Committee on Foreign Investment in the United States: Action Needed to Address Evolving National Security Concerns Facing the Department of Defense
GAO-18-494
Published: Jul 10, 2018. Publicly Released: Jul 10, 2018.
Fast Facts
Foreign investment in U.S. companies can benefit the economy, but could pose risks to national security. The Committee on Foreign Investment in the United States (CFIUS) reviews certain foreign acquisitions and mergers and can mitigate risks or block transactions.
DOD identified some investments as national security concerns because they may give foreign investors access to emerging technologies or be in proximity to critical military locations. However, the CFIUS process doesn't cover all the types of investments DOD identified.
Our recommendations are to help DOD and CFIUS address these risks and other concerns.
Aerial photo of the Pentagon.
Highlights
What GAO Found
The Department of Defense (DOD) faces challenges identifying and addressing evolving national security concerns posed by some foreign investments in the United States.
- Resources: DOD's Office of Manufacturing and Industrial Base Policy represents the department and coordinates DOD's participation on the Committee on Foreign Investment in the United States (CFIUS). As a committee member, DOD co-leads CFIUS's review and investigation of transactions between foreign acquirers and U.S. businesses where it has expertise. DOD co-led 99 transactions in calendar year 2017, or 57 percent more transactions than it co-led in 2012, while the annual authorized positions increased from 12 to 17 during that same time period. DOD's workload has also been affected by the volume and complexity of the transactions it is responsible for co-leading, in addition to other CFIUS responsibilities, such as identifying transactions that foreign acquirers do not voluntarily file with CFIUS. DOD has taken some steps to address its resource limitations, but has not fully assessed the department-wide resources needed to address its growing workload.
- Emerging Technology and Proximity: DOD officials identified some investments that pose national security concerns from foreign acquirers gaining access to emerging technologies or being in close proximity to critical military locations, which, according to officials, cannot always be addressed through CFIUS because the investments would not result in foreign control of a U.S. business. DOD and Department of the Treasury (Treasury) officials said addressing these investments may require legislative action. DOD is taking steps to identify critical emerging technologies and military locations that should be protected from foreign investment. However, DOD has not fully assessed risks from these types of foreign investment or what additional authorities, if any, may be necessary for it to address them.
- Policy: DOD's CFIUS Instruction does not clearly identify some reviewer responsibilities or processes for identifying transactions that foreign acquirers do not voluntarily file with CFIUS. The policy is also outdated and inconsistent with current practices.
DOD's CFIUS Instruction and federal internal control standards emphasize the importance of assessing organizational structures, policies, and procedures to respond to risks. Without assessing resources needed to address its CFIUS workload and risks from foreign investment in emerging technologies or in proximity to critical military locations, and ensuring its policies and processes clearly reflect the issues facing the department, DOD is at risk of being unable to respond to evolving national security concerns.
This is a public version of a sensitive report that GAO issued in April 2018. Information that DOD and Treasury deemed sensitive has been omitted.
Why GAO Did This Study
Foreign acquisitions of U.S. companies can pose challenges for the U.S. government as it balances the economic benefits of foreign direct investment with the need to protect national security. CFIUS is an interagency group, led by Treasury, that reviews certain transactions—foreign acquisitions or mergers of U.S. businesses—to determine their effect on U.S. national security and whether the transaction may proceed.
GAO was asked to review DOD's ability, as a member of CFIUS, to address defense issues. This report assesses factors, if any, that affect DOD's ability to identify and address national security concerns through the CFIUS process, among other objectives. GAO analyzed data on DOD co-led transactions from January 2012 through December 2017, the most recent data available. GAO also interviewed DOD and Treasury officials and reviewed documentation to identify DOD's CFIUS processes, resources, and responsibilities and selected a non-generalizable sample of nine DOD component reviewers, based on their participation in the CFIUS process.
