The Committee on Foreign Investment in the United States (CFIUS) released its statutorily mandated annual report to congress last month. While the report itself highlights several notable developments in 2023 (New Zealand and the United Kingdom are now excepted foreign states; eight military installations are now included in Appendix A of the regulations related to real estate transactions), three trends that we think foreign investors and U.S. businesses should be monitoring are noncompliance penalties, transactions originating from China (or Hong Kong), and non-notified transactions. 

Penalties

Section 721 of the Defense Production Act of 1950, as amended, authorizes CFIUS to impose monetary penalties for violations of Section 721, which include the failure to submit a mandatory declaration or notice or failure to comply with a mitigation agreement. Such failures carry a civil penalty of $250,000 or the value of the transaction, whichever is greater. 

This year, CFIUS issued its first ever formal determinations of noncompliance specifically in connection with failure to comply with the mandatory filing provisions. These matters did not result in penalties after CFIUS considered the specific facts and circumstances. Additionally, CFIUS conducted 43 site visits to determine compliance with mitigation agreements and assessed four civil monetary penalties for breaches of material provisions in mitigation agreements. This is double the number of penalties issued in CFIUS’s 50-year history. By comparison, CFIUS did not issue any penalties in 2021 and 2022. 

The rise in the assessment and issuing of penalties is likely due to two factors. First, CFIUS is actively conducting investigations to ensure compliance with the mandatory filing requirement under 31 C.F.R. § 800.401, in addition to continuing its practice of conducting site visits to monitor mitigation agreements (44 in 2022; 29 in 2021). Second, earlier this year, CFIUS proposed a rule to raise the maximum civil penalty to $5 million or the value of the transaction. Coupled together, these factors result in heightened scrutiny for transactions which historically did not register on CFIUS’s radar, either because of the country of origin the  technology, infrastructure, or sensitive data implicated, or because CFIUS simply did not have the resources to conduct an investigation.

China

Investors from China accounted for two declarations (usually characterized as “short-form” filings to non-practitioners) this year, down from five in 2022 and up from one in 2021. The near-absence of declarations for transactions involving China is almost certainly because Chinese entities (and their counsel) realize the futility of attempting a “short form” filing. On the other hand, investors from China filed the highest number of notices (usually characterized as “long-form” filings to non-practitioners), filing 33 in 2023 (down from 36 in 2022 and 46 in 2021). Investors from China operated primarily in the finance, information, and services sector and manufacturing sector. Note that any transaction for which Hong Kong is identified as the origin geographic economy of the foreign acquirer is reported as originating from China.

For the last two annual reports, CFIUS included a finding by the U.S. Intelligence Community (IC) that “according to the Office of the Director of National Intelligence’s (ODNI) 2024 Annual Threat Assessment and the 2018 National Counterintelligence and Security Center Report to Congress, foreign economic, industrial, and cyber espionage by foreign actors like China, Russia, Iran, and North Korea against the United States continues to represent a significant threat to U.S. prosperity, security, and competitive advantage.”

This IC assessment confirms that investments involving Chinese companies will likely receive the most attention from CFIUS, regardless of whether the filing is mandatory or not. Indeed, earlier this year, CFIUS proposed an outbound investment screening rule that will affect U.S. investments in Chinese-owned or controlled companies that design semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence (AI) systems. 

Non-Notified Transactions

Non-notified and non-declared investigations are those in which CFIUS identifies an interest after the transactions have closed. This year, CFIUS used several methods to identify non-notified and non-declared transactions, including interagency referrals, tips from the public, classified reporting, media reports, voluntary self-disclosures, congressional notifications, and multiple commercial and proprietary databases. Notably, CFIUS has not mentioned using classified reporting, voluntary self-disclosures, or multiple commercial and proprietary databases in previous annual reports.

This year, CFIUS identified thousands of potential non-notified transactions and opened inquiries for 60 transactions, for 13 of which it requested a formal filing. In 2022, CFIUS reported that it identified 84 transactions through its then-established process which resulted in requests for 11 filings. In 2021, CFIUS reported that it identified 135 transactions through its process, eight which resulted in a request for filing.

The key takeaway for non-notified transactions is the rise in the number of transactions that CFIUS identifies in addition to those for which it opens an investigation or requests a filing. CFIUS is improving the sophistication of its approach to launching inquiries: the continued hiring of dedicated staff; identification and evaluation of additional commercial tools and datasets; and increased training and attention of existing staff across CFIUS member agencies to coordinate and identify transactions to pursue guarantee that the non-notified program will continue to be a heavily-used CFIUS tool.

Engaging CFIUS counsel earlier is paramount to ensuring that buyers and sellers are guarded against stiff penalties and time-consuming investigations by CFIUS.