[DOCID: f:sr264.109]
From the Senate Reports Online via GPO Access
[wais.access.gpo.gov]
Calendar No. 474
109th Congress Report
SENATE
2d Session 109-264
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FOREIGN INVESTMENT AND NATIONAL SECURITY ACT OF 2006
_______
June 21, 2006.--Ordered to be printed
_______
Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
[To accompany S. 3549]
The Committee on Banking, Housing, and Urban Affairs,
having had under consideration an original bill to amend the
Defense Production Act of 1950, to strengthen Government review
and oversight of foreign investment in the United States, to
provide for enhanced Congressional oversight with respect
thereto, and for other purposes, having considered the same,
reports favorably thereon and recommends that the bill do pass.
I. PURPOSE
Section 721 of the Defense Production Act, also known as
the Exon-Florio Amendment (``Exon-Florio''), established a
statutory framework for the United States Government to analyze
foreign acquisitions, mergers, and takeovers (hereafter
``transactions'') of privately-owned entities within the United
States to determine whether such transactions affect the
national security of the United States. The Foreign Investment
and National Security Act of 2006 (hereafter ``the Act'')
amends Section 721 for the purpose of strengthening the process
by which such transactions are reviewed and, when warranted,
investigated for national security concerns. In addition, the
Act provides for a system of Congressional notification to
address the absence of such notifications that characterized
the previous history of the implementation of Section 721.
II. BACKGROUND
In 1988, Section 721 of the Defense Production Act of 1950,
Exon-Florio, was passed in response to congressional concerns
about the impact on national security of certain foreign
acquisitions of United States corporate entities. Exon-Florio
established a process by which proposed foreign transactions
would be analyzed by the Executive Branch of the United States
Government (specifically, ``the President or the President's
designee'') to determine whether such transactions could pose a
threat to U.S. national security. Historically, U.S. Presidents
have assigned the responsibility for implementing Exon-Florio
to the Committee on Foreign Investment in the United States
(hereafter, CFIUS), a multi-agency organization established by
Executive Order in 1975. Exon-Florio was amended in 1992 by the
so-called ``Byrd Amendment'' to require that all foreign
transactions involving a foreign government-owned or controlled
entity would be subject to a more stringent analytical process.
Since Exon-Florio went into effect, transactions have been
reviewed in a highly secretive manner in part to prevent the
public release of sensitive proprietary information. The
practical effect of conducting transactional reviews in this
manner, however, has made congressional oversight and public
understanding of Exon-Florio extremely difficult.
After a series of specific transactions brought to the
forefront the difficulty in conducting thorough oversight by
Congress of the security review process,\1\ on February 20,
2004, the chairman of the Committee on Banking, Housing, and
Urban Affairs, Senator Shelby, and the Ranking Member of the
Committee, Senator Sarbanes, requested a study by the
Government Accountability Office of the implementation of Exon-
Florio. That study was completed in September 2005.
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\1\Cases previously reviewed by CFIUS that were the focus of
increased congressional concern included the proposed acquisition of
fiber optic network provider Global Crossing Ltd. by Singapore
Technology and Hutchison Whampoa of Hong Kong; the purchase by a
Chinese consortium of high-precision magnet manufacturer Magnequench,
Inc.; and the proposed acquisition by a Netherlands company of Silicon
Valley Group, a manufacturer of computer semiconductor lithography with
military applications.
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In its review of the Exon-Florio process, the GAO examined
nine cases reviewed by CFIUS over a ten-year period, beginning
in 1995. Generally, GAO found that systemic weaknesses in
implementation of Exon-Florio limited its effectiveness in
protecting national security. Specifically, GAO concluded that
weaknesses in implementation of Exon-Florio include application
of excessively narrow definitions of ``national security'' by
the Department of the Treasury and other CFIUS member-agencies;
insufficient time during the pre-investigation review period
for agencies with a national security mission to collect and
analyze information on transactions, and consequent excessive
reliance by CFIUS on the withdrawal of corporate filings from
the review process in order to gain relief from statutory time
constraints; and inappropriate standards for initiation of
formal investigations due to concerns among some CFIUS member-
agencies of the ramifications of a formal investigation for the
preservation of the U.S. open investment policy. In addition,
the GAO found that responsibility for implementation of Exon-
Florio within the Office of International Investment in the
Department of the Treasury has created a conflict between that
office's responsibility for facilitating international
investment and its responsibility for reviewing foreign
investment for national security concerns.
In its report, GAO offered a number of recommendations for
congressional action. Those recommendations include more
clearly delineating the factors to be considered in CFIUS
reviews and investigations; addressing the time constraint
problem by replacing the existing review and investigation
phases with a single 75-day review period; and providing for
greater transparency by reviewing the existing Exon-Florio
provision pertaining to notifications to Congress. Finally, to
address congressional concerns regarding the status of cases
withdrawn from CFIUS reviewfor the purpose of ``stopping the
clock,'' GAO recommended that Congress require the Secretary of the
Treasury to establish more formal and stringent criteria to govern such
withdrawals, including a process for tracking withdrawn cases and
mandating time frames for refiling.
