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33–310 PDF 2006

S. HRG. 109–805

A REVIEW OF THE CFIUS PROCESS

FOR IMPLEMENTING

THE EXON-FLORIO AMENDMENT

HEARINGS

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

THE IMPLEMENTATION OF THE EXON-FLORIO PROVISION BY THE COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED STATES (CFIUS),

WHICH SEEKS TO SERVE U.S. INVESTMENT POLICY THROUGH REVIEWS THAT PROTECT NATIONAL SECURITY WHILE MAINTAINING

THE CREDIBILITY OF OPEN INVESTMENT POLICY

OCTOBER 6 AND 20, 2005

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

(II)

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

MEL MARTINEZ, Florida

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

SKIP FISCHER, Senior Staff Professional

JOHN V. O’HARA, Senior Investigative Counsel

STEPHEN R. KROLL, Democratic Special Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(III)

CONTENTS

THURSDAY, OCTOBER 6, 2005

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Stabenow ............................................................................................. 7

Senator Bayh .................................................................................................... 9

Senator Sarbanes .............................................................................................. 13

WITNESS

Katherine Schinasi, Managing Director, Acquisition and Sourcing Management; accompanied by: Ann Calvaresi Barr, Director, Industrial Base

Issues, U.S. Government Accountability Office ................................................. 2

Prepared statement .......................................................................................... 23

THURSDAY, OCTOBER 20, 2005

Opening statement of Chairman Shelby ................................................................ 93

Opening statements, comments, or prepared statements of:

Senator Schumer .............................................................................................. 95

Senator Allard ................................................................................................... 96

Senator Hagel ................................................................................................... 115

Senator Sarbanes .............................................................................................. 136

WITNESSES

James Inhofe, A U.S. Senator from the State of Oklahoma ................................ 97

Prepared statement .......................................................................................... 137

Robert M. Kimmitt, Deputy Secretary, U.S. Department of the Treasury ......... 100

Prepared statement .......................................................................................... 138

Response to written questions of:

Senator Schumer ....................................................................................... 162

Senator Allard ........................................................................................... 163

Senator Inhofe ........................................................................................... 164

Senator Sarbanes ...................................................................................... 168

David A. Sampson, Deputy Secretary, U.S. Department of Commerce .............. 102

Prepared statement .......................................................................................... 143

Response to written questions of:

Senator Inhofe ........................................................................................... 175

Senator Sarbanes ...................................................................................... 176

Stewart Baker, Assistant Secretary for Policy, U.S. Department of Homeland

Security ................................................................................................................. 103

Prepared statement .......................................................................................... 145

Response to written questions of:

Senator Inhofe ........................................................................................... 178

Senator Sarbanes ...................................................................................... 178

E. Anthony Wayne, Assistant Secretary, Business and Economic Affairs, U.S.

Department of State ............................................................................................ 103

Prepared statement .......................................................................................... 146

Response to written questions of:

Senator Inhofe ........................................................................................... 180

Senator Sarbanes ...................................................................................... 180

Page

IV

Peter C.W. Flory, Assistant Secretary for International Security Policy, U.S.

Department of Defense ........................................................................................ 105

Prepared statement .......................................................................................... 147

Response to written questions of:

Senator Inhofe ........................................................................................... 183

Senator Sarbanes ...................................................................................... 183

Robert D. McCallum, Jr., Acting Deputy Attorney General, U.S. Department

of Justice ............................................................................................................... 107

Prepared statement .......................................................................................... 149

Response to written questions of Senator Sarbanes ...................................... 185

Patrick A. Mulloy, Commissioner, United States-China Economic and Security

Review Commission ............................................................................................. 126

Prepared statement .......................................................................................... 151

David Marchick, Partner, Covington & Burling ................................................... 130

Prepared statement .......................................................................................... 156

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by United States-China Economic and Security Review Commission dated October 21, 2005 .......................................................................... 189

(1)

A REVIEW OF THE CFIUS PROCESS

FOR IMPLEMENTING

THE EXON-FLORIO AMENDMENT

THURSDAY, OCTOBER 6, 2005

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will now come to order. Senator

Sarbanes will be here as soon as he can.

This morning, we are meeting to hear testimony on the role of

the Committee on Foreign Investment in the United States. This

hearing was to include representatives from the Federal agencies

that comprise that Committee, commonly known by its acronym,

CFIUS. Unfortunately, some of those agencies were not able to

present their cases here today, nor were they prepared to do so on

September 29, when this hearing was originally scheduled. It is the

Banking Committee’s hope that we will be able to hear from those

agencies in the very near future, as no examination of the process

by which foreign acquisitions of U.S. companies are reviewed for

potential national security implications can be complete without

their testimony.

Neither the public nor the agencies that comprise CFIUS should

be under any misunderstanding about this Committee’s position on

the current process. Evidence and analysis indicates that improvements are needed. The extent to which changes are warranted,

however, is unclear. The current process for reviewing proposed acquisitions remains excessively murky. It is too opaque to allow for

the appropriate level of Congressional oversight into a process established by Congress with passage in 1988 of the Exon-Florio

Amendment to the Defense Production Act. That is why Congress

has repeatedly tasked its investigative arm, the Government Accountability Office, GAO, to conduct studies on this subject.

The process by which the CFIUS reviews proposed foreign acquisitions for national security implications may remain too opaque,

and the Committee understands and acknowledges the legitimate

need for the protection of proprietary information. We have enough

insight, though, from anecdotal information emanating from press

accounts of individual cases, GAO reports dating from 1992, and

2

Committee research, to hold firm the belief that improvements to

the current system are warranted.

I would like to note my concerns regarding the difficulties the

Committee has encountered in arranging for the relevant Federal

agencies to appear to address the GAO report. While I recognize

that protection of proprietary information is important, and that

there are sensitivities involved with Congressional oversight of a

body created by Executive Order, Congress has a legitimate need

to scrutinize the efforts of agencies of the Federal Government responsible for national security.

This morning, GAO will testify as to its findings. We will hold

another hearing at which Federal agencies will again be asked to

appear to comment on these findings.

The GAO report is not trivial in its implications. It suggests that

implementation of the Exon-Florio Amendment may not protect national security. It discusses the need to address the distinctions

component agencies make in how they define ‘‘national security,’’ a

term deliberately left vague so as not to overly constrain the review

process. It discusses problems with the current timeline that arise

when agencies with a national security focus lack adequate time to

collect and analyze intelligence on foreign corporations and the governments that may back them. It discusses the very difficult issue

of when companies withdraw their paperwork from CFIUS review,

either at their suggestion or on their own initiative.

And it addresses the issue of transparency. The Treasury Department may believe that the process is sufficiently transparent as it

currently exists. This is the U.S. Senate Committee with jurisdiction over the process in question, and we most certainly do not

agree with Treasury.

With us here today to speak to their findings are Katherine

Schinasi, Managing Director for Acquisition and Sourcing Management, U.S. Government Accountability Office, and Ms. Ann

Calvaresi Barr, Director of Industrial Base Issues for the GAO.

Ladies, welcome to the Committee. Your written statements will

be made part of the record. We know this is a very important

study, and you take as much time as you wish. Who wants to go

first?

STATEMENT OF KATHERINE SCHINASI, MANAGING DIRECTOR,

ACQUISITION AND SOURCING MANAGEMENT;

ACCOMPANIED BY: ANN CALVARESI BARR,

DIRECTOR, INDUSTRIAL BASE ISSUES,

U.S. GOVERNMENT ACCOUNTABILITY OFFICE

Ms. SCHINASI. I will. Thank you, Mr. Chairman.

Thank you for the opportunity today to appear before the Committee to discuss GAO’s work on the Committee on Foreign Investment in the United States, and as you noted, I am accompanied by

Ann Calvaresi Barr, who directed our most recent report, which

was done at the request of this Committee and issued on September 28. I will submit my full statement for the record and take

this opportunity to summarize my remarks.

But before I turn to the findings in our most recent review of

CFIUS, I would like to put that review in the broader context of

GAO’s reporting on the process. Our knowledge of this CFIUS procVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 33310.TXT SBANK4 PsN: SBANK4
3

ess is both broad and deep. Our recent review builds on and incorporates knowledge gained during more than a dozen evaluations,

which, as you noted, date back to the early 1990’s.

Recommendations we made in earlier reports, in 2000, and again

in 2002 were directed toward improving the CFIUS process. For example, we recommended that all member agencies have access to

data needed to assess risk. We also made recommendations to improve company compliance with agreements that are negotiated as

the basis for CFIUS approval. The agencies have made some

changes based on our recommendations, and we have seen some

improvements in the process.

In responding to a draft of our most recent report, however, the

Treasury Department, which indicated that its comments reflected

the position of all CFIUS agencies, disagreed with our findings and

recommendations. I would be happy to address the specifics of the

Treasury Department’s comments in response to your questions,

but let me state for the record that Treasury’s assertions, both in

their comments and in later press interviews first, assume a policy

position that is not in the report. We deal with the CFIUS process,

not the policies inherent in CFIUS decisions. Second, the Treasury

comments are not substantiated with any opposing evidence. And

third, they apparently do not actually reflect the position of all

CFIUS agencies, as evidenced by the fact that there are no Administration witnesses at the hearing today.

Let me also add that the Department of Justice provided independent comments, which we have appended to our report, as is

our practice, that reflect a different position than that provided by

Treasury. Further, let me suggest that the actions taken by the

CFIUS agencies subsequent to our providing them a draft of our

reported findings and recommendations might be seen as a further

indication that significant disagreements exist within the CFIUS

member agencies.

As we state in our report, our review of case files and our discussions with officials at both the staff and policy levels reveal fundamentally differing views about what constitutes a threat to

national security, what criteria should be used to go to investigation, and the sufficiency of time to address potential risks. Any

interagency process, by its very nature, is messy, as each agency

is included in the process to ensure that their competing and sometimes conflicting positions receive full vetting.

The overwhelming majority of foreign transactions bring benefits

to the U.S. economy, but the Exon-Florio Amendment was established to ensure that those limited number of transactions, which

do pose a threat to national security, are identified and mitigated

to the fullest extent possible.

And now, let me turn to a summary of our report. First, let me

address the differing views of the scope of Exon-Florio among committee members on how risk is defined. The statute establishing

the Exon-Florio provision lays out a number of factors that can be

considered in defining a threat to national security, but that issue

is not addressed in implementing regulations. Our finding is based

on the practices we observed in going through the different case

files.

4

Some members view national security threat as one that is tied

to export controls, classified contracts or specific derogatory intelligence. Other members’ expanded definition includes the

vulnerabilities that can result from foreign control of critical infrastructure or critical inputs to the defense systems because of the

potential for longer term harm. Why does this matter? Well, for example, in one proposed acquisition, DoD raised concerns about the

security of its supply of specialized integrated circuits, which the

Defense Science Board has identified as essential to a number of

defense systems such as unmanned aerial vehicles.

However, some committee members, including the Department of

the Treasury, the Council of Economic Advisers, and the Office of

Science and Technology Policy, argued that DoD’s was an industrial policy concern and as such fell outside the scope of ExonFlorio. As a result, an enforcement provision between the acquiring

company and the Departments of Defense and Homeland Security

was removed from the ensuing agreement. In removing the provision, the committee eliminated the President’s authority under

Exon-Florio to divest a company that has not complied with the

agreement, thereby weakening its impact.

The second type of disagreement that we saw in reviewing the

cases occurs when the committee decides whether or not to initiate

an investigation, which is the second period of fact-finding laid out

in the statute. The CFIUS chair applies a standard that there must

be evidence that a credible threat exists, and no other laws are appropriate or adequate to deal with it. This is also the criteria that

ends an investigation with a finding to the President. Other agencies, which, in our case review, included the Departments of Justice, Defense, and Homeland Security argue that the purpose is in

fact to determine whether or not a credible threat exists. So using

that as a reason to go into an investigation seems counterintuitive.

A third area of disagreement revolved around whether there is

a sufficiency of time to assess potential risks. Most initial reviews

of company-notified transactions are completed in the legislated 30-

day time frame, either because the transactions do not pose a risk

to national security, the transactions are adequately covered by

other laws, or the committee quickly reaches an agreement with

the acquiring company that sufficiently mitigates any potential

risk.

However, case documentation shows that Departmental staff can

actually have as little as 3 to 10 days to conduct their analysis. For

complicated cases, agencies may not be able to fully explore the

potential risks of a transaction, and in at least one instance, an

agency was unable to provide input with in the allotted time and

therefore was not able to affect the decision. In its comments on

our report draft, let me just note that the Department of Justice

did note that any additional time to analyze cases would be helpful.

Finally, I would like to draw the Committee’s attention to the

practice of allowing or promoting company withdrawal of the notification of a transaction. Because of the reluctance by some CFIUS

agencies to enter investigation, a point I made previously, committee members have encouraged companies to withdraw their applications to allow more time for agency assessments. As in our

2002 review, we found, again, a number of cases where companies

5

were encouraged or permitted to withdraw their notification of both

pending and completed acquisitions. When an acquisition is pending, the Government maintains some leverage in conditioning company behavior during this period of time of withdrawal. Therefore,

the additional time may be productive in mitigating risk. However,

when the transaction has already been completed, the Government

loses transparency of company activities and also loses the leverage

provided by Exon-Florio to condition those activities. We found at

least four cases where companies that withdrew refiled at a much

later date or not at all.

In cases where national security issues have been raised, this is

perhaps the area that provides the greatest potential for harm. Additionally, without an investigation, there is no Presidential decision to allow, suspend, or prohibit acquisitions. As you know, Mr.

Chairman, it is a Presidential decision that triggers reporting to

the Congress.

In closing, let me say that the recommendations we make in our

report are directed to ensuring that the practices that we have

found in our review do not impede the United States’ ability to

identify and mitigate risks that might be posed by a few select but

critical acquisitions. We make our recommendations fully aware of

the need to implement Exon-Florio in the context of the continuing

benefits to this country of foreign investment. An open investment

policy, however, need not be compromised by a reexamination of

the laws and regulations of a national security structure that was

established decades ago.

This concludes my summary, Mr. Chairman, and I would be

happy to take your questions.

Chairman SHELBY. Thank you. This report is very detailed and

very much in need, and I want to thank you and the others at GAO

that worked on this. This is more than worth reading.

Ms. SCHINASI. Thank you.

Chairman SHELBY. We know a lot of the issues that come before

this Committee are very complex, tedious, hard to understand, but

we know they are very important, at least we think so.

I have a number of questions. The Committee on Foreign Investment in the United States, that is—CFIUS operates under a voluntary system. It only reviews acquisitions that are voluntarily

submitted to it by the companies involved in the acquisition. Does

the system of relying on voluntary submissions, even with the

knowledge that the committee will at times contact companies and

suggest they submit to review, create a vulnerability or a weakness

in the system for the protection of national security? It is a voluntary deal.

Ms. SCHINASI. There are provisions under the voluntary arrangement that are not being used to the fullest extent possible, and let

me give you an example: Under Exon-Florio, any agency who is a

member of the CFIUS committee has the ability to notify to the

committee acquisitions that it believes raise potential threats to

national security. So even though the process is voluntary, there is

a provision for the agencies to be proactive in doing that. What we

have found is that the agencies do not always do that.

Chairman SHELBY. Are you aware, yourself, of any mergers or

acquisitions that were not submitted for review but in your opinVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 33310.TXT SBANK4 PsN: SBANK4
6

ion, your judgment, should have been? If you have, we would like

to know.

Ms. SCHINASI. One of the problems, and you raised the issue of

complexity of this process, one of the problems is you do not know

what you do not know.

Chairman SHELBY. That is right.

Ms. SCHINASI. But there is nothing in our own experience that

I would put in that category.

Chairman SHELBY. You have had previous GAO reviews of this.

You have reviewed the implementation of the Exon-Florio Amendment and the role that the committee plays a number of times in

the past, going back as far as 1992, I believe. Why is this the first

time you are raising issues that get to the very heart of the process? Should something as fundamental to the process as reconciling

divergent understandings of the meanings of national security have

been neglected for so many years after the passage of Exon-Florio?

In other words, have we forgotten what national security is and

should be?

Ms. SCHINASI. I think one of the things that I would say on that

is that defining and protecting national security has gotten much

more difficult as threats have become more varied and diffuse and

technology cycles shorter and those borders, national borders, have

become less relevant for trade and investment in national securityrelated industries.

I think we have a context today that is very different than the

one that existed either in 1988, when the Exon-Florio Amendment

was passed but even more significantly when the entire national

security structure was put in place. We have called for a reexamination of the basis of much of the national security structure, and

I think CFIUS would clearly fall into that category.

Chairman SHELBY. Exon-Florio clearly states, and your report

points this out, that a Presidential determination based upon the

Committee on Foreign Investment review should be the path of last

resort. From GAO’s years of studying the implementation of the

Exon-Florio Amendment, how do you believe that the Committee

on Foreign Investment review processes fit in with other mechanisms for protecting national security? In other words, has GAO

looked at the question of how Exon-Florio fits in with a broader

legal or regulatory framework?

Ms. SCHINASI. Yes, Mr. Chairman. As you know, Exon-Florio was

established to be a last resort, a process of last resort, and there

are many other processes that we have in place, for example, export licensing or the National Industrial Security Program that

deal with mitigating other threats to national security. But the

problem with the way we have seen Exon-Florio implemented is

that it assumes that those other processes are in fact working the

way they were intended, and so, the statute says for Presidential

determination, other statutes have to be both appropriate and adequate, and it is the assumption of the adequacy of those other laws

that troubles me about the way some of the determinations have

been made.

Chairman SHELBY. The GAO report also notes problems with

agencies with national security missions have in completing their

reviews, as you mentioned earlier, within the 30-day period manVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 33310.TXT SBANK4 PsN: SBANK4
7

dated by law, a problem exacerbated by the fact that it is in practice a 23-day period. In response, the GAO suggests removing the

distinction between the initial review and the follow-up 45-day investigation period, making it a 75-day study phase. What ramifications would you foresee if such a change were made?

Ms. SCHINASI. We are trying to accomplish two things with that

recommendation. The first is to provide more time for those few

cases that are complicated and require additional time for the

agencies to determine potential risk. The second is to remove that

designation of investigation, because the Treasury Department has

been very vocal in its position that using the term investigation

and making companies go through an investigation could have deleterious effects on their position in the financial community.

Chairman SHELBY. Would the culture change, perhaps?

Ms. SCHINASI. That would be something that would be a welcome

outcome. I am not sure if the time, giving more time would in fact

have that effect.

Chairman SHELBY. The mission is very close to the Committee

and very close to the issues of regulating dual-use exports, in a

sense, people said. Integral to the mission of regulating dual-use

technologies, and it is explicit in the case of high performance computers, in the case of tiering, or ranking countries on a scale of

threat to the U.S. national security. The European Union has been

very concerned about what changes to Exon-Florio Congress might

make, and I recall the case of a Dutch, clearly a benign allied company, seeking to acquire a U.S. manufacturer of semiconductor lithography, a case that was reviewed extensively by the Committee

on Foreign Investment, which resulted in changes to the original

acquisition.

Should the Committee on Foreign Investment in the United

States apply a tiering concept in its review of proposed acquisitions

where a NATO or other close ally is involved as opposed to perhaps

other risk?

Ms. SCHINASI. Mr. Chairman, I would suggest that that is probably a policy call that certainly goes beyond our work and probably

is better for me to stay away from.

Chairman SHELBY. Okay; Senator Stabenow, I believe you were

here first.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman, very much, for

holding this important hearing. We certainly understand that we

need to monitor foreign investment in the United States, and I appreciate this thorough report and all of the questions that it raises

that we need to address. I appreciate your efforts.

Let me first say that while we know we must protect the unintentional flow of information and technology through mergers and

acquisitions that could compromise our national security, we also

know, and Michigan is an example, Mr. Chairman, of a place that

has been very open to foreign investment, we view ourselves as the

leaders in advanced manufacturing technology and engineering and

R&D and have, in fact, major new investments coming into the

State, partnering with us, and we appreciate those.

8

But that does not take away from the need to address what we

are talking about today, and particularly when we look at the recent events involving the proposed acquisition of Unocal and all of

the issues that were raised, I think this is a particularly timely

hearing.

Questions regarding your report: As we continue to compete in

a world economy, we are clearly in a world economy right now,

what major industries or sectors do you think we most likely

should be looking at in terms of investigations or oversight?

Ms. SCHINASI. I think I would answer that question in the context of Exon-Florio being the last resort national security structure,

and I would look not so much at industries, but I would look at

those areas which are not thought traditionally to pose a threat to

national security; for example, we have a number of laws and regulations in place that deal with classified information, but there is

a lot that is considered sensitive but unclassified in many of the

higher tech industries that could fall through the cracks, so that

would be one area I would look to.

The other is in the whole communication revolution. Again, most

of our traditional communications are covered by the regulatory

provisions that the FCC applies and others. But all of the Internet

communications and the system that are arising to support our

Internet communications might be one of those other areas that

would fall through the cracks, so that would be how I would focus

our attention.

Senator STABENOW. You focus in your report on the fact that

there are narrow definitions of what a threat is to our national security. Could you speak more to that and how you view that definition and ways in which it possibly should be expanded?

Ms. SCHINASI. I think let me first say that the flexibility that is

inherent in Exon-Florio is very important, and each case needs to

be considered on a facts and circumstances basis, so we are not

calling for a definition of national security. You know, we need to

have more flexibility than that.

That said, however, the statute itself lays out a number of factors

that can be considered by the committee in its deliberations, and

some of those, as we point out in the report, have to do with credible intelligence, derogatory intelligence about companies having

classified contracts, a rather narrow scope. But there are other factors in the statute that deal with security of supply, technological

preeminence of our industries that we believe also should come to

bear in making decisions about what constitutes a threat to the national security.

And in our review of the case files that we have gone through,

we have seen that those factors do not always become part of the

decisionmaking process, despite the fact that some member agencies think they should be.

Senator STABENOW. So basically, you are saying that there are

flexibilities within the statute, but the committee has been very

narrow in terms of defining the scope of national security.

Ms. SCHINASI. That is correct.

Senator STABENOW. And is it fair to say you would recommend

that they look more broadly at the factors that are in the statute?

Ms. SCHINASI. That was our recommendation.

9

Senator STABENOW. And then, second, with that, the committee,

you indicate, has been reluctant to initiate investigations. You

show some numbers. You say in your report that CFIUS recently

received more than 1,580 notifications, but only 25 cases were investigated, and I know you speak to the negative connotations of

an investigation, the need for a Presidential decision, and so on.

Did you look also at issues related to budget and whether or not

this is a question of staffing or budget, the ability to actually initiate more investigations?

Ms. SCHINASI. We did not ask that question directly, and that did

not come up directly as a reason. However, one of the things that

we did note was that because this is an interagency process, the

accountability for doing that is not always assigned. And the guidelines give certain responsibilities to the chair.

The agencies have other responsibilities, but it is not always

clear between the agencies who is supposed to be doing what, and

I would guess that one of the mitigating factors in how much work

the agencies do is, in fact, budget. The other thing is that it is often

‘‘other duties as assigned’’ for the individuals involved. It is not

their primary focus.

Senator STABENOW. So is it fair to indicate or to say that you believe the committee has been too reluctant to investigate, too cautious at this point? How would you frame that?

Ms. SCHINASI. I think that for those cases where the 30-day period is sufficient to determine that there is no potential risk, and

that would be the majority of those cases, we would not make the

point about reluctance. But we would answer that by saying when

companies withdraw their application from the CFIUS process, and

there are those instances, particularly when an acquisition has already been finalized—the purchase has already gone through, the

new governing structure of the company is already in place—that

in those cases, trying to prevent going into investigation, we would

rather see more time given to address issues that were raised concerning the acquisition rather than the opportunity for those companies to withdraw their application, because that is where you

really lose transparency. You do not know what is going to happen.

Senator STABENOW. Thank you, Mr. Chairman. I am hopeful that

we will have an opportunity to continue to focus on this. There are

so many challenges and questions that we now face as we compete

in the international marketplace, so I appreciate very much your

bringing this up and your leadership in this.

Chairman SHELBY. Thank you.

Senator STABENOW. And I look forward to working with you.

Chairman SHELBY. Thank you, Senator. Senator Bayh.

STATEMENT OF SENATOR EVAN BAYH

Senator BAYH. I would like to thank the witnesses for their time

today and for their excellent report, Mr. Chairman. I would like to

thank you for your leadership in focusing on this.

Chairman SHELBY. I could add and your leadership, too. It was

you and Senator Sarbanes, me, who asked for this report together.

We thought it was important.

Go ahead.

10

Senator BAYH. Thank you, Mr. Chairman, and I know you have

been working with Senator Inhofe in trying to strike the right balance here, so I look forward to learning from this report and continuing our work together to strike the right balance, as Senator

Stabenow says. This is just another manifestation of the consequences of globalization, in which we benefit from direct foreign

investment in our country; we welcome foreign companies who

build factories and employ Americans. But at the same time, there

will be very narrow parts of our economy where our national security interests of necessity will trump our commercial concerns, and

it is striking that right balance and identifying that very narrow

segment that of course brings us here today and is very important.

So, I thank you for your focus on this.

I have several questions. Some of them will be somewhat similar

to what a couple of my colleagues asked. I hope they are not totally

redundant, but let us go through them and see.

First, talking about the need for notification, why should that not

be required?

Ms. SCHINASI. I think there would be a down side to having a

mandatory notification, and it would perhaps get back to the resource issue that Senator Stabenow raised. The number of transactions affected could potentionally be large.

Senator BAYH. The resource issue on the part of the governmental entities involved?

Ms. SCHINASI. Yes, on the part of the Government.

Senator BAYH. This reminds me of this whole avian flu situation

we are dealing with right now, where the responsibility has been

spread across governmental entities. And even for those individuals

who have a responsibility, it is only one of many responsibilities.

Would we not solve this problem by having a single individual with

adequate resources who could focus on this issue assuming that, if

we were to move in that direction, would a requirement of notification not make sense?

Ms. SCHINASI. That is, again, one of those policy questions that

goes beyond our works.

Senator BAYH. Let me phrase it a different way: If we were to

deal with the resource question, would that remove the principal

obstacle to a requirement of notification?

Ms. SCHINASI. Voluntary versus mandatory notification is something that has been an inherent question ever since CFIUS was

put in place. I would want to go back and look at the number of

investigations, the number of, excuse me, transactions that actually

are occurring out there to be able to give you a good answer of

whether or not the costs and the benefits would be in balance

there.

Senator BAYH. Currently, who makes the decision about whether

a notification takes place?

Ms. SCHINASI. The companies themselves.

Senator BAYH. Does it strike you as an interesting fact that the

private sector would be making decisions about what affects the

national security interests of our country rather than the Government?

Ms. SCHINASI. What we have called on is the agencies themselves, we have found when we looked at this issue in earlier reVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 33310.TXT SBANK4 PsN: SBANK4
11

ports that, in fact, there are transactions that do pose potential

threats to national security that have not been notified to the committee. And we have found that individual agencies in carrying out

their own mission have information about those.

The process allows for those agencies to come forward and notify

the committee. However, it is uncertain how often those agencies

are doing that. So what I would like to see first is the agencies

themselves to come forward and carry out that responsibility to notify the committee.

Senator BAYH. Well, I only speak for one Senator, but I think we

should address this resource issue and this focus issue. This is important. When we are talking about the national security interests

of the country, somebody should be in charge and be held accountable. We should not have this fall through the cracks because it is

just so diffused, and people are busy with other things. I am not

in favor of big, intrusive government, far from it, but when it comes

to making the final call about national security matters, it probably

should be the country rather than the private sector making those

calls.

Ms. SCHINASI. Yes, sir, we would agree with that.

Senator BAYH. My second question, well, it is a subset of the

first. Once a notification does take place, should an investigation

be required? I guess it deals with the whole stigma and maybe this

gets into the realm of the semantic. Maybe we need to come up

with a different word here so we do not spook the market. Inquiry,

maybe that sounds a little too stigmatizing, too?

Senator STABENOW. Review.

Senator BAYH. Review, excellent. Maybe we can get out our thesaurus here and come up with something that gets the job done

and does not negatively impact the financial markets. If we can do

that, would that resolve the down side inherent to requiring the review at that point following a notification?

Ms. SCHINASI. What we saw in our review of the cases that we

looked at was that for complicated cases, and there are a number

of those, there just is not enough time to establish whether or not

there is a potential threat and how to mitigate that threat if, in

fact, it is there. And I think it is those two things that would warrant an extended period of time. What you call it, I think is review.

Senator BAYH. So that the potential stigma from what may be an

innocuous situation——

Ms. SCHINASI. That is correct.

Senator BAYH. The fact that in 30 days, what can you really do?

Ms. SCHINASI. That is correct.

Senator BAYH. Fair enough. We will work on the semantics and

think about the timeframe, and if we could get those two things resolved, would that then alleviate the concerns about the requirement of a review over a more meaningful period of time?

Ms. SCHINASI. We believe so, and as importantly, we believe it

would have a difference on the outcome as well.

Senator BAYH. Senator Stabenow touched on the factors that

may be taken into consideration but are not required, even things

like whether the acquiring company comes from a country that, for

example, might be implicated in supporting terrorism or present

proliferation risks for missile technology or a variety of other

12

things. Should those factors not be required to be taken into account?

Ms. SCHINASI. Yes.

Senator BAYH. The definition of national security, it has been,

and I think Senator Stabenow touched on this as well, and you answered with regard to the recent energy situation. We had a situation in my own home State where a company was producing well

more than half of the magnets necessary to make our smart bombs

work. It has been acquired by a company from China.

Should things like that not be taken into account, not just whether it is a sensitive technology but whether it is an input, for example, that is critical to a national defense system or, in the

globalized marketplace, access to energy supplies? I mean, this is

a strategic concern. Apparently, the Chinese have decided it is a

strategic concern. I would assume it is perhaps one of ours as well.

Should factors like that not be required to be taken into account

rather than just be merely advisory?

Ms. SCHINASI. Senator, I think when I referenced the decreasing

relevance of national borders in our national security, particularly

in our defense-related industries, it is in fact the underlying concern, the manufacturing processes and the technologies that we

have invested billions of dollars in that give us our military superiority that probably are residing as much in the commercial sector

as they are in the defense sector now, and it is exactly those that

are the underlying concerns.

Senator BAYH. Take this one small example from my State.

Eighty-five percent of the magnets necessary to make the smart

bombs work, if that production is eventually relocated to a foreign

country, does that not place our country in a position of dependency for a critical input to a weapons system that we now rely

upon to a great extent?

Ms. SCHINASI. I will go back to the statute and say both of those

examples are in the statute as factors to be considered. One is security of supply; another is continuing technological preeminence in

the United States.

Senator BAYH. That they must be considered, or they can be considered?

Ms. SCHINASI. No, they are factors that can be considered.

Senator BAYH. Can or must?

Ms. SCHINASI. Can.

Senator BAYH. Should they not be required to be considered?

Ms. SCHINASI. The recommendations that we have made, and we

have made them for Congressional consideration because the agencies have disagreed with us is that there be more guidance in what

factors should be considered in making the decisions and determinations.

Senator BAYH. So your position is that they should continue to

be advisory only, or they should be required to be taken into account?

Ms. SCHINASI. Our position is that we have suggested that you

look at that decision again.

Senator BAYH. You are reluctant to play referee, huh?

Ms. SCHINASI. If moved into the policy, we try to maintain

our——

13

Senator BAYH. You are the good cops? Is that the deal here?

Well, we are up to the challenge, right.

[Laughter.]

Okay; I think I hear what you are saying. Again, when it comes

to national security and weapons systems, it seems to me we

should err on the side of ensuring supply and therefore require

that these things be taken into account rather than well, maybe

yes, maybe no, because it a dangerous world, regrettably.

Final thing, and this may be more attitudinal than not. It has

been suggested to me that there are some on the trade side of this

whole thing; some of our trading partners like to raise this whole

process as an example, according to them, about how we restrain

investment into our country, and they use that as a tissue with

which to cover their own much more restrictive practices that prohibit American direct investment into their own economies. Anything like that come up in the course of your report?

Ms. SCHINASI. I think that is a position you will hear given by

a number of the member agencies.

Senator BAYH. Our trade officials get aggravated by this, but I

get back to my opening statement: Globalization can work and

work well if we prepare ourselves for the globalized economy. Part

of that is going to be direct investment. That can be a good thing.

But when it comes to that narrow category of national security interests, I think the Nation’s security has to trump our commercial

concerns when it gets right down to it, and there is a legitimate

reason for that.

So, I just hope that we bear that in mind in setting our priorities

and trying to strike the right balance here. And again, thank you

both very much, and Chairman and Ranking Member Sarbanes,

thank you both.

Chairman SHELBY. Thank you, Senator Bayh.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. I want

to welcome the representatives of the GAO this morning.

As I think has already been noted, last February, you, Senator

Bayh, and I joined in sending a letter to the GAO, asking them to

build on their earlier work and undertake a further study of the

process for the implementation of the Exon-Florio Amendment, and

we are very pleased to have this report, and it is very helpful to

the Committee.

The questions raised there are serious ones: Substantial economic benefits can generally flow from investment and from reciprocal or multilateral agreements that permit free investment in the

U.S. economies of other countries. But Exon-Florio recognizes that

what is true in many situations is not necessarily true in all situations. And CFIUS has received a great deal of publicity in recent

months. I am concerned about some of the way it is apparently perceived.

In June, the Financial Times called it an opaque Government

panel, opaque. It seems to me given the importance of its work and

the sensitive issues and information with which it must deal, it is

important that CFIUS be as transparent as possible, thereby conVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 33310.TXT SBANK4 PsN: SBANK4
14

tributing to a higher degree of acceptance of its decisions. Actually,

they have not complied with the requirements in the Defense Production Act for quadrennial study for Congress for whether particular countries are engaged in a coordinated strategy to acquire

U.S. companies that develop or produce critical technology. That is

a requirement. It is in the statute. CFIUS seems to just be ignoring

that requirement, and we ought to, I think, Mr. Chairman, take a

look at that.

Chairman SHELBY. Absolutely.

Senator SARBANES. I understand that the representatives of the

executive departments were invited to this hearing but were unable to appear, but we hope to have their testimony at a future

hearing.

Chairman SHELBY. Absolutely. Senator Sarbanes, we have

worked together on this. I was disappointed with the executive

branch not appearing here today. We are going to call for another

hearing. Also, Senator Inhofe, if you will yield me a little bit of

your time——

Senator SARBANES. Certainly.

Chairman SHELBY. He is very interested in this issue. He has

worked with all of us on it, and he would be very interested in, as

he told me, testifying at another hearing before the Banking Committee if it meets with all of you—thank you, Senator Sarbanes.

Senator SARBANES. The Chairman, Senator Bayh, and I have

outlined the importance of these security concerns, and we weigh

economic considerations, but the security concerns, it seems to me,

are the trump card when we consider these matters.

Chairman SHELBY. Should be.

Senator SARBANES. I am going to be very up front and blunt with

the two witnesses. The Treasury is quoted, an unnamed official—

that is the way it always happens——

[Laughter.]

Senator SARBANES. —in the Financial Times on September 28—

it is a widely read business publication, of course, in Europe and

in this country, and I am going to quote from the article, and then,

I would like to address a question to you: ‘‘However, the Treasury

questioned the motives’’—motives—‘‘behind the report which was

requested by Mr. Shelby and others. The Chairman had observed

that the GAO report underscored the need for Congress to have far

better insight into the review process to ensure that national security considerations are not given short shrift.’’ That is an issue that

Senator Bayh has raised on a number of occasions here.

And I am now quoting again from the article. ‘‘An official said,’’

this is a Treasury official, ‘‘GAO’s views were well-formed before

talking to Treasury, and GAO failed to ever interview other members of the CFIUS committee, including the State Department, the

President’s Council of Economic Advisers, and the U.S. Trade Representative. The official added GAO was selective in its interviews,

excluding key Members of the Committee, and this clearly colors

the report. They obviously had a viewpoint going in and were merely looking to fill in the blanks. In this regard, the report is sloppy

and lacks any useful evidence to back its conclusions. The report

is not worthy of GAO’s reputation for thorough, unbiased analysis.’’

15

Well, first of all, I would say GAO certainly has a reputation for

thorough, unbiased analysis. I do not see that that reputation is

done in by this report, but since your motives have been put into

question here, I thought I should put it right out front and ask you

to address this unknown, unnamed——

Chairman SHELBY. Unnamed.

Senator SARBANES. Presumably not unknown but unnamed official who did this—I guess one would describe it as an anticipatory

or preemptive smear job here before you even got before us to

present the report. Could you address that?

Ms. SCHINASI. Senator, I welcome your question.

Senator SARBANES. Yes.

Ms. SCHINASI. What I would like to do is go through the methodology that we did use in this report, if you will have a few minutes

to listen to that.

Senator SARBANES. I think it is important. I mean, this is not an

idle allegation that has been made here by the Treasury Department. I must say we expect better of the Treasury, too, but anyhow, please.

Ms. SCHINASI. The work that we did that culminated in this report is a continuation of work that we began and issued a report

on in 2002, so I would like to start there with what we have done.

In that report, we had 18 cases that we reviewed. We started with

some knowledge of the 451 cases that have been notified to CFIUS

between 1997 and 2004, and from that, we selected 18 cases to look

at more fully and in depth. And we went through over 1,000 documents in looking at those cases, and I wanted to make sure I said

what those were.

