Government Resets Approach to National Security Reviews

Yesterday the federal government released guidelines on the national security review of foreign investments in Canada.

Under the Investment Canada Act, the government can review virtually any foreign investment to determine whether it could be injurious to Canada’s national security.

There have been eight formal reviews since national security powers were introduced in 2009:

• In two cases, conditions were imposed on investors to mitigate national security risk.
• In three cases, proposed investments were blocked by cabinet order.
• In two cases, investors were required to divest themselves of acquired businesses. In one of these two cases, the government recently consented to redo its review following an application for judicial review of the decision.
• One application was withdrawn prior to a final order being made.

Most cases have involved Chinese or Russian investors and/or investments in the high-tech and telecommunications sectors. Until now, the specific criteria the government uses to screen investments had not been publicly disclosed. The new guidelines shed some light on those criteria.

According to the guidelines, the government will consider the nature of the assets or businesses subject to the investment as well as the nature of the foreign investors, including the potential for third-party influence. The following factors may be taken into account:

• the potential effects of the investment on Canada's defence capabilities and interests;
• the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
• Involvement in the research, manufacture or sale of goods/technology identified in the Defence Production Act;
• the potential impact of the investment on the security of Canada's critical infrastructure;¹
• the potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the government;
• the potential of the investment to enable foreign surveillance or espionage;
• the potential of the investment to hinder current or future intelligence or law enforcement operations;
• the potential impact of the investment on Canada's international interests, including foreign relationships; and
• the potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

This transparency is welcome as it provides some guideposts on the parameters of the review process and the main areas of potential concern. It also confirms that national security reviews are non-political in nature and intended to identify transactions that create legitimate and substantive security concerns.

In reviews to date, a challenge faced by both the government and foreign investors has been the need to understand the government’s potential concerns in order to address them in a meaningful way, while at the same time preserving the integrity of the national security review process. This can be difficult where the information that the government possesses is confidential and where its ability to disclose that information may be limited. Until now, the government has erred on the side of non-disclosure and the result has been an opaque review process. However, with the release of these new guidelines, the government has recognised that there can and should be some degree of openness. This transparency should be beneficial for both foreign investors and Canadian businesses, both of whom will be better able to assess risk up front and enter into transactions with a clearer sense of the potential outcome.

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¹ Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government.