
and must continue to work in a parallel, coordinated fashion.
    Where technology transfers present concerns, the export 
control system is best designed to address those concerns. The 
Export Administration Regulations' (EAR) authority covers a 
wide array of transactions and technology transfers. The EAR 
governs both traditional exports of goods, software, or 
technology to third countries as well as the transfers of 
controlled technology within the United States to foreign 
nationals under what we call ``deemed exports.'' The goods, 
software, and technology listed for control on the Commerce 
Control List (CCL) are set by using specific technical 
parameters. The interagency decisions on where to set these 
parameters are national security determinations that define 
when particular items become sufficiently applicable to a 
military end-use to warrant control.
    In addition to being an interagency national security 
process, our export control system benefits from close 
cooperation with our international partners through the four 
major multilateral export control regimes. Through these 
regimes--the Wassenaar Arrangement, the Nuclear Suppliers 
Group, the Missile Technology Control Regime, and the Australia 
Group--the United States and our partners determine which items 
and technologies merit control and how those controls should be 
applied. It has long been our position that export controls are 
significantly more effective when they are implemented 
multilaterally. This helps ensure that these sensitive 
technologies are controlled by all countries that are capable 
of producing them to make it more difficult for them to be 
acquired by parties of concern.

Q.2. Could the export control system be modified to address the 
concern that know-how--not just intellectual property--is being 
transferred through joint ventures and other partnerships?

A.2. The Export Administration Regulations (EAR), administered 
by the Department of Commerce, does control ``technology,'' 
including things like technical know-how, so the export of such 
technology to a foreign joint venture or partnership would be 
subject to the license requirements in the export control 
system.
    Our export control system is constantly reviewed and 
updated, particularly as it relates to the lists of items that 
are subject to control, to ensure that we are controlling the 
kinds of critical technologies that merit such measures. BIS is 
committed to continuing to identify and control sensitive 
emerging technologies, and ensuring that the process is 
systematic, proactive, and institutionalized. We are currently 
undertaking a review to better utilize our authorities to 
combat threats arising from this kind of technology.

Q.3. Are there other changes outside of CFIUS and export 
controls that should be considered to address this security 
challenge?

A.3. The export control system and CFIUS are likely the two 
authorities that address this security challenge most directly, 
although other authorities, such as cybersecurity, are also 
part of the challenge.

Q.4. One of the strengths of the U.S. is our ability to foster 
innovation and develop new technologies.
    Would increasing filing times and additional fees for 
expanded CFIUS jurisdiction, as proposed by the Foreign 
Investment Risk Review Modernization Act (FIRRMA) significantly 
inhibit venture capital investments and hurt entrepreneurship 
by creating excessive barriers, such as prolonged wait times, 
to foreign investment?

A.4. FIRRMA recognizes that certain complex transactions take 
longer to review than the current timelines allow. It is our 
hope that an increased review period will allow CFIUS to 
conclude its review of transactions in response to the initial 
filing in the vast majority of cases, rather than requiring 
multiple re-filings, as often happens now. This will provide 
greater predictability and certainty to the investment 
community. Similarly, the fee authority will help agencies hire 
and maintain adequate staff to review transactions, which in 
turn should lead to greater assurance that transactions will 
not be subject to re-filings.

Q.5. Would significantly expanding CFIUS's jurisdiction 
negatively affect our investment relationship with Europe and 
other traditional economic allies, who could get caught up in 
an expansion of CFIUS's scope of review?

A.5. Even with the expanded scope of FIRRMA, CFIUS will remain 
sharply focused on the small percentage of transactions that 
present national security concerns. Investments from our allies 
traditionally have not presented serious national security 
concerns, and the increased jurisdiction of CFIUS post-FIRRMA 
would not change that underlying reality.
    FIRRMA would also allow CFIUS to develop regulations to 
exempt transactions from CFIUS review in appropriate 
circumstances if the foreign persons are from an allied 
country. It is worth noting as well that several of our allies 
are also considering strengthening their investment security 
review processes in response to current global economic trends 
and security concerns. FIRMMA's provisions to allow increased 
cooperation with allies will support CFIUS efforts to encourage 
a coordinated and likeminded approach to investment security 
reviews.