We looked at documents that included handwritten notes of

CFIUS meetings at the staff and policy level, formal minutes of

policy level meetings that were chaired at the assistant secretary

level; looked at communications between CFIUS members and the

companies. We looked at emails between various CFIUS member

agency officials and within agencies that raised their concerns. We

looked at agendas and speaking notes for policy level meetings. We

looked at memos to the under secretaries concerning the views of

various staff levels. We looked at classified risk assessments by the

CIA and DIA. We looked at final versions and drafts of the mitigation agreements and emails and memos between the Government

and companies setting those agreements out. We looked at reports

that the companies sent to CFIUS or member agencies in compliance with the agreements.

As you know, there are confidentiality provisions associated with

CFIUS, and we scrupulously adhere to those, so I am not at liberty

to talk about any individual cases. But that is to give you a sense

of the documents that we looked at.

In discussing what we found in those documents, we had interviews with all of the member agencies. At that time, there were 11.

That includes the Departments of Commerce, Defense, State,

Treasury, and—I am sorry, I just lost one of the five there. I will

come back to that. We spoke with the six Executive Offices of the

President, the National Security Council, the National Economic

Council, the Office of Management and Budget, the Council of Economic Advisers, and the Office of Science and Technology Policy.

16

So we met with all of the agencies and all of the Executive Offices of the President. That gave us the basis for our understanding

of the CFIUS process. When we moved to this review, we had that

understanding. We picked an additional set of cases to look at in

addition to the ones that we had looked at in 2002, and we went

through the case files on all of those cases as well. We had discussions with those agencies that we saw were most active in those

cases, and we went back to those agencies and asked if there were

other documents or other agencies that we should contact, and we

were told no. In our own review, we identified the National Security Council as one of the agencies we had not preliminarily identified, and we contacted the National Security Council to ask them

if they wanted to weigh in and make their views known. They declined to do that.

So the process of data gathering was very extensive and dare I

say exhaustive. We have a process internally with that data, where

we go through a series of fact checking and also an internal review

that includes our division that looks at trade matters, our attorneys, our economists, to understand not just whether the facts are

correct but whether or not the findings, the conclusions are logical.

We went through that review process.

We also took our facts back to all of the agencies, and we go to

Treasury as the chair of the committee and let them manage the

process of checking the facts with the other agencies. And we made

any changes that we needed to based on evidence that came back

from the Administration. There were not a lot of changes.

And then, finally, we have a process, as you know from looking

at the report, where we send out a draft of our report to the agencies to get their formal comments on our conclusions and recommendations. And as you see, the Treasury Department, which

said it was speaking for all of the member agencies, sent us about

19 pages of comments. Some of those addressed issues in the report. Some of those addressed issues that were not in the report.

And we have seen at least over the last three reports that we have

issued that the Treasury Department comments assume that we

have a policy position that is limiting the open investment policy

in the United States.

Clearly, that is not true. It has not been within the scope of any

of our reports, nor is it within the scope of this one. But you will

see that in the back of this report that the Justice Department provided individual comments. We go through a process where we review those comments. We make changes as we believe necessary,

and we answer for those where we do not believe that changes are

necessary why we do not think so. That is in accordance with the

procedures that we have in place for every review that we do at

GAO, and those are the procedures that we followed here as well.

Senator SARBANES. What basis is there, if any, for this Treasury

unknown spokesman questioning the motives of the GAO in making this report?

Ms. SCHINASI. Senator, I am afraid you will have to ask them.

Chairman SHELBY. We need to have them here to ask them.

[Laughter.]

I think that is one reason they are not here today.

[Laughter.]

17

Senator SARBANES. As I understand, you invited them to this

hearing.

Chairman SHELBY. We have. And we have invited them for the

future. We plan to pursue that. I think it is very important that

they appear here before the Banking Committee. I will be surprised and shocked if they do not in the future.

[Laughter.]

Senator Bayh.

Senator BAYH. Mr. Chairman, if I could just add one minute’s

worth of credibility to the report. One of the cases, Senator Sarbanes, they based their report on was in my home State, a company called Magnequench. They produced 85 percent of the

magnets that go into our smart bombs that you see on TV. That

plant has now been closed, and the production has been moved to

China.

Senator SARBANES. Are these magnets that are essential for the

smart bombs?

Senator BAYH. Correct. That plant is now closed, and it has been

moved to China, and this is one of the cases that they reviewed.

So it is a matter of debate, but my point is simply that this is a

very credible example of the kind of questions that have been

raised and deserve to be addressed at a policy level. So, I commend

the GAO for their report and, at least as far as I am aware of, the

facts that went into it.

Chairman SHELBY. Senator Bayh, if you would yield, this is a bipartisan inquiry here. I know Senator Inhofe and I are working together. You all are working together on this, Senator Sarbanes and

others.

This is not a partisan interest. This is a national security interest and an economic interest, all of it together. But as I have said

before, I do not believe everything in this country is for sale. If

Senator Bayh talked about earlier, if we let all of our—just do

something for a dollar, for a profit, to sell something and trump national security. I thought, and I was always taught that the national security, the security of the people of this Nation, trumped

everything.

Senator SARBANES. Yes, I see, Senator, maybe this has been referred to before I was able to arrive at the hearing, Senator Inhofe,

in a story in the Los Angeles Times today said yesterday that the

screening process was broken, leaving the Nation vulnerable to foreign threats. Pretty strong statement.

Chairman SHELBY. Well, from what Senator Bayh was just talking about the example in his home State, maybe it is broken, and

that is why we are going to try to address it. But we need Treasury

here, too, because this issue is not going to go away. We are not

going to let it go away.

Senator SARBANES. Right. Treasury is the chair of the CFIUS

interagency group, is it not?

Ms. SCHINASI. Yes, sir.

Senator SARBANES. And does the Secretary himself act in this

chairmanship role, or has he delegated it out to someone?

Ms. SCHINASI. There is a provision to escalate issues to the Secretary, but it has for the most part been delegated down.

18

Senator SARBANES. And how far down has it been delegated in

Treasury?

Ms. SCHINASI. The Under Secretary and the Assistant Secretary.

Senator SARBANES. I see, Under Secretary Adams, who is the one

who commented on your report, is also the one who has generally

acted as the chairman of the interagency group?

Ms. SCHINASI. Yes, at the policy level, yes, sir.

Senator SARBANES. Now, Treasury asserts these decisions are

made by consensus by policy level officials, is that right?

Ms. SCHINASI. Yes.

Senator SARBANES. So they have no division within the group? I

mean, do they ever get a case where they push it to a decision and

the group is divided?

Ms. SCHINASI. Yes, Treasury refers to the process as a consensus

process. The guidelines call for each agency to state their views,

but there is nothing in the guidelines to talk about how disputes

are resolved or whether or not they need to be resolved.

Senator SARBANES. Presumably, they have disputes within the

committee when they consider matters.

Ms. SCHINASI. Yes, they do.

Senator SARBANES. Are they all of one mind, marching to one

drummer all the time?

Ms. SCHINASI. No, there are many disputes.

Senator SARBANES. Many disputes within the committee. And

how do they resolve those disputes? Have you been able to ascertain that?

Ms. SCHINASI. In some cases, we believe that they are not resolved. They are pushed aside but not resolved.

Chairman SHELBY. Excuse me, if you would yield.

Senator SARBANES. Certainly.

Chairman SHELBY. What happens when they are pushed aside?

Are they able to sell?

Ms. SCHINASI. I will give you a couple of examples, one that I

spoke about in my opening statement, where there was an agreement that had been worked out by two of the member agencies and

a company about measures that the company would take to mitigate what had been seen to be potential risks to national security.

And the agencies wanted to put a provision in that agreement that

referenced Exon-Florio and were not able to because there was not

consensus that they could put that provision in there. So that is

one way that consensus works.

Senator SARBANES. Now, were you able to ascertain which of the

agencies or the Departments seemed to be most rigorous in questioning these sales, in other words, most protective of the national

security concerns within CFIUS?

Ms. SCHINASI. Yes; I think each agency would tell you that they

have national security concerns as they come into this process, but

those whose other responsibilities are more focused on national security, and those would be the Department of Defense, the Department of Homeland Security, and the Justice Department, would be

those that we have seen as being the strongest proponents, for example, of using additional factors in their consideration of the potential risks, wanting more time to investigate whether there is a

potential risk and having stronger mitigation agreements, stronger

19

agreements in place and stronger mitigation factors that are enforceable within those agreements.

Senator SARBANES. Now, Adams, in his comment on your report,

Adams being the Under Secretary at Treasury, says 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.

GAO apparently did not solicit any input from other members of

GAO, such as the Department of State, the Office of the U.S. Trade

Representative, nor the Council of Economic Advisers. Despite

GAO’s unsubstantiated assertion, these organizations, like the ones

GAO did choose to meet with, are very much engaged in CFIUS review. If GAO had interviewed senior policy officials from these organizations, which reflect a broad spectrum of CFIUS membership,

the Committee is confident that GAO would have gained a more informed perspective on the CFIUS process.

I am beginning to think that maybe Adams is the source of

this——

[Laughter.]

Given that language, the source of this Financial Times story.

But what do you say in response to that?

Ms. SCHINASI. I have several points.

Senator SARBANES. Good.

Ms. SCHINASI. It is not our view who is the most active. We made

that determination in going through the case files and identifying

those agencies which attended meetings, which had a position,

which conducted their own fact finding on potential risk. So the determination of most active is not our view; it is based in fact. That

is the first thing.

The second thing, we had identified on a number of these cases

that had some history to them, we have had discussions with officials from all of the relevant agencies, as I had said before, and so,

that Financial Times is not correct.

Senator SARBANES. So it is not accurate to say that you did not

receive input from other members of CFIUS other than the five departments he named; is that correct?

Ms. SCHINASI. We had their positions. We did not interview during the period of time of this review all member agencies, because

we did not feel that we needed to interview all member agencies.

However, once the report was written and sent to the Administration for comment, we did meet with those agencies that wanted to

meet with us.

Senator SARBANES. And which agencies were those?

Ms. SCHINASI. The State Department and the Special Trade Representative.

Senator SARBANES. And that was in the process of formulating

your final report.

Ms. SCHINASI. Yes, sir.

Senator SARBANES. So the final report would come later in the

report process than this comment from Adams; is that right?

Ms. SCHINASI. That is correct.

20

Senator SARBANES. And in the interim, there were discussions

with those agencies, at least some of those agencies as well; is that

correct?

Ms. SCHINASI. That is correct.

Senator SARBANES. Mr. Chairman, there is a lot we could pursue

in this report in terms of its substance, and I want to thank the

GAO for preparing it and submitting it to us, but I must say it

seems to me the essential hearing that we need to have is for the

executive departments and particularly the Treasury, which is the

chair of this interagency committee, to come here at the witness

table and give us an opportunity to examine them quite closely,

which I, for one, intend to do.

Thank you very much.

Chairman SHELBY. Thank you.

First of all, I want to say again this looks to me like a very thorough, well-researched report that GAO has done, building on what

you have done in the past, and on behalf of the Committee I want

to thank you for that.

Ms. SCHINASI. Thank you, Mr. Chairman.

Chairman SHELBY. I have a few other questions.

Could you expand upon the process by which cases are mitigated? Have the agreed upon measures required by the committee

been sufficient to protect sensitive information or technology here?

You mentioned, of course, sensitivity is important, but one that

was disturbing to me, the one Senator Bayh brought up, and I am

sure there were worse cases.

Ms. SCHINASI. One of the findings that we had in an earlier report that we went back and looked at again in this review was, in

fact, that we did not know the answer to your question. There had

not been responsibility for company compliance with these agreements given to any individual agency, and there were a number of

cases where there was no monitoring going on.

Chairman SHELBY. In other words if they agreed to do something, we are talking about mitigation in exchange for getting this

sale approved then, there is no oversight to see that what they

agreed to do, which would be in our best interests, was done.

Ms. SCHINASI. That is correct.

Chairman SHELBY. Okay.

Ms. SCHINASI. We had two issues that we raised: One, that the

mitigation agreements were very vague, ‘‘best effort,’’ for example,

and we raised questions about how can you determine what is actually a best effort. And then, the second point was the one you

raised about who is looking to see what is actually happening here.

Chairman SHELBY. Withdrawn proposals, on the issue of discretionary withdrawal of paperwork from the committee’s review,

Committee on Foreign Investment in the United States, do you

know of any cases when a company withdrew its paperwork from

the Committee on Foreign Investment on its own initiative and

then proceeded with an acquisition that may have resulted in the

transfer of military sensitive technology or knowledge?

Ms. SCHINASI. Not those exact circumstances, no, sir.

Chairman SHELBY. Will you look through the committee’s record

and report to us on that?

21

Ms. SCHINASI. Yes. During the course of our 2002 and 2004 reviews, GAO was not provided unfettered access to committee files.

We were granted access to case files we requested. From the specific cases we reviewed, GAO is not aware of any committee cases

where a company withdrew its paperwork on its own initiative and

then proceeded with an acquisition that may have resulted in the

transfer of military sensitive technology or knowledge.

Chairman SHELBY. To the best of your knowledge, in cases where

the Committee on Foreign Investment in the United States’ review

occurred after the completion of an acquisition of a U.S. company

by a foreign company, was there a transfer of technology, items of

knowledge that you feel should have been prevented? If so, you can

furnish this for the record.

Ms. SCHINASI. Okay.

Chairman SHELBY. Will you do that?

Ms. SCHINASI. Yes.

During our previous reviews, GAO was not given unfettered access to committee files. We do not know whether there are cases

that the committee reviewed where technology or items of knowledge that should be protected were transferred. In our September

28, 2005 report, however, we describe two cases where the companies completed the acquisition before filing with the Committee and

later abandoned the Committee process, leaving some member

agencies’ concerns unresolved.

(Excerpt from GAO, Defense Trade: Enhancements to the Implementation of Exon-Florio Could Strengthen the Law’s Effectiveness.

GAO–05–686 (Washington, DC: September 28, 2005), pp. 16–17.)

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.

Chairman SHELBY. Do you think there are some cases there?

Ms. SCHINASI. What I do know is that there are some cases

where we do not know.

Chairman SHELBY. It is what you do not know, is it not?

Ms. SCHINASI. Yes.

Chairman SHELBY. The credible evidence standard in the definition issue that you alluded to, Exon-Florio employs a standard of

what we call credible evidence that harm may come to national security in the consideration of a proposed acquisition; correct?

Ms. SCHINASI. Yes, sir.

Chairman SHELBY. In GAO’s assessment, has this standard provided for the discretion necessary for full consideration of the risks

to national security of proposed acquisitions?

22

Ms. SCHINASI. Applying a standard of credible evidence before

you go to an investigation precludes your ability to determine

whether or not there is credible evidence.

Chairman SHELBY. Given the fact that critical infrastructure protection and energy security have been an integral part of the Defense Production Act, which involves primarily the preservation of

the vital industrial base needed for national defense, national security for a number of years, why do you feel these areas may not

have received the attention they should have during the Committee

on Foreign Investment’s review? You pointed a lot of this out in

your report, but you are here in the Committee now, for the record.

Ms. SCHINASI. The way we describe it in the report is because,

again, through this consensus provision that not all members agree

that those should be factors that are considered in the decisions

and deliberations of foreign acquisitions.

Chairman SHELBY. Senator Sarbanes, do you have any other

questions? I know some of our other colleagues are going to have

some for the record.

Senator SARBANES. That is for sure. The earlier report you did

on CFIUS was in 2002; is that correct?

Ms. SCHINASI. That was one of the earlier ones, yes, sir.

Senator SARBANES. Right; was that the most recent earlier one?

Ms. SCHINASI. Yes.

Senator SARBANES. It is my understanding that subsequent to

that report, actually, a number of your recommendations in dealing

with the situation you examined were adopted by the CFIUS agencies in an effort to improve their procedures; is that correct?

Ms. SCHINASI. That is correct, yes, sir.

Senator SARBANES. At that time, you did not get this kind of demeaning response to the report, did you?

Ms. SCHINASI. No, we did not.

Senator SARBANES. That you encountered in this circumstance?

Ms. SCHINASI. No, sir, this is unprecedented.

Senator SARBANES. Do you have any inkling as to why we have

gotten this what you just described as unprecedented behavior or

reaction?

Ms. SCHINASI. Senator, it would only be speculation on my part,

and I would ask that you ask the Treasury Department.

Senator SARBANES. Okay; all right.

Thank you very much, Mr. Chairman.

Chairman SHELBY. We appreciate your appearance, but more

than that, we appreciate your diligence and your work at GAO, and

we are going to follow up on this with a hearing. As I said before,

it is incumbent upon Treasury to be here. We are going to give

them a lot of opportunities. We will not quit until they show up.

[Laughter.]

Even if it is a Sunday hearing.

Thank you.

The hearing is adjourned.

[Whereupon, at 11:17 a.m., the hearing was adjourned.]

[Prepared statements supplied for the record follow:]

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(93)

A REVIEW OF THE CFIUS PROCESS

FOR IMPLEMENTATING

THE EXON-FLORIO AMENDMENT

THURSDAY, OCTOBER 20, 2005

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:05 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

This morning, the Banking Committee continues its examination

of the implementation of the Exon-Florio Amendment and the role

of the Committee on Foreign Investment in the United States.

In February 2004, Senator Sarbanes, Senator Bayh, and I asked

the Government Accountability Office, GAO, to examine the process through which the Committee on Foreign Investment in the

United States reviews proposed foreign acquisitions for potential

national security implications.

On October 6, GAO presented the Banking Committee with its

findings. It was GAO’s conclusion that the system is flawed and

that improvements can and should be made. Beyond GAO’s findings, the Banking Committee is concerned about its inability to

conduct appropriate levels of oversight of a process shielded for

largely legitimate reasons from public view.

As the public’s representatives, the Congress, invested with authority by the U.S. Constitution to regulate interstate commerce,

Congress has a need to know. As the Committee of primary jurisdiction in the U.S. Senate, the Banking Committee has a responsibility to ensure that the process receives the appropriate scrutiny.

This is not to suggest this morning that a fundamental transformation of the manner in which the Committee on Foreign Investments operates is due; on the contrary, I am confident that the

requisite fixes will be relatively painless for all of those involved

if we work together.

But it has become apparent that fixes may be warranted, including in the areas of mandating components of national security that

must be considered in any review, far greater sharing of information with the Congressional Committee of oversight than heretofore

has been the case, less reliance on withdrawals from the review

process for cases with potential problems, and more time for agenVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00097 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
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cies to study individual cases without incurring the risk of undermining the Nation’s policy on foreign direct investment.

The Committee approaches its review of Exon-Florio with full

awareness that the issue of foreign direct investment is not one to

be taken lightly. Foreign direct investment is a vital component of

U.S. economic growth, and the principle of reciprocity is an integral

part of our economic policy.

The Banking Committee is further aware that the leading foreign investors in the United States are among our closest allies and

friends. We are cognizant of the concerns expressed by the European Union regarding the chilling effect on economic ties of

changes in Exon-Florio that unduly impede investment flows.

But lost in the mist surrounding the Committee’s review of ExonFlorio is the very serious issue of acquisition of U.S. corporations

that design and manufacture military sensitive technologies by

countries with less benign motivations than some of the friends

and allies that I referred to above or by countries with weak export

control systems, where a risk of diversion is present.

Preservation of the U.S. defense industrial base, protection of the

resources vital to our future economic well-being and protection of

our critical infrastructure are legitimate areas of concern. Congress, I believe, needs to be comfortable with all of these considerations that are integral to the process by which proposed foreign

acquisitions are reviewed by the Committee on Foreign Investments. That level of comfort is currently nonexistent.

A Tuesday article in The Hill newspaper mentioned the concern

among the business community that the Committee’s efforts at

strengthening what it seems as a flawed process will have serious

ramifications for international trade and investment. The article

noted the concern among some lobbyists over the recent French uproar over PepsiCo’s potential takeover of Dannon, the prize Frenchowned yogurt company. Please be assured here today, with all due

respect to the market fluctuations that accompany takeover bids,

the issues in question here are of far greater importance than yogurt and involve a very small percentage of foreign acquisitions.

The Banking Committee, I feel confident in stating, will take no

actions that impede international investment. But national security

should never, ever be subordinated to commercial interests. The

Committee on Foreign Investment has a mandate to review acquisitions for national security implications, not for potential retaliatory measures by foreign governments and not with an eye

toward market reactions.

Exon-Florio states that the Committee may consider defense industrial base requirements, and the Defense Production Act is explicit in its emphasis on critical infrastructure protection and energy security. These areas, the GAO report suggests, are given inadequate attention. Preservation of the Nation’s open investment

policy, not addressed in Exon-Florio, is given measurable emphasis.

The Committee will hear this morning from a high level panel

of Government officials representing the Federal agencies comprising the Committee on Foreign Investment. It was our intention

to hear from this panel during the October 6 meeting. That did not

occur. I must add here that it is disappointing that two of the agenVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00098 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
95

cies failed to submit prepared statements in advance of today’s

hearing, which is unusual in this Committee.

Following that panel, we will hear testimony from two eminent

experts on Exon-Florio: Patrick Mulloy, who is no stranger to this

Committee, of the United States-China Economic and Security Review Commission and David Marchick, a Partner at Covington and

Burling, with long Government and private sector experience in the

area of international trade and investment.

But before we begin, we are pleased to have testifying this morning one of our colleagues, Senator James Inhofe of Oklahoma. Senator Inhofe has been very active in seeking to reform the process

by which foreign acquisitions of U.S. companies are reviewed.

Senator, we would welcome you, and do you want to make an

opening statement, Senator Schumer?

STATEMENT OF SENATOR CHARLES E. SCHUMER

Senator SCHUMER. Thank you, Mr. Chairman, and I want to

thank you and Senator Sarbanes for moving so quickly to hold a

second hearing on this important issue. One of the greatest principles in the United States is that FDI, foreign direct investment,

occurs freely without discouragement from the Federal Government, and that happens in about 99.9 percent of the cases.

But even with that rate of success, we still have some concern,

since there are some areas in need of greater Congressional oversight. CFIUS gained a lot of attention a few months ago when

CNOOC made an $18 billion bid to take over Unocal. Many of us

knew before, and others learned more recently, that CFIUS plays

an extremely important role and may be the last stop-gap measure

to ensure that our U.S. national security interests are protected,

which, in some extreme cases, may mean recommending that the

President block a foreign direct investment deal.

But I would argue one of the greatest problems with CFIUS is

the narrow definition of what is encompassed in the term national

security. Members of CFIUS in the past have strictly used the term

national security to apply to potential investment deals which pertain to military goods, national security sensitive technology, in addition to other goods we need for our national defense.

I agree that any direct foreign investment deal that hinders the

United States’ ability to protect our national security interests in

a traditional sense should be closely examined, but I believe the recent GAO report requested by you, Senator Sarbanes, and Senator

Bayh, Mr. Chairman, hit the nail on the head when they said that

the Committee absolutely defines the definition too narrowly.

One of the most important missing pieces of the puzzle pertains

to our country’s ability to protect against deals that hinder our economic security interests. And in this new global world, economic security is every bit as important as national security. Economic

security is a U.S. national security issue. That is a fact. Our economic interests should be aligned with our military security interests, and that definition should be broadened, and I am prepared

to amend Exon-Florio to do just that.

The other major issue I have with CFIUS is the issue of reciprocity. On trade issues, the thing I have been most active in is my

work on currency manipulation, but I have a much longer history

96

from my days in the House on the issue of reciprocity, when Japan

was investing, their financial companies were investing here, but

we could not invest in Japan, which greatly hurt American companies, and we passed legislation or moved it through the House that

changed all that.

Today, it is the fact that the United States and China’s relationship is more of a narrow, one-way street than a multilane interstate highway in all industries. I released a report a few months

ago on the unfair trade practices used by China to keep United

States companies from directly investing in order to gain market

access to China. You cannot invest in this industry; you can only

invest 9 percent in that industry, and which industries do they

keep us out of, American firms? Owning the most strategic industries, the industries where we have the greatest advantage, the industries where we have the greatest technology.

I did not oppose CNOOC, Mr. Chairman. I was not one of the 41

Senators who signed the letter. But I did attach an amendment

saying that we should get a report on whether China would allow

a United States company to buy the Chinese Unocal in a similar

position. They obviously would not.

I should note that this hurts our economic intellectual property.

It hurts the advantages that we have. China has a lot of advantages in trade. They have lower cost labor. They have an increasingly well-educated work force. But we have advantages, and that

is our intellectual property and our know-how and ability how to

do things in financial services and high tech and communications,

and we are blocked, American firms are blocked from investing.

One other point I would make, Mr. Chairman: Our companies do

not say a peep about it, because they are part of the game. They

will say hey, if we make a fuss, we will not even be allowed to buy

the 9 percent that they are allowing us to buy, so we are quiet. And

what is happening is our big multinational companies do not have

the same interests as America has. Their interest, understandably,

is to their shareholders. That is what it should be.

But our interest on this Committee has to be to the best for

America. And so, I propose to expand the President’s criteria under

which he can act to exercise his authority under Exon-Florio to

block a foreign acquisition of a U.S. corporation to include a provision on reciprocity. We cannot buy there? Why should they be allowed to buy here?

And I am interested in hearing the witnesses’ comments on these

issues, and I am going to ask you with unanimous consent, Mr.

Chairman, my entire statement be read into the record, and if

could get a week for the witnesses to respond in writing, because

I will not be here to be able to—

Chairman SHELBY. Without objection, so ordered.

Senator SCHUMER. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, I would like to thank you for

holding today’s hearing on the CFIUS process for implementing the

Exon-Florio Amendment.

97

I was fortunate to serve with you when you chaired the Intelligence Committee, and so, I share many of your concerns regarding national security. That concern was further reinforced when I

sat on the Armed Services Committee with one of our witnesses we

have here on the first panel, Senator Jim Inhofe.

While I am a strong advocate for economic growth and business

opportunities, it cannot come at the expense of our national security. More than ever, we are recognizing new vulnerabilities and

the shifting nature of war and terrorism. We must be more vigilant

than ever in more ways than ever to keep our Nation safe and

strong. The new global economy has brought with it increased opportunities. We must carefully evaluate those opportunities to determine what is in the country’s best interests.

CFIUS and the Exon-Florio Amendment is one way in which we

can do that. I appreciate this opportunity to examine the current

functioning of the process to determine what is and is not working.

I look forward to working with my colleagues to find the appropriate balance between commerce and national security.

Thank you, Senator Inhofe, for coming to be a witness today, and

I also thank the other witnesses for being here today, and I look

forward to your testimony.

Chairman SHELBY. Senator Inhofe, your written testimony will

be made a part of the hearing record in its entirety. I want to welcome you again to the Banking Committee. You proceed as you

wish.

STATEMENT OF JAMES INHOFE,

A U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator INHOFE. Thank you, Mr. Chairman.

I chair the Committee on Environment and Public Works, and

we are having a hearing simultaneously, so with your permission,

I would like to make a statement and then be excused.

Chairman SHELBY. Absolutely.

Senator INHOFE. And I would also say, observe, that my very

good friend on panel two, David Sampson, and I have worked together for many years, and I commented to him when I came in

that this was the first time we had disagreed on anything and that

everyone has the right to be wrong once. I am looking forward also

to making sure that you get the full testimony of Pat Mulloy. I was

with two other people from the China Commission last night. They

have done great work.

Mr. Chairman, I have to say, I know this is not zeroing in on one

country. The CFIUS process affects all negotiations, all relationships, but this first came to my attention when my service on the

Senate Armed Services Committee drew me to the conclusion that

we had some real serious problems with China.

During the drawdown of the military in the 1990’s, we had the

experience that there are great threats out there that we were not

really going to be prepared to handle. At the same time, China,

specifically between the years of 1990 and 2002, increased their

weapons procurement program by 1,000 percent. So, I have been

concerned about this, and that is when CFIUS came to my attention.

98

It began last April when I delivered four speeches on the floor.

I am sure you were there. They were each one one hour speeches,

Mr. Chairman.

Chairman SHELBY. I was there for part of one.

[Laughter.]

Senator INHOFE. I think you were. As a matter of fact, you were

stuck in the chair, as I recall, at one time.

[Laughter.]

But I have been concerned about this for some time, and when

the Magnequench came along, and they made the acquisition in

China and then piecemeal, it was moved back to China, and I

would like to read from part of the speech that I made on the floor

at that time referencing this, because I think it is pertinent today.

I said,

I believe that CFIUS does not have a broad enough conception of U.S. security.

I understand that Representatives Hyde, Hunter, and Manzullo expressed similar

views in a January letter to the Treasury Secretary John Snow and chairman of

CFIUS. One example of CFIUS falling short is with Magnequench International, Incorporated. In 1995, Chinese corporations bought GM’s Magnequench, a supplier of

rare-earth metals used in the guidance system of smart bombs. Over 12 years, the

company has been moved piecemeal to mainland China, leaving the United States

with no domestic supplier of neodymium, a critical component of rare-earth

magnets. CFIUS approved this transfer.

Senator Schumer talked about the CNOOC. I was a party the

letter that was objecting to that. At the time, it was very similar.

These rare metals, in the case of Magnequench, are used for smart

bombs. It is something we have to have. There is a closely related

metal that was owned by—there is only one mine in the United

States that had it, and that was owned by Unocal, and of course,

CNOOC was trying to buy, at that time, Unocal. I really believe

that when they withdrew their offer, it was mostly due to the pressure of some of the comments that were made people on this Committee as well as on the Senate Armed Services Committee.

So, I think that there is very definitely a national security issue

here. I also testified before the United States-China Commission on

July 21. Of course, you are going to hear from someone on that

Commission in a few minutes. I explained my concerns with the

CFIUS process. At the time, I had introduced an amendment to the

Defense authorization bill that would have made some of the necessary changes. Now, we know what has happened in the Senate

to the Defense authorization bill, and because of that, I have introduced a standalone committee bill which is before your Committee.

Over the past few months, I have pointed out that the CFIUS

process has ignored some major issues which threaten our national

security, and the GAO has recently issued a report on CFIUS that

is right in line. That was referred to both by you, in your opening

statement, and by Senator Schumer.

I would, however, like just to read just one quote out of that report. It says they have ‘‘limited the definition to export control

technologies or items classified contacts or specific derogatory intelligence on foreign companies.’’ I am aware of at least one instance

where the Department of Defense and Homeland Security believed

national security was at risk, but they were overruled because the

threat did not meet the narrow definition set forth by Treasury.

The language that I have proposed in this bill requires CFIUS to

99

investigate transactions of national security concern, including economic and energy security.

The length of the period of review: Right now, presently, they

have a 30-day that is allotted for CFIUS for a determination as to

whether or not the acquisition should take place. In my legislation,

I have increased that to 60 days, and I think everyone now agrees

that 30 days is not adequate. The Justice Department, a member

agency of CFIUS, agrees with this stating, quoting now, ‘‘gathering

timely and fully vetted input from the intelligence community is

critical to a thorough and comprehensive national security assessment. Any potential extension of time available to the participants

of the collection of that information would be helpful.’’

I think if you just look at it and realize that there have been

1,520 notifications investigated. They have only investigated, out of

1,520, 24. That is all. And only one was actually stopped by the

President. That has to say the system is broken. It does not work.

Some say that this extremely low number is because there are

many opportunities for compensation to alter the nature of their

acquisition, that they are more right than they realize.

Well, here is one of the problems that you have. In this system,

a company can come back, and if it looks like it is going to be

stalled; they can merely take it out and make some changes and

put it back in at their leisure, and it is not a disciplined approach.

We do not have Congressional oversight, and I think Congressional

oversight is an effective tool to fix this problem.

My bill that I introduced requires unclassified quarterly submissions of acquisitions that have occurred over a 90-day period with

a classified section that includes dissenting views, the findings of

the review process to be reported to the Senate Committee on

Banking, Housing, and Urban Affairs and the House Committee on

Financial Services. A layover period of 10 days after a transaction

is allowed to proceed, during which time a resolution of the disapproval can be introduced in Congress. The power of the Chairman of the ranking committee of oversight should be intact.

So in conclusion, I would say that the current CFIUS process is

more than opaque. It clearly is broken, and it is up to the Congress

to fix it. I look forward to what this hearing will reveal and hope

that we have the courage to act on what we learn. A vital part of

the understanding of this issue is a comprehensive analysis of this

that have occurred, and I have two questions along this line that

I am requesting be submitted to the witnesses if not answered here

can be answered for the record. If you would do that for me, Mr.

Chairman, I would appreciate it.

Chairman SHELBY. Be glad to. What are the questions, Senator?

Senator INHOFE. They will be submitted to you.

Chairman SHELBY. Okay; you will submit them.

Senator INHOFE. Thank you very much for the opportunity to be

here.

Chairman SHELBY. Thank you, Senator Inhofe. I know you have

to chair another Committee that you are the Chairman of, and we

appreciate your work very much in this area.

Senator INHOFE. Thank you.

Chairman SHELBY. Our first panel, if you will make your way to

the table, we have Robert Kimmitt, Deputy Secretary of the TreasVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
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ury; David Sampson, Deputy Secretary of Commerce; Robert

McCallum, Acting Deputy Attorney General, Department of Justice; Stewart Baker, Assistant Secretary for Policy, Department of

Homeland Security; E. Anthony Wayne, Assistant Secretary for

Economic Affairs, Department of State; and Peter Flory, Assistant

Secretary of Defense for International Security Policy.

Gentlemen, I want to welcome all of you on behalf of the Committee. All of your written testimony will be made part of the

record, and Secretary Kimmitt, we will start with you to sum up

your points you want to make before the Committee.

STATEMENT OF ROBERT M. KIMMITT

DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

Mr. KIMMITT. Thank you, Mr. Chairman.

Mr. Chairman, Senator Allard, Senator Hagel, good morning.

Thank you for this opportunity to testify. As the Chairman mentioned, I am Robert Kimmitt, Deputy Secretary of the Treasury

since August of this year.

This morning, I am speaking on behalf of the Administration and

the Treasury Department and the Committee on Foreign Investment in the United States, and I am very pleased to be joined by

my colleagues representing the member agencies of CFIUS.

Mr. Chairman, we regret the delay in scheduling this hearing,

but in light of the significance of the issues we are discussing, we

thought it was important both substantively and procedurally for

officials from the policy levels of the CFIUS agencies to testify.

As you noted, 2 weeks ago, the Committee heard from the GAO

regarding its most recent report on CFIUS. We appreciate the time

and resources that GAO dedicated to this report, and although we

do not agree with all of the assertions in the report, we do recognize the need to review current CFIUS policies and operating procedures, especially those mentioned in the GAO recommendations.

The witnesses here this morning will endeavor to explain the

current process in order to reassure this Committee, the Congress,

and the American public that CFIUS is committed to protecting

our national security.

Mr. Chairman, we wholeheartedly agree with your recent comment that national security cannot take second place to purely economic considerations. Throughout my years of government service,

starting with combat duty in Vietnam 35 years ago, continuing

through 8 years of service on the National Security Council staff,

I have based my career on the belief that protecting and advancing

national security is a Government official’s highest priority.

Let me assure you that my colleagues and I fully appreciate the

national security concerns voiced by the Members of this Committee and other Members of the Congress. In my view, the concept

of national security includes both traditional foreign policy and defense criteria and also economic considerations. Indeed, we believe

that there is an inherent link between our national security interests and a strong U.S. economy that facilitates free and fair trade,

market-based exchange rates, and the free flow of capital across

borders.

An open investment policy, as your opening statement, Mr.

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nomic policy, because foreign investment in the United States enhances competition, provides capital, improves productivity, and

creates jobs, over 5 million nationally.

Additionally, picking up on Senator Schumer’s point, promotion

of an open investment policy at home enables us to advocate for

similar opportunities for U.S. companies to invest and expand

abroad.

As an interagency group, CFIUS provides a forum for discussion

and, yes, debate among members representing 12 different executive departments and offices. In addition, important agencies that

are not formal members of CFIUS such as the FBI and offices

under the Director of National Intelligence play a critical role, either by providing CFIUS with intelligence on international

acquirers or by advising CFIUS on counterintelligence and foreign

espionage. Further, the Departments of Energy and Transportation

have actively participated in the consideration of transactions that

have an impact on the industries under their respective jurisdictions.

The give and take among members leads to a comprehensive examination of transactions from all relevant agencies. There is a

natural competition of differing perspectives on the part of CFIUS

members, and vigorous debates and constructive friction among

members helps CFIUS ultimately determine the best possible outcome for our national security. If consensus cannot be reached, Mr.

Chairman, then the President must make the final determination

regarding national security.

As I noted at the outset, the new senior CFIUS team is involved

in an effort to improve the process, drawing on your comments, the

recommendations of GAO, and suggestions I have received from

agency colleagues. First, we believe that CFIUS requires high level

attention from Treasury and the other members, and the departmental representation at today’s hearing is an important indication

of our common commitment in this regard.

Second, when meeting at the deputies’ level, I will chair CFIUS,

while the Under Secretary of Treasury for International Affairs or

his designee will represent the Treasury Department during consideration of a particular transaction. We think that this change

will enable me to manage the process to ensure that all viewpoints

are identified and given the same equal, careful consideration.

Third, we are looking carefully at ways to allow more time to assemble the information needed to develop agency positions during

the CFIUS review process, especially, Mr. Chairman, for that small

number of cases that your opening statement makes clear raise legitimate national security concerns.

Last, and picking up on your important point regarding the Congress’ oversight role, we support the idea of enhancing the transparency of the CFIUS process through more effective communication with Congress, while recognizing our shared responsibility to

avoid the disclosure of proprietary information that could undermine a transaction or be used for competitive purposes. We are

very open to suggestions on ways to improve the transparency of

the process such as more regular reports to Congress and Congressional briefings.

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Mr. Chairman, we are at a time of both challenge and opportunity for our national security interests. Through an improved

CFIUS process, we will continue to protect our national security in

the context of an open investment policy that recognizes the critical

link between national security and economic prosperity.

I thank the Committee for this opportunity to testify, and I look

forward, after my colleagues’ statements, to your questions.