While GAO was conducting its examination, but prior to the
release of its findings, the China National Offshore Oil
Corporation (CNOOC) announced on June 23, 2005, its intention
to acquire U.S. energy company Unocal. This announcement
resulted in increased congressional concerns regarding foreign
acquisitions of U.S. energy companies. While the CNOOC bid was
withdrawn prior to that proposed transaction's review by CFIUS,
the Chinese company's bid led many members of Congress to raise
questions about the transfer of ownership or control of certain
sectors of the U.S. economy to foreign companies, especially to
foreign companies located within or controlled by countries the
governments of which might not be sympathetic to U.S. regional
security interests.
On October 6, 2005, the Committee on Banking, Housing, and
Urban Affairs conducted a hearing into the findings of the GAO
report. Testifying on behalf of GAO was Ms. Katherine Schinasi,
Managing Director for Acquisition and Management, and Ann
Calvaresi, director of Industrial Base Issues. Discussion
between the GAO witnesses and Banking Committee members further
highlighted deficiencies in implementation of Exon-Florio and
the level of dissatisfaction with the lack of communication
between CFIUS and the appropriate committees of Congress. That
hearing was followed on October 20 by another hearing that
allowed the Banking Committee to hear directly from many of the
agencies that comprise CFIUS, including the Department of the
Treasury, which has the lead role in implementing Exon-Florio.
In late January 2006, congressional offices began to become
aware of the proposed acquisition of terminal operations at a
number of U.S. maritime ports by Dubai Ports World, an
established port operator owned by the government of the
Emirate of Dubai. Concern within Congress about a transaction
that would transfer terminal operations to a Persian Gulf
emirate through whose financial system funds had been
transferred to the terrorists who carried out the September 11,
2001 attacks upon the United States, and that had been a
central conduit for nuclear weapons components being smuggled
to hostile regimes, provided further impetus for review of the
manner in which foreign transactions are analyzed by CFIUS. In
addition to concerns regarding the potential national security
ramifications of the Dubai Ports World transaction, the
Committee on Banking, Housing, and Urban Affairs viewed CFIUS's
handling of this case as indicative of the systemic problems
discussed by the GAO. That the Secretaries and Deputy
Secretaries of the Departments of the Treasury and Homeland
Security were ignorant of the Dubai Ports World transaction,
combined with the fact that this transaction was not subjected
to a formal investigation in violation of the Byrd Amendment,
compounded congressional concerns about the nature of the
underlying transaction.
In response to continued concerns regarding implementation
of Exon-Florio, on April 30, 2006, the Committee on Banking,
Housing, and Urban Affairs met to consider legislation to
reform the process by which foreign transactions are analyzed
for potential national security ramifications.
III. DESCRIPTION OF THE BILL
(a) Review of transactions involving foreign persons and governments
Reviews of foreign transactions are currently conducted on
a voluntary basis involving interested party submission to
CFIUS of documentation pertaining to the transaction in
question. CFIUS then has discretion with regard to whether to
conduct a review of that transaction. This section would
require CFIUS to review all transactions submitted by the
persons or governments involved. The review would determine
whether the transaction affected national security, and whether
the transaction was required to be subjected to a formal
investigation.
The timing of reviews remains consistent with current law,
meaning it must be concluded within 30 days of receipt of
notification of the proposed or pending transaction. Should the
review determine that the proposed or pending transaction could
effect national security, then an investigation, discussed
below, would be required.
The issue of advancing from a review to a more formal
investigation has historically carried negative commercial and
political connotations. Specifically, industry and the
Department of Treasury are concerned that subjecting a proposed
or pending transaction to a formal investigation could
adversely affect the public standing of the companies involved
because the investigative phase of Exon-Florio is viewed as a
sign of serious government reservations about the impact on
national security of the transaction. That is one reason why,
of the 470 cases notified to CFIUS during the period covered by
the GAO study discussed above, only 8 were subjected to an
investigation, which, under Exon-Florio, results in a
presidential determination, although only two such
determinations had actually been made through 2004, the period
studied by GAO.\2\
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\2\There has been four such determinations during 2006, possibly at
least in part due to increased public and congressional attention
focused on the foreign acquisition review process in the wake of the
CNOOC and Dubai Ports World cases.
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Because of the convergence of the 30-day maximum time
period that can be spent conducting a pre-investigation review
and the reluctance of CFIUS to advance to the investigative
stage, those federal agencies that are members of CFIUS and
that have national security as their primary mission have
occasionally found themselves with insufficient time to collect
and analyze information on a proposed or pending transaction
while simultaneously being subjected to pressures to make a
determination without the need for a formal investigation.\3\
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\3\This situation was discussed, for example, by the Department of
Justice in its comments to GAO: ``The Department [of Justice] shares
the concern expressed in the draft [GAO] report with respect to the
constraints imposed by the time limits of the current process. In
particular, gathering timely and fully-vetted input from the
intelligence community is critical to a thorough and comprehensive
national security assessment. Any potential extension of the time
available to the participants for the collection and analysis of that
information would be helpful.'' United States Government Accountability
Office, Defense Trade: Enhancements to the Implementation of Exon-
Florio Could Strengthen the Law's Effectiveness, GAO-05-686, September
2005, p.48.
