[Senate Hearing 115-213]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 115-213


             CFIUS REFORM: EXAMINING 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 ESSENTIAL NATIONAL SECURITY ELEMENTS UNDERLYING A 
    COMPREHENSIVE PROPOSAL TO REFORM THE REVIEW PROCESS USED BY THE 
      COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED STATES (CFIUS)

                               __________

                            JANUARY 18, 2018
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                Available at: http: //www.govinfo.gov/
                                   ______
		 
                     U.S. GOVERNMENT PUBLISHING OFFICE 
		 
29-914 PDF                WASHINGTON : 2019                 

























            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
                      Elad Roisman, Chief Counsel
       John V. O'Hara, Chief Counsel for National Security Policy
                      Kristine Johnson, Economist
                 Elisha Tuku, Democratic Chief Counsel
               Colin McGinnis, Democratic Policy Director
                       Dawn Ratliff, Chief Clerk
                     James Guiliano, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

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                            C O N T E N T S

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                       THURSDAY, JANUARY 18, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     3
    Prepared statement...........................................    33

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     5

                               WITNESSES

John Cornyn, a U.S. Senator from the State of Texas..............     1
    Prepared statement...........................................    34
Dianne Feinstein, a U.S. Senator from the State of California
    Prepared statement...........................................    37
Christopher Padilla, Vice President for Government and Regulatory 
  Affairs, IBM Corporation; and Former Under Secretary for 
  International Trade, Department of Commerce....................     7
    Prepared statement...........................................    38
    Responses to written questions of:
        Chairman Crapo...........................................    67
        Senator Cotton...........................................    68
        Senator Menendez.........................................    70
        Senator Warner...........................................    71
        Senator Cortez Masto.....................................    72
Scott Kupor, Managing Partner, Andreessen Horowitz, and Chair, 
  National Venture Capital Association...........................     9
    Prepared statement...........................................    43
    Responses to written questions of:
        Chairman Crapo...........................................    73
        Senator Menendez.........................................    75
        Senator Warner...........................................    76
        Senator Cortez Masto.....................................    77
Gary Clyde Hufbauer, Ph.D., Reginald Jones Senior Fellow, 
  Peterson Institute for International Economics.................    11
    Prepared statement...........................................    53
    Responses to written questions of:
        Chairman Crapo...........................................    79
        Senator Menendez.........................................    79
        Senator Warner...........................................    80
        Senator Cortez Masto.....................................    81
James Mulvenon, Ph.D., General Manager, Special Programs 
  Division, SOS International....................................    12
    Prepared statement...........................................    56
    Responses to written questions of:
        Chairman Crapo...........................................    82
        Senator Menendez.........................................    82
        Senator Warner...........................................    83
        Senator Cortez Masto.....................................    83

              Additional Material Supplied for the Record

FIRRMA-related documents--summaries, letters, quotes, and 
  background papers--submitted by Senator Cornyn.................    85
Prepared statement of the Rail Security Alliance.................   125

 
             CFIUS REFORM: EXAMINING THE ESSENTIAL ELEMENTS

                              ----------                              


                       THURSDAY, JANUARY 18, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:47 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.
    Chairman Crapo. This hearing will come to order.
    This morning, we are going to go immediately to Senator 
Cornyn for his statement, and then we will return back to 
Senator Brown and myself to give opening statements and then go 
to the witnesses.
    So, Senator Cornyn, without any further ado, you may begin 
your statement at any time.

  STATEMENT OF JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF 
                             TEXAS

    Senator Cornyn. Thank you, Mr. Chairman and Ranking Member 
Brown and Members of the Committee. I appreciate your holding 
this hearing to consider mine and Senator Feinstein's proposal 
called the Foreign Investment Risk Review Modernization Act, or 
FIRRMA.
    I will make abbreviated remarks, and I would ask consent, 
Mr. Chairman, to have my full testimony put in the record along 
with a written statement by Senator Feinstein who could not be 
here because she is Ranking on Judiciary and has a conflicting 
engagement.
    Senator Cornyn. Senator Feinstein and I spent months 
working on FIRRMA based in part on troubling information we 
both regularly hear as members of the Senate Select Committee 
on Intelligence. The bill takes a targeted approach at 
addressing specific national security problems while aiming not 
to unnecessarily chill foreign investment. I support foreign 
investment in the United States.
    I would like to take a moment to highlight the list of 
people who we have worked with, we have consulted with to try 
to improve this legislation and who have announced their 
support for it. It includes, of course, Members of the 
Committee like Senator Scott who introduced this bill with us, 
and it includes current and former U.S. national security 
leaders like Secretary of Defense James Mattis; Secretary of 
Treasury Steve Mnuchin; Attorney General Jeff Sessions; Admiral 
Harry Harris, Commander of U.S. Pacific Command; former 
Secretaries of Defense like Donald Rumsfeld and Bill Perry; 
former Homeland Security Secretary Michael Chertoff; former 
DNI, Director of National Intelligence, Admiral Dennis Blair; 
and other distinguished retired four-star generals and 
admirals.
    It also includes industry players such as Ericsson, Oracle, 
and several other companies and trade groups from across the 
country.
    Mr. Chairman, I would ask consent to submit for the record 
their letters and quotes as well as several summary and 
background documents on FIRRMA.
    Chairman Crapo. Without objection.
    Senator Cornyn. The context for this legislation is 
important, and it is easily misunderstood, so I want to 
hopefully correct some misconceptions. The context for this 
legislation is about China. I am an ardent supporter of free 
trade, and I strongly support foreign investment in the United 
States, consistent with the protection of our national 
security. China, however, has significantly altered the threat 
landscape for the United States.
    General Joe Dunford, Chairman of the Joint Chiefs of Staff, 
says that by 2025, China will pose the greatest threat to U.S. 
national security of any other nation. China poses a threat 
unlike anything the United States has ever faced before--a 
powerful economy with coercive, state-driven industrial 
policies that undermine the free market, married up with an 
aggressive military modernization and the intent to dominate 
not only its own region but potentially beyond.
    China uses both legal and illegal means to turn our own 
technology and knowhow against us and erase our national 
security advantage. One of these tools is investment, which 
China has weaponized to vacuum up U.S. industrial capabilities 
in dual-use technologies.
    Unfortunately, the jurisdiction of the Committee on Foreign 
Investment in the United States that reviews such transactions 
is limited, and China has studied the law and found gaps to 
exploit. To circumvent CFIUS review, China pressures U.S. 
companies into arrangements like joint ventures, coercing them 
into sharing their capabilities and their intellectual property 
and enabling Chinese companies to acquire that and then the 
knowhow that goes along with it and replicate them on Chinese 
soil, which undermines our defense industrial base.
    China has been able to exploit minority position 
investments in early stage technology companies to gain access 
to cutting-edge intellectual property as well as trade secrets 
and key personnel. The Chinese have figured out which dual-use 
emerging technologies are still in the cradle, so to speak, and 
not yet subject to export controls.
    I want to quickly debunk three flawed arguments advanced by 
some who have opposed our efforts. First, they say the bill 
represents regulatory overreach, which really misses the point. 
CFIUS is not a normal regulator by any means. It is a part of 
our national security apparatus, and the Federal Government has 
no higher duty--I would argue no American has a higher duty 
than to protect and to maintain our national security.
    Second, opponents claim that the export control system can 
already address these national security risks. Well, under 
FIRRMA, export controls would remain the first line of defense 
when it comes to technology transfers, but that system has 
inherent limitations, so we need a second line of defense. And 
CFIUS and export controls are designed to be interactive and 
complementary and not mutually exclusive.
    What is more, FIRRMA includes safeguards to ensure that 
CFIUS would review transactions only when necessary. Many 
transactions would be exempted where there are other 
authorities, such as export controls that adequately address 
national security risks.
    CFIUS would also create a safe list of certain allied 
countries for which these new types of transactions would be 
exempt.
    Third, some opponents argue that FIRRMA will flood CFIUS 
with too many transactions, seemingly questioning whether 
addressing real national security threats is worth the time and 
expense. Well, it is, and I am fully committed to securing the 
necessary resources working together with my colleagues because 
this is a national security priority.
    So, in closing, Mr. Chairman, I want to ask those who 
perhaps are skeptical of what we are trying to do here to 
withhold judgment until you have heard the front-line 
perspectives of key member agencies of CFIUS. The time, I 
believe, to modernize CFIUS is now. Our adversaries and rivals 
around the world are on the march, and they are vacuuming up 
our cutting-edge dual-use technology, which not only cuts our 
technological advantage when it comes to national security but 
undermines our industrial base here at home, as I have said.
    The time to modernize CFIUS is now, and we must not allow 
ourselves to be the frog in the pot of boiling water, so to 
speak. So I urge you to advance this bill for the sake of our 
long-term national security.
    Thank you, Mr. Chairman, I really appreciate the 
opportunity to present these remarks and the cooperation that 
you and others on the Committee and other colleagues have shown 
in trying to address this vital national security issue.
    Chairman Crapo. Thank you, Senator, Cornyn. We appreciate 
both you and Senator Feinstein bringing this critical issue to 
us and the work that you have put into it, and we appreciate 
your testimony here today.
    You are obviously facing a pretty busy schedule and are 
free to leave at any time you wish. Thank you, and thanks again 
for bringing this to us.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. Today the Committee will begin to evaluate 
the essential national security elements underlying a 
comprehensive proposal to reform the review process used by the 
Committee on Foreign Investment in the United States, or CFIUS.
    Again, thanks go to Senators Feinstein and Cornyn for their 
testimony and work on their bipartisan Foreign Investment Risk 
Review Modernization Act of 2017.
    The bill was first introduced by Senators Cornyn and 
Feinstein on November 8th to modernize and strengthen CFIUS to 
more effectively guard against the risk to the national 
security of the United States posed by certain types of foreign 
investment.
    The Senators and their staff have worked well over a year 
with concerned national security officials, the Treasury 
Department, and various affected industry representatives.
    This comprehensive bill could be the first update to the 
body of the CFIUS law in more than a decade. It would expand 
the reach of current law in a number of respects, while 
codifying some current administrative practices, and result in 
significant changes to jurisdiction, process, and enforcement.
    A study produced for the Pentagon's DIUx unit, which 
enlists startups to find solutions for the military's most 
advanced technology-related requirements, is credited as being 
the catalyst for much of the impetus behind this CFIUS reform.
    The DIUx study highlights the problems arising from the 
fact that the U.S. Government does not currently monitor or 
restrict venture investing nor stop potential transfers of what 
is known variously as early stage, foundational, or critical 
technology knowhow, particularly with regard to certain types 
of Chinese investment in the United States.
    Today's hearing also draws witnesses from one perspective 
of the private sector that is concerned not only with inbound 
investment but also outbound transactions and from the venture 
capitalists that support American innovation.
    We are also joined by two long-time CFIUS analysts with 
particular expertise in regard to China's economy, its trade 
practices, and national security objectives.
    The Committee will benefit from learning more about the 
types and numbers of transactions that may be circumventing 
CFIUS and if any are believed to have already transferred 
critical technology.
    Many of us are interested in learning more about the ways 
China acquires U.S. technology and which improvements to the 
current system are warranted, particularly with regard to those 
investments that fall short of a foreign person's actual 
ownership or control.
    We are also interested in the issue of emergent critical 
technology and the witnesses' input on how it would be defined 
and applied by CFIUS.
    Additionally, we hope to hear more on the impact on U.S.-
based multinational corporations as a result of CFIUS 
unilaterally restricting U.S. outward investment and associated 
technology and whether U.S. companies would lose the ability to 
compete to allied companies or others in third-country markets.
    It is also important to study the question of necessary 
resources for any proposed reform to CFIUS. While CFIUS 
certified about 260 applications last year, the Committee looks 
forward to testimony on the changes contemplated by S. 2098 and 
their impact on the number of reviews, staff needs and 
resources going forward, and the impact that, in turn, would 
have on U.S. national security if the resources fell short.
    CFIUS is but one leg of a triad that secures national 
security-related technology and the defense industrial base. 
The other two are the U.S. export control regime and Federal 
investment itself in research and development that keeps the 
industrial base resilient and innovative.
    The Committee must be mindful that in pursuing its mandate 
to assure the national security interests of the United States 
under CFIUS that it not create a situation where it chills a 
wide range of commercial activities that have traditionally 
been controlled through export control laws.
    The United States is both the world's largest foreign 
direct investor and beneficiary of foreign direct investment, 
and it ranks among the most favorable destinations for FDI 
which plays an important role in not only the U.S. economy but 
specifically in the innovation of its industrial base and, 
therefore, its national security.
    It is clear that the current CFIUS system is itself under 
stress. Moving forward, the Committee must prepare itself to 
thoughtfully consider all of the recommendations made by S. 
2098 and other CFIUS legislation, with the full awareness of 
the national security and economic stakes at heart.
    It is a new world. The laws, regulations, and policies 
currently exercised by CFIUS may no longer protect U.S. 
technology from illicit transfers as they did in the past.
    We must work together as a Congress first to assure the 
national security of the United States by granting the 
Administration all the authority it needs to confront this 
growing threat, but then not exceed that grant to the detriment 
of maintaining a free, fair, and open U.S. investment policy.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Well, thank you, Chairman Crapo, and thank 
you to the witnesses for joining us. I comment Senators Cornyn 
and Feinstein for their work on this issue.
    A dozen years ago, I was serving in the House of 
Representatives when we learned the Bush administration had 
signed off on the sale of the operations at more than 20 U.S. 
ports, including major ones from New York and New Jersey to New 
Orleans, to Dubai Ports World.
    Congress responded the next year by adopting FINSA, the 
Foreign Investment and National Security Act, to give our 
Government a greater ability to respond to foreign investment 
that could pose a threat to national security and to protect 
critical infrastructure.
    In the intervening years, the interagency group that 
implements the law, the Committee on Foreign Investment in the 
United States has quietly worked to try to ensure that foreign 
purchases of assets in the United States does not undermine our 
national security--obviously not an easy task, as our witnesses 
will describe, our adversaries are constantly working to narrow 
the gaps between our capabilities and theirs, through 
legitimate and illegitimate means.
    Over the past decade, we have seen China become more 
aggressive. The evidence stretches from the OPM servers to the 
South China Sea. We know that CFIUS has a limited mandate, and 
we know the distinction between economic security and national 
security is not an easy one to make.
    Foreign direct investment can be a real positive for our 
country. It was a French company, for example, that built the 
first rolling mill in Youngstown, Ohio, in decades.
    But today we will hear testimony that some foreign 
investors are not interested in capturing market share in auto 
or oil country tubular goods or any other industry. Instead, 
they seek to capture the intellectual property of leading edge 
technology companies in our country for their home country's 
military uses.
    We attempt today to prevent this type of technology 
transfer through a system of multilateral and unilateral export 
controls. This system, a product of the cold war, identifies 
dual-use products, technology, and software that may not be 
exported.
    The question is, is this approach sufficient, or do we need 
to intervene at an earlier stage of product or technology 
development to prevent the building blocks of the next 
generation of advances from being expropriated by foreign 
investors?
    I mentioned at the beginning of my remarks the failure of 
the Bush administration to block the sale of our port 
operations to a company from the UAE, but this is not a 
partisan issue. The Clinton administration agreed to China's 
accession to the WTO. A number of us opposed that. They agreed 
to that accession. The Obama administration refused to take 
action in the face of China's manipulation of its currency.
    Some of our witnesses today will speak to the benefits of 
trade liberalization, but it is hard to maintain a bilateral 
trading partnership when one party is abiding by the rules and 
the other is not.
    When China joined the WTO in 18 years, 17 years ago, it 
agreed to remove market barriers for foreign companies and to 
comply with international trade standards that are intended to 
create a worldwide level playing field. Unfortunately, as we 
know and we feel all too often, China has not lived up to many 
of these commitments. That country continues to use nontariff 
barriers to block foreign producers from entering its market. 
Chinese state-owned enterprises, such as those in the steel 
sector, receive extensive subsidies that allow them to compete 
with no consideration of market forces. It can be energy. It 
can be land. It can be capital. It can be other kinds of 
inputs. As a result, they flood the global market with steel 
products and make it much harder for U.S. companies and workers 
to compete.
    I do not think CFIUS can or should bear the burden of 
trying to bring about a fair trading relationship with China. 
That is not its job. That is not its intent. It has its hands 
full trying to police the national security threats we face 
from that country and others.
    But neither should we sit idle. The vast majority of 
foreign investment in the United States falls, of course, 
outside the scope of CFIUS. But we do not have a way to review 
that investment to make sure it is in our economic interests.
    I have introduced legislation with Senator Grassley--both 
of us are members of the Finance Committee--called the Foreign 
Investment Review Act that would require the Secretary of 
Commerce to review certain foreign investments, particularly 
those made by state-owned-enterprises, to make sure they are in 
the long-term, strategic interests, economic and otherwise, of 
the United States.
    I agree we should update CFIUS to respond to the challenges 
we face. It is equally important now, Mr. Chairman, that we 
recognize that the same practices that undermine our national 
security, can pose a threat to our economic security as a 
Nation as well.
    Thank you.
    Chairman Crapo. Thank you, Senator Brown.
    We will now move to our witnesses and their testimony. We 
have with us four excellent witnesses today, and in the order 
of your testimony, they will be the Honorable Christopher 
Padilla, Vice President for Government and Regulatory Affairs 
at IBM Corporation, and former Under Secretary for 
International Trade at the U.S. Department of Commerce. Second 
will be Mr. Scott Kupor, Managing Partner at Andreessen 
Horowitz and Chairman of the Board of National Venture Capital 
Association. Next would be Dr. Gary Clyde Hufbauer, the Reginal 
Jones Senior Fellow at the Peterson Institute for International 
Economics; and finally, Dr. James Mulvenon.
    Did I get that pronounced right? Close?
    Mr. Mulvenon. Mulvenon.
    Chairman Crapo. Mulvenon? All right. Thank you for that.
    Dr. James Mulvenon, the General Manager at the Special 
Programs Division of SOS International.
    Gentlemen, we appreciate you being with us today and your 
bringing your expertise to assist us with this issue. We will 
proceed in the order that I introduced you. I remind you that 
we ask you to keep your oral remarks to 5 minutes, so we have 
time for questions and answers. And I again remind our Senators 
to do the same when their turn for questions comes.
    Thank you. And Mr. Padilla.

