Defense Trade
Mitigating National Security Concerns under Exon-Florio Could Be Improved Gao ID: GAO-02-736 September 12, 2002The Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions, mergers, or takeovers of U.S. companies if (1) there is credible evidence that a foreign controlling interest might threaten national security and (2) legislation, other than Exon-Florio and the International Emergency Economic Powers Act, does not adequately or appropriately 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. The Committee initiates investigations only when it cannot identify potential mitigation measures in the review period to resolve national security issues arising from the acquisitions or when it needs time beyond the 30-day review to negotiate potential mitigation measures and the companies involved are not willing to request withdrawal of their notification. The Committee's process for implementing Exon-Florio contains the following weaknesses that may have limited effectiveness: (1) the Committee has not established interim protections before allowing withdrawal when concerns were raised and the acquisition had already been completed (2) agreements between the Committee and companies contained nonspecific language that may make them difficult to implement and (3) agreements did not specify responsibility for overseeing implementation and contained few provisions to assist in monitoring compliance.
RecommendationsOur 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.
Director: Team: Phone:GAO-02-736, Defense Trade: Mitigating National Security Concerns under Exon-Florio Could Be Improved
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Report to the Chairman, Subcommittee on National Security, Veterans
Affairs, and International Relations, Committee on Government Reform,
U.S. House of Representatives:
United States General Accounting Office:
GAO:
September 2002:
DEFENSE TRADE:
Mitigating National Security Concerns under Exon-Florio Could Be
Improved:
GAO-02-736:
Contents:
Letter:
Results in Brief:
Background:
The Committee Investigates in Only Limited Circumstances:
The Committee‘s Process for Implementing Exon-Florio May Limit Its
Effectiveness:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Scope and Methodology:
Appendix I: The Committee on Foreign Investment in the
United States and the Process for Implementing
Exon-Florio:
Appendix II: Comments from the Department of the Treasury:
Appendix III: Comments from the Department of Defense:
Appendix IV: Comments from the Department of Justice:
Table:
Table 1: Notifications to the Committee on Foreign Investment in the
United States and Actions, 1997-2001:
Figures:
Figure 1: Evolution of Committee on Foreign Investment in the United
States Membership:
Figure 2: The Committee on Foreign Investment in the United States
Process According to 31 C.F.R. Part 800:
United States General Accounting Office:
Washington, DC 20548:
September 12, 2002:
The Honorable Christopher Shays
Chairman, Subcommittee on National Security, Veterans
Affairs, and International Relations
Committee on Government Reform
House of Representatives:
Dear Mr. Chairman:
The Exon-Florio amendment[Footnote 1] to the Defense Production Act
authorizes the President to suspend or prohibit foreign acquisitions,
mergers, or takeovers of U.S. companies[Footnote 2] if (1) there is
credible evidence that a foreign controlling interest might threaten
national security and (2) legislation, other than Exon-Florio and the
International Emergency Economic Powers Act,[Footnote 3] does not
adequately or appropriately 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. Implementing regulations require that the
Committee undertake an initial 30-day review after receiving a
voluntary submission from the companies involved in an acquisition. If
the Committee decides during this 30-day review that there could be
credible evidence to support the belief that the acquisition may
threaten national security, the Committee can initiate a 45-day
investigation. After completing the investigation, the Committee
submits a recommendation to the President. The President has 15 days to
decide whether to allow the acquisition to proceed or to suspend or
prohibit it. In 1992, the law was amended to require that the President
report all cases requiring a presidential determination to the
Congress. Previously, the law required a report only when the President
took action to block an acquisition.
In response to your request, we examined the process by which the
Committee on Foreign Investment in the United States reviews and
investigates foreign acquisitions of U.S. companies. Specifically, we
(1) determined the circumstances under which the Committee formally
investigates acquisitions and (2) identified weaknesses in the
Committee‘s process for implementing Exon-Florio that limit its
effectiveness.
Results in Brief:
The Committee initiates investigations only when it cannot identify
potential mitigation measures in the review period to resolve national
security issues arising from the acquisitions or when it needs time
beyond the 30-day review to negotiate potential mitigation measures and
the companies involved are not willing to request withdrawal of their
notification. Of 320 acquisitions notified to the Committee from 1997
through 2001, only 4 were investigated; and only 1 resulted in a
presidential determination. For acquisitions in which the Committee
identified national security concerns but was unable to mitigate them
within the 30-day review period, it allowed companies to withdraw and
resubmit their notification to provide further information and/or
provide additional time to mitigate those concerns. Also, the
additional time allowed agencies to take actions under other laws and
regulations that could address the Committee‘s concerns. Where these
actions would address concerns, the Committee could approve the
acquisition without resorting to an investigation.
The Committee‘s process for implementing Exon-Florio contains the
following weaknesses that may have limited its effectiveness:
* The Committee has not established interim protections before allowing
withdrawal when concerns were raised and the acquisition had already
been completed. We identified two cases in which the companies
completed the acquisition prior to initially filing with the Committee,
withdrew their notification because of unresolved national security
concerns, and failed to promptly re-file. As a result, potential
threats to national security, such as foreign access to export
controlled technology, remained.
* Agreements between the Committee and companies contained nonspecific
language that may make them difficult to implement. For example, one
agreement was modeled on the network security agreements that the
Department of Justice has negotiated with some telecommunications
companies and that have been attached as conditions to Federal
Communications Commission licensing orders. However, this agreement
contained provisions that Justice Department officials acknowledged
were less specific and less stringent than many similar provisions in
network security agreements.
* The agreements did not specify responsibility for overseeing
implementation and contained few provisions to assist in monitoring
compliance. For example, one contained no time frame by which the
conditions in the agreement had to be implemented. The other contained
time frames but no consequences for failure to meet the time frames.
This report contains recommendations for the Secretary of the Treasury
as Chair of the Committee on Foreign Investment in the United States.
We are recommending that the Secretary of the Treasury (1) establish
interim protections before allowing withdrawal for acquisitions in
which companies have completed or plan to complete the acquisition
prior to a Committee decision, (2) increase the specificity of actions
required by mitigation measures negotiated under the authority of Exon-
Florio, and (3) designate in the agreement, the agency responsible for
overseeing implementation of the agreement and monitoring compliance
with mitigation measures.
In commenting on a draft of this report, the Treasury Department agreed
to implement our recommendation to more clearly identify in future
agreements the agency responsible for ensuring compliance with
mitigation measures, but disagreed with our other two recommendations.
Treasury stated that the Committee already has the authority to place
conditions on withdrawals and could conclude cases involving withdrawal
more expeditiously if it strove to do so, without compromising national
security or the U.S. open investment policy. However, in the two cases
we identified in which the companies completed the acquisition prior to
filing with the Committee and were allowed to withdraw their
notifications, the Committee did not use its authority to ensure that
the companies re-filed and that the cases were concluded expeditiously.
Treasury also questioned whether greater specificity in the agreements
would have provided additional national security protections in the two
cases we cited. In our opinion, greater specificity would provide
greater protection by making it easier for agencies to effectively
evaluate compliance with agreements. The Departments of Defense and
Justice also provided comments, which are reprinted in the appendixes.
