U.S. GOVERNMENT PUBLISHING OFFICE

29–914 PDF WASHINGTON : 2019

S. HRG. 115–213 

CFIUS REFORM: EXAMINING THE ESSENTIAL 

ELEMENTS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE ESSENTIAL NATIONAL SECURITY ELEMENTS UNDERLYING A COMPREHENSIVE PROPOSAL TO REFORM THE REVIEW 

PROCESS USED BY THE COMMITTEE ON FOREIGN INVESTMENT IN 

THE UNITED STATES (CFIUS) 

JANUARY 18, 2018 

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

( 

Available at: http://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOHN V. O’HARA, Chief Counsel for National Security Policy 

KRISTINE JOHNSON, Economist 

ELISHA TUKU, Democratic Chief Counsel 

COLIN MCGINNIS, Democratic Policy Director 

DAWN RATLIFF, Chief Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

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C O N T E N T S 

THURSDAY, JANUARY 18, 2018 

Page 

Opening statement of Chairman Crapo ................................................................. 3 

Prepared statement .......................................................................................... 33 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 5 

WITNESSES 

John Cornyn, a U.S. Senator from the State of Texas ......................................... 1 

Prepared statement .......................................................................................... 34 

Dianne Feinstein, a U.S. Senator from the State of California 

Prepared statement .......................................................................................... 37 

Christopher Padilla, Vice President for Government and Regulatory Affairs, 

IBM Corporation; and Former Under Secretary for International Trade, 

Department of Commerce .................................................................................... 7 

Prepared statement .......................................................................................... 38 

Responses to written questions of: 

Chairman Crapo ........................................................................................ 67 

Senator Cotton ........................................................................................... 68 

Senator Menendez ..................................................................................... 70 

Senator Warner ......................................................................................... 71 

Senator Cortez Masto ................................................................................ 72 

Scott Kupor, Managing Partner, Andreessen Horowitz, and Chair, National 

Venture Capital Association ................................................................................ 9 

Prepared statement .......................................................................................... 43 

Responses to written questions of: 

Chairman Crapo ........................................................................................ 73 

Senator Menendez ..................................................................................... 75 

Senator Warner ......................................................................................... 76 

Senator Cortez Masto ................................................................................ 77 

Gary Clyde Hufbauer, Ph.D., Reginald Jones Senior Fellow, Peterson Institute for International Economics ........................................................................ 11 

Prepared statement .......................................................................................... 53 

Responses to written questions of: 

Chairman Crapo ........................................................................................ 79 

Senator Menendez ..................................................................................... 79 

Senator Warner ......................................................................................... 80 

Senator Cortez Masto ................................................................................ 81 

James Mulvenon, Ph.D., General Manager, Special Programs Division, SOS 

International ......................................................................................................... 12 

Prepared statement .......................................................................................... 56 

Responses to written questions of: 

Chairman Crapo ........................................................................................ 82 

Senator Menendez ..................................................................................... 82 

Senator Warner ......................................................................................... 83 

Senator Cortez Masto ................................................................................ 83 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

FIRRMA-related documents—summaries, letters, quotes, and background papers—submitted by Senator Cornyn .................................................................. 85 

Prepared statement of the Rail Security Alliance ................................................ 125 

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CFIUS REFORM: EXAMINING THE ESSENTIAL 

ELEMENTS 

THURSDAY, JANUARY 18, 2018 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 9:47 a.m. in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

Chairman CRAPO. This hearing will come to order. 

This morning, we are going to go immediately to Senator Cornyn 

for his statement, and then we will return back to Senator Brown 

and myself to give opening statements and then go to the witnesses. 

So, Senator Cornyn, without any further ado, you may begin 

your statement at any time. 

STATEMENT OF JOHN CORNYN, A U.S. SENATOR FROM THE 

STATE OF TEXAS 

Senator CORNYN. Thank you, Mr. Chairman and Ranking Member Brown and Members of the Committee. I appreciate your holding this hearing to consider mine and Senator Feinstein’s proposal 

called the Foreign Investment Risk Review Modernization Act, or 

FIRRMA. 

I will make abbreviated remarks, and I would ask consent, Mr. 

Chairman, to have my full testimony put in the record along with 

a written statement by Senator Feinstein who could not be here because she is Ranking on Judiciary and has a conflicting engagement. 

Senator CORNYN. Senator Feinstein and I spent months working 

on FIRRMA based in part on troubling information we both regularly hear as members of the Senate Select Committee on Intelligence. The bill takes a targeted approach at addressing specific 

national security problems while aiming not to unnecessarily chill 

foreign investment. I support foreign investment in the United 

States. 

I would like to take a moment to highlight the list of people who 

we have worked with, we have consulted with to try to improve 

this legislation and who have announced their support for it. It includes, of course, Members of the Committee like Senator Scott 

who introduced this bill with us, and it includes current and former 

U.S. national security leaders like Secretary of Defense James 

Mattis; Secretary of Treasury Steve Mnuchin; Attorney General 

Jeff Sessions; Admiral Harry Harris, Commander of U.S. Pacific 

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Command; former Secretaries of Defense like Donald Rumsfeld and 

Bill Perry; former Homeland Security Secretary Michael Chertoff; 

former DNI, Director of National Intelligence, Admiral Dennis 

Blair; and other distinguished retired four-star generals and admirals. 

It also includes industry players such as Ericsson, Oracle, and 

several other companies and trade groups from across the country. 

Mr. Chairman, I would ask consent to submit for the record their 

letters and quotes as well as several summary and background documents on FIRRMA. 

Chairman CRAPO. Without objection. 

Senator CORNYN. The context for this legislation is important, 

and it is easily misunderstood, so I want to hopefully correct some 

misconceptions. The context for this legislation is about China. I 

am an ardent supporter of free trade, and I strongly support foreign investment in the United States, consistent with the protection of our national security. China, however, has significantly altered the threat landscape for the United States. 

General Joe Dunford, Chairman of the Joint Chiefs of Staff, says 

that by 2025, China will pose the greatest threat to U.S. national 

security of any other nation. China poses a threat unlike anything 

the United States has ever faced before—a powerful economy with 

coercive, state-driven industrial policies that undermine the free 

market, married up with an aggressive military modernization and 

the intent to dominate not only its own region but potentially beyond. 

China uses both legal and illegal means to turn our own technology and knowhow against us and erase our national security advantage. One of these tools is investment, which China has 

weaponized to vacuum up U.S. industrial capabilities in dual-use 

technologies. 

Unfortunately, the jurisdiction of the Committee on Foreign Investment in the United States that reviews such transactions is 

limited, and China has studied the law and found gaps to exploit. 

To circumvent CFIUS review, China pressures U.S. companies into 

arrangements like joint ventures, coercing them into sharing their 

capabilities and their intellectual property and enabling Chinese 

companies to acquire that and then the knowhow that goes along 

with it and replicate them on Chinese soil, which undermines our 

defense industrial base. 

China has been able to exploit minority position investments in 

early stage technology companies to gain access to cutting-edge intellectual property as well as trade secrets and key personnel. The 

Chinese have figured out which dual-use emerging technologies are 

still in the cradle, so to speak, and not yet subject to export controls. 

I want to quickly debunk three flawed arguments advanced by 

some who have opposed our efforts. First, they say the bill represents regulatory overreach, which really misses the point. CFIUS 

is not a normal regulator by any means. It is a part of our national 

security apparatus, and the Federal Government has no higher 

duty—I would argue no American has a higher duty than to protect 

and to maintain our national security. 

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Second, opponents claim that the export control system can already address these national security risks. Well, under FIRRMA, 

export controls would remain the first line of defense when it 

comes to technology transfers, but that system has inherent limitations, so we need a second line of defense. And CFIUS and export 

controls are designed to be interactive and complementary and not 

mutually exclusive. 

What is more, FIRRMA includes safeguards to ensure that 

CFIUS would review transactions only when necessary. Many 

transactions would be exempted where there are other authorities, 

such as export controls that adequately address national security 

risks. 

CFIUS would also create a safe list of certain allied countries for 

which these new types of transactions would be exempt. 

Third, some opponents argue that FIRRMA will flood CFIUS 

with too many transactions, seemingly questioning whether addressing real national security threats is worth the time and expense. Well, it is, and I am fully committed to securing the necessary resources working together with my colleagues because this 

is a national security priority. 

So, in closing, Mr. Chairman, I want to ask those who perhaps 

are skeptical of what we are trying to do here to withhold judgment 

until you have heard the front-line perspectives of key member 

agencies of CFIUS. The time, I believe, to modernize CFIUS is 

now. Our adversaries and rivals around the world are on the 

march, and they are vacuuming up our cutting-edge dual-use technology, which not only cuts our technological advantage when it 

comes to national security but undermines our industrial base here 

at home, as I have said. 

The time to modernize CFIUS is now, and we must not allow 

ourselves to be the frog in the pot of boiling water, so to speak. So 

I urge you to advance this bill for the sake of our long-term national security. 

Thank you, Mr. Chairman, I really appreciate the opportunity to 

present these remarks and the cooperation that you and others on 

the Committee and other colleagues have shown in trying to address this vital national security issue. 

Chairman CRAPO. Thank you, Senator, Cornyn. We appreciate 

both you and Senator Feinstein bringing this critical issue to us 

and the work that you have put into it, and we appreciate your testimony here today. 

You are obviously facing a pretty busy schedule and are free to 

leave at any time you wish. Thank you, and thanks again for bringing this to us. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. Today the Committee will begin to evaluate 

the essential national security elements underlying a comprehensive proposal to reform the review process used by the Committee 

on Foreign Investment in the United States, or CFIUS. 

Again, thanks go to Senators Feinstein and Cornyn for their testimony and work on their bipartisan Foreign Investment Risk Review Modernization Act of 2017. 

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The bill was first introduced by Senators Cornyn and Feinstein 

on November 8th to modernize and strengthen CFIUS to more effectively guard against the risk to the national security of the 

United States posed by certain types of foreign investment. 

The Senators and their staff have worked well over a year with 

concerned national security officials, the Treasury Department, and 

various affected industry representatives. 

This comprehensive bill could be the first update to the body of 

the CFIUS law in more than a decade. It would expand the reach 

of current law in a number of respects, while codifying some current administrative practices, and result in significant changes to 

jurisdiction, process, and enforcement. 

A study produced for the Pentagon’s DIUx unit, which enlists 

startups to find solutions for the military’s most advanced technology-related requirements, is credited as being the catalyst for 

much of the impetus behind this CFIUS reform. 

The DIUx study highlights the problems arising from the fact 

that the U.S. Government does not currently monitor or restrict 

venture investing nor stop potential transfers of what is known 

variously as early stage, foundational, or critical technology knowhow, particularly with regard to certain types of Chinese investment in the United States. 

Today’s hearing also draws witnesses from one perspective of the 

private sector that is concerned not only with inbound investment 

but also outbound transactions and from the venture capitalists 

that support American innovation. 

We are also joined by two long-time CFIUS analysts with particular expertise in regard to China’s economy, its trade practices, 

and national security objectives. 

The Committee will benefit from learning more about the types 

and numbers of transactions that may be circumventing CFIUS 

and if any are believed to have already transferred critical technology. 

Many of us are interested in learning more about the ways China 

acquires U.S. technology and which improvements to the current 

system are warranted, particularly with regard to those investments that fall short of a foreign person’s actual ownership or control. 

We are also interested in the issue of emergent critical technology and the witnesses’ input on how it would be defined and applied by CFIUS. 

Additionally, we hope to hear more on the impact on U.S.-based 

multinational corporations as a result of CFIUS unilaterally restricting U.S. outward investment and associated technology and 

whether U.S. companies would lose the ability to compete to allied 

companies or others in third-country markets. 

It is also important to study the question of necessary resources 

for any proposed reform to CFIUS. While CFIUS certified about 

260 applications last year, the Committee looks forward to testimony on the changes contemplated by S. 2098 and their impact on 

the number of reviews, staff needs and resources going forward, 

and the impact that, in turn, would have on U.S. national security 

if the resources fell short. 

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CFIUS is but one leg of a triad that secures national securityrelated technology and the defense industrial base. The other two 

are the U.S. export control regime and Federal investment itself in 

research and development that keeps the industrial base resilient 

and innovative. 

The Committee must be mindful that in pursuing its mandate to 

assure the national security interests of the United States under 

CFIUS that it not create a situation where it chills a wide range 

of commercial activities that have traditionally been controlled 

through export control laws. 

The United States is both the world’s largest foreign direct investor and beneficiary of foreign direct investment, and it ranks 

among the most favorable destinations for FDI which plays an important role in not only the U.S. economy but specifically in the innovation of its industrial base and, therefore, its national security. 

It is clear that the current CFIUS system is itself under stress. 

Moving forward, the Committee must prepare itself to thoughtfully 

consider all of the recommendations made by S. 2098 and other 

CFIUS legislation, with the full awareness of the national security 

and economic stakes at heart. 

It is a new world. The laws, regulations, and policies currently 

exercised by CFIUS may no longer protect U.S. technology from illicit transfers as they did in the past. 

We must work together as a Congress first to assure the national 

security of the United States by granting the Administration all 

the authority it needs to confront this growing threat, but then not 

exceed that grant to the detriment of maintaining a free, fair, and 

open U.S. investment policy. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Well, thank you, Chairman Crapo, and thank 

you to the witnesses for joining us. I comment Senators Cornyn 

and Feinstein for their work on this issue. 

A dozen years ago, I was serving in the House of Representatives 

when we learned the Bush administration had signed off on the 

sale of the operations at more than 20 U.S. ports, including major 

ones from New York and New Jersey to New Orleans, to Dubai 

Ports World. 

Congress responded the next year by adopting FINSA, the Foreign Investment and National Security Act, to give our Government a greater ability to respond to foreign investment that could 

pose a threat to national security and to protect critical infrastructure. 

In the intervening years, the interagency group that implements 

the law, the Committee on Foreign Investment in the United 

States has quietly worked to try to ensure that foreign purchases 

of assets in the United States does not undermine our national security—obviously not an easy task, as our witnesses will describe, 

our adversaries are constantly working to narrow the gaps between 

our capabilities and theirs, through legitimate and illegitimate 

means. 

Over the past decade, we have seen China become more aggressive. The evidence stretches from the OPM servers to the South 

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China Sea. We know that CFIUS has a limited mandate, and we 

know the distinction between economic security and national security is not an easy one to make. 

Foreign direct investment can be a real positive for our country. 

It was a French company, for example, that built the first rolling 

mill in Youngstown, Ohio, in decades. 

But today we will hear testimony that some foreign investors are 

not interested in capturing market share in auto or oil country tubular goods or any other industry. Instead, they seek to capture the 

intellectual property of leading edge technology companies in our 

country for their home country’s military uses. 

We attempt today to prevent this type of technology transfer 

through a system of multilateral and unilateral export controls. 

This system, a product of the cold war, identifies dual-use products, 

technology, and software that may not be exported. 

The question is, is this approach sufficient, or do we need to intervene at an earlier stage of product or technology development to 

prevent the building blocks of the next generation of advances from 

being expropriated by foreign investors? 

I mentioned at the beginning of my remarks the failure of the 

Bush administration to block the sale of our port operations to a 

company from the UAE, but this is not a partisan issue. The Clinton administration agreed to China’s accession to the WTO. A number of us opposed that. They agreed to that accession. The Obama 

administration refused to take action in the face of China’s manipulation of its currency. 

Some of our witnesses today will speak to the benefits of trade 

liberalization, but it is hard to maintain a bilateral trading partnership when one party is abiding by the rules and the other is 

not. 

When China joined the WTO in 18 years, 17 years ago, it agreed 

to remove market barriers for foreign companies and to comply 

with international trade standards that are intended to create a 

worldwide level playing field. Unfortunately, as we know and we 

feel all too often, China has not lived up to many of these commitments. That country continues to use nontariff barriers to block 

foreign producers from entering its market. Chinese state-owned 

enterprises, such as those in the steel sector, receive extensive subsidies that allow them to compete with no consideration of market 

forces. It can be energy. It can be land. It can be capital. It can 

be other kinds of inputs. As a result, they flood the global market 

with steel products and make it much harder for U.S. companies 

and workers to compete. 

I do not think CFIUS can or should bear the burden of trying 

to bring about a fair trading relationship with China. That is not 

its job. That is not its intent. It has its hands full trying to police 

the national security threats we face from that country and others. 

But neither should we sit idle. The vast majority of foreign investment in the United States falls, of course, outside the scope of 

CFIUS. But we do not have a way to review that investment to 

make sure it is in our economic interests. 

I have introduced legislation with Senator Grassley—both of us 

are members of the Finance Committee—called the Foreign Investment Review Act that would require the Secretary of Commerce to 

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review certain foreign investments, particularly those made by 

state-owned-enterprises, to make sure they are in the long-term, 

strategic interests, economic and otherwise, of the United States. 

I agree we should update CFIUS to respond to the challenges we 

face. It is equally important now, Mr. Chairman, that we recognize 

that the same practices that undermine our national security, can 

pose a threat to our economic security as a Nation as well. 

Thank you. 

Chairman CRAPO. Thank you, Senator Brown. 

We will now move to our witnesses and their testimony. We have 

with us four excellent witnesses today, and in the order of your testimony, they will be the Honorable Christopher Padilla, Vice President for Government and Regulatory Affairs at IBM Corporation, 

and former Under Secretary for International Trade at the U.S. 

Department of Commerce. Second will be Mr. Scott Kupor, Managing Partner at Andreessen Horowitz and Chairman of the Board 

of National Venture Capital Association. Next would be Dr. Gary 

Clyde Hufbauer, the Reginal Jones Senior Fellow at the Peterson 

Institute for International Economics; and finally, Dr. James 

Mulvenon. 

Did I get that pronounced right? Close? 

Mr. MULVENON. Mulvenon. 

Chairman CRAPO. Mulvenon? All right. Thank you for that. 

Dr. James Mulvenon, the General Manager at the Special Programs Division of SOS International. 

Gentlemen, we appreciate you being with us today and your 

bringing your expertise to assist us with this issue. We will proceed 

in the order that I introduced you. I remind you that we ask you 

to keep your oral remarks to 5 minutes, so we have time for questions and answers. And I again remind our Senators to do the 

same when their turn for questions comes. 

Thank you. And Mr. Padilla. 

STATEMENT OF CHRISTOPHER PADILLA, VICE PRESIDENT 

FOR GOVERNMENT AND REGULATORY AFFAIRS, IBM CORPORATION; AND FORMER UNDER SECRETARY FOR INTERNATIONAL TRADE, DEPARTMENT OF COMMERCE 

Mr. PADILLA. Thank you, Mr. Chairman. 

During the Administration of President George W. Bush, I served 

as Assistant Secretary of Commerce responsible for export controls 

in addition to my role as Under Secretary, and in that and other 

Administration roles, I was a senior sub-Cabinet official on CFIUS. 

Interestingly, the last major expansion of export controls focused 

on China, which looked at Chinese military end users, bears my 

signature. It was signed in June of 2007 when I served as Assistant Secretary for Export Administration. 

In my role at IBM, I have been involved in two transactions that 

were reviewed and approved by CFIUS, and I am responsible for 

the company’s compliance with export controls. And my comments 

will draw on these experiences. 

I would like to focus my remarks on the FIRRMA bill discussed 

by Senator Cornyn this morning, and let me start by saying that 

FIRRMA contains, I think, some important reforms that IBM supports—to expand the ability of CFIUS, to examine certain inbound 

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investments, plugging gaps that do exist in its jurisdiction. These 

include expanding the ability of the committee to look at a wider 

range of inbound investment, taking measures to prevent the evasion of CFIUS, and ensuring senior-level review of cases. We also 

support increasing resources for the committee. 

But the problem with FIRRMA, Mr. Chairman—and it is a big 

one—is that the bill does something else. It would drastically expand the committee’s mandate beyond examining inbound investment. For the first time ever, CFIUS would also review outbound 

international transactions, including thousands of nonsensitive 

sales, IP technology transfer deals, even with friendly nations, and 

this is a serious flaw in the bill. It would duplicate and undermine 

the existing U.S. export control system, would result in a flood of 

cases that would overwhelm CFIUS, and could constitute the largest unilateral trade controls imposed by the United States in many 

decades. 