Q.6. Do you think that significantly expanding CFIUS's 
jurisdiction and identifying ``countries of particular 
concern'' for purposes of CFIUS review could be considered a 
discriminatory measure by trade partners?

A.6. FIRRMA defines ``country of special concern'' to mean ``a 
country that poses a significant threat to the national 
security interests of the United States.'' In conducting its 
national security reviews, CFIUS is acutely aware that the 
country of origin of an investor has an impact on the potential 
threat to the national security arising from the transaction. 
That said, CFIUS does not make arbitrary distinctions between 
countries, and treats each transaction on a case-by-case basis. 
FIRRMA states expressly that CFIUS would not be required to 
maintain a list of countries of special concern.

Q.7. What would be the potential consequences of doing so from 
a trade perspective?

A.7. CFIUS identifies national security concerns with only a 
minority of investments that it reviews. Even with an expanded 
scope post-FIRRMA, we anticipate that CFIUS would only need to 
mitigate or recommend a prohibition on a small percentage of 
overall investment. Commerce will work with the other CFIUS 
agencies as we prepare implementing regulations to ensure that 
CFIUS review is focused on transactions that are of genuine 
national security concern and that we continue to welcome 
foreign investment.

Q.8. Should we expect retaliation?

A.8. It is reasonable to assume that certain Governments may 
not support an expanded CFIUS mandate, to the extent that such 
a reform may directly impact their companies or their stated 
industrial policies. However, it is difficult to predict how 
specifically they may respond. The United States will continue 
to push other countries to ensure that trade and investment is 
fair and reciprocal. The U.S. investment regime is already much 
more open than many foreign countries' regimes.

Q.9. What forms could that retaliation take?

A.9. It is difficult to speculate on specifically what form 
retaliation could take. The United States will continue to push 
other countries to ensure that trade and investment is fair and 
reciprocal.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR CORTEZ MASTO FROM RICHARD ASHOOH

Q.1. Can you discuss the use of ``mitigation agreements''--or 
conditions placed on acquisitions approved by CFIUS?
    Are they being used appropriately?
    Does CFIUS have the resources and staffing to ensure 
adherence to these mitigation agreements?

A.1. The Department does believe that CFIUS mitigation 
agreements are being used effectively. CFIUS works diligently 
to ensure that the mitigation measures enacted as part of a 
CFIUS transaction are effective and targeted at addressing the 
specific national security risks arising from the transaction 
so that they are not overly broad or burdensome. CFIUS also 
takes care to ensure that CFIUS mitigation agreements do not 
overlap or duplicate other existing authorities (such as 
Commerce and State's export control and Defense's National 
Industrial Security Program authorities), but are instead 
focused on areas that are not adequately or appropriately 
covered by such authorities.
    As the Department of Commerce is not a signatory to any 
CFIUS mitigation agreements at this time, I would defer to my 
colleagues at agencies that are responsible for the monitoring 
of CFIUS mitigation agreements on whether they have adequate 
resources to effectively monitor them.

Q.2. What are the pros and cons of making the filing of CFIUS 
reviews mandatory--rather than discretionary--for State-
controlled acquiring firms?

A.2. As I stated in my testimony, the Department of Commerce is 
supportive of the requirement in FIRRMA for mandatory filings 
for certain transactions involving foreign Government 
controlled entities. However, we are concerned that the 25-
percent threshold in FIRRMA is too high and that transactions 
could easily be structured to evade it.
    We are interested in ensuring that CFIUS has full 
visibility into transactions that could raise national security 
concerns. Under the existing statute, we sometimes see 
transactions in which the foreign acquirer obtains less than a 
25-percent ownership interest in the U.S. company but still 
obtains control through governance rights or other mechanisms. 
In those cases, the transaction is appropriately subject to 
CFIUS review under existing law. Given the national security 
concerns that may arise from foreign Government ownership of a 
U.S. firm, it is important that CFIUS be made aware of foreign 
Government-owned entities acquiring significant stakes in U.S. 
companies, particularly if those shares are so significant as 
to allow the foreign Government to control the U.S. company. We 
believe that requiring mandatory filings for such transactions 
to be in the U.S. national security interest.

