National security probes into foreign acquisitions of U.S. firms climb

By Aliya Sternstein 12/08/2011

Investigations into potential security risks posed by foreign takeovers of U.S. companies, including many information technology firms, have increased 23 percentage points in recent years, according to a new federal assessment.


The Committee on Foreign Investment in the United States this week reported to Congress that 35 international business transactions in 2010 raised red flags and nine deals were either restricted or scuttled to resolve security concerns. The affected companies were in the computer software, telecommunications and energy sectors, according to the committee's annual appraisal. It does not name the companies or countries involved, or specify the mitigating actions taken.

"More transactions are going to the investigation stage and getting a closer look," said Ben Powell, general counsel in the Office of the Director of National Intelligence during the George W. Bush administration. "I don't think it's illogical to assume that those in the sensitive sectors [such as IT and telecommunications] are those that are likely to go to the investigation stage."

The committee assesses the possible national security implications of planned transactions that would result in foreign powers gaining significant influence over U.S. companies. American firms voluntarily notify the panel of their dealings, so the report may not reflect all transfers.

Of 313 notices reviewed from 2008 through 2010, 62 involved computer and electronics manufacturers, 33 were in the software and communications sector, and 23 dealt with computer systems design and related services, according to the report.

The number of reviews that turn into lengthier investigations is on the rise, said Powell, now a partner at Washington law firm WilmerHale. In 2008, the committee investigated 15 percent of cases filed; 38 percent of acquisitions were probed in 2010.

The committee works to ensure sales do not, for example, expose U.S. network vulnerabilities that could present an opportunity for nation states to sabotage American organizations. The threat is real, according to other federal agencies. In November, ODNI released a study stating, "Chinese actors are the world's most active and persistent perpetrators of economic espionage" and that Russian intelligence services are out "to collect economic information and technology from U.S. targets."

The panel recently took action against a major Chinese IT player. Earlier this year, China-based Huawei Technologies divested itself of intellectual property assets purchased from U.S.-based computing firm 3Leaf Systems after lawmakers urged the commission to scrutinize the potential "serious risk." The Chinese telecommunications giant is suspected of having ties to the Chinese military -- a claim the company rejects. The committee in 2008 also pressured Huawei into abandoning a bid for U.S. network equipment-maker 3COM.

Source @NextGov