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                                                       Calendar No. 474
109th Congress                                                   Report
 2d Session                                                     109-264




                 June 21, 2006.--Ordered to be printed


Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 3549]

    The Committee on Banking, Housing, and Urban Affairs, 
having had under consideration an original bill to amend the 
Defense Production Act of 1950, to strengthen Government review 
and oversight of foreign investment in the United States, to 
provide for enhanced Congressional oversight with respect 
thereto, and for other purposes, having considered the same, 
reports favorably thereon and recommends that the bill do pass.

                               I. PURPOSE

    Section 721 of the Defense Production Act, also known as 
the Exon-Florio Amendment (``Exon-Florio''), established a 
statutory framework for the United States Government to analyze 
foreign acquisitions, mergers, and takeovers (hereafter 
``transactions'') of privately-owned entities within the United 
States to determine whether such transactions affect the 
national security of the United States. The Foreign Investment 
and National Security Act of 2006 (hereafter ``the Act'') 
amends Section 721 for the purpose of strengthening the process 
by which such transactions are reviewed and, when warranted, 
investigated for national security concerns. In addition, the 
Act provides for a system of Congressional notification to 
address the absence of such notifications that characterized 
the previous history of the implementation of Section 721.

                             II. BACKGROUND

    In 1988, Section 721 of the Defense Production Act of 1950, 
Exon-Florio, was passed in response to congressional concerns 
about the impact on national security of certain foreign 
acquisitions of United States corporate entities. Exon-Florio 
established a process by which proposed foreign transactions 
would be analyzed by the Executive Branch of the United States 
Government (specifically, ``the President or the President's 
designee'') to determine whether such transactions could pose a 
threat to U.S. national security. Historically, U.S. Presidents 
have assigned the responsibility for implementing Exon-Florio 
to the Committee on Foreign Investment in the United States 
(hereafter, CFIUS), a multi-agency organization established by 
Executive Order in 1975. Exon-Florio was amended in 1992 by the 
so-called ``Byrd Amendment'' to require that all foreign 
transactions involving a foreign government-owned or controlled 
entity would be subject to a more stringent analytical process.
    Since Exon-Florio went into effect, transactions have been 
reviewed in a highly secretive manner in part to prevent the 
public release of sensitive proprietary information. The 
practical effect of conducting transactional reviews in this 
manner, however, has made congressional oversight and public 
understanding of Exon-Florio extremely difficult.
    After a series of specific transactions brought to the 
forefront the difficulty in conducting thorough oversight by 
Congress of the security review process,\1\ on February 20, 
2004, the chairman of the Committee on Banking, Housing, and 
Urban Affairs, Senator Shelby, and the Ranking Member of the 
Committee, Senator Sarbanes, requested a study by the 
Government Accountability Office of the implementation of Exon-
Florio. That study was completed in September 2005.
    \1\Cases previously reviewed by CFIUS that were the focus of 
increased congressional concern included the proposed acquisition of 
fiber optic network provider Global Crossing Ltd. by Singapore 
Technology and Hutchison Whampoa of Hong Kong; the purchase by a 
Chinese consortium of high-precision magnet manufacturer Magnequench, 
Inc.; and the proposed acquisition by a Netherlands company of Silicon 
Valley Group, a manufacturer of computer semiconductor lithography with 
military applications.
    In its review of the Exon-Florio process, the GAO examined 
nine cases reviewed by CFIUS over a ten-year period, beginning 
in 1995. Generally, GAO found that systemic weaknesses in 
implementation of Exon-Florio limited its effectiveness in 
protecting national security. Specifically, GAO concluded that 
weaknesses in implementation of Exon-Florio include application 
of excessively narrow definitions of ``national security'' by 
the Department of the Treasury and other CFIUS member-agencies; 
insufficient time during the pre-investigation review period 
for agencies with a national security mission to collect and 
analyze information on transactions, and consequent excessive 
reliance by CFIUS on the withdrawal of corporate filings from 
the review process in order to gain relief from statutory time 
constraints; and inappropriate standards for initiation of 
formal investigations due to concerns among some CFIUS member-
agencies of the ramifications of a formal investigation for the 
preservation of the U.S. open investment policy. In addition, 
the GAO found that responsibility for implementation of Exon-
Florio within the Office of International Investment in the 
Department of the Treasury has created a conflict between that 
office's responsibility for facilitating international 
investment and its responsibility for reviewing foreign 
investment for national security concerns.
    In its report, GAO offered a number of recommendations for 
congressional action. Those recommendations include more 
clearly delineating the factors to be considered in CFIUS 
reviews and investigations; addressing the time constraint 
problem by replacing the existing review and investigation 
phases with a single 75-day review period; and providing for 
greater transparency by reviewing the existing Exon-Florio 
provision pertaining to notifications to Congress. Finally, to 
address congressional concerns regarding the status of cases 
withdrawn from CFIUS reviewfor the purpose of ``stopping the 
clock,'' GAO recommended that Congress require the Secretary of the 
Treasury to establish more formal and stringent criteria to govern such 
withdrawals, including a process for tracking withdrawn cases and 
mandating time frames for refiling.
    While GAO was conducting its examination, but prior to the 
release of its findings, the China National Offshore Oil 
Corporation (CNOOC) announced on June 23, 2005, its intention 
to acquire U.S. energy company Unocal. This announcement 
resulted in increased congressional concerns regarding foreign 
acquisitions of U.S. energy companies. While the CNOOC bid was 
withdrawn prior to that proposed transaction's review by CFIUS, 
the Chinese company's bid led many members of Congress to raise 
questions about the transfer of ownership or control of certain 
sectors of the U.S. economy to foreign companies, especially to 
foreign companies located within or controlled by countries the 
governments of which might not be sympathetic to U.S. regional 
security interests.
    On October 6, 2005, the Committee on Banking, Housing, and 
Urban Affairs conducted a hearing into the findings of the GAO 
report. Testifying on behalf of GAO was Ms. Katherine Schinasi, 
Managing Director for Acquisition and Management, and Ann 
Calvaresi, director of Industrial Base Issues. Discussion 
between the GAO witnesses and Banking Committee members further 
highlighted deficiencies in implementation of Exon-Florio and 
the level of dissatisfaction with the lack of communication 
between CFIUS and the appropriate committees of Congress. That 
hearing was followed on October 20 by another hearing that 
allowed the Banking Committee to hear directly from many of the 
agencies that comprise CFIUS, including the Department of the 
Treasury, which has the lead role in implementing Exon-Florio.
    In late January 2006, congressional offices began to become 
aware of the proposed acquisition of terminal operations at a 
number of U.S. maritime ports by Dubai Ports World, an 
established port operator owned by the government of the 
Emirate of Dubai. Concern within Congress about a transaction 
that would transfer terminal operations to a Persian Gulf 
emirate through whose financial system funds had been 
transferred to the terrorists who carried out the September 11, 
2001 attacks upon the United States, and that had been a 
central conduit for nuclear weapons components being smuggled 
to hostile regimes, provided further impetus for review of the 
manner in which foreign transactions are analyzed by CFIUS. In 
addition to concerns regarding the potential national security 
ramifications of the Dubai Ports World transaction, the 
Committee on Banking, Housing, and Urban Affairs viewed CFIUS's 
handling of this case as indicative of the systemic problems 
discussed by the GAO. That the Secretaries and Deputy 
Secretaries of the Departments of the Treasury and Homeland 
Security were ignorant of the Dubai Ports World transaction, 
combined with the fact that this transaction was not subjected 
to a formal investigation in violation of the Byrd Amendment, 
compounded congressional concerns about the nature of the 
underlying transaction.
    In response to continued concerns regarding implementation 
of Exon-Florio, on April 30, 2006, the Committee on Banking, 
Housing, and Urban Affairs met to consider legislation to 
reform the process by which foreign transactions are analyzed 
for potential national security ramifications.

