The CFIUS EO directs CFIUS to take the following factors into account when conducting national security reviews of any transaction:
(1) “[S]upply chain resilience and security,” including
(A) the effect of foreign investment on domestic capacity to meet national security requirements, “both within and outside of the defense industrial base;”
(B) “the degree of diversification through alternative suppliers across the supply chain, including suppliers located in allied or partner economies;”
(C) “whether the United States business that is party to the covered transaction supplies, directly or indirectly, the United States Government, the energy sector industrial base, or the defense industrial base;” and
(D) the degree of involvement and the “concentration of ownership or control by the foreign person in a given supply chain;”
(2) U.S. technological leadership, including in the context of “manufacturing capabilities, services, critical mineral resources, or [fundamental] technologies” and any transaction that may “result in future advancements and applications in technology that could undermine national security;”
(3) Cybersecurity risks, including “activity designed to undermine the protection or integrity of data in storage or databases;” "interference with United States elections, United States critical infrastructure, the defense industrial base, or other cybersecurity national security priorities;” or “the sabotage of critical energy infrastructure;” and
(4) Sensitive data, particularly
(A) “United States persons’ health, digital identity, or other biological data;”
(B) Technology that, when combined with large data sets, can enable the re-identification or de-anonymization of what once was unidentifiable data; and
(C) “Data on sub-populations in the United States that could be used by a foreign person to target individuals or groups of individuals in the United States in a manner that threatens national security.”
To help CFIUS fully assess the risk factors above, the CFIUS EO directs CFIUS to analyze whether foreign persons who are party to a covered transaction have any relevant third-party ties that might cause the transaction to pose a national security threat. The CFIUS EO also requests that CFIUS analyze whether any foreign persons and governments (not just parties to the specific transaction before CFIUS) have made “[i]ncremental investments over time in a sector or technology” (or in related manufacturing capabilities, services, critical mineral resources, or technologies) that could cede, little-by-little, “domestic development or control in that sector or technology” to foreign persons. Prior to this directive, CFIUS was only focused on incremental investments by the same foreign person/entity in a specific U.S. company.
The CFIUS EO directs the White House Office of Science and Technology Policy (OSTP), which is a CFIUS member agency, to periodically publish a list of technology sectors that are fundamental to U.S. technological leadership in areas relevant to national security. CFIUS will, as appropriate, consider this list during its national security reviews. The CFIUS EO also empowers CFIUS to request analysis from the U.S. Department of Commerce International Trade Administration on the industry in which any U.S. business involved in a covered transaction operates, as well as “the cumulative control of, or pattern of recent transactions by, the foreign person . . . in that sector or industry.” Further, the CFIUS EO requires CFIUS to regularly review its processes, practices, and regulations, and to periodically report the results of these reviews to the Assistant to the President for National Security Affairs.
B. New Exemption for Investments from New Zealand
Notwithstanding the areas that CFIUS likely will prioritize pursuant to the CFIUS EO, CFIUS also de-prioritized investments from New Zealand. Specifically, on January 5, 2022, CFIUS added New Zealand to its ‘whitelist’ of excepted foreign states, thereby granting certain investors from New Zealand who meet the ‘excepted investor’ requirements in the CFIUS regulations an opportunity to bypass CFIUS jurisdiction over their investments in or acquisition of a U.S. business. With the addition of New Zealand, the group of excepted foreign states has increased to four—the others are Australia, Canada, and the United Kingdom.
C. New Enforcement and Penalty Guidelines, Inaugural Conference, and Annual Report
While the CFIUS EO brought additional insight to CFIUS national security reviews, the year 2022 also saw CFIUS increase transparency in several additional ways. For instance, on October 20, 2022, CFIUS, for the first time ever, published Enforcement and Penalty Guidelines (the Guidelines). The Guidelines lay out how CFIUS assesses whether and in what amount to impose a penalty or take some other enforcement action for a violation of a party’s obligation with respect to CFIUS, including aggravating and mitigating factors that CFIUS considers in making such a determination. The Guidelines address the failure to timely submit a mandatory filing, as well as other acts or omissions that may constitute a violation of CFIUS’s laws and regulations. They also lay out the process by which parties could petition CFIUS for reconsideration of a penalty.
