From China with Love: Espionage in the Age of Foreign Investment

48 Pages Posted: 19 Nov 2015

Date Written: Fall 2015


In March 2012, Ralls Corporation, a Delaware corporation owned by Chinese executives, acquired four Oregon-based limited liability companies that were formed to develop wind farms. The wind farms were located within a restricted U.S. Navy airspace and bombing site. Once the acquisition was complete, the Navy notified Ralls that it was concerned about the location of one of the wind farms. Although Ralls moved the contested wind farm, the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) compelled Ralls to file a notice with CFIUS to review the transaction. After CFIUS investigated the transaction and attempted to mitigate the national security concerns, CFIUS submitted its report and recommendation to President Obama. On September 28, 2013, President Obama mandated Ralls divest all property interests in the project companies, terminate access to the project site, and refrain from selling the project companies to third parties. Neither CFIUS nor President Obama notified Ralls of the evidence supporting their decisions, and Ralls was never given an opportunity to rebut the evidence.

After President Obama mandated that Ralls unwind the acquisition (the “Presidential Order”), Ralls became the first party to challenge CFIUS’s authority and the Presidential Order in court. On July 15, 2014, the United States Court of Appeals for the District of Columbia issued a controversial decision in Ralls Corporation v. Committee on Foreign Investment in the United States and held that the Presidential Order deprived Ralls of its property interests in the companies without due process. Subsequently, in an unprecedented decision, the D.C. District Court ordered CFIUS to provide Ralls with the information that supported the Presidential Order to unwind Ralls’ acquisition of the wind farm companies. The Ralls decision illustrates an ongoing conflict between foreign investors and the CFIUS review process. Additionally, the decision revived the debate about the efficacy and integrity of the mysterious reviews that consistently plague foreign direct investment into the United States.

Throughout U.S. history, national security has been a paramount concern of the U.S. government. In recent decades, burgeoning technologies and the rise of unconventional acts of terror have heightened fears for the nation’s security. These fears have resulted in the perception of new threats to the nation’s security. Acts of espionage -- those primarily associated with identifiable persons or groups -- have conceptually merged with cybersecurity breaches and industrial espionage. In this environment, cyber-espionage has threatened prominent U.S. businesses, including Home Depot and J.P. Morgan Chase. These events illustrate widespread flaws in corporate and government security across the globe.

As globalization accelerates and the world’s largest corporations conduct cross-border transactions with increasing frequency, businesses can be victims of espionage, or instead become vessels for espionage through foreign direct investment. This can occur in two ways: first, when a State-owned or government-connected entity conducts business in the United States; and second, when a foreign entity purchases a U.S. business. Foreign ownership of U.S. entities establishes a foreign presence in the United States and enables theft of U.S. technology and sensitive data pertaining the United States critical infrastructure.

While the FBI, Central Intelligence Agency, and National Security Agency address certain security concerns stemming from foreign investments, CFIUS is the government agency charged with preserving this nuanced component of national security. CFIUS is an inter-agency committee of the U.S. government and is authorized to review transactions that could “result in control of a U.S. business by a foreign person.” CFIUS conducts such reviews to determine whether certain transactions pose national security threats. However, this review places an additional burden on CFIUS’s duties as a governmental agency. CFIUS must maintain and protect U.S. national security while simultaneously balancing the business interests of foreign investors.

CFIUS’s secretive evaluations -- and its power -- have become an increasingly contested political issue, both domestically and abroad. In the United States, these debates have garnered significant legislative responses. In the international arena, as a response to CFIUS reviews, nations such as the People’s Republic of China have instituted their own protectionist regimes. Critics of CFIUS assert a variety of complaints, alleging both inaction and prejudiced reviews. The correct balance must be struck, between ensuring the nation’s security and promoting foreign direct investment, if all the foregoing concerns are to be addressed.

This Note argues that the U.S. government should neither explicitly define “national security” in the context of CFIUS reviews, nor expand its definition to include a “net-benefit” or economic review, as proposed by in recent legislation. Rather, the definition of “national security” should remain undefined to allow the government to adapt its security reviews to unpredictable and evolving threats. Alternatively, the type of “covered transaction[s]” that CFIUS has the power to review should be amended. CFIUS jurisdiction should not hinge upon traditional, corporate law distinctions that define control only in terms of mergers, acquisitions, and takeovers. Instead, CFIUS’s jurisdiction should maintain a more equitable approach to other types of nontraditional control that could pose a security threat. An amended definition of a “covered transaction” should include leases, construction, and additional investments. A more inclusive definition that directs the Committee’s focus to examine the substance and effect of transactions, rather than merely the structure, will provide a more comprehensive review of foreign direct investment. These amendments will not only eliminate loopholes in the enacting legislation, but also increase the quality and integrity of CFIUS national security reviews. Additionally, such amendments will nurture the United States’ presence in international markets by not further discouraging foreign direct investment with a more economically focused and intrusive national security review.

Part I of this Note outlines CFIUS’s structure and the multistep CFIUS review process by examining Section 721 of the Defense of Production Act of 1950 (“Section 721”), as amended by the Foreign Investment and National Security Act of 2007, and regulations at 31 C.F.R. Part 800. Part II discusses prior international business transactions that have both successfully and unsuccessfully undergone CFIUS review. This discussion primarily focuses on international business transactions involving parties from China because such transactions have garnered the most political opposition. Part III addresses recently proposed legislation prompting the aggressive expansion of the scope of CFIUS reviews. Part IV surveys China’s national security review of foreign direct investment and further compares and contrasts China’s national security review with CFIUS’s review procedures. Finally, Part V analyzes and evaluates the CFIUS review process. This Part concludes by proposing amendments to CFIUS’s enacting legislation and articulating the positive effects such amendments would have on the quality of the review process and on the fairness, legitimacy, and security of foreign direct investment in the United States.

Suggested Citation

Stanley, Mary, From China with Love: Espionage in the Age of Foreign Investment (Fall 2015). Brooklyn Journal of International Law, Forthcoming. Available at SSRN:

Mary Stanley (Contact Author)


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