Regulation of foreign direct investment after the Dubai Ports controversy: has the U.S. government finally figured out how to balance foreign threats to national Security without alienating foreign companies?

• Author: Cox, Jason

1. INTRODUCTION II. BACKGROUND A. The Turbulent History of the Legislature Choosing Sides Between FDI and National Security 1. Committee on Foreign Investment in the United States 2. The Exon-Florio Amendment 3. The Byrd Amendment 4. Foreign Investment and National Security Act of 2007 B. Perceived Threats to National Security 1. Influx of Foreign Direct Investment 2. The Japanese Threat 3. The First Divestment 4. Dubai Ports Scandal C. The Current Look of the Exon-Florio Amendment After the Enactment of FINSA 1. CFIUS Membership 2. The CFIUS Process 3. The Evergreen Provision 4. Who Is Subject to a CFIUS Review? 5. Additional Requirements of a CFIUS Review a. Analysis by the Director of National Intelligence b. Accountability to Congress III. ANALYSIS A. FINSA Modifications to the Exon-Florio Amendment 1. The Introduction of the CFIUS Lead Agency 2. Mandatory 45 Day Investigation of Acquisitions Involving Foreign Governments 3. Defining National Security to Incorporate Issues Pertaining to Homeland Security Including Its Application to Critical Infrastructure and Critical Technologies 4. Unilateral Initiation of Review of Any Foreign Acquisition by Any Member of the CFIUS 5. Including an Analysis by the Director of National Security of Any Proposed Threat 6. Addition of the Evergreen Provision to Completed Reviews 7. Increased CFIUS Accountability to Congress IV. RECOMMENDATIONS A. Removal of the Mandatory Investigation of Foreign Government Controlled Transactions B. Creation of a Separate Committee to Review All FDI Transactions and Initiate CFIUS Reviews C. Rework the Evergreen Provision to Only Include Intentional Fraud by the Parties to the Covered Transaction D. The Nature of a CFI US Review Requires More Secrecy Than Allowed by FINSA V. CONCLUSION I. INTRODUCTION

   Congress has consistently struggled with balancing regulation of foreign direct investment (FDI) so as to protect the national security of the United States while promoting foreign investment that improves the U.S. economy. Congress has often enacted these FDI regulations in response to a real or perceived threat to national security. Congress passed the latest installment of FDI regulation, the Foreign Investment and National Security Act of 2007 (FINSA), and it became effective in October 2007. (1) Part II of this Note examines the history of the specific laws that Congress has passed to regulate FDI, the threats to national security that prompted congressional action, and the details of the current law after FINSA.

   FINSA made seven major changes to the existing FDI regulation. Part III details the FINSA modifications to existing FDI regulation. This Note scrutinizes each of the seven changes, examining the congressional intent behind the changes and the likely result these changes will have on future FDI in the United States.

   Finally, in Part IV, this Note formulates four recommendations intended to make future FDI regulations more business friendly to foreign investors without sacrificing the ability of the U.S. government to monitor transactions that could impair national security. Congress should adopt the following recommendations when drafting the next statute that addresses FDI: (1) remove the mandatory investigation of foreign government-controlled transactions, (2) create a separate committee in addition to the Committee on Foreign Investment in the United States (CFIUS) to instigate CFIUS reviews, (3) rework the evergreen provision to create a stronger res judicata effect on companies that voluntarily submit their transactions to CFIUS reviews, and (4) give the CFIUS more power to protect the secrecy of the information gathered in a review.

2. BACKGROUND

   Foreign investment has been an extremely important part of the financial well-being of the United States since the beginning of the U.S. economy, but never more so than today. In 2005, foreign investors poured more than $100 billion into the United States in the form of FDL (2) Dependence on FDI is reflected everywhere in the U.S. economy, with the beneficial effects demonstrated in higher employment and increased research and development. (3) In 2003, foreign investors employed over five million workers in the United States. (4)

   With this awesome inflow of money and power from abroad also comes the threat of losing control over national security. By allowing foreign countries to invest in the United States the government cedes much of its control to these companies. (5) In 2006, 53% of the U.S. population had a "negative view of foreign investors owning U.S. companies." (6) Terrorism has brought national security to the forefront of the public eye. The U.S. Government has repeatedly responded to national security scares caused by FDI by restricting foreign investment flow across U.S. borders. (7) This tightening of FDI has led to a balancing act between regulating potential foreign threats and not alienating the foreign investors who legitimately improve the U.S. economy. (8)

