GAO

United States General Accounting Office

Report to the Honorable

Chuck Hagel, U.S. Senate

June 2000 DEFENSE TRADE

Identifying Foreign 

Acquisitions Affecting 

National Security Can 

Be Improved

GAO/NSIAD-00-144

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Contents

Letter 3

Appendixes Appendix I: Comments From the Department of Commerce 20

Appendix II: Comments From the Department of Defense 23

Appendix III: Comments From the Department of State 27

Appendix IV: Comments From the Department of the Treasury 28

Table Table 1: Foreign Acquisitions, Voluntary Reports to the Committee, 

and Dispositions, 1988-99 8
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-285111 Letr

June 29, 2000

The Honorable Chuck Hagel

United States Senate 

Dear Senator Hagel:

In 1988, Congress enacted the Exon-Florio Amendment to the Defense 

Production Act, authorizing the President to suspend or prohibit foreign 

acquisitions, mergers, or takeovers of U.S. companies if there is credible 

evidence that a foreign controlling interest might threaten national security 

and if other legislation cannot adequately protect national security. 

Congress passed the legislation to prevent foreign acquisitions that would 

adversely affect national security with respect to the domestic defense 

industry, U.S. technological leadership in national security areas, and the 

sale of military equipment and technology to countries that support 

terrorism or proliferate missile technology or chemical and biological 

weapons. 

The President delegated the authority to review foreign acquisitions of U.S. 

companies to an interagency group, the Committee on Foreign Investment 

in the United States. The Secretary of the Treasury chairs the Committee, 

which consists of 11 departments and agencies, including the departments 

of State, Commerce, and Defense.1

 Companies involved in a foreign 

acquisition of a U.S. company that may affect national security are 

encouraged to voluntarily report the acquisition to the Committee. The 

Committee then passes the report to its member agencies to determine 

whether the acquisition could adversely affect national security. To 

supplement voluntary reporting, the Committee’s member agencies also 

have the authority to independently report foreign acquisitions that may 

affect national security and that have not been voluntarily reported to the 

Committee. 

1

 Other member agencies include the Department of Justice, the Office of Management and 

Budget, the Council of Economic Advisers, the United States Trade Representative, the 

Office of Science and Technology Policy, the National Economic Council, and the National 

Security Council. The Department of Energy participates in the review of certain 

acquisitions, but is not a member of the Committee.
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Because of concerns that the current process may not identify all foreign 

acquisitions of U.S. companies that could affect our national security, you 

asked us to review the process used by the Committee on Foreign 

Investment to identify foreign acquisitions of U.S. companies. Specifically, 

we evaluated the current identification process used by the Committee and 

the effectiveness of the Committee’s follow-up on acquisitions identified by 

its member agencies.

Results in Brief The identification process the Committee on Foreign Investment currently 

uses does not enable it to effectively identify all foreign acquisitions with 

possible effects on national security. The Committee depends on a system 

of voluntary reporting by the parties to foreign acquisitions. The 

Committee also encourages each member agency to inform the Committee 

of any acquisitions that comes to the agency’s attention. We did not attempt 

to identify foreign acquisitions of U.S. companies with potential national 

security implications that were not reported voluntarily. However, we did 

find that member agencies become aware of such acquisitions in the course 

of their daily operations. In some instances member agencies reported 

foreign acquisitions to the Committee, but in other instances agencies did 

not. Defense and Treasury Department officials informed us of three 

acquisitions that were known to officials in these agencies but the agencies 

did not inform the Committee. For example, in March 1999, a Germanowned firm acquired a U.S. manufacturer of ceramic body armor. The U.S. 

company reported the acquisition to the Defense Security Service and the 

State Department’s Office of Defense Trade Controls because the company 

manufactures classified defense products and was required by law to 

report the acquisition to the Defense and State Departments (but not to the 

Committee). The company, the Defense Security Service and the Office of 

Defense Trade Controls did not inform or report this acquisition to the 

Defense, State, or Treasury Departments’ Committee representatives 

because there is no requirement to do so. As a result, the Committee did 

not conduct a full assessment of this acquisition. 

The Committee does not keep records of acquisitions referred by member 

agencies, does not document all contacts made with the parties to 

acquisitions to encourage voluntary reporting, and does not track whether 

these contacts led the parties to report the acquisition to the Committee. As 

a result, Treasury officials could not tell us which acquisitions were 

identified by member agencies but not reviewed by the Committee. 

Further, the Committee has no process to inform all member agencies that 

potentially relevant unreported acquisitions have been identified. As a 
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result, not all member agencies have the opportunity to review acquisitions 

identified by other member agencies for potential national security risks 

using relevant information available only to individual agencies. 

