Report to Congressional Requesters

United States Government Accountability Office

GAO

September 2005 DEFENSE TRADE

Enhancements to the 

Implementation of 

Exon-Florio Could 

Strengthen the Law's 

Effectiveness 

GAO-05-686 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

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www.gao.gov/cgi-bin/getrpt?GAO-05-686.

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calvaresibarra@gao.gov. 

Highlights of GAO-05-686, a report to 

Congressional Requesters 

September 2005

DEFENSE TRADE

Enhancements to the Implementation of 

Exon-Florio Could Strengthen the Law's 

Effectiveness 

Foreign acquisitions of U.S. companies can pose a significant challenge for 

the U. S. government in implementing the Exon-Florio amendment because 

while foreign investment can provide substantial economic benefits, these 

benefits must be weighed against the potential for harm to national security. 

Exon-Florio’s effectiveness in protecting U.S. national security may be 

limited because the Department of the Treasury—as Chair of the Committee 

on Foreign Investment in the United States—and others narrowly defines 

what constitutes a threat to national security and, along with some other 

member agencies, is reluctant to initiate investigations to determine whether 

national security concerns require a recommendation for possible 

presidential action. Some Committee members have argued that this narrow 

definition is not sufficiently flexible to protect critical infrastructure, secure 

defense supply, and preserve technological superiority in the defense arena. 

The Committee’s reluctance to initiate an investigation—due in part to 

concerns about potential negative effects on the U.S. open investment 

policy—limits the time available for member agencies to analyze national 

security concerns. To provide additional time, while avoiding an 

investigation, the Committee has encouraged companies to withdraw their 

notification of a pending or completed acquisition and to refile at a later 

date. However, for companies that have completed the acquisition, there is a 

substantially longer time before they refile to complete the Committee’s 

process; in some cases they never do, leaving unresolved any outstanding 

concerns. 

In our 2002 report, GAO recommended improvements in provisions to assist 

agencies in monitoring actions companies have agreed to take to address 

national security concerns. The Committee has improved provisions on 

monitoring compliance, and the Department of Homeland Security is 

actively involved in monitoring company actions. 

Agencies Represented on the Committee on Foreign Investment in the United States 

Executive Departments 

Executive 

Office of the President 

Department of the Treasury (chair) Council of Economic Advisers 

Department of Commerce National Economic Council 

Department of Defense National Security Council 

Department of Homeland Security Office of Management and Budget 

Department of Justice Office of Science and Technology Policy 

Department of State Office of the U. S. Trade Representative 

Source: Executive Order 11858, as amended. 

The 1988 Exon-Florio amendment 

to the Defense Production Act 

authorizes the President to suspend 

or prohibit foreign acquisitions of 

U.S. companies that may harm 

national security, an action the 

President has taken only once. 

Implementing Exon-Florio can 

pose a significant challenge 

because of the need to weigh 

security concerns against U.S. open 

investment policy—which requires 

equal treatment of foreign and 

domestic investors. 

Exon-Florio’s investigative 

authority was delegated to the 

Committee on Foreign Investment 

in the United States—an 

interagency committee established 

in 1975 to monitor U.S. policy on 

foreign investments. In September 

2002, GAO reported on the 

implementation of Exon-Florio. 

This report further examines that 

implementation. 

What GAO Recommends

This report contains matters for 

congressional consideration 

regarding Exon-Florio’s coverage 

and improvements to the law’s 

implementation. In commenting on 

a draft of this report, the Secretary 

of the Treasury, as Committee 

Chair, disagreed with GAO’s 

characterization of the 

Committee’s process and the 

adequacy of insight into that 

process. Based on GAO’s review of 

the process, GAO continues to 

believe that increased insight and 

oversight could strengthen the 

law’s effectiveness. 
Page i GAO-05-686 Exon-Florio Implementation 

Letter 1

Results in Brief 3 

Background 5 

The Committee’s Implementation of Exon-Florio May Limit Its 

Effectiveness 11 

Provisions for Monitoring Compliance Have Improved 18 

Conclusions 20 

Matters for Congressional Consideration 21 

Agency Comments and Our Evaluation 21 

Scope and Methodology 24 

Appendix I Comments from the Department of Treasury 27 

Appendix II Comments from the Department of Justice 47 

Appendix III GAO Contacts and Staff Acknowledgments 50 

Related GAO Products 51 

Tables 

Table 1: Agencies Represented on the Committee on Foreign 

Investment in the United States 6 

Table 2: Notifications to the Committee on Foreign Investment in 

the United States and Actions Taken, 1997 through 2004 14 

Table 3: Investigations and Outcomes, 1997 through 2004 18 

Figures 

Figure 1: The Committee on Foreign Investment in the United 

States’ Process for Implementing the Exon-Florio 

Amendment 8 

Figure 2: Number of Days between Withdrawal and Refiling in 19 

Withdrawn Notifications 16 

Contents 
Page ii GAO-05-686 Exon-Florio Implementation 

Abbreviations 

DOD Department of Defense 

GAO Government Accountability Office 

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Page 1 GAO-05-686 Exon-Florio Implementation 

September 28, 2005 

The Honorable Richard Shelby 

Chairman 

The Honorable Paul S. Sarbanes 

Ranking Minority Member 

Committee on Banking, Housing, 

 and Urban Affairs 

United States Senate 

The Honorable Evan Bayh 

United States Senate 

Foreign acquisitions of U.S. companies can pose a significant challenge for 

the U.S. government because of the need to balance the U.S. open 

investment policy against the potential that an acquisition may harm 

national security. Under the U.S. open investment policy, foreign investors 

are to be treated no differently than domestic investors. In 1988, Congress 

passed the Exon-Florio amendment1

 to the Defense Production Act, which 

authorizes the President to suspend or prohibit foreign acquisitions, 

mergers, or takeovers2

 of U.S. companies if a foreign controlling interest 

might take action that threatens national security. Exon-Florio is meant to 

serve as a safety net to be used when laws other than Exon-Florio and the 

International Emergency Economic Powers Act3

 may not be effective in 

protecting national security. 

The President delegated the investigative authority of Exon-Florio to the 

Committee on Foreign Investment in the United States (Committee)—an 

interagency committee established in 1975 to monitor and coordinate U.S. 

policy on foreign investment in the United States. The Committee is 

chaired by the Secretary of the Treasury. To provide the broadest latitude 

 1

 50 U.S.C. app. § 2170. 

2

 In the remainder of this report, acquisitions, mergers, and takeovers are referred to as 

acquisitions. 

3

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

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

economy of the United States (50 U.S.C. §§ 1701-1706). To exercise this authority, however, 

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

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

any foreign interest’s acquisition of U.S. companies (50 U.S.C. § 1702(a) (1) (B)). 

 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-686 Exon-Florio Implementation 

for determining whether an acquisition presents a national security threat, 

neither the statute nor the implementing regulation defines “national 

security.” 

Exon-Florio establishes a four-step process for examining a foreign 

acquisition of a U.S. company: (1) voluntary notice by the companies, (2) a 

30-day review to identify whether there are any national security concerns, 

(3) a 45-day investigation to determine whether those concerns require a 

recommendation to the President for possible action, and (4) a 

presidential decision to permit, suspend, or prohibit the acquisition. The 

law requires that the Committee report to Congress on the circumstances 

surrounding any acquisition that results in a presidential decision. This 

requirement was added in 1992 to provide Congress insight into the 

process. 

In September 2002,4

 we reported on several weaknesses in the process 

used by the Committee as well as in the agreements negotiated with 

companies under Exon-Florio to mitigate identified national security 

concerns. You asked us to further examine the Committee’s 

implementation of Exon-Florio. We also determined whether the 

Committee had implemented the recommendations from our 2002 report. 

To understand the Committee’s process for reviewing foreign acquisitions 

of U.S. companies, we met with officials from the Department of 

Commerce, the Department of Defense, the Department of Homeland 

Security, the Department of Justice, and the Department of the 

Treasury—the agencies that are most active in the review of acquisitions—

and discussed their involvement in the process. Further, we conducted 

case studies of nine acquisitions that were filed with the Committee 

between June 28, 1995, and December 31, 2004. We selected acquisitions 

based on recommendations by Committee member agencies and the 

following criteria: (1) the Committee permitted the companies to withdraw 

the notification; (2) the Committee or member agencies concluded 

agreements to mitigate national security concerns; (3) the foreign 

company had been involved in a prior acquisition notified to the 

Committee; or (4) GAO had reviewed the acquisition for its 2002 report. 

We did not attempt to validate the conclusions reached by the Committee 

on any of the cases we reviewed. To determine whether the weaknesses in 

 4

 GAO, Defense Trade: Mitigating National Security Concerns under Exon-Florio Could 

be Improved. GAO-02-736 (Washington, D.C.: Sept. 12, 2002). 
Page 3 GAO-05-686 Exon-Florio Implementation 

provisions to assist agencies in monitoring agreements that GAO had 

identified in its 2002 report had been addressed, we analyzed agreements 

concluded under the Committee’s authority between 2003 and 2005. We 

conducted our review from April 2004 through July 2005 in accordance 

with generally accepted government auditing standards. 