Background:
In 1975, the President established the interagency Committee on Foreign
Investment in the United States to monitor the impact and coordinate
U.S. policy on foreign investment in the United States. In 1988, the
Congress enacted the Exon-Florio amendment to the Defense Production
Act. Exon-Florio authorized the President to investigate the impact of
foreign acquisitions of U.S. companies on national security and to
suspend or prohibit an acquisition if it might threaten national
security and no legislation, other than Exon-Florio and the
International Emergency Economic Powers Act, could adequately protect
national security. The President delegated the authority to investigate
to the Committee.[Footnote 4]
The Committee operates at two levels: staff representatives who perform
initial reviews of companies‘ notices and principals who are the
decision makers on issues of national security. The Secretary of the
Treasury serves as the Committee Chair and Treasury‘s Office of
International Investment coordinates the Committee‘s activities. This
office has the dual responsibility of monitoring foreign investment in
the United States and advocating free trade and world markets open to
foreign investment, i.e., the U.S. open investment policy. In
implementing Exon-Florio, the Committee seeks to preserve the
confidence of foreign investors that they will be treated fairly while
implementing the intent of Exon-Florio. That is, to provide a mechanism
to review, and if the President finds appropriate, to restrict foreign
investment that threatens to impair the national security.
Exon-Florio and implementing regulations provide the Committee with
broad discretion to evaluate and make decisions about issues of
potential national security risk. Neither the law nor its implementing
regulations define ’national security,“ although the law provides
guidance on factors to consider, such as U.S. technological leadership
in national security areas. The Committee interprets its authority to
conduct an investigation as providing the Committee the authority to
negotiate measures to mitigate national security concerns when other
regulatory regimes do not apply.
In an uninterrupted process, the Committee and the President would have
up to 90 calendar days to review, investigate, and determine what if
any action the President would take concerning an acquisition. The
companies can request withdrawal of their voluntary notice at any time
up to the President‘s decision. (See app. I for a detailed discussion
of the Committee‘s process.):
Notifying the Committee of an acquisition is not mandatory. However,
the Committee may review any acquisition it identifies that has not
been notified. In June 2000, we recommended that the Secretaries of
Commerce, Defense, Treasury, and State establish procedures for the
Committee and member agencies to improve their ability to identify
foreign acquisitions with potential national security
implications.[Footnote 5] The Committee also may reopen a case if it
learns that companies submitted false or misleading information in
their notice.
From 1997 through 2001, the Committee received 333 notices for 320
proposed or completed acquisitions. Table 1 provides summary data on
notices filed with the Committee.
Table 1: Notifications to the Committee on Foreign Investment in the
United States and Actions, 1997-2001:
Year: 1997; Notifications: 62; Acquisitions[A]: 60; Investigations: 0;
Notices withdrawn after investigation initiated: 0; Presidential
determination: 0.
Year: 1998; Notifications: 65; Acquisitions[A]: 62; Investigations: 2;
Notices withdrawn after investigation initiated: 2; Presidential
determination: 0.
Year: 1999; Notifications: 79; Acquisitions[A]: 76; Investigations: 0;
Notices withdrawn after investigation initiated: 0; Presidential
determination: 0.
Year: 2000; Notifications: 72; Acquisitions[A]: 71; Investigations: 1;
Notices withdrawn after investigation initiated: 0; Presidential
determination: 1.
Year: 2001; Notifications: 55; Acquisitions[A]: 51; Investigations: 1;
Notices withdrawn after investigation initiated: 1; Presidential
determination: 0.
Year: Total; Notifications: 333; Acquisitions[A]: 320; Investigations:
4; Notices withdrawn after investigation initiated: 3; Presidential
determination: 1.
[A] Acquisitions that were withdrawn and re-filed are shown in the year
of initial notification.
Source: Based on Treasury Department Office of International Investment
data.
[End of table]
In most instances, the Committee concluded its activities under Exon-
Florio within 30 days of receiving notification because (1) the
Committee did not identify any issues of national security, (2) the
companies and the government agencies addressed potential national
security concerns prior to filing, or (3) the companies and the
government agreed on measures to mitigate national security concerns
before the end of the 30-day review. About 96 percent (306 of 320
acquisitions) were concluded within 30 days.
The Committee Investigates in Only Limited Circumstances:
The Committee has initiated investigations under only limited
circumstances, namely, when it could not identify potential mitigation
measures in the review period that would resolve national security
issues arising from the acquisitions or when it needed more time than
the 30-day review period to complete its work and the companies
involved were not willing to request withdrawal of their notification.
Since 1997, the Committee has initiated only four 45-day
investigations. The Committee initiated investigations because of
concerns about the potential for unauthorized transfers of technology
and because it could not identify measures that would mitigate those
concerns or needed extra time beyond the 30-day review to negotiate
possible mitigation measures, but the companies were not willing to
request withdrawal of their notifications.
As a matter of practice, the Committee tries to avoid the use of
investigations and presidential determinations. The Committee reviews
foreign acquisitions to protect national security while seeking to
maintain the U.S. open investment policy. For many companies, being the
subject of an investigation has negative connotations. Avoiding an
investigation helps to maintain the confidence of investors that the
government does not view the acquisition as problematic. Also, a
presidential determination could be politically sensitive. According to
one Committee staff member, the Committee looks for the best way to
work out national security concerns without an investigation.
Since 1997, the Committee has allowed companies involved in 13
acquisitions (including 3 of the 4 for which an investigation was
subsequently initiated) to withdraw their notifications and re-file at
a later date rather than initiate an investigation. In some, the time
was needed for other agencies to complete reviews of the acquisition
under other laws and regulations. For example, the Committee allowed
two shipping companies to withdraw the notification of their planned
merger to provide time for the companies to request approval from the
Maritime Administration. The companies re-filed so that Committee
approval would coincide with the end of the Maritime Administration‘s
90-day review. The Maritime Administration required the companies to
transfer operations of ships that participated in the Maritime Security
Program[Footnote 6] to a U.S.-owned operator to prevent foreign
ownership of ships that the United States would rely on in wartime.
According to a Committee official, based on the Maritime
Administration‘s approval, the Committee did not need to initiate an
investigation. In others, the Committee used the extra time to clarify
such issues as the nature of the foreign ownership, products and
technologies that were subject to U.S. export control laws,
relationships with countries or companies of concern, and future plans
for the U.S. company.
In three acquisitions, the companies chose not to request withdrawal
and the Committee initiated investigations. In two of these cases, the
companies had withdrawn their notification once to provide more time to
negotiate agreements to protect sensitive information and to provide
more information. The companies then re-filed with the Committee and
began a new 30-day review period. However, by the end of the second 30-
day review they had not reached agreement and the companies were
unwilling to withdraw again, so the Committee initiated an
investigation. In one case, the companies and the Committee agreed on
mitigation measures after the investigation ended but prior to a
presidential determination. The Committee allowed the companies to
withdraw the notification again and re-file it as a new case to avoid
the need for a presidential determination. In the second case, the
companies were unable to reach agreement with the Defense Department
and the investigation ended after the companies agreed to abandon the
proposed acquisition.
