oversight

National Security Review of Two Foreign Acquisitions in the Semiconductor Sector

Published by the Government Accountability Office on 1990-06-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                                      6   WlAlCt:




GAO                    Testimony




- . 32iease     on          National   Security    Review of Two
T-,
I     _-


-5-A -*lery Expected        Foreign  Acquisitions      in the
a: 3:jC a.m. EDT            Semiconductor     Sector
;U'e:! ce s day
Z:ne 13, 1990




                          Statement     of
                          Allan     I. Mendelowitz
                          Director,     International                Trade,         Energy,    and
                             Finance    Issues
                         Before the
                         Subcommittee   on Commerce, Consumer
                           Protection  and Competitiveness
                         House Committee on Energy and Commerce
                         House of Representatives

                                                   .




GAO/T-NSIA3-90-47
                                                                                          GAO Pono 160 (12/W)
Mr. Chairman          and Members of the Subcommittee:


I am pleased          to testify         today     before       this         Subcommittee.             At your
request,       we examined the review                  process         of the Committee                on Foreign
Investment       in the United            States       (CFIUS) for                 two foreign
investments.1              Also,      as requested,          we are providing                   comments on
provisions       in proposed            legislation          relating              to GAO access to
certain      kinds     of government             data on foreign                   investment.


For the two acquisitions                   involving         the semiconductor                   industry,        we
sought     to clarify              why CFIUS proceeded               with     the 45-day
investigation          stage         in one case,          as provided              for     in the Exon-Florio
Amendment to the Defense Production                           Act,          but,     for     the later       case,
ended its       consideration            after     the initial               300day period.               The two
investments          are     (1) the acquisition              of Monsanto's                  silicon      division
by Huels,       AG, of West Germany, which                      CFIUS investigated                     in early
1989 (but       the President            decided       not to intervene)                     and (2) the
proposed       acquisition            of Union Carbide               Chemicals             and Plastics
Company (UCcXP) by Komatsu Electronic                                Metals         Company (KEM) of
Japan,     which      CFIUS considered             in March and April                       1990 but did not
investigate.




kFIUS agencies are the Departments of Treasury (chair),        State,
Commerce, and Defense, the U.S. Trade Representative,      the Council
of Economic Advisors,  the Attorney  General, and the Director      of the
Office of Management and Budget.    Other agencies participate,       as
appropriate.
                                                       1
    These two acquisitions                  involve          U.S.      fims      that     produce          the most
    basic     elements        in the       "food      chain"         of component suppliers                        to the
    semiconductor         industry          and uitimately               to defense          electronics
    systems.        UCC&P is unique                as the technological                   leader          in producing
    ultra-high-purity                polysilicon,             which DOD anticipates                  it         will      use in
    missile      guidance           systems,        infrared         sensors,       and electrically
    powered drives            for     submarines.              Monsanto's         silicon         division              was the
    last    major     U.S. merchant               producer          of silicon          wafers.           Although            it
    was not a supplier                directly        to the Defense Department,                           it      was to be
    a key supplier            to Sematech,            the U.S. business-government                                consortium
    supported        by Congress           to strengthen               manufacturing             technology               in the
    U.S.      semiconductor           industry.


    In the case of Huels'                  acquisition              of Monsanto,          we found that                   CFIUS'
    decision        to investigate             was based on the fact                     that,     at the end of
    the initial         300day consideration                       period,    some CFIUS agencies                         had
    questions        or concerns           that      still         needed to be fully              examined
.
    according        to the Exon-Florio                 Amendment's           requirements.                     This
    acquisition         was the first               CFIUS case to proceed                   to the 450day
    investigation         phase.           In the UCC&P-Komatsu case,                        the Department                        of
    Defense       (DOD) position            that      U.S.         laws are adequate              to assure
    continued        supply         was pivotal          to the CFIUS decision                    to end the case
    at the conclusion                of the 30-day period.