Controlling sensitive technology works best when it is done internationally in cooperation with allies. A technology control system 

that only unilaterally stops U.S. firms from doing business abroad 

will not advance security interests if it simply hands out markets 

to foreign competitors, many of whom are equally adept in advanced technology, yet this is precisely what FIRRMA would do. 

As drafted, the bill would impose a very onerous and entirely 

unilateral set of restrictions on overseas transactions involving the 

contribution, vaguely defined, of technology, IP, and associated support through any—I emphasize ‘‘any’’—type of arrangement. 

This could capture under CFIUS things like the sale of a computer server to a bank in Singapore, the licensing of a database to 

a pharmaceutical company in Switzerland. Even routine licensing 

of trademarks could require CFIUS review. Saying, as the bill does, 

that ordinary customer relationships are excluded does not narrow 

the bill because that term is also left to regulators to define. With 

such a broad reach, the CFIUS caseload would skyrocket from 

about 250 cases a year now, which is already a record, to many 

thousands or even tens of thousands. 

Now, I know as Senator Cornyn said, one of the issues driving 

FIRRMA is a concern that the export control system has not kept 

up to date, but the answer to that is not to abandon export controls 

and dump everything on to CFIUS, layering another bureaucracy 

on top of foreign commerce. I think the better answer is that there 

is existing regulatory authority to impose new export controls 

quickly over time in partnership with our allies. This can be done 

under current rules already on the books. 

So the authority is there, but the control lists do need a refresh. 

A GAO report found in February 2015 that the Defense Department was no longer updating or even using the Militarily Critical 

Technologies List, which was established in statute by Congress to 

keep export controls up to date. 

FIRRMA would not correct this problem and could make it 

worse. Under FIRRMA, the Government would define a vague new 

list of technologies, even though it is not using the one it is already 

supposed to keep, and then wait until something pops up in a 

transaction review. We might then try to stop it in a haphazard 

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and scattershot way on a deal-by-deal basis, but that would be totally unilateral. 

Casting a huge regulatory net over business and applying a test 

of, essentially, ‘‘We will know it when we see it’’ would be very 

damaging to both competitiveness and security. I think the answer, 

Mr. Chairman, is not to turn CFIUS into a super export control 

agency. Instead, Congress and this Committee should use its oversight authority to demand updates, to export controls, ideally in cooperation with our allies to reflect current technology. If you do 

that combined with a slimmed-down FIRRMA bill that does plug 

some gaps in the ability of CFIUS to look at inbound investment, 

I think that would be the best approach for our economy and for 

our national security. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Mr. Padilla. 

Mr. Kupor. 

STATEMENT OF SCOTT KUPOR, MANAGING PARTNER, 

ANDREESSEN HOROWITZ, AND CHAIR, NATIONAL VENTURE 

CAPITAL ASSOCIATION 

Mr. KUPOR. Chairman Crapo, Ranking Member Brown, Members 

of the Committee, thank you again for the time today and the opportunity to testify regarding the Foreign Investment Risk Review 

Modernization Act. My name is Scott Kupor and I am the Managing Partner of Andreessen Horowitz. We are a venture capital 

firm that has partnered with many innovative technology companies. I am here today in my capacity, though, as the Chairman of 

the National Venture Capital Association. 

The venture capital industry shares the goals of this Committee 

and FIRRMA’s authors to protect U.S. innovation and ensure that 

technology is not used to harm our competitiveness or security. At 

the same time, we believe that Congress and the Administration 

should be mindful of the bill’s potential impact on startups in the 

venture industry. 

My testimony today will focus on the ways in which we think 

FIRRMA can be improved while still accomplishing its foundational 

goal. 

First, I thought I would give you a quick background on what 

venture capitalists do and what it means to the overall economy 

and innovation. Venture capitalists like myself, we often are called 

general partners, or GPs, raise investment funds for a broad range 

of limited partners, or LPs. These are endowments, foundations, 

and pension plans, many of which are in your States. 

We use this capital to invest in outstanding entrepreneurs with 

breakthrough ideas. The basic structure of a venture fund effectively protects the sensitive information of startups from disclosure 

of investors into the fund. We generally limit disclosure of limited 

partners to a very small amount, and most of that disclosure is related to valuation and accounting-related information to ensure 

that limited partners understand that is the current economic position is of the fund. 

Limited partners do not have access to sensitive information, the 

concern of FIRRMA, and of course, they have no say in the investment decisions of the venture fund. 

10 

We hope, of course, that all the companies we invest in will succeed, but entrepreneurship is an inherently risky endeavor. It is 

worth the risk, though, because it is absolutely essential to our 

economy, with one study finding that young startups, mostly venture-backed, were responsible for almost all the 25 million net jobs 

created in the United States since 1977. 

Increased interests in startups by other countries, though, has 

caused the share of global venture capital invested in the United 

States to fall from 90 percent to 54 percent in only a matter of 20 

years. China is now the second largest destination in the world for 

venture capital, and in 2016, 6 of the 10 largest venture deals in 

the world occurred in China. 

Entrepreneurship is now a global competition, and I strongly encourage policymakers to prioritize policies that will solidify our 

leadership position, be they regulatory, tax, or immigration related. 

Against this backdrop, I would like to share our views on 

FIRRMA. I do believe FIRRMA is well-meaning legislation intended to deal with a very real challenge; however, as drafted, the 

legislation produces many questions for the venture industry that 

we believe should be clarified before the bill moves forward. 

My written testimony goes into greater detail, but this morning, 

I thought I would highlight two key areas that we would offer for 

improvement. 

First, we would recommend that FIRRMA be amended to clearly 

specify that U.S. venture funds with foreign limited partners are 

not implicated by the covered transaction definition, nor does a 

venture fund take on foreign personhood for purposes of FIRRMA 

merely because it has foreign limited partners. 

As drafted, FIRRMA is ambiguous in its application to a venture 

capital fund with foreign limited partners. We are concerned that 

this ambiguity, especially when combined with a broad grant of 

rulemaking authority, will cause unnecessary confusion, cost, and 

burden for the venture capital industry, as venture firms will be 

left without a clear understanding of whether they must file with 

CFIUS and under what circumstances. 

As I mentioned earlier, as a practical matter, information disclosure to limit partners is minimal and related largely to valuation 

and accounting-related information, and also, as you may know, 

most venture capitalists sit on the boards of directors of the companies in which they invest, and as a result, they owe duties of confidentiality directly to the shareholders of those companies. 

Thus, to the extent a venture capitalist were aware of proprietary technology in use or being developed by the company, she 

would not be in a position to share that with limited partners. 

Hence, the risk of disclosure of proprietary intellectual property to 

a foreign LP, understandably of concern to Congress, is not a paramount risk in a typical venture capital fund structure. 

Second, we would ask that FIRRMA be modified so it does not 

stifle foreign direct strategic investors that have become an important part of the U.S. startup financing and are increasingly investing alongside U.S. venture capital firms. 

Specifically, FIRRMA should specify that CFIUS filing is not 

needed if the foreign strategic investor takes a de minimis stake 

in a startup, as in that case the foreign strategic investor is a 

11 

de facto passive investor, but might fear it does not meet the tightly drafted passive investment test. 

In addition, we would ask that the passive investment test be 

broadened to reflect true passivity. These changes, we believe will 

maintain FIRRMA’s intended effects, while avoiding serious issues 

for startups in the venture capital industry. 

The bottom line is that U.S. venture capital in entrepreneurial 

companies are competing against a global set of investors and companies who would love to have the next set of breakthrough technologies developed in the countries of their origin. If we make it 

harder for foreign investment to come into U.S.-domiciled companies, that money will simply go to other countries that are more 

welcoming, and we risk losing the leading competitive position in 

innovation that the United States has long held. It is far better for 

the United States to continue to be the global financial center, 

where the benefits of economic and job growth stemming from technological innovation accrue to our citizens. 

To conclude, our industry appreciates the interest the Committee 

and FIRRMA’s authors have paid this important issue in national 

security. I hope my comments today have conveyed the modern 

startup investing ecosystem is complex, and care should be taken 

to ensure that it is not disrupted in a way that harms the ability 

of startups to grow. I also hope that we can all work together on 

policies that support the American entrepreneurial system. 

Thank you again for the opportunity. 

Chairman CRAPO. Thank you, Mr. Kupor. 

Dr. Hufbauer. 

STATEMENT OF GARY CLYDE HUFBAUER, PH.D., REGINALD 

JONES FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. HUFBAUER. Thank you, Senator Crapo and Members of the 

Committee, and apologies for my hoarse throat. Many of my remarks overlap with what Chris Padilla said, so I will try to abbreviate them. And I appreciate, Senator Crapo, the balance you 

struck in your opening remarks between national security and economic progress. 

Inward and outward foreign direct investment almost always 

benefit the U.S. economy, and the econometrics on this are just 

overwhelmingly strong. Therefore, in my view, the burden should 

be placed on those who would propose restrictions, and that is the 

way CFIUS has operated in the past. 

As Chris said, S. 2098 and its House counterpart would significantly enlarge the CFIUS mandate to cover outward investment 

and technology transactions. I mean, that is an enormous expansion, and the bills would cast a skeptical eye, perhaps properly, toward investment into a firm based in an adversary nation. And 

that would seem to be China certainly, but also Russia, Iran, and 

I am sure there are others. 

The new mandate, as both the previous speakers have said, could 

put U.S. multinationals at a disadvantage if they are competing 

with, let us say, British or European or Japanese multinationals 

who have the same technology because the United States would be 

prevented from selling, and the others could go ahead. 

12 

So with its enlarged mandate, CFIUS would need a much, much 

larger staff. I really want to emphasize that. To give them the 

mandate without the staff, everybody will be disappointed. As 

Chris said, the number of cases will jump from 200 to at least 

1,000 and probably more. 

And the way the enlarged mandate is written in the bill—maybe 

this is not how it would play out, but it seems to put the burden 

on private firms to show that the transaction will not reduce U.S. 

technological advantages in areas that are currently or might soon 

become subjects of national security concern. 

So with those thoughts, I have just two recommendations. First, 

I think the new mandate should focus on adversaries, they should 

be named, and critical technology. 

Now, we have just brilliant scientists in the National Academy 

and National Engineering Association and elsewhere, and they can 

identify these critical technologies. Let us name them, and it is not 

a one-for-all name. It is a rolling name. 

And second, the bill ought to more explicitly take into account 

the availability of the technology in question from our allies. That 

would be Japan and Korea and Europe and Canada, and if we are 

going to block it to the adversaries, well, then we ought to have a 

very heavy diplomatic demarche to the allies that they should block 

it as well. 

Thank you very much. 

Chairman CRAPO. Thank you, Dr. Hufbauer. 

Dr. Mulvenon. 

STATEMENT OF JAMES MULVENON, PH.D., GENERAL MANAGER, SPECIAL PROGRAMS DIVISION, SOS INTERNATIONAL 

Mr. MULVENON. Mr. Chairman, Ranking Member Brown, Members of the Committee, thank you for inviting me this morning. My 

name is James Mulvenon. I am the General Manager of SOS International’s Special Programs Division. I spent the last 20 years 

building teams of Chinese linguist analysts supporting the intelligence community and Federal law enforcement and the Department of Defense primarily trying to understand Chinese technology 

trends. 

Three years ago, with two of my U.S. Government colleagues, I 

wrote a book called ‘‘Chinese Industrial Espionage,’’ which documented in tedious detail the extent to which the Chinese were 

stealing our technology which understandably made the Chinese 

government quite upset. 

I would like to make four key points today. The first, I feel like 

my major role this morning is to present a more comprehensive 

view of the problem, as I see it. 

China has a comprehensive strategy, in many ways unlike the 

U.S. Government, for national economic development and military 

modernization, which has unfortunately for U.S. companies created 

a very unfair asymmetric business environment in China for them 

to operate. 

I have sympathy for the plight of U.S. companies in China. My 

father did business there for 25 years, but the nature of the environment that the Chinese government has created through regulation and other policies has in many ways forced U.S. companies, 

13 

which are in China and in the Chinese market for legitimate reasons, to grow and prosper and make money, to make suboptimal 

decisions, which may benefit that particular quarters numbers but 

may not be in the long-term interest of U.S. national security. 

The second feature of the problem as I see it that U.S. laws have 

not evolved to really accommodate the creativity and innovation 

that the Chinese government and its entities are using in order to 

exploit the gaps and weaknesses in our system, moving as they 

found that they could not do straight acquisition through the front 

door through CFIUS, as they kept getting those rejected, but instead turned to more creative joint venture and investment vehicles to be able to back-door their way into intellectual property that 

they wanted to find. 

And of this Chinese strategy, I think there are some key features: heavy state industrial planning like the ‘‘Made in China 

2025’’ plan, military-civilian fusion, dispelling the notion that there 

actually is such a thing as a private company in China. The political and legal system in China really does not allow any company 

in China to be able to refuse the entreaties of the Chinese government if they wanted access to the technology—very heavy state 

subsidies, as was mentioned earlier. The integrated circuit fund of 

$250 billion was designed specifically to evade WTO prohibitions 

against state subsidies. 

The promotion of national champion companies, we are all familiar with Huawei and its various activities. A whole raft of new laws 

and regulations that they have put out to codify what had previously been informal measures on their part, particularly the new 

cybersecurity law, which is putting tremendous pressure on U.S. 

companies for data localization, which is a threat to U.S. PII and 

other sensitive data. 

Their creation of an entire domestic standards regime, they use 

as a trade weapon against U.S. companies. I would highlight 5G 

wireless standard is the latest iteration of that. A buy local strategy through their government procurement law, that puts pressure 

on U.S. companies. State-backed joint ventures and investment vehicles, which are quickly identified as state-backed. I would highlight Canyon Bridge, which is sort of a thinly disguised state council proxy of the Chinese government that attempted to buy Lattice 

Semiconductor. 

The mercantilism that we see in the One Belt, One Road initiative, not to mention their planetary scale cyber espionage program 

that took all of our OPM data back to Beijing, large-scale technology espionage. Their nontraditional collection program, the socalled ‘‘1,000 Talents Programs,’’ whereby they financially 

incentivize U.S. scientists and researchers to come back to China 

to be able to share that technology. 

But in my view, export controls, which is often cited as the reason why we do not need FIRRMA, are not enough. I have many 

personal experiences with failing to convince Assistant U.S. Attorneys to be able to prosecute clear export control violation cases, but 

the anecdote that I would leave you with that is most troubling to 

me is the U.S. engineer who in its head possesses the kind of 

knowhow and information that would otherwise be subject to 

export control violations, sitting in a joint venture in China, 

14 

encouraged to help solve a particular technical problem. That conduit of information transfer is not covered under the U.S. export 

control regime, and it is why we need to more heavily scrutinize 

these overseas joint ventures and investment programs. 

Thank you, sir. 

Chairman CRAPO. Well, thank you very much, Dr. Mulvenon, and 

to all of our witnesses. Again, your testimony is fascinating, and 

you bring a wealth of knowledge to us. And we appreciate you 

doing that. 

My first question is for Mr. Kupor and Mr. Mulvenon. The national security concern with venture capital arises from an assessment that China will soon surpass the United States as the technological leader in fields such as artificial intelligence and robotics in 

part derived from venture capital deals and special purpose vehicles, the latter formed to obscure the source of capital for a foreign 

acquisition. 

My question is sort of a series of a couple of them. How do you 

assess the risk of early or growth stage venture capital contributing to the transfer of U.S. technology to the Chinese? And along 

with that, how is a venture capital deal different from a special 

purpose vehicle or a private equity deal? 

Do you want to go first, Mr. Kupor? 

Mr. KUPOR. Sure. Thank you, Mr. Chairman. 

So, yes. First of all, with respect to China and artificial intelligence, there is no question—I think the witness talked about it— 

that China has very clear government policy around artificial intelligence. It was mentioned, and it is true, that they have offering 

things like cash stipends, for example, for U.S.-trained engineers 

who are Chinese nationals to come back to the country and obviously help them develop those technologies. So I do not think there 

is any question that there is a major technological race happening, 

particularly with respect to things like artificial intelligence. 

On the venture capital side, the reason why, as I said, I do not 

think this is a major issue to worry about on the venture capital 

side is—number one is, at the end of the day from a U.S. venture 

capital perspective, the goal that we would like to see is how do 

we actually get foreign investment here into the United States so 

that the U.S. benefits from those technologies. 

And as I mentioned, kind of as the global share of U.S. venture 

technology, venture capital has fallen, there are a lot more dollars 

competing for those deals from other geographies. So we think it 

is far better to actually encourage foreign investment into those 

companies. 

On the venture capital side, specific to your question, what happens is venture capitalists are almost always minority investors in 

companies, and this is, I think, a very important distinction. You 

mentioned kind of private equity more broadly in buyouts. In 

buyouts, those tend to be controlled transactions, so those companies actually run the board. They control from an ownership perspective of the companies. 

Venture capitalists are almost always minority investors, and so 

as a result, our ability to kind of dictate what the company does 

and to kind of share information from an IP perspective is much 

15 

more limited than it might be in an M&A or another control transaction. 

So I think for that respect in particular, venture capital, in fact, 

is quite a very different investment category than you might be 

thinking about from some of the other investment categories. 

Chairman CRAPO. Thank you. 

Dr. Mulvenon? 

Mr. MULVENON. Mr. Chairman, you mentioned earlier the DIUx 

report, which I associate myself with as well, and we collaborated 

with them in the creation of that report. 

My organization also produced a study for the U.S. Economic and 

Security Review Commission on China’s research into artificial intelligence and robotics and discovered—frankly were surprised by 

the extent of Chinese investment in early stage startups on both 

the West and East Coast of the United States, in that area, and 

our concern about it was, of course, derived from the Department 

of Defense’s Third Offset Strategy, which explicitly calls out artificial intelligence and robotics and machine learning as the core 

technologies undergirding the next wave of U.S. military modernization. 

And to the extent to which the Chinese government has a more 

robust investment strategy—and I think that has been carefully 

documented as to how much larger it is than the U.S. investment 

strategy—as well as the lack of scrutiny of these investments—and 

I would just highlight particularly in the DIUx category that there 

were certain investments, such as companies like Neurala and 

other places where there had been initial DoD funding, and because of the lack of nimbleness of our system, the Chinese then 

came in and did the second and third rounds of funding for those 

companies and then took over the seating of that research. 

And so I think this is an area of great concern only because our 

own military leaders have identified these technologies as really 

what are going to be the game changers in the next round of military modernization globally, and given the amount of friction we 

currently have with the Chinese government in certain key security areas, if you have read books like ‘‘Ghost Fleet,’’ which may be 

a hyperbolic view of the future, but are often seen by futurists as 

the role that things like artificial intelligence and machine learning 

will play, I think we need to look at this issue very carefully. 

Chairman CRAPO. Well, thank you. 

Mr. Padilla, the central point of your testimony is that FIRRMA 

broadens of the scope of CFIUS to something akin to a supra-export control agency with jurisdiction to capture outbound transactions, joint ventures, and other transactions outside the United 

States that are not investments and may even be licensed transactions that have consequences for critical technology companies 

and others. 

What is the national security concern or gap in the export control 

regime or other enforcement mechanism that would necessitate 

this kind of expansion of CFIUS authority. 

Mr. PADILLA. I think the concern that is driving some of what we 

are seeing in the debate about FIRRMA is that technology control 

lists need to be updated. 

16 

I would say that a couple of the technologies that Dr. Mulvenon 

mentioned—for example, artificial intelligence, machine learning, 

which IBM is very heavily involved in, things like quantum computing, Blockchain, these emerging technologies do not appear on 

the Militarily Critical Technologies List because DoD has not updated that list since 2011, nor have there been proposals put forward by the United States in the Wassenaar Arrangement, which 

is the international control regime that has existed really since the 

end of the Second World War through different names to try to control that technology on a multilateral basis to countries of concern. 

So I think those are legitimate concerns, but I do not think the 

answer is to say, well, export controls are not working the way they 

were designed by Congress, so let us dump it all onto CFIUS. 

CFIUS is not equipped to do that kind of work. They are not 

equipped to look at new emerging technologies. They are not 

equipped to consult with allies. They are not equipped to impose 

multilateral or even unilateral controls. 

So the export control system, which is under the jurisdiction of 

this Committee, I think needs a refresh, and I think the tools exist. 

They exist in regulation today, and they ought to be used. But I 

think simply throwing up our hands and saying, well, we would 

rather throw it all onto this other bureaucracy is not the right approach. 

