49–010 

Calendar No. 474 

109TH CONGRESS REPORT " ! SENATE 2d Session 109–264 

FOREIGN INVESTMENT AND NATIONAL SECURITY ACT 

OF 2006 

JUNE 21, 2006.—Ordered to be printed 

Mr. SHELBY, from the Committee on Banking, Housing, and Urban 

Affairs, submitted the following 

R E P O R T 

[To accompany S. 3549] 

The Committee on Banking, Housing, and Urban Affairs, having 

had under consideration an original bill to amend the Defense Production Act of 1950, to strengthen Government review and oversight of foreign investment in the United States, to provide for enhanced Congressional oversight with respect thereto, and for other 

purposes, having considered the same, reports favorably thereon 

and recommends that the bill do pass. 

I. PURPOSE

Section 721 of the Defense Production Act, also known as the 

Exon-Florio Amendment (‘‘Exon-Florio’’), established a statutory 

framework for the United States Government to analyze foreign acquisitions, mergers, and takeovers (hereafter ‘‘transactions’’) of privately-owned entities within the United States to determine whether such transactions affect the national security of the United 

States. The Foreign Investment and National Security Act of 2006 

(hereafter ‘‘the Act’’) amends Section 721 for the purpose of 

strengthening the process by which such transactions are reviewed 

and, when warranted, investigated for national security concerns. 

In addition, the Act provides for a system of Congressional notification to address the absence of such notifications that characterized 

the previous history of the implementation of Section 721. 

II. BACKGROUND

In 1988, Section 721 of the Defense Production Act of 1950, 

Exon-Florio, was passed in response to congressional concerns 


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1 Cases previously reviewed by CFIUS that were the focus of increased congressional concern 

included the proposed acquisition of fiber optic network provider Global Crossing Ltd. by Singapore Technology and Hutchison Whampoa of Hong Kong; the purchase by a Chinese consortium 

of high-precision magnet manufacturer Magnequench, Inc.; and the proposed acquisition by a 

Netherlands company of Silicon Valley Group, a manufacturer of computer semiconductor lithography with military applications. 

about the impact on national security of certain foreign acquisitions 

of United States corporate entities. Exon-Florio established a process by which proposed foreign transactions would be analyzed by 

the Executive Branch of the United States Government (specifically, ‘‘the President or the President’s designee’’) to determine 

whether such transactions could pose a threat to U.S. national security. Historically, U.S. Presidents have assigned the responsibility for implementing Exon-Florio to the Committee on Foreign 

Investment in the United States (hereafter, CFIUS), a multi-agency organization established by Executive Order in 1975. ExonFlorio was amended in 1992 by the so-called ‘‘Byrd Amendment’’ to 

require that all foreign transactions involving a foreign government-owned or controlled entity would be subject to a more stringent analytical process. 

Since Exon-Florio went into effect, transactions have been reviewed in a highly secretive manner in part to prevent the public 

release of sensitive proprietary information. The practical effect of 

conducting transactional reviews in this manner, however, has 

made congressional oversight and public understanding of ExonFlorio extremely difficult. 

After a series of specific transactions brought to the forefront the 

difficulty in conducting thorough oversight by Congress of the security review process,1 on February 20, 2004, the chairman of the 

Committee on Banking, Housing, and Urban Affairs, Senator Shelby, and the Ranking Member of the Committee, Senator Sarbanes, 

requested a study by the Government Accountability Office of the 

implementation of Exon-Florio. That study was completed in September 2005. 

In its review of the Exon-Florio process, the GAO examined nine 

cases reviewed by CFIUS over a ten-year period, beginning in 

1995. Generally, GAO found that systemic weaknesses in implementation of Exon-Florio limited its effectiveness in protecting national security. Specifically, GAO concluded that weaknesses in implementation of Exon-Florio include application of excessively narrow definitions of ‘‘national security’’ by the Department of the 

Treasury and other CFIUS member-agencies; insufficient time during the pre-investigation review period for agencies with a national 

security mission to collect and analyze information on transactions, 

and consequent excessive reliance by CFIUS on the withdrawal of 

corporate filings from the review process in order to gain relief 

from statutory time constraints; and inappropriate standards for 

initiation of formal investigations due to concerns among some 

CFIUS member-agencies of the ramifications of a formal investigation for the preservation of the U.S. open investment policy. In addition, the GAO found that responsibility for implementation of 

Exon-Florio within the Office of International Investment in the 

Department of the Treasury has created a conflict between that office’s responsibility for facilitating international investment and its 

responsibility for reviewing foreign investment for national security 

concerns. 


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In its report, GAO offered a number of recommendations for congressional action. Those recommendations include more clearly delineating the factors to be considered in CFIUS reviews and investigations; addressing the time constraint problem by replacing the 

existing review and investigation phases with a single 75-day review period; and providing for greater transparency by reviewing 

the existing Exon-Florio provision pertaining to notifications to 

Congress. Finally, to address congressional concerns regarding the 

status of cases withdrawn from CFIUS review for the purpose of 

‘‘stopping the clock,’’ GAO recommended that Congress require the 

Secretary of the Treasury to establish more formal and stringent 

criteria to govern such withdrawals, including a process for tracking withdrawn cases and mandating time frames for refiling. 

