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[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]

 
                     THE NEED FOR CFIUS TO ADDRESS
                       HOMELAND SECURITY CONCERNS

=======================================================================

                              FULL HEARING

                               before the

                     COMMITTEE ON HOMELAND SECURITY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 24, 2006

                               __________

                           Serial No. 109-79

                               __________

       Printed for the use of the Committee on Homeland Security
                                     
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  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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                     COMMITTEE ON HOMELAND SECURITY

                   Peter T. King, New York, Chairman

Don Young, Alaska                    Bennie G. Thompson, Mississippi
Lamar S. Smith, Texas                Loretta Sanchez, California
Curt Weldon, Pennsylvania            Edward J. Markey, Massachusetts
Christopher Shays, Connecticut       Norman D. Dicks, Washington
John Linder, Georgia                 Jane Harman, California
Mark E. Souder, Indiana              Peter A. DeFazio, Oregon
Tom Davis, Virginia                  Nita M. Lowey, New York
Daniel E. Lungren, California        Eleanor Holmes Norton, District of 
Jim Gibbons, Nevada                  Columbia
Rob Simmons, Connecticut             Zoe Lofgren, California
Mike Rogers, Alabama                 Sheila Jackson-Lee, Texas
Stevan Pearce, New Mexico            Bill Pascrell, Jr., New Jersey
Katherine Harris, Florida            Donna M. Christensen, U.S. Virgin 
Bobby Jindal, Louisiana              Islands
Dave G. Reichert, Washington         Bob Etheridge, North Carolina
Michael McCaul, Texas                James R. Langevin, Rhode Island
Charlie Dent, Pennsylvania           Kendrick B. Meek, Florida
Ginny Brown-Waite, Florida

                                   II

                            C O N T E N T S

                              ----------                              
                                                                   Page

                               Statements

The Honorable Peter T. King, a Representative in Congress From 
  the State of New York, and Chairman, Committee on Homeland 
  Security:
  Oral Statement.................................................     1
  Prepared Statement.............................................     2
The Honorable G. Thompson, a Representative in Congress From the 
  State of Mississippi, and Ranking Member, Committee on Homeland 
  Security
  Oral Statement.................................................     2
  Prepared Statement.............................................     3
The Honorable Donna M. Christensen, a Delegate in Congress From 
  the U.S. Virgin Islands........................................    21
The Honorable Peter A. DeFazio, a Representative in Congress From 
  the States of California.......................................    24
The Honorable Charlie Dent, a Representative in Congress From the 
  State of Pennsylvania..........................................    22
The Honorable Norman D. Dicks, a Representative in Congress From 
  the State of Washington........................................    16
The Honorable Bob Etheridge, a Representative in Congress From 
  the State of North Carolian....................................    20
The Honorable Sheila Jackson-Lee, a Representative in Congress 
  From the State of Texas........................................    49
The Honorable James R. Langevin, a Representative in Congress 
  From the State of Rhode Island.................................    25
The Honorable Bill Pascrell, Jr., a Representative in Congress 
  From the State New Jersey......................................    17
The Honorable Mike Rogers, a Representative in Congress From the 
  State of Alabama...............................................    16
The Honorable Loretta Sanchez, a Representative in Congress From 
  the State of California........................................    15
The Honorable Rob Simmons, a Representative in Congress From the 
  State of Connecticut...........................................
The Honorable Mark E. Souder, a Representative in Congress From 
  the State of Indiana...........................................    13

                               WITNESSES
                                PANEL I

The Honorable Stewart Baker, Assistant Secretary for Policy, 
  Planning, and International Affairs, Department of Homeland 
  Security:
  Oral Statement.................................................     9
  Prepared Statment..............................................    10
The Honorable Clay Lowery, Assistant Secretary for International 
  Affairs, Department of Treasury:
  Oral Statement.................................................     4
  Prepared Statement.............................................     5

                                PANEL II

The Honorable Stuart Eizenstat, Partner at Covington and Burling 
  and Former Deputy Secretary of the Treasury:
  Oral Statement.................................................    31
  Prepared Statement.............................................    34
Ms. Daniella Markheim, Jay Van Andel Senior Analyst in Trade 
  Policy, Center for International Trade and Economics, The 
  Heritage Foundation:
  Oral Statement.................................................    26
  Prepared Statement.............................................    28

                               PANEL III

The Honorable Roy Blunt, a Representative in Congress from the 
  State of Missouri:
  Oral Statement.................................................    42
  Prepared Statement.............................................    44
The Honorable Carolyn B. Maloney, a Representative in Congress 
  From the State of New York:
  Oral Statement.................................................    45
  Prepared Statement.............................................    46

                                APPENDIX

The Honorable Stewart Baker:
  Questions and Responses........................................    55
The Hononorable Clay Lowery:
  Questions and Responses........................................    58
The Honorable Ginny Brown-Waite:
  Prepared Statement.............................................    55

        THE NEED FOR CFIUS TO ADDRESS HOMELAND SECURITY CONCERNS

                              ----------                              

                        Wednesday, May 24, 2006

                     U.S. House of Representatives,
                            Committee on Homeland Security,
                                                    Washington, DC.
    The committee met, pursuant to call, at 1:38 p.m., in Room 
311, Cannon House Office Building, Hon. Peter King [chairman of 
the committee] presiding.
    Present: Representatives King, Smith, Souder, Lungren, 
Gibbons, Simmons, Rogers, Reichert, McCaul, Dent, Thompson, 
Sanchez, Dicks, DeFazio, Lofgren, Jackson-Lee, Pascrell, 
Christensen, Etheridge, and Langevin.
    Chairman King. [Presiding.] The Committee on Homeland 
Security will come to order.
    The committee is meeting today to hear testimony on the 
need for reforms to the Committee on Foreign Investments in the 
United States, or CFIUS, to adequately address homeland 
security concerns.
    Let me at the outset apologize to our witnesses for the 
delay. Certainly, the previous hearing went on longer than we 
expected, and I want to thank you for your patience and thank 
you for being here today, and also thank you for the service 
you give to our country. Because of the delays we have had, I 
will make my opening remarks very brief.
    All of us went to the Dubai ports issue, and on one side of 
the issue we happened to come out on, the reality was that it 
showed a need, I believe, for reform of the process to 
adequately take into account the unique homeland security 
concerns that we have in the post-9/11 era. There has been 
legislation introduced. We will be hearing from Congressman 
Blunt and Congresswoman Maloney who will be testifying on that 
legislation, in addition to other experts that we have here 
today.
    I will limit my remarks to again thanking the witnesses for 
being here today, expressing my belief that there is a need for 
legislation, and also to express to all the members of the 
CFIUS panel, even if it is reconstituted, we will be working 
closely with them.
    I now recognize the gentleman from Mississippi, the ranking 
member, Mr. Thompson.

                Prepared Statement of Hon. Peter T. King

    Despite the horrific attacks of 9/11 being over four years behind 
us, we continue to find processes in government that fail to recognize 
the difference between threats to national security and threats to 
homeland security.
    These processes were created before 9/11, but have not yet 
transformed to acknowledge that we live in a new and different world.
    The Committee on Foreign Investment in the United States is such a 
process.
    When I first heard of the pending purchase of P&O by Dubai Ports 
World, I thought it was a joke. Who would allow such a purchase to go 
forward? Weren't the United Arab Emirates one of only three nations to 
recognize the Taliban government of Afghanistan as legitimate? Didn't 
the terrorists from 9/11 funnel their money through the UAE? It simply 
didn't add up.
    I then learned of this mysterious entity called CFIUS, which it 
seemed few, if anyone, ever heard of.
    As we moved forward, I asked many questions about the Dubai Ports 
World acquisition, and slowly the information began to flow.
    Let me take a moment to recognize our first panel. This afternoon 
we have:
        Mr. Clay Lowery, Assistant Secretary for International Affairs 
        at the Department of the Treasury; and
        Mr. Stewart Baker, Assistant Secretary for Policy at the 
        Department of Homeland Security.
    I want to thank Assistant Secretaries Lowery and Baker for coming 
to testify on the record before my Committee. We first spoke in my 
office over three months ago when this issue first raised its ugly head 
during the Dubai Ports World acquisition, and I'm pleased to see that 
despite some heavy punches from Members of Congress, myself included, 
you both appear to be holding up rather well.
    Thank you for answering our Committee's inquiries and providing the 
files I requested. After reviewing the intelligence data gathered by 
the Director of National Intelligence following his 4-week 
investigation, I can honestly say that I feel comfortable that the 
Dubai Ports World acquisition was not a threat to our national 
security.
    Unfortunately, it took a thorough assessment conducted by the 
Intelligence Community to convince me of this--an assessment that was 
not conducted to any great detail prior to April of this year. It begs 
the question, why wasn't this thorough investigation conducted 
beforehand?
    I am concerned that the current CFIUS process does not adequately 
consider homeland security threats and I support reforms that will 
address these CFIUS shortcomings. That said, I believe Congress must 
work to ensure that we do not deter foreign investment. I have always 
supported free trade and will continue to do so. However, in the post-
9/11 world, there are other factors we must take into account.
    Since 1998, the Committee on Foreign Investment in the United 
States has conducted over 1,600 reviews, of which some 25 posed some 
level of national security concern. Of these 25, over half were 
withdrawn before the investigation was completed, and only one went to 
the President for a decision in accordance with the Exon-Florio 
provisions.
    How is it possible that only one purchase in 1,600 actually raised 
sufficient national security concerns to be forwarded to the President 
for action?
    I suspect much of it revolves around how you define national 
security. How does CFIUS define it?
    I look forward to your testimony this afternoon as I seek the 
answer to these and other questions.

    Mr. Thompson. Thank you very much, Mr. Chairman.
    I, too, will limit my remarks in that we have three panels 
for this afternoon, and we are some 40 minutes late getting 
started. We all know that this process came to light because of 
the Dubai concerns as to whether or not the due diligence 
required under the existing legislation was performed. And what 
we all want at the end of the day is for any of these 
transactions, not only to have the financial security, but we 
want to make sure that from a terrorist standpoint or security 
standpoint also we have not created a vulnerability by 
approving these processes.
    So in the interest of time, I will submit my written 
statement for the record and yield back and I look forward to 
the testimony.

             Prepared Statement of Hon. Bennie G. Thompson

    Good afternoon.
    I want to thank Chairman King for agreeing to hold these hearings.
    When I sent you that letter in February, the CFIUS process was just 
starting to come to light. Though CFIUS hasn't been in the news a lot 
recently, I still believe that it's a vital issue for this Congress and 
our Committee to consider, and I thank you for putting it on our 
agenda.
    Mr. Chairman, when Congress passed the Exon-Florio statute in 1988, 
we vested the authority to investigate and review mergers, 
acquisitions, and takeovers with the President of the United States.
        At the time, Congress believed that the President was the only 
        one who could adequately balance the country's need for foreign 
        investment with our demands for national security.
        The President is in a unique position to be able to assess both 
        sides and make a judgment about whether our national security 
        will be threatened by such acquisitions.
        President Reagan designated CFIUS to be the Committee to review 
        these deals. The Secretary of the Treasury became the enforcer 
        of Exon-Florio.
    But it has become painfully clear that in the 18 years since Exon-
Florio, the President's designee has failed to conduct the kind of 
careful, thoughtfull review that the drafters of Exon-Florio 
envisioned.
    The President has ceded his authority to a Committee that has 
repeatedly violated the provisions of Exon-Florio.
    First, according to statute, CFIUS is required to conduct a 
mandatory investigation in any instance in which a foreign government 
acquires a company that affects national security.
        It is clear to me that the acquisition of 6 major ports by DP 
        World, a UAE-owned company, would meet that standard.
        Unfortunately, it was only after the CFIUS process became 
        public and Congressional pressures were exerted upon the 
        Committee that a more rigorous investigation began.
        We know from a GAO report that only 8 investigations have taken 
        place since 1997. Given the facts that have recently come to 
        light over DP World, I wonder how many mandatory investigations 
        has CFIUS failed to under take during these years?
    How many times has this Committee failed to undertake careful 
scrutiny if a acquisition affecting our national security?
    Second, CFIUS failed to comply with Sec. 2170(k) of Exon-Florio 
which requires a quadrennial review to Congress.
        Only one report has ever been submitted under this provision, 
        and that was back in 1994.
        How can this Congress or the American people trust CFIUS to do 
        the kind of careful, intelligent review of these deals when the 
        Committee has failed to live up to its statutory requirement?
        How do we know whether there has been a coordinated strategy by 
        one or more countries or companies to acquire United States 
        companies involved in research, development, or production of 
        critical technologies?
        More importantly, how can the President--our Commander in 
        Chief--trust this Committee as his designee to carry out the 
        statutory demands of the Exon-Florio Act?
    Mr. Chairman, I want to be clear when I say that we need to have a 
fair and balanced policy when it comes to promoting foreign investment 
and ensuring our national security in this country.
        Foreign investment in this country drives our economy. Foreign 
        nations have invested billions in America--it is neither sound 
        economics nor sound politics to place blanket limitations on 
        foreign investment.
    But foreign investors need to know that this country follows a fair 
but rigorous balancing test that ensures the safety of the American 
public, while promoting foreign investment in the United States.
    I have my doubts about whether it's happening today. But I hope 
that we can come to some solution in the upcoming months as we consider 
legislation to reform the process.
    I'd like to thank the witnesses for appearing before us today, and 
I look forward to hearing their testimony.

    Chairman King. The gentleman yields back.
    If we could just take a moment to recognize the first panel 
and to ask them to begin their testimony. First is Mr. Clay 
Lowery, the assistant secretary for international affairs at 
the Treasury Department, and Mr. Stewart Baker, the assistant 
secretary for policy at the Department of Homeland Security.
    Your statements will be made part of the record. If you 
could possibly limit your remarks to 5 minutes. As you can see, 
the committee runs very much on time, but we do ask our 
witnesses to.
    Mr. King. But seriously, Secretary Lowery, you are 
recognized.

STATEMENT OF THE HONORABLE CLAY LOWERY, ASSISTANT SECRETARY OF 
         INTERNATIONAL AFFAIRS, DEPARTMENT OF TREASURY

    Mr. Lowery. Mr. Chairman, Ranking Member Thompson and 
distinguished members of the Homeland Security Committee, first 
of all, I appreciate the opportunity to be here today.
    Secondly, I want to thank you for your indulgence and 
Secretary Baker for letting me go first. This is sort of the 
batting order we have been using for a while when our testimony 
is involved. It has not always been a lucky batting order, but 
it has been ours.
    I am here speaking on behalf of the administration, the 
Department of Treasury, and the Committee on Foreign 
Investments in the United States. While we do not have a formal 
administration position on pending CFIUS legislation, I will 
address the two principles that guide us as we work to update 
CFIUS process.
    We believe that reforms should address two broad 
principles. First, U.S. national security imperatives in the 
post-9/11 environment; and secondly, the need to continue 
welcoming investment in the United States, which creates good 
jobs for American workers. In that context, I would like to 
highlight some specific areas that we believe get at some of 
the concerns of Congress.
    First, the administration supports efforts to update CFIUS 
to reflect the post-9/11 security environment. Two factors that 
should always be taken into account in CFIUS assessments are 
the nature of the acquiring entity and the nature of the assets 
to be acquired. In other words, CFIUS must consider the 
ultimate ownership and control of the acquirer and the possible 
foreign acquisition of critical infrastructure or other 
sensitive assets when reviewing any transaction.
    Second, CFIUS's focus must remain national security. A wide 
range of agencies comprise CFIUS and each brings its own unique 
expertise and perspective on national security. I want to be 
clear about how CFIUS operates. The initial 30-day review 
period is a thorough investigation in which a comprehensive 
threat and vulnerability assessment is conducted across 
agencies. If national security concerns are raised that cannot 
be addressed, CFIUS undertakes a 45-day extended investigation.
    However, many transactions do not raise national security 
issues and requiring extended investigations in such cases 
would divert resources and thereby diminish CFIUS's ability to 
protect national security.
    Third, the administration believes we should strengthen the 
role of the intelligence community in the CFIUS process. We 
have formalized the role of the DNI, but we do not think that 
the DNI should vote on CFIUS matters because the DNI's role is 
to provide intelligence support, not to make policy judgments.
    Fourth, we must also continue to emphasize the importance 
of preserving the attractiveness of the United States to 
overseas investors. FDI is critical to the U.S. economy. 
Majority-owned U.S. affiliates of foreign companies employ over 
5 million Americans. These jobs on average are higher paying 
jobs and roughly 40 percent of these jobs are in the 
manufacturing sector, about four times the national average.
    Fifth, the administration shares the view that we need to 
improve our communication with Congress to help Congress meet 
its oversight responsibilities. We are now promptly notifying 
Congress of every transaction upon completion and are committed 
to conducting quarterly briefings on CFIUS matters.
    While reforms of the CFIUS process should advance our 
shared goal of improved communication, we must always keep in 
mind that proprietary business information must be adequately 
protected. The integrity of the executive branch's decision-
making process must be preserved, and security reviews must not 
expose intelligence information or become politicized.
    Finally, we should look at ways to increase Congress' 
confidence in the process by enhancing accountability in terms 
of CFIUS decisions and monitoring mitigation agreements. The 
administration is committed to ensuring that senior, Senate-
confirmed officials play an integral role in examining every 
transaction. CFIUS agencies are now briefing transactions at 
the highest levels. However, requiring a Presidential 
determination or Cabinet-level certification on every 
transaction would introduce unnecessary delays and divert 
attention from transaction that raise possible national 
security issues.
    Mr. Chairman, I would like to reiterate in closing that the 
administration supports reforms of the CFIUS process. We 
believe that CFIUS can best serve U.S. interests through 
examinations that protect the national security, while 
maintaining the credibility of an open investment policy and 
the confidence that U.S. investors abroad will not be subject 
to retaliatory discrimination.
    I thank you for your time and would be happy to answer any 
questions.
    [The statement of Mr. Lowery follows:]

                 Prepared Statement of Hon. Clay Lowery

    Mr. Chairman, Ranking Member Thompson, and distinguished members of 
the Homeland Security Committee, I appreciate the opportunity to appear 
before you today. I am here speaking on behalf of the Administration, 
the Department of the Treasury, and the Committee on Foreign Investment 
in the United States (``CFIUS'' or the ``Committee'') to discuss our 
work and ways to improve the CFIUS process.

Improving the CFIUS Process
    The Homeland Security Committee and CFIUS share the common 
objective to protect our national and homeland security. In my recent 
testimony before the House Financial Services Committee's Subcommittee 
on Domestic and International Monetary Policy, Trade and Technology, I 
laid out the key principles that will guide CFIUS as we work with the 
Congress to integrate further America's national and homeland security 
interests. Reforms should address two broad principles: U.S. national 
security imperatives in the post-9/11 environment and the need to 
continue welcoming investment in the U.S. and creating good jobs for 
American workers.
    To advance those principles, the Administration supports improving 
communications with Congress on CFIUS matters. The Administration also 
welcomes other reforms to the CFIUS process, including those that 
ensure due consideration of the nature of the acquirer and assets to be 
acquired, focus resources on transactions that present national 
security issues, strengthen the role of the intelligence community, 
improve CFIUS monitoring of mitigation agreements, preserve the 
attractiveness of the United States for foreign investment, and enhance 
accountability. The CFIUS process should first and foremost ensure U.S. 
national security but should not unnecessarily discourage legitimate 
investment in U.S. businesses that will provide income, innovation, and 
employment for Americans. In today's testimony, I plan on addressing 
these reform principles. Of particular interest to the Homeland 
Security Committee will be our focus on those transactions that raise 
national and homeland security issues. The Administration looks forward 
to a dialogue with Congress regarding reforms to the CFIUS process. Let 
me first provide a paragraph or two on the historical context.
    The Committee examines foreign acquisitions of U.S. companies 
pursuant to section 721 of the Defense Production Act of 1950. Commonly 
known as the Exon-Florio Amendment, section 721 gives the President the 
authority to investigate such acquisitions and to suspend or prohibit a 
transaction if credible evidence leads him to believe that the acquirer 
might take action that threatens to impair the national security and 
if, in his judgment, existing laws, other than the International 
Emergency Economic Powers Act and the Exon-Florio Amendment, do not 
provide adequate and appropriate authority for him to protect the 
national security. After the enactment of the Exon-Florio Amendment, 
the President delegated certain of his authorities to the Committee. 
Pursuant to an Executive Order of the President and subsequent Treasury 
regulations, the Committee receives notices of transactions subject to 
the Exon-Florio Amendment and conducts thorough interagency reviews and 
investigations to identify potential national security issues. The 
President retains the authority to suspend or prohibit transactions.

Focusing on the Nature of the Acquirer and the Assets to be Acquired
    The Exon-Florio Amendment is nearly two decades old, and the 
Administration supports efforts to update it to reflect the post-9/11 
security environment. The Committee considers a broad range of national 
security issues when reviewing transactions, and its assessment of 
threats and vulnerabilities should remain flexible in order to meet 
changing circumstances and conditions that relate to national security. 
Two factors that should always be taken into account in CFIUS 
assessments are the nature of the acquiring entity and the nature of 
the assets to be acquired. These are essential in weighing the national 
security implications of any acquisition. The Administration does and 
will continue to support the Committee's consideration of the ultimate 
ownership and control of the acquirer and the possible foreign 
acquisition of sensitive assets when reviewing any transaction under 
the Exon-Florio Amendment, both of which are factors the Committee 
already considers when reviewing transactions.

Focusing on Transactions that Raise National Security Issues
    CFIUS's appropriate focus is and will remain national security. One 
of the focuses of the Exon-Florio amendment is, indeed, on transactions 
that could impact the U.S. defense industrial base. There is a wide 
range of agencies involved in CFIUS, including DHS, each bringing its 
own unique perspective and its own definition of national security. 
This enables us to consider all aspects of transactions ranging from 
energy and transportation to information technology and 
telecommunications. The intelligence community also provides thorough 
threat assessments as part of its analysis.
    This process allows us to focus the most resources and highest 
level of oversight on those cases that pose the greatest potential 
threat to national security. Many transactions notified to the 
Committee do not raise national security issues. In other cases, the 
national security issues are mitigated by the end of the 30-day review 
so do not require an extended investigation. Requiring an investigation 
of every transaction involving a foreign government-controlled acquirer 
would result in scores of investigations each year in which no national 
security concerns are present. This would diminish the Committee's 
ability to protect the national security and send the wrong message 
that the United States does not welcome foreign investment.

Strengthening the Role of the Intelligence Community
    The Administration also believes that the Committee can carry out 
its role more effectively by strengthening the role of the intelligence 
community in the CFIUS process, which is essential in a complex and 
changing national security environment. The Director of National 
Intelligence (DNI) has begun to do so by assigning an all-threat 
assessment responsibility to the National Intelligence Council and 
ensuring that all relevant intelligence community agencies and 
activities participate in the development of final intelligence 
assessments provided to the Committee. The Committee recently 
formalized the role of the Office of the DNI, which plays a key role in 
all CFIUS reviews and investigations by participating in CFIUS 
meetings, examining every transaction notified to the Committee, and 
providing broad and comprehensive threat assessments. The DNI already 
contributed greatly to the CFIUS process through reports by the 
Intelligence Community Acquisition Risk Center concerning transactions 
notified to the Committee, but formalizing its place in the process--
and strengthening the threat assessments provided to the Committee--
represent an enhancement of the intelligence community's role. The DNI 
does not vote on CFIUS matters and should not, because the role of the 
DNI is to provide intelligence support and not to make policy judgments 
based upon that intelligence.