Remember it is the Committee on Foreign Investment in the 

United States. It was intended and created to look at inbound investment. If we do this, it would have to be renamed. 

Chairman CRAPO. Thank you. I appreciate it. I have got to move 

on. My time has expired, and Senator Brown has—— 

Mr. PADILLA. Thank you. 

Chairman CRAPO.——some really good questions, sir. But thank 

you for that. 

Senator BROWN. Thank you, Mr. Chairman. 

I was intrigued, Mr. Mulvenon, by your comment that there is 

no company in China that can resist entreaties to share—or turn 

over—may be a better term, technologies to the government, so 

thank you for that. 

Dr. Hufbauer, good to see you again. Thank you for being here. 

You suggested some of China’s trade practices may spur legitimate 

concerns, but that Congress should wait the outcome of the USTR 

study of the matter initiated last August. 

I have great respect for Ambassador Lighthizer, but I am not 

sure we can or should wait for another study. I would like to ask 

you and then each of the panelists. Is there any doubt that China 

has and continues to violate its international trade commitments 

and that engages in unlawful technology transfers? 

Start with you, Dr. Hufbauer. 

Mr. HUFBAUER. No doubt whatsoever. 

Senator BROWN. Mr. Padilla? 

Mr. PADILLA. I would agree. I do not think there is much doubt 

of violations, including by companies like ZTE most recently. 

Senator BROWN. Mr. Kupor. 

Mr. KUPOR. I am definitely not an expert on the topic, but certainly, from my understanding, that is true. Yes, sir. 

Senator BROWN. Mr. Mulvenon. 

17 

Mr. MULVENON. I think it is not only true, but I think every day, 

we uncover more and more of the scope and scale of it and never 

cease to be amazed by the size of the transfer. 

Senator BROWN. OK. Thank you. 

Mr. Padilla, I agree that we should be careful not to ask too 

much from CFIUS, as your testimony pointed out, but when it 

comes to national security, do we need to choose between export 

controls, which you admit are outdated in CFIUS, and why not 

adopt an appropriate that tries to fill the gaps between the two? 

Mr. PADILLA. Well, CFIUS reviews do look at export controls. 

When I was Assistant Secretary of Commerce, I sat on the CFIUS 

committee, and one of the things we looked at when we were looking at an acquirer, for example, is do they have a history of violating export control laws. Could the acquirer be trusted to follow 

our laws, or were there concerns there? So I think there is close 

interlock between the systems, but they were built very differently, 

and they have evolved very differently over the course of 70 years 

in the case of the export control system to do different things. 

And I think the answer is to improve the export control system, 

also to improve CFIUS because there are some gaps in what it can 

look at, but not to layer them on both together, so that the same 

transaction that might not need an export license or that might 

have received one also then has to go through a redundant CFIUS 

review. I do not think that is an appropriate approach. I do not 

think it would enhance security, and it certainly would hurt competitiveness. 

Senator BROWN. Thank you. 

Mr. Mulvenon, there is broad agreement, I think, that the identification of technology that should not be transferred to our adversaries lags well behind where it should be. Will it not be a problem 

that wherever you locate the responsibility, DoD or CFIUS or Commerce? So why is CFIUS in your mind the best place to place that 

responsibility? 

Mr. MULVENON. First of all, I agree with Mr. Padilla about the 

laggard updating of the MCTL, which is really the most powerful 

resource we have for tracking these kinds of technology developments, and many, many times in my own professional experience, 

I ran into situations in which we could not convince key decisionmakers about an export control violation because of the delay in 

adding new technologies to that list. 

I would highlight, however, that in terms of the gaps between 

the systems, I could give you a good example of where the two systems are not interacting well terribly. 

The Commerce Department denied entity export list has not 

been updated, for instance, to reflect certain recent CFIUS actions. 

There is a Chinese company called San’an Optoelectronics, which 

is a chip firm that has twice been blocked by CFIUS from attempting to acquire military sensitive technology, which is not on the denied entities list, and American firms continue selling sensitive 

technology to them and discussing investment in those companies. 

And so that is a good example where the two systems need to interact better because I certainly see them as complementary. 

I do not see FIRRMA as a threat to become a supra-export control agency. I see us needing to fill the gaps on both sides, of both 

18 

the export control system as the first line of defense, and then 

CFIUS as a second line of defense, particularly related to investment and joint ventures. 

Senator BROWN. So talk just for a moment in the last minute or 

so about developing these lists. It seems that as we move from 200 

CFIUS filings a year to perhaps many, many more than that, how 

do you organize these lists across so many agencies? 

Clearly, there will be case-by-case determinations, but they obviously need more structure than that. How do we do that better? 

Mr. MULVENON. Well, I mean, the suggestion earlier about the 

National Academy of Sciences and other entities that are actually 

more directly interfacing with the cutting-edge technology, that is 

always the dilemma when I deal with elements of the U.S. Government is that they are not always on the cutting edge of understanding which technologies are emerging at any particular time. 

And so I think there are those kinds of outside partnerships whereby you can maintain, then be current about the technologies we 

should care about rather than putting an undue burden on U.S. 

Government agencies that really do not have the kind of day-to-day 

expertise to be able to track that. 

Senator BROWN. [Presiding.] Senator Toomey. 

Senator TOOMEY. Thanks very much. Gentlemen, I appreciate 

the testimony today. I am very sympathetic with the goals of this 

legislation, but I do have some concern about unintended consequences. 

My concern arises from a starting point that foreign direct investment is a huge and hugely important engine for growth in the 

United States. 

The tax reform we just completed, I think is going to encourage 

significant increases in foreign direct investment because we are 

going to lower the burden, the tax burn on the returns on those investments. I think this is a huge driver of growth, and yet there 

are legitimate concerns about whether there is some security 

that—security issues. 

So I just want to figure out how we strike the right balance here. 

One of the concerns—and maybe Mr. Hufbauer could address 

this—is so much of the kind of technology that we would be worried about transferring is inherently mobile. It can be developed 

and refined and improved almost anywhere in the world. If we do 

not strike the right balance here, what is the risk? And maybe 

under this legislation, would you be concerned about really constructive innovators being driven overseas because they are concerned that if they are domiciled in the United States, potential future investment is too limited? Is that a concern? 

Mr. HUFBAUER. Thank you, Senator. Yes, that is very much a 

concern, and the way I would put it is this—U.S.—well, during my 

lifetime, which dates to before the Second World War, the U.S. 

Government has been a leading proponent of technology, DARPA 

and ARPA and so forth, and of course, companies. It is that investment at home that has given us this leadership, and our big weakness is not the espionage by the Chinese or their forced technology 

transfer. Our big weakness is that we may not be keeping up the 

pace of investment in innovation that we had. 

19 

At one time, we were clearly the leader. You cannot really say 

that so strongly today, and the leadership has a couple of components. One of the components is making the United States a very 

attractive place for foreign scientists and engineers and so forth to 

not only get their degrees here but to stay here. 

Senator TOOMEY. So in its current form, are you concerned that 

this legislation could tend to have that effect of driving some innovation overseas? 

Mr. HUFBAUER. Well, I think it is flexible enough that it would 

not necessarily have that, but I do not want to see the U.S. Government put all its emphasis on trying to build a wall on the outward 

flow of technology. 

Senator TOOMEY. Well, that is another concern. That is another—— 

Mr. HUFBAUER. That will never work. I mean, we have to do 

more at home, and that is by far, the bigger part of the story. 

Senator TOOMEY. I have only got 2 minutes left. Let me put another issue out on the table and invite anyone to comment on either my first question or this next one. 

The next one is—let us be honest. Incumbent businesses are 

never enthusiastic about a dynamic innovative competitor emerging, and I worry that large powerful incumbent businesses might 

attempt to use CFIUS as a way to protect their status and diminish the opportunity of potential competitors to raise the capital that 

would allow them to compete. 

Do you believe that there are sufficient safeguards in this legislation to minimize the risk of that unintended adverse consequence? 

Mr. PADILLA. Senator, I will maybe take the first stab. When I 

served in Government, I saw cases like what you just described, 

where it was clear that an incumbent competitor was trying to prevent a foreign investor who would then infuse capital into a relatively weaker domestic competitor and strengthen themselves in 

the process, and we tried very hard in the Bush administration at 

least not to allow that dynamic to take hold because it is improper. 

On your first question, I would just comment. IBM has 12 

research laboratories around the world. Most of our cutting edge 

research on things like AI and quantum computing are done in 

New York or Texas or California, but we also have labs in places 

like Zurich, Switzerland, and Sao Paulo, Brazil. 

And I can tell you that if FIRRMA goes in the way that it is written now, there would be large incentives to move core research outside the United States, so that it would not be captured by some 

of this added bureaucracy, and that is not a good thing. It is not 

what IBM wants to do. 

Mr. KUPOR. Senator, if I could just add to your first comment as 

well, your first question, there is no question that kind of engineering talent will follow capital, and we have got case studies of that 

already today in the form of Government incentives that are driving capital. So whether that is R&D tax credits, for example, that 

Canada and France and others are offering to engineers—it was 

mentioned that China obviously is trying to attract a lot of its 

expat community back through financial incentives. 

20 

So I think it is a microcosm of a broader problem that could be 

here, which is if you stifled capital flows, you could have talent 

flow out as well. 

Senator TOOMEY. Thank you very much. 

Ms. DOWNEY. Senator Schatz. 

Senator SCHATZ. Thank you, Ranking Member Brown. 

Mr. Padilla, I have a question, just a practical question about the 

capacity at CFIUS. How many employees does it have? How many 

analysts? What is the funding level? Because as we consider expanding its scope, it is going to matter whether or not they can accomplish anything additional. 

Mr. PADILLA. I do not know the exact current number, Senator. 

It has been a little time, about a decade, since I was involved, but 

when I was there, there were less than 20 full-time staff at the 

Treasury who were focused on this, and then you had in each agency—I was at the Commerce Department. We had three people 

under me at the Bureau of Industry and Security who worked on 

this. 

So I would guess the entire universe among all the agencies, 

maybe about less than 100. 

Senator SCHATZ. OK. So if you are talking about fewer than 100 

people, one of the questions is—it is an appropriations question. It 

is a resource question. It is a throughput and capacity question. 

Setting aside whatever statute CFIUS hangs its hat on, we could 

give them more things to do, and if it is the same number of people, they are not going to be able to accomplish it. 

I have a question about early stage investment and potential 

dual use, and it seems to me this is an appropriate thing for 

CFIUS to look at, but it is a little dicey in the sense that you have 

a startup company, and they are not sure at the outset—I mean, 

technology has evolved, and their application has evolved. So a 

company may not know that it is going to be dual use until the research finds a defense application. 

So at what point does CFIUS—I mean, how do you strike that 

balance between sort of not snuffing out anything that could potentially be dual use in the future, which would pretty much snuff out 

90 percent of tech startups, but recognizing that once something 

has a serious defense implication and application, that then it is 

under CFIUS jurisdiction. But how do you sort of—I am looking at 

the two of you here—strike that right balance between CFIUS and 

the VC and startup community? 

And I will start with Mr. Padilla and then go to Mr. Kupor. 

Mr. PADILLA. It is a very hard balance to strike, Senator. I do 

think—and I support the idea—that CFIUS does need the authority to at least look at nonpassive, noncontrolling investments. In 

other words, it is not just passive, but it may not constitute control. 

You could look at things where someone gets a board seat on a 

company. It is not a controlling interest, but because they are on 

the board, they have access to information that they might not otherwise get. And I think it is appropriate that CFIUS be able to at 

least inquire about that. 

In terms of what technologies, here again, I think it is incumbent 

on the Government to define what it is worried about. That is why 

Congress created the Militarily Critical Technologies List, and it 

21 

cannot just be we are worried about AI. It has to be more specific 

than that, and that is hard to do. I used to do it. It is not easy 

to say this parameter or this algorithm. 

But if the Government is concerned about security, it is incumbent on the regulator to define what it is regulating. I do not think 

the right approach is to say bring us everything in a very broad 

universe, and we will sort it out one by one and tell you later what 

we are worried about. That is not a good regulatory approach. 

Senator SCHATZ. Mr. Kupor. 

Mr. KUPOR. Yeah, I agree with that, Senator. 

I think also you are right, which is as startup companies develop, 

of course, the products go through many iterations. So I think it 

would be very hard for CFIUS to have any ability to review kind 

of the criticality of that technology until there is a true commercial 

application developed that actually has dual use, and that is going 

to often come probably 3, 5 years into a company’s history. So at 

that point in time, many of its investment dollars will have actually already been received by the company. So you may be talking 

about retrospectively trying to undo financing agreements and 

other stuff that has happened. I think it is a really hard problem 

to handle. I wish I had a more definitive answer for you, but I 

think for that reason, it is very difficult to kind of think about cutting off that early supply of capital before you actually understand 

what the commercial use of that technology is. 

Senator SCHATZ. So I have maybe a tougher question for the 

whole panel, and it has to do with CFIUS was constructed to be 

limited in scope because of how serious the matter is because to 

have the Government intervene against a transaction is no joke, to 

expand that, and yet it still has to have confidentiality because a 

lot of the discussion is a national security discussion. There is a 

logic to that on the other hand. Then you have a black box with, 

say, 100 human beings, and maybe even few are making determinations on which companies get investments and which do not, 

and maybe only in the SCIF can Congress exercise its oversight. 

And that seems scary from the standpoint of the potential for crony 

capitalism, of the potential for corruption. And I am wondering 

whether you can just speak to that very briefly as my time expires. 

Mr. Padilla, and then quickly all the way down the line. 

Mr. PADILLA. CFIUS is one of the least transparent Government 

processes that deals with foreign commerce. The export control system for whatever faults it may have is relatively transparent. The 

business community knows how to do it, knows how to work with 

it. CFIUS by contrast is very opaque. 

Mr. KUPOR. Yeah, I would agree. I think if this institution decides to go forward with legislation, I think—deferring too much of 

the rulemaking authority of CFIUS is a real problem, just given 

kind of the confidential nature of it. So I think having very clear 

bright-line rules about what is covered and what is not, it would 

be incumbent upon this organization to do so. 

Mr. HUFBAUER. That is a very legitimate concern, and my suggestion is that the Congress ought to on a secret basis take a 

report from the CFIUS maybe every year, every 6 months, and review the cases which were blocked or the cases which were maybe 

not formally blocked but turned back and get your own judgment, 

22 

because it is obvious that CNI and the CIA and the Pentagon and 

so forth who have all the secret information, which we do not want 

to disclose widely to the public, but Congress should take a look. 

Mr. MULVENON. Senator, I think one of the tradeoffs that is important, particularly when I talk to companies about their frustration with the process is that there could be—and there is some language in the bill right now that suggests this. There could be a 

greater opportunity for the companies earlier in the process to provide their own technical assessments of the technology issues at 

play as well as a commitment to resolve the CFIUS evaluation at 

the first level much sooner as a tradeoff to incentivize companies 

for the fact that they are expanding the scope of what is being reviewed. And I know that was tremendously frustrating to Western 

Digital and others that were involved in the process, how long it 

took. 

Senator SCHATZ. Thank you. 

Chairman CRAPO. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

So let me first take a point of personal privilege and say, Mr. 

Kupor, you have a great guy working for you in Justin Field. He 

was my finance guy. He is in the audience, and my mom said if 

you can say something nice, say it; if not, keep quiet. I can say 

something nice. He is a great guy. 

Mr. KUPOR. Thank you, Mr. Senator. I agree with you. 

Senator MENENDEZ. And I also see that another alumni of my 

staff, who was my communications director, Matt Miller, is back 

there, sitting back there. I do not know who you are representing 

here today, but, Matt, it is good to see you. 

I thank all of you for your testimony. Dr. Mulvenon, a draft report prepared for DoD last year raised concerns about certain activities by Chinese firms in the United States that appear to be 

motivated by transferring innovative technologies to China with 

the ultimate goal of giving China a competitive advantage and specifically to report highlights to Chinese venture capital investment 

in early stage startup firms in the United States in the artificial 

intelligence robotics financial technology sectors. 

It raises concerns that these investment activities are both part 

of a larger Chinese strategy to displace U.S. businesses and certain 

industries and are specifically structured to fly under the radar of 

the CFIUS review process. 

In your testimony, you discuss how China has structured certain 

technology investments in the United States to essentially get 

around the CFIUS reviews. What are the vehicles or investment 

structures that they are using to do this? And in your opinion, 

what steps should the Committee consider to ensure that those 

types of efforts are actively monitored, tracked, reviewed, and then 

appropriately done so by CFIUS? 

Mr. MULVENON. Thank you, Senator. 

Well, in fact, if you look at artificial intelligence, you can go all 

the way down my structure of China’s comprehensive strategy and 

pick off the pieces of each one. 

China has a national industrial planning strategy for artificial 

intelligence development, including the corresponding military artificial intelligence development. They have a massive subsidy 

23 

system set up, just structured in a way that evades the current 

WTO restrictions on state subsidies. They have identified national 

champion companies within China that they want to be leaders on 

artificial intelligence. They have designed laws and regulations 

that insist on data localization, such that those artificial intelligence efforts, that that critical intellectual property data has to 

be stored in China if that work is going to be done there. 

They have a domestics standards regime that they are using as 

a trade weapon in order to leverage using market access in China 

to leverage technology transfer for multinationals, and then they 

have state-backed investment vehicles focused on artificial intelligence investments. 

Senator MENENDEZ. So how do we respond to that? 

Mr. MULVENON. Well, first of all, recognizing that it is a comprehensive strategy rather than the individual actions of self-interested financial actors, which was our first cut at the problem, and 

recognizing, as Dr. Hufbauer would say, there is unfortunately on 

our side a realization that we are not investing enough. So let me 

always say that we need to do more investment on our side in artificial intelligence rather than simply block Chinese efforts to invest 

in artificial intelligence in the United States, and we are woefully 

inadequate on that front. 

But also just clearly recognizing in many cases the thinly disguised state and military origins of many of these investment vehicles from the Chinese side and scrutinizing those and not permitting those to harvest the best of the emerging technologies in the 

United States. 

Senator MENENDEZ. Thank you. 

Let me ask you this. The legislation being discussed today includes a provision that would make mandatory CFIUS filings for 

transactions that involve certain investments by state-owned enterprises. This has been an issue of mine going back to the Dubai 

Ports World deal in which CFIUS approved a transaction that 

would have handled over control the port operations in New Jersey, 

New York, Baltimore, and Miami to a state-owned company in the 

United Arab Emirates. 

In September, the Committee heard testimony from the former 

Treasury Assistant Secretary, Clay Lowery, who oversaw CFIUS. 

He told the Committee that it was a worthwhile exercise to explore 

the idea of mandatory filings for state-owned companies as opposed 

to the current regime of high scrutiny for those transactions. 

What are your views of a mandatory filing requirement for transactions involving investments in the United States by state-owned 

or controlled enterprises? 

Mr. MULVENON. Well, with the caveat, as I said earlier, that 

under the current Chinese political and legal system, principally 

given Chairman Xi Jinping’s assertion that there needs to be greater Communist Party penetration even into private enterprises in 

China, there is an element of it that is a false distinction, given the 

Chinese government’s ability to reach into private companies and 

get access to technologies, but I do believe that state-owned enterprises should be mandatorily reviewed, if only because when we 

have peeled back various investment efforts in the last couple of 

years and found them to be actually state-backed and state-owned 

24 

enterprise-backed investments, that those were—that was the primary basis of the security concern. 

And given the nature of the Chinese system of state capitalism, 

I think those state-owned enterprises deserve particular scrutiny. 

Senator MENENDEZ. Any other views on that? And then I will 

close on that. 

Mr. HUFBAUER. I agree, totally. 

Mr. PADILLA. I would agree also, Senator. I worked with Clay 

Lowery when he was at Treasury and I was at Commerce, and the 

FINSA bill, the last bill Congress passed on this, did increase the 

scrutiny, and perhaps another increase of scrutiny would be appropriate. 

Senator MENENDEZ. Thank you. 

Senator BROWN. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman, and thank you to 

our witnesses for being here today. 

The Committee on Foreign Investment in the United States, 

CFIUS, that we have been talking about reviews acquisitions by 

foreign companies to ensure that they do not threaten our national 

security, and at our last hearing, we discussed how technology 

transfers from our companies to foreign competitors can undermine 

our security and how CFIUS does not cover certain transactions 

where our adversaries are intentionally investing in American 

startups in order to get access to critical testimonies. 

