U.S. Senators Ask GAO to Assess CFIUS’ Approach to Foreign Investment in U.S. Real Estate

On May 17, 2017, U.S. Senators Ron Wyden (D-OR), Claire McCaskill (D-MO), and Sherrod Brown (D-OH)—respectively ranking members of the Senate Finance; Homeland Security and Government Affairs; and Banking, Housing, and Urban Affairs Committees of the U.S. Senate—asked the Government Accountability Office (GAO) to review the approach taken by the Committee on Foreign Investment in the United States (CFIUS) to foreign investment in U.S. real estate and to “assess whether and how CFIUS addresses the full range of national security challenges such transactions may pose.” (The Senators’ letter to the GAO is below).

Specifically, the Senators have asked the GAO to examine a number of issues aimed at assessing the extent to which applicable regulations and the CFIUS process capture real estate transactions, the percentage of foreign acquisitions of U.S. real estate that have “filed” for CFIUS review, and the information and processes used by CFIUS to assess national security issues raised by foreign acquisitions of U.S. real estate.

The Senators identified the following three categories of national security concerns that arise or could arise from foreign acquisitions (and ownership) of U.S. real estate

    • Real estate located in close proximity to sensitive properties (e.g., military bases) and the leasing by the U.S. government and others of “high-security space” owned (partially or wholly) by foreign parties. (Note that in foreign acquisitions of U.S. firms that are not primarily real estate transactions, the proximity of to-be-acquired real property to sensitive properties can trigger CFIUS national security reviews (as discussed, e.g., here)).
    • National security risks posed by the fact that several members of the Trump Administration, including the President himself, have “significant real estate holdings” that could become the subjects of foreign real estate acquisitions.

As discussed in previous MassPoint publications (see related publications below) and elsewhere, members of Congress have in the last few years become increasingly active in seeking an expansion of the scope of CFIUS’ “national security” ambit, both in the context of specific transactions (often involving Chinese acquirers) and generally (e.g., where agriculture or other key U.S. sectors and assets are concerned).  This recent letter is a continuation of that pattern.

With respect to beneficial ownership transparency and the use of shell companies in real estate transactions, it is notable that lack of beneficial ownership transparency has been raised as a national security issue in connection with the CFIUS process (as noted below, the lack of beneficial ownership transparency is and has been an issue in the areas of banking, anti-money laundering enforcement, and real estate, for example).

Real estate sector participants, foreign investors, finance providers and other relevant parties should take note of the links drawn by Senators Wyden, McCaskill, and Brown between beneficial ownership and the CFIUS national security review process. (Of course, the issue has arisen in other contexts, including in banking regulation (banks will be required to collect beneficial ownership information as of May 2018); anti-money laundering enforcement (see, e.g., the recent discussion in Congress about beneficial ownership opacity and money laundering); and, proposals to require U.S. lawyers to obtain beneficial ownership information in providing certain services (e.g., company and trust formation) and to conduct “client due diligence” as financial system “gatekeepers”)).

Continue to full article and Senators’ letter…