                      III. DESCRIPTION OF THE BILL

(a) Review of transactions involving foreign persons and governments

    Reviews of foreign transactions are currently conducted on 
a voluntary basis involving interested party submission to 
CFIUS of documentation pertaining to the transaction in 
question. CFIUS then has discretion with regard to whether to 
conduct a review of that transaction. This section would 
require CFIUS to review all transactions submitted by the 
persons or governments involved. The review would determine 
whether the transaction affected national security, and whether 
the transaction was required to be subjected to a formal 
    The timing of reviews remains consistent with current law, 
meaning it must be concluded within 30 days of receipt of 
notification of the proposed or pending transaction. Should the 
review determine that the proposed or pending transaction could 
effect national security, then an investigation, discussed 
below, would be required.
    The issue of advancing from a review to a more formal 
investigation has historically carried negative commercial and 
political connotations. Specifically, industry and the 
Department of Treasury are concerned that subjecting a proposed 
or pending transaction to a formal investigation could 
adversely affect the public standing of the companies involved 
because the investigative phase of Exon-Florio is viewed as a 
sign of serious government reservations about the impact on 
national security of the transaction. That is one reason why, 
of the 470 cases notified to CFIUS during the period covered by 
the GAO study discussed above, only 8 were subjected to an 
investigation, which, under Exon-Florio, results in a 
presidential determination, although only two such 
determinations had actually been made through 2004, the period 
studied by GAO.\2\
    \2\There has been four such determinations during 2006, possibly at 
least in part due to increased public and congressional attention 
focused on the foreign acquisition review process in the wake of the 
CNOOC and Dubai Ports World cases.
    Because of the convergence of the 30-day maximum time 
period that can be spent conducting a pre-investigation review 
and the reluctance of CFIUS to advance to the investigative 
stage, those federal agencies that are members of CFIUS and 
that have national security as their primary mission have 
occasionally found themselves with insufficient time to collect 
and analyze information on a proposed or pending transaction 
while simultaneously being subjected to pressures to make a 
determination without the need for a formal investigation.\3\
    \3\This situation was discussed, for example, by the Department of 
Justice in its comments to GAO: ``The Department [of Justice] shares 
the concern expressed in the draft [GAO] report with respect to the 
constraints imposed by the time limits of the current process. In 
particular, gathering timely and fully-vetted input from the 
intelligence community is critical to a thorough and comprehensive 
national security assessment. Any potential extension of the time 
available to the participants for the collection and analysis of that 
information would be helpful.'' United States Government Accountability 
Office, Defense Trade: Enhancements to the Implementation of Exon-
Florio Could Strengthen the Law's Effectiveness, GAO-05-686, September 
2005, p.48.
    During its review of the implementation of Exon-Florio, the 
Committee on Banking, Housing, and Urban Affairs heard 
identical sentiments from other agencies with the protection of 
national security as their mandate. In fact, the only specific 
request made of the Committee during its review of Exon-Florio 
was for an option to extend the 30-day review period for those 
cases where additional time is needed to collect and analyze 
    \4\In addition to the written comments of the Department of Justice 
included in Appendix II of the GAO report, the report notes that 
Department of Defense officials responsible for conducting security 
reviews under the authority of Exon-Florio have expressed concerns with 
the 30-day restriction for pre-investigative reviews. According to 
these officials, the ``30-day review'' is, in practice, 23 days, as 
CFIUS guidelines ``require member agencies to inform the Committee 
[CFIUS] of concerns by the 23rd day of the 30-day review * * *'' See 
the GAO report cited above, p. 15.
    With no option to extend the 30-day review period for 
complex cases, CFIUS has historically encouraged companies to 
withdraw their filings for the purpose of ``stopping the 
clock'' and allowing for additional review time without the 
burden of a statutorily-imposed time constraint. Withdrawn 
cases, however, may not be resubmitted in a timely manner, if 
at all, and such means of buying time are clearly inconsistent 
with the intent of the law. It is for this reason that the 
Committee included in its legislation a provision allowing for 
relief from the 30-day constraint in existing law by allowing 
for an additional period of up to 30 days for further review. 
In response to concerns expressed by some members of the 
Committee, by the Department of the Treasury, and by industry 
that an extension of time would be exploited by certain federal 
agencies to unnecessarily delay the conclusion of transactions, 
the Committee bill included a requirement that any extension 
for time beyond the initial 30-day period must be made by one 
of the top three officials of the agency making the request. To 
further address the concern about unwarranted requests for an 
extension of time, the Committee accepted a provision by 
Senator Hagel requiring the request to certify that credible 
evidence exists that a completed transaction would threaten to 
impair the national security.
    There has been concern expressed by some members of 
Congress that the avoidance of investigations for the purpose 
of insulating transactions from the negative connotations of an 
investigation has seriously undermined the law's effectiveness. 
The Committee emphasizes, however, that requests for extensions 
beyond the initial 30-day period should not be used to 
compensate for delinquent or otherwise unnecessarily delayed 
staff work. It is the Committee's understanding that the number 
of cases for which such an extension would have been used in 
the past had it previously existed is very few. The Committee 
intends to monitor the use of the extension closely to ensure 
that is used solely for its intended purpose.