The manner in which the Committee on Foreign Investment in the United 

States implements Exon-Florio may limit its effectiveness. For example, 

Treasury, in its role as Chair, and some others narrowly define what 

constitutes a threat to national security—that is, they have limited the 

definition to export-controlled technologies or items and classified 

contracts, or specific derogatory intelligence on the foreign company. 

Other members have argued that this definition is not sufficiently flexible 

to provide for safeguards in areas such as protection of critical 

infrastructure, security of defense supply, and preservation of 

technological superiority in the defense arena. In one case, some member 

agencies would not agree with the Departments of Defense’s and 

Homeland Security’s using the authority of Exon-Florio and the 

Committee as a basis for an agreement that Defense officials believed 

necessary to mitigate national security concerns because the concerns did 

not, in the opinions of these Committee members, fit this narrow 

definition. 

In addition, the Committee is reluctant to initiate investigations because of 

a perception that they would discourage foreign investment—a potential 

conflict with U.S. open investment policy. Treasury, in its capacity as 

Chair, applies a strict standard in determining whether an acquisition 

should be investigated. The Chair has established as the criteria for 

initiating an investigation essentially the same criteria that the law 

provides as the basis for the President to suspend or prohibit the 

transaction or order divestiture. Those criteria are: the likelihood that 

(1) there is credible evidence that the foreign controlling interest may take 

action to threaten national security and (2) no other laws are appropriate 

or adequate to protect national security. Defense and other agencies have 

argued that since the statute applies these criteria to presidential 

decisions, these criteria should not be the standard for initiating an 

investigation. Defense officials and others have stated that the 45 days of 

the investigation should be used to analyze the acquisition to determine 

whether those criteria are met. In addition, the Committee’s guidance 

requires member agencies to determine the likelihood of meeting the 

standard by the 23rd day of the 30-day review. Several officials commented 

that, in complex cases, it is difficult to complete analyses to meet that 

Results in Brief 
Page 4 GAO-05-686 Exon-Florio Implementation 

standard within 23 days. To avoid the negative connotation associated 

with initiating an investigation, the Committee encourages companies to 

withdraw their notification to provide additional time, rather than proceed 

to the investigation phase. When companies withdraw their notifications 

and refile at a later date, the 30-day review period is restarted. If there are 

concerns, allowing a withdrawal can heighten risks, particularly when a 

company has completed the acquisition before notifying the Committee. 

For example, one company had completed an acquisition over one year 

before filing with the Committee, but was allowed to withdraw its 

notification. Four years later the company has yet to refile, despite 

concerns raised by some agencies about the acquisition. Further, the use 

of withdrawals contributes to the opaque nature of the process because 

very few cases reach a presidential decision, only two between 1997 and 

2004, and thus very few transactions are subject to the required reporting 

to Congress. 

In our 2002 report, we recommended improvements in provisions to assist 

agencies in monitoring actions companies had agreed to take to mitigate 

or address concerns. The Committee has improved provisions on 

monitoring company compliance with mitigation agreements, and the 

Department of Homeland Security is actively involved in monitoring 

agreements to which it is a party. In analyzing two recent agreements, we 

identified provisions that addressed our prior concerns. For example, both 

agreements clearly identified the offices within the Departments of 

Homeland Security and Justice to which the companies should report. 

This report contains matters for congressional consideration to help 

resolve the disagreements as to the extent of coverage of Exon-Florio and 

to require interim protections where specific concerns have been raised, 

specific time frames for refiling, and a process for tracking any actions 

being taken during a withdrawal period in cases where the transaction has 

been completed. 

The Department of the Treasury, as Committee Chair, provided comments 

on a draft of this report on behalf of all Committee members. However, the 

Department of Justice provided comments in a separate letter. Overall, 

Treasury disagreed with our characterization of the Committee’s process 

in that the Chair believes issues are fully vetted and consensus has always 

been reached. During the course of our review, certain member agencies 

raised concerns about the Committee’s process that indicated differing 

views among Committee members when reviewing certain cases. These 

differing views concerned what constitutes a threat to national security, 
Page 5 GAO-05-686 Exon-Florio Implementation 

the sufficiency of the time allowed for reviews, and the appropriate 

criteria for initiating an investigation. 

• In one case we reviewed where member agencies disagreed over what 

should be deemed a national security concern, the narrower 

definition—one that excludes national security concerns raised by 

certain member agencies—prevailed, in that the notice was withdrawn 

instead of the case proceeding to investigation. 

• In complex cases in which national security concerns have been raised 

and for which Exon-Florio is the relevant statute, case documentation 

we reviewed revealed the significant pressures some agencies face to 

complete analysis within 23 days. 

• Policy-level officials from two member agencies have indicated that the 

debate over the criteria for initiating an investigation remains 

unresolved. 

The Department of Justice’s comments were generally technical and we 

have incorporated them as appropriate. However, Justice did share the 

concern expressed in our report with respect to the time constraints 

imposed by the current process, particularly its effect on gathering and 

using input from the intelligence community. Justice commented that any 

“extension of the time available...would be helpful.” 

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

Production Act, which authorized the President to investigate the impact 

of foreign acquisitions of U.S. companies on national security and to 

suspend or prohibit acquisitions that might threaten national security. The 

President delegated this investigative authority to the Committee on 

Foreign Investment in the United States. The Committee is an interagency 

group that was established by executive order in 1975 to monitor the 

impact of and coordinate U.S. policy on foreign investment in the United 

States.5

 The Committee is chaired by the Secretary of the Treasury, and its 

membership includes representatives from executive branch departments 

and the Executive Office of the President (see table 1). The President 

added the Department of Homeland Security to the Committee in 2003, 

 5

 Executive Order 11858 (May 7, 1975), as amended by Executive Order 12188 (Jan. 2, 

1980), Executive Order 12661 (Dec. 27, 1988), Executive Order 12860 (Sept. 3, 1993), and 

Executive Order 13286 (Feb. 28, 2003). 

Background 
Page 6 GAO-05-686 Exon-Florio Implementation 

reflecting an increased focus on domestic security in the aftermath of the 

September 11, 2001, terror attacks and subsequent global war on terror. 

Table 1: Agencies Represented on the Committee on Foreign Investment in the United States 

Agencies represented Year added Lead office mission 

Executive Departments 

Department of the Treasury (Chair) 1975 Office of International Investment: Coordinates policies toward foreign 

investments in the United States and U.S. investments abroad. 

Department of Commerce 1975 International Trade Administration: Coordinates issues concerning trade 

promotion, international commercial policy, market access, and trade law 

enforcement. 

Department of Defense 1975 Defense Technology Security Administration: Administers the development 

and implementation of Defense technology security policies on international 

transfers of defense-related goods, services, and technologies. 

Department of State 1975 Bureau of Economic and Business Affairs: Formulates and implements 

policy regarding foreign economic matters, including trade and international 

finance and development. 

Department of Justice 1988 Criminal Division: Develops, enforces, and supervises the application of all 

federal criminal laws, except for those assigned to other Justice Department 

divisions. 

Department of Homeland Security 2003 Information Analysis and Infrastructure Protection: Identifies and assesses 

current and future threats to the homeland, maps those threats against 

vulnerabilities, issues warnings, and takes preventative and protective 

action. 

Executive Office of the President 

Council of Economic Advisers 1980 Performs analyses and appraisals of the national economy for the purpose 

of providing policy recommendations to the President. 

Office of the United States Trade 

Representative 

1980 Directs all trade negotiations of and formulates trade policy for the United 

States. 

Office of Management and Budget 1988 Evaluates, formulates, and coordinates management procedures and 

program objectives within and among federal departments and agencies, 

and controls administration of the federal budget. 

National Economic Council 1993 Coordinates the economic policymaking process and provides economic 

policy advice to the President. 

National Security Council 1993 Advises and assists the President in integrating all aspects of national 

security policy as it affects the United States. 

Office of Science and Technology Policy 1993 Provides scientific, engineering, and technological analyses for the 

President with respect to federal policies, plans, and programs. 

Source: GAO analysis. 

In 1991, the Treasury Department issued regulations to implement ExonFlorio. As shown in figure 1, Exon-Florio and the regulations establish a 

four-step process for reviewing a foreign acquisition of a U.S. company: 
Page 7 GAO-05-686 Exon-Florio Implementation 

voluntary notice, 30-day review, 45-day investigation, and presidential 

decision. 
Page 8 GAO-05-686 Exon-Florio Implementation 

Figure 1: The Committee on Foreign Investment in the United States’ Process for 

Implementing the Exon-Florio Amendment 

a

At any point prior to a presidential decision, companies can request to withdraw a notification. 

