The Senate Banking Committee this week advanced the Foreign Investment Risk Review Modernization Act of 2017. An amendment prohibits President Trump from changing penalties on Chinese telecommunication companies—including ZTE—that have sanctions levied against them until Congress certifies that they have met certain conditions.

In November 2017, U.S. Senators John Cornyn (R-Texas) and Dianne Feinstein (D-Calif.), along with the Chairman of the Senate Select Committee on Intelligence, Richard Burr (R-N.C.), introduced the legislation. It is intended to modernize and strengthen the process by which the Committee on Foreign Investment in the United States reviews acquisitions, mergers, and other foreign investments in the United States for national security risks.

The Banking Committee, which has jurisdiction over the CFIUS process, held three hearings and met with government and industry stakeholders to help shape the bill.

The role of CFIUS is to review certain types of foreign transactions to determine if there is: a threat to impair U.S. national security; a foreign investor present who is controlled by a foreign government, such as a state-owned enterprise; and something that can affect homeland security or result in control of any critical infrastructure that might impair national security.

Increasingly, in a multinational business climate, concerns arise regarding national security and the intellectual property held by domestic companies that do business abroad. That has sparked legislative efforts to expand the jurisdiction of CFIUS.

“By exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies,” Cornyn said. “This undermines our national security and highlights the imperative of modernizing the CFIUS review process to address 21st-century threats. This bill takes a measured approach by providing long overdue reforms to better protect our country, while also working to ensure that beneficial foreign investment is not chilled.”

Specifically, FIRRMA would:

Expand the CFIUS jurisdiction to include certain joint ventures, minority position investments, and real estate transactions near military bases or other sensitive national security facilities;

Update the Committee’s definition of “critical technologies” to include emerging technologies that could be essential for maintaining the U.S. technological advantage over countries that pose threats, such as China;

Allow foreign investors to submit “light filings” to CFIUS for certain types of transactions; and

Add new national security factors for CFIUS to consider in its analyses.

The bill would also authorize CFIUS to exempt otherwise covered transactions if all foreign investors are from a country that meets certain criteria, such as being a U.S. treaty ally or having a mutual investment security arrangement.

FIRRMA also reforms CFIUS by:

Expanding the ability of CFIUS to review certain real estate transactions when they are in close proximity to government installations;

Requiring greater scrutiny by CFIUS of transactions from countries of ‘special concern’ that involve critical technologies or critical materials;

Allowing review of transactions when there are material changes in shareholder rights that expand control of or access to sensitive information;

Providing additional resources to CFIUS to match the expected increased caseload;

Requiring CFIUS to more closely evaluate state-owned companies and shell companies that don’t report information on their true owners;

Requiring CFIUS to establish a recusal process for members of the administration that may have conflicts of interest pertaining to transactions under CFIUS review; and

Requiring the Secretary of Commerce to submit a report to Congress on activities to identify and control emerging and foundational technologies.

FIRRMA will “require heightened scrutiny and vetting of certain transactions for national security risks, particularly those deals involving China’s acquisition efforts that can infringe national security interests of the United States,” Sen. Mike Crapo (R-Idaho), Senate Banking Committee chairman, said in a statement. It will “tighten the rings of protection around America’s most valuable and sensitive emerging critical and foundational technologies.”

An amendment co-sponsored by Crapo and Sen. Sherrod Brown leverages the jurisdiction and authorities of the CFIUS process with those of multilateral export control regimes to review inbound and outbound transactions that may involve acquisitions of “emerging critical or foundational technologies to the detriment of the U.S. national security.”

In terms of joint ventures and outbound transactions, the legislation creates an interagency process, led by the President, to identify emerging critical technologies that are not yet subject to export controls.

Another interagency process, led by the Commerce Department’s Bureau of Industry and Security and informed by the intelligence community, will classify and determine how, if at all, this technology can be transferred by whatever means, including by joint venture or other transactions.

“While President Trump waves a white flag in his Chinese trade negotiations, China is stealing our technology right under our nose,” said Sen. Bob Menendez (D-N.J.). “I’m proud members of both parties could come together to begin to fix this gaping hole in our national security infrastructure that has allowed China to stealthily purchase critical American defense technology.”

“It is critical we update the CFIUS process to better screen foreign investments for risks to our national security,” he added. “A key component of that screening is making sure that we have the best information possible on who is benefitting from these investments. As we work to make sure we know as much as possible about the foreign entities looking to invest in sensitive U.S. technology, we should be equally concerned about how the government makes decisions on approving or blocking transactions that might pose a threat to our national security.”

Dealing with ZTE

Sen. Chris Van Hollen secured language in the bill to expressly prohibit President Trump from changing the penalties on Chinese telecommunication companies—including ZTE—that have sanctions levied against them until the administration certifies to Congress that they have met certain conditions.

In March 2017, Chinese telecommunications company ZTE agreed to pay a record-high combined civil and criminal penalty of $1.19 billion, pending approval from the courts, for violating U.S. sanctions by sending U.S.-origin items to Iran.

In April, in response to its violation of the terms in that Justice Department settlement, BIS imposed a denial of export privileges against Zhongxing Telecommunications Equipment, the full and legal name of ZTE.

The government’s action means that American companies are prohibited from selling parts and software to ZTE for seven years.

Denial Orders are issued by BIS to halt the export privileges of a company or individual.

Last month, however, Trump hinted that he would be willing to lift the prohibition, tweeting that he and President Xi of China “are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast.”

He wrote: “Too many jobs in China lost. Commerce Department has been instructed to get it done!”

Trump later directed the Department of Commerce to look at easing penalties imposed on ZTE.

“We know ZTE is a repeated and flagrant violator of U.S. laws. There’s absolutely no question of their culpability,” Van Hollen said, addressing his amendment. “Yet the President of the United States is fighting to protect jobs in China at a company that may be spying on Americans and has been sanctioned by our government. This is deeply troubling, regardless of your political party. We must continue to work to stop the President from absolving ZTE of its many transgressions in the interest of Chinese jobs.” 

Van Hollen’s amendment would expressly prohibit the President from changing the penalties on Chinese telecommunication companies that have sanctions levied against them until the administration certifies to Congress that the entity is no longer violating U.S. law, has not done so for a year, and is fully cooperating with investigators.

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