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During its review of the implementation of Exon-Florio, the
Committee on Banking, Housing, and Urban Affairs heard
identical sentiments from other agencies with the protection of
national security as their mandate. In fact, the only specific
request made of the Committee during its review of Exon-Florio
was for an option to extend the 30-day review period for those
cases where additional time is needed to collect and analyze
intelligence.\4\
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\4\In addition to the written comments of the Department of Justice
included in Appendix II of the GAO report, the report notes that
Department of Defense officials responsible for conducting security
reviews under the authority of Exon-Florio have expressed concerns with
the 30-day restriction for pre-investigative reviews. According to
these officials, the ``30-day review'' is, in practice, 23 days, as
CFIUS guidelines ``require member agencies to inform the Committee
[CFIUS] of concerns by the 23rd day of the 30-day review * * *'' See
the GAO report cited above, p. 15.
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With no option to extend the 30-day review period for
complex cases, CFIUS has historically encouraged companies to
withdraw their filings for the purpose of ``stopping the
clock'' and allowing for additional review time without the
burden of a statutorily-imposed time constraint. Withdrawn
cases, however, may not be resubmitted in a timely manner, if
at all, and such means of buying time are clearly inconsistent
with the intent of the law. It is for this reason that the
Committee included in its legislation a provision allowing for
relief from the 30-day constraint in existing law by allowing
for an additional period of up to 30 days for further review.
In response to concerns expressed by some members of the
Committee, by the Department of the Treasury, and by industry
that an extension of time would be exploited by certain federal
agencies to unnecessarily delay the conclusion of transactions,
the Committee bill included a requirement that any extension
for time beyond the initial 30-day period must be made by one
of the top three officials of the agency making the request. To
further address the concern about unwarranted requests for an
extension of time, the Committee accepted a provision by
Senator Hagel requiring the request to certify that credible
evidence exists that a completed transaction would threaten to
impair the national security.
There has been concern expressed by some members of
Congress that the avoidance of investigations for the purpose
of insulating transactions from the negative connotations of an
investigation has seriously undermined the law's effectiveness.
The Committee emphasizes, however, that requests for extensions
beyond the initial 30-day period should not be used to
compensate for delinquent or otherwise unnecessarily delayed
staff work. It is the Committee's understanding that the number
of cases for which such an extension would have been used in
the past had it previously existed is very few. The Committee
intends to monitor the use of the extension closely to ensure
that is used solely for its intended purpose.
(b) Investigations of certain transactions
As discussed above, relatively few of the total number of
cases submitted to CFIUS for review are subjected to an
investigation, which under Exon-Florio must be completed within
45 days of initiation. One reason for this result is the desire
of CFIUS to resolve cases without subjecting the corporate
entities involved to the potentially negative connotations of a
formal investigation. However, another reason that so few
transactions have been investigated has been the failure of the
Department of the Treasury to accurately interpret Section
2170(b), the so-called Byrd Amendment, named for the
amendment's author, Senator Robert Byrd.\5\
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\5\This language states an investigation is required ``in any
instance in which an entity controlled by or acting on behalf of a
foreign government seeks to engage in any merger, acquisition, or
takeover which could result in control of a person engaged in
interstate commerce in the United States that could affect the national
security of the United States.'' See 50 U.S.C. 2170(b).
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In introducing his amendment to Exon-Florio, Senator Robert
Byrd stated on the Senate floor that it ``requires that any
acquisition that involves a company controlled by a foreign
government * * * must automatically receive the more detailed
45-day investigation.'' It was because the intent of Section
2170(b) of Exon-Florio was unambiguous that the Committee on
Banking, Housing, and Urban Affairs was extremely disappointed
to learn that the law was being interpreted by the Department
of the Treasury at variance with that intent. This disparity
became clear when Deputy Secretary of the Treasury Robert
Kimmitt responded to questions by Senator Byrd, the author of
the language, during a briefing of the Senate Armed Services
Committee with the following comment: ``We have a difference on
opinion on the interpretation of your amendment.''
As stated, the implication of the Department of the
Treasury interpretation of Section 2170(b) was that numerous
transactions that should have been investigated were not.
Deputy Secretary Kimmitt testified before the Committee on
Banking, Housing, and Urban Affairs that 92 cases involving
foreign government-owned and controlled companies were reviewed
by CFIUS during the Clinton and Bush Administrations. In total,
from passage of the law in 1988 to the end of 2005, only 25
cases had been subjected to an investigation. Of the 46 cases
during the Clinton Administration that involved foreign
government-owned and controlled companies, only one went to
investigation. During the current Administration, as of March
2, 2006, only four out of 46 went to investigation. In short,
noncompliance with Section 2170(b) has been a recurring problem
since its passage.
Because of concerns regarding noncompliance with the Byrd
Amendment, concerns that reached their zenith during
congressional debate surrounding the aborted Dubai Ports World
transaction, the Committee-passed legislation includes language
intended to eliminate anypossible ambiguity regarding the
requirement for an investigation in cases involving foreign government-
owned and/or controlled companies.
Another result of the aborted Dubai Ports World transaction
was increased congressional concerns regarding foreign
ownership or control of critical infrastructure in the United
States. To address these concerns, the Committee-passed
legislation establishes a new requirement for a mandatory
investigation: transactions that would result in foreign
control of ``critical infrastructure.''
