CFIUS and China
- Chinese companies increasingly invest in the United States and perpetrate a variety of intellectual property crimes. This has led to an inevitable increase in federal government scrutiny in these foreign transactions.
- U.S. authorities warn U.S. businesses that Chinese entities are aggressively and actively targeting all industry sectors, especially those in emerging and critical technologies.
- A key part of the FIRRMA legislative reform was to broaden the jurisdiction of CFIUS to scrutinize foreign investments involving Chinese entities or entities controlled by China. CFIUS involvement has therefore become mainstream for investigating Chinese investments in order to protect the national security interests of the United States.
- Further, the Department of the Treasury final regulations released in January 2020 vest CFIUS with enhanced investigative authority concerning foreign investments regarding China and Chinese-controlled entities.
- Consider hiring an attorney who is knowledgeable about these legislative reforms and can advise you on how these changes affect your company.
CFIUS and National Security Defense Team
If you need advice regarding Chinese investment or how CFIUS reviews foreign investments, do not hesitate to contact one of our defense attorneys.
Today’s threats to U.S. national and economic security have increased due to the sophistication of technology. Chinese IP theft and cybersecurity threats represented a significant impetus for the enhanced legislative reforms in FIRRMA.
China has repeatedly and publicly demonstrated its intent to surpass the development and technology of the United States. Additionally, China has a track record of stealing the intelligence of the United States.
This could impact your business and result in significant losses. Further, if your business regularly conducts business with China or engages in Chinese-backed investments, an increased CFIUS review is likely, especially considering the new final regulations giving CFIUS enhanced jurisdiction and authority.
If you are concerned about potential risks or regulatory changes, get in touch with a qualified CFIUS attorney today.
Put Oberheiden, P.C. on your side to advise you on these legal issues and implications.
Introduction to FIRRMA and CFIUS
On August 13, 2018, President Trump signed into law the NDAA 2019, which incorporated the Foreign Investment Risk Review Modernization Act (“FIRRMA”).
FIRRMA reformed the process used to investigate foreign direct investment into U.S. businesses by enhancing the authority of the Committee on Foreign Investment in the United States (“CFIUS”) to review covered transactions and respond to national security issues such as those presented by Chinese-backed investments.
Chinese Investment in the United States
Within the past several years, Chinese companies have been increasingly willing and eager to invest in the United States. This has been accomplished by acquiring U.S. businesses or purchasing a substantial amount of U.S. assets to give Chinese companies control over U.S. businesses.
This active involvement of China in the United States has led to an inevitable increase in federal scrutiny in these foreign transactions. For instance, Chinese investors have had several pending foreign transactions blocked by three U.S. presidents.
This has also led to several violations of U.S. intellectual property laws and has necessitated an increased level of government involvement in Chinese investment.
The increased federal involvement does not mean that there is an absolute bar to Chinese investment in the United States; however, it is a significant impediment.
Trade Tensions: United States vs. China
The United States and China continue to battle a trade war with China with tensions rising. China and Chinese-controlled companies have repeatedly demonstrated their intent to dominate certain U.S. industries such as the technological sectors.
President Xi of China announced his strategy to make Chinese-backed investments for military and industrial uses, which has sparked the attention of the United States.
U.S. authorities increasingly warn U.S. businesses that Chinese entities are targeting all industry sectors, especially those in emerging and critical technologies.
This is especially true considering the economic uncertainty created by the coronavirus pandemic. The public has a fiercely negative view of trade with China and, consequently, an increased federal review of foreign investment involving Chinese companies is expected and encouraged.
Thus, federal government involvement has become mainstream regarding these Chinese investments.
Concerns over Chinese Investment
Many policymakers in the United States have expressed concerns over Chinese investment in the United States being used as a tool to commit economic espionage by the Chinese government.
These concerns are valid, as China has consistently been charged with violating U.S. privacy and intellectual property laws.
In fact, China has exhibited more aggressive and comprehensive strategies to acquire U.S. technology and U.S. intellectual property both legally and illegally such as the situation involving the alleged intellectual property theft by Huawei Technologies—a Chinese-controlled entity.
China has also taken its plans public. In 2015, China announced its “Made in China 2025” plan that is designed to supersede and surpass the United States in terms of manufacturing, technology, and development.
CFIUS has therefore taken up the responsibility of scrutinizing Chinese transactions more extensively for potential threats to the national security of the United States.
Foreign Investments by Chinese Companies and CFIUS Review
A key part of the FIRRMA reform was to enable CFIUS to scrutinize foreign investments involving Chinese entities or entities significantly controlled by China.
