New filters how to screen FDI into Europe

Malta is now an enforcer of regulation EU2019/452 to create the first EU-wide framework for the screening of foreign direct investments.

One may question, whether this is another level of bureaucracy intended to slow down new business to Malta which comes at an awkward time when the COVID-19 pandemic has created havoc in the global business sphere and there are a lot of countries seeking elusive business to their shores.

One notes that the overriding criteria is that such screening is only applicable for any FDI where the owner, titleholder or ultimate beneficial owner originates outside the 27 member states.

This regulation was originally presented by President Juncker during the 2017 State of the Union address. In Malta, it entered into force on 1 April. Why is this screening important? The answer is that the EU has one of the world's most open investment regimes, as acknowledged by the OECD in its investment restrictiveness index.

The EU is the top destination for foreign direct investment in the world: foreign direct investment stocks held by third country investors in the EU amounted to €6,295bn at the end of 2017. This new investment is a godsend since it has created the much-needed 16 million direct jobs. The regulation does not require member states to have an FDI screening mechanism, but only to cooperate in sharing information.

There is a set of minimum criteria where a member state chooses to have an FDI screening mechanism assessing FDI’s effects on “security or public order”. In theory, it is expected that all member states cooperate with one another and with the European Commission in this activity. Thus, simply stated, one member state needs to seek information from the foreign investor and investment beneficiary to share with other EU counterparts and to provide relevant information especially on the potential impact of FDI on security and public order. This requirement is obligatory before and also for up to 15 months after the FDI is secured. The European Commission will not shy away from using its power to provide ex-post advice within 15 months after the FDI has been completed. This could lead to ex-post investigations by member states able to retroactively review deals under their national legislation and possible orders to unwind or adopt mitigating measures post-closing. The European Commission will monitor investment structures which aim to circumvent FDI screening. The current Guidelines indicate that, certainly in the COVID-19 context, the goal of protecting the EU’s security (specifically healthcare) is the priority.

Member states are encouraged to consider reviewing portfolio investments relevant to security or public order: for example, where a small shareholding (for example 5%) may confer relevant rights on the investor. By comparison, in the US, there has been increasing focus in recent years on so-called “critical infrastructure”, which is understood to encompass aspects of the economy related to healthcare, pharmaceuticals and related supply chains – and ad hoc regulations already call for heightened scrutiny of foreign investments in critical infrastructure. Malta recently set up a new agency − National Foreign Direct Investment Screening office. The sectors that fall under the screening regulation are as follows:

a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;

(b) critical technologies and dual-use items as defined in point 1 of Article 2 of Council Regulation (EC) No. 428/2009 (15), including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;

(c) supply of critical inputs including energy or raw materials, as well as food security;

(d)access to sensitive information including personal data or the ability to control such information; and

(e) the freedom and pluralism of the media.

This is another burden (possibly unpaid) for practitioners, lawyers, notaries and corporate service providers that after extensive marketing succeed to attract FDI to Malta. They must submit critical data with clearance from the Office to the Malta Business Register prior to filing the customary documents when registering companies, foundations, partnerships and so on. The screening office therefore vets the new forms that need to be submitted and give or refuse clearance. Without clearance, the FDI cannot seek shelter in

Malta. It is unclear whether appeal against a refusal to an independent tribunal is allowed. The list of additional information is exhaustive. Officially the screening agency requests authenticated documentation from the business introducer. The guideline states that forms need to be filled stating inter alia:

• the ownership structure of the foreign investor and of the undertaking in which the foreign direct investment is planned to be made or has been made, including information on the ultimate investor and/or beneficial owner and participation in the capital;

• the approximate value of the FDI;

• the products, services and business operations of the foreign investor and of the undertaking in which the FDI foreign is planned or has been completed;

• the jurisdictions, including member states in which the foreign investor and the undertaking in which the FDI is planned or has been completed to conduct relevant business operations;

• the funding of the investment and its source; and

• the date when the FDI is planned to be completed or has been completed.

One may question, whether this is another level of bureaucracy intended to slow down new business to Malta which comes at an awkward time when the COVID-19 pandemic has created havoc in the global business sphere and there are a lot of countries seeking elusive business to their shores. One hopes that the screening office (possibly at a nominal fee) will be super-efficient and understands the dire need for FDI even though it is not coming from Europe but other continents such as Asia.

In fact, China is the world’s second-largest economy giving it enormous leverage to shape the world economy and politics. It is still lagging behind the EU in many areas of technology, but has ambitious policies of promoting technology upgrading including through outward FDI. It is interesting to note that in response to the COVID-19 pandemic, Spain had decided to block all FDI coming from outside the EU or the European Free Trade Association (including state-owned companies). In particular exclusions include: healthcare, energy, finance, for reasons of public safety, and public order. Other countries such as France, Germany and Italy are contemplating to introduce further restrictions for non-EU investments. There is some concern to ensure that no sell-out of EU strategic companies occurs in the current volatile market as these businesses will be crucial to rebuilding the European economy post the COVID-19 crisis.

In conclusion, one hopes that the recovery plan for the global economy will be aided by bona fide investors who truly wish to revive the sagging GDP of the recipient country.