Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect Certain U.S. Assets and Agencies Have Various Enforcement Processes
Published: 2009-05-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Foreign investors in U.S. companies or assets include individuals, companies, and government entities. One type of foreign investor that has been increasingly active in world markets is sovereign wealth funds (SWF), government-controlled funds that seek to invest in other countries. As the activities of these funds have grown they have been praised as providing valuable capital to world markets, but questions have been raised about their lack of transparency and the potential impact of their investments on recipient countries. GAO's second report on SWFs reviews (1) U.S. laws that specifically affect foreign investment, including that by SWFs, in the United States and (2) processes agencies use to enforce them. GAO reviewed policy statements, treaties, and U.S. laws, and interviewed and obtained information from agencies responsible for enforcing these laws. GAO also interviewed legal experts and organizations that track state foreign investment issues.
section_title: What GAO Found
paragraphs: While the United States has a general policy of openness to foreign investment, it does restrict foreign investment, including from SWFs, in certain U.S. assets. The U.S. government has issued policy statements supporting openness to foreign investment and entered into international agreements to protect investors. However, sectors with specific restrictions on foreign investments include transportation, communications, and energy. For example, foreign governments may not be issued radio communications licenses and foreign entities are not allowed to own or control more than 25 percent of the voting interest of any U.S. airline. In other cases, foreign investors can purchase companies or assets in a sector but face restrictions on their activities once they invest. For example, foreign companies can invest in U.S. banks, but if a company's stake exceeds 25 percent or the company would control the bank, the company must receive prior approval and become regulated by banking regulators and would be limited in the types of nonbanking activities in which it can also invest. Foreign investors can generally invest in U.S. agricultural land, but must disclose purchases above certain thresholds to the Department of Agriculture (Agriculture). In addition, while not specifically a restriction on foreign investment, a recently strengthened U.S. law authorizes interagency reviews of certain foreign investments, potentially in any sector, for national security considerations. Most federal laws limiting foreign investment were put in place decades ago in response to national security or economic concerns at the time. GAO's analysis of state-level restrictions on foreign investment indicated that some states had restrictions on foreign entities' ability to invest in real estate, including agricultural land, and some had restrictions on foreign government ownership of insurance companies. The agencies responsible for enforcing the U.S. laws affecting foreign investment--Agriculture, Department of Transportation (DOT), Federal Reserve Board, Federal Communications Commission (FCC), Nuclear Regulatory Commission, and Department of the Interior--have processes for addressing key elements of enforcement, including those for (1) identifying all transactions subject to the law, (2) verifying the identity and amount of foreign ownership, and (3) monitoring changes in ownership. To identify investments potentially subject to restrictions and disclosure laws, each agency largely relies on requirements that entities seeking to establish new operations or invest in existing ones must first seek approval or licensing, or disclose their activity. To verify foreign ownership and ensure limits are not exceeded, agencies obtain and verify information about investor identities through information provided by the investors. Finally, to ensure that subsequent changes of ownership are disclosed and do not exceed legal limits, agencies review information from required ownership change declarations. Some agencies reported additional processes to identify new investments and ownership changes such as monitoring press releases, and receiving tips from competitors. Some agencies, but not all, reported using data from other government or private sources to independently verify changes in ownership information self-reported by entities in their sector.

section_title: Letter
paragraphs: Foreign individuals, companies, and governments have long invested in  U.S. stocks, bonds, land, or other assets. Recently, one type of investor has  become more prominent in world capital markets. Known as sovereign  wealth funds (SWF), these government-owned investment funds may seek  to invest in a wide range of financial instruments in other countries.  Funded through surpluses generated by exports of natural resources such  as oil or other noncommodity exports, some SWFs have large and growing  sums of money to invest.
While some observers see SWFs as having positive effects on markets  because they may be long-term stable investors, other perspectives of  different interested parties are mixed. Since August 2007, SWFs have made  key investments into U.S. and European banks seeking capital as the result  of disruptions in the subprime mortgage loan market and other markets.  However, as large government-controlled investment funds, SWFs have  also been criticized for the lack of transparency about their holdings and  their investment strategies. Some market observers have expressed  concerns that SWFs could adversely affect asset prices by moving large  amounts of funds into or out of countries or markets. Concerns have also  been raised in congressional hearings and elsewhere that rather than  making investments primarily to earn investment returns, as is generally  the motivation of a private investor, some SWFs may instead invest their  assets to achieve the noncommercial or political goals of their  governments. However, some observers have noted that little evidence  exists as to whether SWFs have engaged or intend to engage in  noncommercial activities in another country’s economy.
Your letter asked us to examine a broad range of issues about SWFs. As  agreed with your offices, we have begun addressing the issues raised in  your request in a series of reports. In September 2008 we reported on the  availability of data on the size of SWFs and their holdings internationally  that have been publicly reported by SWFs, their governments,  international organizations, or private sources and the availability of  published or reported data from the U.S. government or others on SWF  investments in the United States. In this report, we examined the legal  environment facing SWF investment in the United States, including  reviewing (1) the U.S. laws that specifically affect foreign investment,  including that by SWFs in the United States, and (2) the processes  agencies use to enforce these laws.
To identify the U.S. legal environment that could affect SWF investments  in the United States, we reviewed U.S. government policy statements and  directives, as well as treaties and international agreements addressing  investment issues that the U.S. government has entered into with other  countries. We also reviewed legal treatises on laws that affect foreign  investment, as well as the laws and regulations themselves, to identify the  laws that place restrictions on foreign investment or otherwise could  affect foreign investors’ use of any purchased U.S. assets. We spoke with  law firms that represent foreign investors seeking to invest in the United  States. We also interviewed officials from government agencies that  address international trade and investment issues—including Department  of Agriculture (Agriculture), Department of Commerce (Commerce),  Federal Communications Commission (FCC), Department of Defense  (DOD), Federal Reserve Board (FRB), Department of the Interior  (Interior), Nuclear Regulatory Commission (NRC), Department of State,  Department of Transportation (DOT), Department of the Treasury  (Treasury), Office of the U.S. Trade Representative (USTR), and Securities  and Exchange Commission (SEC). We also met with an industry  association that represents U.S. subsidiaries of companies headquartered  abroad. We excluded from our review most laws that apply to both  domestic and foreign investors such as antitrust laws. We also collected  information about laws addressing foreign investment in banking,  insurance, and real estate and real property from the Conference of State  Banking Supervisors, the National Association of Insurance  Commissioners, and the National Association of Realtors. To determine  the processes the agencies have for enforcing the federal-level U.S. laws  that affect foreign investors specifically, we focused on the laws that  either restricted or required disclosure of such investments as the most  relevant. These were in the agriculture, transportation, banking,  communications, and natural resources and energy sectors. For the six  agencies responsible for enforcing the laws in these sectors, we  interviewed officials, reviewed regulations, and obtained information on  examples of enforcement actions taken by them with respect to  restrictions or other requirements on foreign investors. Given the number  of agencies we identified with enforcement responsibility for these major  provisions, we did not conduct a full assessment of the extent to which the  agencies are following their processes for enforcing the laws. See  appendix I for a more detailed discussion of our objectives, scope, and  methodology.
We conducted this performance audit from September 2008 through May  2009 in accordance with generally accepted government auditing  standards. These standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: During the past 20 years the level of foreign investment in the United  States has increased. Foreign-owned assets in the United States, which  include holdings of bonds and other securities, were approximately $20  trillion in 2007, having increased from 39 percent of gross domestic  product (GDP) in 1988 to 145 percent of GDP in 2007. Within this amount,  the value of foreign investors’ direct investment holdings—which are  investments of 10 percent or more of the equity ownership in a company— have increased from about 8 percent of GDP in 1988 to more than 17  percent in 2007. In terms of annual flows into the United States, new  investments by foreign entities have generally showed an upward trend  since 1988, but dropped considerably in 2008 (see fig. 1).
subsections: section_title: SWFs Have Been Formed in Many Countries, but Recently Some Have Experienced Asset Value Declines
paragraphs: As we reported in September 2008, our analysis of the publicly available  government sources and private researcher lists identified 48 SWFs across  34 countries from most regions of the world.  Of the 48 SWFs we  identified, 13 were in the Asia and Pacific region, 10 were located in the  Middle East, and the remaining 25 were spread across Africa, North  America, South America, the Caribbean, and Europe. Some countries,  such as Singapore, the United Arab Emirates, and the Russian Federation,  have more than one entity that can be considered a SWF. Some SWFs have  existed for many years, but recently a number of new funds have been  created. For example, while the Kuwait Investment Authority has existed  since 1953 and the Kiribati Revenue Equalization Reserve Fund since 1956,  many commodity and trade-exporting countries have set up new SWFs  since 2000. In July 2008, for example, Saudi Arabia announced plans to  create a new sovereign wealth fund.
