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Countering China: Advancing U.S. National Security, Economic Security, and Foreign Policy

Senate Committee on Banking, Housing, and Urban Affairs
Wednesday, May 31, 2023

Topline

  • Democrats and Republicans agreed that China represents a major threat to American economic and national security, and discussed specific issues related to foreign and outbound investment, fentanyl, and illicit finance.

Witnesses

  • Elizabeth Rosenberg, Assistant Secretary for Terrorist Financing and Financial Crimes, U.S. Department of the Treasury
  • Paul M. Rosen, Assistant Secretary for Investment Security, U.S. Department of the Treasury
  • Thea D. Rozman Kendler, Assistant Secretary for Export Administration, U.S. Department of Commerce
  • Matthew Axelrod, Assistant Secretary for Export Enforcement, U.S. Department of Commerce

Opening Statements

Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown said that U.S. policies around China have catered to multinational corporations and failed working families by destroying local communities and eroding the manufacturing base. He added that since NAFTA’s enactment and China’s reentry into the WTO, Ohio has lost at least 275,000 manufacturing jobs. In addition to making more goods in America, he highlighted the need to safeguard key technologies from China’s military apparatus. The Chair also stated that international fentanyl trafficking poses an enormous threat to the national security, foreign policy, and economy of the U.S. He noted that the FEND Off Fentanyl Act has strong bipartisan support. Finally, Brown said that the committee is examining a range of proposals to address challenges posed by China related to Taiwan, technology development, digital assets, export controls, and other issues.

Ranking Member Tim Scott (R-S.C.)

In his opening statement, Scott said that China has grown in force and strength while working to undermine U.S interests. He added that China has resorted to intellectual property theft, unfair trade practices, and other harmful actions to challenge U.S. innovation and free markets. He said that there should never be a world where a company finds China to be a better business environment than the U.S., and he recommended lessening burdensome regulations and using existing tools to curb their economic aggression. Scott also stated that the CCP is facilitating the flow of fentanyl into the country. He concluded by arguing that the U.S. needs to maintain its technological edge, promote capital formation, and ensure supply chain resilience. 

Witness Statements

Elizabeth Rosenberg, Assistant Secretary for Terrorist Financing and Financial Crimes, U.S. Department of the Treasury

In her opening statement, Rosenberg said that cooperation between the U.S and China is absolutely critical in addressing important global challenges like the climate and managing international debt distress. She highlighted three objectives that outline the Treasury Department’s economic approach to China:

  • Securing the national security interests of the United States and its allies and partners and promoting respect for human rights;
  • Seeking an economic relationship with China that fosters growth and innovation in both countries through healthy competition; and
  • Cooperating on the urgent global challenges of the day.

Rosenberg also explained that the national security concerns about the PRC relate to its challenge to global norms, including acts of economic coercion, economic espionage, transnational crime, and human rights abuses. She added that the Treasury is concerned with China’s role in the illicit narcotics trade, as well as its role in geopolitical conflict around the world, including support for Russia and North Korea. She noted that the Treasury publicly exposes threatening activity, including through financial sanctions, and regularly engages the private sector directly, providing information to help financial institutions, money service businesses, and other actors in the economic and finance space to identify and disrupt violations of U.S. sanctions laws and regulations.

Rosenberg concluded by noting that the United States can effectively manage the relationship with China by clearly conveying its interests and intentions, and by talking about real examples. She added that the health of the global economy rests on how the United States and China can manage their relationship and address pressing shared challenges. 

Paul M. Rosen, Assistant Secretary for Investment Security, U.S. Department of the Treasury

In his opening statement, Rosen said that his work is focused on stopping the access and exploitation of sensitive technologies, infrastructure, data, and other assets by those who have the intent and capability to harm national security. He noted that the U.S. does not use national security tools to gain competitive economic advantage or stop China from growing, but it will fully and zealously exercise economic tools to protect the national security of the United States. He also explained that CFIUS protects national security in the context of foreign direct investment from any country, and the agency has benefited from congressional action to codify and enhance its authorities, including the bipartisan Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA.)

Finally, Rosen said that as the department protects national security in the context of inbound investments, they continue to contribute to interagency discussions regarding policies to restrict certain U.S. outbound investments in specific sensitive technologies with significant national security implications. He added that the desire is to avoid situations in which U.S. investments support and advance technologies that enhance military or intelligence capabilities in countries of concern that could undermine national security and put Americans at risk.