Chairman SHELBY. Mr. Sampson.

STATEMENT OF DAVID A. SAMPSON

DEPUTY SECRETARY, U.S. DEPARTMENT OF COMMERCE

Mr. SAMPSON. Mr. Chairman, Senator Allard, Senator Hagel, on

behalf of Secretary Gutierrez, I want to thank the Committee for

this opportunity to appear before you today. As you know, the Department of Commerce has been a member of the Committee on

Foreign Investments in the United States since the panel was created in 1988.

CFIUS reviews are carried out by our Exon-Florio working

group. The International Trade Administration chairs the group

and coordinates departmental responses to CFIUS. ITA brings to

the table extensive knowledge from private industry, from technological capabilities of individual companies to market positions and

future prospects. This enables ITA to look at things in the bigger

picture when assessing both the commercial and national defense

implications of foreign acquisitions.

Other members of our working group include the Bureau of Industry and Security, the Technology Administration, the Economic

and Statistics Administration, the National Telecommunications

and Information Administration, and the Office of General Counsel.

As a CFIUS member, a key part of our work is identifying any

business transactions with perceived national security implications

and when appropriate requesting a review and subsequent action

by CFIUS.

We have a formalized process that requires members of our

working group to report any potential acquisitions by foreign companies that may be of interest to CFIUS, especially those that involve smaller or privately held U.S. firms that may not have been

reported widely in the media.

In addition to the International Trade Administration, Commerce’s Bureau of Industry and Security is a key player in the

CFIUS process. It assesses the national security, defense industrial

base and export control implications of all proposed foreign acquisitions of U.S. companies that are under CFIUS review. The goal is

to ensure that the U.S. defense, industrial, and technology base

will not be compromised by foreign acquisitions.

As a part of this process, the Bureau of Industry and Security

determines whether the parties to an acquisition have violated U.S.

export control laws and whether significant sensitive technology is

being acquired. The Bureau evaluates a foreign company’s plans for

managing its compliance with U.S. export control laws, and it

works closely with the Departments of Defense, Justice, and Homeland Security as well as the intelligence community in assessing

whether national security would be compromised as a result of foreign access to key U.S. firms. For example, if an acquisition were

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in the telecommunications industry, we would determine the security implications for the Nation’s communications infrastructure.

Finally, Mr. Chairman, let me say that we believe that while the

CFIUS process is working well, we realize there are opportunities

to improve it, and we look forward to working with you in that effort. I look forward to answering your questions at the appropriate

time.

Chairman SHELBY. Secretary Baker.

STATEMENT OF STEWART BAKER

ASSISTANT SECRETARY FOR POLICY,

U.S. DEPARTMENT OF HOMELAND SECURITY

Mr. BAKER. Thank you, Mr. Chairman, Members of the Committee. I represent the newest member of CFIUS, and I will try to

be the briefest, if you will allow me to submit my prepared remarks.

Chairman SHELBY. Your prepared remarks will be made part of

the record.

Mr. BAKER. Many thanks.

When we joined the Committee, we certainly noticed that timing

was certainly an issue that we had to be concerned about.

We have done two or three things in the context of CFIUS that

I think have eased many of the concerns we had. We now do research well in advance on potential mergers and acquisitions and

takeovers that may come before CFIUS. So well before any filing

has been made, we have already begun to do the research and

share that with other CFIUS members.

Also, we have worked hard to encourage a practice that I think

sophisticated companies and sophisticated counsel have begun to

adopt pretty widely, which is coming in early and providing briefings well before they have made any filings to let CFIUS members

know what the transaction is and to try to get some feel for what

the CFIUS issues might be. That is a practice that we think should

be encouraged. And finally, on the mitigation of the national security concerns, we have looked very hard at that, and one of the concerns that we had was that we should focus very hard on actually

enforcing those agreements, making sure that there is a consistent

and aggressive approach to enforcement. We have devoted a lot of

resources to that, all of that inside the context of the existing statute, which is quite flexible, and I agree with Deputy Secretary

Kimmitt: We can do a lot inside the context of this statute to make

it work well.

Chairman SHELBY. Secretary Wayne.

STATEMENT OF E. ANTHONY WAYNE

ASSISTANT SECRETARY, BUSINESS AND ECONOMIC AFFAIRS,

U.S. DEPARTMENT OF STATE

Mr. WAYNE. Thank you very much, Mr. Chairman, Senators Allard, and Hagel. It is a great pleasure to be here and talk about

the role of the Department of State in the Committee on Foreign

Investment in the United States.

I think as you all know, a key part of the mission of the Department of State is to create a more secure, democratic, and prosperous world for the benefit of the American people and our friends

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and partners internationally, and we see the work that we do in

support of the Exon-Florio statute as a very important part of that,

and we take that mission and that job very seriously.

We bring to the CFIUS process the expertise and experience that

we have in dealing with international economic issues as well as

national and international economic security policy. And as you

yourself said, Mr. Chairman, these are mutually reinforcing.

Security and prosperity are interdependent, and when one is

lacking, the other will be undermined in time. We believe that our

internal processes in the Department of State ensure that each and

every CFIUS case receives careful scrutiny from a wide range of offices. We in the Bureau of Economic and Business Affairs take the

lead in coordinating this effort, but we work with the Bureau of Political and Military Affairs, the Bureau of International Security

and Nonproliferation, the Bureau of Diplomatic Security, the Bureau of Intelligence and Research, the Office of the Legal Advisor,

and the appropriate regional bureaus.

We also bring other experts in as needed, so we try to get an

overarching view of both the economic and the security and the

geopolitical aspects behind each and every case, and of course, in

this, we rely tremendously on the expertise of our embassies overseas, so we can really understand what is the context, political and

economic, of the particular case that is brought together.

We rely on our colleagues, who have responsibilities on defense,

trade, and nonproliferation, and those who are working to fight terrorist financing and to counter terrorism. We think that just to

note that, of course, the Department, like many of our colleagues,

have security interests that extend well beyond CFIUS. In our

case, the Arms Export Control Act and its implementing regulations and the International Traffic in Arms Control regulations, the

role we have there, give the State Department independent authority to regulate the export of defense articles and services and provide for criminal and civil penalties, whether a company operating

in the United States, a U.S. company, is foreign-owned or not if

these provisions of these two key statutes are violated.

And pursuant to that, we do manage a registration system of all

manufacturers, exporters, and brokers of defense articles and services and track foreign ownership as a part of this process. And we

bring those elements into any CFIUS review process where we are

asked to participate.

All CFIUS members here, I think, share the goal of assuring that

no transaction reviewed by CFIUS leads to a compromise of national security, and although confidentiality requirements and

other factors prevent me or my colleagues from going into specific

cases in an open hearing, I can assure you that in my experience,

the process has enabled the U.S. Government to take appropriate

action to address potential threats when they have arisen.

Now, as you said, Mr. Chairman, preserving both economic security and prosperity in a post-September 11 world is a pretty complex challenge, but it is critical that we do it right, that we learn,

that we adapt, that we get smarter and better in doing it. The belief in an open investment policy is essential to our economic prosperity, and that is a longstanding belief that goes back to the very

origins of our republic and has been borne out by the facts.

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The U.S. openness to foreign investment has helped make the

United States the world’s most successful economy, which in turn

provides the wealth and technology needed to support the world’s

most powerful and best equipped military that ensures our security.

Therefore, as you said, Mr. Chairman, and as Secretary Kimmitt

said, we have welcomed, and we continue to welcome foreign investment. In fact, I think your State and the other States represented by the Senators here have profited significantly from foreign investment coming into the United States, creating well paying jobs.

The free flow of capital also makes the rest of the world economically stronger. It creates opportunities overseas for U.S. investors.

And this is not just sound economic policy, but it is also part of our

international obligation in many cases. We have enshrined the

principle of providing foreign companies operating in the United

States the same treatment U.S. companies receive in investment

treaties and trade agreements signed with many foreign companies.

Our openness and the benefits it has provided for us have been

very effective in encouraging others around the world to emulate

us, to open their own markets, and with my colleagues at Commerce, Treasury, USTR, and at the State Department, we work

very hard on a regular basis to seek to remove the discriminatory

investment barriers in other markets and to put in place strong

protections for American investors and their investments overseas.

In conclusion, the Department of State believes that Exon-Florio

and its implementation by CFIUS have strengthened our national

security while avoiding unnecessary and detrimental restrictions

on our open investment policy. I think as you know, Mr. Chairman,

the President and Secretary Rice have instructed all of us at the

State Department as well as my colleagues in other agencies to

make sure that we are doing everything possible to protect the national security of the United States and the American people and

to promote the kind of global economic policies, including open investment regimes, that will maximize U.S. prosperity, and I want

to assure you that we take this mission very seriously.

Thank you very much. I look forward to the opportunity to answer your questions.

Chairman SHELBY. Thank you.

Secretary Peter Flory.

STATEMENT OF PETER C.W. FLORY

ASSISTANT SECRETARY,

INTERNATIONAL SECURITY POLICY,

U.S. DEPARTMENT OF DEFENSE

Mr. FLORY. Mr. Chairman, Members of the Committee, thank

you for the opportunity to appear today to discuss the impact of

Section 21 of the Defense Production Act, better known as the

Exon-Florio Amendment on National Security.

Mr. Chairman, it is a particular pleasure to be here. I have spent

many hours on hearings on related subjects with you on the other

side of the table and during your time as Chairman of the Intelligence Committee. I am pleased to be before you today.

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Chairman SHELBY. Also with Senator Allard.

Mr. FLORY. And Senator Allard indeed and Senator Inhofe as

well. Different perspective but also happy to be here.

Sir, I just would echo what you said at the beginning. National

security cannot take second place. This is something we in the Defense Department feel very clearly, and I know my colleagues here

all have the same feeling.

Foreign investment is a good thing for the country; in many

cases, it is good for the defense industry. It helps us maintain the

viability and diversity of our supplier base. But it is important that

in dealing with foreign investment that we protect the technology,

the industrial base, and the security of the critical infrastructures

we rely on to carry out our mission and to keep our war fighters

second to none. So again, this is somebody that we at DoD take

very seriously, and I know all of my colleagues today have the

same view.

Just to give you some perspective on the particular role of the

Defense Department in the CFIUS process, when it comes to reviewing a foreign acquisition of a U.S. company that has been proposed, there are a number of factors that the Defense Department

looks at before taking a position. Some of these, although not necessarily all, the significance of the technologies that are possessed

by the firm, are they state-of-the-art or otherwise militarily critical;

the importance of the firm to the defense industrial base; possible

security risks that might be posed by a particular foreign firm, for

example, is it controlled by a foreign government? If so, by which

government? Does the firm have a record of export control violations or other troublesome transactions? Whether the company to

be acquired is part of the critical infrastructures upon which we

rely. And, can any potential national security concerns posed by a

proposed transaction be mitigated and eliminated by the application of risk mitigation measures either under the Defense Department’s own regulations, through the CFIUS process, and negotiations through the parties?

Within the Department of Defense, there are a number of offices

and agencies that have a part to play in this decisionmaking together with the military services. I will just hit some of the main

ones. The Defense Technology Security Administration, DTSA,

which works under me in the Office of the Under Secretary of Defense for Policy, plays a leading role as our representative on

CFIUS and is responsible for the management, coordination, and

formulation of the Department’s position on CFIUS cases. The Office of the Under Secretary of Defense for Acquisition, Technology,

and Logistics, AT&L, determines if a U.S. company involved, for

example, provides a service or a product that is critical technology

and evaluates the transaction’s impact on the defense industrial

base.

The Office of the Assistant Secretary of Defense for Networks,

Information, and Integration, better known as NII, performs vital

technical reviews of filings that involve critical information and

telecommunications infrastructures. It does this in cooperation

with agencies such as the National Security Agency and the Defense Information Systems Agency.

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And the Office of the Under Secretary of Defense for Intelligence,

in cases involving defense contractors performing classified work, it

is the Office of the Under Secretary of Defense for Intelligence,

USDI, that assesses whether the Defense industrial security regulations are adequate to mitigate potential national security concerns that might arise as a result of foreign control of U.S. defense

contractors.

Mr. Chairman, that concludes my opening statement. I look forward to your and the Committee’s questions.

Chairman SHELBY. Robert McCallum, Acting Deputy Attorney

General on behalf of the Department of Justice.

STATEMENT OF ROBERT D. McCALLUM, JR.

ACTING DEPUTY ATTORNEY GENERAL,

U.S. DEPARTMENT OF JUSTICE

Mr. MCCALLUM. Mr. Chairman, Senator Allard, and Senator

Hagel, I appreciate the opportunity to be here and to discuss the

Department of Justice’s role in implementing the Exon-Florio

Amendment.

The Department of Justice has worked diligently within CFIUS

to implement Exon-Florio effectively to protect national security interests, and the effective implementation of Exon-Florio is obviously critically important to the Department’s national security

mission, and it is a responsibility I want to assure all Members of

the Committee that all members of CFIUS take very seriously.

To fulfill its mission to defend the interests of the United States

to ensure public safety and to prevent crime, the Department of

Justice has set goals to strengthen its counterintelligence capacities, with a focus on protecting sensitive U.S. information and

technology relating to national defense and critical infrastructure

and to protect the Nation’s communications systems by preventing

and combatting cybercrime and protecting the privacy of U.S. communications.

Currently, the Federal Bureau of Investigation has as its second

and third highest priorities to protect against foreign intelligence

operations and espionage and to protect against cyber-based attacks and high technology crimes.

The Department must ensure that it has the necessary tools and

resources to accomplish its mission and to meet these goals, and

nothing is more important to our arsenal than the ability to conduct lawful electronic surveillance without risking interference by

foreign entities and the premature or unauthorized disclosure of

targets of surveillance.

The Department of Justice is using all of its traditional techniques and resources to address national security risks. ExonFlorio is a very important national security tool to protect national

security. Through its involvement in the CFIUS process, the Department of Justice has carefully examined potential threats to national security posed by specific foreign acquisitions of U.S. businesses, and where appropriate, we have developed measures to

mitigate those risks.

Along with other interested member agencies of CFIUS, the Department of Justice has negotiated numerous security agreements

to mitigate potential threats to national security caused by those

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transactions. These security agreements are typically the result of

negotiations between companies involved in the transaction and

those CFIUS member agencies whose national security responsibilities are implicated.

In addition to the Department of Justice, the Departments of

Homeland Security and Defense are often parties to these agreements. These agreements vary in scope and purpose, depending on

the facts of each particular transaction and are negotiated on a

case-by-case basis to meet the particular national security interest

that is at issue. For transactions that involve the communications

sector, these agreements are often negotiated in conjunction with

Executive Branch review of applications submitted to the Federal

Communications Commission.

Along with the Department of Homeland Security, the Department of Justice plays a key role in monitoring and enforcing the

security agreements to which it is a party. The Department has

brought together its diverse resources to address the complex

issues raised by a variety of transactions coming before CFIUS.

The Department’s Criminal Division has the primary responsibility

at a policy level for CFIUS matters, and it closely coordinates the

involvement of various Department components in that process.

These components include the FBI, which both coordinates with

the intelligence community and provides operational and analytical

support in the areas of counterintelligence, critical infrastructure

protection, privacy protection, and electronic surveillance.

The Computer Crime and Intellectual Property Section is involved and provides expertise relating to the United States communications systems, cybercrime, and privacy protections. It is the Office of Enforcement Operation and the Narcotics and Dangerous

Drug Sections which provide expertise related to electronic surveillance issues as well.

The Counterespionage Section provides legal guidance on counterintelligence issues. The Office of Intelligence Policy and Review

assists with intelligence community coordination, and the

Counterterrorism Section assists in reviewing transactions that

may implicate terrorist concerns. In addition, the Antitrust Division has provided support and input in appropriate cases regarding

competition issues, and the Office of the Chief Information Officer

has provided assistance on occasion in technology matters.

By bringing all of these diverse resources and this extensive expertise to bear, the Department, we believe, has maximized its

ability to participate in the effective implementation of Exon-Florio.

Again, I would like to thank you, Mr. Chairman, and the Committee Members for your interest in ensuring that Exon-Florio is

used as effectively as possible and for giving the Department the

opportunity to explain its role with respect to this important national security safeguard.

The Department of Justice is keenly aware of the significance of

its responsibilities under Exon-Florio, and we have and continue to

work diligently to meet those responsibilities. The Nation’s security

and the safety of our citizens are always the Department’s highest

priority, so I thank you for allowing me to be here, and I will be

happy to try and answer your questions.

Chairman SHELBY. Thank you. I thank all of you.

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Each of you has had the opportunity to study the GAO report.

The concerns raised in that report, according to the Treasury-led

interagency response, are largely misplaced. Information gleaned

from press accounts of individual cases over the years, previous

work performed by GAO on this issue, and Committee research,

however, all point to a system in need of improvement.

I understand that there has been considerable effort made to ensure that each of the Government officials testifying today supports

the status quo, and Secretary Kimmitt, you are in particular aware

of the Committee’s concerns with statements attributed to Treasury Department personnel questioning the professionalism of GAO

as well as its methodologies and findings. For the record here, I

would like each of you to share with the Committee your views on

whether there are improvements to the current system that should

be implemented. Otherwise, the Committee would be led by this

panel to believe that the system is perfect.

Secretary Kimmitt.

Mr. KIMMITT. Mr. Chairman, I will first start by saying that the

views that were attributed to an unnamed source in a single newspaper about the GAO report are neither my views nor the Department’s views. As I said in my comments, there are some assertions

made in the GAO report that I would take exception with. I will

mention one.

Chairman SHELBY. Okay.

Mr. KIMMITT. But on balance, I think they try to do a very professional job, and particularly, when one looks at their recommendations, it is a good starting point for our continuing discussions on improvements to the process.

I would note that GAO has been involved in this process ever

since the process has existed. They have a wealth of information

on this, and while we might not agree on everything, I am open

to talking to anybody who has good ideas, especially in an area as

important as protecting the national security.

Chairman SHELBY. But you do not think the system is perfect,

is it?

Mr. KIMMITT. The system is not perfect. No system is perfect, Mr.

Chairman.

Chairman SHELBY. Do you think this one is close to perfect?

Mr. KIMMITT. This one? No, I do not think it is close to perfect.

I think that there is an opportunity in every governmental process,

frankly, and in every business process to look for ways every day

to make the process better and adapt to the new realities.

Chairman SHELBY. We are focusing on this process now.

Mr. KIMMITT. Right, so let us focus on this one.

I would say that in the three areas that the GAO recommendations talked about, I think that is a very good starting point for our

discussion. One would be transparency. National security processes, as you know very well, and your two colleagues know well

from their service both on this Committee and elsewhere, tend to

be somewhat opaque, but I think we can certainly have a much

better line of communication with the Congress on the CFIUS process.

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Chairman SHELBY. Do you believe that the Committee of jurisdiction, which is this Committee, should know what is going on? To

carry out the act that we have oversight responsibilities for?

Mr. KIMMITT. Exactly. As you said and as I picked up in my comments, I think that we have an obligation to help you live up to

your oversight responsibilities. We both have an obligation to discharge our responsibilities.

Chairman SHELBY. Right.

Mr. KIMMITT. We will strike a balance.

I think we need to find a better way to communicate more frequently, more fully with you; also, all of my colleagues long before

this hearing was scheduled have told me that the timing was a

problem. I think that we have to look for ways, and I think Secretary Baker’s comment about what we can do even before the formal filing to begin a process is good.

Chairman SHELBY. Sure.

Mr. KIMMITT. And then, I think it was correct for the GAO to

point to the question of definition of national security, but that is

the one place I have to take major exception with a point that they

made and, frankly, that Senator Schumer made, this notion that

somehow Treasury has narrowed the definition of national security.

I have been in this business for 30 years. I have not yet seen a

definition of national security. It is a dynamic concept that defies

static definition. For example, we would all agree that national security and challenges thereto are vastly different today than they

were pre-September 11.

I think the way to ensure that the most current and comprehensive view of national security is taken into account in each transaction is to have the agencies at this table and others who are

charged with developing and protecting the national security of the

United States are at the table and have a fair opportunity to put

those views on the table.

That is why the Department of Homeland Security is a member

now and was not before, because its important responsibilities are

integral to the national security, and last, at the same time, picking up on my first point, I think it is very important for us to learn

from both what GAO has said, what the Committees of jurisdiction,

especially, have said should be factors taken into account. But

again, if you tried to define national security, I promise you, the

day you define it, it will be out of date. It is a dynamic concept that

I think you would want us, just as you do, to look at it in light of

the facts and circumstances both of the transaction in front of us

and the world in which we live.

Chairman SHELBY. Secretary Sampson, do you have any comment?

Is it perfect?

Mr. SAMPSON. It is not perfect.

This is the fourth GAO report. I found the report, which I read,

to be professional in nature and scope. I think, first of all, there

is a need for the leadership of CFIUS, at the highest levels, to be

engaged. I think we are making that commitment to you by our

presence here today and our discussions with each other.

The points that I would make with respect to the GAO report

that I found did not resonate with my experience was that someVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00114 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
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how, Treasury either imposed a definition upon the agencies; that

has certainly not been our experience at Commerce. And particularly with the Bureau of Industry and Security, that raises issues

with respect to control of products involved in a transaction, the export of technical data, or the maintenance of an adequate defense

industrial base.

And the other point that I thought may have missed the mark

to some degree is a connotation that the very robust dialogue and

debate that occurs within CFIUS is somehow indicative of a system

not working or that Treasury is trying to squelch that. I find that

robust debate to be a sign that each agency feels fully empowered

to bring their equities to the table and that resolution is achieved

on a consensus basis, or else, the decision goes forward to the

President.

And so, those would be my observations about the report, but

clearly, there is opportunity for improvement in the area of communication with Congress.

Chairman SHELBY. Secretary Baker, do you have a comment?

Mr. BAKER. Yes, I will certainly join the parade of people who

think that the process is not perfect. But I would also say that it

is a very flexible statute. Many of the procedures have evolved over

time. Secretary Kimmitt has suggested another one in which he

would chair the committee to allow a fair umpire for a debate that

can go forward with Treasury expressing its own views.

All of the procedures that I talked about for improving the insight into transactions well in advance of a filing are things that

are well within the scope of the current statute. So, I would suggest that in fact there are improvements that are possible, but they

can take place within the context of this statute.

Chairman SHELBY. Secretary Wayne.

Mr. WAYNE. In part to echo my colleagues, but I think what we

have seen over the past several years is that as our sense of national security has expanded, especially in the post-September 11

era, the Committee has worked hard to adapt to those new challenges, to learn new ways of interacting.

Chairman SHELBY. Sure.

Mr. WAYNE. And part of that vigorous debate that we have had

is really showing the health of the process and the flexibility of

working through these issues as we go forward, because there is no

doubt that we are looking much wider now at implications than we

might have in the past. And the statute does allow that flexibility.

This kind of discussion and the kind of debate spurred by the GAO

report is healthy in that process, and we will work with you to

make it better.

Chairman SHELBY. Well, we are all for trade, but should we subordinate our national security, Secretary Flory, in any way to economic interests?

Mr. FLORY. Mr. Chairman, we should not subordinate our national security to anything. I think it is a fair point, as others have

pointed out, that economic security is an element of national security, but we know what we are talking about here.

Chairman SHELBY. We are talking about two different things

here, now, I understand that. My emphasis is national security. We

know we have to buy and sell. We trade and all of this. That is

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given, and we should not hide behind national security on something as long as there is reciprocity out there in the world with our

partners.

Mr. FLORY. No, sir, I agree completely with that statement.

With respect to the GAO report, I think it has made a very valuable contribution. I think that one of the things you see here today

is a high level of attention and a high level of commitment to work

across the membership of the CFIUS to look at the comments of

the GAO, to review them and see what changes in policies and procedures are required, as Secretary Kimmitt has committed to do.

I think this is a good thing. I think it would have been a smart

thing to do even if there had not been a GAO report. Having a

GAO report helps focus attention on seizing these problems early.

I know. I have been working this process for 2 months. We have

not had a CFIUS case in that time, so Secretary Kimmitt and some

others are also relatively new to their jobs.

Chairman SHELBY. But you are not new to the issue.

Mr. FLORY. I am not new to the issue, sir, not at all, no. We were

looking at very similar issues a few years ago. But I have found

it valuable, because as I say, it has focused attention, it has focused attention at a very high level. It has achieved a commitment

to grapple with the issues raised by the GAO report and others

that we may find. I think people are approaching this in a very

constructive and open-minded sense.

I would make one comment beyond that on the report that I

think is potentially misleading.

Chairman SHELBY. You are referring to the GAO report.

Mr. FLORY. The GAO report, yes, sir. The tone of the report suggests that the failure to block more transactions, the failure either

to get to the President more transactions or for the President to actually veto more transactions is in itself a symptom of the weakness of the process. I do not know for a fact that it is, or it is not,

but I do tend to think that the purpose of the——

Chairman SHELBY. But you are not telling us the process is perfect.

Mr. FLORY. No, sir. I did not want to bore you with another assertion.

Chairman SHELBY. Do not do that.

Mr. FLORY. But for the record, I do not think that the process

is perfect. But what I do think is that the purpose of the process

is to make sure that any transaction that goes forward is one that

meets our national security requirements.

Chairman SHELBY. Absolutely.

Mr. FLORY. And if that can be done through negotiation and risk

mitigation, which appears to be what has happened in the majority

of cases, that is not necessarily a bad thing. I think it is appropriate for us to scrub the process and look at it and say is there

something that might have gotten through that maybe should not

have?

But I think that the GAO report, maybe by seizing on that one

metric that has the potential to mislead, and I think what we need

to do is look at it and say, look, what we really care about here

is have we made sure that any transactions that take place are

ones that meet our national security needs? And if it turns out that

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the answer to that is yes, then, I think I would say that at least

that far, the process seems to have worked reasonably well.

Chairman SHELBY. Mr. McCallum, how does Justice’s role play

in this? FBI is part of Justice.

Mr. MCCALLUM. It is, it is, Senator, and just so that i can answer

the first question and get into the area of boring you with the response that Secretary Flory eventually gave, we at the Department

of Justice agree that the system is not perfect, and all systems can

be improved. And we support Secretary Kimmitt’s call for ways to

look within the process to improve it.

Within the Department of Justice, as you have correctly pointed

out, we do have various components, including the FBI, and the

lead component for CFIUS purposes, as I indicated in my opening

statement, is the Criminal Division. But we bring to bear within

a coordinated effort under the leadership of the Criminal Division,

the FBI, and the various other areas that I mentioned in my opening statement, Senator.

Chairman SHELBY. I am going to recognize Senator Allard first.

Go ahead.

Senator ALLARD. Thank you, Mr. Chairman.

I would like to have each one of the panel members respond to

this, because you all represent different Departments, but has, to

your knowledge, has the current law on CFIUS come into conflict

with any other existing laws?

Mr. KIMMITT. Senator, the way I would answer that is if you look

at the way Exon-Florio was written. It was written to ensure that

in those instances where national security concerns were raised but

not addressed by other laws that it provided a backstop to ensure

that no transaction went forward that would harm the national security.

So, I think we have worked very hard, and each of my colleagues

mentioned laws for which they have primary jurisdiction that are

also part of any acquisition process. CFIUS was really, again, created, and the Exon-Florio provision was created, really as a backstop to ensure that where other laws could not successfully address

national security concerns that the CFIUS process was to step in

to make sure that those were fully addressed.

Senator ALLARD. And how often, then, does the CFIUS come into

play within a year, on average?

Mr. KIMMITT. On average, I think that the formal process itself

is engaged probably about 50 times a year on average recently. It

used to be, in the early days, in 1988, 1989, and 1990, that it was

in the hundreds.

What has happened, actually, is there has developed in the legal

community, the investment banking community, in the business

community, an awareness of what one has to do to pass CFIUS

muster. So there is an awful lot of self-correction that takes place

right now. As Secretary Baker and Secretary Flory said, a lot of informal contact that takes place, including under those other jurisdictions, even before someone comes to CFIUS. In many cases,

transactions just go away, because people know that there is a hurdle that they will not be able to cross.

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But again, it is on average about 50 cases a year is what has

been running in the last, let us say, in this Administration, 50 to

60 a year.

Senator ALLARD. Do we know how many instances where people

have come in, thought they might go through the CFIUS process,

but then withdraws their application?

Mr. KIMMITT. In this Administration, so if I look real quickly,

one, two, three, four, five, let us say there have been 250 cases notified since the beginning of President Bush, Sr’s Administration,

the information I have available to me, and I am relying on people

who were there long before August of this year was that there were

12 withdrawals of those 250.

Senator ALLARD. Okay; and were they, again, those were withdrawn because of the complication of the process? Is that why they

withdrew?

Mr. KIMMITT. It is a very good question, Senator, and I think this

was actually an issue that the GAO said in their report had two

aspects to it. I think one part of the withdrawal process is to get

around some of the time constraints, that you are getting close to

the end of the 30-day process; either Departments need more information before they can make a decision, or the companies and the

Departments need more time to work out mitigation procedures.

But you have a good chance of getting that done so that you do not

have to go into a formal, lengthier investigation, and that is good;

that is, that it allows the time process a little bit of flexibility.

At the other side, the GAO rightfully pointed out that you have

to be a little bit concerned if someone withdraws and then does not

refile, particularly in the circumstance where the transaction then

goes forward. Now, we have ways, and each of the Departments

and agencies has responsibility for continuing to monitor transactions, whether they have been approved by CFIUS or not. But I

will just tell you, having sat on boards of directors both at home

and abroad, I cannot imagine in the post-Sarbanes-Oxley world,

with all deference to your Ranking Member, Mr. Chairman, how

any director could give the go-ahead on a transaction that had been

notified, withdrawn, and then not refiled, because the President’s

authority to unwind that transaction is without limit if the person

has not received approval of the process.

So, I actually think that that very powerful nonjudicially reviewable authority of the President to stop or unwind transactions acts

as a real leavener on the process, especially in the withdrawal case

but even in the voluntary notification circumstance.

Senator ALLARD. Now, there was an amendment to be proposed

or possibly was proposed on the Defense authorization bill pertaining to CFIUS, and then, that has been introduced as a separate

piece of legislation. Have you had a chance to review that piece of

legislation as it was reintroduced as a standalone bill?

Mr. KIMMITT. I have looked at it, Senator Allard. As Senator

Inhofe had said, he had put one measure in; then, because of the

complexities of the Defense authorization bill, he has put in another standing bill. I think, again, what I would say is if you look

at this plus the GAO report, it seems that we are coming to some

of the same areas that we need to look at carefully; for example,

the first thing Senator Inhofe said it does is it changes the CFIUS

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review period from 30 to 60 days, so it goes back to that time question.

I think we have to think very creatively about how to give the

agencies more time, but remember, about 95 percent of these cases,

as the Chairman said, the vast majority do not present troubles,

get cleared quite easily within the 30 days.

I think what we have to do is to find a way to get those out of

the way and focus in on that small number of cases that really

raise national security concerns. My concern any time in the Government is if you move something from 30 to 60 days, then, things

are going to get done on day 59 rather than day 29, and I think

we are going to spend more time on cases that do not raise major

concerns, and we will have less time on the ones that raise concerns.

Senator ALLARD. But we still give them an opportunity to withdraw voluntarily, and then, if they do not come and reapply, it

raises a big red flag out here is the way I——

Mr. KIMMITT. Again, I just cannot understand how a director

could discharge her or his fiduciary responsibility to allow that to

go through.

Senator ALLARD. So even though you run into time limit problems with the 30 days, then, they can withdraw, and then frequently, they come back and refile.

Mr. KIMMITT. That is my understanding of what the recent experience has been, although I would mention, as the Chairman said,

you are going to have some practitioners on in the next panel. I

think that would be a very good question to ask Mr. Marchick who

practices in this area, because he will be able to give you that view

from the point of view of somebody who has to advise the client.

Senator ALLARD. Now, those that you have turned—how many of

them have voluntarily withdrawn and then come back and refiled

later? Have they all done that, or have those 12 that you just mentioned just been permanently withdrawn?

Mr. KIMMITT. What I have, my statistics indicate, and again, I

am operating on the basis of transactions that took place or were

proposed before I took office or before most of us did. Again, in this

Administration, roughly 250 cases, 12 withdrawals, 10 refilings.

And there were two that were not refiled, and I would have to,

if I could, for the record, provide you additional information on

those two. What I could say for the record is that if an agency

raises a concern that leads to a withdrawal, I think I can speak for

my colleagues in saying whether that is refiled or not, that is a

concern that is going to be of continuing interest to the agency,

particularly if those companies decide to go forward without the

CFIUS or Presidential approval.

Senator ALLARD. Thank you.

I see my time has expired, Mr. Chairman.

Chairman SHELBY. Thank you.

Senator Hagel.

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you. Gentlemen, welcome.

Let me ask you, Secretary Kimmitt, and I would welcome additional response if you feel compelled to do so to this question from

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the other witnesses. In your opinion, your knowledge of CFIUS

since its inception, has there ever been a situation where this country’s national security interests have been jeopardized by CFIUS

not acting to break up a foreign acquisition?

Mr. KIMMITT. Senator Hagel, not to the best of my knowledge. I

was involved in this process even before Exon-Florio passed, and

although I have been out of Government for 12 years, I have continued to watch this very carefully. I think I can say certainly, the

view of the Treasury Department is that the answer to your question would be no, that there has never been an instance where a

transaction involved in the CFIUS process compromised or undercut the national security of the United States.

And I would say, based on my reading also of not only the most

recent GAO report but also their reports going back to the mid1990’s, there was never an allegation that there had been harm to

the national security, but rather we needed to continue to have

procedural improvements to ensure that the possibility never occurred.

Senator HAGEL. Anyone wish to add to that or take issue with

Secretary Kimmitt?

Mr. FLORY. I am not aware of any incidents of that type.

Mr. KIMMITT. Thank you, Secretary. Are any of you aware of any

instances where any member of CFIUS had their national security

interests overruled by Treasury?

Mr. SAMPSON. No.

Senator HAGEL. No? There is not an instance that any of you can

think of?

Mr. KIMMITT. Excuse me, Peter, go ahead.

Mr. FLORY. Senator, from my knowledge of the process, which is

based on the GAO report, which recounts a number of debates, in

a number of cases, it suggests that a national security interest was

overruled.

I have talked with my staff who have been working this, and my

understanding is that in any case where the Department of Defense may have had concerns, or components of the Department of

Defense may have had concerns, that the eventual solution that

was reached on the case had addressed those concerns. So that

does not necessarily prove that in a given—an issue may have been

debated and may have been debated in a fairly extensive way within the Committee, but the end results were results that we were

satisfied with.

Mr. KIMMITT. And Senator Hagel, I would just note that this is

a legal process based on an Executive Order that created CFIUS

in 1975; updated it with Exon-Florio in 1988; then again in 1992.

It is a legal process. We follow the law. At the same time, it is an

interagency process, one that both you and the Chairman are very

familiar with.

And the fact of the matter is there is only one decisionmaker in

the national security community, and that is the President of the

United States, and if anyone has a national security concern that

cannot be addressed, whether it be at the staff level or the deputies’ level or higher, we do not have the ability to stop it at that

point. We must send it forward.

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As Secretary Flory said, our goal, consistent with the open investment policy, is to try to find a way to let the transaction proceed. But each one of us has a Constitutional responsibility to

make sure that we do not give an okay to a transaction that is

going to harm the national security interest, and Treasury neither

can narrow the definition of national security, because national security is what the Committee defines it to be, nor, can the Treasury

Department keep any Cabinet secretary from taking his or her

view on that national security issue to the President.

I think it is incumbent upon us to do as much as we can at the

staff level, where a good 75 to 80 percent of the work will be done;

that that cannot will be resolved at the policy level, but at the end

of the day, if that cannot be resolved, and none of these people, I

tell you, will ever give a free pass to a transaction on national security grounds, it then goes forward.

Senator HAGEL. Thank you.

Mr. MCCALLUM. Senator, on behalf of the Department of Justice,

I would like to echo what has been said before in that having made

inquiry, I know of no case where the Department of Justice had national security concerns with a transaction that went unaddressed.

Senator HAGEL. Thank you. It has been suggested, as you each

know, that Congress be given a final approval role, at least, in the

CFIUS process. What is your assessment of this proposal, and if

you think that is a good idea, I would also like for you to address,

then, the political dynamic that may well creep into that approval

process. Start with you, Secretary Kimmitt.

Mr. KIMMITT. Oh, I was hoping that you were going to look somewhere else on that one, Senator.

[Laughter.]

Let me say this: We have a system of government that leaves to

each of the three branches an important set of responsibilities. You

have the legislative; we have the executive responsibilities.

I think that when it comes to national security, each of us has

very important responsibilities, both individually as well as institutionally. I will defer to the Acting Deputy Attorney General on the

separation of powers issues that are raised by that, because I think

they are significant. What I would say is if we do a better job of

staying in touch with you than we have in the past and have an

idea of what the issues of concern to you are, not just procedurally

but the factors, as the Chairman said, of what should be taken into

account in the Committee’s deliberations, and then, in the wake of

that, if we are open with you and frankly more open and more frequently open with you than we have been in the past so that you

can be assured that we are doing this correctly, then, I think we

stay away from the more difficult Constitutional issue of the legislative branch getting involved in an executive function.

Senator HAGEL. Let me ask you a point to clarify this. So, you

would not be enthusiastic about changing the approval process or

Congress being involved in any final approval of a CFIUS decision.

Mr. KIMMITT. I would not, Senator, any more than I think the

Justice Department would want the Congress more deeply involved

in Hart-Scott-Rodino antitrust review or the FCC on communications review. You have a range of powers and authorities available

to you that the CFIUS process does not touch: This hearing, your

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ability at any point to call people up before you, either private sector or public sector; that, we understand. I think, though, I would

say let us make these improvements to the process, let us assure

you that we can handle this thing properly. Then, we do not have

to get into the Constitutional debate.