Although some funds have continued to grow as they have received new  capital inflows, the recent financial crisis has led to declines in the value  of certain asset holdings of SWFs. Because not all funds publish  information on their size and performance, no official estimate of the  decline or increase in the overall size of SWFs is available. Some funds  that do publish information on the value of their investment portfolios  have reported losses in certain types of assets. Even with these losses,  some funds are reporting that they have grown in size. For example, the  Norwegian Government Pension Fund-Global incurred losses of 23  percent of its value in 2008, including losses on its equity portfolio of  about 41 percent. However, the government of Norway reports that the  size of the fund increased in 2008 from new capital infusions. Another  example is Mubadala Development Company, a SWF of the United Arab  Emirates’ Abu Dhabi, which experienced realized and unrealized losses of   $5.2 billion in 2008 but also received more than $6.9 billion in  contributions from shareholders.
Countries with SWFs account for a substantial share of the level of foreign  investment in the United States, although only a portion of the investments  in the United States made from entities in these countries are made by  such funds. As we reported in 2008, the extent of SWF investment within  the United States’ data on overall foreign official holdings cannot be  identified. In the United States in 2008, entities from countries with SWFs  accounted for about 33 percent of foreign portfolio investment holdings— holdings of less than 10 percent of the equity ownership in a company— and more than 16 percent of foreign direct investment holdings (see fig. 2).
section_title: U.S. Federal Laws Do Not Address SWF Investments Specifically, but Restrict Foreign Investments in the United States in Some Sectors
paragraphs: While most types of investors operating in the United States are not  subject to laws that are targeted at foreign investment, investments in  some sectors are subject to restriction. Although the United States has an  overall policy of openness to foreign investment through policy statements  and treaties and international agreements addressing investment, we  identified the banking, agriculture, transportation, natural resources and  energy, communications, and defense sectors as having federal laws that  apply to foreign investment specifically. Banking, agriculture,  transportation, natural resources and energy, and communications make  up about 20 percent of the U.S. economy in terms of gross output. The  sector-specific laws include those that limit the amount of foreign  ownership or control allowed or require approval of foreign ownership,  laws that restrict activities of foreign-owned firms once the investment is  made, and laws that require disclosure of foreign ownership and control.  The predominant rationale for these investment laws is protecting national  security. In addition to laws specific to certain sectors, some broader  federal laws—including national security and general disclosure laws— can affect foreign investors investing in any sector. Lastly, there are state  level laws that also target foreign investment, especially in the insurance  and real estate sectors.
subsections: section_title: The United States Is Generally Open to Foreign Investment
paragraphs: The United States has long been open and receptive toward foreign  investment and this openness has been demonstrated by the U.S.  government in various statutory frameworks, and policy measures, and in  treaties and international agreements addressing investment. For example,  a 1977 presidential statement noted that the U.S. policy towards  international investment was to neither promote nor discourage  investment flows or activities. A 1983 presidential statement noted that  direct investment in the United States was welcome if it was responding to  market forces. More recently, in 2007 former President George W. Bush  issued a policy statement supporting open international investment  regimes and stating that the U.S. government unequivocally supports  international investment in the United States.
The United States also has entered into agreements or treaties with other  countries and international organizations that acknowledge its  commitment to openness to foreign investment and encourage other  countries to also open their economies to investment. According to the  Department of State, the United States has entered into bilateral  investment treaties (BIT) with 40 countries, seeking to both encourage the  adoption of market oriented policies and protect cross-border  investments. The provisions of these treaties pledge the United States and  the signing country to grant foreign investors the same investment  opportunities as enjoyed by domestic investors. The BITs also provide for  the right of an investor to submit an investment dispute with the treaty  partner’s government to international arbitration. In addition to these  treaties, many of the free trade agreements the United States has entered  into have provisions that pledge open investment among the signing  countries. For example, the North American Free Trade Agreement signed  by the United States, Canada, and Mexico has provisions with terms  similar to those in the U.S. BITs. Lastly, the United States is also a member  of two international organizations—the Organization for Economic and  Community Development (OECD) and the World Trade Organisation  (WTO)—that advocate open investment related policies, including policies  that are transparent and nondiscriminatory.
In nine cases, the United States has entered into a BIT or a free trade  agreement with countries with SWFs, as shown in table 1. The table shows  the SWF countries that have signed investment treaties or entered into free  trade agreements with the United States, or are members of OECD and WTO.
section_title: No Laws Specifically Target Sovereign Wealth Funds, but Some U.S. Sectors Have Laws That Specifically Apply to Foreign Investors
paragraphs: We did not find examples of federal laws that specifically target SWFs  investing in the United States; however some laws specifically target  foreign investment, which would include SWFs. While foreign investors  appear to face no federal restrictions specifically targeting their ability to  invest in many sectors of the U.S. economy, federal laws in several  sectors—banking, communications, transportation, natural resources and  energy, agriculture, and defense—do contain provisions that either restrict  the level of foreign investment, limit the use of a foreign-owned asset, or at  least require approval or disclosure of any foreign investments. Banking,  communications, transportation, natural resources and energy, and  agriculture accounted for about 20 percent of U.S. output in 2007.  However, in terms of attracting foreign investment, these sectors  accounted for about 28 percent of foreign direct investment holdings in  2007 (see fig. 3).
Several U.S. laws specifically affect foreign investment in the United States  regardless of the sector, with national security considerations having the  largest potential impact. These laws can potentially limit foreign  investment directly by preventing planned investments from being carried  out, which according to Treasury officials is rare, or indirectly by  discouraging investments by foreign investors who either find the process  burdensome or believe their chances of success are too low. The Defense  Production Act of 1950, as amended by the Foreign Investment and  National Security Act of 2007 (Section 721), authorizes the President,  following a review by the interagency Committee on Foreign Investment in  the United States (CFIUS), to suspend or prohibit a foreign acquisition,  merger, or takeover of a U.S. business that is determined to threaten the  national security of the United States.  The President can do this in cases  where there is credible evidence leading him to believe the foreign interest  exercising control might take action that threatens to impair national  security, and that provisions of law other than Section 721 and the  International Emergency Economic Powers Act (IEEPA) do not provide  adequate and appropriate authority for the President to protect the  national security. CFIUS may also enter into an agreement with, or impose  conditions on, parties to mitigate national security risks. Filing a notice of  a transaction with CFIUS is voluntary. However, CFIUS can initiate a  review unilaterally and can compel the production of necessary  information about the terms of any covered transaction. If CFIUS is not  satisfied that national security concerns can be mitigated, it can  recommend that the President suspend or prohibit such a transaction, and  the President may order divestment if the transaction has been completed,  regardless of whether a notice was filed. The regulations outlining the  review process for CFIUS provide broad authority to review any covered  transaction if it is a possible impairment to national security.
In addition, IEEPA authorizes the President to prohibit certain  transactions or block any property in which any foreign country or foreign  national has any interest.  It grants the President broad authorities to “deal  with any unusual and extraordinary threat, which has its source in whole  or substantial part outside the United States, to the national security,  foreign policy, or economy of the United States.”  Before exercising these  authorities, IEEPA requires the President to declare a national emergency.   National emergency declarations are governed by the National  Emergencies Act.  IEEPA sanctions are typically imposed pursuant to an  executive order.
