Defense Trade: Enhancements to the Implementation of Exon-Florio
Could Strengthen the Law's Effectiveness (28-SEP-05, GAO-05-686).
The 1988 Exon-Florio amendment to the Defense Production Act
authorizes the President to suspend or prohibit foreign
acquisitions of U.S. companies that may harm national security,
an action the President has taken only once. Implementing
Exon-Florio can pose a significant challenge because of the need
to weigh security concerns against U.S. open investment
policy--which requires equal treatment of foreign and domestic
investors. Exon-Florio's investigative authority was delegated to
the Committee on Foreign Investment in the United States--an
interagency committee established in 1975 to monitor U.S. policy
on foreign investments. In September 2002, GAO reported on the
implementation of Exon-Florio. This report further examines that
implementation.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-686
ACCNO: A38537
TITLE: Defense Trade: Enhancements to the Implementation of
Exon-Florio Could Strengthen the Law's Effectiveness
DATE: 09/28/2005
SUBJECT: Congressional oversight
Corporate mergers
Defense industry
Federal law
Foreign corporations
Foreign investments in US
Foreign policies
Homeland security
International economic relations
National policies
Transparency
Government and business
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GAO-05-686
United States Government Accountability Office
GAO
Report to Congressional Requesters
September 2005
DEFENSE TRADE
Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's
Effectiveness
GAO-05-686
[IMG]
September 2005
DEFENSE TRADE
Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's
Effectiveness
What GAO Found
Foreign acquisitions of U.S. companies can pose a significant challenge
for the U. S. government in implementing the Exon-Florio amendment because
while foreign investment can provide substantial economic benefits, these
benefits must be weighed against the potential for harm to national
security. Exon-Florio's effectiveness in protecting U.S. national security
may be limited because the Department of the Treasury-as Chair of the
Committee on Foreign Investment in the United States-and others narrowly
defines what constitutes a threat to national security and, along with
some other member agencies, is reluctant to initiate investigations to
determine whether national security concerns require a recommendation for
possible presidential action. Some Committee members have argued that this
narrow definition is not sufficiently flexible to protect critical
infrastructure, secure defense supply, and preserve technological
superiority in the defense arena. The Committee's reluctance to initiate
an investigation-due in part to concerns about potential negative effects
on the U.S. open investment policy-limits the time available for member
agencies to analyze national security concerns. To provide additional
time, while avoiding an investigation, the Committee has encouraged
companies to withdraw their notification of a pending or completed
acquisition and to refile at a later date. However, for companies that
have completed the acquisition, there is a substantially longer time
before they refile to complete the Committee's process; in some cases they
never do, leaving unresolved any outstanding concerns.
In our 2002 report, GAO recommended improvements in provisions to assist
agencies in monitoring actions companies have agreed to take to address
national security concerns. The Committee has improved provisions on
monitoring compliance, and the Department of Homeland Security is actively
involved in monitoring company actions.
Agencies Represented on the Committee on Foreign Investment in the United
States
Executive Executive Departments Office of the President
Department of the Treasury (chair) Council of Economic Advisers
Department of Commerce National Economic Council
Department of Defense National Security Council
Department of Homeland Security Office of Management and Budget
Department of Justice Office of Science and Technology Policy
Department of State Office of the U. S. Trade Representative
Source: Executive Order 11858, as amended.
United States Government Accountability Office
Contents
Letter
Results in Brief
Background
The Committee's Implementation of Exon-Florio May Limit Its
Effectiveness Provisions for Monitoring Compliance Have Improved
Conclusions Matters for Congressional Consideration Agency Comments and
Our Evaluation Scope and Methodology
1
3 5
11 18 20 21 21 24
Appendix I Comments from the Department of Treasury
Appendix II Comments from the Department of Justice
Appendix III GAO Contacts and Staff Acknowledgments
Related GAO Products
Tables
Table 1: Agencies Represented on the Committee on Foreign Investment in
the United States 6 Table 2: Notifications to the Committee on Foreign
Investment in the United States and Actions Taken, 1997 through 2004 14
Table 3: Investigations and Outcomes, 1997 through 2004 18
Figures
Figure 1: The Committee on Foreign Investment in the United States'
Process for Implementing the Exon-Florio Amendment 8
Figure 2: Number of Days between Withdrawal and Refiling in 19 Withdrawn
Notifications 16
Abbreviations
DOD Department of Defense
GAO Government Accountability Office
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.
United States Government Accountability Office Washington, DC 20548
September 28, 2005
The Honorable Richard Shelby
Chairman
The Honorable Paul S. Sarbanes
Ranking Minority Member
Committee on Banking, Housing,
and Urban Affairs
United States Senate
The Honorable Evan Bayh
United States Senate
Foreign acquisitions of U.S. companies can pose a significant challenge
for
the U.S. government because of the need to balance the U.S. open
investment policy against the potential that an acquisition may harm
national security. Under the U.S. open investment policy, foreign
investors
are to be treated no differently than domestic investors. In 1988,
Congress
passed the Exon-Florio amendment1 to the Defense Production Act, which
authorizes the President to suspend or prohibit foreign acquisitions,
mergers, or takeovers2 of U.S. companies if a foreign controlling interest
might take action that threatens national security. Exon-Florio is meant
to
serve as a safety net to be used when laws other than Exon-Florio and the
International Emergency Economic Powers Act3 may not be effective in
protecting national security.
The President delegated the investigative authority of Exon-Florio to the
Committee on Foreign Investment in the United States (Committee)-an
interagency committee established in 1975 to monitor and coordinate U.S.
policy on foreign investment in the United States. The Committee is
chaired by the Secretary of the Treasury. To provide the broadest latitude
1 50 U.S.C. app. S: 2170.
2 In the remainder of this report, acquisitions, mergers, and takeovers
are referred to as acquisitions.
3 The International Emergency Economic Powers Act gives the President
broad powers to deal with any "unusual and extraordinary threat" to the
national security, foreign policy, or economy of the United States (50
U.S.C. S:S: 1701-1706). To exercise this authority, however, the President
must declare a national emergency to deal with any such threat. Under this
legislation, the President has the authority to investigate, regulate,
and, if necessary, block any foreign interest's acquisition of U.S.
companies (50 U.S.C. S: 1702(a) (1) (B)).
for determining whether an acquisition presents a national security
threat, neither the statute nor the implementing regulation defines
"national security."
Exon-Florio establishes a four-step process for examining a foreign
acquisition of a U.S. company: (1) voluntary notice by the companies, (2)
a 30-day review to identify whether there are any national security
concerns, (3) a 45-day investigation to determine whether those concerns
require a recommendation to the President for possible action, and (4) a
presidential decision to permit, suspend, or prohibit the acquisition. The
law requires that the Committee report to Congress on the circumstances
surrounding any acquisition that results in a presidential decision. This
requirement was added in 1992 to provide Congress insight into the
process.
In September 2002,4 we reported on several weaknesses in the process used
by the Committee as well as in the agreements negotiated with companies
under Exon-Florio to mitigate identified national security concerns. You
asked us to further examine the Committee's implementation of Exon-Florio.
We also determined whether the Committee had implemented the
recommendations from our 2002 report.
To understand the Committee's process for reviewing foreign acquisitions
of U.S. companies, we met with officials from the Department of Commerce,
the Department of Defense, the Department of Homeland Security, the
Department of Justice, and the Department of the Treasury-the agencies
that are most active in the review of acquisitions- and discussed their
involvement in the process. Further, we conducted case studies of nine
acquisitions that were filed with the Committee between June 28, 1995, and
December 31, 2004. We selected acquisitions based on recommendations by
Committee member agencies and the following criteria: (1) the Committee
permitted the companies to withdraw the notification; (2) the Committee or
member agencies concluded agreements to mitigate national security
concerns; (3) the foreign company had been involved in a prior acquisition
notified to the Committee; or (4) GAO had reviewed the acquisition for its
2002 report. We did not attempt to validate the conclusions reached by the
Committee on any of the cases we reviewed. To determine whether the
weaknesses in
4 GAO, Defense Trade: Mitigating National Security Concerns under
Exon-Florio Could be Improved. GAO-02-736 (Washington, D.C.: Sept. 12,
2002).