(b) Investigations of certain transactions

    As discussed above, relatively few of the total number of 
cases submitted to CFIUS for review are subjected to an 
investigation, which under Exon-Florio must be completed within 
45 days of initiation. One reason for this result is the desire 
of CFIUS to resolve cases without subjecting the corporate 
entities involved to the potentially negative connotations of a 
formal investigation. However, another reason that so few 
transactions have been investigated has been the failure of the 
Department of the Treasury to accurately interpret Section 
2170(b), the so-called Byrd Amendment, named for the 
amendment's author, Senator Robert Byrd.\5\
    \5\This language states an investigation is required ``in any 
instance in which an entity controlled by or acting on behalf of a 
foreign government seeks to engage in any merger, acquisition, or 
takeover which could result in control of a person engaged in 
interstate commerce in the United States that could affect the national 
security of the United States.'' See 50 U.S.C. 2170(b).
    In introducing his amendment to Exon-Florio, Senator Robert 
Byrd stated on the Senate floor that it ``requires that any 
acquisition that involves a company controlled by a foreign 
government * * * must automatically receive the more detailed 
45-day investigation.'' It was because the intent of Section 
2170(b) of Exon-Florio was unambiguous that the Committee on 
Banking, Housing, and Urban Affairs was extremely disappointed 
to learn that the law was being interpreted by the Department 
of the Treasury at variance with that intent. This disparity 
became clear when Deputy Secretary of the Treasury Robert 
Kimmitt responded to questions by Senator Byrd, the author of 
the language, during a briefing of the Senate Armed Services 
Committee with the following comment: ``We have a difference on 
opinion on the interpretation of your amendment.''
    As stated, the implication of the Department of the 
Treasury interpretation of Section 2170(b) was that numerous 
transactions that should have been investigated were not. 
Deputy Secretary Kimmitt testified before the Committee on 
Banking, Housing, and Urban Affairs that 92 cases involving 
foreign government-owned and controlled companies were reviewed 
by CFIUS during the Clinton and Bush Administrations. In total, 
from passage of the law in 1988 to the end of 2005, only 25 
cases had been subjected to an investigation. Of the 46 cases 
during the Clinton Administration that involved foreign 
government-owned and controlled companies, only one went to 
investigation. During the current Administration, as of March 
2, 2006, only four out of 46 went to investigation. In short, 
noncompliance with Section 2170(b) has been a recurring problem 
since its passage.
    Because of concerns regarding noncompliance with the Byrd 
Amendment, concerns that reached their zenith during 
congressional debate surrounding the aborted Dubai Ports World 
transaction, the Committee-passed legislation includes language 
intended to eliminate anypossible ambiguity regarding the 
requirement for an investigation in cases involving foreign government-
owned and/or controlled companies.
    Another result of the aborted Dubai Ports World transaction 
was increased congressional concerns regarding foreign 
ownership or control of critical infrastructure in the United 
States. To address these concerns, the Committee-passed 
legislation establishes a new requirement for a mandatory 
investigation: transactions that would result in foreign 
control of ``critical infrastructure.''
    Because of Department of the Treasury concerns that the 
term ``critical infrastructure'' would be interpreted too 
broadly, and would consequently have a ``chilling'' effect on 
foreign investment in the United States, the Committee 
emphasized, by restating the definition of ``critical 
infrastructure'' already existing in the Defense Production Act 
of 1950, that the term is to be defined as follows:

``any systems or assets, whether physical or cyber-based, so 
vital to the United States that the degradation or destruction 
of such systems or assets would have a debilitating impact on 
national security, including national economic security and 
national public health or safety.''