Further, in addition to the impact of statutes that may block foreign  investment, there is also an element of political risk to investing in the  United States that can have an effect on foreign investment. According to a  trade group representing foreign investors, the political risk of investing in  the United States has risen since 2006. For example, the CFIUS review  process came under increased scrutiny, and went through significant  reforms, after the public outcry over the attempted purchase by a Dubai  company, Dubai Ports World, of a company that operated various U.S. port  facilities. Although initially allowed to proceed by CFIUS in 2006,  subsequent congressional and media attention ultimately caused the  company to sell the U.S. portion of the business to a U.S. company. Similar  controversy thwarted a Chinese state-owned enterprise’s attempt to  purchase a U.S. oil company in 2005. Legal experts representing SWFs  investing in the United States told us that they now take their clients to  meet with members of Congress prior to initiating a transaction that might  be viewed as politically sensitive to try to mitigate any potential concerns  or resistance that could disrupt a planned transaction.
Some federal laws do not restrict foreign investment, but place general  reporting requirements on foreign investments, regardless of the sector.  For example, the International Investment and Trade in Services Act  requires reporting on all investments in U.S. business enterprises in which  a foreign person owns a 10 percent or greater voting interest, as well as  periodic surveys of foreign ownership of U.S. firms. In addition, under the  Tax Equity and Fiscal Responsibility Act of 1982, as amended, any U.S.  corporation that is at least 25 percent foreign owned and any foreign  corporation doing business in the United States must file an information  return with the Internal Revenue Service disclosing reportable  transactions.
Lastly, all foreign investors, including SWFs, must abide by all applicable  U.S. laws. For example, any investor, including foreign investors, which  make substantial investments in U.S. registered securities, must file proper  disclosures with the SEC under federal securities laws. Also, mergers and  acquisitions by foreign investors would still face a regulatory review by the  Federal Trade Commission or the Department of Justice, if there are  concerns about possible antitrust violations.
subsections: section_title: No Federal Laws Completely Prohibit Foreign Investment in a Sector, but Limits and Additional Requirements Placed on Foreign Investors Exist for Some Sectors
paragraphs: The sector-specific federal laws that apply to foreign investors vary in the  types and levels of restrictions and provisions they contain. Based on our  review, there is no sector of the U.S. economy within which foreign  investors are completely excluded by federal law from any type of  investing. The laws that are in place generally fall into one of the three  following categories:   (1) Laws that limit and regulate direct foreign ownership in certain sectors  or require prior approval of foreign investment.   (2) Laws that restrict activities of either the foreign-owned firm or the  foreign parent once an investment has been made.  (3) Laws that do not explicitly limit foreign investment but require  disclosure of ownership.
Table 2 summarizes the key provisions of these laws by sector. For a more  detailed discussion of the applicable laws in each sector see appendix II.
Based on our analysis, we found three sectors—transportation,  communications, and natural resources and energy—to have federal laws  with provisions that specifically limit foreign ownership. The level of  investment permitted or the type of restrictions vary by law and sector.  For example, in the transportation sector, total foreign ownership may not  exceed 25 percent of the voting interest of a U.S. air carrier, under  provisions of the Federal Aviation Act of 1958. In the communications  sector, foreign governments are prohibited from holding any radio license,  and foreign corporations are prohibited from holding broadcast, common  carrier (telecommunications services), and certain other radio licenses.  These prohibitions may prevent an SWF from being issued such licenses,  since such funds are government-owned investment vehicles. Foreign  investors may, however, hold up to 20 percent of the capital stock of  licensees, and may hold up to 25 percent of the capital stock of U.S.  entities that control licensees. And in the natural resources and energy  sector, foreign investors are precluded from directly purchasing and  holding mineral extraction leases on U.S. lands. However, according to  officials at the Department of the Interior, the law does allow foreign  investors to own these assets indirectly by allowing up to 100 percent  foreign ownership of a U.S. company that holds such leases.
Some federal laws in transportation, banking, and defense do not prevent  foreign investors from purchasing U.S. assets but instead restrict the  activities in which these foreign-owned assets can engage. For example,  under shipping laws foreign-owned vessels—meaning vessels more than  25 percent owned or controlled by foreign investors—are generally not  permitted to carry cargo between points in the United States. Foreign  investors are allowed to invest in U.S. companies that provide goods and  services to the U.S. military, subject to restrictions related to the control of  classified information and the performance on classified contracts. For  example, under the regulations governing the National Industrial Security  Program (NISP), a company is ineligible for access to classified  information or award of a classified contract if that company is under  foreign ownership, control or influence to such a degree that the granting  of a facility clearance would be inconsistent with the national interest.  Pursuant to the regulations under NISP, foreign ownership, control or  influence may be mitigated through certain corporate agreements  controlling shareholder interests with respect to shareholder voting, board  of director composition, visitation privileges, technology and electronic  communication controls, and other security measures to effectively  monitor and address related threats.
In the banking sector, foreign companies, like domestic companies, must  seek approval for investments that exceed certain thresholds and must  meet other requirements once an investment is made above those  thresholds. Foreign companies are required to receive approval from FRB  prior to acquiring 25 percent or more of the voting shares, or otherwise  acquiring control, of a U.S. bank.  Foreign banks must receive prior  approval of FRB before opening certain types of banking operations in the  United States. In general, only foreign banks that are subject to  comprehensive supervision on a consolidated basis by the appropriate  authorities in their home country are permitted by FRB to acquire control  of U.S. banks or bank holding companies or conduct banking operations in  the United States. In addition, once a foreign company obtains 25 percent  or more, or otherwise acquires control, of a U.S. bank or bank holding  company, it becomes a bank holding company and is subject to  restrictions on conducting certain banking and nonbanking related  activities. These restrictions apply to the company and to any company  that owns the foreign company.  An official at FRB told us that this may  also serve to limit foreign investment in banks by SWFs, since many of  them would not want to be limited in the other types of investments they  could make in the United States.
Finally, foreign investors face no federal restrictions on investments in  U.S. agricultural land, but are required to report purchases above a  minimum threshold. Under the Agricultural Foreign Investment Disclosure  Act of 1978, foreign entities—meaning individuals, organizations, and  governments—are required to file reports on the acquisition or transfer of  agricultural land if it involves more than 10 acres or produces agricultural  products of $1,000 or more per year. U.S. entities in which there is a  significant interest or substantial control must also file these reports.  Significant interest or substantial control is defined as 10 percent or more  direct or indirect interest in the entity if held by a single foreign person or  a group of foreign persons acting in concert, or a 50 percent or more direct  or indirect interest if held by a group of foreign persons not acting in  concert, as long as none of them individually holds a 10 percent or greater  interest. This information is compiled by the Farm Services Agency of the  Department of Agriculture and is reported annually. A filing must also be  made when there are certain changes in circumstance.
section_title: Federal Laws Affecting Foreign Investment Were Generally Enacted to Protect National Security and U.S. Industry
paragraphs: The various investment laws restricting or otherwise affecting foreign  investment in the United States date back to 1872 in one case and were  generally enacted in response to national security concerns existing at the  time. For example, the Merchant Marine Act of 1920 was passed largely to  address concerns at the time that the United States maintain a sizable  shipping fleet under U.S. control. Also, the restrictions on foreign  ownership of communication licenses, as contained in provisions of the  Communications Act of 1934, were intended to preclude foreign  dominance of American radio and arose from lessons the United States  had learned from the foreign dominance of cables and the dangers from  espionage and propaganda disseminated through foreign-owned radio  stations in the United States prior to and during World War I. Further,  restrictions on ownership and control of U.S. air carriers are partially the  result of concern over military reliance on civilian airlines to supplement  airlift capacity in times of war. According to some experts, foreign  investment laws have received more prominence or increased attention  since the terrorist attacks on the United States in 2001.
Other rationales for these laws include, in part, using them to gain access  for U.S. investors abroad and protecting U.S. industries. For example, part  of the rationale for the reciprocity provision in the Mineral Leasing Act of  1920 was to promote outward U.S. investment by blocking investments  from countries that did not allow U.S. investors to participate in mineral  leasing. The Merchant Marine Act of 1920 also aimed to augment  American shipping, as it allowed preferential rail rates for shippers that  used U.S. vessels, and authorized the President to abrogate treaties that  did not allow discrimination in favor of U.S. shipping. Further, the foreign  ownership standards of the Civil Aeronautics Act of 1938 sought to protect  the then fledgling U.S. airline industry and stimulate the domestic  provision of aviation services. Lastly, the Agriculture Foreign Investment  Disclosure Act of 1978 was enacted partly in response to concerns voiced  by rural constituencies that foreign investment, spurred by the  depreciation of the U.S. dollar against European currencies, was causing  an escalation in the price of agricultural land in the United States and  posing a threat to family farm and rural communities. Figure 5 shows a  timeline of when these various laws were passed.
section_title: State Laws Restricting Foreign Investment Largely Limit Investments in Real Estate and Insurance
paragraphs: In addition to federal laws that may affect foreign investment, we  identified various state laws that may affect foreign investors’ ability to  invest in U.S. assets, based on information available from government and  private sources with relevant expertise.
