White House Unveils Plans for Long-Awaited Outbound Investment Screening Mechanism

At a Glance

• On August 9, the White House issued an Executive Order that will, once implemented, create a mechanism — akin to a “reverse” Committee on Foreign Investment in the United States (CFIUS) — aimed at screening and/or preventing outbound U.S. investment in China for select industries.
• Prior to implementation, the Biden administration is seeking public comments on how the mechanism should be implemented. The deadline for comments is September 28, 2023.
• The EO follows the Senate’s recent passage of a similar outbound investment screening mechanism included in its version of the National Defense Authorization Act for Fiscal Year 2024.

On August 9, the White House issued a highly-anticipated Executive Order that will, once implemented, create a mechanism aimed at screening and/or prohibiting certain U.S. outbound investment in China.

Specifically, the mechanism would:

• Prohibit U.S. persons from undertaking particular transactions involving certain entities located in or subject to the jurisdiction of a “country of concern,” and certain other entities owned by persons of a “country of concern,” engaged in activities related to defined subsets of technologies and products; and
• Require notification by U.S. persons to the U.S. Treasury Department regarding particular transactions involving certain entities located in or subject to the jurisdiction of a “country of concern,” and certain other entities owned by persons of a “country of concern,” engaged in activities related to other defined technologies and products.

Notably, the Annex to the EO only lists China, as well as the Special Administrative Regions of Hong Kong and Macau, as “countries of concern.”

Covered Industries

Per the White House, the EO is intended to cover certain sensitive or advanced technologies and products that may be critical for military, intelligence, surveillance, or cyber enabled capabilities. Specifically, the industries covered by the new restrictions include:

• Semiconductors and microelectronics
• Quantum information technologies
• Certain artificial intelligence systems

However, the EO instructs the Treasury Department to further define the technologies and products covered by the prohibition and the notification requirement, and “to consult, as appropriate, with other relevant executive departments and agencies in this process.” For enforcement, the EO also provides the Treasury Department with the authority to investigate, as appropriate, violations of the EO and accompanying regulations, and pursue available penalties for such violations. 

In a fact sheet, the Treasury Department highlighted the complementary nature between the new outbound investment screening mechanism and existing tools, including export controls and CFIUS: “This new program would prevent U.S. investments from helping accelerate the indigenization of these technologies in the [People’s Republic of China], which undermines the effectiveness of our existing export controls and inbound investment screening programs which also seek to protect U.S. national security.”   

Notice and Comment Period

Contemporaneously with the EO, the White House issued an Advanced Notice of Proposed Rulemaking (ANPR) (published in the Federal Register on August 14) seeking “comments and views from a wide range of stakeholders on all aspects of how [Treasury] should implement this new program.” All comments are due on September 28, 2023.

White House officials have confirmed that the new rules will not go into effect until the Biden administration has taken into account stakeholder input submitted as part of the notice-and-comment period for the proposed rule.

Additional information regarding the EO can be found on Treasury’s website.

Looking Ahead

The idea of subjecting outbound investments to a review process has continued to build steady momentum in Washington (and among Western allies, including the European Union) since 2018, when the idea was proposed on Capitol Hill during the congressional debate surrounding the Export Control Reform Act (ECRA) and the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018.

On July 26, the U.S. Senate approved an amendment to S.2226, the National Defense Authorization Act for Fiscal Year 2024 (NDAA), offered by Senators Bob Casey (D-PA), John Cornyn (R-TX), and others that incorporates an alternative outbound investment screening mechanism.

Unlike the EO, the Senate bill does not include prohibitions and only requires notification (but not a review) for covered outbound investments. The covered industries/products in the Senate bill are broader, however, encompassing advanced semiconductors and microelectronics; artificial intelligence; quantum information science and technology; hypersonics; satellite-based communications; and networked laser scanning systems with dual-use applications.

It remains to be seen whether Congress, when it reconciles the House and Senate-passed versions of the NDAA this Fall, will ultimately pass an outbound investment screening mechanism or, for the time-being, rely on the newly issued EO.