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

Letter

Background

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).

SWFs Have Been Formed in Many Countries, but Recently Some Have Experienced Asset Value Declines

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).

U.S. Federal Laws Do Not Address SWF Investments Specifically, but Restrict Foreign Investments in the United States in Some Sectors

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.

The United States Is Generally Open to Foreign Investment

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.

No Laws Specifically Target Sovereign Wealth Funds, but Some U.S. Sectors Have Laws That Specifically Apply to Foreign Investors

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.

No Federal Laws Completely Prohibit Foreign Investment in a Sector, but Limits and Additional Requirements Placed on Foreign Investors Exist for Some Sectors

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.

Federal Laws Affecting Foreign Investment Were Generally Enacted to Protect National Security and U.S. Industry

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.

State Laws Restricting Foreign Investment Largely Limit Investments in Real Estate and Insurance

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.

Agencies Described Processes Addressing Key Elements of Enforcing Laws Affecting Foreign Investment; Using Supplemental Information Could Assist Some Agencies

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.

Enforcing Laws Affecting Foreign Investment Requires Several Key Elements

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.

Each Agency Identifies Transactions Subject to Relevant Laws Largely through Licensing and Disclosure Requirements

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.

Agencies’ Processes for Identifying Foreign Ownership and Verifying Information Vary by Statute

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.

Agencies Monitor Changes in Ownership and Ensure Ongoing Compliance with Laws through Various Processes

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.

Although Agencies Report that Violations Are Rare, They Have Taken Some Enforcement Actions Concerning Violations of Laws Related to Foreign Investment

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.

Conclusions

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.

Recommendation for Executive Action

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.

Agency Comments

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Summaries of Key Federal Foreign Investment Laws

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.

Appendix III: Comments from the U.S. Department of Agriculture

Appendix IV: GAO Contacts and Staff Acknoweldgments

GAO Contacts

Acknowledgments

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.