We are making recommendations aimed at improving (1) the current 

process used by the Committee on Foreign Investment to identify foreign 

acquisitions of U.S. companies with national security implications and

(2) the Committee’s use of available information about acquisitions that 

may have potential implications for national security to determine whether 

the acquisitions warrant further review. In commenting on a draft of this 

report, the Commerce, Defense, and Treasury Departments agreed with our 

recommendations. The State Department said that they would take our 

recommendations under advisement. 

Background The President established the Committee on Foreign Investment in the 

United States in 1975 to monitor foreign investment.2

 The Treasury 

Department’s Office of International Investment coordinates the 

Committee’s activities and has the dual responsibility of monitoring foreign 

investment in the United States and advocating U.S. policy on open 

investment—that is, U.S. policy of advocating free trade and world markets 

open to foreign investment.

Voluntary reporting of a foreign acquisition requires the U.S. company or 

the foreign company to submit detailed information to the Committee 

concerning the organization, background, assets, and products of each 

company and how these areas relate to national security. Since legal fees 

associated with a submission can be a burden to a company, and because 

reviewing all acquisitions could create a large workload for the 

Committee’s member agencies, the Committee does not require reporting 

of acquisitions that do not involve national security issues. Committee 

officials told us, however, that it is in the interest of the foreign investor to 

voluntarily report because the President retains the authority to force 

divestiture for acquisitions that are not reviewed by the Committee. 

Committee member agencies also have the authority to report any foreign

2

 Executive Order 11858 (May 9, 1975) as amended by Executive Order 12661 (Dec. 27, 1988) 

and Executive Order 12860 (Sept. 3, 1993).
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acquisition that comes to their attention and that may adversely affect 

national security.3

Once companies involved in an acquisition provide the required 

information, the Treasury Department distributes the companies’ reports to 

its member agencies for an initial 30-day review. If the Committee decides 

during this 30-day review that there could be credible evidence to support 

the belief that the foreign entity may take action that threatens to impair 

national security, it can initiate a 45-day investigation. After it completes 

the investigation, the Committee submits a report and a recommendation 

to the President. The President has 15 days to decide whether to allow the 

acquisition to proceed or suspend or prohibit it. The Committee retains the 

right to review at any time any acquisition that is not reported to the 

Committee. Such a subsequent review could result in an order to divest. 

Before the Exon-Florio Amendment,4

 a foreign acquisition could not be 

stopped unless the President declared a national emergency or regulators 

invoked federal antitrust, environmental, or securities laws. To take action 

under Exon-Florio, the President must find that (1) credible evidence 

exists that the foreign interest might take action that threatens to impair 

national security and (2) provisions of law, other than this legislation and 

the International Emergency Economic Powers Act,5

 do not provide 

adequate and appropriate authority to protect national security.

Process Does Not 

Ensure Acquisitions 

Are Identified

The Committee does not know the extent of foreign acquisitions of U.S. 

companies that have effects on national security. To ensure that national 

security-related acquisitions are reviewed, Treasury depends on voluntary 

reporting by the companies involved, and Treasury officials encourage the 

3

 31 C.F.R. Section 800.401.

4

 The amendment is a provision of the Omnibus Trade and Competitiveness Act of 1988 and 

part of the Defense Production Act of 1950, 50 U.S.C. app. 2170, which has been extended 

until the end of fiscal year 2000 by Section 1063 of the National Defense Authorization Act of 

Fiscal Year 2000.

5

 The International Emergency Economic Powers Act gives the President broad powers to 

deal with any “unusual and extraordinary threat” to the national security, foreign policy, or 

economy of the United States (50 U.S.C. 1701). To exercise this authority, however, the 

President must declare a national emergency to deal with any such threat. Under this 

legislation, the President has the authority to investigate, regulate, and, if necessary, block 

any foreign interests’ acquisition of U.S. companies (50 U.S.C. 1702(a)(1)(B)).
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Committee’s member agencies to inform the Committee of any national 

security-related foreign acquisitions they identify in the course of their 

work. 

Voluntary reporting results in some acquisitions not being reported by the 

companies. For example, in November 1999, the Commerce Department 

informed the Committee of a January 1999 acquisition of a U.S. ultraprecision machine tools manufacturer by a Swiss-owned company. The 

Commerce Department became aware of the acquisition when the Swissowned company applied for a Commerce Department license to sell 

products to a Chinese manufacturer of jet engine turbine blades. Treasury 

contacted the company, which agreed to voluntarily report the acquisition 

to the Committee. However, the Committee does not keep records of 

acquisitions identified by member agencies and does not document all 

contacts made with the parties to these acquisitions to encourage voluntary 

reporting. 