But I want to ask a different question around this. When CFIUS 

does review a transaction, it can approve it with a mitigation 

agreement that requires companies to complete certain steps in 

order to reduce the national security risk. 

Now, CFIUS is supposed to ensure that parties implement the 

mitigation agreement, but a draft Pentagon report issued in February of 2017—I think Senator Menendez just referred to it—advised that CFIUS should try to minimize reliance on these agreements because they are difficult to enforce, and there are not 

enough resources decided to monitoring them. 

So, Dr. Hufbauer, are more investigations into the national security risks of transactions become necessary, how can CFIUS ensure 

that a mitigation agreement is maintained over time if overseeing 

that agreement may be too costly or addressing security risks if the 

transaction may be too complicated? 

Mr. HUFBAUER. Thank you, Senator. 

It is a problem because as Chris Padilla said, there is only about 

100 people on the staff of CFIUS, and it is hard with that size staff 

to do all the follow-up that is necessary. 

So if this bill becomes law, there has to be a substantial expansion, but in addition, I would suggest that where there is a mitigation agreement, which obviously the company wants, the acquiring 

company and probably the acquired company, they should put 

money into some kind of escrow in the Treasury to ensure the enforcement over a period of years, 5 years, 10 years, to take care of 

the financial burden that this will entail. 

Senator WARREN. Interesting idea. Thank you. 

I should note that the defense authorization bill that passed Congress last year requires a multiagency report that includes an 

assessment of whether current CFIUS process provides adequate 

25 

monitoring and compliance, and I think we need to work through 

this and need more good ideas on how to do this. 

The discussion of CFIUS focuses on protecting our national security while preserving foreign investment, but I want to touch on a 

policy that I think protects both priorities, and that is investment 

in basic research. 

Jim Lewis, a former official with the Departments of State and 

Commerce, testified in this Committee last year that CFIUS reform 

should be paired with policies that drive innovation right here at 

home, and that means investing in research that helps our economy and our military. 

He said that our underinvestment in scientific research, quote, 

creates a self-imposed disadvantage in military and economic competition with China, and that maintaining our economic and military superiority requires investment, both by encouraging private 

sector investment and by Government spending in those areas like 

basic research where private sector spending is likely to be insufficient. 

So let me start with you, Dr. Hufbauer, again. Would more Government investment in scientific research support the core objectives of CFIUS by protecting strategic industries from foreign competition and maintaining our technological advantage? 

Mr. HUFBAUER. Yes. When you were out of the room, Senator, I 

gave a big plug for more investment, both by the Government and 

by private firms. 

Senator WARREN. I want to give you as many chances as possible. 

Mr. HUFBAUER. Well, in any event, yes, this is the big picture. 

What we do to stir innovation in this country is substantially more 

important than what we do to block outward technology going to 

China or Russia or these countries, and we should do more. We are 

not very good right now. 

Senator WARREN. That is very well stated. 

Anyone else like to weigh in on that? 

Mr. KUPOR. I would just like to underscore that doubly. Yeah, I 

think that is exactly right. There is no question that what we are 

up against, our foreign governments, who have very kind of centralized groups that they put together from a funding perspective, 

to attract talent, to build technologies—and there is a lot more we 

can do in the United States, no question. 

Senator WARREN. Anyone else want to add or just say yes, yes, 

so I can get a good record here? 

Mr. PADILLA. I would strongly echo the comments of my colleagues, Senator Warren. 

Senator WARREN. Good. 

Mr. MULVENON. I strongly agree with you, Senator, particularly 

given the, frankly, staggering scale of the investment that the Chinese government is putting into advanced technologies right now. 

Senator WARREN. Well, I really appreciate it, and thank you all 

on this. 

I think it is important to stand up to unfair commercial practices 

that harm our economy and threaten our national security, but I 

also think we need to make the necessary investments here at 

26 

home in our own research. That is what keeps us strong, and that 

is what gives us a true advantage. 

So thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. [Presiding.] Thank you. 

Senator SCOTT. Thank you, Chairman, and I want to say thank 

you to Senator Cornyn for being here this morning and his testimony and his continued efforts on this very important issue. 

South Carolina is the home of a number of incredible companies. 

We are one of the largest beneficiaries of foreign direct investment. 

There are 1,200 foreign-owned entities that have created or are 

currently employing 130,000 South Carolinians. Two-thousand fifteen alone saw $2.4 billion of foreign investment in South Carolina. 

2011, a few years earlier, was the height, the peak at $3.7 billion 

of FDI. 

Whether it is Bridgestone in Aiken, Honda in Florence, Mercedes 

in North Charleston, foreign companies are flocking to South Carolina, and this is not an ad for South Carolina, but who can blame 

them? We have world-class universities, a world-class skilled workforce, and an incredibly high quality of life. From the beaches of 

the low country to the mountains in upstate, South Carolina has 

something to offer for everybody. 

Our state would not be where it is, however, without foreign investment. That said, it is clear to me that some are taking advantage of our system of trade to the detriment of our Nation’s security. 

Last year, I joined with Senator Cornyn in introducing the Foreign Investment Risk Review Modernization Act. The bill expands 

the committee’s jurisdiction to include real estate purchases around 

military basis in light of the documented attempts by the Chinese 

to spy on our armed forces. 

We also updated the committee’s definition of critical technologies, just as a development of AI and advanced genetic engineering is taking on. 

So, Mr. Mulvenon, why is it so important for CFIUS to review 

these kinds of transactions and specifically those transactions 

around military bases that seem to be—land transactions around 

military bases that seems to be a sore spot as it relates to the Chinese trying to take advantage of opportunities to spy on our armed 

forces? 

Mr. MULVENON. Well, Senator, it is an excellent question. If you 

look at this raft of new laws that the Chinese have put out, one 

of the most striking parts of it is their view of extraterritoriality 

with respect to Chinese companies. 

And the extent to which the Chinese military and their security 

services can directly intervene in the operations of these companies 

to benefit Chinese national security, as an example, if a Chinese 

telecommunications company is operating a network operations 

center in the United States, according to their new national security law, state security personnel can enter that facility in Plano, 

Texas, for instance, and do lawful intercept of communications in 

that facility because they are treating that Chinese company as a 

domestic Chinese company rather than one operating on foreign 

soil. 

27 

That is why the decision to reject the purchase of that wind farm 

in the Pacific Northwest is particularly relevant because those facilities in that wind farm would have been able to collect emissions 

from a Navy electronic warfare facility that was just there on 

shore. And those emanations would have been able to reach those 

wind farm turbines. 

And so I think that that is the particular concern, that the ability of the Chinese government to impose upon these companies involved in the Chinese side of the transaction and to use those corporate facilities as intelligence collection platforms. 

Senator SCOTT. Thank you. 

Would you say that we have done our best to strike a proper balance between our economic concerns and our national security concerns within the bill? Do you think we have hit that sweet spot? 

Mr. MULVENON. I do think there is a good balance in the bill. I 

favor the bill because I believe it responds to very creative Chinese 

attempts to exploit gaps and weaknesses in our current system. 

I do not believe that the bill is a death knell for innovation or 

investment in the United States, but I believe that given the scale 

of Chinese technology espionage of the last 15 to 20 years, most of 

which has gone unchecked, that frankly we need to swing the pendulum a bit more in the other direction. 

Senator SCOTT. Thank you. 

With my remaining time, Mr. Padilla, I am appreciative of IBM’s 

growing presence in South Carolina as well. I read your letter expressing concerns regarding our efforts to reform CFIUS. Your 

claim that FIRRMA would subject hundreds of transactions unrelated to national security to a committee review, I want to hear you 

out and get your perspective as we share the goal of protecting our 

country. What specific changes do you envision for us to improve 

FIRRMA and to meet the mutually important goals? 

Mr. PADILLA. Thank you, Senator, and South Carolina is a great 

place to do business. 

Senator SCOTT. Yes, sir. 

Mr. PADILLA. So thank you for your support. 

My concern with the bill boils down basically to one section, and 

it is Section—it is in the definitions, Section B, Roman Numeral V, 

and it is the provision that would do what I have described as 

problematic. It would expand CFIUS from looking at inbound investment to looking at outbound transactions. And it has the language that I referred to in my testimony about the contribution of 

any technology or IP through any form whatsoever. 

I think if you change that provision and a couple of other definitions, much of what the rest of the bill does, IBM would support, 

including, by the way, expanding the jurisdiction of CFIUS to look 

at real estate transactions. That is one of the gaps that I identified 

that does need to be filled and needs to be filled by legislation. 

Senator SCOTT. Yes, sir. Thank you so much. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman, and thank you 

to the witnesses. 

28 

Before I ask the witnesses a question, I just wanted to address 

a question to you and the Ranking Member regarding another 

issue of national security, which is the North Korea situation. 

Under your bipartisan leadership, Mr. Chairman and Ranking 

Member, this Committee unanimously passed legislation, I think 

important legislation, to strengthen and better enforce sanctions 

against North Korea. 

We passed that unanimously out of Committee on November 7th. 

Since that time, on November 29th, North Korea tested another 

ICBM missile, and just 2 days ago, despite the environment with 

respect to the Olympics and some of the talks that are taking 

place, Secretary Tillerson said that ‘‘the threat is growing’’ because 

even as those talks take place, the North Koreans continue with 

their program. 

So my question, Mr. Chairman, could you give us an update on 

the status of this legislation which passed unanimously out of this 

Committee? I just want some assurances that we are going to get 

a vote on this as soon as possible in the full Senate. 

Chairman CRAPO. Yes, Senator Van Hollen. I will be glad to give 

you my update and then also turn to Senator Brown for his response as well. 

I remain solidly committed to moving this legislation not only on 

the Senate floor as quickly as we possibly can but also encouraging 

prompt house action, so that we can get the bill to the President’s 

desk. We do need to stand firmly and strongly with regard to the 

developments in North Korea, and I believe the legislation that you 

have helped to draft and bring forward is a very critical and important part of that. 

As you know, we have been running into some difficulty getting 

the necessary consents from the other Senators to move on the 

floor at this point in time. I am continuing to work with all of the 

Senators to get those roadblocks removed. 

As is often the case, the roadblocks do not necessarily relate to 

this legislation, but the politic of the body result in us having to 

resolve some other issues as well, which we are working on as recently as yesterday. We have had meetings on trying to move it. 

Although I cannot tell you yet that we have got everything 

ironed out in terms of the process to move forward, I can reassure 

you that I am committed firmly to doing it. 

Senator VAN HOLLEN. Thank you, and I appreciate that, Mr. 

Chairman. 

Senator BROWN. Thank you, Senator Hollen. I concur with the 

Chair and strongly support this bill and this vehicle and moving 

on the floor as quickly as we can, understanding the roadblocks 

that have been thrown in front of us. 

I spoke briefly at the White House last week with Secretary 

Tillerson. This is important for a whole lot of reasons, as you know, 

and we will work together to remove those roadblocks and work 

with you. And thanks for the work. You have really kept this going 

and kept this in front of us and in front of the public, so thank you. 

Senator VAN HOLLEN. Well, thank both of you, and Senator 

Toomey was here earlier. He said he would join me in full support 

of the effort, and thank you both of your effort. 

Chairman CRAPO. Thank you. 

29 

Senator VAN HOLLEN. I just think we need to move it as quickly 

as possible because I do not know of any real substantive on the 

merits objection, so thank you. 

Chairman CRAPO. You are right. Thank you. 

Senator VAN HOLLEN. And I do not have a lot of time left, but 

I do want to ask Mr. Padilla. You mentioned in your testimony 

when I was here earlier your concerns about essentially using 

CFIUS for U.S. exports as opposed to investments here in the 

United States, but you said with respect to investments here in the 

United States, you thought we could strengthen the current regime. 

What are some specific ideas? I am trying to look for some common ground here. We can figure out what we disagree on and what 

we agree on. 

Mr. PADILLA. Sure. 

Senator VAN HOLLEN. What is it that specifically we can change 

with respect to CFIUS? 

Mr. PADILLA. Well, one is the one that Senator Scott mentioned, 

the ability of CFIUS to look at real estate transactions that are in 

close proximity to Government or military installations. 

The second would be what I would call nonpassive but noncontrolling investments. Right now, CFIUS looks at—if you control 

an acquisition, it is not worried about passive investment, but what 

about that gray area in between, where, say, you get a board seat 

on a company, and you get access to certain controlled information, 

but you may not ‘‘control’’ the company. That, I think is an area 

for expansion. 

The other would be more process-related, and that is, I think 

there should be a senior Senate-confirmed official in every CFIUS 

agency who signs off on the transactions. I did that when I was at 

Commerce. I know some agencies do it. Others do not. And you 

need that senior-level review. Dubai Ports World showed that when 

you do not have that, you can have problems. 

Senator VAN HOLLEN. Got it. Appreciate that. 

The one area that we would not be able to address, the issue that 

Dr. Mulvenon raised earlier with respect to the kind of joint venture in China, where it amounted to a directed Chinese effort to 

gather more important information in some of these very innovative areas. 

So we are going to have to bridge your proposals where there 

was agreement on the U.S.-based investments with some kind 

of—— 

Mr. PADILLA. I think you can do that, Senator, through enhanced 

export controls, and there is already authority to do that. It is not 

being used to its full potential. 

Senator VAN HOLLEN. Dr. Mulvenon, would enhanced export controls be enough? Because I heard your earlier testimony. I think 

that was important that we have not—since 2011, I think you 

said—updated that. 

Mr. MULVENON. My concern—I can give you a scenario, a very 

simple one that is my main concern. A lot of export control cases 

and the technology control and mitigation plans that I have seen 

developed dealing with that, where you de-architect, where you dofeature a technology to take out the 30 percent of that technology 

30 

that is covered under the export control regime, the technology is 

then transferred. 

But then in the context of the joint venture, the engineers potentially who have that additional—that remaining 30 percent of the 

knowhow in their heads and then they are working on common 

problems within the joint venture and everyone is committed to 

making the joint venture a success, my concern is the export control system does not cover the bleed of that potential last 30 percent to re-architect it back into the technology after the export control system successfully had to de-architect it. And that is the dilemma about joint ventures and investment vehicles particularly 

located in China. 

Senator VAN HOLLEN. Let me just correct a factual point. The export control system actually does control that transfer of knowledge. There are deemed export laws on the books that say if you 

have something in your head and you are subject to U.S. jurisdiction, you cannot tell anybody about it without a license. 

Now, there may be issues about whether it is being followed or 

not, but that is an enforcement problem, not a legal jurisdiction 

problem. 

Mr. MULVENON. My only point, Senator, is that, of course, it falls 

under deemed exports, and we have a whole variety of deemed export problems, not the least of which is PRC nationals at U.S. universities operating equipment in laboratories that would have required a deemed export license if they were using them at a facility 

in China, but they are allowed to use them at a university in the 

United States in a hard science program. So there is a whole range 

of problems we have on the deemed export side, but the problem 

is the enforcement regime, a commercial enterprise in China of 

that last 30 percent, that there is no good mechanism for the enforcement other than the good will of the people involved in the enterprise. 

Senator VAN HOLLEN. Thank you. Thank you both. 

Chairman CRAPO. Senator Jones. 

Senator JONES. Thank you, Mr. Chairman, and I apologize for 

being late. Thanks to all the witnesses for being here. I have got 

just a basic—not in the weeds, but just kind of simple questions. 

I know, Mr. Kupor, you expressed some concern about a bill that 

might chill foreign investment, and it is my understanding that to 

date, there have been four transactions blocked by presidents as a 

result of the CFIUS review. Do you have any information of other 

potential deals or investments that might have been either withdrawn or otherwise scuttled because of the possibility of CFIUS review? 

Mr. KUPOR. No, not specific to the venture capital world. 

What my specific concern was, if we sweep up foreign investment 

in two areas—one is as limited partners in U.S. venture funds, 

then that would obviously chill the ability for non-U.S. investors to 

be able to participate and help us grow those technologies. 

And then the second specific question was if you have foreign direct investment into a venture capital company, a little bit to the 

point that was made to Mr. Padilla about kind of nonpassive investments, making sure that we are very clear about what the 

rules of the road there are, so that we understand at the outset, 

31 

if we are going to take money from a foreign investor, what are the 

things that we need to ensure so that information disclosure is appropriate and consistent with U.S. law. 

Senator JONES. OK. And does this bill address concerns about 

foreign investment, or can we make it better? 

Mr. KUPOR. The broader objectives of the bill, we are very comfortable with. Again, it is these specific areas where our concern is 

there is enough vagueness in the way it is written that it could 

chill this investment, and so our request would be for this institution to make sure that we define those more appropriately as part 

of the legislation process. 

Senator JONES. OK. Very good. 

What about green field deals, the ones that U.S. businesses—you 

know, that did not exist prior to the investment by foreign person 

or entity that seemed to be beyond the reach of CFIUS? Is that covered by any other rule, regulation, or something that is out there, 

or should we covered green field, the new deals that come in that 

are beyond CFIUS control right now? 

Mr. KUPOR. Just so I am clear, Senator, do you mean new deals 

as in kind of startup companies? 

Senator JONES. Yeah. That did not exist prior to the foreign investment coming in, that is part of a new deal. 

Mr. KUPOR. I think it is very reasonable that to the extent a U.S. 

company, a new startup is going to take money from a foreign investor, I think it is very reasonable for us to have a defined process 

to understand does CFIUS apply, and if so, are there things that 

the U.S. company can do to make sure that they are compliant 

with it, whether that be board seats, whether that be information 

disclosure, those types of things. 

Right now, at least our concerns, it is not well defined there, and 

so what a passive investor actually is, is a largely undefined term 

of the bill. 

Senator JONES. All right. 

Mr. Chairman, that is all I think I have. I am going to resist the 

urge to go toe-to-toe with Senator Scott about Alabama versus 

South Carolina, especially in light of the most recent football 

games. 

[Laughter.] 

Chairman CRAPO. Well, thank you very much, Senator Jones. 

Those are the kind of fun little battles that you can have on the 

sidelines, anyway. 

That concludes our questioning, and again, I want to thank our 

witnesses. You all have a wealth of knowledge. It is very obvious, 

and we have some very tricky and complicated issues to resolve 

here and roads to travel on this. But we must get it right, and we 

must do it well. 

And so I am sure that we will be in continued contact with you. 

As a matter of fact, it is a practice for Senators who did not get 

all the time they wanted or who did not have an opportunity to 

send some questions to you after the hearing. I would let those 

Senators know that those questions will be due by Thursday, January 25th, and then ask each of you, if you get additional questions 

following the hearing, if you would respond to them as quickly as 

you can. 

32 

Again, we appreciate your being here with us today and your attention to not only this legislation and the issues we are grappling 

with right now, but the overall set of issues of protecting our U.S. 

national security on these critical technologies. 

And with that, this hearing is adjourned. 

[Whereupon, at 11:18 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follows:] 

33 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

JANUARY 18, 2018 

Today the Committee will begin to evaluate the essential national security elements underlying a comprehensive proposal to reform the review process used by 

the Committee on Foreign Investment in the United States, or ‘CFIUS.’ 

Thank you to Senators Feinstein and Cornyn for their testimony on their bipartisan Foreign Investment Risk Review Modernization Act of 2017. 

This bill was first introduced by Senators Cornyn and Feinstein on November 8th 

to ‘modernize and strengthen CFIUS to more effectively guard against the risk to 

the national security of the United States posed by certain types of foreign investment.’ 

The Senators and their staff have worked over a year with concerned national security officials, the Treasury Department and various affected industry representatives. 

This comprehensive bill could be the first update to the body of CFIUS law in 

more than a decade. It would expand the reach of current law in a number of respects, while codifying some current administrative practices, and result in significant changes to jurisdiction, process and enforcement. 

A study produced for the Pentagon’s DIUx unit, which enlists startups to find solutions for the military’s most advanced technology-related requirements, is credited 

as being the catalyst for much of the impetus behind this CFIUS reform. 

The DIUx study highlights the problems arising from the fact that the U.S. Government does not currently monitor or restrict venture investing, nor stop potential 

transfers of what’s known variously as early stage, foundational or critical technology know-how, particularly with regard to certain types of Chinese investment 

in the United States. 

