The Chinese have found weaknesses in CFIUS and are exploiting it to the hilt.

As per current and former U.S. officials, the U.S. is poised to heighten the scrutiny on investments made by China in Silicon Valley in order to better shield sensitive technologies which are seen as vital to U.S. national security.

In recent years, China has significantly boosted its investments in artificial intelligence and machine learning in the U.S. Officials are now worried that these cutting-edge technologies, developed in the U.S., could bolster China’s economic and military capabilities.

Keeping this view in mind, the Trump Administration is looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), and the inter-agency committee that reviews foreign acquisitions of U.S. companies on national security grounds.

As per an unreleased Pentagon report, Beijing is exploiting a loophole in the U.S. system: it is skirting U.S. oversight and is managing to gain access to sensitive technologies through transactions that currently don’t trigger CFIUS scrutiny, including minority stakes, joint ventures and early-stage investments in start-ups.

“We’re examining CFIUS to look at the long-term health and security of the U.S. economy, given China’s predatory practices” in technology, said an official from the Trump administration official on the condition of anonymity since he was not authorized to speak publicly.

On Tuesday, Defense Secretary Jim Mattis weighed into the debate calling CFIUS “outdated” and telling a Senate hearing that “It needs to be updated to deal with today’s situation.”

CFIUS is headed by the Treasury Department and includes nine permanent members including representatives from the departments of Defense, Justice, Homeland Security, Commerce, State and Energy.

In the Barack Obama Administration, CFIUS had stopped a series of attempted Chinese acquisitions of high-end chip makers.

Senator John Cornyn, the No. 2 Republican in the Senate, is now drafting legislation that would empower CFIUS to block investments in technology, said an aide to Cornyn.

“Artificial intelligence is one of many leading-edge technologies that China seeks and that has potential military applications,” said the Cornyn aide, who declined to be identified.

He went on to add, “These technologies are so new that our export control system has not yet figured out how to cover them, which is part of the reason they are slipping through the gaps in the existing safeguards”.

The upcoming legislation would require heightened scrutiny from CFIUS, especially from buyers who come from nations identified as potential threats to national security.

CFIUS would maintain the list, the aide said, without specifying who would create it.

While Cornyn’s legislation would not single out any specific technology, it would however provide a mechanism for the Pentagon to lead that identification effort, with inputs from the U.S. Commerce Department, Energy Department, and technology sector, said the aide.

As per James Lewis, an expert on military technology at the Center for Security and International Studies, the U.S. government is playing catch-up.

“The Chinese have found a way around our protections, our safeguards, on technology transfer in foreign investment. And they’re using it to pull ahead of us, both economically and militarily,” said Lewis.

“I think that’s a big deal.”

Chinese Foreign Direct Investments (FDI) in 2016 touched $45.6 billion in completed acquisitions and greenfield investments, as per the Rhodium Group, a research firm.

Chinese investment from January to May 2017 have totalled to $22 billion, which represents a 100% increase against the same period last year, said the research firm.

“There will be a significant pushback from the technology industry” if legislation is overly aggressive, said Thilo Hanemann, an economist with the Rhodium Group.

The risks extend beyond technology transfer.

“When the Chinese make an investment in an early stage company developing advanced technology, there is an opportunity cost to the U.S. since that company is potentially off-limits for purposes of working with (the Department of Defense),” said the report.

“The single biggest thing we can do is staple a green card to their diploma so that they stay here and build the technologies here – not go back to their countries and compete against us,” said Venky Ganesan, managing director of Menlo Futures.