Defense Trade: Mitigating National Security Concerns under
Exon-Florio Could Be Improved (12-SEP-02, GAO-02-736).
The Exon-Florio amendment to the Defense Production Act
authorizes the President to suspend or prohibit foreign
acquisitions, mergers, or takeovers of U.S. companies if (1)
there is credible evidence that a foreign controlling interest
might threaten national security and (2) legislation, other than
Exon-Florio and the International Emergency Economic Powers Act,
does not adequately or appropriately protect national security.
The President delegated the authority to review foreign
acquisitions of U.S. companies to an interagency group, the
Committee on Foreign Investment in the United States. The
Committee initiates investigations only when it cannot identify
potential mitigation measures in the review period to resolve
national security issues arising from the acquisitions or when it
needs time beyond the 30-day review to negotiate potential
mitigation measures and the companies involved are not willing to
request withdrawal of their notification. The Committee's process
for implementing Exon-Florio contains the following weaknesses
that may have limited effectiveness: (1) the Committee has not
established interim protections before allowing withdrawal when
concerns were raised and the acquisition had already been
completed (2) agreements between the Committee and companies
contained nonspecific language that may make them difficult to
implement and (3) agreements did not specify responsibility for
overseeing implementation and contained few provisions to assist
in monitoring compliance.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-736
ACCNO: A05145
TITLE: Defense Trade: Mitigating National Security Concerns
under Exon-Florio Could Be Improved
DATE: 09/12/2002
SUBJECT: Foreign corporations
Corporate mergers
Defense industry
International economic relations
Foreign investments in US
DOT Maritime Security Program
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GAO-02-736
Report to the Chairman, Subcommittee on National Security, Veterans
Affairs, and International Relations, Committee on Government Reform, U.
S. House of Representatives
United States General Accounting Office
GAO
September 2002 DEFENSE TRADE Mitigating National Security Concerns under
Exon- Florio Could Be Improved
GAO- 02- 736
Page i GAO- 02- 736 Defense Trade Letter 1
Results in Brief 2 Background 4 The Committee Investigates in Only Limited
Circumstances 6 The Committee*s Process for Implementing Exon- Florio May
Limit
Its Effectiveness 8 Conclusions 11 Recommendations for Executive Action 12
Agency Comments and Our Evaluation 12 Scope and Methodology 14
Appendix I The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio 17
Appendix II Comments from the Department of the Treasury 23
Appendix III Comments from the Department of Defense 26
Appendix IV Comments from the Department of Justice 30
Table
Table 1: Notifications to the Committee on Foreign Investment in the
United States and Actions, 1997- 2001 5
Figures
Figure 1: Evolution of Committee on Foreign Investment in the United
States Membership 18 Figure 2: The Committee on Foreign Investment in the
United
States Process According to 31 C. F. R. Part 800 19 Contents
Page 1 GAO- 02- 736 Defense Trade
September 12, 2002 The Honorable Christopher Shays Chairman, Subcommittee
on National Security, Veterans
Affairs, and International Relations Committee on Government Reform House
of Representatives
Dear Mr. Chairman: The Exon- Florio amendment 1 to the Defense Production
Act authorizes the President to suspend or prohibit foreign acquisitions,
mergers, or takeovers of U. S. companies 2 if (1) there is credible
evidence that a foreign controlling interest might threaten national
security and (2) legislation, other than Exon- Florio and the
International Emergency Economic Powers Act, 3 does not adequately or
appropriately protect national security. The President delegated the
authority to review foreign acquisitions of U. S. companies to an
interagency group, the Committee on Foreign Investment in the United
States. Implementing regulations require that the Committee undertake an
initial 30- day review after receiving a voluntary submission from the
companies involved in an acquisition. If the Committee decides during this
30- day review that there could be credible evidence to support the belief
that the acquisition may threaten national security, the Committee can
initiate a 45- day investigation. After completing the investigation, the
Committee submits a recommendation to the President. The President has 15
days to decide whether to allow the acquisition to proceed or to suspend
or prohibit it. In 1992, the law was amended to require that the President
report all cases requiring a presidential determination to the Congress.
Previously, the law required a report only when the President took action
to block an acquisition.
1 50 U. S. C. app. 2170. 2 In the remainder of this report, acquisitions,
mergers, and takeovers are referred to as acquisitions. 3 The
International Emergency Economic Powers Act gives the President broad
powers to
deal with any *unusual and extraordinary threat* to the national security,
foreign policy, or economy of the United States (50 U. S. C. 1701- 1706).
To exercise this authority, however, the President must declare a national
emergency to deal with any such threat. Under this legislation, the
President has the authority to investigate, regulate, and, if necessary,
block any foreign interests* acquisition of U. S. companies (50 U. S. C.
1702( a)( 1)( B)).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 02- 736 Defense Trade
In response to your request, we examined the process by which the
Committee on Foreign Investment in the United States reviews and
investigates foreign acquisitions of U. S. companies. Specifically, we (1)
determined the circumstances under which the Committee formally
investigates acquisitions and (2) identified weaknesses in the Committee*s
process for implementing Exon- Florio that limit its effectiveness.