Results in Brief
provisions to assist agencies in monitoring agreements that GAO had
identified in its 2002 report had been addressed, we analyzed agreements
concluded under the Committee's authority between 2003 and 2005. We
conducted our review from April 2004 through July 2005 in accordance with
generally accepted government auditing standards.
The manner in which the Committee on Foreign Investment in the United
States implements Exon-Florio may limit its effectiveness. For example,
Treasury, in its role as Chair, and some others narrowly define what
constitutes a threat to national security-that is, they have limited the
definition to export-controlled technologies or items and classified
contracts, or specific derogatory intelligence on the foreign company.
Other members have argued that this definition is not sufficiently
flexible to provide for safeguards in areas such as protection of critical
infrastructure, security of defense supply, and preservation of
technological superiority in the defense arena. In one case, some member
agencies would not agree with the Departments of Defense's and Homeland
Security's using the authority of Exon-Florio and the Committee as a basis
for an agreement that Defense officials believed necessary to mitigate
national security concerns because the concerns did not, in the opinions
of these Committee members, fit this narrow definition.
In addition, the Committee is reluctant to initiate investigations because
of a perception that they would discourage foreign investment-a potential
conflict with U.S. open investment policy. Treasury, in its capacity as
Chair, applies a strict standard in determining whether an acquisition
should be investigated. The Chair has established as the criteria for
initiating an investigation essentially the same criteria that the law
provides as the basis for the President to suspend or prohibit the
transaction or order divestiture. Those criteria are: the likelihood that
(1) there is credible evidence that the foreign controlling interest may
take action to threaten national security and (2) no other laws are
appropriate or adequate to protect national security. Defense and other
agencies have argued that since the statute applies these criteria to
presidential decisions, these criteria should not be the standard for
initiating an investigation. Defense officials and others have stated that
the 45 days of the investigation should be used to analyze the acquisition
to determine whether those criteria are met. In addition, the Committee's
guidance requires member agencies to determine the likelihood of meeting
the standard by the 23rd day of the 30-day review. Several officials
commented that, in complex cases, it is difficult to complete analyses to
meet that
standard within 23 days. To avoid the negative connotation associated with
initiating an investigation, the Committee encourages companies to
withdraw their notification to provide additional time, rather than
proceed to the investigation phase. When companies withdraw their
notifications and refile at a later date, the 30-day review period is
restarted. If there are concerns, allowing a withdrawal can heighten
risks, particularly when a company has completed the acquisition before
notifying the Committee. For example, one company had completed an
acquisition over one year before filing with the Committee, but was
allowed to withdraw its notification. Four years later the company has yet
to refile, despite concerns raised by some agencies about the acquisition.
Further, the use of withdrawals contributes to the opaque nature of the
process because very few cases reach a presidential decision, only two
between 1997 and 2004, and thus very few transactions are subject to the
required reporting to Congress.
In our 2002 report, we recommended improvements in provisions to assist
agencies in monitoring actions companies had agreed to take to mitigate or
address concerns. The Committee has improved provisions on monitoring
company compliance with mitigation agreements, and the Department of
Homeland Security is actively involved in monitoring agreements to which
it is a party. In analyzing two recent agreements, we identified
provisions that addressed our prior concerns. For example, both agreements
clearly identified the offices within the Departments of Homeland Security
and Justice to which the companies should report.
This report contains matters for congressional consideration to help
resolve the disagreements as to the extent of coverage of Exon-Florio and
to require interim protections where specific concerns have been raised,
specific time frames for refiling, and a process for tracking any actions
being taken during a withdrawal period in cases where the transaction has
been completed.
The Department of the Treasury, as Committee Chair, provided comments on a
draft of this report on behalf of all Committee members. However, the
Department of Justice provided comments in a separate letter. Overall,
Treasury disagreed with our characterization of the Committee's process in
that the Chair believes issues are fully vetted and consensus has always
been reached. During the course of our review, certain member agencies
raised concerns about the Committee's process that indicated differing
views among Committee members when reviewing certain cases. These
differing views concerned what constitutes a threat to national security,
the sufficiency of the time allowed for reviews, and the appropriate
criteria for initiating an investigation.
o In one case we reviewed where member agencies disagreed over what
should be deemed a national security concern, the narrower definition-one
that excludes national security concerns raised by certain member
agencies-prevailed, in that the notice was withdrawn instead of the case
proceeding to investigation.
o In complex cases in which national security concerns have been raised
and for which Exon-Florio is the relevant statute, case documentation we
reviewed revealed the significant pressures some agencies face to complete
analysis within 23 days.
o Policy-level officials from two member agencies have indicated that
the debate over the criteria for initiating an investigation remains
unresolved.
The Department of Justice's comments were generally technical and we have
incorporated them as appropriate. However, Justice did share the concern
expressed in our report with respect to the time constraints imposed by
the current process, particularly its effect on gathering and using input
from the intelligence community. Justice commented that any "extension of
the time available...would be helpful."
Background In 1988, the Congress enacted the Exon-Florio amendment to the
Defense Production Act, which authorized the President to investigate the
impact of foreign acquisitions of U.S. companies on national security and
to suspend or prohibit acquisitions that might threaten national security.
The President delegated this investigative authority to the Committee on
Foreign Investment in the United States. The Committee is an interagency
group that was established by executive order in 1975 to monitor the
impact of and coordinate U.S. policy on foreign investment in the United
States.5 The Committee is chaired by the Secretary of the Treasury, and
its membership includes representatives from executive branch departments
and the Executive Office of the President (see table 1). The President
added the Department of Homeland Security to the Committee in 2003,
5 Executive Order 11858 (May 7, 1975), as amended by Executive Order 12188
(Jan. 2, 1980), Executive Order 12661 (Dec. 27, 1988), Executive Order
12860 (Sept. 3, 1993), and Executive Order 13286 (Feb. 28, 2003).
reflecting an increased focus on domestic security in the aftermath of the
September 11, 2001, terror attacks and subsequent global war on terror.
Table 1: Agencies Represented on the Committee on Foreign Investment in the
United States
Agencies represented Year added Lead office mission
Executive Departments
Department of the Treasury 1975 Office of International Investment:
(Chair) Coordinates policies toward foreign
investments in the United States and U.S.
investments abroad.
1975 International Trade Administration:
Department of Commerce Coordinates issues concerning trade
promotion, international commercial
policy, market access, and trade law
enforcement.
Defense Technology Security
1975 Administration: Administers the
Department of Defense development
and implementation of Defense technology
security policies on international
transfers of defense-related goods,
services, and technologies.
1975 Bureau of Economic and Business Affairs:
Department of State Formulates and implements
policy regarding foreign economic matters,
including trade and international
finance and development.
1988 Criminal Division: Develops, enforces, and
Department of Justice supervises the application of all
federal criminal laws, except for those
assigned to other Justice Department
divisions.
Department of Homeland Security 2003 Information Analysis and
Infrastructure Protection: Identifies and assesses current and future
threats to the homeland, maps those threats against vulnerabilities,
issues warnings, and takes preventative and protective action.
Executive Office of the President
Council of Economic Advisers 1980 Performs analyses and appraisals of the
national economy for the purpose
of providing policy recommendations to
the President.
Office of the United States 1980 Directs all trade negotiations of and
Trade formulates trade policy for the United
Representative States.
Office of Management and 1988 Evaluates, formulates, and coordinates
Budget management procedures and
program objectives within and among
federal departments and agencies,
and controls administration of the
federal budget.
National Economic Council 1993 Coordinates the economic policymaking
process and provides economic
policy advice to the President.
1993 Advises and assists the President in
National Security Council integrating all aspects of national
security policy as it affects the
United States.
Office of Science and 1993 Provides scientific, engineering, and
Technology Policy technological analyses for the
President with respect to federal
policies, plans, and programs.
Source: GAO analysis.
