US intelligence officials have issued a recent statement urging caution among domestic startups and venture capital firms regarding certain foreign investments, as adversaries have been seeking to exploit early investments in the US to steal sensitive data.
The US is stepping up security reviews on investments coming from Beijing and other adversary countries. The latest move is a warning to domestic tech startups and venture capital firms that some foreign investments could be a front for hostile nations, seeking to acquire data and technology for their governments or to undermine US businesses.
On Wednesday, the National Counterintelligence and Security Center (NCSC), the Office of the Director of National Intelligence’s Economic Security and Emerging Technology Directorate, as well as the criminal investigative departments of the Air Force and Navy, jointly released a statement.
These US intelligence agencies emphasized in the announcement their concerns to small businesses, industry associations, and other entities related to the venture capital sector.
NCSC Director Michael Casey said, “Unfortunately, our adversaries continue to exploit early investments in US startups to steal their sensitive data.”
“These actions threaten the US economy and national security, and could directly lead to the failure of these companies,” he added.
Washington is ramping up scrutiny on investments from adversary countries, particularly China, as advanced technologies like artificial intelligence with breakthrough commercial potential could also be used to enhance military or espionage capabilities.
Wednesday’s announcement highlighted the need for these companies to pay attention to transactions from unknown sources. The announcement warned that the ownership of funding sources is often complex, “typically established in offshore locations lacking transparency and effective regulatory oversight,” or foreign investors make investments through funds, partners, or intermediaries.
“This strategy can assist foreign threat actors in avoiding or complicating external scrutiny through a certain level of separation,” it stated.
The announcement also cautioned startups that if they allow foreign threat actors to gain a foothold in their companies, they could risk being deprived of contracts or funding from the US government. Additionally, they may be influenced to make decisions that benefit “foreign threat actors” and harm US interests.
There have been numerous instances where Chinese investments in small US tech companies or acquisitions through venture capitalists have quickly turned initially civilian or non-military technologies into dual-use, posing a threat to US national security.
The Committee on Foreign Investment in the United States (CFIUS), an institution led by the US Treasury Department that reviews foreign investments, said in its latest annual report on Tuesday that it continues to handle a significant number of cases involving “complex national security implications” from certain source countries.
CFIUS can recommend to the President to reject certain foreign acquisitions of US companies on grounds of national security.