In the third case, Committee members had raised concerns about the
potential for foreign government access to sensitive information and
the ability of the foreign company to deny the U.S. government access
to information. The Committee and the companies were unable to reach
agreement on how to mitigate these national security concerns within
the 30-day review period and the companies were unwilling to withdraw
the notification, so the Committee initiated an investigation. By the
end of the investigation, the Committee and the companies had concluded
an agreement in time for the Committee to recommend that the President
take no action. Accordingly, the President determined that no further
action was necessary and the acquisition was reported to the Congress.
In another case in which the acquisition had already occurred, the
Committee was unwilling to allow a second withdrawal of the
notification. The Committee had allowed the company to withdraw and re-
file to allow time to address export control concerns. However, the
Committee could not resolve concerns about unauthorized transfers of
technology. As a result, it initiated an investigation. During the
investigation, the company asked to withdraw its notification instead
of waiting for a presidential determination. The Committee permitted
the company to withdraw on the 45th day of the investigation, with the
understanding that the foreign company would divest the U.S. company.
The Committee‘s Process for Implementing Exon-Florio May Limit Its
Effectiveness:
Weaknesses in the Committee‘s process for implementing Exon-Florio may
in some cases have resulted in ineffective national security
protections because the Committee allowed withdrawal of cases in which
the acquisition had been completed without establishing interim
protections, used nonspecific provisions or language in agreements it
had concluded with companies to mitigate national security concerns,
and did not identify the agency responsible for overseeing
implementation and monitoring compliance with the agreement.
Allowing Withdrawals of Completed Acquisitions Can Delay National
Security Protections:
According to Committee officials, few of the acquisitions for which the
Committee receives notification are completed prior to the Committee
concluding its responsibilities under Exon-Florio. Therefore, the
period before the companies re-file generally creates limited risk to
national security because, until the acquisition is completed, the
foreign company does not have full access to the U.S. company‘s
resources. Committee officials told us that the companies‘ desire to
conclude the acquisition provides an incentive for the companies to
resolve issues and re-file as quickly as possible. However, this
incentive does not exist when companies notify the Committee after
concluding their acquisition.
We identified two instances where long periods had elapsed between the
companies concluding their acquisition and the Committee completing its
work. One company that filed its notification almost 2 years after
concluding the acquisition asked to withdraw its notification near the
end of the 30-day review to provide additional information and to
address export control issues the Committee had identified. The company
waited over 9 months to re-file. After re-filing, the Committee
determined that concerns about unauthorized transfers of technology
could not be mitigated and the company agreed to divest the acquired
company. However, the foreign company had the ability to access the
technologies that prompted the Committee‘s concern for almost 3 years,
from the time the acquisition was concluded until the company agreed to
divest the acquisition to address the Committee‘s concerns.
In the second case, the company filed with the Committee more than a
year after completing the acquisition. The Committee allowed the
company to withdraw the notification to provide more time to answer the
Committee‘s questions and provide assurances concerning export control
matters. The company did not re-file for more than a year after
withdrawing the original notification. The Committee allowed the
company to withdraw its notification a second time because there were
still unresolved issues. More than a year has passed since the second
withdrawal and the company has yet to re-file.
Nonspecific Language May Make Agreements Difficult to Implement:
In the two acquisitions that required the Committee to conclude
agreements under the authority of Exon-Florio, the agreements contained
provisions or language that may make them difficult to implement. In
one instance, the Defense Department was concerned about the release of
certain technologies to foreign parties and took the lead in
negotiating an agreement. In the other instance involving a
communications company, the Justice Department was concerned about
access to subscriber information, among other matters, and took the
lead in negotiating an agreement.
The agreement negotiated by the Defense Department contained language
that was open to interpretation. It required a ’good faith effort“ to
divest a subsidiary to mitigate a concern about access to technology
and provided an alternative[Footnote 7] if the company could not find a
domestic purchaser to make a ’reasonable“ offer. The agreement did not
include criteria defining what actions would constitute a ’good faith
effort“ nor what would be a ’reasonable“ offer. Accordingly, when the
company divested part, but not all, of the subsidiary and cited the
lack of interested buyers as the rationale, the agreement contained no
criteria that would allow government officials to determine whether the
company‘s efforts to sell the subsidiary were made in good faith.
Likewise, without measurable criteria in the agreement, it was not
possible to determine whether the sole bidder for the entire subsidiary
made a reasonable offer. Further, although the divestiture or the
alternative was considered necessary, there were no criteria for
determining whether the partial divestiture served the same purpose.
Without clear criteria, government officials could not effectively
evaluate compliance with the agreement and could be faced with the need
to litigate questions of this nature.
The Justice Department modeled the agreement it negotiated on network
security agreements it has used with some telecommunications companies.
These agreements are attached as conditions to Federal Communications
Commission licensing orders.[Footnote 8] While the agreement negotiated
under the authority of Exon-Florio addressed many of the same issues as
the network security agreements, the provisions were often less
detailed. In discussions with Justice Department officials, they
acknowledged that several provisions were less specific and less
stringent than those in some network security agreements. They said
that, in their opinion, Exon-Florio offers less bargaining power to the
government than the Communications Act, which underlies the Federal
Communications Commission licensing process. As a result, conditions
negotiated under Exon-Florio may be less stringent than conditions they
have negotiated with some telecommunications companies.
Provisions on Monitoring Compliance Are Lacking:
Exon-Florio implementing regulations do not provide guidance on
monitoring company compliance with agreements. Committee officials have
stated that the Committee generally defers to various federal agencies
for monitoring activities, even in cases in which the authority to
negotiate mitigation measures was based on Exon-Florio. One Committee
official noted that these agencies have the expertise that the
Committee lacks. However, neither of the two agreements negotiated
under the authority of Exon-Florio specified which agency would be
responsible for monitoring implementation.
Provisions to assist agencies in monitoring agreements were also
lacking. One agreement contained no requirement for the company to
demonstrate compliance and no time frames by which provisions were to
be implemented. The other required the company to appoint a board
member, subject to approval by the Secretaries of the Treasury and
Defense, to oversee the implementation of the agreement and provide a
semiannual status report to the Committee and the Defense Department.
It provided time frames for certain actions to occur, but it contained
no consequences for failure to comply with the time frames, thus
providing no incentive for the company to act within the time frames.
And in fact, the company failed to meet the terms of one provision
within the agreed upon time frame.
This approach is less stringent than the approach used in consent
agreements by the Department of Justice and the Federal Trade
Commission in resolving antitrust issues during reviews of mergers and
acquisitions. Some consent agreements contain provisions to ensure that
the government has access to documents and people to verify compliance
with the terms of the agreement. Some also include provisions allowing
the government some approval authority over the buyer of a company in
the event that a divestiture is required and provide for the government
to appoint trustees to monitor the divestiture. If the companies do not
divest within the agreed time frame, some consent agreements also
provide for a trustee to manage the divestiture.
