	Background

In 1988, the Congress enacted the Exon-Florio amendment to the Defense  Production Act, which authorized the President to investigate the impact  of foreign acquisitions of U.S. companies on national security and to  suspend or prohibit acquisitions that might threaten national security. The  President delegated this investigative authority to the Committee on  Foreign Investment in the United States. The Committee is an interagency  group that was established by executive order in 1975 to monitor the  impact of and coordinate U.S. policy on foreign investment in the United  States. The Committee’s Implementation of Exon-Florio May Limit Its Effectiveness

The manner in which the Committee implements Exon-Florio may limit its  effectiveness because (1) Treasury, in its role as Chair, has narrowly  defined what constitutes a threat to national security and (2) the  Committee is reluctant to initiate a 45-day investigation because of a  perceived negative impact on foreign investment and a conflict with the  U.S. open investment policy. However, when companies  that have already completed the acquisition are allowed to withdraw, there  is a substantially longer time before they refile, and in some cases they  never do, leaving unresolved any outstanding concerns. While these vulnerabilities may not pose an  immediate threat to national security, they may create the potential for  longer-term harm to U.S. national security interests by reducing U.S.  technological leadership in defense systems. According to Treasury Department officials, the Committee reviews  foreign acquisitions with a view to protecting national security while  maintaining U.S. open investment policy, which provides for equal  treatment of foreign and domestic investors. Provisions for Monitoring Compliance Have Improved

In our 2002 report, we identified several weaknesses in the agreements  that agencies negotiated with companies under the Exon-Florio  Amendment. The Department of Homeland Security has taken the lead on monitoring  compliance for those agreements that it has signed under Exon-Florio. Exon-Florio provides the latitude for  the Committee on Foreign Investment in the United States to address  these threats. Those time constraints, together with the  Committee’s reluctance to initiate investigations, can result in the  Committee permitting companies to withdraw their notifications. In addition, in view of the need to ensure that national security is  protected during the period that withdrawal is allowed for companies that  have completed or plan to complete an acquisition prior to the Committee  completing its work, the Congress should require that the Secretary of the  Treasury, as Committee Chair, establish (1) interim protections where  specific concerns have been raised, (2) specific time frames for refiling,  and (3) a process for tracking any actions being taken during the  withdrawal period.
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--an interagency committee established in 1975 to monitor U.S. policy on foreign investments. In September 2002, GAO reported on the implementation of Exon-Florio. This report further examines that implementation.

What GAO Found

Foreign acquisitions of U.S. companies can pose a significant challenge for the U. S. government in implementing the Exon-Florio amendment because while foreign investment can provide substantial economic benefits, these benefits must be weighed against the potential for harm to national security. Exon-Florio's effectiveness in protecting U.S. national security may be limited because the Department of the Treasury--as Chair of the Committee on Foreign Investment in the United States--and others narrowly defines what constitutes a threat to national security and, along with some other member agencies, is reluctant to initiate investigations to determine whether national security concerns require a recommendation for possible presidential action. Some Committee members have argued that this narrow definition is not sufficiently flexible to protect critical infrastructure, secure defense supply, and preserve technological superiority in the defense arena. The Committee's reluctance to initiate an investigation--due in part to concerns about potential negative effects on the U.S. open investment policy--limits the time available for member agencies to analyze national security concerns. To provide additional time, while avoiding an investigation, the Committee has encouraged companies to withdraw their notification of a pending or completed acquisition and to refile at a later date. However, for companies that have completed the acquisition, there is a substantially longer time before they refile to complete the Committee's process; in some cases they never do, leaving unresolved any outstanding concerns. In our 2002 report, GAO recommended improvements in provisions to assist agencies in monitoring actions companies have agreed to take to address national security concerns. The Committee has improved provisions on monitoring compliance, and the Department of Homeland Security is actively involved in monitoring company actions.