Treasury debuts plan to penalize foreign investment threatening national security

The Biden administration on Thursday released the first-ever enforcement and penalty guidelines for foreign companies and investors that violate national security review protocols, a move that comes as federal officials and lawmakers have expressed growing concerns about the involvement of China and other adversarial nations in the operations of major technology companies. 

The new guidelines for the Committee on Foreign Investment in the United States—or CFIUS—describe how the committee will determine the imposition of penalties in instances where foreign investors or companies fail to properly safeguard national security. CFIUS, which is overseen by the Treasury Department, is responsible for identifying and mitigating national security risks related to foreign ownership of or investments in U.S. companies.

The enforcement and penalty guidelines outline “three categories of conduct that may constitute a violation, the process the committee generally follows in imposing penalties and some of the factors it considers in determining whether a penalty is warranted and the scope of any such penalty.” 

Conduct that constitutes a violation of mitigation agreements includes failing to “timely submit a mandatory declaration or notice;” non-compliance with CFIUS’s mitigation agreements; and filing “material misstatements,” “omissions” and “ false or materially incomplete certifications.”

“In determining whether a violation has occurred, CFIUS considers information from a variety of sources, including from across the U.S. government, publicly available information, third-party service providers (e.g., auditors and monitors), tips, transaction parties and filing parties,” the guidelines added. 

If a violation has occurred, the guidelines say that CFIUS will engage “in a fact-based analysis in which it weighs aggravating and mitigating factors,” including accountability, harm, intent and record of compliance. This allows the committee to have some leeway in determining penalties on a case-by-case basis. 

“The weight CFIUS gives to any factor will necessarily vary depending on the particular facts and circumstances surrounding the conduct giving rise to the violation,” the guidelines noted. “Factors that are relevant in the context of one violation will not necessarily be relevant in the context of another.”

CFIUS in recent years has reviewed a growing number of foreign investments to determine their impact on national security, with this work ranging, in part, from forcing a Chinese company to sell the dating app Grindr in 2020 to, more recently, reviewing a proposal by a company with Chinese ties to build a corn mill in Grand Forks, North Dakota. According to an annual report released by the Treasury Department in August, CFIUS “reviewed a record number of covered transactions, including 164 declarations and 272 notices” in 2021. 

Paul Rosen, the Treasury Department’s assistant secretary for investment security, said in a statement that “the vast majority of those who come before CFIUS abide by their legal obligations and work collaboratively with the committee to mitigate any national security risks arising from the transaction,” but added that those who fail to comply with the committee’s agreements or obligations “will be held accountable.”

“Today’s announcement sends a clear message: Compliance with CFIUS mitigation agreements is not optional, and the committee will not hesitate to use all of its tools and take enforcement action to ensure prompt compliance and remediation, including through the use of civil monetary penalties and other remedies,” Rosen added. 

The national security threat posed by foreign involvement in major technology companies—particularly those originating from adversarial countries, such as China—has led to growing alarm from both Congress and the Biden administration. During a Senate Homeland Security and Governmental Affairs Committee hearing about social media’s impact on national security on Sept. 14, lawmakers expressed concerns about popular video app TikTok’s Chinese ownership and ties to Beijing. TikTok remains in advanced talks with CFIUS to address the U.S. government’s national security concerns.

President Joe Biden previously signed an executive order on Sept. 15 that directed CFIUS to examine additional national security factors—such as “risks to U.S. persons’ sensitive data”—when reviewing foreign investments in U.S. companies or operations.