The Committee on Foreign Investment in the United States (CFIUS) is drafting the implementing regulations for the Foreign Investment Risk Review Modernisation Act (FIRRMA), which was enacted in August 2018 and represents the most sweeping set of changes to the processes and jurisdiction of CFIUS in its 44-year history.
During the legislative process, Congress raised a slew of tough issues and highlighted questions regarding key definitions. CFIUS must now address those issues and clarify the definitions.
The draft regulations may be released for public comment as early as Summer 2019. Foreign investors are closely following how CFIUS will exercise its new 'country specification' authority under Section 1703 of the FIRRMA, which was enacted as part of the John McCain National Defence Authorisation Act for fiscal year 2019 and codified in Section 4565(a)(4)(E) of US Code Title 50. More precisely, the question is whether CFIUS will create a negative or positive list of specific countries whose transactions are, respectively, either required to undergo CFIUS review or exempt from CFIUS review.
Senate versus House of Representatives: divergent approaches on country treatment
The country specification provision was added to the FIRRMA during conference negotiations between the Senate and the House of Representatives following a disagreement over whether a negative or positive list approach was the best option for CFIUS to manage the pool of non-controlling, non-passive investments and real estate deals that would require screening. By design, this provision in Section 1703 is vague and thus provides CFIUS with substantial flexibility in implementation.
However, Congress also made the country specification function mandatory so, at the very least, CFIUS must enumerate some basic criteria in the new regulations. If CFIUS leverages this authority, it has the potential to drastically reduce the number of transactions that might otherwise fall under its jurisdiction, allowing it to better focus its energy and attention on transactions that involve real national security risks. In anticipating how CFIUS might implement this provision, it is worth considering some of the FIRRMA's legislative history.
Senator John Cornyn (R-Texas), the principal author of the FIRRMA, drafted his original bill in close coordination with executive branch officials at the Department of Treasury, the Department of Defence and the Department of Justice, as well as other CFIUS member agencies. He introduced the FIRRMA on 8 November 2017 and drove the entire legislative process. One provision in his original bill would have authorised CFIUS to use a positive list (or so-called 'white list') of foreign allies and partner nations that, as a general matter, represent little risk to US national security. CFIUS would have been able to use this list to grant exemptions from CFIUS reviews under the expanded jurisdiction, provided that each foreign investor in a transaction was organised under the laws of a positive listed country or at least subject to such a country's jurisdiction.
On 16 May 2018 a hollowed-out version of the FIRRMA was introduced in the House of Representatives to counter the Cornyn bill, which had gathered significant legislative momentum and was well on its way to passage. That House bill would have required CFIUS to apply a negative list (or so-called 'black list') of foreign countries to restrict the expansion of CFIUS jurisdiction to transactions emanating from 'countries of concern' – defined to include China, Russia and Venezuela, state sponsors of terrorism and other arms-embargoed countries. Critically, this negative list approach was strongly opposed by the Treasury Department, which chairs CFIUS and is leading the drafting of the FIRRMA regulations, suggesting that a positive list approach is much more likely to emerge in the regulations.
How positive list might look: home country will remain key
If CFIUS puts its new country specification authority to use in a robust way and pursues a positive list approach, what might that look like? It could resemble a pre-check process for CFIUS, referring of course to the programme started by the Transportation Security Administration in 2011 to exempt approved air travel passengers from the full security screening that is required of all other passengers.
The related provision from the original Cornyn bill, which had substantial input from CFIUS itself, gives strong indications of what CFIUS likely considers to be appropriate criteria and what direction the regulations will likely take. To help CFIUS determine which transactions to exempt from review, that provision authorised it to review specific criteria, such as whether a foreign country has:
- a mutual defence treaty in place with the United States;
- an adequate foreign investment screening system of its own; and
- an arrangement to coordinate with the United States on foreign investment screening.
Based on this history, it is likely that a foreign investor's home country and that country's relationship with the United States will be the overarching factors in whether the investor attains trusted status under the forthcoming regulations. In fact, the final provision, as enacted by Congress, requires CFIUS to consider exactly how a foreign investor is connected to a particular foreign country or government and what that means for US national security.
The United States has mutual defence treaties in effect with numerous countries, including long-time North Atlantic Treaty Organisation (NATO) allies such as Canada, the United Kingdom, France and Germany, as well as key Indo-Pacific allies such as Australia, Japan and South Korea. In addition to partnering on security matters, many of these nations have also been prolific investors in the United States.
As CFIUS drafts the new regulations, it may also broaden the criteria regarding mutual defence treaty allies that was laid out in the original Cornyn bill. In so doing, it could preserve the opportunity for broader categories of countries to qualify for a positive list at some point in the future, including perhaps "major non-NATO" allies or strategic partners such as Singapore, India or Israel, which cooperate extensively with the United States on security matters but, for various reasons, are unlikely to sign up as formal US allies.
Information sharing would perhaps be the easiest of the three original criteria for a foreign country to meet, and the possibility of being put on a positive list would provide a powerful incentive for countries to share information and amplify their own screening systems for foreign investment. However, it remains to be seen what standard CFIUS will use to determine what 'good enough' looks like regarding a country's screening system. To that end, in recent years the Treasury Department has been working with allies and partners to help them establish new foreign investment screening systems and bolster existing ones.
One additional issue is that the final country specification language contemplates categories of foreign investor and it remains unclear how each specific foreign investor will ascertain whether CFIUS considers it a trusted investor. CFIUS could establish some type of mechanism to make such determinations and inform investors, but such a process might also be viewed by CFIUS as unwieldly or too resource intensive.
Apart from relationships with specific countries, for investors that aspire to hold trusted investor status, it is advisable to keep their ownership structures simple, straightforward and transparent. In considering whether to grant trusted investor status, CFIUS may also examine a foreign investor's track record on compliance, including with sanctions and export control regulations. Additionally, trusted investor status is unlikely to be a permanent reality for all foreign investors. Rather, the status will likely need to be revisited with CFIUS and refreshed on a regular basis, especially after any changes in the foreign investor (eg, in ownership).
Since Congress mandated FIRRMA's country specification function, CFIUS will have to set out at least some basic criteria in the regulations to narrow down and better focus its workload in relation to foreign investors' connections to foreign countries or governments. The real question is whether CFIUS will make aggressive use of this authority, as key members of Congress and many stakeholders in the investment community strongly prefer or whether it will just 'check the box' by writing regulatory provisions that leave foreign investors guessing or perhaps contain standards that are impossible to meet. Fully leveraging this authority would allow CFIUS to avoid wasting time reviewing investments from lower-risk investors, instead directing its efforts towards more complicated, higher-risk transactions emanating from China, Russia and other countries of special concern.
This article was originally published in Law360.
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