Foreign investments

Assessing the National Security Aspects of Foreign Investments: Between National Security and Economic Uncertainty

Foreign investment in Israel has exploded in recent years. At the end of 2020, direct investment by foreign residents in Israel exceeded $185 billion, an increase of almost 15% compared to 2019.

Foreign investment offers significant benefits in terms of the Israeli economy, but it also raises concerns. Many sectors of the Israeli economy involve aspects of national security and privacy. Concerns have thus arisen in particular with regard to investments by companies from countries in which the government is heavily involved in market activity, such as China.

United States: do not engage with companies controlled by the Chinese government

Another element has been added to these concerns since 2016: the United States has identified China as a significant threat to American hegemony in the world. In particular, the United States has identified Chinese financial investments in various countries as a strategic threat for two main reasons. The first is the fear that Chinese investments in critical infrastructure will create decisive Chinese influence in these countries. The second is the fear that the activities of Chinese companies controlled by the Chinese government will give China access to a large amount of information and cutting-edge technology. The Americans blacklisted many Chinese government-controlled companies they deemed particularly dangerous and banned investment in them. The Americans have also begun to pressure their allies, including Israel of course, not to engage in large infrastructure deals with Chinese companies or investments through which China could expose itself. American information or technology.

Against the backdrop of the all-out American offensive against Chinese investment around the world and increasing Chinese investment in major projects in Israel, Israel is under increased pressure to devise a mechanism to limit foreign investment in Israel, especially Chinese investments.

Mechanism for controlling foreign investment in Israel

In October 2019, the Israeli Ministerial Committee on National Security Affairs (the National Security Cabinet) decided to design a mechanism to control foreign investments in Israel. At the heart of the mechanism is the “Advisory Board for the Assessment of National Security Aspects of Foreign Investments”. This advice is the result of a compromise between the interest of promoting foreign investment in Israel, the fear of jeopardizing Israel’s national security and the need to respond to American pressure in this regard.

The cabinet decided that the council would be composed of the chief economist of the Ministry of Finance (or his representative), a representative of the National Security Council and a representative of the Ministry of Defence. Regulators vested by statute with the power to grant approvals, licenses or control permits in various sectors of the economy may approach the council if they believe that a foreign investment raises concerns that national security could be compromised in one of two ways. The first is the fear that a foreign entity could take control of an Israeli asset in a way that raises national security concerns. or Israel’s foreign relations could be jeopardized. The second is the fear that information may be exposed or disclosed to a foreign entity in a way that could compromise Israel’s national security. The council does not have the power to review foreign investment transactions in which no Israeli regulator is involved.

The drafters of this decision went to great lengths to emphasize that the board has advisory power only and that regulators have no obligation to refer to the board or accept the board’s recommendation. The decision states that regulators retain their independent decision-making discretion and that the council’s mandate is only to present information to regulators on the national security aspects of a foreign investment. In addition, the board must formulate its recommendations unanimously and issue them relatively quickly. Otherwise, it will be interpreted as if the council had issued no recommendation. Indeed, anyone reading the cabinet decision in itself might come to the conclusion that this is a powerless board that regulators can ignore.

However, if the cabinet’s decision is read in the context of the US pressures described above and the national security situation in Israel, a slightly different conclusion emerges. It is unlikely that any Israeli regulator, no matter how independent, would simply ignore the board’s recommendation that foreign investment poses national security risks. Moreover, the council was expressly authorized to take into account not only security considerations, but also considerations concerning Israel’s foreign relations. This authority further attests to the interests underlying the formation of the board. Simply put, the board could very well heed US pressure to block investment from Chinese companies.

Legal issues in Council activities

The formation of the board of directors raises several legal issues. Are the various regulators even allowed to take national security considerations into account, especially if they include the “external relations” of the state? Can regulators, in fact, exercise independent discretion vis-à-vis a board to assess national security aspects?

Concerns also arise with regard to the procedure before the council. The board’s deliberations are privileged and the firm’s decision stipulates that the board has broad discretionary power over the entities with which it can consult and the subjects on which it can engage. The cabinet’s decision contains no reference to whether a foreign investor itself, or Israeli economic or civil entities, have the right to present their position to the council. While council recommendations do have a significant impact on how regulators exercise their discretion, this form of deliberation raises important administrative law issues. How can a foreign investor appeal a decision that prevents him from obtaining a license or participating in a tender if he does not have access to the board’s deliberations?

It is reasonable to assume that these issues will eventually find their way to the courts. Judges will need to consider the issues raised, set clear limits on counsel’s discretion, and design the procedure to be conducted by counsel. Until the courts resolve these issues, potential foreign investors in a number of sectors of Israel’s economy will have to deal with uncertainty about the extent of the board’s influence.