Based on our analysis of information from these sources, most state level  laws affecting foreign investment appear to be in the insurance and real  estate sectors. According to information collected by the National  Association of Insurance Commissioners, 28 states have laws that address  foreign government ownership of insurance companies in their state. For  example, under the state insurance code for Wyoming, no foreign insurer  that is owned or controlled in any manner or degree by any government or  governmental agency shall be authorized to transact insurance in  Wyoming.
Restrictions on foreign investment in real estate also exist in many states.  According to a survey conducted by the National Association of Realtors  in 2006, 37 U.S. states had some type of law affecting foreign ownership of  real property. These laws varied, with some only requiring foreign  investors to register as a company doing business in the state before  purchasing property, and others specifically prohibiting foreign ownership  of certain types of land. For example, one common type of real property  restriction was for agricultural land, with 15 states having some law  governing foreign ownership in this area.
section_title: Agencies Described Processes Addressing Key Elements of Enforcing Laws Affecting Foreign Investment; Using Supplemental Information Could Assist Some Agencies
paragraphs: Agencies responsible for enforcing laws specifically addressing foreign  investment in six sectors have processes addressing the key elements of  enforcement. We determined, based on analysis of the specific  requirements of each law and professional judgment, that to enforce laws  restricting or requiring disclosure of purchases, responsible agencies  would at a minimum need to have processes addressing three key  elements: detecting foreign investments, verifying the identity and share of  foreign ownership to ensure that purchases meet requirements of certain  statutes, and monitoring ongoing changes in ownership. Each of the  agencies responsible for the six sectors has processes addressing these  three enforcement elements, although we did not fully assess the extent to  which these processes were being followed. However, reviewing  additional transaction and investment sources could supplement some  agencies’ efforts to detect subsequent ownership changes. Staff with the  six agencies reported that they find few violations of foreign investment  laws in their sectors and have taken some enforcement actions pursuant  to these laws, with none involving an SWF.
subsections: section_title: Enforcing Laws Affecting Foreign Investment Requires Several Key Elements
paragraphs: Federal agencies responsible for oversight in the agriculture,  transportation, banking, communications, and the two natural resources  and energy sectors of nuclear energy, and mining and mineral leases are  also responsible for ensuring compliance with the laws relating to foreign  investment in those sectors. In general, the laws in these sectors are  intended to limit foreign investment in U.S. assets to specific percentages,  ensure that the extent of foreign ownership of certain U.S. assets is  known, or limit the activities that can be undertaken by the foreign  owners. We determined that in order for agencies to have the necessary  information to determine whether the requirements of the laws were being  met, they would, at a minimum, need processes to  (1) identify all transactions that are subject to the law,  (2) verify the identity and amount of foreign ownership and control to  ensure that the portion of foreign ownership and control is below the  legal limit for restrictive statutes, and  (3) monitor changes to ownership that occur after the initial transaction,  and ensure that foreign ownership and control remains below the legal  limit for blocking statutes.
subsections: section_title: Each Agency Identifies Transactions Subject to Relevant Laws Largely through Licensing and Disclosure Requirements
paragraphs: To identify investments potentially subject to the various restricting and  disclosure laws, each of the six federal agencies becomes aware of  potential foreign investments in its sectors through the existing licensing  and filing requirements that apply to its sector. Though the processes vary  by agency, the sector-specific laws applicable to foreign investment  generally require approval, licensing, or disclosure of any entity seeking to  operate or own assets in that sector (see table 3).
For five of the sectors we reviewed—transportation, banking,  communications, nuclear energy, and mineral leases—entities seeking to  establish new operations or invest in existing ones must generally seek  approval from the federal oversight agencies through a licensing or  approval process. As a result, when an entity seeks to make an investment  in one of these sectors, the federal agency becomes aware of the  transaction. With respect to purchases by foreign entities of U.S.  agricultural land, the Department of Agriculture, although not required to  approve such purchases, becomes aware of them through reporting  requirements under the Agriculture Foreign Investment Disclosure Act.
Agency officials described aspects of the approval and licensing  requirements and other actions they take to ensure their awareness of  foreign investments, as factors contributing to compliance. Officials at the  six agencies stated that that foreign investors’ compliance with these laws  is likely high because the requirements are well-established, and  consequences of not filing can be severe, such as halting operations or  forcing payment of penalties. In addition, most of the agencies reported  additional processes to ensure compliance. For example, staff from four  agencies told us that they monitor press releases and other public  information sources to identify potentially relevant transactions. For  example, NRC officials reported that changes in ownership of nuclear  facilities are somewhat rare and are newsworthy when they do occur. In  addition, staffs from two agencies told us that they expect to receive  whistleblower tips from competitors or inside sources which they use to  help monitor compliance and become aware of transactions. For example,  banking regulator officials told us that in the late 1990s a foreign bank that  operated U.S. branches had invested in another U.S. financial services  organization violating restrictions set out in the Bank Holding Company  Act. They became aware of this violation from the staff of a law firm  employed as part of the transaction. Staff from Agriculture told us that to  ensure they are identifying all transactions, their field-based staff annually  review county records to identify real estate transactions recorded that  year to ensure all transfers of ownership involving foreign parties were  reported to them as required.
section_title: Agencies’ Processes for Identifying Foreign Ownership and Verifying Information Vary by Statute
paragraphs: To identify foreign ownership, verify the accuracy of the identities of the  reported owners, and determine the full extent of foreign ownership, each  agency’s methods vary according to the specific provisions in the law  applicable to its sector (see table 4).
Across the six sectors, agencies require that investors establishing  operations or making purchases submit information regarding ownership  and control. The amount and type of information requested varies by  agency, in part due to the requirements of the statute. For example, five of  the agencies request information on ownership that allows the agency to  track ownership back to the ultimate beneficial owners. However, in the  case of mineral leases, the statute requires only that the lease holder be a  U.S. citizen, permanent resident, corporation, or association of citizens,  residents, or corporations. The requirements concerning foreign  ownership of the lease holder are less stringent than the other sectors,  therefore Interior requires less documentation on ownership in this case.
Each agency reviews the information provided to determine if the extent  of foreign ownership can be accurately determined, and in some cases  verifies the accuracy against other sources. Three agencies reported using  outside sources to verify some of the information provided. For example,  DOT and NRC reported using, as part of their reviews of ownership  information provided, disclosures that entities investing in 5 percent or  more of the securities outstanding for a publicly traded company must file  with SEC. Similarly, officials at FRB reported verifying information  through background checks of individual owners. In the event that the  original information provided is not enough to determine the extent of  foreign ownership, some agencies will request additional information from  the involved entities. For example, NRC can request additional  information that shows information such as management positions held by  non-U.S. citizens and the ability of foreign entities to control the  appointment of management personnel. Officials at the agency stated they  do not generally conduct independent verification of the information  provided unless they have reason to believe the information provided is  false. However, officials at NRC stated that any nuclear facility operator  would be subject to ongoing ownership reviews under the National  Industrial Security Program, in order to receive clearances for working  with classified information. Each agency reported that it relies, to some  extent, on companies truthfully providing ownership information and  stated that there are penalties for misrepresentation that act as a deterrent  to supplying false information.