Some national security-related foreign acquisitions are reported to 

individual agencies on the basis of other laws and regulations, but no 

requirement exists to inform the Committee of these acquisitions. For 

example, companies that manufacture certain controlled items are 

required to report their acquisition by a foreign entity to the State 

Department’s Office of Defense Trade Controls. The Office of Defense 

Trade Controls is required to report these acquisitions to the U.S. Customs 

Service but is not required to inform Committee representatives at either 

the State or Treasury Departments of these acquisitions. As a result, 

agencies do not always inform the Committee of foreign acquisitions and 

diverse agency perspectives on national security may not be considered. 

Since the Exon-Florio legislation was enacted in 1988, nearly 1,300 foreign 

acquisitions have been reported voluntarily to the Committee. These 

acquisitions represent about 17 percent of the nearly 7,400 foreign 

acquisitions of U.S. companies that have been reported to the Commerce 

Department’s Bureau of Economic Analysis over the same period.6

However, many of these acquisitions had no effect on U.S. national 

security. In December 1995, we reported that although many companies 

6

 Data reported by the Bureau includes only foreign acquisitions of U.S. companies that had 

total assets of more than $1 million. Beginning in 1998, the threshold was raised to 

$3 million. Exon-Florio regulations do not specify a minimum investment or asset value for 

notification. 
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voluntarily reported proposed foreign acquisitions to the Committee, 

nearly 600 foreign acquisitions in the high-technology industry were not 

reported between October 1988 and May 1994.7

 However, we did not gauge 

to what extent these foreign acquisitions may have had an effect on 

national security.

Table 1 shows foreign acquisitions annually reported by the Commerce 

Department, acquisitions reported voluntarily to the Committee, and 

dispositions of the acquisitions voluntarily reported. Committee officials 

attribute the large drop in reports after 1990 to companies and their legal 

representatives obtaining a better understanding of the criteria for 

reporting foreign acquisitions “affecting national security,” after the 

Committee had several years of experience in conducting reviews. 

Table 1: Foreign Acquisitions, Voluntary Reports to the Committee, and Dispositions, 1988-99

a

Filings began in September 1988.

b

1998 data is not complete.

Sources: Committee, Department of Commerce Bureau of Economic Analysis.

7

 See Foreign Investment: Implementation of Exon-Florio and Related Amendments

(GAO/NSIAD-96-12, Dec. 21, 1995).

Year

Foreign

acquisitions

Reports to

Committee

Reports

investigated

Offers

withdrawn

Blocked by

President

1988 869 a

14 1 0 0

1989 837 200 5 2 1

1990 839 295 6 2 0

1991 561 152 1 0 0

1992 463 106 2 1 0

1993 554 82 0 0 0

1994 605 69 0 0 0

1995 644 81 0 0 0

1996 686 55 0 0 0

1997 640 62 0 0 0

1998 b

673 63 2 2 0

1999 Not available 79 0 0 0

Total 7,371 1,258 17 7 1
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In 7 of the 17 investigations, the companies voluntarily withdrew their 

investment offers and terminated the foreign acquisitions. The President 

decided not to intervene in 9 of the 10 remaining acquisitions. In one case, 

the President ordered divestiture of a Chinese company’s interest in a U.S. 

aircraft parts company because the technology used by the U.S. company 

was under export controls, the Chinese company had close ties to the 

People’s Liberation Army, and the acquisition would have given the Chinese 

company unique access to U.S. aerospace companies.

Process Depends on 

Voluntary Reporting and 

Agency Identification of 

Acquisitions

To ensure that foreign acquisitions with national security implications are 

reported, the Committee relies on U.S. and foreign companies to 

voluntarily report foreign acquisitions and on the Committee’s member 

agencies to inform the Committee of foreign acquisitions. According to 

Treasury officials, there is no requirement for member agencies to inform 

the Committee when they identify a potential national security-related 

foreign acquisition. Although the Committee’s member agencies have 

informed Treasury officials of acquisitions, agencies have never initiated 

the process that would require companies involved in an acquisition to 

provide information to the Committee as described in the regulations.8

Instead, Treasury officials generally encourage agencies to bring foreign 

acquisitions to their attention informally so that the officials may contact 

the companies involved and encourage them to report the acquisition 

voluntarily.

