Defense Trade: Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness
Published: 2005-09-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 1988 Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security, an action the President has taken only once. Implementing Exon-Florio can pose a significant challenge because of the need to weigh security concerns against U.S. open investment policy--which requires equal treatment of foreign and domestic investors. Exon-Florio's investigative authority was delegated to the Committee on Foreign Investment in the United States--an interagency committee established in 1975 to monitor U.S. policy on foreign investments. In September 2002, GAO reported on the implementation of Exon-Florio. This report further examines that implementation.
section_title: What GAO Found
paragraphs: Foreign acquisitions of U.S. companies can pose a significant challenge for the U. S. government in implementing the Exon-Florio amendment because while foreign investment can provide substantial economic benefits, these benefits must be weighed against the potential for harm to national security. Exon-Florio's effectiveness in protecting U.S. national security may be limited because the Department of the Treasury--as Chair of the Committee on Foreign Investment in the United States--and others narrowly defines what constitutes a threat to national security and, along with some other member agencies, is reluctant to initiate investigations to determine whether national security concerns require a recommendation for possible presidential action. Some Committee members have argued that this narrow definition is not sufficiently flexible to protect critical infrastructure, secure defense supply, and preserve technological superiority in the defense arena. The Committee's reluctance to initiate an investigation--due in part to concerns about potential negative effects on the U.S. open investment policy--limits the time available for member agencies to analyze national security concerns. To provide additional time, while avoiding an investigation, the Committee has encouraged companies to withdraw their notification of a pending or completed acquisition and to refile at a later date. However, for companies that have completed the acquisition, there is a substantially longer time before they refile to complete the Committee's process; in some cases they never do, leaving unresolved any outstanding concerns. In our 2002 report, GAO recommended improvements in provisions to assist agencies in monitoring actions companies have agreed to take to address national security concerns. The Committee has improved provisions on monitoring compliance, and the Department of Homeland Security is actively involved in monitoring company actions.

section_title: Letter
paragraphs: Foreign acquisitions of U.S. companies can pose a significant challenge for  the U.S. government because of the need to balance the U.S. open  investment policy against the potential that an acquisition may harm  national security. Under the U.S. open investment policy, foreign investors  are to be treated no differently than domestic investors. In 1988, Congress  passed the Exon-Florio amendment to the Defense Production Act, which  authorizes the President to suspend or prohibit foreign acquisitions,  mergers, or takeovers of U.S. companies if a foreign controlling interest  might take action that threatens national security. Exon-Florio is meant to  serve as a safety net to be used when laws other than Exon-Florio and the  International Emergency Economic Powers Act may not be effective in  protecting national security.
The President delegated the investigative authority of Exon-Florio to the  Committee on Foreign Investment in the United States (Committee)—an  interagency committee established in 1975 to monitor and coordinate U.S.  policy on foreign investment in the United States. The Committee is  chaired by the Secretary of the Treasury. To provide the broadest latitude  for determining whether an acquisition presents a national security threat,  neither the statute nor the implementing regulation defines “national  security.”
Exon-Florio establishes a four-step process for examining a foreign  acquisition of a U.S. company: (1) voluntary notice by the companies, (2) a  30-day review to identify whether there are any national security concerns,  (3) a 45-day investigation to determine whether those concerns require a  recommendation to the President for possible action, and (4) a  presidential decision to permit, suspend, or prohibit the acquisition. The  law requires that the Committee report to Congress on the circumstances  surrounding any acquisition that results in a presidential decision. This  requirement was added in 1992 to provide Congress insight into the  process.
In September 2002, we reported on several weaknesses in the process  used by the Committee as well as in the agreements negotiated with  companies under Exon-Florio to mitigate identified national security  concerns. You asked us to further examine the Committee’s  implementation of Exon-Florio. We also determined whether the  Committee had implemented the recommendations from our 2002 report.
To understand the Committee’s process for reviewing foreign acquisitions  of U.S. companies, we met with officials from the Department of  Commerce, the Department of Defense, the Department of Homeland  Security, the Department of Justice, and the Department of the   Treasury—the agencies that are most active in the review of acquisitions— and discussed their involvement in the process. Further, we conducted  case studies of nine acquisitions that were filed with the Committee  between June 28, 1995, and December 31, 2004. We selected acquisitions  based on recommendations by Committee member agencies and the  following criteria: (1) the Committee permitted the companies to withdraw  the notification; (2) the Committee or member agencies concluded  agreements to mitigate national security concerns; (3) the foreign  company had been involved in a prior acquisition notified to the  Committee; or (4) GAO had reviewed the acquisition for its 2002 report.  We did not attempt to validate the conclusions reached by the Committee  on any of the cases we reviewed. To determine whether the weaknesses in  provisions to assist agencies in monitoring agreements that GAO had  identified in its 2002 report had been addressed, we analyzed agreements  concluded under the Committee’s authority between 2003 and 2005. We  conducted our review from April 2004 through July 2005 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: In 1988, the Congress enacted the Exon-Florio amendment to the Defense  Production Act, which authorized the President to investigate the impact  of foreign acquisitions of U.S. companies on national security and to  suspend or prohibit acquisitions that might threaten national security. The  President delegated this investigative authority to the Committee on  Foreign Investment in the United States. The Committee is an interagency  group that was established by executive order in 1975 to monitor the  impact of and coordinate U.S. policy on foreign investment in the United  States. The Committee is chaired by the Secretary of the Treasury, and its  membership includes representatives from executive branch departments  and the Executive Office of the President (see table 1). The President  added the Department of Homeland Security to the Committee in 2003,  reflecting an increased focus on domestic security in the aftermath of the  September 11, 2001, terror attacks and subsequent global war on terror.
In 1991, the Treasury Department issued regulations to implement Exon- Florio. As shown in figure 1, Exon-Florio and the regulations establish a  four-step process for reviewing a foreign acquisition of a U.S. company:  voluntary notice, 30-day review, 45-day investigation, and presidential  decision.
