The FCDO’s role in blocking foreign asset stripping in the UK

If the Government is not more coordinated and able to think long-term in its approach to foreign investment, we risk losing our most innovative companies overseas, with harmful consequences for our national security. (Paragraph 13) Critique of the National Security and Investment Bill

The Bill in its current form does not provide sufficiently clear guidance on how national security should be understood. This is likely to hinder targeted application of the new law, with adverse repercussions for the UK’s national security and economy.

We recommend that the new legislation should be as clear as possible about what may or may not constitute a national security risk in the context of foreign investment. Failure to provide greater clarity would be likely to have significant consequences for the credibility of the national security regime and for UK inward investment. (Paragraph 21) Clarifying the meaning of national security in the context of foreign investment

Businesses, investors and the Secretary of State and the Investment Security Unit need clarity and guidance on the factors that should be considered as part of national security assessments. We recommend that the new legislation and accompanying guidance should clearly distinguish between ‘national security’ and the broader ‘public interest’ or ‘solely economic’ concerns that are not within scope, to prevent undue uncertainty for businesses and avoid any misuse of the term ‘national security’. (Paragraph 26) 16 Striking the balance: Protecting national security through foreign investment legislation

The takeover of Newport Wafer Fab by Nexperia represents the sale of one of the UK’s prized assets to a strategic competitor, at a time when global chip shortages means that the products manufactured by NWF are of vital national importance. Failure to conduct a detailed assessment of this transaction under the NSI Act would indicate that the Government continues to hold an unrealistically optimistic understanding of the Chinese government’s intentions and is prioritising short-term commercial interests over the long-term security of our country. The case of NWF may yet serve to demonstrate that, despite the stated intentions of the NSI Bill, the Government has not yet learned the lessons of previous years.

We recommend that the Government calls in the acquisition of Newport Wafer Fab by Nexperia for review and imposes appropriate mitigating measures, as a matter of urgency.

It is vital that there is continuous monitoring of the investment and technology landscapes to catch non-notified transactions, as well as monitoring for changes to board compositions or ownership models, which may not serve the UK’s security interests, after the initial transaction has taken place with Government intervention if necessary. This should be additional to the notification regime established by the NSI Act and will require regular feed-in from multiple departments, including the FCDO, building on the tech ambassador we recommended in our report on the Integrated Review, Brave new Britain

Ongoing monitoring of the global technology landscape by the FCDO should inform any future changes, as needed, to (a) the sectors subject to mandatory notification under the National Security and Investment Bill, and (b) the factors to be taken into consideration by the BEIS Secretary of State when assessing transactions, as set out in the Statement of Policy Intent. We recommend that the annual report outlines how this information has been taken into account in the Secretary of State’s decisions.

For the FCDO to add value to the NSI regime, it will be important that the Department has the necessary skills, expertise and structures to effectively support the ISU. If the Government continues to behave in the same ways and rely on the same skills base as it has previously, it will continue to see the same results—or worse, given our changing security environment.

The FCDO should demonstrate leadership on the foreign relations aspects of foreign investment decisions. Supporting the ISU’s work in this area is a key responsibility of the FCDO. It will be vital that the Department has the right expertise both at overseas Posts and in London to fulfil this responsibility, including through ongoing monitoring of the global investment landscape. We recommend that the Government outlines how it intends to achieve this in its response to this report.

We support the Government’s decision to keep the NSI Act agnostic of geography or type of actor, so that investments are judged on a case-by case rather than country- 30 Sovereignty for sale: the FCDO’s role in protecting strategic British assets specific basis. The FCDO has a vital role to play in communicating to other parts of government its assessment of the broader strategic intent of foreign governments in their investment decisions, and this information should be a primary consideration when considering specific transactions. The FCDO should be responsible for advising BEIS on these matters and we intend to hold the Department to account for any failure to do so. (Paragraph 37) Cross-Government cooperation on investment screening

We recommend that 10 percent of Investment Security Unit staff should be secondees from FCDO, to ensure that FCDO expertise can be drawn upon on a day-to-day basis. (Paragraph 44) Cooperation with like-minded partners and allies

Given the complex and transnational nature of the global investment landscape, the UK cannot operate alone on this matter. The Government should cooperate on FDI screening with other countries with whom we share values and strategic objectives. We recommend that the FCDO seeks to play a leading role in bringing together countries and partners from overseas and in building alliances to make sure investment vehicles in one country aren’t used as a Trojan horse in others. (Paragraph 54) Transparency and reporting

With cross-Government working comes a need for cross-committee scrutiny. If the Government is to succeed in achieving an “integrated” approach to UK security and foreign policy as set out in the Integrated Review, Government departments must be held to account by all committees with the relevant remit and expertise. In the case of the Investment Security Unit, this would ensure that scrutiny of Government decisions is not only conducted by select committees with a primarily pro-business lens, but would provide a more balanced and nuanced assessment of its decisions.

We acknowledge the Secretary of State’s concern about the workload entailed by involvement of multiple committees in scrutinising the ISU but would argue that this should not be a barrier to effective scrutiny. FAC’s important contribution to UK national security and foreign investment was recognised in the Government response to our report in February 2021. Following our scrutiny of the National Security and Investment Bill, it is our intention to monitor its effectiveness. This requires the Government to furnish us with the necessary information.

We recommend that the Chairs of the Foreign Affairs Committee, Intelligence and Security Committee and Science and Technology Committees are also provided with private briefings on the activities of the ISU on Privy Council terms, to ensure that Government decisions are scrutinised from all angles relevant to the UK’s interests. These briefings should be held bi-annually as a minimum. (Paragraph 66) Sovereignty for sale: the FCDO’s role in protecting strategic British assets 31

In the absence of any evidence to the contrary, we have no choice but to assume that the NSA review that the Prime Minister said he had initiated has not, in fact, been started. In its response to this report, we ask that the Government set out the circumstances in which the National Security Adviser is engaged in reviews under the National Security and Investment or Enterprise Acts; the reasons why the Prime Minister asked the NSA to undertake a review of Newport Wafer Fab; why the NSA did not undertake such a review; and for an update on the nature of the continued monitoring by the Investment Security Unit

The Government has explicitly recognised the criticality of semiconductors to the UK’s national security and wider global interests; likewise, the Chinese Government’s ambitions to achieve self-sufficiency in semiconductors and the means by which it aims to achieve this are well documented. These factors, compounded by the current global semiconductor shortage, mean that the Government’s apparent failure to take this matter seriously is likely to damage the UK’s national interest. (Paragraph 19) 12 Sovereignty for sale: follow-up to the acquisition of Newport Wafer Fab