In addition to issuing the Guidelines, CFIUS hosted its first-ever CFIUS Conference on June 16, 2022. The Conference featured the Deputy Secretary of the U.S. Department of the Treasury, the Acting CFIUS Staff Chair and Director, and more than a dozen other leaders from CFIUS member agencies. The 2022 CFIUS Conference provided insights on CFIUS authorities, processes, and practice. Key takeaways from the conference included: the intention of CFIUS to continue its focus on data-related transactions; the importance of a collaborative rather than adversarial approach to the CFIUS review process; and the CFIUS plan to increase its compliance monitoring efforts as well as its efforts to identify and review transactions that were not voluntarily notified to CFIUS. As a result, it is widely anticipated that in 2023 CFIUS will issue penalties for violations of existing CFIUS mitigation agreements and for failure to notify CFIUS of transactions subject to mandatory filing requirements (i.e., non-notified transactions).
Lastly, CFIUS published the declassified version of its annual report to Congress on August 2, 2022. This year’s annual report, which concentrated on CFIUS’s activities in calendar year 2021, demonstrated, among other things, that CFIUS reviewed a record number of covered transactions, including thirty percent more declarations and forty-five percent more notices than were reviewed in 2020. Only eleven percent of the cases CFIUS cleared in 2021 required mitigation and the U.S. president did not block any transaction in 2021. It is unclear if CFIUS filings will increase in 2023 given the slowing global economy, but based upon an increased engagement posture by CFIUS and an outward-focused Biden administration, many believe CFIUS will continue to be a significant player in foreign direct investment matters in 2023, particularly in connection with transactions involving Chinese investment or critical technology investments and acquisitions.
II. Semiconductor-Related Supply Chain Developments in 2022
Two key national security-related actions that were taken to improve semiconductor-related supply chain security were: (1) the passage of the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) and (2) the enactment of stringent export controls that have made it very difficult, if not impossible, for U.S. companies to export semiconductors and related manufacturing equipment and technology to China. These developments are discussed below.
The United States was an early pioneer in semiconductors, but today produces only about ten percent of the world’s supply. Instead, the United States has relied on Asia (mainly Taiwan and China) to satisfy domestic semiconductor demand. U.S. companies across multiple industries are dependent on chips made abroad for production, and the fragility of those supply chains has been exposed during the pandemic. A good example is the U.S. auto industry, which suffered major supply-side disruptions arising from chip shortages. Moreover, estimates point to an increased demand for semiconductors.
A. Overview of the CHIPS Act
The CHIPS Act provisions were mostly extracted from the U.S. Innovation and Competition Act (USICA) and its House alternative, the America COMPETES Act, which Congress failed to pass. Unlike its predecessors, the CHIPS Act received bipartisan support, passing in the Senate by a 64-33 vote. But important aspects of other sought-after trade remedies in the USICA and Competes Act (e.g., 301 tariffs exclusion, AD/CV duties, and trade preference programs (GSP) were left out of the CHIPS Act.
The CHIPS Act provides USD $52.7 billion for American semiconductor research, development, manufacturing, and workforce development.” “This [funding] includes USD $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, USD $13.2 billion in R&D and workforce development, and USD $500 million to provide for international information communications technology security and semiconductor supply chain activities.”
The CHIPS Act also provides a twenty-five percent investment tax credit related to manufacturing of semiconductors and associated equipment. These incentives (are intended to) secure domestic supply, create high-skilled manufacturing jobs, and catalyze hundreds of billions more in private investment.
The CHIPS Act requires recipients to demonstrate significant worker and community investments, including opportunities for small businesses and disadvantaged communities. Other guardrails in the CHIPS Act help ensure that entities that receive the semiconductor incentive funding or tax incentives do not use the funding to buy back their own stock, provide shareholders with dividend payments, or expand advanced semiconductor manufacturing capabilities in foreign countries of concern like China. Recipients’ failure to abide by the restrictions will result in clawback of granted funds and/or forfeiture of tax credits.
In total, the CHIPS Act directs USD $280 billion in funding over the next ten years “to bolster U.S. semiconductor manufacturing capacity,” including authorizing about USD $174 billion to certain government agencies for research and development. The agencies include the Department of Commerce, the Department of Energy, the National Science Foundation, and the National Institute of Standards and Technology.