STATEMENT OF CHRISTOPHER PADILLA, VICE PRESIDENT FOR GOVERNMENT 
   AND REGULATORY AFFAIRS, IBM CORPORATION; AND FORMER UNDER 
   SECRETARY FOR INTERNATIONAL TRADE, DEPARTMENT OF COMMERCE

    Mr. Padilla. Thank you, Mr. Chairman.
    During the Administration of President George W. Bush, I 
served as Assistant Secretary of Commerce responsible for 
export controls in addition to my role as Under Secretary, and 
in that and other Administration roles, I was a senior sub-
Cabinet official on CFIUS.
    Interestingly, the last major expansion of export controls 
focused on China, which looked at Chinese military end users, 
bears my signature. It was signed in June of 2007 when I served 
as Assistant Secretary for Export Administration.
    In my role at IBM, I have been involved in two transactions 
that were reviewed and approved by CFIUS, and I am responsible 
for the company's compliance with export controls. And my 
comments will draw on these experiences.
    I would like to focus my remarks on the FIRRMA bill 
discussed by Senator Cornyn this morning, and let me start by 
saying that FIRRMA contains, I think, some important reforms 
that IBM supports--to expand the ability of CFIUS, to examine 
certain inbound investments, plugging gaps that do exist in its 
jurisdiction. These include expanding the ability of the 
committee to look at a wider range of inbound investment, 
taking measures to prevent the evasion of CFIUS, and ensuring 
senior-level review of cases. We also support increasing 
resources for the committee.
    But the problem with FIRRMA, Mr. Chairman--and it is a big 
one--is that the bill does something else. It would drastically 
expand the committee's mandate beyond examining inbound 
investment. For the first time ever, CFIUS would also review 
outbound international transactions, including thousands of 
nonsensitive sales, IP technology transfer deals, even with 
friendly nations, and this is a serious flaw in the bill. It 
would duplicate and undermine the existing U.S. export control 
system, would result in a flood of cases that would overwhelm 
CFIUS, and could constitute the largest unilateral trade 
controls imposed by the United States in many decades.
    Controlling sensitive technology works best when it is done 
internationally in cooperation with allies. A technology 
control system that only unilaterally stops U.S. firms from 
doing business abroad will not advance security interests if it 
simply hands out markets to foreign competitors, many of whom 
are equally adept in advanced technology, yet this is precisely 
what FIRRMA would do.
    As drafted, the bill would impose a very onerous and 
entirely unilateral set of restrictions on overseas 
transactions involving the contribution, vaguely defined, of 
technology, IP, and associated support through any--I emphasize 
``any''--type of arrangement.
    This could capture under CFIUS things like the sale of a 
computer server to a bank in Singapore, the licensing of a 
database to a pharmaceutical company in Switzerland. Even 
routine licensing of trademarks could require CFIUS review. 
Saying, as the bill does, that ordinary customer relationships 
are excluded does not narrow the bill because that term is also 
left to regulators to define. With such a broad reach, the 
CFIUS caseload would skyrocket from about 250 cases a year now, 
which is already a record, to many thousands or even tens of 
thousands.
    Now, I know as Senator Cornyn said, one of the issues 
driving FIRRMA is a concern that the export control system has 
not kept up to date, but the answer to that is not to abandon 
export controls and dump everything on to CFIUS, layering 
another bureaucracy on top of foreign commerce. I think the 
better answer is that there is existing regulatory authority to 
impose new export controls quickly over time in partnership 
with our allies. This can be done under current rules already 
on the books.
    So the authority is there, but the control lists do need a 
refresh. A GAO report found in February 2015 that the Defense 
Department was no longer updating or even using the Militarily 
Critical Technologies List, which was established in statute by 
Congress to keep export controls up to date.
    FIRRMA would not correct this problem and could make it 
worse. Under FIRRMA, the Government would define a vague new 
list of technologies, even though it is not using the one it is 
already supposed to keep, and then wait until something pops up 
in a transaction review. We might then try to stop it in a 
haphazard and scattershot way on a deal-by-deal basis, but that 
would be totally unilateral.
    Casting a huge regulatory net over business and applying a 
test of, essentially, ``We will know it when we see it'' would 
be very damaging to both competitiveness and security. I think 
the answer, Mr. Chairman, is not to turn CFIUS into a super 
export control agency. Instead, Congress and this Committee 
should use its oversight authority to demand updates, to export 
controls, ideally in cooperation with our allies to reflect 
current technology. If you do that combined with a slimmed-down 
FIRRMA bill that does plug some gaps in the ability of CFIUS to 
look at inbound investment, I think that would be the best 
approach for our economy and for our national security.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Mr. Padilla.
    Mr. Kupor.

    STATEMENT OF SCOTT KUPOR, MANAGING PARTNER, ANDREESSEN 
   HOROWITZ, AND CHAIR, NATIONAL VENTURE CAPITAL ASSOCIATION

    Mr. Kupor. Chairman Crapo, Ranking Member Brown, Members of 
the Committee, thank you again for the time today and the 
opportunity to testify regarding the Foreign Investment Risk 
Review Modernization Act. My name is Scott Kupor and I am the 
Managing Partner of Andreessen Horowitz. We are a venture 
capital firm that has partnered with many innovative technology 
companies. I am here today in my capacity, though, as the 
Chairman of the National Venture Capital Association.
    The venture capital industry shares the goals of this 
Committee and FIRRMA's authors to protect U.S. innovation and 
ensure that technology is not used to harm our competitiveness 
or security. At the same time, we believe that Congress and the 
Administration should be mindful of the bill's potential impact 
on startups in the venture industry.
    My testimony today will focus on the ways in which we think 
FIRRMA can be improved while still accomplishing its 
foundational goal.
    First, I thought I would give you a quick background on 
what venture capitalists do and what it means to the overall 
economy and innovation. Venture capitalists like myself, we 
often are called general partners, or GPs, raise investment 
funds for a broad range of limited partners, or LPs. These are 
endowments, foundations, and pension plans, many of which are 
in your States.
    We use this capital to invest in outstanding entrepreneurs 
with breakthrough ideas. The basic structure of a venture fund 
effectively protects the sensitive information of startups from 
disclosure of investors into the fund. We generally limit 
disclosure of limited partners to a very small amount, and most 
of that disclosure is related to valuation and accounting-
related information to ensure that limited partners understand 
that is the current economic position is of the fund.
    Limited partners do not have access to sensitive 
information, the concern of FIRRMA, and of course, they have no 
say in the investment decisions of the venture fund.
    We hope, of course, that all the companies we invest in 
will succeed, but entrepreneurship is an inherently risky 
endeavor. It is worth the risk, though, because it is 
absolutely essential to our economy, with one study finding 
that young startups, mostly venture-backed, were responsible 
for almost all the 25 million net jobs created in the United 
States since 1977.
    Increased interests in startups by other countries, though, 
has caused the share of global venture capital invested in the 
United States to fall from 90 percent to 54 percent in only a 
matter of 20 years. China is now the second largest destination 
in the world for venture capital, and in 2016, 6 of the 10 
largest venture deals in the world occurred in China.
    Entrepreneurship is now a global competition, and I 
strongly encourage policymakers to prioritize policies that 
will solidify our leadership position, be they regulatory, tax, 
or immigration related.
    Against this backdrop, I would like to share our views on 
FIRRMA. I do believe FIRRMA is well-meaning legislation 
intended to deal with a very real challenge; however, as 
drafted, the legislation produces many questions for the 
venture industry that we believe should be clarified before the 
bill moves forward.
    My written testimony goes into greater detail, but this 
morning, I thought I would highlight two key areas that we 
would offer for improvement.
    First, we would recommend that FIRRMA be amended to clearly 
specify that U.S. venture funds with foreign limited partners 
are not implicated by the covered transaction definition, nor 
does a venture fund take on foreign personhood for purposes of 
FIRRMA merely because it has foreign limited partners.
    As drafted, FIRRMA is ambiguous in its application to a 
venture capital fund with foreign limited partners. We are 
concerned that this ambiguity, especially when combined with a 
broad grant of rulemaking authority, will cause unnecessary 
confusion, cost, and burden for the venture capital industry, 
as venture firms will be left without a clear understanding of 
whether they must file with CFIUS and under what circumstances.
    As I mentioned earlier, as a practical matter, information 
disclosure to limit partners is minimal and related largely to 
valuation and accounting-related information, and also, as you 
may know, most venture capitalists sit on the boards of 
directors of the companies in which they invest, and as a 
result, they owe duties of confidentiality directly to the 
shareholders of those companies.
    Thus, to the extent a venture capitalist were aware of 
proprietary technology in use or being developed by the 
company, she would not be in a position to share that with 
limited partners. Hence, the risk of disclosure of proprietary 
intellectual property to a foreign LP, understandably of 
concern to Congress, is not a paramount risk in a typical 
venture capital fund structure.
    Second, we would ask that FIRRMA be modified so it does not 
stifle foreign direct strategic investors that have become an 
important part of the U.S. startup financing and are 
increasingly investing alongside U.S. venture capital firms.
    Specifically, FIRRMA should specify that CFIUS filing is 
not needed if the foreign strategic investor takes a de minimis 
stake in a startup, as in that case the foreign strategic 
investor is a 
de facto passive investor, but might fear it does not meet the 
tightly drafted passive investment test.
    In addition, we would ask that the passive investment test 
be broadened to reflect true passivity. These changes, we 
believe will maintain FIRRMA's intended effects, while avoiding 
serious issues for startups in the venture capital industry.
    The bottom line is that U.S. venture capital in 
entrepreneurial companies are competing against a global set of 
investors and companies who would love to have the next set of 
breakthrough technologies developed in the countries of their 
origin. If we make it harder for foreign investment to come 
into U.S.-domiciled companies, that money will simply go to 
other countries that are more welcoming, and we risk losing the 
leading competitive position in innovation that the United 
States has long held. It is far better for the United States to 
continue to be the global financial center, where the benefits 
of economic and job growth stemming from technological 
innovation accrue to our citizens.
    To conclude, our industry appreciates the interest the 
Committee and FIRRMA's authors have paid this important issue 
in national security. I hope my comments today have conveyed 
the modern startup investing ecosystem is complex, and care 
should be taken to ensure that it is not disrupted in a way 
that harms the ability of startups to grow. I also hope that we 
can all work together on policies that support the American 
entrepreneurial system.
    Thank you again for the opportunity.
    Chairman Crapo. Thank you, Mr. Kupor.
    Dr. Hufbauer.

STATEMENT OF GARY CLYDE HUFBAUER, Ph.D., REGINALD JONES FELLOW, 
         PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

    Mr. Hufbauer. Thank you, Senator Crapo and Members of the 
Committee, and apologies for my hoarse throat. Many of my 
remarks overlap with what Chris Padilla said, so I will try to 
abbreviate them. And I appreciate, Senator Crapo, the balance 
you struck in your opening remarks between national security 
and economic progress.
    Inward and outward foreign direct investment almost always 
benefit the U.S. economy, and the econometrics on this are just 
overwhelmingly strong. Therefore, in my view, the burden should 
be placed on those who would propose restrictions, and that is 
the way CFIUS has operated in the past.
    As Chris said, S. 2098 and its House counterpart would 
significantly enlarge the CFIUS mandate to cover outward 
investment and technology transactions. I mean, that is an 
enormous expansion, and the bills would cast a skeptical eye, 
perhaps properly, toward investment into a firm based in an 
adversary nation. And that would seem to be China certainly, 
but also Russia, Iran, and I am sure there are others.
    The new mandate, as both the previous speakers have said, 
could put U.S. multinationals at a disadvantage if they are 
competing with, let us say, British or European or Japanese 
multinationals who have the same technology because the United 
States would be prevented from selling, and the others could go 
ahead.
    So with its enlarged mandate, CFIUS would need a much, much 
larger staff. I really want to emphasize that. To give them the 
mandate without the staff, everybody will be disappointed. As 
Chris said, the number of cases will jump from 200 to at least 
1,000 and probably more.
    And the way the enlarged mandate is written in the bill--
maybe this is not how it would play out, but it seems to put 
the burden on private firms to show that the transaction will 
not reduce U.S. technological advantages in areas that are 
currently or might soon become subjects of national security 
concern.
    So with those thoughts, I have just two recommendations. 
First, I think the new mandate should focus on adversaries, 
they should be named, and critical technology.
    Now, we have just brilliant scientists in the National 
Academy and National Engineering Association and elsewhere, and 
they can identify these critical technologies. Let us name 
them, and it is not a one-for-all name. It is a rolling name.
    And second, the bill ought to more explicitly take into 
account the availability of the technology in question from our 
allies. That would be Japan and Korea and Europe and Canada, 
and if we are going to block it to the adversaries, well, then 
we ought to have a very heavy diplomatic demarche to the allies 
that they should block it as well.
    Thank you very much.
    Chairman Crapo. Thank you, Dr. Hufbauer.
    Dr. Mulvenon.

