GAO Releases Second Report on Foreign Investment Into U.S.
Inbound investments into the United States by sovereign wealth funds (SWF’s) were the subject of a second report issued last month by the Government Accountability Office (GAO). Last September GAO released a report describing data that was available on the size and investments of SWF’s in the United States. Both reports responded to questions that members of the Senate Committee on Banking, Housing and Urban Affairs had raised about the increasing investment activities of SWF's. The May report examines U.S. laws that specifically affect foreign investment and the processes that U.S. agencies use to enforce these laws. The report found that no laws targeted only SWF’s. It’s a important resource for any advisor or principal looking for a survey of the regulation of foreign investment.
The Harvard Law School Forum on Corporate Governance and Financial Regulation contains a good summary of the report, authored by Jeff Trinklein, in particular that part of the report that catalogues the applicable laws:
Before proposing a transaction involving a U.S. asset, the GAO suggests that foreign investors should be aware of four different areas of focus.
1. CFIUS Review. The Foreign Investment and National Security Act of 2007, an amendment of the Defense Production Act of 1950, provides that any foreign acquisition, merger, or takeover of a U.S. business is subject to a review by the Committee on Foreign Investment in the United States (CFIUS), if the proposed transaction could potentially impair U.S. national security interests. The review is intended to determine if the proposed investment presents serious national security concerns, and if so, CFIUS can enter into an agreement that will impose conditions in order to mitigate those concerns. Following the review, the President is authorized to suspend or prohibit the transaction if there is credible evidence of a national security threat. Furthermore, due to recent changes in CFIUS rules, the normal 30 day review period is extended by an additional 45 days if state-owned entities are deemed to have a controlling interest in a transaction.
2. Emergency Powers. The International Emergency Economic Powers Act gives the President the authority to prohibit certain transactions if the transaction is seen as a threat to national security, foreign policy, or the economy of the United States.
3. Political Risk. General political risk may threaten a proposed investment. For example, the Dubai Ports World investment in U.S. port facilities was first approved by CFIUS but ultimately was abandoned due to the intense political controversy it provoked on Capitol Hill.
4. Public Disclosure. Any company that does business in the United States is subject to general reporting requirements including, but not limited to, confidential disclosure requirements for foreign-owned companies.
The report concludes that staff at certain agencies do not routinely review information from other governmental agencies or private sources to supplement the information that they use to enforce their own rules. GAO reached this conclusion after detailing the various and differing approaches to enforcement that six agencies follow.
Reading between the lines, there may be a suggestion for a more uniform approach across federal agencies to foreign investment by SWF’s or perhaps even regulation centralized within a single agency. There's no indication of whether there will be a third report and, if so, whether with wil address itself to the question of whether inter-agency uniformity or centralization would assist foreign investors who may be deterred by the current mutli-facted process.