B. Executive Branch Actions to Implement the CHIPS Act
On August 25, 2022, President Biden signed an executive order to implement the semiconductor funding in the bipartisan CHIPS Act. The order created the CHIPS Implementation Steering Council, which will coordinate the implementation of the CHIPS Act across the administration. The council will be co-chaired by National Economic Director Brian Deese, National Security Advisor Jake Sullivan, and Acting Director of the Office of Science and Technology Policy Alondra Nelson. Other members will include:
(1) Department of State Secretary Antony Blinken;
(2) Department of Treasury Secretary Janet Yellen;
(3) Department of Defense Secretary Lloyd Austin;
(4) Department of Commerce Secretary Gina Raimondo;
(5) Department of Labor Secretary Marty Walsh;
(6) Department of Energy Secretary Jennifer Granholm;
(7) White House Office of Management and Budget Director Shalanda Young;
(8) Small Business Administration Administrator Isabel Guzman;
(9) Office of the Director of National Intelligence Director Avril Haines;
(10) White House Domestic Policy Council Director Susan Rice;
(11) White House Council of Economic Advisers Chair Cecilia Rouse;
(12) White House Office of the National Cyber Director Chris Inglis; and
(13) National Science Foundation Director Sethuraman Panchanathan.
The Six Implementation Priorities of the Steering Council Created by the Executive Order are:
(1) Protect taxpayer dollars. The CHIPS program will include rigorous review of applications along with robust compliance and accountability requirements to ensure taxpayer funds are protected and spent wisely.
(2) Meet economic and national security needs. The CHIPS program must address economic and national security risks “by building domestic capacity that reduces [U.S.] reliance on vulnerable or overly concentrated foreign production for both leading-edge and mature microelectronics,” and increasing United States economic productivity and competitiveness. U.S. long-term economic and national security require a sustainable, competitive domestic industry.
(3) Ensure long-term leadership in the sector. The CHIPS program will establish a dynamic, collaborative network for semiconductor research and innovation to enable long-term U.S. leadership in the industries of the future. The program intends to support a diversity of technologies and applications along many stages of product and process development.
(4) Strengthen and expand regional manufacturing and innovation clusters. Long-term competitiveness requires large economies of scale and investments across the supply chain. Regional clusters containing manufacturing facilities, suppliers, “basic and translational research,” and workforce programs, along with supporting infrastructure, will be the foundation for a competitive industry. The CHIPS program intends to facilitate the expansion, creation and coordination of semiconductor manufacturing and innovation clusters that benefit many companies.
(5) Catalyze private sector investment. A successful CHIPS program will respond to market signals, fill market gaps and reduce investment risk to attract significant private capital. The role of government in the CHIPS program is to shift financial incentives to maximize large-scale private investment in production, breakthrough technologies and workers. The CHIPS program intends to encourage new ecosystem partnerships that reduce risk, build on U.S. strengths and facilitate such investments.
(6) Generate benefits for a broad range of stakeholders and communities. A successful CHIPS program will create benefits for startups, workers, socially and economically disadvantaged (SEDI) businesses, including minority-owned, veteran-owned and women-owned businesses, and rural businesses universities and colleges, and state and local economies, in addition to supporting semiconductor companies. The CHIPS program intends to encourage linkages to underserved regions and populations to draw in new participants to the semiconductor ecosystem.
C. New Semiconductor-Related Export Controls
The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) is implementing a series of targeted updates to its export controls as part of its efforts to protect U.S. national security and foreign policy interests. These amendments to the Export Administration Regulations (EAR) administered by BIS will restrict the ability of the People’s Republic of China’s (PRC’s) ability to purchase and manufacture certain high-end chips used in military applications and build on prior policies, company-specific actions, and less public regulatory, legal, and enforcement actions taken by BIS. The bureau published an interim final rule to implement these semiconductor-related amendments to the EAR in the Federal Register on October 13, 2022.