Senator HAGEL. Are there any contrary opinions on the panel to

what Secretary Kimmitt noted?

Thank you. I know my red light is on, Mr. Chairman.

Chairman SHELBY. Go ahead.

Senator HAGEL. May I ask another question thank you.

Chairman SHELBY. Yes, sir.

Senator HAGEL. Did the GAO interview all of your agencies before their final report? Each of you had opportunities, or representatives of your Departments were interviewed?

Mr. SAMPSON. Yes.

Mr. KIMMITT. I think, Senator, what took place, if I read the

GAO response to the Treasury comments correctly, was that there

were some agencies who were not interviewed during the process,

but I think all agencies received a copy of the draft report before

it was submitted.

I will be candid: I think it would have been good for GAO to have

interviewed all of the agencies, both at the professional staff level

but also engage us at the policy level. They may have had some

time constraints of which I am not aware, but I think in the end,

each of us did have an opportunity to comment on the report before

it came forward to you.

Senator HAGEL. I am not aware of this part of the CFIUS review,

so here is the question to you: Does a regular CFIUS review include bringing in outside agencies or departments within the intergovernmental process? The Department of Energy, for example, obviously energy is a critical part of our national security, and that

is done on a regular basis?

Mr. KIMMITT. Yes, Senator, I mean, just as you had Senator

Inhofe in before your Committee today, the only way that we work

well is on an interagency basis. There are some people, as I mentioned in my opening statement, in the intelligence community

whom we immediately involve in any notification to get their full

intelligence on the transaction involved.

I might note that that creates a little bit of a time problem in

terms of responsiveness, and we are working on that. But beyond

that, any department or agency, I mentioned specifically Energy

and Transportation in my remarks, but really, any department or

agency who will bring a perspective to the table that will better inform us on the national security implications will be invited.

And I might say, as both you and the Chairman know, when the

National Security Council meets, although technically, it just comprises the President, the Vice President, the Secretary of State,

Secretary of Defense, the Chairman of the Joint Chiefs, and the Director of Central Intelligence, you will not be surprised to know

that Treasury is there very frequently, Commerce, DHS, Justice,

and others, and so, again, I think just as the concept of national

security is a dynamic concept, the representation has to be dynamic

and tied to the transaction in question.

Senator HAGEL. Mr. Chairman, may I ask one last question?

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Chairman SHELBY. Go ahead.

Senator HAGEL. I appreciate your patience.

Chairman SHELBY. It is important.

Senator HAGEL. And it is this: It has been referred to this morning in various ways, but the issue of the review period being extended, could I get a quick answer from each of you whether you

think that is a good idea or not a good idea?

Let us start with you, Secretary Baker.

Mr. BAKER. I think it would not be a good idea, because of, as

Secretary Kimmitt suggested, we would be extending a lot of routine transactions to day 59 instead of day 29, and the impact on

foreign investment and investors’ expectations would be significant.

And as I said earlier, there are other ways to achieve early warning about the transactions we are particularly concerned about.

Senator HAGEL. Thank you.

Mr. SAMPSON. I would fully concur with DHS.

Senator HAGEL. Thank you.

Mr. FLORY. I agree, sir.

Mr. KIMMITT. I agree both with what Stewart said, and we are

going to have a meeting as early as next week to see if there are

any other better ideas.

I mentioned to my colleagues, and as you know, Senator Hagel,

when someone does a notification in the European Union, they also

have a 30-day review process, and if they are not quite ready to

go at 30 days, they just stop the clock.

Now, maybe the Europeans are cleverer than we about that, but

it allows them to maintain jurisdiction, take a little bit more time

to get the information. I am not sure that we have the ability to

do that, but as Stewart says, I think we do have the ability to

make a lot better use of the preformal notification process.

Mr. MCCALLUM. Yes, as Secretary Baker stated, for most transactions, the 30-day review period is enough, and it is that small

number of transactions with complex and sensitive issues that put

the stress on the resources that are available within that time period. But as I indicated previously, the Department of Justice has

not seen any situation in which the national security issues were

not addressed and addressed appropriately.

Senator HAGEL. Thank you.

Secretary Wayne.

Mr. WAYNE. I concur with Secretary Kimmitt and Secretary

Baker and the others on this.

Senator HAGEL. Gentlemen, thank you.

Mr. Chairman, thank you.

Chairman SHELBY. Thank you, Senator Hagel.

I have a number of questions, but before this, Sarbanes is tied

up in some other areas, but he has a number of questions that he

would like to submit to all of you for the record, and we will keep

the record open for that.

Mr. KIMMITT. Thank you, Mr. Chairman.

Chairman SHELBY. Secretary Kimmitt, you and the rest of the

witnesses on this panel all operate at what we call the upper stratum of government policymaking. At the policy level, how does the

Committee on Foreign Investment resolve disagreements that could

be resolved at the staff level? What additional kinds of information

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are brought to bear, and how are policy considerations reconciled?

What kind of guidance does the White House provide in these instances? How is consensus reached? In other words, how do you

work?

Mr. KIMMITT. Well, I will describe how I would like the process

to work.

Chairman SHELBY. Yes. Tell us how the process works basically

and how you would like for it to work.

Mr. KIMMITT. Well, I think that the way the process works right

now is that the vast majority of the cases, and therefore the vast

majority of the work, is done by an exceptionally capable professional staff representing not just the Departments at the table but

the other six agencies involved.

Chairman SHELBY. The vast majority of cases dealing with trade

and buying companies and so forth and here and abroad, direct investment is not concerned generally with national security.

Mr. KIMMITT. Right, exactly, and my point would be that I think

what that staff level work has done is to develop a process that

identifies very clearly as the time permits what the policy level national security questions are that need to be considered. And if they

can resolve them at their level, largely by working with the companies on mitigation procedures and so forth, then, I do not think it

would have to go any higher.

But certainly, before one would go to an investigation that could

lead to a Presidential decision, that is where I think we, on behalf

of the Cabinet secretaries for whom we work, have to have those

issues brought to our attention. We have to make sure that we

have the information that we need to make that critical judgment

of whether the national security will be protected and discuss it in

the context of the broader policy responsibilities each one of us

deals with every day in other national security forums.

Again, to the extent that we can work it out there and get the

companies to accept it so that we are all confident that the transaction can proceed in a manner that is not harmful to national security, I think we can get it resolved at this level. But in the end,

as I said earlier, this is not a consensus-driven process in which

consensus is the goal. It is a consensus-driven process that creates

a presumption in favor of the person who thinks a national security

question has not been answered, and if that has not been answered, it can only go forward to the President.

Chairman SHELBY. Mr. Secretary, what is the Committee on Foreign Investment’s procedure for maintaining control over cases that

have been withdrawn, especially those cases where an acquisition

has already been completed? Because the notification to the Committee is voluntary, as I understand it, and because companies are

routinely permitted to withdraw their paperwork, what mechanism

is in place to ensure that acquisitions are monitored for national

security implications and blocked, blocked if necessary before damage is done?

Who is responsible, in other words, for ensuring that the companies refile, and each agency has the opportunity to complete a full

review? As I understand it, the guidelines state that Treasury has

responsibility for setting up a timeline. In how many instances has

that been done?

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Mr. KIMMITT. Well, no, I think, and again, I think it was a good

point made not only in your comments Mr. Chairman but also by

the GAO. I think we have to watch these withdrawals very carefully. Again, the percentages, at least as I have them, would suggest that only about 5 percent of the cases notified over the past

5 years have been withdrawn, and 10 of those have been resubmitted.

So what the statistics would suggest is that 1 percent of the

cases that have been notified in the past 5 years were notified,

withdrawn, and then not renotified. It is a small number of cases,

but going back to my earlier point, those are probably precisely the

ones that we have to look at very carefully.

Although Treasury, in its role as chair of the process, sets up

procedures and has to keep people generally informed of whether

a company has refiled, whether the transaction has gone forward,

I would defer to each of my colleagues to say how they do it, but

we also look at the agency that raised the objection or agencies

that raised the objections that led the company to withdraw the filing to have a continuing watch over that issue that caused the concern, with particular attention on transactions that close without

coming back to CFIUS.

Chairman SHELBY. Basically, we cannot afford where national security is involved to let anything slip through or slip by.

Mr. KIMMITT. No, absolutely not. And then, again, that is why

Exon-Florio is just one of the many laws available to us. It is a

process that helps identify, really do a triage, a screening out, but

on a going forward basis, if those companies come together and

begin to operate in the United States without addressing the concern, whether it be of Justice, the Defense Department, DHS, or

anyone else, I would imagine that that Department has the ability,

using its existing statutes, to make life very difficult for that company, and that is why, again, it is hard for me to see how a board

of directors could ever let that happen.

Chairman SHELBY. Secretary Kimmitt, the bid by the China National Offshore Oil Company to buy Unocal entailed a number of

factors that may or may not have contributed to a determination

by the Committee on Foreign Investments had it reached that

stage. For example, there was the question of control over oil and

natural gas deposits as well as concerns about deep sea mapping

technologies and other sensitive technologies that we might have

wanted to protect.

I know you cannot address that case in any detail, but it did

bring to mind here on the Committee concerns that the Banking

Committee has over how the review process, as we keep talking

about it, unfolds. For purposes of paragraph B of Exon-Florio, mandating investigations in the case of state-owned or controlled entities where national security could be affected, is it your assessment

that the China National Offshore Oil Company would have qualified?

Mr. KIMMITT. Again, that case both took place before I was in

this position, and as you indicated, it had been withdrawn but——

Chairman SHELBY. Well, it brought a lot of this to the attention

of the American people.

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Mr. KIMMITT. Let us talk about the public facts. The fact is it

was a state-owned company receiving concessional financing, according to reports, wanting to make an investment into a sensitive

sector, sensitive by their definition, since they will not let United

States companies invest in that in China.

Chairman SHELBY. Absolutely.

Mr. KIMMITT. So it would seem to me that had a case like

that——

Chairman SHELBY. Reciprocity, no reciprocity.

Mr. KIMMITT. Right, had a case like that, and frankly, whether

the state-owned entity was China or in another country, it would

seem to me that it falls squarely within Section B, which was the

Byrd Amendment in 1992.

I think the factors that you mentioned, you said they were outside the CFIUS purview; I would not think so. I would think that

the Energy Department or other Departments would have brought

precisely those kind of factors into play if a case put forward by a

state-owned company of any nationality in that particular sector

were to come before us. But in this case, as you said, Mr. Chairman, the bid was withdrawn.

Chairman SHELBY. Sure; if a case is not reviewed prior to an acquisition process being in what we call an advanced stage, does

that mean that there is no consideration of the case at all? When

precisely does the 30-day clock start ticking?

Mr. KIMMITT. My understanding is that under the regulations,

Mr. Chairman, there is an information requirement from the parties to the transaction that has to be submitted to the Treasury Department to begin the 30-day process. Now, I think in almost every

case, my experience has been, and my briefings have suggested, as

Secretary Baker said, that that process of interaction begins long

before that formal filing.

And I would imagine, for example, if a European manufacturer

looking to make an investment into the U.S. defense industry,

Treasury would not be the first to hear about that. My guess is

that Secretary Flory and his colleagues would have heard about

that first, because that is the customer. We are not the customer.

And I think any smart company and smart advisers to companies

would try to get as much done as possible before making the formal

filing to help us get around the time issues that have been raised.

Chairman SHELBY. I would like to direct the next question to

Acting Deputy Attorney General Secretary Flory, Secretary Baker,

and Secretary Sampson.

Has the credible evidence standard that you all are all familiar

with in Exon-Florio limiting when the President can use the authorities of the statute to suspend or to block a transaction been

flexible enough to allow the Committee on Foreign Investment to

block a transaction or to impose sufficient risk mitigation measures

when needed when the foreign company in question is government

owned or controlled? When that government is neither a NATO or

a non-NATO major ally, how is a determination made on whether

credible evidence exists that an acquisition could harm national security? What factors are used in making such a determination? Mr.

McCallum, we will start with you.

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Mr. MCCALLUM. Well, Senator, I think we posed a very broad

and general question, and each particular case is, in fact, unique.

I think the best way for me to address that is to indicate the fact

that according to the Department of Justice and those who have

been involved in this process for many years, there has never been

a situation that the Justice Department was dissatisfied with the

mitigation issues or the mitigation activities and requirements that

were instituted and agreed to. So in each one of the situations that

the Department of Justice has had national security concerns,

those national security concerns were, in fact, addressed. And the

issue, the legal issue of credible evidence is, I guess, less one for

the Committee than it is for the President, and the reason I say

that is, as Secretary Kimmitt has indicated, the standards that are

used within the Committee are whether any particular component

or agency that is acting either as a Committee member or is invited to participate in the process asserts that there are

unaddressed concerns that they have, we then send it forward.

And the Committee then, at the end of the investigation stage,

will make its determination on whether or not it believes that

there is credible evidence. And there is ultimately the decision to

be placed before the President, and on that Presidential decision,

there is no judicial review. So each case will stand on its own

unique basis, if you will, given the facts and circumstances.

And I can hypothetically, as a law academic exercise, imagine

transactions 10 years ago that would not have implicated national

security to the same degree that they do today.

Chairman SHELBY. Secretary Flory, do you have anything to add

on that?

Mr. FLORY. Senator Shelby, I do not. I indicate, as I indicated

earlier, we are not aware of any cases where our concern, any concerns that we had were not ultimately addressed, whether as a

function of a dispute over what constituted credible evidence or

anything else.

But described by the Department of Justice, the way the process

works here, I think that gives you a good idea. If DoD or Homeland

Security or anybody has an issue that they think is a problem, we

put that on the table, and that will get the process going, and the

matter will be assessed.

Chairman SHELBY. But DoD is part of this process for a real reason, is it not?

Mr. FLORY. Absolutely.

Chairman SHELBY. And Homeland Security, the same way, and

of course, Commerce is. All of you are to a point. The Justice Department says that it shares GAO’s concern about the time constraints we keep talking about in the review process. It stated, Justice did, that any potential extension of time available to the participants for the collection and analysis of that information would

be helpful to Justice. Where is the process in trouble? What period

of time is too short for an effective completion of a comprehensive

review? Should there be a one 75-day period to complete all of the

Committee’s business before a vote is taken to refer to the President? Does the Justice Department know of any instance where the

Committee asked a corporation to withdraw an application to allow

the Committee more time to finish its review?

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Mr. MCCALLUM. Well, Your Honor, Senator—lawyer’s habit, Your

Honor.

Chairman SHELBY. I know.

Mr. MCCALLUM. Senator, I do not know of particular instances,

particular cases that I can point to.

Chairman SHELBY. Could you check the record and furnish that

information.

Mr. MCCALLUM. I do have general information on that, and in

certain circumstances, in a small minority of cases——

Chairman SHELBY. We would like some specific information.

Mr. MCCALLUM. But the confidentiality of the filings before the

Committee on Foreign Investments and——

Chairman SHELBY. We are not asking for everything.

Mr. MCCALLUM. I do understand that, but I do think I can respond on a general basis to say that there have been situations in

which withdrawals did occur in order to allow both the companies

involved in the transaction and the Committee itself additional opportunities to obtain information and to review that information.

So, I return to the ultimate result of all of those is that within

the Department of Justice, there is no instance in and of itself or

particular case in which the national security concerns were not

able to be addressed and addressed adequately in the views of the

Department.

Chairman SHELBY. Secretary Kimmitt, dealing with mitigation

and how they are monitored, how exactly does that work? Does the

Committee on Foreign Investment, send people out into the field to

investigate compliance with mitigation agreements? Do any of the

other witnesses after him, do you want to comment? Do you send

people out in the field, and do you follow up the mitigation stuff?

Do you know?

Mr. KIMMITT. Mr. Chairman, this is a response primarily for my

colleagues, because the role of the Committee is to ensure that the

Committee members are sufficiently satisfied by the mitigation result that the process can either be completed within the 30-day period or in some cases beyond.

But once the mitigation agreement is in place, it is the responsibility of the agency or agencies who negotiated that mitigation

agreement with the parties to ensure on an ongoing basis that the

party, probably now the united entity, lives up to its responsibilities, and although I will defer to my colleagues, I think they have

worked out some arrangements where, for example, in the area of

network security agreements, the Department of Homeland Security takes a responsibility on an interagency basis.

But in short answer to your question, the Committee does not

have an ongoing responsibility in terms of effective implementation

of the arrangements, but if any member of the Committee, as it follows up on it, reports to us a problem in that regard, that is an

issue that could come back to the Committee.

Chairman SHELBY. Secretary Flory, do you know of any cases

where an acquisition or merger was resolved through mitigation

yet resulted in the loss of sensitive technology or know-how?

Mr. FLORY. No, sir, I do not.

Chairman SHELBY. Mr. McCallum, do you?

Mr. MCCALLUM. I do not, Senator.

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Chairman SHELBY. Anybody?

Transparency issue. In the Department of Justice’s letter to the

Government Accountability Office, Justice’s position stressed that

should any regulations be amended to make the Committee process

more transparent to Congress, those changes should not impeded

the confidentiality, you refer to that, now afforded companies under

the statute.

How exactly would you see that confidentiality being compromised? If it is compromised, Justice opines that it could reduce

the number of voluntary applications, and that without corporate

confidence in the system, meaningful reviews could not be undertaken. What, then, is the opinion of the Justice Department on the

nature of these voluntary applications? Should legislation instead

provide for mandatory initial filings?

Mr. MCCALLUM. Your Honor, the Department of Justice would,

if there was a proposal, a particular legislative proposal for mandatory filing requirements, we would, of course, like to see the specifics of it and review it.

In general terms, though, although filings are voluntary, the

Committee itself does have the power to go into and to effect transactions even if there is not a particular filing. And Secretary

Kimmitt has previously indicated that there is contact between the

Committee and companies that are involved in transactions in

which prior to filing, there are communications, and in fact, there

have been, to my understanding, through members of the Department of Justice, situations in which companies were encouraged to

file or contacted and notified that the Committee thought filing was

appropriate and then did so.

Chairman SHELBY. Because Exon-Florio is based on voluntary

notification by the parties to a foreign acquisition, have there been

any cases where you have discovered a defense-related foreign acquisition after the transaction closed and where you were concerned that any subsequent Committee on Foreign Investment Review was too late to prevent harm to U.S. national security? And

do you think some defense-related foreign acquisitions are perhaps

passing under that radar?

Secretary Flory.

Mr. FLORY. Mr. Chairman, I am not aware of any cases of that

type. When you are talking about things that are under the radar,

I guess by definition, you are talking about things that you do not

see. But I am not, I certainly am not aware of any case.

I think that, as a number of witnesses have pointed out, there

is a dynamic out there. There is a network out there of people who

pay attention to this process and to its requirements and there is

also a substantial motivation on the part of corporations——

Chairman SHELBY. But the people that should pay most attention would be your Committee, would it not?

Mr. KIMMITT. Well, and I think most people do, Mr. Chairman.

Again, if a person does not avail themselves of the protection that

comes to the company by subjecting themselves to our review, they

leave themselves open not only to us through the President later

unwinding the transaction, but it also seems to me that it would

sharpen the focus of the Justice Department using the United

States, the Commerce Department, using our export control laws,

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any number of authorities available to the Defense Department. I

am not saying that people do not do those kinds of things. I think

our process is an important part of a broader mosaic of laws and

regulations that are set up to make sure that our national security

is protected.

Chairman SHELBY. Anybody got any other comment on that?

We thank you, gentlemen, for appearing, and we are going to

keep the record open. Some Members, Senator Sarbanes included,

have a number of questions for the record.

Thank you very much.

Mr. KIMMITT. Thank you, Mr. Chairman.

Chairman SHELBY. We will next hear from our third and final

panel. Today, we have two experts on the history of Exon-Florio

and the role of the Committee on Foreign Investment in the United

States. Patrick Mulloy is a known face around the Banking Committee, having spent a good part of his life here, including as General Counsel and Chief International Trade Counsel. He has served

as Assistant Secretary for Market Access and Compliance in the

Department of Commerce’s International Trade Administration and

currently serves on the United States-China Economic and Security

Review Commission.

David Marchick is a partner at the law firm of Covington & Burling, specializing in international trade and investment. He is one

of the country’s leading authorities on the Committee on Foreign

Investment, having served on a variety of Government positions involved in international trade and foreign investment matters, including the Departments of State and Commerce. He has been active since leaving Government in advising U.S. corporations on the

Committee on Foreign Investment and its review process. He has

also just returned to Washington from a trip to the Caucasus in

time to accommodate us here today, and for that, we are grateful.

Gentlemen, your written testimony will be made part of the

record in its entirety. We appreciate your indulgence through the

hearing of the first panel, second panel today. Mr. Mulloy, we will

start with you. Welcome again to the Banking Committee, where

you spent many years.

STATEMENT OF PATRICK A. MULLOY

COMMISSIONER, UNITED STATES-CHINA ECONOMIC AND

SECURITY REVIEW COMMISSION

Mr. MULLOY. Mr. Chairman, thank you very much.

I commend you and the Committee for holding this important

oversight hearing, and I am really honored by the invitation to

come here and testify. I take great pride, and it is a source of enormous personal satisfaction to have served in a bipartisan manner

on the staff of this Committee from 1983 to 1998.

During the period of 1987 and 1988, when the Exon-Florio provision was being formulated by the Congress, I served as the Committee’s General Counsel and was directly involved in the negotiations which led to its enactment. I want to make absolutely clear,

Mr. Chairman, I have no clients other than the public interest on

this issue, and I have never been paid by any company of any party

to advise it on CFIUS matters. I am telling you exactly what my

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experience and what I get out of my experience in dealing with

this.

The Committee on Foreign Investment in the United States was

not established by the law Exon-Florio. That preexisted. It was put

in place by an Executive Order in 1975, because a lot of the oil producing countries suddenly had a lot of new money because of the

increase in oil prices, and there was a desire to understand more

about waves of foreign investment that were starting to come into

the country. CFIUS was set up by the President by an Executive

Order.

Treasury chaired it. Commerce had a major role in actually

tracking the information on what was coming into the country. So

the two agencies had a key role. In the 1988 trade bill, this Committee reported major provisions dealing with exchange rates,

trade promotion. We did a lot of hearings. Your provision, dealing

with Toshiba and export controls, all that was in a bill formulated;

we got out of the Committee and it went to the floor.

Exon-Florio was actually developed in the Commerce Committee,

but when it was coming through the process, we said foreign investment, that is Banking Committee jurisdiction; we appealed to

the parliamentarian. He ruled in our favor. He put us in charge of

it. Senator Exon was brought in as a special conferee to work with

us in formulating the final compromise.

Now, it should be noted that Treasury was absolutely opposed to

Exon-Florio. They led the opposition, and in fact, they even got the

President to put it on their veto list. They were going to veto the

whole omnibus trade bill developed by all of the Committees in the

Congress working over almost a year, and this was one of the provisions they would veto it over.

So then, we were told, work, see if we could come up with a compromise. One of the elements that they wanted out of the bill was

the term essential commerce. The second thing they wanted out of

the bill was they did not want—originally, it was putting the authority in the Commerce Secretary, who would make a recommendation to the President, and the President could overrule

the Commerce Secretary. But they did not want Commerce getting

control of this, they wanted to keep control. I think that may have

driven part of their opposition. Also, they wanted the open investment climate. I think that was another thing that drove their opposition.

We finally agreed to put the authority solely in the President,

and we agreed to take out the term essential commerce. The members of the conference were Senators Sarbanes, Danforth, Exon,

Heinz, and Dickson. But we did then say this should then go into

the Defense Production Act, because we do not want some little,

narrow interpretation of national security, and the conferees put in

the statute itself that they wanted the capability and capacity of

domestic industries to meet national defense requirements to be

considered, and they wanted the capacity of the United States to

meet the needs of its national security be considered.

Okay; it goes into the law; the President signs it; and then, I am

sure there were some inner workings of how that—they issued a

new Executive Order putting the new authority into the hands of

the pre-existing CFIUS, chaired by the Treasury Department. So

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the Department that was most opposed to this new authority ended

up chairing the Committee to implement it.

I think that is part of the problem. In their regulations, which

they took 3 years to get out, they were the ones who put in this

idea there should only be voluntary notifications, Mr. Chairman,

not required; voluntary.

Let me just give you a couple other things that have happened

here.

Chairman SHELBY. You take your time.

Mr. MULLOY. In 1992, this Committee held some oversight hearings on how this was being implemented, because there were out

there. One of the witnesses we brought in, and it was done by Senators Sarbanes and Mack—Senator Mack was here—there was a

worry that a French-controlled government company was going to

buy an American defense contractor, LTV, missiles. And the Committee, Senator Mack said we do not want any foreign government

to be owning U.S. defense contractors.

The head of Semitech, which was a special consortium set up by

the U.S. Government to make sure that a industry-government

consortium that we maintained, the semiconductor industry, because it was so essential to our national security, he came in and

testified, and he told the Committee, foreign interests have targeted key U.S. technologies, and the present CFIUS law or its implementation is ineffective in presenting this.

He also voiced concern—this was very important—that CFIUS

was not considering the cumulative effect of multiple foreign purchases of U.S. companies, and he urged that the chairmanship of

CFIUS be moved out of the Treasury Department, into the Commerce Department, where they had people who work on technology.

They have a Technology Administration in the Commerce Department. And I urge the staff, you might want to look at pages 70,

73, and 74 for that hearing. There is some really good testimony

in that 1992 hearing.

Now, there were a couple of changes that Congress, in 1992,

based on those hearings, put into law. First, it put into law a new

provision requiring Treasury to move beyond the 30-day period into

a full 45-day investigation if it was a government-controlled company that was going to do the purchase; like CNOOC, governmentcontrolled, we would have had to under that provision do it.

Second, it said that there should be a quadrennial study done by

the President, using the intelligence community: Does any country

have a strategy of buying up U.S. key technologies? And that study

was to be done every 4 years.

The Administration, led by the Treasury, did that report once in

1994 and never again. You look at the law; that provision is there.

It is just being ignored.

Now, in the first report, they said okay, we do not find any evidence that there is a big strategy out there, but then, they add the

absence of credible evidence demonstrating a coordinated strategy

should not be viewed as conclusive proof that a coordinated strategy does not exist.

They went on further to say in some cases, foreign governments

give indirect assistance and guidance to domestic firms acquiring

companies. Also, they give them financial assistance. I urge the

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staff to read that 1994 report, pages 13 and 14, pages 31 and 32.

They point out specific countries that give subsidies to their companies to come here, buying U.S. key technologies, and I think if it

was happening in 1994, it is going to be happening in a much more

major way now, because countries like China now have huge

amounts of U.S. dollars due to the fact that we have these enormous trade deficits, because Treasury, among other things, is really not enforcing the exchange rate provisions that we put in that

1988 trade bill as well to identify currency manipulators.

Okay; now, the GAO, in its most recent report, says that the

mandatory investigation that the Congress put into the law in 1992

is being read out of the statute. How do they do it? They say if you

do not, in the first 30 days, find credible evidence that there is inappropriate behavior, then, you do not do the 45-day, even when

it is a government-controlled company. So they are essentially

reading a mandatory requirement out of the law.

The second thing is that GAO says they have narrowly defined

national security to export controlled technologies, classified contracts, or special derogatory intelligence on the foreign company.

That is not what Congress intended. If we wanted that kind of

thing, we could have put this kind of authority in the Export Administration Act, over which we have jurisdiction. We did not. We

put it in the Defense Production Act, because we wanted them to

look at the large industrial base issues that are so important to

this country’s national strength.

I think if you give an honest review of the record, Treasury Department opposed the enactment of the Exon-Florio provision and

has sought to stymie its effectiveness ever since it was enacted. I

know Mr. Kimmitt. I like Mr. Kimmitt. Mr. Kimmitt is unusual,

in fact. Most of these Treasury people come out of the finance community, not the national security community, and they do not have

quite the appreciation for technology and the importance of that for

an industrial base.

The Chinese do. They even talk about the importance of building

the scientific and technological base of that society. It is the highest priority. We on the China Commission, of which I am a member, and I am not testifying for the Commission, but in 2004, in

our report, unanimous, bipartisan, every commissioner recommended that the chairmanship of CFIUS be transferred from

the Treasury Department to the Commerce Department.

It is the culture. The culture of the Treasury Department does

not work in this situation. In 1979, the Congress—you know the

group in the Government that deals with dumping cases, dumping,

Treasury used to have that authority. They did not implement it.

In 1979, Congress took it right out of the Treasury Department and

put it in the Commerce Department, because Treasury’s psyche,

their whole mode, their culture does not want to do these kinds of

things.

Mr. Chairman, let me just sum up. There are very few rules on

foreign investment. People say we have these WTO rules. On trade,

we do have some, a lot. On investment, there are very few WTO

rules, so we can do what we want to do.

In the WTO, there is a national security exception. The SchumerGraham bill is based on that. He bases his bill on the national seVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00133 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
130

curity exception. So the Committee can really look at this, and I

think it is very important that they do and come up with some

changes to the law that will really protect the national security interests.

Thank you, Mr. Chairman.

Chairman SHELBY. Thank you, Mr. Mulloy.

Mr. MULLOY. And thank you.

Chairman SHELBY. Mr. Marchick.

STATEMENT OF DAVID MARCHICK

PARTNER, COVINGTON & BURLING

Mr. MARCHICK. Thank you, Mr. Chairman. Thank you for the opportunity to be here, and I do hope that I hold the record for coming the farthest way for one of your hearings. I was in Azerbaijan

yesterday, and I am sitting today, not standing.

Chairman SHELBY. I hope you slept on the plane.

Mr. MARCHICK. I slept on the plane. I also want to compliment

you on your opening statement. I thought it highlighted the critical

issues and had an appropriate balance, and as a result, I am going

to take a big segment out of my statement and put it aside because

you said the same thing, including talking about the yogurt example.

I thought I would focus on three issues: First, how CFIUS has

operated in recent years; second, some of the ideas that GAO and

other Members of Congress have put forth to change CFIUS, and

third, some of the ideas that I would like to offer for improvements

in the process that you and the CFIUS agencies can consider.

First, trends and application of the Exon-Florio Amendment:

since September 11, 2001, the Bush Administration has applied

greater scrutiny to transactions, has imposed tougher requirements

as a condition for approval, and has enhanced enforcement of security agreements negotiated through the Exon-Florio process.

Now, Senator Inhofe mentioned the fact that the President has

only formally blocked one transaction and investigated two dozen

out of more than 1,500 reviews. But these statistics, Mr. Chairman,

obscure the true impact of Exon-Florio. A large number of investments have been abandoned or substantially modified because of

the CFIUS process. In the last 3 years alone, there have been more

investigations and more withdrawals than there were during the

previous 10 years combined. So scrutiny has increased. I will come

back to the withdrawal question in a second.

CFIUS has also imposed tougher terms as a condition for approving transactions. You can just look at the telecommunications industry. Even foreign-owned telecommunications companies that do

not hold Government contracts have been required to sign up to

many of the same provisions that DoD traditionally uses for foreign-owned companies that have Government contracts that are

classified contracts. In other words, CFIUS is starting to use the

same mitigation methods to protect critical infrastructure as DoD

has long used to protect its supply chain.

Now, on the ideas to amend Exon-Florio, let me offer some

thoughts. I am concerned that a number of these changes would

have the impact of chilling inward investment, blocking those investments that we do want to come to the United States and simulVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00134 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
131

taneously encouraging other governments around the world to erect

obstacles to investment abroad, and these obstacles would hurt

U.S. companies more than any other country, because we are the

largest investor abroad.

A few examples: The term economic security, in my view, that

term is extraordinarily vague. It would be extremely hard to implement. And one could imagine that we would get into situations like

the French of seeing yogurt as a strategic industry, because the yogurt lobby or some other lobby would say this is in our economic

interests.

Chairman SHELBY. That is not my goal.

Mr. MARCHICK. I know it is not, sir, but it may be others’. Again,

I compliment you on the balance of your statement.

Second, allowing Congress to override the President’s approval of

a particular transaction would place Congress in the role of a regulatory agency and create uncertainty for investors. I think it also,

as the previous panel mentioned, creates some separation of powers

issues and may have problems under the Chadha decision.

On timing, my view is that timelines work. As the representative

from Homeland Security suggested, most this are actually

prevetted with CFIUS. I would never advise a company just to file

on the day that they announce a transaction. You always go

through a preconsultation process, so there is a period of time before the 30-day clock starts.

On withdrawals, I think withdrawals are a healthy part of the

process. I have been involved in advising a number of clients on

withdrawals myself. They have come up for a number of reasons.

First, we have been told the transaction is not going to be approved, and if we keep the process going, the President will reject

it. Well, companies in that circumstance typically say, well, I will

just withdraw rather than force the President to make a decision

that would adversely affect our reputation.

Second, we have been told that CFIUS does not have enough

time, so we withdraw and refile. And third, we have negotiated an

agreement that successfully mitigates a national security concern,

and in order to avoid a transaction going to the President, you

withdraw and then refile.

I do agree with you, Mr. Chairman, that there can be improved

transparency with Congress while at the same time protecting proprietary business information. We all recall the dire predictions of

the 1980’s about Japanese investing in the United States. These

predictions occurred at a time when Japan had huge trade surpluses and a need to invest its significant foreign currency earnings, much like China does today.

Congress reacted to the concerns about growing Japanese investment by adopting Exon-Florio. Looking back, all of our fears about

Japan, I think, appear to be misguided. At the same time, ExonFlorio has been a useful tool to ensure that national security is protected in the context of an open investment policy. Now, to ensure

that this continues, I hope the Committee refrains from amending

the statute and instead works with CFIUS to improve the way that

it is implemented.

And let me just throw out very briefly a few ideas, Mr. Chairman. First, I think that the CFIUS can clarify the criteria that

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they use in assessing national security issues. Your legislation,

frankly, has some good ideas. I would recommend that those be put

into regulations or into a statement of policy as opposed to legislation, because national security priorities change.

Second, there has to be greater transparency with Congress,

while protecting proprietary information. If CFIUS does not have

the confidence of this Committee and the Congress, it is not going

to be effective in the way it is implemented, the Exon-Florio statute

is implemented.

Third, as the representative from Homeland Security suggested,

there are ways that companies and the Committee can improve the

advance work before a formal filing.

Fourth, I think that there should be earlier involvement by the

White House in resolving differences. Treasury cannot tell another

agency what to do. Only the White House can. And earlier involvement by the White House can help resolve differences among agencies and formulate a cohesive——

Chairman SHELBY. How do we work that?

Mr. MARCHICK. Well, right now, for example, in a number of

cases that I have had, which are difficult cases—most transactions

sail through, frankly. I mean, you think about an auto investment

in Alabama, or my daughter’s favorite, a Dutch acquisition of Ben

and Jerry’s, they pose no problems. But for those difficult transactions, you often find differences between Justice, the security

agencies, and the economic agencies, and until those differences get

raised to a high enough level or until the White House gets involved, you get deadlock, and there is no movement.

So the two ways to improve that are, one, to have higher level

involvement, which, frankly, your hearings have inspired, and second, to get the White House involved earlier, even before a formal

investigation takes place.

We know which transactions are going to be difficult before we

file them, and the agencies know. Earlier involvement, higher level

involvement can avoid problems in the future and improve implementation.

Let me just close by saying two things: First, Mr. Mulloy said

that he does not have any clients, and these are his own opinions.

I do have clients. These are my own opinions. My clients’ views are

all over the map. I hope after today, I still have some clients, but

I want to assure you that these are my views. And second, I just

want to compliment you and your staff on the leadership you have

shown, because these hearings have brought focus to the process

and will improve the process just by having the hearing themself.

Chairman SHELBY. Thank you so much, Mr. Marchick.

One of the central questions at issue in the GAO report concerns

the disparate approaches different agencies bring to the concept of

what we call national security. It should not surprise anybody that

the Office of the U.S. Trade Representative or the Department of

the Treasury should bring a different perception onto the issue

than the Department of Defense or Department of Homeland Security. Mr. Mulloy, you alluded to that a few minutes ago.

Mr. MULLOY. Yes.

Chairman SHELBY. Taking into account that the Committee operates under a consensus arrangement—their Committee, not this

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Committee—operates under a consensus arrangement, have these

differences adversely affected the ability of the Committee on Foreign Investment to carry out its mission of protecting national security?

Mr. Mulloy.

Mr. MULLOY. Here is what I see, Mr. Chairman. I have been in

the executive branch. I have been in the State Department and the

Justice Department, and I was a political appointee in the Commerce Department.

These agencies have cultures and interests that they represent

in these processes. The problem in the export control area, we have

was built in, timeframes, and you can get things up to the President. The problem with this process, as I see it, we have a credible

evidence test that the President has to meet before he blocks a

transaction.

They are using that test to knock out most of these transactions

in the first 30 days, so we never even get to the formal investigation, because they say that you have to have credible evidence. And

the way that I understand it, the Treasury, which staffs the Committee, that they are the ones that push for using that as the approach.

They have kind of knocked out this whole provision that in a government acquisition, and I do not think that things get elevated.

I think that things, up until this point, and I think Mr. Marchick

even referred to it, these have been handled by people who have

no political legitimacy. They are not appointed and confirmed by

the Congress. These things are getting knocked out at a lower

level. And the authority that the Congress put in for the President

is being handled by people who do not have political legitimacy.

Chairman SHELBY. There have been proposals to place the concept of what we call economic security under the realm of the

issues for which a Committee on Foreign Investment review would

be mandated or encouraged. Could you comment on the ramifications, Mr. Marchick, for U.S. economic competitiveness and economic growth of having transactions reviewed for concerns broader

than even the broadest definitions of national security? That is not

my proposal, as you know.