 STATEMENT OF JAMES MULVENON, Ph.D., GENERAL MANAGER, SPECIAL 
              PROGRAMS DIVISION, SOS INTERNATIONAL

    Mr. Mulvenon. Mr. Chairman, Ranking Member Brown, Members 
of the Committee, thank you for inviting me this morning. My 
name is James Mulvenon. I am the General Manager of SOS 
International's Special Programs Division. I spent the last 20 
years building teams of Chinese linguist analysts supporting 
the intelligence community and Federal law enforcement and the 
Department of Defense primarily trying to understand Chinese 
technology trends.
    Three years ago, with two of my U.S. Government colleagues, 
I wrote a book called ``Chinese Industrial Espionage,'' which 
documented in tedious detail the extent to which the Chinese 
were stealing our technology which understandably made the 
Chinese government quite upset.
    I would like to make four key points today. The first, I 
feel like my major role this morning is to present a more 
comprehensive view of the problem, as I see it.
    China has a comprehensive strategy, in many ways unlike the 
U.S. Government, for national economic development and military 
modernization, which has unfortunately for U.S. companies 
created a very unfair asymmetric business environment in China 
for them to operate.
    I have sympathy for the plight of U.S. companies in China. 
My father did business there for 25 years, but the nature of 
the environment that the Chinese government has created through 
regulation and other policies has in many ways forced U.S. 
companies, which are in China and in the Chinese market for 
legitimate reasons, to grow and prosper and make money, to make 
suboptimal decisions, which may benefit that particular 
quarters numbers but may not be in the long-term interest of 
U.S. national security.
    The second feature of the problem as I see it that U.S. 
laws have not evolved to really accommodate the creativity and 
innovation that the Chinese government and its entities are 
using in order to exploit the gaps and weaknesses in our 
system, moving as they found that they could not do straight 
acquisition through the front door through CFIUS, as they kept 
getting those rejected, but instead turned to more creative 
joint venture and investment vehicles to be able to back-door 
their way into intellectual property that they wanted to find.
    And of this Chinese strategy, I think there are some key 
features: heavy state industrial planning like the ``Made in 
China 2025'' plan, military-civilian fusion, dispelling the 
notion that there actually is such a thing as a private company 
in China. The political and legal system in China really does 
not allow any company in China to be able to refuse the 
entreaties of the Chinese government if they wanted access to 
the technology--very heavy state subsidies, as was mentioned 
earlier. The integrated circuit fund of $250 billion was 
designed specifically to evade WTO prohibitions against state 
subsidies.
    The promotion of national champion companies, we are all 
familiar with Huawei and its various activities. A whole raft 
of new laws and regulations that they have put out to codify 
what had previously been informal measures on their part, 
particularly the new cybersecurity law, which is putting 
tremendous pressure on U.S. companies for data localization, 
which is a threat to U.S. PII and other sensitive data.
    Their creation of an entire domestic standards regime, they 
use as a trade weapon against U.S. companies. I would highlight 
5G wireless standard is the latest iteration of that. A buy 
local strategy through their government procurement law, that 
puts pressure on U.S. companies. State-backed joint ventures 
and investment vehicles, which are quickly identified as state-
backed. I would highlight Canyon Bridge, which is sort of a 
thinly disguised state council proxy of the Chinese government 
that attempted to buy Lattice Semiconductor.
    The mercantilism that we see in the One Belt, One Road 
initiative, not to mention their planetary scale cyber 
espionage program that took all of our OPM data back to 
Beijing, large-scale technology espionage. Their nontraditional 
collection program, the so-called ``1,000 Talents Programs,'' 
whereby they financially incentivize U.S. scientists and 
researchers to come back to China to be able to share that 
technology.
    But in my view, export controls, which is often cited as 
the reason why we do not need FIRRMA, are not enough. I have 
many personal experiences with failing to convince Assistant 
U.S. Attorneys to be able to prosecute clear export control 
violation cases, but the anecdote that I would leave you with 
that is most troubling to me is the U.S. engineer who in its 
head possesses the kind of knowhow and information that would 
otherwise be subject to
export control violations, sitting in a joint venture in China,
encouraged to help solve a particular technical problem. That 
conduit of information transfer is not covered under the U.S. 
export control regime, and it is why we need to more heavily 
scrutinize these overseas joint ventures and investment 
programs.
    Thank you, sir.
    Chairman Crapo. Well, thank you very much, Dr. Mulvenon, 
and to all of our witnesses. Again, your testimony is 
fascinating, and you bring a wealth of knowledge to us. And we 
appreciate you doing that.
    My first question is for Mr. Kupor and Mr. Mulvenon. The 
national security concern with venture capital arises from an 
assessment that China will soon surpass the United States as 
the technological leader in fields such as artificial 
intelligence and robotics in part derived from venture capital 
deals and special purpose vehicles, the latter formed to 
obscure the source of capital for a foreign acquisition.
    My question is sort of a series of a couple of them. How do 
you assess the risk of early or growth stage venture capital 
contributing to the transfer of U.S. technology to the Chinese? 
And along with that, how is a venture capital deal different 
from a special purpose vehicle or a private equity deal?
    Do you want to go first, Mr. Kupor?
    Mr. Kupor. Sure. Thank you, Mr. Chairman.
    So, yes. First of all, with respect to China and artificial 
intelligence, there is no question--I think the witness talked 
about it--that China has very clear government policy around 
artificial intelligence. It was mentioned, and it is true, that 
they have offering things like cash stipends, for example, for 
U.S.-trained engineers who are Chinese nationals to come back 
to the country and obviously help them develop those 
technologies. So I do not think there is any question that 
there is a major technological race happening, particularly 
with respect to things like artificial intelligence.
    On the venture capital side, the reason why, as I said, I 
do not think this is a major issue to worry about on the 
venture capital side is--number one is, at the end of the day 
from a U.S. venture capital perspective, the goal that we would 
like to see is how do we actually get foreign investment here 
into the United States so that the U.S. benefits from those 
technologies.
    And as I mentioned, kind of as the global share of U.S. 
venture technology, venture capital has fallen, there are a lot 
more dollars competing for those deals from other geographies. 
So we think it is far better to actually encourage foreign 
investment into those companies.
    On the venture capital side, specific to your question, 
what happens is venture capitalists are almost always minority 
investors in companies, and this is, I think, a very important 
distinction. You mentioned kind of private equity more broadly 
in buyouts. In buyouts, those tend to be controlled 
transactions, so those companies actually run the board. They 
control from an ownership perspective of the companies.
    Venture capitalists are almost always minority investors, 
and so as a result, our ability to kind of dictate what the 
company does and to kind of share information from an IP 
perspective is much more limited than it might be in an M&A or 
another control transaction.
    So I think for that respect in particular, venture capital, 
in fact, is quite a very different investment category than you 
might be thinking about from some of the other investment 
categories.
    Chairman Crapo. Thank you.
    Dr. Mulvenon?
    Mr. Mulvenon. Mr. Chairman, you mentioned earlier the DIUx 
report, which I associate myself with as well, and we 
collaborated with them in the creation of that report.
    My organization also produced a study for the U.S. Economic 
and Security Review Commission on China's research into 
artificial intelligence and robotics and discovered--frankly 
were surprised by the extent of Chinese investment in early 
stage startups on both the West and East Coast of the United 
States, in that area, and our concern about it was, of course, 
derived from the Department of Defense's Third Offset Strategy, 
which explicitly calls out artificial intelligence and robotics 
and machine learning as the core technologies undergirding the 
next wave of U.S. military modernization.
    And to the extent to which the Chinese government has a 
more robust investment strategy--and I think that has been 
carefully documented as to how much larger it is than the U.S. 
investment strategy--as well as the lack of scrutiny of these 
investments--and I would just highlight particularly in the 
DIUx category that there were certain investments, such as 
companies like Neurala and other places where there had been 
initial DoD funding, and because of the lack of nimbleness of 
our system, the Chinese then came in and did the second and 
third rounds of funding for those companies and then took over 
the seating of that research.
    And so I think this is an area of great concern only 
because our own military leaders have identified these 
technologies as really what are going to be the game changers 
in the next round of military modernization globally, and given 
the amount of friction we currently have with the Chinese 
government in certain key security areas, if you have read 
books like ``Ghost Fleet,'' which may be a hyperbolic view of 
the future, but are often seen by futurists as the role that 
things like artificial intelligence and machine learning will 
play, I think we need to look at this issue very carefully.
    Chairman Crapo. Well, thank you.
    Mr. Padilla, the central point of your testimony is that 
FIRRMA broadens of the scope of CFIUS to something akin to a 
supra-export control agency with jurisdiction to capture 
outbound transactions, joint ventures, and other transactions 
outside the United States that are not investments and may even 
be licensed transactions that have consequences for critical 
technology companies and others.
    What is the national security concern or gap in the export 
control regime or other enforcement mechanism that would 
necessitate this kind of expansion of CFIUS authority.
    Mr. Padilla. I think the concern that is driving some of 
what we are seeing in the debate about FIRRMA is that 
technology control lists need to be updated.
    I would say that a couple of the technologies that Dr. 
Mulvenon mentioned--for example, artificial intelligence, 
machine learning, which IBM is very heavily involved in, things 
like quantum computing, Blockchain, these emerging technologies 
do not appear on the Militarily Critical Technologies List 
because DoD has not updated that list since 2011, nor have 
there been proposals put forward by the United States in the 
Wassenaar Arrangement, which is the international control 
regime that has existed really since the end of the Second 
World War through different names to try to control that 
technology on a multilateral basis to countries of concern.
    So I think those are legitimate concerns, but I do not 
think the answer is to say, well, export controls are not 
working the way they were designed by Congress, so let us dump 
it all onto CFIUS. CFIUS is not equipped to do that kind of 
work. They are not equipped to look at new emerging 
technologies. They are not equipped to consult with allies. 
They are not equipped to impose multilateral or even unilateral 
controls.
    So the export control system, which is under the 
jurisdiction of this Committee, I think needs a refresh, and I 
think the tools exist. They exist in regulation today, and they 
ought to be used. But I think simply throwing up our hands and 
saying, well, we would rather throw it all onto this other 
bureaucracy is not the right approach.
    Remember it is the Committee on Foreign Investment in the 
United States. It was intended and created to look at inbound 
investment. If we do this, it would have to be renamed.
    Chairman Crapo. Thank you. I appreciate it. I have got to 
move on. My time has expired, and Senator Brown has----
    Mr. Padilla. Thank you.
    Chairman Crapo.----some really good questions, sir. But 
thank you for that.
    Senator Brown. Thank you, Mr. Chairman.
    I was intrigued, Mr. Mulvenon, by your comment that there 
is no company in China that can resist entreaties to share--or 
turn over--may be a better term, technologies to the 
government, so thank you for that.
    Dr. Hufbauer, good to see you again. Thank you for being 
here. You suggested some of China's trade practices may spur 
legitimate concerns, but that Congress should wait the outcome 
of the USTR study of the matter initiated last August.
    I have great respect for Ambassador Lighthizer, but I am 
not sure we can or should wait for another study. I would like 
to ask you and then each of the panelists. Is there any doubt 
that China has and continues to violate its international trade 
commitments and that engages in unlawful technology transfers?
    Start with you, Dr. Hufbauer.
    Mr. Hufbauer. No doubt whatsoever.
    Senator Brown. Mr. Padilla?
    Mr. Padilla. I would agree. I do not think there is much 
doubt of violations, including by companies like ZTE most 
recently.
    Senator Brown. Mr. Kupor.
    Mr. Kupor. I am definitely not an expert on the topic, but 
certainly, from my understanding, that is true. Yes, sir.
    Senator Brown. Mr. Mulvenon.
    Mr. Mulvenon. I think it is not only true, but I think 
every day, we uncover more and more of the scope and scale of 
it and never cease to be amazed by the size of the transfer.
    Senator Brown. OK. Thank you.
    Mr. Padilla, I agree that we should be careful not to ask 
too much from CFIUS, as your testimony pointed out, but when it 
comes to national security, do we need to choose between export 
controls, which you admit are outdated in CFIUS, and why not 
adopt an appropriate that tries to fill the gaps between the 
two?
    Mr. Padilla. Well, CFIUS reviews do look at export 
controls. When I was Assistant Secretary of Commerce, I sat on 
the CFIUS committee, and one of the things we looked at when we 
were looking at an acquirer, for example, is do they have a 
history of violating export control laws. Could the acquirer be 
trusted to follow our laws, or were there concerns there? So I 
think there is close interlock between the systems, but they 
were built very differently, and they have evolved very 
differently over the course of 70 years in the case of the 
export control system to do different things.
    And I think the answer is to improve the export control 
system, also to improve CFIUS because there are some gaps in 
what it can look at, but not to layer them on both together, so 
that the same transaction that might not need an export license 
or that might have received one also then has to go through a 
redundant CFIUS review. I do not think that is an appropriate 
approach. I do not think it would enhance security, and it 
certainly would hurt competitiveness.
    Senator Brown. Thank you.
    Mr. Mulvenon, there is broad agreement, I think, that the 
identification of technology that should not be transferred to 
our adversaries lags well behind where it should be. Will it 
not be a problem that wherever you locate the responsibility, 
DoD or CFIUS or Commerce? So why is CFIUS in your mind the best 
place to place that responsibility?
    Mr. Mulvenon. First of all, I agree with Mr. Padilla about 
the laggard updating of the MCTL, which is really the most 
powerful resource we have for tracking these kinds of 
technology developments, and many, many times in my own 
professional experience, I ran into situations in which we 
could not convince key decisionmakers about an export control 
violation because of the delay in adding new technologies to 
that list.
    I would highlight, however, that in terms of the gaps 
between the systems, I could give you a good example of where 
the two systems are not interacting well terribly.
    The Commerce Department denied entity export list has not 
been updated, for instance, to reflect certain recent CFIUS 
actions. There is a Chinese company called San'an 
Optoelectronics, which is a chip firm that has twice been 
blocked by CFIUS from attempting to acquire military sensitive 
technology, which is not on the denied entities list, and 
American firms continue selling sensitive technology to them 
and discussing investment in those companies. And so that is a 
good example where the two systems need to interact better 
because I certainly see them as complementary.
    I do not see FIRRMA as a threat to become a supra-export 
control agency. I see us needing to fill the gaps on both 
sides, of both the export control system as the first line of 
defense, and then CFIUS as a second line of defense, 
particularly related to investment and joint ventures.
    Senator Brown. So talk just for a moment in the last minute 
or so about developing these lists. It seems that as we move 
from 200 CFIUS filings a year to perhaps many, many more than 
that, how do you organize these lists across so many agencies?
    Clearly, there will be case-by-case determinations, but 
they obviously need more structure than that. How do we do that 
better?
    Mr. Mulvenon. Well, I mean, the suggestion earlier about 
the National Academy of Sciences and other entities that are 
actually more directly interfacing with the cutting-edge 
technology, that is always the dilemma when I deal with 
elements of the U.S. Government is that they are not always on 
the cutting edge of understanding which technologies are 
emerging at any particular time. And so I think there are those 
kinds of outside partnerships whereby you can maintain, then be 
current about the technologies we should care about rather than 
putting an undue burden on U.S. Government agencies that really 
do not have the kind of day-to-day expertise to be able to 
track that.
    Senator Brown. [Presiding.] Senator Toomey.
    Senator Toomey. Thanks very much. Gentlemen, I appreciate 
the testimony today. I am very sympathetic with the goals of 
this legislation, but I do have some concern about unintended 
consequences.
    My concern arises from a starting point that foreign direct 
investment is a huge and hugely important engine for growth in 
the United States.
    The tax reform we just completed, I think is going to 
encourage significant increases in foreign direct investment 
because we are going to lower the burden, the tax burn on the 
returns on those investments. I think this is a huge driver of 
growth, and yet there are legitimate concerns about whether 
there is some security that--security issues.
    So I just want to figure out how we strike the right 
balance here. One of the concerns--and maybe Mr. Hufbauer could 
address this--is so much of the kind of technology that we 
would be worried about transferring is inherently mobile. It 
can be developed and refined and improved almost anywhere in 
the world. If we do not strike the right balance here, what is 
the risk? And maybe under this legislation, would you be 
concerned about really constructive innovators being driven 
overseas because they are concerned that if they are domiciled 
in the United States, potential future investment is too 
limited? Is that a concern?
    Mr. Hufbauer. Thank you, Senator. Yes, that is very much a 
concern, and the way I would put it is this--U.S.--well, during 
my lifetime, which dates to before the Second World War, the 
U.S. Government has been a leading proponent of technology, 
DARPA and ARPA and so forth, and of course, companies. It is 
that investment at home that has given us this leadership, and 
our big weakness is not the espionage by the Chinese or their 
forced technology transfer. Our big weakness is that we may not 
be keeping up the pace of investment in innovation that we had.
    At one time, we were clearly the leader. You cannot really 
say that so strongly today, and the leadership has a couple of 
components. One of the components is making the United States a 
very attractive place for foreign scientists and engineers and 
so forth to not only get their degrees here but to stay here.
    Senator Toomey. So in its current form, are you concerned 
that this legislation could tend to have that effect of driving 
some innovation overseas?
    Mr. Hufbauer. Well, I think it is flexible enough that it 
would not necessarily have that, but I do not want to see the 
U.S. Government put all its emphasis on trying to build a wall 
on the outward flow of technology.
    Senator Toomey. Well, that is another concern. That is 
another----
    Mr. Hufbauer. That will never work. I mean, we have to do 
more at home, and that is by far, the bigger part of the story.
    Senator Toomey. I have only got 2 minutes left. Let me put 
another issue out on the table and invite anyone to comment on 
either my first question or this next one.
    The next one is--let us be honest. Incumbent businesses are 
never enthusiastic about a dynamic innovative competitor 
emerging, and I worry that large powerful incumbent businesses 
might attempt to use CFIUS as a way to protect their status and 
diminish the opportunity of potential competitors to raise the 
capital that would allow them to compete.
    Do you believe that there are sufficient safeguards in this 
legislation to minimize the risk of that unintended adverse 
consequence?
    Mr. Padilla. Senator, I will maybe take the first stab. 
When I served in Government, I saw cases like what you just 
described, where it was clear that an incumbent competitor was 
trying to prevent a foreign investor who would then infuse 
capital into a relatively weaker domestic competitor and 
strengthen themselves in the process, and we tried very hard in 
the Bush administration at least not to allow that dynamic to 
take hold because it is improper.
    On your first question, I would just comment. IBM has 12
research laboratories around the world. Most of our cutting 
edge research on things like AI and quantum computing are done 
in New York or Texas or California, but we also have labs in 
places like Zurich, Switzerland, and Sao Paulo, Brazil.
    And I can tell you that if FIRRMA goes in the way that it 
is written now, there would be large incentives to move core 
research outside the United States, so that it would not be 
captured by some of this added bureaucracy, and that is not a 
good thing. It is not what IBM wants to do.
    Mr. Kupor. Senator, if I could just add to your first 
comment as well, your first question, there is no question that 
kind of engineering talent will follow capital, and we have got 
case studies of that already today in the form of Government 
incentives that are driving capital. So whether that is R&D tax 
credits, for example, that Canada and France and others are 
offering to engineers--it was mentioned that China obviously is 
trying to attract a lot of its expat community back through 
financial incentives.
    So I think it is a microcosm of a broader problem that 
could be here, which is if you stifled capital flows, you could 
have talent flow out as well.
    Senator Toomey. Thank you very much.
    Ms. Downey. Senator Schatz.
    Senator Schatz. Thank you, Ranking Member Brown.
    Mr. Padilla, I have a question, just a practical question 
about the capacity at CFIUS. How many employees does it have? 
How many analysts? What is the funding level? Because as we 
consider expanding its scope, it is going to matter whether or 
not they can accomplish anything additional.
    Mr. Padilla. I do not know the exact current number, 
Senator. It has been a little time, about a decade, since I was 
involved, but when I was there, there were less than 20 full-
time staff at the Treasury who were focused on this, and then 
you had in each agency--I was at the Commerce Department. We 
had three people under me at the Bureau of Industry and 
Security who worked on this.
    So I would guess the entire universe among all the 
agencies, maybe about less than 100.
    Senator Schatz. OK. So if you are talking about fewer than 
100 people, one of the questions is--it is an appropriations 
question. It is a resource question. It is a throughput and 
capacity question. Setting aside whatever statute CFIUS hangs 
its hat on, we could give them more things to do, and if it is 
the same number of people, they are not going to be able to 
accomplish it.
    I have a question about early stage investment and 
potential dual use, and it seems to me this is an appropriate 
thing for CFIUS to look at, but it is a little dicey in the 
sense that you have a startup company, and they are not sure at 
the outset--I mean, technology has evolved, and their 
application has evolved. So a company may not know that it is 
going to be dual use until the research finds a defense 
application.
    So at what point does CFIUS--I mean, how do you strike that 
balance between sort of not snuffing out anything that could 
potentially be dual use in the future, which would pretty much 
snuff out 90 percent of tech startups, but recognizing that 
once something has a serious defense implication and 
application, that then it is under CFIUS jurisdiction. But how 
do you sort of--I am looking at the two of you here--strike 
that right balance between CFIUS and the VC and startup 
community?
    And I will start with Mr. Padilla and then go to Mr. Kupor.
    Mr. Padilla. It is a very hard balance to strike, Senator. 
I do think--and I support the idea--that CFIUS does need the 
authority to at least look at nonpassive, noncontrolling 
investments. In other words, it is not just passive, but it may 
not constitute control.
    You could look at things where someone gets a board seat on 
a company. It is not a controlling interest, but because they 
are on the board, they have access to information that they 
might not otherwise get. And I think it is appropriate that 
CFIUS be able to at least inquire about that.
    In terms of what technologies, here again, I think it is 
incumbent on the Government to define what it is worried about. 
That is why Congress created the Militarily Critical 
Technologies List, and it cannot just be we are worried about 
AI. It has to be more specific than that, and that is hard to 
do. I used to do it. It is not easy to say this parameter or 
this algorithm.
    But if the Government is concerned about security, it is 
incumbent on the regulator to define what it is regulating. I 
do not think the right approach is to say bring us everything 
in a very broad universe, and we will sort it out one by one 
and tell you later what we are worried about. That is not a 
good regulatory approach.
    Senator Schatz. Mr. Kupor.
    Mr. Kupor. Yeah, I agree with that, Senator.
    I think also you are right, which is as startup companies 
develop, of course, the products go through many iterations. So 
I think it would be very hard for CFIUS to have any ability to 
review kind of the criticality of that technology until there 
is a true commercial application developed that actually has 
dual use, and that is going to often come probably 3, 5 years 
into a company's history. So at that point in time, many of its 
investment dollars will have actually already been received by 
the company. So you may be talking about retrospectively trying 
to undo financing agreements and other stuff that has happened. 
I think it is a really hard problem to handle. I wish I had a 
more definitive answer for you, but I think for that reason, it 
is very difficult to kind of think about cutting off that early 
supply of capital before you actually understand what the 
commercial use of that technology is.
    Senator Schatz. So I have maybe a tougher question for the 
whole panel, and it has to do with CFIUS was constructed to be 
limited in scope because of how serious the matter is because 
to have the Government intervene against a transaction is no 
joke, to expand that, and yet it still has to have 
confidentiality because a lot of the discussion is a national 
security discussion. There is a logic to that on the other 
hand. Then you have a black box with, say, 100 human beings, 
and maybe even few are making determinations on which companies 
get investments and which do not, and maybe only in the SCIF 
can Congress exercise its oversight. And that seems scary from 
the standpoint of the potential for crony capitalism, of the 
potential for corruption. And I am wondering whether you can 
just speak to that very briefly as my time expires.
    Mr. Padilla, and then quickly all the way down the line.
    Mr. Padilla. CFIUS is one of the least transparent 
Government processes that deals with foreign commerce. The 
export control system for whatever faults it may have is 
relatively transparent. The business community knows how to do 
it, knows how to work with it. CFIUS by contrast is very 
opaque.
    Mr. Kupor. Yeah, I would agree. I think if this institution 
decides to go forward with legislation, I think--deferring too 
much of the rulemaking authority of CFIUS is a real problem, 
just given kind of the confidential nature of it. So I think 
having very clear bright-line rules about what is covered and 
what is not, it would be incumbent upon this organization to do 
so.
    Mr. Hufbauer. That is a very legitimate concern, and my 
suggestion is that the Congress ought to on a secret basis take 
a
report from the CFIUS maybe every year, every 6 months, and 
review the cases which were blocked or the cases which were 
maybe not formally blocked but turned back and get your own 
judgment, because it is obvious that CNI and the CIA and the 
Pentagon and so forth who have all the secret information, 
which we do not want to disclose widely to the public, but 
Congress should take a look.
    Mr. Mulvenon. Senator, I think one of the tradeoffs that is 
important, particularly when I talk to companies about their 
frustration with the process is that there could be--and there 
is some language in the bill right now that suggests this. 
There could be a greater opportunity for the companies earlier 
in the process to provide their own technical assessments of 
the technology issues at play as well as a commitment to 
resolve the CFIUS evaluation at the first level much sooner as 
a tradeoff to incentivize companies for the fact that they are 
expanding the scope of what is being reviewed. And I know that 
was tremendously frustrating to Western Digital and others that 
were involved in the process, how long it took.
    Senator Schatz. Thank you.
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    So let me first take a point of personal privilege and say, 
Mr. Kupor, you have a great guy working for you in Justin 
Field. He was my finance guy. He is in the audience, and my mom 
said if you can say something nice, say it; if not, keep quiet. 
I can say something nice. He is a great guy.
    Mr. Kupor. Thank you, Mr. Senator. I agree with you.
    Senator Menendez. And I also see that another alumni of my 
staff, who was my communications director, Matt Miller, is back 
there, sitting back there. I do not know who you are 
representing here today, but, Matt, it is good to see you.
    I thank all of you for your testimony. Dr. Mulvenon, a 
draft report prepared for DoD last year raised concerns about 
certain activities by Chinese firms in the United States that 
appear to be motivated by transferring innovative technologies 
to China with the ultimate goal of giving China a competitive 
advantage and specifically to report highlights to Chinese 
venture capital investment in early stage startup firms in the 
United States in the artificial intelligence robotics financial 
technology sectors.
    It raises concerns that these investment activities are 
both part of a larger Chinese strategy to displace U.S. 
businesses and certain industries and are specifically 
structured to fly under the radar of the CFIUS review process.
    In your testimony, you discuss how China has structured 
certain technology investments in the United States to 
essentially get around the CFIUS reviews. What are the vehicles 
or investment structures that they are using to do this? And in 
your opinion, what steps should the Committee consider to 
ensure that those types of efforts are actively monitored, 
tracked, reviewed, and then appropriately done so by CFIUS?
    Mr. Mulvenon. Thank you, Senator.
    Well, in fact, if you look at artificial intelligence, you 
can go all the way down my structure of China's comprehensive 
strategy and pick off the pieces of each one.
    China has a national industrial planning strategy for 
artificial intelligence development, including the 
corresponding military artificial intelligence development. 
They have a massive subsidy
system set up, just structured in a way that evades the current 
WTO restrictions on state subsidies. They have identified 
national champion companies within China that they want to be 
leaders on artificial intelligence. They have designed laws and 
regulations that insist on data localization, such that those 
artificial intelligence efforts, that that critical 
intellectual property data has to be stored in China if that 
work is going to be done there.
    They have a domestics standards regime that they are using 
as a trade weapon in order to leverage using market access in 
China to leverage technology transfer for multinationals, and 
then they have state-backed investment vehicles focused on 
artificial intelligence investments.
    Senator Menendez. So how do we respond to that?
    Mr. Mulvenon. Well, first of all, recognizing that it is a 
comprehensive strategy rather than the individual actions of 
self-interested financial actors, which was our first cut at 
the problem, and recognizing, as Dr. Hufbauer would say, there 
is unfortunately on our side a realization that we are not 
investing enough. So let me always say that we need to do more 
investment on our side in artificial intelligence rather than 
simply block Chinese efforts to invest in artificial 
intelligence in the United States, and we are woefully 
inadequate on that front.
    But also just clearly recognizing in many cases the thinly 
disguised state and military origins of many of these 
investment vehicles from the Chinese side and scrutinizing 
those and not permitting those to harvest the best of the 
emerging technologies in the United States.
    Senator Menendez. Thank you.
    Let me ask you this. The legislation being discussed today 
includes a provision that would make mandatory CFIUS filings 
for transactions that involve certain investments by state-
owned enterprises. This has been an issue of mine going back to 
the Dubai Ports World deal in which CFIUS approved a 
transaction that would have handled over control the port 
operations in New Jersey, New York, Baltimore, and Miami to a 
state-owned company in the United Arab Emirates.
    In September, the Committee heard testimony from the former 
Treasury Assistant Secretary, Clay Lowery, who oversaw CFIUS. 
He told the Committee that it was a worthwhile exercise to 
explore the idea of mandatory filings for state-owned companies 
as opposed to the current regime of high scrutiny for those 
transactions.
    What are your views of a mandatory filing requirement for 
transactions involving investments in the United States by 
state-owned or controlled enterprises?
    Mr. Mulvenon. Well, with the caveat, as I said earlier, 
that under the current Chinese political and legal system, 
principally given Chairman Xi Jinping's assertion that there 
needs to be greater Communist Party penetration even into 
private enterprises in China, there is an element of it that is 
a false distinction, given the Chinese government's ability to 
reach into private companies and get access to technologies, 
but I do believe that state-owned enterprises should be 
mandatorily reviewed, if only because when we have peeled back 
various investment efforts in the last couple of years and 
found them to be actually state-backed and state-owned 
enterprise-backed investments, that those were--that was the 
primary basis of the security concern.
    And given the nature of the Chinese system of state 
capitalism, I think those state-owned enterprises deserve 
particular scrutiny.
    Senator Menendez. Any other views on that? And then I will 
close on that.
    Mr. Hufbauer. I agree, totally.
    Mr. Padilla. I would agree also, Senator. I worked with 
Clay Lowery when he was at Treasury and I was at Commerce, and 
the FINSA bill, the last bill Congress passed on this, did 
increase the scrutiny, and perhaps another increase of scrutiny 
would be appropriate.
    Senator Menendez. Thank you.
    Senator Brown. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman, and thank you to 
our witnesses for being here today.
    The Committee on Foreign Investment in the United States, 
CFIUS, that we have been talking about reviews acquisitions by 
foreign companies to ensure that they do not threaten our 
national security, and at our last hearing, we discussed how 
technology transfers from our companies to foreign competitors 
can undermine our security and how CFIUS does not cover certain 
transactions where our adversaries are intentionally investing 
in American startups in order to get access to critical 
testimonies.
    But I want to ask a different question around this. When 
CFIUS does review a transaction, it can approve it with a 
mitigation agreement that requires companies to complete 
certain steps in order to reduce the national security risk.
    Now, CFIUS is supposed to ensure that parties implement the 
mitigation agreement, but a draft Pentagon report issued in 
February of 2017--I think Senator Menendez just referred to 
it--advised that CFIUS should try to minimize reliance on these 
agreements because they are difficult to enforce, and there are 
not enough resources decided to monitoring them.
    So, Dr. Hufbauer, are more investigations into the national 
security risks of transactions become necessary, how can CFIUS 
ensure that a mitigation agreement is maintained over time if 
overseeing that agreement may be too costly or addressing 
security risks if the transaction may be too complicated?
    Mr. Hufbauer. Thank you, Senator.
    It is a problem because as Chris Padilla said, there is 
only about 100 people on the staff of CFIUS, and it is hard 
with that size staff to do all the follow-up that is necessary.
    So if this bill becomes law, there has to be a substantial 
expansion, but in addition, I would suggest that where there is 
a mitigation agreement, which obviously the company wants, the 
acquiring company and probably the acquired company, they 
should put money into some kind of escrow in the Treasury to 
ensure the enforcement over a period of years, 5 years, 10 
years, to take care of the financial burden that this will 
entail.
    Senator Warren. Interesting idea. Thank you.
    I should note that the defense authorization bill that 
passed Congress last year requires a multiagency report that 
includes an
assessment of whether current CFIUS process provides adequate 
monitoring and compliance, and I think we need to work through 
this and need more good ideas on how to do this.
    The discussion of CFIUS focuses on protecting our national 
security while preserving foreign investment, but I want to 
touch on a policy that I think protects both priorities, and 
that is investment in basic research.
    Jim Lewis, a former official with the Departments of State 
and Commerce, testified in this Committee last year that CFIUS 
reform should be paired with policies that drive innovation 
right here at home, and that means investing in research that 
helps our economy and our military.