The interim final rule addresses U.S. national security and foreign policy concerns in two key areas. First, the rule imposes restrictive export controls on certain advanced computing semiconductor chips, transactions for supercomputer end-uses, and transactions involving certain entities listed under supplement No. 4 to part 744 of the EAR (also known as the Entity List). Second, the interim final rule imposes new controls on certain semiconductor manufacturing items and on transactions for certain integrated circuit (IC) end uses. Specifically, the interim final rule:
(1) Adds certain advanced and high-performance computing chips and computer commodities that contain such chips to the Commerce Control List (CCL);
(2) Adds new license requirements for items destined for a supercomputer or semiconductor development or production end use in the PRC;
(3) Expands the scope of the EAR over certain foreign-produced advanced computing items and foreign-produced items for supercomputer end uses;
(4) Expands the scope of foreign-produced items subject to license requirements for twenty-eight existing entities on the Entity List that are located in the PRC;
(5) Adds certain semiconductor manufacturing equipment and related items to the CCL;
(6) Adds new license requirements for items destined for a semiconductor fabrication “facility” in the PRC that fabricates ICs meeting specified standards. Licenses for facilities owned by PRC entities will face a “presumption of denial,” and facilities owned by multinationals will be decided on a case-by-case basis;
(7) Restricts the ability of U.S. persons to support the development or production of ICs at certain PRC-located semiconductor fabrication “facilities” without a license;
(8) Adds new license requirements to export items to develop or produce semiconductor manufacturing equipment and related items; and
(9) Establishes a temporary general license to minimize the short-term impact on the semiconductor supply chain by allowing specific, limited manufacturing activities related to items destined for use outside the PRC.
In response to many industry-posed questions, BIS has recently issued guidance relating to the interim final rule. The guidance provides important clarifications relating to such things as the definition of a covered “facility,” the scope of the “activities of U.S. persons” restrictions, and the impact of the rule on deemed exports and encryption-related items.
The PRC’s response to the new export controls was framed as an abuse by the United States to block and suppress Chinese companies. The export controls are expected to be just the first in a series of actions from the United States before the end of 2022, including possible executive branch actions to strengthen federal oversight of U.S. investment in China and to limit data collection from Chinese firms.
III. Cabo Verde and the Extradition of Alex Saab
On June 12, 2020, Cabo Verdean authorities detained Colombian businessman Alex Saab during a refueling stop while traveling from Caracas to Tehran. Saab is alleged to have run an elaborate global money laundering operation on behalf of the Maduro regime in Venezuela, in part to evade U.S. sanctions, with the help of countries like Russia, Turkey, and Iran. Saab himself was sanctioned by OFAC for laundering billions for the regime off of corrupt food contracts and sanctions evasion and is under federal indictment in the United States for allegedly laundering USD $350 million of that money through U.S. financial institutions. Pursuant to an International Criminal Police Organization (INTERPOL) Red Notice requesting his seizure, Cabo Verdean authorities took responsible action in detaining him.
Although Cabo Verde has neither a Mutual Legal Assistance Treaty nor an extradition treaty with the United States, the Cabo Verdean government proceeded with the extradition under Article 16 of the U.N. Convention on Transnational Organized Crime, which it ratified in 2004.
The Maduro regime reacted swiftly and strongly, claiming Saab was a Special Envoy traveling on a diplomatic passport who was unlawfully intercepted on his humanitarian mission to help feed the Venezuelan people. He was entitled to diplomatic inviolability and immunity while in transit, they argued, and his arrest was simply politically-driven and amounted to a kidnapping. Sixteen months of lawfare and political attacks followed, aimed at Cabo Verdean government officials and judges, while the small nation worked diligently to uphold its international obligations. For instance, an aggressive social media campaign included deploying Twitter bots to smear and threaten Cabo Verde’s government and specific officials and judges and paying influencers to sew domestic discord. Saab also brought actions through regional bodies without jurisdiction as a public relations pressure tactic, including a habeas action in the ECOWAS Court of Justice, despite the fact that Cabo Verde has never assented to that body’s jurisdiction. After Saab’s arrest, Maduro also designated him as Venezuela’s deputy representative to the African Union (AU) to try to bolster the immunity claims, though Cabo Verde is not a signatory to the AU’s privileges and immunities protocol.
Saab was finally extradited to the U.S. in October 2021 after he exhausted all of his appeals in Cabo Verde’s judicial and constitutional courts. In the year and a half since his arraignment in Miami, he has continued to use U.S.-based lawyers to push his diplomatic immunity narrative. But discovery produced in November undermined the credibility and reliability of the evidence and arguments Saab’s team had relied upon, and in December the district court formally rejected Saab’s immunity claim. He has appealed that ruling, but the Eleventh Circuit has since held in different case that a district court could not grant a motion brought by a Maduro-appointed body without addressing a nonjusticiable political question concerning the State Department’s conclusion that Maduro is not Venezuela’s legitimate political leader. It follows, then, that Saab’s argument that he is entitled to diplomatic immunity based upon his alleged appointment by someone not recognized as a legitimate head of state, is likely to fail on appeal, as well.
