At a campaign rally in October 2016, Donald Trump, Republican nominee for President of the United States, alleged: “Hillary Clinton gave Russia twenty percent of American uranium.”
Candidate Trump was referencing then-Secretary of State Hillary Clinton’s role as a member of the Committee on Foreign Investment in the United States (CFIUS), which had approved the partial sale of Uranium One, a Canadian mining company with holdings in the United States, to a Russian entity in 2010.
CFIUS, an interagency body led by the Secretary of the Treasury, is authorized by the Foreign Investment and National Security Act of 2007 (FINSA) to review foreign investments for national security risks.
If the risks posed by a certain transaction are deemed too great upon CFIUS review, the President may block the transaction.
Despite calls from members of Congress to block the Uranium One transaction,
CFIUS approved the deal, seemingly without hesitation.
Seven years after Uranium One’s approved sale—by which time Donald Trump had become President—Republican lawmakers, concerned that conflicts of interest involving Clinton had impaired CFIUS’s review, announced a probe into the matter.
Politics aside, the Uranium One controversy highlights a significant criticism of CFIUS: that CFIUS, with its review process shielded from view, is too much of a black box.
Much of this criticism surrounds CFIUS’s statutory scheme, which gives CFIUS seemingly unlimited discretion,
prevents the public and most members of Congress from accessing much information about specific reviews,
and specifically exempts the President’s findings on national security and any subsequent decision to block a transaction from judicial review.
As commentators wrote regarding the Uranium One deal, for instance, “Because of the secrecy surrounding the process, it is hard to know whether [CFIUS] weighed the desire to improve bilateral relations against the potential risks of allowing the Russian government control over the biggest uranium producer in the United States.”
While one would anticipate that concerns regarding CFIUS’s lack of accountability would tend to encourage legislative reform limiting CFIUS’s authority—or at least, reform giving third parties oversight of the CFIUS review process—the recent CFIUS-reform effort, which culminated in enacted legislation in August 2018, instead favored a strengthened foreign investment review body with broader authority to consider and block transactions.
Sponsors of this effort argued that CFIUS is outdated and must be given greater authority to consider novel threats outside its traditional scope.
This Note focuses on the tension between lawmakers’ recent expansion of CFIUS on the one hand and criticisms regarding CFIUS’s lack of accountability on the other. More specifically, this Note looks to the accountability mechanisms required of another Treasury-led entity charged with reviewing national security threats, the Office of Foreign Assets Control (OFAC), by virtue of its statutory scheme, the International Emergency Economic Powers Act (IEEPA).
This is a particularly apt comparison given CFIUS’s and OFAC’s similar focuses on national security
and their governing statutes’ conferring of similar powers on the executive.
Drawing inspiration from OFAC and IEEPA—the latter of which governed CFIUS prior to 1988
—this Note proposes how CFIUS can be made more accountable even as it is given the power to review transactions and considerations beyond those historically permitted.
In Part I, this Note introduces CFIUS and its governing statute, FINSA, describing changes to CFIUS since its creation in 1975 and the recent legislative steps taken to broaden CFIUS’s scope. In Part II, this Note expands on a criticism of CFIUS as lacking accountability and transparency by introducing a similar national security body headed by the Department of the Treasury, OFAC, and overviewing the safeguards required by OFAC’s statutory scheme: IEEPA’s (1) national-emergency requirement, (2) congressional-oversight provisions, and (3) imposition of judicial review. Part II notes that FINSA lacks safeguards comparable to IEEPA’s and argues that the recent CFIUS legislation does not remedy FINSA’s shortcomings in this regard but rather worsens them.
Following Part II’s suggestion that enhancing accountability should be a goal of CFIUS reform, Part III draws inspiration from IEEPA’s accountability mechanisms. While noting that the specific safeguards provided for by IEEPA may not be appropriate for CFIUS, Part III proposes that CFIUS adopt IEEPA’s general approach of incorporating safeguards at three key points throughout executive action: before a review is initiated (“ex ante”), while a review is ongoing (“ongoing”), and after the conclusion of a review (“ex post”). Part III then suggests several specific reforms to this end: clarifying CFIUS’s definition of national security, enhancing communication with Congress regarding CFIUS’s process, and providing parties with limited judicial review.
I. CFIUS: Past and Present
This Part introduces CFIUS and its governing statute, FINSA. Section I.A describes CFIUS’s history, process, and purpose by considering CFIUS’s transformation from a relatively powerless body between 1975 and 2006, described in section I.A.1, to a more robust regulator as a result of FINSA, detailed in section I.A.2. Section I.B then details the recent legislative effort that expanded CFIUS.
A. Overview of CFIUS: History, Process, and Purpose
CFIUS plays a crucially important role in an increasingly globalized business environment.
