The Wall Street Journal

Congress May Overhaul Process For Vetting Foreign Investments

February 23 , 2006
By MICHAEL SCHROEDER and GREG HITT

Congress is considering revamping the process for reviewing foreign investments with national-security implications amid the furor over Dubai Ports World's proposed takeover of a company that manages five U.S. ports.

Such deals, including the proposed $6.8 billion acquisition of Britain's Peninsular & Oriental Steam Navigation Co., typically require approval from a 12-member interagency panel. The panel, headed by the Treasury secretary, is called the Committee on Foreign Investment in the United States, or CFIUS.

The panel monitors and reviews foreign investment -- and can recommend that the president exercise his legal authority to block a foreign acquisition, merger or takeover if he determines it is a threat to national security unless there are laws that provide adequate safeguards.

Even before the flap over the ports deal, Senate Banking Committee Chairman Richard Shelby (R., Ala.) said that "improving the transparency of the [CFIUS] process and ensuring adequate consideration of national-security interests" was among his top priorities for the year. "It is my hope to move legislation in the very near future," Mr. Shelby said.

Mr. Shelby first said he wanted to broaden oversight of the investment-review process in the wake of Cnooc Ltd.'s bid last year to buy U.S. oil company Unocal Corp., which ultimately was withdrawn under political pressure. The administration persuaded him to pull back to allow it to consider changes. But the ports controversy has given the issue new life.

The Senate Banking committee, which first held hearings on the subject last fall, scheduled a hearing on the current controversy for March 2. It plans to hear testimony from representatives of the departments of Treasury, Homeland Security and Defense, as well as experts on port and infrastructure security and relations between the U.S. and the United Arab Emirates, where the Dubai company is based.

CFIUS was established by a 1975 presidential executive order in response to waves of foreign investment in the U.S. by oil-producing countries. Under a 1988 law, the committee can approve a transaction if no credible threat to national security has been found after a 30-day review. If a possible threat exists, it can launch a 45-day probe. The president then has 15 days to approve or deny a transaction.

Since 1988, the review panel has evaluated more than 1,500 deals. About 25 of those have been investigated, and a dozen sent to the president. Only one was prohibited, in 1990, when China National Aero Technology Import & Export Corp. was required to sell its interest in a Seattle-based aircraft-component company called Mamco Manufacturing Inc.

Critics in Congress complain the process uses too narrow a definition of national security. Reviews are tightly focused on traditional security concerns such as safety and military strength, but some suggest concerns such as the nation's economic security ought to be taken into account.

Some of those concerns are reflected in the Shelby bill, which is evolving. One option is to mandate that CFIUS conduct an extended, 45-day investigation of all transactions involving entities controlled by foreign governments, as is the case with DP World. The measure as it stands now also would require Congress to be notified when the administration begins a review -- not currently the practice -- and would broaden the scope of the review process to include energy security, not just national security.

Members on both sides of the aisle are proposing changes. Senate Majority Leader Bill Frist (R., Tenn.) says Congress should have a role in vetting deals and "possibly voiding them if necessary." At a minimum, he says, the committee "needs to be more transparent." Sen. James Inhofe (R., Okla.) has proposed extending the panel's review to 60 days and giving Congress the right to disapprove deals the committee okays.

Sen. Evan Bayh (D., Ind.) says he plans legislation that would require the Director of National Intelligence to approve foreign investments in the U.S., so that homeland security is given greater consideration before deals are approved.

Some business interests, and some administration officials, say they fear such changes would turn the panel into a protectionist tool to block the free flow of capital across borders. "Such broad interest in this particular deal, we hope, will not be a catalyst for a fundamental expansion of CFIUS," said Todd Malan, executive director of the Organization for International Investment, a Washington organization of companies with global interests. "That will affect the normal course of investment in the United States."

A Government Accountability Office report last year offered criticisms of the review committee process, including complaints that the process doesn't allow agencies enough time to fully investigate possible national-security concerns.

In November, a panel created by Congress, the U.S.-China Economic and Security Review Commission, recommended the law be amended to require the committee to focus on "economic security," as well as national security; that an agency other than Treasury, such as Defense, head the committee; and that Congress get notice of each proposed transaction and the panel's determination.

Write to Michael Schroeder at mike.schroeder@wsj.com10 and Greg Hitt at greg.hitt@wsj.com11