The environment for foreign investment in the United States is shifting. Most recently, a bid by Chinese-owned Ant Financial to acquire MoneyGram International Inc., a US money transfer company, was derailed early this year after the Committee on Foreign Investment in the United States (CFIUS) rejected proposals offered to try to mitigate national security concerns associated with the deal. 1 At the same time, high-profile US legislation to tighten and expand CFIUS controls seems to be gaining momentum. It remains to be seen what these developments portend.
Ant Financial is jointly owned by Jack Ma, the executive chairman of the powerful Chinese conglomerate Alibaba Group Holding Ltd., and other Alibaba executives. The deal to acquire MoneyGram was reportedly abandoned because of CFIUS concerns over Chinese access to personally identifiable information of US citizens and residents collected and transmitted by MoneyGram. When the deal's abandonment was announced, some commentators opined that the deal's demise meant that no Chinese deal would ever be approved. 2Fortunately for the many Chinese deals in the works, that is an overly pessimistic reading of this CFIUS decision. While the $1.2 billion deal's failure could be seen as merely the latest in a string of deals involving Chinese buyers to face difficult CFIUS scrutiny, unique risks associated with this deal may have been to blame for the deal's ultimate demise. Representative Robert Pittenger (R-NC), a vocal critic on foreign investment issues, had raised particular concerns about Ant Financial's potential access to sensitive personal and financial information of Americans through its proposed acquisition of MoneyGram. 3 The purchase would have given Ant Financial access to approximately 350,000 MoneyGram outlets in nearly every country in the world. 4
Further, some of the MoneyGram locations are within or very close to US military installations and frequently are used by soldiers, their families, and defense contractors to transfer money. 5 Foreign access to this information could threaten national security by revealing to a foreign power which individuals with access to intelligence or national defense information are facing financial trouble or other personal issues, making them vulnerable to foreign pressure. Additionally, some have worried that this acquisition could frustrate US law enforcement access to one of the most frequently used money transfer services and hinder efforts to investigate and curb money laundering, financing of terrorism, and related financial crimes. 6
The failed Chinese acquisition of MoneyGram therefore does portend difficulty for Chinese buyers interested in acquiring financial institutions, insurance companies, or even health care companies. However, this CFIUS action should not be seen as implying a radical change in CFIUS risk for companies maintaining less comprehensive or detailed personally identifiable information. Although the landscape for Chinese buyers of US companies generally has grown more difficult over the past year, investments are clearing the process. In January, CFIUS cleared the way for a subsidiary of Beijing-based semiconductor company NAURA Technology Group Co. to acquire Akrion Systems, LLC, a US supplier of wet-processing systems used for cleaning processing equipment, and packaging equipment for semiconductor products. 7 In December, CFIUS cleared Chinese buyer Zhengzhou Coal Mining Machinery Group's indirect acquisition of US-based Robert Bosch Motors Generators LLC, determining that the deal did not pose national security concerns. 8 And even if CFIUS raises national security concerns with a transaction, the parties can attempt to negotiate conditions to mitigate those concerns sufficiently to permit the deal's clearance.
Potential Chinese buyers and targets of Chinese acquisitions should not, however, ignore the Trump administration's and Congress' indications of heightened concern about the national security and economic implications of Chinese purchases of American companies. 9 Growing concern about Chinese government technological ambitions and policy actions, especially those involving control of technology and information, appear to have influenced CFIUS's consideration of potential Chinese acquisitions. In September 2017, President Trump blocked Chinese firm Canyon Bridge Capital Partners LLC's acquisition of US chip manufacturer Lattice Semiconductor Corp. 10 In July 2017, the Chinese conglomerate HNA Group abandoned its $416 million bid for Global Eagle Entertainment, Inc., a satellite-based connectivity and media company, after serious CFIUS opposition. 11 And in June 2017, Chinese firm TCL Industries Holdings withdrew its bid to purchase Novatel Wireless, Inc., a wireless "MiFi" company, due to CFIUS concerns. 12
Officials and lawmakers on both sides of the aisle have expressed concern about Chinese purchases of US companies dealing in semiconductors and artificial intelligence. The White House Council of Advisors on Science and Technology under President Barack Obama released a report in January 2017 warning that Chinese investment in the semiconductor industry could threaten US leadership and put national security at risk. 13Some have expressed worry that the Chinese government is directing companies tied closely to the Chinese government and Chinese Communist Party to invest in technologies with potential military applications—including semiconductors and communications technology, artificial intelligence, and robotics—to enhance China's military strength. 14
In response to increased Chinese interest in acquiring US companies, US lawmakers have introduced legislation calling for greater scrutiny of Chinese investment in the United States. In November, Senator John Cornyn (R-TX), Senator Dianne Feinstein (D-CA), and Senator Richard Burr (R-NC) introduced the Foreign Investment Risk Review Modernization Act (FIRRMA). 15 Representative Pittenger, along with bipartisan cosponsors, introduced an identical bill in the House. The bill has gained the support of US Treasury Secretary Steven Mnuchin and US Attorney General Jeff Sessions, two key officials involved in the CFIUS review process. 16 Lawmakers appear confident that some version of the bill will pass and be signed into law by President Trump by August. 17
The current proposed legislation is designed to enhance CFIUS's power to review and potentially reject foreign investment in US companies. Currently, CFIUS may review a transaction that could result in control of a US business by a foreign person ("covered transactions") to determine whether the transaction would negatively impact the national security of the United States. 18 The bill proposes three main changes to the CFIUS review process: (1) allowing CFIUS to review certain foreign investment that does not reach the level of "control" of a US company, (2) adding to the list of national security concerns that might result in rejection of a covered transaction, and (3) strengthening review of transactions involving unspecified "countries of special concern" that pose particular national security threats.
