Outbound Investment Security Program
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5 11. What are the penalties for violations of the Outbound Rules? Answer: The Outbound Order authorizes the Secretary of the Treasury to investigate violations of the regulations, including pursuing civil penalties available under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA) and referring criminal violations to the Attorney General. The Secretary of the Treasury may also, as appropriate, take action authorized under IEEPA to nullify, void, or otherwise compel the divestment of any prohibited transaction. Under IEEPA, as of the date of issuance of the Outbound Rules, the maximum civil penalty for a violation is the greater of $368,136 or twice the value of the transaction that is the basis for the violation. Pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended, the maximum civil penalty will be adjusted annually for inflation and notice of the adjustment will be published in the Federal Register and on Treasury’s Outbound Investment Security Program website. Released on December 13, 2024 12. Is the Treasury Department working with U.S. allies and partners? Answer: The Treasury Department, working with the U.S. Department of State and U.S. Department of Commerce, has engaged with U.S. allies and partners regarding the important national security goals of the Outbound Order. The Outbound Order and the scope of the program reflect discussions with the G7 and other ally and partner engagements. The Treasury Department is encouraged by the interest and attention given to this issue by allies and partners. Released on December 13, 2024 13. If a transaction is subject to or would implicate jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), sanctions or licenses administered by the Treasury Department’s Office of Foreign Assets Control (OFAC) or the U.S. Department of State, export controls, or other U.S. “Moreover, no action taken pursuant to the Outbound Rules relieves parties from complying with any other applicable laws or regulations.” 6 For example, if a U.S. person makes an investment that it believes is covered by a General License issued by OFAC, the person would still be required to comply with any applicable provisions of the Outbound Rules. At the same time, the existence of an exception or the granting of an exemption under the Outbound Rules does not excuse a person from its obligations under any other applicable U.S. Government program. Released on December 13, 2024 14. After a U.S. person submits a notification, will the Treasury Department contact the U.S. person submitter? Answer: Under section 850.404(b), the Treasury Department may contact a U.S. person submitter who has filed a notification with questions or document requests related to the transaction or compliance with the Outbound Rules. However, apart from receiving an acknowledgment of receipt of a notification from the Treasury Department, a submitter should not expect to receive any confirmation from the Treasury Department with respect to the notification or its status. Released on December 13, 2024 15. If a U.S. person investor entered into an investment agreement prior to the January 2, 2025 effective date of the Outbound Rules but the transaction will close on or after the effective date, is the transaction subject to the Outbound Rules? Answer: Transactions with a completion date on or after the effective date of the Outbound Rules (January 2, 2025, or the “effective date”) may be subject to the Outbound Rules regardless of whether an agreement was entered into prior to the effective date. In other words, the mere signing of a contract or term sheet prior to the effective date does not render a transaction outside the scope of the Outbound Rules if it otherwise meets the criteria of a covered transaction and the completion date is on or after January 2, 2025.
In Compliance
19 2. What constitutes a “reasonable and diligent inquiry,” as described in the discussion of the knowledge standard in 850.104? Answer: A “reasonable and diligent inquiry” refers to a U.S. person’s efforts to obtain relevant information about a transaction as part of a reasonable pre-transaction due diligence process, given that whether a transaction is a “covered transaction” depends, in part, on the knowledge a U.S. person had or could have had at the time of the transaction. Because each transaction is different, the Treasury Department will consider the totality of relevant facts and circumstances in assessing whether such an inquiry has been undertaken. Such assessment will consider, among other things, the specific factors set forth in section 850.104(c): (1) The inquiry a U.S. person has made regarding an investment target or other relevant transaction counterparty (such as a joint venture partner), including questions asked of the investment target or relevant counterparty, as of the time of the transaction; (2) The contractual representations or warranties the U.S. person has obtained or attempted to obtain from the investment target or other relevant transaction counterparty (such as a joint venture partner) with respect to the determination of a transaction's status as a covered transaction and status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person; (3) The efforts by the U.S. person as of the time of the transaction to obtain and consider available non-public information relevant to the determination of a transaction's status as a covered transaction and the status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person; (4) Available public information, the efforts undertaken by the U.S. person to obtain and consider such information, and the degree to which other information available to the U.S. “(7) The use of available public and commercial databases to identify and verify relevant information of an investment target or other relevant transaction counterparty (such as a joint venture partner).” 20 The “reasonable and diligent inquiry” framework is intended to apply to a variety of transactions rather than creating a prescriptive, one-size-fits-all requirement. Under this framework, a U.S. person can, following a “reasonable and diligent inquiry,” proceed with a transaction if at the time it does not have knowledge of relevant facts that would render the transaction a covered transaction. This would be true even if, for example, the investment target had been engaged in a covered activity at the time of the relevant transaction, but the U.S. person lacked knowledge or a reason to know about that covered activity following a “reasonable and diligent inquiry.” Released on December 13, 2024 3. What should a U.S. person do when information required to determine the applicability of the Outbound Rules is only within the possession of the investment target? What if a U.S. person is unable to obtain answers to diligence questions? Answer: The Treasury Department expects a U.S. person to make efforts to ascertain relevant information about a transaction as part of a reasonable pre-transaction due diligence process. The Treasury Department acknowledges that in certain instances, information required to assess whether a transaction is a covered transaction may be difficult to ascertain. In such circumstances, a U.S. person may wish to obtain representations or warranties from the relevant transaction counterparty regarding pertinent information such as the investment target or counterparty’s ownership, investments, and activities. While receipt of contractual representations or warranties—such as with respect to a transaction’s status as a covered transaction and the status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person—does not confer a safe harbor, such representations and warranties can provide, in the absence of other relevant information available to a U.S.
