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Ports deal puts focus on vetting

THE BALTIMORE SUN

The federal panel that signed off on the Dubai port deal is charged with ensuring that foreign takeovers of U.S. companies don't jeopardize national security, but it's hardly spoiling for a fight.

Of the roughly 1,600 cases it has reviewed in the past generation, the Committee on Foreign Investment in the United States has considered 25 in need of a full investigation. A dozen were forwarded to the president to decide their fate. Of those, one deal - 16 years ago - was quashed.

Now that a United Arab Emirates company is poised to assume some operations at six U.S. ports, including Baltimore's, the resulting surge of criticism has cast a glaring light on a process so enigmatic that it gives the tight-lipped National Security Agency a run for its money.

"Clearly," said Peter Morici, a University of Maryland business professor who once worked for the U.S. International Trade Commission, "it's too secretive."

Formed during the Cold War, the panel is chaired by the Treasury Department and has tended to be most concerned about deals involving technology important in defense, at least in situations that broke through its closed doors. Typically the Chinese were involved.

Because Congress doesn't want to unduly interfere with market forces, the bar for government intervention is set high, and the committee uses a bar that's even higher, critics say. Some consider the committee's record little better than rubber-stamping.

Others said the panel is more attuned to conventional dangers than to the terrorism of today. The Government Accountability Office, Congress' investigative arm, concluded last fall that the panel was operating in a way that significantly limited its effectiveness.

"The Treasury ... narrowly defines what constitutes a threat to national security and, along with some other member agencies, is reluctant to initiate investigations," the GAO said in its report.

But supporters say the very existence of the panel is a deterrent to corporate espionage or terrorism; its secrecy - though necessary, they say - makes it seem less effective than it is.

It has required concessions from many companies, persuaded others to back away from deals voluntarily and has never approved an acquisition that later proved to be a threat, say some academics, attorneys and government officials.

"Where did the committee make a mistake? Where is the company that was sold to a foreign corporation where the national security of the United States is weaker today?" asked Tony Fratto, a spokesman for the Treasury Department.

More than national security is at stake, others say.

"It's very difficult for America to be an advocate for free markets," said David Braunschvig, senior fellow for the think tank Council on Foreign Relations, "if it takes a protectionist stance."

By law, the committee must tread carefully so as not to reveal sensitive corporate information, Fratto said. But some facts are publicly available, if not precisely public knowledge.

The committee - often referred to as CFIUS (pronounced see-fee-us) - is made up of 12 government bodies focused on safety and economic issues, such as Homeland Security and Commerce.

The process is either flexible or loose, depending on one's point of view. CFIUS doesn't have regular meetings. Each member unit conducts its own review, followed by - if needed - a conference call or a face-to-face session, Fratto said.

Participants are rarely higher ranked than assistant secretary because the issues are so technical, Fratto said. Though his department chairs the committee, Treasury Secretary John W. Snow has been quoted in news reports as saying he didn't know about the Dubai deal until after the committee concluded its review in favor of the state-owned company more than five weeks ago.

Formed in 1975 to monitor the impact of foreign investments, the panel was given teeth in 1988 when Congress - concerned about Japanese acquisitions of semiconductor firms - permitted the president to block foreign purchases of U.S. companies. He can do so only if "credible evidence" exists that the takeover might threaten national security and there's no other legal authority to adequately contain that threat.

Since then the committee has served as the president's investigator, sifting through hundreds of deals. (Companies aren't required to notify the administration, but if they don't, they run the risk of the president's breaking up the deal after the fact.)

The committee has 30 days to decide whether to give its OK or launch an investigation of an additional 45 days.

The single deal officially killed by the process was the 1990 acquisition of aerospace parts-maker Mamco Manufacturing Inc. by a corporation owned by the Chinese government. The previous President George Bush ordered the company to sell Mamco.

Such a track record raises eyebrows.

"There's something wrong here, at least by appearances," said Charlie Papavizas, a partner with Winston & Strawn who specializes in maritime law and has sent deals to the committee for review. "CFIUS is a Cold War relic. It focuses on technology; it focuses on defense-related technology. It wasn't designed to deal with the terrorism threat."

He said the panel is expected to balance the demands of an open market with security, which he calls a tricky order. Though most deals that come before it are "benign," he said, "we really don't have a system for detecting ones that aren't."

Harry Clark, a partner with the law firm of Dewey Ballantine, which handled cases that made it to the presidential desk, said that in his experience the committee conducts "real conscientious examinations" and commonly clears deals only if the companies agree to conditions. Those have ranged from regular sharing of information with the government to selling off sensitive subsidiaries, according to the Treasury Department.

Six years ago the committee banned Japanese government involvement in a U.S. Internet service provider before it would sign off on its purchase by a Japanese company, according to the Congressional Research Service.

Three years ago, a plan by two companies from Hong Kong and Singapore to acquire a telecommunications company fell apart because the committee - concerned about the Hong Kong company's ties to the Chinese military - launched a full investigation. It later allowed the Singapore firm to make the purchase on its own.

In the Dubai Ports World deal, Homeland Security raised concerns but dropped them after the company signed off on additional security restrictions.

The committee's only job is to protect national security, Fratto said, but it prefers to fix - rather than stifle - problematic deals. Those solutions aren't reflected in the numbers.

"In some cases, the transactions have been ... fundamentally modified from what was planned," Clark agreed. "One notable dimension to this is that national security is not defined, and so people can obviously have profoundly different views."

That's what worries the Government Accountability Office. On paper the committee requires consensus, which means any one of the agencies can force a full investigation and have the results sent to the Oval Office for a decision.

But in practice, the Treasury Department wields the power to limit reviews to the regular 30 days, the GAO concluded in a report issued last September. The consensus "is, at best, uncertain" in some cases, the agency found.

Sen. Barbara A. Mikulski, a Democrat from Maryland, was blunt. She said at a committee hearing Friday that, in the Dubai case, "the law was not followed. Due diligence was not done."

Because the committee is reluctant to use its full 75 days, the time that member agencies have to analyze national security issues is limited, the GAO said.

The committee buys breathing room by encouraging companies to withdraw and re-file later, restarting the 30-day process, the GAO said, but that creates other risks. Nothing stops acquisitions from closing if the committee doesn't act. One unnamed company, allowed to withdraw its notification in 2001, had yet to re-file when the report was issued four years later, "despite concerns raised by some agencies about the acquisition."

The Treasury Department, which insists that it never trumps defense agencies' concerns, said the committee frequently has more than 30 days for reviews because companies routinely give it an informal heads-up before the clock officially starts.

That was true of the Dubai case. In a rare public explanation, Deputy Treasury Secretary Robert M. Kimmitt told a Senate panel Thursday that the committee started reviewing the deal in mid-October as Dubai Ports World and the Peninsular & Oriental Steam Navigation Co. were in talks. The review ended Jan. 17, a month after formal notification.

Politicians have criticized the committee for not launching a full investigation, and Republicans as well as Democrats were angered that they found out about the approval through the news media. Only when the committee forwards deals to the president does it have to notify Congress of its actions, though last year it agreed to make quarterly reports about certain closed cases.

Snow, the Treasury secretary, told reporters Friday that perhaps the process should be tweaked to keep congressional leaders in the loop.

Dan Griswold, director of the Center for Trade Policy Studies at the libertarian Cato Institute, thinks the committee should notify and consult more often. But the current process works, he said.

"There's a danger if we abandon normal procedures and subject every controversial foreign acquisition to a debate and a vote in Congress," he said. "It shouldn't become a political circus."

jamie.smith.hopkins@baltsun.com

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