A nine-member, interagency body—chaired by the Secretary of the Treasury and comprising the heads of the Departments of Justice, Homeland Security, Commerce, Defense, State, and Energy; the Offices of the U.S. Trade Representative and Science and Technology Policy;
and other agencies on a case-by-case basis
—CFIUS has the power to review cross-border transactions for national security risks. If it finds a transaction would pose risks to the national security of the United States, CFIUS may condition approval of the deal on certain mitigating circumstances
or recommend that the President block a transaction altogether.
For any given transaction, CFIUS operates in one of two ways: through CFIUS’s own decision to review the transaction, or in response to transacting parties’ filing with CFIUS. Under the first approach, CFIUS may consider any transaction covered by its authorizing statute—that is, “any merger, acquisition, or takeover . . . by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.”
This in turn requires a finding of control, a functional threshold met when CFIUS determines that a transaction will provide a foreign entity with “the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, . . . to determine, direct, or decide important matters affecting [the U.S. entity].”
Under the second route—considering a transaction upon the parties’ own initiative—CFIUS must review any transaction filed with it by the transacting parties.
While a foreign party seeking to acquire an American target is not required to submit its transaction to CFIUS, many foreign parties will voluntarily do so before closing in order to secure a transaction’s safe harbor, or assurance that CFIUS will not review and unwind the transaction.
While deals are seldom pursued by parties to the point at which CFIUS recommends presidential action,
blocks have become more common in recent years: Of the five transactions a president has rejected on CFIUS’s recommendation since 1988, four were blocked since 2012.
1. CFIUS Since 1975: From “Paper Tiger” to Bulwark. — While CFIUS has existed since 1975, its authority and reach have expanded greatly in the last few decades. Created by President Ford
in response to increasing foreign investment, especially from Arab states,
CFIUS was originally authorized only to monitor foreign direct investments.
Further, the President could block a transaction only in tandem with IEEPA,
passed in 1977, much as he or she can today.
Importantly, to block a transaction during this early period, the President had to abide by IEEPA’s requirement of first declaring a national emergency with respect to the transaction.
Because such an action amounted to “a hostile declaration against the country involved,” few transactions were blocked during the late 1970s and early 1980s.
In its first four years, from 1975 to 1978, CFIUS met only six times and considered just two transactions;
in contrast, from 2012 to 2015, CFIUS reviewed more than 500 transactions.
During this early period, therefore, CFIUS was in essence a “paper tiger,”
with IEEPA’s national-emergency requirement thwarting any real enforcement power.
While increased Arab investment motivated President Ford to create CFIUS, new perceived threats—concern among Americans about the United States’ declining economic position and a worsening trade relationship with Japan
—encouraged President Reagan to strengthen it.
Congress ultimately passed the Exon–Florio Amendment of 1988, which authorized the President to investigate and block foreign “mergers, acquisitions, or takeovers”—absent the national-emergency declaration required under CFIUS’s IEEPA-era regime.
Between the adoption of Exon–Florio in 1988 and the enactment of the modern CFIUS governing scheme in 2007,
legislators took two additional measures to strengthen CFIUS’s power of review. First, in 1992, Congress passed the Byrd Amendment, which enhanced CFIUS scrutiny over any transaction involving an acquiror controlled by a foreign government.
Second, in 2006, President George W. Bush introduced mitigation agreements, transaction-specific agreements imposing conditions with which parties to the transaction have to comply to receive CFIUS approval of their deal.
While mitigation measures provided CFIUS with enhanced flexibility to approve deals that it may have earlier felt the need to block, the introduction of mitigation agreements also created uncertainty for transacting parties: CFIUS has the power to reopen review of a transaction approved pursuant to a mitigation agreement if CFIUS believes a party to the transaction “intentionally materially breache[d]” the mitigation agreement.
In effect, some critics allege that the introduction of mitigation agreements rendered the safe-harbor effect of CFIUS review null by giving CFIUS essentially perpetual power of review over mitigated transactions.
2. CFIUS Since 2007: Breaking Down the Black Box. — In 2007, the United Arab Emirates– owned Dubai Ports World (DP World) sought CFIUS’s approval of its acquisition of six U.S. port-management businesses. Much to the surprise of Congress and the public, who were aghast at the possibility of Arab control of American terminal operations in the wake of 9/11, CFIUS approved the acquisition.
In response, Congress introduced CFIUS reform through FINSA,
establishing the modern CFIUS regime. FINSA will continue to govern CFIUS until the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), passed by Congress in August 2018, is implemented.
FINSA’s aim was twofold. Through FINSA, legislators sought increased accountability from CFIUS, both to Congress and the executive branch.
At the same time, however, FINSA was an attempt by legislators to build on prior CFIUS reforms
and to strengthen and expand CFIUS even further.
Under FINSA, the typical CFIUS review process comprises three time-limited stages: review, investigation, and presidential action.
CFIUS first has thirty days to conduct a review of a transaction and determine whether it would pose a national security threat if consummated.
If no national security risks are discovered during review, CFIUS will notify the parties to the transaction that it has decided not to pursue the deal further, granting the deal safe harbor.
