Defense Trade: National Security Reviews of Foreign Acquisitions 
of U.S. Companies Could Be Improved (23-MAR-07, GAO-07-661T).	 
                                                                 
The Exon-Florio amendment to the Defense Production Act of 1950, 
enacted in 1988, authorized the President to suspend or prohibit 
foreign acquisitions of U.S. companies that pose a threat to	 
national security. The Committee on Foreign Investment in the	 
United States--chaired by the Department of Treasury with 11	 
other members, including the Departments of Commerce, Defense,	 
and Homeland Security--implements Exon-Florio through a four-step
review process: (1) voluntary notice by the companies of pending 
or completed acquisitions; (2) a 30-day review to determine	 
whether the acquisition could pose a threat to national security;
(3) a 45-day investigation period to determine whether concerns  
require possible action by the President; and (4) a presidential 
decision to permit, suspend, or prohibit the acquisition. Over	 
the past decade, GAO has conducted several reviews of the	 
Committee's process and has found areas where improvements were  
needed. GAO's most recent work, conducted in 2005, indicated	 
concerns remained.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-661T					        
    ACCNO:   A67224						        
  TITLE:     Defense Trade: National Security Reviews of Foreign      
Acquisitions of U.S. Companies Could Be Improved		 
     DATE:   03/23/2007 
  SUBJECT:   Corporate mergers					 
	     Foreign corporations				 
	     Foreign investments in US				 
	     Homeland security					 
	     International trade				 
	     Investigations by federal agencies 		 
	     Multinational corporations 			 
	     National policies					 
	     Procurement					 

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GAO-07-661T

   

     * [1]Background
     * [2]Views Differed over What Constitutes a National Security Thr
     * [3]Committee Allowed Withdrawal of Notifications to Avoid Inves
     * [4]Lack of Reporting Contributed to the Opaqueness of the Commi
     * [5]Scope and Methodology
     * [6]GAO's Mission
     * [7]Obtaining Copies of GAO Reports and Testimony

          * [8]Order by Mail or Phone

     * [9]To Report Fraud, Waste, and Abuse in Federal Programs
     * [10]Congressional Relations
     * [11]Public Affairs

Testimony before the Committee onHomeland Security, Subcommittee on
Transportation Security and Infrastructure Protection, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT
Friday, March 23, 2007

DEFENSE TRADE

National Security Reviews of Foreign Acquisitions of U.S. Companies Could
Be Improved

Statement of Ann M. Calvaresi-Barr, Director
Acquisition and Sourcing Management

GAO-07-661T

Madam Chairwoman and Members of the Subcommittee:

I am pleased to be here today to take part in this hearing on issues
related to foreign ownership of U.S. assets and potential effects on
national security. As you know, U.S. export control laws, national
disclosure policy, the National Industrial Security Program, and other
processes and programs have been established to protect defense
technologies and other critical assets from falling into the wrong hands,
and for other reasons. Similarly, the Exon-Florio amendment to the Defense
Production Act of 1950,^1 enacted in 1988, authorized the President to
suspend or prohibit foreign acquisitions, mergers, or takeovers^2 of U.S.
companies that pose a threat to national security. Exon-Florio is meant to
serve as a safety net when laws other than the International Emergency
Economic Powers Act^3 may be ineffective in protecting national security.

Exon-Florio is administered by the Committee on Foreign Investment in the
United States, currently made up of 12 members: the Department of the
Treasury, which serves as Chair; the Departments of Commerce, Defense,
Homeland Security, Justice, and State; and six offices in the Executive
Office of the President. On the surface, the Exon-Florio review process is
fairly straightforward. According to regulations, after a company
voluntarily files a notice of a pending or completed acquisition by a
foreign concern, the Committee conducts a 30-day review to determine
whether there are any national security concerns. If the Committee is
unable to complete its review within 30 days, the Committee may either
allow the companies to withdraw the notification and refile or initiate a
45-day investigation. If a case undergoes an investigation, the Committee
submits a report to the President, including a recommendation for action.
Cases that result in a presidential decision are reported to the Congress.

^150 U.S.C. app. S 2170.

^2In the remainder of this statement, acquisitions, mergers, and takeovers
are referred to as acquisitions.

^3The 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. SS 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)).