    We note that         both        cases raise             broader     questions          regarding              the
    preservation         of U.S. technological                       capabilities           in sectors                 critical

                                                               2
to   national           security,      and that         these     questions     need to be addressed
at a higher             policy-making           level    and in a broader           context     than the
case-by-case             approach      afforded         by CFIUS.


EXON-FLORIO AMENDMENT
                    REOUIREMENTS


AS   you know, the 1988 Exon-Florio                            Amendment to the Defense
Production            Act gave the President                   new authority     to investigate            and
block       or suspend foreign                 investments        that   threaten     to impair
national          security.          Although       the amendment did not define                  "national
security,"             Congress did note            in the accompanying             conference         report
that      this        phrase    is to be interpreted                broadly    and without
 lim itation           to particular           industries.


The President's                authority        to block        an investment       is more narrowly
 defined.             To exercise       this     authority,         the President         must find       that
 (1) credible             evidence      exists      that       the foreign     interest       m ight take
 action        that     threatens       to impair          U.S. security       and (2) provisions                of
 law,     other        than the International                  Emergency Economic Powers Act,                    do
 not provide            adequate       authority        to protect       the national         security.


 The amendment specifies                   the maximum time periods                 for     each stage of
 the review            process,      allowing       30 days to determine             whether      to
 initiate         an investigation,               45 days to complete           an investigation,
 and a final            15 days for        the President            to act.     Virtually       ill     CFIUS



                                                           3
cases now are initiated                    when parties              to foreign      investment
transactions           notify      the Treasury           Department.


AS of early          June,       1990,     10 proposed              foreign     investments          have been
selected          as warranting           the 45-day          investigation          stage,     out of a
total      of about         375 investments             considered            by CFIUS under the Exon-
Florio      Amendment.            Of     the 7 investigations                  completed      so far,       the
President.decided                to block       one by ordering                a Chinese      firm     to
divest      its     interest        in a U.S.         aircraft         parts     manufacturer.              In 2
of the 7 completed                investigations,              the proposed          foreign         investments
were withdrawn.


CRITERIA FOR INITIATING                    THE INVESTIGATION PHASE


The amendment did not specify                         what criteria             are to be used in
deciding          whether       to initiate          an investigation,              nor are these
criteria          specified       in the proposed                regulations.         These regulations
were published              by CFIUS in July             1989 but have not yet been made
final.        CFIUS participants                state        that     each proposed        foreign
investment          is considered             individually,             on a case-by-case             basis,
without       defined         criteria        but in light            of the amendment's              explicitly
required          Presidential           findings.


In general,           the move to initiate                   the 450day investigation                  period
is not to be interpreted                      as prejudging             the case;     it   is normally
characterized            as a further           step     in the fact-finding               process,         which

                                                         4
may be needed when important                   questions          remain        unanswered             at the end
of the initial          300day consideration                  period.


The Exon-Florio          Amendment does not specify                       how many CFIUS member
agencies     are needed to support                the initiation                of an investigation.
However,     under      CFIUS' present           operating         rule        for      initiating
investigations,          a minimum of three               agencies            is needed.              According
to Treasury,        when two agencies             request         an investigation,                    Treasury
or the U.S.        Trade Representative                Will     normally             join     as the needed
third    party.


Treasury,       Commerce, and Defense officials                         also         noted     that
initiating        an investigation            can have costs              in terms            of potential
business     effects          and demands on the President's                          time,     in addition
to the direct          costs      of an investigation.                  Of course,             CFIUS
investigations          may also         have implications              fc:          :e U.S.'         overall
relationships          with      other    countries.           We note that                 the UCC&P/Xomatsu
case was being          discussed         the same week that                  the United          States        and
Japan were involved               in intensive         talks      under the Structural
Impediments        Initiative.            These talks          included         a,discussion              of the
U.S commitment          to maintaining           an open U.S.             investment            climate.