However, under various circumstances—if national security risks are found,
CFIUS is not satisfied with the results of its review,
the transaction involves critical infrastructure,
or, as required by the Byrd Amendment and FINSA, the acquiror is foreign-government controlled and the lead agencies have not certified that the transaction “will not impair” national security
—CFIUS will move onto its second stage, investigation, essentially a continuation of CFIUS’s initial review.
An investigation may last as long as forty-five days,
during which CFIUS may negotiate, impose, or enforce a mitigation agreement.
In rare cases, CFIUS may conclude an investigation by recommending that the President block the transaction.
While the President is not obligated to follow CFIUS’s recommendation,
the President must act within a fifteen-day window following a completed investigation to block a transaction if he or she wishes to act upon CFIUS’s recommendation to do so.
B. Recent Calls for CFIUS Reform
Although legislators have introduced various bills related to CFIUS since 1975, not many past CFIUS-reform efforts have amounted to enacted legislation.
Unlike these “periodic legislative efforts to effect [CFIUS] reform that . . . rapidly faded from view,”
FIRRMA, an effort to expand CFIUS scrutiny over foreign investment, was passed by Congress and signed by President Trump in August 2018.
FIRRMA’s unique momentum stemmed from concerns about increasing Chinese investment in American businesses
and fears that certain investments that have traditionally circumvented CFIUS review due to their structure—minority investments, some joint ventures, and greenfield investments, among others
—may nonetheless pose national security risks.
Of particular concern is the vulnerability of U.S. technology, which some argue needs to be better protected in light of potential military applications.
Further, comments by Chinese officials and a pattern of acquisitions indicating that the Chinese government may be attempting to acquire U.S. technology through strategic, government-funded transactions increased calls for CFIUS reform, leading to FIRRMA.
1. FIRRMA: Broadening Foreign Investment Review’s Scope. — In response to these concerns over foreign investment, FIRRMA was introduced in Congress on November 8, 2017.
FIRRMA quickly became the leading CFIUS-reform effort
and was ultimately incorporated into and enacted as part of the John S. McCain National Defense Authorization Act for Fiscal Year 2019.
Once the Department of the Treasury promulgates regulations implementing FIRRMA, likely sometime in 2019,
CFIUS’s operations will change substantially. In particular, FIRRMA will increase CFIUS’s reach, authority, and discretion, continuing the trend in CFIUS reform since 1975.
FIRRMA is intended as a “modernization of the processes and authorities of [CFIUS] and of the [U.S.] export control system,” in response to recent changes in both the national security landscape and the “nature of the investments that pose the greatest potential risk to national security.”
Legislators pursued modernization of CFIUS through FIRRMA by expanding the types of transactions CFIUS may consider
and creating an expedited channel of CFIUS review to encourage greater use of CFIUS.
Because FIRRMA’s reforms will substantially increase CFIUS’s workload,
FIRRMA also provides CFIUS with additional resources.
First, FIRRMA expands CFIUS’s jurisdiction over certain types of transactions and considerations not currently covered by FINSA. Significantly, FIRRMA breaks away from FINSA’s key control limitation, broadening the definition of covered transaction to include certain noncontrolling investments involving critical infrastructure, critical technology, and sensitive personal data.
FIRRMA also departs from FINSA by enabling CFIUS to consider purchases, leases, or other concessions of vacant land, so long as such land is located within the United States and meets certain other requirements; FINSA had allowed CFIUS to consider only real estate transactions associated with a U.S. business.
Under FIRRMA, CFIUS may also consider whether a transaction “involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect [U.S.] leadership in areas related to national security” as part of its review.
Second, FIRRMA seeks to encourage increased filing with CFIUS by introducing an expedited CFIUS review known as a declaration, which will exist alongside the traditional FINSA filing system.
Once this mechanism is implemented, CFIUS will be required to respond to a declaration within thirty days, either by asking the parties for more information, initiating a traditional CFIUS review, or concluding consideration of the transaction altogether.
While some investors may voluntarily pursue a declaration due to perceived cost and timing benefits,
FIRRMA will require declarations for direct or indirect acquisitions of a “substantial interest” in a U.S. business that could potentially compromise critical infrastructure, critical technology, or sensitive personal information.
Third, in light of the increased demands it imposes on an already-burdened CFIUS,
FIRRMA provides CFIUS with a number of resources. Most significantly, FIRRMA authorizes appropriation of funds to CFIUS
and introduces a CFIUS filing fee,
the proceeds of which will be used to fund CFIUS operations, such as hiring additional CFIUS staff.
In addition, FIRRMA extends CFIUS’s review period from thirty to forty-five days and allows a fifteen-day extension to the forty-five-day investigation period under “extraordinary circumstances.”