IV. Nuclear Arms Control
On February 24, 2022, Russia invaded Ukraine in violation of both the United Nations Charter and Russian security assurances when Ukraine agreed to relinquish its nuclear weapons. Russia ignored the UN General Assembly and the International Court of Justice’s calls for halting the invasion. President Putin referred to Russia’s nuclear arsenal and threatened historic consequences if other nations “interfered,” but the United States and other NATO countries furnished extensive military aid to Ukraine. Ukraine repelled an initial Russian drive on the capital, Kyiv, but at the time this article went to press, fighting continued in the Southern and Eastern parts of Ukraine. Meanwhile, Russia was conducting a campaign of missile strikes on civilian water, heat, and electricity infrastructure, prompting United Nations human rights officials to express “shock” at the suffering caused.
Despite tensions over Ukraine, the United States and Russia agreed to resume nuclear arms control talks, including talks of renewal or replacement of the New START treaty. A State Department spokesperson said that talks would resume “in the near future,” but they had not resumed at the time of this writing. Numerous arms control experts and scientists have published warnings that rapid advances in military technology are shortening the window of time available for negotiation of an effective arms control treaty.
In 2022, all states possessing nuclear weapons continued to upgrade, and in some instances, to enlarge, their nuclear arsenals. Russia had completed eighty-nine percent of its comprehensive modernization program, but Putin professed to be “extremely concerned” about U.S. missile defense near Russia and the Russian Defense Ministry announced that in 2023 there would be a major upgrade of nuclear infrastructure to enhance the combat capabilities of Russia’s missile forces. The United States rolled out the first of its new B-21 stealth bombers and continued with plans for an enhanced long-range air to surface nuclear missile, enhanced nuclear missile submarines, and a new generation of fixed silo nuclear ICBMs. The Defense Department assesses that China is seeking to enhance its “strategic nuclear capability,” which currently has about four-hundred nuclear warheads, and could have as many as 1,500 by 2035.
North Korea continued extensive testing of nuclear-capable missiles. It reportedly made apparent preparations for a possible nuclear weapons test, but no such test had been conducted when this article went to press.
Two scientific studies published in 2022 estimated that a full-scale nuclear war between the United States and Russia, and the inevitable “nuclear winter” and subsequent famine caused by soot and smoke lingering in the atmosphere, would cause up to five billion deaths worldwide, and that a limited nuclear war between India and Pakistan would cause up to two billion deaths from a global famine.
The first Meeting of State Parties under the Treaty on the Prohibition of Nuclear Weapons (TPNW) issued renewed calls for the complete elimination of nuclear weapons. But none of the states actually possessing nuclear arms are among the sixty-eight states parties that have ratified the TPNW.
The Review Conference of the Nuclear Non-Proliferation Treaty, scheduled for 2020 but postponed because of the COVID pandemic, met in 2022 and adjourned without agreeing on a final document. Russia’s invasion of Ukraine led to widespread predictions that additional states might seek their own nuclear weapons programs, but none have yet announced plans to do so.
On October 27, 2022, the U.S. Department of Defense released the Administration’s Nuclear Posture Review (NPR), similar in numerous respects to those released by previous administrations. The NPR did not contain the statement, advocated by President Biden during the 2020 Presidential campaign, that the “sole purpose” of the U.S. nuclear arsenal is to deter nuclear attacks against the United States and its allies. The 2022 NPR repeats statements that the United States remains committed to arms control and shares the ultimate goal of a world without nuclear weapons but did not propose any specific steps to implement the statements.
Efforts continued in 2022 to reestablish the Iran nuclear agreement that President Trump withdrew the United States from in May 2018, but talks ended in an impasse, and Iran announced that it was increasing the amount of uranium that it was enriching to near weapons-grade. Meanwhile Saudi Arabia, which has reserved the right to enrich uranium, has issued a request for proposals for construction of a major new nuclear reactor.
The Conference on Establishment of a Middle East Zone Free of Nuclear Weapons and Other Weapons of Mass Destruction met in November 2022 and issued a report stating that no agreement had been reached but that work would continue in hopes of arriving at a treaty.
