The Committee on Foreign Investment in the United States (CFIUS) is reviewing a record number of transactions for national security risks, according to a recently released Annual Report to Congress for Calendar Year 2021.

Amid a bipartisan focus on national security threats arising from foreign direct investment, flush with resources and staff, and armed with expanded authorities following the passage of a 2018 law, the Committee has stepped up its scrutiny of transactions across the economy, with a particular focus on businesses in the finance, information and services sector and the manufacturing sector, CFIUS told Congress.

Released in public form on August 2, 2022, the Annual Report reviews the Committee’s activities for the first full year since the finalization of regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which broadened CFIUS’ mandate.

The Annual Report lands just as the White House has announced support for a bipartisan bill that would deepen substantially the US government’s role in regulating private investment by establishing as a complement to CFIUS an interagency committee to review certain outbound investments impacting supply chain security, domestic production and manufacturing capacities.

Businesses should expect heightened government scrutiny of investments by and in foreign entities in coming years.

Background

CFIUS is an interagency committee chaired by the US Department of the Treasury that reviews certain foreign investments in the United States and certain real estate transactions by foreign persons to determine their impact on US national security. With the exception of certain transactions that are subject to a mandatory filing requirement, transaction parties voluntarily submit short-form declarations or longer-form joint voluntary notices (JVNs) to CFIUS.

CFIUS reviews declarations during a 30-day assessment period, after which time it may require the parties to file a JVN. CFIUS reviews of JVNs can routinely last more than three months—a 45-day “review period” followed by a 45-day “investigation” period that the government can order. CFIUS may also review pending or completed transactions even when the parties have not filed a notice, if CFIUS believes that the transaction is subject to its jurisdiction and may raise national security concerns.

At the end of the process, CFIUS can determine that there are no unresolved national security issues, permitting the investment to proceed without incident; it can recommend to the President that the President block the transaction; or it can order that mitigation measures be undertaken by the transaction parties to protect US national security interests.

With overwhelming bipartisan support (a vote of 85–10 in the Senate and 400–2 in the House of Representatives), Congress passed FIRRMA in 2018 and substantially expanded the jurisdiction of CFIUS, including requiring mandatory filings if a transaction involved certain technologies, and provided support for a burgeoning bureaucracy to conduct those reviews.

Record-Setting Reviews in 2021

The results of these changes are apparent in CFIUS’ 2021 Annual Report, which shows explosive growth in CFIUS reviews. During 2021, CFIUS reviewed 164 declarations and 272 JVNs, the largest number of transactions ever analyzed and amounting to year-over-year jumps of 30% and 45%, respectively.

Of those 272 notices, 130 (or 48%) led to an “investigation phase,” and 74 (27%) were withdrawn during the review or investigations phase. Of the 74 withdrawn notices, the parties in 63 instances filed a new notice, either in 2021 or in 2022. In nine of these instances, the parties withdrew the notice and abandoned the transactions either after CFIUS informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns, or after the parties declined to accept CFIUS’ proposed mitigation measures. In two of these instances, the parties withdrew their notice and abandoned the transaction for commercial reasons.

CFIUS required mitigation measures to resolve national security concerns about 10% of the time (in 26 of 272 notices). CFIUS adopted mitigation measures to address residual national security concerns with respect to two notices that were voluntarily withdrawn and abandoned. There were no presidential actions taken on transactions in 2021.

CFIUS has the authority and the staff to review and investigate transactions that were not notified to the Committee and to require filings. In 2021, the Committee considered 135 transactions identified through the non-notified process and requested a filing in eight of them.

The Committee reviewed transactions involving buyers from around the world, although investors from Britain, Canada, China and Japan were among the most common recent filers. Canadian investors accounted for the most declarations filed in 2021 and the largest proportion of declarations filed from 2019 to 2021, with 14% (54 declarations). Japanese and British investors filed 11% (43 declarations) and almost 9% (33 declarations), respectively, of all filed declarations from 2019 to 2021.