While this reform appears to lengthen the CFIUS process from seventy-five days of review and investigation under FINSA to one hundred five days,
CFIUS is also newly required under FIRRMA to act within ten business days of receiving a filing;
because CFIUS reviews have often extended beyond FINSA’s statutory timeline, this additional reform may actually speed up CFIUS reviews once FIRRMA is implemented.
II. Juxtaposing FINSA and IEEPA: Highlighting CFIUS as a Black Box
There are several oft-cited criticisms of CFIUS. One is the concern reflected in the momentum behind FIRRMA: that CFIUS is unable to address considerations and transactions that increasingly pose a national security threat to the United States.
Another is a criticism quite prevalent among foreign transacting parties, yet nearly opposite in nature: that CFIUS lacks accountability, transparency, and predictability.
This Part describes this criticism of CFIUS and argues that while accountability has not been a goal of CFIUS reform, it should be.
Rather than discuss CFIUS’s current accountability shortcomings in isolation, this Part compares CFIUS’s contemporary FINSA regime with IEEPA,
the statutory scheme of OFAC, another national security body headed by the Department of the Treasury.
This comparison both highlights CFIUS as a black box and inspires the accountability reforms proposed in Part III.
Section II.A introduces OFAC and IEEPA, noting the overlapping functions and purposes of CFIUS and OFAC. Section II.B then compares three accountability mechanisms required of OFAC by IEEPA—a national-emergency-declaration requirement, congressional oversight through reporting requirements and a legislative veto, and judicial review—with those that FINSA currently imposes on CFIUS. Section II.C notes that FIRRMA exacerbates CFIUS’s accountability problems as they exist under FINSA rather than remedies them and concludes by arguing that enhancing accountability should be a goal of CFIUS reform.
A. Overview of OFAC and IEEPA
Like CFIUS, OFAC is charged with protecting national security and administered by the Department of the Treasury.
Rather than reviewing cross-border transactions on a case-by-case basis like CFIUS, however, OFAC plans and administers ongoing economic-sanctions programs for a variety of reasons, from terrorism to narcotics trafficking.
While OFAC programs vary, the general OFAC scheme prohibits trading with or providing economic support to sanctioned individuals or persons in sanctioned countries, with a licensing regime providing for general and specific exemptions.
OFAC may freeze assets and prevent access to the U.S. financial system to enforce its prohibitions, as well as institute penalties against those who defy its directives.
Unlike CFIUS, OFAC’s statutory scheme is not unique to its work. Rather, OFAC’s sanctions programs are primarily enforced pursuant to IEEPA,
a more general grant of emergency powers that has been invoked outside the OFAC context.
IEEPA gives the President authority to regulate commerce—including the power to investigate, regulate, and block transactions
—in response to “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.”
So long as the President meets IEEPA’s threshold requirement of publicly declaring a national emergency with regard to a specific threat, the President has broad authority to regulate commerce under IEEPA,
comporting with traditional deference to the executive in national security matters.
Unlike CFIUS, OFAC does not act pursuant to a single set of regulations but rather to particular regulations issued for each sanctions program, each in turn authorized by a separate national-emergency declaration.
B. Comparing Accountability Mechanisms Provided by FINSA and IEEPA
Both FINSA and IEEPA were drafted to enable the executive to protect the country from national security threats,
and both statutes involve the Department of the Treasury in a leadership capacity.
Further, while IEEPA confers somewhat broader authority on the President than FINSA does,
both statutes provide the executive with the same authority to investigate, regulate, and block transactions,
as delegated to CFIUS and OFAC. Yet, despite these similarities in purpose and authority, FINSA and IEEPA differ in terms of accountability, as IEEPA includes a number of safeguards to promote transparency that FINSA lacks.
This section considers the IEEPA safeguards that enhance accountability at three key points in the OFAC process and juxtaposes them with comparable CFIUS safeguards at those same three stages of review. First, section II.B.1 considers IEEPA’s national-emergency-declaration requirement. Second, section II.B.2 discusses IEEPA’s reporting requirements and (now unconstitutional) legislative veto, mechanisms that provide for congressional oversight while OFAC action is ongoing. And third, section II.B.3 takes up judicial review of OFAC actions, an ex post safeguard.
1. IEEPA’s Ex Ante Safeguard: The National-Emergency-Declaration Requirement. — IEEPA’s national-emergency-declaration requirement, which requires the President to declare that some foreign circumstance constitutes a national emergency before taking action authorized under IEEPA,
serves as a significant ex ante safeguard in the OFAC realm.
Much to the contrary, the CFIUS process incorporates few safeguards to encourage deliberation before launching a review or to curtail the Committee’s discretion in its reviews.
First, IEEPA’s national-emergency-declaration requirement provides a check on the executive’s readiness to take action under IEEPA. Because such a public declaration is likely to have negative political repercussions regarding the target of that declaration, it encourages more careful deliberation of the costs and benefits of such an exercise of authority.
