Calls Grow for US Outbound Investment Screening

- The U.S. Department of the Treasury's final rule on outbound investment screening, which implements Executive Order 14105, went into effect on January 2, 2025. This program prohibits or requires notification for certain U.S. investments in Chinese entities involved in semiconductors and microelectronics, quantum information technologies, and artificial intelligence. - The rules apply to U.S. persons and their controlled foreign subsidiaries, requiring them to notify the Treasury Department of certain investments within 30 days of closing the transaction. The compliance burden falls on the U.S. investor, who must conduct due diligence to determine if a target entity is covered, as there is no official government list of such entities. - In March 2025, a bipartisan group of senators introduced the Foreign Investment Guardrails to Help Thwart (FIGHT) China Act to codify and expand the screening program. Proposed changes include adding hypersonics and high-performance computing to the list of targeted sectors and shortening the notification timeline to 14 days. - The definition of a "covered foreign person" is broad, including not only Chinese entities but also their subsidiaries and even non-Chinese companies that derive 50% or more of their revenue from or incur 50% or more of their expenses in China. This complexity requires U.S. investors to conduct significant due diligence on potential investments, including those in third-country transactions. - Violations of the outbound investment rules can lead to substantial penalties, including civil fines of up to $368,137 per violation or twice the transaction amount, and criminal penalties of up to $1 million or 20 years in prison for willful violations. - The Fiscal Year 2024 National Defense Authorization Act (NDAA) included provisions to address strategic competition with China, focusing on disruptive technologies like AI and quantum computing. It also requires the Department of Defense to develop a strategy to achieve critical mineral supply chain independence from adversarial nations by 2035. - Broader U.S.-China trade tensions escalated in early 2025 with significant tariff increases on Chinese goods. While some tariffs were later rolled back, the unpredictable trade policy environment has created a volatile and uncertain atmosphere for businesses, particularly impacting small and medium-sized firms with complex supply chains. - Some analysts suggest the new screening measures are narrowly tailored and may have a limited immediate impact, noting that U.S. investors have already been withdrawing from Chinese tech firms. However, others believe the regulations have already had a chilling effect on even permissible, notifiable transactions due to investor reluctance to attract government scrutiny.