Notifying the Committee of an acquisition is not mandatory. However, any 

member agency is authorized to submit a notification of an acquisition if 

Companies submit 

voluntary filing

(can be pre- or

post-acquisition)

Committee actions 

completed and no 

national security 

concerns warrant 

investigation

30-day

review

45-day

investigation

President permits 

acquisition by taking 

no action

President may suspend 

or prohibit transaction, 

or order divestiture or 

other action

15-day window for 

presidential decision

Companies

withdraw filinga

Committee 

recommendation to 

President

Report to

Congress

Companies 

withdraw filinga

Decision to 

investigate

Source: GAO analysis based on 50 U.S.C. App. § 2170 and 31 C.F.R. Part 800 and case file review. 
Page 9 GAO-05-686 Exon-Florio Implementation 

the companies have not done so. To date, no agency has submitted a 

notification of an acquisition. Instead, when a member agency becomes 

aware of an acquisition that may be subject to Exon-Florio, the agency 

informs Treasury, as Chair, and Committee staff contact the companies to 

encourage them to officially notify the Committee of the acquisition to 

begin a review. Committee officials noted that companies have an 

incentive to notify the Committee prior to completing the acquisition 

because Exon-Florio provides the President with the authority to order 

companies to divest completed acquisitions found to pose a threat to 

national security. 

Under Exon-Florio, after receiving notification of a proposed or completed 

acquisition, the Committee begins a 30-day review to determine whether 

the acquisition could pose a threat to national security.6

 The Treasury 

Department, as Committee Chair, forwards the notification documentation 

to the lead office in each of the member agencies. Lead offices forward the 

information to other offices within their agency. For example, the Defense 

Technology Security Administration, the lead office for the Department of 

Defense, forwards notification to 12 other offices within the department. 

These other offices may also forward the notification, as appropriate. In 

one case, the point-of-contact in the Office of the Under Secretary of 

Defense for Acquisition, Technology, and Logistics, one of the initial 12 

offices, forwarded the notification to four other offices within that 

organization. 

In most instances, the Committee completes its review within the 30 days. 

However, if the Committee is unable to complete its review within 30 days, 

the Committee may either allow the companies to withdraw the 

notification or initiate a 45-day investigation. If the Committee concludes a 

45-day investigation, it is required to submit a report to the President 

containing its recommendations. If Committee members cannot agree on a 

recommendation, the regulations require that the report to the President 

include the differing views of all Committee members.7

Under Exon-Florio, the President has 15 days to decide whether to 

prohibit or suspend the proposed acquisition, order divestiture of a 

completed acquisition or take no action. The President may take action 

upon a determination that (1) there is credible evidence that leads the 

 6

 50 U.S.C. App. § 2170(a). 

7

 31 C.F.R. § 800.504(b). 
Page 10 GAO-05-686 Exon-Florio Implementation 

President to believe that a foreign controlling interest might take action 

that threatens to impair national security and (2) laws other than ExonFlorio and the International Emergency Economic Powers Act are 

inadequate or inappropriate to protect national security. Under the 

regulations, the President’s divestiture authority, however, cannot be 

exercised if (1) the Committee has informed the companies in writing that 

their acquisition was not subject to Exon-Florio or had previously decided 

to forego investigation or (2) the President has previously decided not to 

act on that specific acquisition under Exon-Florio.8

 The Committee may 

reopen its review or investigation and revise its recommendation to the 

President if it determines that the companies omitted or provided false or 

misleading information.9

 In some cases, the companies will decide not to 

proceed with the transaction because of concerns that a presidential 

decision would be unfavorable. However, the President has ordered 

divestiture in only one case. In 1990, the President ordered a Chinese 

aerospace company to divest its ownership of a U.S. aircraft parts 

manufacturer. 

Under the original Exon-Florio law, the President was obligated to report 

to the Congress on the circumstances surrounding a presidential decision 

only after prohibiting an acquisition. In response to concerns about the 

lack of transparency in the Committee’s process, in 1992 Congress passed 

the Byrd Amendment to Exon-Florio, requiring a report to the Congress if 

the President makes any decision regarding a proposed foreign 

acquisition. 

Companies can request to withdraw their notification at any time prior to 

the President announcing a decision. A Treasury official told us that the 

Committee generally grants withdrawal requests. After the Committee 

approves a withdrawal, any prior voluntary notices submitted no longer 

remain in effect. Any subsequent refiling by the parties is considered as a 

new, voluntary notice to the Committee. 

 8

 31 C.F.R. § 800.601(d). 

9

 31 C.F.R. § 800.601(e). 
Page 11 GAO-05-686 Exon-Florio Implementation 

The manner in which the Committee implements Exon-Florio may limit its 

effectiveness because (1) Treasury, in its role as Chair, has narrowly 

defined what constitutes a threat to national security and (2) the 

Committee is reluctant to initiate a 45-day investigation because of a 

perceived negative impact on foreign investment and a conflict with the 

U.S. open investment policy. As a result of the narrow definition, some 

issues that Defense, Homeland Security, and Justice officials believe have 

important national security implications, such as security of supply, may 

not be addressed. In addition, the reluctance to initiate the 45-day 

investigation compresses the time available to consider issues. This 

compressed time frame limits agencies’ ability to complete their analysis 

of some cases. The Committee encourages companies to request 

withdrawal of their notification to provide additional time to resolve 

issues and to avoid the need for investigation. However, when companies 

that have already completed the acquisition are allowed to withdraw, there 

is a substantially longer time before they refile, and in some cases they 

never do, leaving unresolved any outstanding concerns. 

Under the statute, the President or the President’s designee may make an 

investigation to determine whether a foreign acquisition might threaten 

the national security of the United States. Neither the statute nor its 

implementing regulations define national security. This permits a broad 

interpretation of the term. The statute does provide factors to be 

considered in determining a threat to national security; however, 

consideration of these factors is not mandatory. These factors include the 

following: 

• Domestic production needed for projected national defense 

requirements. 

• The capability and capacity of domestic industries to meet national 

defense requirements, including the availability of human resources, 

products, technology, materials, and other supplies and services. 

• The control of domestic industries and commercial activity by foreign 

citizens as it affects the capability and capacity of the United States to 

meet the requirements of national security. 

• The potential effects of the proposed or pending transaction on sales of 

military goods, equipment, or technology to any country identified 

under applicable law as (a) supporting terrorism or (b) a country of 

The Committee’s 

Implementation of 

Exon-Florio May 

Limit Its Effectiveness 

Threats to National 

Security Are Narrowly 

Defined 
Page 12 GAO-05-686 Exon-Florio Implementation 

concern for missile proliferation or the proliferation of chemical and 

biological weapons. 

• The potential effects of the proposed or pending transaction on U.S. 

international technological leadership in areas affecting national 

security. 

Despite the broad coverage of the factors under the statute, Treasury and 

some other Committee member agencies have continued to view threats to 

national security in the traditional and more narrowly defined sense. That 

is, they based their definition on a U.S. company’s possession of exportcontrolled technologies or items, classified contracts, and critical 

technology; or specific derogatory intelligence on the foreign company. 

The Departments of Justice and Defense have applied a broader view of 

what might constitute a threat to national security. And since being added 

to the Committee, the Department of Homeland Security has begun to 

analyze acquisitions both in traditional terms and more broadly in terms of 

the potential vulnerabilities posed by the acquisition. According to Justice, 

Homeland Security, and Defense officials, vulnerabilities can result from 

foreign control of critical infrastructure, such as control of or access to 

information traveling on networks. Vulnerabilities can also result from 

foreign control of critical inputs to defense systems or a decrease in the 

number of innovative small businesses conducting research on developing 

defense-related technologies. While these vulnerabilities may not pose an 

immediate threat to national security, they may create the potential for 

longer-term harm to U.S. national security interests by reducing U.S. 

technological leadership in defense systems. 

The agencies that favor applying the narrower, more traditional definition 

of what constitutes a threat to national security have resisted using ExonFlorio to mitigate the concerns being raised by the Department of Defense 

and others. For example, in reviewing a 2001 acquisition involving a U.S. 

company that produced precision optics and semiconductor 

manufacturing equipment, Defense and Commerce raised concerns about 

(a) foreign ownership of sensitive but unclassified technology used in 

reconnaissance satellites, (b) the possibility of this sensitive technology 

being transferred to countries of concern, and (c) maintaining U.S. 

government access to the technology. Treasury officials said that the 

concerns raised by Defense and Commerce were not national security 

concerns because they did not involve classified contracts, the foreign 

company’s country of origin was a U.S. ally, and there was no specific 

negative intelligence about the company’s actions in the United States. 
Page 13 GAO-05-686 Exon-Florio Implementation 

During a more recent review, disagreement over the scope of Exon-Florio 

resulted in a weakening of the enforcement provisions in an agreement. 