Conclusions:
For the most part, the Committee on Foreign Investment in the United
States is able to fulfill its responsibility to ensure that foreign
acquisitions of U.S. companies do not threaten national security
without resorting to investigations. When the process could not be
completed within the 30 days, the Committee has allowed companies
to withdraw and re-file to avoid initiating an investigation. However,
this approach can, in certain circumstances, negate the effectiveness
of the Exon-Florio statute. Typically, the Committee reviews a proposed
acquisition for national security concerns before the acquisition is
concluded. However, when companies have completed an acquisition before
filing with the Committee, the potential for harm already exists and
any
actions to prevent harm can only be after the fact. Allowing companies
to withdraw notification to the Committee when an acquisition has
already occurred without instituting interim protections risks the very
harm to national security that Exon-Florio was enacted to prevent.
Likewise, when agreements are concluded to mitigate national security
concerns, the lack of specificity in actions called for by the
agreements and the uncertain responsibility for implementing and
monitoring make assuring compliance difficult.
Recommendations for Executive Action:
In view of the need to assure that national security is protected
during the period that withdrawal is allowed for companies that have
completed or plan to complete the acquisition prior to the Committee
completing its work, we recommend that the Secretary of the Treasury,
in his capacity as Chair of the Committee on Foreign Investment in the
United States, revise implementing regulations to require specific
interim protections prior to allowing withdrawal for companies that
have completed or plan to complete the acquisition before the Committee
has completed its work. Further, to ensure compliance with agreements
concluded under the authority of Exon-Florio, we recommend that the
Secretary of the Treasury, in his capacity as Chair of the Committee on
Foreign Investment in the United States, (1) increase the specificity
of actions required by mitigation measures in future agreements
negotiated under the authority of Exon-Florio and (2) designate in the
agreement the agency responsible for overseeing implementation and
monitoring compliance with mitigation measures.
Agency Comments and Our Evaluation:
In commenting on a draft of our report, the Treasury Department stated
that understanding the context in which the Committee implements
Exon-Florio would aid in assessing the report‘s conclusions and
recommendations. Treasury explained in its comments that the Congress
intended that Exon-Florio be invoked only in cases where other laws
were not adequate or appropriate to protect national security. Further,
Treasury noted that the United States has traditionally maintained an
open investment policy because it benefits our economy. Both Treasury
and Defense disagreed with our recommendations (1) for interim measures
to protect national security when companies that have completed an
acquisition are allowed to withdraw their notification and (2) that
increased specificity of actions be required by mitigation measures in
future agreements negotiated under the authority of Exon-Florio. The
Treasury Department agreed to act on our recommendation to make the
agency responsible for ensuring compliance with mitigation measures
more explicit in future agreements.
The Treasury Department stated that we focused on only a few cases and
that it is unusual for agreements to be negotiated under the authority
of Exon-Florio. We agree. As Treasury noted in its comments, the
Congress intended that Exon-Florio be invoked only when other laws are
not adequate or appropriate to protect national security, and thus acts
as a safety net. However, the two cases in which we raise concerns
about granting an extended withdrawal period were the universe of cases
in which companies that have already completed the acquisition prior to
notifying the Committee have requested and been granted withdrawal.
Likewise, the two cases in which we believe greater specificity was
needed in the agreements represent 100 percent of the cases in which
Exon-Florio was the basis for an agreement. As a result, we believe
that the current process is not an effective safety net.
The Departments of Treasury and Defense stated that our recommendation
for interim measures is not necessary. Further, the departments said
that negotiating interim measures could take considerable time and
effort, thus delaying a final review of the acquisition. Treasury also
said that the Committee already has the authority to place conditions
on withdrawals without amending the implementing regulations and that
by striving to do so, it can conclude its cases more expeditiously
without compromising national security or the U.S. open investment
policy. We did not intend for the regulations to call for negotiating
interim measures, but rather for the Committee to use its authority to
impose them as a condition of withdrawal under certain circumstances.
In one of the cases we identified, the company waited over 9 months to
re-file with the Committee, and when the Committee could not mitigate
its concerns about unauthorized transfers of technology, the company
agreed to divest. In the other case, the company did not re-file for
more than a year after withdrawing the original notification, and has
yet to re-file more than a year after the second withdrawal. In these
cases, the Committee did not use its authority to ensure that the
companies re-filed and that the cases were concluded expeditiously.
Therefore, for those cases in which the acquisitions occur prior to the
Committee completing its work, we continue to believe revising the
implementing regulations to require interim protections prior to
granting withdrawal would ensure that cases involving completed
acquisitions are concluded more expeditiously.
The departments questioned whether greater specificity in the
agreements we cited would have provided additional national security
protections. In our opinion, greater specificity would provide greater
protection by making it easier for agencies to effectively evaluate
compliance with agreements. For example, in the instance we noted where
an agreement called for a ’good faith effort“ to sell a subsidiary, the
foreign company sold only part of the subsidiary and deemed it a ’good
faith effort,“ even though at least one other company offered to buy
the entire subsidiary. Further, the foreign company sold the subsidiary
in exchange for stock in the acquiring company. The agreement also
provided, if divestiture was not possible, for the foreign company to
ensure that the subsidiary would be able to support government
contracts, such as by continuing a certain level of investment in
equipment and personnel. The foreign company maintains that those
requirements do not apply to the part of the subsidiary that was not
divested. The government officials monitoring the agreement would need
to decide whether what the company did constituted a ’good faith
effort“ and whether the partial divestiture was adequate to protect
national security as called for by the agreement. In our view,
mitigation measures that are open to interpretation increase the
difficulty of determining compliance and thus provide the potential for
harm to national security.
The Treasury Department agreed to act on our recommendation to make
explicit which agency has responsibility for reviewing compliance with
mitigation measures. However, Treasury, along with the Defense
Department, maintained that the accountability in the two cases we
cited was clear because the agreements were signed by policy level
officials. During our review, the agencies did not provide evidence to
show that anyone was ensuring that the companies were complying with
the agreements. Although the Justice Department stated in its comments
that officials from the Federal Bureau of Investigation visited the
offices of the U.S. company to assess its compliance with the
agreement, Bureau officials told us that only one visit took place and
that they have no additional plans to verify compliance. In addition,
the Defense Department did not provide any documentation showing that
it took action to ensure the companies were complying with the
agreement beyond some initial meetings. Defense Department officials
also had indicated that it was not their responsibility to monitor
compliance. Therefore, we believe that it is necessary to be more
specific in assigning responsibility to ensure company compliance with
commitments to the Committee.
Treasury, Defense, and Justice Department comments are reprinted in
appendixes II through IV, respectively.
Scope and Methodology:
We examined 17 acquisitions notified to the Committee on Foreign
Investment in the United States between January 1, 1997, and December
31, 2001. They included the 4 acquisitions that were investigated, 12
of the acquisitions that were withdrawn and re-filed, and 1 acquisition
suggested by Committee staff. The objective of the case reviews was to
understand and document the Committee‘s process for reviewing foreign
acquisitions of U.S. companies. We did not attempt to validate the
conclusions reached by the Committee on any of the cases we reviewed.
We analyzed data on acquisitions from relevant Committee member
agencies, including the Departments of Commerce, Defense, Justice
(including the Federal Bureau of Investigation), State, and Treasury.