Recommendations
GAO is making eight recommendations, including that DOD assess resources needed to address workload, assess risks from foreign investment in emerging technologies and in close proximity to critical military locations, and update its policies and processes to better reflect the evolving national security concerns facing the department. DOD and Treasury agreed with GAO's recommendations, and have identified some actions to address them.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | The Secretary of Defense should assess CFIUS resource requirements within the Office of Manufacturing and Industrial Base Policy (MIBP) and DOD component reviewers in light of increasing workload, and prioritize personnel and funding resources accordingly to review, mitigate, and monitor transactions that are of concern to the department. (Recommendation 1) |
DOD agreed with this recommendation and has taken a variety of steps since our report to assess and prioritize personnel and funding resources to review, mitigate, and monitor CFIUS transactions that are of concern to the department. According to officials from the Office of the Deputy Assistant Secretary of Defense for Industrial Policy, they have used data calls and quarterly meetings with DOD CFIUS stakeholders to discuss and determine resource needs. Based on our review of DOD budget information submitted as of April 2022, the funding resources dedicated to supporting CFIUS operations have increased from an average of $2.4 million a year at the time of our report to $24.5 million as of the fiscal year 2023 budget. Our review of personnel resources as of March 2022 indicates that the Office of the Deputy Assistant Secretary of Defense for Industrial Policy has also increased the personnel resources dedicated to supporting CFIUS operations from 17 positions as of October 2017 to a total of 60 positions. These positions include 8 federal employees and 52 contractors including personnel to monitor mitigation agreements, identify non-notified transactions, and support other DOD CFIUS stakeholders. Further, according to officials from the Office of the Deputy Assistant Secretary of Defense for Industrial Policy, in June 2021, senior DOD leadership orally granted CFIUS funding protected status from congressional reductions, limiting the impact of future budget cuts. These steps should help ensure that DOD has the funding and personnel resources necessary to perform its current and future CFIUS responsibilities.
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| Department of Defense | The Secretary of Defense, in coordination with the Deputy Assistant Secretary of Defense for MIBP and Office of the Under Secretary of Defense, Personnel and Readiness, should incorporate the results of its efforts to identify, assess, and prioritize national security concerns related to foreign investment in emerging technologies and in proximity to certain critical military locations, into DOD Instruction 2000.25 and communicate the results to DOD component reviewers. (Recommendation 2) |
DOD agreed with this recommendation, and in December 2021 it finalized updates to DOD Instruction 2000.25. The updated instruction clarifies that the Under Secretary of Defense for Research and Engineering has responsibilities for assessing whether a company is critical to developing vital or emerging technology. The Instruction was also updated to specify that transactions involving real estate in close proximity to critical military installations, as identified in 31 C.F.R. 802, are required to be declared to CFIUS for review and requires that DOD stakeholders assess CFIUS transactions for any risks related to their proximity to critical infrastructure. These actions meet the intent of the recommendation and will help to clarify and provide consistency across DOD components when reviewing CFIUS transactions for national security concerns related to emerging technology and proximity to critical military locations.
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| Deputy Assistant Secretary of Manufacturing and Industrial Base Policy | Following the completion of its emerging technology study, the Deputy Assistant Secretary of Defense for MIBP should assess what additional authorities may be necessary to address risks related to foreign investment in critical and emerging technologies, and seek legislative action to address risks posed by these investments as appropriate. (Recommendation 3) |
DOD agreed with this recommendation and stated in July 2019 that it believes the passage of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) should provide the department with the necessary authorities to address concerns related to foreign investment in emerging technologies. In July 2022, officials from the Office of the Deputy Assistant Secretary of Defense for Industrial Policy stated that some of the regulations implementing FIRRMA requirements related to emerging technology are still being finalized by the Department of Commerce. Following the completion of those regulations, the Office of the Deputy Assistant Secretary of Defense for Industrial Policy will assess whether additional authorities are needed to address emerging technology concerns through CFIUS. As of August 2024, DOD has not provided an update on any additional actions taken.
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| Department of Defense | Following the department's efforts to identify critical locations and develop and implement guidance assessing risks to these locations from foreign encroachment, the Secretary of Defense should assess what additional authorities, if any, may be necessary to address national security risks from foreign investments in proximity to these locations, and seek legislative action as appropriate. (Recommendation 4) |
DOD agreed with this recommendation and in August 2020, DOD officials stated that they worked in coordination with Department of Treasury officials to develop 31 C.F.R. 802, implementing CFIUS's authorities through the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) to review certain real estate transactions by foreign persons in the United States. According to DOD officials, they helped to inform the regulation, which identifies a list of military locations and other government sites and establishes the circumstances under which foreign investment in close proximity to these locations may be considered a covered real estate transaction under CFIUS. DOD officials stated that their involvement in developing the regulation allowed them to address their concerns related to foreign investments in close proximity to critical military locations, and the department will be able to update the list of locations as needed to address national security considerations.