    The Committee adopted this definition, adapted from the 
Homeland Security Act of 2002 (Public Law 107-296) to create a 
realistic standard by which CFIUS should measure the potential 
impact on national security of individual assets that are the 
subject of proposed or pending transactions. The Department of 
the Treasury should coordinate with the Department of Homeland 
Security on establishing parameters designed to exclude from 
mandatory investigation commercial assets that clearly do not 
by themselves constitute critical infrastructure.
    The Committee accepted an amendment by Senator Hagel to 
exempt from mandatory investigation critical infrastructure 
cases that were resolved through mitigation agreements between 
parties to the transaction and the federal government.
    Finally, the Committee-passed legislation requires an 
investigation in any case in which a review by CFIUS produces 
sufficient information to indicate the possibility of an 
impairment to national security after taking into account the 
factors listed in subsection (g) of the bill.
    The Committee-passed legislation retains the requirement 
that investigations conducted pursuant to this Act be concluded 
within 45 days.
    As discussed above, some members of the Committee are 
concerned about the use of withdrawals by CFIUS to manipulate 
the statutory time lines in Exon-Florio. While withdrawals can 
be appropriate when the parties to a proposed or pending 
transaction decide to undertake a fundamental modification to 
the nature of the transaction, such as divestment from the U.S. 
company of a division or sector involved in sensitive work, 
there are scenarios where the use of withdrawals cause concern. 
Additionally, in its report on implementation of Exon-Florio, 
GAO noted that companies involved in acquisitions that have 
been completed prior to conclusion of a CFIUS review have 
little incentive to resolve outstanding issues and refile their 
paperwork with CFIUS.\6\
    \6\U.S. Government Accountability Office, Defense Trade: 
Enhancements to the Implementation of Exon-Florio Could Strengthen the 
Law's Effectiveness, p.16.
    To address concerns about the resolution of cases withdrawn 
from an investigation within the initial 45-day time line, the 
underlying bill presented to the Committee included a proposal 
to require the completion of investigations even when cases are 
withdrawn from consideration, and that CFIUS continue to 
monitor the status of withdrawn cases. The Committee accepted 
an amendment by Senator Dodd that mandates that resubmitted 
cases be investigated for another period of up to 45 days. 
Review of the justification for the withdrawal must be included 
in the new investigation.
    The purpose of this provision is to ensure that CFIUS 
remains engaged in monitoring unresolved transactions that are 
withdrawn either to avoid bumping up against Exon-Florio time 
lines or so that the parties involved can negotiate divestiture 
agreements or other mitigating measures. It is not the 
Committee's intent that the number of cases forwarded to the 
President for his or her decision be unnecessarily increased. 
As the law will, upon passage of this Act, continue to require 
a presidential determination upon the formal conclusion of an 
investigation, the Committee recognizes that it may be 
necessary to require that withdrawn cases be resubmitted for an 
investigation, but that, should the investigation of a 
resubmitted case be terminated on account of the successful 
negotiation of an assurances or mitigation agreement, than it 
will not be required to be submitted to the President for final 
    To address concerns that mandatory refiling of 
documentation from withdrawn cases would extend to transactions 
that were terminated by mutual consent of the parties involved, 
a manager's amendment sponsored by the chairman and ranking 
member of the Committee, adopted by unanimous consent, included 
a provision that excludes such cases from the requirement.
    One of the more difficult issues for the Committee to 
resolve involved the question of whether companies should be 
required to file with CFIUS for consideration of proposed or 
pending transactions. Currently and historically, Exon-Florio 
has operated as a voluntary regime with the parties to a 
transaction responsible for filing with CFIUS or risking more 
draconian actions by the President of the United States under 
the International Emergency Economic Powers Act (Public Law 95-
223; 50 U.S.C. 1701). The Committee was reluctant to change the 
existing system to require mandatory filings. However, the 
manager's amendment did include a provision submitted by 
Senator Dodd that cases involving persons controlled by or 
acting onbehalf of foreign governments should in part be 
excluded from the voluntary filing regime. For this reason, the 
Committee-passed legislation requires that such persons involved in 
acquiring, merging with, or otherwise seeking to take control of U.S. 
critical infrastructure relating to national security give written 
notice of such transaction to CFIUS.

