New Restrictions on U.S. Investment in China Open for Public Comment
All these concerns are set against a backdrop of increased enforcement across the federal government, and CFIUS is no exception.
Rules that place new restrictions on American investment in China opened for public comment this week. The new proposed regime comes after years of concern about China’s technological advancement, originating with U.S. investment, and the country’s use of that technology against American interests. And while the effort has rare bi-partisan support, lawyers in the international investment and national security space expect it to make life much harder for U.S. investors looking to spend money overseas.
“It’s another step to address growing concern in the U.S. about potentially leaking critical technologies as well as investment into countries like China,” said Mick Tuesley, head of Simpson Thacher & Bartlett’s National Security Regulatory Practice.
Tuesley helped author a report for Simpson Thacher which detailed some of the anticipated rule-making. Pointing to a 2022 report from the Committee on Foreign Investment in the United States (CFIUS) which showed record action by the agency, he and his colleagues anticipate “the enactment of a new outbound investment regime [that] further expands the Biden administration’s ability to regulate cross-border transactions and foreign investment.”
Called “reverse CFIUS” by some, the new rules aim to create new oversight for American money flooring into some technology sectors, including artificial intelligence and quantum computing, in China and its neighbors. They’ve come at the behest of an executive order from President Joe Biden issued earlier this month.
“As part of this strategy of advancing the development of these sensitive technologies and products, countries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed,” the president said in the August 9 executive order, empowering the Department of Treasury to develop new rules that rely on several legislative efforts passed in recent years.
The “reverse” part of the namesake comes from a flip of what the agency was originally tasked to do—although it was designed to monitor investments flowing into the U.S., CFIUS will now also monitor investments flowing out.
But the new rules, as proposed so far, also turn the disclosure process on its head, according to Baker McKenzie partner Janet K. Kim. Instead of companies being required to submit transactions to CFIUS, they instead must decide on their own if the transaction requires reporting.
“The burden is on us to get it right to make sure the right national security safeguards are imposed,” said Kim, who handles outbound trade compliance issues and export control laws at Baker. “They say investors have to determine if they’re engaging in something prohibited or decide the investment is more benign and it’s just something you have to tell the government after the fact.”
Tuesley said this added layer of complexity was causing some concern among clients, but those concerns were also a sticking point for the Treasury Department: “They don’t want to be a huge impediment to deal-making, but they want to address this identified national security issue,” he said of the agency’s posture leading up to publication in the federal register on Monday.
He also noted the effort could still be impacted by public comment. “We’re thinking through with trade associations and other interested parties what we hope will offer informed comments to the rule-making, making the process transparent and as smooth as possible,” he said.
For Kim, one of the top concerns is existing investments. If a company has been supporting an overseas entity in a country now targeted by the rules, when do operating expenses become a problematic investment if the company’s work evolves? “At what point does it look like my original investment from five years ago looks like a new investment into something that’s off-limits?” she asked.
Tuesley also stressed a “forward-looking” approach, warning against any new rules that consider retroactive applicability. But he said investments created between the first mention of this new effort and Monday’s rule publication may not fall under such a safe harbor.
Notably, both attorneys have seen a drop off in investment in China in recent years, in the wake of the Foreign Investment Risk Review Modernization Act and the Export Control Reform Act, both passed in 2018, along with public pressure from both political parties in the U.S. Tuesley described what followed as an increase in “sensitivity to investment in China,” and Kim said the two 2018 efforts led to drop offs that could render some of the 2023 effort less relevant.
She said “open questions” around investment funds and venture capital remain, but they’re not in the manufacturing sector, so what may happen is a drop in spending of their U.S. clients’ funds in problematic countries.
The Simpson Thacher report suggested the Biden administration and Treasury staffers were pushing allies to pass similar laws, but Kim isn’t sure that’ll happen. While efforts to curb the use of Chinese-made 5G saw some international support via jawboning, she wonders if closing the door for U.S. investors will just open doors for money from other countries.
“We don’t expect the EU [European Union] to adopt something similar,” she said. “Will that lead to other countries investing in China instead of us, taking advantage of the Chinese market?”
All these concerns are set against a backdrop of increased enforcement across the federal government, and CFIUS is no exception. The agency released “first of its kind” enforcement guidelines late last year, making some previously voluntary disclosures mandatory.
“China and Russia are huge enforcement priorities,” Kim said before pointing to increased funding for 39 full-time employees requested by Treasury as part of the 2024 budget. “Staffing in the agencies and coordination between agencies and allied governments is all way up,” she added. “So enforcement would be expected.”
Further complicating the matter are efforts from China—via updates to the country’s Counter-Espionage Law—to control what information about its native businesses make it overseas. De Brauw Blackstone Westbroek attorneys warned about the changing Chinese landscape in July and noted several international consulting firms were already facing local enforcement.
“The three enforcement instances appear to signal intensified scrutiny over companies that collect information which the Chinese authorities may deem a matter of national security, even if the information is of a commercial nature,” the De Brauw attorneys wrote about the March 2023 raid of Mintz Group and other actions that have put international business data operatives at risk.
“It’s a problem under Chinese law for those in China to share the information, for locals or American companies trying to gather that information on their own,” Kim said. “To go digging around for it carries great risk for the diggers.” That’s bound to run headlong into any new finalized rules that rely on information which is now essentially criminal to collect.
The window for public comment ends late September with any finalization expected in 2024.
From: The National Law Journal