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| Department of the Treasury | The Secretary of the Treasury should provide clarification to parties filing a notice of a transaction with CFIUS that for filings involving multiple locations, geographic coordinates are required to be part of the notification. (Recommendation 5) |
In March 2018, in response to this recommendation, the Department of the Treasury updated information on its website to clarify that addresses and/or geographic coordinates are required for a Committee on Foreign Investment in the United States (CFIUS) filing to be considered complete. Specifically, Treasury's website states that CFIUS notices must include addresses or geographic coordinates for all U.S. properties and facilities for the notice to be considered complete, and thus able to be reviewed by the Committee. As a result of this clarification, DOD will be able to more efficiently identify whether covered transactions may pose proximity concerns for being near critical military locations.
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| Deputy Assistant Secretary of Manufacturing and Industrial Base Policy | The Deputy Assistant Secretary of Defense for MIBP should update DOD Instruction 2000.25, to include additional guidance and clarification regarding DOD component responsibilities during the CFIUS process and DOD processes for identifying non-notified transactions. (Recommendation 6) |
DOD agreed with this recommendation, and in December 2021 it finalized updates to DOD Instruction 2000.25. The updated Instruction clarifies the responsibilities of the Under Secretary for Defense for Acquisition and Sustainment and the Deputy Assistant Secretary of Defense for Industrial Policy to represent DOD on the Committee on Foreign Investment in the United States (CFIUS), and updates DOD component responsibilities related to reviewing CFIUS transactions. The updated Instruction also clarifies DOD's process and responsibilities for identifying non-notified transactions. For example, the Instruction states that DOD components are key stakeholders in discovering and submitting non-notified transactions, and clarifies that completed transactions or joint ventures can be submitted as non-notified transactions for review. The updated Instruction should help DOD to ensure that its stakeholders are aware of and consistently performing their responsibilities to review both notified and non-notified transactions.
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| Deputy Assistant Secretary of Manufacturing and Industrial Base Policy | The Deputy Assistant Secretary of Defense for MIBP should update and implement requirements identified in DOD Instruction 2000.25 regarding management and oversight of mitigation agreements, such as taking into account the resources needed to effectively monitor agreements, improving communication methods between MIBP and the DOD components, and clarifying component responsibilities in developing and monitoring mitigation agreements. (Recommendation 7) |
DOD agreed with this recommendation and in December 2021 it finalized updates to DOD Instruction 2000.25. The updated Instruction clarifies that the Office of the Deputy Assistant Secretary of Defense for Industrial Policy has primary responsibility for identifying mitigation plans and monitoring mitigation agreements, with assistance from primary DOD stakeholders who can help determine the necessity and appropriateness of mitigation options and assist with monitoring mitigation agreements. The Instruction also establishes quarterly Defense CFIUS Coordination group meetings to promote training and information sharing among components involved in CFIUS operations, such as mitigation and monitoring activities. According to DOD officials, the Office of the Deputy Assistant Secretary of Defense for Industrial Policy has also more than doubled the personnel resources it has supporting its mitigation and monitoring efforts, and its most recent organizational chart as of March 31, 2022 includes four federal employees and 21 contractors. These efforts should help provide clarity and improve communication about DOD component responsibilities related to monitoring mitigation agreements, and help address resource challenges related to DOD's workload monitoring these agreements.
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| Department of Defense | The Secretary of Defense should submit the response to the House Report reviewing the role of the Deputy Assistant Secretary of Defense for MIBP in monitoring CFIUS mitigation agreements, and determining if the Defense Security Service is suited to perform these functions. (Recommendation 8) |
DOD agreed with this recommendation and in July 2019 provided documentation that it had completed its report in response to House Report 113-102. Specifically, on June 10, 2019 DOD submitted a report to the congressional defense committees recommending that responsibilities for CFIUS mitigation agreement oversight, monitoring, and compliance remain with the Industrial Policy office (formerly MIBP) rather than be transferred to the Defense Security Service.
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