Ensuring compliance with laws applicable to foreign ownership  sometimes requires each agency to research various levels of ownership  beyond the entity conducting the transaction in the United States. Some  agency staff indicated this can be challenging because of the complex  ownership structures often employed. To determine the identities of  owners in such corporate structures, agency officials told us that they ask  applicants to provide additional documentation. To determine the extent  of foreign ownership of companies holding broadcast licenses that are  publicly owned, FCC staff told us that they have the discretion to—and  have—allowed the use of a statistical sample of the shareholders of a  public entity. Where common carrier (telecommunications services)  licenses are involved, FCC staff ask the applicants to categorize the type of  foreign investors who hold a stake in their company, such as foreign  governments, pension plans and endowments, banks, insurance  companies, and private equity funds. In contrast, Agriculture staff told us  that their ability to determine the ultimate foreign owners of U.S.  agricultural lands is sometimes limited under their current regulations  because their staff do not have authority to compel disclosure of  information beyond the third tier of ownership. However, an official at  Agriculture told us that most filers comply with requests for additional  information beyond three tiers and that, in cases where ownership is only  traced to the third tier, this would still most likely indicate some level of  foreign ownership.
section_title: Agencies Monitor Changes in Ownership and Ensure Ongoing Compliance with Laws through Various Processes
paragraphs: To ensure that subsequent changes of ownership are disclosed or do not  exceed the legal limits after a transaction has been approved, the six  agencies responsible for these sectors have various procedures.  (See table 5.)
In each sector, entities conducting operations or holding licenses are  required by regulations to notify the relevant agencies of ownership  changes and are subject to civil or criminal penalties for noncompliance  with these requirements. Some agencies supplement information from  these mandated disclosures with additional reporting requirements or  regular examinations which include reviews of ownership. In the  broadcast sector, companies are required to submit a biennial ownership  disclosure to FCC. In banking and transportation, agencies periodically  review ownership. For example, banking regulators told us that most  banks, including those with foreign owners, are examined annually, and  these examinations include reviews of any changes in ownership to ensure  that the entities are still in compliance with all requirements. DOT also  examines operations in its sector when it conducts examinations of  airlines operating in the United States every 3 to 5 years to ensure they still  meet all fitness requirements.
Officials with DOT, NRC, FCC, and FRB stated that in addition to formal  disclosure and review procedures, they also obtain information on  changes in foreign ownership through tips from competitors or comments  posted on public notices of proposed transactions. For example, a  competitor in the U.S. airline industry filed a public petition in early 2009  asking DOT to examine the ownership of Virgin America because of  allegations that changes in the airline’s ownership structure could have  resulted in a violation of foreign ownership restrictions. Three agencies  also reported reviewing news items about companies in their sectors to  become aware of potential transactions that could lead to an ownership  transfer. For example, FRB reported monitoring press reports on banks  under their supervision through Bloomberg and other sources, and DOT  also reported monitoring press reports on U.S. air carriers.
While each agency has various processes for monitoring ownership  changes, staff at DOT, FCC, and Agriculture do not routinely review  information from certain additional sources, including those maintained  by other government agencies or private sources, to supplement the  information they use to identify possible unreported ownership changes.  Examples of sources of potentially relevant information include SEC  investor filings and news reports and transaction information captured by  private databases. This information may include reported full or partial  acquisitions of U.S. assets by foreign investors in certain sectors. FRB  reported that it does actively monitor SEC filings and press reports  concerning the institutions they oversee. While staff at DOT and FCC told  us that they believed that their current processes resulted in a high  compliance rate amongst licensees in filing the proper notifications, staff  at Agriculture indicated that they had not assessed whether sources such  as SEC filings had potentially useful information because they were  unaware that they could access such information from these sources.  Although these agencies have processes for detecting changes in  ownership, the emergence of new foreign investors—such as recently- created SWFs—appears to warrant consideration by these agencies of  additional sources of investment information that could supplement their  existing sources and provide them with greater assurance that they are  detecting all relevant transactions.
NRC and Interior are two agencies that may not benefit from monitoring  additional external sources for ownership changes. Citing the small  number of licensees in the sector, NRC officials stated that the need for  the agency to actively monitor changes in ownership in the nuclear sector  is low. Moreover, because of nuclear facilities’ use of classified  information, operators are subject to reviews and monitoring using  classified and unclassified data sources, including ongoing ownership  reviews, through the National Industrial Security Program. In addition,  while officials at Interior did not report using any government or private  sources to monitor changes in ownership, the law requires that  leaseholders be U.S. citizens but does not limit foreign ownership of a  leaseholder. Thus, there may be no need for the agency to actively monitor  ownership changes.
section_title: Although Agencies Report that Violations Are Rare, They Have Taken Some Enforcement Actions Concerning Violations of Laws Related to Foreign Investment
paragraphs: Interior, FRB, FCC, NRC, and DOT have rarely identified violations of the  applicable foreign investment laws, but have taken some enforcement  actions, although none were identified as involving an SWF. The number  of transactions the agencies review each year ranged from less than 20 to  thousands. For example, NRC has reviewed, or is in the process of  reviewing, 17 applications for new licenses for nuclear reactors since 2007,  and reviews roughly 6 transfers of ownership each year. In contrast,  Interior reported issuing more than 2,400 new onshore oil and gas leases  and approving more than 23,000 transfers of ownership of such leases in  2008. Most of the agencies reported that their application and licensing  processes help assure that the foreign investors comply with the law. As a  result, actions against foreign investors for violating the laws restricting  foreign holdings or requiring disclosure of purchases were rare. Only three  of the six agencies reported taking any enforcement actions since 2004.  FCC and DOT each reported one enforcement action over this period.  Agriculture reported assessing a total of 160 penalties over this period for  violations of their requirements, with the total for each year ranging from  15 to 48. In addition, agency officials told us that they were not aware of  any current or past enforcement action that has been taken against an  SWF. Officials with each of the agencies that oversee these laws also told  us they have the ability to withdraw approvals to operate, rescind  purchases, or levy fines, and that this provides considerable incentive on  the part of any foreign investor to comply with existing laws. Further, the  enforcement actions that agencies take, though rare, serve to strengthen  their perceived enforcement power among industry participants. In 1999,  FRB received information from a law firm involved in part of the  transaction and subsequently took enforcement action against a private  foreign bank that had allegedly hidden its acquisition of an insurance  company. The bank’s actions violated the restriction under the Bank  Holding Company Act that it not engage in other financial activities. The  agency assessed a $100 million civil monetary penalty against the foreign  bank and entered into a consent order with the former chief executive  officer, based on allegations of his involvement in the violations, and the  failure to disclose them to the regulator.  The consent order further  extends the restriction on the former chief executive officer's involvement  in the U.S. banking industry beyond the period that arose as a  consequence of the officer's criminal plea agreement in a separate action.
section_title: Conclusions
paragraphs: The United States is generally open to foreign investment; however,  sector-specific restrictions in federal laws on the ability of foreign  investors to purchase stakes in U.S. businesses or other assets exist for  certain sectors. We did not find any laws that only target SWFs. We found  that the agencies that are responsible for overseeing the laws that either  restrict or require disclosure of foreign investments have processes for  addressing key elements of enforcement for these types of laws, including  having processes for identifying transactions subject to the law, verifying  foreign ownership amounts, and monitoring changes in ownership. To  ensure that all changes in ownership that could affect compliance with  these laws are identified, the laws and regulations generally require that  such changes be reported to the relevant agency. Although each agency  takes steps to review information about subsequent ownership changes,  FCC, Agriculture, and DOT are not using some sources of information that  might enhance their ability to detect changes in company ownership.  These additional sources include information on investment  transactions—including those involving foreign entities—that is compiled  by various government or private sources. The sources with potentially  relevant information for these agencies include Securities and Exchange  Commission investor filings and transactions captured by private  databases. By assessing the usefulness of these other sources and  potentially including them in the agencies’ oversight process, the agencies  might more accurately determine if transactions subject to the foreign  investment restrictions they are charged with enforcing have occurred.
section_title: Recommendation for Executive Action
paragraphs: To enhance their oversight of sectors subject to laws restricting or  requiring disclosure of foreign investments, we recommend that the  Chairman of the FCC and the Secretaries of Agriculture and  Transportation review the current sources of the information their  agencies currently monitor to detect changes in ownership of U.S. assets— which are subject to restriction or disclosure requirements applicable to  foreign investors—and assess the value of supplementing these sources  with information from other government and private data sources on  investment transactions.
section_title: Agency Comments
paragraphs: We provided a draft of this report to Agriculture, DOD, DOT, FCC, FRB,  Interior, NRC, SEC, State, Treasury, and the U.S. Trade Representative. In  a memorandum from Agriculture, the Director of Economic and Policy  Analysis noted that they agreed with our findings and recommendation  that they review their current sources of information and assess the value  of supplementing these with information from other government agencies  and private data sources, and indicated that they will use such sources to  enhance their ability to detect changes in ownership. DOT and FCC  provided technical comments but did not specifically address our  recommendation to them.
