The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee that is tasked with reviewing foreign investments in U.S. business entities and real estate assets. For foreign investors, successfully managing the CFIUS review process is critical, as findings of non-compliance can stop proposed investments in their tracks—and potentially lead to further scrutiny of foreign investors’ operations as well as the parties to the proposed financial transaction in the U.S.
With this in mind, what does it take to implement and manage a successful CFIUS compliance program? As with other areas of federal compliance in the U.S., a comprehensive and custom-tailored approach is essential. While there are no guarantees, by prioritizing compliance and taking proactive steps to facilitate favorable CFIUS reviews, foreign investors can maximize their chances of success while simultaneously mitigating their risk of facing sanctions or other penalties.
“Effectively managing CFIUS compliance is essential for foreign entities and individuals seeking to invest in U.S. business entities and real estate assets. CFIUS has enhanced its oversight of foreign investments in recent years, and being unprepared for a CFIUS review can have significant financial and legal ramifications.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
To be clear, not all foreign investors are subject to CFIUS’s oversight. However, those that are must take a proactive approach to compliance. This starts with making an appropriate disclosure to FinCEN. Before making a disclosure, however, investors need to ensure that they are fully prepared to face CFIUS’s scrutiny—and this is where a comprehensive and custom-tailored CFIUS compliance program comes into play.
How Foreign Investors Can (and Should) Effectively Manage CFIUS Compliance
Here are 10 keys to a successful CFIUS compliance program:
1. Identify All Applicable U.S. Federal Laws and Regulations
CFIUS enforces several federal laws and regulations, and foreign investors that are subject to the Committee’s oversight need to ensure that they comply with all pertinent federal requirements. Some of the key laws and regulations that CFIUS enforces are:
These statutes and regulations establish various compliance requirements for foreign investors and establish multiple different ways for CFIUS to assess and enforce compliance. As a result, when it comes to managing CFIUS compliance successfully, having a clear and comprehensive understanding of all pertinent sources of federal authority is a key first step in the CFIUS process.
2. Understand the Acts and Omissions that May Constitute Violations
Given the breadth of CFIUS’s oversight and enforcement authority, violations that can trigger scrutiny from CFIUS can take a variety of different forms. Broadly, however, CFIUS classifies violations in three main categories:
- Failure to File – These violations involve failure to disclose proposed foreign investments to CFIUS when required.
- Mitigation Violations – In some cases, CFIUS will require that foreign investors take steps to mitigate potential national security risks before moving forward with proposed investments.
- False Statements and Omissions – Making false statements or omissions to CFIUS in pre-transaction disclosures or during the review process can expose foreign investors to substantial penalties.
To be clear, these are not the only categories of violations that can lead to CFIUS scrutiny (and the potential for administrative, civil, or even criminal penalties). Rather these categories reflect some of CFIUS’s top enforcement priorities—and thus each is a key consideration when developing a CFIUS compliance program.
3. Develop Custom-Tailored CFIUS Compliance Policies and Procedures
While all foreign investors are generally subject to the same prohibitions and requirements under FIRRMA, FINSA, and other pertinent sources of federal authority, a custom-tailored approach to CFIUS compliance is key. This is because foreign investors must be able to implement their compliance programs effectively within the unique context of their operations within the United States.
As a result, once a foreign investor has a clear understanding of all applicable sources of federal authority and the acts and omissions they need to avoid, the next step is to develop custom-tailored CFIUS compliance policies and procedures. These policies and procedures should be focused on allowing the investor to both identify and effectively address CFIUS compliance-related concerns on an ongoing basis.
4. Implement These CFIUS Compliance Policies and Procedures Effectively
While developing custom-tailored CFIUS compliance policies and procedures is essential, simply having these policies and procedures is not enough. With custom-tailored policies and procedures in place, the next step is implementation.
Implementing a robust compliance program generally involves disseminating compliance materials, providing training programs, and enhancing existing operations as necessary to ensure that no compliance-related concerns go overlooked. By taking steps to facilitate the identification of potential CFIUS concerns as a matter of course, foreign investors can substantially mitigate their risk of unknowingly committing statutory or regulatory violations.