We also discussed the Committee‘s process with Committee staff
officials.
To determine under what circumstances the Committee formally
investigates foreign acquisitions, we interviewed Committee staff level
members. We reviewed all four cases that went to investigation since
1997. After reviewing these, we interviewed Committee members,
documented their national security concerns, and discussed the measures
needed to mitigate those concerns.
To determine whether weaknesses exist in the Committee‘s implementation
of Exon-Florio, we analyzed and discussed with Committee staff members
the laws and regulations that grant the Committee authority to
identify, negotiate, and mitigate national security concerns. For the
telecommunications cases, we interviewed Federal Communications
Commission officials and discussed their regulatory processes related
to license transfer. We also compared Exon-Florio agreements to consent
agreements used by the Department of Justice and the Federal Trade
Commission in antitrust actions.
We performed our work from June 2001 through May 2002 in accordance
with generally accepted government auditing standards.
As we agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 30 days from the date of this letter. We will then send copies to
the Chairman and Ranking Minority Member of the Senate Committee on
Banking, Housing, and Urban Affairs and the Chairman and Ranking
Minority Member of the House Committee on Financial Services and the
Ranking Minority Member of the Subcommittee on National Security,
Veterans Affairs, and International Relations of the House Committee on
Government Reform. We will also send copies to the Secretaries of
Commerce, Defense, Justice, State, and the Treasury; the Chairman,
Council of Economic Advisors; the Director, National Economic Council;
the Assistant to the President for National Security Affairs; the
Director, Office of Management and Budget; the Director, Office of
Science and Technology Policy; and the United States Trade
Representative. We will also make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov.
Please contact me on (202) 512-4841 if you or your staff has any
questions concerning this report. Major contributors to this report
were Thomas J. Denomme, Paula J. Haurilesko, Monica Brym, Gregory K.
Harmon, Anne W. Howe, John Van Schaik, and Michael C. Zola.
Sincerely yours,
Katherine V. Schinasi
Director
Acquisition and Sourcing Management:
Signed by Katherine V. Schinasi:
[End of section]
Appendix I: The Committee on Foreign Investment in the United States
and
the Process for Implementing Exon-Florio:
In 1975, the President established the interagency Committee on Foreign
Investment in the United States to monitor the impact of foreign
investment in the United States and to coordinate the implementation of
U.S. policy on foreign investment.[Footnote 9] In fulfilling this
responsibility, the Committee was expected to (1) analyze trends and
significant developments in foreign investment in the United States,
(2) provide guidance on arrangements with foreign governments for
advance consultation on their prospective major investments in the
United States, (3) review investments that may have major implications
for U.S. national interest, and (4) consider proposals for new
legislation or regulations relating to foreign investment.
In 1988, the Congress enacted the Exon-Florio amendment[Footnote 10] to
the Defense Production Act. Exon-Florio authorized the President to
investigate the impact of foreign acquisitions[Footnote 11] of U.S.
companies on national security and to suspend or prohibit an
acquisition if credible evidence exists that a foreign controlling
interest may threaten national security and no legislation, other than
Exon-Florio and the International Emergency Economic Powers Act, can
adequately protect national security.
The President delegated the authority to conduct investigations under
Exon-Florio to the Committee on Foreign Investment in the United
States. The Committee, chaired by the Secretary of the Treasury, is
currently composed of representatives from the Departments of Commerce,
Defense, Justice, and State; the Council of Economic Advisors; the
National Economic Council; the National Security Council; the Office of
Management and Budget; the Office of Science and Technology Policy; and
the United States Trade Representative.[Footnote 12] Figure 1 shows how
the Committee‘s membership evolved from 1975 to the present.
Figure 1: Evolution of Committee on Foreign Investment in the United
States Membership:
[See PDF for image]
Source: GAO.
[End of figure]
The Treasury Department‘s Office of International Investment
coordinates the Committee‘s activities and is responsible for
monitoring foreign investment in the United States while also
advocating U.S. policy on open investment.
In 1991, the Treasury Department issued regulations to implement
Exon-Florio.[Footnote 13] As figure 2 shows, the Committee follows a
four-step review process of proposed foreign acquisitions of U.S.
companies: voluntary notice, 30-day review, investigation, and
presidential determination.
Figure 2: The Committee on Foreign Investment in the United States
Process According to 31 C.F.R. Part 800:
[See PDF for Image]
Source: GAO.
[End of figure]
Voluntary Notification:
The Committee relies on companies to voluntarily report pending or
completed acquisitions and Committee members to inform each other about
known foreign acquisitions, although neither the companies nor the
Committee members are required to do so. Treasury officials generally
encourage agencies through their Committee representatives to bring
foreign acquisitions to Treasury‘s attention informally so that the
officials may contact the companies involved and encourage them to
notify voluntarily. If companies do not voluntarily submit a
notification, any member of the Committee may do so. The Committee
points out that companies have a strong incentive to notify and obtain
approval because the President can order divestiture of unapproved
acquisitions. Although the regulations do not require prior
notification, in most instances, companies notify the Committee before
the acquisition occurs, thus avoiding the risk and expense of forced
divestiture.
The implementing regulations require notices to contain detailed,
accurate, and complete information about:
* the nature of the acquisition,
* the name and address of the U.S. and foreign principals,
* the acquisition‘s proposed or actual completion date,
* assets being acquired,
* each contract with any U.S. government agency with national defense
responsibilities active within the last 3 years, and:
* each contract involving classified information active within the past
5 years.
Further, the notice is required to state whether the acquired U.S.
company is a Department of Defense supplier and whether it has products
or technical data subject to export controls or international
regulations.
Thirty-day Review Period:
To begin the 30-day review, the Committee staff from Treasury notifies
the member agencies of the acquisition and provides them with
supporting documents. The Committee members then notify their
appropriate internal offices to assist in reviewing the acquisition.
During the 30-day review, the Committee considers such factors as
whether (1) the acquisition may result in control by a foreign person
of a U.S. company engaged in interstate commerce in the United States;
(2) credible evidence exists to support a concern that the acquisition
could impair national security; and (3) adequate authority to protect
the national security is provided under provisions of laws other than
the International Emergency Economic Powers Act (50 U.S.C. 1701-1706).
The Committee may invite the parties to meet with the staff to discuss
and clarify issues.
Investigation:
When necessary, Committee members meet to determine whether any
concerns raised are significant, thus requiring a 45-day investigation.
If the Committee agrees to investigate, the Committee formally notifies
the companies about the investigation and its time frame for
completion. During the investigation, the Committee may analyze the
acquisition in greater depth or attempt to mitigate the national
security concerns raised. If national security concerns are not
resolved, the Committee informs the companies that a report will go to
the President with the Committee‘s recommendation on the acquisition.
If Committee members cannot agree on a recommendation, the report to
the President includes the differing views of all Committee members.
