Source: https://www.federalregister.gov/documents/2008/12/08/E8-28791/office-of-investment-security-guidance-concerning-the-national-security-review-conducted-by-the
Timestamp: 2018-09-24 09:29:29
Document Index: 667514012

Matched Legal Cases: ['art 800', 'art 800', '§\u2009800', '§\u2009800', '§\u2009800', '§\u2009800']

Federal Register :: Office of Investment Security; Guidance Concerning the National Security Review Conducted by the Committee on Foreign Investment in the United States
74567-74572 (6 pages)
E8-28791
II. Purpose and Nature of the CFIUS Process
A. Purpose of the CFIUS Process
B. Nature of the CFIUS Process
1. CFIUS Reviews Are Limited to National Security Considerations
A. The Process for Analyzing National Security Risk
B. Transactions That Have Presented National Security Considerations Because of the Identity of the Foreign Person That Is Acquiring Control of a U.S. Business
https://www.federalregister.gov/d/E8-28791 https://www.federalregister.gov/d/E8-28791
This notice provides guidance to U.S. businesses and foreign persons that are parties to transactions that are Start Printed Page 74568covered by section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, and the regulations at 31 CFR part 800. The guidance is issued pursuant to section 721(b)(2)(E), which requires the Chairperson of the Committee on Foreign Investment in the United States to publish guidance regarding the types of transactions that it has reviewed and that have presented national security considerations.
Nova Daly, Deputy Assistant Secretary, U.S. Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, telephone: (202) 622-2752, e-mail: Nova.Daly@do.treas.gov; or Welby Leaman, Senior Advisor, telephone: (202) 622-0099, e-mail: Welby.Leaman@do.treas.gov.
Consistent with section 721(b)(2)(E) of the Defense Production Act of 1950 (“section 721”) (50 U.S.C. App. 2170), as amended by the Foreign Investment and National Security Act of 2007 (“FINSA”), the U.S. Department of the Treasury, as the chair of the Committee on Foreign Investment in the United States (“CFIUS”), is issuing the following guidance regarding the types of transactions that CFIUS has reviewed and that have presented national security considerations.[1]
The United States has a longstanding commitment to welcoming foreign investment. In May 2007, the President's Statement on Open Economies reaffirmed that commitment, recognizing that “our prosperity and security are founded on our country's openness.” CFIUS carries out its responsibilities within the context of this open investment policy. In the preamble to FINSA, Congress states that the purpose of the Act is “[t]o ensure national security while promoting foreign investment and the creation and maintenance of jobs [and] to reform the process by which such investments are examined for any effect they may have on national security.”
The rules governing the CFIUS process are set forth in section 721; in Executive Order 11858, as amended most recently by Executive Order 13456 of January 23, 2008 (“Executive Order 11858”); and in regulations found at 31 CFR part 800, as amended most recently by the Final Rule published at 73 FR 70702 (Nov. 21, 2008) (“Regulations”). These provisions establish CFIUS and provide the President and CFIUS with the authority to review any “covered transaction,” defined in the Regulations as “any transaction that is proposed or pending after August 23, 1988, by or with any foreign person, which could result in control of a U.S. business by a foreign person.” [2] The purpose of the national security reviews conducted by CFIUS is to allow CFIUS to identify and address any national security risk that arises as a result of a covered transaction, and, in the circumstances described in § 800.506(b) of the Regulations, to request that the President determine whether to suspend or prohibit a covered transaction or take other action.