3g
ISSUES RE T


The two investment               cases we were requested                  to examine illustrate
the manner in which               CFIUS considers             the three         key elements:              the

                                                   5
link      to national          security;              credible       evidence        of a possible            threat
to U.S.         security;           and the adequacy of other                       laws to protect
national         security.            We note that                the types        of issues      presented          in
,these     cases have also                  arisen       in other       CFIUS cases.


Link      to National          Security


Komatsu's             acquisition           of    UCCCP required           evaluating           the     importance
of ultra-high-purity                       polysilicon            to national        security.             During    the
initial         300day period,                certain        questions        about this         link       were
raised         that       did not have clear                 answers,      namely


          --     what future               military       and commercial             applications            are
                 possible           for     ultra-high-purity              polysilicon;


          --     to what extent                  VT      ultra-high-purity              polysilicon
                 technology               be central         to U.S.      firms'      ability         to
                 participate               in future         generations           of microelectronics,
                  i.e.,      to what extent               will      ultra-high-purity             polysilicon
                  be a technology                 dri.vert


          --      to what extent                 is UCC&P's technology                still      a product          of a
                  Komatsu license                 for    the original           process       and what
                  technology              is unique       to UCC&P; and




                                                              6
         --      to what extent                     Komatsu would be gaining                      access         to
                 technology                 it    did not already              have?


Ultra        high-purity               polysilicon,             the fundamental                material          for     several
technologies              included               on the Defense              Department's          Critical
Technologies              List,         is an essential                material          for    use in the
Strategic         Defense              Initiative             and other        weapon systems.                   Although
DOD did not have an immediate                                  need for         such polysilicon,                  it
anticipated              its     use in semiconductors                        used in high          power switchink                  '
devices         and more sensitive                      infrared            detector      materials.               CFIUS
agencies         recognized                 UCC&P as the U.S.                 firm      capable         of producing           the
highest         purity          polysilicon.                  UCC&P had completed                 two contracts               for
DOD but had no current                             DOD contracts.               One other         U.S.      firm        had bean
awarded a DOD contract                             to produce         ultra-high-purity                  polysilicon,
but     it    failed           to meet the specification                         with     regard         to phosphorus




Although         commercial                 applications             for     ultra-high-purity                  polysilicon
were unknown,                  their        future      importance            was not ruled              out.


CFIUS members knew that                             UCC&P had originally                  licensed          technology
from Komatsu but UCCSIPalso had a patent                                             pending      for     major         changes
it    had made to that                      technology,          which Komatsu would gain                          through
the acquisition.                       It        was not clear             whether      CFIUS agencies
independently                  verified            how the technology                  involved         in the pending
patent         related          to U.S.            security      interests;             one CFIUS member

                                                                 7
stated     that     Komatsu,may                 already      possess         in Japan the technology
covered      by the pending                 patent.


Credible       Evidence


The requirement              of the Exon-Florio                  Amendment for               llcredfble
evidence"         of a threat              by the foreign             investor            to take     action         that
might      impair        U.S.      security         implicitly           calls      for     an examination                of
the past       behavior            of the acquiring.firm.                        In the o'ne case in which
the President             moved to compel divestiture                            of a completed
acquisition,             confidential             information            regarding          past     activities             of
a foreign         firm     of a Communist country                        was cited          as "credible
evidence."          In cases involving                      allied       countries,          it     is inherently
more difficult              for        a CFIUS agency to argue that                         the foreign            firm
may threaten             national          security.