    He said that our underinvestment in scientific research, 
quote, 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 Government 
spending in those areas like basic research where private 
sector spending is likely to be insufficient.
    So let me start with you, Dr. Hufbauer, again. Would more 
Government investment in scientific research support the core 
objectives of CFIUS by protecting strategic industries from 
foreign competition and maintaining our technological 
advantage?
    Mr. Hufbauer. Yes. When you were out of the room, Senator, 
I gave a big plug for more investment, both by the Government 
and by private firms.
    Senator Warren. I want to give you as many chances as 
possible.
    Mr. Hufbauer. Well, in any event, yes, this is the big 
picture. What we do to stir innovation in this country is 
substantially more important than what we do to block outward 
technology going to China or Russia or these countries, and we 
should do more. We are not very good right now.
    Senator Warren. That is very well stated.
    Anyone else like to weigh in on that?
    Mr. Kupor. I would just like to underscore that doubly. 
Yeah, I think that is exactly right. There is no question that 
what we are up against, our foreign governments, who have very 
kind of centralized groups that they put together from a 
funding perspective, to attract talent, to build technologies--
and there is a lot more we can do in the United States, no 
question.
    Senator Warren. Anyone else want to add or just say yes, 
yes, so I can get a good record here?
    Mr. Padilla. I would strongly echo the comments of my 
colleagues, Senator Warren.
    Senator Warren. Good.
    Mr. Mulvenon. I strongly agree with you, Senator, 
particularly given the, frankly, staggering scale of the 
investment that the Chinese government is putting into advanced 
technologies right now.
    Senator Warren. Well, I really appreciate it, and thank you 
all on this.
    I think it is important to stand up to unfair commercial 
practices that harm our economy and threaten our national 
security, but I also think we need to make the necessary 
investments here at home in our own research. That is what 
keeps us strong, and that is what gives us a true advantage.
    So thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. [Presiding.] Thank you.
    Senator Scott. Thank you, Chairman, and I want to say thank 
you to Senator Cornyn for being here this morning and his 
testimony and his continued efforts on this very important 
issue.
    South Carolina is the home of a number of incredible 
companies. We are one of the largest beneficiaries of foreign 
direct investment. There are 1,200 foreign-owned entities that 
have created or are currently employing 130,000 South 
Carolinians. Two-thousand fifteen alone saw $2.4 billion of 
foreign investment in South Carolina. 2011, a few years 
earlier, was the height, the peak at $3.7 billion of FDI.
    Whether it is Bridgestone in Aiken, Honda in Florence, 
Mercedes in North Charleston, foreign companies are flocking to 
South Carolina, and this is not an ad for South Carolina, but 
who can blame them? We have world-class universities, a world-
class skilled workforce, and an incredibly high quality of 
life. From the beaches of the low country to the mountains in 
upstate, South Carolina has something to offer for everybody.
    Our state would not be where it is, however, without 
foreign investment. That said, it is clear to me that some are 
taking advantage of our system of trade to the detriment of our 
Nation's security.
    Last year, I joined with Senator Cornyn in introducing the 
Foreign Investment Risk Review Modernization Act. The bill 
expands the committee's jurisdiction to include real estate 
purchases around military basis in light of the documented 
attempts by the Chinese to spy on our armed forces.
    We also updated the committee's definition of critical 
technologies, just as a development of AI and advanced genetic 
engineering is taking on.
    So, Mr. Mulvenon, why is it so important for CFIUS to 
review these kinds of transactions and specifically those 
transactions around military bases that seem to be--land 
transactions around military bases that seems to be a sore spot 
as it relates to the Chinese trying to take advantage of 
opportunities to spy on our armed forces?
    Mr. Mulvenon. Well, Senator, it is an excellent question. 
If you look at this raft of new laws that the Chinese have put 
out, one of the most striking parts of it is their view of 
extraterritoriality with respect to Chinese companies.
    And the extent to which the Chinese military and their 
security services can directly intervene in the operations of 
these companies to benefit Chinese national security, as an 
example, if a Chinese telecommunications company is operating a 
network operations center in the United States, according to 
their new national security law, state security personnel can 
enter that facility in Plano, Texas, for instance, and do 
lawful intercept of communications in that facility because 
they are treating that Chinese company as a domestic Chinese 
company rather than one operating on foreign soil.
    That is why the decision to reject the purchase of that 
wind farm in the Pacific Northwest is particularly relevant 
because those facilities in that wind farm would have been able 
to collect emissions from a Navy electronic warfare facility 
that was just there on shore. And those emanations would have 
been able to reach those wind farm turbines.
    And so I think that that is the particular concern, that 
the ability of the Chinese government to impose upon these 
companies involved in the Chinese side of the transaction and 
to use those corporate facilities as intelligence collection 
platforms.
    Senator Scott. Thank you.
    Would you say that we have done our best to strike a proper 
balance between our economic concerns and our national security 
concerns within the bill? Do you think we have hit that sweet 
spot?
    Mr. Mulvenon. I do think there is a good balance in the 
bill. I favor the bill because I believe it responds to very 
creative Chinese attempts to exploit gaps and weaknesses in our 
current system.
    I do not believe that the bill is a death knell for 
innovation or investment in the United States, but I believe 
that given the scale of Chinese technology espionage of the 
last 15 to 20 years, most of which has gone unchecked, that 
frankly we need to swing the pendulum a bit more in the other 
direction.
    Senator Scott. Thank you.
    With my remaining time, Mr. Padilla, I am appreciative of 
IBM's growing presence in South Carolina as well. I read your 
letter expressing concerns regarding our efforts to reform 
CFIUS. Your claim that FIRRMA would subject hundreds of 
transactions unrelated to national security to a committee 
review, I want to hear you out and get your perspective as we 
share the goal of protecting our country. What specific changes 
do you envision for us to improve FIRRMA and to meet the 
mutually important goals?
    Mr. Padilla. Thank you, Senator, and South Carolina is a 
great place to do business.
    Senator Scott. Yes, sir.
    Mr. Padilla. So thank you for your support.
    My concern with the bill boils down basically to one 
section, and it is Section--it is in the definitions, Section 
B, Roman Numeral V, and it is the provision that would do what 
I have described as problematic. It would expand CFIUS from 
looking at inbound investment to looking at outbound 
transactions. And it has the language that I referred to in my 
testimony about the contribution of any technology or IP 
through any form whatsoever.
    I think if you change that provision and a couple of other 
definitions, much of what the rest of the bill does, IBM would 
support, including, by the way, expanding the jurisdiction of 
CFIUS to look at real estate transactions. That is one of the 
gaps that I identified that does need to be filled and needs to 
be filled by legislation.
    Senator Scott. Yes, sir. Thank you so much.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman, and thank you 
to the witnesses.
    Before I ask the witnesses a question, I just wanted to 
address a question to you and the Ranking Member regarding 
another issue of national security, which is the North Korea 
situation. Under your bipartisan leadership, Mr. Chairman and 
Ranking Member, this Committee unanimously passed legislation, 
I think important legislation, to strengthen and better enforce 
sanctions against North Korea.
    We passed that unanimously out of Committee on November 
7th. Since that time, on November 29th, North Korea tested 
another ICBM missile, and just 2 days ago, despite the 
environment with respect to the Olympics and some of the talks 
that are taking place, Secretary Tillerson said that ``the 
threat is growing'' because even as those talks take place, the 
North Koreans continue with their program.
    So my question, Mr. Chairman, could you give us an update 
on the status of this legislation which passed unanimously out 
of this Committee? I just want some assurances that we are 
going to get a vote on this as soon as possible in the full 
Senate.
    Chairman Crapo. Yes, Senator Van Hollen. I will be glad to 
give you my update and then also turn to Senator Brown for his 
response as well.
    I remain solidly committed to moving this legislation not 
only on the Senate floor as quickly as we possibly can but also 
encouraging prompt house action, so that we can get the bill to 
the President's desk. We do need to stand firmly and strongly 
with regard to the developments in North Korea, and I believe 
the legislation that you have helped to draft and bring forward 
is a very critical and important part of that.
    As you know, we have been running into some difficulty 
getting the necessary consents from the other Senators to move 
on the floor at this point in time. I am continuing to work 
with all of the Senators to get those roadblocks removed.
    As is often the case, the roadblocks do not necessarily 
relate to this legislation, but the politic of the body result 
in us having to resolve some other issues as well, which we are 
working on as recently as yesterday. We have had meetings on 
trying to move it.
    Although I cannot tell you yet that we have got everything 
ironed out in terms of the process to move forward, I can 
reassure you that I am committed firmly to doing it.
    Senator Van Hollen. Thank you, and I appreciate that, Mr. 
Chairman.
    Senator Brown. Thank you, Senator Hollen. I concur with the 
Chair and strongly support this bill and this vehicle and 
moving on the floor as quickly as we can, understanding the 
roadblocks that have been thrown in front of us.
    I spoke briefly at the White House last week with Secretary 
Tillerson. This is important for a whole lot of reasons, as you 
know, and we will work together to remove those roadblocks and 
work with you. And thanks for the work. You have really kept 
this going and kept this in front of us and in front of the 
public, so thank you.
    Senator Van Hollen. Well, thank both of you, and Senator 
Toomey was here earlier. He said he would join me in full 
support of the effort, and thank you both of your effort.
    Chairman Crapo. Thank you.
    Senator Van Hollen. I just think we need to move it as 
quickly as possible because I do not know of any real 
substantive on the merits objection, so thank you.
    Chairman Crapo. You are right. Thank you.
    Senator Van Hollen. And I do not have a lot of time left, 
but I do want to ask Mr. Padilla. You mentioned in your 
testimony when I was here earlier your concerns about 
essentially using CFIUS for U.S. exports as opposed to 
investments here in the United States, but you said with 
respect to investments here in the United States, you thought 
we could strengthen the current regime.
    What are some specific ideas? I am trying to look for some 
common ground here. We can figure out what we disagree on and 
what we agree on.
    Mr. Padilla. Sure.
    Senator Van Hollen. What is it that specifically we can 
change with respect to CFIUS?
    Mr. Padilla. Well, one is the one that Senator Scott 
mentioned, the ability of CFIUS to look at real estate 
transactions that are in close proximity to Government or 
military installations.
    The second would be what I would call nonpassive but 
noncontrolling investments. Right now, CFIUS looks at--if you 
control an acquisition, it is not worried about passive 
investment, but what about that gray area in between, where, 
say, you get a board seat on a company, and you get access to 
certain controlled information, but you may not ``control'' the 
company. That, I think is an area for expansion.
    The other would be more process-related, and that is, I 
think there should be a senior Senate-confirmed official in 
every CFIUS agency who signs off on the transactions. I did 
that when I was at Commerce. I know some agencies do it. Others 
do not. And you need that senior-level review. Dubai Ports 
World showed that when you do not have that, you can have 
problems.
    Senator Van Hollen. Got it. Appreciate that.
    The one area that we would not be able to address, the 
issue that Dr. Mulvenon raised earlier with respect to the kind 
of joint venture in China, where it amounted to a directed 
Chinese effort to gather more important information in some of 
these very innovative areas.
    So we are going to have to bridge your proposals where 
there was agreement on the U.S.-based investments with some 
kind of----
    Mr. Padilla. I think you can do that, Senator, through 
enhanced export controls, and there is already authority to do 
that. It is not being used to its full potential.
    Senator Van Hollen. Dr. Mulvenon, would enhanced export 
controls be enough? Because I heard your earlier testimony. I 
think that was important that we have not--since 2011, I think 
you said--updated that.
    Mr. Mulvenon. My concern--I can give you a scenario, a very 
simple one that is my main concern. A lot of export control 
cases and the technology control and mitigation plans that I 
have seen developed dealing with that, where you de-architect, 
where you do-feature a technology to take out the 30 percent of 
that technology that is covered under the export control 
regime, the technology is then transferred.
    But then in the context of the joint venture, the engineers 
potentially who have that additional--that remaining 30 percent 
of the knowhow in their heads and then they are working on 
common problems within the joint venture and everyone is 
committed to making the joint venture a success, my concern is 
the export control system does not cover the bleed of that 
potential last 30 percent to re-architect it back into the 
technology after the export control system successfully had to 
de-architect it. And that is the dilemma about joint ventures 
and investment vehicles particularly located in China.
    Senator Van Hollen. Let me just correct a factual point. 
The export control system actually does control that transfer 
of knowledge. There are deemed export laws on the books that 
say if you have something in your head and you are subject to 
U.S. jurisdiction, you cannot tell anybody about it without a 
license.
    Now, there may be issues about whether it is being followed 
or not, but that is an enforcement problem, not a legal 
jurisdiction problem.
    Mr. Mulvenon. My only point, Senator, is that, of course, 
it falls under deemed exports, and we have a whole variety of 
deemed export problems, not the least of which is PRC nationals 
at U.S. universities operating equipment in laboratories that 
would have required a deemed export license if they were using 
them at a facility in China, but they are allowed to use them 
at a university in the United States in a hard science program. 
So there is a whole range of problems we have on the deemed 
export side, but the problem is the enforcement regime, a 
commercial enterprise in China of that last 30 percent, that 
there is no good mechanism for the enforcement other than the 
good will of the people involved in the enterprise.
    Senator Van Hollen. Thank you. Thank you both.
    Chairman Crapo. Senator Jones.
    Senator Jones. Thank you, Mr. Chairman, and I apologize for 
being late. Thanks to all the witnesses for being here. I have 
got just a basic--not in the weeds, but just kind of simple 
questions.
    I know, Mr. Kupor, you expressed some concern about a bill 
that might chill foreign investment, and it is my understanding 
that to date, there have been four transactions blocked by 
presidents as a result of the CFIUS review. Do you have any 
information of other potential deals or investments that might 
have been either withdrawn or otherwise scuttled because of the 
possibility of CFIUS review?
    Mr. Kupor. No, not specific to the venture capital world.
    What my specific concern was, if we sweep up foreign 
investment in two areas--one is as limited partners in U.S. 
venture funds, then that would obviously chill the ability for 
non-U.S. investors to be able to participate and help us grow 
those technologies.
    And then the second specific question was if you have 
foreign direct investment into a venture capital company, a 
little bit to the point that was made to Mr. Padilla about kind 
of nonpassive investments, making sure that we are very clear 
about what the rules of the road there are, so that we 
understand at the outset, if we are going to take money from a 
foreign investor, what are the things that we need to ensure so 
that information disclosure is appropriate and consistent with 
U.S. law.
    Senator Jones. OK. And does this bill address concerns 
about foreign investment, or can we make it better?
    Mr. Kupor. The broader objectives of the bill, we are very 
comfortable with. Again, it is these specific areas where our 
concern is there is enough vagueness in the way it is written 
that it could chill this investment, and so our request would 
be for this institution to make sure that we define those more 
appropriately as part of the legislation process.
    Senator Jones. OK. Very good.
    What about green field deals, the ones that U.S. 
businesses--you know, that did not exist prior to the 
investment by foreign person or entity that seemed to be beyond 
the reach of CFIUS? Is that covered by any other rule, 
regulation, or something that is out there, or should we 
covered green field, the new deals that come in that are beyond 
CFIUS control right now?
    Mr. Kupor. Just so I am clear, Senator, do you mean new 
deals as in kind of startup companies?
    Senator Jones. Yeah. That did not exist prior to the 
foreign investment coming in, that is part of a new deal.
    Mr. Kupor. I think it is very reasonable that to the extent 
a U.S. company, a new startup is going to take money from a 
foreign investor, I think it is very reasonable for us to have 
a defined process to understand does CFIUS apply, and if so, 
are there things that the U.S. company can do to make sure that 
they are compliant with it, whether that be board seats, 
whether that be information disclosure, those types of things.
    Right now, at least our concerns, it is not well defined 
there, and so what a passive investor actually is, is a largely 
undefined term of the bill.
    Senator Jones. All right.
    Mr. Chairman, that is all I think I have. I am going to 
resist the urge to go toe-to-toe with Senator Scott about 
Alabama versus South Carolina, especially in light of the most 
recent football games.
    [Laughter.]
    Chairman Crapo. Well, thank you very much, Senator Jones. 
Those are the kind of fun little battles that you can have on 
the sidelines, anyway.
    That concludes our questioning, and again, I want to thank 
our witnesses. You all have a wealth of knowledge. It is very 
obvious, and we have some very tricky and complicated issues to 
resolve here and roads to travel on this. But we must get it 
right, and we must do it well.
    And so I am sure that we will be in continued contact with 
you. As a matter of fact, it is a practice for Senators who did 
not get all the time they wanted or who did not have an 
opportunity to send some questions to you after the hearing. I 
would let those Senators know that those questions will be due 
by Thursday, January 25th, and then ask each of you, if you get 
additional questions following the hearing, if you would 
respond to them as quickly as you can.
    Again, we appreciate your being here with us today and your 
attention to not only this legislation and the issues we are 
grappling with right now, but the overall set of issues of 
protecting our U.S. national security on these critical 
technologies.
    And with that, this hearing is adjourned.
    [Whereupon, at 11:18 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follows:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
                            January 18, 2018
    Today the Committee will begin to evaluate the essential national 
security elements underlying a comprehensive proposal to reform the 
review process used by the Committee on Foreign Investment in the 
United States, or `CFIUS.'
    Thank you to Senators Feinstein and Cornyn for their testimony on 
their bipartisan Foreign Investment Risk Review Modernization Act of 
2017.
    This bill was first introduced by Senators Cornyn and Feinstein on 
November 8th to `modernize and strengthen CFIUS to more effectively 
guard against the risk to the national security of the United States 
posed by certain types of foreign investment.'
    The Senators and their staff have worked over a year with concerned 
national security officials, the Treasury Department and various 
affected industry representatives.
    This comprehensive bill could be the first update to the body of 
CFIUS law in more than a decade. It would expand the reach of current 
law in a number of respects, while codifying some current 
administrative practices, and result in significant changes to 
jurisdiction, process and enforcement.
    A study produced for the Pentagon's DIUx unit, which enlists 
startups to find solutions for the military's most advanced technology-
related requirements, is credited as being the catalyst for much of the 
impetus behind this CFIUS reform.
    The DIUx study highlights the problems arising from the fact that 
the U.S. Government does not currently monitor or restrict venture 
investing, nor stop potential transfers of what's known variously as 
early stage, foundational or critical technology know-how, particularly 
with regard to certain types of Chinese investment in the United 
States.
    Today's hearing also draws witnesses from one perspective of the 
private sector that is concerned not only with inbound investment, but 
also outbound transactions and from the venture capitalists that 
support American innovation.
    We are also joined by two long-time CFIUS analysts, with particular 
expertise in regard to China's economy, trade practices and national 
security objectives.
    The Committee will benefit from learning more about the types and 
numbers of transactions that may be circumventing CFIUS and if any are 
believed to have already transferred critical technology.
    Many of us are interested in learning more about the ways China 
acquires U.S. technology and which improvements to the current system 
are warranted, particularly with regard to those investments that fall 
short of a foreign person's actual ownership or control.
    We are also interested in the issue of emergent `critical 
technology,' and the witnesses' input on how it would be defined and 
applied by CFIUS.
    Additionally, we hope to hear more on the impact on U.S.-based 
multinational corporations as a result of CFIUS unilaterally 
restricting U.S. outward investment and associated technology, and 
whether U.S. companies would lose the ability to compete to allied 
companies or others in third-country markets.
    It is also important to study the question of necessary resources 
for any proposed reform to CFIUS. While CFIUS certified about 260 
applications last year, the Committee looks forward to testimony on the 
changes contemplated by S. 2098 and their impact on the number of 
reviews, staff needs and resources going forward, and the impact that, 
in turn, would have on U.S. national security if the resources fell 
short.
    CFIUS is but one leg of a triad that secures national security 
related technology and the defense industrial base. The other two are 
the U.S. export control regime and Federal investment itself in 
research and development that keeps the industrial base resilient and 
innovative.
    The Committee must be mindful that in pursuing its mandate to 
assure the national security interests of the United States under 
CFIUS, that it not create a situation where it chills a wide range of 
commercial activities that have traditionally been controlled through 
export control laws.
    The United States is both the world's largest foreign direct 
investor and beneficiary of foreign direct investment (FDI), and it 
ranks among the most favorable destinations for FDI which plays an 
important role in not only the U.S. economy, but specifically in the 
innovation of its industrial base, and therefore, its national 
security.
    It is clear that the current CFIUS system is itself under stress. 
Moving forward, the Committee must prepare itself to thoughtfully 
consider all of the recommendations made by S. 2098 and other CFIUS 
legislation, with the full awareness of the national security and 
economic stakes at the heart of it.
    It is a new world. The laws, regulations and policies currently 
exercised by CFIUS may no longer protect U.S. technology from illicit 
transfers as they did in the past.
    We must work together, as a Congress, first to assure the national 
security of the United States by granting the Administration all the 
authority it needs to confront this growing threat, but then not exceed 
that grant to the detriment of maintaining a free, fair and open U.S. 
investment policy.''
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR JOHN CORNYN
                            January 18, 2018
Introduction
    Thank you, Chairman Crapo and Ranking Member Brown, for convening 
this hearing to consider the proposal that Sen. Feinstein and I have 
put forward, the Foreign Investment Risk Review Modernization Act 
(FIRRMA). I have been honored to collaborate on this legislation with 
my esteemed colleague, Senator Feinstein, who I serve alongside on both 
the Judiciary and Intelligence Committees.
    We spent many months working on FIRRMA, and we wrestled with some 
tough issues in the process. Based in part on the information we are 
exposed to on the Intelligence Committee, we believe these issues are 
urgent and complicated ones. The bill we have put together takes a 
targeted approach to addressing the problem, while also aiming to not 
unnecessarily chill foreign direct investment. Before we get into 
addressing the merits of the bill, however, I'd like to take a moment 
to highlight the list of people who have endorsed this legislation. 
That includes current U.S. national security leaders such as Secretary 
of Defense James Mattis; Secretary of the Treasury Steven Mnuchin; 
Attorney General Jeff Sessions; and Admiral Harry Harris, Commander of 
U.S. Pacific Command.
    It includes former U.S. national security leaders such as former 
Secretaries of Defense Donald Rumsfeld and Bill Perry; former Secretary 
of Homeland Secretary Michael Chertoff; former Director of National 
Intelligence and Commander of U.S. Pacific Command, Admiral Dennis 
Blair; General Mike Hagee, former U.S. Marine Corps Commandant; General 
Edward Rice, former Vice Commander of Pacific Air Forces and Commander 
of U.S. Forces in Japan; and General J.D. Thurman, former Commander of 
U.S. Forces Korea and U.S. Army Forces Command.
    The list includes private industry players such as 
telecommunications giant, Ericsson, Inc.; Oracle Corporation; Trinity 
Industries; Amsted Rail Company, Inc.; the Greenbrier Companies, the 20 
member companies of the American Iron and Steel Institute; and the 260-
member Railway Supply Institute. It includes China experts such as Dr. 
Larry M. Wortzel, a member of the U.S.-China Economic and Security 
Review Commission.
    Mr. Chairman, with your indulgence, I encourage the Committee 
Members to review the comments of these supporters, and I ask consent 
to submit their letters and quotes for the record. I would also ask 
consent to submit for the record several summary and background 
documents on FIRRMA.
Context: China
    The context for this legislation is important and relatively 
straight forward, and it's China. I have always been an ardent 
supporter of free trade, and I strongly support foreign direct 
investment in our country, consistent with the protection of our 
national security. However, the not-always-peaceful rise of China has 
significantly altered the threat landscape in recent years.
    General Joe Dunford, Chairman of the Joint Chiefs of Staff, has 
said that by 2025, China will pose the greatest threat to U.S. national 
security of any nation. And, last summer, CIA Director Mike Pompeo 
echoed that view, saying that, over the long-term, China represents a 
graver security risk than even Russia or Iran.
    It's not just that China poses a threat, though, it's that the kind 
of threat is unlike anything the United States has ever before faced--a 
powerful economy with coercive, state-driven industrial policies that 
distort and undermine the free market, married up with an aggressive 
military modernization and the intent to dominate its own region and 
potentially beyond.
    To close the technology gap with the United States and leap-frog 
ahead of us, China uses both legal and illegal means. One of these 
tools is investment, which China has weaponized in order to vacuum up 
U.S. industrial capabilities from American companies that focus on 
dual-use technologies. China seeks to turn our own technology and know-
how against us in an effort to erase our national security advantage.
    In the modern era, the U.S. Military has always had a decisive 
technological advantage over our adversaries. This advantage is eroding 
before our very eyes, in part because some U.S. companies have 
willingly helped China build industrial
capabilities with clear national security applications. It is time to 
tackle the underlying problems head-on, while there is still time.
    If the trend continues for the foreseeable future, what might this 
mean for our national security? We would potentially have an adversary 
that can dominate the cyber realm, defeat our space weapons, and 
control the skies as well or better than the U.S. Military. Just 
imagine if China's military was stronger, faster, and more lethal--such 
that China could unilaterally dictate which ships can transit through 
critical sea lanes in the Indo-Pacific region. Or, imagine if China 
could invade its democratic island neighbor Taiwan with impunity. The 
implications for the United States would be profound, both security-
wise and economically. That is what the future likely holds, unless we 
act.
    I encourage each Member of this Committee to get a classified 
intelligence briefing on these issues. I and my staff would be happy to 
set those up for you, if helpful.
Rationale and Key Objectives of FIRRMA
    As it currently stands, the jurisdiction of the Committee on 
Foreign Investment in the United States (CFIUS) is quite limited; it 
was designed for the last century, not the present one. China has found 
gaps in both the existing CFIUS process and the export control system 
and is exploiting them to the detriment of our national security, 
aiding its own military modernization and simultaneously weakening our 
U.S. defense industrial base. FIRRMA takes a measured and targeted 
approach to close these gaps, with changes that are laser-focused on 
national security concerns. Its provisions also reflect the need to 
preserve as much certainty and predictability for investors as 
possible.
    The rationale behind FIRRMA is simple: CFIUS should be able to 
review transactions that have, in effect, the same national security 
consequences as a traditional acquisition of a U.S. company or a piece 
of it. Foreign investors should not be able to circumvent CFIUS and get 
via the ``back door'' something they cannot get through the ``front 
door.''
    To take advantage of these gaps and circumvent CFIUS review, China 
pressures U.S. companies into business arrangements such as joint 
ventures, coercing them into sharing their technology and know-how, 
enabling Chinese companies to acquire high-tech U.S. industrial 
capabilities and then replicate them on Chinese soil.
    China has also been able to exploit minority-position investments 
in early stage technology companies in places like Silicon Valley, 
California, or the ``Silicon Hills'' in Central Texas to gain access to 
intellectual property (IP), trade secrets, and key personnel. The 
Chinese have figured out which dual-use emerging technologies are still 
in the cradle, so to speak, and not yet subject to export controls.
    FIRRMA would expand the jurisdiction of CFIUS to cover some of 
these technology joint ventures and related arrangements and minority-
position investments, as well as certain real estate transactions near 
military bases.
China's Civil-Military Integration Policies
    The problems are compounded by some of China's carefully 
constructed policies on civil-military integration, under which China's 
military suppliers and their activities are woven right into China's 
commercial environment, unlike in our free market economy. To help 
modernize its military, China purposely blurs the lines between 
military and ostensibly commercial activities, combining its defense 
and civilian industrial bases. As such, U.S. technology and know-how 
transferred to ``private'' Chinese companies are likely to contribute 
directly and materially to China's military modernization.
    Here, our export control system does not address the problem 
because the diversion of U.S. dual-use technologies is no longer just a 
risk, but a foregone conclusion. It is safe to assume that China will 
divert the fruits of any U.S. company's cooperation with China to a 
military end-use. It would be foolhardy to think these capabilities are 
not making their way into the hands of the Chinese military.
    Further, U.S. companies doing business in China are entirely 
subject to the whims and dictates of the Chinese Communist Party. And, 
there is no real difference between a Chinese state-owned enterprise 
and a ``private'' Chinese firm, in terms of the national security risks 
that exist when a U.S. company partners with one. Rule of law in China 
is often illusory, and the Chinese Communist Party can easily exercise 
control over both types of companies, as American Enterprise Institute 
economist, Derek Scissors, has pointed out.
    There are also major concerns regarding U.S. data, especially the 
personally identifiable information (PII) of U.S. citizens, and export 
controls do not cover this. The Chinese Communist Party considers data 
to be a national strategic resource, so China is basically 
nationalizing all data. Therefore, when U.S. companies are forced to 
on-shore data into China, it can have major U.S. national security 
implications.
    So, China is clearly not normal business environment for U.S. 
companies, and CFIUS modernization is the only way to effectively 
address the national security risks.
Debunking Arguments by Opponents of FIRRMA
    I want to take a moment to debunk a few flawed arguments that some 
opponents of FIRRMA are making.
    First, they say this bill represents regulatory overreach, which 
really misses the point. I am typically one of the loudest Senate 
voices of opposition to unnecessary regulation, as my track record 
demonstrates. But, this is very different--CFIUS is not akin to 
something like the Consumer Financial Protection Bureau; instead, it is 
part of our national security apparatus. And, the Federal Government 
has no higher duty than to maintain our national security.
    Second, opponents claim that the export control system can already 
address these national security risks, and that this update to the 
CFIUS statute is unnecessary. Without question, export controls are 
vital in preventing transfers of technology that would be damaging to 
national security, and I am committed to maintaining a strong export 
control system. That is why under FIRRMA the export control system 
would remain the first line of defense when it comes to technology 
transfers.
    Export controls work reasonably well in many cases, but they have 
inherent limitations and are not enough by themselves. We need a second 
line of defense. The CFIUS process and the export control system are 
designed to be interactive and complementary, not mutually exclusive. 
To effectively address the full range of mounting national security 
risks regarding China's activities, these systems must be robust, 
interoperable, and seamless.
    Our bill certainly does not duplicate the export control system. 
With transactions that represent pure technology transfers--basically, 
just the IP--FIRRMA leaves those to the export control system. It would 
only cover certain outbound U.S. transactions where they also include 
the transfer of know-how, which is the so-called ``secret sauce.'' 
These are the types of transactions that could help China acquire an 
industrial capability that is embodied in the U.S. business and 
accelerate China's learning curve in areas of technology that are key 
to national security.
    What's more, FIRRMA includes safeguards to ensure that, with its 
expanded authorities, CFIUS would review transactions only when 
necessary. CFIUS would define circumstances in which transactions could 
be excluded because other provisions of law, such as export controls, 
are adequate to address any national security risks. This same 
provision also leaves ample room for future export control reform by 
giving CFIUS the flexibility to exempt transactions in the future that 
are adequately addressed through the export control regime.
    CFIUS would also be authorized to create a ``safe list'' of certain 
allied countries, for which these new types of transactions would be 
exempt from review. This provision would drastically reduce the pool of 
transactions that would need CFIUS review, allowing CFIUS to focus its 
efforts on higher-risk deals.
    Third, opponents argue that FIRRMA will flood and distract CFIUS 
with transactions that were previously routine. This argument questions 
whether addressing real national security threats is worth the 
financial cost; I assure you it is. For the price of a single B-21 
bomber, we can fund an updated CFIUS process and protect our key 
capabilities for several years. That is a down payment on long-term 
national security. I am fully committed to securing the necessary 
funding for implementation to ensure the process continues to run 
smoothly, because this has to be a national security priority right up 
there with training and equipping our troops and intelligence 
professionals.
    FIRRMA would also help provide additional resources, allowing CFIUS 
to charge modest filing fees and also submit a unified annual budget 
request covering all member agencies. And, the bill's own provisions 
guard against an unfunded mandate, with the expansion only taking 
effect after CFIUS determines on its own that the necessary personnel 
and other resources are in place. FIRRMA also exempts outbound 
transactions that are done through ``ordinary customer relationships,'' 
ensuring harmless day-to-day activities do not have to be reviewed.
Closing
    In closing, I also ask you to withhold judgment on FIRRMA until you 
have heard testimony from the Treasury Department and other key member 
agencies of CFIUS, who are on the front lines of this issue.
    While it is certainly appropriate to consider what the potential 
impacts of this bill could be on foreign investment, that should not be 
done in a vacuum. We must also ask what the impacts on our national 
security will be if we do not take action on this.
    As you hear from opponents of FIRRMA, I urge you to assess their 
credibility on this issue by asking some basic questions about their 
activities in China:

    What types of arrangements do you currently have in China 
        with Chinese companies, what do you have planned for the near 
        future, and is CFIUS able to review any of it?

    What dual-use technology and know-how has your company 
        transferred to China over the last decade, and what impact has 
        that had on our country's relative national security advantage?

Increasingly, U.S. companies operating in China are being unfairly 
pressured into turning over valuable technology and know-how to Chinese 
companies, often as a condition of getting market access. Regardless, 
when U.S. companies engage in activities on Chinese soil that could 
negatively impact our national security, the Federal Government has a 
legitimate interest in being notified and afforded a chance to assess 
the national security risks. If CFIUS is not modernized to allow for 
this, we will continue to be in the dark here, and our national 
security will suffer.
    I urge you to advance this bill for the sake of our long-term 
national security, which is being damaged before our very eyes. The 
time to modernize CFIUS is now, and we must not allow ourselves to be 
the frog in the boiling pot of water, so to speak.
    Thank you, Mr. Chairman.
                                 ______
                                 
             PREPARED STATEMENT OF SENATOR DIANNE FEINSTEIN
                            January 18, 2018
    Chairman Crapo, Ranking Member Brown, thank you for inviting 
Senator Cornyn and me to your hearing to discuss the need for CFIUS 
reform. While I regretfully am unable to attend in person, I appreciate 
the opportunity to offer these written remarks.
    I would like to open my remarks by commending this Committee for 
taking up this issue and its interest in identifying ways we can 
strengthen the United States' foreign investment process. We have heard 
for some time in the Intelligence Committee about the need for reform 
and the concerns regarding investment strategies other nations are 
employing to undermine our security.
    When I was Mayor of San Francisco, we had a sister city 
relationship with Shanghai. Through this relationship I grew close with 
Jiang Zemin, then the Mayor of Shanghai. Eventually, Jiang Zemin became 
the President of China.
    In this position, President Zemin prioritized efforts to privatize 
China's economy and, ever since then, there has been significant 
economic growth and development, including in foreign investment. In 
fact, in 2016, Chinese entities invested a record $46 billion in the 
U.S. economy, triple what they invested the prior year and 10 times 
what they invested 5 years ago.
    While this growth has done much to improve and grow China's 
economy, it poses unique threats to United States national security.
    For example, Chinese companies, often backed by the Chinese 
government, have increasingly used investment in U.S. businesses to 
acquire sensitive new
technologies and related know-how. Many of these technologies, such as 
artificial intelligence and robotics, have military applications, and 
gaining access to such cutting-edge technologies has been a key part of 
the Chinese government's strategy to
modernize its military.
    Other investments threaten our national security because they allow 
China to acquire land or buildings in strategically sensitive 
locations--like near U.S. military bases or other Federal facilities. 
It's the job of the Committee on Foreign Investment in the United 
States--or CFIUS--to police foreign investment for national security 
concerns.
    However, the current law governing CFIUS, including the scope of 
its authority, has not been updated for over a decade. In that time, 
China and other countries have begun structuring their investments in 
U.S. businesses so that they can evade CFIUS jurisdiction.
    For example, many of these transactions take the form of joint 
ventures or minority-position investments, which CFIUS currently does 
not have the authority to reach. As a result, many transactions that 
pose potential national security concerns are going completely 
unreviewed.
    In short, CFIUS just doesn't have the tools it needs to effectively 
screen foreign investments for these emerging national security 
threats.
    The Foreign Investment Risk Review Modernization Act, which I am 
cosponsoring with Senator Cornyn, addresses these concerns.
    First, it provides CFIUS with a new arsenal of tools to prevent 
foreign companies from evading its jurisdiction. Under current law, 
CFIUS may review only foreign investments structured as mergers, 
acquisitions, or takeovers. But our bill expands this authority, 
allowing CFIUS to reach joint ventures, minority-position investments, 
certain leasehold arrangements, and other investments where a foreign 
company effectively gains control of a U.S. business, regardless of how 
the transaction is structured.
    Second, it streamlines the CFIUS filing process in an effort to 
encourage parties to notify CFIUS of potentially problematic 
transactions in the first place.
    Third, our bill mandates that CFIUS place a greater focus on the 
threat posed by the transfer of cutting-edge technologies to foreign 
countries such as China. By redefining the term ``critical 
technologies'' to include these emerging technologies, the bill allows 
CFIUS to take into account the full range of national security concerns 
potentially posed by transactions that result in technology transfers 
to foreign companies.
    Finally, our bill gives CFIUS additional flexibility to address 
national security concerns it identifies, granting CFIUS new authority 
to suspend transactions during its review and attach mitigation 
conditions to abandoned transactions when necessary. It also enhances 
CFIUS's ability to monitor and enforce mitigation measures and to take 
action when parties fail to comply with such measures.
    In closing, I want to be clear, not all foreign investment causes 
national security concerns. Rather, the vast majority of such 
investment greatly benefits this country. Foreign investment has long 
been an important source of capital that supports U.S. innovation, 
economic growth, employment, and global competitiveness.
    However, we must do all we can to ensure we can differentiate 
between the two.
    That is why, for the past 10 months, Senator Cornyn and I have been 
working to craft a bill that strikes the right balance by giving CFIUS 
greater authority to address very real national security issues without 
unduly chilling foreign investment in the United States. By expanding 
CFIUS's authority in a targeted manner and granting CFIUS the 
flexibility to further define that authority through regulations, this 
bill does just that.
    In fact, our bill has received support from several Federal 
stakeholders and members of the Intelligence Community.
    In short, I think this is a strong bill that fills crucial gaps in 
the current CFIUS process. I hope you will join Senator Cornyn and me 
in supporting the Foreign Investment Risk Review Modernization Act.
                                 ______
                                 
