The Custom-House

CFIUS Under FINSA

G. Christopher Griner, Farhad Jalinous, and Christopher Brewster of Kaye Scholer describe the changes in the way U.S. security reviews of foreign investments are done following passage of last year's Foreign Investment and National Security Act (FINSA) and this year's executive order on the process: Soapbox: Mitigating circumstances (The Deal.com, April 16, 2008):

Satellites and Sovereignty

Canada's Conservative government has just blocked the sale of a division of the Canadian satellite firm MacDonald Dettwiler & Associates (MDA) to U.S. Alliant Techsystems. (Two Issues Combine to Scuttle an Aerospace Takeover,Ian Austen, New York Times, April 11). 

The advanced satellite technology developed by MDA allows the Canadians to monitor their northern lands and waters, and shipping that may be entering those waters.   The Canadian government is worried that the U.S. might gain control of the satellite system and use that control to compromise Canadian national security.   

Mark, at the Canadian defense blog, The Torch, has done a nice series of posts on this.  In Our new satellite surveillance capability... (January 12, 2008) he quotes from a Canadian National Defense backgrounder of January 10 to explain something about the satellite (Radarsat-2) and its associated information system (Polar Epsilon):

Expect New CFIUS Rules Soon

Stephanie Kirchgaessner reports that the Treasury may release draft rules governing national security reviews of foreign investments by the end of the month: US set to lower Cfius threshold (Financial Times, April 8).

She also reports that the draft will propose lower thresholds for the level of foreign ownership that may trigger review:

Recent Trends in CFIUS Reviews

Legislation reforming the way the U.S. vets foreign direct investment for national security concerns became effective in late October (The Foreign Investment and National Security Act of 2007: Improved Transparency and Slower Deal Making). 

George Foote and Joshua Zive of Bracewell and Giuliani have identified a few trends in the way the Committee on Foreign Investment in the U.S. (CFIUS) carries out reviews in the new legal environment (United States: Heightened Scrutiny Of Foreign Transactions In The U.S. Continues While FINSA Regulations Are Developed, March 6):

Some More Ideas for the New CFIUS Regulations

Last year Congress reformed the process by which the U.S. reviews foreign investments to identify security concerns (Foreign Investment and National Security Act - FINSA).  Reviews are carried out by the interagency Committee on Foreign Investment in the U.S. (CFIUS)  Now the Treasury is preparing a rule to bring regulations up to date.

Yesterday Barney Frank, Carolyn Maloney (a key mover behind FINSA), and Luis Gutierrez, all of the House Financial Services Committee, sent a letter the the Treasury (Frank, Maloney, Gutierrez Call on Treasury to Address Sovereign Wealth Funds in FINSA Regulations) yesterday weighing in with two ideas for the new rule:

Space Science, Exports, and National Security

Exports with military uses are subject to either Department of Commerce Export Administration Regulations (EAR - for products with civilian or military uses) or Department of State International Traffic in Arms Regulations (ITAR - for products that only have military uses).  ITAR rules are more demanding than EAR rules.  Space satellites are covered by the more rigorous ITAR. 

The National Academies Press reports on a recent workshop on the problems that have been created by the application of ITAR to space satellites:  Space Science and the International Traffic in Arms Regulations:Summary of a Workshop (2008).

Here are some extracts:

More Advice on What to Put In the Upcoming FDI Security Review Regs

Democratic Senators Evan Bayh of Indiana and James Webb of Virginia made it clear they expect the Treasury to address the potential security issues raised by sovereign wealth funds as it revamps the regulations governing security reviews of foreign investments.

Both spoke at a hearing held by the U.S.-China Economic and Security Review Commission today (Hearing on the Implications of Sovereign Wealth Fund Investments for National Security).  Last year Congress revised the legislation that governs those security reviews.  The Treasury is revising its regulations to bring them in line with the new statute (How Should We Revise the Regs Governing FDI Security Reviews?).

Bayh laid out his concerns about foreign investments.  His expectations for the regulations:

How Should We Revise the Regs Governing FDI Security Reviews?

In 2006 the Dubai Ports World controversy raised a lot of concerns about the way the U.S. evaluates the national security implications of foreign direct investment (Countdown to controversy: Dubai Ports World, The Custom-House, March 6, 2006).

Since then some changes have been made:

• In 2006 the Administration changed the way it vetted foreign investments (Tightening up the CFIUS Process, The Custom-House, January 29, 2007). 
• In 2007, Congress revised the U.S. statute governing reviews (H.R. 556: Foreign Investment and National Security Act of 2007 (FINSA) at GovTrack.us). 
• In January 2008, the Administration issued a new executive order on reviews (New Executive Order on National Security Reviews of FDI, The Custom-House, January 24). 
• Now the Treasury needs to revise the regulations that govern the reviews (Regulations Pertaining To Mergers, Acquisitions, and Takeovers by Foreign Persons ).

Last Fall the Treasury requested public comment on the changes that should be made to the regulations (Regulations Pertaining to Mergers, Acquisitions and Takeovers October 11, 2007).  It received seven comments - three from industry associations, two from law firms that work with businesses in the reviews, one from the Canadian pensions board, and one from the Yukos Minority Shareholder Coalition (Comments Received Based on October Public Meeting on FINSA Regulations ).

What concerns did the commenters bring up?

Two Reports on Sovereign Wealth Funds

The Congressional Research Service released two reports on sovereign wealth funds this past month.  Martin Weiss provided an overview of the issues they raise in Sovereign Wealth Funds: Background and Policy Issues for Congress (January 28).  Michael Martin focused on the China Investment Corporation in China’s Sovereign Wealth Fund (January 22, 2008).

Treasury's Role in Protecting U.S. National Security

Deputy treasury Secretary Robert Kimmitt spoke to the cadets at the Virginia Military Academy on Tuesday about the Treasury Department's recent role in protecting U.S. National Security.  That role has grown considerably since the Reagan Administration. 

The following extract from his speech (A Department Transformed: Treasury's Role in National Security , January 29, 2008) has some general background remarks, and case studies of Treasury's work with Iraq and Iran (illustrating the both the constructive and punitive dimensions of Treasury's efforts):