Notifying the Committee of an acquisition is not mandatory. However, any  member agency is authorized to submit a notification of an acquisition if  the companies have not done so. To date, no agency has submitted a  notification of an acquisition. Instead, when a member agency becomes  aware of an acquisition that may be subject to Exon-Florio, the agency  informs Treasury, as Chair, and Committee staff contact the companies to  encourage them to officially notify the Committee of the acquisition to  begin a review. Committee officials noted that companies have an  incentive to notify the Committee prior to completing the acquisition  because Exon-Florio provides the President with the authority to order  companies to divest completed acquisitions found to pose a threat to  national security.
Under Exon-Florio, after receiving notification of a proposed or completed  acquisition, the Committee begins a 30-day review to determine whether  the acquisition could pose a threat to national security. The Treasury  Department, as Committee Chair, forwards the notification documentation  to the lead office in each of the member agencies. Lead offices forward the  information to other offices within their agency. For example, the Defense  Technology Security Administration, the lead office for the Department of  Defense, forwards notification to 12 other offices within the department.  These other offices may also forward the notification, as appropriate. In  one case, the point-of-contact in the Office of the Under Secretary of  Defense for Acquisition, Technology, and Logistics, one of the initial 12  offices, forwarded the notification to four other offices within that  organization.
In most instances, the Committee completes its review within the 30 days.  However, if the Committee is unable to complete its review within 30 days,  the Committee may either allow the companies to withdraw the  notification or initiate a 45-day investigation. If the Committee concludes a  45-day investigation, it is required to submit a report to the President  containing its recommendations. If Committee members cannot agree on a  recommendation, the regulations require that the report to the President  include the differing views of all Committee members.
Under Exon-Florio, the President has 15 days to decide whether to  prohibit or suspend the proposed acquisition, order divestiture of a  completed acquisition or take no action. The President may take action  upon a determination that (1) there is credible evidence that leads the  President to believe that a foreign controlling interest might take action  that threatens to impair national security and (2) laws other than Exon- Florio and the International Emergency Economic Powers Act are  inadequate or inappropriate to protect national security. Under the  regulations, the President’s divestiture authority, however, cannot be  exercised if (1) the Committee has informed the companies in writing that  their acquisition was not subject to Exon-Florio or had previously decided  to forego investigation or (2) the President has previously decided not to  act on that specific acquisition under Exon-Florio. The Committee may  reopen its review or investigation and revise its recommendation to the  President if it determines that the companies omitted or provided false or  misleading information. In some cases, the companies will decide not to  proceed with the transaction because of concerns that a presidential  decision would be unfavorable. However, the President has ordered  divestiture in only one case. In 1990, the President ordered a Chinese  aerospace company to divest its ownership of a U.S. aircraft parts  manufacturer.
Under the original Exon-Florio law, the President was obligated to report  to the Congress on the circumstances surrounding a presidential decision  only after prohibiting an acquisition. In response to concerns about the  lack of transparency in the Committee’s process, in 1992 Congress passed  the Byrd Amendment to Exon-Florio, requiring a report to the Congress if  the President makes any decision regarding a proposed foreign  acquisition.
Companies can request to withdraw their notification at any time prior to  the President announcing a decision. A Treasury official told us that the  Committee generally grants withdrawal requests. After the Committee  approves a withdrawal, any prior voluntary notices submitted no longer  remain in effect. Any subsequent refiling by the parties is considered as a  new, voluntary notice to the Committee.
section_title: The Committee’s Implementation of Exon-Florio May Limit Its Effectiveness
paragraphs: The manner in which the Committee implements Exon-Florio may limit its  effectiveness because (1) Treasury, in its role as Chair, has narrowly  defined what constitutes a threat to national security and (2) the  Committee is reluctant to initiate a 45-day investigation because of a  perceived negative impact on foreign investment and a conflict with the  U.S. open investment policy. As a result of the narrow definition, some  issues that Defense, Homeland Security, and Justice officials believe have  important national security implications, such as security of supply, may  not be addressed. In addition, the reluctance to initiate the 45-day  investigation compresses the time available to consider issues. This  compressed time frame limits agencies’ ability to complete their analysis  of some cases. The Committee encourages companies to request  withdrawal of their notification to provide additional time to resolve  issues and to avoid the need for investigation. However, when companies  that have already completed the acquisition are allowed to withdraw, there  is a substantially longer time before they refile, and in some cases they  never do, leaving unresolved any outstanding concerns.
subsections: section_title: Threats to National Security Are Narrowly Defined
paragraphs: Under the statute, the President or the President’s designee may make an  investigation to determine whether a foreign acquisition might threaten  the national security of the United States. Neither the statute nor its  implementing regulations define national security. This permits a broad  interpretation of the term. The statute does provide factors to be  considered in determining a threat to national security; however,  consideration of these factors is not mandatory. These factors include the  following:    Domestic production needed for projected national defense  requirements.
The capability and capacity of domestic industries to meet national  defense requirements, including the availability of human resources,  products, technology, materials, and other supplies and services.
The control of domestic industries and commercial activity by foreign  citizens as it affects the capability and capacity of the United States to  meet the requirements of national security.
The potential effects of the proposed or pending transaction on sales of  military goods, equipment, or technology to any country identified  under applicable law as (a) supporting terrorism or (b) a country of  concern for missile proliferation or the proliferation of chemical and  biological weapons.
The potential effects of the proposed or pending transaction on U.S.  international technological leadership in areas affecting national  security.
Despite the broad coverage of the factors under the statute, Treasury and  some other Committee member agencies have continued to view threats to  national security in the traditional and more narrowly defined sense. That  is, they based their definition on a U.S. company’s possession of export- controlled technologies or items, classified contracts, and critical  technology; or specific derogatory intelligence on the foreign company.  The Departments of Justice and Defense have applied a broader view of  what might constitute a threat to national security. And since being added  to the Committee, the Department of Homeland Security has begun to  analyze acquisitions both in traditional terms and more broadly in terms of  the potential vulnerabilities posed by the acquisition. According to Justice,  Homeland Security, and Defense officials, vulnerabilities can result from  foreign control of critical infrastructure, such as control of or access to  information traveling on networks. Vulnerabilities can also result from  foreign control of critical inputs to defense systems or a decrease in the  number of innovative small businesses conducting research on developing  defense-related technologies. While these vulnerabilities may not pose an  immediate threat to national security, they may create the potential for  longer-term harm to U.S. national security interests by reducing U.S.  technological leadership in defense systems.
