How the secretive CFIUS became a powerful weapon in the trade wars

CFIUS (pronounced “SIFF-ee-us”) will have final sign-off on a proposed deal to deliver partial control over TikTok to a coalition of U.S. investors and companies, including Oracle and Walmart. Once an obscure nook in Washington’s regulatory labyrinth, CFIUS has grown dramatically in power and influence in recent years, as Congress beefed up its mandate as part of a technological arms race with China and other rivals. Its widening ambit could redefine the relationship between foreign companies and the U.S. government. But the TikTok saga, which could see a prominent supporter of President Trump obtain a big stake in the app, is also stoking a backlash among critics who see CFIUS as a powerful tool for crony capitalism.

Illustration by Sam Island

CFIUS was established in 1975 by President Gerald Ford to safeguard strategic industries like oil and munitions from foreign control. For decades it was rarely invoked: Brian Fleming, a former national security lawyer for the Justice Department who is now an attorney at Miller & Chevalier, estimates that the Obama and Trump administrations blocked fewer than one deal a year between 2009 and 2017. 

The pace accelerated, however, as the Trump administration adopted a more bellicose stance on China—and as lawmakers across the political spectrum grew more worried about data, patents, and tech expertise passing out of U.S. control. In 2018, CFIUS stopped China’s Ant Financial from buying money-transfer service MoneyGram and scuttled an effort by Singapore-based Broadcom to acquire chip giant Qualcomm. That same year, Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA). That law not only expanded CFIUS’s enforcement powers but also gave it a new mandate to protect U.S. consumer data—such as that collected by TikTok and its Chinese parent company, ByteDance.

The advent of FIRRMA has triggered a stampede of CFIUS actions. The review process is highly secretive, but according to the Washington Post, the panel has launched dozens of investigations this year alone, aimed primarily at companies that received investment from China or Russia. Some probes retroactively examine deals completed years ago: The TikTok investigation, for example, rose out of ByteDance’s 2017 purchase of a Los Angeles–based company called Musical.ly.

CFIUS is composed of the chiefs of nine federal agencies, headed by the secretary of the Treasury. It can intervene in any deal involving foreign investors in which there are national security concerns—a rationale that can extend to nearly any transaction, lawyers object. While social media platforms like TikTok and Tencent’s WeChat have been the most prominent recent targets, other industries are in the panel’s crosshairs. Nevena Simidjiyska, cochair of the international trade group at Fox Rothschild LLP, which has seen an uptick in CFIUS work, says the mobile game industry—which has many ties to China—is likely the next to face scrutiny.

Simidjiyska and others argue that CFIUS review is highly vulnerable to political influence. Members of Congress who wish to flaunt nationalist credentials can lean on CFIUS to block a deal or unwind it retroactively. And U.S. companies have also urged lawmakers to demand CFIUS investigations into their corporate rivals.

In this new climate, lawyers say, companies are increasingly taking steps to avoid CFIUS scrutiny. Some might structure deals in such a way that foreign investors have only a passive role, with no board seats or executive presence; others might simply decline Chinese investment altogether. And in some cases, companies quietly pull the plug on a planned deal upon learning that CFIUS intends to make a negative recommendation to the President. While firms can turn to the courts if they view CFIUS’s actions as arbitrary or heavy-handed, this may be a long shot. Only one company has gone to court over a CFIUS order, and the case settled without a ruling on the underlying issues. And U.S. judges typically give the executive branch broad deference on matters of national security.  

That deference, along with CFIUS’s growing scope, has amplified complaints that the process could be used for nakedly political ends. Many China hawks shared President Trump’s stated concerns about the influence of TikTok and WeChat. But his open advocacy of an ownership bid by Oracle—whose cochairman, Larry Ellison, hosted a top-dollar fundraiser for the President earlier this year—has raised hackles in Congress and C-suites alike. 

“Have we broken the fourth wall when it comes to CFIUS, and entered a bold new world where the President can intervene and meddle in a way no one envisioned?” asks Fleming, the former Justice Department lawyer. “With this President, all bets are off.” It remains to be seen whether the TikTok affair is a one-off, and whether the enmeshing of geopolitics and business would continue under a different President, of either party. 

Jason Lee—REUTERS

Tougher over time

Since its creation in 1975, CFIUS has slowly evolved from a regulatory footnote to a trade-war weapon. Some key dates from the pre-TikTok era: 

1988: Growing teeth

Concerned over Japan’s tech prowess, Congress gives CFIUS the power to reject foreign investments.

1990: That deal won’t fly

The administration of George H.W. Bush uses CFIUS to order a Chinese firm to divest MAMCO Manufacturing, a Seattle-based aircraft-parts maker.

2006: Shape up or ship out

The Dubai Ports World consortium strikes a deal to obtain control of six U.S. seaports. CFIUS approves the plan, but Congress votes to block it.

2012: Blowing in the wind

President Obama orders Chinese-owned Ralls Corp. to divest wind turbines it acquired near a Navy site in Oregon.

2018: The art of no deal

President Trump invokes CFIUS to bar Singapore-based Broadcom from carrying out a $117 billion hostile takeover of chipmaker Qualcomm.

A version of this article appears in the November 2020 issue of Fortune with the headline, “A powerful tool for trade hawks.”