The Committee initiates investigations only when it cannot identify
potential mitigation measures in the review period to resolve national
security issues arising from the acquisitions or when it needs time beyond
the 30- day review to negotiate potential mitigation measures and the
companies involved are not willing to request withdrawal of their
notification. Of 320 acquisitions notified to the Committee from 1997
through 2001, only 4 were investigated; and only 1 resulted in a
presidential determination. For acquisitions in which the Committee
identified national security concerns but was unable to mitigate them
within the 30- day review period, it allowed companies to withdraw and
resubmit their notification to provide further information and/ or provide
additional time to mitigate those concerns. Also, the additional time
allowed agencies to take actions under other laws and regulations that
could address the Committee*s concerns. Where these actions would address
concerns, the Committee could approve the acquisition without resorting to
an investigation.
The Committee*s process for implementing Exon- Florio contains the
following weaknesses that may have limited its effectiveness:
The Committee has not established interim protections before allowing
withdrawal when concerns were raised and the acquisition had already been
completed. We identified two cases in which the companies completed the
acquisition prior to initially filing with the Committee, withdrew their
notification because of unresolved national security concerns, and failed
to promptly re- file. As a result, potential threats to national security,
such as foreign access to export controlled technology, remained.
Agreements between the Committee and companies contained nonspecific
language that may make them difficult to implement. For example, one
agreement was modeled on the network security agreements that the
Department of Justice has negotiated with some telecommunications
companies and that have been attached as conditions to Federal
Communications Commission licensing orders. Results in Brief
Page 3 GAO- 02- 736 Defense Trade
However, this agreement contained provisions that Justice Department
officials acknowledged were less specific and less stringent than many
similar provisions in network security agreements.
The agreements did not specify responsibility for overseeing
implementation and contained few provisions to assist in monitoring
compliance. For example, one contained no time frame by which the
conditions in the agreement had to be implemented. The other contained
time frames but no consequences for failure to meet the time frames.
This report contains recommendations for the Secretary of the Treasury as
Chair of the Committee on Foreign Investment in the United States. We are
recommending that the Secretary of the Treasury (1) establish interim
protections before allowing withdrawal for acquisitions in which companies
have completed or plan to complete the acquisition prior to a Committee
decision, (2) increase the specificity of actions required by mitigation
measures negotiated under the authority of Exon- Florio, and (3) designate
in the agreement, the agency responsible for overseeing implementation of
the agreement and monitoring compliance with mitigation measures.
In commenting on a draft of this report, the Treasury Department agreed to
implement our recommendation to more clearly identify in future agreements
the agency responsible for ensuring compliance with mitigation measures,
but disagreed with our other two recommendations. Treasury stated that the
Committee already has the authority to place conditions on withdrawals and
could conclude cases involving withdrawal more expeditiously if it strove
to do so, without compromising national security or the U. S. open
investment policy. However, in the two cases we identified in which the
companies completed the acquisition prior to filing with the Committee and
were allowed to withdraw their notifications, the Committee did not use
its authority to ensure that the companies re- filed and that the cases
were concluded expeditiously. Treasury also questioned whether greater
specificity in the agreements would have provided additional national
security protections in the two cases we cited. In our opinion, greater
specificity would provide greater protection by making it easier for
agencies to effectively evaluate compliance with agreements. The
Departments of Defense and Justice also provided comments, which are
reprinted in the appendixes.
Page 4 GAO- 02- 736 Defense Trade
In 1975, the President established the interagency Committee on Foreign
Investment in the United States to monitor the impact and coordinate U. S.
policy on foreign investment in the United States. In 1988, the Congress
enacted the Exon- Florio amendment to the Defense Production Act. Exon-
Florio authorized the President to investigate the impact of foreign
acquisitions of U. S. companies on national security and to suspend or
prohibit an acquisition if it might threaten national security and no
legislation, other than Exon- Florio and the International Emergency
Economic Powers Act, could adequately protect national security. The
President delegated the authority to investigate to the Committee. 4
The Committee operates at two levels: staff representatives who perform
initial reviews of companies* notices and principals who are the decision
makers on issues of national security. The Secretary of the Treasury
serves as the Committee Chair and Treasury*s Office of International
Investment coordinates the Committee*s activities. This office has the
dual responsibility of monitoring foreign investment in the United States
and advocating free trade and world markets open to foreign investment, i.
e., the U. S. open investment policy. In implementing Exon- Florio, the
Committee seeks to preserve the confidence of foreign investors that they
will be treated fairly while implementing the intent of Exon- Florio. That
is, to provide a mechanism to review, and if the President finds
appropriate, to restrict foreign investment that threatens to impair the
national security.
Exon- Florio and implementing regulations provide the Committee with broad
discretion to evaluate and make decisions about issues of potential
national security risk. Neither the law nor its implementing regulations
define *national security,* although the law provides guidance on factors
to consider, such as U. S. technological leadership in national security
areas. The Committee interprets its authority to conduct an investigation
as providing the Committee the authority to negotiate measures to mitigate
national security concerns when other regulatory regimes do not apply.
4 Membership on the 11- member Committee was established by Executive
Order and includes the Departments of Commerce, Defense, Justice, and
State; the Council of Economic Advisors; the National Economic Council;
the National Security Council; the Office of Management and Budget; the
Office of Science and Technology Policy; and the United States Trade
Representative. Treasury, as Chair, has discretion to invite other
agencies to participate in the Committee*s activities. Background
Page 5 GAO- 02- 736 Defense Trade
In an uninterrupted process, the Committee and the President would have up
to 90 calendar days to review, investigate, and determine what if any
action the President would take concerning an acquisition. The companies
can request withdrawal of their voluntary notice at any time up to the
President*s decision. (See app. I for a detailed discussion of the
Committee*s process.)
