Defense Trade:

Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness

GAO-05-686: Published: Sep 28, 2005. Publicly Released: Sep 28, 2005.

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The 1988 Exon-Florio amendment to the Defense Production Act authorizes the President to suspend or prohibit foreign acquisitions of U.S. companies that may harm national security, an action the President has taken only once. Implementing Exon-Florio can pose a significant challenge because of the need to weigh security concerns against U.S. open investment policy--which requires equal treatment of foreign and domestic investors. Exon-Florio's investigative authority was delegated to the Committee on Foreign Investment in the United States--an interagency committee established in 1975 to monitor U.S. policy on foreign investments. In September 2002, GAO reported on the implementation of Exon-Florio. This report further examines that implementation.

Foreign acquisitions of U.S. companies can pose a significant challenge for the U. S. government in implementing the Exon-Florio amendment because while foreign investment can provide substantial economic benefits, these benefits must be weighed against the potential for harm to national security. Exon-Florio's effectiveness in protecting U.S. national security may be limited because the Department of the Treasury--as Chair of the Committee on Foreign Investment in the United States--and others narrowly defines what constitutes a threat to national security and, along with some other member agencies, is reluctant to initiate investigations to determine whether national security concerns require a recommendation for possible presidential action. Some Committee members have argued that this narrow definition is not sufficiently flexible to protect critical infrastructure, secure defense supply, and preserve technological superiority in the defense arena. The Committee's reluctance to initiate an investigation--due in part to concerns about potential negative effects on the U.S. open investment policy--limits the time available for member agencies to analyze national security concerns. To provide additional time, while avoiding an investigation, the Committee has encouraged companies to withdraw their notification of a pending or completed acquisition and to refile at a later date. However, for companies that have completed the acquisition, there is a substantially longer time before they refile to complete the Committee's process; in some cases they never do, leaving unresolved any outstanding concerns. In our 2002 report, GAO recommended improvements in provisions to assist agencies in monitoring actions companies have agreed to take to address national security concerns. The Committee has improved provisions on monitoring compliance, and the Department of Homeland Security is actively involved in monitoring company actions.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: On July 26, 2007, the President signed Public Law 110-49 into law. Public Law 110-49 contains provisions that implement this recommendation.

    Matter: To provide more transparency and facilitate congressional oversight, the Congress may wish to revisit the criterion for reporting circumstances surrounding cases to the Congress. For example, the Congress could require an annual report on all transactions that occurred during the preceding year. Such a report could provide the Congress with information on the nature of each acquisition; the national security concerns raised by Committee member agencies, if any; how the concerns were mitigated; and whether each acquisition was concluded or abandoned, in addition to any presidential decisions required under the statute.

  2. Status: Closed - Not Implemented

    Comments: The Foreign Investment and National Security Act of 2007 was enacted and implementing regulations issued; no action was taken to implement this recommendation.

    Matter: To address Treasury's concern with the impact of investigations on U.S. open investment policy and the member agencies' concerns with having sufficient time to address relevant issues concerning the acquisitions, the Congress may wish to consider eliminating the distinction between a review and an investigation and make the entire 75-day period available for review. The Committee could then be required to submit recommendations to the President only if presidential action was necessary.

  3. Status: Closed - Implemented

    Comments: On July 26, 2007, the President signed Public Law 110-49 into law. Public Law 110-49 contains provisions that implement this recommendation.

    Matter: In light of the differing views within the Committee on Foreign Investment in the United States regarding the extent of authority provided by Exon- Florio, the Congress may wish to consider amending Exon-Florio by more clearly emphasizing the factors that should be considered in determining potential harm to national security.

  4. Status: Closed - Implemented

    Comments: On July 26, 2007, the President signed Public Law 110-49 into law. Public Law 110-49 contains provisions that implement this recommendation.

    Matter: In view of the need to ensure that national security is protected during the period that withdrawal is allowed for companies that have completed or plan to complete an acquisition prior to the Committee completing its work, the Congress may wish to require that the Secretary of the Treasury, as Committee Chair, establish (1) interim protections where specific concerns have been raised, (2) specific time frames for refiling, and (3) a process for tracking any actions being taken during the withdrawal period.

 

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