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23 April 2021
A potential expansion of the Committee on Foreign Investment in the United States' (CFIUS') powers suggests broader congressional concern about attempts by Chinese entities to circumvent CFIUS reviews and access critical technologies.
New legislation may soon expand the jurisdiction of the CFIUS as part of a broader push by Congress to position the United States to out compete China in the coming decades and counter China's increasing global influence. On 8 April 2021 the Senate Foreign Relations Committee publicly released a draft of the Strategic Competition Act 2021, a 281-page bill that aims "to mobilize all US strategic, economic, and diplomatic tools for an Indo-Pacific strategy that will allow our nation to truly confront the challenges China poses to our national and economic security". Among other things, the bill calls for hundreds of millions of dollars in funding for foreign military sales and Indo-Pacific security initiatives, while also seeking to deter further human rights and anti-democratic actions by China, particularly in relation to Hong Kong and the treatment of Uighur Muslims.
The Strategic Competition Act comes as part of a broader congressional initiative to bolster the United States' ability to compete with China. The bill should be viewed as complementary to the Endless Frontier Act, an evolving piece of bipartisan legislation that would invest $100 billion in taxpayer dollars in 10 key technology areas, including AI, semiconductors, quantum computing, robotics, advanced manufacturing, biotechnology, genomics and materials science. The Senate is likely to take up the Endless Frontier Act at some point in the coming weeks, at which time the Strategic Competition Act is likely to be added to it.
If enacted, the Strategic Competition Act would create a new role for CFIUS in preventing foreign malign influence or espionage activities directed towards institutions of higher education in the United States. Under Section 138 of the bill, CFIUS would have jurisdiction to review transactions where an 'institution of higher education' (generally speaking, a nationally accredited public or private college or university that receives federal funding) receives a 'gift' (ie, money or property) from, or contracts with, a foreign person.
The bill introduces certain hooks for CFIUS's new jurisdiction. To trigger a review under this new jurisdiction, the gift or contract would need to have a value of at least $1 million (or multiple gifts or contracts from the same foreign person with an aggregate value of at least $1 million over the course of two years). This expanded jurisdiction would apply in only two situations – namely, where:
For any such transaction, the legislation would also mandate the submission of a short-form declaration to CFIUS, and it would add the secretary of education to the membership of CFIUS for any review under this newfound jurisdiction.
This legislative provision is especially noteworthy because it would represent an expansion of CFIUS jurisdiction to include transactions that are not actually investments. That issue may be debated between Congress and the executive branch as the legislation advances, partly because CFIUS is still adapting to the significant expansion of its jurisdiction that occurred under the Foreign Investment Risk Review Modernisation Act (FIRRMA), which CFIUS fully implemented in 2020.
If enacted, the Strategic Competition Act would also mandate a CFIUS pilot programme relating to this new set of transactions. This would not be CFIUS's first pilot programme. In 2018, Congress authorised CFIUS to conduct pilot programmes under FIRRMA, and CFIUS quickly launched a pilot programme on critical technologies that lasted for more than one year. Similarly, this new pilot programme would be governed by temporary regulations that would subsequently be replaced by permanent ones. CFIUS's implementing regulations would also be expected to address potential compliance burdens imposed on institutions of higher education and to clarify the meaning of the term 'control' in the context of these transactions.
CFIUS's reporting mandate would also receive an update, with its annual report on critical technologies requiring an additional evaluation of whether foreign governments are seeking to obtain research and development methods or proprietary information on critical technologies from institutions of higher education through foreign malign influence or espionage activities.
With the broader context of the bill in mind, this potential expansion of CFIUS's powers suggests strong congressional concern about attempts by Chinese entities to circumvent CFIUS reviews and access critical technologies. Senators Chuck Grassley, Mike Crapo and Pat Toomey indicated as much in a letter sent to Treasury Secretary Janet Yellen on 13 April 2021, in which they expressed concerns "about foreign governments, such as China, potentially taking actions to evade CFIUS reviews in an attempt to undermine US superiority in leading-edge technologies, the CFIUS process" and broader trade controls aimed at protecting US national security. The new role envisioned for CFIUS in the Strategic Competition Act aims to cut off one such avenue – foreign malign influence or espionage activities targeting domestic colleges and universities – through which Chinese entities may have been attempting to evade CFIUS.
However, this new area of jurisdiction for CFIUS would not arise until the enactment of the Strategic Competition Act and would only apply to transactions on or after that date. The Foreign Relations Committee is scheduled to consider the bill on 21 April 2021 and, as with any piece of draft legislation, changes to the abovementioned provisions are possible.
For further information on this topic please contact David Hanke or John A Gurtunca at Arent Fox LLP by telephone (+1 202 857 6000) or email (email@example.com or firstname.lastname@example.org). The Arent Fox LLP website can be accessed at www.arentfox.com.
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