Defense Trade
Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness Gao ID: GAO-05-686 September 28, 2005The 1988 Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security, an action the President has taken only once. Implementing Exon-Florio can pose a significant challenge because of the need to weigh security concerns against U.S. open investment policy--which requires equal treatment of foreign and domestic investors. Exon-Florio's investigative authority was delegated to the Committee on Foreign Investment in the United States--an interagency committee established in 1975 to monitor U.S. policy on foreign investments. In September 2002, GAO reported on the implementation of Exon-Florio. This report further examines that implementation.
Foreign acquisitions of U.S. companies can pose a significant challenge for the U. S. government in implementing the Exon-Florio amendment because while foreign investment can provide substantial economic benefits, these benefits must be weighed against the potential for harm to national security. Exon-Florio's effectiveness in protecting U.S. national security may be limited because the Department of the Treasury--as Chair of the Committee on Foreign Investment in the United States--and others narrowly defines what constitutes a threat to national security and, along with some other member agencies, is reluctant to initiate investigations to determine whether national security concerns require a recommendation for possible presidential action. Some Committee members have argued that this narrow definition is not sufficiently flexible to protect critical infrastructure, secure defense supply, and preserve technological superiority in the defense arena. The Committee's reluctance to initiate an investigation--due in part to concerns about potential negative effects on the U.S. open investment policy--limits the time available for member agencies to analyze national security concerns. To provide additional time, while avoiding an investigation, the Committee has encouraged companies to withdraw their notification of a pending or completed acquisition and to refile at a later date. However, for companies that have completed the acquisition, there is a substantially longer time before they refile to complete the Committee's process; in some cases they never do, leaving unresolved any outstanding concerns. In our 2002 report, GAO recommended improvements in provisions to assist agencies in monitoring actions companies have agreed to take to address national security concerns. The Committee has improved provisions on monitoring compliance, and the Department of Homeland Security is actively involved in monitoring company actions.
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-05-686, Defense Trade: Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
September 2005:
Defense Trade:
Enhancements to the Implementation of Exon-Florio Could Strengthen the
Law's Effectiveness:
GAO-05-686:
GAO Highlights:
Highlights of GAO-05-686, a report to Congressional Requesters:
Why GAO Did This Study:
The 1988 Exon-Florio amendment to the Defense Production Act authorizes
the President to suspend or prohibit foreign acquisitions of U.S.
companies that may harm national security, an action the President has
taken only once. Implementing Exon-Florio can pose a significant
challenge because of the need to weigh security concerns against U.S.
open investment policy”which requires equal treatment of foreign and
domestic investors.
Exon-Florio‘s investigative authority was delegated to the Committee on
Foreign Investment in the United States”an interagency committee
established in 1975 to monitor U.S. policy on foreign investments. In
September 2002, GAO reported on the implementation of Exon-Florio. This
report further examines that implementation.
What GAO Found:
Foreign acquisitions of U.S. companies can pose a significant challenge
for the U. S. government in implementing the Exon-Florio amendment
because while foreign investment can provide substantial economic
benefits, these benefits must be weighed against the potential for harm
to national security. Exon-Florio‘s effectiveness in protecting U.S.
national security may be limited because the Department of the
Treasury”as Chair of the Committee on Foreign Investment in the United
States”and others narrowly defines what constitutes a threat to
national security and, along with some other member agencies, is
reluctant to initiate investigations to determine whether national
security concerns require a recommendation for possible presidential
action. Some Committee members have argued that this narrow definition
is not sufficiently flexible to protect critical infrastructure, secure
defense supply, and preserve technological superiority in the defense
arena. The Committee‘s reluctance to initiate an investigation”due in
part to concerns about potential negative effects on the U.S. open
investment policy”limits the time available for member agencies to
analyze national security concerns. To provide additional time, while
avoiding an investigation, the Committee has encouraged companies to
withdraw their notification of a pending or completed acquisition and
to refile at a later date. However, for companies that have completed
the acquisition, there is a substantially longer time before they
refile to complete the Committee‘s process; in some cases they never
do, leaving unresolved any outstanding concerns.
In our 2002 report, GAO recommended improvements in provisions to
assist agencies in monitoring actions companies have agreed to take to
address national security concerns. The Committee has improved
provisions on monitoring compliance, and the Department of Homeland
Security is actively involved in monitoring company actions.
Agencies Represented on the Committee on Foreign Investment in the
United States:
[See Table 1]
What GAO Recommends:
This report contains matters for congressional consideration regarding
Exon-Florio‘s coverage and improvements to the law‘s implementation. In
commenting on a draft of this report, the Secretary of the Treasury, as
Committee Chair, disagreed with GAO‘s characterization of the
Committee‘s process and the adequacy of insight into that process.
Based on GAO‘s review of the process, GAO continues to believe that
increased insight and oversight could strengthen the law‘s
effectiveness.
www.gao.gov/cgi-bin/getrpt?GAO-05-686.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Ann Calvaresi-Barr at
(202) 512-4841 or calvaresibarra@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Committee's Implementation of Exon-Florio May Limit Its
Effectiveness:
Provisions for Monitoring Compliance Have Improved:
Conclusions:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Scope and Methodology:
Appendix I: Comments from the Department of Treasury:
Appendix II: Comments from the Department of Justice:
Appendix III: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Agencies Represented on the Committee on Foreign Investment in
the United States:
Table 2: Notifications to the Committee on Foreign Investment in the
United States and Actions Taken, 1997 through 2004:
Table 3: Investigations and Outcomes, 1997 through 2004:
Figures:
Figure 1: The Committee on Foreign Investment in the United States'
Process for Implementing the Exon-Florio Amendment:
Figure 2: Number of Days between Withdrawal and Refiling in 19
Withdrawn Notifications:
Abbreviations:
DOD: Department of Defense:
GAO: Government Accountability Office:
United States Government Accountability Office:
Washington, DC 20548:
September 28, 2005:
The Honorable Richard Shelby:
Chairman:
The Honorable Paul S. Sarbanes:
Ranking Minority Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Evan Bayh:
United States Senate:
Foreign acquisitions of U.S. companies can pose a significant challenge
for the U.S. government because of the need to balance the U.S. open
investment policy against the potential that an acquisition may harm
national security. Under the U.S. open investment policy, foreign
investors are to be treated no differently than domestic investors. In
1988, Congress passed the Exon-Florio amendment[Footnote 1] to the
Defense Production Act, which authorizes the President to suspend or
prohibit foreign acquisitions, mergers, or takeovers[Footnote 2] of
U.S. companies if a foreign controlling interest might take action that
threatens national security. Exon-Florio is meant to serve as a safety
net to be used when laws other than Exon-Florio and the International
Emergency Economic Powers Act[Footnote 3] may not be effective in
protecting national security.
The President delegated the investigative authority of Exon-Florio to
the Committee on Foreign Investment in the United States (Committee)--
an interagency committee established in 1975 to monitor and coordinate
U.S. policy on foreign investment in the United States. The Committee
is chaired by the Secretary of the Treasury. To provide the broadest
latitude for determining whether an acquisition presents a national
security threat, neither the statute nor the implementing regulation
defines "national security."Exon-Florio establishes a four-step process
for examining a foreign acquisition of a U.S. company: (1) voluntary
notice by the companies, (2) a 30-day review to identify whether there
are any national security concerns, (3) a 45-day investigation to
determine whether those concerns require a recommendation to the
President for possible action, and (4) a presidential decision to
permit, suspend, or prohibit the acquisition. The law requires that the
Committee report to Congress on the circumstances surrounding any
acquisition that results in a presidential decision. This requirement
was added in 1992 to provide Congress insight into the process.
In September 2002,[Footnote 4] we reported on several weaknesses in the
process used by the Committee as well as in the agreements negotiated
with companies under Exon-Florio to mitigate identified national
security concerns. You asked us to further examine the Committee's
implementation of Exon-Florio. We also determined whether the Committee
had implemented the recommendations from our 2002 report.
To understand the Committee's process for reviewing foreign
acquisitions of U.S. companies, we met with officials from the
Department of Commerce, the Department of Defense, the Department of
Homeland Security, the Department of Justice, and the Department of the
Treasury--the agencies that are most active in the review of
acquisitions--and discussed their involvement in the process. Further,
we conducted case studies of nine acquisitions that were filed with the
Committee between June 28, 1995, and December 31, 2004. We selected
acquisitions based on recommendations by Committee member agencies and
the following criteria: (1) the Committee permitted the companies to
withdraw the notification; (2) the Committee or member agencies
concluded agreements to mitigate national security concerns; (3) the
foreign company had been involved in a prior acquisition notified to
the Committee; or (4) GAO had reviewed the acquisition for its 2002
report. We did not attempt to validate the conclusions reached by the
Committee on any of the cases we reviewed. To determine whether the
weaknesses in provisions to assist agencies in monitoring agreements
that GAO had identified in its 2002 report had been addressed, we
analyzed agreements concluded under the Committee's authority between
2003 and 2005. We conducted our review from April 2004 through July
2005 in accordance with generally accepted government auditing
standards.
Results in Brief:
The manner in which the Committee on Foreign Investment in the United
States implements Exon-Florio may limit its effectiveness. For example,
Treasury, in its role as Chair, and some others narrowly define what
constitutes a threat to national security--that is, they have limited
the definition to export-controlled technologies or items and
classified contracts, or specific derogatory intelligence on the
foreign company. Other members have argued that this definition is not
sufficiently flexible to provide for safeguards in areas such as
protection of critical infrastructure, security of defense supply, and
preservation of technological superiority in the defense arena. In one
case, some member agencies would not agree with the Departments of
Defense's and Homeland Security's using the authority of Exon-Florio
and the Committee as a basis for an agreement that Defense officials
believed necessary to mitigate national security concerns because the
concerns did not, in the opinions of these Committee members, fit this
narrow definition.
In addition, the Committee is reluctant to initiate investigations
because of a perception that they would discourage foreign investment-
-a potential conflict with U.S. open investment policy. Treasury, in
its capacity as Chair, applies a strict standard in determining whether
an acquisition should be investigated. The Chair has established as the
criteria for initiating an investigation essentially the same criteria
that the law provides as the basis for the President to suspend or
prohibit the transaction or order divestiture. Those criteria are: the
likelihood that (1) there is credible evidence that the foreign
controlling interest may take action to threaten national security and
(2) no other laws are appropriate or adequate to protect national
security. Defense and other agencies have argued that since the statute
applies these criteria to presidential decisions, these criteria should
not be the standard for initiating an investigation. Defense officials
and others have stated that the 45 days of the investigation should be
used to analyze the acquisition to determine whether those criteria are
met. In addition, the Committee's guidance requires member agencies to
determine the likelihood of meeting the standard by the 23rd day of the
30-day review. Several officials commented that, in complex cases, it
is difficult to complete analyses to meet that standard within 23 days.
To avoid the negative connotation associated with initiating an
investigation, the Committee encourages companies to withdraw their
notification to provide additional time, rather than proceed to the
investigation phase. When companies withdraw their notifications and
refile at a later date, the 30-day review period is restarted. If there
are concerns, allowing a withdrawal can heighten risks, particularly
when a company has completed the acquisition before notifying the
Committee. For example, one company had completed an acquisition over
one year before filing with the Committee, but was allowed to withdraw
its notification. Four years later the company has yet to refile,
despite concerns raised by some agencies about the acquisition.
Further, the use of withdrawals contributes to the opaque nature of the
process because very few cases reach a presidential decision, only two
between 1997 and 2004, and thus very few transactions are subject to
the required reporting to Congress.
In our 2002 report, we recommended improvements in provisions to assist
agencies in monitoring actions companies had agreed to take to mitigate
or address concerns. The Committee has improved provisions on
monitoring company compliance with mitigation agreements, and the
Department of Homeland Security is actively involved in monitoring
agreements to which it is a party. In analyzing two recent agreements,
we identified provisions that addressed our prior concerns. For
example, both agreements clearly identified the offices within the
Departments of Homeland Security and Justice to which the companies
should report.
