Update on Outbound Investment Screening: Current Developments in the EU and US

1. Introduction 

Since the European Commission added the regulation of Outbound Investments onto its 2023 Working Program in fall 2022 and President Biden signed the Executive order to restrict Outbound Investments by US- persons in summer 2023, a lot has happened in regard of Outbound Screening. While a potential Outbound Screening mechanism was first discussed as a tool to navigate geopolitical questions in an increasingly competitive environment, the scope and thereby the connection of Investment screening and other legislation restricting the export of critical technologies has changed.  

This post will give an update of the proposed legislation in the EU, take a look at the most recent developments in the United States and will finish with an outlook in the near future.  

2. The process of legislation in the EU 

Ursula von der Leyen advised her vice President Valdis Dombrovski in 2019 to develop a new Foreign Direct Investment Screening tool during his five-year turn.1 While this task most likely only referenced the now updated Screening-Directive, at least in 2022 the European Commission identified an Outbound- Investment-Screening as a potential additional tool to strengthen the strategic export control regime.2 

In the 2023 Economy-Security Strategy, the European Commission identified the leaking of technology and know-how as a relevant factor in regard of economic and national security.3 The Commission named advanced semi-conductors, quantum-technology and artificial intelligence as relevant sectors in this context. As part of further assessment, an expert group on the European level was established. During the first meeting in September 2023, the European Commission communicated its openness to a targeted and precise approach, but also to a wider scope, taking geopolitical dimensions into consideration.4 In the Commission’s Recommendations on critical technology areas especially relevant to the economic security, the need for further risk assessment was clearly identified.5 As part of the recommendation the EU updated its list of especially relevant technologies, now containing semi-conductors, quantum-technology, artificial intelligence and biotechnology.  

On January 24th of 2024, the Commission launched its Economic Security Package.6 Besides a proposal for an updated FDI-Screening Regulation and an update for the Dual-Use- Directive, the Commission announced, that a lack of data in regard of Outbound-Investments hinders a regulation for the moment. A White Paper on Outbound-Investments published as part of the Economic Security Package laid down the time frame for a potential regulation.7 After a phase of public consultation, a one-year phase of data collection by the member states will follow. After the data has been collected the Commission will evaluate the need of an additional tool in summer 2025 and potentially propose regulation in fall 2025. Since then, the Public Consultation was completed with a summary report and the expert group met continuously.  

3. Past and current developments in the USA

3.1 Past Developments

In US-Legislation Outbound Investments have been addressed in numerous approaches, such as the National Critical Capabilities Defense Act (NCCDA)8 or as an amendment to the National Defense Authorization Act for the Fiscal Year 2024 (NDAA)9. However, none of these approaches actually became law yet. Both approaches have the common goal of establishing a screening mechanism for outbound investments, as it already exists for inbound investments under the CFIUS regime. Also, the scope of the NCCDA proposal as it passed the house of representatives included a broad definition of technologies to be covered, reflecting its objection to serve national interest overall, rather than strictly addressing security issues.10 As President Biden declared a national emergency on August 9th 2023 in regard of the advancements by countries of concern in the areas of sensitive technologies and military and issued an executive order in regard of Outbound-Investments, the future of the NCCDA is uncertain. That the NCCDA will become law any time soon is unlikely as the process of legislation is still in an early stage.11  

3.2 The Executive Order from August 9th 202312

President Biden exercised his powers under the Constitution and the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act (NEA) to issue a presidential order restricting Outbound-Investments. The order was accompanied by an advanced notice of rulemaking from the Treasury Department13 and a fact sheet14 providing guidance to interpret the executive order. The scope of the executive order covers technologies with a special relevance to military and intelligence operation of countries of concerns, setting a focus on national security interests. By restricting US-Investments in certain technologies in countries of concern commercial and intangible benefits of such investments are to be prevented. Covered are products in the semiconductors and microelectronics, quantum information technologies and artificial intelligence systems with a relevance for military, surveillance or intelligence proposes. Transactions that fall under these categories may either be prohibited or subject to notification obligations.  

While the Executive Order sets direct restrictions for the named kind of investments, the key terms are not fully defined in the executive order or the fact sheet issued with the executive  order. Moreover, further legislation issued by the Department of Treasury will provide specific details to implement the order.  

3.3 Notice of proposed rulemaking July 5th 202415

The department of Treasury issued an advanced notice of rulemaking with the presidential order. As the advanced notice called for public consultation the later issued notice of rulemaking contained several changes and more detailed definitions. As of now the notice of rulemaking from July 5th is the most recent piece of regulation. However, the notice of rulemaking is still subject to public consultation and may see further changes.  

