US Uses Obscure Agency To Target Chinese Foreign Investments
By VOA
By Masood Farivar
For decades, it was virtually unknown outside a small circle of investors, corporate lawyers and government officials.
But in recent years, the small interagency body known as the Committee for Investment in the United States has grown in prominence, propelled by a U.S. desire to use it as an instrument of national security and foreign policy.
This week, the panel made headlines after it reportedly directed Chinese gaming company Beijing Kunlun Tech to divest itself of Grindr, a popular gay dating app, because of concern the user data it collects could be used to blackmail military and intelligence personnel.
Operating out of the Treasury Department, the nine-member CFIUS (pronounced Cy-fius) reviews foreign investments in U.S. businesses to determine whether they pose a national security threat.
Notification was voluntary
Until last year, notifying the panel about such investments was voluntary, something Kunlun and California-based Grindr took advantage of when they closed a deal in 2016.
But given growing U.S. concern about Chinese companies with ties to Beijing buying businesses in sensitive U.S. industries, the committee’s rare intervention to undo the deal was hardly a surprise, said Harry Broadman, a former CFIUS member.
“I think anyone who was surprised by the decision really didn’t understand the legislative history, legislative landscape and the politics” of CFIUS, said Broadman, who is now a partner and chair of the emerging markets practice at consulting firm Berkley Research Group.
The action by CFIUS is the latest in a series aimed at Chinese companies investing in the U.S. tech sector and comes as the Trump administration wages a global campaign against telecom giant Huawei Technologies and remains locked in a trade dispute with Beijing. The U.S. says the state-linked company could gain access to critical telecom infrastructure and is urging allies to bar it from participating in their new 5G networks.
While the administration has yet to formulate a policy on Huawei, the world’s largest supplier of telecom equipment, the latest CFIUS action underscores how the U.S. is increasingly turning to the body to restrict Chinese investments across a broad swath of U.S. technology companies.
“CFIUS is one of the few tools that the government has that can be used on a case-by-case basis to try to untangle [a] web of dependencies and solve potential national security issues, and the government has become increasingly willing to use that tool more aggressively,” said Joshua Gruenspecht, an attorney at Wilson Sonsini Goodrich & Rosati in Washington, who represents companies before the committee.
CFIUS’s history has long been intertwined with politics and periodic public backlash against foreign investment in the U.S.
OPEC investments
In 1975 it was congressional concern over the Organization of the
Petroleum Exporting Countries (OPEC) investments in U.S. stocks and
bonds that led President Gerald Ford to set up the committee through an
executive order. It was tasked with monitoring the impact of foreign
investment in the United States but had little other authority.
In the years that followed, backlash against foreign acquisitions of certain U.S. firms led Congress to beef up the agency.
In 1988, spurred in part by a Japanese attempt to buy a U.S.
semiconductor firm, Congress enshrined CFIUS in law, granting the
president the authority to block mergers and acquisitions that
threatened national security.
In 2007, outrage over CFIUS’s decision to approve the sale of management
operations of six key U.S. ports to a Dubai port operator led Congress
to pass new legislation, broadening the definition of national security
and requiring greater scrutiny by CFIUS of certain types of foreign
direct investment, according to the Congressional Research Service.
But by far the biggest change to how CFIUS reviews and approves foreign
transactions came last summer when Congress passed the Foreign
Investment Risk Review Modernization Act of 2018.
Slated to be fully implemented in 2020, the new law vastly expanded
CFIUS’s jurisdiction and authority, requiring foreign companies that
take even a non-controlling stake in a sensitive U.S. business to get
the committee’s clearance.
While the new law did not mention China by name, concern about Chinese
investments and national security dominated the debate that led to its
enactment.
“There is no mistake that both the congressional intent and the
executive intent has a clear eye on the role of China in the
transactions,” Broadman said.
Threats to ‘technological superiority’
Under interim rules issued by the Treasury Department last fall, investments in U.S. businesses that develop and manufacture “critical technologies” in one or more of 27 designated industries are now subject to review by CFIUS. Most of the covered technologies are already subject to U.S. export controls. The designated industries are sectors where foreign investment “threatens to undermine U.S. technological superiority that is critical to U.S. national security,” according to the Treasury Department. They range from semiconductor machinery to aircraft manufacturing.
The new regulations mean that foreign companies seeking to invest in any of these technologies and industries must notify CFIUS at least 45 days prior to closing a deal. CFIUS will then have 30 days to clear the deal, propose a conditional approval or reject it outright. If parties to a transaction do not withdraw in response to CFIUS’s concerns, the president will be given 15 days to block it.
To date, U.S. presidents have blocked five deals — four of them
involving Chinese companies. One was blocked by the late President
George H.W. Bush in 1990, two by former President Barack Obama in 2012
and 2016, and two by President Donald Trump.
The number is deceptively small. A far greater number of deals are
simply withdrawn by parties after they don’t get timely clearance or
CFIUS opens a formal investigation. According to the Treasury
Department, of the 942 notices of transactions filed with CFIUS between
2009 and 2016, 107 were withdrawn during the review or after an
investigation.
In recent years, CFIUS has reviewed between 200 and 250 cases per year,
according to Gruenspecht. But the number is likely to exceed 2,000 a
year under the new CFIUS regime, he added.
The tighter scrutiny has raised questions about whether the new law
strikes the right balance between encouraging foreign investment and
protecting national security.
“I think the short answer is it’s too early to tell,” Gruenspecht said.
However, he added, if the new law “becomes a recipe for taking foreign
investment off the table for whole realms of new emerging technology,
that crosses a lot of boundaries.”
Concern in Europe
The U.S. is not the only country toughening screening measures for foreign investment. In December, the European Union proposed a new regulation for members to adopt “CFIUS-like” foreign investment review processes.
Gruenspecht said that while foreign investors are not “thrilled” about the additional CFIUS scrutiny, “a lot of Western nations are also saying, actually, ‘We totally understand the rational behind CFIUS and we’re looking to implement our own internal versions of CFIUS ourselves.’ ”