This report contains matters for congressional consideration to help
resolve the disagreements as to the extent of coverage of Exon-Florio
and to require interim protections where specific concerns have been
raised, specific time frames for refiling, and a process for tracking
any actions being taken during a withdrawal period in cases where the
transaction has been completed.
The Department of the Treasury, as Committee Chair, provided comments
on a draft of this report on behalf of all Committee members. However,
the Department of Justice provided comments in a separate letter.
Overall, Treasury disagreed with our characterization of the
Committee's process in that the Chair believes issues are fully vetted
and consensus has always been reached. During the course of our review,
certain member agencies raised concerns about the Committee's process
that indicated differing views among Committee members when reviewing
certain cases. These differing views concerned what constitutes a
threat to national security, the sufficiency of the time allowed for
reviews, and the appropriate criteria for initiating an investigation.
* In one case we reviewed where member agencies disagreed over what
should be deemed a national security concern, the narrower definition-
-one that excludes national security concerns raised by certain member
agencies--prevailed, in that the notice was withdrawn instead of the
case proceeding to investigation.
* In complex cases in which national security concerns have been raised
and for which Exon-Florio is the relevant statute, case documentation
we reviewed revealed the significant pressures some agencies face to
complete analysis within 23 days.
* Policy-level officials from two member agencies have indicated that
the debate over the criteria for initiating an investigation remains
unresolved.
The Department of Justice's comments were generally technical and we
have incorporated them as appropriate. However, Justice did share the
concern expressed in our report with respect to the time constraints
imposed by the current process, particularly its effect on gathering
and using input from the intelligence community. Justice commented that
any "extension of the time available—would be helpful."Background:
In 1988, the Congress enacted the Exon-Florio amendment to the Defense
Production Act, which authorized the President to investigate the
impact of foreign acquisitions of U.S. companies on national security
and to suspend or prohibit acquisitions that might threaten national
security. The President delegated this investigative authority to the
Committee on Foreign Investment in the United States. The Committee is
an interagency group that was established by executive order in 1975 to
monitor the impact of and coordinate U.S. policy on foreign investment
in the United States.[Footnote 5] The Committee is chaired by the
Secretary of the Treasury, and its membership includes representatives
from executive branch departments and the Executive Office of the
President (see table 1). The President added the Department of Homeland
Security to the Committee in 2003, reflecting an increased focus on
domestic security in the aftermath of the September 11, 2001, terror
attacks and subsequent global war on terror.
Table 1: Agencies Represented on the Committee on Foreign Investment in
the United States:
Executive Departments:
Agencies represented: Department of the Treasury (Chair);
Year added: 1975;
Lead office mission: Office of International Investment: Coordinates
policies toward foreign investments in the United States and U.S.
investments abroad.
Agencies represented: Department of Commerce;
Year added: 1975;
Lead office mission: International Trade Administration: Coordinates
issues concerning trade promotion, international commercial policy,
market access, and trade law enforcement.
Agencies represented: Department of Defense;
Year added: 1975;
Lead office mission: Defense Technology Security Administration:
Administers the development and implementation of Defense technology
security policies on international transfers of defense-related goods,
services, and technologies.
Agencies represented: Department of State;
Year added: 1975;
Lead office mission: Bureau of Economic and Business Affairs:
Formulates and implements policy regarding foreign economic matters,
including trade and international finance and development.
Agencies represented: Department of Justice;
Year added: 1988;
Lead office mission: Criminal Division: Develops, enforces, and
supervises the application of all federal criminal laws, except for
those assigned to other Justice Department divisions.
Agencies represented: Department of Homeland Security;
Year added: 2003;
Lead office mission: Information Analysis and Infrastructure
Protection: Identifies and assesses current and future threats to the
homeland, maps those threats against vulnerabilities, issues warnings,
and takes preventative and protective action.
Executive Office of the President:
Agencies represented: Council of Economic Advisers;
Year added: 1980;
Lead office mission: Performs analyses and appraisals of the national
economy for the purpose of providing policy recommendations to the
President.
Agencies represented: Office of the United States Trade Representative;
Year added: 1980;
Lead office mission: Directs all trade negotiations of and formulates
trade policy for the United States.
Agencies represented: Office of Management and Budget;
Year added: 1988;
Lead office mission: Evaluates, formulates, and coordinates management
procedures and program objectives within and among federal departments
and agencies, and controls administration of the federal budget.
Agencies represented: National Economic Council;
Year added: 1993;
Lead office mission: Coordinates the economic policymaking process and
provides economic policy advice to the President.
Agencies represented: National Security Council;
Year added: 1993;
Lead office mission: Advises and assists the President in integrating
all aspects of national security policy as it affects the United
States.
Agencies represented: Office of Science and Technology Policy;
Year added: 1993;
Lead office mission: Provides scientific, engineering, and
technological analyses for the President with respect to federal
policies, plans, and programs.
Source: GAO analysis.
[End of table]
In 1991, the Treasury Department issued regulations to implement Exon-
Florio. As shown in figure 1, Exon-Florio and the regulations establish
a four-step process for reviewing a foreign acquisition of a U.S.
company: voluntary notice, 30-day review, 45-day investigation, and
presidential decision.
Figure 1: The Committee on Foreign Investment in the United States'
Process for Implementing the Exon-Florio Amendment:
[See PDF for image]
[A] At any point prior to a presidential decision, companies can
request to withdraw a notification.
[End of figure]
Notifying the Committee of an acquisition is not mandatory. However,
any member agency is authorized to submit a notification of an
acquisition if the companies have not done so. To date, no agency has
submitted a notification of an acquisition. Instead, when a member
agency becomes aware of an acquisition that may be subject to Exon-
Florio, the agency informs Treasury, as Chair, and Committee staff
contact the companies to encourage them to officially notify the
Committee of the acquisition to begin a review. Committee officials
noted that companies have an incentive to notify the Committee prior to
completing the acquisition because Exon-Florio provides the President
with the authority to order companies to divest completed acquisitions
found to pose a threat to national security.
Under Exon-Florio, after receiving notification of a proposed or
completed acquisition, the Committee begins a 30-day review to
determine whether the acquisition could pose a threat to national
security.[Footnote 6] The Treasury Department, as Committee Chair,
forwards the notification documentation to the lead office in each of
the member agencies. Lead offices forward the information to other
offices within their agency. For example, the Defense Technology
Security Administration, the lead office for the Department of Defense,
forwards notification to 12 other offices within the department. These
other offices may also forward the notification, as appropriate. In one
case, the point-of-contact in the Office of the Under Secretary of
Defense for Acquisition, Technology, and Logistics, one of the initial
12 offices, forwarded the notification to four other offices within
that organization.
In most instances, the Committee completes its review within the 30
days. However, if the Committee is unable to complete its review within
30 days, the Committee may either allow the companies to withdraw the
notification or initiate a 45-day investigation. If the Committee
concludes a 45-day investigation, it is required to submit a report to
the President containing its recommendations. If Committee members
cannot agree on a recommendation, the regulations require that the
report to the President include the differing views of all Committee
members.[Footnote 7]
Under Exon-Florio, the President has 15 days to decide whether to
prohibit or suspend the proposed acquisition, order divestiture of a
completed acquisition or take no action. The President may take action
upon a determination that (1) there is credible evidence that leads the
President to believe that a foreign controlling interest might take
action that threatens to impair national security and (2) laws other
than Exon-Florio and the International Emergency Economic Powers Act
are inadequate or inappropriate to protect national security. Under the
regulations, the President's divestiture authority, however, cannot be
exercised if (1) the Committee has informed the companies in writing
that their acquisition was not subject to Exon-Florio or had previously
decided to forego investigation or (2) the President has previously
decided not to act on that specific acquisition under Exon-
Florio.[Footnote 8] The Committee may reopen its review or
investigation and revise its recommendation to the President if it
determines that the companies omitted or provided false or misleading
information.[Footnote 9] In some cases, the companies will decide not
to proceed with the transaction because of concerns that a presidential
decision would be unfavorable. However, the President has ordered
divestiture in only one case. In 1990, the President ordered a Chinese
aerospace company to divest its ownership of a U.S. aircraft parts
manufacturer.
Under the original Exon-Florio law, the President was obligated to
report to the Congress on the circumstances surrounding a presidential
decision only after prohibiting an acquisition. In response to concerns
about the lack of transparency in the Committee's process, in 1992
Congress passed the Byrd Amendment to Exon-Florio, requiring a report
to the Congress if the President makes any decision regarding a
proposed foreign acquisition.
Companies can request to withdraw their notification at any time prior
to the President announcing a decision. A Treasury official told us
that the Committee generally grants withdrawal requests. After the
Committee approves a withdrawal, any prior voluntary notices submitted
no longer remain in effect. Any subsequent refiling by the parties is
considered as a new, voluntary notice to the Committee.
The Committee's Implementation of Exon-Florio May Limit Its
Effectiveness:
The manner in which the Committee implements Exon-Florio may limit its
effectiveness because (1) Treasury, in its role as Chair, has narrowly
defined what constitutes a threat to national security and (2) the
Committee is reluctant to initiate a 45-day investigation because of a
perceived negative impact on foreign investment and a conflict with the
U.S. open investment policy. As a result of the narrow definition, some
issues that Defense, Homeland Security, and Justice officials believe
have important national security implications, such as security of
supply, may not be addressed. In addition, the reluctance to initiate
the 45-day investigation compresses the time available to consider
issues. This compressed time frame limits agencies' ability to complete
their analysis of some cases. The Committee encourages companies to
request withdrawal of their notification to provide additional time to
resolve issues and to avoid the need for investigation. However, when
companies that have already completed the acquisition are allowed to
withdraw, there is a substantially longer time before they refile, and
in some cases they never do, leaving unresolved any outstanding
concerns.
Threats to National Security Are Narrowly Defined:
Under the statute, the President or the President's designee may make
an investigation to determine whether a foreign acquisition might
threaten the national security of the United States. Neither the
statute nor its implementing regulations define national security. This
permits a broad interpretation of the term. The statute does provide
factors to be considered in determining a threat to national security;
however, consideration of these factors is not mandatory. These factors
include the following:
* Domestic production needed for projected national defense
requirements.
* The capability and capacity of domestic industries to meet national
defense requirements, including the availability of human resources,
products, technology, materials, and other supplies and services.
* The control of domestic industries and commercial activity by foreign
citizens as it affects the capability and capacity of the United States
to meet the requirements of national security.
* The potential effects of the proposed or pending transaction on sales
of military goods, equipment, or technology to any country identified
under applicable law as (a) supporting terrorism or (b) a country of
concern for missile proliferation or the proliferation of chemical and
biological weapons.
* The potential effects of the proposed or pending transaction on U.S.
international technological leadership in areas affecting national
security.
Despite the broad coverage of the factors under the statute, Treasury
and some other Committee member agencies have continued to view threats
to national security in the traditional and more narrowly defined
sense. That is, they based their definition on a U.S. company's
possession of export-controlled technologies or items, classified
contracts, and critical technology; or specific derogatory intelligence
on the foreign company. The Departments of Justice and Defense have
applied a broader view of what might constitute a threat to national
security. And since being added to the Committee, the Department of
Homeland Security has begun to analyze acquisitions both in traditional
terms and more broadly in terms of the potential vulnerabilities posed
by the acquisition. According to Justice, Homeland Security, and
Defense officials, vulnerabilities can result from foreign control of
critical infrastructure, such as control of or access to information
traveling on networks. Vulnerabilities can also result from foreign
control of critical inputs to defense systems or a decrease in the
number of innovative small businesses conducting research on developing
defense-related technologies. While these vulnerabilities may not pose
an immediate threat to national security, they may create the potential
for longer-term harm to U.S. national security interests by reducing
U.S. technological leadership in defense systems.