Treasury officials told us that Committee member agencies obtain 

information about acquisitions that may be of concern by reviewing 

business media sources. The Committee also relies on each agency to 

inform it of acquisitions as it carries out its responsibilities in areas such as 

government contracting, export controls, and industry analysis. In 

response to our 1995 report, Treasury officials provided guidance 

reminding agencies to bring to the Committee’s attention acquisitions that 

have not been reported voluntarily. However, our latest review showed 

inconsistent compliance with this guidance:

• According to an official at the Defense Threat Reduction Agency, which 

coordinates the Committee’s work for the Department of Defense, the 

agency does not regularly search for foreign acquisitions of U.S. 

companies, although agency staff have on occasion searched the 

8

 31 C.F.R. Sections 800.401-404.
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Internet and other sources to identify proposed acquisitions involving 

U.S. companies and foreign investors. The official noted that the 

Department of Defense has to prioritize its work on the basis of what is 

required by statute and regulation. Other tasks such as identifying nonreporting acquisitions are done as time and resources allow. The official 

also stated that his office has no additional resources to regularly devote 

to identification efforts.

• State Department officials told us that they do not search for foreign 

acquisitions and have not informed the Committee of any acquisitions. 

• Commerce Department officials told us that they have occasionally 

informed the Committee of acquisitions.

• According to the Justice Department’s Committee representative, the 

Department considers Exon-Florio as it reviews mergers and 

acquisitions, including acquisitions notified under the Hart-Scott-Rodino 

Antitrust Improvement Act of 1976.9

 Using various sources, the Justice 

Department has identified several foreign acquisitions to the Committee 

for review since 1988.

• The Treasury Department’s Office of International Investments has an 

informal method for identifying foreign acquisitions: an official in the 

Office reads various trade publications and advises the Committee’s 

staff chairperson of pending acquisitions. 

• Other officials from Committee member agencies we spoke with, 

including those from the Council of Economic Advisors, the U.S. Trade 

Representative, and the Office of Science and Technology Policy, do not 

attempt to identify acquisitions for the Committee.

The Committee Was Not 

Informed of Some Known 

Foreign Acquisitions

In the course of our work, we identified three acquisitions of U.S. 

companies that had been identified by the departments of Defense, State, 

and Treasury as having potential implications for national security but that 

had not been reported voluntarily to the Committee. The Committee was 

not aware of the acquisitions because it was informed neither by the 

agencies involved nor by the parties to the acquisitions. As we did not set 

out to identify such acquisitions, we do not know whether there may be 

other similar unreported acquisitions. The three acquisitions are the 

following.

9

 The act (15 U.S.C. 18a) requires parties to a merger or acquisition to notify the Department 

of Justice and the Federal Trade Commission of the proposed merger or acquisition in order 

for them to assess whether the acquisition violates antitrust laws.
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U.S. company acquired by a German firm. In March 1999, a Germanowned firm acquired a U.S. manufacturer of ceramic body armor and a 

nuclear-related material. The U.S. company manufactures and exports 

items on the State Department’s U.S. Munitions List and is the sole source 

supplier of ceramic body armor to the Defense Department. It also has 

several classified contracts with the Army. The company reported the 

acquisition to the Defense Security Service and the State Department’s 

Office of Defense Trade Controls.10 However, the company did not report 

the acquisition to the Committee. Defense Security Service officials told us 

that they advised company officials of the Committee’s reporting process. 

A company official stated that the board of directors believed the 

company’s obligation was met when it reported to the Defense Security 

Service. The Defense Security Service did not inform Defense Department 

Committee representatives of this acquisition because it was not required 

to do so. The Office of Defense Trade Controls, while notified of the 

acquisition, did not refer the acquisition to the Committee because it has no 

process for informing the Committee of foreign acquisitions. The Defense 

Security Service, the U.S. manufacturer, and the German firm signed a 

Special Security Agreement11 to guard against unauthorized disclosure of 

classified information. However, other national security issues, such as the 

company’s status as a sole source supplier of ceramic body armor, were not 

considered because a general review by the Committee did not occur. In 

March 2000, we informed Committee representatives of this acquisition. 

They subsequently contacted the company, and company representatives 

agreed to report the acquisition to the Committee. 

U.S. company acquired by a French firm. In August 1998, a Frenchowned firm acquired a U.S. manufacturer of laser systems. The U.S. 

manufacturer had several classified Army contracts to maintain equipment 

and also makes lasers used in rocket launches. The U.S. manufacturer 

contacted the Defense Security Service shortly after the acquisition 

occurred. The manufacturer chose not to enter into a Special Security 

10 Companies with defense contracts that entail the use of classified national security 

information are required to report acquisition by a foreign entity to the Defense Security 

Service. Companies that manufacture items on the Munitions List (22 C.F.R. Part 121) are 

required to report acquisition by a foreign entity to the State Department. The Munitions List 

consists of defense articles, services, and related technical data that are controlled.