Q.3. Should they be reviewed differently than private-firm 
mergers or acquisitions, or firms that are in part-owned by 
Nation States?

A.3. CFIUS reviews each case on a fact-specific, case-by-case 
basis. However, under existing law, some transactions are 
subject to heightened scrutiny based on a number of different 
factors, including whether it is a foreign Government-
controlled transaction. Transactions involving a foreign 
Government-controlled acquirer deserve additional scrutiny 
because of the foreign Government's ability to influence 
conduct by the acquirer and potentially the U.S. target. For 
instance, a foreign Government-controlled entity could be 
considered more likely than a private company to act on behalf 
of the foreign Government and take actions in furtherance of 
the Government's policies, which may be counter to U.S. 
national security interests.

Q.4. It has been 10 years since Congress last comprehensively 
considered the statutory framework for CFIUS. As practitioners 
that have worked in this space for long tenures, has any 
consensus emerged about what budget, regulatory, or statutory 
changes may be needed?

A.4. As I stated in my testimony, the Department of Commerce 
supports FIRRMA and its modernization of CFIUS. The national 
security and economic landscape have changed significantly 
since CFIUS was last updated and those changes require that 
CFIUS be able to respond accordingly to protect U.S. national 
security. FIRRMA would provide the necessary statutory changes 
to CFIUS's authorities so that it can address risks arising 
from a wide variety of transaction types--not just ones where a 
foreign person gains ``control'' over a U.S. business, as is 
currently the case. The expanded scope of CFIUS envisioned by 
FIRRMA may require additional resources, and Commerce is 
supportive of FIRRMA delaying the effective date for many 
provisions until regulations, organizational structure, 
personnel, and other resources are in place. This will help 
ensure that CFIUS agencies are prepared to implement its 
expanded scope.

Q.5. Can you delineate the appropriate role for export controls 
versus CFIUS?

A.5. CFIUS and export controls are both vital and robust tools/
processes the United States relies upon to protect our national 
security. CFIUS is a process to review whether certain business 
transactions present a risk to U.S. national security, with 
technology transfer being one of several possible factors which 
may be of concern. The export control system governs technology 
transfer itself, irrespective of the mode of transfer, to 
protect sensitive U.S. origin goods, software, and technology. 
As such, these two tools/processes are complementary and must 
continue to work in a parallel, coordinated fashion. It is 
important, as Congress reviews both processes (a review that 
Commerce supports), that they remain complementary as their 
authorities are modernized and potentially expanded.
    Under the BIS-administered export control system, we work 
closely with the Departments of Defense, Energy, and State. 
These agencies review and clear any changes to the Export 
Administration Regulations--including identifying and 
controlling emerging technology. Those agencies also have a 
role in reviewing license applications submitted to BIS. The 
different equities, viewpoints, and technical expertise that 
these four agencies bring to the table ensure that the export 
control system is robust and that national security concerns 
are thoroughly considered for any technology transfer of 
concern.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO
                       FROM ERIC CHEWNING

Q.1. The legislation FIRRMA authorizes CFIUS to impose filing 
fees on transactions to cover the committee's funding needs.
    Will these fees be sufficient to address the increased case 
load anticipated with FIRRMA and what new resources will your 
agencies need to carry out these reforms?

A.1. We do not anticipate that the filing fees will generate 
sufficient revenue to adequately fund CFIUS activities 
throughout the interagency process. The large volume of 
additional, small transactions which FIRRMA would subject to 
CFIUS review are likely to generate very little additional 
revenue. Instead, the filing fees are likely to provide a 
supplemental funding source that would better position CFIUS to 
handle unexpected increases in case volume. Therefore, DoD will 
certainly need additional resources to accomplish its CFIUS 
mission. We foresee using those resources to fund additional 
personnel to manage CFIUS reviews in DoD, as well as a modern, 
interagency case management and big data analytics platform for 
processing and triaging CFIUS cases.

Q.2. How many cases do you anticipate CFIUS would review as a 
result of FIRRMA?

