New Details Emerge on Legislative Proposal to Modernize CFIUS Process

As the Trump Administration continues to examine its trade relationship with China, legislators in Congress are looking to modernize the Committee on Foreign Investment in the United States (CFIUS) review process in order to effectively respond to increased foreign direct investment in the U.S. and perceived threats to U.S. national security. On June 22, 2017, Senator John Cornyn (R-TX) spoke at the Council on Foreign Relations where he highlighted key features of his proposed Foreign Investment Risk Review Modernization Act (FIRRMA).  The bill would make certain changes to the CFIUS review process in order to close perceived gaps.  As described, however, it appears that CFIUS already has the legislative and regulatory authority to address many of these issues.

Sen. Cornyn explained that a key driving force behind the legislation is China’s strategic effort to acquire early stage dual-use technologies that may have military applications.  FIRRMA would look to reform the CFIUS process through the following:

• Focusing on nations that are the greatest threat based on national security criteria.
  • Although specific countries or technologies of concern would not be listed, it is clear from Sen. Cornyn’s remarks that investment from countries such as China and Russia would subject to a higher level of scrutiny. The Department of Defense would be responsible for developing a list of sensitive technologies.

• Giving CFIUS clearer authority to review certain types of investments.
  • Investments mentioned include joint ventures formed overseas and minority investments where the investor would have access to key technology or intellectual property. While these investments are captured to a certain extent under existing regulations, the proposed legislation would include more specific coverage.  Sen. Cornyn noted there would be less concern with minority investments where the acquirer would not have access to sensitive technologies.

The legislation is not intended to ban Chinese foreign investment nor would it make CFIUS reviews mandatory. Rather, the reforms are meant to improve the CFIUS process so that countries would be unable to acquire critical technologies or infrastructure without being subject to CFIUS, with an increased focus placed on countries posing the greatest national security risks.

Several other proposed reforms would also impact CFIUS, some of which are currently pending in Congress. Earlier this year, U.S. Senators Chuck Grassley (R-IA) and Debbie Stabenow (D-MI) introduced the Food Security is National Security Act of 2017 which would add the Secretaries of Agriculture and Health & Human Services to the Committee, as well as require CFIUS to examine the potential impacts of a proposed transaction on U.S. food security. In addition, there has also been discussion of possible legislation that would expand CFIUS’ mandate beyond national security to consider economic factors in its review. Sen. Cornyn made clear, however, that he did not support expanding CFIUS’ mandate to include economic security considerations.

Sen. Cornyn said that greenfield projects and the acquisition of real estate did not in themselves present national security issues, but expressed concern regarding real estate investments near military installations or other sensitive facilities due to the possibility of foreign espionage.

Overall, there appears to be bipartisan support for modernizing the CFIUS review process. While a consensus on the specifics of any potential reforms has yet to be reached, a number of legislators have expressed concerns regarding China’s access to sensitive U.S. technologies.  Proposed legislation would look to address this issue as a part of a broader enhancement to the CFIUS review process.