11 Industrial Security Regulations require that a company obtain a facility clearance before 

working on a classified Department of Defense Contract. To obtain clearance, a U.S. defense 

contractor that is majority-owned by a foreign company must first accept a voting trust, 

proxy agreement, or Special Security Agreement to insulate it from its foreign owners.
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Agreement with the Defense Security Service and canceled its classified 

contracts. Defense Security Service officials told us that they advised 

company officials of the Committee’s reporting process. A company official 

told us that most of its business had been in the defense sector but was 

now primarily in the commercial sector and that as a result, the company 

did not believe it needed to report the acquisition to the Committee. 

However, the company manufactures some sensitive products that require 

Commerce Department approval for export. Defense Security Service 

officials did not inform Committee representatives at the Department of 

Defense or the Committee itself of the acquisition because they were not 

required to do so. As a result, the Committee did not have the opportunity 

to determine whether the acquisition would adversely affect national 

security. In March 2000, we informed Committee representatives of this 

acquisition. They subsequently contacted the company, and company 

representatives agreed to send a letter to the Committee explaining why 

they do not intend to report. 

U.S. company acquired by a Hong Kong firm. In December 1995, a 

Hong Kong firm purchased a U.S. bearing manufacturer. The U.S. company 

has various contracts and purchase orders with the Department of Defense 

and the National Aeronautics and Space Administration. The company’s 

bearings are used in military aircraft, submarines, satellites, and vehicles. A 

major U.S. business trade publication had featured the acquisition in 

August 1996 and reported on the Hong Kong investor’s connection with the 

People’s Republic of China. The article noted the planned transfer of 

sensitive technology. Records show that a Treasury Department Committee 

representative had transmitted a copy of the publication to a Defense 

Department Committee representative. Yet neither Treasury nor Defense 

officials informed the Committee of the acquisition. Defense Department 

officials could not recollect why they took no action to refer the acquisition 

for review when they saw the publication. 

During the acquisition, the parties involved were not aware of the 

Committee’s reporting process and did not report the acquisition to the 

Committee until November 1997, nearly 2 years after the acquisition. 

Committee representatives explained that a new legal counsel at the 

company identified the need to report to the Committee. During the 30-day 

review, the Committee discovered that the company had not properly 

registered as a manufacturer of controlled items with the State Department 

as required by the International Traffic in Arms Regulations. In December 

1997, the Committee permitted the company to withdraw its voluntary 
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report to avoid a Committee 45-day investigation and gave the company 

time to address the Committee’s concerns. 

In September 1998, the company resubmitted its acquisition notification to 

the Committee. The Committee conducted a full investigation and 

determined that the company had not met its obligations to classify its 

technology or bearings for licensing purposes and to identify whether there 

had been any illegal exports. According to the Committee’s investigation 

documents, the foreign buyer’s reason for the acquisition was to transfer 

the company’s technology to China to upgrade a bearing factory there. The 

investigation concluded that continued ownership and control of the U.S. 

company by the Hong Kong firm posed a threat to national security 

because it risked unauthorized transfer of products and technology and 

that existing laws would not be effective in preventing the transfer of 

specific technology. The company agreed to withdraw its report of the 

acquisition to avoid the possibility of a divestiture order from the 

President. As part of the agreement, the Hong Kong company is divesting 

its interest and has appointed a U.S. citizen as an interim trustee to oversee 

operations of the U.S. manufacturer until divestiture is complete.

Follow-Up Not 

Effective

Treasury officials believe that using informal agency referrals allows them 

to remain aware of foreign acquisitions with potential national security 

implications and that this informal process precludes the need for formal 

agency reports to the Committee. Treasury Department officials gave us 

several recent examples in which a member agency informed them of 

unreported acquisitions and followed up by encouraging the parties to the 

acquisitions to voluntarily report. The officials said that they contact 

companies several times a year to encourage voluntary reporting. However, 

Treasury does not maintain records of these contacts and officials there 

were unable to provide data on the results of these informal referrals. 

Committee member agencies maintain information that could help identify 

sensitive foreign acquisitions with potential effects on national security. 

