Proposed Restrictions on Technology Transfers
The transfer of technology is critical to innovation, development and future commercialization of new technologies. Innovations in computer infrastructure and mobile cellular technology I the Unites States, South Korea, and Taiwan have allowed much of the world to become connected via the internet, allowing greater communication and the dissemination of knowledge. But, what happens when parties wish to transfer arms-related technology between nations?
Currently, the transfer of arms related technology is subject to U.S arms export controls. “Export” of arms-related technical data can occur via the transfer of technology to a foreign national, inside or outside of the United States, as well as the transfer of technology to an entity outside of the United States. Depending upon the commodity, the U.S. Commerce Department or the U.S. State Department will take jurisdiction over licensing the export of arms related technology to a foreign national or a foreign entity. The application process is (relatively) straight forward–requests for export approval are reviewed by U.S. Government personnel that understand the technology and take policy considerations into account. Potential stakeholders in the process could involve the U.S. Department of Defense, the Defense Technology Security Administration, and the U.S. intelligence community.
The Foreign Investment Risk Review Modernization Act (FIRRMA)
On November 8, 2017, Senator John Cornyn introduced Senate Bill No. 2098, the Foreign Investment Risk Review Modernization Act of 2017. The bill seeks to reform the review of foreign acquisitions of U.S. businesses, and seeks to give additional power to the Committee on Foreign Investment in the United States (CFIUS). The proposed legislation would grant CFIUS authority over the transfer of technology from a U.S. business to foreign organization and/or a U.S. based organization controlled by a foreign national.
Does that sound similar to the process above, involving the U.S. Commerce and State Departments? Under the proposed legislation, CFIUS would establish a duplicate government approval process to mirror a process that is already well established. In addition, under the proposed legislation, CFIUS would require review of technology that the existing export control agencies have determined to not require an export license.
To make matters worse, CFIUS is an interagency body. Often, technical reviews are carried out by its member agencies–such as the Department of Commerce. As a result, a CFIUS review of technology transfer under FIRRMA would likely be handled by the same export control agency that would handle it outside of the CFIUS process. Alternatively, CFIUS could have other member agencies handle the review of a technology transfer. If this were to occur, the outcome would result in inefficiencies (due to two agencies reviewing the same transaction) and inconsistent results in the event that the agencies come to differing conclusions. Creating an additional review process for technology transfers involving CFIUS results in either a duplicative process, or an inefficient process with an inconsistent outcome.
Definition of “Foreign Person”
As expected, the definition of a foreign national, and what triggers review of a technology transfer differs between the ITAR and CFIUS regulations. This is significant because the determination of foreign status dictates whether review is needed. Currently, the ITAR defines a “Foreign National” as anyone who is not a U.S. Citizen. Control of a U.S. company is based upon majority ownership; a minority owner in the U.S. Company would legally be allowed to access arms-related technology, but no review of a contemplated technology transfer would be required under the ITAR.
CFIUS determines “Foreign National” in the same manner as the ITAR, but adds an additional regulatory component to determine who controls the company. CFIUS looks to whether a foreign national, foreign government or foreign entity exercises control over a U.S. Company. Any voting interest exceeding 10% has historically been considered “controlling” under CFIUS standards. In cases where there are indicia of control, less than 10% ownership could also trigger a “controlling” interest under CFIUS standards. In the event that FIRRMA is enacted into law, U.S. Companies will be forced to conduct additional due diligence before conducting domestic technology transfers to determine whether CFIUS “foreign control” issues are present.
The proposed FIRRMA regulation and resulting expansion of CFIUS authority over U.S. technology transfers is redundant and unnecessary. Enacting additional regulations on the Defense community runs counter to the current and on-going export control reform process, which seeks to deregulate and simplify the export of arms from the United States. Further, the current CFIUS definition of foreign control will add additional levels of compliance and bureaucratic oversight that is redundant and unnecessary. Thankfully, Senate Bill 2098 is only a proposal – there is still time for the bill to be killed or amended into a more favorable and sensible piece of legislation.
Additional information on U.S. Senate Bill S.2098 can be found on the U.S. Senate website at: www.congress.gov/bill/115th-congress/senate-bill/2098/
ABOUT THE AUTHOR
Mr. Wong is a Washington licensed attorney. He regularly provides legal counsel to the firearm and defense industry via his law firm, The Firearms Law Group. Mr. Wong also manages Hurricane Butterfly, an import/export company that assists firearm manufacturers, resellers, and collectors from around the world wade through the regulatory quagmire of U.S. import/export regulations.