In 1991, the Treasury Department issued regulations to implement
Exon-Florio. As shown in figure 1, Exon-Florio and the regulations
establish a four-step process for reviewing a foreign acquisition of a
U.S. company:
voluntary notice, 30-day review, 45-day investigation, and presidential
decision.
Figure 1: The Committee on Foreign Investment in the United States'
Process for Implementing the Exon-Florio Amendment
Source: GAO analysis based on 50 U.S.C. App. S: 2170 and 31 C.F.R. Part
800 and case file review.
aAt any point prior to a presidential decision, companies can request to
withdraw a notification.
Notifying the Committee of an acquisition is not mandatory. However, any
member agency is authorized to submit a notification of an acquisition if
the companies have not done so. To date, no agency has submitted a
notification of an acquisition. Instead, when a member agency becomes
aware of an acquisition that may be subject to Exon-Florio, the agency
informs Treasury, as Chair, and Committee staff contact the companies to
encourage them to officially notify the Committee of the acquisition to
begin a review. Committee officials noted that companies have an incentive
to notify the Committee prior to completing the acquisition because
Exon-Florio provides the President with the authority to order companies
to divest completed acquisitions found to pose a threat to national
security.
Under Exon-Florio, after receiving notification of a proposed or completed
acquisition, the Committee begins a 30-day review to determine whether the
acquisition could pose a threat to national security.6 The Treasury
Department, as Committee Chair, forwards the notification documentation to
the lead office in each of the member agencies. Lead offices forward the
information to other offices within their agency. For example, the Defense
Technology Security Administration, the lead office for the Department of
Defense, forwards notification to 12 other offices within the department.
These other offices may also forward the notification, as appropriate. In
one case, the point-of-contact in the Office of the Under Secretary of
Defense for Acquisition, Technology, and Logistics, one of the initial 12
offices, forwarded the notification to four other offices within that
organization.
In most instances, the Committee completes its review within the 30 days.
However, if the Committee is unable to complete its review within 30 days,
the Committee may either allow the companies to withdraw the notification
or initiate a 45-day investigation. If the Committee concludes a 45-day
investigation, it is required to submit a report to the President
containing its recommendations. If Committee members cannot agree on a
recommendation, the regulations require that the report to the President
include the differing views of all Committee members.7
Under Exon-Florio, the President has 15 days to decide whether to prohibit
or suspend the proposed acquisition, order divestiture of a completed
acquisition or take no action. The President may take action upon a
determination that (1) there is credible evidence that leads the
6 50 U.S.C. App. S: 2170(a). 7 31 C.F.R. S: 800.504(b).
President to believe that a foreign controlling interest might take action
that threatens to impair national security and (2) laws other than
Exon-Florio and the International Emergency Economic Powers Act are
inadequate or inappropriate to protect national security. Under the
regulations, the President's divestiture authority, however, cannot be
exercised if (1) the Committee has informed the companies in writing that
their acquisition was not subject to Exon-Florio or had previously decided
to forego investigation or (2) the President has previously decided not to
act on that specific acquisition under Exon-Florio.8 The Committee may
reopen its review or investigation and revise its recommendation to the
President if it determines that the companies omitted or provided false or
misleading information.9 In some cases, the companies will decide not to
proceed with the transaction because of concerns that a presidential
decision would be unfavorable. However, the President has ordered
divestiture in only one case. In 1990, the President ordered a Chinese
aerospace company to divest its ownership of a U.S. aircraft parts
manufacturer.
Under the original Exon-Florio law, the President was obligated to report
to the Congress on the circumstances surrounding a presidential decision
only after prohibiting an acquisition. In response to concerns about the
lack of transparency in the Committee's process, in 1992 Congress passed
the Byrd Amendment to Exon-Florio, requiring a report to the Congress if
the President makes any decision regarding a proposed foreign acquisition.
Companies can request to withdraw their notification at any time prior to
the President announcing a decision. A Treasury official told us that the
Committee generally grants withdrawal requests. After the Committee
approves a withdrawal, any prior voluntary notices submitted no longer
remain in effect. Any subsequent refiling by the parties is considered as
a new, voluntary notice to the Committee.
8 31 C.F.R. S: 800.601(d). 9 31 C.F.R. S: 800.601(e).
The Committee's Implementation of Exon-Florio May Limit Its Effectiveness
The manner in which the Committee implements Exon-Florio may limit its
effectiveness because (1) Treasury, in its role as Chair, has narrowly
defined what constitutes a threat to national security and (2) the
Committee is reluctant to initiate a 45-day investigation because of a
perceived negative impact on foreign investment and a conflict with the
U.S. open investment policy. As a result of the narrow definition, some
issues that Defense, Homeland Security, and Justice officials believe have
important national security implications, such as security of supply, may
not be addressed. In addition, the reluctance to initiate the 45-day
investigation compresses the time available to consider issues. This
compressed time frame limits agencies' ability to complete their analysis
of some cases. The Committee encourages companies to request withdrawal of
their notification to provide additional time to resolve issues and to
avoid the need for investigation. However, when companies that have
already completed the acquisition are allowed to withdraw, there is a
substantially longer time before they refile, and in some cases they never
do, leaving unresolved any outstanding concerns.
Threats to National Security Are Narrowly Defined
Under the statute, the President or the President's designee may make an
investigation to determine whether a foreign acquisition might threaten
the national security of the United States. Neither the statute nor its
implementing regulations define national security. This permits a broad
interpretation of the term. The statute does provide factors to be
considered in determining a threat to national security; however,
consideration of these factors is not mandatory. These factors include the
following:
o Domestic production needed for projected national defense
requirements.
o The capability and capacity of domestic industries to meet national
defense requirements, including the availability of human resources,
products, technology, materials, and other supplies and services.
o The control of domestic industries and commercial activity by foreign
citizens as it affects the capability and capacity of the United States to
meet the requirements of national security.
o The potential effects of the proposed or pending transaction on sales
of military goods, equipment, or technology to any country identified
under applicable law as (a) supporting terrorism or (b) a country of
concern for missile proliferation or the proliferation of chemical and
biological weapons.
o The potential effects of the proposed or pending transaction on U.S.
international technological leadership in areas affecting national
security.
Despite the broad coverage of the factors under the statute, Treasury and
some other Committee member agencies have continued to view threats to
national security in the traditional and more narrowly defined sense. That
is, they based their definition on a U.S. company's possession of
exportcontrolled technologies or items, classified contracts, and critical
technology; or specific derogatory intelligence on the foreign company.
The Departments of Justice and Defense have applied a broader view of what
might constitute a threat to national security. And since being added to
the Committee, the Department of Homeland Security has begun to analyze
acquisitions both in traditional terms and more broadly in terms of the
potential vulnerabilities posed by the acquisition. According to Justice,
Homeland Security, and Defense officials, vulnerabilities can result from
foreign control of critical infrastructure, such as control of or access
to information traveling on networks. Vulnerabilities can also result from
foreign control of critical inputs to defense systems or a decrease in the
number of innovative small businesses conducting research on developing
defense-related technologies. While these vulnerabilities may not pose an
immediate threat to national security, they may create the potential for
longer-term harm to U.S. national security interests by reducing U.S.
technological leadership in defense systems.
The agencies that favor applying the narrower, more traditional definition
of what constitutes a threat to national security have resisted using
Exon-Florio to mitigate the concerns being raised by the Department of
Defense and others. For example, in reviewing a 2001 acquisition involving
a U.S. company that produced precision optics and semiconductor
manufacturing equipment, Defense and Commerce raised concerns about (a)
foreign ownership of sensitive but unclassified technology used in
reconnaissance satellites, (b) the possibility of this sensitive
technology being transferred to countries of concern, and (c) maintaining
U.S. government access to the technology. Treasury officials said that the
concerns raised by Defense and Commerce were not national security
concerns because they did not involve classified contracts, the foreign
company's country of origin was a U.S. ally, and there was no specific
negative intelligence about the company's actions in the United States.
During a more recent review, disagreement over the scope of Exon-Florio
resulted in a weakening of the enforcement provisions in an agreement. The
Defense Department had raised concerns about the security of its supply of
specialized integrated circuits as a result of a proposed acquisition.