SEC provided technical comments, and noted that their staff are willing to  assist other government agencies by explaining any securities-related  reporting requirements that could apply to SWFs, and also by helping to  locate information about investments in securities of U.S.-registered public  companies. In providing technical comments, staff from the Federal  Reserve Board also stated that while federal bank regulatory laws contains  provisions that are specific to foreign banks, these provisions generally  provide that foreign banks operating in the United States face the same  standards and activity limits as U.S. banks. We also received technical  comments from DOD, DOT, FCC, FRB, Interior, NRC, and Treasury, which  we incorporated as appropriate.
We are sending copies of this report to the Secretaries of Agriculture,  Defense, Interior, State, Transportation, and Treasury; the Chairmen of the  FCC and SEC; NRC, FRB; U.S. Trade Representative; relevant  congressional committees; and other interested parties. The report also is  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Loren Yager at (202) 512-4128 or yagerl@gao.gov or Richard J. Hillman at  (202) 512-8678 or hillmanr@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives in this report were to (1) describe the U.S. laws that  specifically affect foreign investment, including that by SWFs, in the  United States, and (2) review the processes  selected agencies use to  enforce these laws.
To identify and describe the U.S. laws that specifically affect foreign  investment, we (1) reviewed laws affecting foreign investment in the  United States, (2) reviewed documents concerning those laws, and (3)  talked to legal experts on foreign investment both inside and outside the  federal government about laws they considered important for foreign  investors in the United States.
The documents we reviewed included the following:    A key legal study on foreign investment in the United States.
A Department of the Treasury (Treasury) study from 1979 that  summarized federal laws bearing on foreign investment in the United  States.
Guides for foreign companies published by, for example, KPMG, on  investing in the United States.
A legally-oriented testimony presented in congressional hearings on  SWF in 2008.
Two volumes on the history of foreign investment in the United States  for reference to laws affecting foreign investment.
U.S. policy statements on foreign investment.
State Department (State) documentation on treaties in force.
We did not, however, include some types of laws that we judged less  directly related to the entities investing in the United States, including the  following:  Income tax treaties and federal taxation of foreign investment in the  United States.
Immigration statutes detailing visa requirements for foreign investors  or workers.
Some federal regulations concerning foreign investment in commercial  fisheries in the United States.
Most laws that pertain equally to both domestic and foreign investors,  as SWFs must follow the same laws that domestic investors must  follow. Such laws include antitrust statutes and laws targeting health  and safety.
Legal issues related to the Committee on Foreign Investment in the  United States, as these issues have been addressed in other GAO  reports.
We spoke with law firms that represent foreign investors seeking to invest  in the United States. We also spoke with government agencies that address  international trade and investment issues—including Department of  Agriculture (Agriculture), Department of Commerce (Commerce), Federal  Communications Commission (FCC), Department of Defense (DOD),  Federal Reserve Board (FRB), Department of the Interior (Interior),  Nuclear Regulatory Commission (NRC), State, Department of  Transportation (DOT), Treasury, Office of the U.S. Trade Representative  (USTR), and Securities and Exchange Commission (SEC). We also met  with an industry association that represents U.S. subsidiaries of  companies headquartered abroad.
The six sectors we identified through this process of reviewing laws were  agriculture, banking, communications, natural resources and energy, defense  industrial base, and transportation. Also, to provide information on their  importance to the U.S. economy, we calculated the share of the U.S. economy  five of the sectors represent by examining Bureau of Economic Analysis data  on industries of the U.S. economy ranked by output and value added as a  percent of gross domestic product (GDP). We determined that these data, as  well as data on cross-border investments from Treasury and Commerce’s  Bureau of Economic Analysis used to provide context in the background  section of the report, are sufficiently reliable for our purposes.
To identify state level restrictions on foreign investment, we spoke with  officials at various federal agencies—including Treasury, Commerce, and  State—with responsibilities related to foreign investment, to attorneys that  advise foreign investors with U.S. activities; and associations representing  foreign businesses and state officials. These associations included those  representing state legislatures and foreign companies operating in the  United States. In addition, we obtained the results of surveys done by two  organizations—the National Association of Insurance Commissioners and  the National Association of Realtors—on state laws pertaining to foreign  investors. We are reporting on information provided to us by these sources  on state level laws. We did not conduct any independent review or analysis  of state level investment laws.
To evaluate the processes that were used to enforce the federal level laws  applicable to foreign investors, we reviewed agency processes for carrying  out laws concerning foreign investment in the following sectors:  agriculture, transportation: aviation, banking, broadcasting and  telecommunications, mining, and nuclear energy. We selected these  sectors for review as these were the sectors with laws that either  restricted foreign investment or required its disclosures and represented  critical infrastructure sectors. Agencies related to these sectors are  Agriculture, DOT, FRB, FCC, Interior, and NRC respectively. To determine  what activities these agencies undertake to enforce these laws, we  interviewed officials at these agencies responsible for administering these  laws. We also reviewed regulations and agency documents describing their  processes for enforcing the laws. We determined, based on analysis of the  specific requirements of each law and professional judgment, that for  agencies to have the information necessary to determine whether the  requirements of the laws were being met, they would, at a minimum, need  processes to:  (1) Identify all transactions that are subject to the law.  (2) Verify the identity and amount of foreign ownership to ensure that the  portion of foreign ownership is below the legal limit for blocking  statutes.  (3) Monitor changes to ownership that occur after the initial transaction,  and ensure foreign ownership remains below the legal limit for  blocking statutes.
We reviewed agency processes to determine whether they addressed these  three elements. To determine whether agencies had any opportunities to  improve their processes, we compared the various agencies’ activities to  each other and used our professional judgment to assess whether any such  opportunities existed. To determine the frequency and number of  enforcement actions taken pursuant to these laws, we interviewed officials  and requested documentation from relevant agencies.
We spoke with officials from Agriculture, Commerce, FCC, Defense, FRB,  Interior, NRC, State, DOT, Treasury, USTR, and SEC. We also interviewed  industry and trade associations, and attorneys who advise foreign investors in  the United States.
We conducted this performance audit from October 2008 through May  2009 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Summaries of Key Federal Foreign Investment Laws
paragraphs: This appendix covers key U.S. investment laws that specifically apply to  foreign investors; it does not include all such laws.
Any foreign person who acquires or transfers any  interest, other than a security interest, in  agricultural land must report to the Secretary of  Agriculture if it involves more than 10 acres in the  aggregate or if it produces agricultural products of  $1,000 or more per year. A foreign person holding  land that becomes or ceases to be agricultural  land, or a person who holds agricultural land who  becomes or ceases to be a foreign person must  report these changes.
Failure to file a required report  or knowingly submitting a  report that does not contain all  of the required information or  contains misleading or false  information may result in a  civil penalty of up to 25% of  the fair market value of the  foreign person’s interest in the  agricultural land.
Foreign governments, entities created under the  laws of a foreign country or that have their  principal place of business in a foreign country,  and U.S. entities in which there is a direct or  indirect foreign “significant interest or substantial  control” are included in the definition of foreign  person.  “Significant interest or substantial control” is  defined as a 10% or more interest in an entity if  held by a single foreign person or a group of  foreign persons acting in concert, or a 50% or  more interest if held by a group of foreign persons  not acting in concert, none of whom individually  holds a 10% or greater interest in that entity.
Department of  Transportation  (DOT)
To operate as a U.S. air carrier, an entity must  obtain a certificate of public convenience and  necessity or an exemption from the certification  requirement from DOT.
DOT may deny, suspend, or  revoke a certificate or other  operating authority if an  applicant or existing air carrier  is found to be in violation of  DOT’s foreign ownership  requirements.
With respect to merchant shipping, a vessel may  only be registered as a U.S. flag vessel if it has not  been registered under the laws of a foreign  country and it is wholly owned by one or more of  the following: (1) the U.S. government; (2) a state  government; (3) an individual U.S. citizen; (4) an  association, trust, joint venture, or other entity  where all members are U.S. citizens; (5) a  partnership in which all the general partners are  citizens of the U.S. and a controlling interest in the  partnership is owned by U.S. citizens; or (6) a  corporation if it is incorporated under U.S. law, its  chief executive and chairman of the board are  U.S. citizens, and no more of its directors are  noncitizens than a minority of the number  necessary to constitute a quorum.