In the Union Carbide                     case,      questions         arose       regarding          allegations
that     Komatsu had engaged in anticompetitive                                     behavior,         to the
detriment         of U.S.          firms.          In October         1988, UCCCP filed                 a legal
action      alleging            that     Komatsu and six              other       Japanese          firms     had
formed a buyers'                  cartel        (the High Purity              Silicon        Issues         Study
Group) as early                 as 1983 to manipulate                    world      polysilicon             prices        to
lock     non-Japanese              competitors             out of the market                for    high-purity
polysilicon.              While         not all       working        level       staff      were aware of the
allegations          in this            legal      case,     officials           at the Justice
Department,          Commerce, and the U.S. Trade Representative                                            were

                                                             8
familiar        with      the UCC&P complaint.                    Indeed,       UCC&P representatives
had met with             the Under Secretary               of     Commerce for            International
Trade in August              1989 to discuss              (1) how the Study Group sponsored
by Japan's         Ministry         of International               Trade and Industry                 acted       to
transform         the Japanese           industry         to the detriment                of U.S.         commerce
and (2) the possibility                      of raising         this      in the Structural
Impediments            Initiative        talks.         However,          officials        at the Justice
Department,            Commerce, and the U.S. Trade Representative                                    told       us
that     they     did no analysis              of the lawsuit              in the context             of the
Exon-Florio            Amendment.            Exploration          of this       allegation           as behavior
related         to the credible              evidence         criterion       was not considered
relevant,         and no other           agencies         requested          that      either       the
Department          of Justice          or the U.S. Trade Representative                             provide
cFIUS members with                  background        and analysis             of the UCCCP
allegations            of anticompetitive               behavior          by Komatsu and the other
Japanese         polysilicon           producers.             CFIUS members accepted,                     without
independently             verifying,          the information              provided        by Komatsu and
ucC&P related             to Komatsu's            participation             in the study            group.        The
terms      of the acquisition                 of UCC&P by Komatsu are to include                                the
termination            of the legal           case.


Questions         had also          arisen     regarding          Komatsufs           willingness          to
provide         timely      supplies         to U.S.      firms        and to DOD. Apparently,                        at
least      one U.S.         firm     had experienced              previous          problems        in obtaining
timely      supplies          from some Japanese                 firms.



                                                          9
Adecuacv of Other               Laws

                                                                                 .
The principal          concern         expressed          in the UCC&P case was assurity                             of
supply      to DOD, and so discussion                         of the adequacy                 of U.S.      laws
focused       on the Defense             Production            Act.          Under this         act,     the U.S.
government       can compel any U.S. -based                           firm     to supply         defense
contractors          before      other     customers.                 If     a foreign-owned,             U.S.-based
firm     were to withhold              or delay          supplies            to defense         contractors,           the
act can,be       used to compel supply.                         However,             other     questions       were          *
raised       about    the ability          of the act to protect                         against        a foreign-
owned firm's          decision         to close          down a U.S.            factory         or to change the
firm's      product      line     or research             direction.


AGENCY POSITIONS ON THE UNION CARBIDE CASE


On April       3, 1990, CFIUS agencies                        met at the Assistant                     Secretary
level       to discuss        whether      to initiate                an investigation.                  CFIUS
member agencies           looked         to DOD to take                    the lead      in raising         national
security       concerns         about proposed                foreign         investments.              DOD and
commerce staff           attending         this     meeting                had expected         the DOD
Assistant       Secretary         to request             an investigation                    because three         DOD
units       had advocated         in discussion                papers         that     an investigation              be
initiated       to answer several                 questions.


The DOD Assistant               Secretary         told        us that         he did not have strong
views       on the need for            an investigation                     of the proposed             Komatsu

                                                         10
investment        and that          he stated       this       at the CFIUS meeting.                           He had
accepted      that    ultra-high-purity                 polysilicon              was of national
security       interest,        and that         continued            supply      to DOD needed to be
assured.         In his      view,         the case presented               a choice            between two
alternatives--        Union Carbide's               closing           down its          operations             in high
purity      polysilicon         production          or Union Carbide's                        acquisition            by
Komatsu.         He stated          that     acquisition            of UCC&P by Komatsu would be
preferable        to having          Union Carbide            discontinue               its     polysilicon
production.                                                                                      .