The Defense Department had raised concerns about the security of its 

supply of specialized integrated circuits as a result of a proposed 

acquisition. These unique integrated circuits are used in a variety of 

defense technologies, such as unmanned aerial vehicles, the Joint Tactical 

Radio System, and communications protection devices including devices 

used for cryptography. A Defense Science Board task force recently noted 

that the functions performed by Defense-unique integrated circuits are 

essential to the national defense of the United States. However, in 

Treasury’s view, the Department of Defense’s concerns about its supply of 

integrated circuits were industrial policy concerns, not national security 

concerns, despite the importance of these circuits to a variety of defense 

technologies. Treasury, as Chair of the Committee, and several other 

members deemed the concerns outside the scope of Exon-Florio authority 

and would not allow the agreement between the Departments of Defense 

and Homeland Security and the companies to include any mention of the 

Committee. As a result, a provision that included strong enforcement 

language was deleted from an agreement with the acquiring company. In 

the absence of such language, presidential or Committee action can only 

result if the companies materially misrepresented information during the 

Committee’s review. In our view, without that provision, the consequences 

of failure to comply with the agreement are less certain. 

The Committee has been reluctant to initiate investigations, to avoid both 

the negative connotations of an investigation and the need for a 

presidential decision. As a result, the Committee has initiated few 

investigations. From 1997 through 2004, the Committee received 470 

notices, including 19 refilings, for 451 proposed or completed acquisitions. 

The Committee initiated only eight investigations during the period (see 

table 2). 

The Standard for 

Investigation Limits the 

Number of Investigations 
Page 14 GAO-05-686 Exon-Florio Implementation 

Table 2: Notifications to the Committee on Foreign Investment in the United States 

and Actions Taken, 1997 through 2004 

Year Notifications Acquisitionsa

 Investigationsb

1997 62 60 0

1998 65 62 2

1999 79 76 0

2000 72 71 1

2001 55 51 1

2002 43 42 0

2003 41 39 2

2004 53 50 2

Total 470 451 8

Source: Department of the Treasury. 

a

Acquisitions that were withdrawn and refiled are shown in the year of initial notification. 

b

Investigations are shown in the year of their notification. 

According to Treasury Department officials, the Committee reviews 

foreign acquisitions with a view to protecting national security while 

maintaining U.S. open investment policy, which provides for equal 

treatment of foreign and domestic investors. The office within Treasury 

that provides staff support to the Committee—the Office for International 

Investment—is also the office responsible for promoting the open 

investment policy. The Committee’s goal is to implement Exon-Florio 

without chilling foreign investment in the United States. According to 

Treasury officials, being the subject of an investigation may have negative 

connotations for a company. If it becomes public knowledge that the 

acquiring company is the subject of an investigation, it may be perceived 

that the government views the acquisition as problematic and the stock 

price of the company may fall. Thus, avoiding an investigation helps 

maintain the confidence of investors. 

Consistent with its desire to avoid investigations, the Treasury 

Department, as Committee Chair, applies strict criteria in determining 

whether an acquisition should be investigated. The criteria for initiating an 

investigation are the likelihood that (1) there is credible evidence that the 

foreign controlling interest may take action to threaten national security 

and (2) no other laws are appropriate or adequate to protect national 

security. This is essentially the same criteria provided by the statute as the 
Page 15 GAO-05-686 Exon-Florio Implementation 

basis for the President to take action to suspend or prohibit an acquisition 

under Exon-Florio.10 The Defense Department and others have stated that 

these criteria are inappropriate for determining whether to initiate an 

investigation because the 45 days of the investigation should be used to 

determine whether the criteria are met to inform the Committee’s 

recommendation to the President. Exon-Florio does not provide specific 

guidance for the appropriate criteria for initiating a 45-day investigation. 

The statute merely provides that “the President or the President’s designee 

may make an investigation to determine the effects on national security” 

of acquisitions that could result in foreign control of a U.S. company.11

Committee guidelines require member agencies to inform the Committee 

of concerns by the 23rd day of the 30-day review allowed by Exon-Florio. 

According to one Treasury official, this time frame is necessary to meet 

the legislated 30-day requirement for completing a review. For some cases, 

particularly complex ones, the 23-day rule does not allow enough time to 

complete reviews and address concerns. For example, one Defense official 

said that, without advance notice of the acquisition, the time frames are 

too short to complete analysis and provide input for the Defense 

Department’s position. Another Defense official said that to meet 

Treasury’s deadline, analysts have between 3 and 10 days to analyze the 

acquisition. In one instance, Homeland Security was unable to provide 

input within the time frame. 

When agencies have needed more time to gather information or negotiate 

an agreement to mitigate national security concerns, the Committee 

generally suggests that companies request to withdraw their notification. If 

the company does not want to withdraw, the Committee can initiate an 

investigation. Exon-Florio’s implementing regulations permit the 

Committee to allow companies to withdraw their notifications at any time 

before a presidential decision. 

When companies have withdrawn their notification prior to concluding an 

acquisition, the companies have an incentive to resolve any outstanding 

 10 50 U.S.C. app. § 2170(e). 

11 50 U.S.C. App. § 2170(a). Under the statute, investigations are mandatory in those cases 

in which the acquiring company is “controlled by or acting on behalf of a foreign 

government” and the acquisition could result in control of the U.S. company and could 

affect the national security of the United States (50 U.S.C. App. § 2170(b)). 

Withdrawals Bypass 

Regulatory Time Frames 
Page 16 GAO-05-686 Exon-Florio Implementation 

issues and refile as soon as possible. However, if an acquisition has been 

concluded, there is less incentive to resolve issues and refile. Since 1997, 

companies involved in 18 acquisitions have withdrawn their notification 

and refiled 19 times. In one case, the company withdrew and refiled twice. 

In 16 cases, the acquisitions had not yet been concluded, and the time 

between withdrawal and refiling ranged between 0 days and 4 months (see 

fig. 2). In two cases, the companies had already concluded the acquisition, 

and 9 months and 1 year, respectively, passed before the companies 

refiled. In both cases, Defense or Commerce had raised concerns about 

potential export control issues. These concerns remained unresolved 

throughout the period. 

Figure 2: Number of Days between Withdrawal and Refiling in 19 Withdrawn Notifications 

In addition to cases where a company that completed an acquisition 

withdrew and subsequently refiled, we identified two instances in which 

companies that had concluded an acquisition before filing with the 

Committee withdrew and have not refiled. In one case, the company filed 

with the Committee more than a year after completing the acquisition. The 

Committee allowed it to withdraw the notification to provide more time to 

answer the Committee’s questions and provide assurances concerning 

export control matters. The company refiled and was permitted to 

Number of days

0

50

100

150

200

250

300

350

400

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Source: GAO analysis.

Cases in which companies concluded acquisition after Exon-Florio review

Cases in which companies concluded acquisition prior to notifying under Exon-Florio

000 6 7 14 15 18 22 24 26 32

50

72

113 119 123

283

378
Page 17 GAO-05-686 Exon-Florio Implementation 

withdraw a second time because there were still unresolved issues. Four 

years have passed since the second withdrawal. 

In another case, a company filed with the Committee over 6 months after 

completing its acquisition of an internet backbone company. The 

Committee allowed the company to withdraw the notification more than 2 

years ago because the Committee was busy with another, high-profile 

acquisition. The Committee has not requested that the company refile even 

though analysts within one agency had concerns about the acquisition. As 

a result, the review process has never been completed. A Treasury 

Department official said that the member agency that has national security 

concerns about a particular transaction is responsible for ensuring that the 

company refiles. However, the Committee’s guidance to member agencies 

specifically states that Treasury will manage activities during withdrawal 

by specifying time frames and goals to be achieved. 

In six of the eight investigations that have been undertaken since 1997, 

withdrawal was allowed after the investigation had begun. Withdrawal and 

refiling to restart the clock limits the potential negative connotation of an 

investigation. However, this practice also limits instances that require a 

presidential decision, contributing to the opaque nature of the Exon-Florio 

process because reporting to Congress on the results of Committee 

actions only occurs as a result of a presidential decision. Only two of the 

eight cases resulted in a presidential decision and a subsequent report to 

the Congress (see table 3). 
Page 18 GAO-05-686 Exon-Florio Implementation 

Table 3: Investigations and Outcomes, 1997 through 2004 

Year Investigationsa

Notices withdrawn after 

investigation begun 

Presidential

decisions

1997 0 0 0

1998 2 2 0

1999 0 0 0

2000 1 0 1

2001 1 1 0

2002 0 0 0

2003 2 1 1

2004 2 2 0

Total 8 6 2b

Source: U.S. Department of the Treasury. 

a

Investigations are shown in the year of their notification. 

b

In both cases the President took no action, thereby allowing the transaction. 

In our 2002 report, we identified several weaknesses in the agreements 

that agencies negotiated with companies under the Exon-Florio 

Amendment. Specifically, the two agreements that we reviewed either did 

not specify (1) the time frame for implementing provisions of the 

agreement or (2) the action that would be taken if the company failed to 

comply within the stated time frame, thus providing no incentive for the 

companies to act or no penalty for noncompliance. And in one case, the 

company failed to meet the agreed upon time frame. In addition, the 

agreements did not specify which offices in Committee member agencies 

would be responsible for monitoring compliance with the agreements. We 

recommended in our 2002 report that, to ensure compliance with 

agreements, the Secretary of the Treasury, as Chair of the Committee, 

increase the specificity of actions required by mitigation measures in 

agreements negotiated under Exon-Florio and designate in the agreements 

the agency responsible for overseeing implementation and monitoring 

compliance with mitigation measures. 