Section 721 requires CFIUS to complete a review of a covered transaction within a 30-day period. CFIUS concludes action on the vast majority of transactions within this initial 30-day review period. In limited cases, following a review, CFIUS may initiate an investigation, which it must complete within a subsequent 45-day period. CFIUS initiates an investigation only where: (1) CFIUS or a member of CFIUS believes that the transaction threatens to impair the national security of the United States and that threat has not been mitigated; (2) an agency designated by the Department of the Treasury as a lead agency recommends, and CFIUS concurs, that an investigation be undertaken; (3) the transaction is a foreign government-controlled transaction; or (4) the transaction would result in foreign control of any critical infrastructure of or within the United States, if CFIUS determines that the transaction could impair national security and that risk has not been mitigated. With respect to transactions described in (3) and (4) above, CFIUS would not initiate an investigation if the Treasury Department and any lead agency it has designated determine, at the Deputy Secretary level or higher, that the transaction will not impair the national security of the United States.[3]
CFIUS concludes action under section 721 on a covered transaction only if it has determined that there are no unresolved national security concerns. That determination must be certified to Congress after CFIUS concludes action. CFIUS is authorized to enter into or impose, and enforce, agreements or conditions to mitigate any national security risk posed by the covered transaction. Section 721 and Executive Order 11858, however, contain important conditions on CFIUS's exercise of this authority. First, before CFIUS may pursue a risk mitigation agreement or condition, the agreement or condition must be justified by a written analysis that identifies the national security risk posed by the covered transaction and sets forth the risk mitigation measures that the CFIUS member(s) preparing the analysis believe(s) are reasonably necessary to address the risk. CFIUS must agree that risk mitigation is appropriate and must approve the proposed mitigation measures. Second, CFIUS may pursue a risk mitigation measure intended to address a particular risk only if provisions of law other than section 721 do not adequately address the risk. Such other laws include, for example, the International Traffic in Arms Regulations (“ITAR”), Export Administration Regulations (“EAR”), and the National Industrial Security Program Operating Manual (“NISPOM”). Accordingly, for example, if the NISPOM provides adequate authority to address the risk posed by a transaction—e.g., the possibility in a Start Printed Page 74569particular case that a foreign government may use a foreign company to obtain classified government information concerning systems critical to U.S. national defense—then CFIUS would not pursue its own risk mitigation measures under section 721 to address that risk.[4]
In order to exercise the authority to suspend or prohibit a covered transaction under section 721, the President is required to make two findings: (1) That there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security; and (2) that provisions of law, other than section 721 and the International Emergency Economic Powers Act (“IEEPA”), do not, in the judgment of the President, provide adequate and appropriate authority for the President to protect the national security.
In making their decision about whether to submit a voluntary notice of a transaction to CFIUS, parties to a transaction may wish to consider whether their transaction could present national security considerations, since CFIUS focuses solely on national security. A covered transaction that has been notified to CFIUS, and on which CFIUS has concluded action under section 721 after determining that there were no unresolved national security concerns, qualifies for a “safe harbor,” as described in § 800.601 of the Regulations and section 7(f) of Executive Order 11858. Thus, subject to the terms of the safe harbor and any mitigation agreement or conditions imposed by CFIUS, the transaction can proceed without the possibility of subsequent suspension or prohibition under section 721. A covered transaction that CFIUS has not reviewed and cleared without objection does not qualify for the safe harbor, and CFIUS has the authority to initiate review of the transaction on its own, even after the transaction has been concluded, which CFIUS may choose to do if it believes the transaction presents national security considerations.
Section 721 requires CFIUS to review covered transactions notified to it “to determine the effects of the transaction[s] on the national security of the United States,” but does not define “national security,” other than to note that the term includes issues relating to homeland security. Instead, section 721 provides an illustrative list of factors, listed below, for CFIUS and the President to consider in assessing whether the transaction poses national security risks.
The potential effects of the transaction on the domestic production needed for projected national defense requirements.
The potential effects of the transaction on 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 potential effects of a foreign person's control of domestic industries and commercial activity on the capability and capacity of the United States to meet the requirements of national security.
The potential effects of the transaction on U.S. international technological leadership in areas affecting U.S. national security.
The potential national security-related effects on U.S. critical technologies.
The potential effects on the long-term projection of U.S. requirements for sources of energy and other critical resources and material.
The potential national security-related effects of the transaction on U.S. critical infrastructure, including [physical critical infrastructure such as] major energy assets.
The potential effects of the transaction on the sales of military goods, equipment, or technology to countries that present concerns related to terrorism; missile proliferation; Start Printed Page 74570chemical, biological, or nuclear weapons proliferation; or regional military threats.
The potential that the transaction presents for transshipment or diversion of technologies with military applications, including the relevant country's export control system.
Whether the transaction could result in the control of a U.S. business by a foreign government or by an entity controlled by or acting on behalf of a foreign government.
The relevant foreign country's record of adherence to nonproliferation control regimes and record of cooperating with U.S. counterterrorism efforts.
A significant number of covered transactions that CFIUS has reviewed and that have presented national security considerations involve foreign control of U.S businesses that provide products and services—either as prime contractors or as subcontractors or suppliers to prime contractors—to agencies of the U.S. Government and state and local authorities, including, but not limited to, sole-source arrangements. These notices have sometimes involved companies with access to classified information, often included U.S. businesses in the defense, security, and national security-related law enforcement sectors, and covered such industry segments as weapons and munitions manufacturing, aerospace, and radar systems. They have also included U.S. businesses that supply goods and services with broader applicability to a variety of U.S. Government agencies that have functions that are relevant to national security. Such goods and services may involve information technology (consulting, hardware, or software), telecommunications, energy, natural resources, industrial products, and a range of goods and services that affect the national security-relevant functions of the U.S. Government agency or create vulnerability to sabotage or espionage.
Some covered transactions that CFIUS has reviewed have presented national security considerations because they involve infrastructure that may constitute United States critical infrastructure, including major energy assets, which section 721 identifies as presenting national security considerations.[5] As defined in section 721 and further explained in the regulations, CFIUS determines whether a transaction involves critical infrastructure on a case-by-basis, depending on the importance of the particular assets involved in the transaction.