These unique integrated circuits are used in a variety of defense
technologies, such as unmanned aerial vehicles, the Joint Tactical Radio
System, and communications protection devices including devices used for
cryptography. A Defense Science Board task force recently noted that the
functions performed by Defense-unique integrated circuits are essential to
the national defense of the United States. However, in Treasury's view,
the Department of Defense's concerns about its supply of integrated
circuits were industrial policy concerns, not national security concerns,
despite the importance of these circuits to a variety of defense
technologies. Treasury, as Chair of the Committee, and several other
members deemed the concerns outside the scope of Exon-Florio authority and
would not allow the agreement between the Departments of Defense and
Homeland Security and the companies to include any mention of the
Committee. As a result, a provision that included strong enforcement
language was deleted from an agreement with the acquiring company. In the
absence of such language, presidential or Committee action can only result
if the companies materially misrepresented information during the
Committee's review. In our view, without that provision, the consequences
of failure to comply with the agreement are less certain.
The Standard for The Committee has been reluctant to initiate
investigations, to avoid both Investigation Limits the the negative
connotations of an investigation and the need for a Number of
Investigations presidential decision. As a result, the Committee has
initiated few
investigations. From 1997 through 2004, the Committee received 470
notices, including 19 refilings, for 451 proposed or completed
acquisitions. The Committee initiated only eight investigations during the
period (see table 2).
Table 2: Notifications to the Committee on Foreign Investment in the
United States and Actions Taken, 1997 through 2004
Year Notifications Acquisitions a Investigations b
1997 62 60
1998 65 62
1999 79 76
2000 72 71
2001 55 51
2002 43 42
2003 41 39
2004 53 50
Total 470 451
Source: Department of the Treasury.
aAcquisitions that were withdrawn and refiled are shown in the year of
initial notification.
bInvestigations are shown in the year of their notification.
According to Treasury Department officials, the Committee reviews foreign
acquisitions with a view to protecting national security while maintaining
U.S. open investment policy, which provides for equal treatment of foreign
and domestic investors. The office within Treasury that provides staff
support to the Committee-the Office for International Investment-is also
the office responsible for promoting the open investment policy. The
Committee's goal is to implement Exon-Florio without chilling foreign
investment in the United States. According to Treasury officials, being
the subject of an investigation may have negative connotations for a
company. If it becomes public knowledge that the acquiring company is the
subject of an investigation, it may be perceived that the government views
the acquisition as problematic and the stock price of the company may
fall. Thus, avoiding an investigation helps maintain the confidence of
investors.
Consistent with its desire to avoid investigations, the Treasury
Department, as Committee Chair, applies strict criteria in determining
whether an acquisition should be investigated. The criteria for initiating
an investigation are the likelihood that (1) there is credible evidence
that the foreign controlling interest may take action to threaten national
security and (2) no other laws are appropriate or adequate to protect
national security. This is essentially the same criteria provided by the
statute as the
basis for the President to take action to suspend or prohibit an
acquisition under Exon-Florio.10 The Defense Department and others have
stated that these criteria are inappropriate for determining whether to
initiate an investigation because the 45 days of the investigation should
be used to determine whether the criteria are met to inform the
Committee's recommendation to the President. Exon-Florio does not provide
specific guidance for the appropriate criteria for initiating a 45-day
investigation. The statute merely provides that "the President or the
President's designee may make an investigation to determine the effects on
national security" of acquisitions that could result in foreign control of
a U.S. company.11
Withdrawals Bypass Regulatory Time Frames
Committee guidelines require member agencies to inform the Committee of
concerns by the 23rd day of the 30-day review allowed by Exon-Florio.
According to one Treasury official, this time frame is necessary to meet
the legislated 30-day requirement for completing a review. For some cases,
particularly complex ones, the 23-day rule does not allow enough time to
complete reviews and address concerns. For example, one Defense official
said that, without advance notice of the acquisition, the time frames are
too short to complete analysis and provide input for the Defense
Department's position. Another Defense official said that to meet
Treasury's deadline, analysts have between 3 and 10 days to analyze the
acquisition. In one instance, Homeland Security was unable to provide
input within the time frame.
When agencies have needed more time to gather information or negotiate an
agreement to mitigate national security concerns, the Committee generally
suggests that companies request to withdraw their notification. If the
company does not want to withdraw, the Committee can initiate an
investigation. Exon-Florio's implementing regulations permit the Committee
to allow companies to withdraw their notifications at any time before a
presidential decision.
When companies have withdrawn their notification prior to concluding an
acquisition, the companies have an incentive to resolve any outstanding
10 50 U.S.C. app. S: 2170(e).
11 50 U.S.C. App. S: 2170(a). Under the statute, investigations are
mandatory in those cases in which the acquiring company is "controlled by
or acting on behalf of a foreign government" and the acquisition could
result in control of the U.S. company and could affect the national
security of the United States (50 U.S.C. App. S: 2170(b)).
issues and refile as soon as possible. However, if an acquisition has been
concluded, there is less incentive to resolve issues and refile. Since
1997, companies involved in 18 acquisitions have withdrawn their
notification and refiled 19 times. In one case, the company withdrew and
refiled twice. In 16 cases, the acquisitions had not yet been concluded,
and the time between withdrawal and refiling ranged between 0 days and 4
months (see fig. 2). In two cases, the companies had already concluded the
acquisition, and 9 months and 1 year, respectively, passed before the
companies refiled. In both cases, Defense or Commerce had raised concerns
about potential export control issues. These concerns remained unresolved
throughout the period.
Figure 2: Number of Days between Withdrawal and Refiling in 19 Withdrawn
Notifications
Number of days 400 350 300 250 200 150 100 50 0
378
1 2 3 4 5 6 7 8 9 10111213141516171819
Cases in which companies concluded acquisition after Exon-Florio review
Cases in which companies concluded acquisition prior to notifying under
Exon-Florio
Source: GAO analysis.
In addition to cases where a company that completed an acquisition
withdrew and subsequently refiled, we identified two instances in which
companies that had concluded an acquisition before filing with the
Committee withdrew and have not refiled. In one case, the company filed
with the Committee more than a year after completing the acquisition. The
Committee allowed it to withdraw the notification to provide more time to
answer the Committee's questions and provide assurances concerning export
control matters. The company refiled and was permitted to
withdraw a second time because there were still unresolved issues. Four
years have passed since the second withdrawal.
In another case, a company filed with the Committee over 6 months after
completing its acquisition of an internet backbone company. The Committee
allowed the company to withdraw the notification more than 2 years ago
because the Committee was busy with another, high-profile acquisition. The
Committee has not requested that the company refile even though analysts
within one agency had concerns about the acquisition. As a result, the
review process has never been completed. A Treasury Department official
said that the member agency that has national security concerns about a
particular transaction is responsible for ensuring that the company
refiles. However, the Committee's guidance to member agencies specifically
states that Treasury will manage activities during withdrawal by
specifying time frames and goals to be achieved.
In six of the eight investigations that have been undertaken since 1997,
withdrawal was allowed after the investigation had begun. Withdrawal and
refiling to restart the clock limits the potential negative connotation of
an investigation. However, this practice also limits instances that
require a presidential decision, contributing to the opaque nature of the
Exon-Florio process because reporting to Congress on the results of
Committee actions only occurs as a result of a presidential decision. Only
two of the eight cases resulted in a presidential decision and a
subsequent report to the Congress (see table 3).
Table 3: Investigations and Outcomes, 1997 through 2004
Notices withdrawn after Presidential
Year Investigations a investigation begun decisions
1997 0 0
1998 2 2
1999 0 0
2000 1 0
2001 1 1
2002 0 0
2003 2 1
2004 2 2
Total 8 6 2b
Provisions for Monitoring Compliance Have Improved
Source: U.S. Department of the Treasury.
aInvestigations are shown in the year of their notification.
bIn both cases the President took no action, thereby allowing the
transaction.
In our 2002 report, we identified several weaknesses in the agreements
that agencies negotiated with companies under the Exon-Florio Amendment.