As requested, my comments today will summarize our reports on weaknesses
in the Exon-Florio process that GAO has identified over the past decade.
Before I begin, however, it is important to provide some context to
Exon-Florio. Specifically, implementing Exon-Florio can pose a significant
challenge for the federal government because of the potential for conflict
with U.S. open investment policy--a policy that, in recognizing the
economic benefits associated with foreign investments, calls for foreign
investors to be treated no differently than domestic investors. This
challenge has increased significantly since September 2001, when threats
facing the nation were fundamentally redefined to include threats against
the homeland, including those to our critical infrastructure. At the same
time, the economy has become increasingly globalized, as countries open
their markets and communicate regularly through the Internet. Government
programs established decades ago are often ill-equipped to grapple with
these emerging complexities. GAO, therefore, designated the effective
identification and protection of critical technologies as a governmentwide
high-risk area, which warrants a strategic reexamination to identify
needed changes.^4 In terms of Exon-Florio, legislation has been introduced
to reform the Exon-Florio process.

Our understanding of the Committee's process is based on our 2005 work but
built on our review of the process and our discussions with agency
officials for our 2002 report. For our 2005 review, and to expand our
understanding of the Committee's process for reviewing foreign
acquisitions of U.S. companies, we met with officials from the Departments
of Commerce, Defense, Homeland Security, Justice, and 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 conducted our review from April 2004
through July 2005 in accordance with generally accepted government
auditing standards.

To summarize our work in this area, we have found that several aspects of
the Committee's process for implementing Exon-Florio may have weakened the
law's effectiveness. First, we found a lack of agreement among Committee
members about the scope of Exon-Florio--specifically, what defines a
threat to national security. Neither the statute nor the implementing
regulation defines "national security." However, the statute provides
factors that may be considered in determining threats to national
security. Despite these factors, some Committee members argued to apply a
more traditional definition--one limited to concerns about
export-controlled technologies or items, classified contracts, and the
existence of specific derogatory intelligence on a foreign company. Other
Committee members have argued that a broader view is warranted, and in
analyzing the effects of an acquisition, considered the potential
vulnerabilities that an acquisition can create with regard to U.S.
critical infrastructure, defense supply, and defense technology
superiority. These disagreements may have limited the Committee's analyses
of proposed or completed acquisitions.

^4High Risk Series: An Update, [12]GAO-07-310 (Washington D.C.: Jan.
2007).

Second, Committee members also had differing opinions on the criteria that
should be used to determine whether an investigation was warranted. The
criteria used by Treasury as the Committee Chair and others were
essentially the same criteria established in the current law for the
President to suspend or prohibit a transaction, or order divestiture--that
is, there is credible evidence that the foreign controlling interest may
take action that threatens national security and that no laws other than
Exon-Florio and the International Emergency Economic Powers Act are
adequate to protect national security. Some Committee members have argued
that applying these criteria is inappropriate because the purpose of an
investigation is to determine whether or not credible evidence of a threat
exists.

Third, while most acquisitions are not problematic and the Committee's
review can be completed within the 30-day period allowed by Exon-Florio,
some more complex acquisitions required more analysis or consideration
than the 30-day review period could accommodate. However, the Committee
has been reluctant to use the additional 45 days allowed by the
legislation because it would require initiating an investigation. The
Committee's concern was that the negative perceptions surrounding an
investigation could discourage foreign investment in the United States,
thereby conflicting with U.S. open investment policy. To avoid
investigations, the Committee has in the past encouraged companies to
withdraw their notifications of proposed or completed acquisitions and
refile them at a later date. Between 1997 and 2004, companies involved in
18 acquisitions were allowed to withdraw their notification and refile at
a later time. The new filing is considered a new case and restarts the
30-day clock. While withdrawing and refiling provides additional time for
Committee members to review a foreign acquisition while minimizing the
risk of chilling foreign investment, it may also heighten the risk to
national security in transactions where there are concerns and the
acquisition has been completed or is likely to be completed during the
withdrawal period. This was the situation in 4 of the 18 acquisitions
cited above. One company did not refile for 9 months, another did not
refile for 1 year, and 2 had yet to refile at the time of our review.^5

Finally, because very few cases required a presidential decision--the
criterion for reporting to the Congress on specific cases--the Congress
had little insight into the Committee's process. Further, a 1992 amendment
to the legislation requires a report to the Congress every 4 years on
certain trends in foreign acquisitions. However, at the time of our work
only one report had been submitted, in 1994. I understand that another
report, in response to that requirement, has been issued.

Since our 2005 report, the Committee has taken some actions to reform the
process, such as increasing communication to interested congressional
committees. However, we have not examined how these changes are working.
It should be noted that because the law provides for confidentiality of
information filed under Exon-Florio, our ability to discuss details of
cases we examined is limited.