While GAO was conducting its examination, but prior to the release of its findings, the China National Offshore Oil Corporation 

(CNOOC) announced on June 23, 2005, its intention to acquire U.S. 

energy company Unocal. This announcement resulted in increased 

congressional concerns regarding foreign acquisitions of U.S. energy companies. While the CNOOC bid was withdrawn prior to 

that proposed transaction’s review by CFIUS, the Chinese company’s bid led many members of Congress to raise questions about 

the transfer of ownership or control of certain sectors of the U.S. 

economy to foreign companies, especially to foreign companies located within or controlled by countries the governments of which 

might not be sympathetic to U.S. regional security interests. 

On October 6, 2005, the Committee on Banking, Housing, and 

Urban Affairs conducted a hearing into the findings of the GAO report. Testifying on behalf of GAO was Ms. Katherine Schinasi, 

Managing Director for Acquisition and Management, and Ann 

Calvaresi, director of Industrial Base Issues. Discussion between 

the GAO witnesses and Banking Committee members further highlighted deficiencies in implementation of Exon-Florio and the level 

of dissatisfaction with the lack of communication between CFIUS 

and the appropriate committees of Congress. That hearing was followed on October 20 by another hearing that allowed the Banking 

Committee to hear directly from many of the agencies that comprise CFIUS, including the Department of the Treasury, which has 

the lead role in implementing Exon-Florio. 

In late January 2006, congressional offices began to become 

aware of the proposed acquisition of terminal operations at a number of U.S. maritime ports by Dubai Ports World, an established 

port operator owned by the government of the Emirate of Dubai. 

Concern within Congress about a transaction that would transfer 

terminal operations to a Persian Gulf emirate through whose financial system funds had been transferred to the terrorists who carried out the September 11, 2001 attacks upon the United States, 

and that had been a central conduit for nuclear weapons components being smuggled to hostile regimes, provided further impetus 

for review of the manner in which foreign transactions are analyzed by CFIUS. In addition to concerns regarding the potential national security ramifications of the Dubai Ports World transaction, 

the Committee on Banking, Housing, and Urban Affairs viewed 

CFIUS’s handling of this case as indicative of the systemic problems discussed by the GAO. That the Secretaries and Deputy Secretaries of the Departments of the Treasury and Homeland SecuVerDate Aug 31 2005 05:25 Jun 24, 2006 Jkt 049010 PO 00000 Frm 00003 Fmt 6659 Sfmt 6602 E:\HR\OC\SR264.XXX SR264

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2There has been four such determinations during 2006, possibly at least in part due to increased public and congressional attention focused on the foreign acquisition review process in 

the wake of the CNOOC and Dubai Ports World cases. 

rity were ignorant of the Dubai Ports World transaction, combined 

with the fact that this transaction was not subjected to a formal 

investigation in violation of the Byrd Amendment, compounded 

congressional concerns about the nature of the underlying transaction. 

In response to continued concerns regarding implementation of 

Exon-Florio, on April 30, 2006, the Committee on Banking, Housing, and Urban Affairs met to consider legislation to reform the 

process by which foreign transactions are analyzed for potential national security ramifications. 

III. DESCRIPTION OF THE BILL

(a) Review of transactions involving foreign persons and governments 

Reviews of foreign transactions are currently conducted on a voluntary basis involving interested party submission to CFIUS of 

documentation pertaining to the transaction in question. CFIUS 

then has discretion with regard to whether to conduct a review of 

that transaction. This section would require CFIUS to review all 

transactions submitted by the persons or governments involved. 

The review would determine whether the transaction affected national security, and whether the transaction was required to be 

subjected to a formal investigation. 

The timing of reviews remains consistent with current law, 

meaning it must be concluded within 30 days of receipt of notification of the proposed or pending transaction. Should the review determine that the proposed or pending transaction could effect national security, then an investigation, discussed below, would be required. 

The issue of advancing from a review to a more formal investigation has historically carried negative commercial and political connotations. Specifically, industry and the Department of Treasury 

are concerned that subjecting a proposed or pending transaction to 

a formal investigation could adversely affect the public standing of 

the companies involved because the investigative phase of ExonFlorio is viewed as a sign of serious government reservations about 

the impact on national security of the transaction. That is one reason why, of the 470 cases notified to CFIUS during the period covered by the GAO study discussed above, only 8 were subjected to 

an investigation, which, under Exon-Florio, results in a presidential determination, although only two such determinations had 

actually been made through 2004, the period studied by GAO.2

Because of the convergence of the 30-day maximum time period 

that can be spent conducting a pre-investigation review and the reluctance of CFIUS to advance to the investigative stage, those federal agencies that are members of CFIUS and that have national 

security as their primary mission have occasionally found themselves with insufficient time to collect and analyze information on 

a proposed or pending transaction while simultaneously being subVerDate Aug 31 2005 05:25 Jun 24, 2006 Jkt 049010 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\SR264.XXX SR264

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3This situation was discussed, for example, by the Department of Justice in its comments to 

GAO: ‘‘The Department [of Justice] shares the concern expressed in the draft [GAO] report with 

respect to the constraints imposed by the time limits of the current process. In particular, gathering timely and fully-vetted input from the intelligence community is critical to a thorough and 

comprehensive national security assessment. Any potential extension of the time available to the 

participants for the collection and analysis of that information would be helpful.’’ United States 

Government Accountability Office, Defense Trade: Enhancements to the Implementation of ExonFlorio Could Strengthen the Law’s Effectiveness, GAO–05–686, September 2005, p.48. 4 In addition to the written comments of the Department of Justice included in Appendix II 

of the GAO report, the report notes that Department of Defense officials responsible for conducting security reviews under the authority of Exon-Florio have expressed concerns with the 

