Evaluating National Security Aspects of Foreign Investments: Between National Security and Economic Uncertainty

Foreign investments in Israel have skyrocketed in recent years. By the end of 2020, foreign residents’ direct investments in Israel exceeded USD 185 billion, nearly a 15% increase over 2019.

Foreign investments offer significant advantages in terms of the Israeli economy, but they also carry concerns. Many sectors in the Israeli economy involve aspects of national security and confidentiality. Concerns have thus arisen especially in relation to corporate investments from countries in which the government is deeply involved in the market’s activity, such as China.

United States: Don’t Engage with Companies Controlled by the Chinese Government

Another element has added to these concerns since 2016: the United States identified China as a significant threat to American hegemony around the world. In particular, the United States identified Chinese financial investments in various countries as a strategic threat for two main reasons. The first is the concern Chinese investments in critical infrastructure might create decisive Chinese influence in those countries. The second is the concern that activities by Chinese companies controlled by the Chinese government might give China access to a great deal of information and cutting edge technology. The Americans blacklisted many companies controlled by the Chinese government that they deemed particularly dangerous and prohibited investments in them. The Americans also began pressuring their allies, including Israel of course, not to engage in major infrastructure transactions with Chinese companies or in investments through which China could gain exposure to American information or technologies.

Against the backdrop of the Americans’ all-out offensive against Chinese investments worldwide and the increase in Chinese investments in major projects in Israel, Israel has been under increased pressure to devise a mechanism to limit foreign investments in Israel, especially Chinese investments.

Mechanism for Scrutinizing Foreign Investments in Israel

In October 2019, Israel’s Ministerial Committee on National Security Affairs (the National Security Cabinet) decided to devise a mechanism for scrutinizing foreign investments in Israel. At the mechanism’s core is the “Advisory Board for Evaluating National Security Aspects of Foreign Investments.” This board is the result of a compromise between the interest in promoting foreign investments in Israel, the fear of jeopardizing Israel’s national security, and the need to respond to American pressures in this regard.

The cabinet decided the board would be comprised 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 Defense. Regulators vested with authority by law to grant approvals, licenses, or control permits in a variety of sectors in the economy can refer to the board if they believe a foreign investment raises concerns that national security might be jeopardized in one of two aspects. The first is the concern a foreign entity will gain control over an Israeli asset in a way that raises concerns that national security or Israel’s foreign relations might be jeopardized. The second is the concern that information might be exposed or disclosed to a foreign entity in a way that might jeopardize Israel’s national security. The board has no authority to scrutinize foreign investment transactions in which no Israeli regulator is involved.

The drafters of this decision exerted considerable efforts to emphasize the board has advisory authority only and that regulators are under no obligation to refer to the board or to accept the board’s recommendation. The decision states that regulators retain their independent decision-making discretion and that the board’s mandate is solely to present information to the regulators about the national security aspects of a foreign investment. Furthermore, the board must reach its recommendations unanimously and issue them relatively swiftly. Otherwise, this will be construed as if the board had not issued any recommendation at all. Indeed, anyone reading the cabinet decision per se could reach the conclusion this is an impotent board regulators can ignore.

However, if the cabinet decision is read within the context of the American pressures described above and the national security situation in Israel, a slightly different conclusion emerges. It is unlikely any Israeli regulator, independent as it may be, would simply disregard the board’s recommendation that a foreign investment poses national security risks. Moreover, the board was expressly authorized to take into account not only security considerations, but also considerations regarding Israel’s foreign relations. This authority further attests to the interests underlying the board’s formation. Simply put, the board could very well take into account American pressures to block investments by Chinese companies.

Legal Issues in the Board’s Activities

The formation of the board gives rise to several legal concerns. Are various regulators even authorized to take into account national security considerations, especially if they include the State’s “foreign relations”? Can regulators, in fact, exercise independent discretion vis-à-vis a board with a mandate to evaluate national security aspects?

Concerns also arise in relation to the proceedings before the board. The board’s deliberations are privileged, and the cabinet decision states the board possesses wide discretion on the entities with whom it can consult and the topics in which it can engage. The cabinet decision contains no reference whatsoever to the question of whether a foreign investor itself, or Israeli economic or civil entities, are entitled to present their position to the board. If the board’s recommendations indeed have a material impact on the way regulators exercise their discretion, this form of deliberation raises significant issues in terms of administrative law. How can a foreign investor appeal a decision that prevents it from obtaining a license or competing in a tender if it has no access to the board’s deliberations?

It is reasonable to assume such issues will eventually end up in court. Judges will have to consider the questions that have arisen, set clear limits on the board’s discretion, and design the proceeding to be conducted by the board. Until the courts resolve these issues, potential foreign investors in a number of sectors in the Israeli economy will have to take into account the uncertainty about the extent of the board’s influence.