Three agreements negotiated between 2003 and 2005 contain specific time 

frames for actions to be taken: 

• In a telecommunications agreement, the company was required to 

adopt and implement a visitation policy within 90 days after the 

agreement became effective. 

Provisions for 

Monitoring 

Compliance Have 

Improved 
Page 19 GAO-05-686 Exon-Florio Implementation 

• In a software agreement, the company had to adopt mandatory policies 

and procedures to implement the agreement within 90 days and 

provide copies to the government points of contact. 

• In an electronics agreement, the company had to appoint a security 

officer and two security directors within 90 days of a vacancy to ensure 

compliance with the agreement, subject to approval by the 

Departments of Defense and Homeland Security. 

Two of the three agreements also contained strong language concerning 

the consequences of noncompliance with the terms of the agreement. For 

example, these agreements stated that if the company (1) fails to comply 

with the terms of the agreement, (2) makes a materially false or 

incomplete statement, (3) increases foreign entity control, or (4) makes 

other material changes in circumstances, the Attorney General, the 

Secretary of Defense, or the Secretary of Homeland Security may raise 

concerns to the Committee or the President. 

All three agreements also provided specific offices within the signatory 

agencies to which the companies are to report. For example, the 

telecommunications agreement designates as points of contact the 

Assistant Attorney General of the Justice Department’s Criminal Division, 

the General Counsel at the Federal Bureau of Investigation, the Deputy 

General Counsel for Acquisition, Technology, and Logistics at the 

Department of Defense, and the General Counsel at the Department of 

Homeland Security. 

The Department of Homeland Security has taken the lead on monitoring 

compliance for those agreements that it has signed under Exon-Florio. 

According to Homeland Security officials, the agency maintains 

compliance tables to track companies’ compliance with time frames 

provided for in the agreements. To keep all interested parties informed, 

the Department sends out periodic e-mails to other agencies informing 

them of the status of companies’ compliance efforts. 

The Departments of Defense, Commerce, and Justice significantly rely on 

Homeland Security to monitor companies’ compliance with the 

agreements. Homeland Security officials stated that Homeland Security 

Presidential Directive 7 gives the Department the authority to protect 

critical infrastructure assets such as telecommunications and information 

technology. According to a Defense official, the Department of Defense 

has no authority to enforce companies’ compliance with agreements 

signed pursuant to Exon-Florio. A Commerce Department official similarly 
Page 20 GAO-05-686 Exon-Florio Implementation 

stated that Commerce’s authority is limited to enforcing compliance with 

export control laws. As a result, the Department of Homeland Security is 

the only one of the three with broad enforcement authority. Further, 

according to Justice officials, while Justice has authority to seek 

enforcement of agreements signed pursuant to Exon-Florio and to which it 

is a signatory, the Department of Homeland Security has more resources 

for monitoring compliance as well as the legal mandate to act. 

In the aftermath of the September 11, 2001, terror attacks on the United 

States and the subsequent war on terrorism, the nature of threats facing 

this country has changed. In addition to traditional threats to national 

security, vulnerabilities in areas such as the nation’s critical infrastructure 

have emerged as potential threats. Exon-Florio provides the latitude for 

the Committee on Foreign Investment in the United States to address 

these threats. But the effectiveness of Exon-Florio as a safety net depends 

on the manner in which the broad scope of its authority is implemented. 

The narrow, more traditional interpretation of what constitutes a threat to 

national security fails to fully consider the factors currently embodied in 

the law. Further, the time constraints imposed on agencies to develop a 

position before the statutory deadline limits member agencies’ ability to 

complete in-depth analyses. Those time constraints, together with the 

Committee’s reluctance to initiate investigations, can result in the 

Committee permitting companies to withdraw their notifications. When 

companies withdraw after completing an acquisition, the Committee may 

lose visibility over the transaction, and the companies may choose not to 

refile. 

The initial legislation provided for congressional oversight through a 

requirement that the circumstances surrounding any negative decision by 

the President be reported to the Congress. To improve congressional 

oversight, the Byrd amendment expanded required reporting to include 

the circumstances surrounding all presidential decisions. However, the 

Committee’s reluctance to proceed to investigation, coupled with the use 

of withdrawal to resolve cases without the need for presidential decisions, 

has resulted in the circumstances surrounding only two cases being 

reported to the Congress since 1997. This criterion for reporting 

contributes to the opaque nature of the Committee’s process and is 

limiting the information that is provided to the Congress. In addition, 

where companies have concluded the acquisition prior to filing with the 

Committee and concerns have been identified, permitting withdrawal 

expands the opportunity for harm to national security before the 

Committee takes action. 

Conclusions 
Page 21 GAO-05-686 Exon-Florio Implementation 

In light of the differing views within the Committee on Foreign Investment 

in the United States regarding the extent of authority provided by ExonFlorio, the Congress should consider amending Exon-Florio by more 

clearly emphasizing the factors that should be considered in determining 

potential harm to national security. In addition, to address Treasury’s 

concern with the impact of investigations on U.S. open investment policy 

and the member agencies’ concerns with having sufficient time to address 

relevant issues concerning the acquisitions, the Congress should consider 

eliminating the distinction between a review and an investigation and 

make the entire 75-day period available for review. The Committee could 

then be required to submit recommendations to the President only if 

presidential action was necessary. Also, to provide more transparency and 

facilitate congressional oversight, the Congress should revisit the criterion 

for reporting circumstances surrounding cases to the Congress. For 

example, the Congress could require an annual report on all transactions 

that occurred during the preceding year. Such a report could provide the 

Congress with information on the nature of each acquisition; the national 

security concerns raised by Committee member agencies, if any; how the 

concerns were mitigated; and whether each acquisition was concluded or 

abandoned, in addition to any presidential decisions required under the 

statute. 

In addition, in view of the need to ensure that national security is 

protected during the period that withdrawal is allowed for companies that 

have completed or plan to complete an acquisition prior to the Committee 

completing its work, the Congress should require that the Secretary of the 

Treasury, as Committee Chair, establish (1) interim protections where 

specific concerns have been raised, (2) specific time frames for refiling, 

and (3) a process for tracking any actions being taken during the 

withdrawal period. 

We provided a draft of our report to the Departments of Commerce, 

Defense, Homeland Security, Justice, and Treasury for comment. In 

responding, the Department of Treasury noted that it was providing 

comments on behalf of all the members of the Committee on Foreign 

Investment in the United States. However, the Department of Justice 

provided comments in a separate letter. 

Overall, Treasury disagreed with our findings. At issue is our 

characterization of the Committee’s process and the adequacy of insight 

into the Committee’s deliberations—concerns that Treasury states have 

caused the Committee to question our understanding of how it operates. 

Matters for 

Congressional 

Consideration 

Agency Comments 

and Our Evaluation 
Page 22 GAO-05-686 Exon-Florio Implementation 

Our understanding of the Committee’s process is based on an extensive 

examination of Committee guidelines, case files, and memorandums; 

discussions with member agencies, including Treasury, on the process and 

the time frames the Committee uses to come to a decision; and a review of 

the laws and regulations that provide the Committee with criteria against 

which to assess threats to national security. 

Treasury asserts that all Committee decisions are reached only by 

consensus among member agencies. However, during the course of our 

review, certain member agencies raised concerns about the Committee’s 

process that indicated fundamentally differing views among Committee 

members when reviewing certain cases. These disagreements involved 

different views on what constitutes a threat to national security, the 

sufficiency of the time allowed for reviews, and the appropriate criteria for 

initiating an investigation. While we agree that opposing views can, and 

should, be vigorously debated, such a debate does not demonstrate that 

issues have been fully vetted or that consensus has been reached, as 

Treasury implies. In fact, in a number of cases, we found evidence that 

indicates otherwise, for example: 

• In one case we reviewed where member agencies disagreed over what 

should be deemed a national security concern, the narrower 

definition—one that excludes national security concerns raised by 

certain member agencies—has prevailed, in that the notice has been 

withdrawn instead of the case proceeding to investigation. 

• In complex cases in which national security concerns have been raised 

and for which Exon-Florio is the relevant statute, case documentation 

we reviewed revealed the significant pressures some agencies face to 

complete analysis within 23 days. In its comments on our draft report, 

the Department of Justice shared our concern with respect to the time 

constraints imposed by the current process. Specifically, Justice stated 

that “gathering timely and fully vetted input from the intelligence 

community is critical to a thorough and comprehensive national 

security assessment. Any potential extension of the time available to 

the participants for the collection and analysis of that information 

would be helpful.” 