30-day restriction for pre-investigative reviews. According to these officials, the ‘‘30-day review’’

is, in practice, 23 days, as CFIUS guidelines ‘‘require member agencies to inform the Committee 

[CFIUS] of concerns by the 23rd day of the 30-day review * * *’’ See the GAO report cited 

above, p. 15. 

jected to pressures to make a determination without the need for 

a formal investigation.3

During its review of the implementation of Exon-Florio, the Committee on Banking, Housing, and Urban Affairs heard identical 

sentiments from other agencies with the protection of national security as their mandate. In fact, the only specific request made of 

the Committee during its review of Exon-Florio was for an option 

to extend the 30-day review period for those cases where additional 

time is needed to collect and analyze intelligence.4

With no option to extend the 30-day review period for complex 

cases, CFIUS has historically encouraged companies to withdraw 

their filings for the purpose of ‘‘stopping the clock’’ and allowing for 

additional review time without the burden of a statutorily-imposed 

time constraint. Withdrawn cases, however, may not be resubmitted in a timely manner, if at all, and such means of buying time 

are clearly inconsistent with the intent of the law. It is for this reason that the Committee included in its legislation a provision allowing for relief from the 30-day constraint in existing law by allowing for an additional period of up to 30 days for further review. 

In response to concerns expressed by some members of the Committee, by the Department of the Treasury, and by industry that 

an extension of time would be exploited by certain federal agencies 

to unnecessarily delay the conclusion of transactions, the Committee bill included a requirement that any extension for time beyond the initial 30-day period must be made by one of the top three 

officials of the agency making the request. To further address the 

concern about unwarranted requests for an extension of time, the 

Committee accepted a provision by Senator Hagel requiring the request to certify that credible evidence exists that a completed 

transaction would threaten to impair the national security. 

There has been concern expressed by some members of Congress 

that the avoidance of investigations for the purpose of insulating 

transactions from the negative connotations of an investigation has 

seriously undermined the law’s effectiveness. The Committee emphasizes, however, that requests for extensions beyond the initial 

30-day period should not be used to compensate for delinquent or 

otherwise unnecessarily delayed staff work. It is the Committee’s 

understanding that the number of cases for which such an extension would have been used in the past had it previously existed is 

very few. The Committee intends to monitor the use of the extension closely to ensure that is used solely for its intended purpose. 


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5This language states an investigation is required ‘‘in any instance in which an entity controlled by or acting on behalf of a foreign government seeks to engage in any merger, acquisition, or takeover which could result in control of a person engaged in interstate commerce in 

the United States that could affect the national security of the United States.’’ See 50 U.S.C. 

2170(b). 

(b) Investigations of certain transactions 

As discussed above, relatively few of the total number of cases 

submitted to CFIUS for review are subjected to an investigation, 

which under Exon-Florio must be completed within 45 days of initiation. One reason for this result is the desire of CFIUS to resolve 

cases without subjecting the corporate entities involved to the potentially negative connotations of a formal investigation. However, 

another reason that so few transactions have been investigated has 

been the failure of the Department of the Treasury to accurately 

interpret Section 2170(b), the so-called Byrd Amendment, named 

for the amendment’s author, Senator Robert Byrd.5

In introducing his amendment to Exon-Florio, Senator Robert 

Byrd stated on the Senate floor that it ‘‘requires that any acquisition that involves a company controlled by a foreign government 

* * * must automatically receive the more detailed 45-day investigation.’’ It was because the intent of Section 2170(b) of ExonFlorio was unambiguous that the Committee on Banking, Housing, 

and Urban Affairs was extremely disappointed to learn that the 

law was being interpreted by the Department of the Treasury at 

variance with that intent. This disparity became clear when Deputy Secretary of the Treasury Robert Kimmitt responded to questions by Senator Byrd, the author of the language, during a briefing of the Senate Armed Services Committee with the following 

comment: ‘‘We have a difference on opinion on the interpretation 

of your amendment.’’ As stated, the implication of the Department of the Treasury interpretation of Section 2170(b) was that numerous transactions 

that should have been investigated were not. Deputy Secretary 

Kimmitt testified before the Committee on Banking, Housing, and 

Urban Affairs that 92 cases involving foreign government-owned 

and controlled companies were reviewed by CFIUS during the Clinton and Bush Administrations. In total, from passage of the law in 

1988 to the end of 2005, only 25 cases had been subjected to an 

investigation. Of the 46 cases during the Clinton Administration 

that involved foreign government-owned and controlled companies, 

only one went to investigation. During the current Administration, 

as of March 2, 2006, only four out of 46 went to investigation. In 

short, noncompliance with Section 2170(b) has been a recurring 

problem since its passage. 

Because of concerns regarding noncompliance with the Byrd 

Amendment, concerns that reached their zenith during congressional debate surrounding the aborted Dubai Ports World transaction, the Committee-passed legislation includes language intended to eliminate any possible ambiguity regarding the requirement for an investigation in cases involving foreign governmentowned and/or controlled companies. 