The agencies that favor applying the narrower, more traditional
definition of what constitutes a threat to national security have
resisted using Exon-Florio to mitigate the concerns being raised by the
Department of Defense and others. For example, in reviewing a 2001
acquisition involving a U.S. company that produced precision optics and
semiconductor manufacturing equipment, Defense and Commerce raised
concerns about (a) foreign ownership of sensitive but unclassified
technology used in reconnaissance satellites, (b) the possibility of
this sensitive technology being transferred to countries of concern,
and (c) maintaining U.S. government access to the technology. Treasury
officials said that the concerns raised by Defense and Commerce were
not national security concerns because they did not involve classified
contracts, the foreign company's country of origin was a U.S. ally, and
there was no specific negative intelligence about the company's actions
in the United States.
During a more recent review, disagreement over the scope of Exon-Florio
resulted in a weakening of the enforcement provisions in an agreement.
The Defense Department had raised concerns about the security of its
supply of specialized integrated circuits as a result of a proposed
acquisition. These unique integrated circuits are used in a variety of
defense technologies, such as unmanned aerial vehicles, the Joint
Tactical Radio System, and communications protection devices including
devices used for cryptography. A Defense Science Board task force
recently noted that the functions performed by Defense-unique
integrated circuits are essential to the national defense of the United
States. However, in Treasury's view, the Department of Defense's
concerns about its supply of integrated circuits were industrial policy
concerns, not national security concerns, despite the importance of
these circuits to a variety of defense technologies. Treasury, as Chair
of the Committee, and several other members deemed the concerns outside
the scope of Exon-Florio authority and would not allow the agreement
between the Departments of Defense and Homeland Security and the
companies to include any mention of the Committee. As a result, a
provision that included strong enforcement language was deleted from an
agreement with the acquiring company. In the absence of such language,
presidential or Committee action can only result if the companies
materially misrepresented information during the Committee's review. In
our view, without that provision, the consequences of failure to comply
with the agreement are less certain.
The Standard for Investigation Limits the Number of Investigations:
The Committee has been reluctant to initiate investigations, to avoid
both the negative connotations of an investigation and the need for a
presidential decision. As a result, the Committee has initiated few
investigations. From 1997 through 2004, the Committee received 470
notices, including 19 refilings, for 451 proposed or completed
acquisitions. The Committee initiated only eight investigations during
the period (see table 2).
Table 2: Notifications to the Committee on Foreign Investment in the
United States and Actions Taken, 1997 through 2004:
Year: 1997;
Notifications: 62;
Acquisitions[A]: 60;
Investigations[B]: 0.
Year: 1998;
Notifications: 65;
Acquisitions[A]: 62;
Investigations[B]: 2.
Year: 1999;
Notifications: 79;
Acquisitions[A]: 76;
Investigations[B]: 0.
Year: 2000;
Notifications: 72;
Acquisitions[A]: 71;
Investigations[B]: 1.
Year: 2001;
Notifications: 55;
Acquisitions[A]: 51;
Investigations[B]: 1.
Year: 2002;
Notifications: 43;
Acquisitions[A]: 42;
Investigations[B]: 0.
Year: 2003;
Notifications: 41;
Acquisitions[A]: 39;
Investigations[B]: 2.
Year: 2004;
Notifications: 53;
Acquisitions[A]: 50;
Investigations[B]: 2.
Total;
Notifications: 470;
Acquisitions[A]: 451;
Investigations[B]: 8.
Source: Department of the Treasury.
[A] Acquisitions that were withdrawn and refiled are shown in the year
of initial notification.
[B] Investigations are shown in the year of their notification.
[End of table]
According to Treasury Department officials, the Committee reviews
foreign acquisitions with a view to protecting national security while
maintaining U.S. open investment policy, which provides for equal
treatment of foreign and domestic investors. The office within Treasury
that provides staff support to the Committee--the Office for
International Investment--is also the office responsible for promoting
the open investment policy. The Committee's goal is to implement Exon-
Florio without chilling foreign investment in the United States.
According to Treasury officials, being the subject of an investigation
may have negative connotations for a company. If it becomes public
knowledge that the acquiring company is the subject of an
investigation, it may be perceived that the government views the
acquisition as problematic and the stock price of the company may fall.
Thus, avoiding an investigation helps maintain the confidence of
investors.
Consistent with its desire to avoid investigations, the Treasury
Department, as Committee Chair, applies strict criteria in determining
whether an acquisition should be investigated. The criteria for
initiating an investigation are the likelihood that (1) there is
credible evidence that the foreign controlling interest may take action
to threaten national security and (2) no other laws are appropriate or
adequate to protect national security. This is essentially the same
criteria provided by the statute as the basis for the President to take
action to suspend or prohibit an acquisition under Exon-
Florio.[Footnote 10] The Defense Department and others have stated that
these criteria are inappropriate for determining whether to initiate an
investigation because the 45 days of the investigation should be used
to determine whether the criteria are met to inform the Committee's
recommendation to the President. Exon-Florio does not provide specific
guidance for the appropriate criteria for initiating a 45-day
investigation. The statute merely provides that "the President or the
President's designee may make an investigation to determine the effects
on national security" of acquisitions that could result in foreign
control of a U.S. company.[Footnote 11]
Withdrawals Bypass Regulatory Time Frames:
Committee guidelines require member agencies to inform the Committee of
concerns by the 23rd day of the 30-day review allowed by Exon-Florio.
According to one Treasury official, this time frame is necessary to
meet the legislated 30-day requirement for completing a review. For
some cases, particularly complex ones, the 23-day rule does not allow
enough time to complete reviews and address concerns. For example, one
Defense official said that, without advance notice of the acquisition,
the time frames are too short to complete analysis and provide input
for the Defense Department's position. Another Defense official said
that to meet Treasury's deadline, analysts have between 3 and 10 days
to analyze the acquisition. In one instance, Homeland Security was
unable to provide input within the time frame.
When agencies have needed more time to gather information or negotiate
an agreement to mitigate national security concerns, the Committee
generally suggests that companies request to withdraw their
notification. If the company does not want to withdraw, the Committee
can initiate an investigation. Exon-Florio's implementing regulations
permit the Committee to allow companies to withdraw their notifications
at any time before a presidential decision.
When companies have withdrawn their notification prior to concluding an
acquisition, the companies have an incentive to resolve any outstanding
issues and refile as soon as possible. However, if an acquisition has
been concluded, there is less incentive to resolve issues and refile.
Since 1997, companies involved in 18 acquisitions have withdrawn their
notification and refiled 19 times. In one case, the company withdrew
and refiled twice. In 16 cases, the acquisitions had not yet been
concluded, and the time between withdrawal and refiling ranged between
0 days and 4 months (see fig. 2). In two cases, the companies had
already concluded the acquisition, and 9 months and 1 year,
respectively, passed before the companies refiled. In both cases,
Defense or Commerce had raised concerns about potential export control
issues. These concerns remained unresolved throughout the period.
Figure 2: Number of Days between Withdrawal and Refiling in 19
Withdrawn Notifications:
[See PDF for image]
[End of figure]
In addition to cases where a company that completed an acquisition
withdrew and subsequently refiled, we identified two instances in which
companies that had concluded an acquisition before filing with the
Committee withdrew and have not refiled. In one case, the company filed
with the Committee more than a year after completing the acquisition.
The Committee allowed it to withdraw the notification to provide more
time to answer the Committee's questions and provide assurances
concerning export control matters. The company refiled and was
permitted to withdraw a second time because there were still unresolved
issues. Four years have passed since the second withdrawal.
In another case, a company filed with the Committee over 6 months after
completing its acquisition of an internet backbone company. The
Committee allowed the company to withdraw the notification more than 2
years ago because the Committee was busy with another, high-profile
acquisition. The Committee has not requested that the company refile
even though analysts within one agency had concerns about the
acquisition. As a result, the review process has never been completed.
A Treasury Department official said that the member agency that has
national security concerns about a particular transaction is
responsible for ensuring that the company refiles. However, the
Committee's guidance to member agencies specifically states that
Treasury will manage activities during withdrawal by specifying time
frames and goals to be achieved.
In six of the eight investigations that have been undertaken since
1997, withdrawal was allowed after the investigation had begun.
Withdrawal and refiling to restart the clock limits the potential
negative connotation of an investigation. However, this practice also
limits instances that require a presidential decision, contributing to
the opaque nature of the Exon-Florio process because reporting to
Congress on the results of Committee actions only occurs as a result of
a presidential decision. Only two of the eight cases resulted in a
presidential decision and a subsequent report to the Congress (see
table 3).
Table 3: Investigations and Outcomes, 1997 through 2004:
Year: 1997;
Investigations[A]: 0;
Notices withdrawn after investigation begun: 0;
Presidential decisions: 0.
Year: 1998;
Investigations[A]: 2;
Notices withdrawn after investigation begun: 2;
Presidential decisions: 0.
Year: 1999;
Investigations[A]: 0;
Notices withdrawn after investigation begun: 0;
Presidential decisions: 0.
Year: 2000;
Investigations[A]: 1;
Notices withdrawn after investigation begun: 0;
Presidential decisions: 1.
Year: 2001;
Investigations[A]: 1;
Notices withdrawn after investigation begun: 1;
Presidential decisions: 0.
Year: 2002;
Investigations[A]: 0;
Notices withdrawn after investigation begun: 0;
Presidential decisions: 0.
Year: 2003;
Investigations[A]: 2;
Notices withdrawn after investigation begun: 1;
Presidential decisions: 1.
Year: 2004;
Investigations[A]: 2;
Notices withdrawn after investigation begun: 2;
Presidential decisions: 0.
Total;
Investigations[A]: 8;
Notices withdrawn after investigation begun: 6;
Presidential decisions: 2[B].
Source: U.S. Department of the Treasury.
[A] Investigations are shown in the year of their notification.
[B] In both cases the President took no action, thereby allowing the
transaction.
[End of table]
Provisions for Monitoring Compliance Have Improved:
In our 2002 report, we identified several weaknesses in the agreements
that agencies negotiated with companies under the Exon-Florio
Amendment. Specifically, the two agreements that we reviewed either did
not specify (1) the time frame for implementing provisions of the
agreement or (2) the action that would be taken if the company failed
to comply within the stated time frame, thus providing no incentive for
the companies to act or no penalty for noncompliance. And in one case,
the company failed to meet the agreed upon time frame. In addition, the
agreements did not specify which offices in Committee member agencies
would be responsible for monitoring compliance with the agreements. We
recommended in our 2002 report that, to ensure compliance with
agreements, the Secretary of the Treasury, as Chair of the Committee,
increase the specificity of actions required by mitigation measures in
agreements negotiated under Exon-Florio and designate in the agreements
the agency responsible for overseeing implementation and monitoring
compliance with mitigation measures.
Three agreements negotiated between 2003 and 2005 contain specific time
frames for actions to be taken:
* In a telecommunications agreement, the company was required to adopt
and implement a visitation policy within 90 days after the agreement
became effective.
* In a software agreement, the company had to adopt mandatory policies
and procedures to implement the agreement within 90 days and provide
copies to the government points of contact.
* In an electronics agreement, the company had to appoint a security
officer and two security directors within 90 days of a vacancy to
ensure compliance with the agreement, subject to approval by the
Departments of Defense and Homeland Security.
Two of the three agreements also contained strong language concerning
the consequences of noncompliance with the terms of the agreement. For
example, these agreements stated that if the company (1) fails to
comply with the terms of the agreement, (2) makes a materially false or
incomplete statement, (3) increases foreign entity control, or (4)
makes other material changes in circumstances, the Attorney General,
the Secretary of Defense, or the Secretary of Homeland Security may
raise concerns to the Committee or the President.
