Defense Trade:

Identifying Foreign Acquisitions Affecting National Security Can Be Improved

NSIAD-00-144: Published: Jun 29, 2000. Publicly Released: Jun 29, 2000.

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Pursuant to a congressional request, GAO reviewed the process used by the Committee on Foreign Investment in the United States to identify foreign acquisitions of U.S. companies, focusing on current identification process used by the Committee and the effectiveness of the Committee's follow-up on acquisitions identified by its member agencies.

GAO noted that: (1) the identification process the Committee on Foreign Investment uses does not enable it to effectively identify all foreign acquisitions with possible effects on national security; (2) the Committee depends on a system of voluntary reporting by the parties to foreign acquisitions; (3) the Committee also encourages each member agency to inform the Committee of any acquisitions that comes to the agency's attention; (4) GAO did not attempt to identify foreign acquisitions of U.S. companies with potential national security implications that were not reported voluntarily; (5) however, GAO did find that member agencies become aware of such acquisitions in the course of their daily operations; (6) in some instances member agencies reported foreign acquisitions to the Committee, but in other instances agencies did not; (7) the Department of Defense and the Department of the Treasury officials informed GAO of three acquisitions that were known to officials in these agencies but the agencies did not inform the Committee; (8) for example, in March 1999, a German-owned firm acquired a U.S. manufacturer of ceramic body armor; (9) the U.S. company reported the acquisition to the Defense Security Service and Department of State's Office of Defense Trade Controls because the company manufactures classified defense products and was required by law to report the acquisition to Defense and State (but not to the Committee); (10) the company, the Defense Security Service and the Office of Defense Trade Controls did not inform or report this acquisition to the Defense, State or Treasury Departments' Committee representatives because there is no requirement to do so; (11) as a result, the Committee did not conduct a full assessment of this acquisition; (12) the Committee does not keep records of acquisitions referred by member agencies, does not document all contacts made with the parties to acquisitions to encourage voluntary reporting, and does not track whether these contacts led the parties to report the acquisition to the Committee; (13) as a result, Treasury officials could not tell GAO which acquisitions were identified by member agencies but not reviewed by the Committee; (14) further, the Committee has no process to inform all member agencies that potentially relevant unreported acquisitions have been identified; and (15) as a result, not all member agencies have the opportunity to review acquisitions identified by other member agencies for potential national security risks using relevant information available only to individual agencies.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Commerce Department has developed a form for use by Commerce personnel in providing information to the Department of Treasury regarding the acquisition of a U.S. company by a foreign entity with possible national security implications. Commerce will require employees to use this form to submit information on appropriate foreign acquisitions of U.S. companies.

    Recommendation: To improve the Committee's process for identifying foreign acquisitions with potential national security implications, the Secretaries of Commerce, Defense, Treasury, and State should establish procedures requiring agency officials to submit all known foreign acquisitions of companies with potential national security implications to the Committee on Foreign Investment.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The State Department's Office of Defense Trade Controls receives notifications of foreign acquisitions by organizations that are registered as munitions manufacturers. The State Department agreed with our recommendation and has begun forwarding these notifications to the Department of Treasury.

    Recommendation: To improve the Committee's process for identifying foreign acquisitions with potential national security implications, the Secretaries of Commerce, Defense, Treasury, and State should establish procedures requiring agency officials to submit all known foreign acquisitions of companies with potential national security implications to the Committee on Foreign Investment.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: The Department of Treasury has initiated a procedure to formalize the way in which CFIUS shares information about a non-notified transaction involving a foreign acquisition of a U.S. company that may affect national security. The staff chair has notified all CFIUS agencies to advise Treasury when an agency believes that a non-notifed transaction may be appropriate for CFIUS review. On receipt of this information, the staff chair will incorporate this transaction, along with whatever background information might be available from public sources about the transaction, into a list of non-notified transactions that is regularly circulated to all CFIUS agencies for their review. If CFIUS believes the parties to a particular transaction should file a notice, CFIUS will take appropriate action.

    Recommendation: The Secretary of the Treasury, in his role as Chair of the Committee on Foreign Investment in the United States, should establish a process for sharing information on all foreign acquisitions submitted by one member agency with all of the Committee's member agencies, so that agencies can check their databases to determine whether any potential national security implications exist.

    Agency Affected: Department of Commerce

 

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