Improving the Monitoring of Mitigation Agreements
    A further key to improving the CFIUS process is to strengthen the 
monitoring of mitigation agreements entered into between entities 
filing notice under the Exon-Florio amendment and members of the 
Committee. Typically, the members of the Committee with the greatest 
relevant expertise assume the lead role in examining any national 
security issues related to a transaction and, when appropriate, 
developing appropriate mechanisms to address those risks. Mitigation 
agreements implement security measures that vary in scope and purpose 
according to the particular national security concerns raised by a 
specific transaction. Monitoring parties' adherence to mitigation 
agreements after the conclusion of the CFIUS process is an important 
part of protecting the national security. The Administration supports 
reforms that reinforce the authority and provide resources for agencies 
that negotiate mitigation agreements to improve existing enforcement 
practices.

Promoting Legitimate Investment in the United States
    The Administration also emphasizes the importance of preserving the 
attractiveness of the United States to overseas investors. The intent 
of the Exon-Florio Amendment is not to discourage foreign direct 
investment (FDI) generally, but to provide a mechanism to review and, 
if the President finds necessary, to restrict investment that threatens 
the national security. FDI is critical to the U.S. economy. Majority-
owned U.S. affiliates of foreign companies employed 5.1 million U.S. 
workers in 2004. Capital expenditures in 2004 by these affiliates 
totaled $108 billion and their sales totaled $2,302 billion. In 2003, 
these affiliates spent $30 billion on R&D and accounted for 21 percent 
of total U.S. exports. Roughly 40 percent of those jobs were in 
manufacturing, four times the national average. If foreign companies 
were to reduce their spending in the U.S. as a result of perceptions 
that the United States was less welcoming of FDI, lower investment 
would cost American workers good jobs, reduce innovation, and lower the 
growth of the U.S. economy.
    Reforms to the CFIUS process should send a signal that the United 
States is serious about national security and welcomes legitimate FDI. 
The Committee must examine each transaction thoroughly, but the 
timeframes for examination should not be unnecessarily long. In 
addition, the process should not require investigation of transactions 
that could not possibly impair the national security. Last year, the 
Committee received 65 notices of transactions under the Exon-Florio 
Amendment. This year, CFIUS filings are on a pace to total roughly 90. 
Improvements to the CFIUS process should promote filing of notice with 
respect to appropriate transactions but should not delay or deter FDI 
with no nexus to the national security. The Committee can best serve 
U.S. interests through thorough examinations that protect the national 
security while maintaining the credibility of the U.S. open investment 
policy for overseas investors and the confidence of U.S. investors 
abroad that they will not be subject to retaliatory discrimination.

Improving Communication with Congress
    It is clear that improvements in the CFIUS process are still 
required, particularly with respect to communication with Congress and 
political accountability. The Administration is committed to improving 
communication with Congress concerning CFIUS matters and shares the 
view that Congress should receive timely information to help meet its 
oversight responsibilities. Treasury is now promptly notifying Congress 
of every review upon its completion, and the Administration is working 
hard to be responsive to Congressional inquiries. The Administration 
has committed to conducting quarterly briefings for Congress on CFIUS 
matters. These quarterly briefings were scheduled to begin before the 
issues with respect to the DP World transaction became the subject of 
Congressional and media attention. The Administration is also actively 
preparing the 2006 quadrennial report on possible foreign efforts to 
conduct economic espionage in the United States or acquire critical 
U.S. technologies. We regret that a quadrennial report has not been 
prepared since 1994, and the Administration will issue the 2006 report 
in a timely and thorough manner. I look forward to your suggestions on 
how to foster better communication.
    While reforms of the CFIUS process should advance our shared goal 
of improved communication, they should also reflect the importance of 
protecting proprietary information and the integrity of the executive 
branch's decision-making process. First, reforms to the CFIUS process 
should encourage companies to file with the Committee by ensuring that 
proprietary information they provide to the Committee is protected from 
public disclosure and will not be used for competitive purposes. Full 
disclosure of information by companies is critical to the Committee's 
ability to analyze thoroughly the national security risks associated 
with a transaction. Second, it is important to protect both the 
executive branch's deliberative process and classified methods and 
sources, and avoid possible politicization of CFIUS reviews and 
investigations for partisan purposes or at the behest of special 
interests. Third, reporting requirements should take into account the 
need for CFIUS member agencies to focus their limited resources on 
examining transactions notified to the Committee. I am confident that 
the Committee can provide Congress with the information it requires to 
fulfill its oversight role while respecting these important principles.

Enhancing Accountability
    The Administration supports a high level of political 
accountability for CFIUS decisions and is committed to ensuring that 
senior, Senate-confirmed officials play an integral role in examining 
every transaction notified to the Committee. Improvements to the CFIUS 
process should also ensure that senior U.S. officials are focused on 
national security issues. I know that CFIUS agencies are now briefing 
at the highest levels in their respective agencies. However, the 
President and Cabinet-level officials should focus their attention on 
the cases that merit the greatest scrutiny. The President should focus 
on transactions that at least one member of the Committee recommends he 
suspend or prohibit. Requiring the President to make a determination 
when all CFIUS members agree that a transaction does not threaten to 
impair the national security would potentially divert his attention 
from transactions that could pose security risks.
    Similarly, requiring Cabinet-level certification of CFIUS decisions 
on transactions that do not raise potential national security concerns 
would lengthen and delay the process, presenting an unnecessary 
impediment to legitimate investment. Such a requirement would also 
dilute the resources that the most senior U.S. officials could devote 
to transactions that do pose national security risks. This would impede 
the Committee's ability to protect the national security as effectively 
as possible. I am confident that the Committee can carry out its 
obligations in a manner that guarantees high-level political 
accountability while focusing senior officials on transactions that 
raise possible national security threats.

Conclusion
    Mr. Chairman, the Administration appreciates your leadership and 
attention to the protection of America's national and homeland security 
both in terms of the CFIUS role and more broadly. To reiterate, the 
Administration does and will continue to support CFIUS considering the 
ultimate ownership of the acquirer and the possible foreign acquisition 
of sensitive assets when reviewing any transaction, both of which are 
factors the Committee already considers when reviewing transactions. 
The Administration has taken a number of steps to improve the CFIUS 
process and to address concerns raised by Congress, and supports 
continued reforms to the CFIUS process. Sound legislation can ensure 
that the Committee reviews transactions thoroughly, protects the 
national security, conducts its affairs in an accountable manner, and 
avoids creating undue barriers to foreign investment in the United 
States. All members of CFIUS are committed to working with Congress to 
improve the process, understanding that their top priority is to 
protect our national security.
    I thank you for your time today and am happy to answer to any 
questions.

    Chairman King. Secretary Baker?

 STATEMENT OF THE HONORABLE STEWART BAKER, ASSISTANT SECRETARY 
        POLICY, PLANNING, AND INTERNATIONAL AFFAIRS, DHS

    Mr. Baker. Thank you, Chairman King, Ranking Member 
Thompson, members of the committee. It is a pleasure to be here 
to talk about this very important issue.
    We are the newest member of CFIUS, joining in March of 
2003, but I think it is fair to say we have already carved out 
a unique role as the Department of Homeland Security in CFIUS. 
Just three points about that.
    First, given the origins of the department, the attacks of 
September 11, we have had to take a very different and 
untraditional view of what national security is. We have had to 
define it in terms of homeland security and in terms of 
unconventional threats. We have done that. We have looked very 
hard at a wide range of transactions.
    I think the second point that I would make is that we have 
been very aggressive compared to many members of CFIUS in 
saying we see a homeland security element to this transaction, 
and we want some kind of protection. Either we want to stop the 
transaction or more often we want to enter into some kind of 
mitigation agreement that addresses the concerns that we have.
    I think we have participated in about 170 transactions, and 
in more than 30 of them we have joined or been the sole parties 
participating in some form of national security agreements. So 
about one-fifth of them have led us to ask for additional 
protections for homeland security.
    The third point is that CFIUS is a very high priority for 
the Department of Homeland Security and has been since it 
started. As this committee knows quite well, our office, the 
policy office was just created in October. I just was confirmed 
in October. One of my highest priorities was to stand up a 
CFIUS policy office, and the first person that I hired to be a 
career employee in the policy department was someone who is a 
specialist in CFIUS. So we have made it a high priority within 
the department and within the policy office.
    Three additional points about CFIUS reform, very quickly. 
It is quite obvious from the House bill dealing with CFIUS that 
this committee and many of the members here are cosponsors have 
already had a substantial impact on that bill. We appreciate 
it. It is a responsible and thoughtful bill and we look forward 
to working with you as it moves through Congress.
    Two other points. I completely agree with Assistant 
Secretary Lowery about the principles that ought to govern 
CFIUS reform. We have had a very cooperative working 
relationship with the Treasury Department. We have gone through 
a lot together in the last several months.
    Finally, I would extend to this committee a pledge of all 
the cooperation you would like in terms of information about 
our practices under CFIUS or our views on details of the 
legislation as it moves through.
    Thank you very much.
    [The statement of Mr. Baker follows:]

                Prepared Statement of Hon. Stewart Baker

    I thank Chairman King, Ranking Member Thompson, and all of the 
distinguished members of this Committee.
    I appreciate the opportunity to speak briefly today regarding the 
Department of Homeland Security's role as a member of the Committee on 
Foreign Investment in the United States and DHS's support for CFIUS 
reform.

    DHS's CFIUS Background
    The Department of Homeland Security is the newest member of CFIUS. 
We became a member in March 2003, soon after DHS began as an 
organization of 22 diverse agencies whose common mission is the 
protection and security of our nation and people. Since that time, we 
have participated in the review of more than 170 foreign acquisitions 
involving some of the nation's critical infrastructure, technology, and 
other assets vital to our national security.
    I mention our origins to stress what I believe is a key strength of 
the Department--we bring to the CFIUS a diversity of viewpoints, 
expertise, and skills. The government agencies from which we were 
formed give DHS a broad perspective, informed by an understanding of 
infrastructure threats, vulnerabilities and consequences. DHS generally 
leads CFIUS reviews of transactions involving critical infrastructure, 
and we also have entered into dozens of agreements to mitigate national 
security risks that may arise from CFIUS transactions. When we enter 
into these important agreements, DHS is careful to monitor compliance, 
and we do so in coordination with other CFIUS agencies who are parties 
to the agreements.
    I think my CFIUS colleagues will vouch for the fact that we take 
our role in CFIUS seriously and interpret our security mandate broadly. 
We ensure that components throughout DHS review each and every 
transaction. DHS's forward-leaning stance on security issues sometimes 
gives rise to debate within CFIUS, but it is a healthy debate that 
ultimately enhances national security and investment. A substantial 
portion of DHS was formed out of the Treasury Department and we have no 
doubt our dual mission requires us to protect homeland security while 
maintaining an open investment policy.
    In case it is not clear from my remarks so far, I should say 
explicitly that the CFIUS process is one of DHS's highest priorities, 
and senior officials in the Department are involved in every case. We 
are also cognizant of the fact that the number of CFIUS cases is on the 
rise, and our staffing plan is responsive to that fact. When I became 
Assistant Secretary for Policy, one of the first individuals I hired 
was someone whose primary responsibility is to help manage the 
Department's CFIUS program, and we are continuing to build our CFIUS 
staff.

CFIUS Reform
    As to reform of the CFIUS process, I'll briefly make three points. 
First, let me commend the members of this committee for your thoughtful 
and productive work in your efforts to balance national security and 
open investment principles.
    Second, DHS fully subscribes to the principles for further 
improvement that were articulated by my Treasury colleague. While DHS 
functions as an autonomous agency within CFIUS, the Treasury reform 
principles have our complete support.
    Third, DHS is pleased to be involved in this dialog about the 
reform of the CFIUS process and to lend our expertise and experience in 
the reform process. We hope that you will continue to reach out to us, 
and we stand ready to provide our technical expertise in helping to 
ensure that national security and open investment principles are 
balanced in a manner that benefits our nation.