• Policy-level officials from two member agencies have indicated that the 

debate over the criteria for initiating an investigation remains 

unresolved. 
Page 23 GAO-05-686 Exon-Florio Implementation 

Given these fundamental differences, we concluded that the extent to 

which issues are vetted and consensus is reached on certain cases is, at 

best, uncertain. 

Treasury also cites Committee guidelines on withdrawals—which state 

that parties, not member agencies, have the authority to request a 

withdrawal—to dispute our position that the Committee has encouraged 

companies to withdraw notifications to provide additional time to examine 

acquisitions. Guidelines stating that certain actions should be taken do not 

necessarily provide evidence that such actions were indeed taken. In five 

cases that we reviewed, letters from the companies requesting withdrawal 

and/or letters from Treasury, as Committee Chair, approving the requests 

to withdraw cited the need for more review time on the part of the 

government as the reason for the withdrawal. Regardless, Treasury’s 

detailed discussion of the withdrawal process ignores the key issue. 

Allowing companies to withdraw notices to provide more time for a 

review without initiating an investigation significantly increases the risk 

that companies will not refile in a timely manner—particularly in cases 

where the foreign acquisition has been completed—and that national 

security concerns will remain unaddressed. Avoiding investigations by 

using withdrawals also contributes to the opaque nature of the process 

because without an investigation there is no presidential decision and 

required reporting to the Congress. 

Understandably, Treasury is cautious about providing details into the 

Committee’s deliberations, given the sensitivity of the information 

discussed and the need to protect it. And we appreciate the challenges 

each case presents. However, despite Treasury’s assertion that the oral 

briefings provided by agency members to duly authorized committees of 

the Congress when requested are appropriate, the fact that our review was 

prompted by congressional concerns about the Committee’s review and 

investigation process suggests otherwise. 

Finally, Treasury criticized our review methodology—specifically, it 

questioned whether we spoke to all appropriate parties. We focused on the 

agencies that were most active in Exon-Florio reviews, as we noted to 

Treasury at the beginning of our review. During our preliminary 

discussions and throughout the review, none of the Committee member 

agencies, including Treasury, raised concerns with our methodology or 

suggested that we contact the Department of State, the United States 

Trade Representative, or the Council of Economic Advisers. Our reviews 

of the official Committee files, located at the Treasury Department, 

supported our view that the Departments of Commerce, Defense, 
Page 24 GAO-05-686 Exon-Florio Implementation 

Homeland Security, Justice, and Treasury were the most active agencies. 

Regardless, when it became clear to us that information from other 

Committee members could be germane, as was the case with the National 

Security Council, we attempted to contact them. In the case of the 

National Security Council, officials declined to meet with us. At the time 

we sent the draft report for comment, we were contacted by the 

Department of State and the U. S. Trade Representative who wanted to 

discuss the draft report. We met with representatives of both agencies to 

discuss their concern that our report did not adequately recognize the 

importance of open investment and was too focused on national security. 

We recognize that in implementing Exon-Florio, the Committee must 

consider national security in the context of open investment—a challenge 

we point out in the opening statement of our report. However, the purpose 

of the Exon-Florio amendment is to protect national security in the 

context of U.S. open investment policy. It is how national security is 

protected through the Committee process that needs to be better 

understood. We believe that understanding can be enhanced by improved 

insight and oversight of the process. 

The Department of Justice in its letter also provided technical comments, 

which we incorporated as appropriate. Treasury’s letter, along with our 

responses to specific comments, is reprinted in appendix I. Justice’s letter 

is reprinted in appendix II. 

To examine the process used by the Committee and its member agencies 

to review and investigate foreign acquisitions, we analyzed case files and 

discussed with Committee staff members the factors considered when 

cases are reviewed, the process and time frame the Committee uses to 

come to a decision, and the laws and regulations that provide the 

Committee with criteria against which to assess threats to national 

security. 

We examined in depth nine acquisitions notified to the Committee on 

Foreign Investment in the United States between June 28, 1995, and 

December 31, 2004. We selected acquisitions based on recommendations 

by Committee member agency officials and the following criteria: (1) the 

Committee permitted the companies to withdraw the notification; (2) the 

Committee or member agencies concluded agreements to mitigate 

national security concerns; (3) the foreign company had previously 

notified the Committee of a prior acquisition; or (4) GAO had conducted a 

prior review. The objective of the case reviews was to understand and 

Scope and 

Methodology 
Page 25 GAO-05-686 Exon-Florio Implementation 

document the Committee’s and its members’ approaches to and processes 

for reviewing foreign acquisitions of U.S. companies. We did not attempt 

to validate the conclusions reached by the Committee on any of the cases 

we reviewed. 

We also obtained information about other foreign acquisitions that we did 

not conduct case reviews on, and we also used information on other 

acquisitions obtained during prior GAO reviews. We obtained and 

analyzed data from relevant Committee member agencies, including the 

Departments of Commerce, Defense, Homeland Security, and Treasury. 

While we were not granted access to files held by the Department of 

Justice, we discussed individual cases with Justice officials and obtained 

adequate information to meet our objectives. We also discussed the 

Committee’s approach and process with Committee staff officials from 

member agencies most actively involved—namely, the Departments of 

Commerce, Defense, Homeland Security, Justice, and Treasury. 

To determine whether the weaknesses in provisions to assist agencies in 

monitoring agreements that GAO had identified in its 2002 report had been 

addressed, we analyzed agreements concluded under the Committee’s 

authority between 2003 and 2005 and compared these agreements with 

those GAO had previously analyzed. We discussed with Committee staff 

members the steps that they are taking to monitor agreements and enforce 

compliance. 

We conducted our review from April 2004 through July 2005 in accordance 

with generally accepted government auditing standards. 

As we agreed with your office, unless you publicly announce the contents 

of this report earlier, we plan no further distribution of it until 30 days 

from the date of this letter. At that time, we will send copies of this report 

to the Chairman and Ranking Minority Member of the House Committee 

on Financial Services and to other interested House and Senate 

committees and subcommittees. We will also send copies to the 

Secretaries of Commerce, Defense, Homeland Security, and Treasury and 

the Attorney General. We will also make copies available to others upon 

request. In addition, the report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

Please contact me at (202) 512-4841 or calvaresibarra@gao.gov if you have 

any questions regarding this report. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 
Page 26 GAO-05-686 Exon-Florio Implementation 

of this report. A list of major contributors to this report is listed in 

appendix III. 

Ann M. Calvaresi-Barr 

Director 

Acquisition and Sourcing Management 
Appendix I: Comments from the Department 

of Treasury 

Page 27 GAO-05-686 Exon-Florio Implementation 

Appendix I: Comments from the Department 

of Treasury 

See comment 3. 

See comment 2. 

See comment 1. 

GAO’s comments 

supplementing those in 

the report text appear at 

the end of this appendix. 
Appendix I: Comments from the Department 

of Treasury 

Page 28 GAO-05-686 Exon-Florio Implementation 

See comment 4. 
Appendix I: Comments from the Department 

of Treasury 

Page 29 GAO-05-686 Exon-Florio Implementation 
Appendix I: Comments from the Department 

of Treasury 

Page 30 GAO-05-686 Exon-Florio Implementation 

See comment 9. 

See comment 8. 

See comment 7. 

See comment 6. 

See comment 5. 
Appendix I: Comments from the Department 

of Treasury 

Page 31 GAO-05-686 Exon-Florio Implementation 

See comment 11. 

See comment 10. 
Appendix I: Comments from the Department 

of Treasury 

Page 32 GAO-05-686 Exon-Florio Implementation 

See comment 12. 
Appendix I: Comments from the Department 

of Treasury 

Page 33 GAO-05-686 Exon-Florio Implementation 

See comment 15. 

See comment 14. 

See comment 13. 
Appendix I: Comments from the Department 

of Treasury 

Page 34 GAO-05-686 Exon-Florio Implementation 

See comment 18. 

See comment 17. 

See comment 16. 
Appendix I: Comments from the Department 

of Treasury 

Page 35 GAO-05-686 Exon-Florio Implementation 

See comment 21. 

See comment 20. 

See comment 19. 
Appendix I: Comments from the Department 

of Treasury 

Page 36 GAO-05-686 Exon-Florio Implementation 

See comment 23. 

See comment 22. 
Appendix I: Comments from the Department 

of Treasury 

Page 37 GAO-05-686 Exon-Florio Implementation 

See comment 25. 

See comment 24. 
Appendix I: Comments from the Department 

of Treasury 

Page 38 GAO-05-686 Exon-Florio Implementation 
Appendix I: Comments from the Department 

of Treasury 

Page 39 GAO-05-686 Exon-Florio Implementation 

The following are GAO’s comments on the Department of the Treasury’s 

letter dated August 12, 2005. 

1. Our understanding of the Committee’s process is based on an 

extensive review of Committee guidance and case files and structured 

interviews and discussions with member agencies, including Treasury. 

Further, except where changes in Committee make-up and 

proceedings have occurred since 2002, our discussion of the laws and 

the Committee’s process is consistent with our 2002 report. 

