The Rise of Outbound Investment Screening: The U.S. and EU Initiate Measures

On January 15, 2025, the EC published a Recommendation aimed at regulating outbound investments, as part of its broader economic security strategy, first introduced in the summer of 2023. This builds on the EC's January 2024 white paper on outbound investments (as referred to in our February 2024 Commentary, "European Commission Unveils Plan Aimed at Strengthening Economic Security,") and the July 2024 results of the public consultation, supporting the EC's proposed step-by-step action to monitor and assess outbound investments. 

The EU Recommendation calls on EU Member States to conduct a thorough review of outbound investments made by EU investors in third countries, in particular in three strategic sectors: semiconductors, artificial intelligence, and quantum technologies. EU Member States are encouraged to ensure that such investments do not jeopardize the EU's strategic interests or technological leadership. The EC calls for enhanced cooperation between national authorities to assess potential risks and safeguard economic security, aiming to protect the EU's strategic interests and safeguard sensitive technologies from foreign control or influence.

Although recommendations are non-binding instruments under EU law, they often serve as a tool for influencing behavior or encouraging alignment with EU goals, providing guidance, best practices, or suggestions on how to achieve certain objectives. Therefore, even if EU Member States are not legally required to follow a recommendation, the EC's weight of authority and the political significance of its recommendations should ensure a voluntary response to these, for instance, by adjusting national policies or taking other appropriate actions. 

This EU initiative is in line with the U.S. outbound investment executive order (as detailed in our August 2023 Alert, "Biden Administration Issues Highly Anticipated Executive Order on U.S. Investment in China"), which identified the same three categories of national security technologies and products: semiconductors and microelectronics, artificial intelligence, and quantum information technologies. The U.S. Department of the Treasury ("U.S. Treasury") issued a Final Rule on October 28, 2024, which implemented this executive order and entered into force on January 2, 2025. The U.S. OISP's objective is to regulate investments made abroad by U.S. persons in specific technologies that the U.S. government has determined pose a threat to U.S. national security. 

While the U.S. OISP and the EU Recommendation on foreign investment review share certain similarities, such as their focus on regulating and monitoring foreign investment in identical strategic sectors, they differ in their specific frameworks, objectives, and mechanisms.

Scope of Monitoring 

As noted above, both the recommendation and the U.S. OISP identify three high-risk technology sectors, highlighting the need for assessment of outbound investments, given their strategic importance to national economic and security interests:

• Semiconductors (e.g., any technology or know-how related to electronic design automation software for the design of integrated circuits and other semiconductors, or for the design of advanced packaging);
• Artificial intelligence (e.g., any technology or know-how related to an AI system); and
• Quantum technologies (e.g., any technology or know-how related to quantum computing). 

However, while the EU Recommendation only urges EU Member States to gather information, assess the risks potentially arising from different transactions, and report to the EC, the U.S. OISP already prohibits certain transactions (e.g., covered transactions related to certain electronic design automation software; certain fabrication or advanced packaging tools) and imposes notification requirements for others (e.g., covered transactions related to the design, fabrication, or packaging of integrated circuits not otherwise covered by the prohibited transaction definition).

Scope of Transactions 

The EU Recommendation calls for the review of the following types of transactions: mergers and acquisitions, asset transfers, joint ventures, and venture capital, as well as greenfield investments. 

Similarly, the U.S. OISP applies to specific transactions, including the acquisition of equity or contingent equity interests, certain types of debt financing, the conversion of contingent equity interests, greenfield investments or other forms of corporate expansion, joint ventures, and certain investments as a limited partner or equivalent in a non-U.S. pooled investment fund. However, the OISP also excepts certain types of transactions from coverage, provided that such transactions only afford a U.S. person certain standard minority shareholder protections (e.g., an investment in certain publicly traded securities). 

With respect to the natural and legal persons covered by the EU Recommendation, EU Member States are simply encouraged to examine outbound investments made by "EU investors," defined as natural or legal persons resident or established in the EU. In addition to a purely EU company, a non-EU company would also be in scope if an investment is made through an EU legal entity (e.g., an EU subsidiary). In addition, the EU Recommendation also covers investments made (indirectly) through non-EU companies used as investment vehicles, as well as gradual transfers of assets during the period under review and investments aimed at circumventing security controls or EU sanctions.

On the other hand, the U.S. OISP places obligations on any U.S. citizen or lawful permanent resident and any person in the United States, as well as any entity organized under U.S. laws or any jurisdiction within the United States, including any foreign branch of any such entity. Importantly, the obligations of a U.S. person under the OISP are triggered if such person has knowledge of relevant facts or circumstances related to a transaction. However, the OISP allows a U.S. person to seek an exemption from prohibition or notification requirements on the basis that a transaction is in the national interest of the United States.