               PREPARED STATEMENT OF CHRISTOPHER PADILLA
Vice President for Government and Regulatory Affairs, IBM Corporation; 
   and former Under Secretary for International Trade, Department of 
                                Commerce
                            January 18, 2018
    Mr. Chairman, Senator Brown and Members of the Committee, thank you 
for inviting me to testify on this very important topic.
    My name is Christopher Padilla, and I am Vice President for 
Government and Regulatory Affairs at IBM. During the Administration of 
President George W. Bush, I served as Under Secretary of Commerce for 
International Trade, Assistant Secretary of Commerce for Export 
Administration, and in other senior roles in the Department of State 
and the Office of the United States Trade Representative.
    In my Government roles, I was a senior sub-Cabinet representative 
of the Commerce Department to the Committee on Foreign Investment in 
the United States (CFIUS), and I participated closely in inter-agency 
work to implement new Committee procedures after passage of the Foreign 
Investment and National Security Act of 2007 (FINSA).
    In my role at IBM, I have been involved in two large transactions 
that were reviewed by CFIUS, and am responsible for the company's 
worldwide compliance with export controls. My comments today draw upon 
all these experiences.
    IBM shares Congress' goal of strengthening America's national 
security and appreciates the attempt to do so through the Foreign 
Investment Risk Review Modernization Act of 2017 (FIRRMA). CFIUS plays 
an important role in screening inbound foreign investments for 
potential national security risks, and it is necessary to periodically 
consider how this process can be improved.
    In recent years, IBM has been through three reviews by CFIUS 
resulting in the successful conclusion of each transaction. From this 
experience, and from working on mitigation agreements when I served in 
Government, I can assure you that CFIUS has--and makes good use of--its 
authority to address potential security concerns about inbound foreign 
investment.
    Nevertheless, these experiences also revealed the need for 
improvements to the CFIUS process, including an expansion of the 
Committee's jurisdiction to review certain types of inbound foreign 
investment transactions. FIRRMA contains some important reforms that 
IBM supports, such as:

    Expanding the ability of CFIUS to review a limited number 
        of nonpassive, but noncontrolling, investments;

    CFIUS review of transactions when there are material 
        changes in shareholder rights that expand control or access to 
        information;

    Expanding the ability of CFIUS to review certain real 
        estate transactions when they are in close proximity to 
        military or Government installations;

    Taking steps to prevent the deliberate evasion of CFIUS 
        review through complicated financial structures;

    Expanding consultation with allies to coordinate and share 
        information on the types of inbound investment to be 
        scrutinized;

    Ensuring there is a single Senate-confirmed appointee in 
        each CFIUS agency with responsibility and accountability for 
        investment reviews; and

    Providing badly needed resources to the Committee. The 
        CFIUS case load has increased significantly in recent years, 
        and staff resources are already stretched thin. Even if 
        Congress does not elect to give CFIUS an expanded mandate along 
        the lines noted above, it should provide additional resources 
        for CFIUS to do its job effectively.

    But the problem with FIRRMA, Mr. Chairman, and a principal reason 
the bill is controversial in the business community, is that it does 
something else: it would drastically expand the Committee's mandate 
beyond examining inbound investment. For the first time, CFIUS would 
review outbound international commercial activity, including many 
thousands of nonsensitive IP and technology licensing transactions, 
even with friendly nations.
    This is a serious flaw in the bill that would duplicate and 
seriously undermine the existing U.S. export control regime, result in 
a flood of cases that would quickly overwhelm the Committee, and could 
constitute the most economically harmful imposition of unilateral trade 
restrictions by the United States in many decades.
Effectively Protecting National Security
    As a company with long experience in foreign markets, IBM knows 
that controlling sensitive technology works best when accomplished 
internationally, in cooperation with America's allies.
    Since the late 1940s, the United States has worked with other 
countries to stop sensitive technologies from falling into the wrong 
hands. Whether for dual-use goods like computers and electronics, or 
for chemicals, aeronautical products, missile technology or nuclear 
materials, Congress and the executive branch have recognized that to be 
effective, controls on technology should be multilateral.
    A multilateral approach is important for a simple reason: the 
United States does not have a monopoly on smart people, advanced 
technologies or investment in leading-edge R&D. Many emerging, dual-use 
critical technologies are available from other countries, and companies 
and governments around the world continue to drive the frontiers of 
technology through their own R&D investments. In fact, in 2017, three-
fourths of total global investment in R&D was conducted outside of the 
United States.\1\
---------------------------------------------------------------------------
    \1\ 2017 Global R&D Funding Forecast, R&D Magazine, Winter 2017 
(available at: http://digital.rdmag.com/researchanddevelopment/
2017_global_r_d_funding_forecast?pg=1#pg1.
---------------------------------------------------------------------------
    A system of technology controls that unilaterally stops American 
firms from doing business abroad will not advance national security 
interests if it simply hands markets to foreign competitors--many of 
whom are equally capable in advanced technologies.
    Yet this is precisely what FIRRMA would do. As drafted, the bill 
would impose a very onerous--and entirely unilateral--set of 
restrictions on outbound transactions of U.S. companies involving the 
``contribution'' of technology, intellectual property, and associated 
support ``through any type of arrangement.''
    This is an exceptionally broad universe that would capture 
countless licensing, joint development, sales, research, and other 
transactions involving foreign persons, most of which involve 
technology that the U.S. Government previously determined did not 
warrant export control restrictions. For example:

    Computer Hardware Sales & Service: U.S. firms sell 
        computers, servers and systems worldwide, often paired with 
        installation, maintenance and technical support services. This 
        hardware and related support typically involves hundreds of 
        patented or licensed technologies that would count as a 
        ``contribution'' of intellectual property under FIRRMA. For 
        example, the sale of a computer server with tech support to a 
        bank in Singapore could come under CFIUS review.

    Software Licensing: American technology companies license 
        many types of software applications to both businesses and 
        consumers. These applications often come with technical support 
        that may include help desk, software updates, bug fixes and 
        customization, all of which could involve patented or licensed 
        technologies. For example, the licensing of a database 
        application to a pharmaceutical company in Switzerland could be 
        captured by FIRRMA.

    Trademarks: U.S. companies routinely license this most 
        basic form of intellectual property to partners around the 
        world for marketing and business development purposes. This 
        bill could potentially trigger a staggering volume of 
        regulatory filings for basic trademark deals that could not be 
        less threatening to
        national security.

    Saying that ``ordinary customer relationships'' are excluded would 
not solve this overreach, as that term, too, is undefined in FIRRMA and 
left entirely to the discretion of regulators. Neither is it comforting 
to be told that regulators will narrow the scope of covered outbound 
reviews after legislation is passed. Congress, not unelected officials, 
should decide how broad the CFIUS regulatory remit should be.
    More practically, by covering such an extraordinarily broad range 
of transactions, CFIUS would quickly be overwhelmed with new reviews, 
making it difficult for the Committee to focus adequately on real 
threats to national security. Under FIRRMA, the CFIUS workload would 
skyrocket from about 250 cases per year--already a record number--to 
many thousands or even tens of thousands, including review of many 
routine outbound investments and technology transactions hitherto seen 
as nonthreatening by the United States and its allies.
Duplicative Regulation Would Harm U.S. Economic Competitiveness
    As drafted, FIRRMA would turn CFIUS into a supra-export control 
agency, duplicating long-standing U.S. export control regimes and 
unilaterally limiting the ability of American firms to do business 
around the world. Foreign competitors that do not face similar 
regulatory restrictions will seize global market opportunities while 
American companies are left watching from the sidelines.
    FIRRMA would give CFIUS extremely broad discretion to define the 
scope and reach of its regulatory authority, creating uncertainty and 
delays in investment decisions, contract negotiations and sales to 
foreign customers.
    This approach stands in stark contrast to the approach recently 
taken by Congress and the Administration to curtail duplicative 
bureaucracy and regulation, and could capture under Government control 
a very wide range of commercial activity. As a result, foreign 
customers and investors will look elsewhere, and over the long term 
this could drive innovation and the development of new critical 
technologies outside the United States.
Protecting National Security Using Existing Authorities
    One of the issues driving FIRRMA is a concern that the current 
CFIUS and export control regimes do not address the issue of emerging 
critical technologies. There is some justification for this concern. 
However, there is existing regulatory authority to impose new 
technology controls quickly, while also ensuring that effective, long-
term controls are established in partnership with U.S. allies.
    In 2012, a final rule was published (15 CFR 742.6(a)(7)) which 
established the ``0Y521'' series of controls in the Export 
Administration Regulations (EAR). Under this little-used regulation, 
the Government can impose immediate controls on emerging or other 
technologies if deemed in the national security or foreign policy 
interests of the United States. Crucially, however, this regulation 
also envisions that the United States will simultaneously pursue 
effective multilateral controls for these technologies with U.S. 
allies. And such controls would be administered through the specific, 
parameter-based, and relatively transparent process of export licensing 
that the business community knows and can work with.
    So, mechanisms exist to quickly control sensitive technologies if 
necessary. But which technologies should be so controlled? This is 
where the picture gets murkier.
    Technology control lists are badly in need of a refresh, and 
Congress should consider using its oversight authority to make this 
happen. Under the Export Administration Act, Congress directed that 
regular list review should be a priority, and it established the 
Militarily Critical Technologies List (MCTL) in statute for just that 
purpose. Yet a GAO report in February 2015 found that ``the MCTL was 
out-of-date and was no longer being published online, but that 
widespread requirements to know what is militarily critical 
remained.''\2\ The same report found:
---------------------------------------------------------------------------
    \2\ U.S. Government Accountability Office, ``Critical Technologies: 
Agency Initiatives Address Some Weaknesses, But Additional Interagency 
Collaboration is Needed,'' February 2015, GAO 15-288.

        According to DoD officials responsible for the MCTL, they are 
        no longer updating the list, and are in the process of 
        determining whether it is appropriate to seek relief from the 
        requirement to maintain the list. They stated that alternatives 
        to the MCTL are being employed based on the specific needs of 
        each agency, and DoD offices are using the U.S. Munitions List, 
        the Commerce Control List 600 Series, and the Industrial Base 
        Technology List as alternatives to the MCTL.\3\
---------------------------------------------------------------------------
    \3\  Ibid., and reference is also made to a prior report: U.S. 
Government Accountability Office, ``Protecting Defense Technologies: 
DoD Assessment Needed to Determine Requirement for Critical 
Technologies List,'' January 2013, GAO-13-157.

This is not how Congress thought the process should work. Using the 
control list to say what is militarily critical puts the cart before 
the horse. The intent was that the Defense Department, working with 
other agencies and with industry, would broadly identify general 
categories of militarily critical technologies (including emerging 
technologies of concern) in the MCTL, and then draw from that list to 
propose specific, parameter-based, and usually multilateral export 
controls. The controls would be implemented via the Commerce Control 
List, the U.S. Munitions List, and international control regimes such 
as COCOM (succeeded by the Wassenaar Arrangement), the Missile 
Technology Control Regime, the Australia Group, the Nuclear Suppliers 
Group, or others. Export controls have worked well to protect national 
security for decades, but the list review process has recently fallen 
into disuse.
    FIRRMA would not correct this problem, and in fact could make it 
worse. Under FIRRMA the Government would define some new, very vague 
and broad list of technologies of concern (even though it has failed to 
update technology lists already required under current law) and then 
wait until something pops up in a transaction review. The Government 
might then try to stop it--but only unilaterally, on a deal-by-deal 
basis, and without regard to foreign availability, technology trends, 
or consultation with allies or industry. Casting an extraordinarily 
wide net over routine commercial transactions and applying, in effect, 
a regulatory test of ``we'll know it when we see it'' would be deeply 
damaging to U.S. competitiveness, and, more important, could lead to a 
false sense of security.
    Instead, there should be a return to a more disciplined list review 
and multilateral export control process already mandated by law. 
Congress could act to ensure effective monitoring and control of 
emerging technologies through existing export regulations by requiring:

  1)  regular, ongoing reviews of emerging technologies for potential 
        national security risks as envisioned by the MCTL;

  2)  full and robust application of existing EAR regulatory 
        authorities to control these emerging technologies as necessary 
        to protect national security; and

  3)  annual reports to Congress with additional oversight to ensure 
        that this export control process effectively addresses any 
        risks.
Conclusion
    In summary, IBM fully supports efforts to strengthen national 
security. We encourage Congress to find ways to do so without 
undermining U.S. economic competitiveness, or driving innovation and 
investment outside the United States.
    We believe that a refreshed technology control list, and the more 
robust use of existing export control authority ultimately leading to 
international controls, would be the most effective way to protect 
national security interests.
    While FIRRMA contains several important reforms to CFIUS, the 
Committee should continue to focus on inbound foreign investment in the 
United States, rather than reviewing outbound transactions that are 
low-risk or already covered under existing export control regulations.
    Thank you for this opportunity to appear before the Committee. I 
would be pleased to answer any questions that you might have.
                                 ______
                                 
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           PREPARED STATEMENT OF GARY CLYDE HUFBAUER, Ph.D. *
  Reginald Jones Senior Fellow, Peterson Institute for International 
                               Economics
                            January 18, 2018

---------------------------------------------------------------------------
    * This testimony is based on a blog posted on the Peterson 
Institute website: https://piie.com/blogs/trade-investment-policy-
watch/revamping-cfius-and-going-too-far.
---------------------------------------------------------------------------
    Thank you, Senator Crapo, and Members of the Committee for inviting 
me to testify concerning S. 2098, the Foreign Investment Risk Review 
Modernization Act of 2017. My remarks will also touch on the House 
counterpart legislation, H.R. 4311, the Foreign Investment Risk Review 
Modernization Act of 2017.
    Two empirical facts provide the starting point for my remarks:

    Inward foreign direct investment is almost always good for 
        the United States. Foreign firms that invest in the United 
        States--usually by acquiring U.S. firms--are typically top of 
        their class abroad. They pay higher wages than average U.S. 
        firms in the same industry, do more R&D and investment, and 
        export a larger share of production.\1\ These facts are just as 
        characteristic of Chinese firms as foreign firms based in 
        Canada, Europe, or Japan.
---------------------------------------------------------------------------
    \1\ Theodore H. Moran and Lindsay Oldenski. 2013. Foreign Direct 
Investment in the United States: Benefits, Suspicions, and Risks with 
Special Attention to FDI from China. Policy Analyses in International 
Economics 100. Washington: Peterson Institute for International 
Economics. Also see Moran's remarks at https://piie.com/system/files/
documents/moran201702draft-c.pdf.

    Outward foreign direct investment also benefits the United 
        States. Contrary to popular mythology, investment abroad does 
        not, as a rule, take place at the expense of investment in the 
        United States. Instead, U.S. firms that invest heavily abroad 
        typically grow U.S. R&D faster, employ more workers, and 
        produce and export more than comparable U.S. firms that invest 
        little or nothing abroad.\2\
---------------------------------------------------------------------------
    \2\ Gary Hufbauer, Theodore Moran, and Lindsay Oldenski. 2013. 
Outward Foreign Direct Investment and U.S. Exports, Jobs, and R&D: 
Implications for U.S. Policy. Policy Analyses in International 
Economics. Washington: Peterson Institute for International Economics.

    Given these facts, the burden of proof should rest on any 
Government action that seeks to restrict either inward or outward 
foreign direct investment (FDI). Historically, this is how the 
Committee on Foreign Investment in the United States (CFIUS) has 
operated.\3\
---------------------------------------------------------------------------
    \3\ For a detailed background, see James K. Jackson, ``The 
Committee on Foreign Investment in the United States (CFIUS),'' 
Congressional Research Service, October 11, 2017.
---------------------------------------------------------------------------
    CFIUS was created in 1975 to screen foreign takeovers of U.S. firms 
for threats to U.S. national security. The focus was on inward 
investment and technology acquisition. Treasury chairs the CFIUS, 
ensuring that the economic benefits of inward foreign investment are 
given due consideration, a perspective buttressed by membership of 
Commerce and USTR, and observer status of OMB, CEA and the NEC.
    The CIA, NSC, and Defense fully inform other Committee members of 
the national security dimensions of any takeover. However, an 
influential draft report by Brown and Singh (February 2017) calls upon 
Congress to vest the power to block a transaction in just three Cabinet 
members, if they are all in accord: Defense, Justice and Homeland 
Security.\4\ In the past, less than five takeovers have been blocked by 
CFIUS, but somewhat more applications have been withdrawn prior to an 
adverse decision. The Brown and Singh draft report advocates more 
stringent screening, especially with respect to Chinese transactions.
---------------------------------------------------------------------------
    \4\ 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,'' 
pre-Decisional draft, Defense Innovation Unit Experimental, February 
2017.
---------------------------------------------------------------------------
    If enacted, the blend of S. 2098 and H.R. 4311 would significantly 
enlarge the CFIUS mandate to cover outward investment and technology 
transactions by U.S. firms. It would also cast a skeptical eye toward 
investment (inward or outward) from or to China, Russia, and a handful 
of other adversarial nations.
    The new and broader CFIUS mandate raises three inter-related 
concerns:

    It could replace multilateral cooperation with unilateral 
        restrictions on outward flows of ``critical technology'' to 
        neutral or adversarial nations;

    Thereby putting U.S.-based multinational corporations 
        (MNCs) at a disadvantage, relative to MNCs based in Europe or 
        Japan, when firms compete in third-country markets;

    And duplicate controls on the export of merchandise and 
        technology established under the Export Administration Act with 
        multilateral consultation.

    Using existing statutory authorities, President Trump could achieve 
the objectives sought by S. 2098 and H.R. 4311. If he wants to restrict 
U.S. investment and technology flows to China, Russia, Iran or any 
other country, Trump can do so without new legislation.\5\
---------------------------------------------------------------------------
    \5\ The president can restrict foreign investment and exports of 
goods and technology under the International Emergency Economic Powers 
Act (IEEPA) and other statutes.
---------------------------------------------------------------------------
    The lasting impact of these bills will come when a different 
president resides in the White House. If the CFIUS mandate is expanded 
as the co-sponsors contemplate, the CFIUS caseload will burst from 200 
annually to thousands. Necessarily, the bureaucracy will blossom with 
new administrative and technical capabilities. Once the bureaucracy is 
created, and reviews become a thrice-daily event, it will be almost 
impossible to turn the clock back to today's open regime for investment 
and technology flows.
    Under S. 2098 and H.R. 4311, future decisions to block inward or 
outward foreign direct investment might not require the Government to 
carry the same burden of proof as historically has been the case. 
Hypothetical arguments that allowing an acquisition or transferring 
certain technology abroad might in the future endanger national 
security will have greater weight. Proof may not be needed that the 
acquisition or transfer currently endangers national security. The 
cited Brown and Singh draft report, if followed, makes the change in 
emphasis very clear.
    In fact, S. 2098 states, among other factors to be considered, 
``the potential effects of the covered transaction on United States 
international technological and industrial leadership in areas 
affecting national security, including whether the transaction is 
likely to reduce the technological and industrial advantage of the 
United States relative to any country of special concern.''
    Likewise, H.R. 4311, states, among factors to be considered, 
``whether the covered transaction is likely to contribute to the loss 
of or other adverse effects on technologies that provide a strategic 
national security advantage to the United States.''
    In plain language, both bills stipulate that any transaction that 
might enable a foreign country (especially an adversary) to narrow its 
gap with U.S. technological leadership should be viewed skeptically. 
This warning covers a great deal of ground, not only with respect to 
transactions with adversaries, but also with respect to transactions 
with neutrals or allies who might in turn convey the technology to 
adversaries.
    Chinese technology practices have generated the core motivation for 
S. 2098 and H.R. 3411. China has targeted several high-tech industries 
for massive upgrading in the next 10 years. Multiple Chinese means of 
accessing frontier U.S. technology in an effort to achieve this goal 
are spelled out in the Brown and Singh draft report. Among other means, 
China acquires venture capital stakes in nascent technologies and 
compels foreign firms to transfer technology to Chinese business 
partners as the ``price of admission'' to the vast Chinese market. 
President Trump has directed the U.S. Trade Representative to launch an 
investigation of China's technology transfer practices, under Section 
301 of the Trade Act of 1974. Once the investigation is concluded, 
measures to block U.S. firms from acquiescing to Chinese demands could 
be Trump's response, whether or not a blend of S. 2098 and H.R. 4311 
passes Congress.
    Both S. 2098 and H.R. 4311 refer to China, Russia and other U.S. 
adversaries as ``countries of special concern'' without naming them. 
CFIUS is directed to scrutinize inbound and outbound investment and 
technology transactions with these countries. At the same time, both S. 
2098 and H.R. 4311 would allow CFIUS to exempt from review ``covered 
transactions'' with foreign firms based in countries that are U.S. 
military allies or have close security relations.
Recommendations
    Legislation enacted by Congress should be narrowed to cover the 
immediate problem--transfer of critical technology to adversarial 
countries--without a massive expansion of the CFIUS mandate to review 
the bulk of outward foreign direct investment by U.S. firms.
    Narrowing could be accomplished with two provisions. First, require 
the Committee to identify ``critical technologies'', drawing on the 
resources of the intelligence community, the National Academy of 
Sciences, and the National Academy of Engineering. Second, require the 
Committee to name ``countries of special concern''. With these two 
provisions, the workload would be narrowed while U.S. firms that 
develop critical technologies would be put on notice to seek CFIUS 
review prior to transferring the know-how to worrisome countries.
    CFIUS review of questionable transactions should take into 
consideration the availability of equivalent critical technology from 
firms not based in the United States. Obviously, if an end run through 
Europe or Japan has already occurred, there's less reason to block the 
U.S. firm. If an end run is only a future possibility, then a decision 
to block the transaction should be accompanied by a forceful diplomatic 
demarche to U.S. friends and allies to establish a multilateral basis 
for the denial.
    Thank you for the opportunity to testify.
                                 ______
                                 
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     RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM 
                      CHRISTOPHER PADILLA

Q.1. Your written testimony expresses support for specific 
provisions of the bill and concerns about specific provisions.
    Please discuss the one critical provision of the bill that 
is essential to CFIUS' protection of national security, and the 
one provision that you feel most needs further amendment to 
improve the bill.