The resulting decisions by CFIUS have been mixed: some foreign investments involving Chinese entities have been approved while others have not.
CFIUS has been more likely to approve a foreign investment where the parties are willing adopt mitigation measures that specifically address the identified national security threats.
Sometimes, mitigation is not enough. CFIUS has been and continues to be wary of transactions that involve one or more of the following risk factors:
- Chinese acquisition of U.S. businesses that are in close proximity to U.S. government facilities or communications infrastructure
- Substantial investment in the assets of U.S. companies that give Chinese entities a controlling interest
- Chinese investments that are deeply intertwined in U.S. emerging technological sectors
- Chinese investment that is deemed to threaten U.S. cybersecurity
- Investments by Chinese entities that have a high likelihood of data theft or the transfer of sensitive personal or business information
CFIUS New Final Regulations and the Impact on Chinese Investment
In January 2020, the Treasury Department released final regulations that would guide and enforce the authority of CFIUS under FIRRMA to scrutinize foreign investments made in U.S. businesses—especially those concerning China and Chinese-controlled entities.
These regulations drastically broaden the jurisdiction of CFIUS and vest it with the authority to review certain “covered” transactions or investments that had previously been outside the purview of CFIUS.
Briefly, the new regulations allow CFIUS to investigate and even to block certain foreign investments in the United States that pose a threat or have a potential harmful impact on U.S. national security.
In other words, while the terms of the regulations apply to any investment, CFIUS efforts are aimed at preventing excess or questionable Chinese investment in U.S. assets and technology industries.
For instance, the United States has already taken significant steps to block or prohibit government business with the telecommunications giant, Huawei Technologies.
What U.S. Businesses Need to Know
In January 2020, Fortune observed five considerations that U.S. businesses need to be aware of regarding CFIUS’s regulations and the implications of Chinese investment in the United States.
- Businesses that regularly deal with foreign investment or who are thinking about foreign direct investment should become familiar with how and to what extent the new CFIUS regulations affect their business. This is especially important for businesses in the technological sector—critical technology, critical infrastructure, or sensitive personal data—that are heavily scrutinized by CFIUS.
- If the business accepts investments from countries such as China, they can expect an increased degree of CFIUS investigation and scrutiny. This is because China has a track record of stealing personal data from U.S. businesses and violating various U.S. intellectual property laws. Transactions that are linked to the Chinese government are less likely to be approved, especially if they concern technological industries.
- The potential penalties from having the proposed or pending transaction blocked can be significant and extend beyond monetary harm. For instance, in 2019, the U.S. government declared Grindr—acquired for $245 million by Kulun Tech of China—a national security risk and forced the Chinese company to sell Grindr by June 2020.
- U.S. businesses can expect more mitigation measures or mitigation agreements if they have any hope of having their proposed foreign investment approved by CFIUS. Mitigation involves taking steps to protect sensitive information from foreign parties or employing third party companies to monitor and assess compliance. This, however, does not guarantee that the transaction will be approved. For instance, $1.2 MoneyGram sale to China’s Ant Financial failed because CFIUS rejected the parties’ proposals to mitigate due to high concerns over the safety and confidentiality of U.S. data.
- Companies must utilize a strong internal compliance process, especially in the wake of the final CFIUS regulations. Failure to do so could not only result in CFIUS scrutiny for the proposed transaction but could also negatively impact the company’s stock price and reputation. Further, CFIUS may lose confidence in that particular company regarding its reporting of foreign investment transactions in the future. This could affect potential mitigation steps and the approval needed from CFIUS.
Need National Security Advice Regarding CFIUS and China?
We understand that it is difficult to imagine that Chinese investment in your company could pose threats to your company’s trade secrets and intellectual property. But these circumstances are increasingly becoming a reality, therefore prompting massive legislative reform via FIRRMA.
The enhanced jurisdiction and authority vested with CFIUS allows it to more intensely scrutinize foreign direct investment in U.S. companies. Failure to comply and cooperate with CFIUS could expose your company to serious consequences, including reputational harm. It could also result in mandated controls or mitigation plans for your company.
It is similarly hard to stay abreast of all these regulatory changes and legal implications. If you have any concerns or questions regarding CFIUS and Chinese-related investments that may pose threats to national security, contact our law firm today.
The attorneys at Oberheiden, P.C. have the experience and knowledge needed to advise you on these evolving new regulations and how it could affect your business.
Call us at 888-680-1745 or contact our office for a free consultation.