All three agreements also provided specific offices within the
signatory agencies to which the companies are to report. For example,
the telecommunications agreement designates as points of contact the
Assistant Attorney General of the Justice Department's Criminal
Division, the General Counsel at the Federal Bureau of Investigation,
the Deputy General Counsel for Acquisition, Technology, and Logistics
at the Department of Defense, and the General Counsel at the Department
of Homeland Security.
The Department of Homeland Security has taken the lead on monitoring
compliance for those agreements that it has signed under Exon-Florio.
According to Homeland Security officials, the agency maintains
compliance tables to track companies' compliance with time frames
provided for in the agreements. To keep all interested parties
informed, the Department sends out periodic e-mails to other agencies
informing them of the status of companies' compliance efforts.
The Departments of Defense, Commerce, and Justice significantly rely on
Homeland Security to monitor companies' compliance with the agreements.
Homeland Security officials stated that Homeland Security Presidential
Directive 7 gives the Department the authority to protect critical
infrastructure assets such as telecommunications and information
technology. According to a Defense official, the Department of Defense
has no authority to enforce companies' compliance with agreements
signed pursuant to Exon-Florio. A Commerce Department official
similarly stated that Commerce's authority is limited to enforcing
compliance with export control laws. As a result, the Department of
Homeland Security is the only one of the three with broad enforcement
authority. Further, according to Justice officials, while Justice has
authority to seek enforcement of agreements signed pursuant to Exon-
Florio and to which it is a signatory, the Department of Homeland
Security has more resources for monitoring compliance as well as the
legal mandate to act.
Conclusions:
In the aftermath of the September 11, 2001, terror attacks on the
United States and the subsequent war on terrorism, the nature of
threats facing this country has changed. In addition to traditional
threats to national security, vulnerabilities in areas such as the
nation's critical infrastructure have emerged as potential threats.
Exon-Florio provides the latitude for the Committee on Foreign
Investment in the United States to address these threats. But the
effectiveness of Exon-Florio as a safety net depends on the manner in
which the broad scope of its authority is implemented. The narrow, more
traditional interpretation of what constitutes a threat to national
security fails to fully consider the factors currently embodied in the
law. Further, the time constraints imposed on agencies to develop a
position before the statutory deadline limits member agencies' ability
to complete in-depth analyses. Those time constraints, together with
the Committee's reluctance to initiate investigations, can result in
the Committee permitting companies to withdraw their notifications.
When companies withdraw after completing an acquisition, the Committee
may lose visibility over the transaction, and the companies may choose
not to refile.
The initial legislation provided for congressional oversight through a
requirement that the circumstances surrounding any negative decision by
the President be reported to the Congress. To improve congressional
oversight, the Byrd amendment expanded required reporting to include
the circumstances surrounding all presidential decisions. However, the
Committee's reluctance to proceed to investigation, coupled with the
use of withdrawal to resolve cases without the need for presidential
decisions, has resulted in the circumstances surrounding only two cases
being reported to the Congress since 1997. This criterion for reporting
contributes to the opaque nature of the Committee's process and is
limiting the information that is provided to the Congress. In addition,
where companies have concluded the acquisition prior to filing with the
Committee and concerns have been identified, permitting withdrawal
expands the opportunity for harm to national security before the
Committee takes action.
Matters for Congressional Consideration:
In light of the differing views within the Committee on Foreign
Investment in the United States regarding the extent of authority
provided by Exon-Florio, the Congress should consider amending Exon-
Florio by more clearly emphasizing the factors that should be
considered in determining potential harm to national security. In
addition, to address Treasury's concern with the impact of
investigations on U.S. open investment policy and the member agencies'
concerns with having sufficient time to address relevant issues
concerning the acquisitions, the Congress should consider eliminating
the distinction between a review and an investigation and make the
entire 75-day period available for review. The Committee could then be
required to submit recommendations to the President only if
presidential action was necessary. Also, to provide more transparency
and facilitate congressional oversight, the Congress should revisit the
criterion for reporting circumstances surrounding cases to the
Congress. For example, the Congress could require an annual report on
all transactions that occurred during the preceding year. Such a report
could provide the Congress with information on the nature of each
acquisition; the national security concerns raised by Committee member
agencies, if any; how the concerns were mitigated; and whether each
acquisition was concluded or abandoned, in addition to any presidential
decisions required under the statute.
In addition, in view of the need to ensure that national security is
protected during the period that withdrawal is allowed for companies
that have completed or plan to complete an acquisition prior to the
Committee completing its work, the Congress should require that the
Secretary of the Treasury, as Committee Chair, establish (1) interim
protections where specific concerns have been raised, (2) specific time
frames for refiling, and (3) a process for tracking any actions being
taken during the withdrawal period.
Agency Comments and Our Evaluation:
We provided a draft of our report to the Departments of Commerce,
Defense, Homeland Security, Justice, and Treasury for comment. In
responding, the Department of Treasury noted that it was providing
comments on behalf of all the members of the Committee on Foreign
Investment in the United States. However, the Department of Justice
provided comments in a separate letter.
Overall, Treasury disagreed with our findings. At issue is our
characterization of the Committee's process and the adequacy of insight
into the Committee's deliberations--concerns that Treasury states have
caused the Committee to question our understanding of how it operates.
Our understanding of the Committee's process is based on an extensive
examination of Committee guidelines, case files, and memorandums;
discussions with member agencies, including Treasury, on the process
and the time frames the Committee uses to come to a decision; and a
review of the laws and regulations that provide the Committee with
criteria against which to assess threats to national security.
Treasury asserts that all Committee decisions are reached only by
consensus among member agencies. However, during the course of our
review, certain member agencies raised concerns about the Committee's
process that indicated fundamentally differing views among Committee
members when reviewing certain cases. These disagreements involved
different views on what constitutes a threat to national security, the
sufficiency of the time allowed for reviews, and the appropriate
criteria for initiating an investigation. While we agree that opposing
views can, and should, be vigorously debated, such a debate does not
demonstrate that issues have been fully vetted or that consensus has
been reached, as Treasury implies. In fact, in a number of cases, we
found evidence that indicates otherwise, for example:
* In one case we reviewed where member agencies disagreed over what
should be deemed a national security concern, the narrower definition-
-one that excludes national security concerns raised by certain member
agencies--has prevailed, in that the notice has been withdrawn instead
of the case proceeding to investigation.
* In complex cases in which national security concerns have been raised
and for which Exon-Florio is the relevant statute, case documentation
we reviewed revealed the significant pressures some agencies face to
complete analysis within 23 days. In its comments on our draft report,
the Department of Justice shared our concern with respect to the time
constraints imposed by the current process. Specifically, Justice
stated that "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."
* Policy-level officials from two member agencies have indicated that
the debate over the criteria for initiating an investigation remains
unresolved.
Given these fundamental differences, we concluded that the extent to
which issues are vetted and consensus is reached on certain cases is,
at best, uncertain.
Treasury also cites Committee guidelines on withdrawals--which state
that parties, not member agencies, have the authority to request a
withdrawal--to dispute our position that the Committee has encouraged
companies to withdraw notifications to provide additional time to
examine acquisitions. Guidelines stating that certain actions should be
taken do not necessarily provide evidence that such actions were indeed
taken. In five cases that we reviewed, letters from the companies
requesting withdrawal and/or letters from Treasury, as Committee Chair,
approving the requests to withdraw cited the need for more review time
on the part of the government as the reason for the withdrawal.
Regardless, Treasury's detailed discussion of the withdrawal process
ignores the key issue. Allowing companies to withdraw notices to
provide more time for a review without initiating an investigation
significantly increases the risk that companies will not refile in a
timely manner--particularly in cases where the foreign acquisition has
been completed--and that national security concerns will remain
unaddressed. Avoiding investigations by using withdrawals also
contributes to the opaque nature of the process because without an
investigation there is no presidential decision and required reporting
to the Congress.
Understandably, Treasury is cautious about providing details into the
Committee's deliberations, given the sensitivity of the information
discussed and the need to protect it. And we appreciate the challenges
each case presents. However, despite Treasury's assertion that the oral
briefings provided by agency members to duly authorized committees of
the Congress when requested are appropriate, the fact that our review
was prompted by congressional concerns about the Committee's review and
investigation process suggests otherwise.
Finally, Treasury criticized our review methodology--specifically, it
questioned whether we spoke to all appropriate parties. We focused on
the agencies that were most active in Exon-Florio reviews, as we noted
to Treasury at the beginning of our review. During our preliminary
discussions and throughout the review, none of the Committee member
agencies, including Treasury, raised concerns with our methodology or
suggested that we contact the Department of State, the United States
Trade Representative, or the Council of Economic Advisers. Our reviews
of the official Committee files, located at the Treasury Department,
supported our view that the Departments of Commerce, Defense, Homeland
Security, Justice, and Treasury were the most active agencies.
Regardless, when it became clear to us that information from other
Committee members could be germane, as was the case with the National
Security Council, we attempted to contact them. In the case of the
National Security Council, officials declined to meet with us. At the
time we sent the draft report for comment, we were contacted by the
Department of State and the U. S. Trade Representative who wanted to
discuss the draft report. We met with representatives of both agencies
to discuss their concern that our report did not adequately recognize
the importance of open investment and was too focused on national
security.
We recognize that in implementing Exon-Florio, the Committee must
consider national security in the context of open investment--a
challenge we point out in the opening statement of our report. However,
the purpose of the Exon-Florio amendment is to protect national
security in the context of U.S. open investment policy. It is how
national security is protected through the Committee process that needs
to be better understood. We believe that understanding can be enhanced
by improved insight and oversight of the process.
The Department of Justice in its letter also provided technical
comments, which we incorporated as appropriate. Treasury's letter,
along with our responses to specific comments, is reprinted in appendix
I. Justice's letter is reprinted in appendix II.
Scope and Methodology:
To examine the process used by the Committee and its member agencies to
review and investigate foreign acquisitions, we analyzed case files and
discussed with Committee staff members the factors considered when
cases are reviewed, the process and time frame the Committee uses to
come to a decision, and the laws and regulations that provide the
Committee with criteria against which to assess threats to national
security.
We examined in depth nine acquisitions notified to the Committee on
Foreign Investment in the United States between June 28, 1995, and
December 31, 2004. We selected acquisitions based on recommendations by
Committee member agency officials and the following criteria: (1) the
Committee permitted the companies to withdraw the notification; (2) the
Committee or member agencies concluded agreements to mitigate national
security concerns; (3) the foreign company had previously notified the
Committee of a prior acquisition; or (4) GAO had conducted a prior
review. The objective of the case reviews was to understand and
document the Committee's and its members' approaches to and processes
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 also obtained information about other foreign acquisitions that we
did not conduct case reviews on, and we also used information on other
acquisitions obtained during prior GAO reviews. We obtained and
analyzed data from relevant Committee member agencies, including the
Departments of Commerce, Defense, Homeland Security, and Treasury.
While we were not granted access to files held by the Department of
Justice, we discussed individual cases with Justice officials and
obtained adequate information to meet our objectives. We also discussed
the Committee's approach and process with Committee staff officials
from member agencies most actively involved--namely, the Departments of
Commerce, Defense, Homeland Security, Justice, and Treasury.
To determine whether the weaknesses in provisions to assist agencies in
monitoring agreements that GAO had identified in its 2002 report had
been addressed, we analyzed agreements concluded under the Committee's
authority between 2003 and 2005 and compared these agreements with
those GAO had previously analyzed. We discussed with Committee staff
members the steps that they are taking to monitor agreements and
enforce compliance.