(c) Committee on foreign investment in the United States

    The Committee on Foreign Investment in the United States 
was established in 1975 by President Gerald Ford under 
Executive Order 11858. Exon-Florio, passed in 1988, did not 
designate a specific entity responsible for its implementation, 
stating instead that ``the President or the President's 
designee'' shall be responsible. President Ronald Reagan 
designated CFIUS, under Executive Order 12661, as the designee 
responsible for the new statute's implementation.
    Due to its origins within the Executive Branch, the 
Committee on Banking, Housing, and Urban Affairs of the Senate 
and the Committee on Financial Services of the House of 
Representatives lacked appropriate oversight of its activities, 
although individual components have testified before the 
Committees when requested to do so. As part of its effort to 
strengthen the national security review process and establish a 
system of congressional oversight, the Committee-passed 
legislation formally codifies CFIUS in statute, and designates 
the Secretary of Defense as Vice Chair alongside the Secretary 
of the Treasury's continued responsibility as Chairman. In 
establishing CFIUS in statute, the Committee also designates 
the Director of National Intelligence as a formal member. 
Concerns have been expressed by members of the Committee that 
the role of the intelligence community in supporting CFIUS's 
activities has been inadequate. GAO analysts briefed Committee 
staff on January 13, 2005, that such support has been 
problematic to secure and that CIA involvement in the review 
process was not always timely. By designating the Director of 
National Intelligence (DNI) as a formal member of CFIUS, the 
role of the intelligence community, especially the Central 
Intelligence Agency, in supporting CFIUS reviews and 
investigations will be strengthened.
    In addition to designating the DNI as a formal member of 
CFIUS, a proposal by Senator Dodd included in the manager's 
amendment establishes a requirement for a formal intelligence 
review for each transaction brought before CFIUS, to be 
distributed within CFIUS no later than 15 days after the start 
of the review period. This requirement will ensure that each 
component member of CFIUS receives at least preliminary 
intelligence support. The provisions further require that the 
intelligence community continue to provide intelligence support 
to the review and investigation processes.
    Among concerns that arose in the aftermath of the aborted 
Dubai Ports World transaction and the role of CFIUS in 
reviewing that transaction was the lack of adequate 
accountability. The Committee-passed legislation includes a 
requirement that will have the effect of codifying current 
practice: formally designating a lead agency for each 
transaction submitted for review. By formally designating a 
lead agency for each review and investigation, accountable 
agencies will be more easily identified.
    The Committee-passed legislation includes a requirement for 
the Chairman and Vice Chairman of CFIUS, in consultation with 
the Secretaries of State and Energy, the Chairman of the 
Nuclear Regulatory Commission, and the DNI to develop a system 
for assessing and classifying countries according to specified 
criteria: individual country's adherence to nonproliferation 
control regimes and relationship to the United States, as well 
as the risk a certain country poses that militarily-sensitive 
technologies could be diverted from the country in question or 
that it constitutes a risk for transhipment of such 
technologies. CFIUS would then be required to consider a 
country's assessment and classification in determining the risk 
to national security of a proposed or pending transaction.
    A country classification system is not new. Since 1996, 
such a system has been used in determining licensing 
requirements for the export of high performance computers. It 
was implemented through 15 C.F.R. 740.7. This system 
categorized countries into, originally, four tiers. President 
Clinton later combined tiers one and two. Tier 1 included NATO 
and Major non-NATO allies. Tier 4 includes terrorist-supporting 
countries, including Iran, North Korea, Sudan, and Syria. Tier 
3 constitutes the key category for purposes of determining 
national security considerations. Such countries as Russia, 
China and Pakistan are included in Tier 3.
    Because implementation of Exon-Florio involves regulating 
the transfer to foreign companies and countries of potentially 
sensitive technologies and assets, the export control review 
process applied to high performance computers could be 
appropriately applied to CFIUS-conducted reviews and 
investigations. A country classification system would ensure 
that each country in which a foreign company is based is 
considered in a broad context involving geopolitical realities 
that may otherwise not be considered.
    Because of concerns expressed by the Departments of State 
and the Treasury that a country classification system can prove 
harmful to diplomatic and economic relationships, the 
Committee-passed language provides for that system's protection 
from public disclosure, including exempting it from Freedom of 
Information Act filings. The Committee emphasizes that agency 
concerns that a system for classifying foreign countries 
according to national security criteria could undermine U.S. 
foreign relations continue to be fully considered. It is the 
Committee's intent that bilateral relationships, adherence to 
nonproliferation regimes, and the risk of diversion of 
militarily-sensitive technologies to third parties be addressed 
in all CFIUS reviews and investigations. The Committee remains 
sensitive to agency concerns about the ramifications of a 
classifications system for maintaining certain relationships.
    In addressing the reluctance of Treasury and other members 
of CFIUS concerned with protecting the U.S. open investment 
policy to subject transactions to an investigation, the GAO 
report notes the possible conflict involved in having the same 
departmental personnel responsible for protecting that policy 
also being responsible for implementing Exon-Florio national 
securityreviews.\7\ GAO reported that employees of the 
Department of Treasury responsible for implementation of Exon-Florio 
are also responsible for facilitating foreign direct investment in the 
United States and ensuring that U.S. companies enjoy reciprocal access 
in foreign markets.
    \7\U.S. Government Accountability Office, Defense Trade: 
Enhancements to the Implementation of Exon-Florio Could Strengthen the 
Law's Effectiveness, p. 14.
    The United States open investment policy is vital to U.S. 
economic growth. Concerns exist, however, that the dual 
responsibilities imposed upon these employees has resulted in a 
tilt among such employees in the direction of protection of 
that policy at the expense of the national security mandate. 
For this reason, the Committee-passed legislation includes a 
provision requiring that Department of the Treasury employees 
responsible for implementation of Exon-Florio have no other 
function within the department.

(d) Action by the President

    Existing Presidential authorities under Exon-Florio, and 
the President's responsibilities therein, remain adequate to 
ensure the protection of the United States from threats to 
national security resulting from foreign transactions of U.S. 
entities. For this reason, the Committee recommends minimal 
modifications to existing law in this area.

(e) Findings of the President

    This section restates the President's authority to block a 
proposed or pending transaction if he/she believes that 
credible evidence exists that the completed transaction could 
result in a threat to the national security. It further 
restates existing language specifying that the authorities 
provided under this Act are to be applied when other provisions 
of law, particularly the International Emergency Economic 
Powers Act, are inadequate to protect the national security.