The agencies that favor applying the narrower, more traditional definition  of what constitutes a threat to national security have resisted using Exon- Florio to mitigate the concerns being raised by the Department of Defense  and others. For example, in reviewing a 2001 acquisition involving a U.S.  company that produced precision optics and semiconductor  manufacturing equipment, Defense and Commerce raised concerns about  (a) foreign ownership of sensitive but unclassified technology used in  reconnaissance satellites, (b) the possibility of this sensitive technology  being transferred to countries of concern, and (c) maintaining U.S.  government access to the technology. Treasury officials said that the  concerns raised by Defense and Commerce were not national security  concerns because they did not involve classified contracts, the foreign  company’s country of origin was a U.S. ally, and there was no specific  negative intelligence about the company’s actions in the United States.
During a more recent review, disagreement over the scope of Exon-Florio  resulted in a weakening of the enforcement provisions in an agreement.  The Defense Department had raised concerns about the security of its  supply of specialized integrated circuits as a result of a proposed  acquisition. These unique integrated circuits are used in a variety of  defense technologies, such as unmanned aerial vehicles, the Joint Tactical  Radio System, and communications protection devices including devices  used for cryptography. A Defense Science Board task force recently noted  that the functions performed by Defense-unique integrated circuits are  essential to the national defense of the United States. However, in  Treasury’s view, the Department of Defense’s concerns about its supply of  integrated circuits were industrial policy concerns, not national security  concerns, despite the importance of these circuits to a variety of defense  technologies. Treasury, as Chair of the Committee, and several other  members deemed the concerns outside the scope of Exon-Florio authority  and would not allow the agreement between the Departments of Defense  and Homeland Security and the companies to include any mention of the  Committee. As a result, a provision that included strong enforcement  language was deleted from an agreement with the acquiring company. In  the absence of such language, presidential or Committee action can only  result if the companies materially misrepresented information during the  Committee’s review. In our view, without that provision, the consequences  of failure to comply with the agreement are less certain.
section_title: The Standard for Investigation Limits the Number of Investigations
paragraphs: The Committee has been reluctant to initiate investigations, to avoid both  the negative connotations of an investigation and the need for a  presidential decision. As a result, the Committee has initiated few  investigations. From 1997 through 2004, the Committee received 470  notices, including 19 refilings, for 451 proposed or completed acquisitions.  The Committee initiated only eight investigations during the period (see  table 2).
According to Treasury Department officials, the Committee reviews  foreign acquisitions with a view to protecting national security while  maintaining U.S. open investment policy, which provides for equal  treatment of foreign and domestic investors. The office within Treasury  that provides staff support to the Committee—the Office for International  Investment—is also the office responsible for promoting the open  investment policy. The Committee’s goal is to implement Exon-Florio  without chilling foreign investment in the United States. According to  Treasury officials, being the subject of an investigation may have negative  connotations for a company. If it becomes public knowledge that the  acquiring company is the subject of an investigation, it may be perceived  that the government views the acquisition as problematic and the stock  price of the company may fall. Thus, avoiding an investigation helps  maintain the confidence of investors.
Consistent with its desire to avoid investigations, the Treasury  Department, as Committee Chair, applies strict criteria in determining  whether an acquisition should be investigated. The criteria for initiating an  investigation are the likelihood that (1) there is credible evidence that the  foreign controlling interest may take action to threaten national security  and (2) no other laws are appropriate or adequate to protect national  security. This is essentially the same criteria provided by the statute as the  basis for the President to take action to suspend or prohibit an acquisition  under Exon-Florio. The Defense Department and others have stated that  these criteria are inappropriate for determining whether to initiate an  investigation because the 45 days of the investigation should be used to  determine whether the criteria are met to inform the Committee’s  recommendation to the President. Exon-Florio does not provide specific  guidance for the appropriate criteria for initiating a 45-day investigation.  The statute merely provides that “the President or the President’s designee  may make an investigation to determine the effects on national security”  of acquisitions that could result in foreign control of a U.S. company.
section_title: Withdrawals Bypass Regulatory Time Frames
paragraphs: Committee guidelines require member agencies to inform the Committee  of concerns by the 23rd day of the 30-day review allowed by Exon-Florio.  According to one Treasury official, this time frame is necessary to meet  the legislated 30-day requirement for completing a review. For some cases,  particularly complex ones, the 23-day rule does not allow enough time to  complete reviews and address concerns. For example, one Defense official  said that, without advance notice of the acquisition, the time frames are  too short to complete analysis and provide input for the Defense  Department’s position. Another Defense official said that to meet  Treasury’s deadline, analysts have between 3 and 10 days to analyze the  acquisition. In one instance, Homeland Security was unable to provide  input within the time frame.
When agencies have needed more time to gather information or negotiate  an agreement to mitigate national security concerns, the Committee  generally suggests that companies request to withdraw their notification. If  the company does not want to withdraw, the Committee can initiate an  investigation. Exon-Florio’s implementing regulations permit the  Committee to allow companies to withdraw their notifications at any time  before a presidential decision.
When companies have withdrawn their notification prior to concluding an  acquisition, the companies have an incentive to resolve any outstanding  issues and refile as soon as possible. However, if an acquisition has been  concluded, there is less incentive to resolve issues and refile. Since 1997,  companies involved in 18 acquisitions have withdrawn their notification  and refiled 19 times. In one case, the company withdrew and refiled twice.  In 16 cases, the acquisitions had not yet been concluded, and the time  between withdrawal and refiling ranged between 0 days and 4 months (see  fig. 2). In two cases, the companies had already concluded the acquisition,  and 9 months and 1 year, respectively, passed before the companies  refiled. In both cases, Defense or Commerce had raised concerns about  potential export control issues. These concerns remained unresolved  throughout the period.
In addition to cases where a company that completed an acquisition  withdrew and subsequently refiled, we identified two instances in which  companies that had concluded an acquisition before filing with the  Committee withdrew and have not refiled. In one case, the company filed  with the Committee more than a year after completing the acquisition. The  Committee allowed it to withdraw the notification to provide more time to  answer the Committee’s questions and provide assurances concerning  export control matters. The company refiled and was permitted to  withdraw a second time because there were still unresolved issues. Four  years have passed since the second withdrawal.
