A little over a week ago, Magnachip Semiconductor was notified by the US Treasury Department that it had identified national security risks in the Delaware chip company's proposed US$1.4 billion sale to Chinese private equity firm Wise Road Capital. Soon after, the department would recommend US President Joe Biden block the deal.

This new focus on "non-notified transactions" illustrates how comprehensively the US is trying to limit China's opportunities to obtain Americans' personal data and intellectual property.

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The spotlight on these mergers added to other measures - the Treasury Department's blacklist of Chinese companies that allegedly have ties to China's military and the Commerce Department's export control regulation - that prohibit American capital from investing in Chinese firms and restrict sensitive technologies from being sold to China.

Even before this heightened examination, the sharp focus the US put on Chinese acquisitions during the Trump administration had already depressed deal activity to a fraction of its 2016 peak. The new effort signals the business and financial decoupling of the world's two largest economies that is unlikely to roll back under President Joe Biden.

Last year, the regulatory gatekeeper - the Committee on Foreign Investments in the United States (CFIUS), an inter-agency body led by the Treasury Department that scrutinises the national security implications of cross-border deals - sifted through hundreds of non-notified transactions and identified 117 for potential review.

For context, Chinese buyers completed 107 transactions in the US since 2017, according to PitchBook, a deal data provider. All the deals done in the past five years would have been put on possible review.

CFIUS does not disclose specific deals under review and relies on classified information to make its decisions. But at a recent briefing by the Treasury Department, lawyers representing cross-border acquisitions said, the committee called in twice as many non-notified transactions as in 2018 and 2019 combined, and is on pace for a 50 per cent increase in 2021.

A Treasury Department spokeswoman declined to comment.

These foreign-merger reviews do not single out Chinese acquisitions; the regulations do not mention China by name. But for the most part, the ones being reviewed are Chinese investors, according to a CFIUS lawyer, who asked to remain anonymous because the client work is private.

"It is consistent with the narrative that we have been hearing, staffing up and budgeting up the group to look for transactions of interest - even if it means going into the past," the lawyer said.

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"The concern with China, which has been well publicised by the Biden administration, is still very much front and centre," the lawyer added.

CFIUS has always had the authority to probe deals that are already completed or that the committee had not been previously aware of. But such reviews were very rare - until recently.

Ever since the first Bush administration blocked an acquisition by the China National Aero-Technology Import & Export Company (CATIC) in 1990, the number of revoked Chinese deals stayed extremely low until the last decade, when the US began to address China's use of mergers and acquisitions to obtain intellectual property and trade secrets.

But it was President Donald Trump who kicked investigations of non-notified deals into high gear. In its 46-year history, CFIUS has only blocked fewer than 10 deals that had not been submitted to the agency for review. Four were revoked during the Trump administration.

Then-US president Donald Trump accelerated the push for CFIUS to review - and block - Chinese acquisitions of American businesses that might pose national security threats. Photo: AFP alt=Then-US president Donald Trump accelerated the push for CFIUS to review - and block - Chinese acquisitions of American businesses that might pose national security threats. Photo: AFP

The Foreign Investment Risk Review Modernization Act (FIRRMA) was passed in August 2018, expanding the kinds of transactions subject to CFIUS review, including real estate purchases in sensitive locations.

That week, the Trump administration ordered Chinese conglomerate HNA to sell its US headquarters in midtown Manhattan because, officials said, its proximity to Trump Tower posed a security concern.

In 2019, CFIUS directed Beijing Kunlun Tech to divest Grindr, a gay dating app it had bought a year earlier, saying that sensitive personal information by military personnel who frequented the site could be used by China to compromise US national security.

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Last August, Trump signed an executive order to require Chinese company ByteDance to divest its TikTok video-sharing app over data concerns. The ultra-popular app was formed after ByteDance's 2017 US$1 billion acquisition of the US video app Musical.ly.

President Biden dropped Trump's threat to ban TikTok in the US, but the security review of the Musical.ly acquisition is continuing. If the committee concludes that TikTok remains a security danger because it is obliged to answer to Beijing, the deal can still be unwound.

ByteDance, the video-sharing app TikTok's parent company, may still face the unwinding of a 2017 deal for Musical.ly. Photo: AP alt=ByteDance, the video-sharing app TikTok's parent company, may still face the unwinding of a 2017 deal for Musical.ly. Photo: AP

Mario Mancuso, head of CFIUS and national security practice at Kirkland Ellis, said that the inspection of non-notified deals was only growing. The rise is driven less by who is in the White House, and more by the strategic competition the US confronts in China, he added.

Mancuso said that the 117 non-notified deals identified by CFIUS last year were probably a much smaller subset of the transactions the staff actually looked at. "They represented just those deals that looked sufficiently interesting to warrant an outreach," Mancuso said, adding that "many more" are likely to be reviewed annually.

The drive to investigate non-notified transactions came partly because investors weren't filing as often as regulators had hoped.

"People recognised that one way you could potentially get around CFIUS was just to hide," said Tyler McGaughey, a former committee official now heading up the CFIUS practice at Winston & Strawn in Washington. "So some of the most risky transactions weren't being filed."

"Up until FIRRMA, the non-notified team was not a separate team, so people were looking for transactions on an ad hoc basis," said McGaughey, who was a senior official on the CFIUS team at the Treasury Department until January.

The steps in a CFIUS foreign investment national security review. Photo: Congressional Research Service alt=The steps in a CFIUS foreign investment national security review. Photo: Congressional Research Service

Since FIRRMA provided the committee with a bigger budget, it rejiggered the team, made new hires and procured more resources. The team was divided into three units, one of those a new set of investigators dedicated exclusively to non-notified transactions.

The team looked for foreign transactions through commercial databases, news articles, bankruptcy filings, among other sources, searching for transactions that had not been submitted for a CFIUS review. Recently, the Treasury Department also set up a mailbox to receive tips from the public.

"It's been an incredibly significant structural change that is designed to be more aggressive," said McGaughey. "Those case officers aren't doing the normal case review, so they have more freedom in time and flexibility to actually go look for non-notified transactions."

McGaughey said that about 10 people are dedicated to non-notified transactions now and that the number continues to grow. Overall, the number of staff has at least tripled since 2018.

The added resources freed CFIUS to look into more deals. Sometimes, it means reaching back years.

Businesses that accumulate US personal data - from Social Security numbers to lifestyle information - are the focus, especially the ones completed years ago.

Since Biden took office, data security has become an even more urgent issue as the US, China and Europe all scramble to draft laws on the topic. As tensions escalate and competition intensifies, China will remain a primary focus for CFIUS.

"We know that CFIUS has contacted companies for investments that were completed almost a decade ago," said Kirkland's Mancuso. "CFIUS is methodically turning over stones to try to assess which non-notified deals should now be reviewed."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.