Mr. MARCHICK. No, I understand, Mr. Chairman, and with your

permission I would like to respond to your previous question and

offer some thoughts in contrast to Pat’s, to Mr. Mulloy’s.

As I mentioned, I think it would be very hard to implement a criteria that focuses on economic security. It is very hard to define.

But a national security criterion which has and should be broadly

used, broadly defined by CFIUS, can encompass those industries

and those technologies that are so important for the United States’

vitality and for our economic security that they do affect national

security.

For example, one could think of right now with the avian flu or

with other threats to our national security technologies or intellectual property that are so important that they need to be retained

in the United States, that they do affect and do implicate our national security. And I think that the law as drafted now does reach

those issues and should reach those issues, but broadening it to

economic security, I know that is not your proposal, would just inVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
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vite domestic industries that do not want additional

competition——

Chairman SHELBY. Well, we would have chaos in the international market.

Mr. MARCHICK. I am sorry, say it again.

Chairman SHELBY. We would have chaos out there, would we

not?

Mr. MARCHICK. We would, sir. We would. I mean, if you look,

right now, the French, the Russians, and Canada are all coming up

with their own——

Chairman SHELBY. We would be worried about the yogurt syndrome, would we not?

Mr. MARCHICK. That is right, sir.

Chairman SHELBY. And that is something—we are not interested

in that.

Mr. MARCHICK. That is right, as much as I like yogurt.

Chairman SHELBY. Absolutely.

Mr. MULLOY. Mr. Chairman.

Chairman SHELBY. Yes, sir.

Mr. MULLOY. Can I just comment briefly?

Chairman SHELBY. Go ahead.

Mr. MULLOY. In 1992, the Congress did one other change in the

law. They added a provision under the factors they wanted looked

at the potential impact on U.S. technological leadership in areas affecting national security.

I personally agree with what Mr. Kimmitt said. The term national security can, if you encompass what Congress tells should be

included under that, I think you get essentially national economic

security, because Congress has told them in the law itself, in the

conference itself, the term national security is intended to be interpreted broadly, without limitation to particular industries.

I think you can take care of this problem. I just think it is the

culture of the lead agency, and I think it is one other thing: The

way they require agencies to really act on these things in 30 days,

because they do not want to get into the 45-day. And so what happens, these agencies are enormous places. You get the notice; you

farm it out; people cannot even get their views together and get

them up saying I got a problem here, because the time has passed

by the time the guys who really understand these things get them

up to the decision makers.

I think you have a real problem with that 30-day thing in which

most of these things are falling out of the process.

Mr. MARCHICK. Can I respond to that?

Chairman SHELBY. Go ahead, Mr. Marchick.

Mr. MARCHICK. Let me just respond to a few statements that Mr.

Mulloy offered just to ffer a different perspective. And Pat and I

have worked together for years. I have enormous respect for him.

We do have a slight disagreement on some of these issues, which

we have debated.

First, CFIUS is driven by consensus, but the agencies with the

greatest power in a consensus-driven process are the agencies that

object because of a particular national security concern that a particular agency has. And so, any agency can force a transaction to

go to an investigation or be on the 30-day process. And so, there

135

is great deference to those agencies that do have national security

concerns in order to find a way to address those concerns.

Second, I do want to take exception to one statement that Pat

made about the people involved in this process do not have political

legitimacy. The people who run the CFIUS process are professionals in each of their fields. At Treasury, they may be economists

or lawyers. In other agencies, they are defense experts, for example, and these are exceptionally competent people. And in recent

years, the Department of Justice, the Department of Homeland Security, for example, has brought in new people with new expertise,

former prosecutors, intelligence officials, people with extraordinary

levels of experience who are frankly tough as nails, and my partners and I have the scars to show for it because of some of the difficult negotiations we have gone through.

I do think that, as Pat said, the process would benefit from higher level involvement and higher level focus.

Chairman SHELBY. Of course, this is still a voluntary process.

Should it remain a voluntary process? What happens in the case

of companies that manufacture items that are on the commodity

control list? Are they automatically covered under other statutes so

that foreign takeover bids receive the proper scrutiny in the event

that the Committee on Foreign Investments fails to discover a

pending or completed transaction?

How are such cases currently handled, and is the withdrawal option abused or exploited for purposes that are not in the national

security interests of this country?

And let me ask Mr. Mulloy that first. Do you want to comment?

Mr. MULLOY. No, you take it, please, and then, I will comment.

Mr. MARCHICK. I think the voluntary nature of the process is

very important and should be retained, because as you said in your

opening statement, 99 percent of investments do not affect national

security at all.

Chairman SHELBY. But some do, and they are very important.

Mr. MARCHICK. Some do, and they should be filed, and CFIUS

should be very aggressive in making sure that any transaction that

might implicate national security should be filed.

A lot of the transactions, for example, other agencies have existing authority to regulate those; for example, an acquisition of a defense company that may not get a lot of press or may fall under

the radar, DoD can control that company already through its existing regulations and through deciding not to award contracts to

them. Similarly, the State Department, the Commerce Department,

and the other agencies that are part of the export control regime

have authority to ensure that there is not an illegal or inappropriate transfer of export control technologies.

On the withdrawal issue, I do not think it has been abused. I am

not part of the CFIUS process, but I will tell you that no responsible counsel will ever advise their clients to withdraw and not

refile if they are going to close that transaction.

Chairman SHELBY. Pat, do you have any comment?

Mr. MULLOY. Here is my point, Mr. Chairman, and I see Senator

Sarbanes here. Thank you for being here, Senator. The gentleman

from Semitech who came in in 1992—Semitech, again, was a joint

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ductor industry in this country, because it was so important—he

said this: Our foreign competitors are picking off our technology

jewels one by one.

We did a hearing out in Palo Alto on the China Commission in

April to look at high tech, what is going on? What you find out is

we have a lot of young, entrepreneurial companies building very

important new discoveries. They need financing, and the foreign investors can find it for them, and they maintain pretty good surveillance on what these technologies—that is why we wanted that report, the Congress wanted that report done every 4 years.

You cannot look at this one transaction at a time, as the Administration wants to do. The importance of that quadrennial report

was to get a pattern and look at who is buying what in what industries in this country. And if you look at that report, even though

it was done in 1994 and only once, they have very good charts

showing which countries are after which industries in this country.

And so, I think this idea of the voluntary requirement, you may

be missing a lot of stuff, because if you are a smaller company,

maybe you do not even know about these requirements.

Chairman SHELBY. A lot of things slip by.

Mr. MULLOY. How many foreign takeovers have there been since

1988? I think there have been 1,570 filed. I would expect there are

at least four or five times that many that have not been filed.

Chairman SHELBY. Senator Sarbanes, I know you have been tied

up.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. I know, and I have been in another hearing,

and I know we have a vote on, Mr. Chairman. But I just wanted

to come to, one, thank you for holding this hearing. I think it is

very important. I commend you for the oversight you are exercising. I know you have had three very good panels this morning,

and I particularly wanted to thank our old friend and staff member, Pat Mulloy, for this excellent review of the history of the emergence of Exon-Florio, yes. We appreciate it very much.

Chairman SHELBY. Thank you, Senator Sarbanes.

We have to make a vote. Our time is up. Thank you.

Mr. MULLOY. Thank you for having me, Mr. Chairman.

Chairman SHELBY. The hearing is adjourned.

[Whereupon, at 12:27 p.m., the hearing was adjourned.]

[Prepared statements, response to written questions, and additional mterial supplied for the record follow:]

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PREPARED STATEMENT OF JAMES INHOFE

A U.S. SENATOR FROM THE STATE OF OKLAHOMA

OCTOBER 20, 2005

The current CFIUS process for reviewing foreign acquisitions leaves our Nation

vulnerable to foreign threats. In our modern day global economy threats to our national security assume many different forms. CFIUS has not accounted for this dynamic.

My attention to the CFIUS process began last April when I delivered four speeches on China. My concern was with the growing threat China is posing to our military, economic, and energy security. While examining this issue I came across a

disturbing example of China buying a United States company, Magnequench, and

moving it piecemeal back to mainland China. Let me read from the floor speech I

gave on April 4, 2005.

I believe that CFIUS does not have a broad enough conception of U.S. security.

I understand that Representatives Hyde, Hunter, and Manzullo expressed similar views in a January letter to Treasury Secretary John Snow, the Chairman

of CFIUS. One example of CFIUS falling short is with Magnequench International Incorporated. In 1995, Chinese corporations bought GM’s

Magnequench, a supplier of rare earth metals used in the guidance systems of

smart-bombs. Over 12 years, the company has been moved piecemeal to mainland China, leaving the United States with no domestic supplier of neodymium,

a critical component of rare-earth magnets. CFIUS approved this transfer.

The United States now has no domestic supplier of rare earth metals, which are

essential for precision-guided munitions. I would say that is a clear national security concern.

More recently, I was concerned with China’s state-owned CNOOC attempted to

buyout Unocal, a United States oil company. This demonstrates the kind of foreign

acquisition that requires a deep examination in terms of national energy security.

I also testified before the United States-China Commission on July 21, 2005, explaining my concerns with the CFIUS process. At the time I had introduced an

amendment to the Defense Authorization Bill that would have made some of the

necessary changes. With that bill stalled, I chose to introduce the changes as a

stand-alone bill (S. 1797) which has been referred to this Committee.

Over the past months, I have been pointing out that the CFIUS process has ignored some major issues which threaten our national security. The Government Accountability Office has recently issued a report on CFIUS that is right in line with

this (September 28, 2005).

Non-Traditional Security Concerns

One of the biggest problems that I have been trying to draw attention to is the

inadequate definition of ‘‘national security.’’ CFIUS, under the leadership of Treasury, has chosen to define national security in the most limited of terms.

The GAO report details how, ‘‘ . . . they have limited the definition to exportcontrolled technologies or items and classified contacts, or specific derogatory intelligence on the foreign company.’’

I am aware of at least one instance where the Departments of Defense and

Homeland Security believed national security was at risk, but were overruled

because the threat did not meet this narrow definition set forth by Treasury.

The language I have proposed in the bill requires CFIUS to investigate transactions of national security concern, including economic and energy security.

Length of Review Period

The length of the review period is also of concern. Presently, there are only 30

days allotted for CFIUS to determine if an acquisition needs to enter the 45-day investigation process. Now some say that this is sufficient because if the investigating

agencies need more time, CFIUS has the company withdraw and refile.

Besides being intellectually dishonest, this method shows how interrupted and inconsistent the process is. I believe we need to extend the review process to a maximum of 60 days.

The Justice Department, a member agency of CFIUS, agrees with this, stating,

‘‘gathering timely and fully vetted input from the intelligence community is critical

to a thorough and comprehensive national security assessment. Any potential extension of time available to the participants for the collection of that information would

be helpful.’’

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Withdrawn Acquisitions

CFIUS has received over 1,520 notifications and investigated only 24. Of those,

only one acquisition has been stopped by the President.

Now some say this extremely low number is because there are many opportunities

for companies to alter the nature of their acquisition. They are more right than they

realize. CFIUS is less a strict procedure and more a porous and open-ended process

by which companies can enter and leave whenever they feel the transaction may

be threatened. This is the reason for the low number of investigations and single

prohibition.

Worse, there has been no enforcement or tracking of these companies once they

withdraw. I know of one example, cited in the GAO report, where a company was

allowed to withdraw from the review process. After 4 years, that company still has

not refilled despite security concerns raised by some CFIUS agencies. They are, for

all intents, free to continue with the acquisition without any review.

Congressional Oversight

I believe Congressional oversight is an effective tool to fix this problem. The bill

I introduced requires:

Unclassified quarterly submissions of acquisitions that have occurred over a 90

period with a classified section that includes dissenting views.

The findings of the review process to be reported to the Senate Committee on

Banking, Housing, and Urban Affairs and the House Committee on Financial

Services.

A layover period of 10 days after a transaction is allowed to proceed, during

which time a resolution of disapproval can be introduced in Congress.

The power for a Chairman or ranking member of an oversight committee (Banking/Finance) to initiate a review.

Conclusion

The current CFIUS process is more than ‘‘opaque.’’ It is clearly broken. And it is

up to us in Congress to fix it. I look forward to what this hearing will reveal and

hope we have the courage to act on what we learn.

A vital part of understanding this issue is a comprehensive analysis of transactions that have occurred. I have two questions along this line that I request be

submitted to the witnesses that they can answer for the record.

Thank you for your time.

—————

PREPARED STATEMENT OF ROBERT M. KIMMITT

DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY

OCTOBER 20, 2005

Chairman Shelby, Ranking Member Sarbanes, and distinguished Members of the

Senate Committee on Banking, Housing, and Urban Affairs, I appreciate the opportunity to appear before you today to discuss the Committee on Foreign Investment

in the United States (CFIUS), and how CFIUS conducts national security reviews

of foreign acquisitions of companies as required under the Exon-Florio Amendment.

I am here speaking on behalf of the Administration, the Treasury Department, and

the Committee on Foreign Investment in the United States (CFIUS).

National Security

I wholeheartedly agree with your recent comments that national security cannot

take a second place to purely economic considerations. Throughout my years of Government service, starting with combat duty in Vietnam 35 years ago and including

over 8 years with the National Security Council staff, I have built a career

premised on the belief that protecting and advancing the national security is a Government official’s highest priority. Let me assure you that my colleagues and I fully

appreciate the national security concerns voiced by the Members of this Committee

and Congress.

This is a demanding time for our Nation as we seek to provide for the security

of our country. Indeed, no responsibility of Government is more important than protecting the national security, which is also a prerequisite for advancing economic

prosperity. In our view, these missions—protecting national security and advancing

economic prosperity—are inherently linked.

Safeguarding our national security depends on protecting defense-related information, maintaining our technological edge, protecting the defense industrial base, and

securing our critical infrastructures, such as the U.S. telecommunications network

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and related communications systems. We believe that the Exon-Florio Amendment

is sufficiently flexible to provide CFIUS and the President the necessary tools to

protect these national security assets. CFIUS brings together twelve agencies with

diverse expertise and equities to ensure that transactions are considered from a variety of perspectives so that all national security issues are identified and considered

in the review of a foreign acquisition. To provide just a few examples, CFIUS assesses whether the foreign investment under review might threaten the national security by harming the Nation’s communications systems, fostering cyber-crime, or

violating the privacy of users of the U.S. communications systems, and seeks to ensure the protection of sensitive U.S. information and technology relating to national

defense and critical infrastructure.

Member agencies bring particular expertise essential to the assessment of the potential national security implications of specific foreign investments in the United

States. This expertise includes knowledge of the level of technological sophistication

of the transaction participants, the market position of alternate suppliers, the financial and product service track record, and the future outlook for transaction participants. This expertise gives CFIUS the broad perspective needed for a comprehensive

assessment of the national defense, competitive performance, trade and investment

policy, and commercial issues involved in each transaction. It also enables CFIUS

to ensure that the national security is safeguarded in a manner consistent with

longstanding U.S. policy regarding foreign investment in the United States. In addition, since certain member agencies administer U.S. export control programs for

both dual use and military/defense items, CFIUS is able to evaluate the compliance

record of the foreign acquirer and can offer guidance to ensure that any relevant

export control issues are taken into account when the foreign acquisition is completed.

Economic Prosperity

In my view, the concept of national security includes both traditional foreign policy and defense criteria and economic considerations. Indeed, I believe there is an

inherent link between our national security and a strong U.S. economy that facilitates free and fair trade, market-based exchange rates, and the free flow of capital

across borders. We are mindful of the positive benefits of foreign investment to our

country and therefore seek to maintain the traditional U.S. open investment policy.

Indeed, we cannot protect the national security without a strong economy, and

foreign investment strengthens the U.S. economy. Foreign companies bring in new

technology, managerial expertise, and capital. Foreign companies buy some U.S.

companies that would otherwise go out of business or move overseas. Foreign investment enables the United States to import new ways of doing business that revive

our industries and increase productivity. Foreign investment in the United States

keeps jobs and technology in the United States.

A strong world economy enhances our national security by advancing prosperity

and economic freedom in the rest of the world. Economic growth supported by free

trade and free markets creates new jobs and higher incomes, spurs economic and

legal reform, promotes democratic political systems, and helps lift large numbers of

people out of poverty.

The international economy performs best when large economies embrace free

trade, the free flow of capital, and flexible currencies. Obstacles in any of these

areas prevent smooth adjustments to changes in international conditions. At best,

such obstacles result in less than maximum growth; at worst, they create distortions

and increase risks.

In the recent past, the United States has placed considerable emphasis on promoting global free trade and investment, multilaterally through its support for the

resumption of negotiations in the Doha Round and regionally and bilaterally

through the negotiation of Free Trade Agreements, including most recently CAFTA,

and bilateral investment treaties. In addition, the United States has urged countries, including China, to adopt more flexible currency policies. However, we also

need to promote policies that encourage the global free flow of capital. Too many

countries maintain barriers that keep needed foreign portfolio and direct investment

out while preventing domestic capital from seeking better returns in overseas financial markets.

If the United States maintains its openness to foreign direct investment, we have

the credibility internationally to promote similar investment regimes in other countries. Open investment regimes based on the free flow of capital are crucial to the

U.S. economy both because of the benefits provided domestically, including job creation, and because of the reciprocal opportunities such policies in other countries

provide for U.S. firms seeking to invest abroad.

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Investment Policy

U.S. policy toward foreign investment in the United States provides the context

in which Exon-Florio is implemented. U.S. investment policy welcomes foreign direct

investment and provides national treatment—treating foreign companies like we

would treat U.S. companies. In return, the United States seeks to promote reciprocity in similarly open investment regimes in other nations around the world.

When capital is free to flow in response to market demand, it is channeled into

its most efficient use. When the United States makes the best use of capital, as determined by the market, we achieve greater productivity and enhanced international competitiveness. This has direct benefits for our economy, and indirect but

clear benefits for our national security.

To illustrate the benefits of foreign direct investment, last year foreign investors

invested over $115 billion in U.S. companies in the United States. Further, according to data from the Department of Commerce’s Bureau of Economic Analysis, in

2003 foreign firms operating in the United States:

• Employed 5.3 million Americans, 4.7 percent of employment in nonbank private

industries;

• Had payrolls of $318 billion, an average of $60,527 per employee, 31 percent higher than the average of all companies;

• Accounted for 5.8 percent of U.S. gross domestic product originating in private industries compared to 4.3 percent a decade ago (an increase of more than 30 percent);

• Accounted for over 20 percent of all U.S. exports; and

• Spent $30 billion on research and development.

I have discussed foreign direct investment, but portfolio investment is another key

engine of economic growth. The free flow of capital is one reason for the strong performance of the U.S. economy, and it is gratifying to see that countries around the

world increasingly recognize the benefits to be gained from liberalized capital accounts. Openness to capital inflows creates avenues for foreign investors to contribute to economic development. At the same time, it decreases the cost of capital

to local entrepreneurs, especially in the small- to medium-sized enterprise sector.

Exon-Florio

Our open investment policy has always recognized the need to protect the national security, a need that is internationally recognized as a defensible exception

to an open investment regime. The United States has numerous laws and regulations that provide this critical protection.

CFIUS was established in 1975 by Executive Order of the President with the Secretary of the Treasury as its chair. Its main responsibility was ‘‘monitoring the

impact of foreign investment in the United States and coordinating the implementation of United States policy on such investment.’’ It analyzed foreign investment

trends and developments in the United States and provided guidance to the President on significant transactions. However, it had no authority to take action with

regard to specific foreign investments.

The Omnibus Trade and Competitiveness Act of 1988 added Section 721 to the

Defense Production Act of 1950 to provide authority to the President to suspend or

prohibit any foreign acquisition, merger, or takeover of a U.S. company that the

President determines threatens to impair the national security of the United States.

Section 721 is widely known as the Exon-Florio Amendment, after its original Congressional cosponsors.

Specifically, the Exon-Florio Amendment authorizes the President, or his designee, to investigate foreign acquisitions of U.S. companies to determine their effects

on the national security. It also authorizes the President to take such action as he

deems appropriate to prohibit or suspend such an acquisition if he finds that:

(1) There is credible evidence that leads him to believe that the foreign investor

might take action that threatens to impair the national security; and

(2) Existing laws, other than the International Emergency Economic Powers Act

(IEEPA) and the Exon-Florio Amendment itself, do not in his judgment provide

adequate and appropriate authority to protect the national security.

The President may direct the Attorney General to seek appropriate judicial relief

to enforce Exon-Florio, including divestment. The President’s findings are not subject to judicial review.

Following the enactment of the Exon-Florio Amendment, the President delegated

to CFIUS the responsibility to receive notices from companies engaged in transactions that are subject to Exon-Florio, to conduct reviews to identify the effects of

such transactions on the national security, and, if necessary, to undertake investigaVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00144 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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tions. However, the President retained the authority to suspend or prohibit a transaction.

The Secretary of the Treasury is the Chair of CFIUS, and the Treasury’s Office

of International Investment serves as the Staff Chair of CFIUS. Treasury receives

notices of transactions, serves as the contact point for the private sector, establishes

a calendar for review of each transaction, and coordinates the interagency process.

The other CFIUS member agencies are the Departments of State, Defense, Justice,

and Commerce, OMB, CEA, USTR, OSTP, the NSC, the NEC, and the newest member, the Department of Homeland Security.

The CFIUS process is governed by Treasury regulations that were first issued in

1991 (31 CFR part 800). Under these regulations, parties to a proposed or completed

acquisition, merger, or takeover of a U.S. company by a foreign entity may file a

voluntary written notice with CFIUS through Treasury. Alternatively, a CFIUS

member agency may on its own submit notice of a transaction. The CFIUS process

starts upon receipt by Treasury of a complete, written notice. Treasury determines

whether a filing is in fact complete, thereby triggering the start of the

30-day clock, and CFIUS may reject notices that do not comply with the notice requirements under the regulations. Treasury sends the notice to all CFIUS member

agencies and to other agencies that might have an interest in a particular transaction, for example, the Departments of Energy and Transportation, or the Nuclear

Regulatory Commission. CFIUS then begins a thorough review of the notified transaction to determine its effect on national security. In some cases, this review

prompts CFIUS to undertake an ‘‘investigation,’’ which must begin no later than 30

days after receipt of a notice. The Amendment requires CFIUS to complete any investigation and provide a recommendation to the President within 45 days of the

investigation’s inception. The President in turn has up to 15 days to make a decision, for a total of up to 90 days for the entire process.

CFIUS Implementation

Exon-Florio notices are voluntary. Many acquisitions by foreign investors do not

implicate the national security, and parties to those transactions choose not to notify. However, companies know that failure to notify leaves their transaction subject

to Presidential action indefinitely, and there is no statute of limitations. Companies

also know that any CFIUS member may notify a transaction to the Committee.

During the initial 30-day review, each CFIUS member agency conducts its own

internal analysis of the national security implications of the notified transaction. As

part of the review, agencies with particular areas of competence, such as export controls, protection of classified information or critical infrastructure, examine whether

existing laws other than International Emergency Economic Powers Act (IEEPA)

are adequate and appropriate to protect the national security with respect to the

transaction. The U.S. Intelligence Community provides input to CFIUS reviews. For

instance, the Intelligence Community Acquisition Risk Center (CARC) now under

the office of the Director of National Intelligence may be called on by CFIUS to provide intelligence support to CFIUS’ review process, including threat assessments on

the foreign acquirer. Further, the Department of Energy and the Department of

Transportation have actively participated in the consideration of transactions that

impact the industries under their respective jurisdictions. CFIUS agencies, through

the Treasury Staff Chair, can seek clarifications of and supplements to the information provided in the notice by submitting additional questions to the parties to the

transaction. In some cases, the parties are asked to meet with CFIUS agency staff.

If within the initial 30-day period CFIUS determines that there are no national

security concerns, or any national security concerns have been mitigated, thereby

obviating an investigation, Treasury, on behalf of CFIUS, writes to the parties notifying them of that determination. This concludes consideration of the acquisition for

Exon-Florio purposes. However, when the Committee believes that unresolved national security issues remain at the end of the 30-day period, CFIUS conducts an

investigation that ends with a report and recommendation to the President.

Depending on the facts of a particular case, CFIUS agencies that have identified

specific risks that a transaction could pose to the national security may, separately

or through CFIUS auspices, develop appropriate mitigation mechanisms to address

those risks when existing laws and regulations alone are not adequate or appropriate to protect the national security. Agreements implementing mitigation measures vary in scope and purpose, and are negotiated on a case-by-case basis to

address the particular concerns raised by an individual transaction. Publicly available examples of the general types of agreements that have been negotiated include:

Special Security Agreements, which provide security protection for classified or

other sensitive contracts; Board Resolutions, which, for instance, require a U.S. company to certify that the foreign investor will not have access to particular informaVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00145 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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tion or influence over particular contracts; Proxy Agreements, which isolate the foreign acquirer from any control or influence over the U.S. company; and Network Security Agreements (NSA’s), which are used in telecommunications cases and are imposed in the context of the Federal Communications Commission’s (FCC) licensing

process.

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. In such cases, once an agreement to

implement the mitigation measures is executed by the parties to the agreement and

all CFIUS members are satisfied that the national security issues have been adequately addressed. CFIUS concludes its review. When mitigation measures are

agreed to during an investigation, companies may request a withdrawal and refile.

CFIUS then concludes its review.

As noted, publicly available NSA’s provide some insights into the kinds of concerns that arise in the telecommunications sector. Also, in recent years, CFIUS has

taken a close look at transactions involving technologies for either military/defense

or dual use applications. For foreign acquisitions in this sector, CFIUS has analyzed

the acquiring and acquired firms’ records on compliance with U.S. export controls

and the potential for unauthorized diversion of these technologies. In addition, in

the post-September 11 environment, factors in the review have expanded to include

terrorism-related issues. Finally, while CFIUS was always mindful of the potential

national security impact of foreign acquisitions of U.S. companies in critical infrastructure, especially in the telecommunications sector, the addition of Homeland Security to the Committee’s membership has led to an even closer focus on infrastructure vulnerabilities as they relate to foreign acquisitions under review.

When CFIUS completes a full 45-day investigation, it must provide a report to

the President stating its recommendation. If CFIUS is unable to reach a unanimous

recommendation after the investigation period, the Secretary of the Treasury, as

Chairman, must submit a CFIUS report to the President setting forth the differing

views and presenting the issues for decision. The President then has 15 days to announce his decision on the case and inform Congress of his determination.

The Exon-Florio Amendment requires that information furnished to any CFIUS

agency by the parties to a transaction shall be held confidential and not made public, except in the case of an administrative or judicial action or proceeding. This confidentiality provision does not apply to Congress. Treasury, as chair of CFIUS, upon

request of Congressional committees or subcommittees with jurisdiction over ExonFlorio matters, has arranged Congressional briefings on transactions for which

CFIUS has completed a review. These briefings are conducted in closed sessions

and, when appropriate, at a classified level. CFIUS members with equities in the

transaction under discussion have also been invited to participate in these briefings.

Since the enactment of Exon-Florio in 1988, CFIUS has reviewed over 1,570 foreign acquisitions of companies for potential national security concerns. In most of

these reviews, CFIUS agencies have either identified no specific risks to national

security or risks have been addressed during the review period. However, 25 cases

in total have gone to investigation, 12 of which reached the President’s desk for decision. In 11 of those, the President took no action, leaving the parties to the proposed acquisitions free to proceed. In one case, the President ordered the foreign

acquirer to divest all its interest in the U.S. company. In another case that did not

go to the President, the foreign acquirer undertook a voluntary divestiture. Of the

25 investigations, 6 were undertaken since 2001 with one going to the President for

decision. However, these statistics do not reflect the instances where CFIUS agencies implemented mitigation measures that obviated an investigation or where, in

response to dialogue with CFIUS agencies, parties to a transaction either voluntarily restructured the transaction to address national security concerns or withdrew from the transaction altogether.

An important aspect of the Exon-Florio process is the requirement that governmental action be concluded within specified time limits. Those limits—for instance,

the initial 30-day review period—necessitate that the Government act efficiently to

assess all factors relating to the case. At the same time, the short timeframe does

not significantly hold up transactions, which should be driven by the market and

can be time-sensitive.

Improving CFIUS

Two weeks ago, this Committee heard from the GAO regarding its recent report,

‘‘Defense Trade: Enhancements to the Implementation of Exon-Florio Could

Strengthen the Law’s Effectiveness.’’ I appreciate the time and resources that the

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1See 50 U.S.C. app. § 2170. CFIUS’s activities are pursuant to Executive Order 11858, 40 Fed.

Reg. 20263 (May 7, 1975), as amended by Executive Order 12188, 45 Fed. Reg. 989 (Jan. 2,

1980), Executive Order 12661 of December 27, 1988, 54. Fed. Reg. 779 (Jan. 9, 1989), Executive

Order 12869 of September 30, 1993, 58 Fed. Reg. 51751 (Oct. 4, 1993), and Executive Order

13286 of February 28, 2003, 68 Fed. Reg. 10619 (Mar. 5, 2003). The Treasury Department regulations implementing Exon-Florio are at 31 CFR Part 800 (Office of International Investment

Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons). 2See, for example, 15 U.S.C. § 1512.

GAO dedicated to this report, and, although I do not agree with all of the assertions

in the report, I do recognize a need to review current CFIUS policies and operating

procedures, especially those mentioned in the GAO recommendations. The new senior CFIUS team represented at this hearing is involved in an effort to improve the

CFIUS process, drawing on comments from Members of Congress, the recommendations of the GAO, and the recommendations I have received from the member agencies of CFIUS.

• First, I believe that CFIUS requires high-level attention from Treasury and the

other members. You have my commitment that I will work hard to bring that

high level of attention going forward. The departmental representation at today’s

hearing is an important indication of our common commitment in this regard. • Second, when meeting at the deputies level, I will chair CFIUS while the Under

Secretary of Treasury for International Affairs or his designee will represent the

Treasury Department during consideration of a particular transaction. I think

that this change will enable me to manage the process to ensure that all viewpoints are identified and given the same equal, careful consideration. • Third, we are looking carefully at ways to allow more time to assemble the information needed to develop agency positions during the CFIUS process. • Last, I support the idea of enhancing the transparency of the CFIUS process

through more effective communication with Congress, while recognizing our

shared responsibility to avoid the disclosure of proprietary information that could

undermine a transaction or be used for competitive purposes. I am open to suggestions on ways to improve the transparency of the process, such as more regular

reports to Congress and Congressional briefings.

Conclusion

We are in a time of both challenge and opportunity for our national security interests. Through an improved CFIUS process, we will continue to protect our national

security in the context of an open investment policy that recognizes the critical link

between national security and economic prosperity.

Thank you for the opportunity to appear before you today.

—————

PREPARED STATEMENT OF DAVID A. SAMPSON

DEPUTY SECRETARY, U.S. DEPARTMENT OF COMMERCE

OCTOBER 20, 2005

On behalf of Secretary Gutierrez, I would like to thank the Committee for giving

me the opportunity to appear before you today. As you know, the Department of

Commerce is a member of the Committee on Foreign Investment in the United

States (CFIUS), which was established in 1975 and was delegated authority by the

President in 1988 to review and, as appropriate, investigate foreign acquisitions

under the Exon-Florio Amendment to the Defense Production Act of 1950.1 My testimony will describe the participation by the Commerce Department’s International

Trade Administration (ITA) and Bureau of Industry and Security (BIS) in CFIUS’s

Exon-Florio reviews of proposed mergers, takeovers, and acquisitions of U.S. firms

by foreign parties.

ITA’s Role

ITA was established in 1980 to carry out the international trade and investmentrelated functions of the Secretary of Commerce. In this capacity, ITA promotes trade

and export expansion pursuant to Reorganization Plan 3 of 1979, and promotes and

develops the foreign and domestic commerce of the United States pursuant to the

Secretary’s organic authority found in Title 15, United States Code.2 Commerce participation in CFIUS and other international investment fora is led and coordinated

by ITA. ITA has industry expertise essential to the assessment of the potential national security implications of specific foreign investments in the United States. This

expertise includes knowledge of the level of technological sophistication of the transVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00147 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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action participants, the market position of alternate suppliers, the financial and

product service track record, and the future outlook for transaction participants.

This expertise gives ITA the broad perspective needed for a comprehensive assessment of the national defense, competitive performance, trade and investment policy

and commercial issues involved in each transaction, and for ensuring that the national security is fully safeguarded in a manner consistent with longstanding U.S.

policy regarding foreign investment in the United States.

Within Commerce, CFIUS reviews are carried out by members of the Department

of Commerce Exon-Florio Working Group. ITA chairs the group and coordinates the

Department responses to the CFIUS. Members include representatives from ITA

and BIS, the Technology Administration, the Economic and Statistics Administration, the National Telecommunications and Information Administration, and the Office of the General Counsel.

As provided in Treasury’s regulations implementing CFIUS’ delegated authority

under Exon-Florio, Commerce, as a CFIUS member, may also notify CFIUS about

any transactions with perceived national security implications that have not been

notified by the parties to the transaction, with a request for review and subsequent

action by CFIUS. ITA has a formalized process of identifying such transactions, and

asks Working Group members to identify and report any potential acquisitions by

foreign companies that may be of interest to CFIUS, especially those transactions

that involve smaller and/or privately held U.S. firms that may not have been reported widely in the media.

BIS’s Role

The Bureau of Industry and Security (BIS) supports ITA in the development of

the Commerce Department position on proposed foreign acquisitions and takeovers.

The overall mission of BIS is to advance U.S. national security, foreign policy, and

economic security interests. While BIS is best known for developing export controls

for dual use items, issuing export licenses and enforcing export controls, BIS also

conducts programs designed to ensure a strong, technologically superior U.S. defense industrial base. For example, BIS administers the Defense Priorities and Allocations System program that provides for expedited shipment of critical materials

and services from the U.S. industrial base to meet urgent national security needs.

BIS has been very active in using this authority to support the Department of Defense in Operation Enduring Freedom and Operation Iraqi Freedom.

With respect to the CFIUS process, BIS assesses the national security, defense

industrial base, and export control implications of all proposed acquisitions of U.S.

companies by foreign entities that have been notified to CFIUS. In so doing, BIS

seeks to ensure that the U.S. defense industrial and technology base will not be

compromised by such foreign acquisitions.

In reviewing each proposed acquisition, BIS reviews internal databases to determine whether the parties to the acquisition have violated U.S. export control laws.

BIS also checks its CFIUS database for previous acquisitions by the foreign company and other acquisitions in the industry. In addition, BIS assesses whether there

is significant sensitive technology being acquired, and evaluates the foreign company’s plans for managing its compliance with U.S. export control laws.

In order to address potential industrial base concerns, BIS works with the Department of Defense to determine the importance of the firm that is being acquired to

the Nation’s defense manufacturing and technology infrastructure. BIS also works

with the Departments of Justice and Homeland Security, and with the intelligence

community, to investigate potential problems with the acquiring firm and the possible damage to national security and homeland security that might occur as a

result of foreign access to key firms in the United States. For example, if the acquiring company was in the telecommunications industry, BIS would work with Department of Homeland Security and other agencies to resolve concerns about the safety

of the Nation’s communications infrastructure.

In addition, BIS compares companies involved in filings with CFIUS against a series of lists of individuals, companies, and organizations that may have acted in

ways that jeopardize, or have the potential to jeopardize, U.S. national security. BIS

reviews classified and unclassified lists including the Bureau’s Entity List, our

Unverified List, our Denied Persons List, and the Treasury Department’s Specially

Designated Nationals and Blocked Persons List. In sum, BIS’s review of CFIUS

transactions focuses on the national security impact that such proposed acquisitions

may have on the release of sensitive technologies and on the defense industrial base.

Mr. Chairman, the expertise that the various Commerce agencies bring to the

CFIUS process is unique and important to the success of CFIUS reviews. Thank you

for asking me to appear before you today, and I would be happy to answer any questions you may have at this time.

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PREPARED STATEMENT OF STEWART BAKER

ASSISTANT SECRETARY FOR POLICY

U.S. DEPARTMENT OF HOMELAND SECURITY

OCTOBER 20, 2005

Mr. Chairman, Ranking Member Sarbanes, and distinguished Members of the

Committee. Thank you for the opportunity to speak briefly today on the Department

of Homeland Security’s role as a member of the Committee on Foreign Investment

in the United States.

The Department of Homeland Security is the newest member of CFIUS. We became a member in March 2003, soon after standing up as an amalgam of 22 diverse

agencies whose common mission is the protection and security of our Nation and

people. Since that time, we have participated in the review of more than 125 foreign

acquisitions or investments involving some of the Nation’s most critical infrastructure assets and components as well as technology companies vital to the defense

technology base.

I mention our origins in order to stress what I believe is a key strength of the

Department—we bring to CFIUS a diversity of viewpoints, expertise, and skills. The

Government agencies from which we were formed give DHS a broad perspective, informed by an understanding of infrastructure threats, vulnerabilities, and consequences.

You have already heard some of my colleagues speak about achieving a balance

between the desire for free and open markets and our responsibility to provide for

the Nation’s security in the post-September 11 environment. DHS is well-aware of

the importance of free and open markets; it must maintain a close partnership with

private industry in addressing critical infrastructure protection. Although our mission and expertise lead us to focus primarily on the security issues, we can never

ignore the important role that foreign investment plays in our economy and, ultimately, in our national security. Indeed, we consider our CFIUS colleagues whose

missions and expertise are traditionally in the economic arena to be crucial allies

in the endeavor to protect and secure our Nation, and we welcome the vigorous debates that sometimes arise as opportunities to better assess and articulate the risks

that these transactions may represent.

Early Warning Program and Information Sharing

To that end, we have established a program that enables us to identify transactions of potential concern well before they are formally filed with CFIUS, and we

both produce and share with our colleagues on the Committee detailed summaries

and assessments to inform our discussions.