We conducted our review from April 2004 through July 2005 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. At that time, we will send
copies of this report to the Chairman and Ranking Minority Member of
the House Committee on Financial Services and to other interested House
and Senate committees and subcommittees. We will also send copies to
the Secretaries of Commerce, Defense, Homeland Security, and Treasury
and the Attorney General. 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 at (202) 512-4841 or calvaresibarra@gao.gov if you
have any questions regarding this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. A list of major contributors to this
report is listed in appendix III.
Signed by:
Ann M. Calvaresi-Barr:
Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Comments from the Department of Treasury:
DEPARTMENT OF THE TREASURY:
WASHINGTON, D.C.
UNDER SECRETARY:
August 12, 2005:
Ms. Ann Calvaresi-Barr:
Director:
Acquisition and Sourcing Management:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Calvaresi-Barr:
I am responding to your letter of June 30, 2005, to Secretary Snow
requesting comments on the GAO draft Report, "Defense Trade: Exon-
Florio May Have Limited Effectiveness in Protecting U.S. National
Security." These comments are made on behalf of all the members of the
Committee on Foreign Investment in the United States (CFIUS).
We believe that CFIUS has implemented the Exon-Florio provision (Exon-
Florio) effectively to protect the national security. In light of this,
CFIUS has a number of serious concerns with the draft Report, which,
unlike prior GAO reports on CFIUS, reveals a fundamental
misunderstanding of how the Committee operates. Our major concerns are
summarized below.
First, to the extent that the draft Report implies that Treasury or any
other CFIUS agency dictates certain decisions or courses of action, it
is simply incorrect. CFIUS is an interagency committee chaired by the
Secretary of the Treasury. All CFIUS decisions are reached only by
consensus among the CFIUS member agencies. The decisions described in
the draft Report illustrate this point in that they all were agreed to
by senior officials from all CFIUS agencies. The draft report seems to
have focused on the vigorous debate that often occurs as CFIUS
considers a proposed acquisition, not the outcome of such debates.
Second, the draft Report inaccurately describes CFIUS and the
Department of the Treasury as Chair in other ways. Notably, the draft
Report claims that Treasury has narrowly defined "national security."
To the contrary, no agency or agencies "define" national security for
CFIUS. Any agency may bring forward national security concerns to have
them fully considered to enable CFIUS members to reach the necessary
consensus on how those concerns should be addressed. The erroneous
proposition that individual agencies "define" national security for
CFIUS forms the basis for the GAO's lead conclusion, "Exon-Florio's
effectiveness in protecting U.S. national security may be limited."
[NOTE 1]
Third, the draft Report states that in response to congressional
concerns, GAO met with officials from the Departments of Commerce,
Defense, Homeland Security, Justice and Treasury, which in GAO's view
are "the agencies that are the most active in the review of
acquisitions." [NOTE 2] GAO apparently did not solicit any input from
other members of CFIUS, such as the Department of State, the Office of
the United States Trade Representative, nor the Council of Economic
Advisers. [NOTE 3] Despite GAO's unsubstantiated assertion, these
organizations - like the ones GAO did choose to meet with - are very
much engaged in CFIUS reviews. If GAO had interviewed senior policy
officials from these organizations, which reflect the broad spectrum of
CFIUS membership, the Committee is confident that GAO would have gained
a more informed perspective on the CFIUS process.
Finally, it is worth noting that, while Exon-Florio requires CFIUS to
analyze transactions for their effects on national security, other
factors are also relevant. When Exon-Florio was enacted, Congress
understood that there were already a number of effective legislative
provisions to protect the national security. These ranged from laws
that restrict the foreign ownership of U.S, air carriers to laws that
regulate the export of sensitive technology or that restrict access to
sensitive information. In recognition of these existing laws, Congress
limited Exon-Florio to situations where other tools were not adequate
or appropriate to deal with a national security threat. The provision
is designed to be used judiciously. Using Exon-Florio in ways that were
not intended would send a confusing message to our trading and
investing partners around the world, could be inconsistent with our
commitments under various international agreements to provide national
treatment to foreign companies, and implicitly would call into question
the U.S. Govermment's commitment to an open investment policy, all of
which would damage U.S. interests - including national security
interests - in the context of these agreements and commitments.
Unnecessary restrictions by the U.S. on foreign investment may also
encourage other governments to restrict foreign investment by U.S.
firms. Indeed, all CFIUS members recognize that often there is an
inherent link between national security interests and U.S. economic
prosperity and that U.S. prosperity is furthered through foreign
investment in the United States. Through robust debate among CFIUS
members, we seek to protect national security in the context of an open
investment policy that respects this critical link. We believe we have
been successful. Continued congressional sensitivity to these critical
national interests is especially important in today's global economy.
In addition, I have attached an appendix with additional comments on
the following specific issues:
* Definition of National Security;
* Standard for Initiating an Investigation;
* The Day 23 Rule;
* Mitigation Measures;
* Monitoring Compliance, Enforcing Agreements, and Remedies;
* Withdrawals;
* Industrial Policy;
* Vulnerabilities from Foreign Control Alone;
* GAO Conclusion Re Amending Exon-Florio to Specify Additional Factors;
* GAO Conclusion Re Eliminating the Distinction between a Review and an
Investigation;
* GAO Conclusion Re Revisiting the Criterion for Reporting to Congress;
* GAO Conclusion Re Amending the Regulations to Provide Interim
Protections;
* Interagency Process.
Thank you for the opportunity to continent on GAO's draft Report.
Sincerely,
Signed by:
Timothy D. Adams:
Under Secretary for International Affairs:
Additional Comments on Specific Issues:
Definition of U.S. National Security:
There are statements [NOTE 4] in the draft Report that Treasury, as
Chair, or Treasury along with other Committee members, has narrowly
defined what constitutes a threat to national security and that this
narrow definition limits the effectiveness of Exon-Florio to protect
U.S. national security. The recommendations of the Committee are
informed by an extremely broad range of factors and not by the narrow
definition described in the draft Report or any similarly narrow
standard. Any such definition would inappropriately limit the
President's necessary discretion to protect national security.
This open-ended approach allows the President maximum flexibility to
respond on a case-by-case basis to the unique facts and circumstances
of each case. As stated in the portion of the regulations that
discusses their scope, "The principal purpose of section 721 is to
authorize the President to suspend or prohibit any merger, acquisition,
or takeover by or with a foreign person engaged in interstate commerce
in the United States when, in the President's view, the foreign
interest exercising control over that person might take action that
threatens to impair the national security."[NOTE 5] Only the President
decides what constitutes a threat to the national security and what
actions are in the interest of U.S. national security in any particular
case that is sent for a determination under Exon-Florio.
The draft Report states that in regard to one transaction CFIUS
reviewed, "[t]he Treasury Department said that the concerns raised by
Defense and Commerce were not national security concerns because they
did not involve classified contracts, the foreign company's country of
origin was a U.S. ally, and there was no specific negative intelligence
about the company's actions in the United States."[NOTE 6] This
statement suggests that one agency's view was somehow determinative of
CFIUS's actions in this case. The comment ignores that the transaction
at issue was fully investigated and extensive mitigation measures were
put in place before CFIUS completed its review. Again, this illustrates
that the draft Report ignores that all member agencies participate in
the Committee's decision-making process and that CFIUS, as a Committee,
decides whether there are threats to the national security and works
closely with member agencies to develop appropriate mitigation
measures.
Standard for Initiating an Investigation:
The draft Report repeatedly asserts that Treasury, along with some
other member agencies, is reluctant to initiate investigations [NOTE 7]
and applies an overly strict standard in determining whether an
acquisition should be investigated.[NOTE 8] The question of whether to
undertake an investigation demands careful deliberation on the part of
all CFIUS members, including Treasury. The reason is obvious: a 45-day
investigation potentially involves the President in the ultimate
decision about a foreign acquisition. If CFIUS concludes after a 30-day
review that there are unresolved national security issues, then an
investigation is entirely appropriate. The GAO has cited no case since
the enactment of Exon-Florio in 1988 where a Committee decision not to
investigate was the result of imposition of a "strict standard" for
deciding whether to investigate.
Treasury made available to GAO the CFIUS Guidelines which state that
"Policy or Deputies CFIUS meetings are called to consider an action
that may ultimately involve a Presidential decision. All agencies must
be represented at the policy or deputy level and should be prepared to
present their views." The Guidelines go on to state that "[i]f any
agency has national security concerns regarding the transaction and
policy level officials concur, a 45-day investigation is undertaken."
As this indicates, Committee decisions are made on a consensus basis
and the Committee's members are expected to, and do, participate in
this process.
The Day 23 Rule [NOTE 9]:
The draft Report states that "the time constraints imposed on agencies
to develop a position prior to the statutory deadline limits [sic]
agencies' ability to complete in-depth analyses." [NOTE 10]The CFIUS
Guidelines include time frames for completing the various phases of the
reviews. The Guidelines state "Any CFIUS agency informs the Staff Chair
as soon as possible, but in any case no later than Day 23 of a
particular CFIUS review, unless extenuating circumstances prevent
notice by this date, that it will request a policy level meeting to
discuss the agency's request for CFNS to undertake a 45-day
investigation under the Exon-Florio provision." The purpose of the Day
23 deadline is to enable CFIUS to meet its obligations under the tight
30-day time frames of Exon-Florio. In most cases, CFIUS agencies are
able to complete their reviews within the 23-day time frame; where they
are not, CFIUS has been flexible enough to allow agencies as much time
as possible under the 30-day time frame to complete their reviews and
CFIUS has been able to identify and resolve national security concerns.
GAO's criticism also overlooks the impact Exon-Florio has on the
awareness of foreign investors contemplating acquisitions of U.S.
companies of the importance of national security considerations and the
ways it has resulted in foreign investments being structured to avoid
national security problems. Many companies filing with CFIUS undergo
extensive preparation, including ensuring compliance with existing laws
and regulations pertaining to national security, before they even file
their notices with the Committee.
Mitigation Measures:
The draft Report states that "[t]he agencies that favor applying the
narrower, more traditional definition of what constitutes a threat to
national security have resisted using Exon-Florio to mitigate the
concerns being raised by Defense and others." [NOTE 11] This assertion
is undermined by the fact that CFIUS agencies have sought extensive
mitigation measures in many more cases than they did just a few years
ago. Since 1997, CFIUS agencies have negotiated at least 21 mitigation
agreements in conjunction with a CFIUS review.
The mitigation agreements negotiated in conjunction with a CFIUS review
vary in scope and purpose, and are negotiated on a case by case basis
to address the particular concerns raised by an individual transaction.
Some examples of the types of agreements are available through public
sources; however, these examples in no way represent an exhaustive list
of the kinds of agreements or mitigation measures that have been
negotiated by CFIUS agencies. Moreover, because the facts of and issues
raised by each transaction are unique, additional or varied mitigation
measures will undoubtedly be required to resolve agencies' national
security concerns in future transactions. A few examples of the general
types of agreements that have been negotiated include:
Special Security Agreement (SSA): These agreements provide security
protection to the particular aspect of the company's operation that
deals with classified or other sensitive contracts.
Board Resolution: The U.S. company may be required to adopt a board
resolution that certifies the foreign investor will not have access to
particular information or influence over particular contracts.
Proxy Agreement: These agreements are used to totally isolate the
foreign acquirer from any control or influence over the U.S. company.
Network Security Agreements (NSA): In cases in the telecommunications
sector, conditions have been imposed in the context of the Federal
Communications Commission's (FCC) licensing process. Transactions
involving the foreign acquisition of a U.S. telecommunications company
usually are subject to regulation by the FCC, which is an independent
regulatory agency. The FCC has in some cases agreed to condition the
transfer of licenses to a foreign company on its compliance with the
NSA that CFIUS member agencies have negotiated with that company. The
NSAs are public documents available on the FCC's website. Among other
things, the NSAs have included numerous and varied protection measures
for the security of the U.S. communications infrastructure, such as
provisions relating to information storage and access and the company's
ability to comply with rules, regulations and orders related to law
enforcement and national security. Some of the other strong security
measures that have been used in NSAs include but are not at all limited
to:
* Personnel Screening: the acquired company may be required to
implement a screening process for all personnel in positions that have
access to the communications network or data associated with it.
