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Passage of FIRRMA/CFIUS Legislation Possible this Week

On 20 July, House and Senate negotiators announced that a conference committee had reached an agreement to resolve the differences between the previously approved House and Senate versions of the Foreign Investment Risk Review Modernization Act (FIRRMA), which is aimed at modernising and reforming the operation of the Committee on Foreign Investment in the United States. This legislation is expected to be included in the final version of the National Defense Authorization Act, which could be passed as early as this week. CFIUS is chaired by the Treasury Secretary with other members from the State, Defense, Justice, Commerce, Energy and Homeland Security departments.

According to press reports, most of the agreed provisions are based on the Senate version. FIRRMA would expand CFIUS' jurisdiction to include investments that do not result in 51 percent of a company in the United States switching hands to a foreign investor but which could result in foreign control or foreign access to items or know-how that could put U.S. national security at risk. Those transactions could include joint ventures, minority position investments and real estate deals near military bases and other national security facilities. Language backed by the Senate to re-impose stringent penalties on mainland Chinese telecommunications giant ZTE has, however, reportedly been removed.

The 20 July FIRRMA language removes a requirement from the original Senate bill that would have directed CFIUS to take into consideration whether a transaction under review involved a so-called “country of special concern” -- a country that posed “a significant threat to the national security interests of the United States.” It also does not provide that CFIUS exempt otherwise covered transactions if all foreign investors are from a country that meets certain criteria, such as being a U.S. treaty ally, as the original Senate bill allowed. Instead, the conference report includes non-binding “sense of Congress” language saying that CFIUS “may consider whether a covered transaction involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security.” The only reference to mainland China is apparently a requirement for a report on its foreign direct investment practices to be issued every two years.

The conference report also includes the House-passed Export Controls Act of 2018, which would provide a permanent statutory basis for the regulation of dual-use and military exports licenced by the Commerce Department. Since the lapse in 2001 of the Export Administration Act of 1979, emergency presidential authority under the International Emergency Economic Powers Act has been used to ensure that executive agencies can continue to administer the export control system. The Export Controls Act would expand controls to include some items that do not contain U.S. content, including software. It would also allow export controls to cover re-exports and transfers between foreign countries. Additionally, it would require the establishment of an inter-agency process to identify “emerging and foundational technologies” that are essential to national security and not already subject to export controls, to specify an appropriate level of control for those items.

According to an earlier but very complete report issued on 3 July by the non-partisan Congressional Research Service, the FIRRMA legislation would do the following.

  • Broaden the scope of transactions under CFIUS’ purview by including for review real estate transactions in close proximity to a military installation or U.S. government facility or property of national security sensitivities; joint ventures (House version); any non-passive investment in a U.S. critical technology company, U.S. critical infrastructure company or critical technologies; any change in foreign investor rights regarding a U.S. business; transactions in which a foreign government has a direct or indirect substantial interest; and any transaction or arrangement designed to evade CFIUS regulations.
  • Shift the filing process for foreign firms from voluntary to mandatory in certain cases and provide for a two-track method for reviewing investment transactions, with some transactions requiring a declaration to CFIUS and receiving an expedited process and transactions involving investors from countries of special concern requiring a written notification of a proposed transaction and receiving greater scrutiny.
  • Provide for additional factors that CFIUS and the president could use to determine if a transaction threatens to impair U.S. national security, as well as formalise CFIUS’ use of risk-based analysis to assess the national security risks of a transaction by assessing the threat, vulnerabilities and consequences to national security related to the transaction.
  • Authorise CFIUS to suspend transactions that it determines “may pose a risk to the national security of the United States,” in contrast to existing provisions that limit CFIUS’ authority to review transactions that threaten “to impair the national security of the United States.”
  • Lengthen most time periods for CFIUS reviews and investigations as well as for a national security analysis by the Director of National Intelligence. Timing differs regarding the permitted extension of an investigation by CFIUS in the event of “extraordinary circumstances.”
  • Provide for more staff to handle an expected increased workload and provide for additional funding for CFIUS.
  • Modify CFIUS’ annual reporting requirements, including its annual classified report to specified members of Congress and non-classified reports to the public, to provide for more information on foreign investment transactions.
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