Panel Has a Big Say in Foreign Purchases
When a Dutch company sought to take over Silicon Valley Group Inc., a high-tech firm in San Jose, the ultimate vote was cast not by shareholders or executives or even the board of directors.
That job went to the Committee on Foreign Investment in the United States, a secretive, little-known panel of U.S. officials that rules on whether purchases of U.S. businesses by foreign entities would impair national security and should be banned.
The committee approved the $1.6-billion purchase in 2001, but only after setting conditions for the deal, including that the foreign owner -- ASM Lithography Holding -- unload one of the California firm’s assets, a laboratory that produced optical components for spy satellites.
“If they can, they’ll work out a deal with the company,” explained James Andrew Lewis, a senior fellow at the Center for Strategic and International Studies, of the influential U.S. panel. “If they want to deter a purchase, that’s usually what happens.”
The obscure committee known as CFIUS may face a high-profile decision in the near future: The Chinese bid to buy El Segundo-based Unocal Corp. appears likely to trigger a national security review unless the process is derailed by Congress.
House members voted Thursday to block the government from spending money to recommend approval of the bid by CNOOC Ltd., an arm of government-owned China National Offshore Oil Corp. -- a backdoor way to block a CFIUS investigation. It was not immediately clear how such a proposal would fare in the Senate or how it would affect administration policy.
House members who oppose the Unocal takeover fear that the panel would approve the deal, and they want to stop the process in its tracks.
The Chinese firm -- which is trying to trump Chevron Corp.’s previously announced deal for Unocal -- had formally requested a review before the vote Thursday.
CNOOC representatives contend that an investigation would put to rest any fears that the takeover poses a security threat to the U.S. The company also wants any objections dealt with before the acquisition goes further, and it has suggested that it might sell certain Unocal properties, including pipeline and storage assets, to satisfy the government panel.
“There’s a long-proven process for reviewing foreign investment in the United States,” said Mark Palmer, a U.S. spokesman for the Chinese firm. “We believe the process will be thorough and fair, and in the end it will not be influenced by emotion or politics.”
Should that process move forward, the Chinese firm will face a 12-member committee composed of some of the most powerful officials in the U.S. government, starting with the chairman, Treasury Secretary John W. Snow. Other members include the secretaries of Defense, State, Homeland Security and Commerce, the attorney general and the director of the Office of Management and Budget.
Membership is set by law, as are strong rules on confidentiality. The panel is not even supposed to acknowledge when a review is underway.
The mandate is purposely broad, as committee members consider whether there is “credible evidence” that a foreign investor might take action “that threatens to impair the national security.” Issues of national defense, law enforcement concerns and terrorism all may be weighed against the economic pros and cons of a deal.
If substantial questions exist, the panel conducts an investigation and makes a recommendation to the White House.
“The president has a ton of discretion in making a decision on whether or not to block a deal,” said Todd M. Malan, executive director of the Organization for International Investment, which represents foreign firms that have stakes in the U.S.
Intelligence, criminal justice and other officials may take an active role in cases, even negotiating side deals with foreign parties. In contentious cases, such as the Unocal offer, members of Congress invariably weigh in and the issues are discussed at the pinnacle of government.
“Some people would like you to believe it’s nameless, faceless bureaucrats in the basement of some building,” Malan said, alluding to the small committee staff that is housed a block away from the Treasury Department. “It’s not. When they get together on a high-profile deal like this, it’s probably in the Cabinet room in the White House.”
The panel was created in 1988, an era when U.S. economic anxieties centered on Japan. Since then, the panel has taken a look at more than 1,500 cases. Just 25 led to full-scale investigations, and it issued a flat-out ban only once -- preventing a Chinese bid for a U.S. aircraft parts maker in 1990. U.S. officials blocked the sale of Seattle-based Mamco Manufacturing Co. to a Chinese military procurement firm that was accused of past efforts to steal Western aerospace technology.
Rather than veto a deal, the committee is more likely to demand safeguards, such as instructing a foreign purchaser to accept American board members, pledge future cooperation with law enforcement or sell off certain parts of the new acquisition. Its investigations are limited to 45 days, but that prospect sometimes prompts foreign investors to back off altogether.
In recent years, technology and terrorism have altered the national security equation and debates in the committee.
Foreign takeovers in telecommunications, for example, touch off fears that U.S. law enforcement will lose access to wiretaps and electronic data -- or that unfriendly foreign powers may gain a platform to spy on the United States.
In 2000, the committee allowed Nippon Telegraph & Telephone Corp. to go ahead with its purchase of Verio Inc., an Internet service provider, but only after obtaining a strict ban on Japanese government involvement in the American firm.
Similar fears were prompted by the 2003 effort of two companies -- Hutchison Whampoa Ltd. of Hong Kong and Singapore Technologies Telemedia -- to buy fiber-optic network provider Global Crossing Ltd.
U.S. officials were concerned that foreign ownership of the fiber-optic network might make the government vulnerable to eavesdropping from overseas. In addition, members of Congress contended that Hutchison Whampoa had ties to the Chinese military.
To defuse the concerns, Hutchison Whampoa offered to play a passive role in the company. But the committee proceeded with plans to conduct a 45-day investigation. At that point, the Chinese firm backed out. Ultimately, the panel allowed Singapore Technologies -- which offered to put Americans on the Global Crossing board -- to make the purchase on its own.
Technology is not always a deal breaker. In March, the U.S. panel approved the sale of IBM Corp.’s personal computer division to Lenovo Group of China. Among the concerns were whether Lenovo would have access to IBM government contracts that might prove useful to Chinese intelligence.
The terrorist attacks of Sept. 11, 2001, also have left a mark on the committee. The secretary of Homeland Security became a member in 2003. Also, the frequency of investigations has increased since Sept. 11.
“That’s different. That’s new,” Lewis, of the Center for Strategic Studies, said of the new weight being given to potential risks to the nation’s infrastructure.
Experts are divided on whether the Chinese bid for Unocal poses serious issues of national security.
“The more energy resources they lock up, the more marbles they take off the table, as energy demand rises,” said Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission. “This transaction needs to go through careful scrutiny.”
But Roger Cliff, a Chinese military specialist at think tank Rand Corp., said it was a stretch to say that control of Unocal would pose a security threat to the U.S.
“Sure, China could use the fact that it owns Unocal to slow down production and create a short-term crunch in energy supplies in the U.S.,” he said. “But again, I don’t think it’s really a major threat to U.S. national security.”
Times staff writer Evelyn Iritani contributed to this report.