    Chairman King. Thank you, Secretary Baker.
    Mr. Lowery, on February 21 of this year, I requested a copy 
of the CFIUS review relating to Dubai Ports. I received the 
documents yesterday. As I go through them, it was 500 pages of 
background material, but no actual report.
    Is that the way it is usually done? Is there no actual 
report done for the transaction, no official report?
    Mr. Lowery. No, sir. The documents that you received are 
background on the filing itself, and the report is usually 
internal oral discussions and written discussions through e-
mails between agencies, and then eventually a decision is made.
    The key issue was that there were some security concerns 
that were raised and the Department of Homeland Security had 
worked out an agreement between Dubai Ports World and the 
United States government. That was one of the key documents. 
After that, the CFIUS Committee decided that this transaction 
did not raise national security concerns that had not been 
addressed, and therefore there was a letter that basically told 
the companies that we were fine with the transaction.
    Chairman King. Is that going to be the continued policy? 
There will be no reports made, no final reports, no official 
report?
    Mr. Lowery. I think that basically one of the key things 
that we want to do going forward is to make sure that Congress 
does receive reports after transactions are completed. That is 
something that we are broadly supportive of. I mentioned it in 
my testimony, and we want to work very closely with this 
committee and other committees on how best to do that.
    Chairman King. Thank you.
    Secretary Baker indicated that he has looked at 
legislation; the main sponsors are Congressman Blunt and 
Congresswoman Maloney. I would ask Secretary Lowery if he has 
had a chance to look at that legislation and what he thinks of 
it, and also compare it to the other two main pieces of 
legislation. Congressman Barrow, I believe, has legislation, 
and also Senator Shelby.
    So. Secretary Lowery, if you could comment on Congressman 
Blunt's legislation, and if the two of you could then comment 
on the other two, Congressman Barrow's and Senator Shelby's.
    Mr. Lowery. Yes, sir. We have not taken a specific position 
on each of the different pieces of legislation. I think there 
is some other legislation out there as well. I agree with 
Secretary Baker that the legislation that we have seen from 
Representatives Blunt and Maloney is very constructive. We look 
forward to working with the committees on that legislation.
    I actually have not read Congressman Barrow's legislation. 
I have read Senator Shelby's and we are also making sure that 
we are working very closely with the Senate. But in terms of 
comparison, I think what we have tried to do is lay out the 
different types of principles that we have. We would like to 
work with Congress through those principles, and what is the 
best way to structure legislation around them.
    Chairman King. Secretary Baker?
    Mr. Baker. Yes, I also would say that I would not like to 
get into the specifics of the other body's legislation. We 
believe there are a lot of commonalities between that and the 
bill that was cosponsored by Mr. Blunt. We think that the 
commonalities in many cases are constructive. We would like to 
work with both committees to try to resolve them in a way that 
is workable for the future for CFIUS.
    We do have to have a functioning process that meets certain 
deadlines and is responsive to both Congress and to investors, 
as well as national security.
    Chairman King. Thank you, Secretary.
    Now, I would recognize the gentleman from Mississippi, Mr. 
Thompson, who actually was one of the main impetus for this 
meeting and requested it several months ago. The gentleman from 
Mississippi?
    Mr. Thompson. Thank you, Mr. Chairman. I appreciate the 
opportunity to have the witnesses before us today.
    Mr. Pascrell raised a question about human capital and the 
fact that there is always this revolving door happening. Have 
you had that problem with your department, Mr. Baker?
    Mr. Baker. I am too new to leave, so I have not seen a lot 
of departures. Inevitably in government, there is turnover. By 
and large, my experience has been very good in terms of people 
being willing to stay when we have asked them to stay.
    Mr. Thompson. Well, in respect to the CFIUS process, how 
many people in your office work on that process?
    Mr. Baker. Of the staff, I would say three at this point 
are working on CFIUS principally. That is an increase from one 
a few months ago, so we have been increasing the staff. We have 
a request for 10 in the administration's budget for next year, 
so this was something that we asked for even before the Dubai 
Ports World episode. So we have intended to expand that pretty 
substantially.
    Mr. Thompson. So how many compliance agreements does the 
department enter into with other companies?
    Mr. Baker. We have entered into a little over 30 in the 
last 3 years, so 10 a year.
    Mr. Thompson. Ten a year, using somewhere between one to 
three staffers?
    Mr. Baker. Yes. Because my office didn't exist prior to 
October of last year, much of the CFIUS work was done by other 
offices prior to the reorganization. But I think drawing on a 
couple of lawyers in the general counsel's office, we probably 
have had three to six people working on CFIUS over the years.
    Mr. Thompson. So your testimony is based on budget requests 
and your own analysis that you really need more people than 
what you have right now to adequately do the job?
    Mr. Baker. Yes. I think that that is right.
    Mr. Thompson. Thank you.
    Now, taking the chairman's comment about this voluminous 
information we received at 4 o'clock yesterday afternoon, Mr. 
Lowery, it is very difficult for us to conduct oversight 
getting that much information less than 24 hours before a 
hearing.
    Mr. Chairman, I would hope that however we can enforce any 
rules that it really is not enough time for us to go through 
that much information, and then we find that it is not as 
complete as we need.
    So I am not certain how we work on that, but it limits our 
ability and effectiveness as members of Congress when we get it 
so late.
    Chairman King. If the gentleman would yield?
    Mr. Thompson. Yes.
    Chairman King. I would work with the ranking member to 
ensure that we get more compliance in the future, and also I 
would note that we made the initial request back on February 
21.
    Mr. Thompson. That is correct.
    Mr. Lowery. Can I comment?
    Chairman King. Yes, sure, Secretary Lowery.
    Mr. Lowery. We apologize for the delays in getting that 
documentation to you. Just to make sure that everyone is clear, 
we have to be very careful sometimes because of some of the 
proprietary information and the deliberative documents that 
were involved. So because of that, it was a fairly extensive 
process that was handled by the general counsel's office.
    Because CFIUS is made up of 12 different agencies, we have 
to clear it with every single one of those agencies. That does 
take time. We apologize, though, for the delays. We should have 
gotten it up faster than we did. Just so you know, I received 
that telephone book full of information just last week, and I 
was traveling. I got back and got it soon as I possibly could.
    Mr. Thompson. Thank you very much, Mr. Chairman.
    I yield back.
    Chairman King. The gentleman from Indiana, Mr. Souder?
    Mr. Souder. Perhaps one legislation we could look at is how 
to expedite executive branch clearance processes. Over in 
Government Reform, we very seldom get documents prior to the 
night before a hearing. Often, it is this multi-agency internal 
discussions. We deal with classified material all the time. If 
it needs to be classified, it should be classified. If it is 
proprietary, tell us it is proprietary. But we can't do our 
work in oversight, and this is building to a crisis in multiple 
committees that I am part of.
    I have a more particular question. Does this cover leases 
and management, as well as purchase?
    Chairman King. If the gentleman would yield? The gentleman 
from Washington actually asked the question. We can keep going 
with the questions, but so maybe we will go vote, and then we 
will come back and take the hearing back. We will have to move 
quickly on that.
    The gentleman from Indiana?
    Mr. Souder. Does the process include leases and management 
contracts, as well as purchases?
    Mr. Lowery. To my knowledge, no. I think that it is about 
acquisitions.
    Mr. Souder. Because in Indiana, we are having a big 
discussion about Cintras and Macrey, Australian and Spanish 
companies, are managing the Indiana toll road for 75 years. 
They took a lease. They manage the Chicago Skyway. So for that 
infrastructure, none of the legislation, nor your process, 
would impact a lease arrangement?
    Mr. Lowery. I am not an attorney, but to my knowledge, no, 
it would not. It is specifically about acquisitions.
    Mr. Souder. All right. So the similar thing would be if it 
is an airport, because the British are managing the 
Indianapolis Airport, looking at once again leasing it to a 
management. Would the Department of Homeland Security be 
looking at something like that?
    I don't have a problem with it. I am thrilled that they are 
bringing investment to Indiana, quite frankly. I am just 
wondering what kind of process goes through lease management 
because particularly a major airport would be critical 
infrastructure.
    Mr. Baker. Certainly the Department of Homeland Security 
would have an interest, particularly in who is operating 
airports, but I agree with Assistant Secretary Lowery that 
CFIUS would not by itself cover that unless the company that is 
actually administering that lease is then acquired by another 
foreign company.
    The question from our point of view would be what other 
legal authorities might we have to deal with a company that is 
running an airport, and typically to draw on the experience of 
the ports, we have some regulatory authority over security 
activities. That does not necessarily allow us to exclude a 
particular foreign company, but it can allow us to look closely 
at their security practices.
    Mr. Souder. General Electric, Magnavox, many American 
companies were downsizing over the years. In my district, BAE 
bought the GE aircraft controls that does defense contracting 
in the Air Force. USSI bought what was Magnavox-Raytheon-
Sonavoys operation, which is a British company making defense 
parts, which conceivably, depending on how the structure goes, 
could be impacted here.
    Michelin is the largest employer in my district, which is 
French, making tires that go into all sorts of equipment, not 
to mention that I have Dreyfus building the largest biodiesel 
plant in the United States, second-largest in the world, in my 
district, which is also French, while Bruna Steel from Italy 
bought a company from Canada in my district that makes steel.
    Now, some of these companies are structured where they have 
an American division. Some of them are straight ownership. 
Could you explain a little bit where the lines here are on 
military, parts that go into military, steel that would go into 
military, or even energy structures there where Dreyfus is 
actually impacting. Because without this investment, we are 
going to really dry up American jobs.
    Mr. Lowery. I don't know all of those transactions, but 
many of them, I would guess, have actually gone through the 
CFIUS process. What happens is that companies, especially in 
the defense industrial base, but also in critical 
infrastructure, realize that they need to come in and do CFIUS. 
I know that BAE has come through CFIUS many times. I can't 
speak for the specific transactions in your district.
    We agree with you. It is very important to the U.S. economy 
that we continue to get this foreign direct investment. That is 
why we have tried to keep the CFIUS process as professional and 
rigid with timelines as it possibly can be so that we can 
address these issues. If there is a national security concern 
with a CFIUS case, we can address those issues through means of 
the CFIUS process.
    But a lot of times, these transactions do not raise those 
national security concerns. We should look at them from the 
national security perspective and get them out of the system, 
quite frankly.
    Mr. Souder. Does steel qualify as a national security 
concern? Obviously military parts would directly, but what 
about the raw products that go into those parts?
    Mr. Lowery. I think that it probably would. I know that in 
my time we have actually looked at some steel cases.
    Mr. Souder. In Homeland Security, do energy companies 
constitute something that Homeland Security would review?
    Mr. Baker. Yes, sir, they do. They are part of the critical 
infrastructure.
    Mr. Souder. Okay. Thank you.
    I yield back.
    Chairman King. The gentleman yields back.
    There is about 6 minutes to go on the vote, so the 
gentlelady from California can begin her questioning. The 
gentlelady is recognized for 5 minutes.
    Ms. Sanchez. Thank you, Mr. Chairman.
    This whole Dubai issue obviously brought this to the 
forefront. I think the really big issue of Dubai was what is so 
critical to the United States that we have to hold it in our 
own hands, and what is it of the assets that we hold that would 
be available for lease or operation or sale to foreign 
companies?
    This is an incredibly important issue, given the trade 
deficit and the desire of our American companies to own assets 
around the world. I think Europeans, well anybody, Asian, 
anybody is looking at this and saying, you know what, what is 
the United States going to do? So obviously, we have this 
process now.
    Under the critical infrastructure protection arena, as the 
law currently is, could you go through what would fall under 
that as far as a review process?
    Mr. Baker. We define the critical infrastructure the way 
the Homeland Security Act does, which is very broadly. It 
includes agriculture, food production, power production, 
telecommunications, a wide variety of industries. We have 
tended to take the lead in taking a look at transactions that 
affect those sectors.
    When we find a transaction that falls into one of those 
sectors, the first question we ask is is there some other 
authority that would allow us to regulate the national security 
risks, the homeland security risks, without blocking the 
transaction? If there is, then we don't need to use CFIUS.
    But if there isn't, then if we see a risk in the 
transaction, what we will do is ask the companies that are 
engaged in it to come in and sit down with us and to negotiate 
an agreement in which they will agree to take actions that will 
minimize the risk that we see in the transaction. In fact, that 
is what we did in the Dubai Ports World case, where we 
identified some risks that we wanted to protect against.
    Ms. Sanchez. Let's say a telecom company like AT&T or one 
of these, has a buy-out proposed. Would we look at that as a 
critical infrastructure piece?
    Mr. Baker. We would indeed. We have and we have negotiated 
national security agreements with a number of foreign buyers of 
telecommunications companies.
    Mr. Sanchez. Okay. Do you have anything to add?
    Mr. Lowery. I agree completely.
    Ms. Sanchez. Okay. After 9/11, the criteria changed for 
national security and what we were looking at in 
infrastructure. Right? Do you think that is adequate? Or do you 
think we have to look at one of these bills that would address 
a broader scope of what might be included as critical to our 
national security as far as assets, any type of assets?
    Mr. Baker. DHS, working within the existing statute, has 
made it clear that we take a very broad view of what our 
national security requires. The bills that we are looking at 
tend to include homeland security as part of national security. 
We are fully supportive of that idea. So in our view, our 
current practice is that, but it would be very helpful to have 
the law match our practice.
    Ms. Sanchez. Thank you, Mr. Chairman.
    Chairman King. Yes. The gentlelady yields back.
    I am going to call a recess of the committee for about 5 
minutes. The committee stands in recess.
    [Recess.]
    Mr. Rogers. [Presiding.] I would like to call the hearing 
back to order.
    At this time, I recognize Mr. Dicks for any questions he 
may have.
    Mr. Dicks. Let me ask you a question about this letter, Mr. 
Lowery, that you wrote to the committee. In the letter, it 
says, ``CFIUS member agencies provide their position on a 
transaction to Treasury staff, informing Treasury whether the 
CFIUS member agency will request an extended investigation with 
respect to the reviewed transaction.''
    Is that done in writing?
    Mr. Lowery. Yes, sir, usually via e-mail.
    Mr. Dicks. Is that part of the information that you sent to 
the committee?
    Mr. Lowery. I don't think so, sir.
    Mr. Dicks. Why is that?
    Mr. Lowery. I would have to ask the general counsel, but I 
believe that there was some concern about deliberative process, 
sir.
    Mr. Dicks. So you are claiming executive privilege here, is 
that correct?
    Mr. Lowery. I believe so, sir.
    Mr. Dicks. Mr. Chairman, I think the committee has a right 
to see this. I would hope that we would at least consider what 
ever steps we can. I think without that, all we have is a 
series of e-mails and documents that don't seem to mean very 
much.
    I am also surprised, by the way, and we may have to change 
the legislation here, I think there ought to be a report 
written about the decision of the CFIUS group. The secretary or 
whoever is in charge of this should have to write a report that 
could be reviewed.
    Why is that not done?
    Mr. Lowery. Sir, we actually think that that is a good 
thing to look at going forward. Right now, basically, the 
report that we would do to Congress would be in any cases that 
go to the president. There was a recent case where we did a 
report to Congress on a transaction.
    On a regular basis, we have not done that, but we think 
that it is something that should be explored because we do want 
to improve communications with Congress. We do realize that 
this has been a problem, and we need to correct it. That is one 
of the reforms that we are looking at very carefully.
    Mr. Dicks. I am trying to find my notes here. There is a 
report that you are supposed to do on a quadrennial basis, and 
there has only been one of them submitted, and that was in I 
believe 1994. Why is it that this quadrennial report has not 
been filed in the last 12 years?
    Mr. Lowery. Sir, we regret that the quadrennial report has 
not been filed in 1998 and 2002. We are committed to getting it 
done.
    Mr. Dicks. Then why isn't it done, if you are committed to 
it? Did you just figure out before this hearing that it wasn't 
done? You must have known it wasn't done.
    Mr. Lowery. Sir, basically we looked and found out that it 
hadn't been done for all this time, and what we have done is 
put together an interagency working group, as well as working 
with the DNI. It is a very labor-intensive report to get a lot 
of data and do the analysis of that data. We are committed to 
getting that report done in 2006.
    Mr. Dicks. In the fiscal year or calendar year?
    Mr. Lowery. This year, sir, as soon as possible.
    Mr. Dicks. Okay. So this in your mind is an oversight?
    Mr. Lowery. Yes, sir.
    Mr. Dicks. Well, Congress should have maybe proper 
oversight, we should have asked for this report to be 
submitted. What kind of information would be in this report? 
Can you characterize it?
    Mr. Lowery. Yes. There are two parts to the report. One is 
about counter-espionage issues, which actually is a report that 
has been picked up and been done on an annual basis by the 
national counterintelligence unit of DNI. So that actually has 
been going on on an annual basis.
    The part that has not been going on is analysis of trends 
in mergers and acquisitions to see if there has been anybody 
that has been specifically targeting. That part has not been 
happening and that is the part that we need to address during 
this quadrennial report, the one that we are working on right 
now.
    Mr. Dicks. Does the administration, even though they 
haven't sent the report up, does the administration follow 
these trends, and what these other countries like the Peoples 
Republic of China and others?
    Mr. Lowery. We do follow these trends in the general sense. 
We just haven't done it with the type of data analysis that 
would be needed in order to do the quadrennial report.
    If you look over most of the transactions that have been 
done, some involve Japanese companies, but European and 
Canadian companies constitute the bulk of the transactions. We 
have not really found any definitive trends that show any 
targeting by specific countries.
    That said, we do need to do a deeper analysis than we have 
done before. That is why it is going to take us a while, but we 
are committed to getting it done this year.
    Mr. Dicks. I appreciate that.
    I thank you, Mr. Chairman, and I yield back.
    Mr. Rogers. The gentleman yields back.
    The gentleman from New Jersey is recognized for any 
questions he may have.
    Mr. Pascrell. Mr. Lowery, you mentioned in your testimony 
that typically the members of the committee with the greatest 
relevant expertise assume the lead role in examining any 
national security issues which are related to the particular 
transaction, and when appropriate, developing appropriate 
mechanisms to address those risks.
    Would the Department of Homeland Security not take the lead 
on many of these transactions? And do you think that they have 
the personnel capable to fulfill this duty?
    Mr. Lowery. In terms of your question about lead agencies, 
there are a variety of agencies that take lead 
responsibilities. Sometimes it is the Department of Homeland 
Security; sometimes it is the Department of Defense; sometimes 
it is Justice; and sometimes it is the Energy Department, which 
is actually not a CFIUS agency, but we bring them in if there 
is an energy asset at stake.
    There have been times where others like Commerce or the 
Treasury Department will take some of the lead 
responsibilities, but it is usually those agencies. I would 
have to defer to Secretary Baker as to the abilities of the 
Department of Homeland Security to conduct their business. In 
the CFIUS process, they are always very active and very 
rigorous about their job, but in terms of all the follow-up, I 
would have to defer.
    Mr. Pascrell. Do these members of the committee inquire? Do 
they ever discuss this with Homeland Security? Would they reach 
out, the members of the committee that are reviewing these 
transactions? Or are the members of the committee who are 
expert in the specific area, they are looked to examine the 
proper activities of the transaction?
    Mr. Lowery. Each agency reviews the transaction. It is just 
that there is sometimes deference because of the specifics of a 
transaction. For instance, if there is a defense part that is 
being purchased by an acquisition firm, we are going to look to 
the Department of Defense because they are going to know things 
a lot better than the rest of us.
    However, Homeland Security, Justice and Treasury and others 
on the committee are also reviewing it and they are making sure 
that it addresses any concerns that they might have about that 
specific transaction.
    Mr. Pascrell. Did Homeland Security review the Dubai 
transaction?
    Mr. Lowery. Absolutely. In fact, they were the lead agency, 
basically.
    Mr. Pascrell. And they concluded?
    Mr. Lowery. It is probably better for Secretary Baker to 
speak on behalf of his group.
    Mr. Baker. I am glad to. Thank you, Clay.
    We looked at that and for the first time in any port deal, 
we decided we wanted additional security guarantees from what 
we ordinarily would ask for in a transaction. We asked for 
assurances. We were able to get them from the company.
    So we did look at it closely. We did ask for assurances to 
go beyond what the other members of CFIUS would have asked for 
because it was a part of the critical infrastructure.
    Mr. Pascrell. Reports have it, Mr. Secretary, that you were 
the sole dissenter in the beginning in reviewing the Dubai 
transaction. What made you change your mind to go along with 
the other members of the committee in unanimously accepting 
this transaction as not being in any manner, shape or form a 
reflection on the security of this nation? What is it that got 
you over the top?
    Mr. Baker. I think the reports are a little misunderstood. 
We did not object to the transaction, but we did raise our hand 
and say we would like to look at this more closely. We believed 
that it would be appropriate to ask for additional assurances 
from the company.
    Mr. Pascrell. Why?
    Mr. Baker. Because we wanted to make sure, this was a 
government-owned corporation, we wanted to make sure that the 
companies which up to that point had a very good security 
reputation, didn't change that policy later on. We wanted to 
lock them in in their current relatively high level of 
security.
    Mr. Dicks. Would the gentleman yield just for a brief 
moment?
    Mr. Pascrell. Sure.
    Mr. Dicks. One of the things that, there was an 
unclassified Coast Guard report that said that there were 
intelligence gaps concerning the potential for DPW or PNO 
assets to support terrorist organizations, which preclude an 
overall threat assessment of the potential DPW and PNO merger.
    Were you concerned about this Coast Guard report?
    Mr. Baker. The Coast Guard was asked for its evaluation of 
the transaction. The Coast Guard internally commissioned that 
intelligence report. It was not actually sent to DHS 
headquarters. It was for their own purposes in deciding how 
they would vote on the transaction.
    Once we had the assurances, with the assurances in hand, as 
well as that intelligence report, which actually came to the 
conclusion that while there were gaps, the transaction should 
go forward, the Coast Guard voted to let the transaction go 
forward.
    So I didn't actually see the report.
    Mr. Pascrell. Can I reclaim my time, Mr. Chairman?
    Mr. Secretary, I want to ask you a question. I want you to 
explain to everybody in this room what you see as the 
difference between a foreign company running the operations at 
any of our ports, which happens right now, and a foreign 
company owned by a foreign country running the operations of a 
port.
    Because the administration confused that and melded the two 
together in trying to defend their decision about Dubai. I want 
you to tell us if you see any essential, not quantitative 
differences, essential differences between the one and the 
other, and why we should be concerned in our oversight 
capacity.
    Mr. Baker. I do see a difference. A foreign company is 
likely to be acting out of profit motivation most or the time, 
not always, but most of the time. You might still have 
concerns, but the profit motivation often allows you to predict 
how they will behave.
    When it is a foreign government-owned corporation, you 
sometimes worry that the government will take actions that are 
not profit-motivated. And so it is important to take a look at 
that particular risk.
    Mr. Pascrell. How do you know if the country is not going 
to interfere in the operations of that particular company since 
they are on our soil?
    Mr. Baker. One of the thing that we did in this transaction 
was to try to lock in some things that had been done by the 
companies, as private companies, to provide good security and 
to maintain high security standards so that if there were a 
change in policy that was not profit-motivated, but motivated 
by a government policy, we would be able to say that is a 
violation of the agreement.
    Mr. Rogers. The gentleman's time has expired.
    The gentleman from North Carolina is recognized for 5 
minutes.
    Mr. Etheridge. Thank you, Mr. Chairman.
    Mr. Baker, let me follow that line a little bit further 
because we were talking about foreign versus domestic, what 
works out. How do you evaluate the risk of a foreign-owned 
company when these days there is really no clear designation of 
what companies are foreign?
    Let me say what I am talking about, for instance, most 
large companies are multi-international today. I am told both 
Exxon-Mobil and BP have almost half of their ownership is 
American, is U.S. now, and a lot of it overseas.
    How does the department weigh the risk of these so-called 
foreign-owned companies?
    Mr. Baker. I am not sure I would characterize Exxon-Mobil 
yet as foreign-owned.
    Mr. Etheridge. But if you look at the ownership within the 
corporation?
    Mr. Baker. Yes. There is no doubt that the long-term trend 
is toward a lot more confusion about what country a particular 
company is from. The number of governments who have the ability 
to influence the behavior of a company continues to grow.
    We are not the only ones who are seeing that. The 
Canadians, who used to have very aggressive inward investment 
programs, have begun to recognize that they can't maintain 
that. So that confusion is going to continue to grow.
    Mr. Etheridge. So how do you evaluate the risk?
    Mr. Baker. We must nonetheless ask in particular 
transactions, is the risk so significant that even though it is 
harder to tell whether someone is influenced by foreign 
governments or an outsider, we can't take the risk of letting 
the transaction go forward, perhaps because of tight relations 
between the buyer and a foreign government, so that we have 
every reason to believe that this particular company is very 
beholden to a foreign government, and they are buying into a 
particularly sensitive sector.
    So there are still cases where the risks and the 
relationship with the government is quite significant. In many 
cases, though, in fact almost all the time, it is better to 
rely on regulations than trying to block transactions. As we 
talked about earlier, there are many ways in which foreign 
companies can come to exercise control over assets in the 
United States without ever buying a U.S. company.
    So in most cases, having regulations such as our port 
security regulations is a better way to control what happens by 
way of port security than trying to block transactions on an 
individual basis.
    Mr. Etheridge. That being said, then, I guess leads to the 
next question. Did you consider the UAE's ties to the Taliban 
to be a red flag? Was that something you considered in the 
deal?
    Mr. Baker. There is no doubt that before September 11 the 
United Arab Emirates did have close ties to the Taliban, or at 
least they recognized the government. We said at the time that 
we thought that was a very bad idea. We have reiterated that 
view since September 11. They did make substantial changes in 
policy after September 11 and they have been enormously helpful 
to the United States in a wide variety of ways on an 
international basis.
    Mr. Etheridge. So the answer is yes?
    Mr. Baker. We took that into account. It was not a positive 
factor, obviously. What that shows is they are not the United 
States and never will be, and we have to take that into account 
as one of the reasons we said that we want some assurances 
about the policies on security that you are going to follow up.
    Mr. Etheridge. So do I gather from that that the answer is?
    Mr. Baker. All I can say is, you have to take these things 
into account and make a decision after weighing all of them.
    Mr. Etheridge. Are you telling me it was one of the factors 
that was considered?
    Mr. Baker. Certainly. It was.
    Mr. Etheridge. Okay.
    Thank you, Mr. Chairman. I yield back.
    Mr. Rogers. The gentleman's time has expired.
    The gentlelady from the Virgin Islands, Ms. Christensen, is 
recognized for any questions she may have.
    Mrs. Christensen. Thank you, Mr. Chairman.
    I would like to ask a question based on the purpose of the 
program being to identify those foreign investments in U.S. 
critical infrastructure and industrial-based technology 
companies that may pose a national security risk. I have seen 
some of our early critical infrastructure lists, and then you 
would have been reviewing golf courses, country clubs and all 
of those kinds of things.
    Do you think we have sufficiently come to a point where our 
critical infrastructure is identified specifically enough and 
accurately in a relevant fashion so that it gives the proper 
guidance to this process?
    Mr. Baker. I think that is a very good question. We have 
taken a very broad view of what is critical infrastructure. It 
depends on what purpose you are asking the question for, or 
what you want to put in there. We, for example, treat 
agriculture and food production as critical infrastructure, as 
they would be if someone wanted to insert ricin into the food 
supply.
    That does not mean that we should be reviewing every 
transaction in which a European buys a farm in Iowa. So how you 
define ``critical infrastructure'' for purposes of reviewing an 
inward investment may be quite different from how you would 
interpret it if you were worried about a terrorist attack on a 
particular facility.
    So in this case, we keep the definition broad so that we 
can respond to new threats or particular intelligence that we 
may receive about a buyer, but generally we are focused on 
transactions that could give a foreign company or foreign 
government insight into very important technology or an ability 
to influence the way our infrastructure works in a fashion that 
could hurt us.
    Mrs. Christensen. Okay. How do you evaluate the risk of a 
foreign company when these days sometimes there is not a clear 
designation of what companies are foreign?
    For example, large-scale companies are multinational. I 
could talk about Exxon-Mobil or I could talk about Hovensa in 
my district, which has half U.S. ownership, both of them. So 
how does the department weigh the risk of these kinds of so-
called ``foreign-owned'' companies?
    Mr. Baker. Again, we try to leave ourselves a lot of room 
so that we have not locked out a case that we clearly want to 
meet. There are circumstances where just 25 percent ownership 
interest in a large publicly held company would be enough to 
give a foreign government or person control of the company. We 
would not want to say, well, it has to be 51 percent foreign 
before we decide that the transaction ought to be reviewed.
    But in many cases, all we have to decide in the end, if we 
think that there is not a risk to homeland security and 
national security, is that the transaction does not need to be 
further reviewed. We don't say it is because you are not 
foreign. We simply say that is fine; we are not going to review 
this transaction further. And that allows us some discretion in 
a later case where we think there is a risk of abuse, to say 
this transaction needs to come in and be reviewed.
    Mrs. Christensen. Mr. Lowery, would you have anything to 
add to this?
    Mr. Lowery. No, I think the secretary described it very 
well.
    Mrs. Christensen. I have no other questions of this panel, 
Mr. Chairman. Thank you.
    Thank you for your responses.
    Mr. Rogers. The gentleman from Pennsylvania, Mr. Dent, is 
recognized for any questions he may have.
    Mr. Dent. Thank you, Mr. Chairman.
    Mr. Baker, my question is really directed to you. At what 
point in this process do you typically receive the intelligence 
review from the Community Action Risk Center?
    I noticed from the timeline on these yellow sheets that 
this assessment was completed on December 6, but the parties 
did not officially file until December 16. The question is, how 
is that possible? How does that process work?
    Mr. Baker. That is a little unusual. It is a very good 
question. Typically, it will take the intelligence community 
several weeks, 3 weeks to put together a report.
    We were actually lucky in the Dubai Ports World case 
because the company was well advised and they did something 
that we very strongly encourage companies to do, which is they 
came in well before they filed with CFIUS and said, ``we are 
thinking about doing this transaction.'' They briefed the 
transaction. They answered our questions. We were able to get 
the intelligence community started on the assessment well 
before the actual filing of the CFIUS petition.
    Usually, we don't have that much time. And usually, if we 
don't have too much time, it will take us until day 21, day 22, 
day 23 in the 30-day process before we see the fruits of the 
intelligence analysis.
    Mr. Dent. Thank you.
    Mr. Lowery, do you have anything to add to that?
    Mr. Lowery. No, I think that that is correct. I know that 
there was a lot of criticism of us in the Dubai Ports World 
case, that we didn't take the extra 45 days. We actually took 
75 days in the case of Dubai Ports World, or closer even to 90, 
just because they came in very early and gave us a lot of 
information, and then we just were able to get the intelligence 
people working in advance.
    This is something that we have been trying to get. There is 
kind of a small community of people that represent companies on 
these cases, and we have been trying to get the word out that 
coming in early helps the process along. I know that for 
instance in the last seven cases that have been filed with us, 
five of them have come in early. So we are able to get the 
intelligence community doing its work in advance because 
obviously their work is vital to us.
    Mr. Dent. And my follow-up question is this. Some 
legislation has been proposed limiting the time for the 
director of national intelligence to review these acquisitions 
to 15 days. Are you supportive of those proposals, and how 
would that improve or affect our national security?
    Mr. Baker. I am not aware of proposals to limit it to 15 
days. I would say that the intelligence community analysis of 
the transaction is vital, but it is only part of what we have 
to do. If we have a 30-day review window, and the intelligence 
community takes 29 days, there really isn't time for us to do 
the analysis that we need to do, or to ask for the protection 
measures that we need to take.
    So there is always a tension. I think it is probably a bad 
idea to try to set it legislatively. We push the intelligence 
community to give us preliminary or as much information as they 
can as early as possible so we can begin deciding whether we 
want to ask for additional assurances. But it is going to be a 
tension no matter how that particular issue is resolved, 
legislatively or administratively.
    Mr. Dent. And finally, what changes have been made to the 
CFIUS process since the post-9/11 world? I would just be 
curious to get your take on that.
    Mr. Lowery. Yes, sir. I think there have been a few things, 
a lot of it based on the lessons we learned from 9/11 and then 
Dubai Ports World. The first big change was we added the 
Department of Homeland Security.
    Mr. Dent. Other than that.
    Mr. Lowery. What we are now doing is we have much more 
formalized the process of using the intelligence community. 
They are at every meeting. They are observers. They are an 
input valve. It was always kind of an informal process that has 
become much more formalized.
    Secondly, I think each agency is briefing up at the highest 
levels of their agencies because of the concern that there was 
not as much accountability as there should have been in the 
Dubai Ports World case.
    Thirdly, we are trying to work with the oversight 
committees on keeping them informed about how the cases are 
coming out, with some notifications obviously. This is 
something that is in a variety of different legislative bills. 
We are going to work with Congress to try to keep you better 
informed about how the process works and also the results of 
the process. So those are a few off the top of my head.
    Mr. Rogers. The gentleman's time has expired.
    The gentleman from Oregon, Mr. DeFazio, is recognized for 
any questions he may have.
    Mr. DeFazio. Thank you, Mr. Chairman.
    I would assume on the list of critical infrastructure would 
be our airline industry. Would that be correct?
    Mr. Baker. Which industry?
    Mr. DeFazio. Airline.
    Mr. Baker. Yes, sir.
    Mr. DeFazio. Yes, especially since they provide the 
civilian reserve air fleet. What would trigger a review?
    The administration is currently proposing that foreign 
interests, despite the legal restrictions on ownership in the 
Federal Aviation Act, they want to creatively reinterpret the 
meaning of ``control'' to allow foreign interests to actually 
have a controlling interest in a U.S. airline, but somehow 
internally draw some firewalls and say, well, you can hire and 
fire the management; you can set the schedules; you can buy or 
sell equipment; choose routes; use your personnel, the existing 
personnel, foreign pilots, whatever. But we are going to wall 
off safety and security.
    Now, the most credible analysts say that doesn't really 
seem like it is going to work too well, especially since we had 
the director of security from Continental say, well, look, I 
mean the President say, ``I hire the head of security and 
safety. The board of directors tells me they want something, I 
am going to deliver it. I will fire him and get someone who 
will do what I want.''
    So I guess the question is, if this rule goes through, they 
won't technically be buying more than a 50 percent share, but 
they will be buying under the rules that are being proposed a 
controlling interest in a substantial portion of the airline 
through super-voting majorities of certain kinds of stock, 
otherwise they won't make the investments.
    Would that trigger a review?
    Mr. Baker. A couple of thoughts on that.
    The first, I think CFIUS, as I said earlier, is kind of a 
blunt instrument in that in this case it seems to me that we 
have a great deal of much more specific regulatory authority, 
including the authority under the provisions of law that you 
were just talking about. So that the debate will take place, 
rather than in CFIUS, about how to interpret and apply the 
airline-specific rules.
    We are aware of the proposal that you are talking about, 
and of the tensions that you just described, and are still 
examining that proposal to see whether we believe that it will 
protect homeland security and the security generally 
sufficiently. We are in the midst of that, so I would not like 
to comment in more detail.
    Mr. DeFazio. Okay. So you have been asked to review the 
proposed rule?
    Mr. Baker. Yes.
    Mr. DeFazio. Okay. In what venue will that review be made 
available? Will it be made available to members of Congress on 
a need-to-know basis, on a secure basis? Is it being made 
public? What will you do with that?
    Mr. Baker. The administration will arrive at a conclusion 
and then once that conclusion is arrived at, I am sure that we 
are not going to be the principal interlocutor on that issue 
because it is not our regulation, but I expect that it will 
then be explained in whatever supporting detail is necessary 
and made available.
    Mr. DeFazio. I mean, their attempt to end-run Congress has 
been very specific. They are saying the word ``control'' means, 
you know, something else, which means they are going to create 
this artificial fire wall.
    Are you saying, what about the idea that a foreign interest 
can appoint all the management; board of directors direct the 
company, and yet somehow internally within this corporate 
structure we are going to say, oh, safety and security are over 
here, don't worry, despite what we have heard from airline 
execs saying that is not really the way an airline works.
    You are saying, what about this? Do you think this is?
    Mr. Baker. If I said I was saying that, I would probably be 
making a decision. It is a little early.
    Mr. DeFazio. Well, it isn't early. Any day, they could pop 
this rule out. They proposed it. They get a little flak. They 
just changed it cosmetically. It is still the same rule. They 
are trying to end-run Congress because they couldn't get this 
in the last Federal Aviation reauthorization. And there is 
obviously somewhat of a reluctance on the part of the 
Republican leadership to challenge the White House on this 
issue, and some of the financial interests involved.
    But this would include any country with an open skies 
agreement, which just in case you don't know that, it would 
include Indonesia, for instance. I don't think that would be a 
really good idea.
    Mr. Baker. I think we understand precisely the tensions you 
are describing, and are building those into our analysis of the 
proposal.
    Mr. DeFazio. Okay. And your analysis is only going to be 
available to the executive and not to Congress? Or if Congress 
asks?
    Mr. Baker. I am not suggesting that we are writing a 500-
page report. We are examining this and the legal and factual 
issues that go into it because we have been asked for our 
views.
    Mr. DeFazio. Thank you, Mr. Chairman.
    Mr. Rogers. The gentleman yields back.
    The gentleman, Mr. Langevin, is recognized for any 
questions he may have.
    Mr. Langevin. Thank you, Mr. Chairman.
    Actually, in addition to my committee work here, I also sit 
on the House Armed Services Committee. Mr. Lowery and Mr. Baker 
appeared before me there, and I have had the opportunity to 
question them. So I don't have any questions for the panel at 
this time. I will hold those for the record potentially.
    I will just say that during the consideration of the SAFE 
Ports Act, I offered an amendment to require more transparency 
in the CFIUS process. The amendment that I offered would 
require CFIUS to notify congressional leaders of both parties 
of any foreign acquisition dealing with critical 
infrastructure. In addition, it would have ensured open lines 
of communication between Congress and CFIUS.
    So I am going to continue to work for those opportunities 
to enhance those reporting requirements, but at the time 
Chairman King had indicated that he would work with me to 
address this issue, and so I am proud to be a part of this 
hearing today and I want to thank the panel for their 
testimony.
    Thank you. I yield back.
    Mr. Rogers. I thank the gentleman.
    Are there any additional questions by the Members?
    I want to thank both of you for your time. It has been very 
helpful.
    At this time, we will dismiss this panel and call up our 
second panel.
    Thank you very much.
    Joining us today is Daniella Markheim, the Jay Van Andel 
senior analyst in trade policy at The Heritage Foundation's 
Center for International Trade and Economics; and Mr. Stuart 
Eizenstat, a legal expert on CFIUS and former deputy secretary 
of the Treasury.
    Welcome to both of you. We look forward to hearing your 
testimony.
    The chair now recognizes Ms. Markheim for any statement she 
may have.