(f) Actions and findings nonreviewable

    Restates existing Exon-Florio provision protecting 
Presidential decisions resulting from exercise of the 
authorities of this Act from judicial review.

(g) Factors to be considered

    Exon-Florio incorporates a number of factors that CFIUS may 
consider when assessing the potential national security 
implications of a proposed or pending transaction. These 
factors include the domestic production needed for projected 
national defense requirements and related defense industrial 
base issues and the potential effects of the proposed or 
pending transaction on a foreign country that supports 
terrorism or that poses a risk of proliferating militarily-
sensitive technologies, particularly those used in the 
manufacture of weapons of mass destruction.
    The existing list of factors that ``may'' be considered in 
a national security review is both inadequate to ensure a 
thorough review in the post-Cold War environment of national 
security affairs and presents an unacceptable risk that key 
issues will not be addressed. For this reason, the Committee-
passed legislation expands the list of factors to be considered 
and makes consideration of the factors mandatory for all 
reviews. The additions to the list of factors to be considered 
reflects the Committee's belief that critical infrastructure 
assets need to be carefully scrutinized when they become the 
object of a foreign acquisition.
    In addition, while nonproliferation of weapons of mass 
destruction remains one of the country's most pressing 
priorities, greater attention must be provided to foreign 
transactions that could result in a foreign military's ability 
to improve its conventional capabilities through acquisition of 
U.S. technologies. United States regional interests can be 
threatened by improvements in the technological capability of 
foreign militaries with which the United States may be at odds. 
Consequently, the Committee included in the list of factors 
that ``shall'' be considered the potential effect of the 
proposed transaction on U.S. regional security concerns and on 
``the long term projection of United States requirements for 
sources of energy and other critical resources and materials.''
    Finally, as discussed earlier, in reviewing the acquisition 
of the Peninsular and Oriental Steam Navigation Company by 
Dubai Ports World, CFIUS failed to adequately consider such 
risks as the region in which the United Arab Emirates exists, 
including its proximity to Iran, the recent history of 
Pakistani scientist Abdul Qadeer Khan exploiting Dubai's lax 
regulatory environment to smuggle nuclear components to Iran, 
Libya and North Korea, and Dubai's role as a central conduit 
for funding of the terrorist attacks of September 11, 2001.
    In order to address these concerns, the list of factors to 
be considered will henceforth require individual countries to 
be analyzed in a more comprehensive manner, including the risk 
each country poses that militarily-sensitive technologies can 
or are diverted from or through it, as well as the relationship 
of the country in which the foreign company is based with the 
United States. The Department of State has expressed concerns 
about the political sensitivity of a classification system, as 
would be required to be established under the bill initially 
brought before the Committee. Consequently, language was added 
during the Committee's consideration of the bill stipulating 
that the classification system would be for internal use of the 
U.S. Government only and would not be made available to the 
public. The classification metric would be exempt from Freedom 
of Information Act requests.

(h) Confidentiality of information

    The Committee-passed legislation includes Exon-Florio's 
already-existing provision for protection of proprietary or 
business-sensitive information submitted to CFIUS as part of a 
    Some foreign transactions could have a substantial effect 
on the communities in whichthe U.S. entity is located. With the 
increased emphasis on critical infrastructure assets mandated by the 
Committee-passed legislation, state-level officials may need to be made 
aware, on certain occasions, of a pending transaction that could 
adversely affect their state. During public debate over the Dubai Ports 
World transaction, for instance, numerous state-level officials 
expressed concern about the lack of information they had been provided 
regarding a transaction that affected large facilities in their states. 
For this reason, the manager's amendment passed by the Committee during 
its consideration of the legislation includes a provision by Senator 
Menendez that requires CFIUS to notify governors of states containing 
critical infrastructure assets that are the subject of a foreign 
transaction for the purpose of discussing potential security concerns 
that may arise from the transaction. The legislation includes further 
language designed to ensure that confidentiality provisions in the Act 
that apply to the federal government apply equally to governors who are 
so notified.

(i) Additional assurances

    The Committee-passed bill seeks to address the ability of 
the agencies that comprise CFIUS to adequately enforce 
agreements negotiated between those agencies and the parties to 
a transaction subject to CFIUS oversight. Mitigation agreements 
are the basis for the resolution of many of the transactions 
reviewed by CFIUS. They involve commitments made by the parties 
to the government, usually with the agency or agencies within 
CFIUS with the most direct interest in the nature of the 
transaction, and adherence to the terms of the agreement is 
very important to the national security of the United States. 
The legal status of mitigation agreements is not addressed in 
Exon-Florio, although, as stated, many cases involving national 
security concerns reviewed by CFIUS are resolved through such 
    The government's ability to monitor and enforce mitigation 
agreements lies at the heart of the process by which 
transactions are examined for national security concerns. 
Consequently, the legal status of mitigation agreements needs 
to be more clearly established in statute. For this reason, the 
Committee-passed legislation includes provisions intended to 
ensure that mitigation agreements constitute legally-binding 
contracts enforceable in the United States District Court for 
the District of Columbia, and that agreements are monitored and 
enforced in the appropriate manner. Assurances are to be 
treated by the courts as a continuing covenant of the persons 
on whose behalf a CFIUS assessment was sought, and continuing 
observance of the assurances is to be a condition of any CFIUS 
or Presidential determination. The assurances are to be 
embodied in a written agreement executed by the foreign person 
or government on whose behalf the CFIUS assessment was sought, 
and executed by either the Chairman or Vice Chairman of CFIUS 
on behalf of the United States. Compliance with the assurances 
is to be monitored, and may be investigated, in the same manner 
as violation of a civil statute. Enforcement remedies include 
injunctive relief, damages, and divestiture.