In contrast, FINSA has no comparable means of deterring review of a transaction ex ante. CFIUS is not required to notify Congress or seek its approval prior to conducting a review, even in cases in which CFIUS unilaterally initiated the review.
Further, while under current law CFIUS must find that an acquisition would result in foreign control of a U.S. business in order to assert jurisdiction over the transaction,
such a finding lacks the severity of IEEPA’s national-emergency-declaration requirement, which may have grievous political consequences.
Second, IEEPA’s national-emergency-declaration requirement narrows the range of possible actions that may be taken pursuant to such a declaration. IEEPA provides that “[t]he authorities granted to the President . . . may not be exercised for any other purpose,” and further, that “[a]ny exercise of such authorities to deal with any new threat shall be based on a new declaration of national emergency.”
In contrast, neither FINSA nor the CFIUS regulations limit what CFIUS may consider in its review of a given transaction. Although FINSA provides a list of ten national security factors that CFIUS may consider in reviewing a foreign investment, such as the transaction’s potential effects on critical infrastructure
and concerns regarding the foreign acquiror’s home country’s missile proliferation,
FINSA expands CFIUS’s discretion over its reviews in two ways. First, CFIUS may contemplate the potential effects of a given transaction, as opposed to its realized effects.
Second, FINSA allows CFIUS to consider a broad eleventh factor: “such other factors as the President or the Committee may determine to be appropriate, generally or in connection with a specific review or investigation.”
2. IEEPA’s Ongoing Safeguard: Congressional Oversight. — In addition to the discrepancy in ex ante safeguards seen above, IEEPA, through its reporting requirements,
provides for congressional oversight of OFAC for the duration of the declared national emergency. This monitoring is unmatched by any comparable safeguard in the CFIUS context, as FINSA specifically limits congressional oversight of CFIUS while a particular review is ongoing.
More specifically, IEEPA requires that the President immediately transmit to Congress a report specifying his or her actions taken under IEEPA and the reasons for taking such actions,
and update Congress on this information at least once every six months.
IEEPA also originally provided for additional congressional oversight through a legislative veto provision, by which Congress could act by concurrent resolution to prevent further executive action under IEEPA,
but after INS v. Chadha, that measure is no longer constitutional.
In contrast, FINSA sharply limits congressional involvement in a given transaction until CFIUS has concluded action on that transaction.
Although FINSA does require CFIUS to transmit a certified notice and report following each review, with “a description of the actions taken by the Committee with respect to the transaction” and an “identification of the determinative [national security] factors considered,”
and to provide for briefings upon request following the conclusion of CFIUS review,
only certain members of Congress are entitled to receive such certifications or briefings.
In addition, while CFIUS is required to provide Congress with annual reports, transmission of these reports is often delayed,
doing little to enhance congressional oversight of specific transactions.
3. IEEPA’s Ex Post Safeguard: Judicial Review. — Lastly, actions taken under IEEPA are subject to judicial review, an ex post safeguard, whereas FINSA specifically exempts the President’s actions and findings on foreign investment from judicial review.
Notably, courts have reviewed—and even overturned
—OFAC actions under IEEPA in a number of cases. For example, in Al Haramain Islamic Foundation, Inc. v. United States Department of the Treasury, a nonprofit organization brought a challenge against OFAC, which had frozen the organization’s assets pursuant to its finding that the organization supported terrorism.
The Ninth Circuit found that OFAC violated Al Haramain’s rights to procedural due process
and freedom from unreasonable seizures.
In marked contrast to IEEPA, FINSA’s judicial review exemption prevents a would-be acquiror or target company whose transaction is blocked by CFIUS from appealing the prohibition of the transaction.
Admittedly, this wholesale disclaimer of judicial review was complicated by the limited judicial review of CFIUS decisions declared by Ralls Corp. v. Committee on Foreign Investment in the United States.
In Ralls, a corporation owned by Chinese nationals purchased several American companies without first seeking CFIUS approval.
Several months later, however, CFIUS and President Obama, citing national security concerns, ordered Ralls to divest itself of those companies; in response, Ralls brought a due process claim challenging the order.
Noting that FINSA exempts from judicial review the President’s decision to block a transaction and findings in reaching that decision,
but discovering no clear and convincing evidence that Congress intended to bar due process challenges to CFIUS, the court held that FINSA allowed judicial review of “the process preceding such presidential action.”
Further, the court held that notwithstanding its compelling interest in national security, CFIUS is required to provide to transacting parties the most basic elements of procedural due process: “at the least, that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence.”
To be sure, Ralls brought FINSA closer to IEEPA in terms of an ex post safeguard: CFIUS is now required to not only provide unclassified information to parties but also give parties the opportunity to respond to such information, either by rebutting it or tailoring the transaction to avoid CFIUS’s national security concerns.
However, there are reasons to believe that the judicial recourse provided by Ralls may be limited in practice as an ex post safeguard, failing to match the accountability and transparency provided by judicial review of OFAC determinations.