STATEMENT OF DANIELLA MARKHEIM, JAY VAN ANDEL SENIOR ANALYST IN 
  TRADE POLICY, CENTER FOR INTERNATIONAL TRADE AND SECONOMICS

    Ms. Markheim. Thank you, Mr. Chairman and distinguished 
members. I am honored to testify before the House Committee on 
Homeland Security today.
    In my testimony, I would like to describe the contribution 
of foreign investment to the U.S. economy, discuss the efficacy 
of the current foreign investment approval process, and 
recommend improvements to the CFIUS process to preserve both an 
open investment climate and America's national security.
    Today, the United States is the world's dominant economy. 
Because of the promise of America's economic potential and the 
openness of its markets, the U.S. is a major destination for 
foreign direct investment or FDI. Foreign investment introduces 
new technologies and skills to America's economy, helping to 
promote U.S. competitiveness abroad.
    FDI also supports over 5 million U.S. jobs from California 
to New York, and Texas to Ohio. Moreover, the benefits of FDI 
extend beyond the industries receiving investment and into the 
American economy as a whole. Increased investment and 
competition generate higher productivity and more efficient 
resource use.
    Ultimately, this culminates in greater economic growth, job 
creation and higher living standards for all. Any new rules 
that restrict, delay or politicize foreign investment will 
result in the loss of FDI as greater uncertainty and delays add 
to the cost of foreign firms doing business in the U.S. 
Consequently, America will pay for higher investment barriers 
with lower growth and fewer jobs.
    The CFIUS process serves as an objective nonpartisan 
mechanism to review, and if the president finds necessary, to 
restrict or prohibit foreign investment that may threaten 
America's security. With a few exceptions, the current CFIUS 
process minimizes the cost of such legislation on the U.S. 
economy, while preserving the intent: protecting America from 
those that would cause the country harm.
    The process is effective in that it is nonpartisan and 
nonpolitical. It concludes its reviews in a timely manner, and 
because it extends an investigation only if merited, rather 
than as a rule or for bureaucratic convenience. While today's 
CFIUS process is generally effective, it could be improved. The 
recent Dubai Ports controversy is the latest example 
demonstrating that the investment approval process needs to be 
better defined and more transparent.
    First, successful congressional oversight of the CFIUS 
process relies in part on having reliable information 
describing the extent of foreign commercial misconduct in the 
U.S. As such, the administration should immediately resume the 
practice of providing quadrennial reports to Congress of 
credible evidence of foreign efforts to acquire critical U.S. 
technologies or commercial secrets.
    Second, CFIUS investigations that result in presidential 
action are also subject to reporting to Congress. However, 
because firms may withdraw and re-file notifications in order 
to avoid extended reviews, few reports are actually submitted. 
As a result, Congress has little insight into the effectiveness 
of the CFIUS process during investigations. To fill this gap, 
Congress should receive regular general reports of committee 
investigations in addition to the required case-by-case reports 
on any extended examinations.
    Third, while the option to withdraw and re-file provides 
additional time for companies to resolve national security 
concerns, the option may actually increase those risks if the 
transaction is completed during the withdrawal period and the 
foreign firm inappropriately gains control of a U.S. asset 
until it re-files with CFIUS. To mitigate this risk, provisions 
should be incorporated into the process that establish interim 
protections in cases where security issues have been raised, 
and to specify clear and reasonable time limits to limit the 
duration between withdrawal and re-filing.
    Finally, left undefined in the Exon-Florio provision, 
member agencies have generally determined that a risky 
transaction involves a U.S. company that possesses export-
controlled technologies or products, a company that has 
classified contracts, or specific derogatory intelligence on 
foreign companies. This narrow definition of what is a threat 
should be more explicitly and firmly incorporated into the 
process. Leaving ``threat'' undefined in the legislation keeps 
the door open for mis-using the process to protect domestic 
industry from foreign competition.
    In conclusion, the notion that precluding foreign ownership 
of U.S. assets offers a measure of security or saves American 
jobs is flawed. Erecting barriers to foreign investment would 
stifle innovation, reduce productivity, undermine economic 
growth, and cost jobs, all without making America any safer. 
The government's role is not to decide how the marketplace 
operates, but to perform due diligence to ensure that vital 
national interests are looked after.
    Thus, reform should address the heart of the CFIUS problem: 
appropriate reporting and transparent, well-defined rules, 
without opening the door to protectionism and without chancing 
the economic and political consequences of politicizing foreign 
investment in the U.S.
    A successful strategy for improving national security must 
include an ongoing commitment to free trade and investment 
policy.
    Thank you for the opportunity to address the committee. I 
do look forward to any questions you may have on this issue.
    [The statement of Ms. Markheim follows:]

                Prepared Statement of Daniella Markheim

    Mr. Chairman, and other distinguished Members, I am honored to 
testify before the House Committee on Homeland Security today.\1\ In my 
testimony, I would like to (1) describe the contribution of foreign 
investment to the U.S. economy; (2) discuss the efficacy of the current 
foreign investment approval process; and (3) recommend improvements to 
the CFIUS process to preserve both an open investment climate and 
America's national security.
---------------------------------------------------------------------------
    \1\ The Heritage Foundation is a public policy, research, and 
educational organization operating under Section 501(C)(3). It is 
privately supported, and receives no funds from any government at any 
level, nor does it perform any government or other contract work.
    The Heritage Foundation is the most broadly supported think tank in 
the United States. During 2005, it had more than 275,000 individual, 
foundation, and corporate supporters representing every state in the 
U.S. Its 2005 income came from the following sources:
    Individuals  63%
    Foundations  21%
    Corporations  4%
    Investment Income  9%
    Publication Sales and Other  3%
    The top five corporate givers provided The Heritage Foundation with 
2% of its 2005 income. The Heritage Foundation's books are audited 
annually by the national accounting firm of Deloitte & Touche. A list 
of major donors is available from The Heritage Foundation upon request.
    Members of The Heritage Foundation staff testify as individuals 
discussing their own independent research. The views expressed are 
their own, and do not reflect an institutional position for The 
Heritage Foundation or its board of trustees.

    Foreign Investment in the United States
    Today, the United States is the world's dominant economy. Because 
of the promise of America's economic potential and the openness of its 
markets, the U.S. is a major destination for foreign investment. 
According to the Commerce Department's Bureau of Economic Analysis, net 
inflows of foreign direct investment (FDI) increased by almost 50 
percent between 1996 and 2005, growing from $86 billion to $128 
billion. Between 2004 and 2005 alone, the level of FDI in the U.S. 
increased by $21.8 billion, or 20 percent.\2\
---------------------------------------------------------------------------
    \2\ Bureau of Economic Analysis, U.S. International Transactions, 
at http://www.bea.gov/bea/newsrel/transnewsrelease.htm (May 21, 2006).
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    Foreign investment introduces new technologies and skills to 
America's economy, helping to promote U.S. competitiveness abroad. 
About 20 percent of all U.S. exports originate from U.S. affiliates of 
foreign-owned companies.\3\
---------------------------------------------------------------------------
    \3\ William J. Zeile, ``U.S. Affiliates of Foreign Companies: 
Operations in 2003,'' Bureau of Economic Analysis, at http://
www.bea.gov/bea/ARTICLES/2005/08August/0805_Foreign_WEB.pdf (May 21, 
2006).
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    FDI supports about 5.3 million U.S. jobs from California to New 
York, and Texas to Ohio.\4\ U.S. subsidiaries support an annual payroll 
of $317.9 billion with average compensation per employee worth almost 
$60,000--more than one-third more than the average American salary.
---------------------------------------------------------------------------
    \4\ Organization for International Investment, Insourcing 
Statistics, at http://www.ofii.org/insourcing-stats.htm (May 21, 2006).
---------------------------------------------------------------------------
    Moreover, the benefits of FDI extend into the American economy as a 
whole. Increased investment and competition generate higher 
productivity and more efficient resource use. Ultimately, this 
culminates in greater economic growth, job creation and higher living 
standards for all.
    Any new rules that restrict, delay, or politicize foreign 
investment, will result in the loss of FDI as greater uncertainty and 
delays in investment transactions add to the cost of foreign firms' 
doing business in the U.S. Consequently, America will pay for higher 
investment barriers with lower growth and fewer jobs. FDI restrictions 
would undermine America's chances of remaining an economic superpower 
in an increasingly competitive global economy.
    Moreover, there may be secondary consequences of enacting new 
foreign investment barriers. America could face less market access and 
opportunity abroad, as countries enact retaliatory policies that result 
in ever higher barriers to global investment. With over $2 trillion of 
direct investment abroad the U.S. is the world's biggest investor--
foreign retaliation to new U.S. investment restrictions would be costly 
for many Americans.\5\
---------------------------------------------------------------------------
    \5\ Bureau of Economic Analysis, Balance of Payments and Direct 
Investment Position Data,
    at http://www.bea.gov/bea/international (May 21, 2006).

The CFIUS Process Today
    The United States generally welcomes foreign investors and provides 
them equitable and nondiscriminatory access to investment 
opportunities. While the bulk of foreign investment in America 
generates no threat to national security, the Exon-Florio provision was 
implemented in 1988 to insure that FDI remain benign.\6\ The intent of 
Exon-Florio is to provide an objective, non-partisan mechanism to 
review and, if the President finds necessary, to restrict or prohibit 
foreign investment that may threaten America's security.
---------------------------------------------------------------------------
    \6\ 50 U.S.C. app 2170.
---------------------------------------------------------------------------
    The Exon-Florio provision is implemented by the Committee on 
Foreign Investment in the United States (CFIUS), an inter-agency 
committee chaired by the Secretary of Treasury. The Departments of 
Defense, Justice, Commerce, and Homeland Security are part of the 12 
agencies that participate in CFIUS. The Committee's task is ``to 
suspend or prohibit any foreign acquisition, merger or takeover of a 
U.S. corporation that is determined to threaten the national security 
of the United States.'' In 1992, Congress amended the statute through 
section 837(a) of the National Defense Authorization Act for Fiscal 
Year 1993, requiring CFIUS to also review transactions where the 
acquirer is controlled or acting on the behalf of a foreign government.
    Once notified of a potential transaction, the CFIUS process begins 
with a 30-day review of the planned foreign acquisition, followed by an 
additional 45-day review for exceptional cases. At the end of an 
extended review, a report is provided to the President, who then has up 
to 15 days to announce whether the investment is approved. In total, 
the process can not exceed 90 days.
    The amending legislation set in 1992 requires the President to 
report every 4 years to Congress on whether there is credible evidence 
of foreign efforts to acquire critical U.S. technologies or commercial 
secrets. Additionally, a report is to be made to Congress regarding any 
transaction that required Presidential action.
    Through the Exon-Florio provision, CFIUS is directed to consider 
the following factors in evaluating the security risk of a foreign 
acquisition or merger:
         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 that supports terrorism or 
        proliferates missile technology or chemical and biological 
        weapons; and,
         the potential effects of the proposed or pending 
        transaction on United States international technological 
        leadership in areas affecting United States national 
        security.\7\
---------------------------------------------------------------------------
    \7\ Ibid.
---------------------------------------------------------------------------
    A transaction may be voluntarily notified to CFIUS by the companies 
involved in the acquisition, or by CFIUS member agencies. The incentive 
for firms to voluntarily notify the CFIUS process is strong; firms that 
should, but do not notify CFIUS of an acquisition remain subject 
indefinitely to divestment or other negative actions by the President. 
In order to protect proprietary commercial data, notifications to CFIUS 
are confidential.

Balancing Act
    With a few exceptions, the current CFIUS process minimizes the cost 
of such legislation on the U.S. economy, while preserving the intent--
protecting America from those that would cause the country harm. 
Favorably, the process:

         Is designed to be non-partisan and non-political 
        because these decisions should not be based on political 
        considerations, but solely on the merits of the transaction and 
        appropriate security concerns consistent with U.S. policies. 
        Congress does not receive comprehensive notification in any 
        other administrative procedure. Congress sets the law, 
        establishes procedures to implement and enforce the law, and 
        oversees the successful fulfillment of those procedures. As 
        such, Congress plays no collaborative role in anti-trust 
        decisions, patent and trademark awards, or International Trade 
        Commission reviews. Likewise, a successful CFIUS process 
        depends on Congress playing its oversight role, without 
        becoming a part of procedure.
         Reduces the risk and economic cost of delayed foreign 
        investment by concluding its reviews in as timely a manner as 
        possible.
         Subjects investment transactions involving foreign 
        government-owned companies to additional investigation only if 
        merited, rather than as a rule. Transactions involving 
        companies where the foreign government is a minority 
        shareholder should not necessarily be evaluated with the same 
        scrutiny as those transactions involving companies that are 
        wholly owned and operated by foreign governments. Likewise, the 
        potential threat to U.S. national security interests by foreign 
        governments is not the same around the world. CFIUS is, and 
        should remain, flexible enough to differentiate the level of 
        investigation needed for each case. The foreign government-
        owned company headquartered in an ally country that competes 
        fairly and according to market-based rules should not 
        automatically face a more stringent investment approval 
        process.
         Relies on a traditional and narrow definition of what 
        constitutes a threat to national security. Left undefined in 
        the Exon-Florio provision, member agencies have generally 
        associated risky transactions with those involving, (1) a U.S. 
        company that possesses export-controlled technologies or items; 
        (2) a company that has classified contracts and critical 
        technologies; or (3) specific derogatory intelligence on the 
        foreign companies.\8\ This narrow definition of what 
        constitutes a threat reduces the likelihood that barriers will 
        be erected, inappropriately protecting domestic industries from 
        foreign competition. Investigations should remain focused on 
        evaluating security concerns.
---------------------------------------------------------------------------
    \8\ United States Government Accountability Office, ``Defense 
Trade: Implementation of Exon-Florio,'' GAO-06-135T, October 6, 2005.
---------------------------------------------------------------------------
    While today's CFIUS process is generally effective in balancing an 
open investment climate with national security, it could be improved. 
The recent Dubai ports controversy is the latest example demonstrating 
that the investment approval process needs to be better defined and 
more transparent.
         Amendments to Exon-Florio set in 1992 require the 
        President to provide quadrennial reports to Congress of 
        credible evidence of foreign efforts to acquire critical U.S. 
        technologies or commercial secrets. In 1994, the first and last 
        4-year report was provided to Congress.\9\ Successful 
        Congressional oversight of the CFIUS process relies, in part, 
        on having reliable information describing the extent of foreign 
        espionage and attempts to circumvent sensitive technology 
        controls. The administration should immediately resume the 
        practice of providing this report.
---------------------------------------------------------------------------
    \9\ Ibid, p.9.
---------------------------------------------------------------------------
         Any CFIUS investigations that result in presidential 
        action are also subject to reporting to Congress; however, few 
        reports are actually submitted.\10\ As a result, Congress has 
        little insight into the CFIUS process and deliberations that 
        occur during investigations. Few reports are made to Congress 
        because firms are allowed to withdraw a notification that would 
        result in an extended investigation. Companies may then refile 
        the notification of acquisition after previously identified 
        security concerns are addressed. Refiling restarts the clock on 
        the duration of the investigation and reduces the chance that 
        the transaction will fall under presidential review. While this 
        allows greater flexibility in the process and promotes 
        investment, it has resulted in less information reaching 
        Congress about CFIUS operations. To fill this gap, Congress 
        should receive regular, general reports of Committee 
        investigations, in addition to the required reports on any 
        extended investigations. The content of these reports should 
        focus on CFIUS proceedings, without compromising confidential 
        information.
---------------------------------------------------------------------------
    \10\ Ibid, p.9.
---------------------------------------------------------------------------
         While the option to withdraw and refile provides 
        additional time for companies to resolve national security 
        concerns pertaining to an acquisition, withdrawal may increase 
        national security risks if the transaction is completed during 
        the withdrawal period. In this scenario, a foreign firm may 
        inappropriately gain control of a U.S. asset until it refiles a 
        notification with CFIUS. To mitigate this risk, provisions 
        should be incorporated into the process that, (1) establish 
        interim protections in cases where security issues have been 
        raised, (2) specify clear and reasonable time tables to limit 
        the duration between withdrawal and refiling, and (3) establish 
        penalties for non-compliance.\11\
---------------------------------------------------------------------------
    \11\ Ibid, p.8.
---------------------------------------------------------------------------
         The current definition of what foreign investment may 
        constitute a threat to national security should be formally 
        incorporated into the CFIUS process. Leaving ``threat'' 
        undefined in the legislation keeps the door open for misusing 
        the process to erect protectionist barriers to foreign 
        investment. The CFIUS process is solely concerned with 
        identifying the national security risks of foreign investment. 
        CFIUS should not be used as a vehicle for conducting industrial 
        policy.

Conclusion
    A strong economy, bolstered by free trade and investment, is a 
pillar of national defense. The Bush Administration's National Security 
Strategy correctly identifies ``free markets'' as the key to a secure 
America and a necessary component of our national security strategy.
    The notion that merely precluding foreign ownership of U.S. assets 
offers a measure of security or saves American jobs is flawed.\12\ 
Erecting barriers to foreign investment would stifle innovation, reduce 
productivity, undermine economic growth and cost jobs--without making 
America any safer. The government's role is not to decide how the 
marketplace operates, but to perform due diligence to ensure that vital 
national interests are looked after.
---------------------------------------------------------------------------
    \12\ James J. Carafano, Tim Kane, Dan Mitchell, and Ha Nguyen, 
``Protectionism Compromises America's Homeland Security,'' Heritage 
Backgrounder No. 1777, July 9, 2004.
---------------------------------------------------------------------------
    Thus, improving the transparency of the CFIUS process is 
appropriate; provoking a wave of anti-trade, anti-investment policy is 
not. Reform should address the heart of the CFIUS problem--appropriate 
reporting and consideration of investment by government-owned firms--
without opening the door to protectionism and without chancing the 
economic and political consequences of politicizing foreign investment 
in the U.S.
    Protectionism would endanger U.S. prosperity--the very cornerstone 
of security--as well as strain relationships with important allies in 
the war on terror, and make it more difficult to use open markets to 
spread American values and bolster U.S. interests around the world. A 
successful strategy for improving national security must include an 
ongoing commitment to free trade and investment policies.
    Thank you for the opportunity to address this vital issue.

    Mr. Rogers. I thank you, Ms. Markheim.
    The chair now recognizes Mr. Eizenstat for any statement he 
may have.