Today’s hearing also draws witnesses from one perspective of the private sector 

that is concerned not only with inbound investment, but also outbound transactions 

and from the venture capitalists that support American innovation. 

We are also joined by two long-time CFIUS analysts, with particular expertise in 

regard to China’s economy, trade practices and national security objectives. 

The Committee will benefit from learning more about the types and numbers of 

transactions that may be circumventing CFIUS and if any are believed to have already transferred critical technology. 

Many of us are interested in learning more about the ways China acquires U.S. 

technology and which improvements to the current system are warranted, particularly with regard to those investments that fall short of a foreign person’s actual 

ownership or control. 

We are also interested in the issue of emergent ‘critical technology,’ and the witnesses’ input on how it would be defined and applied by CFIUS. 

Additionally, we hope to hear more on the impact on U.S.-based multinational corporations as a result of CFIUS unilaterally restricting U.S. outward investment and 

associated technology, and whether U.S. companies would lose the ability to compete to allied companies or others in third-country markets. 

It is also important to study the question of necessary resources for any proposed 

reform to CFIUS. While CFIUS certified about 260 applications last year, the Committee looks forward to testimony on the changes contemplated by S. 2098 and their 

impact on the number of reviews, staff needs and resources going forward, and the 

impact that, in turn, would have on U.S. national security if the resources fell short. 

CFIUS is but one leg of a triad that secures national security related technology 

and the defense industrial base. The other two are the U.S. export control regime 

and Federal investment itself in research and development that keeps the industrial 

base resilient and innovative. 

The Committee must be mindful that in pursuing its mandate to assure the national security interests of the United States under CFIUS, that it not create a situation where it chills a wide range of commercial activities that have traditionally 

been controlled through export control laws. 

The United States is both the world’s largest foreign direct investor and beneficiary of foreign direct investment (FDI), and it ranks among the most favorable 

destinations for FDI which plays an important role in not only the U.S. economy, 

but specifically in the innovation of its industrial base, and therefore, its national 

security. 

It is clear that the current CFIUS system is itself under stress. Moving forward, 

the Committee must prepare itself to thoughtfully consider all of the recommendations made by S. 2098 and other CFIUS legislation, with the full awareness of the 

national security and economic stakes at the heart of it. 

34 

It is a new world. The laws, regulations and policies currently exercised by CFIUS 

may no longer protect U.S. technology from illicit transfers as they did in the past. 

We must work together, as a Congress, first to assure the national security of the 

United States by granting the Administration all the authority it needs to confront 

this growing threat, but then not exceed that grant to the detriment of maintaining 

a free, fair and open U.S. investment policy.’’ 

PREPARED STATEMENT OF SENATOR JOHN CORNYN 

JANUARY 18, 2018 

Introduction 

Thank you, Chairman Crapo and Ranking Member Brown, for convening this 

hearing to consider the proposal that Sen. Feinstein and I have put forward, the 

Foreign Investment Risk Review Modernization Act (FIRRMA). I have been honored 

to collaborate on this legislation with my esteemed colleague, Senator Feinstein, 

who I serve alongside on both the Judiciary and Intelligence Committees. 

We spent many months working on FIRRMA, and we wrestled with some tough 

issues in the process. Based in part on the information we are exposed to on the 

Intelligence Committee, we believe these issues are urgent and complicated ones. 

The bill we have put together takes a targeted approach to addressing the problem, 

while also aiming to not unnecessarily chill foreign direct investment. Before we get 

into addressing the merits of the bill, however, I’d like to take a moment to highlight the list of people who have endorsed this legislation. That includes current 

U.S. national security leaders such as Secretary of Defense James Mattis; Secretary 

of the Treasury Steven Mnuchin; Attorney General Jeff Sessions; and Admiral 

Harry Harris, Commander of U.S. Pacific Command. 

It includes former U.S. national security leaders such as former Secretaries of Defense Donald Rumsfeld and Bill Perry; former Secretary of Homeland Secretary Michael Chertoff; former Director of National Intelligence and Commander of U.S. Pacific Command, Admiral Dennis Blair; General Mike Hagee, former U.S. Marine 

Corps Commandant; General Edward Rice, former Vice Commander of Pacific Air 

Forces and Commander of U.S. Forces in Japan; and General J.D. Thurman, former 

Commander of U.S. Forces Korea and U.S. Army Forces Command. 

The list includes private industry players such as telecommunications giant, 

Ericsson, Inc.; Oracle Corporation; Trinity Industries; Amsted Rail Company, Inc.; 

the Greenbrier Companies, the 20 member companies of the American Iron and 

Steel Institute; and the 260-member Railway Supply Institute. It includes China experts such as Dr. Larry M. Wortzel, a member of the U.S.-China Economic and Security Review Commission. 

Mr. Chairman, with your indulgence, I encourage the Committee Members to review the comments of these supporters, and I ask consent to submit their letters 

and quotes for the record. I would also ask consent to submit for the record several 

summary and background documents on FIRRMA. 

Context: China 

The context for this legislation is important and relatively straight forward, and 

it’s China. I have always been an ardent supporter of free trade, and I strongly support foreign direct investment in our country, consistent with the protection of our 

national security. However, the not-always-peaceful rise of China has significantly 

altered the threat landscape in recent years. 

General Joe Dunford, Chairman of the Joint Chiefs of Staff, has said that by 

2025, China will pose the greatest threat to U.S. national security of any nation. 

And, last summer, CIA Director Mike Pompeo echoed that view, saying that, over 

the long-term, China represents a graver security risk than even Russia or Iran. 

It’s not just that China poses a threat, though, it’s that the kind of threat is unlike anything the United States has ever before faced—a powerful economy with coercive, state-driven industrial policies that distort and undermine the free market, 

married up with an aggressive military modernization and the intent to dominate 

its own region and potentially beyond. 

To close the technology gap with the United States and leap-frog ahead of us, 

China uses both legal and illegal means. One of these tools is investment, which 

China has weaponized in order to vacuum up U.S. industrial capabilities from 

American companies that focus on dual-use technologies. China seeks to turn our 

own technology and know-how against us in an effort to erase our national security 

advantage. 

In the modern era, the U.S. Military has always had a decisive technological advantage over our adversaries. This advantage is eroding before our very eyes, in 

35 

part because some U.S. companies have willingly helped China build industrial 

capabilities with clear national security applications. It is time to tackle the underlying problems head-on, while there is still time. 

If the trend continues for the foreseeable future, what might this mean for our 

national security? We would potentially have an adversary that can dominate the 

cyber realm, defeat our space weapons, and control the skies as well or better than 

the U.S. Military. Just imagine if China’s military was stronger, faster, and more 

lethal—such that China could unilaterally dictate which ships can transit through 

critical sea lanes in the Indo-Pacific region. Or, imagine if China could invade its 

democratic island neighbor Taiwan with impunity. The implications for the United 

States would be profound, both security-wise and economically. That is what the future likely holds, unless we act. 

I encourage each Member of this Committee to get a classified intelligence briefing on these issues. I and my staff would be happy to set those up for you, if helpful. 

Rationale and Key Objectives of FIRRMA 

As it currently stands, the jurisdiction of the Committee on Foreign Investment 

in the United States (CFIUS) is quite limited; it was designed for the last century, 

not the present one. China has found gaps in both the existing CFIUS process and 

the export control system and is exploiting them to the detriment of our national 

security, aiding its own military modernization and simultaneously weakening our 

U.S. defense industrial base. FIRRMA takes a measured and targeted approach to 

close these gaps, with changes that are laser-focused on national security concerns. 

Its provisions also reflect the need to preserve as much certainty and predictability 

for investors as possible. 

The rationale behind FIRRMA is simple: CFIUS should be able to review transactions that have, in effect, the same national security consequences as a traditional 

acquisition of a U.S. company or a piece of it. Foreign investors should not be able 

to circumvent CFIUS and get via the ‘‘back door’’ something they cannot get through 

the ‘‘front door.’’ 

To take advantage of these gaps and circumvent CFIUS review, China pressures 

U.S. companies into business arrangements such as joint ventures, coercing them 

into sharing their technology and know-how, enabling Chinese companies to acquire 

high-tech U.S. industrial capabilities and then replicate them on Chinese soil. 

China has also been able to exploit minority-position investments in early stage 

technology companies in places like Silicon Valley, California, or the ‘‘Silicon Hills’’ 

in Central Texas to gain access to intellectual property (IP), trade secrets, and key 

personnel. The Chinese have figured out which dual-use emerging technologies are 

still in the cradle, so to speak, and not yet subject to export controls. 

FIRRMA would expand the jurisdiction of CFIUS to cover some of these technology joint ventures and related arrangements and minority-position investments, 

as well as certain real estate transactions near military bases. 

China’s Civil-Military Integration Policies 

The problems are compounded by some of China’s carefully constructed policies 

on civil-military integration, under which China’s military suppliers and their activities are woven right into China’s commercial environment, unlike in our free 

market economy. To help modernize its military, China purposely blurs the lines between military and ostensibly commercial activities, combining its defense and civilian industrial bases. As such, U.S. technology and know-how transferred to ‘‘private’’ Chinese companies are likely to contribute directly and materially to China’s 

military modernization. 

Here, our export control system does not address the problem because the diversion of U.S. dual-use technologies is no longer just a risk, but a foregone conclusion. 

It is safe to assume that China will divert the fruits of any U.S. company’s cooperation with China to a military end-use. It would be foolhardy to think these capabilities are not making their way into the hands of the Chinese military. 

Further, U.S. companies doing business in China are entirely subject to the 

whims and dictates of the Chinese Communist Party. And, there is no real difference between a Chinese state-owned enterprise and a ‘‘private’’ Chinese firm, in 

terms of the national security risks that exist when a U.S. company partners with 

one. Rule of law in China is often illusory, and the Chinese Communist Party can 

easily exercise control over both types of companies, as American Enterprise Institute economist, Derek Scissors, has pointed out. 

There are also major concerns regarding U.S. data, especially the personally identifiable information (PII) of U.S. citizens, and export controls do not cover this. The 

Chinese Communist Party considers data to be a national strategic resource, so 

36 

China is basically nationalizing all data. Therefore, when U.S. companies are forced 

to on-shore data into China, it can have major U.S. national security implications. 

So, China is clearly not normal business environment for U.S. companies, and 

CFIUS modernization is the only way to effectively address the national security 

risks. 

Debunking Arguments by Opponents of FIRRMA 

I want to take a moment to debunk a few flawed arguments that some opponents 

of FIRRMA are making. 

First, they say this bill represents regulatory overreach, which really misses the 

point. I am typically one of the loudest Senate voices of opposition to unnecessary 

regulation, as my track record demonstrates. But, this is very different—CFIUS is 

not akin to something like the Consumer Financial Protection Bureau; instead, it 

is part of our national security apparatus. And, the Federal Government has no 

higher duty than to maintain our national security. 

Second, opponents claim that the export control system can already address these 

national security risks, and that this update to the CFIUS statute is unnecessary. 

Without question, export controls are vital in preventing transfers of technology that 

would be damaging to national security, and I am committed to maintaining a 

strong export control system. That is why under FIRRMA the export control system 

would remain the first line of defense when it comes to technology transfers. 

Export controls work reasonably well in many cases, but they have inherent limitations and are not enough by themselves. We need a second line of defense. The 

CFIUS process and the export control system are designed to be interactive and 

complementary, not mutually exclusive. To effectively address the full range of 

mounting national security risks regarding China’s activities, these systems must 

be robust, interoperable, and seamless. 

Our bill certainly does not duplicate the export control system. With transactions 

that represent pure technology transfers—basically, just the IP—FIRRMA leaves 

those to the export control system. It would only cover certain outbound U.S. transactions where they also include the transfer of know-how, which is the so-called ‘‘secret sauce.’’ These are the types of transactions that could help China acquire an 

industrial capability that is embodied in the U.S. business and accelerate China’s 

learning curve in areas of technology that are key to national security. 

What’s more, FIRRMA includes safeguards to ensure that, with its expanded authorities, CFIUS would review transactions only when necessary. CFIUS would define circumstances in which transactions could be excluded because other provisions 

of law, such as export controls, are adequate to address any national security risks. 

This same provision also leaves ample room for future export control reform by giving CFIUS the flexibility to exempt transactions in the future that are adequately 

addressed through the export control regime. 

CFIUS would also be authorized to create a ‘‘safe list’’ of certain allied countries, 

for which these new types of transactions would be exempt from review. This provision would drastically reduce the pool of transactions that would need CFIUS review, allowing CFIUS to focus its efforts on higher-risk deals. 

Third, opponents argue that FIRRMA will flood and distract CFIUS with transactions that were previously routine. This argument questions whether addressing 

real national security threats is worth the financial cost; I assure you it is. For the 

price of a single B–21 bomber, we can fund an updated CFIUS process and protect 

our key capabilities for several years. That is a down payment on long-term national 

security. I am fully committed to securing the necessary funding for implementation 

to ensure the process continues to run smoothly, because this has to be a national 

security priority right up there with training and equipping our troops and intelligence professionals. 

FIRRMA would also help provide additional resources, allowing CFIUS to charge 

modest filing fees and also submit a unified annual budget request covering all 

member agencies. And, the bill’s own provisions guard against an unfunded mandate, with the expansion only taking effect after CFIUS determines on its own that 

the necessary personnel and other resources are in place. FIRRMA also exempts 

outbound transactions that are done through ‘‘ordinary customer relationships,’’ ensuring harmless day-to-day activities do not have to be reviewed. 

Closing 

In closing, I also ask you to withhold judgment on FIRRMA until you have heard 

testimony from the Treasury Department and other key member agencies of CFIUS, 

who are on the front lines of this issue. 

While it is certainly appropriate to consider what the potential impacts of this bill 

could be on foreign investment, that should not be done in a vacuum. We must also 

37 

ask what the impacts on our national security will be if we do not take action on 

this. 

As you hear from opponents of FIRRMA, I urge you to assess their credibility on 

this issue by asking some basic questions about their activities in China: 

• What types of arrangements do you currently have in China with Chinese companies, what do you have planned for the near future, and is CFIUS able to 

review any of it? 

• What dual-use technology and know-how has your company transferred to 

China over the last decade, and what impact has that had on our country’s relative national security advantage? 

Increasingly, U.S. companies operating in China are being unfairly pressured into 

turning over valuable technology and know-how to Chinese companies, often as a 

condition of getting market access. Regardless, when U.S. companies engage in activities on Chinese soil that could negatively impact our national security, the Federal Government has a legitimate interest in being notified and afforded a chance 

to assess the national security risks. If CFIUS is not modernized to allow for this, 

we will continue to be in the dark here, and our national security will suffer. 

I urge you to advance this bill for the sake of our long-term national security, 

which is being damaged before our very eyes. The time to modernize CFIUS is now, 

and we must not allow ourselves to be the frog in the boiling pot of water, so to 

speak. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF SENATOR DIANNE FEINSTEIN 

JANUARY 18, 2018 

Chairman Crapo, Ranking Member Brown, thank you for inviting Senator Cornyn 

and me to your hearing to discuss the need for CFIUS reform. While I regretfully 

am unable to attend in person, I appreciate the opportunity to offer these written 

remarks. 

I would like to open my remarks by commending this Committee for taking up 

this issue and its interest in identifying ways we can strengthen the United States’ 

foreign investment process. We have heard for some time in the Intelligence Committee about the need for reform and the concerns regarding investment strategies 

other nations are employing to undermine our security. 

When I was Mayor of San Francisco, we had a sister city relationship with Shanghai. Through this relationship I grew close with Jiang Zemin, then the Mayor of 

Shanghai. Eventually, Jiang Zemin became the President of China. 

In this position, President Zemin prioritized efforts to privatize China’s economy 

and, ever since then, there has been significant economic growth and development, 

including in foreign investment. In fact, in 2016, Chinese entities invested a record 

$46 billion in the U.S. economy, triple what they invested the prior year and 10 

times what they invested 5 years ago. 

While this growth has done much to improve and grow China’s economy, it poses 

unique threats to United States national security. 

For example, Chinese companies, often backed by the Chinese government, have 

increasingly used investment in U.S. businesses to acquire sensitive new 

technologies and related know-how. Many of these technologies, such as artificial intelligence and robotics, have military applications, and gaining access to such cutting-edge technologies has been a key part of the Chinese government’s strategy to 

modernize its military. 

Other investments threaten our national security because they allow China to acquire land or buildings in strategically sensitive locations—like near U.S. military 

bases or other Federal facilities. It’s the job of the Committee on Foreign Investment 

in the United States—or CFIUS—to police foreign investment for national security 

concerns. 

However, the current law governing CFIUS, including the scope of its authority, 

has not been updated for over a decade. In that time, China and other countries 

have begun structuring their investments in U.S. businesses so that they can evade 

CFIUS jurisdiction. 

For example, many of these transactions take the form of joint ventures or minority-position investments, which CFIUS currently does not have the authority to 

reach. As a result, many transactions that pose potential national security concerns 

are going completely unreviewed. 

In short, CFIUS just doesn’t have the tools it needs to effectively screen foreign 

investments for these emerging national security threats. 

38 

The Foreign Investment Risk Review Modernization Act, which I am cosponsoring 

with Senator Cornyn, addresses these concerns. 

First, it provides CFIUS with a new arsenal of tools to prevent foreign companies 

from evading its jurisdiction. Under current law, CFIUS may review only foreign 

investments structured as mergers, acquisitions, or takeovers. But our bill expands 

this authority, allowing CFIUS to reach joint ventures, minority-position investments, certain leasehold arrangements, and other investments where a foreign company effectively gains control of a U.S. business, regardless of how the transaction 

is structured. 

Second, it streamlines the CFIUS filing process in an effort to encourage parties 

to notify CFIUS of potentially problematic transactions in the first place. 

Third, our bill mandates that CFIUS place a greater focus on the threat posed 

by the transfer of cutting-edge technologies to foreign countries such as China. By 

redefining the term ‘‘critical technologies’’ to include these emerging technologies, 

the bill allows CFIUS to take into account the full range of national security concerns potentially posed by transactions that result in technology transfers to foreign 

companies. 

Finally, our bill gives CFIUS additional flexibility to address national security 

concerns it identifies, granting CFIUS new authority to suspend transactions during 

its review and attach mitigation conditions to abandoned transactions when necessary. It also enhances CFIUS’s ability to monitor and enforce mitigation measures 

and to take action when parties fail to comply with such measures. 

In closing, I want to be clear, not all foreign investment causes national security 

concerns. Rather, the vast majority of such investment greatly benefits this country. 

Foreign investment has long been an important source of capital that supports U.S. 

innovation, economic growth, employment, and global competitiveness. 

However, we must do all we can to ensure we can differentiate between the two. 

That is why, for the past 10 months, Senator Cornyn and I have been working 

to craft a bill that strikes the right balance by giving CFIUS greater authority to 

address very real national security issues without unduly chilling foreign investment in the United States. By expanding CFIUS’s authority in a targeted manner 

and granting CFIUS the flexibility to further define that authority through regulations, this bill does just that. 

In fact, our bill has received support from several Federal stakeholders and members of the Intelligence Community. 

In short, I think this is a strong bill that fills crucial gaps in the current CFIUS 

process. I hope you will join Senator Cornyn and me in supporting the Foreign Investment Risk Review Modernization Act. 

PREPARED STATEMENT OF CHRISTOPHER PADILLA 

VICE PRESIDENT FOR GOVERNMENT AND REGULATORY AFFAIRS, IBM CORPORATION; 

AND FORMER UNDER SECRETARY FOR INTERNATIONAL TRADE, DEPARTMENT OF

COMMERCE

JANUARY 18, 2018 

Mr. Chairman, Senator Brown and Members of the Committee, thank you for inviting me to testify on this very important topic. 

My name is Christopher Padilla, and I am Vice President for Government and 

Regulatory Affairs at IBM. During the Administration of President George W. Bush, 

I served as Under Secretary of Commerce for International Trade, Assistant Secretary of Commerce for Export Administration, and in other senior roles in the Department of State and the Office of the United States Trade Representative. 

In my Government roles, I was a senior sub-Cabinet representative of the Commerce Department to the Committee on Foreign Investment in the United States 

(CFIUS), and I participated closely in inter-agency work to implement new Committee procedures after passage of the Foreign Investment and National Security 

Act of 2007 (FINSA). 