* Outsourcing: there may be requirements that either limit the ability
of the acquired company to outsource to non-U.S. companies, or impose
some type of screening of personnel performing the outsourced services.
* Visitation: the acquired company may be required to implement a
visitation policy that requires the appointment of a security officer
in the company to review requests to visit the U.S. communications
infrastructure by non-U.S. citizens.
* Routing: the company may be prohibited from routing domestic
communications outside the United States except for special situations
such as to avoid network disruptions.
* Security Audits: the acquired company may be required to undergo and
report to Executive Branch agencies audits, potentially by third
parties, of its network security practices.
Monitoring Compliance. Enforcing Agreements. and Remedies:
The draft report states that "The Departments of Defense, Commerce, and
Justice rely on DHS to monitor companies' compliance with the
agreements." [NOTE 12] Justice participates in several aspects of
monitoring compliance with respect to the agreements to which they are
a party. Therefore, to be more accurate, this statement should read:
"The Departments of Defense, Commerce, and Justice significantly rely
on DHS to monitor companies' compliance with the agreements."
In addition, with regard to enforcement authority, the draft report
states, "[T]he Department of Homeland Security is the only one of the
three [agencies that often sign security agreements] with broad
enforcement authority. Further, according to Justice officials, while
Justice has enforcement authority in some instances, the Department of
Homeland Security has more resources for monitoring compliance as well
as the legal mandate to act." [NOTE 13]
We wish to clarify that the question of which agencies monitor
agreements is distinct from which agencies enforce them. The Committee
believes that any signatory agency has the authority to monitor the
agreement, although there are differences in resources among them for
this purpose. As for the separate question of which agencies have
authority to enforce agreements, we would note that the Justice
Department clearly has the authority to undertake enforcement actions,
both on its own behalf as well as for other signatories. Justice's
position is that it has the unqualified authority to enforce such
agreements to which it is a signatory.
Further, to avoid any possible misunderstanding, it is worth noting
that it is not just Justice's Criminal Division that participates in
the CFIUS process. The Federal Bureau of Investigation (FBI) has been,
and continues to be, a very active and critical participant, and other
components of Justice have played a role on a case-by-case basis.
The draft Report also states that Treasury and several other members
deleted "strong enforcement language" from an agreement with a foreign
acquiring company. [NOTE 14] This discussion in the draft Report
actually refers to a proposed remedies provision, not an enforcement
provision. As noted previously, each transaction reviewed under Exon-
Florio is unique. Therefore, for each mitigation agreement, member
agencies utilize the most effective mitigation measures and strongest
enforcement mechanisms and remedies appropriate to the particular facts
and circumstances to ensure compliance. Although we cannot provide
specific comment on the individual case at issue in the draft Report,
CFIUS agencies have been vigilant to ensure that there are no
transactions for which compliance with mitigation measures is
uncertain.
Withdrawals:
The draft Report states, "To provide additional time, while avoiding an
investigation, the Committee has encouraged companies to withdraw their
notification. . ." [NOTE 15] As noted earlier, Treasury made available
to the GAO the CFIUS Guidelines. The Guidelines state:
Parties, not CFIUS agencies, have the authority to request a
withdrawal. The withdrawal option is not a means to extend the time
frames set by the statute. Legitimate reasons to grant a withdrawal
include providing parties an opportunity to get in compliance with
existing national security laws and regulations, and to provide
additional information to clarify national security issues that may not
necessarily warrant a Presidential determination. The CFIUS Chair, not
any single member agency, communicates with the parties regarding the
appropriateness of this option.
CFIUS as a whole decides whether a party to a transaction may withdraw
its filing, but Treasury as the Chair communicates this decision to the
parties. While "the Committee generally grants withdrawal requests,"
[NOTE 16] CFIUS frequently specifies in its letter granting the request
the conditions for the withdrawal. In cases where a withdrawal is
granted because the parties are abandoning the transaction, that fact
would be specified in the letter granting the request for withdrawal.
Where a withdrawal is granted and a re-filing is expected, that
expectation would also be stated in the letter granting withdrawal.
The GAO raises concerns about two transactions that were notified after
the transactions had closed, were allowed to withdraw, and were never
renotified. [NOTE 17] In these cases, CFIUS granted the companies'
request for a withdrawal to provide additional time to resolve specific
issues. Treasury, as Chair, tracked developments on the cases and
coordinated closely with the interested agencies regarding whether the
companies should be urged to refile in order to resolve national
security concerns. Although refiling was not deemed necessary, it
should be noted that CFIUS agencies also understood that so long as
action is not concluded under Exon-Florio, the President retains his
authority to suspend or prohibit these transactions if he makes the
findings required under the statute.
Industrial Policy:
The draft Report states that some members of CFIUS "argued that
[CFIUS's] narrow definition of national security is not sufficiently
flexible to provide for safeguards in areas such as protection of
critical infrastructure, security of defense supply, and preservation
of technological superiority in the defense arena." [NOTE 18] As noted
earlier, CFIUS considers a range of factors in assessing threats to
national security, precisely because it does not want to limit the
President's flexibility. CFIUS considered all of these areas in
transactions it recently reviewed.
Vulnerabilities from Foreign Control Alone:
The draft Report states that certain CFIUS officials told the GAO that
"[v]ulnerabilities can result from foreign control of critical
infrastructure." [NOTE 19] Although this may be the case, it is equally
true that vulnerabilities can result from foreign influence in commerce
in a myriad of ways other than through control, such as through
contractual relationships. Yet these concerns are not addressed by Exon-
Florio, which calls for a case-by-case determination concerning a
particular foreign investor and a particular U.S. company. In
particular, Exon-Florio requires the President to examine the credible
evidence that such a foreign investor might take action that threatens
to impair U.S. national security, whether or not the foreign investor
intends to or actually takes such action. CFIUS recognizes that foreign
control alone does not automatically constitute a threat to national
security and that there can be vulnerabilities in critical
infrastructure even without foreign control.
GAO Conclusion Re Amending Exon-Florio to Specify Additional Factors:
The draft Report states that "[i]n light of the disagreement within the
Committee on Foreign Investment in the United States with regard to the
extent of authority provided by Exon-Florio, the Congress may want to
consider amending Exon-Florio by more clearly emphasizing the factors
that should be considered in determining potential harm to national
security." [NOTE 20]
The current framework provided by Exon-Florio for national security
reviews allows the broadest possible latitude for CFIUS to consider
foreign acquisitions of U.S. companies that may pose national security
concerns and for the President to take action as needed. The list of
factors in the statute that the President "may consider" in making a
determination is an open list. The President and CFIUS may and do
consider other factors. Well before the creation of the Department of
Homeland Security, CFIUS reviewed transactions involving critical
infrastructure, including the "control of or access to information
traveling on networks. [NOTE 21] Since the creation of the Department
of Homeland Security, CFIUS has reviewed many transactions involving
critical infrastructure, which can often be important to the national
security.
We believe that the statute is already flexible enough to encompass
domestic production necessary for homeland security as a factor that
the President may consider, and CFIUS already considers it. We would be
prepared, however, to consider including this factor in a list of
factors the Committee may consider in the implementing regulations in
order to make this more explicit.
GAO Conclusion Re Eliminating the Distinction between a Review and an
Investigation:
The draft Report states that Congress may want to eliminate the
distinction between a 30-day review period and 45-day investigation
period in favor of considering the entire 75-day period as available
for review. [NOTE 22]
Although there are some complex transactions for which the 30-day time
period poses a significant challenge to the Committee's ability to
conduct a thorough and comprehensive review, CFIUS completes the vast
majority of its reviews within the initial 30-day review. In fact, GAO
found in 2002 that: "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." [NOTE 23] Of
1,560 reviews, 1,535 have been completed in the 30-day review period.
Companies usually make closure of the transaction contingent on
conclusion of the CFIUS review. Moreover, as mentioned earlier,
companies, particularly for transactions with implications for national
security, often will have already completed extensive preliminary work
to comply with existing laws and regulations pertaining to national
security before filing a notice with CFIUS. Although for certain
transactions an extension of time available for the collection and
analysis of information would ease the burden on the government, for
most transactions, extending the time for review by 45 days would be
unnecessary and could have a negative effect on foreign investment in
the United States by extending the regulatory review process and
delaying the closing of acquisitions. Such an extension also could have
the unintended effect of deterring CFIUS filings in the first place,
which would be contrary to Exon-Florio's national security objective.
GAO Conclusion Re Revisiting the Criterion for Reporting to Congress:
The draft Report states that Congress may want to revisit the criterion
for reporting to Congress [NOTE 24] As provided in the Exon-Florio
provision, the President sends a report to Congress with a decision.
Treasury, along with other agencies with equities in any particular
transaction, provide briefings to duly authorized committees of
Congress whenever requested, following completion of action under the
statute. Detailed unclassified reports to Congress could provide a road
map for foreign acquiring companies to circumvent national security
reviews under Exon-Florio. Exon-Florio has a confidentiality provision
in order to protect proprietary information that companies voluntarily
provide to CFIUS. Companies may not invest in the United States if they
fear that proprietary information may be made public. We therefore
believe that oral closed session briefings, consistent with the
confidentiality provision of Exon-Florio, are appropriate. We are happy
to work with the Congress on developing a reasonable periodic reporting
schedule for completed reviews to give interested Members information
about transactions that may be of interest and for which CFIUS could
provide follow-up briefings.
We would stress the importance that any attempts to make the process
more transparent to Congress, and thus more susceptible to
Congressional scrutiny, should not result in any compromise to the
current confidentiality afforded to companies that file under the
statute. The CFIUS process is a voluntary one, and any potential
procedure that might be perceived as lessening the confidentiality
currently afforded to filers could result in a diminution in the number
of applications the Committee receives and an erosion of the confidence
companies have that their sensitive and proprietary information will be
closely held. Without such confidence and the resulting full disclosure
to the Committee, it will be impossible for the Committee to undertake
a meaningful review of any transaction.
GAO Conclusion Re Amending the Regulations to Provide Interim
Protections:
The draft Report recommends that "Treasury, as chair of the Committee,
amend current regulations to require interim protections where specific
concerns have been raised, and to establish specific timeframes for
refiling along with a process for tracking any actions being taken
during the withdrawal period. [NOTE 25] This would apply to
transactions that have closed or will close prior to CFIUS completing
its review during any period when a transaction has withdrawn. CFIUS
has the authority to require interim protections and has done so when
it felt such protections were needed.
We stand by Treasury's comments on the 2002 GAO Report in which the
same recommendation was made. Interim measures would be difficult to
negotiate and would detract from efforts to complete the CFIUS review,
where we believe the emphasis should stay. Overly rigorous schedules
could prevent agencies from performing a complete review.
Interagency Process:
The Committee notes that the Congress deliberately created Exon-Florio
to be a broad and flexible statute that would give the President the
authority needed to deal with threats to our national security. Given
the statute's time constraints and the natural competition of differing
perspectives on the part of the CFIUS members, no one should be
surprised that there are moments of friction in implementing the
statute. Indeed, the Committee's discussions are frequently spirited.
Nonetheless, all member agencies agree that the Committee's
deliberations have been consistently collegial and professional and
that in the end we achieve the results intended under the statute. The
Committee, despite - and perhaps because of --its many perspectives, is
ultimately united in seeking the best possible outcome for the United
States and our national security. We fully expect that the Committee
will continue to be effective in the future.
NOTES:
[1] Paragraph I of the Highlights: What GAO Found.