    STATEMENT OF THE HONORABLE STUART EIZENSTAT, PARTNER AT 
   COVINGTON AND BURLING AND FORMER DEPUTY SECRETARY OF THE 
                            TREASURY

    Mr. Eizenstat. I appreciate the bipartisan way in which 
this committee is proceeding. We are at a strategic crossroads 
on international investment around the world, and we live in 
what threatens to be a protectionist era.
    There is a clear and present danger that the recent Dubai 
Ports World controversy will be used as a platform to 
fundamentally change the rules governing foreign investments in 
the United States in ways that will in my opinion threaten 
investments that are a lifeblood for a healthy economy.
    Little direct foreign investment comes from the Middle 
East. Ninety-four percent of the foreign assets in America are 
owned by the companies from 25 OECD industrialized democracies, 
and 73 percent of all foreign investments in the U.S. are made 
by European companies. At a time when we are all concerned 
about outsourcing, foreign investment represents a vote of 
confidence, in-sourcing in the United States.
    In-sourcing foreign companies employ more than 5 million 
people, and at a time when our manufacturing employment is 
hemorrhaging, 35 percent of all foreign investment is in the 
manufacturing sector. When we have a 7 percent current account 
deficit, we need to keep the arteries of foreign investment 
open to fund this record deficit.
    As former ambassador to the European Union, under secretary 
of commerce, under secretary of state and deputy treasury 
secretary, I want to make one point very clear. That is, what 
you do in the next several weeks will reverberate around the 
world. It will not be isolated. Congressional action to tighten 
restrictions on foreign investment in this country will invite 
and encourage similar action abroad. This is not an idle 
concern.
    Already in response remarkably to PepsiCo's attempt to buy 
Group Danone, which manufactures Dannon yogurt, the prime 
minister of France called the Dannon Group a jewel of French 
industry that had to be defended, and his government has 
proposed legislation establishing 11 strategic sectors to be 
shielded from foreign investment.
    France is not alone. Spain, Poland and Germany all have 
restrictions. President Putin has recently proposed a new law 
to protect what he called ``strategic industries'' in Russia 
from foreign investment, and China has many restrictions 
already in important sectors.
    We obviously should never compromise national security, but 
please realize that any restrictions you impose on foreign 
investments in the U.S. will invite similar restrictions on our 
companies investing abroad.
    I will also ask you to recognize as you look at the 
legislation that even now, because of the aftershocks from 
Dubai Port World, that the administration is changing in a 
profound way, as is the private sector, the way in which the 
CFIUS process is proceeding. Applications are being filed by 
companies that would have never thought that there was any 
national security concern.
    In addition, more of the CFIUS cases are going to the 
second 45-day phase simply because of fear that there will be 
political criticism, even though few of them have national 
security implications. Senior officials are more directly 
involved now than ever before.
    I believe that the fundamental principle that should guide 
you as you look at the legislation is that CFIUS should be 
given by the Congress all the tools and all the time to 
identify, scrutinize and act upon the tough cases that present 
real national security issues, while ensuring that the 
overwhelming number who do not can proceed efficiently with a 
process that will not be clogged down.
    With few adjustments, I believe that the reform bill before 
the House Financial Services Committee that has been 
cosponsored by Chairman King and I believe Congressman Thompson 
has also been involved in this, but I know Congressman Crowley 
and Maloney have as well, will do much to restore confidence in 
the integrity of CFIUS, reassure our global allies, but at the 
same time keep America open for business.
    Having said that, permit me to briefly suggest a few 
modifications that the committee might consider if it gets a 
sequential referral from the Financial Services Committee to 
this legislation.
    First, I understand the political concerns about 
government-owned companies, but all government-owned companies 
are not created alike. And yet this legislation, like the 
Senate legislation, lumps all government-controlled companies 
together and would impose additional time requirements upon 
them.
    Since time is money, it puts them at a disadvantage. Now, 
certainly there are certain government-controlled companies 
that are subsidized or from less friendly governments that 
should go into that type of extended process, but there are 
others from friendly governments which operate purely by market 
principles and shouldn't be arbitrarily lumped together with 
government-owned firms that otherwise raise national security 
concerns. Therefore, optimally all transactions by companies 
that operate on market principles and don't raise national 
security concerns, should go through a 30-day review.
    Second, I understand the desire for additional 
accountability. Having served at senior levels in three 
departments, may I say that the requirement that secretaries or 
deputy secretaries at Treasury and Homeland Security should 
personally approve and sign each and every review and 
investigation is unnecessary. It will create bureaucratic 
delays and overload CFIUS for those cases where it ought to be 
focusing senior-level attention.
    Third, CFIUS should never act if the director of national 
intelligence doesn't have adequate time to analyze and correct 
intelligence relating to a particular transaction. However, by 
creating, as the legislation does, a 30-day minimum for the 
DNI's intelligence review and requiring that the DNI review be 
completed no less than 7 days before the end of the CFIUS 
review period, the bill effectively establishes a de facto 37-
day process even for transactions raising no national security 
issues, and I hope this can likewise be attended to in the 
legislative process.
    And last, I believe that the existing review and 
investigation periods are appropriate for CFIUS to do its work. 
If an extension is necessary, this bill gets it right. Instead 
of adding it to the front end, put it at the back end, and that 
is a better way of proceeding.
    The last point is critical infrastructure. This has become 
a very sensitive issue, and of course something that this 
committee is particularly concerned about. But what may be 
important to protect critical infrastructure from terrorism is 
a very different set of issues from what should be involved in 
the CFIUS process for foreign investment.
    There are three approaches. The first is offered by 
Chairman Hunter in H.R. 4881, which essentially would prohibit 
foreign investment in critical infrastructures defined so 
broadly that 25 percent of the entire U.S. economy would be 
walled off. This is a duplication of what French Prime Minister 
Villepin is doing. I cannot conceive that we would want to go 
down the French road. They have proven that they do not have 
the kind of viable, flexible economy we do, and we hardly 
should be emulating what the French prime minister is doing.
    The Senate bill, the Shelby-Sarbanes bill, creates a de 
facto presumption that all foreign investment in critical 
infrastructure creates a security risk and also should go to 
the 45-day period, and I think this is ill-advised. The bill 
that Chairman King and Congressman Crowley and others have 
cosponsored has it right. It requires CFIUS to consider whether 
a public transaction has a national security-related impact on 
critical infrastructure in the U.S. as a factor in 
deliberations, and that is the way it should go.
    I would also suggest to members of this committee that 
additional work needs to be done by this committee with the 
administration to define what is meant by ``critical 
infrastructure.'' There are varying definitions in the Patriot 
Act and by the Department of Homeland Security. Before one 
legislates in this area, we ought to make sure we know what we 
mean by ``critical infrastructure.''
    So let me close by applauding your contribution to the 
process. I believe that Chairman King and Ranking Member 
Thompson have done a great service by taking a very careful 
bipartisan look, and I will be glad to take your questions.
    Thank you.
    [The statement of Mr. Eizenstat follows:]

           Prepared Statement of Hon. Stuart E. Eizenstat \1\

    Chairman King, Ranking Member Thompson and Members of the 
Committee:
    Thank you for the opportunity to testify today. It is a privilege 
to appear before you. I applaud your leadership, Mr. Chairman, and that 
of Ranking Member Thompson, on the vital issues affecting our nation's 
homeland security. In particular, I want to thank you for your 
contribution to the careful, considered, prudent approach that the 
House of Representatives is taking towards reform of the Exon-Florio 
Amendment and CFIUS. This is a very heated political environment in an 
election year. Because of your leadership, I believe that the House is 
moving towards adopting tough, effective, and truly bi-partisan 
legislation that would restore Congress's confidence in CFIUS, enhance 
protection of national security, and maintain the United States' 
longstanding open investment policy.
---------------------------------------------------------------------------
    \1\ Stuart E. Eizenstat, was President Carter's Chief White House 
Domestic Policy Adviser, and in the Clinton Administration was U.S. 
Ambassador to the European Union, Under Secretary of Commerce for 
International Trade, Under Secretary of State for Economic, Business & 
Agricultural Affairs, and Deputy Secretary of the Treasury, as well as 
Special Representative of President Clinton on Holocaust-Era Issues. He 
heads the international trade and finance practice at Covington & 
Burling, and has and continues to represent U.S. and foreign companies 
before CFIUS. Mr. Eizenstat is also co-chair of the European American 
Business Council, an organization with 58 American and European 
businesses committed to an open investment climate, and is appearing on 
the Council's behalf.

Importance of Foreign Direct Investment
    We live in what threatens to be a protectionist era. There is a 
clear and present danger that the recent Dubai Ports World controversy 
will be used as a platform to fundamentally change the rules governing 
foreign investments in the U.S., in ways that will threaten investments 
that are a lifeblood for a healthy economy.
    We need to be clear-eyed about our vital national interests. Little 
direct foreign investment comes from the Middle East: 94% of foreign 
assets in America are owned by companies from the 25 industrialized, 
democratic OECD member countries, and 73% of all foreign investments in 
the U.S. are made by European companies. Our traditionally open 
investment climate has greatly benefited the American people. At a time 
when concerns are raised about the ``outsourcing'' of jobs abroad, 
foreign investment represents ``in-sourcing,'' a vote of confidence by 
foreign firms and investors in the openness, flexibility and strength 
of the U.S. economy.
    In-sourcing foreign companies employ more than five million 
Americans, some 5% of private industry employment. At a time when U.S. 
manufacturing employment is hemorrhaging, almost 35% of the jobs 
created by foreign firms in this country are in manufacturing. Foreign 
direct investment often saves a struggling American company, which 
might otherwise be shut down or moved abroad. Foreign-owned U.S. 
operations account for 21% of our total exports and in 2004 plowed $45 
billion in profits back into the American economy. Foreign-owned 
affiliates purchase 80% of their intermediate components from U.S. 
firms; they also spend $30 billion on R&D and over $100 billion on 
plant and equipment annually in the U.S.
    Moreover, we also need to keep the arteries of foreign investment 
open to fund our record current account trade deficit, now at 7% of our 
GDP, and compensate for our low savings rates; foreign capital flows 
keep long-term interest rates lower.

Global Impact of CFIUS Reform
    As Congress looks at changing the rules for foreign investment I 
hope you will recognize that your actions will reverberate around the 
world. Congressional action to tighten restrictions on foreign 
investment in the United States could invite similar action abroad, 
limiting opportunities for outward investment by American companies. 
This is not an idle concern:
         Last summer, French politicians reacted to mere rumors 
        of PepsiCo's potential interest in acquiring Danone, the French 
        yogurt and water company. French Prime Minister Dominique de 
        Villepin made the extraordinary statement that ``The Danone 
        Group is one of the jewels of French industry and, of course, 
        we are going to defend the interests of France.'' The French 
        government has followed up by publicly opposing the purchase of 
        the steelmaker Arcelor by Mittal Steel, and pushing for the 
        recent merger of the water utility Suez and the national gas 
        company GDF to pre-empt an Italian energy company from 
        acquiring Suez. Most recently, the de Villepin's government has 
        proposed legislation establishing a list of eleven ``strategic 
        sectors'' that will be shielded from foreign investment.\2\ It 
        is hard to see how yogurt is a strategic industry.
---------------------------------------------------------------------------
    \2\ See Patrick Sabatier, Globalization a la carte, Int'l Herald 
Trib., May 18, 2006.
---------------------------------------------------------------------------
         France is not the only European nation engaging in 
        such protectionist machinations. Since the beginning of the 
        year, the Spanish government has prevented a German company 
        from taking over a Spanish energy concern; the Polish 
        government has blocked Italians from acquiring several Polish 
        banks, while Italy has done the same for some time; and Germany 
        continues to insist on its ``Volkswagen law,'', which insulates 
        its auto industry from foreign competition.\3\
---------------------------------------------------------------------------
    \3\ Id.
---------------------------------------------------------------------------
         In his State of the Union speech, President Putin 
        called for a new law to protect ``strategic industries'' in 
        Russia, including the oil sector. A draft of that law is 
        expected to be put forward shortly.
         The Canadian Parliament is now considering amendments 
        to the Investment Canada Act to permit the review of foreign 
        investments that could compromise national security.
         China continues to restrict investment in a number of 
        important sectors.
    Permit me to give you a recent, and more tangible, example in which 
a foreign government's proposed restrictions on U.S. investors seems to 
be directly linked to security commitments imposed by CFIUS on a 
company from that country. Specifically, the Indian government, 
recently announced its intention to impose extremely broad security 
restrictions on foreign investments in the telecommunications sectors. 
These security restrictions were announced alongside a proposal to 
raise the ceiling on permitted foreign investment in the 
telecommunications sector, from 49% foreign ownership to 74% foreign 
ownership. In this case, it appears that the Indian government's 
proposed new restrictions were provoked in part by the experience of an 
Indian company, VSNL, which itself had a difficult time clearing CFIUS, 
and ultimately signed a Network Security Agreement related to one of 
its investments in the United States. In a letter publicly filed with 
Indian regulatory officials, VSNL wrote, ``[we] propose that TRAI [the 
Indian regulatory authority] consider whether, in the interests of a 
level competitive playing field as well as regulatory symmetry, a 
similar security agreement process should exist in India for U.S. and 
other foreign carriers who desire a license to provide domestic or 
international services.'' VSNL further wrote, ``While we certainly do 
not recommend that the Indian Government force foreign carriers to wait 
as long as VSNL has been made to wait for its license to enter the U.S. 
telecommunications market, we believe that the existence of these 
agreements in India and other countries will have a beneficial result 
by moderating the willingness of the U.S. government to impose 
burdensome conditions and requirements in their own security 
agreements, which of course hinder the ability of VSNL and other 
foreign carriers to compete fairly against U.S. carriers who are not 
subject to such requirements.'' \4\
---------------------------------------------------------------------------
    \4\ Edward M. Graham and David M. Marchick, US National Security 
and Foreign Direct Investment 164 (2006).
---------------------------------------------------------------------------
    Mr. Chairman, this letter proves the old maxim, ``what goes around, 
comes around.'' We should never compromise national security, but 
Congress needs to realize that restrictions imposed on foreign 
companies in the United States will invite similar restrictions in 
foreign countries against U.S. companies. We need to be careful not to 
encourage other countries to impose restrictions that hurt American 
investors, nor should we chill the foreign investment that is so vital 
to the American economy.

Comments on H.R. 5337
    I believe that the fundamental principle that should guide Exon-
Florio reform is to ensure that CFIUS has all the tools and all of the 
time it needs to identify, scrutinize, and act upon the tough cases 
that present real national security issues, while ensuring that CFIUS 
has the necessary flexibility to recognize and efficiently process the 
majority of transactions that present no national security concerns. 
Ensuring that the overwhelming majority of transactions that do not 
raise national security issues can obtain Exon-Florio approval in 30 
days is essential to avoid discriminatory treatment of foreign 
investors that would chill the investment our economy needs. American 
companies that make acquisitions need to secure antitrust approval 
under the Hart-Scott-Rodino Act, which also has an initial 30-day 
review period. Preserving two 30-day, parallel regulatory processes for 
both domestic and foreign acquisitions of U.S. companies ensures that 
foreign bids for U.S. companies are not discounted or ignored because 
of longer regulatory timeframes.
    With a few adjustments, I believe that the CFIUS reform bill 
currently before the House Financial Services Committee, and that you 
co-sponsored, Chairman King, is the right way to reform Exon-Florio. 
The bill will implement structural reforms that address Congress's DP 
World-related concerns, restore confidence in the integrity of the 
CFIUS process, and reassure our global allies and partners that America 
is still open for business. Specifically, the bill facilitates 
identification of the tough cases by requiring CFIUS to consider 
additional factors during the review and investigation process, 
including whether a transaction has a security-related impact on 
critical infrastructure.
    The House bill ensures that CFIUS will have the information it 
needs by giving the Committee greater investigatory authority. It 
defines the appropriate role of the intelligence agencies as an 
information resource, as opposed to a policy role. It enhances 
accountability for both CFIUS and the transacting parties by requiring 
certification of notices, reports, and decisions, and by establishing 
procedures for control and continued monitoring of withdrawn 
transactions. The bill ensures CFIUS is focused and competent to 
fulfill its mission by maintaining Treasury leadership of the Committee 
and authorizing the designation of competent agencies to take the lead 
on particular transactions: investments in critical infrastructure, for 
example, should principally be reviewed by the Department of Homeland 
Security. It maintains voluntary, as opposed to mandatory, notices. And 
it enhances transparency of the process by requiring CFIUS to collect 
and share more data, on an aggregate basis, through semi-annual reports 
to Congress, without creating unduly burdensome notice and reporting 
requirements that will politicize the process or risk leakage of 
business proprietary data. Congress needs to recognize that imposing 
excessive reporting requirements on CFIUS may actually complicate and 
distract CFIUS's focus from its principal mission of protecting U.S. 
national security through efficient review of foreign investments. The 
House bill's provisions represent important substantive and procedural 
improvements to the CFIUS process.
    I do, however, have several concerns with specific provisions of 
the bill in its current form.
    First, I understand the dynamics that led to the provision in the 
bill tightening the so-called ``Byrd Amendment'' for government-owned 
companies, particularly in the wake of the Dubai Ports Controversy. In 
my view, acquisitions by some government-owned companies raise unique 
national security issues and should receive enhanced scrutiny. U.S. 
companies are put at a competitive disadvantage against those 
government-owned companies that receive subsidized or concessional 
government financing. But not all government acquisitions create the 
same national security risk, and CFIUS should have discretion to 
distinguish between transactions that raise issues and those that do 
not. Companies affiliated with friendly governments which operate by 
market principles should not be arbitrarily lumped together with 
government-owned firms that otherwise raise substantial national 
security concerns. Optimally, all transactions that involve parties 
that operate on market principles and do not raise national security 
concerns should be considered by CFIUS in the same, existing 30 day 
review period. But if political realities are such that mandatory 
investigations of all foreign government-controlled transactions are 
necessary, I think it would be useful for Congress to clarify the 
intent of the legislation, perhaps in its report, that CFIUS can allow 
such acquisitions to go straight to the investigation stage and that 
CFIUS has discretion to close the investigation if no real issues exist 
or if any national security concerns have been mitigated.
    Second, I also understand Congress's desire for additional 
accountability. But the requirement that the Secretaries or Deputy 
Secretaries of both the Treasury and Homeland Security personally 
approve and sign each and every review and investigation may create 
bureaucratic delays and impede CFIUS's ability to efficiently implement 
Exon-Florio. Perhaps the Congress could explore ways to require a high-
level sign-off for transactions that raise real national security 
issues, while allowing an Undersecretary or Assistant Secretary to 
approve other transactions. From my own experience in public service, 
very important decisions are regularly made at the Undersecretary and 
Assistant Secretary level.
    Third, CFIUS should never act if the Director of National 
Intelligence does not have adequate time to collect and analyze 
intelligence relating to a particular transaction. But again, the 
policy underpinning CFIUS reform should be to create a process that is 
tough enough for the complex cases and flexible enough for the easy 
cases. Some intelligence reviews might take 30, 45 or even 60 days. 
Reviews of companies that frequently go through the CFIUS process could 
simply be updated in a matter of days. But by creating a 30-day minimum 
for the DNI's intelligence review, and requiring that the DNI review be 
completed no less than 7 days before the end of the initial CFIUS 
review period, the bill establishes a de facto 37 day process, even for 
transactions that raise no national security issues. Time is money; the 
longer a deal takes to approve, the more it costs and the more 
variables can affect the underlying transaction. I am confident that a 
provision can be fashioned to allow the DNI to do his job well without 
slowing down the entire process with a requirement for extended 
analysis of cases that present no national security concerns.
    Finally, I believe the existing review and investigation time 
periods are appropriate for CFIUS to do its work. But if some extension 
is inevitable, it is much preferable to add additional time to the end 
of the investigation period, as the bill does, rather than extending 
the process after the initial 30-day period. Thus, the Senate Banking 
Committee bill would extend the initial 30 day review period if only 
one CFIUS agency requests it. This House bill would allow an extension 
of the 45 day investigation period if requested by either the President 
or two-thirds of the agencies involved in the CFIUS process. Generally, 
CFIUS can determine in the initial 30 day period if a transaction is 
likely to cause significant concerns from a national security 
standpoint.

Protection of Critical Infrastructure
    The final subject I would like to address is protection of 
``critical infrastructure.'' I know that this is a topic that this 
Committee has a particular interest and expertise in, and that 
``critical infrastructure'' has also become a significant issue in the 
debate over CFIUS reform. It will continue to be an important subject 
as any House bill moves into conference committee work with the Senate. 
The focus on protection of critical infrastructure is a relatively new 
and evolving national security objective, and may have different 
implications in different regulatory contexts. CFIUS needs the 
flexibility to focus its scarce attention, time, and resources on those 
foreign direct investments that create real national security risks. 
Forcing CFIUS to scrutinize every foreign investment in critical 
infrastructure will compromise CFIUS's ability to focus on the 
transactions that matter from a national security perspective. Three 
different approaches have been proposed with respect to the protection 
of ``critical infrastructure.''
        H.R. 4881, offered by Chairman Hunter and other Members, would 
        essentially prohibit foreign investment in critical 
        infrastructure unless the particular investment is put in a 
        ``US Trust'' run by American citizens and walled off from the 
        foreign parent. If the Department of Homeland Security's (DHS) 
        current list of ```critical infrastructure'' activities were 
        used, close to 25 percent of the U.S. economy would be off 
        limits to foreign investment under this proposal. This bill is 
        the mirror image of Prime Minister Villepin's legislation 
        shielding 11 sectors of the French economy from foreign 
        investment, which I described earlier. I believe that the last 
        thing we need to do with CFIUS reform is emulate the French 
        government and move our economy closer to the French statist 
        model.
         The Senate bill, offered by Chairman Shelby and 
        Senator Sarbanes, requires that foreign investments in critical 
        infrastructure go to the ``investigation'' stage unless CFIUS 
        determines that ``any possible impairment to national security 
        has been mitigated by additional assurances during'' the review 
        period. This approach creates a de facto presumption that all 
        foreign investment in critical infrastructure creates a 
        security risk because it must go to an ``investigation'' unless 
        the risk is mitigated. In my view, some investments in critical 
        infrastructure do create real national security risks; but 
        other investments should not even be filed with CFIUS because 
        they create no risk whatsoever.
         The bill you co-sponsor, Mr. Chairman, requires CFIUS 
        to consider whether a ``covered transaction has a national 
        security-related impact on critical infrastructure in the 
        United States'' as a factor in its deliberations. I think you 
        have it right. It should be a factor CFIUS should consider. How 
        significant a factor it should be will vary on a case-by-case 
        basis.
    One of the reasons that your approach makes sense is because the 
focus on protection of critical infrastructure is a relatively new and 
evolving security objective. In contrast to the area of foreign 
investments in the defense sector, an area where DOD has extensive 
institutional experience and protocols dealing with what aspects of 
foreign investments present security issues (and which do not), 
``critical infrastructure'' remains a relatively fluid regulatory 
concept. Additional work needs to be done, in my view, to define what 
exactly is meant by critical infrastructure. For example, the Patriot 
Act defines ``critical infrastructure'' to be
        ``[S]ystems and assets, whether physical or virtual, so vital 
        to the United States that the incapacity or destruction of such 
        systems and assets would have a debilitating impact on 
        security, national economic security, national public health or 
        safety, or any combination of those matters.'' \5\
---------------------------------------------------------------------------
    \5\ Section 1016(e) of the Patriot Act, codified at U.S.C. 5195c.
---------------------------------------------------------------------------
    This definition creates a high threshold and implies a relatively 
narrow list of assets that would ``have a debilitating effect'' on 
security. By contrast, the Department of Homeland Security has 
identified twelve extremely broad sectors that it considers to be 
critical infrastructure, including agriculture and food, water, public 
health, emergency services, the defense industry, telecommunications, 
energy, transportation, banking and finance, chemicals, postal services 
and shipping, and information technology.\6\ This definition may work 
for physical protection of critical infrastructure; it does not work 
for foreign investment considerations.
---------------------------------------------------------------------------
    \6\ See National Strategy for the Physical Protection of Critical 
Infrastructure and Key Assets, (February 2003), available at 
www.whitehouse.gov (last visited May 20, 2006); HSPD-7 (December 2003), 
available at www.whitehouse.gov (last visited May 20, 2006).
---------------------------------------------------------------------------
    But beyond specifying these sectors, the Department of Homeland 
Security has not publicly identified the types of companies, or even 
subsectors, for which acquisition by a foreign firm would be deemed a 
high risk to national security. Nor has anyone explained why foreign 
ownership of these sectors would necessarily create a national security 
risk. Thirty percent of value added in the U.S. chemical sector is 
already produced by U.S. affiliates of foreign owned firms. In the 
energy sector, it would seem fairly clear that foreign acquisitions of 
US nuclear energy companies should be reviewed by CFIUS. What about 
foreign acquisitions of US firms operating in other segments of the 
energy sector? Many foreign companies own electric distribution 
companies. Do these raise national security issues? What about foreign 
ownership of a wind farm? Similar questions certainly apply in the 
other sectors, including the food, transportation (including ports), 
and financial sectors, where foreign ownership of US firms is common.
    In my view, the Administration and Congress should work together to 
determine how best to protect critical infrastructure, regardless of 
who owns a particular company. Security policies and guidance could be 
developed on a sector-by-sector basis. A baseline level of security 
requirements should be established. If there are particular national 
security issues associated with foreign ownership in a particular 
asset, CFIUS is well equipped to mitigate that risk--or block the 
investment.
    In sum, until policies and doctrines with respect to critical 
infrastructure have been further developed, it is both unsound and 
unnecessary to do anything beyond adding ``critical infrastructure'' as 
a factor that CFIUS should consider. Creating an outright ban on 
foreign investment in ``critical infrastructure'' would both harm job 
creation and undermine national security, because foreign investment in 
these sectors has both increased research and development and spurred 
additional competition and innovation. Further, it would be unwise to 
create a presumption that foreign investment in critical infrastructure 
creates a national security risk. Rather, CFIUS should be given the 
discretion to deal with these issues on a case-by-case basis, examining 
both the trustworthiness of the acquirer and the sensitivity of the 
asset being acquired.