Another result of the aborted Dubai Ports World transaction was 

increased congressional concerns regarding foreign ownership or 

control of critical infrastructure in the United States. To address 

these concerns, the Committee-passed legislation establishes a new 


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6 U.S. Government Accountability Office, Defense Trade: Enhancements to the Implementation 

of Exon-Florio Could Strengthen the Law’s Effectiveness, p.16. 

requirement for a mandatory investigation: transactions that would 

result in foreign control of ‘‘critical infrastructure.’’ Because of Department of the Treasury concerns that the term ‘‘critical infrastructure’’ would be interpreted too broadly, and 

would consequently have a ‘‘chilling’’ effect on foreign investment 

in the United States, the Committee emphasized, by restating the 

definition of ‘‘critical infrastructure’’ already existing in the Defense 

Production Act of 1950, that the term is to be defined as follows: 

‘‘any systems or assets, whether physical or cyber-based, 

so vital to the United States that the degradation or destruction of such systems or assets would have a debilitating impact on national security, including national economic security and national public health or safety.’’

The Committee adopted this definition, adapted from the Homeland Security Act of 2002 (Public Law 107–296) to create a realistic 

standard by which CFIUS should measure the potential impact on 

national security of individual assets that are the subject of proposed or pending transactions. The Department of the Treasury 

should coordinate with the Department of Homeland Security on 

establishing parameters designed to exclude from mandatory investigation commercial assets that clearly do not by themselves constitute critical infrastructure. 

The Committee accepted an amendment by Senator Hagel to exempt from mandatory investigation critical infrastructure cases 

that were resolved through mitigation agreements between parties 

to the transaction and the federal government. 

Finally, the Committee-passed legislation requires an investigation in any case in which a review by CFIUS produces sufficient 

information to indicate the possibility of an impairment to national 

security after taking into account the factors listed in subsection (g) 

of the bill. 

The Committee-passed legislation retains the requirement that 

investigations conducted pursuant to this Act be concluded within 

45 days. 

As discussed above, some members of the Committee are concerned about the use of withdrawals by CFIUS to manipulate the 

statutory time lines in Exon-Florio. While withdrawals can be appropriate when the parties to a proposed or pending transaction decide to undertake a fundamental modification to the nature of the 

transaction, such as divestment from the U.S. company of a division or sector involved in sensitive work, there are scenarios where 

the use of withdrawals cause concern. Additionally, in its report on 

implementation of Exon-Florio, GAO noted that companies involved 

in acquisitions that have been completed prior to conclusion of a 

CFIUS review have little incentive to resolve outstanding issues 

and refile their paperwork with CFIUS.6

To address concerns about the resolution of cases withdrawn 

from an investigation within the initial 45-day time line, the underlying bill presented to the Committee included a proposal to require the completion of investigations even when cases are withdrawn from consideration, and that CFIUS continue to monitor the 

status of withdrawn cases. The Committee accepted an amendment 


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by Senator Dodd that mandates that resubmitted cases be investigated for another period of up to 45 days. Review of the justification for the withdrawal must be included in the new investigation. 

The purpose of this provision is to ensure that CFIUS remains 

engaged in monitoring unresolved transactions that are withdrawn 

either to avoid bumping up against Exon-Florio time lines or so 

that the parties involved can negotiate divestiture agreements or 

other mitigating measures. It is not the Committee’s intent that 

the number of cases forwarded to the President for his or her decision be unnecessarily increased. As the law will, upon passage of 

this Act, continue to require a presidential determination upon the 

formal conclusion of an investigation, the Committee recognizes 

that it may be necessary to require that withdrawn cases be resubmitted for an investigation, but that, should the investigation of a 

resubmitted case be terminated on account of the successful negotiation of an assurances or mitigation agreement, than it will not 

be required to be submitted to the President for final determination. 

To address concerns that mandatory refiling of documentation 

from withdrawn cases would extend to transactions that were terminated by mutual consent of the parties involved, a manager’s 

amendment sponsored by the chairman and ranking member of the 

Committee, adopted by unanimous consent, included a provision 

that excludes such cases from the requirement. 

One of the more difficult issues for the Committee to resolve involved the question of whether companies should be required to file 

with CFIUS for consideration of proposed or pending transactions. 

Currently and historically, Exon-Florio has operated as a voluntary 

regime with the parties to a transaction responsible for filing with 

CFIUS or risking more draconian actions by the President of the 

United States under the International Emergency Economic Powers Act (Public Law 95–223; 50 U.S.C. 1701). The Committee was 

reluctant to change the existing system to require mandatory filings. However, the manager’s amendment did include a provision 

submitted by Senator Dodd that cases involving persons controlled 

by or acting on behalf of foreign governments should in part be excluded from the voluntary filing regime. For this reason, the Committee-passed legislation requires that such persons involved in acquiring, merging with, or otherwise seeking to take control of U.S. 

critical infrastructure relating to national security give written notice of such transaction to CFIUS. 

(c) Committee on foreign investment in the United States 

The Committee on Foreign Investment in the United States was 

established in 1975 by President Gerald Ford under Executive 

Order 11858. Exon-Florio, passed in 1988, did not designate a specific entity responsible for its implementation, stating instead that 

‘‘the President or the President’s designee’’ shall be responsible. 

President Ronald Reagan designated CFIUS, under Executive 

Order 12661, as the designee responsible for the new statute’s implementation. 

Due to its origins within the Executive Branch, the Committee 

on Banking, Housing, and Urban Affairs of the Senate and the 

Committee on Financial Services of the House of Representatives 

lacked appropriate oversight of its activities, although individual 


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components have testified before the Committees when requested 

to do so. As part of its effort to strengthen the national security review process and establish a system of congressional oversight, the 

Committee-passed legislation formally codifies CFIUS in statute, 

and designates the Secretary of Defense as Vice Chair alongside 

the Secretary of the Treasury’s continued responsibility as Chairman. In establishing CFIUS in statute, the Committee also designates the Director of National Intelligence as a formal member. 