Soon after joining the Committee, DHS developed a rigorous in-house process of

formal reviews for individual CFIUS filings and began producing detailed assessments for each filing, bringing to bear the full scope of unclassified and classified

resources available. During this process, DHS studies any consequences,

vulnerabilities, and threats that may be present and makes a determination on the

total risk to national security. If the risk is at an unacceptable level, DHS, together

with other interested CFIUS parties, will develop tailored risk mitigation measures

that are often memorialized in formal agreements.

In the past 2 years, DHS, along with DOD, DOJ, and the other CFIUS agencies,

has made great efforts to share as much information as possible. We believe that

bringing together each agency’s unique resources spanning law enforcement, national intelligence, and open source information produces the best quality analysis.

As part of this effort, DHS implemented an early warning program soon after joining the Committee. The purpose of this program is to identify those foreign investments in U.S. critical infrastructure and industrial base technology companies that

may result in CFIUS filings or may pose a national security risk. We share this information with Treasury and our other partners. In many cases, prior to any CFIUS

filing, we reach out to the companies involved in these transactions to ask for technical and financial briefings. We believe that this early outreach helps all parties

concerned. CFIUS members get more information earlier, while the private parties

have an early opportunity to explain the transaction and to allay national security

concerns.

In fact, we find that sophisticated companies and experienced counsel increasingly

do not wait for our outreach. Instead, they often approach DHS or other CFIUS

members to offer briefings and discuss Government interests before they file. This

provides more information to the Government and greater certainty to the companies involved. It sometimes allows us to agree on more effective risk management

and mitigation, without the strict timelines that Exon-Florio imposes. This is parVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00149 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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ticularly important for large, complex transactions, and we are pleased that counsel

in such transactions also see the benefits of early consultation.

Compliance Monitoring

DHS has made another contribution to the CFIUS process—systematic, predictable enforcement. When we enter into an agreement, we expect all sides to carry

it out as written. To ensure compliance, DHS takes a disciplined approach to monitoring risk mitigation agreements that it enters into. DHS analyzes each agreement

to which it is a signatory and extracts the timetables, policies, and deliverables that

must be tracked to determine the companies’ current compliance status. DHS uses

both passive and active compliance verification strategies to ensure that foreign

companies continue to abide by the terms of their agreement. In sum, we believe

that the Department is providing an effective, credible, and capable program to

deter or promptly resolve actions that a foreign company might take to endanger

the national security.

Closing Statement

In closing, I would like to observe that the occasionally differing views among the

agencies within CFIUS are not signs that the process is broken. Rather, they are

signs that the process is working. The best way to get to the truth is a healthy debate. CFIUS is a diverse group of executive agencies. The balance between an open

investment policy and protecting national security is a delicate one, and each CFIUS

case deserves to be thoroughly analyzed from all angles in order to get the best

overall, comprehensive determination. Spirited discussions mean that the right people are talking to each other, and they are more likely to produce the right result.

Thank you again for the opportunity to address this important issue. I look forward to your questions.

—————

PREPARED STATEMENT OF E. ANTHONY WAYNE

ASSISTANT SECRETARY, ECONOMIC AND BUSINESS AFFAIRS

U.S. DEPARTMENT OF STATE

OCTOBER 20, 2005

Chairman Shelby, Ranking Member Sarbanes, and distinguished Members of the

Committee, thank you for the opportunity to discuss the Committee on Foreign Investment in the United States (CFIUS), the role of the Department of State in reviewing the acquisition of U.S. companies by foreign investors.

Mr. Chairman, part of the Mission Statement of the Department of State says

‘‘Create a more secure, democratic, and prosperous world for the benefit of the

American people and the international community.’’ An important part of our effort

to create a secure and prosperous world is the Department’s role in implementing

the Exon-Florio statute, and it is an effort we take extremely seriously.

We bring to the CFIUS process expertise and experience in international economic

issues as well as national and international security policy. We consider them to be

mutually reinforcing elements of our work. Security and prosperity are interdependent and where one is lacking, the other will be undermined in time.

I believe our internal processes at the Department of State ensure that each and

every CFIUS case receives careful scrutiny by offices responsible for both economic,

foreign, and national security policy. The Bureau of Economic and Business Affairs,

the Bureau of Political-Military Affairs, the Bureau of International Security and

Nonproliferation, the Bureau of Diplomatic Security, the Bureau of Intelligence and

Research, the Office of the Legal Adviser, and the appropriate regional bureau participate in the review of notifications received by CFIUS and forwarded to us by the

Department of the Treasury as CFIUS chair. Other experts are also brought in, as

needed.

The State Department brings to the CFIUS process background and insight into

the political and economic context abroad in which particular foreign investors operate and the aims and motivations of governments around the world. This expertise

is gained through the hard work of our Embassy personnel, from the Department

of State’s statutory responsibilities on defense trade and nonproliferation, and by

our roles in terrorist financing and counter-terrorism policy.

This work extends far beyond CFIUS. The Arms Export Control Act (AECA) and

its implementing regulations, and the International Traffic in Arms Regulations

(ITAR) give the State Department independent authority to regulate the export of

defense articles and services and provides for civil and criminal penalties, whether

a U.S. company is foreign-owned or not, when provisions of the AECA and ITAR

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are violated. Pursuant to these authorities, the State Department manages a registration system of all manufacturers, exporters, and brokers of defense articles and

services, and tracks foreign ownership as part of this process.

As Deputy Secretary Kimmitt has noted in his testimony, Congress, in crafting

Exon-Florio, provided that the extraordinary authority to prohibit foreign ownership

or control in a particular transaction should be used only when there is credible evidence that those acquiring ownership or control might pose a threat to national security and when it is judged that other existing U.S. legal authority is inadequate

to address the potential threat.

All CFIUS members share the goal of assuring that no transaction reviewed by

CFIUS leads to a compromise of national security. Although the confidentiality requirements of Exon-Florio and other factors prevent me from going into cases in an

open hearing, I can assure you that the process has enabled the U.S. Government

to take appropriate action to address potential threats when they have arisen.

Preserving both economic security and prosperity in a post-September 11 world

is a complex challenge, but it is critical to America’s future. The belief that an open

investment policy is essential to our economic prosperity is long-standing and dates

to the founding of the Republic. It is a policy principle borne out by the facts. U.S.

openness to foreign investment has helped make the United States the world’s most

successful economy, which in turn provides the wealth and technology needed to

support the world’s most powerful and best-equipped military that ensures our security.

Therefore, we have welcomed and continue to welcome foreign investment, and indeed, most State governments in the United States spend considerable time and effort to attract it. Many have been very successful in doing so, and I congratulate

you, Mr. Chairman, because Alabama has been a real success story in attracting

high quality foreign investment. Just like people in Alabama, we understand that

foreign investment brings quality jobs that pay relatively high wages.

The free flow of capital also makes the rest of the world economically stronger,

and creates overseas opportunities for U.S. investors. This is not only sound economic policy, but also our international obligation in many cases. We have enshrined the principle of providing foreign companies operating in the United States

the same treatment U.S. companies receive in investment treaties and trade agreements signed with many foreign countries.

Our openness, and the benefits it has produced for us, has been very effective in

encouraging others to emulate us, and open their own markets to our investors. Together with our colleagues at USTR, Treasury, and Commerce, the State Department negotiates investment agreements that seek to remove discriminatory investment barriers in other markets, and contain strong protections for American investors and their investments.

In this regard, our open investment policy is an important asset, giving us greater

credibility when we seek to open other markets. At the same time, this open investment policy must be implemented in a manner that reinforces our security interests.

In conclusion, Mr. Chairman, the Department of State believes Exon-Florio and

its implementation by CFIUS have strengthened our national security, while avoiding unnecessary and detrimental restrictions on our open investment policy.

Mr. Chairman, the President and Secretary Rice have entrusted all of us at the

Department of State with making sure we do everything possible to protect the national security of the United States and the American people, and to promote the

kind of global economic policies, including open investment climates, that will maximize U.S. prosperity. I want to assure you that we take this mission seriously and

personally.

Thank you for the opportunity to appear before you today. I would be pleased to

answer your questions.

—————

PREPARED STATEMENT OF PETER C.W. FLORY

ASSISTANT SECRETARY, INTERNATIONAL SECURITY POLICY

U.S. DEPARTMENT OF DEFENSE

OCTOBER 20, 2005

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee,

thank you for the opportunity to appear before you today to discuss the impact of

Section 721 of the Defense Production Act (50 U.S.C. App. § 2170 and also known

as the Exon-Florio Amendment) on national security. We in the Department of Defense (DoD) take very seriously our role in protecting technology, the defense indusVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00151 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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trial base, and the security of those critical infrastructures we depend upon to accomplish our mission. Foreign investment in the United States generally is desirable. In terms of the defense sector, foreign investment has been helpful in maintaining the viability and diversity of the defense industry.

When it comes to reviewing a foreign acquisition of a U.S. company, there are a

number of factors which we in the DoD consider before taking a position. These include five major areas of interest:

First, the significance of the technologies possessed by the firm to be acquired (for

example, are they ‘‘state of the art’’ or otherwise militarily critical? Are they classified, export controlled, or otherwise security sensitive?);

Second, the importance of the firm to the U.S. defense industrial base (for example, is it a sole-source supplier and if so, what security and financial costs would

be incurred in finding and/or qualifying a new supplier, if required?);

Third, possible security risks or concerns that might be posed by the particular

foreign acquiring firm (for example, is it controlled by a foreign government? Does

the firm have a record of export control violations?);

Fourth, whether the company to be acquired is part of the critical infrastructures

that the Defense Department depends upon to accomplish its mission; and

Fifth, can any potential national security concerns posed by the transaction be

eliminated by the application of risk mitigation measures either under the Department’s own regulations or through negotiation with the parties?

DoD Participants and their Roles in CFIUS

Within the Department of Defense, there are a variety of DoD offices and agencies

involved in the CFIUS review of each case. The Defense Technology Security Administration (DTSA) plays an important role as our representative to the Committee

on Foreign Investment in the United States (CFIUS). DTSA is responsible for the

management, coordination, and formulation of the Department’s position for all

CFIUS cases. DTSA is also the focal point within the Department for technology security policy as regulated by the Export Administration Regulation, International

Traffic in Arms Regulation and the National Disclosure Policy. The Office of the

Under Secretary, Acquisition, Technology, and Logistics (USD/AT&L), determines if

the U.S. company involved in a CFIUS case provides a product or service that is

a critical technology. That office also evaluates the transaction’s impact on the defense industrial base, including whether the firm is a sole-source provider, and what

the costs would be if we were required to find a new supplier.

The Office of the Assistant Secretary of Defense for Networks Information and Integration (ASD/NII), with input from subject matter experts such as the National

Security Agency and the Defense Information Systems Agency, performs vital technical reviews of filings that involve critical information and telecommunications infrastructures. In its CFIUS review of cases involving defense contractors performing

classified work, the Office of the Under Secretary for Intelligence assesses whether

the Defense Industrial Security Regulations are adequate to mitigate potential national security concerns of foreign control of U.S. defense contractors. The National

Industrial Security Program is a separate, but parallel process to the CFIUS review

that protects classified information in U.S.-located firms owned/acquired by foreign

companies.

The three military services (Army, Navy, and Air Force) identify and assess the

impact of the transfer of technology relevant to the particular military service, especially when cases involve current or former defense contractors. Specifically, the

services review cases to determine if commodities or technologies involved in a given

transaction may affect warfighters’ capabilities and technological advantages. The

Defense Logistics Agency assesses the effect of the transaction on defense procurement and planning. The Defense Advanced Research Projects Agency evaluates the

technology to be transferred, its relationship to defense programs, and its potential

impact on future defense capabilities. The Defense Intelligence Agency prepares intelligence assessments and analyzes the risk of diversion. The Office of General

Counsel provides positions on legal issues, including adequacy of other laws to protect national security, and other legal assistance.

Changing Nature of DoD Suppliers

I would now like to address an issue that is gaining increasing importance for

DoD, that is, the growing role of nontraditional, commercial, and dual-use suppliers

to the Department. As part of defense transformation, the Department is focusing

on real-time communication between those systems and personnel responsible for

finding enemy targets and those systems and personnel responsible for destroying

or incapacitating those targets. This goes under the name of network-centric warfare or sensor-shooter integration, and is essential to the Department’s transVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00152 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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formational efforts. This transformation increasingly involves the use of technologies

from commercial markets in such fields as information technology, telecommunications, and electronics, among others. Many of the suppliers are at the component

and subsystem level and may not even have classified contracts.

Mitigation Measures and Security Agreements

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.

When we find potential national security concerns with a foreign acquisition, we

normally use the risk mitigation measures available to us under the National Industry Security Program’s Foreign Ownership, Control, and Influence Program (FOCI).

The DoD imposes special mitigation/negation measures for companies that are

cleared for access to classified information when they are acquired by a foreign

source. These security agreements specify procedures to ensure protection of classified and export-controlled information. The Department’s Defense Security Service

enters into negotiations with the parties of such cases and develops specifically tailored agreements, which are designed to provide for the necessary level of security

for such classified, export-controlled information and technologies.

The Department and other agencies occasionally negotiate risk mitigation measures for acquisitions where there are no classified contracts. As previously

addressed, this is becoming more common as we increasingly rely on dual use and

primarily commercial suppliers. As we review foreign acquisitions when FOCI does

not apply, we have to enter a negotiation process with the parties to the transaction

to develop appropriately tailored risk mitigation measures.

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 place conditions on the transfer of licenses to a

foreign company subject to compliance with the Network Security Agreement that

CFIUS member agencies have negotiated with that company before the transaction

is finalized. The Network Security Agreement includes actions the commercial parties agree to undertake (during the initial review or during the investigatory period)

in order to mitigate the national security risk. CFIUS members, in turn, agree to

not object to the transaction if the companies have implemented the negotiated mitigation measures.

Conclusion

Mr. Chairman that concludes my formal statement. I would be happy to answer

any further questions you may have regarding this subject.

—————

PREPARED STATEMENT OF ROBERT D. McCALLUM, JR.

ACTING DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE

OCTOBER 20, 2005

Introduction

Mr. Chairman, Ranking Member Sarbanes, and Members of the Committee, I appreciate the opportunity to discuss the Department of Justice’s role in implementing

the Exon-Florio Amendment to Section 721 of the Defense Production Act of 1950

(Exon-Florio). The Department of Justice has worked vigilantly within CFIUS to implement Exon-Florio effectively to protect national security. The effective implementation of Exon-Florio is critically important to the Department’s national security

mission and is a responsibility we take very seriously.

Implementation of Exon-Florio Implicates Key Elements of

the Department of Justice’s National Security Mission

To fulfill its mission to defend the interests of the United States, ensure public

safety, and prevent crime, the Department of Justice has set goals to strengthen its

counterintelligence capabilities, with a focus on protecting sensitive United States

information and technology relating to national defense and critical infrastructure,

and to protect the Nation’s communications systems by preventing and combating

cybercrime and protecting the privacy of U.S. communications. Currently, the Federal Bureau of Investigation’s (FBI) second and third highest priorities are to protect against foreign intelligence operations and espionage and to protect against

cyber-based attacks and high-technology crimes. The Department must ensure that

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it has the necessary tools and resources to accomplish its mission and meet these

goals, and nothing is more important in our arsenal than the ability to conduct lawful electronic surveillance without risking interference by foreign entities and the

premature, unauthorized disclosure to targets of the surveillance.

Acquisitions by foreign persons of U.S. businesses can have the potential to implicate these key areas of national security concern to the Department, particularly:

counterintelligence, U.S. communications system protection, privacy protection, and

the ability to conduct effective electronic surveillance. The Office of the National

Counterintelligence Executive has reported in its Annual Report to Congress on Foreign Economic Collection and Industrial Espionage that in 2004 persons or entities

from nearly 100 foreign countries made attempts to acquire sensitive U.S. information or technology, such as information systems, sensors, aeronautics, electronics,

and armaments materials. One method used for this collection was foreign direct

investment in U.S. businesses. There has also been a rise in foreign acquisitions of

U.S. companies in the telecommunications sector, which directly implicates the Department’s protection of the U.S. communications infrastructure, privacy interests,

and law enforcement’s electronic surveillance capabilities. The risks presented by

these acquisitions vary according to the particular communications assets at issue

and their interconnection with other portions of our critical infrastructure. However,

certain foreign control over certain U.S. infrastructure components, absent mitigation measures, could augment the opportunities for foreign entities to disrupt U.S.

communications, deny Internet or voice services to significant portions of the country, and compromise the privacy of users of the U.S. communications system.

The Department of Justice is using all of its traditional techniques and resources

to combat these risks; however, Exon-Florio is an important national security tool

when no other statutory authority exists, apart from the International Emergency

Economic Powers Act, that is adequate to protect national security. Through its involvement in the CFIUS process, the Department has carefully examined potential

threats to national security posed by specific foreign acquisitions of U.S. businesses,

and where appropriate, we have developed measures to mitigate those risks. Along

with other interested member agencies of CFIUS, the Department of Justice has negotiated numerous security agreements to mitigate potential threats to national security caused by those transactions.

These security agreements are typically the result of negotiations between the

companies involved in the transaction and those CFIUS member agencies whose national security equities are implicated. In addition to the Department of Justice, the

Departments of Homeland Security and Defense often are parties to these agreements. The agreements vary in scope and purpose, depending on the facts of a particular transaction, and are negotiated on a case-by-case basis to meet the particular

national security risks at issue. For transactions that involve the communications

sector, these agreements are often negotiated in conjunction with executive branch

review of applications submitted to the Federal Communications Commission. Along

with the Department of Homeland Security, the Department of Justice plays a key

role in monitoring and enforcing the security agreements to which it is a party.

The Department of Justice has been Vigilant to Ensure Effective

Implementation of Exon-Florio

Effective implementation of Exon-Florio is critical to the mission and goals of the

Department of Justice. Therefore, the Department has brought together its diverse

resources to address the complex issues raised by the variety of transactions coming

before CFIUS. The Department’s Criminal Division has primary responsibility at a

policy level for CFIUS matters and closely coordinates the involvement of various

departmental components in the process. These components include: The FBI, which

both coordinates with the intelligence community and provides operational and analytical support in the areas of counterintelligence, critical infrastructure protection,

privacy protection, and electronic surveillance; the Computer Crime and Intellectual

Property Section, which provides expertise related to the U.S. communications system, cybercrime, and privacy protection; the Office of Enforcement Operations and

the Narcotic and Dangerous Drug Section, both of which provide expertise related

to electronic surveillance issues; and the Counterespionage Section, which provides

legal guidance on counterintelligence issues. The Office of Intelligence Policy and

Review assists with intelligence community coordination, and the Counterterrorism

Section assists with reviewing transactions that may implicate terrorism concerns.

In addition, the Antitrust Division has provided support and input in appropriate

cases, and the Office of the Chief Information Officer has provided assistance on occasion. By bringing all of these diverse resources and this extensive expertise to

bear, the Department of Justice has maximized its ability to participate in the effective implementation of Exon-Florio.

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Conclusion

In conclusion, I again would like to thank you, Mr. Chairman, and the Committee

for your interest in ensuring that Exon-Florio is used as effectively as possible and

for giving me the opportunity to explain the Department of Justice’s role with respect to this important national security safeguard. The Department of Justice is

keenly aware of the significance of its responsibilities under Exon-Florio, and we

have worked extremely hard to meet those responsibilities with the utmost vigilance, diligence, and professionalism. This Nation’s security and the safety of our

citizens are always the highest priority for the Department of Justice. Thank you,

and I am happy to answer any questions you may have.

—————

PREPARED STATEMENT OF PATRICK A. MULLOY

COMMISSIONER, UNITED STATES-CHINA ECONOMIC AND SECURITY REVIEW

COMMISSION

OCTOBER 20, 2005

Introduction

Mr. Chairman, Senator Sarbanes, and Members of the Committee, thank you for

providing me with this opportunity to speak before you today on this crucial issue.

My name is Patrick Mulloy and I have been a member of the twelve member bipartisan, bicameral United States-China Economic and Security Review Commission

since it was established by the Congress in the year 2000. The Commission’s charge

from the Congress is, among other things, to examine the ‘‘national security implications of the bilateral trade and economic relationship between the United States and

the People’s Republic of China.’’ I also teach International Trade Law and Public

International Law as an Adjunct Professor at the Law Schools of Catholic University and George Mason University.

I commend the Banking Committee for holding this important oversight hearing

and I am honored by the invitation to testify. I take great pride and it is a source

of enormous personal satisfaction to have served in a bipartisan manner on the staff

of this Committee from 1983–1998. During the period of 1987–1988, when the ExonFlorio Provision was being considered by the Congress, I served as the Committee’s

General Counsel and was directly involved in the negotiations which led to its enactment. Chairman Shelby, Ranking Member Sarbanes, and Senator Dodd are the

only Members of this Committee today who were involved in crafting the Omnibus

Trade and Competitiveness Act of 1988—in which the Exon-Florio Provision was included as Section 5021.

I was invited today to give the Committee my understanding of the background

which led to the enactment of Section 5021 of Public Law—418 which was codified

in Title VII of the Defense Production Act of 1950 (50 U.S.C. App 2158).

I should note that, while a member of the United States-China Economic and Security Review Commission, I am not testifying on its behalf and the views I present

will be my own. I will, however, set forth the two recommendations the Commission

adopted unanimously in its 2004 Report on the Exon-Florio/CFIUS matter which is

the subject of today’s hearing.

CFIUS Established in 1975

The Committee on Foreign Investment in the United States (CFIUS) was not established by the Exon-Florio Provision in the Omnibus Trade Bill of 1988. The

CFIUS, rather, was established some years earlier in 1975 by President Ford in Executive Order 11858 issued on May 7, 1975. That order, which created CFIUS and

made the Secretary of the Treasury its Chairman, charged the Committee to ‘‘have

the primary continuing responsibility within the Executive Branch for monitoring

the impact of foreign investment in the United States, both direct and portfolio, and

for coordinating the implementation of United States policy in such investment.’’

While the Treasury Secretary was given the Chairmanship of CFIUS, the Executive Order also gave the Department of Commerce a key role, charging it to, among

other things, submit ‘‘appropriate reports, analyses, data, and recommendations relating to foreign investment in the United States, including recommendations as to

how information on foreign investment can be kept current.’’

My own recollection is that in 1975, there were concerns about the fact that, because of the establishment of OPEC and the spike in oil prices in the 1972–1975

period, many oil producing countries suddenly had substantial amounts of money

to buy assets in this country and CFIUS was established to help monitor such acquisitions. I had occasion, when I served as an attorney in the Antitrust Division

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of the Justice Department, to attend some meetings of CFIUS in the 1981–1982 period. One matter in particular I remember is when the Kuwait Petroleum Company

wanted to buy the Santa Fe International Company. This raised concerns within the

executive branch because apparently Santa Fe had some technologies that U.S. authorities did not want transferred in such a merger. Since the President then lacked

the authority given to him by the Exon-Florio Provision in 1988, the Antitrust Division was asked to hold up the merger on antitrust grounds. This was done and I

believe an acceptable solution was negotiated by which the Santa Fe Company sold

off to a third party some technologies which our Government did not want transferred to the Kuwait Petroleum Company.

Enactment of the Exon-Florio Provision

In 1987, the leadership of the Congress, troubled by our Nation’s rising trade deficit, decided to craft an Omnibus Trade Bill and charged each relevant Committee

in the House and Senate to craft different portions of such a bill. Senator Proxmire,

then Chairman of the Banking Committee, asked the International Finance Subcommittee, led by Senators Sarbanes and Heinz, to develop the Banking Committee

portions of such a bill. Chairman Proxmire asked me as his General Counsel to

work closely on the process and to keep him informed of developments. I thus

worked closely with Senator Sarbanes and was personally involved in the development of all facets of the Banking Committee’s contributions to the Omnibus Bill.

The Banking Committee on May 19, 1987 marked up and ordered to be reported

S. 1409, the United States Trade Enhancement Act of 1987, which dealt with export

controls, trade promotion, exchange rates, third world debt, the Foreign Corrupt

Practices Act and better access for U.S. financial institutions to foreign markets.

The Committee Report stated:

The cumulative trade deficits of over $500 billion, built up by the United States

since 1982, have made this country the world’s largest debtor Nation and underscore the need of our economy to compete internationally.

The bill reported by the Banking Committee did not have any provision giving the

President the authority to block certain takeovers of U.S. companies by foreign purchasers. The so-called Exon-Florio Provision, which contained that authority, appeared in the bills reported by the Commerce Committee in the Senate, on which

Senator Exon served, and the Energy and Commerce Committee in the House,

where Congressman Florio served. After the Senate Commerce Committee reported

the provision, the Banking Committee appealed to the Parliamentarian that the investment matters covered by its provisions were properly within Banking Committee jurisdiction. The Parliamentarian ruled in favor of the Banking Committee

and thus the Banking Committee took the lead on the provision. It worked very

closely with Senator Exon and his staff in doing so.

The various portions of the Omnibus Trade Bill, reported by each Senate Committee, were merged into one bill, each Title of which was considered sequentially

on the Senate floor during the summer of 1987. The House followed a similar procedure and in fact passed its bill H.R. 3 first. This was because the trade bill was considered a revenue measure on which the House had to act first. The Senate at the

conclusion of its work took up H.R. 3, substituted the text of the Senate bill and

asked for a conference with the House. Senate conferees, appointed to deal with the

Exon-Florio Provision were Senators Sarbanes, Dixon, and Heinz of the Banking

Committee, along with Senators Exon and Danforth of the Commerce Committee.

Section 905 of the House bill provided that the Secretary of Commerce should ‘‘determine the effects on national security, essential commerce, and economic welfare

of mergers, acquisitions, joint ventures, licensing, and takeovers by or with foreign

companies which involve U.S. companies engaged in interstate commerce.’’ It also

charged the Secretary of Commerce (not the Treasury Secretary) to determine

whether such takeovers would ‘‘threaten to impair national security and essential

commerce.’’ If such a determination were made by the Secretary of Commerce the

President would block the transaction, unless the President determined there was

no threat to ‘‘national security and essential Commerce.’’ The Senate provision was

quite similar and said the criteria to block a takeover was ‘‘national security or essential commerce that relates to national security.’’

The Department of the Treasury, then headed by Secretary Baker, led the executive branch opposition to enactment of the Exon-Florio merger review authority.

Some contend it was both protection of its jurisdiction over investment policy and

championing an open investment policy that led to Treasury’s opposition. At any

rate, the Administration put the item on its ‘‘veto list’’ and threatened to veto the

whole Omnibus Trade bill if the provision stayed in the bill. At that point, I was

directly involved in negotiations with Treasury officials as to how to make the proviVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00156 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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sion acceptable to the Administration. I advised the Senators for whom I worked

what I had seen regarding the Kuwait Petroleum Company/Santa Fe merger and

said it was my belief that the President needed the authority given to him by the

Exon-Florio Provision. Our Senators charged us in our staff negotiations to keep the

provision but to try to get an agreement acceptable to the Administration.

The Treasury was adamant that the term ‘‘essential commerce’’ had to come out

of the bill because it was not clear what that entailed. Conferees agreed to delete

those words but added language to the statute and the Conference Report that they

did not want the term ‘‘national security’’ to be narrowly interpreted. To make this

absolutely clear the statute itself was revised to read:

The President or the President’s designee may, taking into account the requirements of national security, consider among other factors:

(1) domestic production needed for projected national defense requirements;

(2) 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; and

(3) the control of domestic industries and commercial activities by foreign

citizens as it affects the capability and capacity of the United States to

meet the requirements of national security.

They also decided to put the provision into law under Title VII of the Defense Production Act. This was done to indicate that the Exon-Florio Provision should be interpreted as dealing with the broad industrial base issues addressed by that statute

not the more narrow national security controls dealt with in export control matters.

The Conference Report on the provision states:

The standard of review in the section is ‘‘national security.’’ The Conferees recognize that the term ‘‘national security’’ is not a defined term in the Defense

Production Act. The term ‘‘national security’’ is intended to be interpreted

broadly without limitation to particular industries.

On August 23, 1988, the Exon-Florio Provision, as modified in the Conference, became law as Title VII of the Defense Production Act.

Treasury Charged to Lead New Merger-Review Authority

On December 27, 1988, President Reagan issued Executive Order 12661. That

order amended Executive Order 11858 which established the Committee on Foreign

Investment in the United States and effectively put the President’s new authority

to review and block mergers for national security reasons into the hands of the

Treasury-chaired CFIUS. So the Executive Department that most strongly opposed

the blocking authority ended up chairing the Committee charged to implement its

provisions. I think that has led to the concerns in Congress and elsewhere about

the provision not being implemented as Congress intended.

Because it now had the lead for implementing the statute, the Treasury Department also took the lead in the notice and comment rulemaking that developed the

regulations under which it would be administered. It took the Treasury Department

almost 3 years until November 21, 1991 to promulgate the final regulations. (56

F.R. 58774–01 (1991)). Those regulations, not the Exon-Florio Provision, established

the voluntary system of merger notification that has been criticized as inadequate

by many.

1992 Oversight Hearing by Banking Committee

On June 4, 1992, the Senate Banking Committee’s Subcommittee on International

Finance and Monetary Policy, under the leadership of its Chairman, Senator Sarbanes and Ranking member Mack, held an oversight hearing on the implementation

of the Exon-Florio Provision. In opening that hearing Senator Sarbanes stated:

Of particular interest this morning are the criteria for review of Exon-Florio

cases that have been developed by the Interagency Committee on Foreign Investment in the United States, which has been charged by the President with

responsibility for implementing the statutory provision.

In his opening statement Senator Mack, who also served on the Armed Services

Committee, stated:

My interest this morning is to better understand how the Administration determines the U.S. national security interest through the CFIUS process.

He then referred to a matter, which was, then, of public concern, that is the acquisition of the Missile Division of the LTV Aerospace and Defense Company by

Thomson-CSF, a French firm controlled by the French Government. He then stated,

‘‘We don’t want any foreign government to own major U.S. defense contractors.

154

Senator Riegle, the Chairman of the full Banking Committee, in his opening

statement said:

The Administration examines takeovers on an isolated basis and is missing the

cumulative impact such takeovers are having on our technology base. The President’s science adviser, Dr. Alan Bromley, has voiced concerns about this matter.

He warned policymakers that ‘‘our technology base can be nibbled from under

us through a coherent plan of purchasing entrepreneurial companies.’’

The Assistant Secretary of the Treasury for International Affairs, Olin

Wethington in his testimony told the Committee:

After almost 4 years of experience in implementing the so-called Exon-Florio

Provision we believe the statute is achieving its national security objectives, and

that it has done so without compromising our open investment policy.

Mr. Peter Mills, the first Chief Administrative Officer of SEMATECH, also testified at that June 1992 hearing. SEMATECH was a joint DoD/Industry consortium

which was established in the 1980’s to ensure our Nation maintained the ability to

make advanced semiconductor products deemed essential to our national defense

needs. In that hearing, Mr. Mills voiced his concerns and frustration about the failure of CFIUS to prevent foreign interests from buying U.S. semiconductor equipment and materials suppliers. He told the Committee:

. . . foreign interests have targeted key U.S. technologies and the present

CFIUS law or its implementation is ineffective in preventing these transactions.

He also voiced concerns that CFIUS was not considering the cumulative effect of

multiple foreign purchases of U.S. companies and urged that the Chairmanship of

CFIUS be moved from the Treasury Department to the Commerce Department.

Subsequent to that hearing the Congress in 1992 enacted two key changes to Section 721 of the Defense Production Act. First, it put into the law a new provision

requiring CFIUS to move beyond the 30-day review period and do a 45-day investigation in any instance in which an entity controlled by or acting on behalf of a

foreign government is making the acquisition of a U.S. entity. It also put in a provision requiring the President and such agencies as the President designates to do a

report in 1993 and each 4 years thereafter as to whether any foreign government

has a coordinated strategy to acquire U.S. companies involved in research development or production of critical technologies. It also added additional criteria to the

statute that it wanted considered during reviews of foreign takeovers.

The Treasury Department Has Failed To Implement Congressional

Mandates

In 1994, the Administration submitted to the Congress its first and only report

under the required quadrennial report statutory provision of the DPA. The Report

stated on page 13:

Despite examples of government involvement, the working groups did not find

credible evidence demonstrating a coordinated strategy on the part of foreign

governments to acquire U.S. companies with critical technologies. The absence

of credible evidence demonstrating a coordinated strategy, nevertheless, should

not be viewed as conclusive proof that a coordinated strategy does not exist.

The Report then went on to say:

In some cases, however, foreign governments give indirect assistance and guidance to domestic firms acquiring U.S. companies. The main methods of government involvement include:

• extending tax credits to promote foreign M&A activity;

• exercising controlling government interest in major firms to influence foreign M&A activity, and

• identifying technologies that are critical to national economic development, and thus prime targets for acquisition through M&A’s.

After this one report the Treasury Department, which is charged by Executive

Order to implement the requirements of Section 721 of the DPA in which the quadrennial report mandate is placed, has ignored this requirement of law, and no more

reports on this most important matter have been prepared and given to the Congress as required by law. This means neither the CFIUS nor the Congress has the

background information Congress wanted both of them to have in looking at patterns in takeovers or considering their cumulative effect.

The GAO in its most recent report on the implementation of Exon-Florio, submitted to this Committee in September 2005, notes that the statutorily required 45-

day investigation of foreign government purchases of U.S. firms has been stymied

155

by the Treasury’s insistence that any such investigations can be conducted only if,

during the 30-day initial review, there is ‘‘credible evidence’’ that the foreign controlling interest may take action to threaten our national security (page 3). This means

the Treasury has effectively read the 45-day mandated investigation of foreign government acquisitions of U.S. companies right out of the statute.

In addition, GAO on page 3 of its September 2005 Report to this Committee

points out that the Treasury Department as Chair of CFIUS has ‘‘narrowly defined

what constitutes a threat to national security.’’ The GAO tells us ‘‘they have limited

the definition to export controlled technologies or items, classified contracts, or specific derogatory intelligence on the foreign company.’’ This does not carry out the

statutory criteria Congress has mandated be considered. GAO on page 13 of its recent report tells us that the Treasury insists that Defense Department concerns

about foreign acquisitions of integrated circuits essential to national defense is an

industrial policy concern and not a ‘‘national security’’ concern. This flies in the face

of the statute and legislative history of the Exon-Florio Provision of law. That law

that was deliberately placed in the Defense Production Act to indicate Congress did

want defense industrial base issues considered in Exon-Florio reviews.

Conclusion

I believe a review of the record demonstrates that the Treasury Department opposed the enactment of the Exon-Florio Provision and has sought to stymie its effectiveness ever since it was enacted. It is in a position to do this as it chairs and staffs

the Interagency Committee that the President charged to implement the statute.

The agency is so wedded to its open investment policy that it leans over backward

to protect that interest over legitimate national security concerns.

The China Commission, on which I serve, in its 2004 Report to Congress unanimously recommended:

(1) that Congress explicitly provide in statute that the term ‘‘national security’’ in the Exon-Florio Provision includes ‘‘national economic security’’

(2) that the chairmanship of CFIUS be transferred from the Treasury Department to the Commerce Department.

Under the Constitution, the Congress has the authority to regulate Interstate and

Foreign Commerce. The Congress has under Exon-Florio given to the President, not

the Treasury Department, the authority to block certain foreign takeovers of U.S.

companies that may threaten our Nation’s security. As Chairman Shelby stated at

this Committee’s October 6 oversight hearing on this matter, ‘‘Not everything in

America is for sale.’’ Senator Sarbanes at that hearing cited an article that appeared

in the Los Angeles Times on October 6 that said the foreign investment ‘‘screening

process was broken, leaving the country vulnerable to foreign threats.’’ I strongly

agree with the points made by both Senators.

Our Nation is facing new challenges as we find ourselves in a globalized economy

where other countries have clear national strategies on how to compete and raise

the standard of living of their people and their national power. We must take such

matters into account when administering our open investment policy and ensure we

not sacrifice technologies and industries important to our national defense by taking

an ideological approach on open investment. China over the last 10 years has run

massive and ever increasing trade surpluses with this country. This year alone our

bilateral deficit with China will be over $200 billion. That Government has acquired

a vast cache of dollars by forcing companies earning dollars to turn them in for

yuan. Since China does not buy very many U.S.-made goods in comparison with

what we buy from them, it can use these dollars earned through trade surpluses

to buy important U.S. assets and it is now starting to do so.

Part of the reason we have run these massive trade deficits with China is because

that country has for a number of years been engaged in currency manipulation to

keep the yuan undervalued against the dollar. This subsidizes Chinese exports here,

makes our goods more expensive there, and gives our companies incentives to move

operations to China. Another of this Committee’s contributions to the 1988 trade bill

gave the Treasury Secretary major responsibilities in the exchange rate area. The

Treasury is charged to identify currency manipulators and to persuade them, by bilateral negotiations and efforts in the IMF, to halt such practices that are deleterious to the international trading system and unfair to American companies and

workers. As this Committee is well-aware the Treasury has failed to carry out its

responsibilities in that area as well. Its failure there has contributed to Chinese

trade surpluses and has helped China accumulate vast amounts of U.S. dollars. We

will thus soon see a lot more proposed takeovers of American companies by Chinese

companies. We need a serious, functioning, CFIUS process that takes account of our

national security interests.

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1David Marchick is a Partner in Covington & Burling, an international law firm based in

Washington, DC. He has an active CFIUS practice and is co-authoring a book on Exon-Florio

with Edward M. Graham, Senior Fellow at the Institute for International Economics. 2See Edward M. Graham and Paul R. Krugman, Foreign Direct Investment in the United

States 71–72 (Institute for International Economics 1995).