A.1. There are several gaps in the current authority of CFIUS 
that FIRRMA would effectively address. One such gap in the 
authority of the Committee to assess foreign investments in the 
United States for national security risks is real estate 
transactions near military bases or other sensitive Government 
facilities. FIRRMA appropriately fills this gap. In addition, 
the bill would give CFIUS expanded authority over certain 
inbound transactions that are less than controlling, but more 
than passive. Depending on the circumstances of such a 
noncontrolling, nonpassive investment, there may be national 
security issues posed that CFIUS should have the authority to 
address, and FIRRMA provides that.
    Conversely, Sec. 3(B)(v) of FIRRMA significantly expands 
the definition of ``covered transaction,'' giving CFIUS 
jurisdiction over outbound and overseas transactions. CFIUS 
should not govern, nor was it established to review, outbound 
transactions. This provision should be removed and amended with 
new language to appropriately reflect the need to enforce and 
update existing export control regulations to address relevant 
national security concerns in outbound and overseas 
transactions. The appropriate U.S. Government agencies that 
administer export controls should work closely with industry to 
identify and target critical technology controls, including 
updating lists of militarily critical technologies that should 
be considered for control.

Q.2. Much of the concern surrounding this reform effort is 
about China acquiring cutting edge technology by stealing, 
reverse engineering, or investing in companies that develop the 
technology.
    Is there a way for emergent ``critical'' technologies to be 
appropriately defined and applied by CFIUS?

A.2. Export control agencies have the technical expertise and 
established industry advisory groups to identify emergent 
critical technologies. Indeed, in the Export Administration 
Act, Congress
mandated that the Department of Defense, in consultation with 
other agencies, should maintain a list of military critical 
technologies and update it to reflect technological advances. 
From that list, specific export controls and technology 
transfer limits would be drawn. But the MCTL has fallen into 
disuse.
    Rather than re-create the process in CFIUS, which lacks the 
expertise to perform this mission, technical experts in the 
export control agencies (including the Defense Department) are 
best situated to make such an assessment. If improvements are 
needed in this process, then Congress should ensure that the 
export control agencies have the necessary resources, direction 
and focus to accomplish this task. Since new technologies are 
created continually, it is important that the effort to 
identify emergent critical technologies be ongoing and 
conducted with input from industry as well as academic experts. 
Ideally, technologies identified as requiring control would 
also be discussed with U.S. allies, to develop effective 
technology controls that are effective and internationally 
consistent.

Q.2.a. Given the claim that China is acquiring the technology 
through various means, is reforming solely CFIUS statute and 
regulations the best way to solve the problem?

A.2.a. No. As cited in my written testimony to the Committee, 
there are several ways in which CFIUS could be reformed through 
FIRRMA to address increased national security threats from 
certain inbound investment transactions.
    However, reform of and application of CFIUS alone is not 
the answer. There is existing authority in export control 
regulations to govern the transfer of technology to a foreign 
person, regardless of the type of transaction. Where 
appropriate, we should use existing export control regimes to 
identify, define, and control emerging technologies to prevent 
transfers of technology that could create a national security 
threat to the United States. Moreover, restricting access to 
U.S. technologies on a strictly unilateral basis, whether via 
export controls or CFIUS, will not ensure that the United 
States maintains its technological lead. Other countries are 
investing heavily in the development of new technologies, and 
the United States must seek an internationally effective export 
control regime, as well as increasing its own investments in 
research and development across a broad range of technologies 
to ensure that it will not be overtaken in the race for 
technological supremacy.
                                ------                                


     RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM 
                      CHRISTOPHER PADILLA

Q.1. What other collaborative arrangements, including joint 
ventures, does IBM currently have in China with Chinese 
companies, and was CFIUS able to review those for risks to U.S. 
national security?

A.1. All IBM technology partnerships in China are reviewed 
against the U.S. Government's lists of restricted end-users and 
activities, including military end-users and proliferation 
screening. Additionally, our agreements mandate that all 
partner companies also comply with U.S. export control 
regulations, including restrictions on military end use. IBM's 
activities in China comply with U.S. law and export control 
regulations, and, where necessary, have received approval from 
the necessary export licensing agencies. In addition, IBM has 
been through two CFIUS reviews for business transactions with 
Chinese companies, both of which were subject to a rigorous 
review and to risk mitigation agreements with appropriate U.S. 
Government agencies.

Q.2. What such arrangements do you have planned for the near 
future, and is CFIUS able to review any of those for risks to 
U.S. national security?

A.2. While we cannot speculate on future business decisions, 
IBM believes that under existing CFIUS regulations and export 
control regulations, there is ample authority to govern and vet 
transactions for risks to national security. As mentioned in my 
testimony, IBM supports both the expansion of CFIUS 
jurisdiction over certain inbound investment transactions, as 
well as an updated and comprehensive review of militarily 
critical technologies that should be controlled for export from 
the United States.

Q.2.a. What dual-use technology and know-how has IBM 
transferred to China over the last decade, and what impact do 
you think that has had on the United States' relative 
technological advantage in areas of national security?

A.2.a. Most IBM business transactions in China do not require 
an individual export license for either goods or technology, 
but in every transaction there is an obligation to comply with 
U.S. Export Administration Regulations as well as other 
relevant provisions of U.S. law. IBM business in China is fully 
compliant with U.S. law and export regulations. It should be 
noted that as a general matter of policy, U.S. export controls 
have long limited the transfer of technology to China to levels 
that are several generations behind current, cutting-edge 
technologies sold in other markets.

Q.3. Over the past 10 years or so, has IBM been pressured by 
Chinese entities to turn over valuable technology and know-how 
to Chinese companies? If so, what types?

A.3. No. Our business decisions in China are driven by 
commercial considerations and by the limits established in U.S. 
export control laws and regulations.

Q.4. Has IBM been pressured by Chinese entities to oppose, 
criticize, or help defeat the Foreign Investment Risk Review 
Modernization Act?

A.4. No. Even if we had been asked to do so, IBM would have 
refused. Our position on this legislation is not driven by 
pressure from foreign governments, but rather from our long 
experience in international markets and direct experience with 
both CFIUS reviews and U.S. export control laws.

Q.5. When U.S. companies engage in activities on Chinese soil 
that could negatively impact the United States' national 
security, do you believe the Federal Government has a 
legitimate interest in being notified and afforded a chance to 
assess the risks for U.S. national security?

A.5. Yes. This is why the United States has a robust and 
multilateral export control system to review, assess, and 
mitigate legitimate risks to U.S. national security in 
commercial transactions overseas.
                                ------                                


    RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM 
                      CHRISTOPHER PADILLA

Q.1. The legislation introduced by Senators Cornyn and 
Feinstein would add five new types of covered transactions to 
CFIUS' purview and it would expand the definition of ``critical 
technologies.''

Q.1.a. Can you comment on whether CFIUS and its member agencies 
currently have sufficient resources to monitor foreign 
investment and acquisitions, review filed transactions, and 
conduct thorough reviews and investigations in the required 
time periods?

A.1.a. There is a time lag in CFIUS' issuance of public data 
about its work, but the available data indicate that there has 
been a material rise in the number of investigations conducted 
by CFIUS, which places stress on CFIUS resources. Substantially 
increasing the CFIUS workload, as we believe FIRRMA would do, 
would exacerbate this stress.

Q.1.b. In your opinion, should any expansion of authority also 
include new resources, funding, and staffing for the panel?

A.1.b. Yes. We agree with providing badly needed resources to 
the Committee. The CFIUS case load has increased significantly 
in recent years, and staff resources are already stretched 
thin. Even if Congress does not elect to give CFIUS an expanded 
mandate, it should provide additional resources for CFIUS to do 
its job and manage the existing case load effectively.

Q.2. Last year, Ness Technologies, a New Jersey-based software 
engineering 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 by 
Ness Technologies last month, that deal fell apart because HNA 
provided ``knowingly false, inconsistent, and misleading 
information'' about its ownership and ties to the Chinese 
government during CFIUS' review of the acquisition. HNA's 
interests in the United States are certainly not limited to 
Ness Technologies--they've received CFIUS approval to purchase 
a California technology distributor and they are actively 
working to purchase a controlling stake in SkyBridge Capital, 
the investment firm owned by Anthony Scaramucci. This case 
raises important questions about the consequences of failing to 
provide accurate information or knowingly providing false 
information to CFIUS.

Q.2.a. What steps should CFIUS take, if any, with regard to 
other transactions, either previously approved or pending 
approval, involving a party if CFIUS determines that party has 
misled the panel. For example, should the panel reopen 
previously cleared HNA transactions or modify their approach to 
reviewing pending transactions in light of this information?

A.2.a. IBM cannot comment on the HNA transaction or other 
specific transactions in which IBM is not a party. However, 
generally speaking, IBM believes that it would be fully 
appropriate for CFIUS to reopen a review or investigation of a 
transaction if new evidence comes to light indicating that one 
or more of the parties provided false or misleading information 
during the CFIUS process. IBM believes that CFIUS currently has 
the authority to do so and supports efforts to further clarify 
this authority in FIRRMA.

Q.2.b. What should be the consequences of a party misleading or 
failing to provide accurate information to CFIUS?

A.2.b. Transaction denial and unwinding of previously approved 
transactions are the current remedies. These remedies are 
severe but appropriate in a situation involving the provision 
of false or misleading information.
                                ------                                


     RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM 
                      CHRISTOPHER PADILLA

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, I've heard some suggest that we should be 
pursuing other changes instead of or in addition to the 
Committee on Foreign Investment in the United States (CFIUS) 
reform.

Q.1.a. What role should export controls play in addressing this 
problem?
    Could the export control system be modified to address the 
concern that know how--not just intellectual property (IP)--is 
being transferred through joint ventures (JVs) and other 
partnerships?

A.1.a. Existing U.S. export controls already address the issue 
of the transfer of ``know how,'' and they have done so for 
several decades. No modification to the export control system 
is necessary to address this concern. IBM believes that the 
real issue here is that the lists of controlled technology 
(which includes know how) have not kept pace with technological 
advances. The solution is for Congress to exercise its 
oversight authority to ensure that the U.S. export control 
agencies update their control lists so that they cover know how 
of concern from a national security perspective. The U.S. 
export control agencies already have the authority to make such 
updates immediately--they do not have to wait for the 
multilateral system to agree in order to do so.

Q.1.b. Are there other fixes outside of CFIUS that should be 
considered to address this security challenge?

A.1.b. The U.S. Export Administration Regulations (EAR) 
currently provide a mechanism to address concerns about access 
to emerging U.S. technologies. These regulations can already 
control for export emerging technologies that are dual-use 
(i.e., have both commercial and military applications) and that 
have potential national security implications. Specifically, 15 
C.F.R.  742.6(a)(7)
establishes a mechanism for the Commerce Department, with 
concurrence from the Defense and State Departments, to 
designate for control items that are not currently covered by 
the multilateral export control regime (Wassenaar Arrangement) 
but nonetheless ``should be controlled for export because the 
items provide at least a significant military or intelligence 
advantage to the United States or for foreign policy reasons . 
. . ''. Items designated under this unilateral export control 
mechanism (denoted by classification in the ECCN 0Y521 series) 
are controlled for export--and thus require an export license 
issued by the Commerce Department--to all countries except 
Canada (subject to limited exception). These items are 
temporarily controlled for export for one calendar year 
(subject to limited extension), providing time for the Commerce 
Department to transition the items to a more permanent control 
status. Such a transition may occur upon an item's 
incorporation into the multilateral export control regime, or 
it may occur upon a determination by the Commerce Department 
that a more permanent unilateral control is appropriate. The 
Commerce Department also has the option to de-control an item, 
if warranted. Four categories of items (including related 
technology) have been controlled for export in this manner 
since creation of the unilateral export control mechanism in 
2012. Publicly available data indicate that eight licenses were 
issued with respect to such items in 2015.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                      CHRISTOPHER PADILLA

Gaming and Tourism
Q.1. 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.

Q.1.a. 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?

A.1.a. To the extent that the acquisition of hotels or tourism
companies present a national security risk, CFIUS already has 
authority to review such transactions. As an information 
technology solutions company, I regret that IBM has no basis on 
which to comment further on any concerns that might exist 
within the hotel and tourism industry.

Q.1.b. How does CFIUS review such transactions, and what is the 
Committee's track record on approving or denying these types of 
deals?

A.1.b. To the extent that the acquisition of hotels or tourism 
companies present a national security risk, CFIUS already has 
authority to review such transactions. However, IBM has no 
particular knowledge of the Committee's track record in 
reviewing such cases.
CFIUS, Mining and Proximity to Military Installations
Q.2. In the last decade, CFIUS blocked three proposed 
investments in Nevada mining companies, citing national 
security concerns regarding the properties' proximity to Fallon 
Naval Air Station.
    How does CFIUS traditionally review such acquisitions as it 
relates to their location relative to military installations? 
Is that process working effectively, or are there any areas 
needed for improvement?

A.2. CFIUS currently has authority to review transactions that 
include real estate near military or other sensitive facilities 
when the transaction involves the acquisition of a U.S. 
business. However, current CFIUS authority does not extend to 
real estate transactions that include only undeveloped land and 
are not part of an acquisition of a U.S. business. As I stated 
in my testimony, IBM supports the expansion of CFIUS to include 
such real estate transactions.
Greenfield Acquisition
Q.3. In Nevada, we are 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 startups?

A.3. Foreign investment in ``greenfield projects,'' in which a 
foreign entity creates a totally new business in the United 
States from the ground up, generally represents a positive 
contribution to the U.S. economy, creating new jobs and 
boosting economic growth. To the extent that such new 
businesses are located in proximity to military installations 
or other sensitive facilities, expansion of CFIUS to cover pure 
real estate transactions would enable the Committee to address 
this concern.
    In the case of acquisitions or investments that result in 
foreign control of existing U.S. startup companies, CFIUS 
already has authority to review such transactions for national 
security risks, just as it has existing authority to review 
transactions that result in foreign control of any other U.S. 
business.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM SCOTT 
                             KUPOR

Q.1. Your written testimony expresses support for specific 
provisions of the bill and concerns about specific provisions.
    Please discuss the one critical provision of the bill that 
is essential to CFIUS' protection of national security, and the 
one provision that you feel most needs further amendment to 
improve the bill.

A.1. I support modernizing CFIUS to ensure it is reviewing 
appropriate transactions that safeguard our national security. 
However, the area of the Foreign Investment Risk Review 
Modernization Act (FIRRMA) most in need of improvement is 
clarity that a U.S. venture capital fund with foreign limited 
partners (i.e., those that invest into a fund, or ``LPs'') is 
not implicated. As my testimony details, FIRRMA is currently 
ambiguous as to whether a U.S. fund or its LPs must file with 
CFIUS if the fund might invest in critical technologies. FIRRMA 
should be changed to reflect that neither a U.S. fund nor its 
foreign LPs need to file with CFIUS when those LPs are passive 
investors. This means either clarifying that venture funds are 
outside the scope of the bill entirely, or affirmatively 
stating that foreign LPs must meet the passive investment test 
in FIRRMA. If the latter, the passive investment test must be 
broadened to reflect true passivity. For example, FIRRMA 
considers an investment to be nonpassive if the investor has 
access to ``any nonpublic technical information in the 
possession of the United States business'' or ``any 
nontechnical information in the possession of the United States 
business that is not available to all investors.'' These 
requirements are too narrow and do not reflect the reality of 
the marketplace where all shareholders are not subject to the 
same
information at all times. Very early investors--such as angel
investors--may receive less detailed information about a 
company than other investors, but that is harmless in the vast 
majority of cases.

Q.2.a. Much of the concern surrounding this reform effort is 
about China acquiring cutting edge technology by stealing, 
reverse engineering, or investing in companies that develop the 
technology.
    Is there a way for emergent ``critical'' technologies to be 
appropriately defined and applied by CFIUS?

A.2.a. It is imperative that ``critical'' technologies be 
specifically defined so the scope of FIRRMA is well understood 
in the marketplace. Small, high-growth startups are among the 
most innovative companies in the world. Yet the ability of 
startups to navigate the regulatory landscape is limited as 
these companies are resource-constrained. I strongly encourage 
Congress and CFIUS to keep these small companies in mind as 
they define critical technology.
    I believe Congress should set careful parameters on what 
critical technology means; otherwise, there will be a 
temptation by CFIUS to broaden the term out so far as to pull 
in vast areas of our economy. This will have the effect of 
potentially slowing down the innovation economy but also taking 
CFIUS's eye off the areas of technology that could truly impact 
our national security. To highlight an example, artificial 
intelligence and machine learning technologies will likely find 
their way into nearly all companies over the next 5-10 years. 
We suspect they may be as ubiquitous as core infrastructure 
elements--such as a database--are today. Thus to legislate at 
that level of definition will not only curb the development of 
these critical technologies in the United States, but will also 
overwhelm the review cycle for CFIUS. Therefore, to the extent 
Congress seeks to define ``critical'' technologies, it should 
do so not only by limiting broad references to foundational 
technologies, but also by defining the key use cases for which 
the application of that technology could raise national defense 
or other core security issues.

Q.2.b. Given the claim that China is acquiring the technology 
through various means, is reforming solely CFIUS statute and 
regulations the best way to solve the problem?

A.2.b. Reforming CFIUS is not the sole way to combat technology 
theft and transfer. The Federal Government can combat 
technology theft by working closely with the startup, 
technology, and investor community to identify best practices 
and communication channels so industries and Government can 
work together on problem areas. More should be done by law 
enforcement to train the venture industry and startups on how 
to combat technology theft and how to garner the attention of 
law enforcement agencies. Ultimately, if foreign sovereign 
governments want to steal technology, they are much more likely 
to do so through formal espionage and theft efforts versus 
through investing in startup companies. In addition, law 
enforcement should educate startups on ways to deal with 
investors that may seek to transfer technology overseas. 
Finally, the Federal Government should make available more 
nondilutive capital for startups, whether through the Defense 
Advanced Research Projects Agency (DARPA), Advanced Research 
Projects Agency--Energy (ARPA-E), the Small Business Innovation 
Research (SBIR) program, or other initiatives. Our industry 
would be glad to partner with all appropriate Federal agencies 
on these ideas.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM SCOTT 
                             KUPOR

Q.1. The legislation introduced by Senators Cornyn and 
Feinstein would add five new types of covered transactions to 
CFIUS' purview and it would expand the definition of ``critical 
technologies.''
Q.1.a. Can you comment on whether CFIUS and its member agencies 
currently have sufficient resources to monitor foreign 
investment and acquisitions, review filed transactions, and 
conduct thorough reviews and investigations in the required 
time periods?