Because of Department of the Treasury concerns that the
term ``critical infrastructure'' would be interpreted too
broadly, and would consequently have a ``chilling'' effect on
foreign investment in the United States, the Committee
emphasized, by restating the definition of ``critical
infrastructure'' already existing in the Defense Production Act
of 1950, that the term is to be defined as follows:
``any systems or assets, whether physical or cyber-based, so
vital to the United States that the degradation or destruction
of such systems or assets would have a debilitating impact on
national security, including national economic security and
national public health or safety.''
The Committee adopted this definition, adapted from the
Homeland Security Act of 2002 (Public Law 107-296) to create a
realistic standard by which CFIUS should measure the potential
impact on national security of individual assets that are the
subject of proposed or pending transactions. The Department of
the Treasury should coordinate with the Department of Homeland
Security on establishing parameters designed to exclude from
mandatory investigation commercial assets that clearly do not
by themselves constitute critical infrastructure.
The Committee accepted an amendment by Senator Hagel to
exempt from mandatory investigation critical infrastructure
cases that were resolved through mitigation agreements between
parties to the transaction and the federal government.
Finally, the Committee-passed legislation requires an
investigation in any case in which a review by CFIUS produces
sufficient information to indicate the possibility of an
impairment to national security after taking into account the
factors listed in subsection (g) of the bill.
The Committee-passed legislation retains the requirement
that investigations conducted pursuant to this Act be concluded
within 45 days.
As discussed above, some members of the Committee are
concerned about the use of withdrawals by CFIUS to manipulate
the statutory time lines in Exon-Florio. While withdrawals can
be appropriate when the parties to a proposed or pending
transaction decide to undertake a fundamental modification to
the nature of the transaction, such as divestment from the U.S.
company of a division or sector involved in sensitive work,
there are scenarios where the use of withdrawals cause concern.
Additionally, in its report on implementation of Exon-Florio,
GAO noted that companies involved in acquisitions that have
been completed prior to conclusion of a CFIUS review have
little incentive to resolve outstanding issues and refile their
paperwork with CFIUS.\6\
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\6\U.S. Government Accountability Office, Defense Trade:
Enhancements to the Implementation of Exon-Florio Could Strengthen the
Law's Effectiveness, p.16.
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To address concerns about the resolution of cases withdrawn
from an investigation within the initial 45-day time line, the
underlying bill presented to the Committee included a proposal
to require the completion of investigations even when cases are
withdrawn from consideration, and that CFIUS continue to
monitor the status of withdrawn cases. The Committee accepted
an amendment by Senator Dodd that mandates that resubmitted
cases be investigated for another period of up to 45 days.
Review of the justification for the withdrawal must be included
in the new investigation.
The purpose of this provision is to ensure that CFIUS
remains engaged in monitoring unresolved transactions that are
withdrawn either to avoid bumping up against Exon-Florio time
lines or so that the parties involved can negotiate divestiture
agreements or other mitigating measures. It is not the
Committee's intent that the number of cases forwarded to the
President for his or her decision be unnecessarily increased.
As the law will, upon passage of this Act, continue to require
a presidential determination upon the formal conclusion of an
investigation, the Committee recognizes that it may be
necessary to require that withdrawn cases be resubmitted for an
investigation, but that, should the investigation of a
resubmitted case be terminated on account of the successful
negotiation of an assurances or mitigation agreement, than it
will not be required to be submitted to the President for final
determination.
To address concerns that mandatory refiling of
documentation from withdrawn cases would extend to transactions
that were terminated by mutual consent of the parties involved,
a manager's amendment sponsored by the chairman and ranking
member of the Committee, adopted by unanimous consent, included
a provision that excludes such cases from the requirement.
One of the more difficult issues for the Committee to
resolve involved the question of whether companies should be
required to file with CFIUS for consideration of proposed or
pending transactions. Currently and historically, Exon-Florio
has operated as a voluntary regime with the parties to a
transaction responsible for filing with CFIUS or risking more
draconian actions by the President of the United States under
the International Emergency Economic Powers Act (Public Law 95-
223; 50 U.S.C. 1701). The Committee was reluctant to change the
existing system to require mandatory filings. However, the
manager's amendment did include a provision submitted by
Senator Dodd that cases involving persons controlled by or
acting onbehalf of foreign governments should in part be
excluded from the voluntary filing regime. For this reason, the
Committee-passed legislation requires that such persons involved in
acquiring, merging with, or otherwise seeking to take control of U.S.
critical infrastructure relating to national security give written
notice of such transaction to CFIUS.
(c) Committee on foreign investment in the United States
The Committee on Foreign Investment in the United States
was established in 1975 by President Gerald Ford under
Executive Order 11858. Exon-Florio, passed in 1988, did not
designate a specific entity responsible for its implementation,
stating instead that ``the President or the President's
designee'' shall be responsible. President Ronald Reagan
designated CFIUS, under Executive Order 12661, as the designee
responsible for the new statute's implementation.
Due to its origins within the Executive Branch, the
Committee on Banking, Housing, and Urban Affairs of the Senate
and the Committee on Financial Services of the House of
Representatives lacked appropriate oversight of its activities,
although individual components have testified before the
Committees when requested to do so. As part of its effort to
strengthen the national security review process and establish a
system of congressional oversight, the Committee-passed
legislation formally codifies CFIUS in statute, and designates
the Secretary of Defense as Vice Chair alongside the Secretary
of the Treasury's continued responsibility as Chairman. In
establishing CFIUS in statute, the Committee also designates
the Director of National Intelligence as a formal member.