Concerns have been expressed by members of the Committee that 

the role of the intelligence community in supporting CFIUS’s activities has been inadequate. GAO analysts briefed Committee staff 

on January 13, 2005, that such support has been problematic to secure and that CIA involvement in the review process was not always timely. By designating the Director of National Intelligence 

(DNI) as a formal member of CFIUS, the role of the intelligence 

community, especially the Central Intelligence Agency, in supporting CFIUS reviews and investigations will be strengthened. 

In addition to designating the DNI as a formal member of 

CFIUS, a proposal by Senator Dodd included in the manager’s 

amendment establishes a requirement for a formal intelligence review for each transaction brought before CFIUS, to be distributed 

within CFIUS no later than 15 days after the start of the review 

period. This requirement will ensure that each component member 

of CFIUS receives at least preliminary intelligence support. The 

provisions further require that the intelligence community continue 

to provide intelligence support to the review and investigation processes. 

Among concerns that arose in the aftermath of the aborted Dubai 

Ports World transaction and the role of CFIUS in reviewing that 

transaction was the lack of adequate accountability. The Committee-passed legislation includes a requirement that will have the 

effect of codifying current practice: formally designating a lead 

agency for each transaction submitted for review. By formally designating a lead agency for each review and investigation, accountable agencies will be more easily identified. 

The Committee-passed legislation includes a requirement for the 

Chairman and Vice Chairman of CFIUS, in consultation with the 

Secretaries of State and Energy, the Chairman of the Nuclear Regulatory Commission, and the DNI to develop a system for assessing 

and classifying countries according to specified criteria: individual 

country’s adherence to nonproliferation control regimes and relationship to the United States, as well as the risk a certain country 

poses that militarily-sensitive technologies could be diverted from 

the country in question or that it constitutes a risk for 

transhipment of such technologies. CFIUS would then be required 

to consider a country’s assessment and classification in determining 

the risk to national security of a proposed or pending transaction. 

A country classification system is not new. Since 1996, such a 

system has been used in determining licensing requirements for 

the export of high performance computers. It was implemented 

through 15 C.F.R. 740.7. This system categorized countries into, 

originally, four tiers. President Clinton later combined tiers one 

and two. Tier 1 included NATO and Major non-NATO allies. Tier 

4 includes terrorist-supporting countries, including Iran, North 

Korea, Sudan, and Syria. Tier 3 constitutes the key category for 


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7 U.S. Government Accountability Office, Defense Trade: Enhancements to the Implementation 

of Exon-Florio Could Strengthen the Law’s Effectiveness, p. 14. 

purposes of determining national security considerations. Such 

countries as Russia, China and Pakistan are included in Tier 3. 

Because implementation of Exon-Florio involves regulating the 

transfer to foreign companies and countries of potentially sensitive 

technologies and assets, the export control review process applied 

to high performance computers could be appropriately applied to 

CFIUS-conducted reviews and investigations. A country classification system would ensure that each country in which a foreign 

company is based is considered in a broad context involving geopolitical realities that may otherwise not be considered. 

Because of concerns expressed by the Departments of State and 

the Treasury that a country classification system can prove harmful to diplomatic and economic relationships, the Committee-passed 

language provides for that system’s protection from public disclosure, including exempting it from Freedom of Information Act filings. The Committee emphasizes that agency concerns that a system for classifying foreign countries according to national security 

criteria could undermine U.S. foreign relations continue to be fully 

considered. It is the Committee’s intent that bilateral relationships, 

adherence to nonproliferation regimes, and the risk of diversion of 

militarily-sensitive technologies to third parties be addressed in all 

CFIUS reviews and investigations. The Committee remains sensitive to agency concerns about the ramifications of a classifications 

system for maintaining certain relationships. 

In addressing the reluctance of Treasury and other members of 

CFIUS concerned with protecting the U.S. open investment policy 

to subject transactions to an investigation, the GAO report notes 

the possible conflict involved in having the same departmental personnel responsible for protecting that policy also being responsible 

for implementing Exon-Florio national security reviews.7 GAO reported that employees of the Department of Treasury responsible 

for implementation of Exon-Florio are also responsible for facilitating foreign direct investment in the United States and ensuring 

that U.S. companies enjoy reciprocal access in foreign markets. 

The United States open investment policy is vital to U.S. economic growth. Concerns exist, however, that the dual responsibilities imposed upon these employees has resulted in a tilt among 

such employees in the direction of protection of that policy at the 

expense of the national security mandate. For this reason, the 

Committee-passed legislation includes a provision requiring that 

Department of the Treasury employees responsible for implementation of Exon-Florio have no other function within the department. 

(d) Action by the President 

Existing Presidential authorities under Exon-Florio, and the 

President’s responsibilities therein, remain adequate to ensure the 

protection of the United States from threats to national security resulting from foreign transactions of U.S. entities. For this reason, 

the Committee recommends minimal modifications to existing law 

in this area. 


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(e) Findings of the President 

This section restates the President’s authority to block a proposed or pending transaction if he/she believes that credible evidence exists that the completed transaction could result in a threat 

to the national security. It further restates existing language specifying that the authorities provided under this Act are to be applied 

when other provisions of law, particularly the International Emergency Economic Powers Act, are inadequate to protect the national 

security. 

(f) Actions and findings nonreviewable 

Restates existing Exon-Florio provision protecting Presidential 

decisions resulting from exercise of the authorities of this Act from 

judicial review. 

