How Does Investment Screening Impact the Fight Against Corruption?

Following decades of increasing globalization, the world’s economy has been shifting toward more economic nationalism. Markers thereof include the return of industrial policy, reshoring and so-called “friendshoring,” the imposition of new tariffs, and more. While debating the relative merits and drawbacks of such policies is not for these pages, it is worth exploring here how these trends impact the fight against corruption.

In this piece, I explore one tool in particular: investment screening, drawing on a conversation with John Kay, Head of Programmes and Strategic Partnerships at the CELIS Institute. The CELIS Institute was established in 2020 as a successor to the International Conference on a Common European Law on Investment Screening, and is a non-profit, non-partisan think tank “dedicated to promoting better regulation of foreign investments in the context of security, public order, and competitiveness.” Kay’s views do not necessarily represent those of CELIS overall.

Investment screening – the process by which a government reviews, and then approves or rejects, a proposed investment is hardly new. But of late, Kay notes, governments are paying closer attention to sources of incoming capital. This is due, in part, to a growing understanding of “economic security,” sitting at the intersection of national security and domestic economic concerns. The US Committee on Foreign Investment in the United States (CFIUS), created in 1975, has been strengthened, beginning with the 2018 Foreign Investment Risk Review Modernization Act (FIRRMA) and followed by other steps throughout the 2020s. Further, in 2020, the EU’s Regulation 2019/452 “Establishing a framework for the screening of foreign direct investments into the Union” took effect.

Kay explained that there are two primary ways to think about how investment screening plays out in the anti-corruption context. First, there is the “negative” case. Governments have significant latitude and discretion. By some readings, almost all investments could be subject to review, or investors could be required to submit to audits, obtain security clearances, or meet other criteria. As Kay put it, “with great power comes great responsibility.” Where rule of law is weak, and processes are not transparent, such screening could be used to steer opportunities to a select group of investors who are “in favor.” Hungary has been dogged by such allegations.

There is also a “positive” case, Kay continued. Investment screening can be used to forestall “malign economic influence,” whereby non-democratic or kleptocratic states invest strategically in key sectors of a target state, often taking advantage of, and exacerbating, corruption. This type of investment seeks to influence internal affairs, as well as to achieve geo-political goals. Kay points out that concerns about investments from Russia, China, Iran and other countries drove the EU to strengthen screening; this was similarly a concern for Moldova. He says that the best examples of investment screening safeguarding sensitive sectors are the ones we don’t know about: thanks to the deterrent effect, the investment never happens.

At the end of the day, Kay notes, national security concerns justify screening strategic sectors – all the more so because corruption itself can become a security risk. Countries need access to information about foreign investors, as well as a formal system that includes review by, and coordination among, beneficial ownership registries, intelligence services, and ministries of economy. But strong institutions, a culture of transparency and objective review criteria are all crucial to avoid investment screening from being abused to further corruption.

Marc Schleifer

Governance, Democracy and Economic Development Expert