In another case, a company filed with the Committee over 6 months after  completing its acquisition of an internet backbone company. The  Committee allowed the company to withdraw the notification more than 2  years ago because the Committee was busy with another, high-profile  acquisition. The Committee has not requested that the company refile even  though analysts within one agency had concerns about the acquisition. As  a result, the review process has never been completed. A Treasury  Department official said that the member agency that has national security  concerns about a particular transaction is responsible for ensuring that the  company refiles. However, the Committee’s guidance to member agencies  specifically states that Treasury will manage activities during withdrawal  by specifying time frames and goals to be achieved.
In six of the eight investigations that have been undertaken since 1997,  withdrawal was allowed after the investigation had begun. Withdrawal and  refiling to restart the clock limits the potential negative connotation of an  investigation. However, this practice also limits instances that require a  presidential decision, contributing to the opaque nature of the Exon-Florio  process because reporting to Congress on the results of Committee  actions only occurs as a result of a presidential decision. Only two of the  eight cases resulted in a presidential decision and a subsequent report to  the Congress (see table 3).
section_title: Provisions for Monitoring Compliance Have Improved
paragraphs: In our 2002 report, we identified several weaknesses in the agreements  that agencies negotiated with companies under the Exon-Florio  Amendment. Specifically, the two agreements that we reviewed either did  not specify (1) the time frame for implementing provisions of the  agreement or (2) the action that would be taken if the company failed to  comply within the stated time frame, thus providing no incentive for the  companies to act or no penalty for noncompliance. And in one case, the  company failed to meet the agreed upon time frame. In addition, the  agreements did not specify which offices in Committee member agencies  would be responsible for monitoring compliance with the agreements. We  recommended in our 2002 report that, to ensure compliance with  agreements, the Secretary of the Treasury, as Chair of the Committee,  increase the specificity of actions required by mitigation measures in  agreements negotiated under Exon-Florio and designate in the agreements  the agency responsible for overseeing implementation and monitoring  compliance with mitigation measures.
Three agreements negotiated between 2003 and 2005 contain specific time  frames for actions to be taken:  In a telecommunications agreement, the company was required to  adopt and implement a visitation policy within 90 days after the  agreement became effective.
In a software agreement, the company had to adopt mandatory policies  and procedures to implement the agreement within 90 days and  provide copies to the government points of contact.
In an electronics agreement, the company had to appoint a security  officer and two security directors within 90 days of a vacancy to ensure  compliance with the agreement, subject to approval by the  Departments of Defense and Homeland Security.
Two of the three agreements also contained strong language concerning  the consequences of noncompliance with the terms of the agreement. For  example, these agreements stated that if the company (1) fails to comply  with the terms of the agreement, (2) makes a materially false or  incomplete statement, (3) increases foreign entity control, or (4) makes  other material changes in circumstances, the Attorney General, the  Secretary of Defense, or the Secretary of Homeland Security may raise  concerns to the Committee or the President.
All three agreements also provided specific offices within the signatory  agencies to which the companies are to report. For example, the  telecommunications agreement designates as points of contact the  Assistant Attorney General of the Justice Department’s Criminal Division,  the General Counsel at the Federal Bureau of Investigation, the Deputy  General Counsel for Acquisition, Technology, and Logistics at the  Department of Defense, and the General Counsel at the Department of  Homeland Security.
The Department of Homeland Security has taken the lead on monitoring  compliance for those agreements that it has signed under Exon-Florio.  According to Homeland Security officials, the agency maintains  compliance tables to track companies’ compliance with time frames  provided for in the agreements. To keep all interested parties informed,  the Department sends out periodic e-mails to other agencies informing  them of the status of companies’ compliance efforts.
The Departments of Defense, Commerce, and Justice significantly rely on  Homeland Security to monitor companies’ compliance with the  agreements. Homeland Security officials stated that Homeland Security  Presidential Directive 7 gives the Department the authority to protect  critical infrastructure assets such as telecommunications and information  technology. According to a Defense official, the Department of Defense  has no authority to enforce companies’ compliance with agreements  signed pursuant to Exon-Florio. A Commerce Department official similarly  stated that Commerce’s authority is limited to enforcing compliance with  export control laws. As a result, the Department of Homeland Security is  the only one of the three with broad enforcement authority. Further,  according to Justice officials, while Justice has authority to seek  enforcement of agreements signed pursuant to Exon-Florio and to which it  is a signatory, the Department of Homeland Security has more resources  for monitoring compliance as well as the legal mandate to act.
section_title: Conclusions
paragraphs: In the aftermath of the September 11, 2001, terror attacks on the United  States and the subsequent war on terrorism, the nature of threats facing  this country has changed. In addition to traditional threats to national  security, vulnerabilities in areas such as the nation’s critical infrastructure  have emerged as potential threats. Exon-Florio provides the latitude for  the Committee on Foreign Investment in the United States to address  these threats. But the effectiveness of Exon-Florio as a safety net depends  on the manner in which the broad scope of its authority is implemented.  The narrow, more traditional interpretation of what constitutes a threat to  national security fails to fully consider the factors currently embodied in  the law. Further, the time constraints imposed on agencies to develop a  position before the statutory deadline limits member agencies’ ability to  complete in-depth analyses. Those time constraints, together with the  Committee’s reluctance to initiate investigations, can result in the  Committee permitting companies to withdraw their notifications. When  companies withdraw after completing an acquisition, the Committee may  lose visibility over the transaction, and the companies may choose not to  refile.