Notifying the Committee of an acquisition is not mandatory. However, the
Committee may review any acquisition it identifies that has not been
notified. In June 2000, we recommended that the Secretaries of Commerce,
Defense, Treasury, and State establish procedures for the Committee and
member agencies to improve their ability to identify foreign acquisitions
with potential national security implications. 5 The Committee also may
reopen a case if it learns that companies submitted false or misleading
information in their notice.
From 1997 through 2001, the Committee received 333 notices for 320
proposed or completed acquisitions. Table 1 provides summary data on
notices filed with the Committee.
Table 1: Notifications to the Committee on Foreign Investment in the
United States and Actions, 1997- 2001 Year Notifications Acquisitions a
Investigations
Notices withdrawn after investigation initiated Presidential
determination
1997 62 60 0 0 0 1998 65 62 2 2 0 1999 79 76 0 0 0 2000 72 71 1 0 1 2001
55 51 1 1 0
Total 333 320 4 3 1
a Acquisitions that were withdrawn and re- filed are shown in the year of
initial notification. Source: Based on Treasury Department Office of
International Investment data.
In most instances, the Committee concluded its activities under ExonFlorio
within 30 days of receiving notification because (1) the Committee did not
identify any issues of national security, (2) the companies and the
government agencies addressed potential national security concerns prior
5 U. S. General Accounting Office, Defense Trade: Identifying Foreign
Acquisitions Affecting National Security Can Be Improved, GAO/ NSIAD- 00-
144 (Washington, D. C.: June 29, 2000).
Page 6 GAO- 02- 736 Defense Trade
to filing, or (3) the companies and the government agreed on measures to
mitigate national security concerns before the end of the 30- day review.
About 96 percent (306 of 320 acquisitions) were concluded within 30 days.
The Committee has initiated investigations under only limited
circumstances, namely, when it could not identify potential mitigation
measures in the review period that would resolve national security issues
arising from the acquisitions or when it needed more time than the 30- day
review period to complete its work and the companies involved were not
willing to request withdrawal of their notification. Since 1997, the
Committee has initiated only four 45- day investigations. The Committee
initiated investigations because of concerns about the potential for
unauthorized transfers of technology and because it could not identify
measures that would mitigate those concerns or needed extra time beyond
the 30- day review to negotiate possible mitigation measures, but the
companies were not willing to request withdrawal of their notifications.
As a matter of practice, the Committee tries to avoid the use of
investigations and presidential determinations. The Committee reviews
foreign acquisitions to protect national security while seeking to
maintain the U. S. open investment policy. For many companies, being the
subject of an investigation has negative connotations. Avoiding an
investigation helps to maintain the confidence of investors that the
government does not view the acquisition as problematic. Also, a
presidential determination could be politically sensitive. According to
one Committee staff member, the Committee looks for the best way to work
out national security concerns without an investigation.
Since 1997, the Committee has allowed companies involved in 13
acquisitions (including 3 of the 4 for which an investigation was
subsequently initiated) to withdraw their notifications and re- file at a
later date rather than initiate an investigation. In some, the time was
needed for other agencies to complete reviews of the acquisition under
other laws and regulations. For example, the Committee allowed two
shipping companies to withdraw the notification of their planned merger to
provide time for the companies to request approval from the Maritime
Administration. The companies re- filed so that Committee approval would
coincide with the end of the Maritime Administration*s 90- day review. The
Maritime Administration required the companies to transfer operations of
The Committee
Investigates in Only Limited Circumstances
Page 7 GAO- 02- 736 Defense Trade
ships that participated in the Maritime Security Program 6 to a U. S.-
owned operator to prevent foreign ownership of ships that the United
States would rely on in wartime. According to a Committee official, based
on the Maritime Administration*s approval, the Committee did not need to
initiate an investigation. In others, the Committee used the extra time to
clarify such issues as the nature of the foreign ownership, products and
technologies that were subject to U. S. export control laws, relationships
with countries or companies of concern, and future plans for the U. S.
company.
In three acquisitions, the companies chose not to request withdrawal and
the Committee initiated investigations. In two of these cases, the
companies had withdrawn their notification once to provide more time to
negotiate agreements to protect sensitive information and to provide more
information. The companies then re- filed with the Committee and began a
new 30- day review period. However, by the end of the second 30- day
review they had not reached agreement and the companies were unwilling to
withdraw again, so the Committee initiated an investigation. In one case,
the companies and the Committee agreed on mitigation measures after the
investigation ended but prior to a presidential determination. The
Committee allowed the companies to withdraw the notification again and re-
file it as a new case to avoid the need for a presidential determination.
In the second case, the companies were unable to reach agreement with the
Defense Department and the investigation ended after the companies agreed
to abandon the proposed acquisition.
In the third case, Committee members had raised concerns about the
potential for foreign government access to sensitive information and the
ability of the foreign company to deny the U. S. government access to
information. The Committee and the companies were unable to reach
agreement on how to mitigate these national security concerns within the
30- day review period and the companies were unwilling to withdraw the
notification, so the Committee initiated an investigation. By the end of
the investigation, the Committee and the companies had concluded an
agreement in time for the Committee to recommend that the President take
no action. Accordingly, the President determined that no further action
was necessary and the acquisition was reported to the Congress.
6 The Maritime Security Program provides the Defense Department access to
commercial vessels operating under U. S.- flag registry and related assets
in a time of national emergency. The Department of Transportation*s
Maritime Administration is responsible for administering the program.
Page 8 GAO- 02- 736 Defense Trade
In another case in which the acquisition had already occurred, the
Committee was unwilling to allow a second withdrawal of the notification.
