As Prepared for Delivery
The United States has long been the world’s leading destination for foreign direct investment. From time to time, surges of investment from new sources, though much smaller in volume than investment from the traditional sources, spark discussion about the relative benefit and risks related to such investment. It is useful, at the outset, to consider why these discussions have always led to the same conclusion: that it is in the national interest of the United States to maintain an open investment policy.
According to Bureau of Economic Analysis statistics, in 2013, majority-owned U.S. affiliates of foreign-headquartered firms contributed $836 billion to U.S. GDP, or 5.8 percent of total U.S. private industry value added. These firms employed 6.1 million workers, or 5.2 percent of U.S. private industry employment. They have an outsized effect, when compared to the average in the economy or their share of GDP. For example, these firms pay an average compensation of over $79,000, which is about 33 percent higher than the average compensation paid to private industry workers in the U.S. economy as a whole. These firms exported $360 billion of goods in 2013, accounting for 23 percent of total U.S. exports of goods. In 2013, these firms invested $53 billion into research and development, which is more than 16 percent of all R&D performed by all U.S. businesses.
It was in recognition of these many benefits that President Obama, in 2011 and again in 2013, reaffirmed the United States’ open investment policy, noting that taking steps to ensure that we remain the destination of choice for investors around the world will help us win the competition for jobs and industries of the future and bring prosperity to our people.
This is the same position enunciated by President Bush in 2007, President Clinton in 1993, President Bush in 1991, and President Reagan in 1983. Congress, too, on a bipartisan basis, has supported the United States’ open investment policy.
Like any nation, we must protect our national security, which is where the Committee on Foreign Investment in the United States (CFIUS) fits in. The fact is, however, that the vast majority of foreign investment raises no national security concerns. Therefore, it is important that the CFIUS review process be one that supports the open investment environment we seek to foster as a nation. This goal of protecting national security, while at the same time maintaining an open investment environment, is what I’d like to spend a few minutes discussing today.
CFIUS supports these dual goals by (1) ensuring that its reviews are focused (2) ensuring that its reviews are robust and analytically rigorous, (3) acting in proportion to the risk, (4) operating by clear procedures, and (5) ensuring accountability.
I’ll briefly touch on each of these five important elements.
First, CFIUS is focused. By statute, CFIUS reviews foreign acquisitions of U.S. businesses exclusively to identify and address national security concerns. This focused mandate reinforces our commitment to welcoming investment that does not pose national security concerns. At the same time, this focused mandate reinforces our commitment to protecting national security by requiring CFIUS to make its decisions exclusively with reference to national security considerations.
The CFIUS statute and the guidance that CFIUS has published provide an extensive, illustrative list of factors and types of transactions that could present national security considerations. CFIUS does not presume that national security concerns can arise only in certain sectors of the economy, but it also does not presume that acquisitions in certain sectors or by certain countries necessarily present national security concerns. Instead, CFIUS looks at the facts of the particular transaction that is under review to ascertain whether completion of that transaction would pose national security concerns. CFIUS does this giving due consideration to the broader context, including other transactions in the industry, market dynamics, and risks in that sector, as may be relevant to the task of understanding whether a national security risk arises as a result of the particular transaction under review.
Which brings me to my second point—CFIUS’s approach to analyzing national security risk arising from a transaction is not arbitrary. CFIUS’s reviews are robust and analytically rigorous.
CFIUS represents a whole-of-government approach. Every transaction notified to CFIUS is analyzed by policy and subject matter experts at each of the standing CFIUS member departments and offices, which, in addition to Treasury as chair, include the Departments of State, Defense, Justice, Energy, Commerce, and Homeland Security, the Office of the United States Trade Representative, and the Office of Science and Technology Policy, each of which coordinates its review with its component offices and agencies. Each transaction is also analyzed by the Office of the Director of National Intelligence, a non-voting member that coordinates its threat assessment with intelligence components across the government. Several other White House offices are also observer members. Based on the subject matter of the transaction under review, CFIUS also routinely involves other agencies of the Federal Government in its review, such as the Departments of Transportation, Health and Human Services, Agriculture, Interior, Veterans Affairs, and the EPA and NASA, among others.
