	Background

The Exon-Florio amendment to the Defense Production Act, enacted in  1988, 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 the investigative authority to the Committee on Foreign  Investment in the United States, an interagency group established in 1975  to monitor and coordinate U.S. policy on foreign investment in the United  States. The law and regulations establish a  four-step process for reviewing foreign acquisitions of U.S. companies:  (1) voluntary notice by the companies; (2) a 30-day review to determine  whether the acquisition could pose a threat to national security; (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. Differing Views of What Defines A National Security Threat and When to Initiate an Investigation May Weaken Exon-Florio’s Effectiveness

Lack of agreement among Committee members on what defines a threat to  national security and what criteria should be used to initiate an  investigation may be limiting the Committee’s analyses of proposed and  completed foreign acquisitions. If a review cannot be completed within 30 days and more time is needed to  determine whether a problem exists or identify actions that would mitigate  concerns, the Committee can initiate a 45-day investigation of the  acquisition or allow companies to withdraw their notifications and refile at  a later date. According to Treasury officials, the Committee’s interest is  to ensure that the implementation of Exon-Florio does not undermine U.S.  open investment policy. Between 1997 and 2004,  companies involved in 18 acquisitions have withdrawn their notification  and refiled 19 times. In each case, the company has yet to refile. Lack of Reporting Contributes to the Opaqueness of the Committee’s Process

In enacting Exon-Florio, the Congress, while recognizing the need for  confidentiality, indicated a desire for insight into the process by requiring  the President to report to the Congress on any transaction that the  President prohibited. Since 1997, only two cases— both involving telecommunications systems—resulted in a presidential  decision and a subsequent report to the Congress. While Exon-Florio provides the Committee  on Foreign Investment in the United States the latitude to address new  emerging threats, the more traditional interpretation of what constitutes a  threat to national security fails to fully consider the factors currently  embodied in the law. Further, we are suggesting that, when  withdrawal is allowed for a transaction that has been completed, the  Committee establish interim protections where specific concerns have  been raised, specific time frames for refiling, and a process for tracking  any actions being taken during a withdrawal period.
Why GAO Did This Study

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 (Committee)--an interagency committee established in 1975 to monitor and coordinate U.S. policy on foreign investments. In September 2002, GAO reported on weaknesses in the Committee's implementation of Exon-Florio. This review further examined the Committee's implementation of Exon-Florio.

What GAO Found

Several aspects of the process for implementing Exon-Florio could be enhanced thereby strengthening the law's effectiveness. First, in light of differing views among Committee members about the scope of Exon-Florio--specifically, what defines a threat to national security, we have suggested that Congress should consider amending Exon-Florio to more clearly emphasize the factors that should be considered in determining potential harm to national security. Second, to provide additional time for analyzing transactions when necessary, while avoiding the perceived negative connotation of investigation on foreign investment in the United States we have suggested that the Congress eliminate the distinction between the 30-day review and the 45-day investigation and make the entire 75-day period available for review. Third, the Committee's current approach to provide additional time for analysis or to resolve concerns while avoiding the potential negative impacts of an investigation on foreign investment in the United Stated is to encourage companies to withdraw their notifications of proposed or completed acquisitions and refile them at a later date. Since 1997, companies involved in 18 acquisitions have been allowed to withdraw their notification to refile at a later time. The new filing is considered a new case and restarts the 30-day clock. While withdrawing and refiling provides additional time while minimizing the risk of chilling foreign investment, withdrawal may also heighten the risk to national security in transactions where there are concerns and the acquisition has been completed or is likely to be completed during the withdrawal period. We are therefore suggesting that the Congress consider requiring the Committee Chair to (1) establish interim protections where specific concerns have been raised, (2) specify time frames for refiling, and (3) establish a process for tracking any actions being taken during the withdrawal period. Finally, to provide more transparency and facilitate congressional oversight, we are suggesting that the Congress may want to revisit the criterion for reporting circumstances surrounding cases to the Congress. Currently, the criterion is a presidential decision. However, there have only been two such decisions since 1997 and thus only two reports to Congress.