I strongly urge this Committee to look at the record and recognize the Treasury

Department has not been a good steward of the Exon-Florio responsibilities given

to it. The Chairmanship of CFIUS should be moved out of that Department and this

Committee should remain active in its oversight of that interagency operation. I

have no clients other than the public interest on this issue and have never been

paid by any company or any other party to advise it on CFIUS matters.

Again, thank you very much for inviting me, and I am happy to answer any questions.

—————

PREPARED STATEMENT OF DAVID MARCHICK

PARTNER, COVINGTON & BURLING

OCTOBER 20, 2005

Mr. Chairman, Senator Sarbanes, and Members of the Committee, thank you for

the opportunity to testify before the Senate Committee on Banking, Housing, and

Urban Affairs on the subject of implementation of the Exon-Florio Amendment. It

is a privilege to appear before you.1

I applaud your leadership, Mr. Chairman, and that of the Committee for calling

these hearings. Protecting U.S. national security has to be the United States’ top

priority. I believe we can protect our security interests and simultaneously maintain

an open investment policy, including through the effective implementation of the

Exon-Florio Amendment.

You have already heard testimony from the GAO, Senator Inhofe and a distinguished panel of executive branch officials. I am here to offer the perspective of a

private sector adviser who works closely with the twelve members of the Committee

on Foreign Investment in the United States (CFIUS). I plan to speak to four particular issues:

• First, the critical importance of foreign investment to the U.S. economy. Encouraging inward investment is essential to both our economic security and our national security.

• Second, trends in the application of the Exon-Florio Amendment. Since September

11, 2001, the Bush Administration has applied greater scrutiny to foreign investments on national security grounds, imposed tougher security requirements as a

condition for approving specific transactions, and enhanced enforcement of security agreements negotiated through the Exon-Florio process.

• Third, the suitability of the Exon-Florio process to address potential security

issues presented by investments from China. While certain investments by Chinese firms may present unique national security considerations, experience has

shown that the President and CFIUS have adequate authority and flexibility

under Exon-Florio to assess and, if necessary, mitigate any national security risks

such investments may pose.

• Fourth, the myriad initiatives to amend Exon-Florio. Simply put, the Exon-Florio

Amendment in its present form is more than adequate to protect our national security and still preserve our economic interests. Many of the changes being discussed in Congress would risk chilling inward investment and encouraging other

governments to erect new obstacles to U.S. investment abroad. At the same time,

there can and should be greater transparency with Congress while protecting proprietary business information.

The Importance of Foreign Investment to the U.S. Economy

Few would disagree that foreign investment plays a critical role in the U.S. economy. Today more than ever, the vibrancy and vitality of the U.S. economy depends

on the inflow of direct foreign investment. Foreign investment supports approximately 5.3 million jobs in the United States. These typically are highly skilled, wellpaying jobs; indeed, U.S. affiliates of foreign firms on average pay wages higher

than the U.S. industrial mean.2 Foreign investors also invest heavily in manufacturing operations in the United States—investment that is critically important

given the present competitive pressures on the U.S. manufacturing base. It is preVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00160 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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3President Ronald Reagan, Statement on International Investment Policy, Sept. 9, 1983,

available at http://www.reagan.utexas.edu/archives/speeches/1983/90983b.htm.

cisely for these reasons that each of our 50 governors devotes a significant amount

of time and resources to attract foreign investment to their States.

Perhaps most important, because the United States spends more than it produces and saves, and because of the deteriorating current account deficit ($197 billion in

the second quarter of 2005, or some 6.3 percent of annualized GDP), our country

is now literally dependent on inflows of direct and portfolio investment to cover the

gap between what we consume and produce.

Of course, if foreign investors make investments in the United States, it is preferable that they do so in plant, equipment and other fixed assets that drive economic activity, rather than solely in the debt market. Subjecting our economy to the

whims of foreign central banks—which today hold more than one-third of the overall

public U.S. debt—creates much more risk than does foreign ownership of fixed assets in the United States.

The United States has long embraced a policy of encouraging foreign investment.

Indeed, Presidents Carter, Reagan, and George H.W. Bush each issued executive

statements of policy on the subject and President Clinton actively promoted inward

investment. In 1983, President Reagan issued the first public statement in which

a U.S. President expressly welcoming foreign investment. In this statement, President Reagan said ‘‘the United States believes that foreign investors should be able

to make the same kinds of investment, under the same conditions, as nationals of

the host country. Exceptions should be limited to areas of legitimate national security concern or related interests.’’ 3

U.S. foreign investment policy has long been consistent with President Reagan’s

formal statement on the issue. In fact, apart from the narrow exception of a few

World War I-vintage restrictions on foreign investment in aviation, shipping, and

the media, the United States has maintained an open investment policy. Hand-inhand with that policy, laws such as the Exon-Florio Amendment, the International

Emergency Economic Powers Act, and, previously, the Trading with the Enemy Act

have empowered Presidents to block foreign investment or to seize foreign-owned assets (as the United States did in World Wars I and II) when U.S. national security

is threatened by a particular foreign acquisition or involvement in the U.S. economy.

As a result, with the exception of 2003, when China briefly was the largest recipient of direct foreign investment, the United Stated has for many years attracted

more foreign investment than any other country in the world. In addition to our

open investment policy, the size of the U.S. market, the quality of our workforce and

the ease with which foreign investors can operate here have all contributed to this

remarkable record.

Moreover, the vast majority of foreign acquisitions do not implicate U.S. national

security interests in any respect. It is hard to see a national security issue with a

Daimler-Chrysler auto assembly plant, a Japanese investment in a film studio, or,

my children’s’ favorite, Ben & Jerry’s, which is owned by a Dutch company. For the

narrow set of transactions that genuinely implicate U.S. national security interests,

the Exon-Florio Amendment provides the President with ample authority to block

a transaction or otherwise mitigate any concerns raised by a particular acquisition,

and CFIUS agencies have demonstrated their willingness to use the full authority

of the law.

Trends Toward Greater Scrutiny of Transactions in the Exon-Florio

Review Process

The Exon-Florio Amendment created a statutory framework that is unique in a

number of respects. First, there is no time bar on Exon-Florio reviews; CFIUS can

review a transaction at any time, including after a transaction has closed. Second,

unlike Hart-Scott-Rodino or other governmental reviews of mergers and acquisitions, Presidential decisions pursuant to Exon-Florio are not reviewable by U.S.

courts because they involve national security, an inherently ‘‘Presidential’’ function.

Third, the statute gives the CFIUS agencies broad discretion to interpret several

key statutory criteria, including ‘‘foreign control,’’ ‘‘credible evidence,’’ and ‘‘national

security.’’ In my experience, particularly in the past few years, CFIUS has chosen

to interpret these terms very broadly.

CFIUS has significantly broadened the scope of its ‘‘national security’’ reviews

since September 11, 2001—a development that partly reflects the addition of the

Department of Homeland Security to the Committee and the attendant strengthening of the security focus within CFIUS. More importantly, whereas prior to September 11 CFIUS focused primarily on (i) the protection of the U.S. defense industrial base, (ii) the integrity of Department of Justice investigations, and (iii) the exVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00161 Fmt 6621 Sfmt 6621 33310.TXT SBANK4 PsN: SBANK4
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port of controlled technologies, CFIUS has intensified its focus on an additional goal:

The protection of critical infrastructure.

Criticism against CFIUS has focused on the fact that the President has only formally blocked one transaction of more than 1,570 reviewed by CFIUS. However, this

statistic obscures the manner in which CFIUS actually operates and ignores the

larger number of transactions abandoned or substantially modified by parties because of the CFIUS process. There have been more investigations and withdrawals

in just the past 3 years than there were during the previous 10 years combined. In

the last 3 years, I personally have been involved in two investigations, one proposed

investment that was withdrawn when it became clear that CFIUS approval would

not be forthcoming, and multiple negotiations of extremely tough security agreements with CFIUS agencies.

The tougher terms now imposed by CFIUS as a condition for approving particular

transactions are another indicator of the enhanced scrutiny applied to recent transactions. For many years, the security agencies within CFIUS (DOJ/FBI, DoD and

now DHS) have negotiated agreements designed to mitigate the national security

impact of a particular transaction. These security agreements have traditionally

been negotiated by DoD for foreign acquisitions of defense companies, by the DOJ

and FBI for foreign acquisitions of telecommunications companies, and by multiple

agencies for acquisitions in other sectors. Since 2003, DHS has joined DOJ, DoD and

the FBI in playing a central role in the negotiation and enforcement of security

agreements.

By way of illustration, take the Network Security Agreements (NSA’s) negotiated

to mitigate the risk of foreign investment in the telecommunications sectors. (Unlike

security agreements negotiated in other sectors, NSA’s in the telecommunications

sector are made public via the grant of FCC licenses, which often are conditioned

on the agreements.)

Before September 11, NSA’s for foreign acquisitions of U.S. telecommunications

companies typically focused on the ability of U.S. law enforcement to conduct electronic surveillance and wiretaps and prevent foreign governments from accessing

call-related data. In the last few years, NSA’s have become much tougher. Some recent NSA’s have become more intrusive, limiting foreign-owned telecommunications

firms’ freedom of action in key areas in which American-owned telecommunications

firms face no similar restrictions.

For example, to varying degrees, recent NSA’s have:

• permitted only U.S. citizens to serve in sensitive network and security positions

(for example, positions permitting access to monitor and control the network);

• required third party screening of senior company officials and personnel having

access to critical network functions;

• restricted or prohibited the outsourcing of functions covered by the NSA, unless

such outsourcing is approved by the Department of Homeland Security;

• given U.S. Government agencies the right to inspect U.S.-based facilities and to

interview U.S.-based personnel on very short notice (as short as 30 minutes);

• required third party audits of compliance with the terms of the NSA;

• required the implementation of strict visitation policies regulating foreign national access (including by employees of the acquiring company) to key facilities;

and

• required senior executives of the U.S. entity, and certain directors of its board,

to be U.S. citizens approved by the U.S. Government and responsible for supervising and implementing the NSA.

Many of these provisions reflect concepts typically utilized by the Department of

Defense to mitigate security concerns associated with foreign-owned companies that

have classified contracts with the Pentagon. In other words, CFIUS now imposes on

foreign companies handling nonclassified telecommunications work many of the

same requirements that DoD has traditionally required for foreign companies handling the Government’s most sensitive defense-related classified contracts. These security commitments for companies not handling classified contracts can impose substantial costs. For global communications companies, for example, the limitations on

outsourcing, routing of domestic calls, storage of data, and location of network infrastructure can create significant competitive burdens.

Finally, I should note that the CFIUS security agencies have increased the vigor

with which they monitor and enforce these agreements. Unfortunately, in my view,

some provisions required by CFIUS in these agreements can be overly intrusive and

regulatory, unnecessarily limit companies’ operations, and impose significant costs

without commensurate security benefits. Notwithstanding this concern, it is important for the Committee to know that, in the past few years, CFIUS’s scrutiny of

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4One recent study estimated that at the end of 2001, the Chinese Government exerted ultimate ownership control over 81.6 percent of the 1,136 publicly listed Chinese companies. As of

2005, there were more than 1,300 publicly traded companies. China has made important steps

to privatize and eliminate state ownership and control of some former state-owned enterprises,

particularly small and medium-sized companies. At the same time, however, the Chinese Government has retained control over industries considered ‘‘strategic.’’ See Exit the Dragon, Privatization and State Control in China (Stephen Green & Guy S. Liu eds., 2005).

transactions has increased, security agreements have become tougher, and enforcement and monitoring has been more rigorous.

National Security Issues Associated With Investments From China

Acquisitions of U.S. companies by Chinese firms have presented CFIUS with

unique issues and concerns. Of the United States’ 10 largest trading partners,

China is the only one not considered a strategic or political ally. China also stands

out among the largest trading partners in other important respects, including the

high levels of state ownership and control of its largest (and often publicly traded)

companies 4 and the espionage threat assigned to China by our intelligence and law

enforcement agencies.

For these reasons, Chinese investments have drawn, and will likely continue to

draw, close scrutiny. Even with the concerns by some agencies, CFIUS is well

equipped to make national security assessments of Chinese investment in the

United States on a case-by-case basis.

While protection of U.S. national security should always be our highest priority,

we can fulfill this objective while simultaneously integrating China into the global

economy, including through Chinese investment in the United States. For close to

25 years, through Republican and Democratic Administrations, the United States

has encouraged China to lower tariffs, eliminate nontariff barriers to trade, privatize state-owned enterprises and to participate in—and play by the rules of—the

global economy. Moreover, the United States has continually pressed China to eliminate barriers to foreign direct investment by United States and other foreign companies. Successive U.S. Administrations have correctly pursued these policies not only

for the economic and commercial benefit of U.S. companies and workers, but also

based on the belief—correct, in my view—that market reform will facilitate democratic reform in China. A democratic China is, of course, very much in the national

security interests of the United States.

Thus, as the United States Government utilizes the Exon-Florio process to assess

carefully those investments from China that present a national security risk, the

United States should also send a clear signal that we welcome inward investment

from China. We should make clear that Chinese investments in most sectors of the

United States economy present no national security issues at all. It is in the Untied

States’ interest to continue to support China’s integration into the global economy.

In addition, there should be a high threshold for rejecting proposed transactions, in

part because of the myriad tools available to mitigate any perceived threats, including the use of security agreements. At the same time, if mitigation measures do not

adequately protect U.S. national security, the President can and should block an investment.

Recent Proposals to Amend Exon-Florio

Recent proposals to amend Exon-Florio would, among other things:

• expand the definition of national security to include the economic and/or energy

security;

• give Congress the power to force an investigation or block a transaction already

approved by the President;

• extend the statutory time limits for CFIUS reviews; and,

• transfer chairmanship of the process from the U.S. Treasury to the Department

of Defense or Department of Commerce.

In my view, these proposals not only are unnecessary to protect U.S. national security, but they would also have a negative impact on the U.S. economy and therefore U.S. national security. More specifically, they would chill foreign investment,

slow job creation, and provide other countries with a pretext for imposing similar

restrictions on U.S. investment abroad. By chilling inward foreign investment,

which fuels competition and innovation, we would be harming the vitality of the

U.S. economy. A strong economy is essential for U.S. national security.

Let me take each of the proposals in turn:

First, expanding Exon-Florio’s criteria to include ‘‘economic security,’’ or variations

thereof, has been proposed close to a half-dozen times since 1988, including when

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5See, for example, H.R. 2394, ‘‘The Steel and National Security Act,’’ 107th Cong. (2001);

H.R. 2624, ‘‘The Technology Preservation Act of 1991,’’ 102nd Cong. (1991); H.R. 2386, ‘‘The Foreign Investment and Economic Security Act of 1991,’’ 102nd Cong. (1991); H.R. 5225, 101st

Cong. (1990); H.R. 3, ‘‘The Foreign Investment, National Security and Essential Commerce Act

of 1987,’’ 100th Cong. (1987). 6Foreign Acquisitions of Domestic Companies: Hearing on H.R. 3 Before the Senate Committee on Commerce, Science, and Transp., 100th Cong. 17 (1987). 7See INS v. Chadha, 462 U.S. 919 (1985). 8Foreign Acquisitions of Domestic Companies: Hearing on H.R. 3 Before the Senate Committee on Commerce, Science, and Transp., 100th Cong. 14 (1987).

Exon-Florio became law.5 Indeed, the original bill offered by Senator Exon would

have authorized the President to block transactions that threaten the ‘‘essential

commerce’’ of the United States. President Reagan threatened to veto the Omnibus

Trade and Competitiveness Act of 1988 because of the ‘‘essential commerce’’ clause

in the Exon bill; proposals to expand Exon-Florio to cover ‘‘economic security’’ should

similarly be rejected.

It would be difficult for CFIUS to implement a statutory requirement to protect

‘‘economic security.’’ The term is extraordinarily vague. I am reminded of the late

Commerce Secretary Malcolm Baldridge, who argued against a similar provision in

the original Exon bill, saying ‘‘you are trying to kill a gnat with a blunderbuss.’’ 6

Indeed, there is good reason to believe that an ‘‘economic security’’ test would simply

become a vehicle for domestic industries seeking to block foreign competition.

Second, the proposals to allow Congress to force an investigation or to override,

through a joint action by Congress, Presidential approval of a particular transaction

raise serious separation of powers issues under the U.S. Constitution.7 In addition,

these proposals, if enacted, would create so much uncertainty about the prospect of

Congressional involvement in the review process that a substantial number of foreign investors would simply not make investments in the United States. Congress

has a legitimate and important oversight role ensuring that the Exon-Florio statute

is implemented correctly. But Congress should not itself become a regulatory agency. Congress has not, and would not, override Hart-Scott-Rodino decisions made by

the Department of Justice or the FTC. It should not assume that power here.

Third, I would recommend against extending the time limits for a CFIUS review.

The existing time limits work well because they balance the need for the agencies

to have sufficient time to conduct reviews with the concomitant need for parties to

an acquisition to have the certainty that they will receive a decision—up or down—

from CFIUS within a reasonable period of time. In addition, most companies that

file with CFIUS—thereby starting the statutory clock—do so only after engaging in

informal consultations with CFIUS. Through these informal consultations, CFIUS

agencies have additional time to assess the national security risks and design mitigation strategies, if necessary. Indeed, it is common for security agreements to be

hammered out before the parties file.

Another reason not to alter the current statutory timeframes is that the vast majority of transactions reviewed by CFIUS either do not pose a national security risk

or the national security threat has been mitigated. Therefore, most transactions can

appropriately be approved by CFIUS in 30 days. These investments typically come

from companies located in countries that are our closest allies. There would be no

good reason to prolong the timeframe for approving these transactions—a timeframe, by the way, that currently corresponds will with the review period under

Hart-Scott-Rodino. Only a small number of transactions require additional scrutiny

through an ‘‘investigation.’’ The 45 additional days allowed in the current statutory

framework—plus the informal, prefiling consultation period—are sufficient for

CFIUS to do its job.

Fourth, just as there has been with respect to ‘‘economic security,’’ there have

been a number of proposals over the years to transfer the chairmanship of CFIUS

away from Treasury toward the Department of Defense or the Department of Commerce. Indeed, the original Exon bill placed the responsibility in the Department of

Commerce. Then-Secretary Baldridge stated bluntly that he did not want the authority.8 While multiple agencies could competently lead the CFIUS process, placing

the chairmanship at Treasury sends an important positive signal to the rest of the

world. Exon-Florio was intended to give the President a tool to block those rare

transactions that truly threaten national security, not to change our overall open

approach toward foreign investment. Under Treasury’s leadership, the presumption

is—and should remain—that foreign investment is welcome unless it threatens national security. If CFIUS were chaired by an agency with a security mission, the

presumption would be reversed.

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9LCI News, July 20, 2005, available at http://np.www.lci.fr/news/economie/0,,3232812-

VU5WX0lEIDUy,00.html.

Moreover, Congressional action to tighten restrictions on foreign investment in

the United States could invite similar action abroad, limiting opportunities for outward investment by American companies. This is not an idle concern:

• This past summer, French politicians balked at mere rumors of PepsiCo’s potential interest in acquiring Danone, the French yogurt and water company. French

Prime Minister Dominique de Villepin made the extraordinary statement that

‘‘The Danone Group is one of the jewels of French industry and, of course, we are

going to defend the interests of France.’’ 9 Since then, the French Government has

announced that it will establish a list of ‘‘strategic industries’’ that will be shielded from foreign investment. It is hard to see how yogurt is a strategic industry.

• In his State of the Union speech last April, President Putin called for a new law

to protect ‘‘strategic industries’’ in Russia. A draft of that law is expected to be

put forward next month.

• The Canadian Parliament is now considering amendments to the Investment Canada Act to permit the review of foreign investments that could compromise national security.

• China continues to restrict investment in a number of important sectors.

Other countries are closely watching what we do in the United States on ExonFlorio. The United States has worked for decades to reduce barriers to investment

abroad. If we act now to restrict investment into the United States, we will be providing a green light for other countries to erect their own barriers to inward investment.

Conclusion

I would like to conclude my remarks by recalling the dire predictions expressed

in the 1980’s surrounding Japanese investment in the United States. These predictions of doom occurred at a time when Japan had huge trade surpluses with the

United States, followed an export-led growth strategy, and needed a place to invest

their significant foreign currency reserves—much like China today. Congress reacted to the concerns about growing Japanese investment by adopting the ExonFlorio Amendment.

Looking back, the fears about Japan now appear misguided. Over the last 20

years, the United States economy has been the engine of growth for the world and

has been strengthened by large Japanese investments in the auto, information technology, and manufacturing sectors.

For decades, Republican and Democratic Administrations have pursued a policy

of open investment, which has spurred the dynamism that drives our economy. For

those few investments that implicate U.S. security interests, the Exon-Florio

Amendment has given the President and CFIUS ample authority to block investments or mitigate the national security impact of such investment. Exon-Florio is

a flexible statute in part because it does not define ‘‘national security.’’ And the

President should not hesitate to act to block a transaction if it truly threatens U.S.

national security and the threat cannot be mitigated.

Improvements in implementation can be made, including more frequent, highlevel briefings of Congress by CFIUS agencies (without compromising proprietary

business information supplied by the parties to a transaction). Yet, for the reasons

outlined above, I encourage the Committee to keep the existing statutory framework

in place.

Thank you for the opportunity to appear before you today.

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RESPONSE TO A WRITTEN QUESTION OF SENATOR SCHUMER

FROM ROBERT M. KIMMITT

Q.1. In his statement at the beginning of the hearing, Senator

Schumer raised three issues for written comment by the witnesses:

(1) the narrow definition of national security employed by the Committee on Foreign Investment in the United States (CFIUS); (2)

adding economic security to Exon-Florio; and (3) expanding the criteria for blocking a foreign acquisition to include reciprocity.

A.1. Definition of National Security

‘‘National security’’ is not defined in the statute or in the implementing regulations. CFIUS deliberately does not define national

security because a definition would improperly curtail the President’s broad authority to protect national security and, at the same

time, not necessarily result in guidance sufficiently detailed to be

helpful to the parties to a foreign acquisition. The statute lays out

a broad set of factors that may be considered, but this is not an

exhaustive list. Each transaction has unique characteristics and

agencies are not constrained in examining all facets of a transaction that could impact national security. This is consistent with

the fact that ultimately the judgment as to whether a transaction

threatens national security rests within the President’s discretion.

Treasury’s view of national security has evolved over the years,

just as the views of all other members of CFIUS have evolved. This

is to be expected, as the concept of national security is continuously

evolving.

Adding Economic Security to Exon-Florio

Adding ‘‘economic security’’ to the Exon-Florio Amendment would

not be advisable. Curtailing foreign investment on this ground

would significantly alter how the United States treats foreign investment. U.S. investment policy welcomes foreign direct investment and promotes national treatment—that is, treating foreign

companies and U.S. companies alike, except for limited circumstances such as national security.

The concept of national security, even as broadly applied as it is

under the Exon-Florio Amendment, affects a relatively narrow segment of the U.S. economy. However, if Exon-Florio were expanded

to include economic security matters that do not affect national security, foreign investment in nearly every sector of the U.S. economy would be subject to CFIUS review. Such a system would undermine the legal certainty that investors expect when they invest

in the United States. Investors would either overwhelm the Government with notifications or would avoid investing in the United

States. This would constitute an extraordinary reversal in the

treatment of foreign investment in the United States. It would also

undermine the U.S. leadership role in international fora, where we

advocate more liberal investment regimes and the reduction of barriers to the free flow of capital. Finally, it could be perceived as inconsistent with the United States’ obligations under various international trade and investment agreements, which generally prohibit discriminatory treatment of foreign investors except on national security grounds.

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Reciprocity

Although I do not believe that reciprocity alone should be a reason for blocking a foreign acquisition, I do believe that a country’s

decision to close a sector to U.S. investment is a factor that CFIUS

could consider when evaluating a particular transaction. For example, if another country treats a sector as sensitive because of national security concerns, then CFIUS could factor that treatment

into its analysis of foreign investment in the same U.S. sector by

investors of that country. The ultimate decision as to our national

security interests in a particular instance, however, must be made

by the United States, consistent with our nondiscrimination commitments, particularly with respect to our Bilateral Investment

Treaties, Free Trade Agreements, and certain Treaties of Friendship, Commerce, and Navigation.

It is important that we continue to advocate an open investment

policy through our bilateral and multilateral discussions with foreign governments. The greatest lever our negotiators have is to

stress how open the American market is to investment in virtually

every sector, provided that the national security is not adversely affected by such investment.

RESPONSE TO A WRITTEN QUESTION OF SENATOR ALLARD

FROM ROBERT M. KIMMITT

Q.1. Of the 12 withdrawals of notices of foreign acquisitions provided to CFIUS since 2001, how many were refiled and could you

provide some additional information on those that were not refiled?

A.1. Of the 12 withdrawals granted by the Committee on Foreign

Investment in the United States (CFIUS) since 2001, 10 were

refiled and 2 were not. In both of these cases, the issues raised by

two CFIUS member agencies were addressed to the satisfaction of

CFIUS. No agency has requested that CFIUS reopen a review of

either transaction.

In one of the cases not refiled, the issues raised in the initial review involved the foreign company’s export compliance program

and a sales office located in a country of concern to the U.S. Government. Neither of these issues could be resolved in the initial 30-

day review.

Despite the fact that the U.S. Government had some concerns,

the foreign company was in fact in compliance with the laws and

regulations of its host country. In the first withdrawal period, the

foreign company and its host country made certain commitments to

improve their diligence on export control and the company closed

the sales office in the country of concern to the U.S. Government.

The transaction was refiled, but one agency wanted a track record

of compliance with the agreed commitments before relinquishing

its right to object in the CFIUS process. The transaction was therefore withdrawn a second time. After some time for further review,

the agency indicated to CFIUS that it had no national security concerns and saw no need for a refiling.

In the second case that was withdrawn and not refiled, one agency wanted additional time to address its issues with the foreign

company concerning the transaction. The company requested a

withdrawal, and CFIUS granted it. The agency continued to work

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with the company and toured its facilities. The agency ultimately

indicated that there were no further national security concerns and

no need for a refiling.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE

FROM ROBERT M. KIMMITT

Q.1. Can you tell me whether there have been patterns of foreign

acquisition by industry or specialty? Are any countries concentrating their purchases, and thus targeting our aerospace, software,

materials, energy, electronics, and other sectors? Is there any sort

of cumulative, broad-picture analysis that would show if a certain

country or alliance of countries was intentionally or unintentionally

undermining any possible aspect of national security?

A.1. The Committee on Foreign Investment in the United States

(CFIUS) has performed a preliminary examination of a limited set

of data on foreign acquisitions. CFIUS examined the notices of foreign acquisitions of U.S. companies filed between the years 2001–

2004. CFIUS conducted a national security review of 193 foreign

mergers and acquisitions of U.S. companies during this period.

Although we are pleased to provide the results of this preliminary examination, we caution that this limited set of data from 4

years of CFIUS reviews is too small a sample of data to establish

any statistically definitive patterns or conclusions regarding foreign

acquisitions by industry or specialty. A more extensive analysis is

tentatively planned for 2006.

Notices to CFIUS of foreign merger and acquisition (M&A) activity remained fairly constant during the 4 years at between 42 and

55 transactions per year. Of these transactions, 149, or 77 percent,

involved either Western European or Canadian-based companies.

United Kingdom companies alone accounted for more than 39 percent of reviewed merger and acquisition activity in this period.

Transactions involving the acquisition of critical technologies

were fairly evenly distributed among the various categories within

this study. The categories for computer-related, professional/scientific instruments, and communications experienced the most activity. In the computer-related category, 4 of the 7 reviews by

CFIUS involved proposed acquisitions by companies from Israel.

These data are consistent with the results ofthe 1994 Quadrennial Report on U.S. Critical Technology Companies, which showed

that companies from our major trading partners were also predominant investors in the U.S. market, with companies from the United

Kingdom leading the way. This pattern holds in the current analysis, with one notable exception. As a share of total foreign M&A

activity examined by CFIUS, Japanese activity has declined dramatically from 20 percent to 4 percent.

The following chart shows the percentage of the total M&As in

the 2001–2004 period for each sensitive technology.

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Q.2. I also want to know how many United States companies were

purchased by Japan, United Kingdom, Germany, China, and every

other foreign nation in your database. Can you give me a breakdown by nationality of the top 15 acquiring nations in regards to

the industry areas they are investing in?

A.2. CFIUS does not collect comprehensive data on foreign direct

investment in the United States. It does, however, have aggregate

data based on notices under Exon-Florio. The two tables that follow

illustrate this data.

The following table shows the number of notices of foreign acquisitions filed with CFIUS in the 2001—2004 period by the host

country of the foreign acquirer.

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The following table shows the number of notices of foreign acquisitions filed with CFIUS in the 2001—2004 period by the host

country of the foreign acquirer by industry area:

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New Foreign Investment in the United States: In 2004

In addition to this data derived from notices to CFIUS under

Exon-Florio, the Bureau of Economic Analysis (BEA) in the Department of Commerce publishes aggregate data on foreign direct investment.

The attached table is from BEA’s Survey of Current Business,

June 2005. It shows that total outlays by foreign direct investors

to acquire or to establish U.S. businesses were $79.8 billion in

2004. This was up 26 percent from 2003. In 2004, outlays in finance and insurance accounted for almost half of the total outlays.

Outlays by Canadian investors accounted for more than 40 percent

of the total outlays. The largest European outlays were from the

United Kingdom, followed by Germany and France. Outlays from

Japan declined for the fourth year in a row.

The following are key terms for the table:

Foreign direct investment in the United States is ownership or

control, directly or indirectly, by one foreign person of 10 percent

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or more of the voting securities of an incorporated U.S. business

enterprise or an equivalent interest in an unincorporated U.S. business enterprise.

A U.S. affiliate is a U.S. business in which there is foreign direct

investment.

The ultimate beneficial owner is a person, proceeding up a U.S.

affiliate’s ownership chain, beginning with and including the foreign parent, that is not owned more than 50 percent by another

person.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM ROBERT M. KIMMITT

Q.1. How do you explain the failure of CFIUS to produce, after

1993, the quadrennial report required by Exon-Florio?

A.1. Exon-Florio requires the President, and such agencies as the

President shall designate, to complete and furnish to the Congress

a quadrennial report which:

(A) evaluates whether there is credible evidence of a coordinated strategy by one or more countries or companies to acquire U.S. companies involved in research, development, or

production of critical technologies for which the United States

is a leading producer; and

(B) evaluates whether there are industrial espionage activities

directed or directly assisted by foreign governments against

private U.S. companies aimed at obtaining commercial secrets

related to critical technologies.

In 1993, the President asked Treasury to coordinate the preparation of the first report, which was submitted in 1994. However, a

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quadrennial report with regard to paragraph (A) above (regarding

acquisitions) has not been produced since 1994, and I can assure

you that the Administration plans to provide a comprehensive report on that subject in 2006.

Although the information required under paragraph (A) has not

been provided to Congress since 1994, the information required

under paragraph (B) has been provided through reports prepared

by the Office of the National Counterintelligence Executive (NCIX).

The Intelligence Authorization Act for fiscal year 1995 requires the

President to submit annually to Congress updated information on

the threat to U.S. industry from foreign economic collection and industrial espionage. This report, coordinated by the NCIX, draws on

input from all the intelligence agencies. The Foreign Economic Collection and Industrial Espionage reports from 1995–2004 can be

found at: http://www.nacic.gov/publications/reportslspeeches/reports/fecielall/Indexlfecie.html.

The NCIX report covers the question of foreign government-sponsored industrial espionage activities to obtain U.S. critical technology secrets, and therefore effectively satisfies one requirement of

the quadrennial report pertaining to economic espionage. The

NCIX report is actually more comprehensive in scope than what

the quadrennial report requires in that it seeks to characterize and

assess efforts by foreign entities—government and private—to unlawfully target or acquire critical U.S. technologies, trade secrets,

and sensitive financial or proprietary economic information.

Although the NCIX report provides information relating to the

espionage portion of the mandate, we are working toward producing a report related to foreign acquisitions in 2006. While we

work to complete this report, I think that regular Congressional

briefings will provide you with more information on CFlUS’ s operations and enable you to monitor CFIUS more effectively.

Q.2. GAO states that ‘‘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’’ supported by the Department. Would it be advisable

for Treasury to place a greater organizational separation between

these two responsibilities, given the fact that the work of CFIUS

necessarily involves balancing national security and open investment policy considerations?

A.2. I do not think there is a conflict of interest in housing the

CFIUS staff within the Office of International Investment (OII).

Rather, I believe that the current organizational structure complements the CFIUS process and enables the staff to perform a

thorough review.

No responsibility is more important than protecting the national

security. It is also a prerequisite for supporting an open investment

policy and advancing economic prosperity. These missions—protecting national security and advancing economic prosperity—are

inherently linked.

The current organizational structure benefits the national security analysis because OII has the expertise to help inform the

CFIUS process as to the investment regimes of U.S. trade and investment partners, including information pertaining to their naVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00173 Fmt 6602 Sfmt 6602 33310.TXT SBANK4 PsN: SBANK4
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tional security protections. This can be an important consideration

when a foreign investor acquires a U.S. company with sensitive

technology, for example to help assess the likelihood that the technology will not be diverted. OII also draws on the resources of

other offices, such as the Office of Terrorism and Financial Intelligence (TFI) and the Office of the General Counsel.

The OII staff, which is involved in international investment

issues, is in a position to draw on the in-house CFIUS expertise.

This assures that U.S. negotiators working on international trade

and investment agreements are able to provide an informed perspective on the implementation of Exon-Florio to our trading and

investment partners.

Q.3. Treasury is devoting increased resources to building a modern

Office of Terrorism and Financial Intelligence (TFI), headed by

Under Secretary Levey. To what extent is TFI involved, or should

it be involved, in the work of CFIUS, especially given TFI’s increasing involvement in national security issues on behalf of Treasury?

A.3. The Office of Terrorism and Financial Intelligence (TFI) is

closely involved in many national security issues that are relevant

in the CFIUS review of foreign acquisitions of U.S. companies.

TFI’s mission is to marshal the department’s intelligence and enforcement functions with the twin aims of safeguarding the financial system against illicit use, and combating rogue nations, terrorist facilitators, money launderers, drug kingpins, and other national security threats.

CFIUS relied heavily on TFI expertise earlier this year when a

transaction under review raised the potential for some of the above

issues to be a factor. We expect that TFI will continue to participate in future reviews of CFIUS cases that implicate TFI’s specific

expertise as well as broader competence in national security matters.

Q.4. The organizational components of the Treasury Department

have changed considerably since the passage of the Exon-Florio

Amendment, due in part to the transfer of substantial components

of Treasury to the Department of Homeland Security. What expertise does the Department now bring to the consideration of ‘‘the effects on national security’’ of acquisitions of U.S. companies by

nonU.S. companies?

A.4. While it is true that Treasury has undergone change in recent

years, including the transfer of some of its law enforcement components, Treasury maintains a strong involvement in national security issues. Treasury sits on the National Security Council and the

Homeland Security Council, and is a member of the U.S. Intelligence Community.

Indeed, the establishment and development of Treasury’s Office

of Terrorism and Financial Intelligence (TFI), with its intelligence

and national security policy portfolios, has in many respects enhanced Treasury’s involvement in the national security arena. TFI

brings intelligence, enforcement, policy development, and regulatory capabilities to bear on a full range of national security

issues. Recent priority areas include terrorism, proliferation of

weapons of mass destruction, rogue regimes such as Iran, Syria,

and North Korea, narcotraffickers, and money launderers, among

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other national security threats. We draw on expertise in TFI in the

CFIUS process, as appropriate.

Moreover, the concept of national security includes both traditional foreign policy and defense criteria as well as economic considerations. Indeed, there is an inherent link between our national

security and a strong U.S. economy that facilitates free and fair

trade, market-based exchange rates, and the free flow of capital

across borders. We are mindful of the positive benefits of foreign

investment to our country and therefore seek to maintain the traditional U.S. open investment policy.

In all of these ways, Treasury is a key participant in developing

and implementing national security policy and brings that perspective to the CFIUS process.

Q.5. Would CFIUS function more effectively if it were a smaller

body?

A.5. The current membership provides a diverse perspective, assuring a more thorough analysis of the issues than a less diverse body

would provide. Member agencies bring particular expertise essential to the assessment of the potential national security implications of specific foreign investments in the United States. This

expertise includes knowledge of the level of technological sophistication of the transaction participants, the market position of alternate suppliers, the financial and product service track record,

and the future outlook for transaction participants. This expertise

gives CFIUS the broad perspective needed for a comprehensive assessment of the national defense, competitive performance, trade

and investment policy and commercial issues involved in each

transaction. Any narrowing of the Committee’s expertise could

cause the reviews to be less effective. It would therefore be important to consider this possibility in any effort to streamline the Committee’s membership.

Q.6. What explains the fact that CFIUS is now composed of six executive departments and six different components of the Executive

Office of the President, especially in light of the fact that CFIUS’

executive department members must staff out filings to numerous

components within each of those departments?

A.6. The Committee on Foreign Investment in the United States

(CFIUS) was established by Executive Order 11858 in 1975 mainly

to monitor and evaluate the impact of foreign investment in the

United States. There were originally 6 members: (1) the Secretary

of Treasury, the chair; (2) the Secretary of State; (3) the Secretary

of Defense; (4) the Secretary of Commerce; (5) the United States

Trade Representative; and (6) the Chairman of the Council of Economic Advisers. In 1988, the President, pursuant to Executive

Order 12661, delegated to CFIUS some of his responsibilities under

Section 721. Specifically, E.O. 12661 designated CFIUS to receive

notices of foreign acquisitions of U.S. companies, to determine

whether a particular acquisition has national security issues sufficient to warrant an investigation and to undertake an investigation, if necessary, under the Exon-Florio provision, and to submit

a report and recommendation to the President at the conclusion of

an investigation. In recognition of CFIUS’ expanded responsibilities, this order also expanded CFIUS’ membership to include the

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Attorney General and the Director of the Office of Management

and Budget.