Background

Enacted in 1988, the Exon-Florio amendment to the Defense Production Act
authorized the President to investigate the effects of foreign
acquisitions of U.S. companies on national security and to suspend or
prohibit acquisitions that might threaten national security. The President
delegated investigative authority to the Committee on Foreign Investment
in the United States, an interagency group responsible for monitoring and
coordinating U.S. policy on foreign investment in the United States.^6
Since the Committee's establishment in 1975, membership has doubled, with
the Department of Homeland Security being the most recently added member.
In addition to the Committee's 12 standing members, other agencies may be
called on when their particular expertise is needed.

^5Given the immediacy of this hearing, we were unable to gather and verify
data on the disposition of these cases. However, even if the companies
refiled subsequent to our 2005 reporting, the refilings were not timely.

^6Executive 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).

In 1991, the Treasury Department, as Chair of the Committee, issued
regulations to implement Exon-Florio. The law and regulations establish a
four-step process for reviewing foreign acquisitions of U.S. companies:
(1) voluntary notice by the companies;^7 (2) a 30-day review to identify
whether there are any national security concerns; (3) a 45-day
investigation period 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 (see
fig. 1).

^7Notification is not mandatory. However, any member agency is authorized
to submit a notification of an acquisition if the companies have not done
so. As of our 2005 report, no agency has submitted a notification of an
acquisition. Instead, member agencies have informed Treasury of
acquisitions that may be subject to Exon-Florio, and Treasury has
contacted the company to encourage them to officially notify the Committee
of the acquisition to begin a review.

Figure 1: Process Used by the Committee on Foreign Investment in the
United States to Implement the Exon-Florio Amendment

aAt any point prior to a presidential decision, companies can request to
withdraw a notification.

In most cases, the Committee completes its review within the initial 30
days because there are no national security concerns or concerns have been
addressed, or the companies and the government agree on measures to
mitigate identified security concerns. In cases where the Committee is
unable to complete its review within 30 days, it may initiate a 45-day
investigation or allow companies to withdraw their notifications. The
Committee generally grants requests to withdraw. When the Committee
concludes a 45-day investigation, it is required to submit a report with
recommendations to the President. 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.^8 The President has
15 days after the investigation is completed to decide whether to prohibit
or suspend the proposed acquisition, order divestiture of a completed
acquisition, or take no action.^9 Table 1 provides a breakdown of
notifications and committee actions taken from 1997 through 2004 (the
latest date for which data were available at the time of our 2005 review).

Table 1: Notifications to the Committee on Foreign Investment in the
United States and Actions Taken, 1997 through 2004

                                                          Notices                       
                                                        withdrawn                       
                                                            after                       
                                                    investigation                       
Year  Notifications Acquisitions^a Investigations^b         begun Presidentialdecisions 
1997             62             60                0             0                     0 
1998             65             62                2             2                     0 
1999             79             76                0             0                     0 
2000             72             71                1             0                     1 
2001             55             51                1             1                     0 
2002             43             42                0             0                     0 
2003             41             39                2             1                     1 
2004             53             50                2             2                     0 
Total           470            451                8             6                   2^c 

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.

cIn both cases the President took no action, thereby allowing the
transaction, and sent a report to Congress.

^831 C.F.R. S 800.504(b).

^9In 1990, the President ordered a Chinese aerospace company to divest its
ownership of a U.S. aircraft parts manufacturer. To date, this is the only
divestiture the President has ordered.

Over the past decade, GAO has conducted several reviews of the Committee's
process and actions and has found areas where improvements were needed. In
2000, we found that gaps in the notification process raised concerns about
the Committee's ability to ensure transactions are notified.^10 Our 2002
review, prompted by a lack of congressional insight into the process,
again found weaknesses in the process. Specifically, we reported that
member agencies could improve the agreements they negotiated with
companies under Exon-Florio to mitigate national security concerns. We
also questioned the use of withdrawals to provide additional time for
reviews.^11 While our most recent work indicated that member agencies had
begun to take action to respond to some of our recommendations, concerns
remained about the extent to which the Committee's implementation of
Exon-Florio had provided the safety net envisioned by the law.^12

Views Differed over What Constitutes a National Security Threat and When an
Investigation Is Warranted

In 2005, we reported that a lack of agreement among Committee members on
what defines a threat to national security and what criteria should be
used to initiate an investigation may have limited the Committee's
analyses of proposed and completed foreign acquisitions. From 1997 through
2004, the Committee received a total of 470 notices of proposed or
completed acquisitions,^13 yet it initiated only 8 investigations.