The initial legislation provided for congressional oversight through a  requirement that the circumstances surrounding any negative decision by  the President be reported to the Congress. To improve congressional  oversight, the Byrd amendment expanded required reporting to include  the circumstances surrounding all presidential decisions. However, the  Committee’s reluctance to proceed to investigation, coupled with the use  of withdrawal to resolve cases without the need for presidential decisions,  has resulted in the circumstances surrounding only two cases being  reported to the Congress since 1997. This criterion for reporting  contributes to the opaque nature of the Committee’s process and is  limiting the information that is provided to the Congress. In addition,  where companies have concluded the acquisition prior to filing with the  Committee and concerns have been identified, permitting withdrawal  expands the opportunity for harm to national security before the  Committee takes action.
section_title: Matters for Congressional Consideration
paragraphs: In light of the differing views within the Committee on Foreign Investment  in the United States regarding the extent of authority provided by Exon- Florio, the Congress should consider amending Exon-Florio by more  clearly emphasizing the factors that should be considered in determining  potential harm to national security. In addition, to address Treasury’s  concern with the impact of investigations on U.S. open investment policy  and the member agencies’ concerns with having sufficient time to address  relevant issues concerning the acquisitions, the Congress should consider  eliminating the distinction between a review and an investigation and  make the entire 75-day period available for review. The Committee could  then be required to submit recommendations to the President only if  presidential action was necessary. Also, to provide more transparency and  facilitate congressional oversight, the Congress should revisit the criterion  for reporting circumstances surrounding cases to the Congress. For  example, the Congress could require an annual report on all transactions  that occurred during the preceding year. Such a report could provide the  Congress with information on the nature of each acquisition; the national  security concerns raised by Committee member agencies, if any; how the  concerns were mitigated; and whether each acquisition was concluded or  abandoned, in addition to any presidential decisions required under the  statute.
In addition, in view of the need to ensure that national security is  protected during the period that withdrawal is allowed for companies that  have completed or plan to complete an acquisition prior to the Committee  completing its work, the Congress should require that the Secretary of the  Treasury, as Committee Chair, establish (1) interim protections where  specific concerns have been raised, (2) specific time frames for refiling,  and (3) a process for tracking any actions being taken during the  withdrawal period.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of our report to the Departments of Commerce,  Defense, Homeland Security, Justice, and Treasury for comment. In  responding, the Department of Treasury noted that it was providing  comments on behalf of all the members of the Committee on Foreign  Investment in the United States. However, the Department of Justice  provided comments in a separate letter.
Overall, Treasury disagreed with our findings. At issue is our  characterization of the Committee’s process and the adequacy of insight  into the Committee’s deliberations—concerns that Treasury states have  caused the Committee to question our understanding of how it operates.
Our understanding of the Committee’s process is based on an extensive  examination of Committee guidelines, case files, and memorandums;  discussions with member agencies, including Treasury, on the process and  the time frames the Committee uses to come to a decision; and a review of  the laws and regulations that provide the Committee with criteria against  which to assess threats to national security.
Treasury asserts that all Committee decisions are reached only by  consensus among member agencies. However, during the course of our  review, certain member agencies raised concerns about the Committee’s  process that indicated fundamentally differing views among Committee  members when reviewing certain cases. These disagreements involved  different views on what constitutes a threat to national security, the  sufficiency of the time allowed for reviews, and the appropriate criteria for  initiating an investigation. While we agree that opposing views can, and  should, be vigorously debated, such a debate does not demonstrate that  issues have been fully vetted or that consensus has been reached, as  Treasury implies. In fact, in a number of cases, we found evidence that  indicates otherwise, for example:  In one case we reviewed where member agencies disagreed over what  should be deemed a national security concern, the narrower  definition—one that excludes national security concerns raised by  certain member agencies—has prevailed, in that the notice has been  withdrawn instead of the case proceeding to investigation.
In complex cases in which national security concerns have been raised  and for which Exon-Florio is the relevant statute, case documentation  we reviewed revealed the significant pressures some agencies face to  complete analysis within 23 days. In its comments on our draft report,  the Department of Justice shared our concern with respect to the time  constraints imposed by the current process. Specifically, Justice stated  that “gathering timely and fully vetted input from the intelligence  community is critical to a thorough and comprehensive national  security assessment. Any potential extension of the time available to  the participants for the collection and analysis of that information  would be helpful.”
Policy-level officials from two member agencies have indicated that the  debate over the criteria for initiating an investigation remains  unresolved.
Given these fundamental differences, we concluded that the extent to  which issues are vetted and consensus is reached on certain cases is, at  best, uncertain.
Treasury also cites Committee guidelines on withdrawals—which state  that parties, not member agencies, have the authority to request a  withdrawal—to dispute our position that the Committee has encouraged  companies to withdraw notifications to provide additional time to examine  acquisitions. Guidelines stating that certain actions should be taken do not  necessarily provide evidence that such actions were indeed taken. In five  cases that we reviewed, letters from the companies requesting withdrawal  and/or letters from Treasury, as Committee Chair, approving the requests  to withdraw cited the need for more review time on the part of the  government as the reason for the withdrawal. Regardless, Treasury’s  detailed discussion of the withdrawal process ignores the key issue.  Allowing companies to withdraw notices to provide more time for a  review without initiating an investigation significantly increases the risk  that companies will not refile in a timely manner—particularly in cases  where the foreign acquisition has been completed—and that national  security concerns will remain unaddressed. Avoiding investigations by  using withdrawals also contributes to the opaque nature of the process  because without an investigation there is no presidential decision and  required reporting to the Congress.
Understandably, Treasury is cautious about providing details into the  Committee’s deliberations, given the sensitivity of the information  discussed and the need to protect it. And we appreciate the challenges  each case presents. However, despite Treasury’s assertion that the oral  briefings provided by agency members to duly authorized committees of  the Congress when requested are appropriate, the fact that our review was  prompted by congressional concerns about the Committee’s review and  investigation process suggests otherwise.
Finally, Treasury criticized our review methodology—specifically, it  questioned whether we spoke to all appropriate parties. We focused on the  agencies that were most active in Exon-Florio reviews, as we noted to  Treasury at the beginning of our review. During our preliminary  discussions and throughout the review, none of the Committee member  agencies, including Treasury, raised concerns with our methodology or  suggested that we contact the Department of State, the United States  Trade Representative, or the Council of Economic Advisers. Our reviews  of the official Committee files, located at the Treasury Department,  supported our view that the Departments of Commerce, Defense,  Homeland Security, Justice, and Treasury were the most active agencies.  Regardless, when it became clear to us that information from other  Committee members could be germane, as was the case with the National  Security Council, we attempted to contact them. In the case of the  National Security Council, officials declined to meet with us. At the time  we sent the draft report for comment, we were contacted by the  Department of State and the U. S. Trade Representative who wanted to  discuss the draft report. We met with representatives of both agencies to  discuss their concern that our report did not adequately recognize the  importance of open investment and was too focused on national security.