Presidential Determination:
The President has 15 days to decide once he has received the
Committee‘s recommendations. The decision is not subject to judicial
review. The President can suspend or prohibit any proposed or completed
acquisition. He may require the Attorney General to seek appropriate
relief, including divestiture, in U.S. district courts. The President‘s
divestiture authority, however, cannot be exercised if (1) the
Committee has informed the companies that their acquisition was not
subject to Exon-Florio or had previously decided to forego
investigation or (2) the President has decided not to act on that
specific acquisition under Exon-Florio. However, if the Committee
determines that the companies omitted or provided false or misleading
information, the Committee may reopen its review or investigation or
revise its recommendation to the President. The President has ordered
divestiture in only one case, although other acquisitions have been
canceled after Committee action without presidential intervention.
The 1992 Byrd amendment to Exon-Florio requires the President to send a
report to the Congress if the President makes a decision regarding a
proposed foreign acquisition. This requirement was added in response to
concerns about the lack of transparency in the Committee‘s process.
Under the original Exon-Florio law, the President was obligated to
report only after prohibiting a proposed acquisition.
Withdrawal:
Any party to the foreign acquisition may request in writing that the
voluntary notice be withdrawn at any time before the President‘s
decision on a proposed acquisition. The request must be addressed to
the Committee staff chairman and state the reasons for the request. The
Committee decides whether to grant a withdrawal and notifies the
requestor in writing of the Committee‘s decision. After the Committee
approves a withdrawal under these circumstances, any prior voluntary
notices submitted no longer remain in effect. Also, any subsequent
proposals by these parties must be considered as a new, voluntary
notice and receive a new case number from the Committee. In some
circumstances, companies have received a 5-day expedited review if the
re-filed notice did not differ from the original voluntary notice.
[End of section]
Appendix II: Comments from the Department of the Treasury:
June 26, 2002:
Ms. Katherine V. Schinasi Director:
Acquisition and Sourcing Management, United States General Accounting
Office Washington, DC 20548:
Dear Ms. Schinasi:
This is in response to your May 28, 2002 letter to the Secretary
requesting comments on the GAO draft Report, ’Defense Trade:
Implementation of Exon-Florio Could Be Improved.“:
I believe a brief explanation of the Exon-Florio provision in relation
to other U.S. laws and regulations that protect national security and
the context in which CF1US implements the provision would assist
readers of the Report in assessing the conclusions and recommendations.
Exon-Florio:
When Exon-Florio was enacted, one of the major assumptions behind the
legislation was that the President already had at his disposal a number
of laws and regulations designed to protect the national security.
These range from laws that restrict foreign ownership of U.S. air
carriers to laws that regulate the export of sensitive technology or
that restrict access to classified information. Congress intended that
the Exon-Florio provision be invoked by the President only in those
cases where no other law, other than the International Emergency
Economic Powers Act or Exon-Florio itself, is adequate and appropriate
to protect the national security. Of course, the purpose of Exon-Florio
is to provide a statutory framework pursuant to which the President may
suspend or prohibit certain transactions where doing so is necessary to
protect national security when other laws do not provide the tools
necessary to accomplish this.
U.S. Open Investment Policy:
The United States has traditionally maintained an open investment
policy. This means that foreign investors are accorded national
treatment (i.e., permitted to invest in U.S. companies on the same
basis as domestic investors) in nearly all sectors of the U.S. economy,
subject to appropriate national security and other exceptions set forth
in our bilateral and multilateral trade and investment agreements.
Therefore, as a general rule, governmental review and approval of
foreign direct investment is not required, except in certain sectors
related to national security. The United States adheres to this policy
because it is in our interest to do so. The United States receives the
largest share of the world‘s foreign direct investment. This provides
numerous benefits to our economy, including introducing new capital,
technology, managerial expertise, and jobs. Some of these benefits
accrue to sectors of the economy that enhance the U.S. defense
industrial base.
The existence of Exon-Florio raises the awareness of foreign investors
contemplating acquisitions of U.S. companies to the importance of
national security considerations and it helps to ensure that foreign
investments are structured in ways to avoid national security problems.
Foreign acquisitions are structured to take into account national
security concerns because of the existence of Exon-Florio. Moreover,
some transactions are not pursued because the parties recognize that
that the national security concerns raised by the transactions could
not be mitigated.
In its 1995 Report on CFIUS, GAO stated that, ’The CFIUS review process
serves both to protect national security and to minimize any potential
adverse effect of the Exon-Florio legislation on foreign investment in
the United States.“:
GAO‘s Recommendations:
Based on its review of the implementation of Exon-Florio, GAO is
recommending in its report that the Secretary of Treasury, in his
capacity as Chair of CFIUS:
1.Revise implementing regulations to require specific interim
protections prior to granting withdrawal for companies that have
completed or plan to complete an acquisition before CFIUS has completed
its work.
2.Assure compliance with agreements concluded under the authority of
Exon-Florio by: (a) increasing the specificity of actions required by
mitigation measures in future agreements negotiated under the authority
of Exon-Florio and (b) designating in the agreement the agency
responsible for overseeing implementation and monitoring compliance
with mitigation measures.
CFIUS‘s View Regarding GAO‘s Recommendations:
As Chair, Treasury coordinated CFIUS‘s position on GAO‘s
recommendations. We oppose the recommendations with the exception of 2
(b) for the following reasons:
Recommendation 1: Interim measures in the withdrawal period.
We do not agree with the recommendation that interim measures are
necessary in the withdrawal period.
While a party to a transaction can request a withdrawal, it is up to
CFIUS whether or not to approve the withdrawal. If necessary to protect
the integrity of the process, CFIUS has the authority to condition a
withdrawal in writing on specific criteria and timetables that the
companies would be required to meet and would inform them that their
failure to satisfy these criteria in the allotted time could result in
CFIUS‘s reinitiating the review. Conditioning a grant of withdrawal in
this way would not require an amendment to the regulations.
We believe that interim measures could take considerable effort and
time to negotiate, and delay a final review of a transaction. We
believe it makes more sense for CFIUS and its member agencies to pursue
any potential national security concerns in a disciplined manner,
consistent with an on-going effort by CFIUS to reform the process
implementing Exon-Florio. CFIUS can conclude work more expeditiously
than has been the case without compromising the national security or
our open investment policy by striving to complete activities during
the withdrawal period more rapidly.
We would note that GAO acknowledges that very few of the 1,400 foreign
acquisitions notified have been concluded prior to CFIUS‘s concluding
action under Exon-Florio. In fact, GAO identifies only two transactions
where potential national security concerns might justify ’interim
measures.“:
Recommendation 2(a): Increasing the specificity of actions required.
GAO raised this concern in connection with two cases. Since the Exon-
Florio statute looks to the applicability of existing national security
laws and regulations first, it is unusual for agreements to be
negotiated under Exon-Florio authority.
In our view, GAO did not present any evidence that greater specificity
of actions required would have provided additional national security
protections in these two cases. In fact, the agencies with the greatest
interest in negotiating agreements for the two cited cases were both
satisfied that the companies involved made commitments that afforded
the necessary national security protections.
Recommendation 2(b): Monitoring compliance with commitments.
