The Investment Security Edition

On CFIUS, international investment flows, and why spies shouldn’t lose their briefcases

Ben Joseloff (BGJ) is a senior attorney at Cravath, Swaine & Moore LLP where he advises clients on the regulatory aspects of cross-border transactions. His prior experience includes stints in all three branches of the federal government, managing programs in Afghanistan, and bunking with Noah through college.

Ben here. The Bridgeport Projectile Company was organized in Connecticut in April 1915 to manufacture artillery shells. With World War I raging in Europe, the company planned to do a brisk business and placed large orders with leading U.S. munitions suppliers.

A modern photo of the Bridgeport projectile company exterior.

It all went fine for a few months, but things began to unravel when, on July 24, 1915, a German lawyer named Heinrich Albert had his briefcase stolen on the Sixth Avenue El in Manhattan.

This was no ordinary snatch and grab. The “thief” was a U.S. Secret Service agent named Frank Burke, and the contents of the briefcase, which quickly found their way into the hands of U.S. Treasury Secretary William McAdoo, revealed that Bridgeport Projectile wasn’t a defense contractor at all, but rather a secret plot of the German government. As Ernest Wittenberg wrote in American Heritage in 1965:

The plan for the Bridgeport Projectile Company, conceived by Heinrich Albert and Franz von Papen and approved by the German general staff, called for the sheer waste of tens of millions of dollars. Bridgeport Projectile was in business merely to keep America’s leading munitions producers too busy to fill genuine orders for the weapons the French and British so desperately needed. The false-front company had ordered five million pounds of gunpowder and two million shell cases with the intention of simply storing them.

The Bridgeport Projectile episode has been cited by U.S. policymakers as a cautionary tale, an early example of how foreign direct investment in the United States—that is, non-U.S. entities or individuals buying or investing in U.S. companies—can harm U.S. national security.

Why is this interesting?

Today, the U.S. government reviews the national security implications of certain foreign investment transactions through the Committee on Foreign Investment in the United States (CFIUS), an interagency body comprised of nine executive branch departments and offices and backed by the resources of the U.S. Intelligence Community.

CFIUS, which is often described in the media as “secretive” or a “black box” due to the classified nature of its work, has stepped into the spotlight in recent years as it reportedly upended a series of high-profile transactions, including foreign investments in semiconductor companies, healthcare, and ad-tech companies, a Fortune 500 wireless technology company, a company that makes software for hotels, TikTok, and even the dating app Grindr, among others.

In 2018, Congress overhauled the statute that authorizes CFIUS, increasing the committee’s resources and the types of cross-border deals that it can review. The bipartisan effort marked the most significant expansion of CFIUS in 30 years, but the body’s core mission remained unchanged: to ensure that foreign investment in the United States does not harm U.S. national security.

Now, some are saying that Congress should have gone further.

The latest debate in the investment security world is whether CFIUS, or maybe some other U.S. government body, should regulate not only inbound foreign investment, but also outbound foreign investment (i.e., overseas investments by U.S. businesses).

Some proponents of outbound investment screening argue that such screening is necessary to prevent the offshoring of U.S. critical capabilities and supply chains to foreign adversaries. Others say that any new screening mechanism should focus instead on limiting the flow of U.S. capital to foreign companies that could use the funds to develop sensitive technologies that may, one day, be used against the U.S. military. Opponents dismiss the idea as a classic regulatory overreach that would hobble U.S. companies trying to compete in China, the world’s second-largest economy.

With the attention of national security policymakers appropriately focused on more pressing matters in eastern Europe, resolution of the outbound investment screening debate may not come anytime soon. Directionally, however, the trend is clear. As economic statecraft increasingly becomes Washington’s preferred foreign policy tool, scrutiny of foreign investment, both inbound and outbound, is only likely to intensify.

In other words, Herr Albert would have a much more difficult go of it today—even if he managed to hold on to his briefcase. (BGJ)

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Thanks for reading,

Noah (NRB) & Colin (CJN) & Ben (BGJ)

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