However, the Committee does not have a process in place to inform all 

member agencies when it becomes aware of an acquisition that has not 

been voluntarily reported. If they do not know about such foreign 

acquisitions, agencies cannot determine whether acquisitions have national 

security implications. Below are examples of some government and 

commercial information sources that are currently available and that, had 

they been used to share information about foreign acquisitions among all 
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Committee agencies, could have helped identify the national security 

implications of the three foreign acquisitions we found:

Office of the Deputy Under Secretary of Defense for Industrial 

Affairs and Installations. The Office of the Deputy Under Secretary of 

Defense for Industrial Affairs and Installations reviews filings under the 

Hart-Scott-Rodino Antitrust Improvement Act of 1976 to address mergers 

within the defense industry. The office subscribes to a private database 

service that provides access to over a dozen commercial databases, 

including one that provides extensive information on defense-related 

mergers, acquisitions, buyouts, and joint ventures. According to officials in 

the Office of Industrial Affairs, analysts in the office notify the Defense 

Threat Reduction Agency, which coordinates Defense Department 

Committee activities, of 5-10 foreign acquisitions identified by their 

information sources annually. However, the officials could not provide 

documents on these acquisitions and could not recollect the specifics of 

these acquisitions or whether the companies ultimately reported to the 

Committee.

Defense Security Service. Under the National Industrial Security 

Program, U.S. companies that have classified defense contracts are 

required to notify the Service when they are acquired by a foreign entity so 

that the Service can ensure that unauthorized disclosure of classified 

information to the foreign buyer does not occur. These companies must 

also report any material change concerning foreign ownership, control, or 

influence and update their ownership status every 5 years. Defense 

Security Service officials told us that whenever a change of ownership 

involves a foreign buyer, they advise the parties to file with the Committee. 

However, the Defense Security Service does not consistently inform the 

Committee when it is aware of acquisitions involving foreign buyers and 

does not follow up to ensure that companies report to the Committee 

because there is no requirement to do so.

Department of State. The Department’s Office of Defense Trade Controls 

maintains a database of companies that manufacture or export defense 

articles or furnish defense services controlled under the International 

Trade in Arms Regulations. All companies that manufacture covered 

defense articles or furnish defense services are required to register with the 

Office even if they do not export these defense articles or services. An 

Office of Defense Trade Controls official told us that the Office’s databases 

can identify companies that manufacture controlled defense articles. 

Additionally, registered companies must notify the Office of an intended 
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sale or transfer of ownership to a foreign entity. The Office provides this 

information to the U.S. Customs Service but not to Committee 

representatives at the State and Treasury Department because there is no 

requirement to do so.

Department of Commerce. The Bureau of Export Administration has a 

list of companies that have been granted licenses to export controlled 

commodities, as well as information on the status of applications for 

export licenses and violations of Export Administration Regulations. This 

list could be used to identify potential national security implications of 

foreign acquisitions.

Department of Justice. The Department’s Antitrust Division reviews 

filings reported under the Hart-Scott-Rodino Antitrust Improvement Act of 

1976. The Department maintains a database of reported acquisitions. 

However, the database includes only acquisitions valued at $10 million or 

more and does not specifically isolate foreign acquisitions of industries 

with links to national security. Using various sources, the Justice 

Department Committee representative has notified Committee staff at the 

Treasury Department several times of acquisitions involving foreign buyers. 

Defense Intelligence Agency. The Agency assesses the risk of diversion 

of critical defense technology for each acquisition that is voluntarily 

reported. Among the tools the agency uses to assess this risk are 

commercial databases containing information on thousands of hightechnology companies. Agency officials told us that their databases could 

identify acquisitions with national security implications if the Committee 

provided the names of the parties to these acquisitions.

Private sector databases. A number of private sector companies develop 

and maintain financial management information databases, many of which 

are accessible by subscription on the Internet. One company has several 

on-line databases, including one covering worldwide mergers and 

acquisitions. Another company conducts research into and provides 

information on private investment activities. Still another company 

maintains a comprehensive database covering thousands of international 

journals, books, and other publications.

Conclusions In an era of increasing global markets that are open to foreign investment 

and rapid technological innovation, understanding the impact that foreign 

acquisitions of U.S. companies have on national security is increasingly 
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important. The Committee’s member agencies do not always inform the 

Committee of known foreign acquisitions with national security 

implications. These unreported acquisitions may be reviewed from only 

one perspective, for example, from the viewpoint of protection of classified 

material, while other important national security concerns, such as 

technology transfers, weapon technology proliferation, or foreign sources 

of supply, may not be considered. 

Committee member agencies maintain information that could help identify 

sensitive foreign acquisitions that could have an impact on U.S. national 

security. However, the Committee does not have a process in place to 

inform all member agencies when it becomes aware of an acquisition that 

has not been voluntarily reported. If they do not know about foreign 

acquisitions, agencies cannot use their resources to determine whether 

acquisitions have national security implications. If agencies had been 

informed that another member agency was aware of foreign acquisitions, 

existing agency resources could have been used to identify the three 

acquisitions we found during the course of our review.