(g) Factors to be considered 

Exon-Florio incorporates a number of factors that CFIUS may 

consider when assessing the potential national security implications of a proposed or pending transaction. These factors include 

the domestic production needed for projected national defense requirements and related defense industrial base issues and the potential effects of the proposed or pending transaction on a foreign 

country that supports terrorism or that poses a risk of proliferating 

militarily-sensitive technologies, particularly those used in the 

manufacture of weapons of mass destruction. 

The existing list of factors that ‘‘may’’ be considered in a national 

security review is both inadequate to ensure a thorough review in 

the post-Cold War environment of national security affairs and presents an unacceptable risk that key issues will not be addressed. 

For this reason, the Committee-passed legislation expands the list 

of factors to be considered and makes consideration of the factors 

mandatory for all reviews. The additions to the list of factors to be 

considered reflects the Committee’s belief that critical infrastructure assets need to be carefully scrutinized when they become the 

object of a foreign acquisition. 

In addition, while nonproliferation of weapons of mass destruction remains one of the country’s most pressing priorities, greater 

attention must be provided to foreign transactions that could result 

in a foreign military’s ability to improve its conventional capabilities through acquisition of U.S. technologies. United States regional 

interests can be threatened by improvements in the technological 

capability of foreign militaries with which the United States may 

be at odds. Consequently, the Committee included in the list of factors that ‘‘shall’’ be considered the potential effect of the proposed 

transaction on U.S. regional security concerns and on ‘‘the long 

term projection of United States requirements for sources of energy 

and other critical resources and materials.’’

Finally, as discussed earlier, in reviewing the acquisition of the 

Peninsular and Oriental Steam Navigation Company by Dubai 

Ports World, CFIUS failed to adequately consider such risks as the 

region in which the United Arab Emirates exists, including its 

proximity to Iran, the recent history of Pakistani scientist Abdul 

Qadeer Khan exploiting Dubai’s lax regulatory environment to 

smuggle nuclear components to Iran, Libya and North Korea, and 


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Dubai’s role as a central conduit for funding of the terrorist attacks 

of September 11, 2001. 

In order to address these concerns, the list of factors to be considered will henceforth require individual countries to be analyzed in 

a more comprehensive manner, including the risk each country 

poses that militarily-sensitive technologies can or are diverted from 

or through it, as well as the relationship of the country in which 

the foreign company is based with the United States. The Department of State has expressed concerns about the political sensitivity 

of a classification system, as would be required to be established 

under the bill initially brought before the Committee. Consequently, language was added during the Committee’s consideration of the bill stipulating that the classification system would be 

for internal use of the U.S. Government only and would not be 

made available to the public. The classification metric would be exempt from Freedom of Information Act requests. 

(h) Confidentiality of information 

The Committee-passed legislation includes Exon-Florio’s alreadyexisting provision for protection of proprietary or business-sensitive 

information submitted to CFIUS as part of a review. 

Some foreign transactions could have a substantial effect on the 

communities in which the U.S. entity is located. With the increased 

emphasis on critical infrastructure assets mandated by the Committee-passed legislation, state-level officials may need to be made 

aware, on certain occasions, of a pending transaction that could adversely affect their state. During public debate over the Dubai 

Ports World transaction, for instance, numerous state-level officials 

expressed concern about the lack of information they had been provided regarding a transaction that affected large facilities in their 

states. For this reason, the manager’s amendment passed by the 

Committee during its consideration of the legislation includes a 

provision by Senator Menendez that requires CFIUS to notify governors of states containing critical infrastructure assets that are 

the subject of a foreign transaction for the purpose of discussing potential security concerns that may arise from the transaction. The 

legislation includes further language designed to ensure that confidentiality provisions in the Act that apply to the federal government apply equally to governors who are so notified. 

(i) Additional assurances 

The Committee-passed bill seeks to address the ability of the 

agencies that comprise CFIUS to adequately enforce agreements 

negotiated between those agencies and the parties to a transaction 

subject to CFIUS oversight. Mitigation agreements are the basis 

for the resolution of many of the transactions reviewed by CFIUS. 

They involve commitments made by the parties to the government, 

usually with the agency or agencies within CFIUS with the most 

direct interest in the nature of the transaction, and adherence to 

the terms of the agreement is very important to the national security of the United States. The legal status of mitigation agreements 

is not addressed in Exon-Florio, although, as stated, many cases involving national security concerns reviewed by CFIUS are resolved 

through such agreements. 


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The government’s ability to monitor and enforce mitigation 

agreements lies at the heart of the process by which transactions 

are examined for national security concerns. Consequently, the 

legal status of mitigation agreements needs to be more clearly established in statute. For this reason, the Committee-passed legislation includes provisions intended to ensure that mitigation agreements constitute legally-binding contracts enforceable in the 

United States District Court for the District of Columbia, and that 

agreements are monitored and enforced in the appropriate manner. 

Assurances are to be treated by the courts as a continuing covenant of the persons on whose behalf a CFIUS assessment was 

sought, and continuing observance of the assurances is to be a condition of any CFIUS or Presidential determination. The assurances 

are to be embodied in a written agreement executed by the foreign 

person or government on whose behalf the CFIUS assessment was 

sought, and executed by either the Chairman or Vice Chairman of 

CFIUS on behalf of the United States. Compliance with the assurances is to be monitored, and may be investigated, in the same 

manner as violation of a civil statute. Enforcement remedies include injunctive relief, damages, and divestiture. 

