On October 28, 2024, the U.S. Department of the Treasury (Treasury) issued final regulations (the Final Rule) implementing Executive Order 14105, “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern,” issued by President Biden on August 9, 2023 (the Outbound Order). The Final Rule provides the operative regulations and explanatory discussion regarding their intent and application. The regulations go into effect on January 2, 2025.
The Outbound Order describes the strategy that countries of concern are engaged in to advance the development of sensitive technologies and products. As part of this strategy, countries of concern are exploiting or have the ability to exploit certain United States outbound investments, including certain intangible benefits that often accompany United States investments and that help companies succeed. These intangible benefits include enhanced standing and prominence, managerial assistance, investment and talent networks, market access, and enhanced access to additional financing. Certain United States outbound investments may accelerate and enhance the successful development of sensitive technologies and products by countries of concern that develop them to counter United States and allied capabilities. In the Outbound Order, the President identifies the People’s Republic of China, along with the Special Administrative Region of Hong Kong and the Special Administrative Region of Macau, as a country of concern.
The Biden-Harris Administration is committed to keeping America safe and defending U.S. national security by protecting technologies that are critical to the next generation of military innovation. Cross-border investment flows have long contributed to U.S. economic vitality, and the implementation of the Outbound Order is consistent with our longstanding commitment to open investment that does not threaten our national security interests.
The Final Rule reflects Treasury’s consideration of public comments received in response to its August 2023 Advance Notice of Proposed Rulemaking (ANPRM) and its July 2024 Notice of Proposed Rulemaking (NPRM) regarding implementation of the Outbound Order. In developing the Final Rule, Treasury consulted with the Department of Commerce and numerous other U.S. Government departments and agencies. Additionally, Treasury engaged with U.S. allies and partners and will continue coordinating closely with them to advance the goals of the Outbound Order.
The following provides a general overview of the key elements of the Final Rule. The full text of the Final Rule should be reviewed for further details, including important definitions.
The Final Rule identifies the sub-sets of national security technologies and products identified in the Outbound Order that are subject to the regulations:
The Final Rule outlines the penalty and disclosure framework for violations:
The Final Rule can be accessed via the program’s website at https://home.treasury.gov/policy-issues/international/outbound-investment-program.
Why is Treasury issuing these regulations?
The Outbound Order directs the Secretary of the Treasury, in consultation with other departments and agencies, to promulgate rules and regulations, including prescribing definitions of terms as necessary to implement the Outbound Order and administer the new program. The Final Rule includes specific requirements for U.S. persons and reflects Treasury’s consideration of public comments received in response to its August 2023 ANPRM and July 2024 NPRM.
When does the rule take effect?
January 2, 2025. Transactions with a completion date on or after January 2, 2025 are subject to the Final Rule, including the prohibition and notification requirements, as applicable.
What are the key differences between the NPRM and the Final Rule?
In evaluating public comments on the August 2023 ANPRM and the July 2024 NPRM, and considering feedback from stakeholders, allies and partners, and consulting with relevant U.S. Government departments and agencies, Treasury made certain changes intended to address feedback raised by commenters including with respect to the clarity of the rule and compliance.
Key areas that have evolved since the NPRM include:
The full text of the Final Rule should be reviewed for further details.
How does a U.S. person file a notification?
Notifications are required to be submitted via electronic filing. Treasury will post instructions on how to file on Treasury’s Outbound Investment Security Program website prior to the effective date of the Final Rule.
Can U.S. persons still invest in a country of concern?
The Final Rule does not prohibit all investment activity in countries of concern. Consistent with the Outbound Order, the Final Rule is narrowly targeted at certain types of investments in country of concern entities and related to sensitive technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities. The Final Rule focuses on discrete categories of transactions involving sub-sets of technologies and products in an effort to protect national security, maximize compliance, and minimize unintended consequences. In addition, certain transactions are excepted, including those in publicly traded securities and derivatives, certain LP investments, certain intracompany transactions between U.S. parents and controlled foreign entities, and certain employee compensation in the form of stock or stock options.
The United States supports an open investment environment consistent with the protection of U.S. national security.