Recommendations To improve the Committee’s process for identifying foreign acquisitions 

with potential national security implications, we recommend that the 

Secretaries of Commerce, Defense, Treasury, and State establish 

procedures requiring agency officials to submit all known foreign 

acquisitions of companies with potential national security implications to 

the Committee on Foreign Investment.

We further recommend that the Secretary of the Treasury, in his role as 

Chair of the Committee on Foreign Investment in the United States, 

establish a process for sharing information on all foreign acquisitions 

submitted by one member agency with all of the Committee’s member 

agencies, so that agencies can check their databases to determine whether 

any potential national security implications exist.

Agency Comments and 

Our Evaluation

We received written comments on a draft of this report from the 

Departments of Commerce, Defense, State, and Treasury and have 

included them as appendixes I to IV. Commerce, Defense, and Treasury 

agreed with the report and recommendations, and provided information on 

the ways they plan to address them. The three agencies also provided 

technical comments that we have incorporated as appropriate. The 
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Department of State, while not expressing a view on our recommendations, 

commented that it would take our recommendations under advisement and 

would discuss them with the other interested federal agencies. Since the 

State Department collects information from U.S. companies that identify 

foreign acquisitions of U.S. weapon manufacturers, we believe the 

Department should share this information with Committee representatives 

because it is an important body of information that can be used to identify 

acquisitions that should be reviewed. 

While agreeing with our recommendations, Treasury questioned our 

finding concerning the adequacy of the Committee’s procedures for 

ensuring that relevant foreign acquisitions are reported. Treasury 

commented that our report does not emphasize the safeguards the 

Committee uses to help ensure that acquisitions that affect national 

security are reported. Treasury stated that there is a procedure in the ExonFlorio regulations that allows member agencies to notify the Committee of 

a foreign acquisition. While we agree that this provision exists, our report 

points out that it has never been used. Since we are aware of acquisitions 

that have not been reported to the Committee, the provision alone does not 

appear to ensure reporting of foreign acquisitions. Further, our report 

describes in great detail the Committee’s processes for identifying and 

reporting foreign acquisitions and shows that the system for identifying and 

reporting unreported acquisitions is flawed. Our recommendations are 

intended to help correct these flaws. 

Scope and 

Methodology

To evaluate the current identification process, we spoke with officials and 

collected data from the Committee’s member agencies, including the 

Departments of Commerce, Defense, Justice, State, and Treasury; the 

Council of Economic Advisors; the U.S. Trade Representative; and the 

Office of Science and Technology Policy. The objective of these discussions 

was to determine what processes member agencies use to identify foreign 

acquisitions. As for agencies that attempt to identify foreign acquisitions, 

we queried them on their processes and collected documents on the 

unreported acquisitions they have identified. We also spoke with officials at 

two companies to understand their rationale for not reporting acquisitions. 

We did not set out to identify the extent of national security-related foreign 

acquisitions that are not reported to the Committee. Instead, we relied on 

officials from member agencies to identify foreign acquisitions, mergers, 

and takeovers that were not reported to the Committee. Therefore, we do 

not know to what extent, if any, there are other national security-related 

acquisitions that were not reported to the Committee.
B-285111

Page 18 GAO/NSIAD-00-144 Defense Trade

We relied on the Treasury and the Commerce Departments’ data to break 

down the number of acquisitions that were reported by the companies and 

investigated by the Committee. To describe the universe of foreign 

acquisitions in the United States, we used data collected by the Commerce 

Department’s Bureau of Economic Analysis. Because Committee agencies 

do not maintain information on all foreign acquisitions, we were unable to 

quantify the number of national security-related foreign acquisitions.

To evaluate how the Committee follows up on agency identifications, we 

met with officials at member agencies to understand the Committee’s 

follow-up process. We discussed with officials at Treasury and other 

member agencies how they track identified foreign acquisitions. We also 

queried member agencies and private sector sources to determine what 

data they currently use to identify acquisitions and what other data they 

have that would be helpful in identifying the national security implications 

of foreign acquisitions. 

We conducted our work from November 1999 through April 2000 in 

accordance with generally accepted government auditing standards.