We recognize that in implementing Exon-Florio, the Committee must  consider national security in the context of open investment—a challenge  we point out in the opening statement of our report. However, the purpose  of the Exon-Florio amendment is to protect national security in the  context of U.S. open investment policy. It is how national security is  protected through the Committee process that needs to be better  understood. We believe that understanding can be enhanced by improved  insight and oversight of the process.
The Department of Justice in its letter also provided technical comments,  which we incorporated as appropriate. Treasury’s letter, along with our  responses to specific comments, is reprinted in appendix I. Justice’s letter  is reprinted in appendix II.
section_title: Scope and Methodology
paragraphs: To examine the process used by the Committee and its member agencies  to review and investigate foreign acquisitions, we analyzed case files and  discussed with Committee staff members the factors considered when  cases are reviewed, the process and time frame the Committee uses to  come to a decision, and the laws and regulations that provide the  Committee with criteria against which to assess threats to national  security.
We examined in depth nine acquisitions notified to the Committee on  Foreign Investment in the United States between June 28, 1995, and  December 31, 2004. We selected acquisitions based on recommendations  by Committee member agency officials and the following criteria: (1) the  Committee permitted the companies to withdraw the notification; (2) the  Committee or member agencies concluded agreements to mitigate  national security concerns; (3) the foreign company had previously  notified the Committee of a prior acquisition; or (4) GAO had conducted a  prior review. The objective of the case reviews was to understand and  document the Committee’s and its members’ approaches to and processes  for reviewing foreign acquisitions of U.S. companies. We did not attempt  to validate the conclusions reached by the Committee on any of the cases  we reviewed.
We also obtained information about other foreign acquisitions that we did  not conduct case reviews on, and we also used information on other  acquisitions obtained during prior GAO reviews. We obtained and  analyzed data from relevant Committee member agencies, including the  Departments of Commerce, Defense, Homeland Security, and Treasury.  While we were not granted access to files held by the Department of  Justice, we discussed individual cases with Justice officials and obtained  adequate information to meet our objectives. We also discussed the  Committee’s approach and process with Committee staff officials from  member agencies most actively involved—namely, the Departments of  Commerce, Defense, Homeland Security, Justice, and Treasury.
To determine whether the weaknesses in provisions to assist agencies in  monitoring agreements that GAO had identified in its 2002 report had been  addressed, we analyzed agreements concluded under the Committee’s  authority between 2003 and 2005 and compared these agreements with  those GAO had previously analyzed. We discussed with Committee staff  members the steps that they are taking to monitor agreements and enforce  compliance.
We conducted our review from April 2004 through July 2005 in accordance  with generally accepted government auditing standards.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days  from the date of this letter. At that time, we will send copies of this report  to the Chairman and Ranking Minority Member of the House Committee  on Financial Services and to other interested House and Senate  committees and subcommittees. We will also send copies to the  Secretaries of Commerce, Defense, Homeland Security, and Treasury and  the Attorney General. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
Please contact me at (202) 512-4841 or calvaresibarra@gao.gov if you have  any questions regarding this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. A list of major contributors to this report is listed in  appendix III.
section_title: Appendix I: Comments from the Department of Treasury
paragraphs: The following are GAO’s comments on the Department of the Treasury’s  letter dated August 12, 2005.
subsections: section_title: GAO’s Comments
paragraphs: 1.  Our understanding of the Committee’s process is based on an  extensive review of Committee guidance and case files and structured  interviews and discussions with member agencies, including Treasury.  Further, except where changes in Committee make-up and  proceedings have occurred since 2002, our discussion of the laws and  the Committee’s process is consistent with our 2002 report.  2.  As we point out in our evaluation of agency comments in the report,  certain member agencies raised concerns that indicated fundamental  disagreement among members when reviewing certain cases. Given  these fundamental disagreements, we concluded that the extent to  which issues are vetted and consensus is reached on certain cases is,  at best, uncertain.  3.  To analyze cases notified to the Committee and determine whether  threats to national security exist, each agency effectively  operationalizes its own definition of national security. The implication  that individual agencies do not apply a definition is unrealistic.  4.  We agree that Exon-Florio should be used judiciously as a safety net  when laws other than Exon-Florio and the International Emergency  Powers Act may not be effective in protecting national security—a  point we make in the opening paragraph of our report. However, in  cases where Committee members disagree on whether Exon-Florio  applies, we have found that a more narrow definition of national  security often takes precedence or the companies are allowed to  withdraw their notification to avoid investigations. Treasury's rather  lengthy discussion in its comment letter on the need to protect U.S.  open investment policy underscores our concern.  5.  In numerous case documents GAO reviewed, the definitional bounds  agencies used in considering national security concerns are apparent.  Some agencies followed routine analytical processes, searching  specific databases related to export controls, acquisition history, and  critical technology information—sources that would reveal whether  the foreign acquisition involved any export-controlled technology or  item or classified contracts, or whether there was specific derogatory  intelligence on the foreign company. Other agencies prepared specific  vulnerability or threat assessments that have their own methodological  parameters. The debate among Committee members on each  notification is fueled by these differing definitions.   6.  We agree that, taken in total, member agencies consider a broad range  of national security factors when cases are analyzed. We also agree  that anything other than the broad consideration of a range of national  security factors by the Committee would inappropriately limit the  President’s necessary discretion to protect national security.  7.  While only the President decides what constitutes a threat to national  security and what actions are in the interest of U.S. national security in  cases that are sent for a determination, only two cases have reached  this stage since 1997. Further, only 8 of 451 cases have undergone  investigations. By allowing withdrawals of notifications rather than  initiating investigations, the Committee effectively pre-empts the  President from using his discretion to make a determination. To this  end, the Committee has defined what constitutes a threat to national  security, not the President. Further, since only those few cases that go  to the President for a determination require reporting to the Congress,  there is little insight into the Committee’s deliberations. Our review  found that for specific cases, there has been significant disagreement  among member agencies on what constitutes a threat to national  security and what actions are in the interest of national security. In  two such cases, companies were allowed to withdraw their notices,  and to date, they have yet to refile, leaving the concerns unresolved.   8.  Again, Treasury’s response skews our finding. In two cases we  reviewed, when an agency raised what it deemed a national security  concern and other Committee members did not agree, the narrower  definition of national security—which excludes the concern raised— prevailed, in that the notice was withdrawn instead of the case  proceeding to investigation. Regardless, the case Treasury refers to  was cited in our 2002 report as an example of an agreement in which  nonspecific language made the agreement difficult to implement. For  example, to mitigate a concern about access to technology, the  agreement required a “good faith effort” to divest a subsidiary. When  the company divested part, but not all, of the subsidiary—citing lack of  interested buyers as the rationale—government officials could not  determine whether the company’s efforts were made in good faith  because the agreement did not include criteria defining what actions  would constitute a good faith effort. In addition, the agreement  contained no consequences for failure to comply with the monitoring  terms of the agreement within the stated time frames, and as we noted,  the company failed to meet the terms of one provision. Given this  outcome, it is unclear how Treasury can assert that “extensive  mitigation measures were put in place” or how this case exemplifies  that all member agencies participate in the Committee’s decision- making process.  9.  We agree that the decision to undertake an investigation demands  careful deliberation on the part of all Committee members. However,  in two cases we reviewed, documentation shows that in determining  whether to initiate an investigation, Treasury, as Committee Chair,  applies essentially the same criteria that the Exon-Florio amendment  directs the President to use to decide whether to take action to  suspend or prohibit a transaction. While Treasury states that an  investigation is entirely appropriate if national security issues remain  unresolved at the end of the 30-day review period, we found that rather  than initiating an investigation, the Committee commonly allows  companies to withdraw their notifications and refile at a later date to  provide more time for review. Our report has not cited cases where a  Committee decision not to investigate was the result of the application  of an overly strict standard for deciding whether to investigate because  where we noted the application of this standard, the companies  withdrew their notice.