Conclusion
    Let me close by applauding your contribution to this reform 
process, Mr. Chairman and Ranking Member Thompson, along with the 
efforts of so many of your colleagues. Doing Exon-Florio reform right 
is critically important. The open character and continued vibrancy that 
define our national economy is at stake. These are among the 
fundamental characteristics of our great nation, which I know this 
Committee is dedicated to securing. The bi-partisan bill that you are 
co-sponsoring is the correct approach to the problem at hand. I am 
grateful for the opportunity to testify and look forward to working 
with you as you deliberate on this important subject.

    Mr. Rogers. I thank both of you. Those are very good 
opening statements.
    I would make the point that I agree wholeheartedly with 
your observation about the French. I don't think we ought to be 
emulating France in anything. But I do want to talk a little 
bit about the length of the review period.
    In the previous panel, you heard Mr. Lowery talking about 
how there was a relatively small universe of folks that brought 
these petitions, and that they had been encouraging them to 
pre-file early. What do you think we can do to facilitate this 
pre-filing?
    Both of you have addressed this length of review as an 
issue. I would ask you, Mr. Eizenstat, what do you think we can 
do to encourage pre-filing?
    Mr. Eizenstat. It is already being encouraged, but 
certainly because all those representing companies before the 
CFIUS process now realize that if they don't go through a pre-
filing formula where they sit down before they file to find out 
where the kinks are, where the problems are, whether the 
transaction is likely to pass muster, they know that they face 
in this current environment the likelihood of rejection or at 
the very least going to the 45-day period.
    I certainly would have no opposition at all, quite the 
contrary, to committee report language or even bill language 
which would encourage companies to do this pre-filing so that 
you don't jam the CFIUS process and force them to act within 30 
days. The fact is, as Mr. Baker and Mr. Lowery said, that 
already most transactions go through a much longer pre-filing 
process before the first 30-day review process. But if you 
wanted to reinforce that and encourage it, it certainly would 
be a sound thing to do.
    Mr. Rogers. In your opinion, if we did put in some bill 
language that required a pre-filing period, what would you 
think the appropriate time length would be?
    Mr. Eizenstat. I am not sure I would require a pre-filing 
period, because then you are adding additional time. If you 
give 30 days or 45 days, then the CFIUS process will take that 
long, and you don't want to, again, have elongated processes 
for most of these cases which don't really involve national 
security. So I would simply encourage the pre-filing with 
sufficient time for the intelligence agencies to make an 
initial determination.
    Mr. Rogers. What is a sufficient time for the DNI?
    Mr. Eizenstat. It can vary. I think sometimes 30 days; 
sometimes 45 days; sometimes 15 days. It depends on the 
complexity of the issue. But again, what is happening now is 
many transactions are being filed simply out of fear that with 
the current political environment, the transaction is going to 
be turned down and unscrambled later on national security 
grounds when there is no national security interest.
    So rather than put a specific time, I would simply 
encourage the pre-filing to give the agency sufficient time 
before the 30-day review process starts.
    Mr. Rogers. Ms. Markheim, I want to talk to you for a 
minute about congressional notification. In a recent Web note 
you coauthored with James Carafano, you argue that any 
congressional notification prior to approval of the acquisition 
would ``politicize the approval process.''
    In the intelligence community, select Members are briefed 
on highly sensitive programs. What would the downside be to 
having a similar process in place whereby the chairmen and 
ranking members from select committees were briefed prior to 
approval? Your thoughts on that?
    Ms. Markheim. The concern that we have with that is fairly 
simple. These are business transactions. And frankly, at time 
it might be the case that American firms, a U.S. firm has lost 
out in the fight to take over that transaction or what have 
you. By incorporating Congress into the process, by pre-
notifying them or including them along with the investigation, 
that opens the door to allowing information, proprietary data, 
what have you, to potentially be leaked or be used in a way 
that would then be counterproductive to the most effective 
result for what we would hope for from foreign investment 
coming in.
    Our concern wasn't so much that no one should be pre-
notified. Our concern was that the breadth of or the amount of 
notification would extend such that it could actually cause a 
threat to allowing the investigation to be conducted 
appropriately. If the Congress were to become a part of the 
process, ideally the members that would be notified of this and 
briefed on this would be kept to an extreme minimum.
    Mr. Rogers. That is my point. If it was chairmen and 
ranking members, that is pretty restrictive of select 
committees. What I found striking is you use the word that it 
would ``politicize'' the process. In my view, if that practice 
had been used in this Dubai Port situation, you would have 
defused a political problem.
    Ms. Markheim. Aside from the Dubai Ports issue, in general 
this could politicize the problem simply because members are 
bringing in their own interests and their own incentives that 
are part of their agenda. By opening this door to allowing 
their input into the investigation, that might taint the 
overall objective way the CFIUS does handle investigations now. 
I am not saying that it would, but that it could. This is 
looking at the process over time, not just today and in one 
instance, but over all types of cases that could come up.
    So we could see down the road a reversal of what happened 
when we saw Pepsi Company looking at buying Danone in France. 
What if this were reversed? If there was some sort of concern 
of a French company buying Pepsi from America would be a 
problem, that could become an issue that it wouldn't 
necessarily become had CFIUS remained external from Congress.
    Mr. Rogers. I thank you. My time has expired.
    The Chair recognizes the Ranking Member of the Full 
Committee, Mr. Thompson of Mississippi.
    I just went blank. I am looking at your name. Thank you.
    Mr. Thompson. It might be that French wine.
    [Laughter.]
    Mr. Rogers. That is right.
    [Laughter.]
    Mr. Thompson. Thank you both, witnesses.
    Mr. Eizenstat, you talked a little bit about how it might 
be necessary to have a parallel process going for the process 
of review of foreign and domestic acquisitions. Do you foresee 
the time, especially for foreign transactions, that we might 
need to provide a little more time for that process to take 
place?
    Mr. Eizenstat. No, sir, only if there is a national 
security threat and it goes into the second phase. Otherwise, 
the 30-day period should be the same. Under the Hart-Scott-
Rodino, a domestic company has to go through that process with 
the Justice Department to see if there is any competition 
issues, any antitrust issues.
    The CFIUS process has been structured to try to give 
foreign companies that same window in most cases. In 90 
percent, 95 percent of the cases, Congressman Thompson, that is 
sufficient. And that 10 or 15 percent where there is a 
sensitive issue, the additional 45 days is appropriate.
    I want to just make another point, if I may. With our 
current account deficit, that means that we are sending a 
tremendous amount of excess dollars abroad, petro-dollars to 
the Arab countries, additional dollars to the Chinese. What are 
they going to do with those dollars? There are two things they 
can do with them. One is they are investing them in treasury 
bills, and that helps lower our interest rates.
    It also means, however, that huge percentages of our debt 
are held by foreign countries that may decide to unload them at 
some point. It is far better to have them recycle those excess 
dollars that we are sending abroad for everything from T-shirts 
to cars, back into fixed assets in the United States where it 
actually creates jobs. That is why we have to be so careful not 
to have different processes for foreign acquisitions of U.S. 
assets, except again in the rare situations where there is a 
national security threat, than domestic acquisitions.
    Mr. Thompson. But you do see that the public would want to 
know that there is an assurance that this process takes into 
consideration any extenuating circumstances on the acquisition 
itself. I am talking about the Dubai dilemma that more or less 
precipitated a lot of discussion here on the Hill, and whether 
or not the process that was used in that situation provided as 
much transparency as was needed, because when questions started 
bubbling up, it was not as clear-cut in the eyes of the public 
as one would want.
    I think for whatever reason we have to have a process that 
is thorough and complete, but also has to stand the scrutiny of 
the public at some point. I think part of it is the public felt 
that the process was a little less transparent than perhaps one 
would want.
    Mr. Eizenstat. You are quite right. I think that the 
Treasury and other departments, and I say this in a completely 
bipartisan way because I sat in the same seat that they did, 
and I know the pressures that they were under. I think they 
realized that they didn't do the kind of base-touching that 
they should of, and that had they done so, and had they 
explained the transaction; had they explained that this was not 
the ownership of a port; it was the ownership of a terminal, 
and done a more thorough education process, that we wouldn't be 
sitting here today.
    So yes, the public has a right to be concerned about 
national security. The current CFIUS process provides for that. 
I think with the kinds of additional provisions that you have 
put in here, by and large in the House bill, you are giving an 
additional assurance without at the same time shutting down 
foreign investment in a way that I fear the Senate bill will 
do.
    Again, I think even here, as I have suggested with 
government-owned companies, don't consider all government-owned 
companies the same. If a British company is owned by the 
government, or from another ally, and they are run purely by 
private market principles, they shouldn't be necessarily 
automatically extended into the 45-day period unless there is a 
real national security threat. So I think you are headed in the 
right direction. You are going to give more transparency to the 
process.
    But I want to say, as Ms. Markheim said, one has to be very 
careful about the notice requirements. What is good about the 
House bill is the notice requirements are given after the deal 
is done, so you could judge and then grill the agencies if they 
didn't do their job. But by doing it, as the Senate bill does, 
before the deal, what it will encourage, and I can assure you 
as soon as I am sitting here that it will, the losing bidder in 
an acquisition will go to his member of Congress, his governor, 
and lobby you to try to block that deal. That politicizes the 
investment process in ways we don't want.
    Mr. Thompson. Thank you very much.
    I yield back.
    Mr. Rogers. We need to ask for unanimous consent to bring 
up Representatives Blunt and Maloney out of order. They are 
going to be out of here before 4 o'clock. I know we would like 
to hear their statements and ask them some questions before 
they have to leave. So I would ask unanimous consent to call 
them up out of order.
    Mr. Eizenstat. Should we stay, or are we excused?
    Mr. Rogers. No, you are not excused. We would like for you 
to move back one row. We want to ask you some more questions.
    There being no objection, the next panel is called up.
    Thank you. The Chair now calls on Mr. Blunt from Missouri 
for any statement he may have.

   STATEMENT OF THE HONORABLE ROY BLUNT, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MISSOURI

    Mr. Blunt. Mr. Chairman, thank you, and thank you for the 
consideration the committee, based on the other schedule we are 
on, and certainly I am appreciative of the assistance we are 
all getting from the testimony you heard and the questions 
being answered by the people who were at the table before and 
will be again.
    I am also very pleased to be here with Carolyn Maloney, who 
is the ranking member on the subcommittee in Financial 
Services. Ms. Maloney, along with the chairman of that 
subcommittee, Ms. Price, and Mr. Crowley and I, were the 
principal sponsors, are the principal initial sponsors of this 
legislation, but Chairman King and Chairman Hoekstra and others 
have joined us. I certainly appreciated the positive comments 
made about our legislation by the earlier witnesses.
    Obviously, this is a process where we want to have input 
from outside. I do think that the legislation we have filed is 
a good response to what we all saw happen, and I think was 
well-explained again by the earlier witnesses, in the Dubai 
Ports situation. I thought particularly at that time when the 
chairman of this committee, along with the president, appeared 
to learn the information he got from the news media that there 
needed to be a new look at this. Obviously, in a post-9/11 
world, the world has changed. At the same time, protectionism 
is not the answer, getting into a situation where other 
countries decide they have to reciprocate by making it 
difficult for American companies to invest in their country is 
not the answer.
    I think that the work that Chairman Price and Congresswoman 
Maloney and Congressman Crowley and I have done is a reasonable 
response and meets the needs of a post-9/11 world without 
providing the troubles that we could get into if we go further 
than we need to to secure the country.
    Let me make three or four points here, and then I am sure 
we want to hear from Carolyn and have some time to answer 
questions.
    I think, as has been stated earlier today, our legislation 
really clarifies the so-called ``Byrd rule'' that was in CFIUS. 
I do think there is a difference in a government-owned entity 
and that that 45 extra days is a reasonable thing to expect. 
Government-owned entities have many advantages in an 
acquisition. The extra 45 days may be a slight disadvantage to 
them, but I think generally they have advantages and this 45 
days will not offset those advantages, and clearly would have 
provided the additional time that Dubai Ports World did not 
have or that deal didn't take.
    Secondly, what happened exposed a lack of accountability. I 
think because of that, we maintained the structure where the 
secretary of the treasury is the chairman of CFIUS, but we have 
added to that as the vice chair the secretary of homeland 
security. We have required that that be delegated no lower than 
the deputy secretary level, so this is clearly a high-level of 
accountability in those two critical departments, and both of 
those individuals or their designee have to sign-off on the 
CFIUS process as it develops.
    We develop a regular order process for notifying CFIUS 
records and we record and monitor withdrawals from the process. 
Our legislation develops a process for any needed extension of 
an investigation. You have a process to extend an 
investigation. If there is an investigation, any member of the 
CFIUS panel can require the decision be made by the president. 
Any member on that panel can say, we don't agree with the 
decision that has been made after the investigation, if that 
was triggered during the review, and the president has to look 
at this. I don't think that will happen often, but clearly it 
is important that that capacity be there to happen.
    Our legislation establishes a formal analysis by the 
director of national intelligence for every transaction. There 
is a formal method for tracking and enforcing post-transaction 
compliance, where we have asked mitigation to occur. This 
legislation for the first time really develops a system where 
you follow that mitigation and see that it did occur. We give 
formal enforcement authority for compliance to the agreements 
in a way that allows that the committee members of the relevant 
committees keep track of the general trend.
    I do, as Mr. Eizenstat mentioned earlier, the idea that 
this is in virtually all cases post-decision, but very 
responsive to the committees so the committees have an 
opportunity if CFIUS is headed in the wrong direction to say, 
look, we don't like the report that we received; we question 
these specific moves you are taking; and we want to have that 
explained to us further. I think that is the right way to 
approach that.
    Congressional oversight is more important than a 
congressional veto. Involving the Congress too early in this 
process I think would be a mistake, and I think the nature of 
that mistake has been well explained by the earlier panel 
already today.
    Lastly, the CFIUS process post-Dubai Ports World will 
create a degree of certainty that was not there. This bill 
creates statutory protection of proprietary business 
information and certainly has the potential to see an extended 
investigation when that is necessary. Chairman King and Mr. 
Thompson were both actively involved, particularly Chairman 
King, before the bill was finally filed. We benefited from 
having that input and hope that we continue to have that kind 
of a relationship with your committee as this bill moves 
forward.
    Thank you, Mr. Chairman.
    [The statement of Mr. Blunt follows:]

                  Prepared Statement of Hon. Roy Blunt

    Many Americans were outraged when they first learned of the Dubai 
Ports World (DPW) deal to take over the management of commercial 
operations at six ports along the Eastern seaboard and Gulf of Mexico. 
CFIUS, the Committee on Foreign Investment in the United States, an 
inter-agency panel designed to review and investigate mergers and 
acquisitions from foreign investors taking America's national security 
into account, approved the Dubai Ports World acquisition on behalf of 
the Bush Administration, yet no cabinet officer was willing to be held 
accountable for the approval. Equally concerning, the President learned 
of the deal through press reports rather than agency briefings. No one 
in Congress seemed to have any answers either. When Homeland Security 
Committee Chairman King was caught off guard by the lack of 
coordination with Congress, it became clear to me that the CFIUS 
process needed to be updated. As you might expect, Congress reacted to 
their constituents concerns and voted to scuttle the deal by forcing a 
vote on a free standing amendment to the Emergency Supplemental 
Appropriations Act.
    The attacks of September 11th changed the world we live in. Any 
reform in CFIUS must take this into account. Congress has no more 
important duty than to ensure the security of our nation. However, 
protectionism is not the answer. Chairman Pryce, Congresswoman Maloney, 
Congressman Crowley and I have introduced a responsible bipartisan bill 
which addresses the problems exposed in the CFIUS process during the 
Dubai Ports World incident. Striking the right balance between 
protecting America from those who wish to harm us, while preserving our 
open engagement with the global economy was our goal. Avoiding 
unintended consequences by not creating new burdens for normal business 
acquisitions or new diplomatic or business problems for the United 
States is equally important.
    H.R. 5337 deals specifically with the main political issues the 
Dubai Ports World incident exposed.
    First, it reaffirms Congressional intent relating to the ``Byrd 
Rule'', which mandates a 45-day investigation for companies controlled 
by foreign governments. Any state owned enterprise will trigger an 
automatic CFIUS investigation. DPW a United Arab Emerites owned 
enterprise falls into this category. However, due to the Byrd loophole, 
the acquisition failed to trigger a more intensive investigation by 
CFIUS. Blunt, Pryce, Maloney, Crowley would solve this problem.
    Secondly, DPW exposed a lack of accountability. It was widely 
reported that President Bush, and Secs. Snow, Rumsfeld and Chertoff 
were all unaware of the CFIUS approval of DPW. H.R. 5337, our 
legislation establishes CFIUS in statute and adds the Secretary of 
Homeland Security as vice-chair. Additionally, the signature of the 
chair (Secretary of Treasury) and vice chair are required for all 
decisions. This signature requirement cannot be delegated below the 
Deputy Secretary level, ensuring accountability. Blunt, Pryce, Maloney, 
Crowley develops a regular-order process for notifying CFIUS; records 
and monitors withdrawals from the process; develops a process for any 
needed extension of investigation (roll-call votes of 2/3 of 
Committee); and after investigation sends the decision to the President 
with the dissenting vote of any single Committee member.
    Our legislation establishes a formal analysis by the Director of 
National Intelligence of every transaction. If for any reason the DNI 
is unable to complete its threat assessment within the 30 day review 
process, a 45-day CFIUS investigation is triggered.

    Additional requirements relating to CFIUS accountability include:
         A formal method for tracking and enforcing post-
        transaction compliance with mitigation agreements and for 
        tracking any post-transaction changes in such agreements.
         Gives formal enforcement authority for compliance with 
        such agreements to Committee member with greatest expertise in 
        subject.
         Assures an objective review of a proposal, followed by 
        certain notification of responsible presidentially-appointed 
        officials.
    Thirdly, DPW highlighted the lack of Congressional oversight in the 
CFIUS process. I strongly feel that the CFIUS process should not be 
politicized by a Congressional veto. However, certain committees and 
Members need to be aware of the impact of foreign investment as it 
relates to our national security. H.R. 5337, ensures that notices be 
sent to bipartisan Members of leadership and to every committee with 
jurisdiction over any aspect of a transaction after each investigation. 
Any Member receiving such notice may request a classified briefing on 
the transaction. Blunt, Pryce, Maloney, Crowley requires thorough and 
regular (semi-annual) reporting to Congress on activities of CFIUS, 
including trend analysis of foreign investments and of industrial 
espionage or attempts to control a type of asset or sector.
    Lastly, the CFIUS process post DPW has created a lack of certainty 
and predictability for our potential global business partners. More 
than ever it is important that we provide clarity and regular-order 
certainty in consideration of applications. H.R. 5337 does exactly this 
by mandating statutory protection of proprietary business information 
and certainty on the potential for any extensions of CFIUS 
investigations.
    In sum, H.R. 5337 would have prevented the political fallout 
associated with the Dubai Ports World fallout.
        1. DPW a state owned enterprise would have automatically 
        triggered an intensive 45 day investigation by the CFIUS panel. 
        Unfortunately, no such investigation ever took place.
        2. As Chair and Vice Chair, Secs. Snow and Chertoff would have 
        been required to sign a certification that CFIUS completed and 
        approved of the DPW deal. The DPW acquisition only rose to the 
        assistant secretary level.
        3. Had just one CFIUS member expressed concerns related to the 
        DPW transaction, relevant congressional leaders and Committee 
        Members would have received notification of the approved DPW 
        deal 15 days prior to Presidential signature. This would have 
        given Congress the ability to request classified briefings and 
        learn of the intricacies of the transaction before jumping to 
        conclusions. In the case of DPW, every Member learned more from 
        press accounts than from the administration.
    Chairman King, thank you for taking a leadership role on this 
issue. I appreciate your support of H.R. 5337. Your contributions have 
made it much stronger legislation. I would also like to thank Ranking 
Member Thompson. It would be easy to allow CFIUS Reform to become a 
politically charged issue. It is my hope to continue to work with the 
Committee on Homeland Security in a bipartisan fashion to pass a bill 
the United States House of Representatives can be proud of.

    Mr. Rogers. I thank the gentleman from Missouri.
    The chair now recognizes the gentlelady from New York, Ms. 
Maloney.

STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF NEW YORK

    Mrs. Maloney. Thank you, Mr. Chairman and Ranking Member 
Thompson, for inviting us to testify before the committee today 
on the bipartisan CFIUS bill that we have introduced with 
Majority Whip Blunt and Representatives Price and Crowley.
    As a ranking member on the Financial Services subcommittee 
that has jurisdiction over the CFIUS process, we have held 
three hearings to date on it. At these hearings, we have heard 
from the administration, the business community, and experts in 
academia about the need to reform the process and their 
suggestions on how to accomplish it.
    At our hearings, especially the first hearing that focused 
on the Dubai Ports World transaction, it was astonishing how 
tone-deaf the CFIUS board was as they reviewed national 
security concerns related to this transaction. The fact that 
CFIUS did not consider critical infrastructure as a factor 
potentially impacting national security certainly does not 
represent a post-9/11 view of the world and backs up the GAO's 
prior finding that CFIUS was too narrowly defined in what 
constitutes a threat to national security.
    In March following our first hearing, I introduced H.R. 
4915. The Committee on Foreign Investment in the United States 
Reform Act. This legislation enacts reforms suggested by the 
GAO in a report they prepared before the Dubai Ports problem. 
So they were very concerned about the problem even before Dubai 
Ports.
    Following the introduction of this legislation, I was very 
pleased to work in a bipartisan manner with the chair of the 
committee, Deborah Price and Mr. Crowley and Mr. Blunt, on H.R. 
5337, which is under consideration today. This legislation 
incorporates many of the provisions included in my first bill 
and the GAO report.
    I believe it is a very strong common sense approach that 
makes the process more transparent and accountable, while 
protecting our national security. I am pleased to note that one 
of my colleagues from New York, Chairman King, has joined as a 
cosponsor of this legislation. He has been deeply involved in 
the post-9/11 recovery of New York and the steps that we have 
taken as a state to become more secure, and 30 of our 
colleagues have joined us on this bill.
    The remainder of my testimony really went through the 
various provisions that ensures national security needs are met 
and restores accountability and transparency, and the bill 
improves congressional oversight, but my colleague Mr. Blunt 
went through those points. I don't think I should go through 
them again. I will put them into the record.
    Dubai Ports surely showed that we need to reform the CFIUS 
process, and our legislation is a balanced and deliberative 
piece of legislation that will examine the national security 
risks of all transactions, while making sure we do not chill 
foreign investment in the United States. I believe that the 
bill strikes an appropriate balance of protecting our national 
security, while increasing transparency and accountability in 
the process.
    So I thank the committee for their concern and for having 
us today.