The Committee had allowed the company to withdraw and re- file to allow
time to address export control concerns. However, the Committee could not
resolve concerns about unauthorized transfers of technology. As a result,
it initiated an investigation. During the investigation, the company asked
to withdraw its notification instead of waiting for a presidential
determination. The Committee permitted the company to withdraw on the 45th
day of the investigation, with the understanding that the foreign company
would divest the U. S. company.
Weaknesses in the Committee*s process for implementing Exon- Florio may in
some cases have resulted in ineffective national security protections
because the Committee allowed withdrawal of cases in which the acquisition
had been completed without establishing interim protections, used
nonspecific provisions or language in agreements it had concluded with
companies to mitigate national security concerns, and did not identify the
agency responsible for overseeing implementation and monitoring compliance
with the agreement.
According to Committee officials, few of the acquisitions for which the
Committee receives notification are completed prior to the Committee
concluding its responsibilities under Exon- Florio. Therefore, the period
before the companies re- file generally creates limited risk to national
security because, until the acquisition is completed, the foreign company
does not have full access to the U. S. company*s resources. Committee
officials told us that the companies* desire to conclude the acquisition
provides an incentive for the companies to resolve issues and re- file as
quickly as possible. However, this incentive does not exist when companies
notify the Committee after concluding their acquisition.
We identified two instances where long periods had elapsed between the
companies concluding their acquisition and the Committee completing its
work. One company that filed its notification almost 2 years after
concluding the acquisition asked to withdraw its notification near the end
of the 30- day review to provide additional information and to address
export control issues the Committee had identified. The company waited
over 9 months to re- file. After re- filing, the Committee determined that
concerns about unauthorized transfers of technology could not be mitigated
and the company agreed to divest the acquired company. However, the
foreign company had the ability to access the technologies The Committee*s
Process for Implementing Exon- Florio May Limit Its Effectiveness
Allowing Withdrawals of Completed Acquisitions Can Delay National Security
Protections
Page 9 GAO- 02- 736 Defense Trade
that prompted the Committee*s concern for almost 3 years, from the time
the acquisition was concluded until the company agreed to divest the
acquisition to address the Committee*s concerns.
In the second case, the company filed with the Committee more than a year
after completing the acquisition. The Committee allowed the company to
withdraw the notification to provide more time to answer the Committee*s
questions and provide assurances concerning export control matters. The
company did not re- file for more than a year after withdrawing the
original notification. The Committee allowed the company to withdraw its
notification a second time because there were still unresolved issues.
More than a year has passed since the second withdrawal and the company
has yet to re- file.
In the two acquisitions that required the Committee to conclude agreements
under the authority of Exon- Florio, the agreements contained provisions
or language that may make them difficult to implement. In one instance,
the Defense Department was concerned about the release of certain
technologies to foreign parties and took the lead in negotiating an
agreement. In the other instance involving a communications company, the
Justice Department was concerned about access to subscriber information,
among other matters, and took the lead in negotiating an agreement.
The agreement negotiated by the Defense Department contained language that
was open to interpretation. It required a *good faith effort* to divest a
subsidiary to mitigate a concern about access to technology and provided
an alternative 7 if the company could not find a domestic purchaser to
make a *reasonable* offer. The agreement did not include criteria defining
what actions would constitute a *good faith effort* nor what would be a
*reasonable* offer. Accordingly, when the company divested part, but not
all, of the subsidiary and cited the lack of interested buyers as the
rationale, the agreement contained no criteria that would allow government
officials to determine whether the company*s efforts to sell the
subsidiary were made in good faith. Likewise, without measurable criteria
in the agreement, it was not possible to determine whether the
7 If the company was unable to divest the subsidiary, it was required to
transfer a certain portion of the subsidiary*s business to a new entity
that would be controlled by an independent governance board. Nonspecific
Language May
Make Agreements Difficult to Implement
Page 10 GAO- 02- 736 Defense Trade
sole bidder for the entire subsidiary made a reasonable offer. Further,
although the divestiture or the alternative was considered necessary,
there were no criteria for determining whether the partial divestiture
served the same purpose. Without clear criteria, government officials
could not effectively evaluate compliance with the agreement and could be
faced with the need to litigate questions of this nature.
The Justice Department modeled the agreement it negotiated on network
security agreements it has used with some telecommunications companies.
These agreements are attached as conditions to Federal Communications
Commission licensing orders. 8 While the agreement negotiated under the
authority of Exon- Florio addressed many of the same issues as the network
security agreements, the provisions were often less detailed. In
discussions with Justice Department officials, they acknowledged that
several provisions were less specific and less stringent than those in
some network security agreements. They said that, in their opinion, Exon-
Florio offers less bargaining power to the government than the
Communications Act, which underlies the Federal Communications Commission
licensing process. As a result, conditions negotiated under Exon- Florio
may be less stringent than conditions they have negotiated with some
telecommunications companies.
Exon- Florio implementing regulations do not provide guidance on
monitoring company compliance with agreements. Committee officials have
stated that the Committee generally defers to various federal agencies for
monitoring activities, even in cases in which the authority to negotiate
mitigation measures was based on Exon- Florio. One Committee official
noted that these agencies have the expertise that the Committee lacks.
However, neither of the two agreements negotiated under the authority of
Exon- Florio specified which agency would be responsible for monitoring
implementation.