19 2. What constitutes a “reasonable and diligent inquiry,” as described in the discussion of the knowledge standard in 850.104? Answer: A “reasonable and diligent inquiry” refers to a U.S. person’s efforts to obtain relevant information about a transaction as part of a reasonable pre-transaction due diligence process, given that whether a transaction is a “covered transaction” depends, in part, on the knowledge a U.S. person had or could have had at the time of the transaction. Because each transaction is different, the Treasury Department will consider the totality of relevant facts and circumstances in assessing whether such an inquiry has been undertaken. Such assessment will consider, among other things, the specific factors set forth in section 850.104(c): (1) The inquiry a U.S. person has made regarding an investment target or other relevant transaction counterparty (such as a joint venture partner), including questions asked of the investment target or relevant counterparty, as of the time of the transaction; (2) The contractual representations or warranties the U.S. person has obtained or attempted to obtain from the investment target or other relevant transaction counterparty (such as a joint venture partner) with respect to the determination of a transaction's status as a covered transaction and status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person; (3) The efforts by the U.S. person as of the time of the transaction to obtain and consider available non-public information relevant to the determination of a transaction's status as a covered transaction and the status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person; (4) Available public information, the efforts undertaken by the U.S. person to obtain and consider such information, and the degree to which other information available to the U.S. “(6) The presence or absence of warning signs, which may include evasive responses or non-responses from an investment target or other relevant transaction counterparty (such as a joint venture partner) to questions or a refusal to provide information, contractual representations, or warranties;” 20 The “reasonable and diligent inquiry” framework is intended to apply to a variety of transactions rather than creating a prescriptive, one-size-fits-all requirement. Under this framework, a U.S. person can, following a “reasonable and diligent inquiry,” proceed with a transaction if at the time it does not have knowledge of relevant facts that would render the transaction a covered transaction. This would be true even if, for example, the investment target had been engaged in a covered activity at the time of the relevant transaction, but the U.S. person lacked knowledge or a reason to know about that covered activity following a “reasonable and diligent inquiry.” Released on December 13, 2024 3. What should a U.S. person do when information required to determine the applicability of the Outbound Rules is only within the possession of the investment target? What if a U.S. person is unable to obtain answers to diligence questions? Answer: The Treasury Department expects a U.S. person to make efforts to ascertain relevant information about a transaction as part of a reasonable pre-transaction due diligence process. The Treasury Department acknowledges that in certain instances, information required to assess whether a transaction is a covered transaction may be difficult to ascertain. In such circumstances, a U.S. person may wish to obtain representations or warranties from the relevant transaction counterparty regarding pertinent information such as the investment target or counterparty’s ownership, investments, and activities. While receipt of contractual representations or warranties—such as with respect to a transaction’s status as a covered transaction and the status of an investment target or other relevant transaction counterparty (such as a joint venture partner) as a covered foreign person—does not confer a safe harbor, such representations and warranties can provide, in the absence of other relevant information available to a U.S.
person as part of a “reasonable and diligent inquiry” and the absence of warning signs, an indication that a U.S. person lacked a “reason to know” of such facts or circumstances. Released on December 13, 2024 4. What are the expectations for a U.S. person investor in terms of doing diligence to determine whether entities downstream of an investment target are themselves covered foreign persons such that section 850.209(a)(2) may apply and the investment target may also be a covered foreign person? Answer: For a transaction to be a covered transaction as defined in section 850.210, the U.S. person must know at the time of the transaction that such transaction is with or involving a covered foreign person. The Treasury Department’s expectations of a “reasonable and diligent inquiry” therefore relate to whether an investment target or other relevant counterparty meets the definition of a covered foreign person. Depending on applicable facts and circumstances, part of such a “reasonable and diligent inquiry” may include, among other things, making inquiries of an investment target or relevant counterparty as to whether any entity or entities in which the target has an interest specified “A U.S. person is also expected to use, among other resources, available public and commercial databases to attempt to identify relevant information or verify relevant information provided by an investment target.” person, a U.S. person that participates in the advisory board or committee would be liable for “knowingly directing” such a transaction unless they recuse themself in the manner specified in section 850.303(b). Released on December 13, 2024 2. How does the knowledge standard work as applied to a U.S. person who may be “knowingly directing” a transaction? Answer: Under section 850.303, a U.S. person is prohibited from knowingly directing a transaction by a non-U.S. person that the U.S. person “knows at the time of the transaction would be a prohibited transaction if engaged in by a U.S. person.” Because the knowledge standard applies to the U.S. person, and not the non-U.S. person entity, the relevant consideration is whether the U.S. person knew (which includes having “reason to know”) of the transaction’s status at the time it is undertaken. As such, the Treasury Department expects a U.S. person to undertake a reasonable and diligent inquiry regarding a transaction
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