Specifically, the two agreements that we reviewed either did not specify
(1) the time frame for implementing provisions of the agreement or (2) the
action that would be taken if the company failed to comply within the
stated time frame, thus providing no incentive for the companies to act or
no penalty for noncompliance. And in one case, the company failed to meet
the agreed upon time frame. In addition, the agreements did not specify
which offices in Committee member agencies would be responsible for
monitoring compliance with the agreements. We recommended in our 2002
report that, to ensure compliance with agreements, the Secretary of the
Treasury, as Chair of the Committee, increase the specificity of actions
required by mitigation measures in agreements negotiated under Exon-Florio
and designate in the agreements the agency responsible for overseeing
implementation and monitoring compliance with mitigation measures.
Three agreements negotiated between 2003 and 2005 contain specific time
frames for actions to be taken:
o In a telecommunications agreement, the company was required to adopt
and implement a visitation policy within 90 days after the agreement
became effective.
o In a software agreement, the company had to adopt mandatory policies
and procedures to implement the agreement within 90 days and provide
copies to the government points of contact.
o In an electronics agreement, the company had to appoint a security
officer and two security directors within 90 days of a vacancy to ensure
compliance with the agreement, subject to approval by the Departments of
Defense and Homeland Security.
Two of the three agreements also contained strong language concerning the
consequences of noncompliance with the terms of the agreement. For
example, these agreements stated that if the company (1) fails to comply
with the terms of the agreement, (2) makes a materially false or
incomplete statement, (3) increases foreign entity control, or (4) makes
other material changes in circumstances, the Attorney General, the
Secretary of Defense, or the Secretary of Homeland Security may raise
concerns to the Committee or the President.
All three agreements also provided specific offices within the signatory
agencies to which the companies are to report. For example, the
telecommunications agreement designates as points of contact the Assistant
Attorney General of the Justice Department's Criminal Division, the
General Counsel at the Federal Bureau of Investigation, the Deputy General
Counsel for Acquisition, Technology, and Logistics at the Department of
Defense, and the General Counsel at the Department of Homeland Security.
The Department of Homeland Security has taken the lead on monitoring
compliance for those agreements that it has signed under Exon-Florio.
According to Homeland Security officials, the agency maintains compliance
tables to track companies' compliance with time frames provided for in the
agreements. To keep all interested parties informed, the Department sends
out periodic e-mails to other agencies informing them of the status of
companies' compliance efforts.
The Departments of Defense, Commerce, and Justice significantly rely on
Homeland Security to monitor companies' compliance with the agreements.
Homeland Security officials stated that Homeland Security Presidential
Directive 7 gives the Department the authority to protect critical
infrastructure assets such as telecommunications and information
technology. According to a Defense official, the Department of Defense has
no authority to enforce companies' compliance with agreements signed
pursuant to Exon-Florio. A Commerce Department official similarly
Conclusions
stated that Commerce's authority is limited to enforcing compliance with
export control laws. As a result, the Department of Homeland Security is
the only one of the three with broad enforcement authority. Further,
according to Justice officials, while Justice has authority to seek
enforcement of agreements signed pursuant to Exon-Florio and to which it
is a signatory, the Department of Homeland Security has more resources for
monitoring compliance as well as the legal mandate to act.
In the aftermath of the September 11, 2001, terror attacks on the United
States and the subsequent war on terrorism, the nature of threats facing
this country has changed. In addition to traditional threats to national
security, vulnerabilities in areas such as the nation's critical
infrastructure have emerged as potential threats. Exon-Florio provides the
latitude for the Committee on Foreign Investment in the United States to
address these threats. But the effectiveness of Exon-Florio as a safety
net depends on the manner in which the broad scope of its authority is
implemented. The narrow, more traditional interpretation of what
constitutes a threat to national security fails to fully consider the
factors currently embodied in the law. Further, the time constraints
imposed on agencies to develop a position before the statutory deadline
limits member agencies' ability to complete in-depth analyses. Those time
constraints, together with the Committee's reluctance to initiate
investigations, can result in the Committee permitting companies to
withdraw their notifications. When companies withdraw after completing an
acquisition, the Committee may lose visibility over the transaction, and
the companies may choose not to refile.
The initial legislation provided for congressional oversight through a
requirement that the circumstances surrounding any negative decision by
the President be reported to the Congress. To improve congressional
oversight, the Byrd amendment expanded required reporting to include the
circumstances surrounding all presidential decisions. However, the
Committee's reluctance to proceed to investigation, coupled with the use
of withdrawal to resolve cases without the need for presidential
decisions, has resulted in the circumstances surrounding only two cases
being reported to the Congress since 1997. This criterion for reporting
contributes to the opaque nature of the Committee's process and is
limiting the information that is provided to the Congress. In addition,
where companies have concluded the acquisition prior to filing with the
Committee and concerns have been identified, permitting withdrawal expands
the opportunity for harm to national security before the Committee takes
action.
Matters for Congressional Consideration
In light of the differing views within the Committee on Foreign Investment
in the United States regarding the extent of authority provided by
Exon-Florio, the Congress should consider amending Exon-Florio by more
clearly emphasizing the factors that should be considered in determining
potential harm to national security. In addition, to address Treasury's
concern with the impact of investigations on U.S. open investment policy
and the member agencies' concerns with having sufficient time to address
relevant issues concerning the acquisitions, the Congress should consider
eliminating the distinction between a review and an investigation and make
the entire 75-day period available for review. The Committee could then be
required to submit recommendations to the President only if presidential
action was necessary. Also, to provide more transparency and facilitate
congressional oversight, the Congress should revisit the criterion for
reporting circumstances surrounding cases to the Congress. For example,
the Congress could require an annual report on all transactions that
occurred during the preceding year. Such a report could provide the
Congress with information on the nature of each acquisition; the national
security concerns raised by Committee member agencies, if any; how the
concerns were mitigated; and whether each acquisition was concluded or
abandoned, in addition to any presidential decisions required under the
statute.
In addition, in view of the need to ensure that national security is
protected during the period that withdrawal is allowed for companies that
have completed or plan to complete an acquisition prior to the Committee
completing its work, the Congress should require that the Secretary of the
Treasury, as Committee Chair, establish (1) interim protections where
specific concerns have been raised, (2) specific time frames for refiling,
and (3) a process for tracking any actions being taken during the
withdrawal period.
Agency Comments
and Our Evaluation
We provided a draft of our report to the Departments of Commerce, Defense,
Homeland Security, Justice, and Treasury for comment. In responding, the
Department of Treasury noted that it was providing comments on behalf of
all the members of the Committee on Foreign Investment in the United
States. However, the Department of Justice provided comments in a separate
letter.
Overall, Treasury disagreed with our findings. At issue is our
characterization of the Committee's process and the adequacy of insight
into the Committee's deliberations-concerns that Treasury states have
caused the Committee to question our understanding of how it operates.
Our understanding of the Committee's process is based on an extensive
examination of Committee guidelines, case files, and memorandums;
discussions with member agencies, including Treasury, on the process and
the time frames the Committee uses to come to a decision; and a review of
the laws and regulations that provide the Committee with criteria against
which to assess threats to national security.
Treasury asserts that all Committee decisions are reached only by
consensus among member agencies. However, during the course of our review,
certain member agencies raised concerns about the Committee's process that
indicated fundamentally differing views among Committee members when
reviewing certain cases. These disagreements involved different views on
what constitutes a threat to national security, the sufficiency of the
time allowed for reviews, and the appropriate criteria for initiating an
investigation. While we agree that opposing views can, and should, be
vigorously debated, such a debate does not demonstrate that issues have
been fully vetted or that consensus has been reached, as Treasury implies.