8 Although the Federal Communications Commission is not a party to network
security agreements and defers to executive branch agencies on matters
involving national security, the Commission retains discretion to deny,
condition, or revoke a license if it determines that the public interest,
which includes national security concerns, will be served by doing so. The
Justice Department separately negotiates network security agreements with
telecommunications companies to mitigate concerns, such as illegal
wiretapping. At the Justice Department*s request, the Commission has
conditioned its approval of some proposed license transfers or assignments
on compliance with the signed agreement and has attached such agreements
as part of Commission licensing orders. Provisions on Monitoring
Compliance Are Lacking
Page 11 GAO- 02- 736 Defense Trade
Provisions to assist agencies in monitoring agreements were also lacking.
One agreement contained no requirement for the company to demonstrate
compliance and no time frames by which provisions were to be implemented.
The other required the company to appoint a board member, subject to
approval by the Secretaries of the Treasury and Defense, to oversee the
implementation of the agreement and provide a semiannual status report to
the Committee and the Defense Department. It provided time frames for
certain actions to occur, but it contained no consequences for failure to
comply with the time frames, thus providing no incentive for the company
to act within the time frames. And in fact, the company failed to meet the
terms of one provision within the agreed upon time frame.
This approach is less stringent than the approach used in consent
agreements by the Department of Justice and the Federal Trade Commission
in resolving antitrust issues during reviews of mergers and acquisitions.
Some consent agreements contain provisions to ensure that the government
has access to documents and people to verify compliance with the terms of
the agreement. Some also include provisions allowing the government some
approval authority over the buyer of a company in the event that a
divestiture is required and provide for the government to appoint trustees
to monitor the divestiture. If the companies do not divest within the
agreed time frame, some consent agreements also provide for a trustee to
manage the divestiture.
For the most part, the Committee on Foreign Investment in the United
States is able to fulfill its responsibility to ensure that foreign
acquisitions of U. S. companies do not threaten national security without
resorting to investigations. When the process could not be completed
within the 30 days, the Committee has allowed companies to withdraw and
re- file to avoid initiating an investigation. However, this approach can,
in certain circumstances, negate the effectiveness of the Exon- Florio
statute. Typically, the Committee reviews a proposed acquisition for
national security concerns before the acquisition is concluded. However,
when companies have completed an acquisition before filing with the
Committee, the potential for harm already exists and any actions to
prevent harm can only be after the fact. Allowing companies to withdraw
notification to the Committee when an acquisition has already occurred
without instituting interim protections risks the very harm to national
security that Exon- Florio was enacted to prevent. Likewise, when
agreements are concluded to mitigate national security concerns, the lack
of specificity in actions called for by the agreements and the uncertain
Conclusions
Page 12 GAO- 02- 736 Defense Trade
responsibility for implementing and monitoring make assuring compliance
difficult.
In view of the need to assure that national security is protected during
the period that withdrawal is allowed for companies that have completed or
plan to complete the acquisition prior to the Committee completing its
work, we recommend that the Secretary of the Treasury, in his capacity as
Chair of the Committee on Foreign Investment in the United States, revise
implementing regulations to require specific interim protections prior to
allowing withdrawal for companies that have completed or plan to complete
the acquisition before the Committee has completed its work. Further, to
ensure compliance with agreements concluded under the authority of Exon-
Florio, we recommend that the Secretary of the Treasury, in his capacity
as Chair of the Committee on Foreign Investment in the United States, (1)
increase the specificity of actions required by mitigation measures in
future agreements negotiated under the authority of Exon- Florio and (2)
designate in the agreement the agency responsible for overseeing
implementation and monitoring compliance with mitigation measures.
In commenting on a draft of our report, the Treasury Department stated
that understanding the context in which the Committee implements Exon-
Florio would aid in assessing the report*s conclusions and
recommendations. Treasury explained in its comments that the Congress
intended that Exon- Florio be invoked only in cases where other laws were
not adequate or appropriate to protect national security. Further,
Treasury noted that the United States has traditionally maintained an open
investment policy because it benefits our economy. Both Treasury and
Defense disagreed with our recommendations (1) for interim measures to
protect national security when companies that have completed an
acquisition are allowed to withdraw their notification and (2) that
increased specificity of actions be required by mitigation measures in
future agreements negotiated under the authority of Exon- Florio. The
Treasury Department agreed to act on our recommendation to make the agency
responsible for ensuring compliance with mitigation measures more explicit
in future agreements.
The Treasury Department stated that we focused on only a few cases and
that it is unusual for agreements to be negotiated under the authority of
Exon- Florio. We agree. As Treasury noted in its comments, the Congress
intended that Exon- Florio be invoked only when other laws are not
Recommendations for
Executive Action Agency Comments and Our Evaluation
Page 13 GAO- 02- 736 Defense Trade
adequate or appropriate to protect national security, and thus acts as a
safety net. However, the two cases in which we raise concerns about
granting an extended withdrawal period were the universe of cases in which
companies that have already completed the acquisition prior to notifying
the Committee have requested and been granted withdrawal. Likewise, the
two cases in which we believe greater specificity was needed in the
agreements represent 100 percent of the cases in which Exon- Florio was
the basis for an agreement. As a result, we believe that the current
process is not an effective safety net.