Every CFIUS review involves a methodical assessment of the national security risk posed by the transaction. In assessing the national security risk, CFIUS looks (1) at the threat, which involves an assessment of the intent and capabilities of the acquirer, (2) at the vulnerability, which involves an assessment of the aspects of the U.S. business that could impact national security, and (3) at the potential national security consequences if the vulnerabilities were to be exploited.
If any agency identifies a risk that it believes requires CFIUS action, it will produce a classified written analysis of the risk. This analysis is tested and refined through discussion with the full committee. The shared goal of each agency in each review is to ensure that all concerns identified constitute national security risks and that all national security risks posed by the transaction are identified and addressed appropriately.
It is also important to note that CFIUS is just one part of a system of U.S. laws that protect national security. Many of these other authorities apply regardless of who owns the U.S. entity. CFIUS acts only if it concludes that these other authorities are not adequate or are not appropriate to address the national security risk posed by the transaction under review.
This brings me to my third point. While CFIUS has robust authority to address any national security risks that are not addressed by other authorities, CFIUS is proportional in its response.
Consistent with its focused mandate, CFIUS first seeks to resolve its concerns through establishment of targeted measures to mitigate the national security risk. These measures are subject to scrutiny by the full committee, to ensure that they are tailored and effective. In the vast majority of instances in which CFIUS action is required, CFIUS is able to negotiate appropriate mitigation measures. In the very few instances in which the national security risk cannot reasonably be mitigated, CFIUS will recommend to the President that he suspend or prohibit a transaction, a power reserved to the President.
This brings me to my fourth point. CFIUS operates by clear procedures. We sometimes hear CFIUS described as secretive, as if its decisions are made by a small, hidden group within the government via an ambiguous, unaccountable process. The reality, however, is quite different.
The procedures, rules, and standards by which CFIUS conducts reviews are clearly laid out in published statute, regulations, executive order, and guidance. There are clear points of contact for transaction parties and opportunities for engagement at any stage of the deal-making process. Hardly a hidden body, CFIUS regularly meets with parties to a transaction being reviewed by the committee, with many, if not most, of the government agencies that are regular participants in the CFIUS process present.
CFIUS also adheres to a tight, statutorily mandated timeline for completing its consideration of transactions, including an initial 30-day review period and, if needed, a subsequent investigation period of up to an additional 45 days. CFIUS reaches a conclusion within the 30-day review period with respect to the majority of transactions. With respect to the remainder, CFIUS reaches a conclusion by the end of the 45-day investigation period. At any point during the CFIUS process, parties can request to withdraw and refile their notice – for instance, to allow them additional time to discuss CFIUS’s proposed resolution of the matter; however, this occurs only in a very small number of instances in any particular year. For every transaction it reviews, CFIUS provides the parties with a notification of the outcome of its review.
Because CFIUS’s analysis involves sensitive and classified information, CFIUS is often unable to share with the parties the precise national security risk that it identifies with respect to a transaction. However, in most instances, the parties to a transaction will have an understanding, sometimes fairly advanced, of the national security risk that is driving CFIUS’s action on the transaction. Only in exceptional instances are the parties unaware of the national security concern at stake. In those instances, revelation of the concerns would itself create a risk to national security.
At the same time, protection from public disclosure of sensitive business information about particular transactions is critical to the effective functioning of the CFIUS process. Robust and efficient CFIUS review requires that parties provide CFIUS with extensive, detailed, and highly sensitive business information. The legal prohibition against the U.S. government publicly disclosing information filed with CFIUS, and CFIUS’s strict adherence to this requirement, gives parties the confidence that they need to be fully responsive to CFIUS information requirements.
Parties are much more likely to voluntarily notify CFIUS of a transaction if they are confident that their sensitive business information, including the fact that they are entering into a transaction or have filed a notice with CFIUS, will be protected. This is important, since the CFIUS process is based, in the first instance, on the willingness of parties to voluntarily submit notifications of transactions that they believe may be reviewable by CFIUS.
It is important to note, however, that although the vast majority of notices filed with CFIUS are voluntarily filed, CFIUS has the authority to initiate a review of a transaction even without a filing from the parties, and even after a transaction has been completed. CFIUS member agencies are continually surveying information about pending and completed transactions to consider whether non-notified transactions could pose national security considerations that warrant formal review. CFIUS does, on occasion, exercise its authority to reach out to companies to request a filing and has, in the past, initiated review when a party declined to file a notice after being contacted by CFIUS.