(j) Notice and reports to Congress

    The Committee has been very concerned about the absence of 
communications between it and CFIUS over the span of many 
years. The requirement in Exon-Florio for a Quadrennial Report 
on foreign acquisition strategies that could harm national 
security and industrial espionage activities directed against 
U.S. companies has been ignored, with only one report having 
been produced since the requirement was mandated in 1992.
    Throughout its history, and especially since the passage of 
Exon-Florio, CFIUS has operated largely without oversight by 
Congress. It is important to recognize and acknowledge the 
highly sensitive nature of the commercial transactions that 
come before CFIUS for review. However, Congress, through the 
appropriate committees of jurisdiction, must have greater 
insight into CFIUS's activities than heretofore has been the 
case. Congressional committees with jurisdiction for vital 
matters of national security routinely enjoy far greater access 
to sensitive information as a part of their legitimate 
oversight roles, including issues pertaining to nuclear weapons 
and covert operations. The issues before CFIUS, while 
sensitive, do not rise to the level of government conduct that 
warrants the level of opaqueness that has been characteristic 
of CFIUS activities to date.
    A routine process of notifications from CFIUS to the key 
committees with oversight of its activities--in effect, the 
Senate Banking, Housing, and Urban Affairs and House Financial 
Services Committees--is warranted given both the Congress's 
legitimate oversight role and the questionable resolution of 
several cases that have come before CFIUS. It is for these 
reasons that the Committee recommends a requirement that CFIUS 
report to the appropriate committees of Congress on the status 
of transactions that come before it. These notifications should 
include measures taken to resolve cases where mitigation 
agreements are employed. In addition, the Committee recommends 
that chairmen and ranking members of committees with direct 
oversight of CFIUS-member agencies that are designated by the 
chairman and vice chairman of CFIUS as the lead agencies for 
individual reviews and investigations should be notified on the 
same basis as the principal committees of jurisdiction.
    One of the more troubling aspects to the outcome of the 
Dubai Ports World transaction was the absence of accountable 
officials at high levels of lead agencies, particularly 
troubling given both the scale and magnitude of the transaction 
and the fact that it involved a Persian Gulf country with a 
long history as a hub for smuggling activities. Key officials 
in the Departments of the Treasury and Homeland Security were 
not aware of the transaction until after the wide-spread 
expression of concern by many members of Congress and the 
public threw the transaction's survival into jeopardy. To 
address that situation, the Committee recommends a provision 
requiring that notifications to Congress upon completion of 
reviews and investigations be certified by the chairman and 
vice chairman of CFIUS as well as the head of the agency 
designated by the chairman and vice chairman as lead for each 
individual transaction.
    Finally, the Committee recommends that the existing 
requirement for a quadrennial report be replaced with a 
requirement for an annual report that will serve as the basis 
for annual oversight hearings to be carried out by the 
Committee on Banking, Housing, and Urban Affairs of the Senate 
and the Committee on Financial Services of the House of 
Representatives. Theannual report will include a discussion of 
the potential impact on the U.S. defense industrial base and critical 
infrastructure of foreign acquisitions during the preceding year; an 
aggregative analysis of such acquisitions for the preceding four years; 
a prospective discussion of risks to national security and U.S. 
critical infrastructure that CFIUS anticipates adopting for the 
following year; an evaluation of whether there is credible evidence of 
a coordinated strategy by one or more countries or companies to acquire 
U.S. critical infrastructure or companies involved in research, 
development or production of critical technologies; and an evaluation 
of whether there are industrial espionage activities directed by 
foreign governments against private U.S. companies. Such a report is 
essential to ensure that Congress is fully informed on the level and 
nature of foreign direct investment in the United States, not for the 
purpose of impeding such investment, which is essential for U.S. 
economic growth, but for the purpose of both exercising its 
constitutionally-directed role of regulating commerce with foreign 
nations and to ensure that legitimate national security considerations 
are not sacrificed in deference to purely commercial considerations.
    The requirement for an annual report is based on the same 
logic as the biannual Humphrey-Hawkins Act and Foreign Exchange 
Rate Reports submitted to the Committee by the Federal Reserve 
Board and the Department of the Treasury respectively. The 
discipline of producing an annual report should enable CFIUS to 
focus on the strategies that should underlie its day-to-day 
operations and provide as well a basis for public information 
about CFIUS.
    The Committee recognizes, as emphasized above, the 
legitimate requirement for the protection of sensitive 
proprietary information. Foreign direct investment in the 
United States is a vital component of U.S. economic well-being, 
and protection of business-sensitive information used in the 
course of CFIUS deliberations, as well as the intelligence 
provided in support of a CFIUS review, should be protected from 
unwarranted or unauthorized disclosure. For this reason, the 
intelligence assessments that comprise part of the annual 
report can be provided in classified form, with an unclassified 
version made publicly available. Similarly, the Committee-
passed legislation includes a provision authorizing the 
chairman of CFIUS, in consultation with the vice chairman, to 
withhold from public release proprietary information as the 
chairperson deems appropriate.