Concerns have been expressed by members of the Committee that
the role of the intelligence community in supporting CFIUS's
activities has been inadequate. GAO analysts briefed Committee
staff on January 13, 2005, that such support has been
problematic to secure and that CIA involvement in the review
process was not always timely. By designating the Director of
National Intelligence (DNI) as a formal member of CFIUS, the
role of the intelligence community, especially the Central
Intelligence Agency, in supporting CFIUS reviews and
investigations will be strengthened.
In addition to designating the DNI as a formal member of
CFIUS, a proposal by Senator Dodd included in the manager's
amendment establishes a requirement for a formal intelligence
review for each transaction brought before CFIUS, to be
distributed within CFIUS no later than 15 days after the start
of the review period. This requirement will ensure that each
component member of CFIUS receives at least preliminary
intelligence support. The provisions further require that the
intelligence community continue to provide intelligence support
to the review and investigation processes.
Among concerns that arose in the aftermath of the aborted
Dubai Ports World transaction and the role of CFIUS in
reviewing that transaction was the lack of adequate
accountability. The Committee-passed legislation includes a
requirement that will have the effect of codifying current
practice: formally designating a lead agency for each
transaction submitted for review. By formally designating a
lead agency for each review and investigation, accountable
agencies will be more easily identified.
The Committee-passed legislation includes a requirement for
the Chairman and Vice Chairman of CFIUS, in consultation with
the Secretaries of State and Energy, the Chairman of the
Nuclear Regulatory Commission, and the DNI to develop a system
for assessing and classifying countries according to specified
criteria: individual country's adherence to nonproliferation
control regimes and relationship to the United States, as well
as the risk a certain country poses that militarily-sensitive
technologies could be diverted from the country in question or
that it constitutes a risk for transhipment of such
technologies. CFIUS would then be required to consider a
country's assessment and classification in determining the risk
to national security of a proposed or pending transaction.
A country classification system is not new. Since 1996,
such a system has been used in determining licensing
requirements for the export of high performance computers. It
was implemented through 15 C.F.R. 740.7. This system
categorized countries into, originally, four tiers. President
Clinton later combined tiers one and two. Tier 1 included NATO
and Major non-NATO allies. Tier 4 includes terrorist-supporting
countries, including Iran, North Korea, Sudan, and Syria. Tier
3 constitutes the key category for purposes of determining
national security considerations. Such countries as Russia,
China and Pakistan are included in Tier 3.
Because implementation of Exon-Florio involves regulating
the transfer to foreign companies and countries of potentially
sensitive technologies and assets, the export control review
process applied to high performance computers could be
appropriately applied to CFIUS-conducted reviews and
investigations. A country classification system would ensure
that each country in which a foreign company is based is
considered in a broad context involving geopolitical realities
that may otherwise not be considered.
Because of concerns expressed by the Departments of State
and the Treasury that a country classification system can prove
harmful to diplomatic and economic relationships, the
Committee-passed language provides for that system's protection
from public disclosure, including exempting it from Freedom of
Information Act filings. The Committee emphasizes that agency
concerns that a system for classifying foreign countries
according to national security criteria could undermine U.S.
foreign relations continue to be fully considered. It is the
Committee's intent that bilateral relationships, adherence to
nonproliferation regimes, and the risk of diversion of
militarily-sensitive technologies to third parties be addressed
in all CFIUS reviews and investigations. The Committee remains
sensitive to agency concerns about the ramifications of a
classifications system for maintaining certain relationships.
In addressing the reluctance of Treasury and other members
of CFIUS concerned with protecting the U.S. open investment
policy to subject transactions to an investigation, the GAO
report notes the possible conflict involved in having the same
departmental personnel responsible for protecting that policy
also being responsible for implementing Exon-Florio national
securityreviews.\7\ GAO reported that employees of the
Department of Treasury responsible for implementation of Exon-Florio
are also responsible for facilitating foreign direct investment in the
United States and ensuring that U.S. companies enjoy reciprocal access
in foreign markets.
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\7\U.S. Government Accountability Office, Defense Trade:
Enhancements to the Implementation of Exon-Florio Could Strengthen the
Law's Effectiveness, p. 14.
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The United States open investment policy is vital to U.S.
economic growth. Concerns exist, however, that the dual
responsibilities imposed upon these employees has resulted in a
tilt among such employees in the direction of protection of
that policy at the expense of the national security mandate.
For this reason, the Committee-passed legislation includes a
provision requiring that Department of the Treasury employees
responsible for implementation of Exon-Florio have no other
function within the department.
(d) Action by the President
Existing Presidential authorities under Exon-Florio, and
the President's responsibilities therein, remain adequate to
ensure the protection of the United States from threats to
national security resulting from foreign transactions of U.S.
entities. For this reason, the Committee recommends minimal
modifications to existing law in this area.
(e) Findings of the President
This section restates the President's authority to block a
proposed or pending transaction if he/she believes that
credible evidence exists that the completed transaction could
result in a threat to the national security. It further
restates existing language specifying that the authorities
provided under this Act are to be applied when other provisions
of law, particularly the International Emergency Economic
Powers Act, are inadequate to protect the national security.