While neither the statute nor the implementing regulation defines
"national security," the statute provides a number of factors that may be
considered in determining a threat to national security (see fig. 2).

^10Defense Trade: Identifying Foreign Acquisitions Affecting National
Security Can Be Improved, [13]GAO/NSIAD-00-144 (Washington, D.C.: June 29,
2000).

^11Defense Trade: Mitigating National Security Concerns under Exon-Florio
Could Be Improved, [14]GAO-02-736 (Washington, D.C.: Sept. 12, 2002).

^12Defense Trade: Enhancements to the Implementation of Exon-Florio Could
Strengthen the Law's Effectiveness, [15]GAO-05-686 (Washington, D.C.:
Sept. 28, 2005).

^13Nineteen of these notices were refilings.

Figure 2: Exon-Florio Factors That May Be Considered When Determining a
Threat to National Security

Some Committee member agencies argued for a more traditional and narrow
definition of what constitutes a threat to national security--that is, (1)
the U.S. company possesses export-controlled technologies or items; (2)
the company has classified contracts and critical technologies; or (3)
there is specific derogatory intelligence on the foreign company. Other
members, including the Departments of Defense and Justice, argued that
acquisitions should be analyzed in broader terms. According to officials
from these departments, vulnerabilities could 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, such as weapons system
software development^14 or a decrease in the number of innovative small
businesses researching and developing new 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. For example, in reviewing a 2001 acquisition of a U.S.
company, the Departments of Defense and Commerce raised several concerns
about foreign ownership of sensitive but unclassified technology,
including the possibility of this sensitive technology being transferred
to countries of concern or losing U.S. government access to the
technology. However, Treasury argued that these concerns were not national
security concerns because they did not involve classified contracts, the
foreign company's country of origin was a U.S. ally, or there was no
specific negative intelligence about the company's actions in the United
States.

^14Defense Acquisitions: Knowledge of Software Suppliers Needed to Manage
Risks, [16]GAO-04-678 (Washington D.C.: May 25, 2004).

In one proposed acquisition, disagreement over the definition of national
security resulted in an enforcement provision being removed from a
mitigation agreement between the foreign company and the Departments of
Defense and Homeland Security. Defense had raised concerns about the
security of its supply of specialized integrated circuits, which are used
in a variety of defense technologies that the Defense Science Board had
identified as essential to our national defense--technologies found in
unmanned aerial vehicles, the Joint Tactical Radio System, and
cryptography and other communications protection devices. However,
Treasury and other Committee members argued that the security of supply
issue was an industrial policy concern and, therefore, was outside the
scope of Exon-Florio's authority. As a result of removing the provision,
the President's authority to require divestiture under Exon-Florio was
eliminated as a remedy in the event of non-compliance.^15

Committee members also disagreed on the criteria that should be applied to
determine whether a proposed or completed acquisition should be
investigated. While Exon-Florio 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, it does not provide specific guidance for the appropriate
criteria for initiating an investigation of an acquisition.^16 At the time
of our work, Treasury, as Committee Chair, applied essentially the same
criteria established in the law for the President to suspend or prohibit a
transaction, or order divestiture: (1) there is credible evidence that the
foreign controlling interest may take action to threaten national security
and (2) no laws other than Exon-Florio and the International Emergency
Economic Powers Act are adequate and appropriate to protect national
security.^17 However, the Defense, Justice, and Homeland Security
Departments argued that applying these criteria at this point in the
process is inappropriate because the purpose of an investigation is to
determine whether or not credible evidence of a threat exists. Notes from
a policy-level discussion of one particular case further corroborated
these differing views.

^15The regulations provide that 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
material information to the Committee (31 C.F.R. S 800.601(e)).

^1650 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)).

Committee Allowed Withdrawal of Notifications to Avoid Investigations

Committee guidelines required member agencies to inform the Committee of
national security concerns by the 23rd day of a 30-day review--further
compressing the limited time allowed by legislation to determine whether a
proposed or completed foreign acquisition posed a threat to national
security. According to one Treasury official, the information is needed a
week early to meet the legislated 30-day requirement. While most reviews
are completed in the required 30 days, some Committee members have found
that completing a review within such short time frames can be
difficult--particularly in complex cases. One Defense official said that
without advance notice of the acquisition, time frames are too short to
complete analyses and provide input for the Defense Department's position.
Another official said that to meet the 23-day deadline, analysts have only
3 to 10 days to analyze the acquisition. In one instance, Homeland
Security was unable to provide input within the 23-day time frame.