A.2. Precise estimates of the anticipated caseload under FIRRMA 
are elusive because the bill assigns to implementing 
regulations significant elements of the covered transaction 
definition. We believe the annual case volume under FIRRMA, 
however, could be several multiples of the current caseload.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                       FROM ERIC CHEWNING

Q.1. Last year Cosco Shipping Lines (Cosco), a State-owned 
entity of the Chinese Government, acquired Hong Kong based 
Orient Overseas Container Line (OOCL). Among other things, the 
acquisition includes the Long Beach Container Terminal. 
Strategic seaports in the United States are designated by DOD 
because of their ability to support U.S. force and materiel 
deployments in times of war and national emergency. Long Beach 
seaports is designated as strategically important.
    Chinese investment occurs throughout the United States and, 
in fact, Cosco already has as presence in a marine terminal in 
Long Beach. However, that terminal is 100-percent operated by a 
separate, unaffiliated, American owned company.
    It seems logical that the operations of strategic assets at 
seaports be performed by a company owned, operated, and 
controlled by U.S. citizens.
    Do you believe it is reasonable that this criterion, that 
operations of foreign-owned shipping apparatuses are operated 
by a separate, unaffiliated, American-owned company, be part of 
the CFIUS analysis of foreign acquisitions within strategically 
important U.S. ports?

A.1. DoD carefully reviews each CFIUS case for national 
security risks arising from that transaction. Whenever DoD 
identifies a national security concern, we evaluate possible 
risk mitigation options in coordination with subject matter 
experts across DoD. In some instances, the best mitigation tool 
may be requiring that certain company operations be assigned to 
an unaffiliated, U.S.-owned company.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
              SENATOR MENENDEZ FROM ERIC CHEWNING

Q.1. As we look at ways to protect critical technologies from 
falling into the hands of foreign Governments, we need to pay 
equal attention to the investments we have to make so that the 
U.S. retains technological superiority and continues to enjoy 
the economic growth that comes with robust innovation. Earlier 
this month, Bloomberg released its 2018 Innovation Index, which 
ranks countries based on research and development spending, 
value-added manufacturing, educations, and other factors. For 
the first time in the 6 years since the index began, the U.S. 
dropped out of the top 10 most innovative economies. You ended 
your testimony by saying that while defensive measures like 
CFIUS modernization are necessary, they are not sufficient for 
keeping America as a technological leader.
    What steps should Congress consider in conjunction with 
CFIUS reform to ensure that we continue to foster an 
innovation-intensive economy that strengthens our national and 
economic security?

A.1. As it pertains to foreign investment, we approach this 
problem with two broad solution strategies: protect and 
promote. FIRRMA's modernization of CFIUS is part of our protect 
strategy. The promote strategy identifies relevant, innovative 
technology companies and funnels the capital to those companies 
necessary to foster and sustain innovation. This capital can, 
in some instances, originate from U.S. Government sources, like 
grants. Other U.S. Government sources of capital, such as U.S. 
Government credit facilities, can also support innovation long-
term.
    More broadly, an innovation-intensive economy requires 
investments in the workforce and industrial base that can 
develop and commercialize emerging technologies. Those 
investments include, for example, funding for U.S. science, 
technology, engineering, and math education and programs that 
promote advanced U.S. manufacturing, like DoD's Manufacturing 
Innovation Institutes.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                       FROM ERIC CHEWNING

Q.1. As we search for the most appropriate remedy to the very 
real problem of foreign countries gaining access to critical 
U.S. technologies, there are some suggesting that we should be 
pursuing other changes instead of or in addition to the CFIUS 
reform.
    What role should export controls play in addressing this 
problem?

