A Step in the Right Direction

December 19, 2007 • Commentary
By Richard Brand and Ilya Shapiro
This article appeared in the Weekly Standard on December 19, 2007.

Last month, Sequoia Voting Systems, the nation’s third‐​largest electronic voting machine maker, announced that the company had been sold to private U.S. investors. This would be an unremarkable transaction except that the seller, Smartmatic Corporation, is a Venezuelan‐​owned company close to the government of Hugo Chávez. And the sale was forced by a belated investigation by the Committee on Foreign Investment in the United States (CFIUS). But for the unprecedented unwinding of Smartmatic’s ownership–which almost did not happen–Chávez would be in a position to influence the outcome of next year’s presidential election.

This is not the first time in recent memory that CFIUS, one of the federal government’s most secretive entities, has made the news: The Bush administration’s decision last year to allow Dubai Ports World (DPW) to operate several U.S. ports also cast a spotlight on it. Though reasonable people can disagree about whether port management would have changed one iota under the ownership of an Arab ally–actually the British affiliate thereof–the decision proved disastrous politically and led to a very rare thing in Washington: real reform.

The Foreign Investment and National Security Act of 2007 (FINSA) went into effect in late October. This new law, which passed with broad bipartisan support, overhauls the previous rules governing CFIUS, a multi‐​agency committee chaired by the Secretary of the Treasury and tasked with reviewing certain foreign investments for national security concerns.

This august committee, originally created by President Ford’s executive order in 1975, receives notices of foreign mergers and acquisitions and decides whether they should further investigate potential security issues. Unless the acquirer acts on behalf of a foreign government, these notifications are voluntary–an acquirer might want an official imprimatur for public relations purposes–though agency members of CFIUS can also call for reviews. CFIUS can block a transaction, however, only if it finds evidence that the controlling foreign entity might use the takeover to threaten national security.

During the past few years, CFIUS has been widely criticized not only for mishandling Smartmatic and DPW, but also for approving the transfer of advanced nuclear technology to China. FINSA fixes several aspects of CFIUS.

For one thing, the legislation makes clear that the committee’s mandate to review risks to “national security” encompasses transactions beyond sensitive technologies with potential military application.

Smartmatic had argued that its acquisition of Sequoia was outside the scope of review because voting machines do not directly implicate national security. FINSA leaves no doubt that CFIUS’s authority is much broader–and would cover investigations of foreign purchases of such “critical infrastructure” as ports and voting machines.

In the case of the Smartmatic transaction, CFIUS opened an investigation only after Rep. Carolyn Maloney (D-NY), who chairs the subcommittee overseeing CFIUS and who co‐​authored FINSA, wrote a letter to then‐​Treasury Secretary John Snow inquiring whether the Venezuelan government could use Sequoia to manipulate U.S. elections. Maloney cited the fact that the Venezuelan state had invested in Smartmatic’s affiliates, the company’s current ownership was buried in a labyrinth of offshore trusts, and revelations that Sequoia had flown 15 Venezuelan nationals to Chicago to tabulate votes in a local election. As we see now, CFIUS’s investigation was unable to clear doubts about the purchase.

Even as FINSA expands the scope of CFIUS’s authority, however, it reigns in the highly secretive committee by providing for long‐​overdue Congressional oversight (which had been limited to budget and staffing). The secrecy regarding CFIUS investigations is legendary: CFIUS was previously not allowed to tell Congress of the results–or even existence–of security reviews.

Such secrecy all but ensured that facially controversial transactions would erupt into public relations and political nightmares at inopportune times, undermining CFIUS’s public mission. FINSA requires CFIUS to report to Congress when it opens an investigation and to provide regular status reports.

While greater Congressional oversight is an improvement, it is here where the new legislation probably does not go far enough. For example, concerned citizens remain unable under FINSA to learn whether a foreign acquisition of an American asset has ever been vetted by CFIUS. In light of the fact that both the Smartmatic and DPW transactions–as well as the Chinese national oil company’s bid for Unocal in 2005–were derailed not by CFIUS but by external actors who raised alarm bells, future reforms should provide for the release of more information to the public.

As with certain other contentious aspects of our post‐​9/​11 world, the review of foreign acquisitions now demands the apparent paradox of simultaneously increasing security and transparency. Regulating investment to the point where we lose the dynamic, competitive markets that draw it is plainly counter‐​productive, but there is room for further CFIUS reform that keeps our economy both secure and free.

About the Authors
Richard Brand is a recent graduate of NYU School of Law. Ilya Shapiro is a senior fellow in constitutional studies at the Cato Institute.