The NPRM would curtail the outflow of investment to “countries of concern” in relation to certain sensitive U.S. products and technology. The People’s Republic of China (PRC), along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, remain the sole focus of the Executive Order and NPRM, subject to revision.

Overview

The outbound investment screening program will prohibit certain transactions while subjecting others to notification requirements. Of note, unlike the CFIUS review process, the notification requirement is post-closing and there is no review process under which notified transactions could be unwound.

The outbound investment screening program’s prohibitions would kick in for certain kinds of undertakings related to technologies and products that pose a particularly acute national security threat. The program’s notification requirements would similarly apply to other categories of activities related to technologies that may contribute to the threat to national security. The rules set out criteria for determining whether the transaction is prohibited or notifiable, such as by specifying certain performance parameters.

Subject to specific criteria, below is a list of activities that may be prohibited or otherwise subject to notification requirements based on the proposed rule:

• Prohibited Transactions
  • Certain semiconductors- and microelectronics-related investments in:
    • The development or production of front-end semiconductor fabrication equipment designed for performing the volume fabrication of integrated circuits;
    • The design of any integrated circuit having one or more digital processing units having either (1) a total processing performance of 4800 or more, or (2) a total processing performance of 1600 or more and a performance density of 5.92 or more.
  • Certain quantum information technology-related investments in:
    • The development of a quantum computer or production of critical components required to produce a quantum computer such as dilution refrigerator or two-stage pulse tube cryocooler;
    • The development or production of any quantum sensing platform designed for, or which the relevant covered foreign person intends to be used for, any military, government intelligence, or mass-surveillance end use.
  • Certain artificial intelligence systems-related investments:
    • The development of any AI system that is designed to be exclusively used for, or intended to be used for, military, government intelligence, or mass surveillance end uses;
    • The development of any AI system that is trained using a quantity of computing power greater than certain tentatively defined computational operations (e.g., integer or floating-point operations), or certain tentatively defined systems using primarily biological sequence data.
• Notifiable transactions
  • Any semiconductors- and microelectronics-related investments that would not be prohibited under the program, such as the fabrication or packaging of non-prohibited integrated circuits; and
  • Any non-prohibited, artificial intelligence systems-related investment in:
    • AI systems designed to be used for government intelligence, mass-surveillance, or military purposes;
    • Intended to be used for cybersecurity applications, digital forensics tools, and penetration testing tools, or the control of robotic systems; or
    • Training using a tentatively defined quantity of computing power (e.g., integer or floating-point operations).

Both triggers would be designed with a focus on preventing outbound U.S. investments that could enhance a country of concern’s military, intelligence, surveillance, or cyber-enabled capabilities.

Knowledge Requirement and Standard

Notably, in the case of certain greenfield, brownfield, or joint venture investments, the program’s requirements would trigger where a U.S. actor knows that the project will or intends to undertake any covered activity. Whether to incorporate a “knowledge” standard was a central point of discussion during the ANPRM process. In response to concerns surrounding the difficulty of ascertaining when a transaction is covered by the program, the NPRM defines “knowledge” as actual knowledge and also knowledge that could be gleaned from reasonable diligence, or awareness of a high probability a fact will occur.

Another key difference between the program’s prohibitions and notification requirements is that the rule as proposed would extend to instances where a U.S. actor knowingly directs a non-U.S. person or entity to engage in a transaction that would prohibited if undertaken by a U.S. person. The rule also covers investments in entities that are not in “countries of concern” in some situations where those entities are themselves investing in or controlling entities that do fall within the scope of the restrictions. The goal is to limit the workarounds that could exist through indirect investment activity.

Because U.S. actors will be responsible for determining their obligations under the rules, it is critical to become familiar with the reach of the Treasury Department’s proposed rule over U.S. and foreign entities’ activities.

Additional Changes

Other areas of evolution to note are the following:

• Clarification on when the prohibitions would apply to investments in an entity that owns or controls entities covered by the prohibition or notification requirements;

• An exception for transactions involving persons of third countries that have similar measures aimed at outbound investments as designated by the Secretary of the Treasury; and

• The scope of LP investments that would be covered by the proposed rule and those that would be excepted.

An overview of the latest updates to the proposed Outbound Investment Program can be found here, alongside a Fact Sheet that addresses Frequently Asked Questions. Companies that are potentially impacted by the restrictions should consider commenting before the August 2, 2024 date. Please contact our sanctions, export controls, and CFIUS team if you need assistance navigating these latest developments.

