US Foreign Direct Investment Legislation

    (A&B, ASDI, 20.8.07)     On July 26, 2007, President Bush signed into law the Foreign Investment and National Security Act of 2007 (the “Act”). The Act was the culmination of a long-awaited effort by Congress to reform the procedures for national security reviews of foreign direct investment in the United States conducted by the interagency Committee on Foreign Investment in the United States (“CFIUS”). As enacted, the legislation is essentially based on a bill previously approved by the House of Representatives. It does not contain provisions in an earlier Senate version that U.S. industry found objectionable. Most importantly, it maintains the confidentiality of the CFIUS review process and involves Congress in that process only in an oversight role, with after-the-fact reports. It thus minimizes the potential for politicization of the CFIUS review process.
    Deputy Secretary of the Treasury Robert M. Kimmitt characterized the Act as “well balanced.” He stated that the bill updated CFIUS, while appropriately striking the balance between national security and the administration’s policy of promoting open investment. Indeed, many of the changes made by the Act had already been implemented in practice by CFIUS in the wake of the DP World controversy. For example, CFIUS has already in practice interpreted “homeland security” and “critical infrastructure” to be relevant components of “national security” subject to CFIUS review. Moreover, high political-level departmental officials have involved themselves more directly in CFIUS reviews, and Treasury has stepped up its efforts to provide Congress with timely information on completed reviews. Nonetheless, the Act makes a number of subtle but potentially important modifications to the CFIUS process, e.g.:

• The Department of the Treasury remains the chair of CFIUS and, under the Act, has a newly created Assistant Secretary specifically responsible for CFIUS reviews.
• In a change to current CFIUS procedures, the Act requires the designation of a “lead agency” or agencies for each transaction that, in addition to the Department of the Treasury, would negotiate any mitigation agreement or conditions and be responsible for following up on compliance with the terms of any such agreement after the transaction has been approved by CFIUS.
• While maintaining the current CFIUS 90-day timeline for full reviews, investigations and decisions, the Act requires a mandatory 45-day full investigation when, among other things, a foreign government or entity controlled by a foreign government is the acquiring company or if the transaction would result in foreign control of “critical infrastructure” and “could impair national security.” The Act thus mandates implementation by CFIUS of the Byrd Amendment, which was enacted in 1993 and intended to require full investigations in the case of foreign government acquisitions but which successive Democratic and Republican administrations had skirted implementing.
• However, the Act provides an exception to the above requirement if the secretary or deputy secretary of the Treasury and the equivalent level official in the “lead agency” determine that national security will not be impaired by the transaction. The Act thus provides an escape valve that can be exercised only by the highest political levels of the core agencies involved in the CFIUS review.
• The Act formally expands the concept of “national security” to include “issues relating to ‘homeland security,’ including its application to critical infrastructure.” The Act additionally defines “critical infrastructure” to include “systems and assets, whether physical or virtual, so vital to the United States” that their “incapacity or loss” would have a “debilitating impact on national security.” As a result, broader categories of acquisitions are likely to require CFIUS review and full investigation than previously was the case. Examples might include anything from roadways to telecommunications to power plants to banking and finance — all “critical infrastructure.” The breadth and vagueness of these concepts will, as has already been the case, likely increase the need for informal pre-filing consultations with CFIUS to determine whether or not a particular acquisition implicates “critical infrastructure.”
• The Act requires assessment of a country’s compliance with U.S. and multilateral counter-terrorism, nonproliferation and export control regimes for acquisitions by state-owned companies in the investigation stage. Thus, a country’s record of diverting U.S. technology or goods or of not cooperating with U.S. counterproliferation efforts could impact CFIUS reviews and necessitate mitigation measures to address such concerns or even disapprovals of acquisitions. If CFIUS approves acquisitions without dealing with these issues it will almost certainly open itself to congressional criticism once again.
• In a move that could open the door to congressional opposition to transactions by Middle Eastern acquirors, the Act requires an annual study on foreign direct investment in the United States, especially in “critical infrastructure,” by foreign governments or persons in foreign countries that comply with any boycott of Israel or that do not ban organizations designated by the Secretary of State as foreign terrorist organizations.
• The Act enhances the role of the Director of National Intelligence (“DNI”) by making that person an ex-officio member of CFIUS and requiring the director to undertake a thorough analysis of the transaction with respect to any national security implications and report such findings to CFIUS within 20 days of the commencement of the CFIUS review.
• Importantly, the Act provides for written notice to Congress at the conclusion of the CFIUS process for both reviews and investigations. The notice would provide details about the transaction and any mitigation agreements or written assurances. The Act does not require notification to Congress of pending cases.
• The Act also requires detailed annual reports to Congress on CFIUS’s activities, including information concerning transactions that have been reviewed or investigated during the previous 12 months.
• The Act requires the tracking of any withdrawn transactions to prevent potential risks that might have been identified.
• The Act provides for monitoring of mitigation agreements, whereby CFIUS or the president may reopen a case if a party to a mitigation agreement intentionally commits a material breach of that agreement. (CFIUS’s use of mitigation agreements has increased significantly in recent years.) The reopened review could result in additional mitigation requirements or the unwinding of the transaction. Previously CFIUS could reopen a review only if there were a material omission or misstatement by one of the parties during the review period. Now, the obligation to comply with mitigation agreements is ongoing (so-called “evergreen” agreements, a practice that CFIUS has incorporated in a number of mitigation agreements in practice during the past year).
• The Act requires CFIUS to publish regulations within 180 days that would impose civil penalties for violations of mitigation agreements or other conditions imposed as part of a CFIUS approval.
    The net effect of the Act is to codify what has become standard CFIUS practice in the wake of the DP World issue. It therefore should not dramatically change the process or climate for reviews of foreign investments from the way they are currently conducted. However, its inclusion of a broad concept of “critical infrastructure,” as well as its requirement of a mandatory full investigation in the case of foreign government acquisitions, will ensure that CFIUS will be examining more transactions, and those transactions more thoroughly, in the future.
    The larger question is whether the Act will allay the need for potential acquirors to continue to vet their individual transactions directly with potentially concerned members of Congress in advance of filing with CFIUS, a trend that has increased dramatically in the wake of DP World. If individual members of Congress are willing to disengage on these issues and allow the Act to work in practice, the Act could serve a salutary function in depoliticizing the CFIUS process as it currently exists.
However, it is not clear that that will be the case. Notwithstanding passage of the Act, various members of Congress and senior congressional staff have already voiced concerns about foreign government influence over security-related sectors of the U.S. economy, citing as particular concerns state-run investment pools known as “sovereign wealth funds” and individual transactions, such as Dubai International Capital’s recent acquisition of a stake in the large European defense firm EADS, which has investments in the United States, and Kazakhstan’s acquisition of a 10 percent share in Westinghouse Electric.

