Defense Trade

Congress passed legislation in 1988 that allows the President to suspend or prohibit foreign acquisitions, mergers, or takeovers of U.S. companies if there is credible evidence that a foreign controlling interest might threaten U.S. national security or if other legislation cannot adequately protect national security. The President delegated the authority to review foreign acquisitions of U.S. companies to an interagency group--the Committee on Foreign Investment in the United States--that is chaired by the Secretary of the Treasury and includes representatives from 11 federal agencies. In response to congressional concerns that the current process may fall short in identifying all foreign acquisitions of U.S. companies that could affect national security, this report reviews the process used by the Committee to identify foreign acquisitions of U.S. firms. GAO evaluates the current identification process used by the Committee and the effectiveness of the Committee's follow-up on acquisitions identified by its member agencies.

GAO noted that: (1) the identification process the Committee on Foreign Investment uses does not enable it to effectively identify all foreign acquisitions with possible effects on national security; (2) the Committee depends on a system of voluntary reporting by the parties to foreign acquisitions; (3) the Committee also encourages each member agency to inform the Committee of any acquisitions that comes to the agency's attention; (4) GAO did not attempt to identify foreign acquisitions of U.S. companies with potential national security implications that were not reported voluntarily; (5) however, GAO did find that member agencies become aware of such acquisitions in the course of their daily operations; (6) in some instances member agencies reported foreign acquisitions to the Committee, but in other instances agencies did not; (7) the Department of Defense and the Department of the Treasury officials informed GAO of three acquisitions that were known to officials in these agencies but the agencies did not inform the Committee; (8) for example, in March 1999, a German-owned firm acquired a U.S. manufacturer of ceramic body armor; (9) the U.S. company reported the acquisition to the Defense Security Service and Department of State's Office of Defense Trade Controls because the company manufactures classified defense products and was required by law to report the acquisition to Defense and State (but not to the Committee); (10) the company, the Defense Security Service and the Office of Defense Trade Controls did not inform or report this acquisition to the Defense, State or Treasury Departments' Committee representatives because there is no requirement to do so; (11) as a result, the Committee did not conduct a full assessment of this acquisition; (12) the Committee does not keep records of acquisitions referred by member agencies, does not document all contacts made with the parties to acquisitions to encourage voluntary reporting, and does not track whether these contacts led the parties to report the acquisition to the Committee; (13) as a result, Treasury officials could not tell GAO which acquisitions were identified by member agencies but not reviewed by the Committee; (14) further, the Committee has no process to inform all member agencies that potentially relevant unreported acquisitions have been identified; and (15) as a result, not all member agencies have the opportunity to review acquisitions identified by other member agencies for potential national security risks using relevant information available only to individual agencies.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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