In my role at IBM, I have been involved in two large transactions that were reviewed by CFIUS, and am responsible for the company’s worldwide compliance with 

export controls. My comments today draw upon all these experiences. 

IBM shares Congress’ goal of strengthening America’s national security and appreciates the attempt to do so through the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA). CFIUS plays an important role in screening inbound foreign investments for potential national security risks, and it is necessary 

to periodically consider how this process can be improved. 

39 

1 2017 Global R&D Funding Forecast, R&D Magazine, Winter 2017 (available at: http://digital.rdmag.com/researchanddevelopment/2017lgloballrldlfundinglforecast?pg=1#pg1. 

In recent years, IBM has been through three reviews by CFIUS resulting in the 

successful conclusion of each transaction. From this experience, and from working 

on mitigation agreements when I served in Government, I can assure you that 

CFIUS has—and makes good use of—its authority to address potential security concerns about inbound foreign investment. 

Nevertheless, these experiences also revealed the need for improvements to the 

CFIUS process, including an expansion of the Committee’s jurisdiction to review certain types of inbound foreign investment transactions. FIRRMA contains some important reforms that IBM supports, such as: 

• Expanding the ability of CFIUS to review a limited number of nonpassive, but 

noncontrolling, investments; 

• CFIUS review of transactions when there are material changes in shareholder 

rights that expand control or access to information; 

• Expanding the ability of CFIUS to review certain real estate transactions when 

they are in close proximity to military or Government installations; 

• Taking steps to prevent the deliberate evasion of CFIUS review through complicated financial structures; 

• Expanding consultation with allies to coordinate and share information on the 

types of inbound investment to be scrutinized; 

• Ensuring there is a single Senate-confirmed appointee in each CFIUS agency 

with responsibility and accountability for investment reviews; and 

• Providing badly needed resources to the Committee. The CFIUS case load has 

increased significantly in recent years, and staff resources are already stretched 

thin. Even if Congress does not elect to give CFIUS an expanded mandate along 

the lines noted above, it should provide additional resources for CFIUS to do 

its job effectively. 

But the problem with FIRRMA, Mr. Chairman, and a principal reason the bill is 

controversial in the business community, is that it does something else: it would 

drastically expand the Committee’s mandate beyond examining inbound investment. 

For the first time, CFIUS would review outbound international commercial activity, 

including many thousands of nonsensitive IP and technology licensing transactions, 

even with friendly nations. 

This is a serious flaw in the bill that would duplicate and seriously undermine 

the existing U.S. export control regime, result in a flood of cases that would quickly 

overwhelm the Committee, and could constitute the most economically harmful imposition of unilateral trade restrictions by the United States in many decades. 

Effectively Protecting National Security 

As a company with long experience in foreign markets, IBM knows that controlling sensitive technology works best when accomplished internationally, in cooperation with America’s allies. 

Since the late 1940s, the United States has worked with other countries to stop 

sensitive technologies from falling into the wrong hands. Whether for dual-use goods 

like computers and electronics, or for chemicals, aeronautical products, missile technology or nuclear materials, Congress and the executive branch have recognized 

that to be effective, controls on technology should be multilateral. 

A multilateral approach is important for a simple reason: the United States does 

not have a monopoly on smart people, advanced technologies or investment in leading-edge R&D. Many emerging, dual-use critical technologies are available from 

other countries, and companies and governments around the world continue to drive 

the frontiers of technology through their own R&D investments. In fact, in 2017, 

three-fourths of total global investment in R&D was conducted outside of the United 

States.1

A system of technology controls that unilaterally stops American firms from doing 

business abroad will not advance national security interests if it simply hands markets to foreign competitors—many of whom are equally capable in advanced technologies. 

Yet this is precisely what FIRRMA would do. As drafted, the bill would impose 

a very onerous—and entirely unilateral—set of restrictions on outbound transactions of U.S. companies involving the ‘‘contribution’’ of technology, intellectual 

property, and associated support ‘‘through any type of arrangement.’’ 

40 

This is an exceptionally broad universe that would capture countless licensing, 

joint development, sales, research, and other transactions involving foreign persons, 

most of which involve technology that the U.S. Government previously determined 

did not warrant export control restrictions. For example: 

• Computer Hardware Sales & Service: U.S. firms sell computers, servers and 

systems worldwide, often paired with installation, maintenance and technical 

support services. This hardware and related support typically involves hundreds 

of patented or licensed technologies that would count as a ‘‘contribution’’ of intellectual property under FIRRMA. For example, the sale of a computer server 

with tech support to a bank in Singapore could come under CFIUS review. 

• Software Licensing: American technology companies license many types of 

software applications to both businesses and consumers. These applications 

often come with technical support that may include help desk, software updates, bug fixes and customization, all of which could involve patented or licensed technologies. For example, the licensing of a database application to a 

pharmaceutical company in Switzerland could be captured by FIRRMA. 

• Trademarks: U.S. companies routinely license this most basic form of intellectual property to partners around the world for marketing and business development purposes. This bill could potentially trigger a staggering volume of regulatory filings for basic trademark deals that could not be less threatening to 

national security. 

Saying that ‘‘ordinary customer relationships’’ are excluded would not solve this 

overreach, as that term, too, is undefined in FIRRMA and left entirely to the discretion of regulators. Neither is it comforting to be told that regulators will narrow the 

scope of covered outbound reviews after legislation is passed. Congress, not 

unelected officials, should decide how broad the CFIUS regulatory remit should be. 

More practically, by covering such an extraordinarily broad range of transactions, 

CFIUS would quickly be overwhelmed with new reviews, making it difficult for the 

Committee to focus adequately on real threats to national security. Under FIRRMA, 

the CFIUS workload would skyrocket from about 250 cases per year—already a 

record number—to many thousands or even tens of thousands, including review of 

many routine outbound investments and technology transactions hitherto seen as 

nonthreatening by the United States and its allies. 

Duplicative Regulation Would Harm U.S. Economic Competitiveness 

As drafted, FIRRMA would turn CFIUS into a supra-export control agency, duplicating long-standing U.S. export control regimes and unilaterally limiting the ability 

of American firms to do business around the world. Foreign competitors that do not 

face similar regulatory restrictions will seize global market opportunities while 

American companies are left watching from the sidelines. 

FIRRMA would give CFIUS extremely broad discretion to define the scope and 

reach of its regulatory authority, creating uncertainty and delays in investment decisions, contract negotiations and sales to foreign customers. 

This approach stands in stark contrast to the approach recently taken by Congress and the Administration to curtail duplicative bureaucracy and regulation, and 

could capture under Government control a very wide range of commercial activity. 

As a result, foreign customers and investors will look elsewhere, and over the long 

term this could drive innovation and the development of new critical technologies 

outside the United States. 

Protecting National Security Using Existing Authorities 

One of the issues driving FIRRMA is a concern that the current CFIUS and export control regimes do not address the issue of emerging critical technologies. 

There is some justification for this concern. However, there is existing regulatory 

authority to impose new technology controls quickly, while also ensuring that effective, long-term controls are established in partnership with U.S. allies. 

In 2012, a final rule was published (15 CFR 742.6(a)(7)) which established the 

‘‘0Y521’’ series of controls in the Export Administration Regulations (EAR). Under 

this little-used regulation, the Government can impose immediate controls on 

emerging or other technologies if deemed in the national security or foreign policy 

interests of the United States. Crucially, however, this regulation also envisions 

that the United States will simultaneously pursue effective multilateral controls for 

these technologies with U.S. allies. And such controls would be administered 

through the specific, parameter-based, and relatively transparent process of export 

licensing that the business community knows and can work with. 

So, mechanisms exist to quickly control sensitive technologies if necessary. But 

which technologies should be so controlled? This is where the picture gets murkier. 

41 

2 U.S. Government Accountability Office, ‘‘Critical Technologies: Agency Initiatives Address 

Some Weaknesses, But Additional Interagency Collaboration is Needed,’’ February 2015, GAO 

15–288. 3 Ibid., and reference is also made to a prior report: U.S. Government Accountability Office, 

‘‘Protecting Defense Technologies: DoD Assessment Needed to Determine Requirement for Critical 

Technologies List,’’ January 2013, GAO–13–157. 

Technology control lists are badly in need of a refresh, and Congress should consider using its oversight authority to make this happen. Under the Export Administration Act, Congress directed that regular list review should be a priority, and it 

established the Militarily Critical Technologies List (MCTL) in statute for just that 

purpose. Yet a GAO report in February 2015 found that ‘‘the MCTL was out-of-date 

and was no longer being published online, but that widespread requirements to 

know what is militarily critical remained.’’2 The same report found: 

According to DoD officials responsible for the MCTL, they are no longer updating the list, and are in the process of determining whether it is appropriate to seek relief from the requirement to maintain the list. They stated 

that alternatives to the MCTL are being employed based on the specific 

needs of each agency, and DoD offices are using the U.S. Munitions List, 

the Commerce Control List 600 Series, and the Industrial Base Technology 

List as alternatives to the MCTL.3

This is not how Congress thought the process should work. Using the control list 

to say what is militarily critical puts the cart before the horse. The intent was that 

the Defense Department, working with other agencies and with industry, would 

broadly identify general categories of militarily critical technologies (including 

emerging technologies of concern) in the MCTL, and then draw from that list to propose specific, parameter-based, and usually multilateral export controls. The controls would be implemented via the Commerce Control List, the U.S. Munitions List, 

and international control regimes such as COCOM (succeeded by the Wassenaar Arrangement), the Missile Technology Control Regime, the Australia Group, the Nuclear Suppliers Group, or others. Export controls have worked well to protect national security for decades, but the list review process has recently fallen into disuse. 

FIRRMA would not correct this problem, and in fact could make it worse. Under 

FIRRMA the Government would define some new, very vague and broad list of technologies of concern (even though it has failed to update technology lists already required under current law) and then wait until something pops up in a transaction 

review. The Government might then try to stop it—but only unilaterally, on a dealby-deal basis, and without regard to foreign availability, technology trends, or consultation with allies or industry. Casting an extraordinarily wide net over routine 

commercial transactions and applying, in effect, a regulatory test of ‘‘we’ll know it 

when we see it’’ would be deeply damaging to U.S. competitiveness, and, more important, could lead to a false sense of security. 

Instead, there should be a return to a more disciplined list review and multilateral export control process already mandated by law. Congress could act to ensure 

effective monitoring and control of emerging technologies through existing export 

regulations by requiring: 

1) regular, ongoing reviews of emerging technologies for potential national security risks as envisioned by the MCTL; 

2) full and robust application of existing EAR regulatory authorities to control 

these emerging technologies as necessary to protect national security; and 

3) annual reports to Congress with additional oversight to ensure that this export 

control process effectively addresses any risks. 

Conclusion 

In summary, IBM fully supports efforts to strengthen national security. We encourage Congress to find ways to do so without undermining U.S. economic competitiveness, or driving innovation and investment outside the United States. 

We believe that a refreshed technology control list, and the more robust use of 

existing export control authority ultimately leading to international controls, would 

be the most effective way to protect national security interests. 

While FIRRMA contains several important reforms to CFIUS, the Committee 

should continue to focus on inbound foreign investment in the United States, rather 

than reviewing outbound transactions that are low-risk or already covered under existing export control regulations. 

42 

Thank you for this opportunity to appear before the Committee. I would be 

pleased to answer any questions that you might have. 

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* This testimony is based on a blog posted on the Peterson Institute website: https://piie.com/ 

blogs/trade-investment-policy-watch/revamping-cfius-and-going-too-far. 1Theodore H. Moran and Lindsay Oldenski. 2013. Foreign Direct Investment in the United 

States: Benefits, Suspicions, and Risks with Special Attention to FDI from China. Policy Analyses in International Economics 100. Washington: Peterson Institute for International Economics. Also see Moran’s remarks at https://piie.com/system/files/documents/moran201702draftc.pdf. 2Gary Hufbauer, Theodore Moran, and Lindsay Oldenski. 2013. Outward Foreign Direct Investment and U.S. Exports, Jobs, and R&D: Implications for U.S. Policy. Policy Analyses in 

International Economics. Washington: Peterson Institute for International Economics. 3For a detailed background, see James K. Jackson, ‘‘The Committee on Foreign Investment 

in the United States (CFIUS),’’ Congressional Research Service, October 11, 2017. 4Michael Brown and Pavneet Singh, ‘‘China’s Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels 

of U.S. Innovation,’’ pre-Decisional draft, Defense Innovation Unit Experimental, February 2017. 

PREPARED STATEMENT OF GARY CLYDE HUFBAUER, PH.D. * 

REGINALD JONES SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL

ECONOMICS

JANUARY 18, 2018 

Thank you, Senator Crapo, and Members of the Committee for inviting me to testify concerning S. 2098, the Foreign Investment Risk Review Modernization Act of 

2017. My remarks will also touch on the House counterpart legislation, H.R. 4311, 

the Foreign Investment Risk Review Modernization Act of 2017. 

Two empirical facts provide the starting point for my remarks: 

• Inward foreign direct investment is almost always good for the United States. 

Foreign firms that invest in the United States—usually by acquiring U.S. 

firms—are typically top of their class abroad. They pay higher wages than average U.S. firms in the same industry, do more R&D and investment, and export 

a larger share of production.1 These facts are just as characteristic of Chinese 

firms as foreign firms based in Canada, Europe, or Japan. 

• Outward foreign direct investment also benefits the United States. Contrary to 

popular mythology, investment abroad does not, as a rule, take place at the expense of investment in the United States. Instead, U.S. firms that invest heavily abroad typically grow U.S. R&D faster, employ more workers, and produce 

and export more than comparable U.S. firms that invest little or nothing 

abroad.2

Given these facts, the burden of proof should rest on any Government action that 

seeks to restrict either inward or outward foreign direct investment (FDI). Historically, this is how the Committee on Foreign Investment in the United States 

(CFIUS) has operated.3

CFIUS was created in 1975 to screen foreign takeovers of U.S. firms for threats 

to U.S. national security. The focus was on inward investment and technology acquisition. Treasury chairs the CFIUS, ensuring that the economic benefits of inward 

foreign investment are given due consideration, a perspective buttressed by membership of Commerce and USTR, and observer status of OMB, CEA and the NEC. 

The CIA, NSC, and Defense fully inform other Committee members of the national security dimensions of any takeover. However, an influential draft report by 

Brown and Singh (February 2017) calls upon Congress to vest the power to block 

a transaction in just three Cabinet members, if they are all in accord: Defense, Justice and Homeland Security.4 In the past, less than five takeovers have been blocked 

by CFIUS, but somewhat more applications have been withdrawn prior to an adverse decision. The Brown and Singh draft report advocates more stringent screening, especially with respect to Chinese transactions. 

If enacted, the blend of S. 2098 and H.R. 4311 would significantly enlarge the 

CFIUS mandate to cover outward investment and technology transactions by U.S. 

firms. It would also cast a skeptical eye toward investment (inward or outward) 

from or to China, Russia, and a handful of other adversarial nations. 

The new and broader CFIUS mandate raises three inter-related concerns: 

• It could replace multilateral cooperation with unilateral restrictions on outward 

flows of ‘‘critical technology’’ to neutral or adversarial nations; 

• Thereby putting U.S.-based multinational corporations (MNCs) at a disadvantage, relative to MNCs based in Europe or Japan, when firms compete in thirdcountry markets; 

54 

5The president can restrict foreign investment and exports of goods and technology under the 

International Emergency Economic Powers Act (IEEPA) and other statutes. 

• And duplicate controls on the export of merchandise and technology established 

under the Export Administration Act with multilateral consultation. 

Using existing statutory authorities, President Trump could achieve the objectives 

sought by S. 2098 and H.R. 4311. If he wants to restrict U.S. investment and technology flows to China, Russia, Iran or any other country, Trump can do so without 

new legislation.5

The lasting impact of these bills will come when a different president resides in 

the White House. If the CFIUS mandate is expanded as the co-sponsors contemplate, the CFIUS caseload will burst from 200 annually to thousands. Necessarily, the bureaucracy will blossom with new administrative and technical capabilities. Once the bureaucracy is created, and reviews become a thrice-daily event, 

it will be almost impossible to turn the clock back to today’s open regime for investment and technology flows. 

Under S. 2098 and H.R. 4311, future decisions to block inward or outward foreign 

direct investment might not require the Government to carry the same burden of 

proof as historically has been the case. Hypothetical arguments that allowing an acquisition or transferring certain technology abroad might in the future endanger national security will have greater weight. Proof may not be needed that the acquisition or transfer currently endangers national security. The cited Brown and Singh 

draft report, if followed, makes the change in emphasis very clear. 

In fact, S. 2098 states, among other factors to be considered, ‘‘the potential effects 

of the covered transaction on United States international technological and industrial leadership in areas affecting national security, including whether the transaction is likely to reduce the technological and industrial advantage of the United 

States relative to any country of special concern.’’ 

Likewise, H.R. 4311, states, among factors to be considered, ‘‘whether the covered 

transaction is likely to contribute to the loss of or other adverse effects on technologies that provide a strategic national security advantage to the United States.’’ 

In plain language, both bills stipulate that any transaction that might enable a 

foreign country (especially an adversary) to narrow its gap with U.S. technological 

leadership should be viewed skeptically. This warning covers a great deal of ground, 

not only with respect to transactions with adversaries, but also with respect to 

transactions with neutrals or allies who might in turn convey the technology to adversaries. 

Chinese technology practices have generated the core motivation for S. 2098 and 

H.R. 3411. China has targeted several high-tech industries for massive upgrading 

in the next 10 years. Multiple Chinese means of accessing frontier U.S. technology 

in an effort to achieve this goal are spelled out in the Brown and Singh draft report. 

Among other means, China acquires venture capital stakes in nascent technologies 

and compels foreign firms to transfer technology to Chinese business partners as the 

‘‘price of admission’’ to the vast Chinese market. President Trump has directed the 

U.S. Trade Representative to launch an investigation of China’s technology transfer 

practices, under Section 301 of the Trade Act of 1974. Once the investigation is concluded, measures to block U.S. firms from acquiescing to Chinese demands could be 

Trump’s response, whether or not a blend of S. 2098 and H.R. 4311 passes Congress. 

Both S. 2098 and H.R. 4311 refer to China, Russia and other U.S. adversaries as 

‘‘countries of special concern’’ without naming them. CFIUS is directed to scrutinize 

inbound and outbound investment and technology transactions with these countries. 

At the same time, both S. 2098 and H.R. 4311 would allow CFIUS to exempt from 

review ‘‘covered transactions’’ with foreign firms based in countries that are U.S. 

military allies or have close security relations. 

Recommendations 

Legislation enacted by Congress should be narrowed to cover the immediate problem—transfer of critical technology to adversarial countries—without a massive expansion of the CFIUS mandate to review the bulk of outward foreign direct investment by U.S. firms. 

Narrowing could be accomplished with two provisions. First, require the Committee to identify ‘‘critical technologies’’, drawing on the resources of the intelligence 

community, the National Academy of Sciences, and the National Academy of Engineering. Second, require the Committee to name ‘‘countries of special concern’’. With 

these two provisions, the workload would be narrowed while U.S. firms that develop 

55 

critical technologies would be put on notice to seek CFIUS review prior to transferring the know-how to worrisome countries. 

CFIUS review of questionable transactions should take into consideration the 

availability of equivalent critical technology from firms not based in the United 

States. Obviously, if an end run through Europe or Japan has already occurred, 

there’s less reason to block the U.S. firm. If an end run is only a future possibility, 

then a decision to block the transaction should be accompanied by a forceful diplomatic demarche to U.S. friends and allies to establish a multilateral basis for the 

denial. 

Thank you for the opportunity to testify. 

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RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO 

FROM CHRISTOPHER PADILLA 

Q.1. Your written testimony expresses support for specific provisions of the bill and concerns about specific provisions. 

Please discuss the one critical provision of the bill that is essential to CFIUS’ protection of national security, and the one provision 

that you feel most needs further amendment to improve the bill. 

A.1. There are several gaps in the current authority of CFIUS that 

FIRRMA would effectively address. One such gap in the authority 

of the Committee to assess foreign investments in the United 

States for national security risks is real estate transactions near 

military bases or other sensitive Government facilities. FIRRMA 

appropriately fills this gap. In addition, the bill would give CFIUS 

expanded authority over certain inbound transactions that are less 

than controlling, but more than passive. Depending on the circumstances of such a noncontrolling, nonpassive investment, there 

may be national security issues posed that CFIUS should have the 

authority to address, and FIRRMA provides that. 

