What is Coming for Outbound Investment Screening?

In this second article of our three-part series on outbound investment screening, we explore the outbound investment screening proposals from both the United States and the European Union and their future effects on Nordic companies.

US Outbound Investment Screening Regulations

Turning our attention first to the US outbound investment screening, we find that the US has adopted a relatively narrow strategy, often referred to as the “small yard, high fence” approach. The new Executive Order outlining the restrictions was issued in August 2023, and focuses on investments in specific technologies and sectors essential for “national security.”

With the concurrently issued guidance on the future regulations, we know that the three key technological categories in focus include semiconductors, quantum information technologies and artificial intelligence systems but the full scope of the regulation could have a pronounced effect on all firms that transact in or facilitate the transfer of knowledge related to these technologies.

The regulation intends to cover companies owned or located in “countries of concern” (currently only specified as China, including Macau and Hong Kong) and will cover a broad swath of securities such as debt, equity, joint ventures, and greenfield investments. It is important for us in the Nordics to appreciate that the scope of these restrictions is global, as it applies to all U.S. individuals and companies, including foreign branches, and targets investments anywhere in the world that are owned by nationals of the “countries of concern.”

Therefore, the risk extends beyond those directly engaged in the covered sectors; these restrictions will also affect companies operating outside of China that have affiliations with entities that are tied to China and are even indirectly tied to the targeted high-tech sectors.

Nordic companies may find their transactions and gaining investment for their operations under increased scrutiny from counterparties, including the large global financial institutions that underpin global monetary movements.

It is important to appreciate how these measures, even as limitedly scoped as they are, could upend your businesses plans. An illustration, even if not directly analogous, of just how US restrictions can impact non-US companies with substantial operations in the US is the case of Dutch chip manufacturing company ASML, which found itself compelled to restructure its operations related to China due to the introduction of new US restrictions.

EU’s Approach to Outbound Investment Screening

While the EU is slightly behind the US, it is closely monitoring and responding to US developments as it advances its own outbound investment screening initiative.

The EU’s initiative revolves around four key technologies: advanced semiconductors, artificial intelligence, quantum technologies, and biotechnologies, and is intended to protect EU outbound investments and technology. 

Generally speaking, the EU has two possible avenues for how to scope the outbound investment screening. A broad one, where the European Commission is allocated the authority to unilaterally enact and implement all outbound investment screening for critical technologies, requiring sector-specific investment registration. Or a narrow approach which would grant competence and authority for all aspects of the restrictions to member states, potentially leading to national variations instead of a unified EU-level screening tool.

The most probable scenario involves a middle-ground approach. The EU is expected to begin with a proof-of-concept, initially focusing on a very limited set of investments in high-tech industries and gradually expanding its scope. This approach will likely involve the Commission defining precise and limited policy objectives with the approval of member states, and member states having the responsibility for implementation and enforcement.  If this sounds familiar, that is because this approach is similar to the EU’s approach toward enacting, implementing and enforcing sanctions.

How Will This Impact Nordic Companies?

The EU and US measures will affect Nordic companies in several different ways and will extend well beyond just those firms primarily operating in the defined sectors. 

Potentially, any firm making use of AI, advanced semiconductors, quantum technologies or biotechnologies could face enhanced scrutiny and difficulties processing their transactions with counterparties including customers and suppliers. Furthermore, firms will very likely face explicit restrictions on joint ventures, mergers and acquisitions.

For example, the new regulations can include several subcategories of parts and components that can be defined as one of the covered categories. This may lead Nordic companies to unknowingly breach sanctions if they do not have a sufficient understanding of what is defined as the sanctioned component and the full chain of delivery, including the end use of the items. Furthermore, the list of covered components will likely be expanded over time as the regulation advances, adding more complexity to remaining compliant.

How can you prepare for the impending US and EU outbound investment screening proposal? Answer these questions to better identify if your company or investments are at risk of violating cross-border regulations:

  • Does your business have ties to China? Chinese-owned companies outside of China? Joint ventures with Chinese firms or Chinese owners? (China also includes Hong Kong and Macau)
  • Does your business have a US nexus, such as through:
    • American employees (including dual nationals)? 
    • US suppliers? 
    • US tech in your manufacturing? 
  • Do you know the ultimate beneficial owner or controller of all your counterparties? Do you know all the intermediary parties that own or have external control over your counterparty?

In our next article, we will explore how companies can best prepare for these impending regulatory changes.