In 1993, in response to a sense of Congress resolution, CFIUS

membership was expanded by Executive Order 12860 to include

the Director of the Office of Science and Technology Policy, the Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy. In February 2003, the

Department of Homeland Security was added to CFIUS.

Each member agency brings a particular expertise essential to

the assessment of the potential national security implications of

specific foreign investments in the United States. This expertise includes knowledge of the level of technological sophistication of the

transaction participants, the market position of alternate suppliers,

the financial and product service track record, and the future outlook for transaction participants. This expertise gives CFIUS the

broad perspective needed for a comprehensive assessment of the

national defense, competitive performance, trade and investment

policy and commercial issues involved in each transaction. It also

enables CFIUS to ensure that the national security is safeguarded

in a manner consistent with longstanding U.S. policy regarding foreign investment in the United States. In addition, since certain

member agencies administer U.S. export control programs for both

dual use and military/defense items, CFIUS is able to evaluate the

compliance record of the foreign acquirer and can offer guidance to

ensure that any relevant export control issues are taken into account when the foreign acquisition is completed.

Q.7. How many fillings has CFIUS received in which the acquirer

was either a foreign government or an entity controlled by or acting on behalf of a foreign government? How many investigations

has it conducted with respect to such filings?

A.7. Since 2001, there have been 42 notices of foreign acquisitions

of U.S. companies where the acquirer was either a foreign government or an entity controlled or acting on behalf of a foreign government. Of this total, CFIUS has undertaken a formal investigation

of 3.

CFIUS regularly gives extra scrutiny to transactions involving

foreign governments. However, the statistics regarding the number

of investigations do not tell the whole story. In the telecommunications sector, many foreign companies are foreign governmentowned or controlled and have entered into Network Security Agreements (NSAs) when acquiring U.S. companies, thereby obviating

the need for an investigation under Exon-Florio. (The NSAs are

available on the FCC website.) In addition, we have had some

transactions involving foreign governments that were abandoned

because the foreign acquirer became aware that there were significant national security concerns and the transaction would give rise

to serious objections by CFIUS.

Q.8. Please describe the factors the Department of the Treasury

takes into account in reviewing an acquisition in the first stage of

the CFIUS process? What factors does the Department take into

account in deciding whether to recommend that a matter be taken

to formal investigation? Please be as specific as possible.

173

A.8. At the outset, it is important to stress that each transaction

is unique and CFIUS takes a case-by-case approach. The Department of the Treasury, while the chair of CFIUS, is not in a position

to dictate the results of the CFIUS process, since decisions are

made by consensus and reflect the views of its members. However,

in general, CFIUS agencies are guided by the criteria in the ExonFlorio Amendment and, therefore, initially consider whether the

foreign acquirer acting through the U.S. target company might

take action to threaten the national security and, if a threat is

identified, whether existing laws are adequate and appropriate to

deal with it.

The same criteria guide Treasury’s own internal review process.

Most importantly, Treasury relies on the views of the other CFIUS

members who may have expertise regarding a particular sector. In

establishing whether the foreign acquirer may be a threat to national security, Treasury examines the intelligence reporting and

any reports of the foreign acquirer violating U.S. laws and regulations, such as not complying with the export control laws. In addition, it is important to examine the host government of the foreign

company for a number of issues, including whether it maintains an

acceptable export control regime that protects against unlawful

U.S. technology diversion. Treasury also refers to the factors listed

in the statute that the President may consider in a review. Since

these involve the defense industrial base, nonproliferation, and

other issues within the primary responsibility of other member

agencies, these agencies provide CFIUS an analysis of these issues.

Finally, any agency that requests an investigation is expected to

provide CFIUS a paper stating its national security concerns and

the rationale for an investigation. Treasury and other CFIUS members review this information to arrive at a position on whether to

support an investigation. In the end, however, a single agency’s request can result in an investigation.

Q.9. Why are there so few formal Exon-Florio investigations?

A.9. Relatively few acquisitions by foreign entities have the potential to affect national security. The most active foreign investors

are from close ally countries such as Canada and from Western Europe, which together account for more than 70 percent of the foreign direct investment position in the United States. The vast majority of notified transactions do not require an investigation either

because these transactions do not potentially threaten national security, or CFIUS is able to mitigate the national security issues

that arise in connection with these transactions. Exon-Florio requires that CFIUS look first to the ability of existing laws and regulations to address national security concerns. To the extent that

existing laws and regulations can accomplish this objective, there

is no need to rely on Exon-Florio.

The existence of Exon-Florio raises the awareness of foreign investors contemplating acquisitions of U.S. companies to the importance of national security considerations, and it helps to ensure

that foreign investments are structured in ways to avoid national

security problems. In addition, companies understand that sometimes their transaction may not be approved without some type of

mitigation. The use of mitigation agreements enables CFIUS to adVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00177 Fmt 6602 Sfmt 6602 33310.TXT SBANK4 PsN: SBANK4
174

dress concerns without going into an investigation. In some cases

where CFIUS agencies have identified mitigation measures during

the 30-day review period that would adequately address national

security concerns, companies have withdrawn their CFIUS notices

in order to negotiate mitigation agreements. Once mitigation agreements are executed, the companies refile with CFIUS, and CFIUS

then concludes the review.

Q.10. When would it be appropriate for CFIUS to recommend barring or limiting a transaction because the transaction affected ‘‘domestic production needed for projected national defense requirements,’’ ‘‘the capability and capacity of domestic industries to meet

national defense requirements,’’ or ‘‘the capability and capacity of

the United States to meet the requirements of national security.’’

Please be as specific as possible.

A.10. If these factors were relevant in a particular review under

Exon-Florio, CFIUS would weigh them in any decision about

whether to undertake an investigation, and they would be thoroughly examined along with any other relevant national security

issues before CFIUS fonnulated its recommendation to the President. Factors in the statute are not an exhaustive list, but serve

as guidance to CFIUS on areas of national security concern that

Congress highlighted in drafting the legislation. These factors

have, in fact, figured into CFlUS recommendations in past cases,

including cases where CFIUS agencies entered into an agreement

to mitigate a perceived threat. However, it is important to understand that these factors by themselves do not drive a decision. For

the President to take action under Exon-Florio, he must determine

that there is credible evidence that the foreign person exercising

control might take action that threatens to impair the national security. While this is a relatively low standard, it is clearly more

than conjecture. The President must have some reason to believe,

based, for example, on the foreign person’s past actions or likely

motives, that it will take action through the acquisition that

threatens to impair U.S. national security. The injury to the national security can relate to the factors in the statute (for example,

by reducing or eliminating domestic production of a good needed for

national defense) or to other factors the President considers important (for example, harming critical infrastructure, terrorism financing, etc.) Likewise, the President must also find that provisions of

law other than Exon-Florio and IEEPA do not provide adequate

and appropriate authority to protect the national security.

Q.11. At present, filings with CFIUS are voluntary. Would ExonFlorio work more effectively if fillings were mandatory?

A.11. CFlUS has implemented the Exon-Florio Amendment in a

manner that has achieved the national security objectives as prescribed in the statute without compromising our open investment

policy. CFlUS’s implementation of Exon-Florio has increased the

awareness of investors to national security issues, brought transactions into conformity with existing laws where needed, and resulted in investors abandoning transactions that raised insurmountable national security problems. There is no evidence to suggest that transactions that are not notified to CFIUS under the

current voluntary system present national security issues.

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Although Exon-Florio notices are voluntary, failure to notify

leaves the transaction subject to Presidential action indefinitely. In

addition, any CFIUS member may notify a transaction to the staff

chair. This ensures that CFlUS may review any transaction that

it believes should be reviewed.

Mandatory notification would hinder U.S. efforts to promote

more liberal investment regimes worldwide. The United States has

consistently opposed mandatory screening mechanisms for foreign

investment, and has sought the removal of such mechanisms when

we have negotiated international trade and investment agreements.

Moreover, introduction of a mandatory screening process could

conflict with nondiscrimination commitments, particularly with respect to our Bilateral Investment Treaties and certain Treaties of

Friendship, Commerce, and Navigation and Free Trade Agreements, potentially exposing the U.S. Government to claims brought

by foreign investors or their governments.

Q.12. What specific steps is Treasury prepared to take in order to

increase the scope of the information that this Committee receives

about the Administration of the Exon-FIorio Amendment and the

work of CFlUS?

A.12. I support enhancing the transparency of the CFIUS process

through more effective communication with Congress, while recognizing our shared responsibility to avoid the disclosure of proprietary information that could undermine a transaction or be used

for competitive purposes. I am open to suggestions on ways to improve the transparency of the process.

In this regard, CFIUS Policy officials recommend that I meet

with you and Senator Shelby, and with Representatives Oxley and

Frank, to inform you and them of the recent improvements to the

CFIUS process. In order to keep Congress informed adequately and

regularly about the CFIUS process, I would like to offer that Treasury, on behalf of CFIUS, orally brief the Senate Banking and

House Financial Services Committees generally every quarter on

completed reviews. On a case-by-case basis, CFIUS may suggest

that its oversight committees invite other potentially interested

members and committees with jurisdiction over areas affected by

decisions under Exon- Florio to attend these briefings.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE

FROM DAVID A. SAMPSON

Q.1. Can you tell me whether there have been patterns of foreign

acquisition by industry or specialty? Are any countries concentrating their purchases, and thus targeting our aerospace, software,

materials, energy, electronics, and other sectors? Is there any cumulative, broad-picture analysis that would show if a certain country or alliance of countries was intentionally or unintentionally

undermining any possible aspect of national security?

A.1. Commerce defers to Treasury on this question. Treasury has

advised that they will provide you with a response to this question

in the near future.

Q.2. How many U.S. companies were purchased by Japan, United

Kingdom, Germany, China, and every other foreign nation in your

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database? Can you give me a breakdown by nationality of the top

15 acquiring nations in regards to the industry areas they are investing in?

A.2. As chair of the Committee on Foreign Investments in the

United States (CFIUS), the Department of the Treasury maintains

records for all CFIUS cases since the statute’s enactment in 1988.

Therefore, we defer to the Treasury Department on this question.

Treasury has advised that they will provide you with a response

to this question in the near future.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM DAVID A. SAMPSON

Q.1. Please describe the factors the Department of Commerce takes

into account in reviewing an acquisition in the first stage of the

CFIUS process?

A.1. Commerce considers a large number of factors in determining

the national security implications of a proposed foreign acquisition

of a U.S. company or other assets. Major aspects include the likely

effects of a transaction on domestic production needed for projected

national defense requirements, the compliance record of all involved parties with U.S. and multilateral export control laws (including the parties’ plans for managing their compliance with export control laws), the sensitivity of any technology being acquired,

the potential impact on the Nation’s telecommunications, energy,

and other critical infrastructure, and other factors that impact the

national security. Commerce agencies work closely with the Departments of Defense, Justice, State, and Homeland Security, as

well as with the intelligence community, in assessing whether the

national security could be compromised by the proposed transaction.

Q.2. What factors does the Department take into account in deciding whether to recommend that a matter be taken to formal investigation? Please be as specific as possible.

A.2. The Department will recommend that an Exon-Florio filing

proceed to the formal investigation stage only when all identified

national security concerns have not been resolved during the review stage. Major factors that could lead to such a recommendation

by Commerce include:

• Additional information is needed from the companies engaged in

the transaction in order for CFIUS to fully analyze potential national security risks associated with a transaction;

• There is a need to work out mitigation measures to address national security concerns; • Highly adverse intelligence identifies serious national security

risks; and

• Control of commercial activity by the acquiring party could adversely affect U.S. capability to meet national security requirements.

Q.3. Why are there so few formal Exon-Florio investigations?

A.3. There are relatively few instances where foreign acquisitions

of U.S. firms have the potential to affect national security and

those effects cannot be mitigated through security agreements durVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00180 Fmt 6602 Sfmt 6602 33310.TXT SBANK4 PsN: SBANK4
177

ing the 30-day CFIUS review period. Additionally, in most CFIUS

filings, the foreign purchaser is headquartered in a country that is

a close ally of the United States.

Q.4. When would it be appropriate for the Department of Commerce to recommend, in the CFIUS process, barring or limiting a

transaction because: The transaction affected ‘‘domestic production

needed for projected national defense requirements,’’ ‘‘the capability

and capacity of domestic industries to meet national defense requirements,’’ or ‘‘the capability and capacity of the United States

to meet the requirements of national security.’’ Please be as specific

as possible.

A.4. Commerce might recommend intervening in a transaction

when CFIUS has credible evidence that the foreign person might

take action that adversely affects U.S. Government agencies, defense contractors, or domestic businesses in ways that threaten to

impair the national security and no other laws are adequate or appropriate to address that threat. Such action may be warranted

when, among other things:

• Access to critical materials, technologies, vendors, markets, or

manufacturing capability might be denied, or lost.

• There are serious national security risks associated with the

transfer of vital or highly sensitive manufacturing know-how or

technology.

Q.5.a. How does the Department of Commerce monitor mitigation

agreements entered into as a condition for approval of acquisitions?

A.5.a. To date, Commerce has played no formal role in monitoring

mitigation agreements; nor has the Department had any responsibility in enforcing these agreements. Commerce has consulted with

other CFIUS members on the design and implementation of mitigation measures employed in some transactions.

Q.5.b. What part or parts of the Department of Commerce are involved in such monitoring? Please be as specific as possible.

A.5.b. Commerce has played no formal role in monitoring mitigation agreements, but other CFIUS agencies on occasion share information with Commerce relating to compliance with mitigation

agreements.

Q.6. At present, filings with CFIUS are voluntary. Would ExonFlorio work more effectively if filings were mandatory?

A.6. CFIUS has implemented the Exon-Florio Amendment in a

manner that has achieved the national security objectives as prescribed in the statute without compromising our open investment

policy.

On balance, CFIUS implementation of Exon-Florio has increased

the awareness of investors to national security issues, brought

transactions into conformity with existing laws where needed, and

resulted in investors abandoning transactions that raised insurmountable problems.

Although Exon-Florio notices are voluntary, failure to notify

leaves the transaction subject to Presidential action indefinitely.

Mandatory notice would create a significant added burden for

foreign investors.

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In giving the President broad discretion under the Exon-Florio

Amendment, Congress recognized the flexibility that is needed to

protect the national security effectively. This flexible system would

not work with a mandatory system of filing, which would require

clear definitions of such threshold concepts as national security and

foreign control. This would also make it easier for parties to structure transactions to avoid the statute’s reach.

The consequences of adopting the amendment could be quite

damaging to U.S. interests because it could chill the climate for legitimate foreign investment in the United States.

Mandatory notification would be seen as screening foreign investment, would have an adverse impact on U.S. investment policy,

and hinder U.S. efforts to promote more liberal investment regimes

worldwide.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE

FROM STEWART BAKER

Q.1. Can you tell me whether there have been patterns of foreign

acquisition by industry or specialty? Are any countries concentrating their purchases, and thus targeting our aerospace, software,

materials, energy, electronics, and other sectors? Is there any cumulative, broad-picture analysis that would show if a certain country or alliance of countries was intentionally or unintentionally

undermining any possible aspect of national security?

A.1. The Department of the Treasury previously submitted a response to this request. DHS defers to Treasury on this question.

Q.2. I also want to know how many United States companies were

purchased by Japan, United Kingdom, Germany, China, and every

other foreign nation in your database. Can you give me a breakdown by nationality of the top 15 acquiring nations in regards to

the industry area they are investing in?

A.2. The Department of the Treasury previously submitted a response to this request. DHS defers to Treasury on this question.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM STEWART BAKER

Q.1. In your view, what specific steps should be taken to improve

the CFIUS process, the Exon-Florio Amendment, or both, from the

perspective of the responsibilities of the Department of Homeland

Security?

A.1. The Administration is carefully considering whether changes

to the CFIUS process are warranted and, if so, what changes

should be made. While the Administration has not made any decisions at this time, we believe that any changes to CFIUS should

be guided by the following principles:

• Further integration of national and homeland security interests

for a post-September 11 environment;

• Continuation of a welcoming stance toward investments in the

United States because it creates good jobs for American workers;

• Preservation of that which works about CFIUS with improvements and updates where needed, while maintaining the integrity of the decisionmaking process.

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Q.2. Please describe the factors the Department of Homeland Security takes into account in reviewing an acquisition in the first stage

of the CFIUS process? What factors does the Department taken

into account in deciding whether to recommend that a matter be

taken to formal investigation? Please be as specific as possible.

A.2. The Department of Homeland Security (DHS) considers

whether the acquisition may affect national security broadly construed, focusing in particular on the acquisition’s potential impact

on critical infrastructure and other homeland security factors, as

well as traditional measures of national security. In the CFIUS

process DHS examines questions such as: (1) whether DHS already

has sufficient legal or regulatory authority to address any threat to

homeland security that might be raised by the transaction; (2)

whether DHS has homeland security concerns about the parties to

the transaction; and (3) whether the homeland security concerns

can be resolved with binding assurances from the parties to the

transaction.

Q.3. Why are there so few formal Exon-Florio investigations?

A.3. The vast majority of notified transactions do not require an investigation either because these transactions do not potentially

threaten national security, or CFIUS is able to mitigate the national security issues that arise in connection with these transactions.

Many companies understand that sometimes their transaction

may not be approved without some type of mitigation. The use of

mitigation agreements enables CFIUS to address concerns without

going into an investigation. In some cases where CFIUS agencies

have identified mitigation measures during the 30-day review period that would adequately address national security concerns,

companies have withdrawn their CFIUS notices in order to negotiate mitigation agreements. Once mitigation agreements are executed, the companies refile with CFIUS, and CFIUS then concludes

the review.

Q.4. When would it be appropriate for the Department of Homeland Security to recommend, in the CFIUS process, barring or limiting a transaction because the transaction affected ‘‘domestic production needed for projected national defense requirements,’’ ‘‘the

capability and capacity of domestic industries to meet national defense requirements,’’ or ‘‘the capability and capacity of the United

States to meet the requirements of national security.’’ Please be as

specific as possible.

A.4. Questions regarding defense requirements should be answered

by the Department of Defense. In general, DHS would closely scrutinize a proposed purchase that could threaten the availability of

a good or service that is essential to national security.

Q.5. How does the Department of Homeland Security monitor mitigation agreements entered into as a condition for approval of acquisitions? What part or parts of the Department of Homeland Security are involved in such monitoring? Please be as specific as

possible.

A.5. DHS policy with the assistance of the Office of General Counsel and other assets, as necessary, tracks compliance with mitigaVerDate 11-MAY-2000 16:50 Mar 02, 2007 Jkt 025856 PO 00000 Frm 00183 Fmt 6602 Sfmt 6601 33310.TXT SBANK4 PsN: SBANK4
180

tion agreements to which DHS is a party. This monitoring includes

determining whether the parties have provided information they

are required to produce under the agreements, and, as necessary,

making on-site compliance visits, obtaining certifications and/or audits, and following up with the companies and other agencies if an

issue arises.

Q.6. At present, filings with CFIUS are voluntary. Would ExonFlorio work more effectively if filing were mandatory?

A.6. DHS does not believe that mandatory filings would improve

the CFIUS process. CFIUS already possesses authority to initiate

a review if a filing is not volunteered, but most often a filing is

made when CFIUS requests one informally.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR INHOFE

FROM E. ANTHONY WAYNE

Q.1. Can you tell me whether there have been patterns of foreign

acquisition by industry or specialty? Are any countries concentrating their purchases, and thus targeting our aerospace, software,

material, energy, electronics, and other sectors? Is there any cumulative, broad-picture analysis that would show if a certain country

or alliance of countries was intentionally or unintentionally undermining any possible aspect of national security?

A.1. The Department of State does not maintain statistical data on

cases that have come before the Committee on Foreign Investment

in the United States (CFIUS). We note that an extensive analysis

of the merger and acquisition activity by foreign investors in the

United States is planned for 2006; we refer you to the Department

of the Treasury for more information on that analysis.

Q.2. I also want to know how many United States companies were

purchased by Japan, United Kingdom, Germany, China, and every

other foreign nation in your database. Can you give me a breakdown by nationality of the top 15 acquiring nations in regards to

the industry areas they are investing in?

A.2. As Chair of CFIUS, the Department of the Treasury maintains

the database on acquisitions that have come before CFIUS, and we

would refer you to Treasury for the answer to your question.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM E. ANTHONY WAYNE

Q.1. Please describe the factors the Department of State takes into

account in reviewing an acquisition in the first stage of the CFIUS

process. What factors does the Department take into account in deciding to recommend that a matter be taken to formal investigation? Please be as specific as possible.

A.1. The Department of State brings to the CFIUS process expertise and experience in international economic issues, export control

policy, intelligence, national security, and foreign policy. Our internal processes at the Department of State ensure that each and

every CFIUS case receives careful scrutiny by offices with expertise

in these areas. The Bureau of Economic and Business Affairs, the

Bureau of Political-Military Affairs, the Bureau of International Security and Nonproliferation, the Bureau of Diplomatic Security, the

181

Bureau of Intelligence and Research, the Office of the Legal Adviser, and the appropriate regional bureau participate in the review

of notifications received by CFIUS and forwarded to us by the Department of the Treasury as CFIUS chair.

The Department of State is primarily guided by the criteria in

the Exon-Florio Aamendment. As a result, we consider international economic implications, factor in the relevant statutes on

export controls (for example, the Arms Export Control Act), and

nonproliferation, etc.

The Department of State is also able to draw upon the local diplomatic and economic expertise of our embassies to provide relevant information relating to the specific transaction under review.

Q.2. Why are there so few formal Exon-Florio investigations?

A.2. The vast majority of acquisitions by foreign entities generally

do not raise the possibility of harm to national security. Seventy

percent of the foreign direct investment in the United States comes

from Canada and Western Europe. CFIUS has not generally required an investigation in the majority of these transactions either

because these transactions do not potentially threaten national security, or issues that arise can be address within current statutes.

The statutory language of Exon-Florio requires that CFIUS look

first to the ability of existing laws and regulations (other than the

International Emergency Economic Powers Act) to address national

security concerns. To the extent that existing laws and regulations

can accomplish this objective, the Department believes there is no

need to rely on Exon-Florio.

Exon-Florio raises the awareness of foreign investors considering

investment in the United States to the importance of national security, and it helps to ensure that foreign investments are structured

in a way to avoid national security problems.

Q.3. When would it be appropriate for the Department of State to

recommend, in the CFIUS process, barring or limiting a transaction because the transaction affected ‘‘domestic production needed for projected national defense requirements,’’ ‘‘the capability and

capacity of domestic industries to meet national defense requirements,’’ or ‘‘the capability and capacity of the United State to meeting the requirements of national security.’’ Please be as specific as

possible.

A.3. The Department of State thoroughly examines all relevant factors in assessing the possible impact on U.S. national security of

any transaction. The Department also relies on input from other

CFIUS agencies as to whether they believe a national security

threat exists. Exon-Florio provides wide latitude to the President,

and by extension to CFIUS, on what to consider in the areas of national security concerns that Congress highlighted in drafting the

legislation. CFIUS agencies have never viewed the list of factors as

a closed list, and believe the present approach ensures the flexibility to take into account new issues and concerns.

While domestic production concerns have been a part of past

CFIUS recommendations, including cases where CFIUS agencies

have used agency specific mitigation agreements to address a perceived threat, it is important to recognize that these factors by

themselves do not drive a decision. For the President to take action

182

under Exon-Florio, he must determine that there is credible evidence that the foreign person exercising control might take action

that threatens to impair the national security. The President must

have reason to believe, based, for example, on the foreign parties’

prior actions, that it will take action through the acquisition that

threatens to impair U.S. national security.

The risk to national security can relate to the factors in the statute (for example, by reducing or eliminating domestic production of

a good needed for national defense) or to other factors the President considers important (for example, threat to critical infrastructure, potential terrorism finance). In addition, the President also

must find that provisions of law other than Exon-Florio and IEEPA

do not provide adequate and appropriate authority to protect national security.

Q.4. How does the Department of State monitor mitigation agreements entered into as a condition for approval of acquisitions?

What part or parts of the Department of State are involved in such

monitoring? Please be a specific as possible.

A.4. The monitoring of the mitigation agreements is primarily the

responsibility of the agencies that are party to the agreements.

Most often it is the Department of Justice, the Department of

Homeland Security, and the Department of Defense that are signatories to these agreements, with Treasury having overall responsibility as the chair of the CFIUS process. When issues come before

CFIUS where the interests of the Department of State are involved, the Department does take an active role in the discussion

of the mitigation agreements.

Q.5. At present, filings with CFIUS are voluntary. Would ExonFlorio work more effectively if the filings were mandatory?

A.5. No. The Department of State believes the existing Exon-Florio

Amendment, as carefully crafted by Congress, successfully protects

national security while maintaining the U.S. Government’s longstanding open investment policy. CFIUS’s implementation of ExonFlorio has made foreign investors more aware of national security

issues, brought transactions into conformity with existing laws

where needed, and resulted in the abandonment of transactions

that raised national security concerns that could not be mitigated.

There is no evidence to suggest that transactions that have not be

reviewed or notified to CFIUS under the current voluntary system

present national security issues.

Although Exon-Florio notices are ‘‘voluntary,’’ failure to notify

leaves the transaction subject to Presidential review and possible

action indefinitely. In addition, the Department of State or any

other CFIUS member may notify a transaction to the staff chair,

Treasury, to ensure that CFIUS may review any transaction that

it believes should be reviewed.

In the Department of State’s opinion, mandatory notification

would undercut U.S. Government efforts to promote more liberal

investment regimes around the world. The U.S. Government and

American business have consistently opposed mandatory screening

mechanisms for foreign investment when such policies have been

implemented by foreign governments, and have sought the removal

183

of such mechanisms when the United States has negotiated international trade and investment agreements.

Moreover, introduction of a mandatory screening process could

conflict with nondiscrimination commitments, particularly with respect to our Bilateral Investment Treaties and certain Treaties of

Friendship, Commerce, and Navigation, and Free Trade Agreements, potentially exposing the U.S. Government to claims brought

by foreign investors or their governments.

RESPOSNE TO WRITTEN QUESTIONS OF SENATOR INHOFE

FROM PETER C.W. FLORY

Q.1. Can you tell me whether there have been patterns of foreign

acquisition by industry or specialty? Are any countries concentrating their purchases, and thus targeting our aerospace, software,

materials, energy, electronics, and other sectors? Is there any cumulative, broad-picture analysis that would show if a certain country or alliance of countries was intentionally or unintentionally

undermining any possible aspect of national security?

A.1. The Department of the Treasury previously submitted a response to this request. Defense defers to Treasury on this question.

Q.2. How many United States companies were purchased by

Japan, United Kingdom, Germany, China, and every other foreign

nation in your database? Can you give me a breakdown by nationality of the top 15 acquiring nations in regards to the industry

areas they are investing in?

A.2. The Department of the Treasury previously submitted a response to this request. Defense defers to the Treasury Department

on this question.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM PETER C.W. FLORY

Q.1. In your view, what specific steps should be taken to improve

the CFIUS process, the Exon-Florio Amendment, or both from the

standpoint of the responsibilities of the Department of Defense?

A.1. The Administration is carefully considering whether changes

to the CFIUS process are warranted and, if so, what changes

should be made. While the Administration has not made any decisions at this time, we believe that any changes to CFIUS should

be guided by the following principles:

• Further integration of national and homeland security interests

for a post-September 11 environment;

• Continuation of a welcoming stance toward investments in the

United States because it creates good jobs for American workers;

• Preservation of that which works about CFIUS with improvements and updates where needed, while maintaining the integrity of the decisionmaking process.

Q.2. Please describe the factors the Department of Defense takes

into account in reviewing an acquisition in the first stage of the

CFIUS process? What factors does the Department take into account in deciding whether to recommend that a matter be taken to

formal investigation? Please be specific as possible.

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A.2. There are a number of factors that we in the Department of

Defense (DoD) consider before taking a position when it comes to

reviewing a foreign acquisition of a U.S. company. These include

five major substantive areas of interest and one procedural area of

interest. The substantive areas are:

First, the significance of the technologies possessed by the firm

to be acquired (for example, are they ‘‘state of the art’’ or otherwise

militarily critical? Are they classified, export controlled, or otherwise security sensitive?);

Second, the importance of the firm to the U.S. defense industrial

base (for example, is it a sole-source supplier and if so, what security and financial costs would be incurred in finding and/or qualifying a new supplier, if required?);

Third, possible security risks or concerns that might be posed by

the particular foreign acquiring firm;

Fourth, whether the company to be acquired is part of the critical infrastructures that the DoD depends upon to accomplish its

mission; and

Fifth, can any potential national security concerns posed by the

transaction be resolved by the application of risk mitigation measures either under DoD’s own regulations or through negotiation

with the parties?

The procedural issue we consider is whether there has been a

willingness on the part of the parties to the transaction to voluntarily negotiate risk mitigation measures when DoD believes they

are necessary and whether there is sufficient time to do so before

the end of the 30-day initial review period.

Q.3. Why are there so few formal Exon-Florio investigations?

A.3. There are relatively few formal investigations because most

proposed foreign acquisitions of U.S. firms do not have national security implications. For those transactions that do raise potential

concerns, often the issues can be adequately mitigated in the

course of the CFIUS review process.

For transactions that have required mitigation measures to protect national security, the parties typically have either negotiated

mitigation measures during the 30-day review period or the companies have withdrawn their notices (with CFIUS approval) until

mitigation measures were negotiated. The companies then refiled

with CFIUS, with the necessary mitigation measures in place, thus

enabling CFIUS to conclude its review without a formal investigation. In some cases, the companies have abandoned the proposed

transaction.

Q.4. When would it be appropriate for the Department of Defense

to recommend, in the CFIUS process, barring or limiting a transaction because the transaction affected ‘‘domestic production needed for projected national defense requirements,’’ ‘‘the capability and

capacity of the United States to meet the requirements of national

security?’’ Please be specific as possible.

A.4. Because each transaction is unique and is addressed on a

case-by-case basis, it is not possible to provide a generalized standard for when the Defense Department would vote to bar or limit

a transaction. The Defense Department would closely scrutinize

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any transaction where U.S. companies: (a) have classified contracts

with the DoD, and (b) when there are potential national security

concerns with a foreign acquisition which cannot be mitigated

through the National Industrial Security Program’s Foreign Ownership, Control, and Influence Program (FOCI). Recommendations

in other transactions (for example, where no classified contracts are

involved) would depend on the potential impact on national defense

and the ability to mitigate any risks through DoD actions or by

memoranda of agreements with the companies.

Q.5. How does the Department of Defense monitor mitigation

agreements entered into as a condition for approval of acquisitions?

What part or parts of the Department of Defense are involved in

such monitoring? Please be specific as possible.

A.5. Every signatory agency has the authority and responsibility to

monitor an agreement to which it is a party.

The Department’s Defense Security Service (DSS) enters into negotiations with the parties of cases involving Foreign Ownership,

Control or Influence (FOCI) when classified contracts are involved.

DSS develops specifically tailored risk mitigation agreements,

which it designs to provide for the necessary level of security for

classified data and any export-controlled information and technologies that may accompany it. The process for mitigating FOCI

for firms with facility clearances is separate and apart from the

CFIUS process. DSS monitors compliance in such instances involving facility security clearances and can take actions to protect information and technology determined to be at risk.

In cases where the agreements are interagency agreements

signed by several CFIUS agencies, other agencies often notify DoD

of issues that arise regarding potential noncompliance.

Q.6. At present, filing with CFIUS are voluntary. Would ExonFlorio work more effectively if filings were mandatory?

A.6. No. Although Exon-Florio notices are voluntary, there is a

powerful incentive for transactions with national security implications to be notified to CFIUS. The CFIUS review process potentially provides these companies with a safe harbor, and according

to Exon-Florio, if a foreign firm concludes a transaction that may

be covered by the statute and does not file a notification with

CFIUS, the acquisition will remain open to executive branch scrutiny permanently and could be subject to divestment by order of

the President. For cases in which Defense has concerns about the

acquisition of a particular U.S. firm, Defense would recommend to

the companies that they submit a CFIUS filing. We believe this

strategy has worked effectively to protect national security to date.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM ROBERT D. McCALLUM, JR.

Q.1. In a letter to GAO, dated July 25, 2005, Deputy Assistant Attorney General Laura Parsky stated that:

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.

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Any potential extension of the time available to the participants for the collection and analysis of that information would

be helpful. (Emphasis added.)

GAO Report at 48.

What would an appropriate extension of time be? How should it

be implemented?

A.1. CFIUS completes the vast majority of its reviews within the

initial 30-day period. For a small number of cases, which present

complex and sensitive issues, more time would, of course, be helpful. It is these cases in particular to which the Department of Justice was referring in its letter of July 25,2005. The Administration

is carefully considering whether changes to the CFIUS process are

warranted and, if so, what changes should be made, including with

respect to the time for analyzing transactions.

Q.2. Please describe the factors the Department of Justice takes

into account in reviewing an acquisition in the first stage of the

CFIUS process? What factors does the Department take into account in deciding whether to recommend that a matter be taken to

formal investigation? Please be as specific as possible.

A.2. At both the reviewing and the investigation stages, the Department’s principal concerns in the CFIUS context relate to counterintelligence, cybercrime, U.S. communications system protection,

privacy protection, the ability to conduct effective electronic surveillance, and in some instances counterterrorism, although there are

other areas of interest within the Department’s purview that may

be implicated by a particular CFIUS transaction. The Department

of Justice reviews each transaction that comes before CFIUS on a

case-by-case basis. Because each transaction is unique, the Department does not use a one-size-fits-all approach to analyzing transactions.

While the factors mentioned above are of particular concern to

the Department of Justice, as a member of CFIUS, the Department

considers many additional factors when deciding whether a transaction could affect national security and consults closely with many

different components of the Department, including the Federal Bureau of Investigation (FBI), as well as the intelligence community

and other CFIUS agencies to determine the full breadth of factors

that may be relevant in a particular transaction. These additional

national security factors include access to critical infrastructure;

domestic production needed for projected national defense requirements; the capability and capacity of domestic industries to meet

national defense requirements; 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; potential effects on sales of export controlled

goods, equipment, or technology to certain countries; and potential

effects on U.S. international technological leadership in areas affecting U.S. national security. However, this list is not exclusive,

and in accordance with Exon-Florio, the Department considers a

broad array of interests that may affect national security.

Q.3. Why are there so few formal Exon-Florio investigations?

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A.3. There are relatively few acquisitions within the parameters of

Exon-Florio that have the potential to affect national security. If

that potential exists, CFIUS agencies strive to put in place adequate security measures. If it is not possible to reach agreement on

security measures during the 30-day review period or if, despite

best efforts, there are still unanswered questions regarding the effects on national security created by the transaction, CFIUS undertakes investigations or, in particularly complex transactions, companies withdraw their CFIUS notices in order to negotiate security

agreements. Once security agreements are executed, the companies

refile with CFIUS, thereby starting a new 30-day review period.

CFIUS then has no reason to investigate the transaction given the

security measures that have been put in place.

Statistics about the number of CFIUS investigations do not reflect those instances where security agreements were put in place,

thereby obviating the need for an investigation. In a few cases, as

a result of discussions with CFIUS, the companies realize their

transaction will result in a negative recommendation by CFIUS

and therefore decide against proceeding with the transaction.

Q.4. When would it be appropriate for the Department of Justice

to recommend, in the CFIUS process, barring or limiting a transaction because the transaction affected ‘‘domestic production needed for projected national defense requirements,’’ ‘‘the capability and

capacity of domestic industries to meet national defense requirements,’’ or ‘‘the capability and capacity of the United States to meet

the requirement of national security.’’ Please be as specific as possible.

A.4. As stated above, the Department of Justice considers many

factors when deciding whether a transaction could affect national

security and consults closely with its own internal components, including the FBI, as well as the intelligence community and other

CFIUS agencies to determine the full breadth of factors that may

be relevant in a particular transaction. Exon-Florio provides

CFIUS with the flexibility to consider any number of national security factors, including those listed above.

Because the Department of Justice reviews each CFIUS transaction on a case-by-case basis and must assess the unique combination of potential threats and vulnerabilities associated with a given

transaction, it is not possible to categorize those instances when it

would be appropriate for the Department to recommend that a

transaction be blocked or limited. The facts relating to each transaction are unique, and the national security considerations for each

transaction must be based on these unique facts.

Q.5. How does the Department of Justice monitor mitigation agreements entered into as a condition for approval of acquisitions?

What part or parts of the Department of Justice are involved in

such monitoring? Please be as specific as possible.

A.5. The Department of Justice has responsibility for monitoring

mitigation agreements to which it is a party. The Department’s

monitoring efforts are tailored to meet the unique circumstances of

each mitigation agreement and may include, but are not limited to,

such activities as conducting on-site audits, reviewing the reports

of third-party auditors, and meeting with companies to discuss

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their compliance with mitigation measures. In instances where

other CFIUS agencies are also parties to an agreement, the Department and these other agencies coordinate monitoring efforts

and allocate monitoring responsibilities based on their respective

expertise and resources. Since it joined CFIUS in March 2003, the

Department of Homeland Security has made significant contributions in terms of expertise and resources in monitoring many of the

agreements to which it is a party.

Within the Department, the Criminal Division has primary responsibility for coordinating the Department’s efforts in the CFIUS

context, including coordination of monitoring responsibilities. The

FBI has played a key role in monitoring mitigation agreements.

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