First, in Ralls, the plaintiff’s procedural due process claim rested on the finding that it had a vested state law property interest in the acquired companies.
This interest vested upon “completion of the transaction”—notwithstanding any contingency posed by Ralls’s lack of safe harbor under FINSA.
Most parties submit transactions to CFIUS after the merger agreement has been signed but prior to closing, since parties generally want safe harbor from CFIUS before concluding the deal;
in Ralls, however, the transactions had closed prior to CFIUS review.
If Ralls means that a deal must have closed for “completion of the transaction,” many would-be acquirors, most of whom have not yet closed their deals, would not have a vested property interest upon which to bring a procedural due process claim.
Second, even if a claimant’s property interest in a transaction is sufficiently vested under Ralls, the bulk of the evidence may be classified for national security reasons and accordingly withheld by CFIUS, such that a party has little basis on which to respond to CFIUS’s concerns.
C. Accountability as a Focus of CFIUS Reform
Given FINSA’s lack of mechanisms to provide for accountability and transparency throughout the CFIUS process, the existence of a recent congressional effort to reform CFIUS is unsurprising. What is surprising, however, is that FIRRMA focused almost entirely on giving CFIUS greater power through broadened jurisdiction
rather than heeding the aforementioned accountability and transparency criticisms
and proposing reforms to limit CFIUS’s power.
For example, rather than clarify or limit FINSA’s broad definition of national security, FIRRMA increases the number of factors that CFIUS may consider in its discretion.
In addition, FIRRMA restricts jurisdiction for challenges to the D.C. Circuit, curtailing the limited judicial review provided for by Ralls.
All in all, FIRRMA expands CFIUS’s authority while taking very few steps to enhance its accountability and transparency.
Further, by broadening CFIUS’s reach but failing to address CFIUS’s accountability—or lack thereof—in its more limited, FINSA form, FIRRMA will in fact exacerbate the problem of CFIUS as a black box, since more transactions and parties will be impacted by CFIUS.
This disregard of accountability and transparency cannot be explained by a lack of salience among lawmakers: The Uranium One controversy, which led to calls for a congressional investigation into CFIUS’s review of the transaction, in fact suggests that such issues are quite salient within Congress.
Despite a lack of legislative impetus behind this issue, improving CFIUS’s accountability and transparency should be an aim of future CFIUS reform for several reasons.
Critics assert that an opaque foreign investment review process generates uncertainty for investors and permits CFIUS to act outside its scope.
For example, while FINSA’s vague definition of national security helps to ensure CFIUS’s “flexibility with an evolving concept of national security,”
it nonetheless “virtually eviscerate[s] any predictive capabilities” from FINSA.
Furthermore, this broad instruction on national security gives CFIUS leeway to review a transaction for reasons that “may seem quite far strayed from accepted notions of national security,”
which is particularly problematic in light of the apparent conflation of economic and national security concerns under the Trump Administration.
Paired with CFIUS’s limited judicial review,
CFIUS could theoretically block a transaction for any reason—related to national security or not—with would-be acquirors having little recourse to challenge such conduct. As a result, CFIUS may ultimately encourage retaliation abroad and deter foreign investment if steps are not taken to enhance its accountability and transparency.
III. Incorporating the IEEPA Framework into CFIUS Reform
Despite criticisms of CFIUS as a black box,
the recent CFIUS-reform effort largely ignores accountability and transparency concerns in favor of broadening CFIUS’s scope.
Following Part II’s instruction that accountability and transparency should be a key focus of CFIUS reform,
this Part draws on IEEPA’s statutory scheme to propose several reforms that may be adopted to this end.
In sections III.A, III.B, and III.C, respectively, this Part considers whether the specific safeguards that provide for accountability before, during, and after the exercise of authorities under IEEPA—a national-emergency-declaration requirement, congressional oversight, and judicial review
—could serve as feasible reforms for CFIUS. While noting the limitations of IEEPA’s particular accountability mechanisms in the CFIUS context due to confidentiality, flexibility, and speed concerns, among others, this Part proposes that CFIUS borrow IEEPA’s more general framework of incorporating accountability mechanisms at three key points. In each section, this Part draws on IEEPA and suggests specific reforms that may provide for comparable accountability in the CFIUS context.
Importantly, this Part’s proposed accountability safeguards and FIRRMA’s expansion of CFIUS are not necessarily mutually exclusive. Rather, CFIUS would benefit from adopting both sets of proposals, as FIRRMA’s effort to make CFIUS more responsive to novel national security threats and this Note’s proposal to improve CFIUS’s accountability and transparency each address distinct criticisms of the FINSA-era CFIUS process. By failing to incorporate accountability mechanisms alongside FIRRMA’s expansion of CFIUS’s jurisdiction, however, legislators may in fact worsen the accountability and transparency concerns already plaguing CFIUS.
