Expect 'More and More' CFIUS Penalties, Former Official Says

The Committee on Foreign Investment in the U.S. is expected to increase the number of penalties it issues for violations of mitigation agreements, StoneTurn consultant Scott Boylan said. Orion Berg, a lawyer with White & Case, said there will be a similar uptick in activity from European countries, adding that he expects all EU member states to have an active foreign direct investment screening regime within two years.

Although CFIUS has issued less than a handful of fines, Boylan said the committee’s October enforcement and penalty guidelines (see 2210200042) will embolden it to penalize more companies. The guidelines, which other lawyers also said are a signal from CFIUS that it’s preparing to increase enforcement (see 2211030047), gave “the bureaucracy more confidence and ability to fine companies for noncompliance,” Boylan said during a July 12 webinar hosted by StoneTurn and Lexology. CFIUS now has “confidence they can do it without much criticism.”

Boylan, who previously was the CFIUS representative for DHS, said a number of companies “aren't living up to the expectations” of their mitigation agreements, a set of conditions companies must meet to receive CFIUS clearance. “I think we're going to see more and more fines coming out of CFIUS for noncompliance,” Boylan said. “This can definitely be another area of expansion of activity and is a significant risk for companies that have agreements with the U.S.”

Berg pointed to similar developments in the EU, saying “a lot of countries” are strengthening or implementing FDI regimes. Although the EU’s FDI screening mechanism, which isn’t mandatory, has been crippled due to a lack of participation from member states, Berg said that will soon change. “I would say we're expecting two years from now all member states having their own national regimes,” he said during the webinar.

As more EU regimes come online, investors could face more regulatory hurdles, Berg said, especially because “there is no harmonization” among the states’ different FDI systems. “What we see now is authorities coming back after a while and saying ‘OK, I see you filed in France and you didn't file in Spain. Why is that?’” Berg said. “It means you really need to make sure that you didn't miss any country when you did your screening process.”

Investors are facing a different set of challenges with CFIUS, Boylan said, especially companies that don’t view themselves as having ties to national security. He said some toymakers have recently had to speak with CFIUS because some of their technology may have military uses.

“What I see over and over and over again is that companies that you would not consider to be a national security issue, purely commercial, are getting drawn into the national security process because of the technology,” Boylan said.

Other investments being closely scrutinized by the committee include companies involved in cybersecurity and personal data, he said. DOJ is helping to oversee more cases before CFIUS involving sensitive U.S. personal data (see 2305190031). “Data is a huge issue these days,” Boylan said. “And it brings in a number of companies and investors who really don't think that they are a national security issue.”

He also said some investors are increasingly concerned about their reputation among CFIUS officials, and may accept a mitigation agreement from the committee even though it doesn’t directly serve their business interests. In one example from his previous job as general counsel for a U.S. subsidiary, Boylan said CFIUS offered the company a mitigation agreement that prohibited the company from doing “some things that were really the reason why we were buying the company.” Boylan’s employer considered pulling out of the investment, but the CEO refused.

“The company realized that their reputation with the regulators was more important than just that one particular deal,” Boylan said. “We didn't want to have a perceived negative CFIUS transaction, so we bought a company that we probably didn't want to or need to.”