Exon-Florio/CFIUS reform proposals

Foreign acquisitions in the United States are subject to security review under the provisions of the Exon-Florio Act of 1988, as modified by the Byrd amendment of 1992.  By executive order, the President has placed responsibility for the review in the Committee on Foreign Investment in the United States (CFIUS). 

The process, and its history, is summarized in this Congressional Research Service (CRS) report: The Exon-Florio National Security Test for Foreign Investment .

The CFIUS process may or may not have failed in the technical sense of providing an adequate security review of the Dubai Ports World (DP World) purchase of P&O Ports North America.  It was a failure politically, since it failed to provide a level of assurance that could stand up when the issue became politicized.  Given the hot-button nature of the security, and foreign outsouring, issues involved, it might not have been possible to design a process that would stand up.

I described the process up through the point on February 27, when DP World requested an additional 45 day investigation: Countdown to controversy: Dubai Ports World .

DP World acquired P&O but, facing strong public and Congressional opposition, agreed to divest itself of the  U.S. port assets.

Congressmen and Senators are pushing ahead with legislation to modify the CFIUS process.

Jonathan Weisman reports: Legislation to keep ports issue boiling (via Seattle Times, March 11) 

House Republican leaders will soon unveil legislation demanding a congressional role in reviewing the acquisition of U.S. businesses by foreign buyers, suggesting the controversy over an abandoned Dubai ports deal will continue to roil congressional relations with the Bush administration. 

House Majority Whip Roy Blunt, R-Mo., is drafting a bill to require congressional oversight as the administration reviews foreign business acquisitions, a role Congress has not played since the Committee for Foreign Investment in the United States (CFIUS) was created three decades ago....

Jeremy Pelofsky points to some of the proposals:

Senate Banking Committee Chairman Richard Shelby, an Alabama Republican, wants to explicitly require extended reviews of deals involving state-owned companies such as DP World and boost congressional oversight by requiring reports and notification, Gray said.

Sen. Robert Menendez, a New Jersey Democrat, has offered a measure that would require CFIUS to notify Congress about its investigations and for public comment periods on deals. Democratic Sen. Charles Schumer of New York also called for reform.

"I look forward to working with my colleagues on the Banking Committee to make sure that CFIUS puts national security above robust global trade," Schumer said....

Sen. Susan Collins, head of the Senate Homeland Security and Governmental Affairs Committee and a Maine Republican, has called for CFIUS to be headed by the Department of Homeland Security. ("Congress pushes ahead on security review reform", Reuters, March 10)

Here is legislation introduced by Senator Dodd on March 7: U.S. National Security Protection Act of 2006 .  Dodd's press release explains that the legislation would:

• Add the Director of National Intelligence and CIA Director to CFIUS – making it 14 members instead of the current 12.
• Create an Intelligence Subcommittee to review all potential deals.
• Require congressional notification at every step of the CFIUS process.
• Clarify when a mandatory 45-day investigation must occur.
• Require foreign companies to notify the President or CFIUS of potential acquisitions or takeovers of U.S. critical infrastructure, which is currently voluntary.

("Sen. Dodd Introduces Legislation to Strengthen U.S. Security Measures", March 7)

Exon-Florio and the CFIUS process have been the subject of several studies by the Government Accountability Office (GAO - formerly the Government Accounting Office).  In 1995, the GAO produced: Foreign Invesment.  Implementation of Exon-Florio and relatedamendments .   The GAO saw problems in 2002 (Defense Trade: Mitigating National Security Concerns under Exon-Florio Could Be Improved, GAO-02-736, September 12, 2002 )

The Committee's process for implementing Exon-Florio contains the following weaknesses that may have limited effectiveness: (1) the Committee has not established interim protections before allowing withdrawal when concerns were raised and the acquisition had already been completed (2) agreements between the Committee and companies contained nonspecific language that may make them difficult to implement and (3) agreements did not specify responsibility for overseeing implementation and contained few provisions to assist in monitoring compliance.

GAO looked at the process again in 2005, Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness,  and found problems.  These were described by the reports authors before the Senate Banking Committee last October: A Review of the CFIUS Process for Implementing the Exon-Florio Amendment .  A couple of issues may be pertinent in this case.

First, committee members differ over what constitutes a threat to national security:

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 be limiting 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, yet it initiated only 8 investigations.

Some Committee member agencies, including Treasury, apply 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, argue that acquisitions should be analyzed in broader terms.  According to officials from these departments, 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 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 indefense 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.

Second, the GAO authors saw an institutional reluctance to open investigations (in addition to the standard review process):

Committee members also disagree 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.14 Currently, Treasury, as Committee Chair, applies essentially the same criteria established in the law for the President to suspend or prohibit atransaction, 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 the International Emergency Economic Powers Act are appropriate or adequate to protect national security.   However, the Defense, Justice, and Homeland Security departments have 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 a credible threat exists. Notes from a policy-level discussion of one particular case further corroborated these differing views.

Comments

[Clif Burns]

Nice collection of materials, but you should remember that you can't link to a URI at Thomas for a search result. That link expires, so that your link to Dodd's legislation was broken. You need to follow the link in the search request to the GPO site to get a permanent link. The correct link is
here.