In fact, in a number of cases, we found evidence that indicates otherwise,
for example:
o In one case we reviewed where member agencies disagreed over what
should be deemed a national security concern, the narrower definition-one
that excludes national security concerns raised by certain member
agencies-has prevailed, in that the notice has been withdrawn instead of
the case proceeding to investigation.
o In complex cases in which national security concerns have been raised
and for which Exon-Florio is the relevant statute, case documentation we
reviewed revealed the significant pressures some agencies face to complete
analysis within 23 days. In its comments on our draft report, the
Department of Justice shared our concern with respect to the time
constraints imposed by the current process. Specifically, Justice stated
that "gathering timely and fully vetted input from the intelligence
community is critical to a thorough and comprehensive national security
assessment. Any potential extension of the time available to the
participants for the collection and analysis of that information would be
helpful."
o Policy-level officials from two member agencies have indicated that
the debate over the criteria for initiating an investigation remains
unresolved.
Given these fundamental differences, we concluded that the extent to which
issues are vetted and consensus is reached on certain cases is, at best,
uncertain.
Treasury also cites Committee guidelines on withdrawals-which state that
parties, not member agencies, have the authority to request a
withdrawal-to dispute our position that the Committee has encouraged
companies to withdraw notifications to provide additional time to examine
acquisitions. Guidelines stating that certain actions should be taken do
not necessarily provide evidence that such actions were indeed taken. In
five cases that we reviewed, letters from the companies requesting
withdrawal and/or letters from Treasury, as Committee Chair, approving the
requests to withdraw cited the need for more review time on the part of
the government as the reason for the withdrawal. Regardless, Treasury's
detailed discussion of the withdrawal process ignores the key issue.
Allowing companies to withdraw notices to provide more time for a review
without initiating an investigation significantly increases the risk that
companies will not refile in a timely manner-particularly in cases where
the foreign acquisition has been completed-and that national security
concerns will remain unaddressed. Avoiding investigations by using
withdrawals also contributes to the opaque nature of the process because
without an investigation there is no presidential decision and required
reporting to the Congress.
Understandably, Treasury is cautious about providing details into the
Committee's deliberations, given the sensitivity of the information
discussed and the need to protect it. And we appreciate the challenges
each case presents. However, despite Treasury's assertion that the oral
briefings provided by agency members to duly authorized committees of the
Congress when requested are appropriate, the fact that our review was
prompted by congressional concerns about the Committee's review and
investigation process suggests otherwise.
Finally, Treasury criticized our review methodology-specifically, it
questioned whether we spoke to all appropriate parties. We focused on the
agencies that were most active in Exon-Florio reviews, as we noted to
Treasury at the beginning of our review. During our preliminary
discussions and throughout the review, none of the Committee member
agencies, including Treasury, raised concerns with our methodology or
suggested that we contact the Department of State, the United States Trade
Representative, or the Council of Economic Advisers. Our reviews of the
official Committee files, located at the Treasury Department, supported
our view that the Departments of Commerce, Defense,
Homeland Security, Justice, and Treasury were the most active agencies.
Regardless, when it became clear to us that information from other
Committee members could be germane, as was the case with the National
Security Council, we attempted to contact them. In the case of the
National Security Council, officials declined to meet with us. At the time
we sent the draft report for comment, we were contacted by the Department
of State and the U. S. Trade Representative who wanted to discuss the
draft report. We met with representatives of both agencies to discuss
their concern that our report did not adequately recognize the importance
of open investment and was too focused on national security.
We recognize that in implementing Exon-Florio, the Committee must consider
national security in the context of open investment-a challenge we point
out in the opening statement of our report. However, the purpose of the
Exon-Florio amendment is to protect national security in the context of
U.S. open investment policy. It is how national security is protected
through the Committee process that needs to be better understood. We
believe that understanding can be enhanced by improved insight and
oversight of the process.
The Department of Justice in its letter also provided technical comments,
which we incorporated as appropriate. Treasury's letter, along with our
responses to specific comments, is reprinted in appendix I. Justice's
letter is reprinted in appendix II.
To examine the process used by the Committee and its member agencies to
review and investigate foreign acquisitions, we analyzed case files and
discussed with Committee staff members the factors considered when cases
are reviewed, the process and time frame the Committee uses to come to a
decision, and the laws and regulations that provide the Committee with
criteria against which to assess threats to national security.
We examined in depth nine acquisitions notified to the Committee on
Foreign Investment in the United States between June 28, 1995, and
December 31, 2004. We selected acquisitions based on recommendations by
Committee member agency officials and the following criteria: (1) the
Committee permitted the companies to withdraw the notification; (2) the
Committee or member agencies concluded agreements to mitigate national
security concerns; (3) the foreign company had previously notified the
Committee of a prior acquisition; or (4) GAO had conducted a prior review.
The objective of the case reviews was to understand and
Scope and Methodology
document the Committee's and its members' approaches to and processes for
reviewing foreign acquisitions of U.S. companies. We did not attempt to
validate the conclusions reached by the Committee on any of the cases we
reviewed.
We also obtained information about other foreign acquisitions that we did
not conduct case reviews on, and we also used information on other
acquisitions obtained during prior GAO reviews. We obtained and analyzed
data from relevant Committee member agencies, including the Departments of
Commerce, Defense, Homeland Security, and Treasury. While we were not
granted access to files held by the Department of Justice, we discussed
individual cases with Justice officials and obtained adequate information
to meet our objectives. We also discussed the Committee's approach and
process with Committee staff officials from member agencies most actively
involved-namely, the Departments of Commerce, Defense, Homeland Security,
Justice, and Treasury.
To determine whether the weaknesses in provisions to assist agencies in
monitoring agreements that GAO had identified in its 2002 report had been
addressed, we analyzed agreements concluded under the Committee's
authority between 2003 and 2005 and compared these agreements with those
GAO had previously analyzed. We discussed with Committee staff members the
steps that they are taking to monitor agreements and enforce compliance.
We conducted our review from April 2004 through July 2005 in accordance
with generally accepted government auditing standards.
As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter. At that time, we will send copies of
this report to the Chairman and Ranking Minority Member of the House
Committee on Financial Services and to other interested House and Senate
committees and subcommittees. We will also send copies to the Secretaries
of Commerce, Defense, Homeland Security, and Treasury and the Attorney
General. We will also make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov.
Please contact me at (202) 512-4841 or [email protected] if you have
any questions regarding this report. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. A list of major contributors to this report is listed in
appendix III.
Ann M. Calvaresi-Barr
Director
Acquisition and Sourcing Management
GAO's comments supplementing those in the report text appear at the end of
this appendix.
See comment 1.
See comment 2.
See comment 3.
Page 27 GAO-05-686 Exon-Florio Implementation
See comment 4.
Page 28 GAO-05-686 Exon-Florio Implementation
Page 29 GAO-05-686 Exon-Florio Implementation
See comment 5. See comment 6.
See comment 7.
See comment 8.
See comment 9.
Page 30 GAO-05-686 Exon-Florio Implementation
See comment 10.
See comment 11.
Page 31 GAO-05-686 Exon-Florio Implementation
See comment 12.
Page 32 GAO-05-686 Exon-Florio Implementation
See comment 13.
See comment 14.
See comment 15.
Page 33 GAO-05-686 Exon-Florio Implementation
See comment 16.
See comment 17.
See comment 18.
Page 34 GAO-05-686 Exon-Florio Implementation
See comment 19.
See comment 20.
See comment 21.
Page 35 GAO-05-686 Exon-Florio Implementation
See comment 22.
See comment 23.
Page 36 GAO-05-686 Exon-Florio Implementation
See comment 24.
See comment 25.
Page 37 GAO-05-686 Exon-Florio Implementation
Page 38 GAO-05-686 Exon-Florio Implementation
Appendix I: Comments from the Department of Treasury
GAO's Comments
The following are GAO's comments on the Department of the Treasury's
letter dated August 12, 2005.
1. Our understanding of the Committee's process is based on an extensive
review of Committee guidance and case files and structured interviews and
discussions with member agencies, including Treasury. Further, except
where changes in Committee make-up and proceedings have occurred since
2002, our discussion of the laws and the Committee's process is consistent
with our 2002 report.
2. As we point out in our evaluation of agency comments in the report,
certain member agencies raised concerns that indicated fundamental
disagreement among members when reviewing certain cases. Given these
fundamental disagreements, we concluded that the extent to which issues
are vetted and consensus is reached on certain cases is, at best,
uncertain.
