National security & foreign investment screening

Since October 2020, most CEE jurisdictions have been subject to the EU FDI Screening Regulation, which requires every Member State to implement national screening regimes. Although the decision to screen and block a deal is currently the sole responsibility of each Member State, a revised FDI Screening Regulation is anticipated. This will aim to create further harmonisation, greater convergence, and potentially give the European Commission powers to intervene or impose remedies in specific cases, leading to more consistent screening.

Currently, each national mechanism varies in scope and operation: some take a broader approach than others. But collectively, those regimes have tightened, resulting in more robust national security-related foreign investment screening. Bulgaria, Czechia, Poland and Romania are among the CEE countries that have recently adopted or updated their screening mechanisms.

In addition to national security-related sectors, these typically apply to critical infrastructure (e.g., energy, communications, transport), critical technologies (e.g., AI, semiconductors, quantum technologies, biotechnologies) and the supply of critical input (e.g., raw materials, medical supplies, food supplies).

Romania’s FDI screening regime, undertaken by the Commission for Examining Foreign Direct Investments (CEISD), applies to investments by all domestic and international investors that involve a “sensitive sector”, or which have the potential to affect national security or public order.

“In practice, that the question of whether an investment falls into a sensitive sector is widely interpreted,” says Claudia Nagy, senior counsel at CMS in Romania. “Because we have only one FDI screening regime the scope of review is more generally interpreted; unlike, for example, Hungary, where they have two: a General Regime and a Special Regime.”

To enhance their national screening laws, Austria, Czechia, Poland and Slovakia already have multi-sector screening regimes, while Bulgaria and Croatia are in the process of implementing them.

Nagy goes on, “There’s more interaction between EU Member States, and we try to learn from each other’s experience. But FDI screening has a political component in each jurisdiction, so we might not have a fully uniform FDI screening regime across CEE.”

She describes the criteria which the CEISD apply. “They look at potential threats: illicit sources of funds and criminal activity by investors and their connections who could be a national security concern. They also consider the security of supply. We have a very low investment threshold, EUR 2 million, for mandatory filings and a very wide list of areas of interest: security of energy and infrastructure, banking and finance, and the security of citizens and communities, which screens transactions that, under narrower regimes, are not reviewed.”

The main principles of FDI screening regimes are quite similar across CEE jurisdictions. “But most other jurisdictions have a narrower list,” Nagy explains. “For example, Poland only had 12 filings last year, whereas we had about 600, and if every investor submitted a relevant filing, we would likely have many more. Most jurisdictions are in the middle.”

Notwithstanding Romania’s vigilance, based on public information no deals have been formally blocked to date, there might be a case now, although a number have been delayed by backlogs and a high workload following recent changes in government.

However, Nagy notes, “When investors are told that the transaction will not be approved, applications are usually withdrawn.” In terms of decisions published, the most active sectors have been telecoms, IT, manufacturing and energy.

In June 2023, Slovenia passed the Slovenian Investment Promotion Act (the Act) establishing a permanent FDI screening regime. It has subsequently been amended several times. Robert Kordić, senior associate at CMS in Slovenia, says, “While FDI screening is legally aligned, there are challenges when dealing with the Ministry (of the Economy, Tourism and Sport), so you have to take a step back.” Challenges include legal uncertainty, non-disclosure of decisions, and a potentially long review process.

When implementing EU regulations, Slovenia often takes a cut-and-paste approach to domestic legislation, Kordić notes. “But EU legislation and directives are often just minimum standards.

Fortunately, the Act only requires FDI notifications if the investor is from outside the EU. Evidently, many investors come from the US, either directly or indirectly, through various holding structures. US capital is increasing in Slovenia, and that’s important.”

Kordić notes, “The definition of critical infrastructure is broad: energy, transport, water, health. But the supply of critical inputs, like raw materials and food, raises questions.” He explains that in 2023, the Ministry issued 14 decisions of refusal because it was determined that the target company does not perform a critical activity.. “Without clear guidance as to what constitutes a critical activity, it will remain problematic for some foreign investors.”

The inconsistent application of FDI screening across CEE jurisdictions can create legal uncertainty and sometimes delays for investors. Varying national regulations and definitions for strategic sectors can also make it difficult for them to quantify the risks and opportunities across different CEE countries. Despite these challenges, the move towards further convergence and, ultimately, more consistent screening mechanisms, looks set to continue.