5. Implement Specific Protocols for Determining When Disclosure is Required
For most foreign entities and individuals that invest in U.S. business entities and real estate assets which are subject to CFIUS’s oversight, effectively managing the disclosure process is among the most important aspects of overall CFIUS compliance management. When disclosure is required, foreign investors must submit timely and accurate notices to CFIUS in strict accordance with federal law.
As noted above, failure to file is among CFIUS’s top enforcement priorities. Failure to properly disclose a proposed transaction can not only lead to certain covered transaction being “blocked,” but it can also lead to other legal consequences. Foreign investors must take a good-faith approach to deciding when disclosure is necessary, and they must take a good-faith approach to the disclosure process itself as well.
6. Follow a Roadmap to Prepare for CFIUS Reviews
A CFIUS review can make or break a proposed investment in the United States. However, while CFIUS reviews might at times seem unpredictable, there are clear requirements that foreign investors need to meet to secure CFIUS’s approval—and there are clear steps that foreign investors can follow to maximize their chances of success.
With this in mind, all foreign investors that are subject to CFIUS’s oversight should develop and follow a roadmap to prepare for the committee’s reviews of their proposed transactions. Taking a systematic and well-documented approach will help prevent costly oversights and surprises, and it will allow foreign investors to identify potential issues before they lead to potential roadblocks or other costly problems.
7. Be Prepared for Mitigation Requests and Prepare Accordingly
While CFIUS will approve proposed foreign investments in U.S. business entities and real estate assets outright when warranted, it will also require foreign investors to take additional steps to address potential national security concerns in some cases. This is referred to as the “mitigation” process. By anticipating potential mitigation requests when filing their transaction notices with CFIUS, foreign investors can ensure that they are prepared to address these requests if—or when—they arise.
In many cases, foreign investors can also take proactive steps to avoid mitigation requests from CFIUS. By doing so, foreign investors may be able to implement solutions that they find preferable to a CFIUS mitigation agreements or alternate mechanisms that CFIUS might otherwise request instead.
8. Proactively Manage CFIUS Compliance On an Ongoing Basis
Effectively managing the disclosure and review processes are two key aspects of CFIUS compliance. However, these are not sufficient on their own. Foreign investors that are subject to CFIUS’s oversight must also continue to proactively manage compliance on an ongoing basis.
Along with ensuring timely and adequate disclosure of future investments as necessary, this also includes managing compliance with mitigation requirements as well as the general statutory and regulatory requirements that apply to foreign investments falling within CFIUS’s purview. If circumstances change, or if new compliance concerns arise, additional proactive mitigation measures may be necessary.
9. Conduct Periodic Internal CFIUS Compliance Assessments
While adhering to a comprehensive and custom-tailored CFIUS compliance program should mitigate the risk of compliance failures, it is still imperative that foreign investors conduct periodic CFIUS compliance assessments. In the event of a failure (even an inadvertent one), identifying and addressing the issue proactively could be essential for mitigating the risks involved. By engaging experienced outside counsel to conduct periodic internal CFIUS compliance assessments, foreign investors can not only effectively manage (and document) compliance on an ongoing basis, but they can also ensure that information uncovered during the internal assessment process is protected under the attorney-client privilege.
10. Consider (and Adequately Address) Other Potential Federal Compliance Concerns
Finally, foreign investors that are subject to CFIUS’s oversight will frequently be subject to the oversight of other federal authorities as well. These include the Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN), among others. These authorities work together to identify compliance violations and pursue enforcement when warranted, so foreign investors must ensure that they adequately address all federal compliance concerns to effectively mitigate their risk of triggering CFIUS scrutiny.
While these are all important steps for foreign investors to take when it comes to CFIUS compliance, this list of steps is not exhaustive. For those that have questions or concerns about CFIUS compliance, engaging experienced CFIUS counsel to assess their needs and develop a custom-tailored compliance strategy is critical for avoiding unnecessary adverse consequences.