2. As we point out in our evaluation of agency comments in the report, 

certain member agencies raised concerns that indicated fundamental 

disagreement among members when reviewing certain cases. Given 

these fundamental disagreements, we concluded that the extent to 

which issues are vetted and consensus is reached on certain cases is, 

at best, uncertain. 

3. To analyze cases notified to the Committee and determine whether 

threats to national security exist, each agency effectively 

operationalizes its own definition of national security. The implication 

that individual agencies do not apply a definition is unrealistic. 

4. We agree that Exon-Florio should be used judiciously as a safety net 

when laws other than Exon-Florio and the International Emergency 

Powers Act may not be effective in protecting national security—a 

point we make in the opening paragraph of our report. However, in 

cases where Committee members disagree on whether Exon-Florio 

applies, we have found that a more narrow definition of national 

security often takes precedence or the companies are allowed to 

withdraw their notification to avoid investigations. Treasury's rather 

lengthy discussion in its comment letter on the need to protect U.S. 

open investment policy underscores our concern. 

5. In numerous case documents GAO reviewed, the definitional bounds 

agencies used in considering national security concerns are apparent. 

Some agencies followed routine analytical processes, searching 

specific databases related to export controls, acquisition history, and 

critical technology information—sources that would reveal whether 

the foreign acquisition involved any export-controlled technology or 

item or classified contracts, or whether there was specific derogatory 

intelligence on the foreign company. Other agencies prepared specific 

vulnerability or threat assessments that have their own methodological 

parameters. The debate among Committee members on each 

notification is fueled by these differing definitions. 

GAO’s Comments 
Appendix I: Comments from the Department 

of Treasury 

Page 40 GAO-05-686 Exon-Florio Implementation 

6. We agree that, taken in total, member agencies consider a broad range 

of national security factors when cases are analyzed. We also agree 

that anything other than the broad consideration of a range of national 

security factors by the Committee would inappropriately limit the 

President’s necessary discretion to protect national security. 

7. While only the President decides what constitutes a threat to national 

security and what actions are in the interest of U.S. national security in 

cases that are sent for a determination, only two cases have reached 

this stage since 1997. Further, only 8 of 451 cases have undergone 

investigations. By allowing withdrawals of notifications rather than 

initiating investigations, the Committee effectively pre-empts the 

President from using his discretion to make a determination. To this 

end, the Committee has defined what constitutes a threat to national 

security, not the President. Further, since only those few cases that go 

to the President for a determination require reporting to the Congress, 

there is little insight into the Committee’s deliberations. Our review 

found that for specific cases, there has been significant disagreement 

among member agencies on what constitutes a threat to national 

security and what actions are in the interest of national security. In 

two such cases, companies were allowed to withdraw their notices, 

and to date, they have yet to refile, leaving the concerns unresolved. 

8. Again, Treasury’s response skews our finding. In two cases we 

reviewed, when an agency raised what it deemed a national security 

concern and other Committee members did not agree, the narrower 

definition of national security—which excludes the concern raised—

prevailed, in that the notice was withdrawn instead of the case 

proceeding to investigation. Regardless, the case Treasury refers to 

was cited in our 2002 report as an example of an agreement in which 

nonspecific language made the agreement difficult to implement. For 

example, to mitigate a concern about access to technology, the 

agreement required a “good faith effort” to divest a subsidiary. When 

the company divested part, but not all, of the subsidiary—citing lack of 

interested buyers as the rationale—government officials could not 

determine whether the company’s efforts were made in good faith 

because the agreement did not include criteria defining what actions 

would constitute a good faith effort. In addition, the agreement 

contained no consequences for failure to comply with the monitoring 

terms of the agreement within the stated time frames, and as we noted, 

the company failed to meet the terms of one provision. Given this 

outcome, it is unclear how Treasury can assert that “extensive 

mitigation measures were put in place” or how this case exemplifies 
Appendix I: Comments from the Department 

of Treasury 

Page 41 GAO-05-686 Exon-Florio Implementation 

that all member agencies participate in the Committee’s decisionmaking process. 

9. We agree that the decision to undertake an investigation demands 

careful deliberation on the part of all Committee members. However, 

in two cases we reviewed, documentation shows that in determining 

whether to initiate an investigation, Treasury, as Committee Chair, 

applies essentially the same criteria that the Exon-Florio amendment 

directs the President to use to decide whether to take action to 

suspend or prohibit a transaction. While Treasury states that an 

investigation is entirely appropriate if national security issues remain 

unresolved at the end of the 30-day review period, we found that rather 

than initiating an investigation, the Committee commonly allows 

companies to withdraw their notifications and refile at a later date to 

provide more time for review. Our report has not cited cases where a 

Committee decision not to investigate was the result of the application 

of an overly strict standard for deciding whether to investigate because 

where we noted the application of this standard, the companies 

withdrew their notice. 

Further, by applying the Presidential decision-making criteria at the 

conclusion of the 30-day review, the Committee effectively preempts 

the President’s opportunity to make a determination. In a 2004 case, 

documentation from a policy-level meeting shows that the 

appropriateness of applying these criteria in Committee deliberations 

was debated; the debate was not resolved at the time, and officials 

from two separate agencies told us that the debate continues. The 

implementing regulations for Exon-Florio make no distinction 

between the activities the Committee undertakes during the review 

and investigation periods—other than preparing a report to the 

President at the end of an investigation—and provide no criteria for 

determining when to initiate investigation. It is, in part, for this reason 

that we are proposing that the entire 75-day period be available for 

analyzing cases, if needed. Eliminating the distinction between the 

review and investigation periods would help ensure that sufficient time 

is available for thorough analyses of cases and that the presidential 

decision-making criteria are only applied by the President. 

10. Guidelines requiring that certain actions be taken do not provide 

evidence that such actions were indeed taken. For example, in one 

2004 case we reviewed, after a policy-level decision to initiate an 

investigation was made, some Committee member agencies, including 

the Chair, placed calls to corporate counsel informing them of the 

pending investigation and advising that their clients withdraw their 
Appendix I: Comments from the Department 

of Treasury 

Page 42 GAO-05-686 Exon-Florio Implementation 

notices. Because the companies withdrew, an investigation was never 

initiated. 

11. As stated in our report, we understand that the purpose of the 23-day 

rule is to enable the Committee to meet its obligations under ExonFlorio’s statutory time limits for 30-day reviews. For the majority of 

cases where national security concerns either do not exist or agency 

members agree that concerns are addressed by other laws, the 23-day 

rule may help facilitate the closure of cases before the expiration of 

the 30-day review period. However, in complex cases—cases in which 

national security concerns have been raised and for which Exon-Florio 

is the relevant statute—case documentation we reviewed revealed the 

significant pressures some agencies face to complete analysis within 

23 days. In five cases that we reviewed, letters from the companies 

requesting withdrawal and/or letters from Treasury, as Committee 

Chair, approving the requests to withdraw cited the need for more 

review time on the part of the government as the reason for the 

withdrawal. In one such case, an electronic message we reviewed cited 

the Committee’s workload on another high profile case as the reason 

that the Committee sought to have a notice withdrawn. In that case, 

the transaction had already been completed and the company had 

requested withdrawal on day 23, before agencies completed their 

analysis to determine whether to request an investigation. Because the 

company never refiled a notice, the national security concerns 

identified by two member agencies have not been further examined. 

Further, it should be noted that in its comments, the Department of 

Justice said that any additional time that could be made available to 

collect and analyze information needed to conduct a thorough and 

comprehensive national security assessment would be helpful. 

12. We have acknowledged the use of mitigation agreements1

 in our 

current report as a major tool used by the Committee. In fact, we point 

out that the more recent mitigation agreements have addressed several 

of the problems with such agreements that we noted in our 2002 

report. However, strengthening or increasing the number of mitigation 

 1

 GAO recently issued two reports that have identified vulnerabilities when the government 

uses some of the remedies noted by Treasury: one, overseeing contractors under foreign 

influence and two, ensuring classified information is protected. (GAO, Industrial Security: 

DOD Cannot Ensure Its Oversight of Contractors under Foreign Influence Is Sufficient, 

GAO-05-681 (Washington, D.C.: July 15, 2005); GAO, Industrial Security: DOD Cannot 

Provide Adequate Assurance That Its Oversight Ensures the Protection of Classified 

Information, GAO-04-332 (Washington, D.C.: Mar. 3, 2004). 
Appendix I: Comments from the Department 

of Treasury 

Page 43 GAO-05-686 Exon-Florio Implementation 

agreements does not ensure that all national security concerns raised 

by member agencies are sufficiently examined. Further, the particular 

passage cited by the Under Secretary is not disputing that mitigation 

agreements are often negotiated but rather is pointing out that there is 

not agreement on when these mitigation agreements are needed. As we 

reported, agencies that apply the more traditional definition of what 

constitutes a threat to national security have resisted using ExonFlorio to mitigate or address the concerns raised by other Committee 

members. 