(f) Actions and findings nonreviewable
Restates existing Exon-Florio provision protecting
Presidential decisions resulting from exercise of the
authorities of this Act from judicial review.
(g) Factors to be considered
Exon-Florio incorporates a number of factors that CFIUS may
consider when assessing the potential national security
implications of a proposed or pending transaction. These
factors include the domestic production needed for projected
national defense requirements and related defense industrial
base issues and the potential effects of the proposed or
pending transaction on a foreign country that supports
terrorism or that poses a risk of proliferating militarily-
sensitive technologies, particularly those used in the
manufacture of weapons of mass destruction.
The existing list of factors that ``may'' be considered in
a national security review is both inadequate to ensure a
thorough review in the post-Cold War environment of national
security affairs and presents an unacceptable risk that key
issues will not be addressed. For this reason, the Committee-
passed legislation expands the list of factors to be considered
and makes consideration of the factors mandatory for all
reviews. The additions to the list of factors to be considered
reflects the Committee's belief that critical infrastructure
assets need to be carefully scrutinized when they become the
object of a foreign acquisition.
In addition, while nonproliferation of weapons of mass
destruction remains one of the country's most pressing
priorities, greater attention must be provided to foreign
transactions that could result in a foreign military's ability
to improve its conventional capabilities through acquisition of
U.S. technologies. United States regional interests can be
threatened by improvements in the technological capability of
foreign militaries with which the United States may be at odds.
Consequently, the Committee included in the list of factors
that ``shall'' be considered the potential effect of the
proposed transaction on U.S. regional security concerns and on
``the long term projection of United States requirements for
sources of energy and other critical resources and materials.''
Finally, as discussed earlier, in reviewing the acquisition
of the Peninsular and Oriental Steam Navigation Company by
Dubai Ports World, CFIUS failed to adequately consider such
risks as the region in which the United Arab Emirates exists,
including its proximity to Iran, the recent history of
Pakistani scientist Abdul Qadeer Khan exploiting Dubai's lax
regulatory environment to smuggle nuclear components to Iran,
Libya and North Korea, and Dubai's role as a central conduit
for funding of the terrorist attacks of September 11, 2001.
In order to address these concerns, the list of factors to
be considered will henceforth require individual countries to
be analyzed in a more comprehensive manner, including the risk
each country poses that militarily-sensitive technologies can
or are diverted from or through it, as well as the relationship
of the country in which the foreign company is based with the
United States. The Department of State has expressed concerns
about the political sensitivity of a classification system, as
would be required to be established under the bill initially
brought before the Committee. Consequently, language was added
during the Committee's consideration of the bill stipulating
that the classification system would be for internal use of the
U.S. Government only and would not be made available to the
public. The classification metric would be exempt from Freedom
of Information Act requests.
(h) Confidentiality of information
The Committee-passed legislation includes Exon-Florio's
already-existing provision for protection of proprietary or
business-sensitive information submitted to CFIUS as part of a
review.
Some foreign transactions could have a substantial effect
on the communities in whichthe U.S. entity is located. With the
increased emphasis on critical infrastructure assets mandated by the
Committee-passed legislation, state-level officials may need to be made
aware, on certain occasions, of a pending transaction that could
adversely affect their state. During public debate over the Dubai Ports
World transaction, for instance, numerous state-level officials
expressed concern about the lack of information they had been provided
regarding a transaction that affected large facilities in their states.
For this reason, the manager's amendment passed by the Committee during
its consideration of the legislation includes a provision by Senator
Menendez that requires CFIUS to notify governors of states containing
critical infrastructure assets that are the subject of a foreign
transaction for the purpose of discussing potential security concerns
that may arise from the transaction. The legislation includes further
language designed to ensure that confidentiality provisions in the Act
that apply to the federal government apply equally to governors who are
so notified.
(i) Additional assurances
The Committee-passed bill seeks to address the ability of
the agencies that comprise CFIUS to adequately enforce
agreements negotiated between those agencies and the parties to
a transaction subject to CFIUS oversight. Mitigation agreements
are the basis for the resolution of many of the transactions
reviewed by CFIUS. They involve commitments made by the parties
to the government, usually with the agency or agencies within
CFIUS with the most direct interest in the nature of the
transaction, and adherence to the terms of the agreement is
very important to the national security of the United States.
The legal status of mitigation agreements is not addressed in
Exon-Florio, although, as stated, many cases involving national
security concerns reviewed by CFIUS are resolved through such
agreements.
The government's ability to monitor and enforce mitigation
agreements lies at the heart of the process by which
transactions are examined for national security concerns.
Consequently, the legal status of mitigation agreements needs
to be more clearly established in statute. For this reason, the
Committee-passed legislation includes provisions intended to
ensure that mitigation agreements constitute legally-binding
contracts enforceable in the United States District Court for
the District of Columbia, and that agreements are monitored and
enforced in the appropriate manner. Assurances are to be
treated by the courts as a continuing covenant of the persons
on whose behalf a CFIUS assessment was sought, and continuing
observance of the assurances is to be a condition of any CFIUS
or Presidential determination. The assurances are to be
embodied in a written agreement executed by the foreign person
or government on whose behalf the CFIUS assessment was sought,
and executed by either the Chairman or Vice Chairman of CFIUS
on behalf of the United States. Compliance with the assurances
is to be monitored, and may be investigated, in the same manner
as violation of a civil statute. Enforcement remedies include
injunctive relief, damages, and divestiture.
