U.S. Treasury Issues Final Rule to Curb Outbound Investment to China in Sensitive Technologies

The U.S. Treasury Department has issued a final rule, accompanied by the creation of a new oversight division, aimed at limiting outbound investment to China in key sensitive technologies with military potential. Set to take effect on January 2, 2025, the new rule will be administered by the Treasury’s newly established Office of Global Transactions. It prohibits U.S. companies from investing in certain technology sectors—semiconductors and microelectronics, quantum information technologies, and artificial intelligence—in China, Hong Kong, and Macau.

In a statement issued Monday, Paul Rosen, assistant secretary for investment security, emphasized the importance of protecting these technological sectors from exploitation by nations that could pose a security threat. “Artificial intelligence, semiconductors, and quantum technologies are fundamental to the development of the next generation of military, surveillance, intelligence, and certain cybersecurity applications like cutting-edge code-breaking computer systems or next generation fighter jets,” Rosen said. He added, “U.S. investments, including the intangible benefits like managerial assistance and access to investment and talent networks that often accompany such capital flows, must not be used to help countries of concern develop their military, intelligence, and cyber capabilities.”

The final rule requires companies to perform due diligence to assess whether their transactions are subject to this new regulation. It allows the Office of Global Transactions, housed within the Treasury’s Office of Investment Security, to review potential transactions to determine if they fall within the scope of the new restrictions. According to Treasury, the notification process will align closely with export control mechanisms already managed by the U.S. Department of State (DOS). Many of the affected technologies and products are already under DOS restrictions, prohibiting or limiting export to China.

“This program complements the United States’ existing export control and inbound screening tools by preventing U.S. investment from advancing the development of sensitive technologies and products in countries of concern,” the Treasury noted in an accompanying fact sheet.

The rule stipulates penalties for violations, with fines for civil and criminal breaches set according to the International Emergency Economic Powers Act (IEEPA). The Treasury’s FAQ section clarifies: “Under IEEPA, as of the issuance of the Final Rule the maximum civil penalty for a violation is the greater of $368,136 (as adjusted annually for inflation) or twice the value of the transaction that is the basis for the violation.”

This recent rule follows a series of measures by the Biden administration aimed at blocking the flow of strategic information, technology, and know-how to foreign adversaries such as China. Notably, defense contractor RTX, parent company of Raytheon, was recently fined $200 million by the DOS for export control violations due to lapses in applying internal controls—an issue highlighted by this Treasury rule.

The rule still allows U.S. investments in publicly traded Chinese securities, but it builds upon a 2021 Biden executive order that prohibited U.S. investors from investing in select Chinese military companies. The new rule represents an escalating effort to prevent the transfer of critical U.S. technologies to adversarial nations.

By fLEXI tEAM