August 10, 2023

2022 CFIUS Annual Report Announces Record Filings, More Investigations, More Mitigation, But No Fines

Jump to...

2022 CFIUS ANNUAL REPORT ANNOUNCES RECORD FILINGS, MORE INVESTIGATIONS, MORE MITIGATION, BUT NO FINES

Last week, the Committee on Foreign Investment in the United States (CFIUS) released its 2022 Annual Report to Congress. CFIUS reported a record 440 filings in 2022. Although this reflects only a small increase from the 436 filings in 2021, it is considerable given the overall downturn in foreign direct investment in the United States in 2022. The number of short-form declarations filed fell slightly from 164 in 2021 to 154 in 2022, and the number of notices filed increased slightly from 272 in 2021 to 286 in 2022, but the overall split between the two remained stable.

The proportion of declarations to which CFIUS responded with a request for a notice nearly doubled from 18% in 2021 to just under 33% in 2022, while the proportion of declarations to which CFIUS responded with a safe-harbor letter decreased from 73% in 2021 to 58% in 2022. The Committee’s reliance on so-called “no-action” letters (where CFIUS indicates it cannot conclude action based on the declaration alone and leaves it to the parties to decide whether to file a full notice) in response to the filing of declarations remained steady. Put another way, roughly 40% of the declarations filed in 2022 resulted in something other than a safe harbor – the lowest clearance rate since the introduction of the short-form declaration – leaving the parties facing either continued uncertainty in the form of a no-action letter or the expenditure of additional time and money to prepare a requested notice.

Given these numbers, foreign investors contemplating investments in TID U.S. businesses should carefully consider whether to file a long-form notice even when the option of filing a short-form declaration is available. Parties should conduct sufficient diligence not only to determine whether a CFIUS filing is mandatory but, if it is, whether the proposed transaction presents any of the underlying national security issues that CFIUS may want to see mitigated.

Interestingly, the CFIUS annual report did not contain any announcement of fines and violations imposed since the U.S. Department of Treasury released enforcement and penalty guidelines in October 2022. While CFIUS practitioners eagerly anticipated information on the nature and scope of these new penalties, it appears that wait will continue.

From a substantive perspective, the annual report unsurprisingly emphasized that national security risk factors outlined in President Biden’s September 2022 Executive Order, including supply chain security, resiliency, U.S. technological leadership, and national security risks associated with aggregated industry investment trends, cybersecurity, and sensitive data will remain front of mind for CFIUS moving forward.

Additional highlights from the 2022 report include:

CFIUS continues to handle its review processes efficiently, though the Committee generally takes the full allotted time for assessments, reviews, and investigations. In 2022, the Committee averaged accepting submitted declarations in 5.6 days, providing written comments on draft notices in 7.4 business days, and accepting formal notices in 4.5 business days. On average, CFIUS used its entire statutory time allotted to complete assessments, including 30 days for declarations, 45 days for notices, and 90 days for investigations.

More notices resulted in follow-on investigations. Of 286 notices filed in 2022, 162 (about 57%) prompted a follow-on investigation. In 2021, only about 48% of notices started such an investigation. This increase in investigations is likely the result of various factors, including the types of transactions filed with CFIUS, increased CFIUS resources, and a more aggressive CFIUS enforcement posture.

More transactions required mitigation measures. CFIUS reported that approximately 23% of distinct notices filed in 2022 resulted in mitigation agreements (41 in total), nearly double the amount that required mitigation measures in 2021. This increase in the Committee’s application of mitigation measures is likely the product of the same combination of factors noted above, including the types of transactions filed, increased CFIUS resources, and more aggressive CFIUS enforcement. In addition, CFIUS permitted five notices to be withdrawn and abandoned, but with conditions short of a mitigation agreement imposed. CFIUS also required measures to be imposed to mitigate interim risk in three instances. The mitigation measures themselves were largely unchanged from previous years and included:

Engagement of a third-party monitor or auditor;
Requirement of an approved security officer;
Assurances of continued supply of goods and services to the U.S. government;
Restrictions on access to technology and sensitive data; and
FOCI mitigation through governance mechanisms.

CFIUS review of non-notified transactions is becoming more effective. In 2022, CFIUS identified 84 non-notified transactions for Committee consideration, with 11 of them resulting in a request for filing (eight additional non-notified transactions identified in the year prior also resulted in a 2022 request for filing). The Committee also noted that “CFIUS is now primarily focused on monitoring more recent foreign investments for potential non-notified and non-declared transactions.” The increased identification of non-notified transactions and accompanying statements about heightened scrutiny of new foreign investments suggest that parties should carefully consider the risks of post-closing identification when formulating a filing strategy.

Twenty transactions were abandoned in 2022. Twelve covered transaction notices were withdrawn and abandoned after CFIUS informed the parties that the Committee could not identify mitigation measures to resolve the national security risk posed by the transaction or the Committee proposed mitigation measures unacceptable to the parties. Eight transactions were withdrawn and abandoned for business reasons. No presidential decisions were issued in 2022.

Investors from U.S.-allied economies filed the most declarations, with UAE showing the most significant increase in declarations. In 2022, the top three sources of declarations filed with CFIUS were Canada (22), Japan (18), and Germany (13). These figures mirror longer-term trends in declarations between 2020 and 2022. UAE investors had the most significant jump, with seven declarations. In the previous two years combined, UAE investors had only filed five declarations in total.

Singaporean and Chinese investors drove notices. Regarding notices, most notices in 2022 came from Singaporean parties (37), followed closely by Chinese parties (36). China and Singapore have been in the top three countries accounting for the largest proportion of notices from 2020 to 2022. No notices in 2022 resulted in a 15-day investigative extension, as permitted under the regulations. Some countries saw a significant decrease in noticed investments, including Russia (-85%), the Cayman Islands (-45%), Japan (-42%), and Canada (-40%). On the other end of the spectrum, investors from Ireland accounted for nine notices (versus two in 2021), and the UAE accounted for six notices (versus zero in 2021).

Declarations and notices in 2022 spanned similar business sectors. The Finance, Information, and Services sector continues to lead the way, covering 52% of all non-real estate transactions. While flat from 2021, this sector has seen a near-doubling of covered notices compared to 2020. And within this sector, professional, scientific, and technical services dominate notice filings. Unsurprisingly, utilities remain a significant and active sector for notice filings.

Real estate filings continue to constitute only a tiny proportion of CFIUS filings. In 2022, parties filed only five declarations and one notice regarding covered real estate transactions.

New Zealand was identified as an “excepted foreign state.” The Committee identified New Zealand as an “excepted foreign state” and determined that Australia and Canada will remain excepted foreign states absent further Committee action.