A.1.a. I am concerned about the workflow the Foreign Investment 
Risk Review Modernization Act (FIRRMA) would place on CFIUS if 
the covered transaction section is not changed to reflect the 
concerns I raised in my testimony. Specifically, as drafted 
FIRRMA is unclear on whether a U.S. venture fund with foreign 
limited partners (i.e., those that invest into a fund, or 
``LPs'') must file with CFIUS, or whether those foreign LPs 
must file before investing in a fund. LPs do not have access to 
sensitive information that is the concern of FIRRMA, nor do 
they have any say in the investment decisions of venture funds. 
Therefore, FIRRMA should specifically indicate that U.S. 
venture funds and passive LPs are not covered by the 
legislation. If this ambiguity is not cleared up venture funds 
and foreign LPs will very likely file on a precautionary basis 
with CFIUS because they fear the consequences of not filing 
when the agency believes a filing was in order. An 
overabundance of precautionary filings by venture funds and LPs 
will not improve our national security, and in fact will 
diminish the benefit of FIRRMA, as CFIUS will be consumed with 
filings that were never a national security threat in the first 
place.

Q.1.b. In your opinion, should any expansion of authority also 
include new resources, funding, and staffing for the panel?

A.1.b. Yes, I believe if CFIUS's mandate is expanded 
considerably the agency must receive additional resources to 
ensure it has the ability to be appropriately responsive to the 
business community. At the same time, I believe Congress should 
require that CFIUS abide by statutory time lines so the 
business community understands at the outset when it will 
receive a decision.

Q.2. Last year, Ness Technologies, a New Jersey-based software 
engineering 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 by 
Ness Technologies last month, that deal fell apart because HNA 
provided ``knowingly false, inconsistent, and misleading 
information'' about its ownership and ties to the Chinese 
government during CFIUS' review of the acquisition. HNA's 
interests in the United States are certainly not limited to 
Ness Technologies--they've received CFIUS approval to purchase 
a California technology distributor and they are actively 
working to purchase a controlling stake in SkyBridge Capital, 
the investment firm owned by Anthony Scaramucci. This case 
raises important questions about the consequences of failing to 
provide accurate information or knowingly providing false 
information to CFIUS.

   LWhat steps should CFIUS take, if any, with regard 
        to other transactions, either previously approved or 
        pending approval, involving a party if CFIUS determines 
        that party has misled the panel. For example, should 
        the panel reopen previously cleared HNA transactions or 
        modify their approach to reviewing pending transactions 
        in light of this information?

   LWhat should be the consequences of a party 
        misleading or failing to provide accurate information 
        to CFIUS?

A.2. I appreciate the question, but I am not an expert on 
CFIUS's current practices or any of its cases. However, I do 
believe that candor before Government agencies is of the utmost 
importance.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM SCOTT 
                             KUPOR

Q.1. One of the strengths of the United States is our ability 
to foster innovation and develop new technologies.
    Would the filing times and additional fees associated with 
CFIUS jurisdiction significantly inhibit venture capital 
investments and hurt entrepreneurship by creating excessive 
barriers, such as prolonged wait times, to foreign investment?

A.1. My testimony raised serious concerns about the impact of 
the Foreign Investment Risk Review Modernization Act (FIRRMA) 
on U.S. startups and venture capital funds. Presently, FIRRMA 
is ambiguous as to whether a U.S. venture fund with foreign 
limited partners (i.e., those that invest into a fund, or 
``LPs'') must file with CFIUS if it might invest in critical 
technology, or whether the foreign LPs themselves must file 
with CFIUS. This is despite the fact that LPs are truly passive 
investors that have no access to sensitive information and no 
say in investment decisions. If FIRRMA is not clarified to 
remove U.S. venture funds and their LPs from the scope of the 
bill, I fear that it will have a lasting impact on foreign 
investment into venture funds. If foreign LPs must file with 
CFIUS when they invest in a venture fund--incurring wait times 
and additional cost in the process--that would be a substantial 
disincentive to investing in U.S. venture funds. As CFIUS 
reform proceeds, we must keep in mind that global investors 
have many choices these days. U.S. startups have seen their 
share of global venture investment drop from 90 percent 20 
years ago, to 81 percent 10 years ago, to 53 percent last year. 
This means if we make it more burdensome to invest in U.S. 
startups via U.S. venture funds then we will continue to see a 
steady decline in our global share, which will further harm our 
competitiveness.

Q.2. Would significantly expanding CFIUS's jurisdiction 
negatively affect our investment relationship with Europe and 
other traditional economic and military allies, who could get 
caught up in an expansion of CFIUS's scope of review?

A.2. FIRRMA provides that CFIUS may exempt certain counties if 
the United States has in place a mutual defense treaty with 
that country and meets other factors. In my testimony, I 
expressed support for broadening that authority out to a wider 
group of U.S. strategic partners. I am concerned that if 
exemptions are too narrow that FIRRMA will both burden key U.S. 
allies and inundate CFIUS with filings from countries that are 
not engaged in the type of activity with which FIRRMA is 
concerned. I encourage Congress to look at ways to ease burdens 
imposed on important U.S. allies during the CFIUS process.

Q.3. Do you have a sense of how many increased CFIUS filings a 
bill like the Foreign Investment Risk Review Modernization Act 
could result in? Would CFIUS be able to handle the surge in 
reviews likely to result from a bill like FIRRMA? How much 
would it need to expand to handle such a caseload?

A.3. A major factor impacting the increase of filings will be 
whether FIRRMA is improved to clarify that U.S. venture funds 
nor their LPs must file with CFIUS when those LPs are passive 
investors in the fund. As my previous answer indicates, unless 
FIRRMA is modified CFIUS will see many precautionary filings 
from U.S. venture funds and their foreign LPs that should not 
be within the scope of the bill. I strongly encourage Congress 
to narrow the scope of FIRRMA in line with my testimony to 
ensure CFIUS stays focused on the transactions that truly 
impact national security. But even if FIRRMA is modified, I 
believe CFIUS will need additional resources to be responsive 
to the considerable uptick in filings due to the bill.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                          SCOTT KUPOR

Gaming and Tourism
Q.1. 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.

Q.1.a. 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?

Q.1.b. How does CFIUS review such transactions, and what is the 
Committee's track record on approving or denying these types of 
deals?

A.1.a.-b. I appreciate the question, but unfortunately I am not 
able to answer specifically as the U.S. venture capital 
industry has had little experience in dealing with gaming-
related applications of CFIUS. The reason for this is our 
industry invests in and partners with startups as they scale 
and grow, whereas CFIUS's jurisdiction is over transactions 
where a foreign person is acquiring an existing U.S. entity. My 
testimony before the Banking Committee pertained to changes the 
Foreign Investment Risk Review Modernization Act (FIRRMA) 
proposes for CFIUS that might affect the venture capital 
industry and startups for the first time. In particular, I am 
concerned that FIRRMA is unclear on whether a U.S. venture fund 
with foreign limited partners (i.e., those that invest into a 
fund, or ``LPs'') must file with CFIUS, or whether those 
foreign LPs must file before investing in a fund. Neither of 
these options are prudent from a public policy perspective and 
both would be incredibly disruptive to venture firms. LPs in 
venture funds have no access to the sensitive information that 
is the concern of FIRRMA and have no role in the investment 
decisions of venture funds. Therefore, foreign LPs pose no 
national security risk to our Nation. But if FIRRMA is not 
clarified then CFIUS will be confronted with an abundance of 
precautionary filings from venture firms and their foreign LPs 
that distract the agency from investments that may pose a 
national security concern. These precautionary filings will be 
costly for venture funds and distract investors from partnering 
with startups to build and scale the company.
CFIUS, Mining and Proximity to Military Installations
Q.2. In the last decade, CFIUS blocked three proposed 
investments in Nevada mining companies, citing national 
security concerns regarding the properties' proximity to Fallon 
Naval Air Station.
    How does CFIUS traditionally review such acquisitions as it 
relates to their location relative to military installations? 
Is that process working effectively, or are there any areas 
needed for improvement?

A.2. As previously indicated, I am not an expert on CFIUS as it 
currently operates and unfortunately unable to answer this 
question. I would add, however, that focusing CFIUS review on 
investments in close proximity to military or other sensitive 
Government installations seems to be a much more appropriate 
use of CFIUS time than aiming to review passive investments in 
venture capital funds or venture-backed startups.
Greenfield Acquisition
Q.3. In Nevada, we are 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 startups?

A.3. Nevada is home to a burgeoning startup ecosystem. From 
2013-2017, 190 Nevada startups raised $640 million in venture 
funding. FIRRMA has the potential to significantly impact 
startups in Nevada and across the United States. One way 
startups can be affected is if FIRRMA enables CFIUS to 
unnecessarily scrutinize U.S. venture capital funds, which 
partners with many high-growth startups in Nevada. As my 
written testimony detailed, FIRRMA is ambiguous as to whether a 
U.S. venture fund with foreign LPs must file with CFIUS. U.S. 
venture funds have increasingly
attracted foreign LPs, which benefits our country because that 
capital is then invested in U.S. startups. Scrutinizing the LPs 
of a venture fund is not a good use of CFIUS's time, as these 
LPs do not have access to sensitive information that is the 
concern of FIRRMA and have no say in investment decisions of 
the fund. Our national security would be far better served by 
focusing on direct investments into U.S. companies where there 
might be an opportunity for a foreign person to extract 
sensitive information from a company.
    Unless FIRRMA is clarified to remove venture funds from the 
ambit of the bill, foreign LPs will have a significant 
disincentive to invest capital in the United States via venture 
funds. This will in turn harm U.S. startups that need that 
capital to grow and prosper. Furthermore, the risk capital will 
simply flow to other non-U.S. startups, compromising not only 
job growth in the United States, but also making it more likely 
that long-term hubs of innovation will prosper in markets 
outside of the United States.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM GARY 
                         CLYDE HUFBAUER

Q.1. Your written testimony expresses support for specific 
provisions of the bill and concerns about specific provisions.
    Please discuss the one critical provision of the bill that 
is essential to CFIUS' protection of national security, and the 
one provision that you feel most needs further amendment to 
improve the bill.

A.1. The core is the protection of ``critical technologies''. 
The legislation should draw on America's best brains--
identified by the National Academy of Sciences and the National 
Academy of Engineering, with assistance from the National 
Security Agency and the Central Intelligence Agency--to define 
``critical technologies'' for national security purposes. The 
definitions should be updated at least annually.

Q.2. Much of the concern surrounding this reform effort is 
about China acquiring cutting edge technology by stealing, 
reverse engineering, or investing in companies that develop the 
technology.

Q.2.a. Is there a way for emergent ``critical'' technologies to 
be appropriately defined and applied by CFIUS?

A.2.a. The best that can be done for appropriate definition is 
to rely on the agencies named in my first answer. This should 
be a central mission of a standing committee of these agencies, 
with rotating members to obtain expertise on different 
technologies.

Q.2.b. Given the claim that China is acquiring the technology 
through various means, is reforming solely CFIUS statute and 
regulations the best way to solve the problem?

A.2.b. If the CFIUS mandate is enlarged by the pending 
legislation, it should be closely coordinated with the Export 
Administration authority. Ideally, the two committees/agencies 
would be merged, but that may be a step too far. In addition, 
the CIA's resources and budgets should be expanded to keep 
abreast with Chinese technology through covert means. It would 
be worthwhile to ask the GAO for a report on ways to improve 
civil and criminal prosecution of espionage cases. Over the 
long term, the only way the United States will maintain 
technological superiority is through stepped up public and 
private investment in R&D.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM GARY 
                         CLYDE HUFBAUER

Q.1. The legislation introduced by Senators Cornyn and 
Feinstein would add five new types of covered transactions to 
CFIUS' purview and it would expand the definition of ``critical 
technologies.''

   LCan you comment on whether CFIUS and its member 
        agencies currently have sufficient resources to monitor 
        foreign investment and acquisitions, review filed 
        transactions, and conduct thorough reviews and 
        investigations in the required time periods?

   LIn your opinion, should any expansion of authority 
        also include new resources, funding, and staffing for 
        the panel?

A.1. In my view, CFIUS resources are hopelessly inadequate for 
the mandate envisaged by this legislation. Moreover, adequate 
funds must be provided for the NAS, the NAE, and the 
intelligence agencies. Unless the Congress is prepared to 
provide an annual budget in the range of $100 million, the new 
CFIUS cannot possibly discharge the broader mandate.

Q.2. Last year, Ness Technologies, a New Jersey-based software 
engineering 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 by 
Ness Technologies last month, that deal fell apart because HNA 
provided ``knowingly false, inconsistent, and misleading 
information'' about its ownership and ties to the Chinese 
government during CFIUS' review of the acquisition. HNA's 
interests in the United States are certainly not limited to 
Ness Technologies--they've received CFIUS approval to purchase 
a California technology distributor and they are actively 
working to purchase a controlling stake in SkyBridge Capital, 
the investment firm owned by Anthony Scaramucci. This case 
raises important questions about the consequences of failing to 
provide accurate information or knowingly providing false 
information to CFIUS.

   LWhat steps should CFIUS take, if any, with regard 
        to other transactions, either previously approved or 
        pending approval, involving a party if CFIUS determines 
        that party has misled the panel? For example, should 
        the panel reopen previously cleared HNA transactions or 
        modify their approach to reviewing pending transactions 
        in light of this information?

   LWhat should be the consequences of a party 
        misleading or failing to provide accurate information 
        to CFIUS?

A.2. When an acquiring company provides ``knowingly false'' 
information, it should be disqualified from any new U.S. 
acquisition for an extended period, say 5 years, and it should 
be fined quite heavily. But I would not require the company to 
divest past acquisitions not involving critical technology.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM GARY 
                         CLYDE HUFBAUER

Q.1. 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?
    What would be the potential consequences of doing so from a 
trade perspective? Should we expect retaliation? What forms 
could that retaliation take?

A.1. Yes, this would be regarded as a discriminatory measure, 
but GATT Article XXI permits discrimination for national 
security reasons. The target country would not have an 
actionable complaint in the WTO. But retaliation can certainly 
be expected, mainly in the form of denied acquisitions by U.S. 
firms. China and Russia already ``wall off'' vast sectors of 
their economies (mainly high-tech) from foreign acquisition, so 
I suspect that the retaliation would involve other sectors, 
such as finance, food, education, or health.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                      GARY CLYDE HUFBAUER

Gaming and Tourism
Q.1. 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.

   LGiven 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?

   LHow does CFIUS review such transactions, and what 
        is the Committee's track record on approving or denying 
        these types of deals?

A.1. In my opinion, the acquisition of U.S. hotel and tourism 
companies by foreign firms, including firms based in adversary 
nations exemplified by China and Russia, is not a national 
security concern. While I am not privy to the CFIUS track 
record on such M&A transactions, I am unaware of any 
transaction that was blocked.
CFIUS, Mining and Proximity to Military Installations
Q.2. In the last decade, CFIUS blocked three proposed 
investments in Nevada mining companies, citing national 
security concerns regarding the properties' proximity to Fallon 
Naval Air Station.
    How does CFIUS traditionally review such acquisitions as it 
relates to their location relative to military installations? 
Is that process working effectively, or are there any areas 
needed for improvement?

A.2. As a rock-hunter in the Fallon area, I know it well. So 
far as I know, the Pentagon alerts the CFIUS committee when an 
acquisition is proposed near a military installation. If the 
Pentagon objects to the acquisition, because of surveillance 
concerns, I believe the acquisition is routinely denied.
Greenfield Acquisition
Q.3. In Nevada, we are 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 startups?

A.3. In my view, greenfield projects create much less concern 
than M&A projects involving the same technology. However, there 
can be a legitimate worry that the greenfield will hire 
American personnel with technology expertise. In cases 
involving critical technology (as identified in my answer to 
Senator Crapo) it would be appropriate for CFIUS to monitor the 
personnel employed for a reasonable period (say 5 years). In 
appropriate cases, surveillance can be authorized by a FISA 
warrant. In exceptional cases, the foreign firm may be required 
to divest.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM JAMES 
                            MULVENON

Q.1. Your written testimony expresses support for specific 
provisions of the bill and concerns about specific provisions.
    Please discuss the one critical provision of the bill that 
is essential to CFIUS' protection of national security, and the 
one provision that you feel most needs further amendment to 
improve the bill.

A.1. Did not respond by publication deadline.

Q.2. Much of the concern surrounding this reform effort is 
about China acquiring cutting edge technology by stealing, 
reverse engineering, or investing in companies that develop the 
technology.

   LIs there a way for emergent ``critical'' 
        technologies to be appropriately defined and applied by 
        CFIUS?

   LGiven the claim that China is acquiring the 
        technology through various means, is reforming solely 
        CFIUS statute and regulations the best way to solve the 
        problem?

A.2. Did not respond by publication deadline.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JAMES 
                            MULVENON

Q.1. The legislation introduced by Senators Cornyn and 
Feinstein would add five new types of covered transactions to 
CFIUS' purview and it would expand the definition of ``critical 
technologies.''

   LCan you comment on whether CFIUS and its member 
        agencies currently have sufficient resources to monitor 
        foreign investment and acquisitions, review filed 
        transactions, and conduct thorough reviews and 
        investigations in the required time periods?

   LIn your opinion, should any expansion of authority 
        also include new resources, funding, and staffing for 
        the panel?

A.1. Did not respond by publication deadline.

Q.2. Last year, Ness Technologies, a New Jersey-based software 
engineering 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 by 
Ness Technologies last month, that deal fell apart because HNA 
provided ``knowingly false, inconsistent, and misleading 
information'' about its ownership and ties to the Chinese 
government during CFIUS' review of the acquisition. HNA's 
interests in the United States are certainly not limited to 
Ness Technologies--they've received CFIUS approval to purchase 
a California technology distributor and they are actively 
working to purchase a controlling stake in SkyBridge Capital, 
the investment firm owned by Anthony Scaramucci. This case 
raises important questions about the consequences of failing to 
provide accurate information or knowingly providing false 
information to CFIUS.

   LWhat steps should CFIUS take, if any, with regard 
        to other transactions, either previously approved or 
        pending approval, involving a party if CFIUS determines 
        that party has misled the panel. For example, should 
        the panel reopen previously cleared HNA transactions or 
        modify their approach to reviewing pending transactions 
        in light of this information?

   LWhat should be the consequences of a party 
        misleading or failing to provide accurate information 
        to CFIUS?

A.2. Did not respond by publication deadline.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JAMES 
                            MULVENON

Q.1. Can you describe how China legally obtains sensitive U.S. 
technologies through private companies and through joint 
ventures?

A.1. Did not respond by publication deadline.

Q.2. Many of the technologies that China, Russia, and others 
are seeking to obtain are at a very early stage, frequently 
before we know whether there is a military use for them. Many, 
such as artificial intelligence (AI) and robotics also have far 
ranging applications that extend well beyond military usage.
    How can we encourage investment in these early stage 
technologies--which is so critical to our U.S. economic 
dynamism--without giving access to competitor nations and 
weakening our economic advantage?

A.2. Did not respond by publication deadline.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                         JAMES MULVENON

Gaming and Tourism
Q.1. 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.

   LGiven 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?

   LHow does CFIUS review such transactions, and what 
        is the Committee's track record on approving or denying 
        these types of deals?

A.1. Did not respond by publication deadline.
CFIUS, Mining and Proximity to Military Installations
Q.2. In the last decade, CFIUS blocked three proposed 
investments in Nevada mining companies, citing national 
security concerns regarding the properties' proximity to Fallon 
Naval Air Station.
    How does CFIUS traditionally review such acquisitions as it 
relates to their location relative to military installations? 
Is that process working effectively, or are there any areas 
needed for improvement?

A.2. Did not respond by publication deadline.
Greenfield Acquisition
Q.3. In Nevada, we are 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 startups?

A.3. Did not respond by publication deadline.


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