Thea D. Rozman Kendler, Assistant Secretary for Export Administration, U.S. Department of Commerce

In her opening statement, Kendler said that the Commerce Department’s Bureau of Industry and Security (BIS) is responsible for protecting U.S national security and foreign policy interests by ensuring that U.S. technology is not used by adversaries to harm the U.S. and by working to promote American technological leadership. She added that BIS has hammered China’s ability to use artificial intelligence (AI) and supercomputing power to develop its military and is restricting exports of leading-edge semiconductors and semiconductor manufacturing equipment to China. She also noted that advanced semiconductors are key to developing advanced weapons and supporting surveillance systems for human rights abuses. Finally, Kendler said that of the nearly 700 PRC parties on the BIS Entity List, over 200 were added during this Administration.

Matthew Axelrod, Assistant Secretary for Export Enforcement, U.S. Department of Commerce

In his opening statement, Axelrod said that his team has enhanced its enforcement policies, expanded  partnerships, and taken aggressive enforcement actions to impose real costs on those who seek to violate rules and undermine U.S. national security. He also stated that given the scope of the threat that the U.S. faces in protecting U.S. technology from misappropriation by the Chinese government and other actors, there is a need to amplify efforts through robust partnerships. Domestically, he noted partnerships with industry, academia, the IC, Treasury components like the Office of Foreign Assets Control and Financial Crimes Enforcement Network, and sister federal law enforcement agencies like the FBI and Homeland Security. He also explained that Commerce works closely with international counterparts, bilaterally, multilaterally, and through the end use check program.

Finally, he said that Export Enforcement’s mission is a critical part of how the U.S. Government addresses the threat posed by the PRC, especially as Beijing seeks to spread its technology-driven authoritarianism throughout the world. By enhancing administrative enforcement capabilities, multiplying impact through work with partners, and aggressively pursuing both administrative and criminal enforcement actions to punish violators, Axelrod said that his team is committed to meeting this unprecedented challenge. 

Question & Answer

Outbound Investment

Brown asked about the gap in existing authorities and the national security risk that an outbound investment mechanism would address. Rosen said that the Administration is assessing the establishment of a program that gets at U.S. investments in sectors of concern in countries of concern. He said that it would be a targeted way to get at investments in technologies that could be used in a military or intelligence capacity against the U.S. He added that the U.S. currently does not have an effective tool to sophistically target this. Brown also asked about the additional investments that are necessary for BIS to address risks posed by China. Kendler said that she supports the President’s FY24 budget proposal.

Sen. Bob Menendez (D-N.J.) said that the lack of outbound investment oversight in sensitive industries has the potential to harm national security and hamper the competitiveness of U.S. industry. He asked if a screening tool could be broad enough to prevent U.S. capital and expertise from financing investments in critical sectors that undermine U.S. national security but narrow enough to be implementable. Rosen said that they are working to craft a narrow and focused program on national security that restricts the flow of U.S. investment dollars and comes with expertise in specific sectors and subsectors of concern, like advanced semiconductors, AI, and quantum computing.

Sen. Chris Van Hollen (D-Md.) asked about the principles that will be applied as the U.S. decides how to implement outbound investment controls. Rosen said that they are focused on national security and a tailored, narrow, understandable approach that gets to the core equities that clearly and directly impact U.S. national security.

Sen. Fetterman (D-Penn.) said that increased scrutiny on U.S. investments in China is needed. He asked how transparency around U.S. investments in CCP companies can promote national security and de-risk the economic relationship with China. Rosen replied that it is the Administration’s goal to target investment in technologies that could impact national security.

Foreign Direct Investment

Sen. Jack Reed (D-R.I.) asked if Treasury has observed individuals and companies with ties to the CCP investing in U.S. managed hedge funds and private equity funds. Rosenberg said that it is a national security concern and is an area Treasury has been looking at carefully. She said they have seen Russian oligarchs exploit this, and that fund managers are laundering millions through the system in this way. She also expressed concern about Chinese money influencing investment security. Rosen said that they are redoubling efforts to look at the limited partners in these investment funds. He said that if they want to get through the CFIUS review process, they need to provide the information. 

Sen. Jon Tester (D-Mont.) asked if it is true that a covered transaction does not include farmland unless the land is next to a military base. Rosen said that they also have controlled jurisdiction if the purchase involves the acquisition of a U.S. business. Tester asked if they would have the ability to enforce legislation to regulate who’s buying land and even prevent individuals or companies from Russia, China, Iran, and North Korea from buying farmland. Rosen highlighted Tester’s bill with Sen. Mike Rounds (R-S.D.) to do this and expressed an interest in working with them on the issue. Tester reiterated that he wants to make sure CFIUS will have the capacity to enforce the bill before they write it, and Rosen said that it would depend on the scope of the legislation. 

Illicit Finance/Money Laundering/Cryptocurrency

Reed also asked why Treasury has not finalized its rule to propose anti-money laundering (AML) requirements on private equity funds and hedge funds. Rosenberg said that she has asked her team to look at it and gather more information.