[2] Paragraph 2 on page 2 of June 2005 GAO Report #05-686.
[3] State and USTR have written to GAO specifically to express their
objections that GAO did not contact them in connection with preparing
the draft report.
[4] Paragraph 1 of the Highlights: What GAO Found, paragraph 3 on page
2, and paragraph 3 on page 8.
[5] 31 CFR 800.101:
[6] Paragraph 2 on page 9.
[7] Paragraph 1 of the Highlights: What GAO Found. Related references
are made in paragraph 1 on page 3; paragraph 3 on page 8; paragraph 2
on page 10, and paragraph 1 on page 16.
[8] Paragraph 1 on page 3, and paragraph 2 on page 11:
[9] Paragraph 3 on page 11. Related reference is made in paragraph 1 on
page 3.
[10] Paragraph 1 on page 16. Related references are made in paragraph 1
of the Highlights: What GAO Found; paragraph I on page 3; paragraph 3
on page 8, and paragraph 3 on page 11.
[11] Paragraph 2 on page 9.
[12] Paragraph 5 on page 15.
[13] Paragraph 5 on page 15.
[14] Paragraph 1 on page 10.
[15] Paragraph 1 of the Highlights: What GAO Found; paragraphs 2 and 3
on page 8; paragraph 1 on page 12, and paragraph 1 on page 16.
[16] Paragraph 2 on page 8.
[17] Paragraph 1 on page 13.
[18] Paragraph 3 on page 2.
[19] Paragraph 1 on page 9.
[20] Paragraph 3 on page 16. Related references in paragraph 1 of the
Highlights: What GAO Recommends, and paragraph 3 on page 3.
[21] Paragraph 1 on page 9.
[22] Paragraph 3 on page 16.
[23] Paragraph 3 on page 11 of September 2002 GAO Report #02-736.
[24] Top of page 17.
[25] Paragraph I on page 17. Related reference in paragraph I of the
Highlights: What GAO Found, and paragraph I on page 3.
The following are GAO's comments on the Department of the Treasury's
letter dated August 12, 2005.
GAO's Comments:
Our understanding of the Committee's process is based on an extensive
review of Committee guidance and case files and structured interviews
and discussions with member agencies, including Treasury. Further,
except where changes in Committee make-up and proceedings have occurred
since 2002, our discussion of the laws and the Committee's process is
consistent with our 2002 report.
As we point out in our evaluation of agency comments in the report,
certain member agencies raised concerns that indicated fundamental
disagreements among member when reviewing certain cases. Given these
fundamental agreements, we concluded that the extent to which issues
are vetted and consensus is reached on certain cases is, at best,
uncertain.
To analyze cases notified to the Committee and determine whether
threats to national security exist, each agency effectively
operationalizes its own definition of national security. The
implication that individual agencies do not apply a definition is
unrealistic.
We agree that Exon-Florio should be used judiciously as a safety net
when laws other than Exon-Florio and the International Emergency Powers
Act may not be effective in protecting national security--a point we
make in the opening paragraph of our report. However, in cases where
Committee members disagree on whether Exon-Florio applies, we have
found that a more narrow definition of national security often takes
precedence or the companies are allowed to withdraw their notification
to avoid investigations. Treasury's rather lengthy discussion in its
comment letter on the need to protect U.S. open investment policy
underscores our concern.
In numerous case documents GAO reviewed, the definitional bounds
agencies used in considering national security concerns are apparent.
Some agencies followed routine analytical processes, searching specific
databases related to export controls, acquisition history, and critical
technology information--sources that would reveal whether the foreign
acquisition involved any export-controlled technology or item or
classified contracts, or whether there was specific derogatory
intelligence on the foreign company. Other agencies prepared specific
vulnerability or threat assessments that have their own methodological
parameters. The debate among Committee members on each notification is
fueled by these differing definitions.
We agree that, taken in total, member agencies consider a broad range
of national security factors when cases are analyzed. We also agree
that anything other than the broad consideration of a range of national
security factors by the Committee would inappropriately limit the
President's necessary discretion to protect national security.
While only the President decides what constitutes a threat to national
security and what actions are in the interest of U.S. national security
in cases that are sent for a determination, only two cases have reached
this stage since 1997. Further, only 8 of 451 cases have undergone
investigations. By allowing withdrawals of notifications rather than
initiating investigations, the Committee effectively pre-empts the
President from using his discretion to make a determination. To this
end, the Committee has defined what constitutes a threat to national
security, not the President. Further, since only those few cases that
go to the President for a determination require reporting to the
Congress, there is little insight into the Committee's deliberations.
Our review found that for specific cases, there has been significant
disagreement among member agencies on what constitutes a threat to
national security and what actions are in the interest of national
security. In two such cases, companies were allowed to withdraw their
notices, and to date, they have yet to refile, leaving the concerns
unresolved.
Again, Treasury's response skews our finding. In two cases we reviewed,
when an agency raised what it deemed a national security concern and
other Committee members did not agree, the narrower definition of
national security--which excludes the concern raised--prevailed, in
that the notice was withdrawn instead of the case proceeding to
investigation. Regardless, the case Treasury refers to was cited in our
2002 report as an example of an agreement in which nonspecific language
made the agreement difficult to implement. For example, to mitigate a
concern about access to technology, the agreement required a "good
faith effort" to divest a subsidiary. When the company divested part,
but not all, of the subsidiary--citing lack of interested buyers as the
rationale--government officials could not determine whether the
company's efforts were made in good faith because the agreement did not
include criteria defining what actions would constitute a good faith
effort. In addition, the agreement contained no consequences for
failure to comply with the monitoring terms of the agreement within the
stated time frames, and as we noted, the company failed to meet the
terms of one provision. Given this outcome, it is unclear how Treasury
can assert that "extensive mitigation measures were put in place" or
how this case exemplifies that all member agencies participate in the
Committee's decision-making process.
We agree that the decision to undertake an investigation demands
careful deliberation on the part of all Committee members. However, in
two cases we reviewed, documentation shows that in determining whether
to initiate an investigation, Treasury, as Committee Chair, applies
essentially the same criteria that the Exon-Florio amendment directs
the President to use to decide whether to take action to suspend or
prohibit a transaction. While Treasury states that an investigation is
entirely appropriate if national security issues remain unresolved at
the end of the 30-day review period, we found that rather than
initiating an investigation, the Committee commonly allows companies to
withdraw their notifications and refile at a later date to provide more
time for review. Our report has not cited cases where a Committee
decision not to investigate was the result of the application of an
overly strict standard for deciding whether to investigate because
where we noted the application of this standard, the companies withdrew
their notice.
Further, by applying the Presidential decision-making criteria at the
conclusion of the 30-day review, the Committee effectively preempts the
President's opportunity to make a determination. In a 2004 case,
documentation from a policy-level meeting shows that the
appropriateness of applying these criteria in Committee deliberations
was debated; the debate was not resolved at the time, and officials
from two separate agencies told us that the debate continues. The
implementing regulations for Exon-Florio make no distinction between
the activities the Committee undertakes during the review and
investigation periods--other than preparing a report to the President
at the end of an investigation--and provide no criteria for determining
when to initiate investigation. It is, in part, for this reason that we
are proposing that the entire 75-day period be available for analyzing
cases, if needed. Eliminating the distinction between the review and
investigation periods would help ensure that sufficient time is
available for thorough analyses of cases and that the presidential
decision-making criteria are only applied by the President.
Guidelines requiring that certain actions be taken do not provide
evidence that such actions were indeed taken. For example, in one 2004
case we reviewed, after a policy-level decision to initiate an
investigation was made, some Committee member agencies, including the
Chair, placed calls to corporate counsel informing them of the pending
investigation and advising that their clients withdraw their notices.
Because the companies withdrew, an investigation was never initiated.
As stated in our report, we understand that the purpose of the 23-day
rule is to enable the Committee to meet its obligations under Exon-
Florio's statutory time limits for 30-day reviews. For the majority of
cases where national security concerns either do not exist or agency
members agree that concerns are addressed by other laws, the 23-day
rule may help facilitate the closure of cases before the expiration of
the 30-day review period. However, in complex cases--cases in which
national security concerns have been raised and for which Exon-Florio
is the relevant statute--case documentation we reviewed revealed the
significant pressures some agencies face to complete analysis within 23
days. In five cases that we reviewed, letters from the companies
requesting withdrawal and/or letters from Treasury, as Committee Chair,
approving the requests to withdraw cited the need for more review time
on the part of the government as the reason for the withdrawal. In one
such case, an electronic message we reviewed cited the Committee's
workload on another high profile case as the reason that the Committee
sought to have a notice withdrawn. In that case, the transaction had
already been completed and the company had requested withdrawal on day
23, before agencies completed their analysis to determine whether to
request an investigation. Because the company never refiled a notice,
the national security concerns identified by two member agencies have
not been further examined. Further, it should be noted that in its
comments, the Department of Justice said that any additional time that
could be made available to collect and analyze information needed to
conduct a thorough and comprehensive national security assessment would
be helpful.
We have acknowledged the use of mitigation agreements[Footnote 12] in
our current report as a major tool used by the Committee. In fact, we
point out that the more recent mitigation agreements have addressed
several of the problems with such agreements that we noted in our 2002
report. However, strengthening or increasing the number of mitigation
agreements does not ensure that all national security concerns raised
by member agencies are sufficiently examined. Further, the particular
passage cited by the Under Secretary is not disputing that mitigation
agreements are often negotiated but rather is pointing out that there
is not agreement on when these mitigation agreements are needed. As we
reported, agencies that apply the more traditional definition of what
constitutes a threat to national security have resisted using Exon-
Florio to mitigate or address the concerns raised by other Committee
members.
We have revised our report to reflect that the Departments of Defense,
Commerce, and Justice significantly rely on DHS to monitor companies'
compliance with the agreements.
We did not mean to imply that Justice does not have the authority to
undertake enforcement actions and have clarified that in the report.
We agree that the Federal Bureau of Investigation and other Justice
Department components have been and continue to be a very active and
critical participant in the Committee's process. We also acknowledge
there are other Committee agency components that are also critical to
the process such as the Bureau of Industry and Security in the
Department of Commerce; the Office of the Under Secretary of Defense
for Acquisition, Technology and Logistics-Industrial Policy, and the
Central Intelligence Agency. Committee member agencies use many
internal resources as part of their process.
A remedy is defined as a legal means of preventing or redressing a
wrong or enforcing a right. A Defense official confirmed that the
provision in question that was deleted from the agreement stated that
if the company (1) fails to comply with the terms of the agreement, (2)
makes a materially false statement, (3) increases foreign entity
control, or (4) makes other material changes in circumstances, the
Attorney General, the Secretary of Defense or the Secretary of Homeland
Security may raise concerns to the Committee or the President. Without
having this provision, it is unclear what remedy will be available to
the Committee and its member agencies to enforce this mitigation
agreement.
Despite what is stated in the guidelines, in practice the Committee has
allowed companies or parties to withdraw their notices to provide
member agencies additional time to complete their analyses or to
negotiate mitigation measures. Documentation from Committee files shows
that 12 of the 20 withdrawals we identified that have been granted
since 1997 to companies that intended to continue the acquisition were
granted to allow member agencies to either negotiate mitigation
agreements, continue obtaining information from the companies, or
otherwise continue analyses.
Of the 26 letters granting withdrawal that we reviewed, only three
explicitly stated conditions for the withdrawal: in two cases, the
companies were abandoning the transaction; in the third, the company
agreed to divest its U.S. acquisition.