A.1. The National Security Strategy and National Defense 
Strategy highlight protecting our warfighters' technological 
superiority as a national priority. Export controls and CFIUS 
are complementary aspects of a layered defense to accomplish 
this goal. Export controls function as a first line of defense 
to counter threats associated with technology transfer to our 
competitors. Export controls protect both military and dual-use 
(military and civilian use) technologies that are categorized 
by way of interagency deliberations, discussions with industry, 
and in many cases, international negotiations with other 
participating members of the multilateral export control 
regimes.
    CFIUS is a critical second line of defense. This second 
line of defense addresses emerging and foundational 
technologies that may not be currently covered by export 
control. The second line of defense also enables us to protect 
the know-how, expertise, and industrial relationships that 
would enable a competitor to re-create a technology competency 
on foreign soil. Acting in concert, this layered defense 
identifies and controls transfers of new and emerging 
technologies, reviews transfers of sensitive information and 
capabilities through foreign acquisitions, and engages with 
foreign partners to ensure they protect the critical 
technologies we do share.
    We have seen examples of these two layers working together 
in the past. In one instance, CFIUS prevented a country from 
acquiring a U.S. company with sensitive technology after the 
export control regime denied export licenses for the same 
technology to that country. Given that our competitors will 
continue using all available avenues to fill gaps in their 
military requirements, we need both strong export controls and 
a modernized foreign investment review process to maintain our 
technological advantage.

Q.2. Could the export control system be modified to address the 
concern that know-how--not just intellectual property--is being 
transferred through joint ventures and other partnerships?

A.2. For those technology areas where export controls are 
currently in place, a license is usually required for foreign 
nationals seeking access to U.S. technology (including know-
how), whether outside the United States, as an export, or 
inside the United States, as a ``deemed export.'' U.S. 
Government licensing authorities have the ability to require 
export licenses and investigate compliance with export control 
laws and regulations. While these authorities are broad, 
defining a technology with sufficient clarity to control it 
pursuant to these authorities can be a lengthy processes that 
challenges efforts to protect emerging technologies. DoD is 
currently reviewing the recently introduced Export Control 
Reform Act of 2018 (H.R. 5040) to confirm there is sufficient 
language to ensure an effective national security review of 
sensitive technologies.

Q.3. Are there other changes outside of CFIUS and export 
controls that should be considered to address this security 
challenge?

A.3. DoD, along with other U.S. Government agencies, is 
assessing a range of tools to prevent access to critical U.S. 
technology by foreign nationals from countries such as China 
and Russia, including more rigorous vetting of visa 
applications for work in certain technology sectors, 
cooperative research and development programs, and scientific 
exchanges.

Q.4. One of the strengths of the U.S. is our ability to foster 
innovation and develop new technologies.
    Would increasing filing times and additional fees for 
expanded CFIUS jurisdiction, as proposed by the Foreign 
Investment Risk Review Modernization Act (FIRRMA) significantly 
inhibit venture capital investments and hurt entrepreneurship 
by creating excessive barriers, such as prolonged wait times, 
to foreign investment?

A.4. DoD does not see the increased review times and the 
addition of filing fees as significant foreign investment 
inhibitors. FIRRMA would lengthen the current 30 day review 
period to 45 days. We do not expect the additional 15 days in 
review and the optional one-time 30-day extension in 
extraordinary circumstances to have a material impact on 
foreign investment rates. In fact, we anticipate these 
extensions would reduce the need for the parties to withdraw 
and refile more complicated transactions, adding clarity to the 
process and, overall, shortening timelines for final approval. 
We do not anticipate that the regulatory process would 
establish filing fees at a level likely to have a material 
impact on investment decisions.

Q.5. Would significantly expanding CFIUS's jurisdiction 
negatively affect our investment relationship with Europe and 
other traditional economic allies, who could get caught up in 
an expansion of CFIUS's scope of review?

A.5. Investors from our traditional economic partners have 
routinely filed cases with CFIUS for years, and the United 
States has long been a leading destination for foreign direct 
investment despite the CFIUS review. These investors are making 
a business calculation that trades a short, statutorily defined 
CFIUS review for the confidence that the United States will not 
seek to unwind their transactions at a later date. As FIRRMA 
generally maintains the voluntary filing system, we anticipate 
that investors will continue to seek those safe harbor 
protections under FIRRMA just as they do today. When they do, 
we anticipate CFIUS clearing most of those transactions in the 
initial review period.

Q.6. Do you think that significantly expanding CFIUS's 
jurisdiction and identifying ``countries of particular 
concern'' for purposes of CFIUS review could be considered a 
discriminatory measure by trade partners?