Further, by applying the Presidential decision-making criteria at the  conclusion of the 30-day review, the Committee effectively preempts  the President’s opportunity to make a determination. In a 2004 case,  documentation from a policy-level meeting shows that the  appropriateness of applying these criteria in Committee deliberations  was debated; the debate was not resolved at the time, and officials  from two separate agencies told us that the debate continues. The  implementing regulations for Exon-Florio make no distinction  between the activities the Committee undertakes during the review  and investigation periods—other than preparing a report to the  President at the end of an investigation—and provide no criteria for  determining when to initiate investigation. It is, in part, for this reason  that we are proposing that the entire 75-day period be available for  analyzing cases, if needed. Eliminating the distinction between the  review and investigation periods would help ensure that sufficient time  is available for thorough analyses of cases and that the presidential  decision-making criteria are only applied by the President.   10.  Guidelines requiring that certain actions be taken do not provide  evidence that such actions were indeed taken. For example, in one  2004 case we reviewed, after a policy-level decision to initiate an  investigation was made, some Committee member agencies, including  the Chair, placed calls to corporate counsel informing them of the  pending investigation and advising that their clients withdraw their  notices. Because the companies withdrew, an investigation was never  initiated.  11.  As stated in our report, we understand that the purpose of the 23-day  rule is to enable the Committee to meet its obligations under Exon- Florio’s statutory time limits for 30-day reviews. For the majority of  cases where national security concerns either do not exist or agency  members agree that concerns are addressed by other laws, the 23-day  rule may help facilitate the closure of cases before the expiration of  the 30-day review period. However, in complex cases—cases in which  national security concerns have been raised and for which Exon-Florio  is the relevant statute—case documentation we reviewed revealed the  significant pressures some agencies face to complete analysis within  23 days. In five cases that we reviewed, letters from the companies  requesting withdrawal and/or letters from Treasury, as Committee  Chair, approving the requests to withdraw cited the need for more  review time on the part of the government as the reason for the  withdrawal. In one such case, an electronic message we reviewed cited  the Committee’s workload on another high profile case as the reason  that the Committee sought to have a notice withdrawn. In that case,  the transaction had already been completed and the company had  requested withdrawal on day 23, before agencies completed their  analysis to determine whether to request an investigation. Because the  company never refiled a notice, the national security concerns  identified by two member agencies have not been further examined.  Further, it should be noted that in its comments, the Department of  Justice said that any additional time that could be made available to  collect and analyze information needed to conduct a thorough and  comprehensive national security assessment would be helpful.  12.  We have acknowledged the use of mitigation agreements in our  current report as a major tool used by the Committee. In fact, we point  out that the more recent mitigation agreements have addressed several  of the problems with such agreements that we noted in our 2002  report. However, strengthening or increasing the number of mitigation  agreements does not ensure that all national security concerns raised  by member agencies are sufficiently examined. Further, the particular  passage cited by the Under Secretary is not disputing that mitigation  agreements are often negotiated but rather is pointing out that there is  not agreement on when these mitigation agreements are needed. As we  reported, agencies that apply the more traditional definition of what  constitutes a threat to national security have resisted using Exon- Florio to mitigate or address the concerns raised by other Committee  members.  13.  We have revised our report to reflect that the Departments of Defense,  Commerce, and Justice significantly rely on DHS to monitor  companies’ compliance with the agreements.  14.  We did not mean to imply that Justice does not have the authority to  undertake enforcement actions and have clarified that in the report.   15.  We agree that the Federal Bureau of Investigation and other Justice  Department components have been and continue to be a very active  and critical participant in the Committee’s process. We also  acknowledge there are other Committee agency components that are  also critical to the process such as the Bureau of Industry and Security  in the Department of Commerce; the Office of the Under Secretary of  Defense for Acquisition, Technology and Logistics–Industrial Policy,  and the Central Intelligence Agency. Committee member agencies use  many internal resources as part of their process.   16.  A remedy is defined as a legal means of preventing or redressing a  wrong or enforcing a right. A Defense official confirmed that the  provision in question that was deleted from the agreement stated that  if the company (1) fails to comply with the terms of the agreement,  (2) makes a materially false statement, (3) increases foreign entity  control, or (4) makes other material changes in circumstances, the  Attorney General, the Secretary of Defense or the Secretary of  Homeland Security may raise concerns to the Committee or the  President. Without having this provision, it is unclear what remedy will  be available to the Committee and its member agencies to enforce this  mitigation agreement.   17.  Despite what is stated in the guidelines, in practice the Committee has  allowed companies or parties to withdraw their notices to provide  member agencies additional time to complete their analyses or to  negotiate mitigation measures. Documentation from Committee files  shows that 12 of the 20 withdrawals we identified that have been  granted since 1997 to companies that intended to continue the  acquisition were granted to allow member agencies to either negotiate  mitigation agreements, continue obtaining information from the  companies, or otherwise continue analyses.   18.  Of the 26 letters granting withdrawal that we reviewed, only three  explicitly stated conditions for the withdrawal: in two cases, the  companies were abandoning the transaction; in the third, the company  agreed to divest its U.S. acquisition.  19.  