The shipping of cargo between points in the  United States (the coastwise trade) is generally  limited to U.S.-flag vessels that are built in the  United States and owned by U.S. citizens. A  corporation, partnership, or association may  qualify as a U.S. citizen only if 75% of the entity is  owned by U.S. citizens, in addition to other  requirements.
Merchandise transported in  violation of the registration  requirements is liable to  seizure by and forfeiture to the  government. Alternatively, an  amount equal to the value of  the merchandise or the actual  cost of the transportation,  whichever is greater, may be  recovered from any person  transporting the merchandise  or causing the merchandise to  be transported.
Foreign vessels are not permitted to fish  commercially within the boundaries of any state.  However, they can fish within an area that is  contiguous to the U.S.’s territorial sea and extends  200 miles from the shore, called the Exclusive  Economic Zone (EEZ), but only after issuance of a  permit by the Secretary of Commerce. Foreign  vessels fishing in the EEZ are also subject to  annual quotas.
In general, persons found to  have committed specified acts  prohibited by certain sections  of the act shall be liable for a  civil penalty not to exceed  $100,000 for each violation,  considering various factors.
Federal  Communications  Commission (FCC)
Under Section 310(a) of the Act, foreign  governments or their representatives may not hold  radio licenses.
FCC can deny an application  for a license or the transfer of  a license to any company that  doesn’t meet these ownership  requirements.
FCC has authority to order the  forfeiture of assets for  violations under the Act. There  are daily and overall  maximums outlined in the act  for different types of violations.
For example, an unauthorized  “substantial transfer of control”  carries a suggested fine of  $8,000, which can be lowered  or raised at the discretion of  FCC subject to the daily and  overall maximums. by any other corporation of which more than  25% of the stock is owned or voted by aliens,  their representatives, or by a foreign  government or its representative, or by a  foreign corporation.
With respect to the last category, a public interest  determination may be made to permit additional  foreign ownership above the 25% threshold.
Under Section 214 of the Act, any party seeking to  provide common carrier communication services  between the U.S. and a foreign point must obtain  a certificate of public convenience from the FCC.  Under the “public convenience or necessity”  standard, the FCC may have the authority to  restrict ownership and facility operation to U.S.  citizens and entities controlled by U.S. citizens.
Federal  Communications  Commission (FCC)
Any entity that owns or controls a cable landing  station in the U.S., and all other entities owning or  controlling a 5% or greater interest in the cable  system and using the U.S. points of the cable  system are required to apply for and receive a  cable landing license.
FCC can withhold or revoke a  license or transfer of a license  under certain conditions.
The Act permits the FCC to deny an application for  a license if to do so would assist in securing rights  for the landing or operation of cables in foreign  countries, or in maintaining the rights or interests  of the United States or of its citizens in foreign  countries, or will promote the security of the United  States; FCC can also place conditions on such  licenses. As a result, FCC has discretion to  withhold a cable landing license based on foreign  ownership issues. Under certain circumstances,  licensees are required to notify FCC for prior  approval if they seek to become affiliated with a  foreign carrier.
A person who knowingly  operates without a required  license shall be guilty of a  misdemeanor and fined not  more than $5,000, or  imprisoned for not more than  one year, or both.
Nuclear Regulatory  Commission (NRC)
The NRC is prohibited from licensing any person  to transfer or deliver, receive possession of or title  to, or import into or export from the United States  any source material or special nuclear material if,  in the opinion of NRC, the issuance of a license to  such person for such purpose would be “inimical  to the common defense and security or the health  and safety of the public.” Any transfer of such a  license must be approved by the NRC.
NRC can deny an application  for a license or a license  transfer from applicants if it  makes the requisite findings.
NRC is prohibited from issuing a license for  utilization or production facilities for industrial or  commercial purposes, medical therapy, or  research and development activities to  any person for activities which are not under  or within the jurisdiction of the United States  (with some exceptions);  an alien or any corporation or other entity if  NRC knows or has reason to believe it is  owned, controlled, or dominated by an alien, a  foreign corporation, or a foreign government;  or  any person within the United States if, in the  opinion of the NRC, the issuance of a license  to such person would be inimical to the  common defense and security or to the health  and safety of the public.
The NRC is prohibited from issuing a license to  the U.S. Enrichment Corporation if the NRC  determines the applicant is owned by a foreign  interest.
Department of the  Interior (Interior)
Except as otherwise provided by law, all valuable  mineral deposits in lands belonging to the United  States that are open to exploration and purchase  may be purchased by U.S. citizens and by those  who have declared their intention to become U.S.  citizens.
Interior can deny a mineral  patent to any applicant who  does not meet the  requirements.
Department of the  Interior (Interior)
Authorizes the disposition (e.g. by prospecting  permits or leases) by the federal government of  deposits of coal, phosphate, sodium, potassium,  oil, oil shale, gilsonite or gas, and the public lands  containing such deposits only to: (1) U.S. citizens;  (2) association of citizens; (3) municipalities, in the  case of coal, oil, oil shale, or gas; and (4) any  corporation organized under U.S. law.
If a lease holder is found to be  noncompliant with  requirements, they have 2  years to remedy the situation,  after 2 years if nothing is done  the foreign interest is deemed  relinquished.
Foreign investors may own an interest in a lease  through stock ownership, stock holding, or stock  control in a present or potential lessee that is  incorporated under U.S. law but only if the laws,  customs, or regulations of their country do not  deny similar or like privileges to citizens or  corporations of the United States. If it is  determined that a country has denied similar or  like privileges to citizens or corporations of the  United States, it would be placed on a list  available from any Bureau of Land Management  State office.
The Deepwater Ports Act of 1974, as amended  authorizes the Secretary of Transportation to issue  licenses to U.S. citizens for the construction and  operation of deepwater oil or liquid natural gas  ports beyond State seaward boundaries and  beyond the territorial limits of the United States.
Transportation can deny  license to any applicant who  does not meet the  requirements.
Foreign investors may own interest in a license  holder through stock ownership so long as the  licensee is incorporated under U.S. law and its  president or other executive officer, and its  chairman of the board of directors is a United  States citizen and the board is comprised of no  more noncitizens than a minority of the number  necessary to constitute a quorum to conduct  business.
Department of  Defense (DOD)
Nuclear Regulatory  Commission (NRC)
The purpose of the National Industrial Security  Program (NISP) is to safeguard federal  government classified information that is released  to contractors, licensees, and grantees of the U.S.  government. The NISP Operation Manual provides  uniform procedures and guidance for applying  these safeguards, and applies to all government  contractors that perform contracts which require  their access to classified information. Foreign  investors in businesses engaged in classified  government contract work (e.g., national defense,  intelligence activities, nuclear power production, or  nuclear weapon production) are subject to these  detailed procedures.
Firms that cannot negate or  mitigate an FOCI, cannot have  access to classified  information.
Department of  Energy (DOE)
Office of the  Director of National  Intelligence (ODNI)
Under these procedures, contractors cannot have  access to classified information unless they have a  facility clearance. To be eligible for such a  clearance, a company must not be under foreign  ownership, control, or influence (FOCI) unless  measures can be taken to negate or mitigate the  FOCI.
Department of  Defense (DOD)
Department of  Energy (DOE)
A U.S. company that is controlled by one or more  foreign governments cannot be awarded a U.S.  defense contract, or a DOE contract under a  national security program, if such contract requires  access to proscribed information unless the  secretary concerned determines that a waiver is  essential to the national security interests of the  United States or in cases involving contracts for  restoration, remediation, or waste management,  where such a waiver will advance the  environmental restoration, remediation, or waste  management objectives of the department and will  not harm the national security interests of the  United States and the where the awardee is  controlled by a foreign government with which the  Secretary concerned is authorized to exchange  Restricted Data under a provision of the Atomic  Energy Act of 1954.
I if a firm can't get the  necessary waiver it can't be  awarded the contract.