In our view the question of accountability is clear in both cases
because the agreements were signed at the policy level by both Treasury
and the agency with the primary interest in negotiating the commitments
and in reviewing compliance with these commitments. However, any future
agreements negotiated under the authority of Exon-Florio will make
explicit which agency reviews compliance with the commitments.
Thank you for providing the opportunity to review and comment on GAO‘s
report.
Sincerely,
John B Taylor:
Under Secretary for International Affairs:
Signed by John B Taylor:
[End of Section]
Appendix III: Comments from the Department of Defense:
JUN 26 2002:
Ms. Katherine V. Schinasi:
Director, Acquisition and Sourcing Management, U.S. General Accounting
Office:
Washington, D.C. 20548:
Dear Ms. Schinasi:
Thank you for the opportunity to comment on the GAO draft report,
’DEFENSE TRADE: Implementation of Exon-Florio Could Be Improved,“ dated
May 28, 2002, (GAO Code 120063/GAO-02-736).
Although your recommendations are addressed to the Secretary of the
Treasury, please find our attached comments to the GAO draft report.
Lisa Bronson,
Deputy Under Secretary of Defense, Technology Security
Policy and Counterproliferation:
Signed by Lisa Bronson:
Attachment: As stated:
GAO Draft Report, ’DEFENSE TRADE: Implementation Of Exon-Florio Could
Be Improved,“ dated May 28, 2002 (GAO Code 120063/GAO-02-736):
Recommendation 1:
Revise implementing regulations to require specific interim protections
prior to granting withdrawal for companies that have completed or plan
to complete an acquisition before CFIUS has completed its work.
Comments:
Rather than interim measures, which could take more time and effort to
negotiate, and even delay a final resolution, we believe a better
solution is greater emphasis on completing a CFIUS review during a
withdrawal period for companies that have already or plan to complete
an acquisition before CFIUS has completed its work.
We do not advocate setting schedules on such reviews due to the
possibility that over-rigorous schedules will prevent agencies from
performing a complete review. Rather, the greater need is a commitment
by all of the CFIUS members to regard such a situation as one demanding
urgent resolution due to the already-present possibility of technology
diversion in a foreign acquisition that has not been reviewed. On
specific cases in which the parties‘ level of cooperation during a
withdrawal is questionable, CFIUS should condition the withdrawal in
writing on specific criteria and timetables that the companies would be
required to meet and inform them that their failure to satisfy these
criteria in the allotted time could result in CFIUS reinitiating the
review.
Recommendation 2:
Assure compliance with agreements concluded under the authority of
Exon-Florio by: (a) increasing the specificity of actions required by
mitigation measures in future agreements negotiated under the authority
of Exon-Florio and (b):
designating in the agreement the agency responsible for overseeing
implementation and monitoring compliance with mitigation measures.
Comments to 2(a):
The GAO raised concern about two cases. In one case the GAO did not
provide any evidence that greater specificity of actions required would
have provided additional national security protections. We were
satisfied that the companies involved in this case made conunitments
that afforded the necessary national security protections.
Greater specificity will likely engender more U.S. involvement in the
business decisions of companies, which should be avoided. The better
course of action is that which we have pursued previously, that of
tailoring agreements to the national security concerns presented by
each foreign acquisition. It is not desirable for CFIUS to become the
vehicle for the U.S. Government to impose performance requirements on
foreign acquisitions of U.S. companies.
Comments to 2(b):
The question of accountability is clear in both cases because the
agreements were signed at the policy level by both Treasury and the
agency (in one case, Defense) with the primary interest in negotiating
the commitments and in ’reviewing“ rather than ’monitoring“ compliance
with these commitments. (Monitor suggests a far greater involvement in
day-to-day oversight of a company than an individual agency with
national security responsibilities is able to, or even should, provide.
The available means of compliance assurance are better described by the
term ’review“ which implies the periodic look by the responsible agency
or agencies at the company‘s actions in compliance with the agreement,
supported by the independent means of review, e.g., site visits, review
of reports, etc.):
Note: A GAO comment supplementing the report text appears at the end of
this appendix.
See comment 1.
The following is GAO‘s comment on the Department of Defense‘s letter
dated June 26, 2002.
GAO Comment:
Exon-Florio provides the President the authority to take action to
suspend or prohibit any foreign acquisition of a U.S. company that may
threaten national security. Thus, by its nature, the legislation
engenders involvement in the business decisions of companies in the
name of protecting national security. Agreements the Committee and
government agencies negotiate with companies all require some level of
involvement in business decisions. Likewise, antitrust legislation
requires government involvement in the business decisions of companies,
and in implementing antitrust legislation, the Justice Department and
the Federal Trade Commission use consent agreements that are more
stringent than the agreements the Committee has used.
[End of section]
Appendix IV: Comments from the Department of Justice:
June 25, 2002:
Mr. Thomas Denomme:
Assistant Director Acquisition and Sourcing Management:
U.S. General Accounting Office, Washington, D.C. 20548:
Re: Department of Justice Comments to GAO Report on the Exon-Florio
Amendment to the Defense Production Act (GAO-02-736):
Dear Mr. Denomme:
The following constitute the comments by Department of Justice (’DOJ“)
to the GAO Report on the Exon-Florio Amendments to the Defense
Production Act (GAO-02-736 Defense Trade) (hereinafter referred to as
the ’Report“):
At the bottom of page 7, the Report states:
In the two acquisitions that required the committee to conclude
agreements under the authority of Exon-Florio, the agreements contained
provisions or language that may make them difficult to implement. In
one instance, the Defense Department was concerned about the release of
certain technologies to foreign parties and took the lead in
negotiating an agreement. In the other instance involving a
communications company, the Justice Department was concerned about
access to subscriber information and took the lead in negotiating an
agreement.
DOJ Comment:
Regarding the second transaction, the Report implies that DOJ took the
lead with respect to this transaction solely because it was concerned
about access to subscriber information. While DOJ was concerned about
this issue, DOJ was concerned about other matters too, which it:
sought to alleviate through negotiation. The resulting agreement
reflects those efforts and concerns.
(2)On page 2, second bullet, second sentence, the report addresses the
same transaction and states:
For example, one agreement, modeled on the network security agreements
that the Department of Justice negotiates with telecommunications
companies as part of the Federal Communications Commission licensing
process, contained provisions that Justice Department officials
acknowledged were less specific and less stringent than many similar
provisions in network security agreements.
Similarly, in the middle of page 8, again referring to the same
transaction, the Report states:
The Justice Department modeled the agreement it negotiated on network
security agreements used with telecommunications companies as part of
the Federal Communications Commission licensing process. While the
agreement negotiated under the authority of Exon-Florio addressed many
of the same issues as the network security agreements, the provisions
were often less detailed. In discussions with Justice Officials, they
acknowledged that the provisions were less specific and less stringent
than many in network security agreements.