(j) Notice and reports to Congress 

The Committee has been very concerned about the absence of 

communications between it and CFIUS over the span of many 

years. The requirement in Exon-Florio for a Quadrennial Report on 

foreign acquisition strategies that could harm national security and 

industrial espionage activities directed against U.S. companies has 

been ignored, with only one report having been produced since the 

requirement was mandated in 1992. 

Throughout its history, and especially since the passage of ExonFlorio, CFIUS has operated largely without oversight by Congress. 

It is important to recognize and acknowledge the highly sensitive 

nature of the commercial transactions that come before CFIUS for 

review. However, Congress, through the appropriate committees of 

jurisdiction, must have greater insight into CFIUS’s activities than 

heretofore has been the case. Congressional committees with jurisdiction for vital matters of national security routinely enjoy far 

greater access to sensitive information as a part of their legitimate 

oversight roles, including issues pertaining to nuclear weapons and 

covert operations. The issues before CFIUS, while sensitive, do not 

rise to the level of government conduct that warrants the level of 

opaqueness that has been characteristic of CFIUS activities to 

date. 

A routine process of notifications from CFIUS to the key committees with oversight of its activities—in effect, the Senate Banking, 

Housing, and Urban Affairs and House Financial Services Committees—is warranted given both the Congress’s legitimate oversight 

role and the questionable resolution of several cases that have 

come before CFIUS. It is for these reasons that the Committee recommends a requirement that CFIUS report to the appropriate committees of Congress on the status of transactions that come before 

it. These notifications should include measures taken to resolve 

cases where mitigation agreements are employed. In addition, the 

Committee recommends that chairmen and ranking members of 

committees with direct oversight of CFIUS-member agencies that 


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are designated by the chairman and vice chairman of CFIUS as the 

lead agencies for individual reviews and investigations should be 

notified on the same basis as the principal committees of jurisdiction. 

One of the more troubling aspects to the outcome of the Dubai 

Ports World transaction was the absence of accountable officials at 

high levels of lead agencies, particularly troubling given both the 

scale and magnitude of the transaction and the fact that it involved 

a Persian Gulf country with a long history as a hub for smuggling 

activities. Key officials in the Departments of the Treasury and 

Homeland Security were not aware of the transaction until after 

the wide-spread expression of concern by many members of Congress and the public threw the transaction’s survival into jeopardy. 

To address that situation, the Committee recommends a provision 

requiring that notifications to Congress upon completion of reviews 

and investigations be certified by the chairman and vice chairman 

of CFIUS as well as the head of the agency designated by the 

chairman and vice chairman as lead for each individual transaction. 

Finally, the Committee recommends that the existing requirement for a quadrennial report be replaced with a requirement for 

an annual report that will serve as the basis for annual oversight 

hearings to be carried out by the Committee on Banking, Housing, 

and Urban Affairs of the Senate and the Committee on Financial 

Services of the House of Representatives. The annual report will 

include a discussion of the potential impact on the U.S. defense industrial base and critical infrastructure of foreign acquisitions during the preceding year; an aggregative analysis of such acquisitions 

for the preceding four years; a prospective discussion of risks to national security and U.S. critical infrastructure that CFIUS anticipates adopting for the following year; an evaluation of whether 

there is credible evidence of a coordinated strategy by one or more 

countries or companies to acquire U.S. critical infrastructure or 

companies involved in research, development or production of critical technologies; and an evaluation of whether there are industrial 

espionage activities directed by foreign governments against private U.S. companies. Such a report is essential to ensure that Congress is fully informed on the level and nature of foreign direct investment in the United States, not for the purpose of impeding 

such investment, which is essential for U.S. economic growth, but 

for the purpose of both exercising its constitutionally-directed role 

of regulating commerce with foreign nations and to ensure that legitimate national security considerations are not sacrificed in deference to purely commercial considerations. 

The requirement for an annual report is based on the same logic 

as the biannual Humphrey-Hawkins Act and Foreign Exchange 

Rate Reports submitted to the Committee by the Federal Reserve 

Board and the Department of the Treasury respectively. The discipline of producing an annual report should enable CFIUS to focus 

on the strategies that should underlie its day-to-day operations and 

provide as well a basis for public information about CFIUS. 

The Committee recognizes, as emphasized above, the legitimate 

requirement for the protection of sensitive proprietary information. 

Foreign direct investment in the United States is a vital component 

of U.S. economic well-being, and protection of business-sensitive inVerDate Aug 31 2005 05:25 Jun 24, 2006 Jkt 049010 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 E:\HR\OC\SR264.XXX SR264

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formation used in the course of CFIUS deliberations, as well as the 

intelligence provided in support of a CFIUS review, should be protected from unwarranted or unauthorized disclosure. For this reason, the intelligence assessments that comprise part of the annual 

report can be provided in classified form, with an unclassified 

version made publicly available. Similarly, the Committee-passed 

legislation includes a provision authorizing the chairman of CFIUS, 

in consultation with the vice chairman, to withhold from public release proprietary information as the chairperson deems appropriate. 

IV. HEARINGS

The Committee on Banking, Housing, and Urban Affairs held the 

following public hearings on implementation of the Exon-Florio 

Amendment to the Defense Production Act of 1950: 

October 6, 2005 A Review of the CFIUS Process for Implementing the Exon-Florio Amendment 

Witnesses: Ms. Katherine Schinasi, Managing Director, 

Acquisition and Sourcing Management, U.S. Government 

Accountability Office; Ms. Ann Calvarese Barr, Director, 

Industrial Base Issues, U.S. Government Accountability 

Office. 