3. To analyze cases notified to the Committee and determine whether
threats to national security exist, each agency effectively
operationalizes its own definition of national security. The implication
that individual agencies do not apply a definition is unrealistic.
4. We agree that Exon-Florio should be used judiciously as a safety net
when laws other than Exon-Florio and the International Emergency Powers
Act may not be effective in protecting national security-a point we make
in the opening paragraph of our report. However, in cases where Committee
members disagree on whether Exon-Florio applies, we have found that a more
narrow definition of national security often takes precedence or the
companies are allowed to withdraw their notification to avoid
investigations. Treasury's rather lengthy discussion in its comment letter
on the need to protect U.S. open investment policy underscores our
concern.
5. In numerous case documents GAO reviewed, the definitional bounds
agencies used in considering national security concerns are apparent. Some
agencies followed routine analytical processes, searching specific
databases related to export controls, acquisition history, and critical
technology information-sources that would reveal whether the foreign
acquisition involved any export-controlled technology or item or
classified contracts, or whether there was specific derogatory
intelligence on the foreign company. Other agencies prepared specific
vulnerability or threat assessments that have their own methodological
parameters. The debate among Committee members on each notification is
fueled by these differing definitions.
Appendix I: Comments from the Department of Treasury
6. We agree that, taken in total, member agencies consider a broad range
of national security factors when cases are analyzed. We also agree that
anything other than the broad consideration of a range of national
security factors by the Committee would inappropriately limit the
President's necessary discretion to protect national security.
7. While only the President decides what constitutes a threat to national
security and what actions are in the interest of U.S. national security in
cases that are sent for a determination, only two cases have reached this
stage since 1997. Further, only 8 of 451 cases have undergone
investigations. By allowing withdrawals of notifications rather than
initiating investigations, the Committee effectively pre-empts the
President from using his discretion to make a determination. To this end,
the Committee has defined what constitutes a threat to national security,
not the President. Further, since only those few cases that go to the
President for a determination require reporting to the Congress, there is
little insight into the Committee's deliberations. Our review found that
for specific cases, there has been significant disagreement among member
agencies on what constitutes a threat to national security and what
actions are in the interest of national security. In two such cases,
companies were allowed to withdraw their notices, and to date, they have
yet to refile, leaving the concerns unresolved.
8. Again, Treasury's response skews our finding. In two cases we
reviewed, when an agency raised what it deemed a national security concern
and other Committee members did not agree, the narrower definition of
national security-which excludes the concern raised- prevailed, in that
the notice was withdrawn instead of the case proceeding to investigation.
Regardless, the case Treasury refers to was cited in our 2002 report as an
example of an agreement in which nonspecific language made the agreement
difficult to implement. For example, to mitigate a concern about access to
technology, the agreement required a "good faith effort" to divest a
subsidiary. When the company divested part, but not all, of the
subsidiary-citing lack of interested buyers as the rationale-government
officials could not determine whether the company's efforts were made in
good faith because the agreement did not include criteria defining what
actions would constitute a good faith effort. In addition, the agreement
contained no consequences for failure to comply with the monitoring terms
of the agreement within the stated time frames, and as we noted, the
company failed to meet the terms of one provision. Given this outcome, it
is unclear how Treasury can assert that "extensive mitigation measures
were put in place" or how this case exemplifies
Appendix I: Comments from the Department of Treasury
that all member agencies participate in the Committee's decisionmaking
process.
9. We agree that the decision to undertake an investigation demands
careful deliberation on the part of all Committee members. However, in two
cases we reviewed, documentation shows that in determining whether to
initiate an investigation, Treasury, as Committee Chair, applies
essentially the same criteria that the Exon-Florio amendment directs the
President to use to decide whether to take action to suspend or prohibit a
transaction. While Treasury states that an investigation is entirely
appropriate if national security issues remain unresolved at the end of
the 30-day review period, we found that rather than initiating an
investigation, the Committee commonly allows companies to withdraw their
notifications and refile at a later date to provide more time for review.
Our report has not cited cases where a Committee decision not to
investigate was the result of the application of an overly strict standard
for deciding whether to investigate because where we noted the application
of this standard, the companies withdrew their notice.
Further, by applying the Presidential decision-making criteria at the
conclusion of the 30-day review, the Committee effectively preempts the
President's opportunity to make a determination. In a 2004 case,
documentation from a policy-level meeting shows that the appropriateness
of applying these criteria in Committee deliberations was debated; the
debate was not resolved at the time, and officials from two separate
agencies told us that the debate continues. The implementing regulations
for Exon-Florio make no distinction between the activities the Committee
undertakes during the review and investigation periods-other than
preparing a report to the President at the end of an investigation-and
provide no criteria for determining when to initiate investigation. It is,
in part, for this reason that we are proposing that the entire 75-day
period be available for analyzing cases, if needed. Eliminating the
distinction between the review and investigation periods would help ensure
that sufficient time is available for thorough analyses of cases and that
the presidential decision-making criteria are only applied by the
President.
10. Guidelines requiring that certain actions be taken do not provide
evidence that such actions were indeed taken. For example, in one 2004
case we reviewed, after a policy-level decision to initiate an
investigation was made, some Committee member agencies, including the
Chair, placed calls to corporate counsel informing them of the pending
investigation and advising that their clients withdraw their
Appendix I: Comments from the Department of Treasury
notices. Because the companies withdrew, an investigation was never
initiated.
11. As stated in our report, we understand that the purpose of the 23-day
rule is to enable the Committee to meet its obligations under
Exon-Florio's statutory time limits for 30-day reviews. For the majority
of cases where national security concerns either do not exist or agency
members agree that concerns are addressed by other laws, the 23-day rule
may help facilitate the closure of cases before the expiration of the
30-day review period. However, in complex cases-cases in which national
security concerns have been raised and for which Exon-Florio is the
relevant statute-case documentation we reviewed revealed the significant
pressures some agencies face to complete analysis within 23 days. In five
cases that we reviewed, letters from the companies requesting withdrawal
and/or letters from Treasury, as Committee Chair, approving the requests
to withdraw cited the need for more review time on the part of the
government as the reason for the withdrawal. In one such case, an
electronic message we reviewed cited the Committee's workload on another
high profile case as the reason that the Committee sought to have a notice
withdrawn. In that case, the transaction had already been completed and
the company had requested withdrawal on day 23, before agencies completed
their analysis to determine whether to request an investigation. Because
the company never refiled a notice, the national security concerns
identified by two member agencies have not been further examined. Further,
it should be noted that in its comments, the Department of Justice said
that any additional time that could be made available to collect and
analyze information needed to conduct a thorough and comprehensive
national security assessment would be helpful.
12. We have acknowledged the use of mitigation agreements1 in our
current report as a major tool used by the Committee. In fact, we point
out that the more recent mitigation agreements have addressed several of
the problems with such agreements that we noted in our 2002 report.
However, strengthening or increasing the number of mitigation
1 GAO recently issued two reports that have identified vulnerabilities
when the government uses some of the remedies noted by Treasury: one,
overseeing contractors under foreign influence and two, ensuring
classified information is protected. (GAO, Industrial Security: DOD Cannot
Ensure Its Oversight of Contractors under Foreign Influence Is Sufficient,
GAO-05-681 (Washington, D.C.: July 15, 2005); GAO, Industrial Security:
DOD Cannot Provide Adequate Assurance That Its Oversight Ensures the
Protection of Classified Information, GAO-04-332 (Washington, D.C.: Mar.
3, 2004).
Appendix I: Comments from the Department of Treasury
agreements does not ensure that all national security concerns raised by
member agencies are sufficiently examined. Further, the particular passage
cited by the Under Secretary is not disputing that mitigation agreements
are often negotiated but rather is pointing out that there is not
agreement on when these mitigation agreements are needed. As we reported,
agencies that apply the more traditional definition of what constitutes a
threat to national security have resisted using Exon-Florio to mitigate or
address the concerns raised by other Committee members.