The Departments of Treasury and Defense stated that our recommendation for
interim measures is not necessary. Further, the departments said that
negotiating interim measures could take considerable time and effort, thus
delaying a final review of the acquisition. Treasury also said that the
Committee already has the authority to place conditions on withdrawals
without amending the implementing regulations and that by striving to do
so, it can conclude its cases more expeditiously without compromising
national security or the U. S. open investment policy. We did not intend
for the regulations to call for negotiating interim measures, but rather
for the Committee to use its authority to impose them as a condition of
withdrawal under certain circumstances. In one of the cases we identified,
the company waited over 9 months to re- file with the Committee, and when
the Committee could not mitigate its concerns about unauthorized transfers
of technology, the company agreed to divest. In the other case, the
company did not re- file for more than a year after withdrawing the
original notification, and has yet to re- file more than a year after the
second withdrawal. In these cases, the Committee did not use its authority
to ensure that the companies refiled and that the cases were concluded
expeditiously. Therefore, for those cases in which the acquisitions occur
prior to the Committee completing its work, we continue to believe
revising the implementing regulations to require interim protections prior
to granting withdrawal would ensure that cases involving completed
acquisitions are concluded more expeditiously.
The departments questioned whether greater specificity in the agreements
we cited would have provided additional national security protections. In
our opinion, greater specificity would provide greater protection by
making it easier for agencies to effectively evaluate compliance with
agreements. For example, in the instance we noted where an agreement
called for a *good faith effort* to sell a subsidiary, the foreign company
sold only part of the subsidiary and deemed it a *good faith effort,* even
though at least one other company offered to buy the entire subsidiary.
Further, the foreign company sold the subsidiary in exchange for stock in
Page 14 GAO- 02- 736 Defense Trade
the acquiring company. The agreement also provided, if divestiture was not
possible, for the foreign company to ensure that the subsidiary would be
able to support government contracts, such as by continuing a certain
level of investment in equipment and personnel. The foreign company
maintains that those requirements do not apply to the part of the
subsidiary that was not divested. The government officials monitoring the
agreement would need to decide whether what the company did constituted a
*good faith effort* and whether the partial divestiture was adequate to
protect national security as called for by the agreement. In our view,
mitigation measures that are open to interpretation increase the
difficulty of determining compliance and thus provide the potential for
harm to national security.
The Treasury Department agreed to act on our recommendation to make
explicit which agency has responsibility for reviewing compliance with
mitigation measures. However, Treasury, along with the Defense Department,
maintained that the accountability in the two cases we cited was clear
because the agreements were signed by policy level officials. During our
review, the agencies did not provide evidence to show that anyone was
ensuring that the companies were complying with the agreements. Although
the Justice Department stated in its comments that officials from the
Federal Bureau of Investigation visited the offices of the U. S. company
to assess its compliance with the agreement, Bureau officials told us that
only one visit took place and that they have no additional plans to verify
compliance. In addition, the Defense Department did not provide any
documentation showing that it took action to ensure the companies were
complying with the agreement beyond some initial meetings. Defense
Department officials also had indicated that it was not their
responsibility to monitor compliance. Therefore, we believe that it is
necessary to be more specific in assigning responsibility to ensure
company compliance with commitments to the Committee.
Treasury, Defense, and Justice Department comments are reprinted in
appendixes II through IV, respectively.
We examined 17 acquisitions notified to the Committee on Foreign
Investment in the United States between January 1, 1997, and December 31,
2001. They included the 4 acquisitions that were investigated, 12 of the
acquisitions that were withdrawn and re- filed, and 1 acquisition
suggested by Committee staff. The objective of the case reviews was to
understand and document the Committee*s process for reviewing foreign
acquisitions of U. S. companies. We did not attempt to validate the
conclusions reached Scope and
Methodology
Page 15 GAO- 02- 736 Defense Trade
by the Committee on any of the cases we reviewed. We analyzed data on
acquisitions from relevant Committee member agencies, including the
Departments of Commerce, Defense, Justice (including the Federal Bureau of
Investigation), State, and Treasury. We also discussed the Committee*s
process with Committee staff officials.
To determine under what circumstances the Committee formally investigates
foreign acquisitions, we interviewed Committee staff level members. We
reviewed all four cases that went to investigation since 1997. After
reviewing these, we interviewed Committee members, documented their
national security concerns, and discussed the measures needed to mitigate
those concerns.
To determine whether weaknesses exist in the Committee*s implementation of
Exon- Florio, we analyzed and discussed with Committee staff members the
laws and regulations that grant the Committee authority to identify,
negotiate, and mitigate national security concerns. For the
telecommunications cases, we interviewed Federal Communications Commission
officials and discussed their regulatory processes related to license
transfer. We also compared Exon- Florio agreements to consent agreements
used by the Department of Justice and the Federal Trade Commission in
antitrust actions.
We performed our work from June 2001 through May 2002 in accordance with
generally accepted government auditing standards.
As we agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter. We will then send copies to the
Chairman and Ranking Minority Member of the Senate Committee on Banking,
Housing, and Urban Affairs and the Chairman and Ranking Minority Member of
the House Committee on Financial Services and the Ranking Minority Member
of the Subcommittee on National Security, Veterans Affairs, and
International Relations of the House Committee on Government Reform. We
will also send copies to the Secretaries of Commerce, Defense, Justice,
State, and the Treasury; the Chairman, Council of Economic Advisors; the
Director, National Economic Council; the Assistant to the President for
National Security Affairs; the Director, Office of Management and Budget;
the Director, Office of Science and Technology Policy; and the United
States Trade Representative. We will also make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http:// www. gao. gov.
Page 16 GAO- 02- 736 Defense Trade
Please contact me on (202) 512- 4841 if you or your staff has any
questions concerning this report. Major contributors to this report were
Thomas J. Denomme, Paula J. Haurilesko, Monica Brym, Gregory K. Harmon,
Anne W. Howe, John Van Schaik, and Michael C. Zola.