Conversely, Sec. 3(B)(v) of FIRRMA significantly expands the 

definition of ‘‘covered transaction,’’ giving CFIUS jurisdiction over 

outbound and overseas transactions. CFIUS should not govern, nor 

was it established to review, outbound transactions. This provision 

should be removed and amended with new language to appropriately reflect the need to enforce and update existing export control regulations to address relevant national security concerns in 

outbound and overseas transactions. The appropriate U.S. Government agencies that administer export controls should work closely 

with industry to identify and target critical technology controls, including updating lists of militarily critical technologies that should 

be considered for control. 

Q.2. Much of the concern surrounding this reform effort is about 

China acquiring cutting edge technology by stealing, reverse engineering, or investing in companies that develop the technology. 

Is there a way for emergent ‘‘critical’’ technologies to be appropriately defined and applied by CFIUS? 

A.2. Export control agencies have the technical expertise and established industry advisory groups to identify emergent critical technologies. Indeed, in the Export Administration Act, Congress 

mandated that the Department of Defense, in consultation with 

other agencies, should maintain a list of military critical technologies and update it to reflect technological advances. From that 

list, specific export controls and technology transfer limits would be 

drawn. But the MCTL has fallen into disuse. 

Rather than re-create the process in CFIUS, which lacks the expertise to perform this mission, technical experts in the export control agencies (including the Defense Department) are best situated 

68 

to make such an assessment. If improvements are needed in this 

process, then Congress should ensure that the export control agencies have the necessary resources, direction and focus to accomplish 

this task. Since new technologies are created continually, it is important that the effort to identify emergent critical technologies be 

ongoing and conducted with input from industry as well as academic experts. Ideally, technologies identified as requiring control 

would also be discussed with U.S. allies, to develop effective technology controls that are effective and internationally consistent. 

Q.2.a. Given the claim that China is acquiring the technology 

through various means, is reforming solely CFIUS statute and regulations the best way to solve the problem? 

A.2.a. No. As cited in my written testimony to the Committee, 

there are several ways in which CFIUS could be reformed through 

FIRRMA to address increased national security threats from certain inbound investment transactions. 

However, reform of and application of CFIUS alone is not the answer. There is existing authority in export control regulations to 

govern the transfer of technology to a foreign person, regardless of 

the type of transaction. Where appropriate, we should use existing 

export control regimes to identify, define, and control emerging 

technologies to prevent transfers of technology that could create a 

national security threat to the United States. Moreover, restricting 

access to U.S. technologies on a strictly unilateral basis, whether 

via export controls or CFIUS, will not ensure that the United 

States maintains its technological lead. Other countries are investing heavily in the development of new technologies, and the United 

States must seek an internationally effective export control regime, 

as well as increasing its own investments in research and development across a broad range of technologies to ensure that it will not 

be overtaken in the race for technological supremacy. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM CHRISTOPHER PADILLA 

Q.1. What other collaborative arrangements, including joint ventures, does IBM currently have in China with Chinese companies, 

and was CFIUS able to review those for risks to U.S. national security? 

A.1. All IBM technology partnerships in China are reviewed 

against the U.S. Government’s lists of restricted end-users and activities, including military end-users and proliferation screening. 

Additionally, our agreements mandate that all partner companies 

also comply with U.S. export control regulations, including restrictions on military end use. IBM’s activities in China comply with 

U.S. law and export control regulations, and, where necessary, 

have received approval from the necessary export licensing agencies. In addition, IBM has been through two CFIUS reviews for 

business transactions with Chinese companies, both of which were 

subject to a rigorous review and to risk mitigation agreements with 

appropriate U.S. Government agencies. 

69 

Q.2. What such arrangements do you have planned for the near future, and is CFIUS able to review any of those for risks to U.S. national security? 

A.2. While we cannot speculate on future business decisions, IBM 

believes that under existing CFIUS regulations and export control 

regulations, there is ample authority to govern and vet transactions for risks to national security. As mentioned in my testimony, IBM supports both the expansion of CFIUS jurisdiction over 

certain inbound investment transactions, as well as an updated 

and comprehensive review of militarily critical technologies that 

should be controlled for export from the United States. 

Q.2.a. What dual-use technology and know-how has IBM transferred to China over the last decade, and what impact do you think 

that has had on the United States’ relative technological advantage 

in areas of national security? 

A.2.a. Most IBM business transactions in China do not require an 

individual export license for either goods or technology, but in 

every transaction there is an obligation to comply with U.S. Export 

Administration Regulations as well as other relevant provisions of 

U.S. law. IBM business in China is fully compliant with U.S. law 

and export regulations. It should be noted that as a general matter 

of policy, U.S. export controls have long limited the transfer of 

technology to China to levels that are several generations behind 

current, cutting-edge technologies sold in other markets. 

Q.3. Over the past 10 years or so, has IBM been pressured by Chinese entities to turn over valuable technology and know-how to 

Chinese companies? If so, what types? 

A.3. No. Our business decisions in China are driven by commercial 

considerations and by the limits established in U.S. export control 

laws and regulations. 

Q.4. Has IBM been pressured by Chinese entities to oppose, criticize, or help defeat the Foreign Investment Risk Review Modernization Act? 

A.4. No. Even if we had been asked to do so, IBM would have refused. Our position on this legislation is not driven by pressure 

from foreign governments, but rather from our long experience in 

international markets and direct experience with both CFIUS reviews and U.S. export control laws. 

Q.5. When U.S. companies engage in activities on Chinese soil that 

could negatively impact the United States’ national security, do you 

believe the Federal Government has a legitimate interest in being 

notified and afforded a chance to assess the risks for U.S. national 

security? 

A.5. Yes. This is why the United States has a robust and multilateral export control system to review, assess, and mitigate legitimate risks to U.S. national security in commercial transactions 

overseas. 

70 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR 

MENENDEZ FROM CHRISTOPHER PADILLA 

Q.1. The legislation introduced by Senators Cornyn and Feinstein 

would add five new types of covered transactions to CFIUS’ purview and it would expand the definition of ‘‘critical technologies.’’ 

Q.1.a. Can you comment on whether CFIUS and its member agencies currently have sufficient resources to monitor foreign investment and acquisitions, review filed transactions, and conduct thorough reviews and investigations in the required time periods? 

A.1.a. There is a time lag in CFIUS’ issuance of public data about 

its work, but the available data indicate that there has been a material rise in the number of investigations conducted by CFIUS, 

which places stress on CFIUS resources. Substantially increasing 

the CFIUS workload, as we believe FIRRMA would do, would exacerbate this stress. 

Q.1.b. In your opinion, should any expansion of authority also include new resources, funding, and staffing for the panel? 

A.1.b. Yes. We agree with providing badly needed resources to the 

Committee. The CFIUS case load has increased significantly in recent years, and staff resources are already stretched thin. Even if 

Congress does not elect to give CFIUS an expanded mandate, it 

should provide additional resources for CFIUS to do its job and 

manage the existing case load effectively. 

Q.2. Last year, Ness Technologies, a New Jersey-based software 

engineering company, had agreed to be purchased by HNA, a Chinese conglomerate, on the condition that the transaction received 

approval from CFIUS. According to a lawsuit filed by Ness Technologies last month, that deal fell apart because HNA provided 

‘‘knowingly false, inconsistent, and misleading information’’ about 

its ownership and ties to the Chinese government during CFIUS’ 

review of the acquisition. HNA’s interests in the United States are 

certainly not limited to Ness Technologies—they’ve received CFIUS 

approval to purchase a California technology distributor and they 

are actively working to purchase a controlling stake in SkyBridge 

Capital, the investment firm owned by Anthony Scaramucci. This 

case raises important questions about the consequences of failing 

to provide accurate information or knowingly providing false information to CFIUS. 

Q.2.a. What steps should CFIUS take, if any, with regard to other 

transactions, either previously approved or pending approval, involving a party if CFIUS determines that party has misled the 

panel. For example, should the panel reopen previously cleared 

HNA transactions or modify their approach to reviewing pending 

transactions in light of this information? 

A.2.a. IBM cannot comment on the HNA transaction or other specific transactions in which IBM is not a party. However, generally 

speaking, IBM believes that it would be fully appropriate for 

CFIUS to reopen a review or investigation of a transaction if new 

evidence comes to light indicating that one or more of the parties 

provided false or misleading information during the CFIUS process. IBM believes that CFIUS currently has the authority to do so 

and supports efforts to further clarify this authority in FIRRMA. 

71 

Q.2.b. What should be the consequences of a party misleading or 

failing to provide accurate information to CFIUS? 

A.2.b. Transaction denial and unwinding of previously approved 

transactions are the current remedies. These remedies are severe 

but appropriate in a situation involving the provision of false or 

misleading information. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM CHRISTOPHER PADILLA 

Q.1. As we search for the most appropriate remedy to the very real 

problem of foreign countries gaining access to critical U.S. technologies, I’ve heard some suggest that we should be pursuing other 

changes instead of or in addition to the Committee on Foreign Investment in the United States (CFIUS) reform. 

Q.1.a. What role should export controls play in addressing this 

problem? 

Could the export control system be modified to address the concern that know how—not just intellectual property (IP)—is being 

transferred through joint ventures (JVs) and other partnerships? 

A.1.a. Existing U.S. export controls already address the issue of 

the transfer of ‘‘know how,’’ and they have done so for several decades. No modification to the export control system is necessary to 

address this concern. IBM believes that the real issue here is that 

the lists of controlled technology (which includes know how) have 

not kept pace with technological advances. The solution is for Congress to exercise its oversight authority to ensure that the U.S. export control agencies update their control lists so that they cover 

know how of concern from a national security perspective. The U.S. 

export control agencies already have the authority to make such 

updates immediately—they do not have to wait for the multilateral 

system to agree in order to do so. 

Q.1.b. Are there other fixes outside of CFIUS that should be considered to address this security challenge? 

A.1.b. The U.S. Export Administration Regulations (EAR) currently provide a mechanism to address concerns about access to 

emerging U.S. technologies. These regulations can already control 

for export emerging technologies that are dual-use (i.e., have both 

commercial and military applications) and that have potential national security implications. Specifically, 15 C.F.R. § 742.6(a)(7) 

establishes a mechanism for the Commerce Department, with concurrence from the Defense and State Departments, to designate for 

control items that are not currently covered by the multilateral export control regime (Wassenaar Arrangement) but nonetheless 

‘‘should be controlled for export because the items provide at least 

a significant military or intelligence advantage to the United 

States or for foreign policy reasons . . . ’’. Items designated under 

this unilateral export control mechanism (denoted by classification 

in the ECCN 0Y521 series) are controlled for export—and thus require an export license issued by the Commerce Department—to all 

countries except Canada (subject to limited exception). These items 

are temporarily controlled for export for one calendar year (subject 

to limited extension), providing time for the Commerce Department 

72 

to transition the items to a more permanent control status. Such 

a transition may occur upon an item’s incorporation into the multilateral export control regime, or it may occur upon a determination 

by the Commerce Department that a more permanent unilateral 

control is appropriate. The Commerce Department also has the option to de-control an item, if warranted. Four categories of items 

(including related technology) have been controlled for export in 

this manner since creation of the unilateral export control mechanism in 2012. Publicly available data indicate that eight licenses 

were issued with respect to such items in 2015. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM CHRISTOPHER PADILLA 

Gaming and Tourism 

Q.1. Foreign companies are beginning to expand into new industries, including gaming and tourism in the State of Nevada. As an 

example, foreign companies have been investing in and developing 

properties on the Las Vegas Strip. In the context of CFIUS reviews, hotel deals previously examined by the committee include 

the acquisition of New York’s Waldorf-Astoria Hotel by Anbang Insurance Group in 2014. 

Q.1.a. Given the importance of the tourism industry to Nevada, 

could you elaborate on the concerns associated with foreign acquisition of hotels or tourism companies in the United States? 

A.1.a. To the extent that the acquisition of hotels or tourism 

companies present a national security risk, CFIUS already has authority to review such transactions. As an information technology 

solutions company, I regret that IBM has no basis on which to comment further on any concerns that might exist within the hotel and 

tourism industry. 

Q.1.b. How does CFIUS review such transactions, and what is the 

Committee’s track record on approving or denying these types of 

deals? 

A.1.b. To the extent that the acquisition of hotels or tourism companies present a national security risk, CFIUS already has authority to review such transactions. However, IBM has no particular 

knowledge of the Committee’s track record in reviewing such cases. 

CFIUS, Mining and Proximity to Military Installations 

Q.2. In the last decade, CFIUS blocked three proposed investments 

in Nevada mining companies, citing national security concerns regarding the properties’ proximity to Fallon Naval Air Station. 

How does CFIUS traditionally review such acquisitions as it relates to their location relative to military installations? Is that 

process working effectively, or are there any areas needed for improvement? 

A.2. CFIUS currently has authority to review transactions that include real estate near military or other sensitive facilities when the 

transaction involves the acquisition of a U.S. business. However, 

current CFIUS authority does not extend to real estate transactions that include only undeveloped land and are not part of an 

73 

acquisition of a U.S. business. As I stated in my testimony, IBM 

supports the expansion of CFIUS to include such real estate transactions. 

Greenfield Acquisition 

Q.3. In Nevada, we are home to a number of technology startups, 

including drone technology. 

Can you discuss the potential positive and negative consequences 

of expanding CFIUS review to ‘‘greenfield’’ projects—or those involving startups? 

A.3. Foreign investment in ‘‘greenfield projects,’’ in which a foreign 

entity creates a totally new business in the United States from the 

ground up, generally represents a positive contribution to the U.S. 

economy, creating new jobs and boosting economic growth. To the 

extent that such new businesses are located in proximity to military installations or other sensitive facilities, expansion of CFIUS 

to cover pure real estate transactions would enable the Committee 

to address this concern. 

In the case of acquisitions or investments that result in foreign 

control of existing U.S. startup companies, CFIUS already has authority to review such transactions for national security risks, just 

as it has existing authority to review transactions that result in 

foreign control of any other U.S. business. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO 

FROM SCOTT KUPOR 

Q.1. Your written testimony expresses support for specific provisions of the bill and concerns about specific provisions. 

Please discuss the one critical provision of the bill that is essential to CFIUS’ protection of national security, and the one provision 

that you feel most needs further amendment to improve the bill. 

A.1. I support modernizing CFIUS to ensure it is reviewing appropriate transactions that safeguard our national security. However, 

the area of the Foreign Investment Risk Review Modernization Act 

(FIRRMA) most in need of improvement is clarity that a U.S. venture capital fund with foreign limited partners (i.e., those that invest into a fund, or ‘‘LPs’’) is not implicated. As my testimony details, FIRRMA is currently ambiguous as to whether a U.S. fund 

or its LPs must file with CFIUS if the fund might invest in critical 

technologies. FIRRMA should be changed to reflect that neither a 

U.S. fund nor its foreign LPs need to file with CFIUS when those 

LPs are passive investors. This means either clarifying that venture funds are outside the scope of the bill entirely, or affirmatively 

stating that foreign LPs must meet the passive investment test in 

FIRRMA. If the latter, the passive investment test must be broadened to reflect true passivity. For example, FIRRMA considers an 

investment to be nonpassive if the investor has access to ‘‘any nonpublic technical information in the possession of the United States 

business’’ or ‘‘any nontechnical information in the possession of the 

United States business that is not available to all investors.’’ These 

requirements are too narrow and do not reflect the reality of the 

marketplace where all shareholders are not subject to the same 

information at all times. Very early investors—such as angel 

74 

investors—may receive less detailed information about a company 

than other investors, but that is harmless in the vast majority of 

cases. 

Q.2.a. Much of the concern surrounding this reform effort is about 

China acquiring cutting edge technology by stealing, reverse engineering, or investing in companies that develop the technology. 

Is there a way for emergent ‘‘critical’’ technologies to be appropriately defined and applied by CFIUS? 

A.2.a. It is imperative that ‘‘critical’’ technologies be specifically defined so the scope of FIRRMA is well understood in the marketplace. Small, high-growth startups are among the most innovative 

companies in the world. Yet the ability of startups to navigate the 

regulatory landscape is limited as these companies are resourceconstrained. I strongly encourage Congress and CFIUS to keep 

these small companies in mind as they define critical technology. 

I believe Congress should set careful parameters on what critical 

technology means; otherwise, there will be a temptation by CFIUS 

to broaden the term out so far as to pull in vast areas of our economy. This will have the effect of potentially slowing down the innovation economy but also taking CFIUS’s eye off the areas of technology that could truly impact our national security. To highlight 

an example, artificial intelligence and machine learning technologies will likely find their way into nearly all companies over 

the next 5–10 years. We suspect they may be as ubiquitous as core 

infrastructure elements—such as a database—are today. Thus to 

legislate at that level of definition will not only curb the development of these critical technologies in the United States, but will 

also overwhelm the review cycle for CFIUS. Therefore, to the extent Congress seeks to define ‘‘critical’’ technologies, it should do so 

not only by limiting broad references to foundational technologies, 

but also by defining the key use cases for which the application of 

that technology could raise national defense or other core security 

issues. 

Q.2.b. Given the claim that China is acquiring the technology 

through various means, is reforming solely CFIUS statute and regulations the best way to solve the problem? 

A.2.b. Reforming CFIUS is not the sole way to combat technology 

theft and transfer. The Federal Government can combat technology 

theft by working closely with the startup, technology, and investor 

community to identify best practices and communication channels 

so industries and Government can work together on problem areas. 

More should be done by law enforcement to train the venture industry and startups on how to combat technology theft and how to 

garner the attention of law enforcement agencies. Ultimately, if foreign sovereign governments want to steal technology, they are 

much more likely to do so through formal espionage and theft efforts versus through investing in startup companies. In addition, 

law enforcement should educate startups on ways to deal with investors that may seek to transfer technology overseas. Finally, the 

Federal Government should make available more nondilutive capital for startups, whether through the Defense Advanced Research 

Projects Agency (DARPA), Advanced Research Projects Agency— 

Energy (ARPA–E), the Small Business Innovation Research (SBIR) 

75 

program, or other initiatives. Our industry would be glad to partner with all appropriate Federal agencies on these ideas. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR 

MENENDEZ FROM SCOTT KUPOR 

Q.1. The legislation introduced by Senators Cornyn and Feinstein 

would add five new types of covered transactions to CFIUS’ purview and it would expand the definition of ‘‘critical technologies.’’ 

Q.1.a. Can you comment on whether CFIUS and its member agencies currently have sufficient resources to monitor foreign investment and acquisitions, review filed transactions, and conduct thorough reviews and investigations in the required time periods? 

A.1.a. I am concerned about the workflow the Foreign Investment 

Risk Review Modernization Act (FIRRMA) would place on CFIUS 

if the covered transaction section is not changed to reflect the concerns I raised in my testimony. Specifically, as drafted FIRRMA is 

unclear on whether a U.S. venture fund with foreign limited partners (i.e., those that invest into a fund, or ‘‘LPs’’) must file with 

CFIUS, or whether those foreign LPs must file before investing in 

a fund. LPs do not have access to sensitive information that is the 

concern of FIRRMA, nor do they have any say in the investment 

decisions of venture funds. Therefore, FIRRMA should specifically 

indicate that U.S. venture funds and passive LPs are not covered 

by the legislation. If this ambiguity is not cleared up venture funds 

and foreign LPs will very likely file on a precautionary basis with 

CFIUS because they fear the consequences of not filing when the 

agency believes a filing was in order. An overabundance of precautionary filings by venture funds and LPs will not improve our 

national security, and in fact will diminish the benefit of FIRRMA, 

as CFIUS will be consumed with filings that were never a national 

security threat in the first place. 

Q.1.b. In your opinion, should any expansion of authority also include new resources, funding, and staffing for the panel? 

A.1.b. Yes, I believe if CFIUS’s mandate is expanded considerably 

the agency must receive additional resources to ensure it has the 

ability to be appropriately responsive to the business community. 

At the same time, I believe Congress should require that CFIUS 

abide by statutory time lines so the business community understands at the outset when it will receive a decision. 