13. We have revised our report to reflect that the Departments of Defense,
Commerce, and Justice significantly rely on DHS to monitor companies'
compliance with the agreements.
14. We did not mean to imply that Justice does not have the authority to
undertake enforcement actions and have clarified that in the report.
15. We agree that the Federal Bureau of Investigation and other Justice
Department components have been and continue to be a very active and
critical participant in the Committee's process. We also acknowledge there
are other Committee agency components that are also critical to the
process such as the Bureau of Industry and Security in the Department of
Commerce; the Office of the Under Secretary of Defense for Acquisition,
Technology and Logistics-Industrial Policy, and the Central Intelligence
Agency. Committee member agencies use many internal resources as part of
their process.
16. A remedy is defined as a legal means of preventing or redressing a
wrong or enforcing a right. A Defense official confirmed that the
provision in question that was deleted from the agreement stated that if
the company (1) fails to comply with the terms of the agreement, (2) makes
a materially false statement, (3) increases foreign entity control, or (4)
makes other material changes in circumstances, the Attorney General, the
Secretary of Defense or the Secretary of Homeland Security may raise
concerns to the Committee or the President. Without having this provision,
it is unclear what remedy will be available to the Committee and its
member agencies to enforce this mitigation agreement.
17. Despite what is stated in the guidelines, in practice the Committee
has allowed companies or parties to withdraw their notices to provide
member agencies additional time to complete their analyses or to negotiate
mitigation measures. Documentation from Committee files shows that 12 of
the 20 withdrawals we identified that have been granted since 1997 to
companies that intended to continue the
Appendix I: Comments from the Department of Treasury
acquisition were granted to allow member agencies to either negotiate
mitigation agreements, continue obtaining information from the companies,
or otherwise continue analyses.
18. Of the 26 letters granting withdrawal that we reviewed, only three
explicitly stated conditions for the withdrawal: in two cases, the
companies were abandoning the transaction; in the third, the company
agreed to divest its U.S. acquisition.
19. We recognize that the President retains the authority to take action
if the Committee's review is not completed. However, our review of case
files does not support the Under Secretary's assertion that Treasury, as
Chair, tracked developments on the withdrawn cases that were notified
after the transactions were closed. Further, it is unclear how Treasury
could conclude that refiling is unnecessary in these cases, given that the
withdrawals were granted to provide additional time to resolve specific
concerns raised by other agencies. For example, in one case, a Treasury
official told us that she was unaware that the Department of Defense had
concerns. By not having the companies refile, Defense's concerns were not
fully vetted. In another case, a Defense official provided documentation
indicating that the Defense Department's position remained that conditions
should be imposed on the transaction. In our view, refiling serves two
purposes: (1) it provides assurances to the companies that action will not
be taken at a future date and (2) it permits Committee member agencies to
ensure that no national security concern was overlooked.
20. The documentation we reviewed clearly showed that Treasury and Defense
have different views of what constitutes a threat to national security.
For example, in one case, Treasury officials wrote three separate memos
stating that in Treasury's view, Defense and Commerce Department concerns
about (a) foreign ownership of sensitive but unclassified technology used
in reconnaissance satellites, (b) the possibility of this sensitive
technology being transferred to countries of concern, and (c) maintaining
U.S. government access to the technology were not national security
concerns.
21. We agree that vulnerabilities can result from a variety of things not
addressed by Exon-Florio. We merely provided examples of the kinds of
vulnerabilities that may result from foreign control. We were not
addressing the universe of vulnerabilities, only some of those addressed
by Exon-Florio, the subject of our report.
22. We agree that Exon-Florio provides broad latitude for the Committee to
consider whether foreign acquisitions constitute a threat to national
Appendix I: Comments from the Department of Treasury
security. Our concern is how Exon-Florio is being implemented. Given the
internal disagreement among Committee members and the lack of transparency
as to how disagreements are resolved, we believe that additional guidance
from the Congress would be beneficial.
23. We recognize that, in most instances, 30 days is sufficient to
conclude reviews. If Exon-Florio were amended, then we expect that the
Committee could manage the process so that the vast majority of cases
would continue to be completed within 30 days. However, Exon-Florio is to
be used when other laws are inadequate-in short, to act as a safety net.
The ability to complete "a vast majority" of reviews in 30 days is not
relevant to Exon-Florio's importance as a safety net. Moreover, as we
point out in our report, some agency officials have stated that 30 days is
insufficient in complex reviews. The Justice Department, in its official
comments, stated that any potential extension of the time available to the
participants for the collection and analysis of information from the
intelligence community would be helpful (see page 2 of Justice Department
comments in app. II).
Treasury officials have pointed out that being the subject of an
investigation may have negative connotations for a company, and that the
Committee tries to avoid initiating investigations. By eliminating the
distinction between investigations and reviews, this negative connotation
and the potential impact on investment would no longer exist.
The Under Secretary expressed concern that extending the time frames would
deter filings but did not explain the basis for his concern. However, the
Committee need not rely solely on voluntary filings. The implementing
regulations state that "any member of the Committee may submit an agency
notice of a proposed or completed acquisition to the Committee through its
staff chairman if that member has reason to believe, based on facts then
available, that the acquisition is subject to section 721 and may have
adverse impacts on the national security. In the event of agency notice,
the Committee will promptly furnish the parties to the acquisition with
written advice of such notice."2
24. The Congress has made numerous efforts to conduct oversight of the
Committee's activities-first in the original Exon-Florio legislation by
requiring a report when the President prohibited an acquisition, and
2 31 C.F.R. S: 800.401(b).
Appendix I: Comments from the Department of Treasury
again in 1992 by passing the Byrd Amendment to require a report when the
President makes any decision regarding a foreign acquisition. In addition,
in requesting our review, the Senate Banking Committee cited the "opaque
nature" of the Exon-Florio process as a reason for its request, which
suggests that the Committee on Foreign Investment in the United States has
not been successful in keeping the Congress adequately informed. We agree
that the confidentiality afforded to the companies under Exon-Florio
should not be compromised. However, subsection (c) of the statute provides
that the confidentiality provisions "shall not be construed to prevent
disclosure to either house of Congress or to any duly authorized committee
or subcommittee of the Congress." Therefore, we stand by our suggestion
that the Congress may wish to revisit the congressional reporting
requirement.
25. As we stated in our 2002 report, the regulations should not call for
negotiating interim measures, but rather for the Committee to use its
authority to impose them as a condition of withdrawal where the
transaction has been completed or will be completed during the withdrawal
period. Further, as we state in our report, "the Committee's guidance to
member agencies specifically states that Treasury will manage activities
during withdrawal by specifying time frames and goals to be achieved."
Because Treasury has declined to implement our recommendation, we are
including our recommendation as a matter that Congress may wish to
consider.
Appendix II: Comments from the Department of Justice
Appendix II: Comments from the Department of Justice
Appendix II: Comments from the Department of Justice
Appendix III: GAO Contacts and Staff Acknowledgments
GAO Contact Ann M. Calvaresi-Barr, (202) 512-4841
Acknowledgments In addition to the contact named above, Thomas J.
Denomme, Assistant Director, Allison Bawden, Gregory K. Harmon, Paula J.
Haurilesko, Karen Sloan, John Van Schaik and Michael Zola made key
contributions to this report.
Page 50 GAO-05-686 Exon-Florio Implementation
Related GAO Products
Defense Trade: Mitigating National Security Concerns under Exon-Florio
Could Be Improved. GAO-02-736. Washington, D.C.: September 12, 2002.
Defense Trade: Identifying Foreign Acquisitions Affecting National
Security Can Be Improved. GAO/NSIAD-00-144. Washington, D.C.: June 29,
2000.
Foreign Investment: Implementation of Exon-Florio and Related Amendments.
GAO/NSIAD-96-12. Washington, D.C.: December 21, 1995.
Foreign Investment: Foreign Laws and Policies Addressing National Security
Concerns. GAO/NSIAD-96-61. Washington, D.C.: April 2, 1996.
Page 51 GAO-05-686 Exon-Florio Implementation
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