New CFIUS Guidelines Signal Increased Enforcement, Law Firms Say
New guidance from the Committee on Foreign Investment in the U.S. signals that the committee is preparing to increase its enforcement efforts, law firms said this week. Companies should expect more scrutiny from the committee, firms said, adding that completing and documenting due-diligence before finalizing an investment transaction is growing increasingly important.
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The new guidelines mean CFIUS “may be willing to take a more muscular approach as U.S. companies are put on alert,” Herbert Smith Freehills said in a Nov. 2 client alert. The firm added that the guidance is also an “unmistakable signal that CFIUS will continue its increased vigilance with respect to non-notified transactions and potential lapses in mitigation agreement compliance.”
Treasury issued the enforcement and penalty guidelines last month, outlining how CFIUS decides on violations, where the committee gets its information and other steps it takes during the penalty process (see 2210200042). Although Treasury stressed that the guidelines weren’t binding and may be updated, Paul Weiss said “their issuance suggests that CFIUS intends to make use of the enhanced enforcement authorities conferred on it by” the Foreign Investment Risk Review Modernization Act “to strengthen enforcement of the CFIUS regulations,” especially involving mitigation.
The firm pointed to CFIUS’s two penalties so far: a $1 million penalty in 2018 for breaches of a mitigation agreement, and a $750,000 penalty in 2019 for violations of an interim order. “With such potential penalties in the background, the Guidelines highlight the importance of non-U.S. investors and their U.S. targets performing appropriate CFIUS diligence in transactions, particularly to determine whether a mandatory filing is triggered,” Paul Weiss said, “and for all parties subject to CFIUS Mitigation to devote appropriate resources to ensure compliance with such CFIUS Mitigation.”
Sidley Austin said the new guidelines “signal a strong commitment to enforcement,” adding that “now more than ever, parties face serious penalties if they do not take their regulatory obligations seriously.” The firm said companies should make sure they conduct “proper” due diligence when they enter into a transaction and make sure their CFIUS filings are complete, accurate and don’t “misstate or omit material information.”
Companies should also make sure they have compliance and training policies in place so they can comply with a potential mitigation agreement, the firm said, and should cooperate “fully” with questions from CFIUS. If a business discovers a violation of the committee’s regulations or of a mitigation agreement, “it is advisable to disclose the problem to CFIUS as soon as possible and take corrective action,” Sidley said.
The firm also said self-reporting of past compliance may no longer be accepted. During Treasury’s inaugural CFIUS conference in June (see 2205310044), CFIUS officials said they will “increasingly seek proof of compliance” rather than rely on testimony from companies, Sidley said. The committee also plans to increase its audits and site visits and implement a “trust but verify” policy, including for third-party monitors, the firm said.
The committee’s recent focus on enforcement aligns with its “significant increase over the last few years in its staff personnel dedicated to monitoring and enforcement activities,” DLA Piper said. “It is anticipated that CFIUS will materially increase its enforcement activity in line with the Guidelines,” the firm said, adding that companies should “carefully assess whether a filing is mandatory and implement robust compliance measures” to meet CFIUS requirements.