The Commerce Assistant                     Secretary        told     us he raised               the issue            of
assured      supply        (1) in the case that                    the Komatsu-owned                   UCCfP
facility       remained       in the United             States         and (2) in the case that                            the
UCCCP facility             was either         closed        down or moved offshore.                            Regarding
the first        case,      the DOD Assistant                Secretary           told         us that        the
Defense Production                 Act would be adequate                   to assure            continued            and
timely      supply,        since     the production                facilities           are located             in the
United      States.         Regarding         the second case,                  he noted             that,     for    sound
business       reasons,        it    was unlikely            that      Komatsu would close                      the
UCCtP facility.              The DOD Assistant                 Secretary          further             stated       that,
if   Komatsu closed           the U.S.          facility,           the 1983 Mutual                   Defense
Assistance        Agreement          between the United                  States         and Japan would
enable      the U.S. government                 to enlist           the aid of the government                             of
Japan to compel Komatsu to supply                            U.S. military               needs.




                                                       11
We asked the DOD Assistant                      Secretary          to explain          his         basis      for
concluding         that       the Defense            Production          Act is adequate                   to assure
supply        from the proposed               Komatsu-owned              UCC&P facility.                    He cited
the authorities               provided        in the act,          noting      that      the act             "provides
the President             with     broad powers including                    authority             to require
priority        performance              of contracts,         to allocate            materials              and
facilities,          and to enter             into     arrangements           to guarantee                  sources         of
supply        essential          to national          defense."           However,       he        also      noted that
it   is the Commerce Department                        that    is responsible                for          implementing
these      broad     authorities.


When DOD did not recommend an investigation,                                     the Commerce
Department          agreed to end the case at the conclusion                                       of the         initial
30-day period.                Once DOD had stated                 that     the Defense               Production             Act
was adequate           to assure           a continued         supply,        no CFIUS agencies                      raised
questions          and this        key     element       of the CFIUS process                      was      not
developed          further.         Neither          the importance           of ultra-high-purity
polysilicon           as a technology                driver,      nor the importance                       of the
allegations           about KomatsuVs anticompetitive                          behavior              were discussed
at the April           3, 1990, CFIUS meeting.                       CFIUS members told                      us that
those      matters        either         had been dealt           with      at the working                  level      or
had not been raised.




                                                          12
COMPARISONWITH MONSANTOCASE


In late      1988 CFIUS began consideration                      of the West German firm
Huels'      proposed      acquisition         of Monsanto's          silicon         wafer     division.
At the end of the initial                  300day period,           CFIUS decided             to initiate
an investigation           in order        to examine further               and resolve         the
questions      raised       in the case.



                  l


National      Securitv       Link


In this      case,      the link     to national         security          was somewhat indirect.
Monsanto was not a direct                  supplier      to DOD, but           it    was to be a key
supplier      to the newly created              business         consortium          Sematech,        which
Congress      had authorized            in 1987 to promote            the U.S.'         ability        to
manufacture           advanced technology             semiconductors.               Because other           U.S.
firms      produced      silicon     wafers     for     their     own internal          use (as
tgcaptivelg    producers),          the uniqueness          of Monsanto's             wafer
technology       also     needed to be established.


Credible      Evidence


CFIUS members found no credible                       evidence      that     Huels,     as the
acquiring       firm,     might     take    action      threatening          U.S.     security.         In
addition,      West Germany, as Huels'                  parent      country,         is a military
ally.       The case did raise             questions       about what could             be cited        as

                                                  13
credible      evidence         regarding        the future           intentions             and behavior        of
foreign      investors         from allied          countries.             Once a foreign             investment
case becomes public,               it    can be awkward for                 an agency to argue that
the foreign         fim'S       intentions          are    malevolent,           in terms        of
l!threateningl*        national         security,         particularly           if     the    foreign     firm
makes a formal              statement      of its      intentions           to maintain          U;S.
operations.          Huels,       in fact,       provided           a letter          assuring     CFIUS that
it   intended       to maintain          Monsanto's          operations,              was committed        to the
U.S. market,          and planned          to invest         $50 million              for    research     and
capital       improvements.