Does this program set-up a screening process or case-by-case review of investments?
No. Consistent with the Outbound Order, U.S. persons are prohibited from undertaking certain transactions and are required to notify Treasury of certain other transactions. There will not be a case-by-case review of transactions. The relevant U.S. person undertaking a transaction has an obligation to determine whether the given transaction is prohibited, permissible but subject to notification, or not covered by the Final Rule because either it is an excepted transaction or it is not within the jurisdiction set forth under the Final Rule. A U.S. person can also seek a national interest exemption from the notification requirement or prohibition.
How will U.S. individuals and companies be expected to comply with this program?
The Final Rule places certain requirements on U.S. persons, including recordkeeping and notification requirements. The Final Rule also establishes a prohibition on certain U.S. person transactions. A U.S. person’s knowledge of certain facts or circumstances is generally a pre- requisite for obligations under the Final Rule. Treasury therefore anticipates that U.S. persons should be able to comply with the Final Rule through a reasonable and diligent transactional due diligence and compliance process. A person who fails to undertake a reasonable and diligent inquiry prior to a transaction may be responsible for knowledge it could have acquired.
Are U.S. nationals working at foreign entities going to be impacted?
U.S. persons are prohibited from knowingly directing transactions by non-U.S. entities that the U.S. person knows at the time of the transaction would be prohibited if engaged in by a U.S. person. The Final Rule provides for a U.S. person’s recusal from participation in certain activities to avoid violating this prohibition. The Final Rule does not restrict a U.S. person from generally working at any entity that receives investment, nor does it restrict a U.S. person from working at an entity making such an investment.
Are technology licensing, consulting, or procurement contracts covered?
Certain transactions that involve the acquisition of equity or a contingent equity interest, conversion of a contingent equity interest, provision of debt financing that carries certain rights, greenfield investments or other corporate expansions, the entrance into joint ventures, or certain LP investments are covered. Activities that do not meet the definition of a covered transaction are not subject to the program except where they are undertaken to evade or avoid the Final Rule.
Will Treasury publish a list of designated covered foreign persons under the program?
At this time, Treasury does not intend to publish a list of entities designated as covered foreign persons. Instead, Treasury expects a U.S. person to conduct a reasonable and diligent inquiry to determine whether a transaction is covered under the Final Rule, including whether any covered foreign persons are involved.
What are the penalties for violations of the program?
The Outbound Order authorizes the Secretary of the Treasury to investigate violations of the regulations, including pursuing civil penalties available under IEEPA and referring criminal violations to the Attorney General. The Secretary of the Treasury may also, as appropriate, take action authorized under IEEPA to nullify, void, or otherwise compel the divestment of any prohibited transaction. Under IEEPA, currently the maximum civil penalty for a violation is the greater of $368,136 or twice the value of the transaction that is the basis for the violation.
Is Treasury working with U.S. allies and partners?
Treasury, working with the U.S. Department of State, has engaged with U.S. allies and partners regarding the important national security goals of the Outbound Order. The Outbound Order and the scope of the program reflect discussions with the G7 and other ally and partner engagements.
Treasury is encouraged by the interest and attention given to this issue by allies and partners, including in the July 2024 G7 Apulia Leaders’ Communiqué. Treasury also notes that the European Commission and United Kingdom have begun processes to consider whether and how to address outbound investment risks.
Does Treasury intend to put out further details on the program?
Prior to the effective date of the Final Rule, Treasury will provide on its Outbound Investment Security Program website instructions on how to file a notification and how to request a national interest determination. In addition, Treasury anticipates providing additional information to help facilitate compliance by U.S. persons. Treasury also anticipates engaging in stakeholder outreach and education on the requirements in the Final Rule.
Further, with respect to the exception regarding certain transactions with or involving persons of designated territories or countries outside the United States, Treasury anticipates making available on its website more information on the factors the Secretary of the Treasury will consider when making a designation of a country or territory or a determination as to the types of transactions for which the relevant national security concerns are likely to be adequately addressed by measures taken or that may be taken by the government of the relevant country or territory.
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