CFIUS has also reviewed numerous covered transactions that have presented national security considerations related to the U.S. businesses' production of certain types of advanced technologies that may be useful in defending, or in seeking to impair, U.S. national security. Many of these U.S. businesses are engaged in the design and production of semiconductors and other equipment or components that have both commercial Start Printed Page 74571and military applications. Others are engaged in the production or supply of goods and services involving cryptography, data protection, Internet security, and network intrusion detection, and they may or may not have contracts with U.S. Government agencies.
Whether a covered transaction is a “foreign government-controlled transaction” is one of the national security factors listed in section 721 for consideration by CFIUS. The regulations define a foreign government-controlled transaction as “any covered transaction that could result in control of a U.S. business by a foreign government or a person controlled by or acting on behalf of a foreign government.” 31 CFR 800.214. Foreign government-controlled transactions may include transactions resulting in control of a U.S. business by, among others, foreign government agencies, state-owned enterprises, government pension funds, and sovereign wealth funds.
A corporate reorganization normally involves the realignment of a company's structure to achieve some legal, financial, or other business objective. It is only in exceptional cases that a corporate reorganization would present national security considerations. Even where a corporate reorganization results in a new foreign person obtaining control over a U.S. business—by becoming, for example, an intermediate parent of the U.S. business—the corporate reorganization usually would not result in a change in the ultimate parent of the U.S. business and, therefore, generally would not present national security considerations.
One example of an exceptional corporate reorganization that would raise national security considerations would be the following: Control of a U.S. business is transferred from Corporation A, a foreign person, to Corporation B, another foreign person, both of which are wholly-owned subsidiaries of Corporation C. Although Corporation C continues to be the ultimate parent of the U.S. business, the facts and circumstances related to the actions, policies, and personnel of the new intermediate controlling entity, Corporation B, raise national security considerations that were not raised by the facts and circumstances related to control of the U.S. business by Corporation A, the previous intermediate controlling entity.Start Printed Page 74572
In CFIUS's experience, the efficiency of reviews is also enhanced when parties to transactions voluntarily provide in their notice additional information that may be relevant to the notified transaction but which is not listed in § 800.402 of the Regulations. A list of such information, which may be updated from time to time, is provided on the CFIUS Web site (http://www.ustreas.gov/​offices/​international-affairs/​cfius/​). Examples of such information include: Information regarding whether the U.S. business develops or provides cyber systems, products, or services (including business systems used to manage or support common business processes and operations, such as enterprise resource planning, e-commerce, e-mail, and database systems; telecommunications or Internet systems; control systems used to monitor, assess, and control sensitive processes and physical functions, such as supervisory control, data acquisition, and process and distributed control systems; or safety, security, support, and other specialty systems, such as fire, intrusion detection, access control, people mover, and heating, ventilation, and air conditioning systems); information regarding whether the U.S. business processes natural resources and material or produces and transports energy; and information on any required regulatory reviews, on-going dealings, or outstanding issues that the parties have with other U.S. Government agencies with national security responsibilities.
CFIUS does not issue advisory opinions as to whether a covered transaction raises national security considerations. Rather, it conducts full reviews of specific covered transactions that are notified to CFIUS pursuant to § 800.401 of the Regulations. This guidance may provide assistance to parties as they consider whether to file a voluntary notice with CFIUS. Additional information is available on the CFIUS Web site, http://www.ustreas.gov/​offices/​international-affairs/​cfius/​.
1. “National security considerations” are facts and circumstances, with respect to a transaction, that have potential national security implications and that therefore are relevant for CFIUS to analyze in determining whether a transaction threatens to impair U.S. national security, i.e., whether the transaction poses “national security risk.” The term “national security concerns” is used in this document to describe those circumstances where CFIUS (or any CFIUS member) has unresolved questions about whether the transaction poses national security risk or where CFIUS (or any CFIUS member) has identified national security risks and those risks have not yet been mitigated.
2. The terms “U.S. business” and “foreign person” are defined at 31 CFR 800.226 and 800.216, respectively.
3. The terms “foreign government-controlled transaction” and “critical infrastructure” are defined at 31 CFR 800.214 and 800.208, respectively.
4. In addition, pursuant to section 7(c) of Executive Order 11858, CFIUS may not, except in extraordinary circumstances, require that a party to a transaction recognize, state its intent to comply with, or consent to the exercise of any authorities under existing provisions of law.
5. As described in Section II.B.1 above, section 721 also prescribes special procedural rules for certain covered transactions involving “critical infrastructure of or within the United States.”
[FR Doc. E8-28791 Filed 12-5-08; 8:45 am]