A senior       CFIUS official            told     us that        such letters               of assurance        have
no legal       standing        and that         CFIUS does not have the means to follow
up or enforce           them.      The Treasury            Department,           which chairs            the
CFIUS, prefers              not to request          such assurances              because they may be
regarded       as a type         of performance            requirement            inconsistent           with
principles         advocated       by the U.S. government                      at the General
Agreement       on Tariffs         and Trade.


Provisions         of Laws


Regarding       the requirement              to prove        that        laws other          than the
International           Emergency Economic Powers Act do not provide                                     adequate
authority         to protect       the national            security,           the Monsanto case had
no such finding.



                                                     14
The Union Carbide                   and Monsanto cases highlight                              an apparent
inconsistency               in U.S. defense                  technology          policy        which has arisen                in
other     CFIUS cases.                    On the one hand,               the U.S. government                 has
established           a national                goal,     through        Sematech,            of developing          U.S.
capabilities             in the semiconductor                        materials       and equipment            sector
and has supported                   it     with      DOD funds.           On the other             hand,     some U.S.
companies         with       the most advanced                      semiconductor             technologies          have
been acquired               by competing                foreign       firms      Without        the U.S.
government          objecting.


CFIUS'       case-by-case                 approach           does highlight          certain        foreign
investment          issues,              but    it    is focused         on developing             information            to
meet the Exon-Florio                       Amendment's              specific      requirements.              Although
particular          cases          may not individually                    present        a    threat      to national
security,         the overall                  decline        of U.S. commercial                competitiveness                in
some sectors             that       are key to defense                   technology            leadership          does
raise     broader           concerns            about preserving               the U.S.-owned              production
base.


An additional               limitation               of the CFIUS process                 is its        reactive
nature.         By the time                some foreign              acquisitions             come to government
attention,          there          may be no other                  way to maintain             production          in the
United       States         if     the U.S.           firm     wants to discontinue                 operations            and
no U.S. buyers                   show interest.                Although        foreign         investments          can

                                                               15
bring      new capital              and technology             to U.S.-based            production
facilities,               foreign     control      means that              decisions        affecting
research,            product        choice,     and plant          modernization             can be made
abroad.


The Exon-Florio                Amendment Serves as a                     Useful      tool    for      a narrow
range of circumstances.                        As we have noted                   in our report         on national
security            concerns        about     foreign         investmentl,           however,         CFIUS cannot
be expected               to provide        answers to the more complex                       questions
arising            out of individual            cases.          These questions              include      (1) how
much of the defense                   industrial         base has been acquired                     by foreign-
owned firms,                (2) which       industry          sectors,        technologies,            or types   of
firms,        if     any,    should      be preserved             for     U.S. ownership,              (3) why some
U.S.      companies          have found it             desirable          to discontinue            operations        in
certain            high    technology         sectors,         or (4) how to assess                 the direction
and effects               of technology         transfers          accompanying             foreign
acquisitions.


These questions                need to be addressed                 at a higher             policy-making
level      and in a broader                 context      than the case-by-case                     approach
presently            afforded       by CFIUS.




*Foreisn Investment:  Analyzing                          National          Securitv         Concerns,
GAO/NSIAD-90-94, Mar.  29,  1990.

                                                         16
COMMl?NTSON H.R. 4520, THE FOREIGN INVESTMENT POLICY IMPROQMENTS




As requested,            we are providing              comments on H.R. 4520, the Foreign
Investment        Policy         Improvements          Act,         introduced      by Congressman
Sharp,     to improve            the quality          of data on foreign               direct       investment
in the United            States.          My comments on the bill                   are primarily          on
those     provisions            which     relate      to GAO.


