European auditors: Blind spots in screening potentially harmful FDI in EU

Screening of potentially harmful foreign investment in the EU suffers from blind spots which compromise effectiveness and efficiency when identifying, assessing and mitigating security and public-order risks in the entire EU, according to a new report by the European Court of Auditors, released on December 6.

Although the recently established EU framework is a positive step, making it possible to detect potential threats to the EU’s security or public order, a large proportion of FDI between 2020 and 2022 was not screened and reported at EU level, the European Court of Auditors said.

This occurred for a number of reasons, in particular because there was no screening mechanism in some countries, while those countries that did have a mechanism considered different sectors as critical, or had different interpretations of key concepts of the EU rules adopted in 2020.

Openness to FDI is a key principle of the EU’s single market, and foreign investment can enhance growth and innovation in countries where the money is received, the report said.

However, investment in strategic sectors that are vital for security and public order in the EU (e.g. ports, nuclear plants, semi-conductors, or dual-use microchips) may at times create a risk of unwarranted control by non-EU investors (e.g. those involved in criminal activity, or controlled by foreign governments or armed forces).

This risk may increase if EU countries do not coordinate their efforts, according to the report.

“Screening of foreign investment in the EU is a work in progress,” Mihails Kozlovs, the European Court of Auditors member in charge of the audit, said.

“As the EU’s safety net, it has some large holes in it. If the EU wishes to mitigate the risks better, both the Commission and all member states must repair the net.”

The auditors found that the European Commission has taken appropriate steps to set up the framework, and that more and more EU countries are now following up with their own screening mechanisms and are working together more closely. This makes it possible to detect risks that could otherwise stay under the radar.

However, various factors still hinder the proper functioning of the system. EU rules do not require countries to set up a screening mechanism, and also allow them discretion in determining the scope of their national screening rules.

In addition, countries are not obliged to report the outcome of their screening decisions to the Commission, even when it issues an opinion or other EU countries have shared their concerns.

The auditors found that several countries reported only those transactions that were likely to affect their own public order or security, thus depriving other member states and the Commission of a chance to assess the potential impact on them, or on EU programmes.

Between 2020 and 2022, EU countries reported 886 screened cases to the Commission.

“We found that the number of notifications did not correlate with the level of inward FDI for a number of countries.”

Six countries submitted 92 per cent of all cases, and nine countries the remaining eight per cent.

Twelve countries did not carry out any screening at all or report any cases, even though they account for almost half of the EU’s inward FDI. At the same time, the mechanism is overburdened with a high volume of low-risk or ineligible cases.

The Commission’s eligibility and risk assessments, opinions and recommendations need to improve, th European Court of Auditors said.

Although its assessments identify risks and help with forward thinking on potential vulnerabilities, the auditors identified issues with the Commission’s assessments and aspects of the recommendations which may pose challenges in terms of enforceability, or be inconsistent with a market-economy environment.

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