Vetting of overseas investors stepped up

Vetting of overseas investors stepped up

By Stephanie Kirchgaessner in Washington

Published: April 7 2008 22:02 | Last updated: April 7 2008 22:02

Sovereign wealth funds and other overseas investors will face closer scrutiny by US regulators under changes to the way foreign deals are vetted on national security grounds.

The US Treasury is expected to clarify in new regulations that foreign investments falling below the 10 per cent threshold can be investigated on security grounds. The proposed regulations are expected to be released this month and to be open for public debate before being finalised.

The subtle, but significant, change will affect any minority investor and is aimed at quelling concerns in Congress about foreign government-controlled investment funds.

Lawmakers on Capitol Hill have had a relatively subdued response to the sharp influx of cash by sovereign wealth funds into the US banking system, in recognition of the fact that Wall Street was in desperate need of investments by Middle Eastern and other funds.

Yet, some legislators, including Barney Frank, the Democratic chairman of the House financial services committee, have urged the Treasury to take a cautious approach to the funds in drafting regulations on how foreign deals ought to be vetted.

In a recent letter, Mr Frank called on Hank Paulson, Treasury secretary, to make it clear that foreign investors could not evade national security investigations by the Committee on Foreign Investment in the US (Cfius), the secretive inter-agency panel that probes foreign deals, by keeping their investments under 10 per cent.

“The regulations should not give the false impression that investments below this [10 per cent] threshold are also below the radar in terms of the Cfius’s ability to do its work,” Mr Frank said.

The Treasury declined to comment on the rule changes ahead of their release, saying they were still “in flux”. But people familiar with the matter expect that the Treasury will reflect Mr Frank’s concerns in drafting the rules.

Under current regulations, foreign investments under 10 per cent are generally not considered outright acquisitions and do not come under the purview of Cfius. Many attorneys who handle sensitive cross-border deals say the changes may prove largely symbolic because Cfius already has broad authority to examine sensitive takeovers and investments of any size.

The change also reflects the growing political salience of state-owned funds in the US.