CFIUS development advisor warns against incoming investment in US | Proskauer – Regulations and Compliance

With the goal of preserving and expanding its role as a watchdog on national security, the Committee on Foreign Investment in the United States (CFIUS) has issued proposed regulations aimed at strengthening enforcement.

On April 11, 2024, the U.S. Department of the Treasury, as Chair of CFIUS, announced proposed rules and adopted comments until May 15, 2024, 30 days after publication in the Federal Register on April 15, 2024. The proposed rules strengthen CFIUS regulations and enforcement tools in following way.

First, the proposed rules would expand the scope of information that CFIUS can request from parties to unreported transactions—transactions that the parties have not voluntarily reported to CFIUS. Under the proposed regulations, CFIUS may request information related to “national security considerations” and “mandatory declaration criteria.” This goes beyond current regulations, which only include requests to parties to unreported transactions for information necessary to determine whether a transaction is a “covered transaction” or a “covered real estate transaction” – potentially establishing new mechanisms for CFIUS to identify failures to comply with mandatory reporting obligations. The proposed regulations also provide CFIUS with the authority to issue subpoenas to compel responses when CFIUS is monitoring compliance with a mitigation agreement, order, or condition and when CFIUS is investigating a potential “material misstatement or omission of material information” by parties in an entered into contract review. Currently, such requests for information are voluntary and do not require a subpoena.

Second, the proposed rules would expand CFIUS’s authority to issue subpoenas “if recognized right by the Commission” compared to the existing criteria “deemed necessary” – effectively lowering the standard for issuing subpoenas.

Third, the proposed rules would provide for an extended deadline of 3 business days to respond to proposed mitigating conditions. The applicable regulations did not impose a deadline. And while CFIUS is considering issuing discretionary extensions for some submitted mitigation proposals, they would only be granted on a case-by-case basis – potentially imposing significant additional burdens on parties for which discretionary extensions were not granted.

Fourth, the proposed regulations increase the maximum penalty amount from $250,000 per violation to $5,000,000 per violation. As under current regulations, the maximum penalty may be the greater of the fixed amount or the value of the transaction, for a breach resulting from failure to submit an application on time or for breach of an agreement, order or mitigating condition. According to CFIUS, the current maximum penalty amount of $250,000 may not provide sufficient incentives for compliance, given the average value of reported transactions is $170 million and that existing rules may in some cases result in transactions being valued at zero. The proposed rules further expand the $5,000,000 maximum penalty per violation to include “material misstatements or omissions in contexts other than declarations and notices,” particularly with respect to unreported transactions.

The proposed rules accompany recent significant enforcement by the White House through CFIUS. On May 13, 2024, the White House issued an order to MineOne Partners Ltd. to divest property located within a mile of Francis E. Warren Air Force Base in Cheyenne Wyoming. According to the resolution, MineOne is partially owned by Chinese nationals and acquired the property in June 2022. The company then improved the property to enable specialized cryptocurrency mining. It is worth noting that CFIUS’s unreported transaction panel first investigated the transaction based on a public tip – the parties to the transaction filed a request with CFIUS only after the investigation was completed. The order requires the property to be disposed of within 120 days and all equipment and improvements to the property to be removed within 90 days of the order, subject to extensions granted by CFIUS.

In a statement, Treasury Secretary Janet Yellen said the MineOne divestment order “underscores the critical watchdog role CFIUS plays to ensure that foreign investments do not threaten our national security, particularly with respect to transactions that also pose risks to sensitive U.S. installations.” military as those requiring specialized equipment and technology.”

Beyond the White House, Congress has shown increasing interest in national security and CFIUS issues. Although CFIUS is led by the Secretary of the Treasury, CFIUS’s voting members also include the heads of the Departments of Justice, Homeland Security, Commerce, Defense, State, and Energy, as well as the heads of the Office of the U.S. Trade Representative and the Office of Science & Technology Policy. Some other agencies monitor members or are non-voting members.

Congress recently added the Secretary of Agriculture as a member of CFIUS on a case-by-case basis for covered transactions “relating to agricultural land, agricultural biotechnology, or the agricultural industry.” The congressional action follows growing interest in foreign investment in U.S. farmland.

CFIUS’s current enforcement focus extends far beyond military installations to farmland and large swaths of the economy, and increased subpoena powers, increased penalties and expanded enforcement of unreported transactions will make conditions already difficult for non-U.S. investors. Comments have ended on the proposed rules. A final announcement on the final rulemaking is expected in the coming months.

(Show source.)