13. We have revised our report to reflect that the Departments of Defense, 

Commerce, and Justice significantly rely on DHS to monitor 

companies’ compliance with the agreements. 

14. We did not mean to imply that Justice does not have the authority to 

undertake enforcement actions and have clarified that in the report. 

15. We agree that the Federal Bureau of Investigation and other Justice 

Department components have been and continue to be a very active 

and critical participant in the Committee’s process. We also 

acknowledge there are other Committee agency components that are 

also critical to the process such as the Bureau of Industry and Security 

in the Department of Commerce; the Office of the Under Secretary of 

Defense for Acquisition, Technology and Logistics–Industrial Policy, 

and the Central Intelligence Agency. Committee member agencies use 

many internal resources as part of their process. 

16. A remedy is defined as a legal means of preventing or redressing a 

wrong or enforcing a right. A Defense official confirmed that the 

provision in question that was deleted from the agreement stated that 

if the company (1) fails to comply with the terms of the agreement, 

(2) makes a materially false statement, (3) increases foreign entity 

control, or (4) makes other material changes in circumstances, the 

Attorney General, the Secretary of Defense or the Secretary of 

Homeland Security may raise concerns to the Committee or the 

President. Without having this provision, it is unclear what remedy will 

be available to the Committee and its member agencies to enforce this 

mitigation agreement. 

17. Despite what is stated in the guidelines, in practice the Committee has 

allowed companies or parties to withdraw their notices to provide 

member agencies additional time to complete their analyses or to 

negotiate mitigation measures. Documentation from Committee files 

shows that 12 of the 20 withdrawals we identified that have been 

granted since 1997 to companies that intended to continue the 
Appendix I: Comments from the Department 

of Treasury 

Page 44 GAO-05-686 Exon-Florio Implementation 

acquisition were granted to allow member agencies to either negotiate 

mitigation agreements, continue obtaining information from the 

companies, or otherwise continue analyses. 

18. Of the 26 letters granting withdrawal that we reviewed, only three 

explicitly stated conditions for the withdrawal: in two cases, the 

companies were abandoning the transaction; in the third, the company 

agreed to divest its U.S. acquisition. 

19. We recognize that the President retains the authority to take action if 

the Committee’s review is not completed. However, our review of case 

files does not support the Under Secretary’s assertion that Treasury, as 

Chair, tracked developments on the withdrawn cases that were 

notified after the transactions were closed. Further, it is unclear how 

Treasury could conclude that refiling is unnecessary in these cases, 

given that the withdrawals were granted to provide additional time to 

resolve specific concerns raised by other agencies. For example, in 

one case, a Treasury official told us that she was unaware that the 

Department of Defense had concerns. By not having the companies 

refile, Defense’s concerns were not fully vetted. In another case, a 

Defense official provided documentation indicating that the Defense 

Department’s position remained that conditions should be imposed on 

the transaction. In our view, refiling serves two purposes: (1) it 

provides assurances to the companies that action will not be taken at a 

future date and (2) it permits Committee member agencies to ensure 

that no national security concern was overlooked. 

20. The documentation we reviewed clearly showed that Treasury and 

Defense have different views of what constitutes a threat to national 

security. For example, in one case, Treasury officials wrote three 

separate memos stating that in Treasury’s view, Defense and 

Commerce Department concerns about (a) foreign ownership of 

sensitive but unclassified technology used in reconnaissance satellites, 

(b) the possibility of this sensitive technology being transferred to 

countries of concern, and (c) maintaining U.S. government access to 

the technology were not national security concerns. 

21. We agree that vulnerabilities can result from a variety of things not 

addressed by Exon-Florio. We merely provided examples of the kinds 

of vulnerabilities that may result from foreign control. We were not 

addressing the universe of vulnerabilities, only some of those 

addressed by Exon-Florio, the subject of our report. 

22. We agree that Exon-Florio provides broad latitude for the Committee 

to consider whether foreign acquisitions constitute a threat to national 
Appendix I: Comments from the Department 

of Treasury 

Page 45 GAO-05-686 Exon-Florio Implementation 

security. Our concern is how Exon-Florio is being implemented. Given 

the internal disagreement among Committee members and the lack of 

transparency as to how disagreements are resolved, we believe that 

additional guidance from the Congress would be beneficial. 

23. We recognize that, in most instances, 30 days is sufficient to conclude 

reviews. If Exon-Florio were amended, then we expect that the 

Committee could manage the process so that the vast majority of cases 

would continue to be completed within 30 days. However, Exon-Florio 

is to be used when other laws are inadequate—in short, to act as a 

safety net. The ability to complete “a vast majority” of reviews in 30 

days is not relevant to Exon-Florio’s importance as a safety net. 

Moreover, as we point out in our report, some agency officials have 

stated that 30 days is insufficient in complex reviews. The Justice 

Department, in its official comments, stated that any potential 

extension of the time available to the participants for the collection 

and analysis of information from the intelligence community would be 

helpful (see page 2 of Justice Department comments in app. II). 

Treasury officials have pointed out that being the subject of an 

investigation may have negative connotations for a company, and that 

the Committee tries to avoid initiating investigations. By eliminating 

the distinction between investigations and reviews, this negative 

connotation and the potential impact on investment would no longer 

exist. 

The Under Secretary expressed concern that extending the time 

frames would deter filings but did not explain the basis for his 

concern. However, the Committee need not rely solely on voluntary 

filings. The implementing regulations state that “any member of the 

Committee may submit an agency notice of a proposed or completed 

acquisition to the Committee through its staff chairman if that member 

has reason to believe, based on facts then available, that the 

acquisition is subject to section 721 and may have adverse impacts on 

the national security. In the event of agency notice, the Committee will 

promptly furnish the parties to the acquisition with written advice of 

such notice.”2

 

24. The Congress has made numerous efforts to conduct oversight of the 

Committee’s activities—first in the original Exon-Florio legislation by 

requiring a report when the President prohibited an acquisition, and 

 2

 31 C.F.R. § 800.401(b). 
Appendix I: Comments from the Department 

of Treasury 

Page 46 GAO-05-686 Exon-Florio Implementation 

again in 1992 by passing the Byrd Amendment to require a report when 

the President makes any decision regarding a foreign acquisition. In 

addition, in requesting our review, the Senate Banking Committee 

cited the “opaque nature” of the Exon-Florio process as a reason for its 

request, which suggests that the Committee on Foreign Investment in 

the United States has not been successful in keeping the Congress 

adequately informed. We agree that the confidentiality afforded to the 

companies under Exon-Florio should not be compromised. However, 

subsection (c) of the statute provides that the confidentiality 

provisions “shall not be construed to prevent disclosure to either 

house of Congress or to any duly authorized committee or 

subcommittee of the Congress.” Therefore, we stand by our 

suggestion that the Congress may wish to revisit the congressional 

reporting requirement. 

25. As we stated in our 2002 report, the regulations should not call for 

negotiating interim measures, but rather for the Committee to use its 

authority to impose them as a condition of withdrawal where the 

transaction has been completed or will be completed during the 

withdrawal period. Further, as we state in our report, “the Committee’s 

guidance to member agencies specifically states that Treasury will 

manage activities during withdrawal by specifying time frames and 

goals to be achieved.” Because Treasury has declined to implement our 

recommendation, we are including our recommendation as a matter 

that Congress may wish to consider. 
Appendix II: Comments from the Department 

of Justice 

Page 47 GAO-05-686 Exon-Florio Implementation 

Appendix II: Comments from the Department 

of Justice 
Appendix II: Comments from the Department 

of Justice 

Page 48 GAO-05-686 Exon-Florio Implementation 
Appendix II: Comments from the Department 

of Justice 

Page 49 GAO-05-686 Exon-Florio Implementation 
Appendix III: GAO Contacts and 

Staff Acknowledgments 

Page 50 GAO-05-686 Exon-Florio Implementation 

Ann M. Calvaresi-Barr, (202) 512-4841 

In addition to the contact named above, Thomas J. Denomme, Assistant 

Director, Allison Bawden, Gregory K. Harmon, Paula J. Haurilesko, Karen 

Sloan, John Van Schaik and Michael Zola made key contributions to this 

report. 

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Related GAO Products 

Page 51 GAO-05-686 Exon-Florio Implementation 

Defense Trade: Mitigating National Security Concerns under ExonFlorio Could Be Improved. GAO-02-736. Washington, D.C.: September 12, 

2002. 

Defense Trade: Identifying Foreign Acquisitions Affecting National 

Security Can Be Improved. GAO/NSIAD-00-144. Washington, D.C.: June 

29, 2000. 

Foreign Investment: Implementation of Exon-Florio and Related 

Amendments. GAO/NSIAD-96-12. Washington, D.C.: December 21, 1995. 

Foreign Investment: Foreign Laws and Policies Addressing National 

Security Concerns. GAO/NSIAD-96-61. Washington, D.C.: April 2, 1996. 

Related GAO Products 

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