                              IV. HEARINGS

    The Committee on Banking, Housing, and Urban Affairs held 
the following public hearings on implementation of the Exon-
Florio Amendment to the Defense Production Act of 1950:
          October 6, 2005 A Review of the CFIUS Process for 
        Implementing the Exon-Florio Amendment
                  Witnesses: Ms. Katherine Schinasi, Managing 
                Director, Acquisition and Sourcing Management, 
                U.S. Government Accountability Office; Ms. Ann 
                Calvarese Barr, Director, Industrial Base 
                Issues, U.S. Government Accountability Office.
          October 20, 2005 Implementation of the Exon-Florio 
        Amendment and the Committee on Foreign Investment in 
        the United States
                  Witnesses: The Honorable James Inhofe, United 
                States Senator; The Honorable Robert Kimmitt, 
                Deputy Secretary, Department of the Treasury; 
                The Honorable David A. Sampson, Deputy 
                Secretary, Department of Commerce; The 
                Honorable Stewart Baker, Assistant Secretary 
                for Policy, Department of Homeland Security; 
                The Honorable E. Anthony Wayne, Assistant 
                Secretary for Economic and Business Affairs, 
                Department of State; The Honorable Robert 
                McCallum, Acting Deputy General, Department of 
                Justice; The Honorable Peter Flory, Assistant 
                Secretary for International Security Policy, 
                Department of Defense; The Honorable Patrick A. 
                Mulloy, U.S.-China Economic and Security Review 
                Commission; Mr. David Marchick, Partner, 
                Covington and Burling.
          March 2, 2006, Continued Examination of 
        Implementation of the Exon-Florio Amendment: Focus on 
        Dubai Ports World's Acquisition of P&O;
                  Witnesses: The Honorable Robert Kimmitt, 
                Deputy Secretary, Department of the Treasury; 
                The Honorable Eric Edelman, Under Secretary for 
                Policy, Department of Defense; The Honorable 
                Robert Joseph, Under Secretary for Arms Control 
                and International Security, Department of 
                State; The Honorable Stewart Baker, Assistant 
                Secretary for Policy, Department of Homeland 

                       V. COMMITTEE CONSIDERATION

    The Committee on Banking, Housing, and Urban Affairs met in 
open session on March 30, 2006, and ordered the bill reported, 
as amended.


    Section 11(b) of the Standing Rules of the Senate, and 
Section 403 of the Congressional Budget Impoundment and Control 
Act, require that each committee report on a bill contain a 
statement estimating the cost of the proposed legislation. The 
Congressional Budget Office has provided the following cost 
estimate and estimate of costs of private-sector mandates.
                                                       May 3, 2006.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Foreign Investment 
and National Security Act of 2006.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Matthew 
                                          Donald B. Marron,
                                                   Acting Director.

Foreign Investment and National Security Act of 2006

    This legislation would amend the Defense Production Act of 
1950 to establish in law the Committee on Foreign Investment in 
the United States (CFIUS). Under the bill, the commission would 
consist of at least eight permanent members (including the 
Secretaries of the Departments of Treasury, State, Defense, 
Commerce, and Homeland Security; as well as the Attorney 
General, Director of the Office of Management and Budget; and 
the Director of National Intelligence) to coordinate a review 
of foreign investment in the United States that involves 
national security or critical infrastructure in the United 
States. The legislation would formalize and expand the review 
and investigation process and increase the role of the Office 
of the Director of National Intelligence.
    CBO expects that complying with the bill's provisions would 
increase the administrative expenses of federal agencies, but 
because of the confidential nature of the CFIUS review process, 
the number of agencies involved, and the confidential 
information needed to prepare an estimate for some provisions 
of the legislation, CBO cannot determine a precise estimate of 
the likely total costs of this bill. Additional costs over the 
2007-2011 period, however, would generally come from agencies' 
salary and expense budgets which are subject to annual 
appropriation. Such costs would probably total at least a few 
million dollars per year.
    Enacting the legislation would likely increase collections 
of fines and penalties for violations of the notification 
provisions. Such collections are recorded in the budget as 
revenues and deposited in the Treasury. CBO estimates that the 
additional collections of penalties and fines would not be 
significant because of the relatively small number of cases 
likely to be involved.
    The legislation contains no intergovernmental or private-
sector mandates as defined in the Unfunded Mandates Reform Act 
and would impose no direct costs on state, local, or tribal 
    The CBO staff contact for this estimate is Matthew 
Pickford. The estimate was approved by Peter H. Fontaine, 
Deputy Assistant Director for Budget Analysis.


    In accordance with paragraph 11(b), rule XXVI, of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill.
    The bill seeks to ensure that transactions involving 
companies owned or controlled by foreign governments undergo a 
thorough investigation to determine whether the national 
security would be impacted by the transactions. Such a 
requirement was believed to have been imposed with passage in 
1992 of amendments to the Defense Production Act of 1950, 
particularly the so-called Byrd Amendment. Given the fact that 
the Department of the Treasury has interpreted that amendment 
at variance with congressional intent, many more cases will 
henceforth be subjected to an investigation than heretofore has 
been the case. This could entail the production of more 
documentation by involved corporate entities than would 
otherwise have been required.
    The requirement established in the bill under (b)(A)(ii) 
that foreign transactions involving U.S. critical 
infrastructure be subjected to an investigation unless national 
security concerns have been previously addressed through 
conclusion of a mitigation agreement could entail costs to both 
the government, charged with implementing the provisions of the 
bill, and the corporate entities charged with complying.
    The Congressional Budget Office Cost Estimate prepared for 
this bill notes that enactment of the legislation ``would 
likely increase collections of fines and penalties for 
violations of the notification provisions . . . CBO estimates 
that the additional collections of penalties and fines would 
not be signficant because of the relatively small number of 
cases likely to be involved.''