Q.2. Last year, Ness Technologies, a New Jersey-based software 

engineering company, had agreed to be purchased by HNA, a Chinese conglomerate, on the condition that the transaction received 

approval from CFIUS. According to a lawsuit filed by Ness Technologies last month, that deal fell apart because HNA provided 

‘‘knowingly false, inconsistent, and misleading information’’ about 

its ownership and ties to the Chinese government during CFIUS’ 

review of the acquisition. HNA’s interests in the United States are 

certainly not limited to Ness Technologies—they’ve received CFIUS 

approval to purchase a California technology distributor and they 

are actively working to purchase a controlling stake in SkyBridge 

Capital, the investment firm owned by Anthony Scaramucci. This 

case raises important questions about the consequences of failing 

76 

to provide accurate information or knowingly providing false information to CFIUS. 

• What steps should CFIUS take, if any, with regard to other 

transactions, either previously approved or pending approval, 

involving a party if CFIUS determines that party has misled 

the panel. For example, should the panel reopen previously 

cleared HNA transactions or modify their approach to reviewing pending transactions in light of this information? 

• What should be the consequences of a party misleading or failing to provide accurate information to CFIUS? 

A.2. I appreciate the question, but I am not an expert on CFIUS’s 

current practices or any of its cases. However, I do believe that 

candor before Government agencies is of the utmost importance. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM SCOTT KUPOR 

Q.1. One of the strengths of the United States is our ability to foster innovation and develop new technologies. 

Would the filing times and additional fees associated with CFIUS 

jurisdiction significantly inhibit venture capital investments and 

hurt entrepreneurship by creating excessive barriers, such as prolonged wait times, to foreign investment? 

A.1. My testimony raised serious concerns about the impact of the 

Foreign Investment Risk Review Modernization Act (FIRRMA) on 

U.S. startups and venture capital funds. Presently, FIRRMA is ambiguous as to whether a U.S. venture fund with foreign limited 

partners (i.e., those that invest into a fund, or ‘‘LPs’’) must file with 

CFIUS if it might invest in critical technology, or whether the foreign LPs themselves must file with CFIUS. This is despite the fact 

that LPs are truly passive investors that have no access to sensitive information and no say in investment decisions. If FIRRMA 

is not clarified to remove U.S. venture funds and their LPs from 

the scope of the bill, I fear that it will have a lasting impact on 

foreign investment into venture funds. If foreign LPs must file with 

CFIUS when they invest in a venture fund—incurring wait times 

and additional cost in the process—that would be a substantial disincentive to investing in U.S. venture funds. As CFIUS reform proceeds, we must keep in mind that global investors have many 

choices these days. U.S. startups have seen their share of global 

venture investment drop from 90 percent 20 years ago, to 81 percent 10 years ago, to 53 percent last year. This means if we make 

it more burdensome to invest in U.S. startups via U.S. venture 

funds then we will continue to see a steady decline in our global 

share, which will further harm our competitiveness. 

Q.2. Would significantly expanding CFIUS’s jurisdiction negatively 

affect our investment relationship with Europe and other traditional economic and military allies, who could get caught up in an 

expansion of CFIUS’s scope of review? 

A.2. FIRRMA provides that CFIUS may exempt certain counties if 

the United States has in place a mutual defense treaty with that 

country and meets other factors. In my testimony, I expressed support for broadening that authority out to a wider group of U.S. 

77 

strategic partners. I am concerned that if exemptions are too narrow that FIRRMA will both burden key U.S. allies and inundate 

CFIUS with filings from countries that are not engaged in the type 

of activity with which FIRRMA is concerned. I encourage Congress 

to look at ways to ease burdens imposed on important U.S. allies 

during the CFIUS process. 

Q.3. Do you have a sense of how many increased CFIUS filings a 

bill like the Foreign Investment Risk Review Modernization Act 

could result in? Would CFIUS be able to handle the surge in reviews likely to result from a bill like FIRRMA? How much would 

it need to expand to handle such a caseload? 

A.3. A major factor impacting the increase of filings will be whether FIRRMA is improved to clarify that U.S. venture funds nor their 

LPs must file with CFIUS when those LPs are passive investors in 

the fund. As my previous answer indicates, unless FIRRMA is 

modified CFIUS will see many precautionary filings from U.S. venture funds and their foreign LPs that should not be within the 

scope of the bill. I strongly encourage Congress to narrow the scope 

of FIRRMA in line with my testimony to ensure CFIUS stays focused on the transactions that truly impact national security. But 

even if FIRRMA is modified, I believe CFIUS will need additional 

resources to be responsive to the considerable uptick in filings due 

to the bill. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM SCOTT KUPOR 

Gaming and Tourism 

Q.1. Foreign companies are beginning to expand into new industries, including gaming and tourism in the State of Nevada. As an 

example, foreign companies have been investing in and developing 

properties on the Las Vegas Strip. In the context of CFIUS reviews, hotel deals previously examined by the committee include 

the acquisition of New York’s Waldorf-Astoria Hotel by Anbang Insurance Group in 2014. 

Q.1.a. Given the importance of the tourism industry to Nevada, 

could you elaborate on the concerns associated with foreign acquisition of hotels or tourism companies in the United States? 

Q.1.b. How does CFIUS review such transactions, and what is the 

Committee’s track record on approving or denying these types of 

deals? 

A.1.a.–b. I appreciate the question, but unfortunately I am not able 

to answer specifically as the U.S. venture capital industry has had 

little experience in dealing with gaming-related applications of 

CFIUS. The reason for this is our industry invests in and partners 

with startups as they scale and grow, whereas CFIUS’s jurisdiction 

is over transactions where a foreign person is acquiring an existing 

U.S. entity. My testimony before the Banking Committee pertained 

to changes the Foreign Investment Risk Review Modernization Act 

(FIRRMA) proposes for CFIUS that might affect the venture capital industry and startups for the first time. In particular, I am 

concerned that FIRRMA is unclear on whether a U.S. venture fund 

78 

with foreign limited partners (i.e., those that invest into a fund, or 

‘‘LPs’’) must file with CFIUS, or whether those foreign LPs must 

file before investing in a fund. Neither of these options are prudent 

from a public policy perspective and both would be incredibly disruptive to venture firms. LPs in venture funds have no access to 

the sensitive information that is the concern of FIRRMA and have 

no role in the investment decisions of venture funds. Therefore, foreign LPs pose no national security risk to our Nation. But if 

FIRRMA is not clarified then CFIUS will be confronted with an 

abundance of precautionary filings from venture firms and their 

foreign LPs that distract the agency from investments that may 

pose a national security concern. These precautionary filings will 

be costly for venture funds and distract investors from partnering 

with startups to build and scale the company. 

CFIUS, Mining and Proximity to Military Installations 

Q.2. In the last decade, CFIUS blocked three proposed investments 

in Nevada mining companies, citing national security concerns regarding the properties’ proximity to Fallon Naval Air Station. 

How does CFIUS traditionally review such acquisitions as it relates to their location relative to military installations? Is that 

process working effectively, or are there any areas needed for improvement? 

A.2. As previously indicated, I am not an expert on CFIUS as it 

currently operates and unfortunately unable to answer this question. I would add, however, that focusing CFIUS review on investments in close proximity to military or other sensitive Government 

installations seems to be a much more appropriate use of CFIUS 

time than aiming to review passive investments in venture capital 

funds or venture-backed startups. 

Greenfield Acquisition 

Q.3. In Nevada, we are home to a number of technology startups, 

including drone technology. 

Can you discuss the potential positive and negative consequences 

of expanding CFIUS review to ‘‘greenfield’’ projects—or those involving startups? 

A.3. Nevada is home to a burgeoning startup ecosystem. From 2013–2017, 190 Nevada startups raised $640 million in venture 

funding. FIRRMA has the potential to significantly impact startups 

in Nevada and across the United States. One way startups can be 

affected is if FIRRMA enables CFIUS to unnecessarily scrutinize 

U.S. venture capital funds, which partners with many high-growth 

startups in Nevada. As my written testimony detailed, FIRRMA is 

ambiguous as to whether a U.S. venture fund with foreign LPs 

must file with CFIUS. U.S. venture funds have increasingly 

attracted foreign LPs, which benefits our country because that capital is then invested in U.S. startups. Scrutinizing the LPs of a venture fund is not a good use of CFIUS’s time, as these LPs do not 

have access to sensitive information that is the concern of FIRRMA 

and have no say in investment decisions of the fund. Our national 

security would be far better served by focusing on direct investments into U.S. companies where there might be an opportunity for 

a foreign person to extract sensitive information from a company. 

79 

Unless FIRRMA is clarified to remove venture funds from the 

ambit of the bill, foreign LPs will have a significant disincentive to 

invest capital in the United States via venture funds. This will in 

turn harm U.S. startups that need that capital to grow and prosper. Furthermore, the risk capital will simply flow to other nonU.S. startups, compromising not only job growth in the United 

States, but also making it more likely that long-term hubs of innovation will prosper in markets outside of the United States. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO 

FROM GARY CLYDE HUFBAUER 

Q.1. Your written testimony expresses support for specific provisions of the bill and concerns about specific provisions. 

Please discuss the one critical provision of the bill that is essential to CFIUS’ protection of national security, and the one provision 

that you feel most needs further amendment to improve the bill. 

A.1. The core is the protection of ‘‘critical technologies’’. The legislation should draw on America’s best brains—identified by the National Academy of Sciences and the National Academy of Engineering, with assistance from the National Security Agency and the 

Central Intelligence Agency—to define ‘‘critical technologies’’ for 

national security purposes. The definitions should be updated at 

least annually. 

Q.2. Much of the concern surrounding this reform effort is about 

China acquiring cutting edge technology by stealing, reverse engineering, or investing in companies that develop the technology. 

Q.2.a. Is there a way for emergent ‘‘critical’’ technologies to be appropriately defined and applied by CFIUS? 

A.2.a. The best that can be done for appropriate definition is to 

rely on the agencies named in my first answer. This should be a 

central mission of a standing committee of these agencies, with rotating members to obtain expertise on different technologies. 

Q.2.b. Given the claim that China is acquiring the technology 

through various means, is reforming solely CFIUS statute and regulations the best way to solve the problem? 

A.2.b. If the CFIUS mandate is enlarged by the pending legislation, it should be closely coordinated with the Export Administration authority. Ideally, the two committees/agencies would be 

merged, but that may be a step too far. In addition, the CIA’s resources and budgets should be expanded to keep abreast with Chinese technology through covert means. It would be worthwhile to 

ask the GAO for a report on ways to improve civil and criminal 

prosecution of espionage cases. Over the long term, the only way 

the United States will maintain technological superiority is 

through stepped up public and private investment in R&D. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR 

MENENDEZ FROM GARY CLYDE HUFBAUER 

Q.1. The legislation introduced by Senators Cornyn and Feinstein 

would add five new types of covered transactions to CFIUS’ purview and it would expand the definition of ‘‘critical technologies.’’ 

80 

• Can you comment on whether CFIUS and its member agencies 

currently have sufficient resources to monitor foreign investment and acquisitions, review filed transactions, and conduct 

thorough reviews and investigations in the required time periods? 

• In your opinion, should any expansion of authority also include 

new resources, funding, and staffing for the panel? 

A.1. In my view, CFIUS resources are hopelessly inadequate for 

the mandate envisaged by this legislation. Moreover, adequate 

funds must be provided for the NAS, the NAE, and the intelligence 

agencies. Unless the Congress is prepared to provide an annual 

budget in the range of $100 million, the new CFIUS cannot possibly discharge the broader mandate. 

Q.2. Last year, Ness Technologies, a New Jersey-based software 

engineering company, had agreed to be purchased by HNA, a Chinese conglomerate, on the condition that the transaction received 

approval from CFIUS. According to a lawsuit filed by Ness Technologies last month, that deal fell apart because HNA provided 

‘‘knowingly false, inconsistent, and misleading information’’ about 

its ownership and ties to the Chinese government during CFIUS’ 

review of the acquisition. HNA’s interests in the United States are 

certainly not limited to Ness Technologies—they’ve received CFIUS 

approval to purchase a California technology distributor and they 

are actively working to purchase a controlling stake in SkyBridge 

Capital, the investment firm owned by Anthony Scaramucci. This 

case raises important questions about the consequences of failing 

to provide accurate information or knowingly providing false information to CFIUS. 

• What steps should CFIUS take, if any, with regard to other 

transactions, either previously approved or pending approval, 

involving a party if CFIUS determines that party has misled 

the panel? For example, should the panel reopen previously 

cleared HNA transactions or modify their approach to reviewing pending transactions in light of this information? 

• What should be the consequences of a party misleading or failing to provide accurate information to CFIUS? 

A.2. When an acquiring company provides ‘‘knowingly false’’ information, it should be disqualified from any new U.S. acquisition for 

an extended period, say 5 years, and it should be fined quite heavily. But I would not require the company to divest past acquisitions 

not involving critical technology. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM GARY CLYDE HUFBAUER 

Q.1. Do you think that significantly expanding CFIUS’s jurisdiction 

and identifying ‘‘countries of particular concern’’ for purposes of 

CFIUS review could be considered a discriminatory measure by 

trade partners? 

What would be the potential consequences of doing so from a 

trade perspective? Should we expect retaliation? What forms could 

that retaliation take? 

81 

A.1. Yes, this would be regarded as a discriminatory measure, but 

GATT Article XXI permits discrimination for national security reasons. The target country would not have an actionable complaint 

in the WTO. But retaliation can certainly be expected, mainly in 

the form of denied acquisitions by U.S. firms. China and Russia already ‘‘wall off’’ vast sectors of their economies (mainly high-tech) 

from foreign acquisition, so I suspect that the retaliation would involve other sectors, such as finance, food, education, or health. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM GARY CLYDE HUFBAUER 

Gaming and Tourism 

Q.1. Foreign companies are beginning to expand into new industries, including gaming and tourism in the State of Nevada. As an 

example, foreign companies have been investing in and developing 

properties on the Las Vegas Strip. In the context of CFIUS reviews, hotel deals previously examined by the committee include 

the acquisition of New York’s Waldorf-Astoria Hotel by Anbang Insurance Group in 2014. 

• Given the importance of the tourism industry to Nevada, could 

you elaborate on the concerns associated with foreign acquisition of hotels or tourism companies in the United States? 

• How does CFIUS review such transactions, and what is the 

Committee’s track record on approving or denying these types 

of deals? 

A.1. In my opinion, the acquisition of U.S. hotel and tourism companies by foreign firms, including firms based in adversary nations 

exemplified by China and Russia, is not a national security concern. While I am not privy to the CFIUS track record on such M&A 

transactions, I am unaware of any transaction that was blocked. 

CFIUS, Mining and Proximity to Military Installations 

Q.2. In the last decade, CFIUS blocked three proposed investments 

in Nevada mining companies, citing national security concerns regarding the properties’ proximity to Fallon Naval Air Station. 

How does CFIUS traditionally review such acquisitions as it relates to their location relative to military installations? Is that 

process working effectively, or are there any areas needed for improvement? 

A.2. As a rock-hunter in the Fallon area, I know it well. So far as 

I know, the Pentagon alerts the CFIUS committee when an acquisition is proposed near a military installation. If the Pentagon objects to the acquisition, because of surveillance concerns, I believe 

the acquisition is routinely denied. 

Greenfield Acquisition 

Q.3. In Nevada, we are home to a number of technology startups, 

including drone technology. 

Can you discuss the potential positive and negative consequences 

of expanding CFIUS review to ‘‘greenfield’’ projects—or those involving startups? 

82 

A.3. In my view, greenfield projects create much less concern than 

M&A projects involving the same technology. However, there can 

be a legitimate worry that the greenfield will hire American personnel with technology expertise. In cases involving critical technology (as identified in my answer to Senator Crapo) it would be 

appropriate for CFIUS to monitor the personnel employed for a 

reasonable period (say 5 years). In appropriate cases, surveillance 

can be authorized by a FISA warrant. In exceptional cases, the foreign firm may be required to divest. 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO 

FROM JAMES MULVENON 

Q.1. Your written testimony expresses support for specific provisions of the bill and concerns about specific provisions. 

Please discuss the one critical provision of the bill that is essential to CFIUS’ protection of national security, and the one provision 

that you feel most needs further amendment to improve the bill. 

A.1. Did not respond by publication deadline. 

Q.2. Much of the concern surrounding this reform effort is about 

China acquiring cutting edge technology by stealing, reverse engineering, or investing in companies that develop the technology. 

• Is there a way for emergent ‘‘critical’’ technologies to be appropriately defined and applied by CFIUS? 

• Given the claim that China is acquiring the technology 

through various means, is reforming solely CFIUS statute and 

regulations the best way to solve the problem? 

A.2. Did not respond by publication deadline. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR 

MENENDEZ FROM JAMES MULVENON 

Q.1. The legislation introduced by Senators Cornyn and Feinstein 

would add five new types of covered transactions to CFIUS’ purview and it would expand the definition of ‘‘critical technologies.’’ 

• Can you comment on whether CFIUS and its member agencies 

currently have sufficient resources to monitor foreign investment and acquisitions, review filed transactions, and conduct 

thorough reviews and investigations in the required time periods? 

• In your opinion, should any expansion of authority also include 

new resources, funding, and staffing for the panel? 

A.1. Did not respond by publication deadline. 

Q.2. Last year, Ness Technologies, a New Jersey-based software 

engineering company, had agreed to be purchased by HNA, a Chinese conglomerate, on the condition that the transaction received 

approval from CFIUS. According to a lawsuit filed by Ness Technologies last month, that deal fell apart because HNA provided 

‘‘knowingly false, inconsistent, and misleading information’’ about 

its ownership and ties to the Chinese government during CFIUS’ 

review of the acquisition. HNA’s interests in the United States are 

certainly not limited to Ness Technologies—they’ve received CFIUS 

83 

approval to purchase a California technology distributor and they 

are actively working to purchase a controlling stake in SkyBridge 

Capital, the investment firm owned by Anthony Scaramucci. This 

case raises important questions about the consequences of failing 

to provide accurate information or knowingly providing false information to CFIUS. 

• What steps should CFIUS take, if any, with regard to other 

transactions, either previously approved or pending approval, 

involving a party if CFIUS determines that party has misled 

the panel. For example, should the panel reopen previously 

cleared HNA transactions or modify their approach to reviewing pending transactions in light of this information? 

• What should be the consequences of a party misleading or failing to provide accurate information to CFIUS? 

A.2. Did not respond by publication deadline. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM JAMES MULVENON 

Q.1. Can you describe how China legally obtains sensitive U.S. 

technologies through private companies and through joint ventures? 

A.1. Did not respond by publication deadline. 

Q.2. Many of the technologies that China, Russia, and others are 

seeking to obtain are at a very early stage, frequently before we 

know whether there is a military use for them. Many, such as artificial intelligence (AI) and robotics also have far ranging applications that extend well beyond military usage. 

How can we encourage investment in these early stage technologies—which is so critical to our U.S. economic dynamism— 

without giving access to competitor nations and weakening our economic advantage? 

A.2. Did not respond by publication deadline. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM JAMES MULVENON 

Gaming and Tourism 

Q.1. Foreign companies are beginning to expand into new industries, including gaming and tourism in the State of Nevada. As an 

example, foreign companies have been investing in and developing 

properties on the Las Vegas Strip. In the context of CFIUS reviews, hotel deals previously examined by the committee include 

the acquisition of New York’s Waldorf-Astoria Hotel by Anbang Insurance Group in 2014. 

• Given the importance of the tourism industry to Nevada, could 

you elaborate on the concerns associated with foreign acquisition of hotels or tourism companies in the United States? 

• How does CFIUS review such transactions, and what is the 

Committee’s track record on approving or denying these types 

of deals? 

A.1. Did not respond by publication deadline. 

84 

CFIUS, Mining and Proximity to Military Installations 

Q.2. In the last decade, CFIUS blocked three proposed investments 

in Nevada mining companies, citing national security concerns regarding the properties’ proximity to Fallon Naval Air Station. 

How does CFIUS traditionally review such acquisitions as it relates to their location relative to military installations? Is that 

process working effectively, or are there any areas needed for improvement? 

A.2. Did not respond by publication deadline. 

Greenfield Acquisition 

Q.3. In Nevada, we are home to a number of technology startups, 

including drone technology. 

Can you discuss the potential positive and negative consequences 

of expanding CFIUS review to ‘‘greenfield’’ projects—or those involving startups? 

A.3. Did not respond by publication deadline. 

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