If a review cannot be completed within 30 days and more time is needed to
determine whether a problem exists or identify actions that would mitigate
concerns, the Committee can initiate a 45-day investigation of the
acquisition or allow companies to withdraw their notifications and refile
at a later date.^18 According to Treasury officials, the Committee's
interest is to ensure that the implementation of Exon-Florio does not
undermine U.S. open investment policy. Concerned that public knowledge of
investigations could devalue companies' stock, erode confidence of foreign
investors, and ultimately chill foreign investment in the United States,
the Committee has generally allowed and often encouraged companies to
withdraw their notifications rather than initiate an investigation.

^1750 U.S.C. app. S 2170(e).

^18Exon-Florio's implementing regulations permit companies to request to
withdraw notifications at any time up to a presidential decision. After
the Committee approves a withdrawal, any subsequent refiling is considered
a new, voluntary notice.

While an acquisition is pending, companies that have withdrawn their
notification have an incentive to resolve any outstanding issues and
refile as soon as possible. However, if an acquisition has been concluded,
there is less incentive to resolve issues and refile, extending the time
during which any concerns remain unresolved. Between 1997 and 2004,
companies involved in 18 acquisitions withdrew their notification and
refiled 19 times. In four cases, the companies had already concluded the
acquisition before filing a notification. One did not refile until 9
months later and another did not refile for 1 year. Consequently, concerns
raised by Defense and Commerce about potential export control issues in
these two cases remained unresolved for as much as a year--further
increasing the risk that a foreign acquisition of a U.S. company would
pose a threat to national security.

For the other two cases, neither company had refiled at the time we
completed our work. In one case, the company had previously withdrawn and
refiled 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. When we issued our report in
2005, 4 years had passed since the second withdrawal without a refiling.
In the second case, the company--which filed with the Committee more than
6 months after completing its acquisition--was also allowed to withdraw
its notification. At the time we issued our report, 2 years had passed
without a refiling.

Lack of Reporting Contributed to the Opaqueness of the Committee's Process and
Diminished Oversight

In response to concerns about the lack of transparency in the Committee's
process, the Congress passed the Byrd Amendment to Exon-Florio in 1992,
requiring a report to the Congress if the President made any decision
regarding a proposed foreign acquisition. In 1992, another amendment also
directed the President to report every 4 years on whether there was
credible evidence of a coordinated strategy by one or more countries to
acquire U.S. companies involved in research, development, or production of
critical technologies for which the United States is a leading producer,
and whether there were industrial espionage activities directed or
assisted by foreign governments against private U.S. companies aimed at
obtaining commercial secrets related to critical technologies.

While the Byrd Amendment expanded required reporting on Committee actions,
few reports have been submitted to the Congress because withdrawing and
refiling notices to restart the clock has limited the number of cases that
result in a presidential decision. Between 1997 and 2004, only two
cases--both involving telecommunications systems--resulted in a
presidential decision and a subsequent report to the Congress. Infrequent
reporting of Committee deliberations on specific cases provides little
insight into the Committee's process to identify concerns raised during
investigations and determine the extent to which the Committee has reached
consensus on a case. Further, despite the 1992 requirement for a report on
foreign acquisition strategies every 4 years, at the time of our work
there had been only one report--in 1994. However, another report, in
response to this requirement, was recently delivered to the Congress.

In conclusion, the effectiveness of Exon-Florio as a safety net depends on
how the broad scope of its authority is implemented in today's globalized
world--where identifying threats to national security has become
increasingly complex. While Exon-Florio provides the Committee on Foreign
Investment in the United States the latitude to define what constitutes a
threat to national security, the more traditional interpretation fails to
fully consider factors currently embodied in the law. Further, the
Committee guidance requiring reviews to be completed within 23 days to
meet the 30-day legislative requirement, along with the reluctance to
proceed to an investigation, limits agencies' ability to complete in-depth
analyses. However, the alternative--allowing companies to withdraw and
refile their notifications--increases the risk that the Committee, and the
Congress, could lose visibility over foreign acquisitions of U.S.
companies. The criterion for reporting specific cases to the Congress only
after a presidential decision contributes to the opaque nature of the
Committee's process.

Our 2005 report laid out several matters for congressional consideration
to (1) help resolve the differing views as to the extent of coverage of
Exon-Florio, (2) address the need for additional time, and (3) increase
insight and oversight of the process. Further, we suggested that, when
withdrawal is allowed for a transaction that has been completed, the
Committee establish 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. We have been told that
some of these steps are now being taken.

