Is Your Company at Risk? New Limits on Outbound Investment

Executive Due Diligence

Business Risk Management, Compliance, Risk Management

US President Joe Biden will sign an Executive Order in August 2023 that establishes new regulations for outbound investments. These regulations are aimed at Chinese technology development that is deemed to pose a threat to US national safety.

This order allows the Department of the Treasury to monitor US investors who are seeking to finance Chinese companies involved in the development of sensitive technology, such as semiconductors, AI, or quantum computing. This executive order opens the door to formalized restrictions on foreign investment, including Executive Due Diligence. It could even lead to a brand new regime of outbound investments in the United States. The move follows an increasing trend in Western countries to gain geopolitical advantages by controlling investment flows out of their territories, especially into tech and energy.

The Executive Order of President Biden

The Executive Order signed by Biden in 2023 on the 9th of August establishes investment rules for technology, AI, quantum computing, and semiconductors. This order mentions only the People’s Republic of China and its governed regions of Hong Kong and Macau.  Biden’s administration has identified the growth of Chinese companies and their development in these areas as an “extraordinary threat” to US national security. This is due to China’s ability to improve warfighting capabilities, intelligence, and cyber.

This order also requires that US citizens provide information about certain transactions with foreign entities/individuals who are covered by these interests. The order also bans some transactions with ‘covered foreign individuals’ outright. These restrictions are currently limited to investments in certain Chinese companies, but they will soon be expanded to other countries or jurisdictions that pose a threat to national security.

The Secretary of Treasury can now prohibit some outbound investments, and notify others to maintain US strategic advantage over its geopolitical enemies. This executive order, which was among the first to be issued of this kind, opened for public comments after its initial announcement in August. The formal regulations will include definitions for industries and products that are deemed to be threats to US National Security. These regulations may evolve over the next few months or years.

The Future of Outbound Investment Regulations

Other US allies will likely consider policies similar to the US’s new outbound investment regulations. For example, the UK and other European countries have also

Many European nations share concerns about China’s capability to develop sensitive technology that could bolster their military capabilities. This is especially true with their relationship with Russia. Concerns over China’s treatment for Uighur Muslims, in Xinjiang Province and other humanitarian concerns have led to a rise in fears about the destinations of foreign investment.

Both the House of Representatives and the Senate have debated the future of foreign investment outside the limits set by executive order. There is currently no formalized system for reviewing foreign investments. Congress is likely to build upon the existing legislation and expand geopolitical screening of business practices. They will also establish a formal review process for specific transactions.

China was the only jurisdiction that the executive order defined as a ‘risky one’. However, with the growth of legislation on this topic, new products and industries, jurisdictions, or jurisdictions will likely be the target for outbound investment restrictions.

What This Means for Investors

Geopolitical Tensions are threatening to further polarize the world’s powers. The war in Ukraine, China’s territorial ambitions, and desire for commercial dominance are threatening the security of both the United States as well as its allies. The US and its Allies, who understand this threat, have passed sanctions, regulations, and laws that target individuals, businesses, and industries around the world. These measures threaten to undermine their ability to maintain economic and military superiority.

As geopolitical tensions increase, investors should be aware that government agencies will pay more attention to overseas economic and commercial activities. This is particularly relevant to the technology industry, especially those involved with artificial intelligence, cyber security, and semiconductors. Financial services (but not only) should engage in increased due diligence to stay ahead and comply with the current and future legislation regarding outbound investments.

The economic impact of the outbound investment control may be more profound, especially in high-risk jurisdictions. Outbound investment restrictions may make it more difficult for industries not affected directly to operate in China or other regions that could be targeted. Geopolitical tensions in China have caused Chinese officials to target foreign executives and firms as a form of retaliation. This may continue as the countries lose valuable foreign investments in their industries.

Liability and De-Risking Implications

Biden’s EO limiting Chinese investment isn’t just a product of his time in office, but the most recent development on how the federal government responds economically to multipolarity. In conjunction with Biden’s EO in March this year, recent statements made by Deputy Attorney-General Lisa Monaco at the American Bar Association show the increased complexity and liabilities that US companies face when they invest overseas and adjust their supply chain.

The traditional American business culture is increasingly being forced to adopt and implement new training, and due diligence to prevent rapidly developing liability and regulatory limitations due to geopolitical risks. The companies must recognize the problem. Federal officials emphasize this often, which has significant implications for US-based companies operating abroad.