EU FDI Mechanism Limited by Lack of Participation, Clear Screening Obligations, OECD Says

The EU’s foreign direct investment screening mechanism has several glaring “shortcomings” that hinder the bloc’s ability to monitor harmful FDI and can lead to delays in regulatory decisions on investments, the Organisation for Economic Co-operation and Development said in a recent report. Although the OECD said “most actors” involved in the EU’s investment screening efforts approve of the new mechanism, its effectiveness is limited by member states that haven’t yet implemented FDI screening and don’t properly share information about ongoing screening efforts.

The EU in 2021 said it was seeing a steady uptick in notified transactions under its new FDI screening regime (see 2111300055) and gave a mostly positive assessment of the regime nearly one year after it was enacted (see 2010090016). But the EU Parliament at the time urged the European Commission to help convince more members to adopt screening frameworks, and the OECD said one third of EU states “still have no operational framework for investment screening at all,” including Belgium -- which is expected to implement an FDI regime at the start of next year (see 2206220012) -- Cyprus, Ireland and Luxembourg.

EU states with no FDI regime “have few or no effective means to manage risk related to foreign investment into the” EU and can’t share information with other states about potential harmful investments, the OECD said in its report. The organization noted malign foreign investors may use these states as “gateways” into the EU market. “Transactions taking place in these Member States are unlikely to be discovered and if they are, the concerned Member States may not be able to provide related information and, a fortiori, identify and address related risks to public order or security,” the OECD said.

Other portions of the FDI mechanism -- including a lack of a clear understanding about specific screening obligations among members that do screen foreign investments -- “diminish the effectiveness and efficiency” of the mechanism, the OECD said. Not all member states have rules that allow them to “incorporate input” from the EU’s cooperation mechanism into their screening decisions, the report said, and therefore don’t take into account concerns over specific investors.

“The possibility to incorporate such information is mandatory under the EU Regulation,” the OECD said, “but the Regulation frames this obligation poorly, inviting broadly different views on what is required and resulting in different practices in this regard.” The cooperation mechanism, which was designed to allow states to raise concerns about specific transactions taking place in other member countries, “lacks effectiveness and is inefficient to the extent that the EU Regulation appears to require only a procedural response to comments and opinions while tolerating substantive inaction by the addressee of such input,” the OECD said.

The report also pointed to what it called “ambitiously set timelines” for screening decisions, which “further dent the possibility of Member States to use the input from the cooperation mechanism.” In some cases, member states are required by their government's own set of regulations to issue a decision on an investment before they have time to receive input from other EU member states.

Although foreign and EU companies “have noted little if any additional delays or administrative burden for transactions they accompany” as a result of the FDI regime, the OECD said, some delays are present. The FDI mechanism’s broader “shortcomings” are “directly observed by participants in screening processes as they result in delays, inefficient procedures, duplication of work, or tight timelines that strain resources and lead to unsatisfactory national screening decisions,” the report said.

The OECD also warned that it’s seeing a decline in member states’ prioritization of FDI screening efforts, partly due to a “lack of peer pressure.” EU efforts “to draw attention to the matter has not produced sufficient results.” Although the EU is having productive conversations on investment screening at the EU-U.S. Trade and Technology Council -- which in May agreed to share more information on investment trends, transaction structures and best screening practices (see 2205160033) -- there is still “limited strategic conversation” on FDI screening within the EU.

The EU’s upcoming review of its FDI regulations “could be a catalyst of renewed attention, especially on the slow pace of advance in several Member States,” the OECD said. The organization said the EU should consider requiring member states to participate in a “cyclical conversation on investment screening at leadership level.”

The EU’s trade agency said it “welcomes” the OECD study and “will use it to evaluate our Foreign Direct Investment Screening Regulation next year.”