The Notice of Rulemaking states in its objectives that the Outbound-Order is to complement export-controls and inbound-investment screenings, but in differentiation will not establish a case by case review of covered transactions. Rather, US-persons will have to determine whether the Order is applicable or not as part of the due diligence process.  

The regulation identifies covered transactions that are either notifiable or prohibited. The regulation requires US-persons to notify the Department of Treasury if a US-person or its controlled foreign entity make a transaction that results in the establishment of a foreign covered person or engages in a covered activity. The obligation is dependend on whether a person had knowledge of the circumstances on the completion date. Nevertheless, if the US- person gets actual knowledge after the completion date, it still has to notify the Department of Treasury. Other kinds of investments are prohibited. In that case, US-persons are prohibited from engaging in such transaction or knowingly directing such transaction.  

The term covered transactions is further defined and covers all kinds of investments, such as the acquisition of equity, debt financing, the establishment of new covered person, entering a joint-venture or limited partner investments into private equity or venture capital funds (§ 850.210). Therefore, the regulation covers all kinds of investments including greenfield and portfolio investments. However, under § 850.501, exceptions are being made, mainly for transactions that are made in publicly traded securities or are not aimed at taking influence on business decisions. Also, transactions that affect a national interest can be exempted from the duties established by the regulation based on a case by case review form the Secretary of Treasury (§850.502). 

Which specific technologies in the sectors of semi-conductors and microelectronics, quantum computers and artificial intelligence are covered and qualify as prohibited (§850.224) or notifiable transactions (§ 850.217) is defined in detail in the proposed regulation. 

3.4 Conclusion 

The US follows its “small yard, high fence” approach in the proposed rule to implement the presidential order. Only a small number of specific technologies with a special importance to military, surveillance or intelligence activities are covered. Nevertheless, the range of covered activities, like the acquisition of equity, the establishment of debt or greenfield investments from US-persons or their controlled subsidies is very wide. Additionally financial services in those matters are often covered under the term “knowingly directing”.   

4. What can be expected from the EU Legislation? 

The developments until October 2024 show, that the EU is still working on an Outbound Screening Regulation. Until the data collection and evaluation phase will be completed in fall 2025, no specific action can be expected. However, the current developments in the USA and within the Member States allow for certain assumptions to be made.  

An Outbound Investment Screening mechanism will most likely follow the US approach and will be focused on specific technologies with special importance to military and surveillance technologies. The purpose of regulation will be set on preventing the enhancement of military and intelligence capabilities from other countries from the usage of such technologies. In regard of the scope, the mentioning of four specific technologies in the Commission’s Recommendations in October 2023 allows setting a focus on these areas.16 The goal of a potential Outbound Screening will therefore most likely be set on the prevention of the leakage of technology and know-how, more specifically in regard of advanced semi- conductors, quantum-computers, artificial intelligence and biotechnology.17  

This leaves room for speculation in regard of an overlap to the Dual-Use export control regime. The fact that the EU sees Outbound-Investments in close proximity to the Dual-Use export control regime was shown before.18 As the Commission stated in the White Paper on Outbound Investments, a new tool will only be installed if current tools are not sufficient to address the current developments in geopolitics in this regard. The Summary Report of the public consultation indicates that private actors are very aware of the risks of Outbound-Investments, but are skeptical as far as new regulation goes.19 Private Business fear an extra burden of bureaucracy caused by further legislation. As the Dual-Use Directive is up for an update, a closer look on the developments will help to estimate developments in the Outbound Control.20 Germany and other countries recently added technologies such as quantum computers on to their national review list.21 The similarities between both tools will increase further, if covered technologies tend to overlaps. However, as the US Regulation states controlling Outbound Investments serves a wider purpose than just preventing the leakage of capital and technology. Especially intangible advantages from foreign investors can hardly be addresses properly by the export-control regime. Therefore, a special regulation on Outbound- Investments in differentiation to an extensive reform of the Dual- Use- Directive still seems likely. 

5. Outlook

The EU is still in the process of developing a regulation. A proposal for rulemaking cannot be expected until fall 2025. Whether the EU will add an Outbound Screening on to their 2025 Working program, which can be expected shortly, will give further hints on whether a proposal is to be expected in the end of 2025 or not. As of now, it has become clear that Outbound Screenings are to be seen in close accordance to the export control legislation and will be constructed as a tool to serve the national security of the member states and not be focused on geostrategic interests of the European Union. The scope of an EU Outbound- Screening would most likely cover advanced semi-conductors, quantum computers, artificial intelligence and biotechnology. As the USA choose a different approach for Outbound Investments as for Inbound Investments speculations in regard of the screening mechanism are more open again.  

The appropriate interim conclusion should be, that Outbound-Regulations are still highly relevant in the context of investment- and export control regulation, but at least in Europe are still in a very early stage. Speculations in regard of concrete measures are to be taken extremely carefully.