(j) Notice and reports to Congress
The Committee has been very concerned about the absence of
communications between it and CFIUS over the span of many
years. The requirement in Exon-Florio for a Quadrennial Report
on foreign acquisition strategies that could harm national
security and industrial espionage activities directed against
U.S. companies has been ignored, with only one report having
been produced since the requirement was mandated in 1992.
Throughout its history, and especially since the passage of
Exon-Florio, CFIUS has operated largely without oversight by
Congress. It is important to recognize and acknowledge the
highly sensitive nature of the commercial transactions that
come before CFIUS for review. However, Congress, through the
appropriate committees of jurisdiction, must have greater
insight into CFIUS's activities than heretofore has been the
case. Congressional committees with jurisdiction for vital
matters of national security routinely enjoy far greater access
to sensitive information as a part of their legitimate
oversight roles, including issues pertaining to nuclear weapons
and covert operations. The issues before CFIUS, while
sensitive, do not rise to the level of government conduct that
warrants the level of opaqueness that has been characteristic
of CFIUS activities to date.
A routine process of notifications from CFIUS to the key
committees with oversight of its activities--in effect, the
Senate Banking, Housing, and Urban Affairs and House Financial
Services Committees--is warranted given both the Congress's
legitimate oversight role and the questionable resolution of
several cases that have come before CFIUS. It is for these
reasons that the Committee recommends a requirement that CFIUS
report to the appropriate committees of Congress on the status
of transactions that come before it. These notifications should
include measures taken to resolve cases where mitigation
agreements are employed. In addition, the Committee recommends
that chairmen and ranking members of committees with direct
oversight of CFIUS-member agencies that are designated by the
chairman and vice chairman of CFIUS as the lead agencies for
individual reviews and investigations should be notified on the
same basis as the principal committees of jurisdiction.
One of the more troubling aspects to the outcome of the
Dubai Ports World transaction was the absence of accountable
officials at high levels of lead agencies, particularly
troubling given both the scale and magnitude of the transaction
and the fact that it involved a Persian Gulf country with a
long history as a hub for smuggling activities. Key officials
in the Departments of the Treasury and Homeland Security were
not aware of the transaction until after the wide-spread
expression of concern by many members of Congress and the
public threw the transaction's survival into jeopardy. To
address that situation, the Committee recommends a provision
requiring that notifications to Congress upon completion of
reviews and investigations be certified by the chairman and
vice chairman of CFIUS as well as the head of the agency
designated by the chairman and vice chairman as lead for each
individual transaction.
Finally, the Committee recommends that the existing
requirement for a quadrennial report be replaced with a
requirement for an annual report that will serve as the basis
for annual oversight hearings to be carried out by the
Committee on Banking, Housing, and Urban Affairs of the Senate
and the Committee on Financial Services of the House of
Representatives. Theannual report will include a discussion of
the potential impact on the U.S. defense industrial base and critical
infrastructure of foreign acquisitions during the preceding year; an
aggregative analysis of such acquisitions for the preceding four years;
a prospective discussion of risks to national security and U.S.
critical infrastructure that CFIUS anticipates adopting for the
following year; an evaluation of whether there is credible evidence of
a coordinated strategy by one or more countries or companies to acquire
U.S. critical infrastructure or companies involved in research,
development or production of critical technologies; and an evaluation
of whether there are industrial espionage activities directed by
foreign governments against private U.S. companies. Such a report is
essential to ensure that Congress is fully informed on the level and
nature of foreign direct investment in the United States, not for the
purpose of impeding such investment, which is essential for U.S.
economic growth, but for the purpose of both exercising its
constitutionally-directed role of regulating commerce with foreign
nations and to ensure that legitimate national security considerations
are not sacrificed in deference to purely commercial considerations.
The requirement for an annual report is based on the same
logic as the biannual Humphrey-Hawkins Act and Foreign Exchange
Rate Reports submitted to the Committee by the Federal Reserve
Board and the Department of the Treasury respectively. The
discipline of producing an annual report should enable CFIUS to
focus on the strategies that should underlie its day-to-day
operations and provide as well a basis for public information
about CFIUS.
The Committee recognizes, as emphasized above, the
legitimate requirement for the protection of sensitive
proprietary information. Foreign direct investment in the
United States is a vital component of U.S. economic well-being,
and protection of business-sensitive information used in the
course of CFIUS deliberations, as well as the intelligence
provided in support of a CFIUS review, should be protected from
unwarranted or unauthorized disclosure. For this reason, the
intelligence assessments that comprise part of the annual
report can be provided in classified form, with an unclassified
version made publicly available. Similarly, the Committee-
passed legislation includes a provision authorizing the
chairman of CFIUS, in consultation with the vice chairman, to
withhold from public release proprietary information as the
chairperson deems appropriate.