Madam Chairwoman, this concludes my prepared statement. I will be happy to
answer any questions you or other Members of the Subcommittee may have.

For information about this testimony, please contact Ann M.
Calvaresi-Barr, Director, Acquisition and Sourcing Management, at (202)
512-4841 or [email protected] . Other individuals making key
contributions to this product include Thomas J. Denomme, Gregory K.
Harmon, Paula J. Haurilesko, John J. Marzullo, Russell Reiter, Karen
Sloan, and Marie Ahearn.

Scope and Methodology

Our understanding of the Committee's process is based on our 2005 work but
built on our review of the process and our discussions with agency
officials for our 2002 report. For our 2005 review, and to expand our
understanding of the Committee's process for reviewing foreign
acquisitions of U.S. companies, we met with officials from the Departments
of Commerce, Defense, Homeland Security, Justice, and 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 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.

(120643)

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Highlights of [25]GAO-07-661T , a testimony before the House Committee on
Homeland Security, Subcommittee on Transportation Security and
Infrastructure Protection

March 23, 2007

DEFENSE TRADE

National Security Reviews of Foreign Acquisitions of U.S. Companies Could
Be Improved

The Exon-Florio amendment to the Defense Production Act of 1950, enacted
in 1988, authorized the President to suspend or prohibit foreign
acquisitions of U.S. companies that pose a threat to national security.

The Committee on Foreign Investment in the United States--chaired by the
Department of Treasury with 11 other members, including the Departments of
Commerce, Defense, and Homeland Security--implements Exon-Florio through a
four-step review process: (1) voluntary notice by the companies of pending
or completed acquisitions; (2) a 30-day review to determine whether the
acquisition could pose a threat to national security; (3) a 45-day
investigation period to determine whether concerns require possible action
by the President; and (4) a presidential decision to permit, suspend, or
prohibit the acquisition.

Over the past decade, GAO has conducted several reviews of the Committee's
process and has found areas where improvements were needed. GAO's most
recent work, conducted in 2005, indicated concerns remained.

[26]What GAO Recommends

In 2005, GAO offered several matters for Congressional consideration aimed
at improving the Committee's process. The Committee has taken some actions
to reform the process, but GAO has not examined these actions.

Exon-Florio reviews are meant to serve as a safety net when other laws may
be inadequate to protect national security. GAO found that several aspects
of the review process may have weakened the law's effectiveness. First,
member disagreement about what defines a threat to national security may
have limited the Committee's analyses. Some argued that reviews should be
limited to concerns about export-controlled technologies or items,
classified contracts, or specific derogatory intelligence concerning the
company. Others argued for a broader scope, one that considers potential
threats to U.S. critical infrastructure, defense supply, and technology
superiority.

Committee members also differed on the criteria that should be used to
determine when an investigation is warranted. Some applied essentially the
criteria in the law for a presidential decision--that is, there is
credible evidence that the foreign controlling interest may take action
that threatens national security and that no other laws other than the
International Emergency Economic Powers Act are adequate to protect
national security. Others argued that these criteria are inappropriate
because the purpose of an investigation is to determine if credible
evidence of a threat exists.

While most cases can be completed within the 30-day review period, complex
acquisitions may require more time. Concerned that an investigation could
discourage foreign investment, the Committee allowed companies to withdraw
notifications rather than proceed to investigation. While this practice
can provide additional review time without chilling foreign investment, it
may also heighten the risk to national security in transactions where
there are concerns and the acquisition has been completed or is likely to
be completed during the withdrawal period. Finally, because few cases are
investigated, few require a presidential decision, giving Congress little
insight into the Committee's process.

The Committee on Foreign Investment in the United States' Review Process

References

Visible links
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
  13. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-00-144
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-02-736
  15. http://www.gao.gov/cgi-bin/getrpt?GAO-05-686
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-04-678
  17. file:///home/webmaster/infomgt/d07661t.htm#mailto:[email protected]
  18. http://www.gao.gov/
  19. http://www.gao.gov/
  20. http://www.gao.gov/fraudnet/fraudnet.htm
  21. file:///home/webmaster/infomgt/d07661t.htm#mailto:[email protected]
  22. file:///home/webmaster/infomgt/d07661t.htm#mailto:[email protected]
  23. file:///home/webmaster/infomgt/d07661t.htm#mailto:[email protected]
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-661T
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