Companies will need to account for this change when implementing sanctions compliance programs. Recordkeeping policies should be updated to ensure that companies keep ten years’ worth of transactional and compliance data to navigate future enforcement cases. Although the Act did not explicitly change recordkeeping requirements in the law, in practice companies are wise to change internal recordkeeping because regulators can now ask about compliance going back ten years. Internal investigations and voluntary self-disclosures will need to expand to review ten years of compliance as a best practice to cover the broader statute of limitations. Given already significant costs for internal investigations looking back five years, the new ten-year statute of limitations may change the calculus for conducting and scoping internal reviews. Additionally, in the mergers and acquisitions context, acquirers will need to expand due diligence to look back further in time, and seek representations and warranties that account for the longer statute of limitations.

It remains to be seen whether a similar expansion of the statute of limitations is forthcoming under export controls, including the Export Administration Regulations, to align with the Act’s changes. Many companies treat export and sanctions compliance under the same policies and procedures based on significant overlap between compliance with such laws. As a result, companies implementing changes to their sanctions compliance practices to account for the Act may also want to consider extending such changes to export controls compliance as well.

Please contact our sanctions compliance team for any further questions.

The President’s order follows a string of activities set off by an initial order issued in December 2017, that directed the Secretary of Interior to compile a list of “critical minerals” defined as (i) non-fuel minerals or minerals material essential to the economic and national security of the United States, (ii) the supply chain of which is vulnerable to disruption, and (iii) that serves an essential function in the manufacturing of a product, the absence of which would have significant consequences for our economy or our national security.

On May 18, 2018 the Secretary of Interior finalized a list of 35 “critical minerals” meeting this criteria, including:

Aluminum (bauxite), antimony, arsenic, barite, beryllium, bismuth, cesium, chromium, cobalt, fluorspar, gallium, germanium, graphite (natural), hafnium, helium, indium, lithium, magnesium, manganese, niobium, platinum group metals, potash, the rare earth elements group, rhenium, rubidium, scandium, strontium, tantalum, tellurium, tin, titanium, tungsten, uranium, vanadium, and zirconium.

The order also offers several hints at where future federal action might occur. In particular, the order focuses on minerals where supply chains rely on imports from China and other non-market economy countries including rare earth metals, barite, and gallium.

Within sixty days, the Secretary of Interior is directed to prepare a report summarizing its investigation of the United States’ “undue reliance” on critical minerals from “foreign adversaries” and “recommend executive action” including but not limited to imposition of tariffs, quotas, or other import restrictions.

While the order falls short of identifying any process for stakeholders to participate, Kelley Drye & Warren professionals will be closely monitoring the situation and will provide updates as more information becomes available.

Vanadium is a metallic element often used as an alloying agent in the production of steel and other metals. It is used to improve the resulting metal’s hardness, ductility, and toughness. Typical end uses for vanadium-alloyed steels include armor plates, parts of jet engines, and cutting tools.

According to the U.S. Geological Survey, vanadium is mined mostly in Brazil, China, Russia, and South Africa. Vanadium can also be produced through a secondary process. This source also indicates that from 2015-2018, U.S. demand was supplied 100 percent by imports.

Commerce’s notice provides interested parties with an opportunity to submit written comments and information pertaining to the investigation by July 20, 2020. Commerce is particularly interested in comments and information relating to the following criteria:

1. The quantity and circumstances of imports of vanadium;
2. Domestic production and capacity needed to meet projected national defense requirements;
3. Existing and anticipated availability of human resources, products, raw materials, production equipment, and facilities to produce vanadium;
4. Growth requirements of the vanadium industry to meet national defense requirements and/or requirements for supplies and services necessary to assure such growth including investment, exploration, and development;
5. The impact of foreign competition on the economic welfare of the vanadium industry;
6. The displacement of any domestic vanadium production causing substantial unemployment, decrease in the revenues of government, loss of investment or specialized skills and productive capacity, or other serious effects;
7. Relevant factors that are causing or will cause a weakening of our national economy; and
8. Any other relevant factors, including the use and importance of vanadium in critical infrastructure sectors.

At the conclusion of the investigation, Secretary Ross will prepare a report and advise the President on whether vanadium is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.

Neither the White House nor the Commerce Department has announced the contents of the report and whether the Commerce Department concluded that steel imports (or a particular subset of steel imports) pose a threat to national security. The Commerce Department issued a press release stating that the Secretary reported the Department's findings to the President. After the President has announced a decision, the Department intends to publish the public findings of the investigation.