Sincerely yours, Katherine V. Schinasi Director Acquisition and Sourcing
Management
Appendix I: The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio
Page 17 GAO- 02- 736 Defense Trade
In 1975, the President established the interagency Committee on Foreign
Investment in the United States to monitor the impact of foreign
investment in the United States and to coordinate the implementation of U.
S. policy on foreign investment. 1 In fulfilling this responsibility, the
Committee was expected to (1) analyze trends and significant developments
in foreign investment in the United States, (2) provide guidance on
arrangements with foreign governments for advance consultation on their
prospective major investments in the United States, (3) review investments
that may have major implications for U. S. national interest, and (4)
consider proposals for new legislation or regulations relating to foreign
investment.
In 1988, the Congress enacted the Exon- Florio amendment 2 to the Defense
Production Act. Exon- Florio authorized the President to investigate the
impact of foreign acquisitions 3 of U. S. companies on national security
and to suspend or prohibit an acquisition if credible evidence exists that
a foreign controlling interest may threaten national security and no
legislation, other than Exon- Florio and the International Emergency
Economic Powers Act, can adequately protect national security.
The President delegated the authority to conduct investigations under
Exon- Florio to the Committee on Foreign Investment in the United States.
The Committee, chaired by the Secretary of the Treasury, is currently
composed of representatives from the Departments of Commerce, Defense,
Justice, and State; the Council of Economic Advisors; the National
Economic Council; the National Security Council; the Office of Management
and Budget; the Office of Science and Technology Policy; and the United
States Trade Representative. 4 Figure 1 shows how the Committee*s
membership evolved from 1975 to the present.
1 Executive Order No. 11858, reprinted as amended in 15 U. S. C. 78b
(2002). 2 50 U. S. C. app. 2170. 3 In this appendix, acquisitions,
mergers, and takeovers are referred to as acquisitions. 4 Treasury, as
Committee Chair, can invite other agencies to participate in the
Committee*s activities. For example, representatives from the Department
of Energy and the National Aeronautics and Space Administration
participate in reviews and investigations of certain acquisitions.
Appendix I: The Committee on Foreign
Investment in the United States and the Process for Implementing Exon-
Florio
Appendix I: The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio
Page 18 GAO- 02- 736 Defense Trade
Figure 1: Evolution of Committee on Foreign Investment in the United
States Membership
a Executive Order 12661 also delegated to the Committee the President*s
authority to investigate foreign acquisitions of U. S. companies. b
Executive Order 12860 implemented the suggestion in Public Law 102- 484 to
add the Director of the Office of Science and Technology Policy and the
Assistant to the President for National Security. Source: GAO.
The Treasury Department*s Office of International Investment coordinates
the Committee*s activities and is responsible for monitoring foreign
investment in the United States while also advocating U. S. policy on open
investment.
In 1991, the Treasury Department issued regulations to implement Exon-
Florio. 5 As figure 2 shows, the Committee follows a four- step review
process of proposed foreign acquisitions of U. S. companies: voluntary
notice, 30- day review, investigation, and presidential determination.
5 31 C. F. R. Part 800.
Appendix I: The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio
Page 19 GAO- 02- 736 Defense Trade
Figure 2: The Committee on Foreign Investment in the United States Process
According to 31 C. F. R. Part 800
Note: Companies may request to withdraw their notification at any time
prior to a presidential determination. If the companies re- file, the
process begins again.
Source: GAO.
Appendix I: The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio
Page 20 GAO- 02- 736 Defense Trade
The Committee relies on companies to voluntarily report pending or
completed acquisitions and Committee members to inform each other about
known foreign acquisitions, although neither the companies nor the
Committee members are required to do so. Treasury officials generally
encourage agencies through their Committee representatives to bring
foreign acquisitions to Treasury*s attention informally so that the
officials may contact the companies involved and encourage them to notify
voluntarily. If companies do not voluntarily submit a notification, any
member of the Committee may do so. The Committee points out that companies
have a strong incentive to notify and obtain approval because the
President can order divestiture of unapproved acquisitions. Although the
regulations do not require prior notification, in most instances,
companies notify the Committee before the acquisition occurs, thus
avoiding the risk and expense of forced divestiture.
The implementing regulations require notices to contain detailed,
accurate, and complete information about
the nature of the acquisition,
the name and address of the U. S. and foreign principals,
the acquisition*s proposed or actual completion date,
assets being acquired,
each contract with any U. S. government agency with national defense
responsibilities active within the last 3 years, and
each contract involving classified information active within the past 5
years.
Further, the notice is required to state whether the acquired U. S.
company is a Department of Defense supplier and whether it has products or
technical data subject to export controls or international regulations.
To begin the 30- day review, the Committee staff from Treasury notifies
the member agencies of the acquisition and provides them with supporting
documents. The Committee members then notify their appropriate internal
offices to assist in reviewing the acquisition.
During the 30- day review, the Committee considers such factors as whether
(1) the acquisition may result in control by a foreign person of a
Voluntary Notification
Thirty- day Review Period
Appendix I: The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio
Page 21 GAO- 02- 736 Defense Trade
U. S. company engaged in interstate commerce in the United States; (2)
credible evidence exists to support a concern that the acquisition could
impair national security; and (3) adequate authority to protect the
national security is provided under provisions of laws other than the
International Emergency Economic Powers Act (50 U. S. C. 1701- 1706). The
Committee may invite the parties to meet with the staff to discuss and
clarify issues.