Where a U.S. company has been awarded a U.S.  defense contract, or DOE contract under a  national security program, if such contract requires  access to proscribed information, no entity  controlled by a foreign government may merge  with, acquire, or take over that company absent  conclusive CFIUS review.
The term “entity controlled by a foreign  government” includes—(1) any domestic or foreign  organization or corporation that is effectively  owned or controlled by a foreign government; and  (2) any individual acting on behalf of a foreign  government, as determined by the Secretary  concerned. The term does not include an  organization or corporation that is owned, but is  not controlled, either directly or indirectly, by a  foreign government if the ownership of that  organization or corporation by that foreign  government was effective before October 23,  1992.
Federal Reserve  Board (FRB)
Office of the  Comptroller of the  Currency (OCC)
FBSEA generally precludes U.S. branches of  foreign banks from engaging in domestic retail  deposit-taking, except for those branches that  were insured by the Federal Deposit Insurance  Corporation at the time FBSEA was enacted (i.e.  1991). Consequently, a foreign entity that wishes  to engage in full deposit-taking must establish one  or more domestic bank subsidiaries.
With limited exception, no foreign bank may  establish a branch or an agency, or acquire  ownership or control of a commercial lending  company (CLC), without the prior approval of FRB.  FRB is prohibited from approving such an  application unless it determines that the foreign  bank is “subject to comprehensive supervision or  regulation on a consolidated basis by the  appropriate authorities in its home country”— commonly referred to as the “comprehensive  supervision standard.” If FRB is unable to find that  a foreign bank is subject to comprehensive  supervision or regulation on a consolidated basis  by the appropriate authorities in its home country,  FRB may still approve an application by the bank  if, among other things, the appropriate authorities  in the home country are actively working to  establish arrangements for the consolidated  supervision of such bank.
Federal Reserve  Board (FRB)
A person who knowingly  violates any provision of this  law shall be imprisoned not  more than 1 year, fined not  more than $100,000 per day  for each day during which the  violation continues, or both. certain transactions involving the acquisition  of ownership or control of the voting shares of  a bank or the assets of a bank.
2.
Imposes limitations on the types of  nonbanking organizations a BHC may own.
3.
Imposes limitations on the types of  nonbanking activities a BHC may engage in  directly or indirectly through subsidiaries.
A person who, with the intent  to deceive, defraud, or profit  significantly, knowingly  violates any provision of this  law shall be imprisoned not  more than 5 years, fined not  more than $1,000,000 per day  for each day during which the  violation continues, or both.
BHCA prohibits bank holding companies from  engaging in certain nonbanking activities but  provides some exemptions for foreign bank  holding companies.
A company becomes a “bank holding company,” if  it has control over any bank or any company that  is or becomes a bank holding company. Any  company has control over a bank if:  1.  it directly or indirectly owns, controls or has  power to vote 25% or more of any class of  voting securities of the bank or company;  2.
Any company which violates,  and any individual who  participates in a violation of,  any provision of this law, or  any regulation or order issued  pursuant thereto, shall forfeit  and pay a civil penalty of not  more than $25,000 for each  day during which such  violation continues.
3.  FRB determines that it directly or indirectly  exercises controlling influence over the  management or policies of the bank or  company.
Committee on  Foreign Investment  in the United States  (CFIUS)
Section 721 authorizes the President to take  action to suspend or prohibit any merger,  acquisition, or takeover that is proposed or  pending by or with any foreign person which could  result in foreign control of any person engaged in  interstate commerce in the U.S. and that threatens  to impair the national security of the U.S.
Section 721 establishes a process for reviewing a  foreign acquisition of a U.S. business, which  begins with a voluntary notice by the companies of  covered transactions (though CFIUS may also  unilaterally initiate a review).  In response to any  notice of a covered transaction, CFIUS conducts a  30-day review to identify and resolve any national  security concerns.  CFIUS may also conduct an  additional 45-day investigation in certain  circumstances.  Should CFIUS identify national  security concerns associated with a transaction  during the review or investigation periods, it may  negotiate or impose measures intended to mitigate  any such concern.  Finally, CFIUS may choose to  forward the transaction to the President with a  recommendation for possible action if national  security concerns remain unresolved at the  conclusion of an investigation.  The President may  decide to suspend or prohibit the acquisition only if  there is credible evidence that the foreign entity  exercising control might take action that threatens  national security, and provisions of law, other than  Section 721 and the International Emergency  Economic Powers Act, do not provide adequate  and appropriate authority to protect the national  security.  FINSA requires that CFIUS provide an  annual report to Congress on covered transactions  on which action has been concluded, as well as  report promptly to Congress after each such case.  .
Any person who, after the  effective date, intentionally or  through gross negligence,  submits a material  misstatement or omission in a  notice, or makes a false  certification, may be liable for  a civil penalty not to exceed  $250,000 per violation.  Any  person who, after the effective  date, intentionally or through  gross negligence, violates a  material condition or provision  of a mitigation agreement,  may be liable for a civil  penalty not to exceed  $250,000 per violation or the  value of the transaction,  whichever is greater.
The statute provides for the  President or CFIUS to initiate  a review of a covered  transaction that was  previously reviewed or  investigated if any party  submitted false or misleading  material information or omitted  material information in  connection with the review or  investigation, or, under certain  circumstances, if any party  intentionally materially  breaches a mitigation  agreement or condition.
Under IITSSA, a report is required by a U.S.  business enterprise when a foreign person  acquires (directly or indirectly) through an existing  U.S. affiliate, a 10 % or more voting interest in that  enterprise, including an enterprise that results  from the direct or indirect acquisition by a foreign  person of a business segment or operating unit of  an existing U.S. business enterprise that is then  organized as a separate legal entity, or by the  existing U.S. affiliate of a foreign person when it  acquires a U.S. business enterprise or operating  unit that the existing U.S. affiliate merges into its  own operations. Under certain circumstances,  quarterly reports must be filed concerning direct  financial transactions between a U.S. affiliate and  its foreign parent group.
The act also calls for regular surveys of foreign  portfolio investment, meaning investments of less  than 10% in U.S. enterprises.
Willful failure to report will  result in a fine of no more than  $10,000.00, imprisonment for  up to a year, or both. Any  officer, director, employee, or  agent of any corporation who  knowingly participates in such  a violation, upon conviction,  may be punished by a similar  fine, imprisonment, or both.
Domestic corporations that are at least 25%  foreign owned or a foreign corporations doing  business in the U.S. must file an informational  return with the IRS disclosing reportable  transactions, and maintain records relating to  transactions between the domestic corporation  and the foreign-related parties.
A reporting corporation that  fails to timely file any required  information or fails to maintain  records as required shall pay  a penalty of $10,000 for each  taxable year with respect to  which the failure occurs. A  continuing failure can result in  additional penalties.
The International Emergency Economic Powers  Act (IEEPA) authorizes the President to prohibit  certain transactions or block any property in which  any foreign country or foreign national has any  interest.  It grants the President broad authorities  to “deal with any unusual and extraordinary threat,  which has its source in whole or substantial part  outside the United States.”  Before exercising  these authorities, IEEPA requires the President to  declare a national emergency.  National  emergency declarations are governed by the  National Emergencies Act (NEA).  IEEPA  sanctions are typically imposed pursuant to  Executive Order.
A civil penalty may be  imposed on any person who  commits an unlawful act under  the Act in an amount not to  exceed the greater of  $250,000 or an amount that is  twice the amount of the  transaction that is the basis of  the violation.  The Department  of the Treasury has issued  guidelines that implement  these statutory penalty  authorities.
Criminal penalties provide that  a person who willfully  commits, willfully attempts to  commit, or willfully conspires  to commit, or aids or abets in  the commission of, an  unlawful act described in  IEEPA shall, upon conviction,  be fined not more than  $1,000,000, or if a natural  person, may be imprisoned for  not more than 20 years, or  both.
section_title: Appendix III: Comments from the U.S. Department of Agriculture
section_title: Appendix IV: GAO Contacts and Staff Acknoweldgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to the contacts named above, Cody Goebel, Assistant Director;  Celia Thomas, Assistant Director; Tania Calhoun; David Dornisch; Patrick  Dynes; Nina Horowitz; Richard Krashevski; Michael Maslowski; Marc  Molino; Omyra Ramsingh; and Jeremy Schwartz made major contributions  to this report.