BAE Systems and other organizations are urging the Treasury Department to clarify an interim rule expanding the scope of transactions overseen by the Committee on Foreign Investment in the United States, as BAE argues the current rules could harm trusted, foreign-owned defense firms.
The interim rule, put into effect Nov. 10, expands CFIUS' jurisdiction to non-controlling investments by foreign persons in a U.S. business dealing in critical technologies and requires mandatory declarations on those transactions. Previously, the committee's oversight was limited to acquisitions resulting in foreign control of U.S. firms.
In an Oct. 31 letter to the Treasury Department, BAE warns that "as currently drafted, the interim rule could place certain trusted industry partners like BAE at a serious disadvantage, thereby depriving the U.S. government of both the general benefits of competition and particular opportunities to leverage trusted foreign investments in critical technologies."
BAE is based in the United Kingdom, but has a sizable U.S. business with about 33,000 employees, according to the letter. The company says its U.S. arm is the eighth largest Defense Department supplier in the country.
"We have highlighted an unintended consequence in the otherwise positive effort to strengthen the CFIUS review process," a BAE spokeswoman told Inside Defense. "We hope the Department of Treasury will be receptive to the views that we, along with other organizations, have shared in the public rulemaking process and ultimately make revisions to this pilot program in the near term."
The interim rule is a part of Treasury's implementation of the Foreign Investment Risk Review Modernization Act (FIRRMA), which authorizes pilot programs to implement provisions of the legislation that did not immediately become effective upon enactment. President Trump signed FIRRMA into law in August as part of the Fiscal Year 2019 National Defense Authorization Act.
The "other investments" now subject to CFIUS review under the pilot include those providing the foreign investor with access to the company's non-public technical information, membership or observer rights on the firm's governing body, or any involvement in "substantive decision making of the U.S. business regarding the use, development, acquisition, or release of critical technology," according to the Treasury Department.
"Although the vast majority of foreign direct investment in the United States provides economic benefits to our nation . . . some foreign direct investment threatens to undermine the technological superiority that is critical to U.S. national security," the interim rule document states.
FIRRMA is widely seen as a new tool to prevent U.S. adversaries, particularly China, from accessing critical American technologies and data.
But the pilot program covers all foreign persons and is not country-specific. BAE argues the Treasury Department should further define "foreign person" to "provide certainty for trusted, repeat investors," according to the Oct. 31 letter signed by Ian Graham, the company's senior vice president and general counsel.
Otherwise, BAE would have to file a declaration when it wants to create a joint venture with U.S. companies to bid on a Defense Department program involving critical technology or when it seeks to make an investment to shore up a critical technology supplier, according to some of the examples in Graham's letter.
"Requiring a trusted company to file declarations under the pilot program for these non-control transactions would create delays, distort the competitive dynamics of the U.S. defense industrial base, and diminish the U.S. government's ability to leverage and align with the strategic investment priorities of its most trusted partners," Graham writes.
Several other organizations commenting on the interim rule, including the U.S. Chamber of Commerce and the Organization for International Investment, recommend the Treasury Department further define "foreign person" and narrow the scope of transactions covered by the pilot program,
A Treasury Department spokesman did not comment on whether the agency would change any regulations in the near term. The pilot program will end no later than March 5, 2020, when FIRMMA takes full effect.
"The FIRRMA pilot program enhances the ability of CFIUS to protect U.S. critical technologies immediately," the Treasury spokesman wrote in an email. "We appreciate the comments from stakeholders in recent weeks and look forward to gaining valuable insight through the pilot program that will help shape the final regulations implementing FIRRMA."
Treasury likely kept the "foreign person" definition vague to avoid offending specific countries, but also to capture questionable transactions that may originate from investors based in allied nations, according to Mark Plotkin, partner at law firm Covington and Burling and a specialist in CFIUS transactions. He gave the example of an Italian company that may want to invest in a critical technology company in the United States, but is also working with China on technology initiatives.
"I think that this was a broad brush attempt to try to avoid labeling any particular country and also to give CFIUS the flexibility to capture transactions with companies that might be doing things in non-allied countries where CFIUS might have a concern," Plotkin told Inside Defense.
But Plotkin, who has represented BAE in the past but said he is not currently representing any defense contractors on the CFIUS pilot issue, said the company's situation is "collateral fallout" of the new regime.
"I don't think anybody in Congress had any intent to capture BAE with this, but that's the result of the pilot program," he said.
In his letter, BAE's Graham offers three solutions Treasury could use to narrow the definition of "foreign person." The first is to carve out exemptions for companies with foreign ownership based in trusted allies like the United Kingdom, Japan, France and others.
The second option is to exempt companies operating under a Foreign Ownership, Control or Influence (FOCI) mitigation agreement with the Defense Security Service. The agreements provide DOD with security guarantees from companies working on sensitive technology programs.
And if Treasury considers those options too broad, Graham offers that CFIUS could exempt FOCI-mitigated companies with ownership based in the “National Technology Industrial Base,” comprised of the United States, the United Kingdom, Australia and Canada.
Plotkin said the Treasury Department could potentially "white-list" entities recently approved by CFIUS.
"CFIUS is a very comprehensive process and the government is painstaking in how it examines the acquirer in a CFIUS transaction," he said. "If an acquirer has been through the CFIUS process recently, they've undergone the equivalent of a full physical exam by nine federal agencies and the director of national intelligence. If there was a concern, you would have expected to surface in those circumstances."
He also said BAE makes a good point about companies already working in the United States on critical technology programs for DOD and other agencies.
"We trust them to perform on classified programs because they're subject to FOCI mitigation," Plotkin said. "It doesn't really add anything to our national security to have those FOCI-mitigated companies wait an extra period of time in order to make an investment in a critical technology company."