October 20, 2005 Implementation of the Exon-Florio Amendment and the Committee on Foreign Investment in the United 

States 

Witnesses: The Honorable James Inhofe, United States 

Senator; The Honorable Robert Kimmitt, Deputy Secretary, Department of the Treasury; The Honorable David 

A. Sampson, Deputy Secretary, Department of Commerce; 

The Honorable Stewart Baker, Assistant Secretary for Policy, Department of Homeland Security; The Honorable E. 

Anthony Wayne, Assistant Secretary for Economic and 

Business Affairs, Department of State; The Honorable 

Robert McCallum, Acting Deputy General, Department of 

Justice; The Honorable Peter Flory, Assistant Secretary for 

International Security Policy, Department of Defense; The 

Honorable Patrick A. Mulloy, U.S.-China Economic and 

Security Review Commission; Mr. David Marchick, Partner, Covington and Burling. 

March 2, 2006, Continued Examination of Implementation of 

the Exon-Florio Amendment: Focus on Dubai Ports World’s Acquisition of P&O 

Witnesses: The Honorable Robert Kimmitt, Deputy Secretary, Department of the Treasury; The Honorable Eric 

Edelman, Under Secretary for Policy, Department of Defense; The Honorable Robert Joseph, Under Secretary for 

Arms Control and International Security, Department of 

State; The Honorable Stewart Baker, Assistant Secretary 

for Policy, Department of Homeland Security. 

V. COMMITTEE CONSIDERATION

The Committee on Banking, Housing, and Urban Affairs met in 

open session on March 30, 2006, and ordered the bill reported, as 

amended. 


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VI. CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Section 11(b) of the Standing Rules of the Senate, and Section 

403 of the Congressional Budget Impoundment and Control Act, require that each committee report on a bill contain a statement estimating the cost of the proposed legislation. The Congressional 

Budget Office has provided the following cost estimate and estimate of costs of private-sector mandates. 

MAY 3, 2006. 

Hon. RICHARD C. SHELBY, 

Chairman, Committee on Banking, Housing, and Urban Affairs, 

U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for the Foreign Investment and 

National Security Act of 2006. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Matthew Pickford. 

Sincerely, 

DONALD B. MARRON, 

Acting Director. 

Enclosure. 

Foreign Investment and National Security Act of 2006 

This legislation would amend the Defense Production Act of 1950 

to establish in law the Committee on Foreign Investment in the 

United States (CFIUS). Under the bill, the commission would consist of at least eight permanent members (including the Secretaries 

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

Homeland Security; as well as the Attorney General, Director of 

the Office of Management and Budget; and the Director of National 

Intelligence) to coordinate a review of foreign investment in the 

United States that involves national security or critical infrastructure in the United States. The legislation would formalize and expand the review and investigation process and increase the role of 

the Office of the Director of National Intelligence. 

CBO expects that complying with the bill’s provisions would increase the administrative expenses of federal agencies, but because 

of the confidential nature of the CFIUS review process, the number 

of agencies involved, and the confidential information needed to 

prepare an estimate for some provisions of the legislation, CBO 

cannot determine a precise estimate of the likely total costs of this 

bill. Additional costs over the 2007–2011 period, however, would 

generally come from agencies’ salary and expense budgets which 

are subject to annual appropriation. Such costs would probably 

total at least a few million dollars per year. 

Enacting the legislation would likely increase collections of fines 

and penalties for violations of the notification provisions. Such collections are recorded in the budget as revenues and deposited in 

the Treasury. CBO estimates that the additional collections of penalties and fines would not be significant because of the relatively 

small number of cases likely to be involved. 

The legislation contains no intergovernmental or private-sector 

mandates as defined in the Unfunded Mandates Reform Act and 

would impose no direct costs on state, local, or tribal governments. 


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The CBO staff contact for this estimate is Matthew Pickford. The 

estimate was approved by Peter H. Fontaine, Deputy Assistant Director for Budget Analysis. 

VII. REGULATORY IMPACT STATEMENT

In accordance with paragraph 11(b), rule XXVI, of the Standing 

Rules of the Senate, the Committee makes the following statement 

concerning the regulatory impact of the bill. 

The bill seeks to ensure that transactions involving companies 

owned or controlled by foreign governments undergo a thorough investigation to determine whether the national security would be 

impacted by the transactions. Such a requirement was believed to 

have been imposed with passage in 1992 of amendments to the Defense Production Act of 1950, particularly the so-called Byrd 

Amendment. Given the fact that the Department of the Treasury 

has interpreted that amendment at variance with congressional intent, many more cases will henceforth be subjected to an investigation than heretofore has been the case. This could entail the production of more documentation by involved corporate entities than 

would otherwise have been required. 

The requirement established in the bill under (b)(A)(ii) that foreign transactions involving U.S. critical infrastructure be subjected 

to an investigation unless national security concerns have been 

previously addressed through conclusion of a mitigation agreement 

could entail costs to both the government, charged with implementing the provisions of the bill, and the corporate entities 

charged with complying. 

The Congressional Budget Office Cost Estimate prepared for this 

bill notes that enactment of the legislation ‘‘would likely increase 

collections of fines and penalties for violations of the notification 

provisions . . . CBO estimates that the additional collections of penalties and fines would not be signficant because of the relatively 

small number of cases likely to be involved.’’

Æ 


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