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CFIUS 2.0: Foreign Investors Are Watching For CFIUS ‘Good’ Or ‘Bad’ List

This article was originally published in Law360
The Committee on Foreign Investment in the United States is currently drafting the implementing regulations for the Foreign Investment Risk Review Modernization Act, or FIRRMA, which was enacted this past August and represents the most sweeping set of changes to the processes and jurisdiction of CFIUS in its 44-year history.

(I worked for the Senate Intelligence Committee, specifically for the office of Sen. John Cornyn, R-Texas, and was the primary staff architect of the FIRRMA legislation and chief strategist behind its 2018 enactment.) During the legislative process, Congress punted on a slew of tough issues and key definitions, so CFIUS’ task now includes addressing those very issues and clarifying those definitions.

The draft regulations may be released for public comment as early as this summer, and one aspect that foreign investors are watching closely is how CFIUS will decide to exercise its new “country specification” authority under Section 1703 of FIRRMA, which was enacted as part of the John McCain National Defense Authorization Act for fiscal year 2019 and codified at Section 4565(a)(4)(E) of U.S. Code Title 50.[1] More precisely, the question is whether CFIUS will create either a “negative” or “positive” list of specific countries whose transactions are, respectively, either required to undergo CFIUS review or exempt from CFIUS review.

Senate Versus House of Representatives: Legislative Process Highlighted Divergent Approaches on Country Treatment

The country specification provision was added to FIRRMA during conference negotiations between the U.S. Senate and House of Representatives, following disagreement over whether a positive-list or negative-list approach was the best option for CFIUS to use to manage the pool of noncontrolling, nonpassive investments and real estate deals that would require screening. By design, this provision in Section 1703 is highly vague and, as a result, it provides CFIUS with substantial flexibility in implementation.

However, Congress also made this “country specification” function mandatory so, at the very least, CFIUS will have to enumerate some basic criteria in the new regulations. If CFIUS decides to leverage this authority, it has the potential to drastically reduce the number of transactions that might otherwise fall under its jurisdiction, allowing it to better focus its energy and attention on transactions that involve real national security risks. In anticipating how CFIUS might implement this provision, it is instructive to briefly review some of the legislative history on FIRRMA.

Sen. John Cornyn, R-Texas, the principal author of FIRRMA, drafted his original bill in close coordination with executive branch officials at the U.S. Department of Treasury, U.S. Department of Defense and U.S. Department of Justice, as well as other CFIUS member agencies. He introduced FIRRMA on Nov. 8, 2017, and drove the entire legislative process. One provision in his original bill would have authorized CFIUS to utilize a positive list, or so-called “white list,” of foreign allies and partner nations that, as a general matter, represent very little risk to U.S. national security. CFIUS would have been able to use this list to grant exemptions from CFIUS reviews under the expanded jurisdiction, so long as each foreign investor in a transaction was organized under the laws of a positive-listed country or at least subject to such a country’s jurisdiction.

A hollowed-out version of FIRRMA was introduced in the House on May 16, 2018, to counter the Cornyn bill, after the latter had gathered significant legislative momentum and was well on its way to passage. That House bill would have required CFIUS to apply a negative list, or so-called “black list,” of foreign countries to restrict the expansion of CFIUS jurisdiction to only transactions emanating from “countries of concern,” defined to include China, Russia, Venezuela, state sponsors of terrorism and other arms-embargoed countries. Critically, this negative-list approach was strongly opposed by the Treasury Department, which chairs CFIUS and is leading the drafting of the FIRRMA regulations, suggesting that a positive-list approach is much more likely to emerge in the regulations.

What a Positive-List Approach Might Look Like: Home Country Will Remain Key

So, if CFIUS puts its new country specification authority to use in a robust way and pursues a positive-list approach, what might that look like? It could resemble a sort of “precheck” process for CFIUS, referring of course to the program started by the Transportation Security Administration in 2011 to exempt approved air travel passengers from the full security screening that is required of all other passengers.

The related provision from the original Cornyn bill, which had substantial input from CFIUS itself, gives strong indications of what CFIUS would likely consider to be appropriate criteria and what direction the regulations will likely take. To help CFIUS determine which transactions to exempt from review, that provision authorized it to look at specific criteria, such as whether a foreign country has a mutual defense treaty in place with the United States,[2] an adequate foreign investment screening system of its own and an arrangement to coordinate with the United States on foreign investment screening.

Based on this history, it is likely that a foreign investor’s home country and that country’s relationship to the United States will be the overarching factors in whether the investor attains trusted status under the forthcoming regulations. In fact, the final provision, as enacted by Congress, requires CFIUS to consider how exactly the foreign investor is connected to a particular foreign country or government and what that means for U.S. national security.

Of course, the United States has mutual defense treaties in effect with numerous countries, including longtime NATO allies such as Canada, the United Kingdom, France and Germany, as well as key Indo-Pacific allies such as Australia, Japan and South Korea. In addition to partnering on security matters, many of these nations have also been prolific investors in the United States.

As CFIUS drafts the new regulations, it may also broaden the criteria regarding mutual defense treaty allies that was laid out in the original Cornyn bill. In so doing, it could preserve the opportunity for broader categories of countries to qualify for a positive list at some point in the future, including perhaps “major non-NATO” allies[3] or strategic partners such as Singapore, India or Israel, who cooperate extensively with the United States on security matters but, for various reasons, are unlikely to sign up as formal U.S. allies.

Information sharing would be perhaps the easiest of the three original criteria for a foreign country to meet, and the possibility of being put on a positive list would provide a powerful incentive for countries to share information, as well as to amplify their own screening systems for foreign investment. However, it remains to be seen what standard CFIUS will use to determine what “good enough” looks like regarding a country’s screening system. To that end, in recent years the Treasury Department has been working with allies and partners to help them stand up new foreign investment screening systems and bolster existing ones.

One additional wrinkle is that the final country specification language contemplates “categories” of foreign investors and it remains unclear how each specific foreign investor will ascertain whether CFIUS considers it a trusted investor. CFIUS could establish some type of mechanism to make such determinations and inform investors but such a process might also be viewed by CFIUS as unwieldly or too resource-intensive.

Apart from relationships to specific countries, for investors who aspire to hold trusted investor status, it is advisable to keep their ownership structures simple, straightforward and transparent. In considering whether to grant trusted investor status, CFIUS may also examine a foreign investor’s track record on compliance, including with sanctions and export control regulations. Additionally, trusted investor status is unlikely to be a permanent reality for each foreign investor. Rather, the status will likely need to be revisited with CFIUS and refreshed on a regular basis, especially after any changes in the foreign investor, such as in ownership.


Since Congress mandated FIRRMA’s country specification function, CFIUS will have to lay out at least some basic criteria in the regulations to narrow down and better focus its workload, in relation to foreign investors’ connections to foreign countries or governments. The real question is whether CFIUS will make aggressive use of this authority, as key members of Congress and many stakeholders in the investment community strongly prefer, or will just “check the box” by writing regulatory provisions that leave foreign investors guessing or perhaps contain standards that are impossible to meet. Fully leveraging this authority would allow CFIUS to avoid wasting time reviewing investments from lower-risk investors, instead directing its efforts towards more complicated, higher-risk transactions emanating from China, Russia and other countries of special concern.

*This article was originally published in Law360


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