Sen. Catherine Cortez Masto (D-Nev.) asked if it is possible for Treasury to secure the CCP’s cooperation with international investigations of illicit financial activity. Rosenberg said that it has been a frustration, and that there should be constructive and clear communication between the two countries.

Sen. Tina Smith (D-Minn.) asked how Chinese bad actors are exploiting weaknesses in cryptocurrency restrictions to engage in money laundering or other illicit activities, and how the U.S. can monitor this risk. Rosenberg replied that insufficient requirements, laws, and enforcement in other jurisdictions is an enormous threat for the U.S. She said that it needs to be clear that these jurisdictions must step up to the plate.

Sen. Cynthia Lummis (R-Wyo.) said that digital assets must not be used for illicit finance. She noted that she and Sen. Gillibrand will reintroduce their bill under a new title: Combatting Illicit Finance. Lummis asked if the digital assets are subject to the U.S. comprehensive laws on money laundering and sanctions. Rosenberg replied that financial institutions that offer services in the digital asset domain are covered by these obligations. Lummis also asked if Treasury would prefer to have new legal authorities or new personnel and funding to fight bad actors in the digital asset space. Rosenberg said that it would depend on what the legal authorities are, but they would welcome more resources.

Fentanyl

Scott asked if there is more that can be done to disrupt the financials of cartels involved in the fentanyl trade. Rosenberg said that it is essential to identify, expose, and designate with sanctions the front companies and exchange houses.

Cortez Masto also expressed deep concern about the easy access to fentanyl in communities. She asked why extending the statute of limitations to 10 years is important for Treasury. Rosenberg replied that it would allow Treasury the time to do a complex investigation of the international web of activity. This will also signal to covered entities that they need to comply for a longer period of time and improve deterrence.

Sen. Elizabeth Warren (D-Mass.) noted that fentanyl is now the leading cause of death among Americans ages 18-45, and that China is the leading supplier of fentanyl’s precursors and plays a large role in laundering money for the cartels. She said that Treasury has caught a number of Chinese companies providing fentanyl precursors, and asked if any of these companies were using cryptocurrencies in their illegal drug transactions. Rosenberg said they were using Bitcoin payments. She explained that the suppliers and cartels are turning to crypto because there is an element of pseudonymity. She said that crypto also allows them to process a large value of Bitcoin across a national border, which avoids scrutiny and disclosures. Warren said that she and Sen. Roger Marshall (R-Kans.) will be reintroducing the Digital Asset Anti-Money Laundering Act.

Sen. Steve Daines (R-Mont.) said that more needs to be done to combat China’s illicit financial flows.  He asked how Treasury envisions success when combatting drug and fentanyl trafficking given the limited access to beneficial ownership information (BOI). Rosenberg replied that the ability to see into and understand the beneficial owner of shell companies will help. Daines asked if an active relationship with the private sector would be a multiplier for identifying and tracing illicit financial flows. Rosenberg said that it is essential.

Data Privacy

Scott said that his Know Your App Act would empower Americans to protect their data and security. He asked if providing users with the country of origin for their applications is a useful consumer protection measure. Rosen replied that more information on these topics is very important and useful, particularly when it involves a country of concern.

Advanced Technologies

Sen. Bill Hagerty (R-Tenn.) said that he is concerned that Commerce still permits exports of U.S. technology to China’s most worrisome state-owned enterprises, including Aviation Industry Corp. of China. He asked if BIS has prepared a draft rule to revoke export control licenses related to Huawei. Kendler replied that they do not have a draft rule in place at this time but are working closely and analyzing the issue.

 Russia and Iran

Sen. J.D. Vance (R-Ohio) said that the sanctions policy on Russia has been a total failure. He asked if Russia’s SPFS (System for Transfer of Financial Messages) has grown in response to being cut off from SWIFT. Rosenberg replied that it grew in 2014 when Russia saw the writing on the wall. She added that Russia has less and less connectivity with the international financial architecture, but restricting Russia’s access to SWIFT is insufficient if they can still access international financial channels.

Sen. Katie Britt (R-Ala.) said that she is concerned with the growing relationship between Iran and China. She asked what the Biden Administration is doing to stop Chinese purchases of Iranian oil and petroleum products. Rosenberg said that they are designating and clarifying what is occurring. She added that they went after dozens of Chinese recipients and providers of storage last year and exposed these purchases. Britt also asked if it is a violation of U.S. sanctions if ports or refineries are knowingly accepting shipments of oil from Iran. Rosenberg said yes. The senator concluded that the U.S. is either not using the right sanctions, or not enforcing them to the level possible.

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