IV. HEARINGS
The Committee on Banking, Housing, and Urban Affairs held
the following public hearings on implementation of the Exon-
Florio Amendment to the Defense Production Act of 1950:
October 6, 2005 A Review of the CFIUS Process for
Implementing the Exon-Florio Amendment
Witnesses: Ms. Katherine Schinasi, Managing
Director, Acquisition and Sourcing Management,
U.S. Government Accountability Office; Ms. Ann
Calvarese Barr, Director, Industrial Base
Issues, U.S. Government Accountability Office.
October 20, 2005 Implementation of the Exon-Florio
Amendment and the Committee on Foreign Investment in
the United States
Witnesses: The Honorable James Inhofe, United
States Senator; The Honorable Robert Kimmitt,
Deputy Secretary, Department of the Treasury;
The Honorable David A. Sampson, Deputy
Secretary, Department of Commerce; The
Honorable Stewart Baker, Assistant Secretary
for Policy, Department of Homeland Security;
The Honorable E. Anthony Wayne, Assistant
Secretary for Economic and Business Affairs,
Department of State; The Honorable Robert
McCallum, Acting Deputy General, Department of
Justice; The Honorable Peter Flory, Assistant
Secretary for International Security Policy,
Department of Defense; The Honorable Patrick A.
Mulloy, U.S.-China Economic and Security Review
Commission; Mr. David Marchick, Partner,
Covington and Burling.
March 2, 2006, Continued Examination of
Implementation of the Exon-Florio Amendment: Focus on
Dubai Ports World's Acquisition of P&O
Witnesses: The Honorable Robert Kimmitt,
Deputy Secretary, Department of the Treasury;
The Honorable Eric Edelman, Under Secretary for
Policy, Department of Defense; The Honorable
Robert Joseph, Under Secretary for Arms Control
and International Security, Department of
State; The Honorable Stewart Baker, Assistant
Secretary for Policy, Department of Homeland
Security.
V. COMMITTEE CONSIDERATION
The Committee on Banking, Housing, and Urban Affairs met in
open session on March 30, 2006, and ordered the bill reported,
as amended.
VI. CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
Section 11(b) of the Standing Rules of the Senate, and
Section 403 of the Congressional Budget Impoundment and Control
Act, require that each committee report on a bill contain a
statement estimating the cost of the proposed legislation. The
Congressional Budget Office has provided the following cost
estimate and estimate of costs of private-sector mandates.
May 3, 2006.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Foreign Investment
and National Security Act of 2006.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Matthew
Pickford.
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.
Foreign Investment and National Security Act of 2006
This legislation would amend the Defense Production Act of
1950 to establish in law the Committee on Foreign Investment in
the United States (CFIUS). Under the bill, the commission would
consist of at least eight permanent members (including the
Secretaries of the Departments of Treasury, State, Defense,
Commerce, and Homeland Security; as well as the Attorney
General, Director of the Office of Management and Budget; and
the Director of National Intelligence) to coordinate a review
of foreign investment in the United States that involves
national security or critical infrastructure in the United
States. The legislation would formalize and expand the review
and investigation process and increase the role of the Office
of the Director of National Intelligence.
CBO expects that complying with the bill's provisions would
increase the administrative expenses of federal agencies, but
because of the confidential nature of the CFIUS review process,
the number of agencies involved, and the confidential
information needed to prepare an estimate for some provisions
of the legislation, CBO cannot determine a precise estimate of
the likely total costs of this bill. Additional costs over the
2007-2011 period, however, would generally come from agencies'
salary and expense budgets which are subject to annual
appropriation. Such costs would probably total at least a few
million dollars per year.
Enacting the legislation would likely increase collections
of fines and penalties for violations of the notification
provisions. Such collections are recorded in the budget as
revenues and deposited in the Treasury. CBO estimates that the
additional collections of penalties and fines would not be
significant because of the relatively small number of cases
likely to be involved.
The legislation contains no intergovernmental or private-
sector mandates as defined in the Unfunded Mandates Reform Act
and would impose no direct costs on state, local, or tribal
governments.
The CBO staff contact for this estimate is Matthew
Pickford. The estimate was approved by Peter H. Fontaine,
Deputy Assistant Director for Budget Analysis.
VII. REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
The bill seeks to ensure that transactions involving
companies owned or controlled by foreign governments undergo a
thorough investigation to determine whether the national
security would be impacted by the transactions. Such a
requirement was believed to have been imposed with passage in
1992 of amendments to the Defense Production Act of 1950,
particularly the so-called Byrd Amendment. Given the fact that
the Department of the Treasury has interpreted that amendment
at variance with congressional intent, many more cases will
henceforth be subjected to an investigation than heretofore has
been the case. This could entail the production of more
documentation by involved corporate entities than would
otherwise have been required.
The requirement established in the bill under (b)(A)(ii)
that foreign transactions involving U.S. critical
infrastructure be subjected to an investigation unless national
security concerns have been previously addressed through
conclusion of a mitigation agreement could entail costs to both
the government, charged with implementing the provisions of the
bill, and the corporate entities charged with complying.
The Congressional Budget Office Cost Estimate prepared for
this bill notes that enactment of the legislation ``would
likely increase collections of fines and penalties for
violations of the notification provisions . . . CBO estimates
that the additional collections of penalties and fines would
not be signficant because of the relatively small number of
cases likely to be involved.''
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