Pentagon Should Boost CFIUS Foreign Investment Reviews, GAO Says

(Bloomberg) -- The Pentagon needs to beef up personnel for national security reviews of foreign investments in U.S. companies, according to a new report by Congress’s auditing arm.

The declassified 66-page assessment released Tuesday by the Government Accountability Office also says “legislative action” may be needed to strengthen existing law.

The report is likely to bolster bipartisan efforts in Congress to expand oversight by the interagency Committee on Foreign Investment in the United States, or CFIUS, to more investments including Chinese investors taking stakes in U.S. technology companies even when they don’t take majority control.

“Our body of work in this area has identified progress in improving the effectiveness of the programs designed to protect technologies critical to U.S. national security interests, but government-wide challenges remain, including the need to address weaknesses in individual programs,’’ the GAO said.

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Since 2012, the Defense Department has reviewed hundreds of transactions involving foreign acquirers and U.S. businesses as part of the CFIUS process “but faces several challenges in identifying and addressing national security concerns,” the GAO said.

Among challenges cited: Some national security concerns aren’t defined or addressed in Defense Department guidelines and investments that pose national security concerns can’t always be addressed through the CFIUS process.

Bills pending in the House and Senate would expand the reach of CFIUS into investments that don’t result in control. The Senate bill would expand CFIUS jurisdiction to investments that exceed a passive role in critical technology sectors, while allowing CFIUS to exempt some countries. The House bill would expand CFIUS reviews to minority stakes by companies from a blacklist of countries of special concern. China and Russia would be expected to end up on that list. The CFIUS legislation is likely to be enacted as soon as the end of this month as part of the annual National Defense Authorization Act.

The GAO said that “the number of DOD personnel with CFIUS responsibilities has not kept pace with the growing workload.” The number of transactions CFIUS reviewed from 2012 through 2017 more than doubled, from 114 transactions to 238. During that time, the number of transactions the Department of Defense was responsible for co-leading increased by about 57 percent, to 99, but manpower hasn’t kept pace, according to the report.

The Pentagon also “faces evolving national security concerns from foreign investments in U.S. businesses developing emerging technologies and in proximity to critical military locations, but there are inconsistencies in how DOD is reviewing these investments,” GAO said.

The instructions Pentagon officials receive to help guide their review of pending transactions don’t address “the extent to which emerging technologies and proximity to critical military locations are considered under these factors, or whether and how components should review and prioritize transactions for these concerns,” the GAO said.

The military departments vary in how they review transactions near sensitive facilities. Such transactions “near certain military locations can present encroachment issues or opportunities for persistent surveillance and collection of sensitive information of training procedures or of the integration of certain technological capabilities into major weapon systems,” the GAO said.

The Pentagon office that monitors the industrial base and foreign transactions “is in the process of expanding on a case-by-case basis its use of third-party monitors—private auditing and consulting firms approved by DOD and CFIUS but paid for by the foreign acquirer,” according to the report.

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