             Prepared Statement of Hon. Carolyn B. Maloney

    I would like to thank Chairman King and Ranking Member Thompson for 
inviting me to testify before the committee today on the bipartisan 
CFIUS (Committee on Foreign Investment in the United States) reform 
legislation that I have introduced with Majority Whip Blunt and 
Representatives Pryce and Crowley.
    As Ranking Member of the Financial Services Subcommittee on 
Domestic and International Monetary Policy, Technology and Trade, we 
have held three hearings into the CFIUS process. At these hearings we 
have heard from the Administration, the business community, experts and 
academia about the need to reform the CFIUS process and their 
suggestions on how to accomplish this.
    At our hearings, especially the first hearing that focused on the 
Dubai Ports World transaction, it was astounding how tone-deaf the 
CFIUS board was as they reviewed national security concerns related to 
this transaction. The fact that CFIUS did not consider ``critical 
infrastructure'' as a factor potentially impacting national security 
certainly does not represent a post-9/11 view of the world and backs up 
the GAO's prior finding that CFIUS can too narrowly define what 
constitutes a threat to national security.
    In March, following our first hearing, I introduced H.R. 4915, the 
Committee on Foreign Investment in the United States Reform Act. This 
legislation enacts reforms suggested by the Government Accountability 
Office (GAO) in a report they prepared before Dubai Ports World was a 
household name.
    Following the introduction of this legislation, I was pleased to 
work in a bipartisan manner to develop H.R. 5337, the Reform of 
National Security Reviews of Foreign Direct Investments Act. This 
legislation incorporates many of the provisions included in H.R. 4915 
and the GAO report.
    H.R. 5337 is common sense legislation that makes the CFIUS process 
more transparent and accountable while protecting our national 
security.
    Specifically, H.R. 5337:

Ensures that National Security Needs are met by:
         Mandating a 45-day investigation for all transactions 
        that would result in control by a foreign government.
         Adding the Department of Homeland Security as the 
        vice-chair of the CFIUS board.
         Establishing a formal analysis by the Director of 
        National Intelligence of every transaction. This legislation 
        gives the DNI 30-days to complete his review, but requires the 
        review to be completed 7-days before the end of the 30-day 
        review.
         Expanding the definition of homeland security by 
        requiring the CFIUS board to consider ``critical 
        infrastructure'' as a factor in any review.

    This legislation also restores accountability and adds transparency 
to the process by:
         Establishing CFIUS in statute.
         Requiring the signature of the chair and vice chair on 
        all decisions and only allows this authority to be delegated to 
        the deputy secretary at each agency.
         Requiring that withdrawal requests are in writing and 
        that they receive the approval of the Chair in consultation 
        with the Vice Chair.
         Establishing a formal method for tracking and 
        enforcing post-transaction compliance with mitigation 
        agreements and for tracking any post-transaction changes in 
        such agreements.
         Providing specific funding to the process ($10 million 
        over four years) to make sure that reviews are not abbreviated 
        for lack of resources.

This legislation also improves Congressional Oversight by:
         Requiring notice to bipartisan leadership and to every 
        committee with jurisdiction over any aspect of a transaction 
        after each investigation.
         Allowing any Member receiving such notice to request 
        that his or her chamber receive a classified briefing on the 
        transaction.
         Requiring thorough and semi-annual reporting to 
        Congress on activities of the Committee, including trend 
        analysis of foreign investments and of industrial espionage or 
        attempts to control a type of asset or sector. These provisions 
        strike the appropriate balance between proper oversight while 
        not politicizing the process.
    As the Dubai Ports World deal showed, the CFIUS process is in 
desperate need of reform. It is our responsibility to ensure that this 
is done in a deliberative manner that will effectively examine the 
national security risk of all transactions, while making sure we do not 
chill foreign investment in the United States.
    As I said at the beginning of my testimony, I believe H.R. 5337 
strikes the appropriate balance of protecting our national security 
while increasing the transparency and accountability of the CFIUS 
process.
    I thank the Committee for allowing me to testify, and I look 
forward to your questions.

    Mr. Rogers. I thank the gentlelady.
    I would like to state for the record how much I appreciate 
the bipartisan nature in which you have worked on building this 
piece of legislation, and note that the Chairman of this 
Committee, the Full Committee Chairman, who is not present, Mr. 
King, is a cosponsor.
    The fact that this Committee works on a regular basis in 
such a bipartisan nature, I know that everybody shares my view 
that it is good to see this come to us in this fashion.
    I have no questions. I would be happy now to call on the 
Ranking Member for any questions he may have.
    Mr. Thompson. Thank you very much, Mr. Chairman.
    I, too, want to thank the two witnesses for bringing their 
piece of legislation forward. I just wish we could do more 
things in a similar manner.
    I yield back.
    Mr. Rogers. The Chair recognizes the gentleman from 
Washington, Mr. Dicks.
    Mr. Dicks. Do you want any questions or not? I am trying to 
get the read on this thing. I want to get back to Mr. 
Eizenstat. But let me ask you two quick things, since I can't 
resist.
    You feel that there should be a 40-day additional 
investigation on all transactions where there is a foreign 
government involved. Shouldn't there be some threshold? 
Shouldn't there be some thought about if it doesn't have 
anything to do with national security, why would you have an 
additional 45-day investigation?
    Mr. Blunt. Yes. In response to your first question about 
whether we wanted questions or not, we only want easy questions 
and we will glad for Mr. Eizenstat and the other panel to take 
the hard questions.
    As I said, Mr. Dicks, the government-owned entities I think 
are harder in many ways to evaluate the impact that that 
governmental entity has in this kind of transaction. I think 
they have advantages in the process and this may in fact be a 
slight disadvantage, but I think it is only that. Frankly, this 
is I think almost a minimal response to the concern about a 
government-owned entity running a port, even though it was a 
terminal facility rather than owning the port, as has well been 
explained.
    I think it is a reasonable thing, and frankly as we look at 
the Senate alternative, I believe it is a step we need to take.
    Carolyn, do you have a comment?
    Mrs. Maloney. I feel that when a foreign government buys 
the infrastructure of the United States, it should be held to a 
higher standard. The requirement really grew out of the Dubai 
World example where the committee made the decision that having 
the terminals owned and operated by a foreign government was 
not a national security concern.
    I would think that everyone on your committee and certainly 
on our committee believed that it was a national security 
concern and should have been reviewed the additional 45 days. 
So it takes out any decision-making and requires a 45-day 
review.
    Mr. Dicks. What if it was clearly not? What if it was 
something that was involved in an agriculture facility in Iowa? 
If I have an additional 45 days, you have two of these things 
every week and you have the top people in the government now 
you are going to make review them. I mean, there has to be some 
tie-in with national security, I think.
    Mrs. Maloney. Mr. Dicks, that is why the CFIUS process is 
maintained as a voluntary process so that if you are buying an 
ice cream station, you obviously will not go before the CFIUS 
process. And 45 days is the maximum, not the minimum.
    Mr. Dicks. So what you are saying is if the company thinks 
there is a national security implication, that is the only 
reason they would go through the CFIUS process.
    Mrs. Maloney. Yes. And also I think that businesses want 
certainty. By going through the CFIUS process, you have more 
certainty. They cannot dissolve it. They cannot revoke it. It 
is looked at. I think most businesses would like the stamp of 
approval from the government going forward with an investment.
    I must mention something that came out in Financial 
Services that was a concern to many members, which was the 
advantage that foreign-owned governments have in buying 
infrastructure. In this case they did 20 percent more than 
anyone else because they were a government; they could afford 
to do it. And so there was a sense that there should be a 
higher standard for a foreign-owned entity buying 
infrastructure.
    Mr. Dicks. What about critical infrastructure in the United 
States? How do you deal with that in your bill?
    Mrs. Maloney. We very loosely define it because it is 
changing every day. One of the things that we do is we kick up 
the decision-making to the secretary of homeland security and 
treasury so that they are making the decisions, not assistant 
secretaries which was the case in the prior CFIUS decision with 
Dubai World Ports.
    Mr. Blunt. I think the point to emphasize there, too, is 
that we specifically thought it was best not to try to define 
``critical infrastructure,'' that that has such changing 
potential that the CFIUS board itself, particularly a board 
that includes the director of homeland security, as well as a 
representative of the Department of Defense and the others on 
the CFIUS board, are better at any moment to determine what is 
the current critical infrastructure of the country than a 
Congress might be trying to determine how that definition will 
work in the future. I would hope that the flexibility stays 
with the CFIUS board as opposed to be firmly defined in 
legislation, as some would argue.
    Mr. Dicks. Thank you.
    Thank you, Mr. Chairman.
    Mr. Rogers. Do any other Members have questions for these 
Members?
    The gentlelady from Texas is recognized.
    Ms. Jackson Lee. Thank you.
    Let me thank both of the members for their presence and 
also acknowledge that I think in this business it is necessary 
to be tedious and meticulous. And so the timeframe that you 
have, or the framework that you have, may in some instances 
seem to be prolonged, but I think it is crucial. I particularly 
think it is important that you have a balance between the flow 
of commerce, but also our security.
    The provisions that you have regarding inclusion of the 
Secretary of Homeland Security, does that then provide 
jurisdiction to the Homeland Security Committee?
    Mr. Blunt. I would assume it does. I am not an expert on 
jurisdiction and don't purport to be the parliamentarian, but I 
assume it does and I think it would be valuable for this 
committee to have a level of jurisdiction.
    Carolyn?
    Mrs. Maloney. I believe there should be a level of 
jurisdiction from the Homeland Security Committee.
    Ms. Jackson Lee. And with the provisions that deal with the 
signatures of both the Secretary of Treasury and Homeland 
Security, do you think those provisions are particularly secure 
enough? I don't know if it is going out of Financial Services, 
but will they last the passage to the floor? If this bill gets 
to the floor, will those provisions stay in tact the dual 
signatures of the chair and the vice chair as you have 
constructed it?
    Mrs. Maloney. I believe they will. Yes.
    Ms. Jackson Lee. Okay. Let me just thank you.
    I do, Mr. Chairman, want to ensure Homeland Security 
jurisdiction. I think this is a very good effort, and I hope we 
will have the opportunity to mark it up and have the 
opportunity to support it.
    I yield back. Thank you.
    Mr. Rogers. I thank the gentlelady.
    I thank the Members for this effort. I appreciate your 
time, and I am glad we were able to get you out of here before 
your 4 o'clock deadline.
    This panel is dismissed, and we re-call the second panel.
    The gentleman from New Jersey, Mr. Pascrell, is recognized 
for any questions he may have.
    Mr. Pascrell. Thank you, Mr. Chairman.
    Ms. Markheim, Article I, Section 8 of the Constitution of 
the United States says that the Congress shall have the power 
to lay and collect the taxes, et cetera, to regulate commerce 
with foreign nations and among the several states and with 
Indian tribes. The Constitution is a very important document to 
you, to me, to everybody here in this room. I carry it with me 
at all times.
    But when I read your testimony, and particularly on page 
four, I am aghast. You say that this process is designed to be 
nonpartisan and nonpolitical because these decisions should not 
be based on political considerations, but solely on the merits 
of the transaction and appropriate security concerns consistent 
with the United States' policies. Congress does not receive 
comprehensive notification in any other administrative 
procedure. This is what you wrote.
    I have to take exception with that because it would seem to 
me that we have relegated the potential of political 
interference with the Congress, while we have not even 
suggested the contrary with the administration. It is 
unacceptable. And unless the business community understands 
that we are all in this together trying to find ways for 
security as well as investment, and that we are not 
isolationist, those of us who ask questions about such things 
as the Dubai incident like we kind of disrupted business, when 
we have as our oversight capabilities, the entire Congress that 
is, a duty, in fact indeed an obligation and responsibility to 
check into these matters.
    The fact that so few of these transactions ever have come 
in front of us and that all of them except one have been 
rejected before us I find to be incredible. I think we have a 
right in this Congress to know what in God's name is going on. 
And that is why we are having these hearings.
    If I take what you say, I would ask you this question. 
Foreign companies and CFIUS want the entire process to be 
settled in 30 days, and usually settle matters in negotiations 
before the official review. I even heard that today. What kind 
of oversight can the Congress have over this process when there 
is such a lack of transparency? You tell us.
    Ms. Markheim. I think Congress has not had the opportunity 
to have the appropriate level of oversight of these 
transactions. That is why we are here today. What is important 
here, and I think what I was trying to say in that particular 
memo and in the brief was that fundamentally Congress needs to 
have greater oversight, without however becoming part of the 
process itself.
    So the important thing is to determine where is the process 
and where does oversight begin. The problem is that over the 
years, oversight has not been facilitated by the CFIUS process. 
Congress has not received regular reports; has not received the 
quadrennial reports even. That is a problem, as I did state.
    What we would like to see and what we do recommend is that 
Congress do start receiving regular reports on these sort of 
non-special cases that don't go before the president so that 
Congress does get some insight as to what does go on.
    Mr. Pascrell. But wouldn't you agree, Ms. Markheim, if we 
did not have the Dubai situation, we still wouldn't know what 
was going on out there. This kind of crystallized it, and that 
is why we are having this hearing, or else we wouldn't be 
having this hearing. Wouldn't you agree?
    Ms. Markheim. I do agree with that. However, I do think, 
again going back to a report that was referenced that was out 
in October, the problem with CFIUS transparency has been known 
and it has been something that has been discussed, but it 
certainly has not been the focus of attention that it is today.
    Mr. Pascrell. When you understand that when we talk about 
port security, we are concerned about the relationships we have 
with other countries so that those items in those containers 
are checked before they leave the other country, before they 
leave the other ports, and before they come into the United 
States. It makes things a lot easier.
    So we have to have cooperation. We must have, all of us 
now, we are talking about a global strategy. You know, chapter 
12 of the 9/11 Commission report, we are talking about a global 
strategy. And we need to be very protective of the people in 
this country who are wondering what is coming into this country 
and what is coming over our borders. And that is why we want to 
take the extra added precaution of finding out what is in these 
containers and who is in charge.
    Now, when we said who is in charge of operations at the 
ports, the administration was very, very adamant in saying 
these companies owned by these countries don't own the ports, 
we understand that, they control the operations and manage the 
ports, and they don't even take care of security at the ports. 
But they do name who is in charge of security at the ports.
    If I may, Mr. Chairman, I have one more question, if I can 
ask it this go-round. I have to leave.
    Mr. Simmons. [Presiding.] I will yield 1 more minute, but 
mindful that Charlie Allen is also waiting to testify at the 
next hearing.
    Mr. Pascrell. I am sorry?
    Mr. Simmons. Secretary Allen is waiting to testify for the 
next subcommittee hearing. So you are making excellent points.
    Mr. Pascrell. There is another subcommittee after this?
    Mr. Simmons. Yes, there is. It was scheduled for 3:30, but 
we are postponing it, waiting to finish.
    Mr. Pascrell. Okay. Just a quick question, Mr. Eizenstat.
    You mentioned in your testimony the difficulty in 
determining what is critical infrastructure in the United 
States, and how foreign investment in critical infrastructure 
should be determined you suggest by a case-by-case basis. 
Should the purchase of American port operations by a Dubai-
owned company have received more intense scrutiny by CFIUS? And 
the second question is, should this deal have gone to the 
investigative level?
    Mr. Eizenstat. Let me answer two questions at once here, 
your last question and then the one you just asked.
    On the transparency, congressional oversight, H.R. 5337 
goes a long way to accomplishing what you are properly 
concerned about, because it requires that CFIUS give the 
Congress a written report on any findings of actions that they 
make on any investigation they do. You can have personal 
briefings for the members who get that, and then there are 
semiannual reports that will have to be issued to the Congress 
on what has happened during the previous 6 months, which 
transactions have been approved, what were they like and so 
forth. That will give you the opportunity to determine if you 
think CFIUS is doing the right job.
    Now, in terms of the DP World issue, optimally what should 
have happened, I believe, is that this should have raised a lot 
of red flags. I do not believe it was a national security 
threat. But I do believe that it would have been better to take 
to the 45-day investigation period. I think had that been done, 
it would have satisfied a lot of people in Congress who felt 
that by not taking it to the second phase, that the process was 
somehow rushed through.
    The fact is, it wasn't because there was a long pre-
application period, but in terms of optics, optics certainly 
for the public and for Congress which had no information about 
it, seemed to indicate that it was being rushed through. So I 
think in an optimal way, it might have gone to the 45-day 
period and diminished some of the political opposition. I think 
ultimately the result might have been the same from my 
perspective.
    Mr. Pascrell. Thank you both.
    Mr. Chairman, I would contend that if it wasn't for the 
Dubai incident coming before the Congress of the United States, 
that many in the Congress of the United States would not have 
known that countries like China control and operate many of our 
ports. Now, I will make that statement and I will stand by it 
unless I hear different information.
    So I am aghast when people talk about the possibilities of 
politics in these issues.
    Thank you.
    Mr. Simmons. I thank the gentleman for his questioning. For 
the record, I will yield my 5 minutes to him, and that 5 
minutes has now expired.
    The Chair recognizes the distinguished gentlelady from the 
Virgin Islands, Dr. Christensen.
    Mrs. Christensen. Thank you both, Ms. Markheim and Mr. 
Eizenstat, for your patience with us this afternoon. Mr. 
Eizenstat, it is nice to see you again.
    You noted in your testimony, Mr. Eizenstat, that the bill, 
H.R. 5337, which requires that the secretaries or deputy 
secretaries of both Treasury and Homeland Security personally 
approve and sign each review and every review and 
investigation, that it could create bureaucratic delays and 
impede the CFIUS's ability to efficiently implement Exon-
Florio.
    So my question is, what would be the solution to the 
problem that we saw during the Dubai Ports World deal when no 
high-ranking official, Rumsfeld, Chertoff, claimed to have ever 
signed-off on the deal? They were where the buck stopped, but 
they didn't sign off. So shouldn't they have some show of 
having knowledge of the investigatory process and the outcome 
before it goes to the president?
    Mr. Eizenstat. That is a very good question. I would just 
start by saying that I have spent an enormous amount of time in 
the Virgin Islands. It is a wonderful part of the United 
States.
    A couple of things. First, if I may just say one way to 
deal with this government-owned company issue, permit the 
companies to try to go directly to the 45-day investigative 
process if they are going to be put into that. If you are going 
to insist that even a British government-owned company has to 
go through this, and I am urging you to distinguish between 
friendly governments with companies that are owned by those 
governments that operate on market principles from those that 
don't. But if you have to insist on treating them all alike, 
let them go straight to the 45-day period rather than going to 
the 30-day period.
    Now, second, on the signature issue, one of the first 
things we learn on the first day of law school is bad facts 
make bad law. And we had a bad series of facts with the Dubai 
Ports World issue. This should have had more scrutiny. It 
should have gone to the secretary or deputy secretary level 
simply because of the optics, not the reality, of the deal.
    Had that been done, optimally the deputy secretary or 
secretary might have looked at it. But what I am urging is 
because of that one isolated issue, don't require, as this 
legislation does, that every single one of these transactions 
has to be checked off by the deputy or the secretary. It will 
clog them down from doing much more important work. It only 
should be in the most sensitive cases where there is really a 
national security impact. This is much broader than that. It 
requires it in virtually every case.
    Mrs. Christensen. Thank you. I don't have any other 
questions. Thank you for the answer.
    Mr. Simmons. I thank the gentlelady for her questions.
    Do any other members have questions for this panel?
    Hearing none, I would like to thank the witnesses for their 
valuable testimony.
    And I thank the members, of course, for their questions.
    The members of the committee may have some additional 
questions for all of the witnesses, and I will ask that you 
respond to these in writing. The hearing record will be held 
open for 10 days, and again the chair thanks the members of the 
committee and our witnesses.
    Without objection, the committee stands adjourned.
    Mr. Eizenstat. May I just ask that my full testimony be put 
in the record? Thank you.
    Mr. Simmons. Without objection.
    [Whereupon, at 4:03 p.m., the committee was adjourned.]

                            A P P E N D I X

                              ----------                              

                             For the Record

         Prepared Statement of the Honorable Ginny Brown-Waite

    Thank you Chairman King for holding this important hearing. Like 
many of my colleagues here today, I was appalled at the missteps in the 
recently failed Dubai Ports World transaction. A United Arab Emirates-
owned company, DPW's proposed buyout of the British-owned Peninsular 
Oriental Steamship Navigational Company (P&O) raised serious security 
concerns, not the least of which was that the UAE was one of the few 
governments to officially recognize the Taliban. Yet this proposed 
takeover somehow did not trigger the thorough 45-day investigation that 
should occur whenever there is a question of our nation's security at 
critical infrastructure.
    To be perfectly frank, when I first read about this takeover in a 
news story, I thought it was a hoax. I could not believe that officials 
at the Department of Defense or Department of Homeland Security could 
be so careless as to play Russian roulette with port security for the 
sake of a smooth business transaction. I was further appalled to read 
that the Coast Guard expressed serious concerns in a report to DHS 
officials, yet even that did not jumpstart the additional 
investigation.
    At the time, I wrote to Department of Homeland Security Secretary 
Michael Chertoff, Department of Treasury Secretary John Snow, and 
President Bush to demand an immediate investigation. However, instead 
of assurances that they would carefully scrutinize the deal before 
continuing forward, I received bland letters. Congress had to rely on 
the Dubai Ports World company itself to ask for an investigation, and 
then to later stop the transaction. To me, that indicates something is 
wrong with our vetting system.
    As a member of this Committee I have a responsibility to keep 
Americans safe, and I take that responsibility very seriously. When our 
government makes poor decisions, I want an accounting. There is no 
excuse for ceding management of our ports to a foreign nation with as 
questionable of a record as the United Arab Emirates, despite their 
recent attempts to play nice. So today, I would like to hear from our 
witnesses how the CFIUS process has been improved to address these 
issues, as well as your thoughts on legislation to give homeland 
security a more prominent role in CFIUS deliberations.
    Thank you Mr. Chairman and I look forward to hearing from our 
witnesses today on this vital issue.

                     Questions from Hon. Peter King

                   Responses from Hon. Stewart Baker

    1 You have described the Department's engagement in the CFIUS 
process in previous hearings. You told the Senate Banking Committee 
that the Department analyzes each agreement to which it is a signatory 
and extracts the timetables, policies, and deliverables that must be 
tracked to determine the companies' current compliance status. 
Unfortunately, we know from previous hearings that the Department has a 
serious human capital problem. The following questions are designed to 
address those concerns:

     How many people in your office work on CFIUS?
    Response: Under my supervision, there currently are six people who 
work on CFIUS matters full-time. Of these, three are contractors and 
two are temporary detailees. We are in the process of hiring three more 
government employees to work full-time on CFIUS matters. Others in my 
office provide CFIUS support as needed. Outside my office, the offices 
of Intelligence Analysis and Infrastructure Protection in their joint 
fusion center, the Homeland Infrastructure Threat and Risk Analysis 
Center (HITRAC), have another team of three full-time individuals 
analyzing the risks associated with CFIUS transactions and providing 
analytical support to my office. In addition, there are dozens of 
people throughout DHS who review and provide input on CFIUS 
transactions.

