	Background

Enacted in 1988, the Exon-Florio amendment to the Defense Production  Act authorized the President to investigate the effects of foreign  acquisitions of U.S. companies on national security and to suspend or  prohibit acquisitions that might threaten national security. 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 identify  whether there are any national security concerns; (3) a 45-day  investigation period 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   (see fig. Over the past decade, GAO has conducted several reviews of the  Committee’s process and actions and has found areas where  improvements were needed. Views Differed over What Constitutes a National Security Threat and When an Investigation Is Warranted

In 2005, we reported that a 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 have limited the Committee’s analyses  of proposed and completed foreign acquisitions. Some Committee member agencies argued for a more traditional and  narrow definition of what constitutes a threat to national security—that is,  (1) the U.S. company possesses export-controlled technologies or items;  (2) the company has classified contracts and critical technologies; or   (3) there is specific derogatory intelligence on the foreign company. Other  members, including the Departments of Defense and Justice, argued that  acquisitions should be analyzed in broader terms. Committee members also disagreed on the criteria that should be applied  to determine whether a proposed or completed acquisition should be  investigated. At the time of our  work, Treasury, as Committee Chair, applied essentially the same criteria  established in the law for the President to suspend or prohibit a  transaction, or order divestiture: (1) there is credible evidence that the  foreign controlling interest may take action to threaten national security  and (2) no laws other than Exon-Florio and the International Emergency  Economic Powers Act are adequate and appropriate to protect national  security. However, the Defense, Justice, and Homeland Security  Departments argued that applying these criteria at this point in the process  is inappropriate because the purpose of an investigation is to determine  whether or not credible evidence of a threat exists. While most reviews  are completed in the required 30 days, some Committee members have  found that completing a review within such short time frames can be  difficult—particularly in complex cases. While Exon-Florio provides the Committee on  Foreign Investment in the United States the latitude to define what  constitutes a threat to national security, the more traditional interpretation  fails to fully consider factors currently embodied in the law.
Why GAO Did This Study

The Exon-Florio amendment to the Defense Production Act of 1950, enacted in 1988, authorized the President to suspend or prohibit foreign acquisitions of U.S. companies that pose a threat to national security. The Committee on Foreign Investment in the United States--chaired by the Department of Treasury with 11 other members, including the Departments of Commerce, Defense, and Homeland Security--implements Exon-Florio through a four-step review process: (1) voluntary notice by the companies of pending or completed acquisitions; (2) a 30-day review to determine whether the acquisition could pose a threat to national security; (3) a 45-day investigation period to determine whether concerns require possible action by the President; and (4) a presidential decision to permit, suspend, or prohibit the acquisition. Over the past decade, GAO has conducted several reviews of the Committee's process and has found areas where improvements were needed. GAO's most recent work, conducted in 2005, indicated concerns remained.

What GAO Found

Exon-Florio reviews are meant to serve as a safety net when other laws may be inadequate to protect national security. GAO found that several aspects of the review process may have weakened the law's effectiveness. First, member disagreement about what defines a threat to national security may have limited the Committee's analyses. Some argued that reviews should be limited to concerns about export-controlled technologies or items, classified contracts, or specific derogatory intelligence concerning the company. Others argued for a broader scope, one that considers potential threats to U.S. critical infrastructure, defense supply, and technology superiority. Committee members also differed on the criteria that should be used to determine when an investigation is warranted. Some applied essentially the criteria in the law for a presidential decision--that is, there is credible evidence that the foreign controlling interest may take action that threatens national security and that no other laws other than the International Emergency Economic Powers Act are adequate to protect national security. Others argued that these criteria are inappropriate because the purpose of an investigation is to determine if credible evidence of a threat exists. While most cases can be completed within the 30-day review period, complex acquisitions may require more time. Concerned that an investigation could discourage foreign investment, the Committee allowed companies to withdraw notifications rather than proceed to investigation. While this practice can provide additional review time without chilling foreign investment, it 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. Finally, because few cases are investigated, few require a presidential decision, giving Congress little insight into the Committee's process.