DOJ Comment:
These assertions in the Report create several false impressions. They
imply that the Department of Justice enters into so-called ’network
security agreements“ in all telecommunications transactions that raise
concerns, that such agreements are the same, that they all contain
detailed provisions, and that the agreement for the transaction
referred to in the Report was less specific or stringent than those
agreements. This is not the case. Different proposed transactions can
raise very different concerns. Within the context of the FCC licensing
and authorization process, DOJ employs a wide range of measures to
address the particular concerns identified based on the particular
transaction at hand. These measures range from doing nothing, because
DOJ is satisfied that the transaction poses no particular problem, to
exchanging letters of understanding with the parties, to negotiating a
security agreement, and potentially to objecting to the consummation of
the proposed transaction altogether. Further, even in a cases in which
the Department of Justice seeks to negotiate an agreement, the terms of
the agreement may vary from transaction to transaction. Although it is
accurate to say that DOJ modeled the agreement for the transaction
referred to in the Report on some of the network security agreements
that had been negotiated in past and that, when compared to the FCC
process, the Exon-Florio process does not provide a forum that is as
efficient or conducive to negotiation, it is misleading to conclude
that the terms of the aforementioned agreement were not as specific or
as stringent as all the network security agreements.
On Page 8 of the Report, it states:
[N]either of the two agreements negotiated under the authority of Exon-
Florio specified which agency would be responsible for monitoring
implementation of the agreement. ... Provisions to assist in monitoring
agreements were
also lacking.
Similarly, on Page 9 of the Report in the ’Conclusions“ Section, it
states:
Likewise, when agreements are concluded to mitigate national security
concerns, the lack of specificity in actions called for by the
agreements and the uncertain responsibility far implementing and
monitoring make assuring compliance difficult.
DOJ Comment:
With respect to the aforementioned agreement, the Department of Justice
disagrees with both of these characterizations. Although the agreement
did not explicitly state that the Justice Department and the Federal
Bureau of Investigation are responsible for monitoring and assuring
compliance, it was not deemed necessary to do so because all concerned
parties correctly understand that the Justice Department and the
Bureau, as party signatories, would be responsible for monitoring and
assuring compliance. Failing to state the obvious in an agreement is
hardly a deficiency. Indeed, performance of the agreement establishes
that this understanding was and is held by all parties. Representatives
from the Federal Bureau of Investigation have visited the offices of
the U.S. company to assess its compliance with the terms of the
agreement.
In addition, it is inaccurate to state that there are no provisions
within the agreement that require the U.S. company to assist in the
monitoring process. The agreement specifically requires named company
officials to report ’promptly to [the Department of Justice] and [the
Federal Bureau of Investigation] any information that be or she
acquires regarding inter alia: (i) illegal or unauthorized access to or
disclosure of Classified Information, Sensitive Controlled
Information, or Sensitive Information; (ii) electronic surveillance
conducted in violation of Federal or state law or regulation; or (iii)
illegal access to or disclosure of Subscriber Information.“ The
agreement also requires the companies to use ’all reasonable efforts to
ensure that U.S. law enforcement officials have proper access to the
relevant officers, employees, independent contractors, and facilities
of [the U.S. company] in order to discuss the operation and
implementation of [the U.S. company‘s] law enforcement policies.“
Further, another separate provision, titled ’Cooperation in
Investigations,“ requires the company to extend ’complete and courteous
cooperation with law enforcement officials involved“ in investigations
related to the important aspects of the agreement.
Conclusion:
The aforementioned comments are not meant to suggest that the
Department of Justice believes that the Exon-Florio process cannot be
improved upon. To the contrary, the Justice Department believes that
the process can be, and should be, improved in order to properly
emphasize and adequately protect our national security, with active
involvement by those CFIUS member agencies that express national
security concerns about
particular transactions, while still allowing appropriate
international transactions and free flow of capital. The Department of
Justice is currently working with other CFIUS agencies in considering
ways to do so.
Sincerely,
John G. Malcolm:
Deputy Assistant Attorney General Criminal Division:
Signed by John G. Malcolm:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix
[End of section]
The following are GAO‘s comments on the Department of Justice‘s letter
dated June 25, 2002.
GAO Comments:
We have revised the text to clarify that access to subscriber
information is just one of the issues of concern.
We believe our draft report accurately reflected information Justice
Department officials provided to us. In discussions with department
officials about our findings, they concurred with our statement that
the agreement was less stringent than other agreements and further
stated that the terms were less specific in many provisions. Moreover,
a Justice Department analysis provided specific examples of measures
that were less stringent than measures the department required in other
agreements with telecommunications companies. However, we have revised
the text to clarify that the department enters into network security
agreements with only some, but not all, telecommunications companies.
Text revised to clarify that provisions that assisted the agencies in
monitoring agreements were also lacking, as demonstrated in the text
following the sentence in question.
In the remainder of this report, acquisitions, mergers, and takeovers
are referred to as acquisitions.
[End of section]
FOOTNOTES
[1] 50 U.S.C. app. 2170.
[2] The International Emergency Economic Powers Act gives the President
broad powers to deal with any ’unusual and extraordinary threat“ to the
national security, foreign policy, or economy of the United States (50
U.S.C. 1701-1706). To exercise this authority, however, the President
must declare a national emergency to deal with any such threat. Under
this legislation, the President has the authority to investigate,
regulate, and, if necessary, block any foreign interests‘ acquisition
of U.S. companies (50 U.S.C. 1702(a)(1)(B)).
[3] Membership on the 11-member Committee was established by Executive
Order and includes the Departments of Commerce, Defense, Justice, and
State; the Council of Economic Advisors; the National Economic Council;
the National Security Council; the Office of Management and Budget; the
Office of Science and Technology Policy; and the United States Trade
Representative. Treasury, as Chair, has discretion to invite other
agencies to participate in the Committee‘s activities.
[4] U.S. General Accounting Office, Defense Trade: Identifying Foreign
Acquisitions Affecting National Security Can Be Improved, GAO/
NSIAD-00-144 (Washington, D.C.: June 29, 2000).
[5] The Maritime Security Program provides the Defense Department
access to commercial vessels operating under U.S.-flag registry and
related assets in a time of national emergency. The Department of
Transportation‘s Maritime Administration is responsible for
administering the program.
[6] If the company was unable to divest the subsidiary, it was required
to transfer a certain portion of the subsidiary‘s business to a new
entity that would be controlled by an independent governance board.
[7] Although the Federal Communications Commission is not a party to
network security agreements and defers to executive branch agencies on
matters involving national security, the Commission retains discretion
to deny, condition, or revoke a license if it determines that the
public interest, which includes national security concerns, will be
served by doing so. The Justice Department separately negotiates
network security agreements with telecommunications companies to
mitigate concerns, such as illegal wiretapping. At the Justice
Department‘s request, the Commission has conditioned its approval of
some proposed license transfers or assignments on compliance with the
signed agreement and has attached such agreements as part of Commission
licensing orders.
[8] Executive Order No. 11858, reprinted as amended in 15 U.S.C. 78b
(2002).
[9] 50 U.S.C. app. 2170.
[10] In this appendix, acquisitions, mergers, and takeovers are
referred to as acquisitions.
[11] Treasury, as Committee Chair, can invite other agencies to
participate in the Committee‘s activities. For example, representatives
from the Department of Energy and the National Aeronautics and Space
Administration participate in reviews and investigations of certain
acquisitions.
[12] 31 C.F.R. Part 800.
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