We believe        that     GAO access to foreign                      direct      investment       data would
be consistent            with     GAO's mission              and appropriate           and beneficial           to
legislative        branch         oversight          in this         area.       The legislative          branch
needs to be fully                informed       about the nature,                 extent,       and effects         of
foreign       direct      investment           in the United             States.       Providing          GAO
access to these            data would allow                  it     to perform       such evaluations            for
the Congress            and to assess the adequacy of federal                                government       data
on foreign        investment.


We believe,            however,         that   the bill           is restrictive            in limiting       the
purposes       and times           for    which GAO shall              have access           to agency
information.             Section         8 provides          that     GAO shall       have access to
agency information,                 the disclosure                of which       is otherwise
restricted,            Ifto the extent             necessary         to issue      the reports        required
by sections            3 and 4...."            The GAO reports,                 to the Chairman and Vice
Chairman of the Joint                    Economic Committee,                   would analyze       and
recommend changes in annual                         reports         on foreign      direct       investment

                                                        17
issued       by the Secretary                     of    Commerce          as well       as make recommendation9
for    improving          executive               branch        policy        coordination            and data
collection        and reporting.


By limiting         GAO's access                   to this           narrow       purpose,          GAO will      continue
to be handicapped               by a lack                 of    access to detailed                   Bureau of
Economic Analysis                  (BBA) and Census data to carry                                   out work for           other
congressional             committees               that        have important            responsibilities
relative       to foreign            direct             investment.               Further,          section      4 provides
for    GAO    access       only      with          respect           to the first            five     annual      Commerce
reports       unless       later       reports             are requested              by the Joint             Economic
Committee.          Thus,       the new GAO access might                              terminate          or become
intermittent           after       five       years.              GAO believes           that        the new access
authority        should        be permanent                    and should          not be limited              to that
needed to issue             the annual                  reports          required       by the bill.


We note that           GAO has in place                        strict      and rigorous              programs         to
maintain       the security-and                        confidentiality              of information               consistent
with     originating           agency requirements.                            Confidential            data      is
safeguarded         by the procedures                          for      gaining     access,          handling,         and
enforcing        regulations                for        unauthorized           disclosure:             and access           is
restricted        on a need-to-know                        basis.


GAO conducts           many       reviews              of agency programs                that        necessitate
access to confidential,                       proprietary,                 sensitive,           and in many cases,
highly       classified           information.                    We routinely           have access to

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national          security      information       of     the utmost           sensitivity.            We also
routinely          have access        to proprietary           information             more similar           in
nature      to the foreign            direct     investment           data,      such as that          acquired
by federal          bank authorities            in regulating           bank activities.


GAO has access               to Internal       Revenue Service            tax data,           including
files      that      show names and social               security       numbers.             There are
occasions          when GAO or IRS may prefer                  that     GAO receive            sanitized
data,      with      names and social           security       numbers removed:                but this        is
not a rule.             GAO has access to IRS tax data pursuant                               to two
provisions           of law:        31 U.S.C.     713, which           authorizes            audits    of the
IRS, and Section               6103(f)(4)(A)           and (i)(7)       of the Internal               Revenue
Code, which            authorizes      the IRS to disclose                tax     returns        and tax
return       information          to designated          GAO   officers          and employees.               GAO
does not have access to some IRS information,                                    such as the formula
used to       derive         the Discriminant           Function       scores       for      tax returns,
which IRS uses to judge whether a tax return                                   should        be audited,           and
  .
certain law enforcement information.


We also       note that          the annual      Commerce report               proposed        in H.R. 4520
could       be useful         to identify       investment          trends       and effects,           by
 industry         sectors       or subsectors,          on a timely           basis.         Such
 information           may be more useful              and timely        than the BEA data,                  which
 is highly          aggregated       and sometimes dated due to the time                              needed to
 verify      and compile          the data.



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This   concludes   my statement.   I would be happy to try   to answer any
questions    you may have.




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