3 Takeaways from new CFIUS enforcement and penalty guidelines

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Increased U.S. regulatory scrutiny continues with new guidelines for foreign investments. The Department of the Treasury released the first Enforcement and Penalty Guidelines for the Committee on Foreign Investment in the U.S on October 20. The Treasury Department is the chair of CFIUS, which identifies and reviews transactions involving foreign investments in the U.S. and has the power to mitigate national security risks.

CFIUS reviews have grown alongside foreign direct investments. FDI in the U.S. increased from $71.23 billion in 1990 to peak at $511.43 billion in 2015 and hit an estimated $333.6 billion in 2021. According to the CFIUS Annual Report to Congress, CFIUS reviewed a record number of transactions in 2021, encompassing 164 declarations and 272 notices — a 30% and 45% increase, respectively, compared to the year before.

The U.S. is far from the only jurisdiction concerned with foreign investments. The European Union and United Kingdom launched new screening mechanisms in 2020 and 2022, respectively, and numerous other countries, including Australia, India, Japan, South Korea, and Vietnam, are also considering expanding their foreign investment screening procedures.

CFIUS covered transactions & investments

CFIUS is an interagency committee including the departments of Treasury, Justice, Homeland Security, Commerce, Defense, State, Energy, and the Office of U.S. Trade Representative and Office of Science & Technology Policy.

CFIUS has evolved in recent years. In August 2018, the president signed the Foreign Investment Risk Review Modernization Act of 2018 into law. FIRRMA bolstered CFIUS, enabling it to better address possible national security risks related to noncontrolling investments and real estate transactions involving foreign entities.

Transactions and investments currently covered by CFIUS include:

  • Deals structured as stock or asset purchases
  • Debt-to-equity conversions
  • Foreign-foreign transactions when the target has U.S. assets
  • Private equity investments
  • Joint ventures involving a U.S. business
  • Transactions involving technologies, critical infrastructure, or personal data businesses in the U.S.
  • Purchase or lease by a foreign person of real estate located within certain air or maritime ports or near identified military installations and areas

CFIUS regulations require certain covered transactions and investments to file a declaration or notice with the Committee for review. However, a majority of CFIUS reviews are voluntary.

The parties may jointly notify CFIUS of the transaction to ensure they abide by U.S. law. Another option is to file a declaration, which is an expedited filing that takes approximately six weeks instead of several months.

CFIUS also defines excepted investors, which aren’t subject to review for covered investments and transactions. Currently, only Canada and Australia meet the strict criteria to be exempt from mandatory filing requirements.

CFIUS reviews

CFIUS performs a risk-based analysis of possible national security threats related to foreign investments and decides whether other U.S. laws and regulations sufficiently address any risks. In September 2022, President Biden issued an executive order expanding the list of factors CFIUS considers when reviewing a transaction for national security implications.

If no other legal provision addresses the concerns, CFIUS may require mitigation measures, which the Committee negotiates with the parties. If mitigation isn’t enough to resolve the issue, the Committee asks the parties to abandon the transaction. If the parties refuse, CFIUS can recommend the case to the U.S. president, who has the power to block the transaction.

3 Takeaways from the CFIUS enforcement and penalty guidelines

1. There are three ways to violate CFIUS requirements

The newly published guidelines make it clear three different acts can constitute a violation. The first is a failure to file when it’s mandatory. The second is failure to comply with CFIUS mitigation agreements, conditions, or orders. And the third failure is making material misstatements or omissions when filing with CFIUS or in connection with a review or mitigation.

2. CFIUS encourages tips

In determining whether a party violated CFIUS requirements, the Committee reviews myriad sources of information, including public sources, third-party service providers, the transaction parties, and tips. The CFIUS Annual Report stated “increasing public awareness of the CFIUS tip mailbox” could help identify transactions that hadn’t filed a declaration or notice.

Anyone who believes a party violated the law with regard to direct foreign investments can submit a tip to CFIUS’s Office of Investment Security Monitoring & Enforcement through email.

3. Parties can petition for reconsideration of a penalty

Parties that receive notice of a penalty from CFIUS can submit a petition for reconsideration within 15 business days of receiving the notice. The party can include any explanation, justification, defense, or mitigating factors in its petition.

CFIUS will review numerous mitigating factors, such as:

  • The party’s sophistication and record of compliance
  • The extent of harm the party’s conduct caused
  • The party’s level of negligence, awareness, or intent
  • The timing and duration of the party’s conduct
  • The length of time between the party becoming aware of the conduct and CFIUS learning of it
  • Whether the party self-disclosed to CFIUS, cooperated with the investigation, or took appropriate remedial action

Private markets must prepare for foreign investment scrutiny

The CFIUS Annual Report to Congress and its latest Enforcement and Penalty Guidelines make it clear foreign investments are a high regulatory priority. In addition to required and voluntary notifications, CFIUS identifies transactions in which the parties haven’t notified the Committee, and the Committee continues to hire staff and enhance methods of identifying these non-notified transactions.

Businesses, such as asset managers, that handle foreign investments should determine when filing with CFIUS is required, optional, or unnecessary. U.S.-sponsored private equity funds should also perform a legal analysis of whether CFIUS might consider a fund registered outside of the U.S. (like in the Cayman Islands) to be a foreign entity or foreign person. The results of the analysis may trigger the parties to file a required or voluntary declaration or notice.

 

Ontra is an alternative legal services provider in the United States. We are not a law firm, and do not provide any legal services, legal advice, or referral services. We do not provide any legal representation to clients, nor do we participate in any legal representation of clients. The contents of this article are for informational purposes only. For assistance, please consult your legal advisors. 

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