When real estate becomes a national security issue

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The House Armed Services Committee is growing increasingly concerned about foreign investments in the United States. But this time, it has little to do with foreign companies gobbling up U.S. tech firms, and instead with their apparent appetite for real estate.

Buried deep within the markup of the 2015 defense authorization bill, released today by House Armed Services Committee chairman Rep. Howard P. “Buck” McKeon, R-Calif., is a warning that foreign investors and businesses may be buying up tracts of land near military bases and training facilities in order to collect information on U.S. military tactics and technologies.

“Foreign-controlled entities may be acquiring property near critical military assets, installations and training facilities with the intent to monitor our activities,” the markup of the bill states. “As a result of some recent transactions, entities controlled by foreign interests have acquired access to onshore and offshore properties within proximity of Department of Defense facilities, ranges and sensitive operating areas.”

The concerns are supported by the most recent report by the Committee on Foreign Investments in the United States, known as CFIUS (pronounced siph-ee-us), an interagency committee that reviews foreign investments for national security threats. According to the 2012 annual report by CFIUS, real estate transactions appeared for the first time since 2008.

2014_05_NWSTFSign U.S. Naval Weapons Systems Training Facility in Boardman, Oregon. (Photo: U.S. Navy).

Of the four transactions recorded by CFIUS in 2012, one led to a presidential order blocking the purchase by Chinese nationals of four wind farms in the vicinity of restricted air space at a Naval Weapons Systems Training Facility in Oregon.

Legal experts interviewed by FedScoop acknowledged there has been an increase in the number of shadowy companies expressing interest in real estate for sale near U.S. military installations.

“We’ve been receiving more contacts by suspicious potential clients,” said a lawyer who helps foreign investors navigate CFIUS requirements. The source requested anonymity because they were not authorized to comment publicly.

“It makes perfect sense that this would be a counterintelligence concern,” the lawyer said, referring to the Oregon wind farm case.

“It’s a very real concern for counterintelligence experts and for good reason,” said Daniel Pickard, an international trade lawyer with Wiley Rein LLP in Washington, D.C.

If the defense authorization bill passes in its current form, lawmakers will require the defense secretary to conduct a study of the potential security risks stemming from foreign real estate investments near military installations.

Of particular concern to lawmakers are the gaps in the interagency process. “Other government agencies are not required to coordinate with the Department of Defense to assess the potential effects of selling or leasing federal property to foreign-controlled entities seeking to operate in the vicinity of military operating areas or installations,” the committee stated.

One of the most recent transactions blocked by CFIUS occurred last year when a Chinese firm attempted to purchase a Canadian mining company with operations in the U.S.  The Canadian company, Lincoln Mining Corp., owned two tracts of land near the Fallon Naval Air Station in Nevada, where the Navy’s TOPGUN flight training school is located. The same company also owned property in California, just across the border from the Marine Corps Air Station in Yuma, Ariz.

According to an analysis by Pickard and two of his colleagues, that was the third time since 2009 that CFIUS rejected attempts by Chinese investors to acquire interests in mining companies in Nevada near the Fallon Naval Air Station.

“The most salient lesson to be learned from the Lincoln acquisition, and the others noted above, is that parties to transactions involving foreign entities must carefully consider the national security issues raised by the proximity of the business being acquired to U.S. defense and critical infrastructure facilities,” Pickard wrote.

“It is no surprise that having Chinese eyes posted on wind towers off the Oregon coast did not go down smoothly inside [the] Department of Defense,” wrote Hamilton Loeb, a partner in the Washington, D.C., law offices of Paul Hastings LLP. “But the Ralls case also brought to the forefront the importance of ‘proximity’ for any routine deal,” he wrote, referring to the largest acquisition by a Chinese company in U.S. history— the $7 billion purchase of pork-processor Smithfield Foods by Shuanghui International Holdings Ltd.

“A company like Smithfield, with hog processing facilities in hundreds of locations and a headquarters not far down the road from the Tidewater Virginia naval complex,” wrote Loeb, “learned to expect a penetrating ‘proximity’ analysis even if its most complex product was cured ham.”

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CFIUS, Committee on Foreign Investment in the United States, Department of Defense (DOD), Departments
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