We recognize that the President retains the authority to take action if  the Committee’s review is not completed. However, our review of case  files does not support the Under Secretary’s assertion that Treasury, as  Chair, tracked developments on the withdrawn cases that were  notified after the transactions were closed. Further, it is unclear how  Treasury could conclude that refiling is unnecessary in these cases,  given that the withdrawals were granted to provide additional time to  resolve specific concerns raised by other agencies. For example, in  one case, a Treasury official told us that she was unaware that the  Department of Defense had concerns. By not having the companies  refile, Defense’s concerns were not fully vetted. In another case, a  Defense official provided documentation indicating that the Defense  Department’s position remained that conditions should be imposed on  the transaction. In our view, refiling serves two purposes: (1) it  provides assurances to the companies that action will not be taken at a  future date and (2) it permits Committee member agencies to ensure  that no national security concern was overlooked.  20.  The documentation we reviewed clearly showed that Treasury and  Defense have different views of what constitutes a threat to national  security. For example, in one case, Treasury officials wrote three  separate memos stating that in Treasury’s view, Defense and  Commerce Department concerns about (a) foreign ownership of  sensitive but unclassified technology used in reconnaissance satellites,  (b) the possibility of this sensitive technology being transferred to  countries of concern, and (c) maintaining U.S. government access to  the technology were not national security concerns.  21.  We agree that vulnerabilities can result from a variety of things not  addressed by Exon-Florio. We merely provided examples of the kinds  of vulnerabilities that may result from foreign control. We were not  addressing the universe of vulnerabilities, only some of those  addressed by Exon-Florio, the subject of our report.  22.  We agree that Exon-Florio provides broad latitude for the Committee  to consider whether foreign acquisitions constitute a threat to national  security. Our concern is how Exon-Florio is being implemented. Given  the internal disagreement among Committee members and the lack of  transparency as to how disagreements are resolved, we believe that  additional guidance from the Congress would be beneficial.  23.  We recognize that, in most instances, 30 days is sufficient to conclude  reviews. If Exon-Florio were amended, then we expect that the  Committee could manage the process so that the vast majority of cases  would continue to be completed within 30 days. However, Exon-Florio  is to be used when other laws are inadequate—in short, to act as a  safety net. The ability to complete “a vast majority” of reviews in 30  days is not relevant to Exon-Florio’s importance as a safety net.  Moreover, as we point out in our report, some agency officials have  stated that 30 days is insufficient in complex reviews. The Justice  Department, in its official comments, stated that any potential  extension of the time available to the participants for the collection  and analysis of information from the intelligence community would be  helpful (see page 2 of Justice Department comments in app. II).
Treasury officials have pointed out that being the subject of an  investigation may have negative connotations for a company, and that  the Committee tries to avoid initiating investigations. By eliminating  the distinction between investigations and reviews, this negative  connotation and the potential impact on investment would no longer  exist.
The Under Secretary expressed concern that extending the time  frames would deter filings but did not explain the basis for his  concern. However, the Committee need not rely solely on voluntary  filings. The implementing regulations state that “any member of the  Committee may submit an agency notice of a proposed or completed  acquisition to the Committee through its staff chairman if that member  has reason to believe, based on facts then available, that the  acquisition is subject to section 721 and may have adverse impacts on  the national security. In the event of agency notice, the Committee will  promptly furnish the parties to the acquisition with written advice of  such notice.”   24.  The Congress has made numerous efforts to conduct oversight of the  Committee’s activities—first in the original Exon-Florio legislation by  requiring a report when the President prohibited an acquisition, and  again in 1992 by passing the Byrd Amendment to require a report when  the President makes any decision regarding a foreign acquisition. In  addition, in requesting our review, the Senate Banking Committee  cited the “opaque nature” of the Exon-Florio process as a reason for its  request, which suggests that the Committee on Foreign Investment in  the United States has not been successful in keeping the Congress  adequately informed. We agree that the confidentiality afforded to the  companies under Exon-Florio should not be compromised. However,  subsection (c) of the statute provides that the confidentiality  provisions “shall not be construed to prevent disclosure to either  house of Congress or to any duly authorized committee or  subcommittee of the Congress.”  Therefore, we stand by our  suggestion that the Congress may wish to revisit the congressional  reporting requirement.  25.  As we stated in our 2002 report, the regulations should not call for  negotiating interim measures, but rather for the Committee to use its  authority to impose them as a condition of withdrawal where the  transaction has been completed or will be completed during the  withdrawal period. Further, as we state in our report, “the Committee’s  guidance to member agencies specifically states that Treasury will  manage activities during withdrawal by specifying time frames and  goals to be achieved.” Because Treasury has declined to implement our  recommendation, we are including our recommendation as a matter  that Congress may wish to consider.
section_title: Appendix II: Comments from the Department of Justice
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Thomas J. Denomme, Assistant  Director, Allison Bawden, Gregory K. Harmon, Paula J. Haurilesko, Karen  Sloan, John Van Schaik and Michael Zola made key contributions to this  report.
section_title: Related GAO Products
paragraphs: Defense Trade: Mitigating National Security Concerns under Exon- Florio Could Be Improved. GAO-02-736. Washington, D.C.: September 12,  2002.
Defense Trade: Identifying Foreign Acquisitions Affecting National  Security Can Be Improved. GAO/NSIAD-00-144. Washington, D.C.: June  29, 2000.
Foreign Investment: Implementation of Exon-Florio and Related  Amendments. GAO/NSIAD-96-12. Washington, D.C.: December 21, 1995.
Foreign Investment: Foreign Laws and Policies Addressing National  Security Concerns. GAO/NSIAD-96-61. Washington, D.C.: April 2, 1996.