A.6. As FIRRMA does not mandate any outcome with respect to 
countries of special concern, CFIUS action on national security 
grounds cannot be considered discriminatory. CFIUS, focused 
exclusively on national security risk, operates pursuant to 
national security exemptions in existing trade agreements, and 
CFIUS is expected to continue to do so under FIRRMA.

Q.7. What would be the potential consequences of doing so from 
a trade perspective?

A.7. As DoD does not foresee FIRRMA as a discriminatory 
measure, we do not foresee consequences from a trade 
perspective.

Q.8. Should we expect retaliation?

A.8. DoD anticipates that CFIUS under FIRRMA would continue its 
current practices, which would reduce the chance of 
retaliation. Those practices are a continued, exclusive focus 
on national security risks posed by the specific transaction 
under review and a record of clearing transactions, regardless 
of the buyer's country, that do not pose national security 
concerns.

Q.9. What forms could that retaliation take?

A.9. By continuing to follow current CFIUS practices, DoD does 
not anticipate increased retaliation risk under FIRRMA.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR CORTEZ MASTO FROM ERIC CHEWNING

Q.1. Mining and Proximity to Military Installations--As you may 
know, in Nevada, we have had several concerning investments by 
Chinese companies near our Air Force and Navy bases. In fact, 
in 2015, an Air Force commander explained concerns with 
building near Nellis Air Force Base in Las Vegas.
    Do you believe CFIUS's current authorities and processes 
sufficiently address military concerns regarding Chinese 
investments near military installations?

A.1. No, current CFIUS authorities and processes do not 
sufficiently address DoD's concerns associated with foreign 
investment in proximity to sensitive military activities and 
installations. Current authorities fall short whenever a 
transaction involves the acquisition of real property 
interests, through a purchase or lease, or mineral rights, but 
does not constitute control of a U.S. business. In these 
circumstances, sensitive military activities and installations 
remain vulnerable to persistent observation and information 
collection. As introduced, FIRRMA addresses this weakness by 
including land purchases and leases by a foreign person in the 
definition of a covered transaction.

Q.2. Is CFIUS equipped to combat the most sophisticated 
techniques for information collection near these installations?

A.2. The CFIUS process is not explicitly designed or intended 
to mitigate the most sophisticated techniques near sensitive 
military installations. Further, CFIUS currently has no 
authority to review foreign purchases or leases of land near 
these installations when the transaction does not constitute 
foreign control of a U.S. business. The FIRRMA bill, as 
introduced, would give CFIUS this authority.

Q.3. What more can be done to mitigate the potential for 
information collection near these installations?

A.3. We support the expansion of the definition of a covered 
transaction in the FIRRMA bill, as introduced, as a means of 
better addressing the risks associated with foreign investment 
in close proximity to military installations. FIRRMA would 
expand the definition of the term ``covered transaction'' under 
CFIUS to include the purchase or lease of real property in 
proximity to military installations.

Q.4. Can you discuss the use of ``mitigation agreements''--or 
conditions placed on acquisitions approved by CFIUS?

A.4. Whenever DoD identifies national security risks arising 
from a transaction, we explore risk mitigation measures that 
may reduce the risk to an acceptable level. Doing so is 
consistent with U.S. Government policy, articulated in 
Executive Order 11858, as amended, of supporting international 
investment in the United States consistent with the protection 
of national security. These mitigation measures typically 
oblige the parties to implement technical, personnel, and 
management controls. If DoD determines that a mitigation 
agreement would sufficiently reduce the risk, we, along with 
the Department of the Treasury, enter into agreement 
negotiations with the parties. If we cannot reach a mutually 
acceptable agreement, we prepare a recommendation to the 
President that he prohibit the transaction. If we do reach a 
mutually acceptable agreement with the parties, DoD recommends 
that CFIUS approve the transaction contingent on the parties' 
compliance with the agreement.

Q.5. Are they being used appropriately?

A.5. Yes, the use of these types of mitigation agreements under 
the circumstances described above is an appropriate mechanism 
for realizing the benefits of foreign investment consistent 
with the protection of national security.

Q.6. Does CFIUS have the resources and staffing to ensure 
adherence to these mitigation agreements?

