Foreign Investment:

Implementation of Exon-Florio and Related Amendments

NSIAD-96-12: Published: Dec 21, 1995. Publicly Released: Dec 21, 1995.

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Pursuant to a congressional request, GAO examined the Committee on Foreign Investment in the United States' (CFIUS) implementation of the Exon-Florio legislation and related amendments, focusing on: (1) the characteristics of foreign investments in the United States and the extent to which they are reported to CFIUS; (2) the factors CFIUS considers in determining whether a foreign investment results in foreign control of a U.S. company; and (3) whether foreign control of U.S. companies threatens U.S. national security.

GAO found that: (1) about two-thirds of the cases notified to CFIUS between October 1988 and May 1994 involved defense-related and high-technology industries that raised possible national security concerns; (2) many companies voluntarily notified CFIUS of proposed investments in and acquisitions of U.S. companies, but, according to two private-sector databases, many others did not; (3) the CFIUS process was not intended to provide a comprehensive screening mechanism for all foreign investment although CFIUS officials expressed the view that, because CFIUS clearance essentially eliminates the risk of a forced divestiture, most transactions affecting national security are reported; (4) in deciding whether a foreign investment will result in a foreign company gaining control of a U.S. company, CFIUS considers many factors related to the investor's ability to affect key company decisions; (5) when deciding on foreign government control, CFIUS examines the extent to which a foreign government owns and controls the acquiring company; (6) of the 174 transactions filed between the 1992 legislation and December 1994, CFIUS decided there was foreign government control in 18 cases; (7) none of these cases were investigated since CFIUS decided the national security concerns were not sufficient to warrant further investigation; (8) the Exon-Florio legislation does not provide a precise definition of national security, and neither the statute nor the implementing regulations contain guidelines for weighing the various factors considered in examining the national security risks of a transaction; (9) as a result, CFIUS agencies have significant flexibility in making such judgments; (10) CFIUS members noted that they rely primarily on the Department of Defense's (DOD) assessment of national security risks; (11) the 1992 legislation requires DOD to direct appropriate defense intelligence and other agencies to assess the risks of diversion when DOD decides that a CFIUS case involves a company engaged in the development of defense-critical technology or is otherwise important to the defense industrial or technology base; and (12) of the 174 cases reviewed between October 1992 and December 1994, the Office of the Assistant Secretary of Defense for Economic Security found that 9 cases required a risk of diversion assessment.

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