A. Proposed Ex Ante Safeguard: Clarify CFIUS’s Definition of National Security
As discussed, IEEPA’s requirement that the President declare a national emergency prior to taking action under IEEPA serves as an ex ante check on OFAC action, both encouraging greater deliberation prior to taking action and limiting OFAC’s scope of allowable action.
While the history of CFIUS prior to Exon–Florio suggests that a national-emergency-declaration requirement would encourage greater deliberation prior to reviewing any given transaction,
such a requirement has practical limitations in the CFIUS context.
A more effective reform would be to clarify FINSA’s national security definition, an ex ante safeguard better suited to the CFIUS review process.
First, a cross-border acquisition is less appropriately captured by a national-emergency declaration than is a typical situation targeted for OFAC sanctions. IEEPA defines a national emergency as a declaration issued with respect to “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States.”
In light of the frequency of cross-border transactions,
it may be difficult to argue that a given transaction poses an “unusual and extraordinary” threat, at least from a political perspective, if not a legal one.
Second, the national-emergency-declaration requirement and its accompanying political consequences may be too great of a deterrent in the CFIUS context. Certainly, Congress once felt that evolving national security needs required eliminating the national-emergency-declaration requirement in the CFIUS context.
Despite the infeasibility of requiring the President to declare a national emergency prior to acting on a cross-border transaction, CFIUS may nevertheless borrow the more general idea provided for by IEEPA’s national-emergency-declaration requirement: that the incorporation of certain ex ante checks may increase accountability and transparency. This may be best accomplished by clarifying CFIUS’s definition of national security—especially how CFIUS utilizes FINSA’s eleventh national security factor, which authorizes it to consider “such other factors as the President or [CFIUS] may determine to be appropriate.”
In particular, CFIUS should take steps to more effectively provide ex ante notice to transacting parties of what constitutes a national security threat. CFIUS could update its regulations to include examples of what, in its discretion, it would deem a national security threat and publish select analyses of transactions with confidential information redacted.
Admittedly, ever-evolving national security threats make it impractical to entirely eliminate CFIUS’s discretion in defining national security;
however, greater clarity as to how CFIUS uses its discretion over national security considerations could serve as an ex ante safeguard and increase CFIUS’s transparency, even as legislators broaden its scope.
B. Proposed Ongoing Safeguard: Increase Communication with Congress Regarding CFIUS’s Reasoning
Further, as previously discussed, IEEPA requires the transmission of certain information regarding OFAC’s actions and motivations to Congress even while action is ongoing under IEEPA, providing for a level of congressional oversight unmatched by any applicable FINSA provision or CFIUS practice.
While some congressional oversight over CFIUS is important, the type and frequency of ongoing reporting should be limited in the CFIUS context to ensure that CFIUS’s confidentiality, speed, and political independence are not compromised.
First, a party with a transaction under CFIUS review would likely be wary of increased communication between CFIUS and Congress due to the possibility that sensitive business information may be compromised— for instance, deal provisions that the party does not want revealed to the public. Accordingly, confidentiality has always been a hallmark of CFIUS
and could be threatened by increased communication between CFIUS and persons not party to a given transaction.
Ultimately, such increased communication could discourage foreign investment to the United States in favor of jurisdictions viewed to be more protective of corporate information.
Second, extensive reporting requirements may hinder CFIUS’s ability to consider transactions in a timely fashion.
As the timeframe for regulatory approval lengthens, market risks increase; as with the confidentiality concerns discussed above, longer wait times for CFIUS determinations could ultimately deter foreign investment.
Third, the active involvement of Congress during CFIUS review could politicize the process, encouraging consideration of factors outside CFIUS’s scope, such as political opposition or public opinion.
CFIUS reviews characterized by extensive congressional involvement have even been marred by xenophobic rhetoric.
Acknowledging that such considerations are inappropriate in the CFIUS context, even members of Congress have resisted deepening congressional involvement while CFIUS review is ongoing.
Nonetheless, a certain level of increased congressional oversight over CFIUS may be advisable, particularly because the judiciary has limited ability to reveal CFIUS’s inner workings.
In light of the confidentiality, speed, and politicization concerns detailed above, however, congressional oversight should be limited in two important ways. First, given politicization concerns,
the focus of information provided to Congress by CFIUS should be on CFIUS’s reasoning regarding particular transactions rather than the intricacies of the transactions themselves. While FINSA already provides that certain members of Congress receive information regarding the national security factors considered in a given transaction,
it does not explicitly require CFIUS to specify, in detail, its reasoning under FINSA’s eleventh national security factor. Presumably, under FINSA’s requirement that CFIUS identify the “determinative [national security] factors considered under subsection (f),” CFIUS could simply point to subsection 4565(f)(11)—the category providing for discretion—without greater specificity.
Requiring CFIUS to specify the determinative considerations in its review of a given transaction will help to ensure that CFIUS does not act arbitrarily and remains within the scope of its mandate. While Congress would lack the power to veto a CFIUS decision on the basis of this information,
this reform would nevertheless increase CFIUS’s transparency, as well as provide Congress with a stronger understanding of the CFIUS process for future reform efforts.
