The CFIUS review process serves both to protect national security and to minimize any potential adverse effect of the Exon-Florio legislation on foreign investment in the United States. Investments Not Reported to CFIUS

The Exon-Florio legislation and implementing regulations do not define which investments are important to review for national security reasons. Decisions on Foreign Government Control

The 1992 legislation required mandatory investigations of CFIUS cases in which the foreign company proposing an investment is controlled by a foreign government and the transaction could result in foreign control that “could affect the national security.” As a result, CFIUS also reviews cases for foreign government control. Of the 174 cases reviewed between October 1992 and December 1994, CFIUS found foreign government control in 18 cases. CFIUS found the national security concerns in these cases were not sufficient to warrant investigations. CFIUS found that there was foreign control because the acquiring company was German-owned and planned to purchase substantially all the assets of the U.S. company. A British company notified CFIUS of its intention to acquire 20 percent of a U.S. company. However, officials from other CFIUS agencies stated that they look to DOD to make key judgments regarding the national security risks of a transaction. DOD Determinations of Defense-Critical Technologies for Risk of Diversion Assessments

As required by the 1992 legislation, DOD agencies, including defense intelligence entities, assess the risk of diversion when the Secretary of Defense determines that a proposed merger, acquisition, or takeover may involve a firm engaged in the development of a defense-critical technology or is otherwise important to the defense industrial and technology base. The Office of the Assistant Secretary of Defense for Economic Security found that 9 of the 174 CFIUS cases reviewed between October 1992 and December 1994 required a risk of diversion assessment. The Department of the Treasury discussed the voluntary nature of CFIUS notification and said it will remind agencies to bring to CFIUS’s attention transactions in high-technology industries that have not been notified to CFIUS. Specifically, we focused on (1) the extent foreign investments are reported to the Committee on Foreign Investment in the United States (CFIUS) and the characteristics of these investments and (2) the factors CFIUS considers in making decisions on whether the foreign investment would result in foreign companies’ control of U.S. companies, whether the acquiring foreign company is controlled by a foreign government, and whether there are associated national security risks. The ESI database tracks foreign investments in and acquisitions of U.S. companies involved in high, key, or critical technologies.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined the Committee on Foreign Investment in the United States' (CFIUS) implementation of the Exon-Florio legislation and related amendments, focusing on: (1) the characteristics of foreign investments in the United States and the extent to which they are reported to CFIUS; (2) the factors CFIUS considers in determining whether a foreign investment results in foreign control of a U.S. company; and (3) whether foreign control of U.S. companies threatens U.S. national security.

What GAO Found

GAO found that: (1) about two-thirds of the cases notified to CFIUS between October 1988 and May 1994 involved defense-related and high-technology industries that raised possible national security concerns; (2) many companies voluntarily notified CFIUS of proposed investments in and acquisitions of U.S. companies, but, according to two private-sector databases, many others did not; (3) the CFIUS process was not intended to provide a comprehensive screening mechanism for all foreign investment although CFIUS officials expressed the view that, because CFIUS clearance essentially eliminates the risk of a forced divestiture, most transactions affecting national security are reported; (4) in deciding whether a foreign investment will result in a foreign company gaining control of a U.S. company, CFIUS considers many factors related to the investor's ability to affect key company decisions; (5) when deciding on foreign government control, CFIUS examines the extent to which a foreign government owns and controls the acquiring company; (6) of the 174 transactions filed between the 1992 legislation and December 1994, CFIUS decided there was foreign government control in 18 cases; (7) none of these cases were investigated since CFIUS decided the national security concerns were not sufficient to warrant further investigation; (8) the Exon-Florio legislation does not provide a precise definition of national security, and neither the statute nor the implementing regulations contain guidelines for weighing the various factors considered in examining the national security risks of a transaction; (9) as a result, CFIUS agencies have significant flexibility in making such judgments; (10) CFIUS members noted that they rely primarily on the Department of Defense's (DOD) assessment of national security risks; (11) the 1992 legislation requires DOD to direct appropriate defense intelligence and other agencies to assess the risks of diversion when DOD decides that a CFIUS case involves a company engaged in the development of defense-critical technology or is otherwise important to the defense industrial or technology base; and (12) of the 174 cases reviewed between October 1992 and December 1994, the Office of the Assistant Secretary of Defense for Economic Security found that 9 cases required a risk of diversion assessment.