We are sending copies of this report to Senator Phil Gramm and Senator 

Paul Sarbanes in their capacities as Chairman and Ranking Minority 

Member, respectively, of the Senate Committee on Banking, Housing and 

Urban Affairs, and to Representative James A. Leach and Representative 

John J. LaFalce in their capacities as Chairman and Ranking Minority 

Member, respectively, of the House Committee on Banking and Financial 

Services. We are also sending copies to the Honorable William M. Daley, 

Secretary of Commerce; the Honorable William S. Cohen, Secretary of 

Defense; the Honorable Madeleine K. Albright, Secretary of State; the 

Honorable Lawrence H. Summers, Secretary of the Treasury; and the 

Honorable Jacob J. Lew, Director, Office of Management and Budget. We 

will also make copies available to others on request.
B-285111

Page 19 GAO/NSIAD-00-144 Defense Trade

Please contact me on (202) 512-4841 if you or your staff have any questions 

concerning this report. Major contributors to this report were 

Blake Ainsworth, Raymond H. Denmark, Jr., and Thomas J. Denomme.

Sincerely yours,

Katherine V. Schinasi

Associate Director

Defense Acquisitions Issues
Page 20 GAO/NSIAD-00-144 Defense Trade

Appendix I

Comments From the Department of 

Commerce ApendxiI

Note: GAO comments 

supplementing those in the 

report text appear at the 

end of this appendix.

Now on p. 3.

Now on p. 4.

See comment 1.

Now on pp. 7 and 

8.

See comment 2.
Appendix I

Comments From the Department of 

Commerce

Page 21 GAO/NSIAD-00-144 Defense Trade
Appendix I

Comments From the Department of 

Commerce

Page 22 GAO/NSIAD-00-144 Defense Trade

The following are GAO’s comments that address the Department of 

Commerce’s suggested changes to our report.

GAO Comments 1. We revised the text to include a statement that the Committee does not 

track whether or not agency referrals of foreign acquisitions led the 

parties to report to the Committee. 

2. We added a sentence to the text stating that we did not gauge the extent 

that foreign acquisitions may have had an effect on national security.
Page 23 GAO/NSIAD-00-144 Defense Trade

Appendix II

Comments From the Department of Defense ApendxiI

Note: GAO comments 

supplementing those in the 

report text appear at the 

end of this appendix.
Appendix II

Comments From the Department of Defense

Page 24 GAO/NSIAD-00-144 Defense Trade
Appendix II

Comments From the Department of Defense

Page 25 GAO/NSIAD-00-144 Defense Trade

Now on pp. 4 and 14.

See comment 1.

Now on p. 14.

See comment 2.
Appendix II

Comments From the Department of Defense

Page 26 GAO/NSIAD-00-144 Defense Trade

The following are GAO’s comments that address the Department of 

Defense’s suggested changes to our report.

GAO Comments 1. We revised the text to include a statement in the report that there is no 

requirement to report known foreign acquisitions with national security 

implications to the Committee on Foreign Investment in the United 

States.

2. We clarified this sentence, which now states that companies must also 

report any material change concerning foreign ownership, controls or 

influence and update their ownership status every 5 years.
Page 27 GAO/NSIAD-00-144 Defense Trade

Appendix III

Comments From the Department of State ApendxiI
Page 28 GAO/NSIAD-00-144 Defense Trade

Appendix IV

Comments From the Department of the 

Treasury ApendxiIV

Note: GAO comment 

supplementing those in the 

report text appears at the 

end of this appendix.
Appendix IV

Comments From the Department of the 

Treasury

Page 29 GAO/NSIAD-00-144 Defense Trade
Appendix IV

Comments From the Department of the 

Treasury

Page 30 GAO/NSIAD-00-144 Defense Trade

Now on pp. 7 and 8.

See comment 1.
Appendix IV

Comments From the Department of the 

Treasury

Page 31 GAO/NSIAD-00-144 Defense Trade
Appendix IV

Comments From the Department of the 

Treasury

Page 32 GAO/NSIAD-00-144 Defense Trade

The following GAO comment addresses the Department of the Treasury’s 

comments on our report.

GAO Comment 1. Treasury states that there are only a relatively small number of foreign 

acquisitions with national security implications and noted that our 

report could lead to the conclusion that there are a significant number 

of foreign acquisitions of U.S. companies with implications for national 

security. We added language to the report explaining that we did not 

gauge the extent of unreported foreign acquisitions with national 

security implications. 

However, since the Committee does not know the extent of foreign 

acquisitions with national security implications that are not reported, 

there is no documented basis for the Treasury Department’s statement 

that the number of foreign acquisitions with national security 

implications are relatively small. Further, according to a February 2000 

address by the Deputy Secretary of Defense, the Department plans to 

depend more heavily on commercial firms to meet military 

requirements, and is pursuing a number of initiatives to encourage 

cross-border defense industry cooperation and teaming, which may 

include increased opportunities for acquisitions of U.S. companies by 

foreign firms. Therefore, an effective Committee process will become 

increasingly important as the number of foreign acquisitions grow.

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