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Lack of Government Transparency Threatens Foreign Investments

by Lucas Eaves, published

foreign investments

The Committee on Foreign Investment in the U.S. (CFIUS), a multi-agency committee chaired by the Secretary of the Treasury, is in charge of reviewing foreign acquisitions of U.S. businesses that could affect the national security of the United States. Share the article: Tweet

CFIUS is comprised of the heads of the departments of Defense, Homeland Security, State, Energy, the Office of the Special Trade Representative, and the Office of Science and Technology Policy.

While most requests are approved, in some occasions the CFIUS will regard a specific transaction as a strong threat to the country's national security. In this case, a number of options are possible.

First the foreign company can withdraw its investment in the face of the challenge. Second, an agreement can be found between the CFIUS and the foreign company that will allow the transaction to proceed while mitigating the national security threats. Finally, if the disagreement continues, the case is given to the President of the United States who has the power to block the transaction.

In recent years, the CFIUS work has significantly increased, going from eleven cases in 2006 to forty in 2011. This followed the enactment of the Foreign Investment and National Security Act (FINSA) in 2007, which strengthened the scrutiny process over foreign investments.

After 9/11, and more recently with the Chinese hacking scandals, Congress has expressed concerns about who controls strategic infrastructures such as ports, oil production facilities, and advanced technologies. One of the most recent example is the Ralls Corp case.

In September 2012, President Barack Obama, at the request of the CFIUS, banned the construction of four wind farms in Oregon by a Chinese company named Ralls Corp for national security reasons. The explanation given was that the wind farms would have been situated too close to a Navy base where training missions are conducted for drones.

Ralls Corp sued the CFIUS, as well as President Obama and Treasury Secretary Tim Geithner, for abusing their power.

At issue is the opacity of the CFIUS review process which requires a wide disclosure from foreign companies without reciprocity. If a deal is rejected or if a modification is approved, foreign companies are often left without an explanation for the decision.

At a time when U.S. companies are looking for investments and Chinese and other foreign companies have the resources to meet this demand, the lack of transparency of the CFIUS is acting as a deterrent. However, the lawsuit against CFIUS might change this.

A U.S. judge ruled that the Obama administration had the authority to force the company to sell the wind farms, but allowed the request for a justification to go forward.

“The statute expressly authorizes the president to do what he deems necessary to accomplish or implement the prohibition -- not merely to issue it,” wrote Judge Amy Berman.

Ralls' CEO hopes this decision will result in opening the CFIUS review process to more transparency. Tweet it: Tweet

However, even if it fails to do so, this challenge would have at least sparked a discussion over the methods of this process. While national security raises understandable concerns for the U.S, foreign investments and their impact on the U.S. economy should not be adversely affected.

With another important Chinese investment currently under review, the U.S. government will have to consider what would be the consequences of another unexplained refusal. Not only could it deter Chinese and other foreign companies from investing in the U.S, but American companies investing abroad could suffer from retaliation. A balance needs to be found between these two interests and the sooner, the better.

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