A.6. Monitoring the parties' ongoing compliance with mitigation 
agreements is a critical part of the CFIUS lifecycle. These 
mitigation agreements are typically effective in perpetuity, 
absent a material change such as the sale of the mitigated 
company to a U.S. entity. The number of mitigation agreements 
that require monitoring increases each year, and the resources 
necessary to monitor them increases proportionally. Rather than 
asking the U.S. taxpayer to bear these increasing costs, DoD is 
exploring how to shift the burden to the foreign acquirers. We 
could accomplish that shift by requiring the parties to employ 
company-compensated, trusted third-party monitors with specific 
expertise in the necessary mitigation fields.

Q.7. What are the pros and cons of making the filing of CFIUS 
reviews mandatory--rather than discretionary--for State-
controlled acquiring firms?

A.7. The current CFIUS statute establishes a higher standard 
for clearance for transactions in which the buyer is determined 
to be foreign Government-controlled. The higher standard 
reflects Congress's recognition that a foreign Government-
controlled transaction is likely to present an elevated threat, 
and therefore an elevated risk, in comparison to a similar 
transaction in which the buyer is purely commercial. Making 
reviews mandatory for foreign Government-controlled 
transactions guarantees that CFIUS reviews these transactions 
that are likely to pose an elevated national security risk. 
Such a guarantee is especially important in the context of 
venture capital investments in startup companies. Information 
about these small, private investments is not always readily 
available, hamstringing CFIUS efforts to identify and review 
them.
    The potential disadvantage of this kind of obligatory 
filing is that it may bring certain benign transactions before 
CFIUS that would not have been filed under a strictly voluntary 
system. This potential disadvantage is unlikely to create 
significant problems for CFIUS or the parties because the 
declaration process described in FIRRMA enables CFIUS to triage 
these transactions rapidly.

Q.8. Should they be reviewed differently than private-firm 
mergers or acquisitions, or firms that are in part-owned by 
Nation States?

A.8. As described above, the CFIUS statute currently prescribes 
a higher standard of clearance for transactions in which the 
buyer is determined to be foreign Government-controlled. In 
that sense, foreign Government-controlled transactions are 
reviewed differently. In another sense, however, CFIUS reviews 
all cases similarly by applying the same analytical framework 
to all cases to identify national security risks arising from 
the transactions. DoD supports the application of a consistent 
risk analysis methodology to all cases, while holding foreign 
Government-controlled transactions to a higher standard for 
clearance.

Q.9. It has been 10 years since Congress last comprehensively 
considered the statutory framework for CFIUS. As practitioners 
that have worked in this space for long tenures, has any 
consensus emerged about what budget, regulatory, or statutory 
changes may be needed?

A.9. DoD views FIRRMA as the best expression of interagency 
consensus regarding the changes necessary to modernize CFIUS.

Q.10. Can you delineate the appropriate role for export 
controls versus CFIUS?

A.10. The National Security Strategy and National Defense 
Strategy highlight protecting our warfighters' technological 
superiority as a national priority. Export controls and CFIUS 
are complementary aspects of a layered defense to accomplish 
this goal. Export controls function as a first line of defense 
to counter threats associated with technology transfer to our 
competitors. Export controls protect both military and dual-use 
(military and civilian use) technologies that are categorized 
by way of interagency deliberations, discussions with industry, 
and in many cases, international negotiations with other 
participating members of the multilateral export control 
regimes.
    CFIUS is a critical second line of defense. This second 
line of defense addresses emerging and foundational 
technologies that may not be currently covered by export 
control. The second line of defense also enables us to protect 
the know-how, expertise, and industrial relationships that 
would enable a competitor to re-create a technology competency 
on foreign soil. Acting in concert, this layered defense 
identifies and controls transfers of new and emerging 
technologies, reviews transfers of sensitive information and 
capabilities through foreign acquisitions, and engages with 
foreign partners to ensure they protect the critical 
technologies we do share.
    We have seen examples of these two layers working together 
in the past. In one instance, CFIUS prevented a country from 
acquiring a U.S. company with sensitive technology after the 
export control regime denied export licenses for the same 
technology to that country. Given that our competitors will 
continue using all available avenues to fill gaps in their 
military requirements, we need both strong export controls and 
a modernized foreign investment review process to maintain our 
technological advantage.