A key difference between the suggested EU outbound investment screening system and the U.S. OISP is geographical coverage. While the EU investment review is designed to be "country-neutral" and thus does not exclude specific destinations, the U.S. OISP identifies mainland China, Hong Kong, and Macau as countries of concern. The U.S. restrictions also apply to a transaction involving a covered foreign person, which includes either an entity from a country of concern engaged in specific activities with certain technologies and products, or an entity with significant control over such a person, where more than 50% of key financial metrics are linked to individuals from a country of concern. Still, EU Member States may prioritize reviews based on risk profiles of individual countries, in coordination with one another and the EC. 

With regard to temporal scope, the EU Recommendation urges Member States to review new and ongoing transactions, as well as those completed since January 1, 2021, with the potential to extend to earlier ones if Member States identify specific concerns. For U.S. persons, the prohibitions and notification requirements already apply. Notifiable transactions must be notified to the U.S. Treasury within 30 calendar days following the completion of the transaction. 

With respect to compliance, under the EU Recommendation, EU investors may be required to file information either voluntarily or mandatorily, depending on the approach taken by each Member State. In the United States, by contrast, the OISP specifies both the disclosure framework and the penalties for noncompliance. Violations may incur civil and criminal penalties under the International Emergency Economic Powers Act. The U.S. Treasury can impose civil penalties—the greater of $368,136 (adjusted annually for inflation) or twice the transaction value—and refer criminal violations to the U.S. Attorney General. The U.S. Treasury Secretary can take actions to void or require divestment of prohibited transactions. U.S. persons can submit a voluntary self-disclosure if they suspect a violation.

Monitoring Tools and Information Gathering in the EU

The EU Recommendation encourages EU Member States to implement voluntary or mandatory filings of information on transactions. 

The EC also urges EU Member States to start gathering comprehensive information to assess the risks of outbound investment transactions in critical technology areas. This includes details about the technologies involved, the parties involved, ownership, country of origin, and the type and value of the investment.

Assessments by Member States, with the EC's support, are anticipated to focus on risks of technology leakage and geopolitical factors. 

Member States should review relevant transactions and provide progress reports to the EC by July 15, 2025, with a final report on implementation of the EU Recommendation, the outcome of the review, and the risk assessment due by June 30, 2026. These proposed timelines in initiating outbound screening and reporting will likely prove challenging because of the expected need to enact national legislation.

Final Remarks and Looking Ahead

Both the U.S. and EU frameworks aim to safeguard against the national security risks of foreign investments as determined by relevant government authorities. Although the U.S. OISP is already recently in force, it will take time for EU outbound investment screening systems to come into place, following the EU Recommendation.

Outbound investment screening is likely to drive ahead, given the significance of outbound investments. Notably, EU data shows that, from 2013-2022, EU companies made approximately 12,800 M&A transactions in third countries (valued at €1.4 trillion) and 26,000 venture capital transactions (valued at €408 million). The U.S. and the UK were the top two destinations for these investments, accounting for approximately half of the transactions and 70% of the total value. 

However, although the U.S. OISP targets mainland China as a country of concern (along with Hong Kong and Macau), the EU Recommendation is explicitly country-neutral. It can therefore be expected that outbound screening in the EU could require information and filings with respect to a significant number of investments made in the United States and UK, even if these are unlikely to be the main targets of the EU and its Member States in implementing outbound screening. Furthermore, although the U.S. and EU outbound screening regimes cover only three areas of technologies and products, this scope may enlarge over time, as has been the experience with inbound investment screening in the EU in recent years.

As concerns inbound investment screening, this is relatively new in several EU Member States, with few of them having long-established regimes in place. Certain of these rules are also likely subject to change, as the EU is currently proposing modifications to its foreign direct investment regulation. Therefore, companies and governments in the EU are quickly needing to develop know-how and commit resources to adhere to these new requirements. Investors will likely face increased scrutiny and additional burdens regarding cross-border investment activities in the future, as well as a widened screening system operated by each of the EU Member States. The United States is a step ahead in investment screening, with inbound investment screening already in place for decades through the establishment of the Committee on Foreign Investment in the United States ("CFIUS"), and outbound investment screening is already in force with the recent OISP.

Both programs, developed in close coordination between the U.S. government and the EU, will likely continue to be refined based on feedback, evolving geopolitical considerations, and economic impacts.