Senate Eyes New Role for CFIUS in Combating ‘Foreign Malign Influence or Espionage Activities’ Targeting ‘Institutions of Higher Education

Background

New legislation may soon expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) as part of a broader push by Congress to position the United States to “out-compete” China in the coming decades and counter China’s increasing global influence. On April 8, 2021, the US Senate Foreign Relations Committee publicly released a draft of the Strategic Competition Act of 2021, a 281-page bill that aims “to mobilize all US strategic, economic, and diplomatic tools for an Indo-Pacific strategy that will allow our nation to truly confront the challenges China poses to our national and economic security.” Among other things, the bill calls for hundreds of millions of dollars in funding for foreign military sales and Indo-Pacific security initiatives, while also seeking to deter further human rights and anti-democratic actions by China, particularly in relation to Hong Kong and the treatment of Uighur Muslims.

The Strategic Competition Act comes as part of a broader congressional initiative to bolster the United States’ ability to compete with China. The bill should be viewed as complementary to the Endless Frontier Act, an evolving piece of bipartisan legislation that would invest $100 billion in taxpayer dollars in 10 key technology areas, including artificial intelligence, semiconductors, quantum computing, robotics, advanced manufacturing, biotechnology, genomics, and materials science. The Senate is likely to take up the Endless Frontier Act at some point in the coming weeks, at which time the Strategic Competition Act is likely to be added to it.

A New Role for CFIUS

The Strategic Competition Act, if enacted, would create a new role for CFIUS in preventing “foreign malign influence or espionage activities” directed towards “institutions of higher education” in the United States. Under Section 138 of the bill, CFIUS would have jurisdiction to review transactions where an “institution of higher education” — generally speaking, a nationally accredited public or private college or university that receives federal funding — receives a gift (i.e., money or property) from, or contracts with, a “foreign person.”

The bill introduces certain “hooks” for CFIUS’s new jurisdiction. To trigger a review under this new jurisdiction, the gift or contract would need to have a value of at least $1,000,000 (or multiple gifts or contracts from the same “foreign person” with an aggregate value of at least $1,000,000 over the course of two years). This expanded jurisdiction would only apply in two situations: (1) the gift or contract relates to “research, development, or production of critical technologies” and provides the “foreign person” with access to “material nonpublic technical information;” or (2) the gift or contract is “restricted or conditional” in a way that establishes “control” (presumably over the institution itself, which would be a high bar).

For any such transaction, the legislation would also mandate the submission of a short-form “declaration” to CFIUS, and it would add the Secretary of Education to the membership of CFIUS for any review under this newfound jurisdiction.

This legislative provision is especially noteworthy because it would represent an expansion of CFIUS jurisdiction to include transactions that are not actually investments. That issue may be debated between Congress and the executive branch as the legislation advances, partly because CFIUS is still adapting to the significant expansion of its jurisdiction that occurred under the Foreign Investment Risk Review Modernization Act (FIRRMA), which CFIUS just fully implemented last year.

If enacted, the Strategic Competition Act would also mandate a CFIUS pilot program related to this new set of transactions. This would not be CFIUS’s first pilot program. In 2018, Congress authorized CFIUS to conduct pilot programs under FIRRMA, and CFIUS quickly launched a pilot program on critical technologies that lasted for over a year. Similarly, this new pilot program would be governed by temporary regulations that would subsequently be replaced by permanent ones. CFIUS’s implementing regulations would also be expected to address potential compliance burdens imposed on “institutions of higher education” and to clarify the meaning of the term “control” in the context of these transactions.

CFIUS’s reporting mandate would also receive an update, with CFIUS’s annual report on critical technologies requiring an additional evaluation of whether foreign governments are seeking to obtain research and development methods or proprietary information on critical technologies from institutions of higher education through “foreign malign influence or espionage activities.” 

Conclusion

With the broader context of the bill in mind, this potential expansion of CFIUS’s powers suggests strong congressional concern about attempts by Chinese entities to circumvent CFIUS reviews and access critical technologies. Senators Chuck Grassley, Mike Crapo, and Pat Toomey indicated as much in a letter sent to Treasury Secretary Janet Yellen on April 13, 2021, in which they expressed concerns “about foreign governments, such as China, potentially taking actions to evade CFIUS reviews in an attempt to undermine US superiority in leading-edge technologies, the CFIUS process,” and broader trade controls aimed at protecting US national security. The new role envisioned for CFIUS in the Strategic Competition Act aims to cut off one such avenue — “foreign malign influence or espionage activities” targeting domestic colleges and universities — through which Chinese entities may have been attempting to evade CFIUS.

However, this new area of jurisdiction for CFIUS would not arise until the enactment of the Strategic Competition Act, and it would only apply to transactions on or after that date. The bill is scheduled to be considered by the Foreign Relations Committee on April 21, 2021, and, as with any piece of draft legislation, changes to the above-described provisions are possible. The Arent Fox team will continue closely monitoring this bill for further developments.