     How many compliance agreements does the Department enter 
into with other companies?
    Response: Since DHS began operations in 2003, DHS has entered into 
twenty CFIUS mitigation agreements and an approximately equal number of 
risk mitigation agreements in the context of the Federal Communications 
Commission's telecommunications licensing process.

    2. H.R. 5337 allows for the appointment of ``an appropriate Federal 
department or agency'' to negotiate, modify, monitor, and enforce any 
mitigation agreement reached by the Committee. Isn't the Department of 
Homeland Security, given the breadth of its jurisdiction over domestic 
security concerns, the appropriate agency to take on this 
responsibility?
    Response: DHS believes that there is no single agency that can 
negotiate mitigation agreements for every case, and a legislative 
requirement that the negotiation and enforcement be carried out by a 
single agency would reduce the current protection for homeland and 
national security. For some national security concerns raised by a 
particular case, DHS may be the appropriate agency; for other national 
security concerns raised by the same case, other CFIUS agencies may be 
more appropriate. Accordingly, DHS believes that each agency, in 
consultation with CFIUS, should be authorized to negotiate mitigation 
agreements as each agency deems appropriate. This is consistent with 
past practice.

    In your opinion, if, under H.R. 5337, the Department of Homeland 
Security becomes the Federal entity empowered with negotiating, 
modifying, monitoring, and enforcing, mitigation requirements reached 
by the committee, do they have adequate personnel and resources to 
effectively assume this additional responsibility?
    Response: As indicated above, DHS believes that no agency should be 
designated to negotiate mitigation agreements for every case; rather, 
each agency should be authorized to negotiate mitigation agreements, in 
consultation with CFIUS, as each agency deems appropriate. DHS is 
increasing its personnel and resources dedicated to negotiating, 
modifying, monitoring and enforcing the mitigation agreements to which 
DHS decides to become a party. To the extent DHS were required to 
assume responsibility for all mitigation agreements, contrary to views 
of what constitutes sound policy, substantial additional personnel and 
resources would be necessary.

    What additional resources would the Department of Homeland Security 
require to undertake this potential additional responsibility?
    Response: As indicated above, DHS is increasing its personnel and 
resources dedicated to negotiating, modifying, monitoring and enforcing 
the mitigation agreements to which DHS decides to become a party. 
Additional resources beyond those already planned are not required for 
DHS to fulfill its responsibilities with respect to those mitigation 
agreements to which DHS decides to become a party.

    3. You testified before the Senate Banking Committee that the 
Department implemented an early warning program soon after joining the 
CFIUS. You said that the purpose of the program is to identify those 
foreign investments in U.S. critical infrastructure and industrial base 
technology companies that may result in CFIUS filings or may pose a 
national security risk, and you share this information with CFIUS 
members. Unfortunately, as Mr. Eizenstat, a witness on the second 
panel, notes in his written testimony, ``critical infrastructure'' 
remains a relatively fluid regulatory concept, and very difficult to 
identify specific ``critical infrastructure'' that may pose a national 
security risk. For instance, the Department has identified twelve 
extremely broad sectors that it considers to be critical 
infrastructure, including agriculture and food, water, public health, 
emergency services, the defense industry, telecommunications, energy, 
transportation, banking and finance, chemicals, postal services and 
shipping, and information technology.

    How can the Department really identify foreign investment in 
critical infrastructure when it has not yet publicly identified the 
types of companies, or even sub-sectors, for which acquisition by a 
foreign firm would be deemed a high risk to national security? How can 
you make a judgment about foreign ownership of these sectors?
    Response: An analysis of which transactions would pose a high risk 
to national security must be made on a case-by-case basis, given the 
number of factors involved in making such a determination. The current 
broad operational concept of ``national security'' gives DHS wide 
discretion to act in appropriate cases, and DHS does not believe it is 
practical or prudent to assess national security risk other than by 
case-specific examination. Creating abstract categories of critical 
infrastructure might unhelpfully narrow discretion to mitigate national 
security risks.

    4. You told Reuters that the Department of Homeland Security could 
not find anything concrete that led you to believe that the transaction 
ought to be stopped for national security reasons. Yet according to 
news reports, you were originally the sole dissenting voice in the 
transaction. According to the AP, you eventually changed your mind and 
the Committee approved the deal without dissent after Dubai Ports World 
agreed to the security conditions that CFIUS negotiated.

    How many other times have you voiced dissent on CFIUS only to 
change your mind later? Is it problematic for the current process that 
CFIUS tries to build universal consensus among all members? Do you ever 
feel pressured into changing your dissenting opinion?
    Response: The premise of the question is flawed: DHS did not change 
its views regarding the Dubai Ports World transaction. DHS determined 
that it should get certain risk-mitigating assurances from the 
companies and that, with those assurances, DHS would approve the 
transaction. DHS's ability to obtain the assurances was never in doubt.
    Like each CFIUS agency, DHS determines for itself whether a 
transaction may adversely impact national security and whether to 
request risk-mitigating assurances.

    5. How do you evaluate the risk of a foreign-owned company when, 
these days, there is no clear designation of what companies are 
foreign? For instance, most large-scale companies are multinationals--
case-in-point: both Exxon-Mobil and BP have about half U.S. ownership. 
How does the Department weigh the risk of these so-called ``foreign 
owned companies?''
    Response: The Treasury Department, as Chair of the CFIUS, is better 
positioned to explain the CFIUS determination of whether a company is 
or will be subject to foreign control so as to confer CFIUS 
jurisdiction over a transaction. As in other matters, the risk 
presented by companies that are partly foreign-owned and partly is 
analyzed on a case-by-case basis, taking into account factors such as 
the nature of the assets at issue and the nature of the foreign 
ownership and control, among other factors.

    6. What changes have been made to the CFIUS process, aside from 
adding DHS as a member agency, to reflect the post-911 world?
    Response: In general, the level of scrutiny in the CFIUS process 
has increased in the post-9/11 world. The Treasury Department, as Chair 
of the CFIUS process, is better positioned to provide a detailed 
comparison between the pre-and post-9111 eras, especially in light of 
the fact that DHS did not exist before 2003.

    7. What changes have been made to the process following the DP 
World transaction?
    Response: Again, as CFIUS Chair, the Treasury Department is better 
positioned to discuss changes. Within DHS, we have hired (and are 
continuing to hire) more CFIUS staff and our review process has become 
more formal.

    8. Considering that the proposed Congressional reforms would 
relegate information gathering to the Director of National 
Intelligence, would you plan on performing separate analysis on 
investigations through DHS?
    Response: DHS does not interpret any of the proposed Congressional 
reforms to relegate all information gathering solely to the DNI, and 
DHS would strongly oppose any effort to do so because such limitation 
would impede our ability to fulfill our departmental responsibilities. 
DHS does and, under virtually any conceivable circumstances, will 
continue to engage in substantial information gathering and analysis.
    DHS, through its Office of Intelligence and Analysis, is a key 
participant in the development of the Intelligence Community's threat 
assessments, prepared by the Office of the DNI with input from all 
elements of the Intelligence Community. Although DHS does not develop 
an independent threat assessment as part of this process, information 
and analysis are fully considered. If DHS (or any other element of the 
IC) were to conclude, on the basis of its own analysis, that it should 
disagree with the position of the Intelligence Community, then it may 
state its dissent in the IC assessment.
    In addition to its participation in the development of the IC 
threat assessment, DHS, through its Infrastructure Protection and 
HITRAC components, performs vulnerability assessments and risk-
mitigation assessments in support of CFIUS.

    9. Under the current process, is the Director of National 
Intelligence given sufficient time to examine transactions pending 
before CFIUS?
    Response: The DNI is the appropriate entity to which this question 
should be addressed.

    10. To what extent do you plan on integrating the policies of DHS 
in CFIUS?
    Response: DHS has integrated its CFIUS policy process. All DHS 
components receive notice of CFIUS transactions, and their analyses and 
concerns are consolidated by the DHS Policy Development office.

    11. Does Congress have any concerns that an investigation process 
that involve Congress, the Senate, and the President, along with 
quarterly and semi-annual reports, will slow CFIUS down?
    Response: Congress, rather than DHS, is best positioned to 
determine whether ``Congress has any concerns. . .'' To the extent the 
question is whether DHS has concerns, it is reasonable to think that 
additional reporting requirements, whether to the Congress, the Senate, 
the President, or any other body, will require resources that might 
otherwise be devoted to analysis of CFIUS cases, and that a possible 
resultant diminution of resources associated with such analysis would 
negatively impact the CFIUS process. In any case, reports to Congress 
should be provided only after a CFIUS case is completed. Pre-decisional 
reporting would impinge inappropriately upon the Executive Branch 
deliberative process.

           Questions and Responses from the Hon. Clay Lowery

    1. Mr. Lowery, you say in your testimony that the Administration 
``supports improving communications with Congress on CFIUS matters.'' 
Why did this Administration wait until recently to decide to improve 
its communications with Congress? What efforts have you made to engage 
in outreach with Congress? If communicating with Congress is a 
priority, why then has it taken so long to produce documents that have 
been requested by this Committee months ago? Would you support a 
statute that would increase reporting requirements from CFIUS to 
Congress? What would such a regime look like?
    Response: The Administration is committed to improving 
communications with Congress and agrees that Congress should receive 
timely information about CFIUS matters to help meet its oversight 
responsibilities. Indeed, CFIUS has met with Members and Congressional 
committee staff whenever requested to do so to answer questions about 
the CFIUS process. To ensure improved communications, Treasury is 
promptly notifying Congress of all CFIUS cases upon completion. 
Treasury is also, on behalf of CFIUS, briefing the Senate Banking and 
House Financial Services Committees quarterly on completed CFIUS cases. 
When appropriate, CFIUS suggests that its oversight committees invite 
other potentially interested members and committees with jurisdiction 
over areas affected by decisions under to attend these briefings. It 
should be noted that these briefings were scheduled to begin before the 
issues with respect to the DP World transaction garnered media 
attention. We believe that these steps will enable Congress to meet its 
oversight responsibilities.
    With respect to the provision of information to the committee on 
the DP World case, I spoke to this point during the hearing. As I 
noted, compiling the information and consulting interagency with those 
engaged in CFIUS, as well as providing for the clearance of our General 
Counsel's office, takes a certain amount of time. This was also done in 
the context of an increasing CFIUS case load. We provided you with 
these documents as soon as was possible. I would further note that 
Treasury officials participated in 7 hearing with 7 committees and has 
conducted approximately 25 briefings with Congressional committees 
regarding DP World.
    The House CFIUS reform bill, H.R. 5337, would require that CFIUS 
provide semi-annual reports to Congress. While we believe that an 
annual report would be more appropriate, as it will be more 
comprehensive and better identify the trends designated in the 
legislation, the reporting requirements would provide Congress 
additional information important to conducting its oversight 
responsibilities. However, to prepare such reports properly, the 
Administration needs sufficient time and resources to conduct a 
thorough interagency process.

    2. During your testimony, Rep. Collins asked you whether an 
adequate review of DP World was done, given recently declassified 
portions of a Coast Guard report that highlighted ``many intelligence 
gaps, concerning the potential for DPW or [its subsidiary] P&O assets 
to support terrorist operations.'' According to the declassified 
portions of the report, those gaps precluded ``an overall threat 
assessment of the potential DPS and P&O Ports merger.'' How were you 
able to close those gaps so quickly? And how can the speed with which 
you apparently closed those gaps square with the 2005 GAO report, which 
discussed the need for longer periods of time for CFIUS review because 
agencies could not conduct timely threat analysis?
    Contrary to many accounts, the DP World transaction was not rushed 
through the review process in early February. In total, members of 
CFIUS staff spent nearly 90 days investigating this transaction due to 
early notification of the transition to CFIUS by the companies. 
National security issues raised during this process were addressed to 
the satisfaction of all members of CFIUS.
    During the investigation period, which lasted nearly 3 months, 
members of the CFIUS staff were in contact with one another and the 
companies. As part of this process, the Department of Homeland Security 
(DHS) negotiated an assurances letter that addressed port security 
concerns. The companies committed to maintain no less than their 
current level of membership in, cooperation with, and support for the 
Customs-Trade Partnership Against Terrorism, the Business Anti-
Smuggling Coalition, and the Container Security Initiative (CSI). They 
also committed to their current level of membership in, cooperation 
with, and support for the March 2005 Memorandum of Understanding with 
the U.S. Department of Energy to support CSI by cooperating with other 
signatories and restricting trafficking in nuclear and radioactive 
materials. The companies committed to provide advance written notice to 
DHS before making any material change with respect to their 
cooperation/membership support, and to meet with any DHS designated 
U.S. Government officials prior to implementation. In fact, the DHS 
agreement with DP World provides assurances with respect to law 
enforcement, public safety, and national security that DHS does not 
currently have with other terminal operators.
    The referenced concerns in the Coast Guard report must be placed in 
context. While this question is best addressed to the Department of 
Homeland Security, DHS considered not only the Coast Guard's 
assessment, but also the assessment of the broader intelligence 
community as a whole. The U.S. Coast Guard resolved its initial 
concerns in the context of the broader dialog about this case; that 
dialog took place during the investigation of the transaction, which 
ended on January 17,2006.

    3. You mentioned in your testimony that ``Typically, the members of 
the Committee with the greatest relevant expertise assume the lead role 
in examining any national security issues related to a transaction and, 
when appropriate, developing appropriate mechanisms to address those 
risks.'' Would DHS not take the lead on many of these transactions? Do 
you think that they have the personnel capable to fulfill this duty?
    Each CFIUS agency determines the resources to be dedicated to its 
CFIUS responsibilities and chooses its own staff. Depending on the 
nature of the transaction and the business of the U.S. target company, 
an agency may utilize resources several offices in its agency to 
investigate and analyze the national security implications from its 
agency's perspective.
    Given DHS's expertise, it takes the lead on many cases, as do the 
Departments of Defense and Justice. Questions as to the level of 
resources available in DHS to devote to its CFIUS responsibilities are 
best directed to DHS. However, DHS has been a valuable addition to 
CFIUS and performs its responsibilities thoroughly and diligently.

    4. The Byrd Amendment--Sec. 2170(b) of the Defense Protection Act--
States that ``The President or the President's designee shall make an 
investigation. . .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.'' Why didn't CFIUS engage 
in an investigation of the Dubai Ports World deal--a foreign 
government-owned company engaged in port operations? By not conducting 
these investigations, aren't you, in the words of the frustrating the 
intent of the legislation?
    In February, the State of New Jersey filed a lawsuit challenging 
CFIUS's conclusion that the Byrd Amendment did not require a formal 
``investigation'' of the DP World acquisition. The Department of 
Justice filed a responsive brief in the lawsuit, which set forth the 
Administration's interpretation of the Byrd Amendment. The brief states 
that ``(1) the Byrd Amendment requires an investigation only when the 
transaction at issue is determined to be one that `could affect the 
national security of the United States,' and (2) the determination of 
whether a particular transaction `could affect the national security of 
the United States' is a determination that is anything but ministerial 
and non-discretionary--requiring as it does the collection and analysis 
of facts regarding both the proposed transaction and the nation's 
security.'' The brief further notes that ``this textually compelled, 
commonsense reading of the Byrd Amendment has been followed by the 
Executive Branch since that provision was first enacted'' in 1992.
    The fact that the DP World case did not go into a 45-day extended 
investigation period did not affect ability to conduct a thorough 
investigation. There is a general misunderstanding that CFIUS conducts 
in-depth work only during the 45-day period. This is not the case. 
During the 30-day period, CFIUS thoroughly analyzes transactions for 
their effects on national security and carefully considers input from 
the intelligence community, other CFIUS agencies, and agencies with 
relevant expertise. Often a significant amount of analysis is performed 
even before the 30-day period begins. In the case of DP World, as 
previously noted, members of CFIUS staff spent nearly 90 days 
investigating this transaction, and a mitigation agreement was 
negotiated with DP World to provide assurances with respect to law 
enforcement, public safety, and national security.

    5. If changes to CFIUS were made in light of September llth, then 
why did it take so long to begin enforcing the legislation, and why did 
it take such a case as DP World to jumpstart the legislation?
    Actually, CFIUS has reviewed 268 cases since September 11th, 2001, 
and made many important changes well before the DP World transaction. 
Since September 11th, an important change to the CFIUS process was the 
addition of DHS to CFIUS membership. DHS brings to the CFIUS process 
its own unique perspective of the potential impacts of cases on our 
homeland security. Other efforts have been made to improve the CFIUS 
process, drawing on comments Members of Congress, the recommendations 
of the GAO, and the recommendations received from the member agencies 
of CFIUS.

Some of the changes I would note:
     Accountability: All cases in CFIUS are being briefed at 
the highest levels at Treasury, and clearances on transactions are at 
the Senate-confirmed level.
     DNI: The role of the intelligence community has been 
formalized. The Office of the Director of National Intelligence (DNI) 
plays a key role in all CFIUS cases by participating in CFIUS meetings, 
examining every transaction notified to the Committee, and providing 
broad and comprehensive threat assessments.
     Communications with Congress: We are taking steps to 
improve communications with Congress, including promptly notifying 
Congress of every CFIUS case upon its completion, and committing to 
conducting quarterly briefings for Congress on CFIUS matters, which we 
recently conducted for oversight committees.
     Pre-filing: CFIUS is encouraging pre-filings 
notifications; companies are more frequently informing CFIUS of 
transactions well before filing notice, which allows additional time 
for the Committee's consideration.

    6. Since your two primary goals are to (1) increase Congressional 
oversight of CFIUS and (2) maintain a friendly environment for foreign 
businesses, would it be possible to have CFIUS report all of its 
informal dealings with foreign businesses to Congress rather than deal 
away the entire process?
    The principles that guide CFIUS are protecting U.S. national 
security and maintaining an open investment policy. To advance those 
principles, the Administration supports improving communications with 
Congress on CFIUS matters, among other process reforms.
    We believe it is possible to have increased Congressional oversight 
of CFIUS without tightening the rules for foreign investment, if done 
correctly. We are taking steps to improve communications with Congress, 
including promptly notifying Congress of every CFIUS transaction upon 
its completion, and committing to conducting quarterly briefings for 
Congress on CFIUS matters. We have recently met with oversight 
committees to provide a quarterly report on cases.
    CFIUS does not notify Congress until a CFIUS case is complete in 
order to protect the Executive Branch's deliberative processes, and 
also to avoid the disclosure of proprietary information that could 
undermine a transaction or be used for competitive purposes.

    7. One of the major problems with the DPW transaction was that 
neither the relevant Secretaries nor the President were aware of the 
transaction. Yet in recent testimony before the House Financial Service 
Committee, you opposed Cabinet-level certification of transactions. If 
such certifications were allowed, then wouldn't they ensure that the 
transaction receives the proper amount of scrutiny?
    The Administration supports the Secretary or the Deputy Secretary 
of the Treasury signing the report on a transaction at the conclusion 
of a 45-day extended investigation. Furthermore, at the conclusion of a 
CFIUS 30-day investigation, the Administration supports requiring the 
case to be approved by an official nominated by the President and 
confirmed by the Senate, with an assurance that appropriate senior 
agency officials received a briefing on the transaction. Mandating the 
personal involvement of department heads or deputies in order to 
finalize all 30-day investigations is not practical for a process 
that--while it needs to be thorough, responsible and accountable--also 
needs to be efficient and timely in the disposition of cases that may 
vary greatly in degree of complexity and significance to national 
security. Under this standard, foreign transactions that do not present 
national security issues will be approved in a manner consistent with 
our open investment policy, while CFIUS resources and attention will be 
focused where they are most needed.
    Presently, the Administration is ensuring high-level accountability 
in the CFIUS process. Treasury officials at the highest levels are 
briefed on a regular basis on all CFIUS cases. Presidentially 
appointed, Senate-confirmed officials are responsible for clearing 
transactions at the conclusion of CFIUS 30-day investigations. 
Officials at the Deputy level make decisions about putting cases into 
an extended 45-day investigation. Finally, transactions that need to go 
to the President are decided at the Principal level.

    8. Considering that foreign firms acquiring US firms accounted for 
13% of all mergers and transactions in 2005, how do you seek to 
maintain a friendly environment for foreign businesses, while 
mitigating the discretion of CFIUS? Is it possible to allow for 
increased oversight of CFIUS by Congress, but without tightening the 
rules for foreign investment?
    The Administration supports the efforts to improve the CFIUS 
process in a manner that protects national security and does not 
diminish national security by negatively impacting the nation's 
economy.
    Reforms to the CFIUS process should send a signal that the United 
States continues to be serious about national security and welcomes 
legitimate foreign direct investment (FDI). CFIUS must examine each 
transaction thoroughly, but the timeframes for examination should not 
be unnecessarily long and should not be discriminatory. Therefore, the 
process should not require 45-day extended investigations of 
transactions that do not impair the national security. Improvements to 
the CFIUS process should promote filing of notice with respect to 
appropriate transactions but should not delay or deter FDI with no 
nexus to the national security.
    It is possible to have increased Congressional oversight of CFIUS 
without tightening the rules for foreign investment, if done correctly. 
We are taking steps to improve communications with Congress, including 
promptly notifying Congress of every CFIUS case upon its completion, 
and committing to conducting quarterly briefings for Congress on CFIUS 
matters. We have recently met with Congressional oversight committees 
to provide a quarterly report on cases. At the same time, reforms of 
the CFIUS process should also reflect the importance of protecting 
proprietary information and the integrity of the Executive Branch's 
decision making process.
    9. Considering the fears that many businesses have of the public 
scrutiny that comes with being involved in a CFIUS investigation, what 
steps can Congress take to ease these concerns?
    Reforms to the CFIUS process should encourage companies to file 
with the Committee by ensuring that any information they provide to 
CFIUS is protected from public disclosure and will not be used for 
competitive purposes. Full disclosure of information by companies is 
critical to the Committee's ability to analyze thoroughly the national 
security risks associated with a transaction. It is also important to 
protect the Executive Branch's deliberative process and to avoid 
possible politicization of CFIUS cases.
    To keep Congress informed adequately and regularly about the CFIUS 
process without causing businesses undue concern, Treasury has offered, 
on behalf of CFIUS, to brief the Senate Banking and House Financial 
Services Committees quarterly on completed reviews. Treasury is also 
promptly notifying Congress of all CFIUS cases upon completion. Federal 
law prevents proprietary corporate information from being revealed to 
the public, and Congress and the Executive Branch have an excellent 
record of protecting this information and preserving confidence in the 
process. It is necessary that both continue to treat all such 
information as confidential.

    10. How frequently are mitigation agreements used to quell national 
security concerns? What is the current procedure for monitoring 
mitigation agreements?
    Mitigation agreements and assurances letters are used on a fairly 
regular basis to address potential national security risks.
    Typically, members of the Committee with the greatest relevant 
expertise take the lead role, in consultation with CFIUS, in 
negotiating and ultimately concluding mitigation agreements when 
appropriate or requesting assurance letters. Such agreements implement 
security measures that vary in scope and purpose according to the 
particular national security concerns raised by a specific transaction.
    There are remedies built into mitigation agreements to address 
concerns that arise after the case concludes. The ``lead'' agency or 
agencies are and should be responsible for monitoring the parties' 
compliance, in consultation with CFIUS. Procedures for monitoring an 
agreement may, for example, include annual reporting by the company to 
the lead agency or the authority to conduct on-site visits by the lead 
agency.
    For a material breach of any representation or commitment in the 
mitigation agreement, the lead agency would, in consultation with be 
able to seek any available legal remedy.

                                 
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