The Evolving Risk Landscape of U.S. Foreign Investment Review

Laura Fraedrich 


February 6, 2023

Recently, there have been significant developments related to U.S. foreign investment review. Currently, the Committee on Foreign Investment in the United States (CFIUS) conducts reviews of inbound investments in U.S. businesses that could raise national security concerns. In 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) revolutionized the CFIUS process, creating jurisdiction over real estate transactions and minority investments and mandating filings for certain critical technology transactions. More recently, however, three significant developments will impact the risk landscape of foreign investment review. These developments make the risk review process increasingly complex. 

1. First-Ever CFIUS Executive Order
On September 15, President Biden signed Executive Order (EO) 11858, the first-ever EO related to the foreign investment review process. While the EO does not change the law or regulations related to CFIUS review, it puts companies on notice that CFIUS will be emphasizing certain factors in future reviews. Given this policy announcement, parties to transactions subject to CFIUS jurisdiction must recognize that past CFIUS determinations will not necessarily allow them to predict future outcomes. The EO discusses the national security concerns related to cyber security and personal data, topics that have been of increasing concern to the U.S. government for the last several years. 

However, the EO also emphasizes two somewhat newer focuses for national security reviews—supply chain security and relationships with third parties. The U.S. government continues to be concerned about lack of foreign interference in the supply chain for critical technologies such as semiconductors, batteries and telecommunications. If a covered transaction involves suppliers to these industries, CFIUS’s risk calculus may deviate from what it might have been in the past. Also, CFIUS will look carefully at the relationships of foreign parties with others. For example, a transaction that involves a foreign buyer with a strong presence in China may be looked at differently than one involving a foreign buyer with no such presence.

Finally, the EO explains that CFIUS will be looking at the state of the U.S. industry as whole when analyzing a specific transaction. This focus undoubtedly stems from the concern that over time certain U.S. industries have been the target of strong foreign investment, perhaps to the detriment of U.S. national and supply chain security. Thus, CFIUS may view a transaction later in a series of foreign investments in a particular industry through a slightly different lens than it would an earlier transaction.

2. CFIUS Enforcement Guidelines and Penalties
On October 29, the Department of the Treasury issued CFIUS Enforcement Guidelines and Penalties, another first-time event, increasing the transparency around the process of what is certain to be increased penalties for violations of the CFIUS process. While FIRRMA provided for penalties for failing to make a mandatory filing when required, CFIUS has not yet issued such a penalty. One is coming soon.

In addition to providing penalties for failing to make a mandatory filing, the enforcement guidelines also outline penalties for noncompliance with a CFIUS mitigation agreement and for a material misstatement, omission or false certification in the CFIUS process. The guidelines outline certain mitigating and aggravating factors that can be taken into account in the penalty calculation process. One potential mitigating action would be to make a self-disclosure of a potential violation, which could reduce the assessed penalty. Finally, individuals who are aware of potential violations of the CFIUS process may alert CFIUS anonymously through a tip line. 

3. Potential for Outbound Reviews
While the inbound investment review process has been greatly enhanced in the last five years, the U.S. government is increasingly concerned about technology transfers through outbound investment. In June 2022, a bipartisan coalition introduced in Congress the National Critical Capabilities Defense Act of 2022. The proposed act, if passed, would create the Committee on National Critical Capabilities (CNCC), require mandatory notification 45-days prior to the execution of a covered transaction involving “countries of concern” and “entities of concern,” and authorize the CNCC to review those transactions, regardless of whether a mandatory notification was submitted. Countries of concern in the draft bill include China and Russia, as well as countries subject to U.S. economic sanctions. “Entities of concern” are influenced by countries of concern but can be outside of those countries. If deemed a threat to national security, the committee would be authorized to suspend or prohibit the investment or could require the investor to enter into a mitigation agreement, similar to the inbound review process.

New Risk Considerations

These latest developments increase the risk of foreign direct investment into the United States and potentially out of the United States. The new EO, combined with the increased resources that CFIUS has under FIRRMA to review non-notified transactions, makes the decision on whether to file for CFIUS review more complex. Because of the increased emphasis on data concerns, supply chain security, third-party relationships and industry trends, parties to transactions subject to CFIUS jurisdiction are required to expand their thinking on national security threats. Treasury’s issuance of enforcement guidelines and penalties only buttresses the need for increased diligence since the failure to make a mandatory filing, when required, can lead to a penalty up to the value of the transaction. In addition, offshore business combinations with foreign entities that raise national security concerns may soon come under review as well, potential frustrating multinational combinations in various industries. 

Laura Fraedrich is senior counsel at Lowenstein Sandler and a member of the firm’s global trade and national security practice.

Laura Fraedrich is senior counsel at Lowenstein Sandler and a member of the firm’s global trade and national security practice.