   1. The Turbulent History of the Legislature Choosing Sides Between FDI and National Security

      The U.S. government regulates foreign investment under the authority granted to it by the Commerce Clause of the U.S. Constitution. (9) The Commerce Clause gives Congress the power to "regulate commerce with foreign nations, and among the several states." (10) The current attempt to regulate FDI started in the 1970s when Congress began investigating the large inflow of FDI. (11) In response, Congress passed the Foreign Investment Study Act of 1974 and the International Investment Survey Act of 1976. (12) These Acts allowed the President to collect information on international investment and provide information to Congress. (13)

      1. Committee on Foreign Investment in the United States

         Governmental investigation under the Foreign Investment Study Act of 1974 led Congress to conclude that "the United States lacked a coherent mechanism to monitor foreign investment." (14) In response to the investigation, President Ford created the CFIUS through an executive order in 1975. (15) He gave the committee the task of "continuing responsibility within the Executive Branch for monitoring the impact of foreign investment in the United States ... and for coordinating the implementation of the United States policy on such investment." (16)

      2. The Exon-Florio Amendment

         The next major historical change in FDI regulation occurred in 1988 when Congress enacted the Exon-Florio Amendment to section 721 of the Defense Production Act of 1950. (17) Known as the Omnibus Trade and Competitiveness Act of 1988, the Exon-Florio Amendment allowed the President to "investigate foreign acquisitions, mergers, and takeovers of, or investments in, U. S. companies from a national security perspective." (18) The law authorized the President to block FDI when "there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security." (19) President Ford "delegated his initial review and decision-making authorities, as well as his investigative responsibilities, to CFIUS." (20) Exon-Florio established a four-element procedure for the CFIUS to follow when reviewing FDI:

         (a) notice of the transaction, either through voluntary disclosure by the companies involved or at CFIUS's request; (b) a 30-day review to determine whether the transaction raises national security concerns; (c) if it does, a 45-day investigation period to determine whether such concerns require action by the president; and (d) if such action is required, a 15-day period in which the president can permit, suspend or prohibit the transaction. (21) The Exon-Florio Amendment was the first time CFIUS (or any governmental authority) had a specific blueprint for reviewing FDL (22)

      3. The Byrd Amendment

         In response to perceived threats to national security, the Exon-Florio Amendment has undergone major reforms in an attempt to better define the correct procedures for the CFIUS to follow. (23) In 1993, Congress amended Exon-Florio through part of the National Defense Authorization Act for Fiscal Year 1993, commonly known as the Byrd Amendment. (24) The Amendment created a mandatory review of any foreign company that was "controlled by or acting on behalf of a foreign government" and seeking to merge or take over a U.S. company. (25) Before Byrd, all CFIUS reviews were voluntary. (26) The Byrd Amendment produced stronger regulatory scrutiny for a business owned by a foreign government. (27) It also added a notification requirement, (28) which required the President to "immediately transmit to the Secretary of the Senate and the Clerk of the House of Representatives a written report of the President's determination of whether or not to take action ... including a detailed explanation of the findings made ... and the factors considered." (29) This section of the Byrd Amendment stated that Congress would not allow FDI decisions by the President and the CFIUS to go unchallenged. (30)

      4. Foreign Investment and National Security Act of 2007

         Congress's most recent attempt to regulate foreign investment is the Foreign Investment and National Security Act of 2007 (FINSA), signed into law by President Bush on July 26, 2007. (31) FINSA purports to clarify national security in the Exon-Florio Amendment and enhance reporting requirements of the CFIUS, adding to the transparency of CFIUS reviews. (32) This Note examines the specific provisions of FINSA in Part ILC.

   2. Perceived Threats to National Security

      Each attempt at redefining the CFIUS has come through Congress because of then current threats to national security, whether real or perceived. The public outcry from these threats motivated Congress to attempt to adapt U.S. policy on FDL (33) Each amendment was a response to a specific threat. (34) This Part will examine those specific threats.

      1. Influx of Foreign Direct Investment

         Congress gave the...