Second, to ensure continued confidentiality and speed of CFIUS review,
disclosure to Congress should be limited to those instances that would in fact promote accountability and transparency—not when “the need [for disclosure] might not be . . . as pressing.”
For example, information as to CFIUS’s reasoning could be provided to Congress in the aggregate on a post hoc basis,
through an exhaustive list included in CFIUS’s classified annual report to Congress,
rather than as an additional requirement for each transaction. Further, while the number of members of Congress who receive this information should perhaps be expanded from the short list provided by FINSA to enhance oversight,
this information could be limited to those legislators who regularly handle sensitive information, such as members of the Senate and House Committees on Foreign Affairs, or presented in secret sessions.
While perhaps not rising to the level of congressional oversight provided by IEEPA, these reforms, by illustrating when and how CFIUS uses its discretion, would nonetheless increase CFIUS’s accountability and transparency over time.
C. Proposed Ex Post Safeguard: Remove Obstacles to Ralls
Lastly, as exhibited by cases like Al Haramain, courts have scrutinized and even reversed OFAC actions, providing an ex post check in the OFAC context.
While incorporating judicial review of the sort provided for by IEEPA would certainly increase CFIUS’s accountability and transparency,
comprehensive judicial review of CFIUS decisions would be contrary to congressional intent
and could pose national security risks and administrability concerns.
A more limited ex post safeguard in the CFIUS context would be to eliminate the practical obstacles preventing parties from realizing Ralls’s promise of limited judicial review.
First, wholesale judicial review is problematic in the CFIUS context because it is contrary to clear legislative intent, as exhibited by FINSA
Second, FINSA’s judicial review exemption, while problematic from a transparency perspective, nevertheless serves very important aims in the CFIUS context. Because judicial review may require CFIUS to reveal to foreign parties the national security rationales behind its findings and determinations, judicial review could itself represent a risk to national security.
Further, judicial review of CFIUS decisions would impose an additional administrative burden on the already overloaded and understaffed Committee,
making it even more difficult for CFIUS to manage its reviews within its strict timeframe.
Despite the problems posed by applying IEEPA’s comprehensive judicial review to CFIUS, reforms could be implemented to ensure that parties do in fact have the limited judicial review provided by Ralls,
an ex post safeguard perhaps more suited to the CFIUS context. Most importantly, procedural due process claims should be available for any transaction reviewed by CFIUS, not only those transactions that closed prior to CFIUS review, as in Ralls.
Because the court in Ralls never clarified what it means for a transaction to be complete such that a party’s property and subsequent due process rights vest, Ralls leaves unresolved the question of whether limited judicial review is available for all parties under CFIUS or only those parties that closed their deals prior to seeking CFIUS review.
If the latter, a party would be better off closing its deal as soon as possible, filing notice of the transaction with CFIUS after closing, and, if CFIUS finds national security risks and issues a divestment order, arguing ex post for limited judicial review.
Legislative reform clarifying that due process rights do indeed attach to any transaction reviewed under CFIUS—even if a particular transaction has not yet closed—could both prevent this misaligned incentive and ensure that more parties receive this limited judicial review, enhancing CFIUS’s transparency.
As an additional reform, a third party, rather than CFIUS staff, should make the determination regarding what information must be provided to parties to meet Ralls’s due process requirements.
Such a reform would not run counter to congressional intent to limit judicial review of CFIUS,
as CFIUS’s findings and ultimate determination on a transaction would continue to be given deference. Rather, simply the issue of whether certain information is classified or unclassified would be delegated to a neutral third party, ensuring that all unclassified information that can be provided to a party is in fact provided. While this proposal may appear problematic from an administrability standpoint, involving a third party would in fact help reduce CFIUS’s workload.
Since its creation in the 1970s, CFIUS has transformed from a “paper tiger” to a major focal point of cross-border deal work. As legislators have enhanced CFIUS’s ability to respond to national security threats posed by foreign investment, CFIUS’s accountability, predictability, and transparency have suffered, largely due to deficiencies in CFIUS’s statutory scheme. Surprisingly, however, CFIUS-reform efforts have largely ignored these concerns, pursuing an expansion of CFIUS’s scope while incorporating few, if any, mechanisms intended to enhance CFIUS’s accountability. This Note argues that accountability and transparency must be a focus of CFIUS reform, particularly following Congress’s recent expansion of CFIUS through FIRRMA.
By adopting the IEEPA framework and incorporating accountability mechanisms at key points throughout the CFIUS process, reformers can respond to accountability and transparency criticisms of CFIUS as it currently stands, even while taking steps to expand CFIUS beyond its traditional scope. In doing so, legislators can better preserve the balance between economic prosperity and national security, ensuring that the United States effectively protects against national security threats while remaining a destination for profitable foreign investment.