The Foreign Investment Risk Review Modernization Act (FIRRMA) is the U.S. statute most tailored to protect U.S. technology. It gives the Committee on Foreign Investment in the United States (CFIUS) the authority to review foreign investments in US companies for national security concerns. However, the CFIUS review only covers certain types of investments and does not cover investments made through private equity funds.
Foreign countries can skirt around these gaps in US laws by investing in private equity funds, which are exempt from CFIUS review. Through private equity, foreign countries can invest in US companies without attracting the attention of regulators, as private equity firms are not required to disclose their investors’ identities or nationalities.
Foreign countries often use fronts or shell companies to make these investments. These fronts or shell companies are set up to hide the identity of the true investor, who may be a foreign government or state-owned entity. These fronts or shell companies may also use a US-based investment firm to make the investment on their behalf.
One example of foreign countries using private equity to skirt US laws meant to protect US technology is the case of China’s state-owned Aviation Industry Corporation of China (AVIC) investing in US-based private equity firms. In 2016, AVIC invested $250 million in a private equity fund managed by the US-based private equity firm, Blackstone. The investment allowed AVIC to gain access to US technology and intellectual property without attracting attention from regulators.
Another example is the case of Russia’s state-owned oil company, Rosneft, investing in a US-based private equity firm, HITECVision. In 2019, Rosneft invested $400 million in HITECVision’s fund, which invests in US oil and gas companies. The investment allowed Rosneft to gain access to US technology and expertise in the oil and gas sector.
In conclusion, foreign countries can exploit gaps in US laws meant to protect US technology by investing in private equity, which is exempt from CFIUS review.
Since foreign countries often use fronts or shell companies to make these investments, they can then hide their true identity and bypass regulatory scrutiny.