We recognize that the President retains the authority to take action if
the Committee's review is not completed. However, our review of case
files does not support the Under Secretary's assertion that Treasury,
as Chair, tracked developments on the withdrawn cases that were
notified after the transactions were closed. Further, it is unclear how
Treasury could conclude that refiling is unnecessary in these cases,
given that the withdrawals were granted to provide additional time to
resolve specific concerns raised by other agencies. For example, in one
case, a Treasury official told us that she was unaware that the
Department of Defense had concerns. By not having the companies refile,
Defense's concerns were not fully vetted. In another case, a Defense
official provided documentation indicating that the Defense
Department's position remained that conditions should be imposed on the
transaction. In our view, refiling serves two purposes: (1) it provides
assurances to the companies that action will not be taken at a future
date and (2) it permits Committee member agencies to ensure that no
national security concern was overlooked.
The documentation we reviewed clearly showed that Treasury and Defense
have different views of what constitutes a threat to national security.
For example, in one case, Treasury officials wrote three separate memos
stating that in Treasury's view, Defense and Commerce Department
concerns about (a) foreign ownership of sensitive but unclassified
technology used in reconnaissance satellites, (b) the possibility of
this sensitive technology being transferred to countries of concern,
and (c) maintaining U.S. government access to the technology were not
national security concerns.
We agree that vulnerabilities can result from a variety of things not
addressed by Exon-Florio. We merely provided examples of the kinds of
vulnerabilities that may result from foreign control. We were not
addressing the universe of vulnerabilities, only some of those
addressed by Exon-Florio, the subject of our report.
We agree that Exon-Florio provides broad latitude for the Committee to
consider whether foreign acquisitions constitute a threat to national
security. Our concern is how Exon-Florio is being implemented. Given
the internal disagreement among Committee members and the lack of
transparency as to how disagreements are resolved, we believe that
additional guidance from the Congress would be beneficial.
We recognize that, in most instances, 30 days is sufficient to conclude
reviews. If Exon-Florio were amended, then we expect that the Committee
could manage the process so that the vast majority of cases would
continue to be completed within 30 days. However, Exon-Florio is to be
used when other laws are inadequate--in short, to act as a safety net.
The ability to complete "a vast majority" of reviews in 30 days is not
relevant to Exon-Florio's importance as a safety net. Moreover, as we
point out in our report, some agency officials have stated that 30 days
is insufficient in complex reviews. The Justice Department, in its
official comments, stated that any potential extension of the time
available to the participants for the collection and analysis of
information from the intelligence community would be helpful (see page
2 of Justice Department comments in app. II).
Treasury officials have pointed out that being the subject of an
investigation may have negative connotations for a company, and that
the Committee tries to avoid initiating investigations. By eliminating
the distinction between investigations and reviews, this negative
connotation and the potential impact on investment would no longer
exist.
The Under Secretary expressed concern that extending the time frames
would deter filings but did not explain the basis for his concern.
However, the Committee need not rely solely on voluntary filings. The
implementing regulations state that "any member of the Committee may
submit an agency notice of a proposed or completed acquisition to the
Committee through its staff chairman if that member has reason to
believe, based on facts then available, that the acquisition is subject
to section 721 and may have adverse impacts on the national security.
In the event of agency notice, the Committee will promptly furnish the
parties to the acquisition with written advice of such
notice."[Footnote 13]
The Congress has made numerous efforts to conduct oversight of the
Committee's activities--first in the original Exon-Florio legislation
by requiring a report when the President prohibited an acquisition, and
again in 1992 by passing the Byrd Amendment to require a report when
the President makes any decision regarding a foreign acquisition. In
addition, in requesting our review, the Senate Banking Committee cited
the "opaque nature" of the Exon-Florio process as a reason for its
request, which suggests that the Committee on Foreign Investment in the
United States has not been successful in keeping the Congress
adequately informed. We agree that the confidentiality afforded to the
companies under Exon-Florio should not be compromised. However,
subsection (c) of the statute provides that the confidentiality
provisions "shall not be construed to prevent disclosure to either
house of Congress or to any duly authorized committee or subcommittee
of the Congress." Therefore, we stand by our suggestion that the
Congress may wish to revisit the congressional reporting requirement.
As we stated in our 2002 report, the regulations should not call for
negotiating interim measures, but rather for the Committee to use its
authority to impose them as a condition of withdrawal where the
transaction has been completed or will be completed during the
withdrawal period. Further, as we state in our report, "the Committee's
guidance to member agencies specifically states that Treasury will
manage activities during withdrawal by specifying time frames and goals
to be achieved." Because Treasury has declined to implement our
recommendation, we are including our recommendation as a matter that
Congress may wish to consider.
[End of section]
Appendix II: Comments from the Department of Justice:
U.S. Department of Justice:
Criminal Division:
Office of the Assistant Attorney General: Washington, DC 20530:
July 25, 2005:
Mr. Norman J. Rabin, Managing Director: Homeland Security and Justice:
Government Accountability Office:
Washington, DC 20548:
Dear Mr. Rabin:
This is to provide the Department's comments on your draft report,
entitled "Exon-Florio May Have Limited Effectiveness in Protecting U.S.
National Security." We would like to thank the Government
Accountability Office (GAO) for examining the issues covered by the
draft report and for providing the Department the opportunity to
comment on its contents.
We have several points of clarification. First, at page 15, in the
final paragraph, the draft report states that "The Departments of
Defense, Commerce, and Justice rely on DHS to monitor companies'
compliance with the agreements." The Department of Justice does
participate in several aspects of monitoring compliance with respect to
the agreements to which we are a party; therefore, to be more accurate,
this statement should read: "The Departments of Defense, Commerce, and
Justice significantly rely on DHS to monitor companies' compliance with
the agreements."
In addition, in the final paragraph beginning on page 15, after noting
the positions of the Departments of Defense and Commerce that they lack
authority to enforce security agreements signed pursuant to Exon-
Florio, the draft report states:
As a result, the Department of Homeland Security is the only one of the
three with broad enforcement authority. Further, according to Justice
officials, while Justice has enforcement authority in some instances,
the Department of Homeland Security has more resources for monitoring
compliance as well as the legal mandate to act.
The Department of Justice's position is that any signatory party to an
agreement entered into pursuant to Exon-Florio has the authority to
enforce that agreement - and certainly the Department of Justice has
the unqualified authority to enforce such agreements to which it is a
signatory. For that reason, the last sentence should read:
Further, according to Justice officials, while Justice has authority to
seek enforcement of agreements signed pursuant to Exon-Florio and to
which it is a signatory, the Department of Homeland Security has more
resources for monitoring compliance as well as the legal mandate to
act.
The draft report includes a formal recommendation that the Department
of the Treasury amend the regulations of the Committee on Foreign
Investment in the United States (CFNS) to ensure that companies that
withdraw an initial filing are tracked and required to refile according
to a specific time frame. The Department of Justice suggests that, if
this recommendation is adopted, any implementing language be crafted in
such a manner that it does not inhibit or in any way discourage initial
filings.
The draft report also makes other, informal suggestions for revising
the CFNS process through both regulatory and legislative changes to
Exon-Florio. The Department of Justice requests that any attempts to
make the process more transparent to Congress, and more susceptible to
Congressional scrutiny, not in any way impede the current
confidentiality afforded to companies that file under the statute. The
CFNS process is a voluntary one, and any potential procedure that might
be perceived as lessening the confidentiality currently afforded to
filers could result in a diminution in the number of applications the
Committee receives and an erosion of the confidence companies have that
their sensitive and proprietary information will be closely held.
Without such confidence and the resulting full disclosure to the
Committee, it will be impossible for the Committee to undertake a
meaningful review of any transaction.
The Department shares the concern expressed in the draft 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.
The Department also wishes to clarify that, as far as we know, the
Committee as a body has not been a party to any of the national
security agreements that have been negotiated to date. Rather, the
national security agreements are comprised of commitments from
individual agencies with specific equities at stake, and only those
individual agencies are parties to the agreements. The consideration
for the agreements is that the party agencies will not object to the
transaction in the CFNS process. The agreements do not bind the
Committee as a whole or the agencies who are not parties.
Finally, to avoid any possible misunderstanding, we want to point out
that it is not just the Department's Criminal Division that
participates in the CFNS process. The Federal Bureau of Investigation
(FBI) has been, and continues to be, a very active and critical
participant, and other components of the Department have played a role
on a case-by-case basis. The draft report notes, at page 9 in the first
full paragraph, that since the Department of Homeland Security joined
the Committee, both the Departments of Defense and Homeland Security
"have begun to analyze acquisitions both in traditional terms and more
broadly in terms of the potential vulnerabilities posed by the
acquisition." For the sake of clarity, it should be noted that, for
some time before the Department of Homeland Security joined the
Committee, the Department of Justice and the FBI had been analyzing
proposed transactions in the "broad terms" referred to in the report
and expanding the Committee's analytical approach.
Thank you for your consideration of these comments. Please do not
hesitate to contact us if you would like additional assistance
regarding this matter.
Sincerely,
Signed by:
Laura H. Parsky:
Deputy Assistant Attorney General:
cc: Mr. Thomas Denomme, Assistant Director:
Mr. Gregory Harmon, Senior Analyst:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Ann M. Calvaresi-Barr, (202) 512-4841:
Acknowledgments:
In addition to the contact named above, Thomas J. Denomme, Assistant
Director, Allison Bawden, Gregory K. Harmon, Paula J. Haurilesko, Karen
Sloan, John Van Schaik and Michael Zola made key contributions to this
report.
[End of section]
Related GAO Products:
Defense Trade: Mitigating National Security Concerns under Exon-Florio
Could Be Improved. GAO-02-736. Washington, D.C.: September 12, 2002.
Defense Trade: Identifying Foreign Acquisitions Affecting National
Security Can Be Improved. GAO/NSIAD-00-144. Washington, D.C.: June 29,
2000.
Foreign Investment: Implementation of Exon-Florio and Related
Amendments. GAO/NSIAD-96-12. Washington, D.C.: December 21, 1995.
Foreign Investment: Foreign Laws and Policies Addressing National
Security Concerns. GAO/NSIAD-96-61. Washington, D.C.: April 2, 1996.
FOOTNOTES
[1] 50 U.S.C. app. § 2170.
[2] In the remainder of this report, acquisitions, mergers, and
takeovers are referred to as acquisitions.
[3] 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 interest's
acquisition of U.S. companies (50 U.S.C. § 1702(a) (1) (B)).
[4] GAO, Defense Trade: Mitigating National Security Concerns under
Exon-Florio Could be Improved. GAO-02-736 (Washington, D.C.: Sept. 12,
2002).
[5] Executive Order 11858 (May 7, 1975), as amended by Executive Order
12188 (Jan. 2, 1980), Executive Order 12661 (Dec. 27, 1988), Executive
Order 12860 (Sept. 3, 1993), and Executive Order 13286 (Feb. 28, 2003).
[6] 50 U.S.C. App. § 2170(a).
[7] 31 C.F.R. § 800.504(b).
[8] 31 C.F.R. § 800.601(d).
[9] 31 C.F.R. § 800.601(e).
[10] 50 U.S.C. app. § 2170(e).
[11] 50 U.S.C. App. § 2170(a). Under the statute, investigations are
mandatory in those cases in which the acquiring company is "controlled
by or acting on behalf of a foreign government" and the acquisition
could result in control of the U.S. company and could affect the
national security of the United States (50 U.S.C. App. § 2170(b)).
[12] GAO recently issued two reports that have identified
vulnerabilities when the government uses some of the remedies noted by
Treasury: one, overseeing contractors under foreign influence and two,
ensuring classified information is protected. (GAO, Industrial
Security: DOD Cannot Ensure Its Oversight of Contractors under Foreign
Influence Is Sufficient, GAO-05-681 (Washington, D.C.: July 15, 2005);
GAO, Industrial Security: DOD Cannot Provide Adequate Assurance That
Its Oversight Ensures the Protection of Classified Information, GAO-04-
332 (Washington, D.C.: Mar. 3, 2004).
[13] 31 C.F.R. § 800.401(b).
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