It is important that parties consider whether a CFIUS filing is warranted before completing the transaction. CFIUS will take whatever action is necessary to protect against national security risks posed by a transaction, and if the review occurs after a transaction has been completed, the impact of CFIUS action on the companies could be significantly higher than had the parties sought CFIUS review in advance of completing a transaction. Such actions could include interim measures pending final CFIUS action or a recommendation to the President that the President require divestment. Within the past few years, CFIUS concluded that the risks arising from particular completed transactions could not be resolved without divestment. In all but one instance, the owners chose to voluntarily divest those assets under CFIUS supervision, upon being informed that CFIUS was prepared to send a recommendation to the President. In the one instance in which the owners declined to voluntarily divest the assets, the President issued a divestment order, which, as required by law for any Presidential action under the CFIUS statute, was made public.
The fifth point I’d like to note about CFIUS is that accountability is core to the way that CFIUS conducts its reviews. This is a deliberate result of the CFIUS reforms enacted by Congress in 2007. The process involves numerous federal government agencies with significantly varying missions. As a matter of practice, CFIUS seeks consensus among the member agencies on every transaction. Any agency that has a different assessment of the national security risks posed by a transaction has the ability to press that differing assessment at a higher level within CFIUS and, ultimately, to the President. As a matter of practice, before CFIUS clears a transaction to proceed, each member agency confirms to Treasury, at politically accountable levels, that it has no unresolved national security concerns with the transaction. And, by law, CFIUS—represented by Treasury and one or more other agencies that Treasury designates as a lead agency based on the subject matter of the transaction—then provides a written certification to Congress that CFIUS has no unresolved national security concerns. This certification is executed by Senate-confirmed officials at these agencies at either the Assistant Secretary- or Deputy Secretary-level, depending on the stage of the process at which the transaction is cleared. CFIUS also regularly briefs Congress on transactions about which Congress has expressed interest, after CFIUS has transmitted the required certifications. Finally, CFIUS provides Congress with a classified annual report, a public version of which is also posted on the CFIUS website.
This brings me to my final point, which is an observation about trends involving acquisitions by Chinese companies. As shown in the public version of our annual report, acquisitions by Chinese companies accounted for the largest number of notices of any country filed with CFIUS in 2013 and 2014, replacing the UK and Canada as the largest source of CFIUS transactions. This trend continued in 2015. The composition of CFIUS transactions tends to be generally consistent with overall trends in foreign investment in the United States, even if there isn’t a one-for-one correlation. China, while still small in terms of FDI stock and flow into the United States compared to traditional sources, is a rapidly expanding investor. The Rhodium Group reports that the number of mergers and acquisitions from China increased nearly threefold from 2012 to 2015. It is not surprising, therefore, that we have seen a spike in the number of CFIUS matters where the acquirer is a Chinese company, most of which have been the result of voluntary filings.
CFIUS approaches transactions involving Chinese acquirers with the same national security focus, analytical rigor, commitment to proportionality, adherence to clear procedures, and level of accountability, as it does transactions from any other country. This allows U.S. businesses, U.S. workers, the U.S. economy, and Chinese investors to reap the many benefits of an open investment environment, while ensuring the protection of our national security.
As with all transactions that it reviews, if CFIUS identifies national security concerns with a particular Chinese transaction, it seeks to resolve its concerns through establishment of targeted measures to mitigate the national security risk. If the national security risk cannot reasonably be mitigated, which, as I mentioned earlier, is the case in very few instances, CFIUS will recommend to the President that the President suspend or prohibit the transaction.
I’m prohibited from speaking about specific transactions that CFIUS has cleared. However, there is ample evidence, made public by companies themselves, that CFIUS conducts its reviews of transactions involving Chinese companies on the basis of the facts and circumstances relevant to the particular transaction under review, clearing transactions consistent with our policy of welcoming investment that does not pose national security concerns.
The United States is the leading destination for foreign investment, attracting $380 billion in foreign direct investment in 2015 alone. The CFIUS process as I’ve laid it out here is an important part of ensuring that we maintain such a vibrant investment environment.
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