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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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On October 20, 2022, the <a>Department of the Treasury</a>, as the lead agency for the Committee on Foreign Investment in the United States (CFIUS or “Committee”), released written <a href="https://home.treasury.gov/system/files/206/CFIUS-Enforcement-and-Penalty-Guidelines.pdf" target="_blank" rel="noreferrer noopener">Enforcement and Penalty Guidelines</a> (“Guidelines”) that for the first time provide information on how the Committee assesses violations of the laws and regulations that govern foreign direct investment transactions that fall under its jurisdiction, including potential breaches of CFIUS mitigation agreements.

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CFIUS is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies, as well as non-controlling investments by foreign persons or companies in certain U.S. businesses that are involved in critical technology, critical infrastructure, the gathering of sensitive personal data, or even certain covered real estate transactions, to determine the effect of such transactions on U.S. national security. While the United States welcomes foreign investment, transactions in certain industries and technological sectors warrant a more thorough review to mitigate any potential national security risks. Most covered investments clear CFIUS review, but a limited number do require the parties to take certain actions or enter into mitigation agreements to alleviate any concerns.

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The Treasury Department acknowledges that most parties who undergo CFIUS review “abide by their legal obligations and work collaboratively with the Committee to mitigate any national security risks arising from the transaction.” The Guidelines serve as a reminder, however, that compliance with CFIUS regulations and mitigation agreements is “not optional” and, according to Assistant Secretary Paul Rosen, “the Committee will not hesitate to use all of its tools and take enforcement action to ensure prompt compliance and remediation, including through the use of civil monetary penalties and other remedies.”

The Guidelines set forth three categories that CFIUS considers “acts or omissions” that may constitute violation of relevant statutes (see Section 721 of the Defense Production Act of 1950, as amended) and implementing regulations. They are:

In reviewing a matter for a possible violation, the Guidelines note that CFIUS gathers information from multiple sources, including “from across the U.S. government, publicly available information, third-party service providers (e.g., auditors and monitors), tips, transaction parties, and filing parties.” Most often the Committee will simply request information from the party subject to the investigation, but CFIUS does have subpoena authority. In providing any response, the Guidelines note that parties are able “to provide any exculpatory evidence, as well as any defense, justification, mitigating factors, or explanation for the conduct at issue.”

In addition to issuing a request for information to a party, CFIUS encourages a party subject to a mitigation agreement to submit a self-disclosure if a violation may have occurred. Such self-disclosures must be timely submitted and made before CFIUS or other government agencies discover the possible violation. The Committee also obtains information about possible violations via tips, referrals, or other relevant information.

The Guidelines note that CFIUS often reaches out informally to a subject party prior to initiating a formal penalty process. However, if the issue cannot be resolved, such initial communications “are purely for informational purposes and never constitute any form of waiver of any penalty, remedy, or other authorities by the government or any defense or excuse” for the party subject to the investigation.

The key steps in any formal penalty process under the Guidelines are as follows:

Under current regulations, a party submitting a declaration or notice with a material misstatement or omission or making a false certification may be assessed penalties up to $250,000 per violation. A party that fails to file a mandatory declaration may be assessed a civil penalty of up <a>to $250,000 or the value of the transaction, whichever is greater. </a>Violations of a provision of a mitigation agreement are punishable by a civil penalty of up to $250,000 or the value of the transaction, whichever is greater. Further, some mitigation agreements may contain a liquidated damages provision that specifies the amount of any liquidated damages the Committee might seek.

In assessing any penalty, the Guidelines state that CFIUS undertakes “a fact-based analysis in which it weighs aggravating and mitigating factors,” and that the weight given to any factor depends on the specific facts and circumstances of any violation. The Guidelines provide a non-exhaustive list of both aggravating and mitigating factors that the Committee may consider:

In addition, the Guidelines indicate that CFIUS will take into consideration a party’s sophistication and, when applicable, past record of compliance with all legal obligations under CFIUS statutes. This factor includes any corporate policies, training, procedures, and the overall “compliance culture” that exists within the company.

CFIUS makes clear that these Guidelines are “non-binding and are not intended to, do not, and may not be relied upon to create any right or benefit, substantive or procedural, enforceable at law by any party in any administrative, civil, or criminal matter.” However, they should offer further incentives for compliance and provide further transparency to the CFIUS regulatory process. With an enhanced budget and additional personnel and resources, the Committee is indicating that enforcement is an increasing focus of its regulatory authority. Further, the public issuance of these Guidelines comes only weeks after President Joseph Biden issued an Executive Order elaborating on existing statutory factors and including additional national security considerations CFIUS must consider in its review process of covered transactions. For more information on the EO, please see our <a href="https://www.thompsonhine.com/insights/biden-issues-executive-order-to-focus-the-consideration-of-national-security-factors-in-the-cfius-review-process/" target="_blank" rel="noreferrer noopener">October 6, 2022 International Trade Update</a>.

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

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Treasury Department Releases CFIUS Enforcement and Penalty Guidelines

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