What to look for from the House Select Committee on the Chinese Communist Party: Pre-recess letter blitz highlights key focus areas for the fall work period and beyond
In the last three weeks, the House of Representatives’ Select Committee on the Chinese Communist Party (the House China Committee) sent letters to a research institution, venture capital firms, investment firms, and an automotive company asking questions related to connections to the Chinese military, funding ties to specific PRC companies, and supply chain issues.[1]
H. Res. 11 gives the House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party broad authority “to investigate and submit policy recommendations on the status of the Chinese Communist Party’s economic, technological, and security progress and its competition with the United States.” The focus areas addressed in the letters (labor practices, funding transparency, and academic joint ventures) as well as their targets (academia, the financial sector, and a large multinational corporation) provide insight into the focus of the Committee’s planned investigative work.
Parsing the allegations in the letters
The House Committee’s letters contain between five to thirty multi-part document requests, with a response due on a two-week timeline. Each letter was publicly released and highlights the companies’ obligations to American taxpayers, shareholders, or its “corporate responsibility as an American company.”
- “If [the company] is using a licensing agreement to maximize benefits to itself or [a China-based battery manufacturer] at the expense of the U.S. taxpayer, this demonstrates a disregard for corporate responsibility as an American company.” (Letter to automotive company)
- “It is unconscionable for any U.S. company to profit from investments that fuel the military advancement of America’s foremost foreign adversary and facilitate human rights abuses.” (Letters to investment firms)
- “By facilitating massive flows of American capital to these and other PRC entities linked to the PLA or to human rights abuses…[these investment firms] [are] exacerbating an already significant national security threat and undermining American values.” (Letters to investment firms)
Focus on due diligence, accounting for national security and geopolitical risk
The Committee is particularly interested in how the companies conducted due diligence or will be able to continue to make guarantees related to compliance and due diligence in light of the PRC Counter-Espionage Law and the current operating environment in China. Perhaps most interestingly, the Committee specifically asked the investment firms and venture capital funds about how they account for national security and geopolitical risks in their due diligence process:
- “Please describe the risk factors [the venture capital fund] considers during the due diligence process when considering an investment in a company that is based in or has significant operations in the PRC.” (Letters to venture capital funds)
- “Did any…personnel or outside consultant raise questions or concerns regarding the substance or the reputational risks related to human rights, national security or similar concerns? Please describe the questions and concerns and any objections to proceeding with the investment and produce all related documents.” (Letters to venture capital funds)
- “Do you consider national security factors? If so, how do they weigh into the decision-making process? If not, why not?...How do geopolitical risks factor into your considerations, if at all?” (Letters to investment firms)
Why this committee’s work matters, and matters across sectors
The House China Committee is one of the few bipartisan efforts focused on investigating “strategic competition” between the CCP and the US, and it has broad investigative jurisdiction, leadership support, and an energized and knowledgeable staff. In just three weeks, the Committee has targeted companies across multiple sectors, but almost every sector of the American economy is tied to China.
The House Committee’s investigative activity has only just begun, and its activity can spur interest from other regulators and enforcement agencies. The Committee’s letters to the investment firms specifically ask: “Has the Securities Exchange Commission or any other U.S. regulatory body inquired to you about any conflicts of interest related to your inclusion of PRC companies in your funds? Please produce any communications, including electronic messages, or documents exchanged with the SEC or any other U.S. regulatory body related to such matters.”
This letter blitz is representative of where the Committee is planning to recommend legislation, whether that takes the form of a revamped CFIUS-esque regulatory framework, or something broader and more aggressive.
Going forward
DLA Piper can help in navigating Congressional inquiries and proactively counsels on managing business operations in China to mitigate reputational, business, and security risks. To learn more, please contact either of the authors or your usual DLA Piper relationship attorney.
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