Top 3 Takeaways from CFIUS’ 2023 Annual Report

The Committee on Foreign Investment in the United States (CFIUS) released its statutory annual report to Congress last month. While the report itself highlights several notable developments in 2023 (New Zealand and the United Kingdom are now exceptions to the foreign rules; eight military installations are now included in Appendix A of the real estate transaction rules), three trends we believe foreign investors and U.S. companies should monitor are penalties for noncompliance, transactions originating in China (or Hong Kong), and undeclared transactions.

Penalties

Section 721 of the Defense Production Act of 1950, as amended, authorizes CFIUS to impose monetary penalties for violations of Section 721 that include failure to make a mandatory statement or notification or failure to comply with a mitigation agreement. Such failures carry a civil penalty of $250,000 or the value of the transaction, whichever is greater.

This year, CFIUS issued its first formal findings of noncompliance, specifically for failure to comply with mandatory filing rules. These cases did not result in penalties after CFIUS considered the specific facts and circumstances. In addition, CFIUS conducted 43 site visits to determine compliance with mitigation agreements and imposed four civil money penalties for violations of material provisions of mitigation agreements. This is twice as many penalties as in CFIUS’s 50-year history. By comparison, CFIUS issued no penalties in 2021 or 2022.

The increase in assessments and penalties is likely due to two factors. First, CFIUS is actively conducting investigations to ensure compliance with the mandatory filing requirement under 31 CFR § 800.401, in addition to continuing its practice of conducting site visits to monitor mitigation agreements (44 in 2022; 29 in 2021). Second, earlier this year, CFIUS proposed a rule that would increase the maximum civil penalty to $5 million or the value of the transaction. Combined, these factors are resulting in increased scrutiny of transactions that have historically fallen under CFIUS’ radar, either because of the country of origin of the technology, infrastructure, or sensitive data involved or because CFIUS simply did not have the resources to conduct the investigation.

China

Investors from China have filed two notifications (commonly referred to as “short” notifications to non-practitioners) this year, compared to five in 2022 and one in 2021. The near-total lack of notifications for transactions involving China is almost certainly due to the fact that Chinese entities (and their lawyers) realize the futility of attempting to file a “short” notification. On the other hand, investors from China filed the largest number of notifications (commonly referred to as “long” notifications to non-practitioners), filing 33 in 2023 (compared to 36 in 2022 and 46 in 2021). Investors from China were primarily active in the finance, information and services, and manufacturing sectors. It is important to note that any transaction where Hong Kong is specified as the geographic economy of origin of the foreign acquirer is reported as originating from China.

In its last two annual reports, CFIUS has considered the findings of the U.S. Intelligence Community (IC), which found that “according to the Office of the Director of National Intelligence’s (ODNI) 2024 Annual Threat Assessment and the National Counterintelligence and Security Center’s 2018 Report to Congress, foreign economic, industrial, and cyber espionage by foreign actors such as China, Russia, Iran, and North Korea against the United States continues to pose a significant threat to U.S. prosperity, security, and competitive advantage.”

This IC assessment confirms that investments involving Chinese companies are likely to be of most interest to CFIUS, regardless of whether reporting is mandatory or not. Indeed, earlier this year, CFIUS proposed an outbound investment screening rule that would affect U.S. investments in Chinese-owned or -controlled companies that design semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence (AI) systems.

Unnotified transactions

Unnotified and unreported investigations are those in which CFIUS identifies an interest after the transaction has closed. This year, CFIUS has used several methods to identify unnotified and unreported transactions, including interagency referrals, public tips, classified reports, media reports, voluntary self-disclosures, congressional notifications, and a variety of commercial and proprietary databases. Notably, CFIUS has not mentioned the use of classified reports, voluntary self-disclosures, or a variety of commercial and proprietary databases in previous annual reports.

This year, CFIUS identified thousands of potential unreported transactions and opened inquiries on 60 transactions, requesting formal reporting for 13 of them. In 2022, CFIUS reported identifying 84 transactions through its then-established process, resulting in 11 reporting requests. In 2021, CFIUS reported identifying 135 transactions through its process, resulting in reporting requests for eight of them.

A key finding regarding unreported transactions is the increase in the number of transactions that CFIUS identifies in addition to those for which it initiates an investigation or requests a referral. CFIUS is improving the sophistication of its approach to initiating investigations: continued hiring of dedicated staff; identification and evaluation of additional commercial tools and data sets; and increased training and attention of existing staff in CFIUS member agencies to coordinate and identify transactions for prosecution, ensuring that the unreported transactions program will continue to be a heavily used CFIUS tool.

Engaging the services of a CFIUS attorney early on is critical to ensuring that buyers and sellers are protected from the harsh penalties and time-consuming investigations conducted by CFIUS.

The Committee continues to grapple with a complex national security landscape and a significant caseload… Notably, the Committee imposed or levied four penalties in 2023, more than twice the total number of penalties imposed by CFIUS in its nearly 50-year history and the first under the regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). In addition to these penalties, the Committee also issued its first-ever formal findings of noncompliance, specifically for failure to comply with the mandatory filing provisions under 31 CFR § 800.401. At the same time, the Committee continued to improve its efficiency, reducing the rate of payouts and re-filings for the first time in five years… and increasing the number of transactions settled within the first 30- or 45-day period. CFIUS Annual Report to Congress for Fiscal Year 2023.

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