Chinese investors filed the most JVNs, totaling 44 (16%) in 2021, more than doubling the 17 notices Chinese investors filed in 2020. Investors from Canada and Japan filed the second- and third-highest numbers of JVNs in 2021 (10% or 28 notices and almost 10% or 26 notices, respectively). For the three-year period from 2019 through 2021, the highest number of notices were from Japanese investors (13% or 91 notices), followed by Chinese and Canadian investors (13% or 86 notices, and 9% or 62 notices, respectively).

In 2021, similar to 2020, the greatest number of transactions occurred in the finance, information and services sector, accounting for over half of transactions (147 notices or 55% of those filed). And, as in 2020, the manufacturing sector in 2021 accounted for the second-highest number of notices filed (74 notices, or 28%).

Likewise, of the notices of covered transactions filed with CFIUS over the past decade, from 2012 through 2021, approximately three-fourths were in either the finance, information and services sector (726 notices or 40%) or the manufacturing sector (691 notices or 38%). The remainder of the notices were in the mining, utilities and construction sector (257 notices or 14%) and the wholesale trade, retail trade and transportation sector (149 notices or 8%).

The Annual Report notes that CFIUS acted with alacrity when reviewing many transactions. The Committee cleared nearly 60% of its cases (an all-time high) in either the 30-day assessment period for a declaration or the initial 45-day review period for a notice.

Rising Calls for Outbound CFIUS Screening

CFIUS’ stepped-up review of inbound foreign direct investment is occurring while Congress and the White House push for new legislation that would require US companies to notify the government before investing in certain critical sectors abroad, particularly in China.

The latest congressional effort to create what is called a “reverse CFIUS” process is led by US Senators Bob Casey (D-PA) and John Cornyn (R-TX) and Representatives Rosa DeLauro (D-CT), Bill Pascrell Jr. (D-NJ), Michael McCaul (R-TX), Brian Fitzpatrick (R-PA) and Victoria Spartz (R-IN). While their legislation, the National Critical Capabilities Defense Act of 2022, has not yet been introduced formally in Congress, a draft under discussion would establish a “National Critical Capabilities Committee (NCCC) to conduct ongoing reviews of supply chain security, domestic production and manufacturing capacities of identified National Critical Capabilities,” according to a summary of the bill, which is intended to replace an earlier bill introduced in 2021 (H.R. 6329).

The NCCC would be cochaired by the departments of Commerce and Defense and include representatives from a broad range of federal agencies. It would define “National Critical Capabilities” as systems, services and assets vital to US national security, including agricultural security, health security, homeland security, energy security, infrastructure security and natural resources security. It would deem as “National Critical Capabilities” critical services and the production of medical supplies, medicines, personal protective equipment, electrical grid materials, and articles critical to infrastructure construction after natural or manmade disasters.

The bill would require firms operating in critical industries to report outbound investments into certain foreign markets, including China. If the NCCC were to find that a transaction would result in a national security risk, it would recommend that the President take remedial action “including procurement, use of authorities to increase production, establishment of Federal programs to support production, or any other actions the Committee deems appropriate, which may include suspension of the transaction,” according to the summary.

While much remains to be clarified as this or similar legislation proceeds, the Biden Administration has already voiced support for the underlying principle. “The administration supports the bipartisan and bicameral effort in Congress to provide greater transparency on US investment into China and other countries of concern, particularly for transactions in critical sectors that could undermine America’s national security by blunting our technological edge or undermining our supply chain resilience,” National Security Adviser Jake Sullivan said in a July statement.

In sum, regulatory scrutiny of foreign investment in the United States has been increasing for several years and reached new heights in the Biden Administration’s first year. Businesses should prepare for continued scrutiny of foreign transactions for national security threats and prepare for the possible establishment of a path-breaking outbound investment review process that will significantly increase regulatory exposure.