When necessary, Committee members meet to determine whether any concerns
raised are significant, thus requiring a 45- day investigation. If the
Committee agrees to investigate, the Committee formally notifies the
companies about the investigation and its time frame for completion.
During the investigation, the Committee may analyze the acquisition in
greater depth or attempt to mitigate the national security concerns
raised. If national security concerns are not resolved, the Committee
informs the companies that a report will go to the President with the
Committee*s recommendation on the acquisition. If Committee members cannot
agree on a recommendation, the report to the President includes the
differing views of all Committee members.
The President has 15 days to decide once he has received the Committee*s
recommendations. The decision is not subject to judicial review. The
President can suspend or prohibit any proposed or completed acquisition.
He may require the Attorney General to seek appropriate relief, including
divestiture, in U. S. district courts. The President*s divestiture
authority, however, cannot be exercised if (1) the Committee has informed
the companies that their acquisition was not subject to Exon- Florio or
had previously decided to forego investigation or (2) the President has
decided not to act on that specific acquisition under Exon- Florio.
However, if the Committee determines that the companies omitted or
provided false or misleading information, the Committee may reopen its
review or investigation or revise its recommendation to the President. The
President has ordered divestiture in only one case, although other
acquisitions have been canceled after Committee action without
presidential intervention.
The 1992 Byrd amendment to Exon- Florio requires the President to send a
report to the Congress if the President makes a decision regarding a
proposed foreign acquisition. This requirement was added in response to
concerns about the lack of transparency in the Committee*s process. Under
the original Exon- Florio law, the President was obligated to report only
after prohibiting a proposed acquisition. Investigation
Presidential Determination
Appendix I: The Committee on Foreign Investment in the United States and
the Process for Implementing Exon- Florio
Page 22 GAO- 02- 736 Defense Trade
Any party to the foreign acquisition may request in writing that the
voluntary notice be withdrawn at any time before the President*s decision
on a proposed acquisition. The request must be addressed to the Committee
staff chairman and state the reasons for the request. The Committee
decides whether to grant a withdrawal and notifies the requestor in
writing of the Committee*s decision. After the Committee approves a
withdrawal under these circumstances, any prior voluntary notices
submitted no longer remain in effect. Also, any subsequent proposals by
these parties must be considered as a new, voluntary notice and receive a
new case number from the Committee. In some circumstances, companies have
received a 5- day expedited review if the re- filed notice did not differ
from the original voluntary notice. Withdrawal
Appendix II: Comments from the Department of the Treasury
Page 23 GAO- 02- 736 Defense Trade
Appendix II: Comments from the Department of the Treasury
Appendix II: Comments from the Department of the Treasury
Page 24 GAO- 02- 736 Defense Trade
Appendix II: Comments from the Department of the Treasury
Page 25 GAO- 02- 736 Defense Trade
Appendix III: Comments from the Department of Defense
Page 26 GAO- 02- 736 Defense Trade
Appendix III: Comments from the Department of Defense
Note: A GAO comment supplementing the report text appears at the end of
this appendix.
Appendix III: Comments from the Department of Defense
Page 27 GAO- 02- 736 Defense Trade
Appendix III: Comments from the Department of Defense
Page 28 GAO- 02- 736 Defense Trade
See comment 1.
Appendix III: Comments from the Department of Defense
Page 29 GAO- 02- 736 Defense Trade
The following is GAO*s comment on the Department of Defense*s letter dated
June 26, 2002.
1. Exon- Florio provides the President the authority to take action to
suspend or prohibit any foreign acquisition of a U. S. company that may
threaten national security. Thus, by its nature, the legislation engenders
involvement in the business decisions of companies in the name of
protecting national security. Agreements the Committee and government
agencies negotiate with companies all require some level of involvement in
business decisions. Likewise, antitrust legislation requires government
involvement in the business decisions of companies, and in implementing
antitrust legislation, the Justice Department and the Federal Trade
Commission use consent agreements that are more stringent than the
agreements the Committee has used. GAO Comment
Appendix IV: Comments from the Department of Justice
Page 30 GAO- 02- 736 Defense Trade
Appendix IV: Comments from the Department of Justice
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Now on pp. 2- 3. See comment 1. Now on p. 9.
Appendix IV: Comments from the Department of Justice
Page 31 GAO- 02- 736 Defense Trade
Now on p. 11. See comment 2.
Now on p. 10.
Appendix IV: Comments from the Department of Justice
Page 32 GAO- 02- 736 Defense Trade
See comment 3. Now on p. 12.
Appendix IV: Comments from the Department of Justice
Page 33 GAO- 02- 736 Defense Trade
Appendix IV: Comments from the Department of Justice
Page 34 GAO- 02- 736 Defense Trade
The following are GAO*s comments on the Department of Justice*s letter
dated June 25, 2002.
1. We have revised the text to clarify that access to subscriber
information is just one of the issues of concern.
2. We believe our draft report accurately reflected information Justice
Department officials provided to us. In discussions with department
officials about our findings, they concurred with our statement that the
agreement was less stringent than other agreements and further stated that
the terms were less specific in many provisions. Moreover, a Justice
Department analysis provided specific examples of measures that were less
stringent than measures the department required in other agreements with
telecommunications companies. However, we have revised the text to clarify
that the department enters into network security agreements with only
some, but not all, telecommunications companies.
3. Text revised to clarify that provisions that assisted the agencies in
monitoring agreements were also lacking, as demonstrated in the text
following the sentence in question. GAO Comments
(120063)
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