A closer look: How CFIUS really works

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No sooner had the New Year been pronounced in Times Square than a pronouncement of a different sort was coming out of Washington: the high profile $1.2 billion purchase of MoneyGram by China’s Ant Financial had officially been stymied by the Committee on Foreign Investment in the U.S. (CFIUS) – after three chances at bat. MoneyGram, a Texas-based money transfer company, had been in talks with Ant Financial, one of China’s premier fintech giants and innovators, for some time. Each company had expressed a desire to see the deal go through, with Ant Financial particularly keen to use MoneyGram as a platform to expand its online payment services globally. 

For critics, though, the devil was in the details, and the details of this deal centered on data security. Criticism of the deal focused on the national security concerns of cross-border ownership of U.S citizens’ financial

transaction data. For Ant’s part, the company maintained that all such sensitive data would be stored in mainland U.S. servers, to allay the concerns above. Nonetheless, the mix of national security and economic security concerns were too great for CFIUS members, and the deal was blocked. 

 

The defeat of the transaction dominated headlines and brought CFIUS to the fore of discussions about U.S.-China bilateral investment. Often missing, however, was a discussion of CFIUS’s origins and development. What follows is your CFIUS primer: the who, what, why, how, when, and where of an influential arbiter of foreign investment. 

 

CFIUS is an interagency body within the Department of the Treasury composed of nine heads of various departments and offices, including the Department(s) of Homeland Security, Defense, Energy and the Office of Science and Technology Policy. The Secretary of the Treasury serves as chairman, and an executive order from President George W. Bush in 2008 granted contingent observation and participation to an additional five offices. 

 

The essential function of the committee is to review, and potentially amend or prohibit foreign investments that impair national security or related critical infrastructure. CFIUS conducts the review process after a voluntary submission from the applicants, or by its own initiative, after which it makes a formal recommendation. A more complete description of the review process is provided in the infographic to the left.

 

To understand CFIUS, it helps to appreciate the fluidity of the committee’s development. This development continues today, but here are two pivotal points in its history:

  • The Exon-Florio provision, an amendment to the Defense Production Act passed in 1988, clarified the criteria which allow the President to block a transaction and, more crucially, was the first major discussion over what fell under “national security”. The end result was greater clarity about what CFIUS and the President could and could not do, cementing its status as a precision tool, not a blunt weapon, for reviewing foreign investment. 
  • The 2007 Foreign Investment and National Security Act (FINSA) passed during President Bush’s Administration included the terms “critical industries/infrastructure” and “homeland security” under the umbrella of CFIUS’s national security mandate. FINSA defined “critical industries” as sectors of the economy that were part of the nation’s “critical infrastructure,” to include energy, financial services, and telecommunications. Likewise, the use of the term “homeland security” in FINSA meant that CFUIS’s mandate now expanded alongside the Department of Homeland Security’s definition of “critical infrastructure”. The result is that, following an adjustment in 2013, there are now 16 sectors classified as “critical infrastructure”, and thus under CFIUS’s purview. 

A decade later, we are in another period of discussion over CFIUS’s jurisdiction, this time with U.S.-China investment relations taking center stage. Since the 2008 recession, Chinese investment in the U.S. has risen considerably, and CFIUS has taken note; data from 2013-15 (latest available) show that China had 74 transactions reviewed during that time, 25 more than the second-most reviewed investor nation. Notably, in the past few weeks, two China deals have been approved including one in the sensitive field of semiconductors. 

 

Some concerns, like the fear of foreign State Owned Enterprises (SOEs) holding decision-making power in U.S. businesses, dating back to the earliest days of CFIUS. What has changed the tenor of the conversation more recently is the incredible rate of technological development achieved by Chinese fintech, security, and digital services companies. The rapid growth of firms like Alibaba, Tencent, and Huawei has created an unfamiliar regulatory territory of data ownership, privacy, and access concerns. 

 

This brings us to the most consequential CFIUS story at the moment, and it’s not the Ant/MoneyGram deal. Hearings in the House and Senate recently concluded for a bill introduced by Sen. John Cornyn (R-TX), the Foreign Investment Risk Review Modernization Act (FIRRMA), which would expand CFIUS’s jurisdiction and the breadth of its review process. If enacted, according to a November 8, 2017 press release from Senator Cornyn's office, the key changes would be to: 

  • "Expand the CFIUS jurisdiction to include certain joint ventures, minority position investments, and real estate transactions near military bases or other sensitive national security facilities.
  • Update the Committee’s definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats, such as China.
  • Allow foreign investors to submit “light filings” to CFIUS for certain types of transactions.
  • Add new national security factors for CFIUS to consider in its analyses.
  • Authorizes CFIUS to exempt certain otherwise covered transactions if all foreign investors are from a country that meets certain criteria, such as being a U.S. treaty ally and having a mutual investment security arrangement." 

Despite these assertive measures, FIRRMA would not expand CFIUS’s jurisdiction beyond terms of national security to a broader evaluation of net economic impact, which had been raised as a potential option in early Congressional deliberations. Additionally, foreign investors would be exempt from otherwise covered deals if all investors are from countries that meet certain criteria, such as being engaged in mutual security arrangements. Greenfield investments will still not be required to undergo a CFIUS review as well.

 

FIRRMA has bi-partisan support in its current form. Initial hearings to gather information on the bill’s proposed measures concluded January 25, with representatives from the Departments of Commerce, Defense, and Treasury all voicing their support of the bill to members of the Senate Banking, Housing, and Urban Affairs Committee. In each hearing the tone was one of cautious resolve. There was consensus on the need for CFIUS to be better funded and resourced, regardless of FIRRMA’s passage, and the importance of CFIUS complementing—not duplicating—export controls. Where there was disagreement, it centered on disincentivizing otherwise harmless foreign investment, harming U.S. competitiveness abroad, and specific language that needed to be further clarified. 

 

For now, it’s still too early for prognostications about the long-term impact of either the bill or of the Ant/MoneyGram deal, despite Chinese government comments that this action was politically motivated. It was clear from the comments of lawmakers at the hearings on FIRRMA however, that, regardless of FIRRMA’s fate, there is renewed support across party lines for CFIUS's underlying mandate. With CFIUS’s annual caseload continuing to rise, expect 2018 to provide additional authority to the influential review committee.  

Click here to read our Quick Take on CFIUS and FIRRMA.

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