Congress Pushes Iran, Sudan and Burma Legislation

    Congress broke for the August recess with the House having advanced at least four major bills in July that would intensify economic pressure on Iran and Sudan by encouraging companies to divest from doing business in those countries. Further congressional action on these measures is likely in the autumn, and their prospects for passage in one form or another appear good.
    The first Iran bill, the “Iran Sanctions Enabling Act” (H.R. 2347), introduced by House Financial Services Committee Chairman Barney Frank (D-MA), passed by a vote of 408 to 6. It would authorize state and local governments to direct divestiture from companies with $20 million or more invested in Iran’s energy sector, companies that sell arms to the government of Iran and financial institutions that extend $20 million or more in credit to the government of Iran. It also would require publication of a list of businesses that have made such investments and insulate investment and pension managers from lawsuits arising from divestiture.
    A second highly controversial Iran bill (H.R. 957) would extend U.S. sanctions on Iran extraterritorially to hold U.S. parent companies liable for transactions by their foreign subsidiaries with Iran that would be prohibited as to those U.S. parents by the Office of Foreign Assets Controls’ Iranian Transactions Regulations. Although, the House deferred action on H.R. 957 until it returns from recess (partly in reaction to opposition from industry), it is likely to be taken up again when Congress returns.
    Yet another bill (H.R. 1400), sponsored by House Foreign Affairs Committee Chairman Tom Lantos (D-CA), along with 310 co-sponsors, would delete Section 9(c) of the Iran Sanctions Act of 1996, which gives the president authority to waive sanctions against persons who violate the act by investing in the Iranian oil and gas sectors. In the past, the president has waived enforcement of the Iran Sanctions Act against various European companies that have invested in the Iranian petroleum sector as a result of an accord negotiated in 1998 with the European Union (“EU”) in the face of an EU complaint to the World Trade Organization over the extraterritorial Iran Sanctions Act.
    Separately on Sudan, on July 31 the House passed H.R. 180 by a vote of 418 to 1. This measure would block the U.S. government from entering into any new contracts with certain companies that have invested in Sudan. It also contains a “Statement of Policy” supporting state efforts to pass laws that require state funds and pension funds to divest from companies doing business in Sudan. Both H.R. 180 and H.R. 2347 contain a “Sense of Congress” provision that provides that state divestiture efforts are not preempted under the Supremacy Clause of the U.S. Constitution and are authorized by Congress as an appropriate measure with regard to interstate or foreign commerce. The provision is intended to discourage legal challenges to such state laws under the Supremacy Clause, several of which have recently been successful.
    Finally, in late July both houses of Congress approved a joint resolution (H.J. Res. 44) that would extend U.S. sanctions against Myanmar (Burma) for one year.
    At the state level, a number of states, including Texas and Michigan, have begun to pursue measures to divest state pension funds from companies that do business in Iran, Sudan and similarly sanctioned countries. These measures vary greatly in their details and scope, and taken in the aggregate, could present significant compliance issues because of their lack of a uniform approach.
    In the meantime, the Department of the Treasury has continued its behind-the-scenes efforts to convince foreign banks to cease doing business with Iran. On July 20, Deutsche Bank reportedly became the latest European bank to terminate business with Iran. Treasury in the last year has prohibited two Iranian banks – Bank Sepah and Bank Saderat – from obtaining access to the U.S. financial system, and Treasury is rumored to have under consideration further orders against other Iranian banks, such as Bank Melli, Bank Markazi and the Iranian central bank.

Securities and Exchange Commission Backs Off on “Name and Shame” Web site

    On June 25 the Securities and Exchange Commission (“SEC”) unveiled a Web site entitled “State Sponsors of Terrorism” that published disclosure documents about companies’ investments in countries that the Department of State has designated as “state sponsors of terrorism.” The initiative was part of a “name and shame” exercise initiated by the SEC’s Office of Global Security Risk. However, inaccuracies in the list led to an outcry from industry and Congress, and on July 20 the SEC “temporarily suspended the availability of the website” so that it could undergo “reconstruction” and “improvement.”

Foreign Corrupt Practices Act Enforcement Trends

    The Department of Justice and the SEC, which administer separate sections of the Foreign Corrupt Practices Act (“FCPA”), have dramatically increased investigations and enforcement under the FCPA.
    In addition to approximately 45 pending enforcement actions resulting from the Iraq Oil-for-Food Program, the agencies have recently taken on investigations of foreign companies, such as BAE Systems, Siemens and Total. Enforcement has shifted from traditional targets, such as defense contractors and oil companies, to a broader range of sectors, including pharmaceuticals and medical products, telecommunications and technology. In addition, the SEC has taken an increasingly robust approach in enforcing the accounting and books and records provisions of the FCPA, even in the absence of evidence of bribery. It is expected that a series of significant penalty settlements will be announced shortly.