First, the bill would allow CFIUS to review non-control investments in critical technology or infrastructure, joint ventures involving technology transfers, and real estate investments near facilities used for military or national security purposes. This stems from concerns that companies may be structuring deals to gain access to technologies and other assets that would harm national security without having to "control" the target company, thus escaping CFIUS scrutiny. 19 The bill also contemplates further elaboration through regulation of which transactions are covered "by reference to the technology, sector, subsector, transaction type, or other characteristics." Additionally, it provides exemptions for countries with whom the United States has a mutual defense treaty, mutual national security safeguards, or a comparable foreign investment review process.
Second, the bill broadens the list of national security concerns that might result in rejection of a transaction. It would allow CFIUS to review potential increased reliance on foreign suppliers to meet defense requirements, effects on US technological and industrial leadership, costs of acquiring national security equipment and systems, risks to personally identifiable information or other sensitive data, cybersecurity vulnerabilities, and other national security concerns. The bill updates CFIUS's definition of "critical technologies" to include emerging technologies that may be essential for US technological superiority. Senator Chuck Schumer (D-NY) has been vocal in the past about adding review of potential economic harm to US interests through loss of jobs or technology to competitors in foreign countries. 20 However, the bill stops short of proposing CFIUS review of either economic security or "net benefits" more broadly, which also had been advocated by some.
Third, the bill increases review of transactions involving "countries of special concern," a provision that appears targeted at Chinese buyers. Additionally, the bill makes it mandatory, where it is currently voluntary, for the parties to a covered transaction to file a CFIUS notice if it involves the acquisition of at least a 25 percent voting interest in a US business by a foreign person owned in part by a foreign government.
While the bill appears poised to pass in some form later this year, industry leaders told the House Oversight Committee on January 9, 2018 not to rely solely on legislative changes to improve the CFIUS process. Admiral Dennis C. Blair, the former Director of National Intelligence under President Obama, emphasized that the CFIUS interagency team should be equipped with "sufficient resources to conduct this more thorough review." 21 In 2017, the Committee reviewed approximately 40 percent more cases than it did in 2016, and the review process both lasted longer and involved more withdrawals, refilings, and refusals. 22 Any foreign companies interested in acquiring US companies, as well as US companies seeking purchasers, should carefully watch the CFIUS review process and legislative reform efforts over the coming months.
1 Greg Roumeliotis, U.S. Blocks MoneyGram Sale to China's Ant Financial on National Security Concerns, Reuters (Jan. 2, 2018).
2 See,e.g.,MoneyGram: Ant Eaten, Financial Times (Jan. 3, 2018).; Anjani Triveda, Ant-Moneygram's Demise Spells the End for China-U.S. Deal Making, Wall St. J. (Jan. 3, 2018).
3 Bryan Bender,Chinese Grab for U.S. Money Transfer Giant Sets Off Alarms, Politico (Apr. 1, 2017).
4 Salvatore Babones, Alibaba's Failed MoneyGram Deal Shows How China's Payment Wars Are Spilling Over Into U.S., Forbes (Jan. 3, 2018).
5 Bryan Bender, Chinese Grab for U.S. Money Transfer Giant Sets Off Alarms, Politico (Apr. 1, 2017).
6 See Anti-Money Laundering Compliance Guide, MoneyGram.
7 Greg Roumeliotis, U.S. Clears Chinese Acquisition in Rare Move, Reuters (Jan. 17, 2018).
8 Zhengzhou Coal Mining Machinery Gets Greenlight from CFIUS to Buy Robert Bosch Starter, Reuters (Dec. 6, 2017).
9 See Arnold & Porter Kaye Scholer Advisory, New Presidential Order Blocking Chinese Acquisition of Semiconductor Firm Flags a Trend of Heightened CFIUS Review of Chinese Investments (Sept. 22, 2017); A&P Advisory, Presidential Prohibition of Chinese Company Purchase of Semiconductor Firm Highlights Increased U.S. Government Scrutiny of Chinese Investments (Dec. 21, 2016).
10 See Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Corporation Limited, The White House (Sept. 13, 2017).
11 Sumeet Chatterjee & Diane Bartz, US Regulatory Scrutiny Scuppers Deal for Unit of China's HNA, Reuters (July 25, 2017).
12 CFIUS Filing Abandoned, T.C.L. Industries Limited/TCL Corporation and Inseego Corp./Novatel Wireless, Trade Practitioner (June 12, 2017).
14 Robert D. Williams, CFIUS Reform and U.S. Government Concerns Over Chinese Investment: A Primer, LawfareBlog (Nov. 13, 2017).
15 See S. 2098, Foreign Investment Risk Review Modernizations Act of 2017.
16 Mary Lee, Mnuchin, Sessions Back Bill to Overhaul Foreign Investment Review, PoliticoPro (Dec. 15, 2017).
17 See Doug Palmer, Barr: Trump Could Get CFIUS Reform Bill by August, PoliticoPro (Jan. 9, 2018).
18 See generallySection 721, Defense Production Act of 1950,as amended byForeign Investment and National Security Act of 2007.
19 See, e.g., Foreign Investments and National Security: A Conversation With Senator John Cornyn, Council on Foreign Relations (June 22, 2017).
20 Ana Swanson, Targeting China's Purchases, Congress Proposes Tougher Reviews of Foreign Investments, N.Y. Times (Nov. 8, 2017).
21 Press Release, House Financial Services Committee, Subcommittee Examines Foreign Investment Process (Jan. 9, 2018).
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