New UK legislation addresses the need for FDI security

On the 11th of November, the UK government published its draft for the new National Security and Investment Bill (NSIB). The Bill introduces a new screening mechanism to assess the risks involved with foreign investments in the UK. The mechanism would institute a mandatory pre-screening for investments made in sensitive sectors. The NSIB is an expansion of the existing investment reviewing mechanism in its scope and powers of the UK.

The NSIB implements several concepts borrowed from the Committee on Foreign Investment in the United States (CFIUS) and investment mechanisms from EU member states. The Bill provides new powers for the UK government to screen potentially risky investments in the UK, and presents certain challenges that potential investors in the UK must consider.

The Bill establishes filing obligations for 17 sensitive sectors. This means that it becomes mandatory for the acquiring party to notify the government of the investment if the target entity is active in one of these sectors. Other investments are open to a voluntary filing regime, as well as a “call-in”. This will allow the government to review investments they were not notified of up to five years after closing. The Bill indicates that significant civil and criminal sanctions will follow in the case of non-compliance.

The legislation entered into force on 4^th of January 2022.

The 17 sectors include:

The Competition and Markets Authority (CMA) was previously in charge of investment screening. After the Bill was, this is no longer the case, because the responsibility of national security reviews will fall to the Department for Business, Energy & Industrial Strategy (BEIS). They will be in charge of the Investment Security Unit (ISU), who will be performing the security reviews.

Following notification by the acquirer, the ISU will have 30 working days to assess whether or not an investment should be subject to a national security screening. If the ISU decides that a screening is not necessary, the parties involved in the investment will be notified that the investment has been cleared.

For a national security assessment to take place, there must be reasonable suspicion that the investment could enable a national security risk. These risks are identified by the Statement of Policy Intent. The statement divides the level of risk in three categories: core areas, core activities and the wider economy. Core areas are headline sectors in which national security risks are most likely to arise. Entities in this sector often contribute to the country’s infrastructure and are active in advanced technology, military and dual-use technologies or direct suppliers to Government and the Emergency Services.

It is estimated that the new screening mechanism will drive an increase in security assessments. The BEIS expects 1,000-1,830 notifications per year. Given that in the past there have only been 12 security assessments of foreign investments based on national security, this is a significant increase.

The reforms come at a time in which European countries are becoming increasingly aware of the influence that foreign entities have over their economies. Earlier this year, the European Union introduced the framework for screening of foreign direct investment. This framework promotes closer cooperation by member states of the EU in the matter of the screening of foreign investments.

The Brexit procedure was completed on the 31st of December 2020. Following the split, the UK does not have to comply with EU laws and regulations anymore. This creates a need for the UK to improve the scope of its current investment screening mechanism in order to protect its economy.

Datenna tracks the ownership and investment activities of millions of Chinese companies. This case study demonstrates the importance of a nuanced and granular understanding of Chinese company ownership to make informed decisions about investment and technology risks. If you are interested in the full range of services and capabilities Datenna has to offer, do not hesitate to reach out.