Determine whether a transaction is a covered transaction
Severity Critical31 CFR §§ 850.209, 850.210, 850.501
Covered transactions include acquiring an equity or contingent equity interest in a covered foreign person; providing debt financing with equity-like rights; converting a contingent equity interest acquired on or after 2025-01-02; acquiring, leasing or developing operations, land, property or assets in a country of concern that will result in the establishment of a covered foreign person or the engagement of a country-of-concern person in a covered activity; entering a joint venture, wherever located, with a country-of-concern person that will engage in a covered activity; and acquiring a limited partner interest in a non-U.S. fund that the U.S. person knows likely will invest in a country-of-concern person in the semiconductor and microelectronics, quantum information technology or artificial intelligence sectors.
- Applies when
- Chinese AI companies with U.S.-person founders, residents or U.S. entity shareholders must test each financing, buyback, employee equity or offshore joint-venture structure against this program, and U.S. investors conducting diligence will in turn require the Chinese target to evidence that it is not a covered foreign person.
- Evidence to retain
- · Transaction structure chart and covered-transaction determination memo citing the paragraphs of § 850.210
- · Description of the target activities mapped against the § 850.217 and § 850.224 lists
- · Investment-scope description and fund undertakings for limited partner interests
- · Approval record for the determination signed by legal and compliance
Estimated first-time effort: 5–15 person-days (estimate, not a commitment)
Identify prohibited AI and chip covered activities
Severity Critical31 CFR §§ 850.217, 850.224
Two AI triggers make a transaction prohibited: developing an AI system designed to be exclusively used for, or intended by the covered foreign person to be used for, any military end use or government intelligence or mass-surveillance end use; and developing an AI system trained using more than 10 to the power of 25 computational operations, or more than 10 to the power of 24 computational operations using primarily biological sequence data. Chip-side prohibited activities include EDA software, front-end semiconductor fabrication equipment, volume advanced packaging equipment, EUV-dedicated items, designing integrated circuits meeting or exceeding ECCN 3A090.a, fabricating logic on non-planar transistor architectures or at 16/14 nm or below, NAND with 128 or more layers, DRAM at 18 nm half-pitch or below, gallium-based compound semiconductors, graphene or carbon nanotube circuits, circuits designed to operate at or below 4.5 Kelvin, and specified supercomputer and quantum computing activities.
- Applies when
- Chinese foundation-model companies approaching these compute scales, companies training on biological sequence data, and chip design or semiconductor equipment companies: for them an investment involving a U.S. person may be prohibited outright.
- Evidence to retain
- · Training compute accounting with a stated methodology distinguishing pre-training, fine-tuning and reinforcement learning
- · Training data composition statement addressing whether biological sequence data predominates
- · Product end-use statement and exclusion undertakings for military and intelligence uses
- · Technical file recording chip design parameters and process nodes
Estimated first-time effort: 5–15 person-days (estimate, not a commitment)
File notification of notifiable transactions within 30 days
Severity High31 CFR §§ 850.401-850.406
A U.S. person undertaking a notifiable transaction must file with Treasury no later than 30 calendar days after the completion date, following the electronic filing instructions on the Outbound Investment Security Program website, with the content required by § 850.405 and the certification in § 850.203. A U.S. person must also file for notifiable transactions of its controlled foreign entities, and must file within 30 calendar days of acquiring post-closing actual knowledge of facts that would have made the transaction covered. AI-side notifiable triggers include developing an AI system trained using more than 10 to the power of 23 computational operations, and AI systems intended for cybersecurity applications, digital forensics tools, penetration testing tools or the control of robotic systems.
- Applies when
- Embodied-AI and robotics control companies should note in particular that AI for the control of robotic systems is a notifiable activity even at compute levels far below frontier-model thresholds.
- Deadline: Within 30 calendar days of the completion date, or of acquiring the relevant knowledge
- Evidence to retain
- · Memo establishing the completion date
- · Notification working papers and the electronic filing receipt
- · Certification signed by the chief executive officer or a duly authorized designee
- · Internal log of post-closing knowledge events and evidence of filing within 30 days
Estimated first-time effort: 5–12 person-days (estimate, not a commitment)
Conduct a reasonable and diligent inquiry to meet the knowledge standard
Severity High31 CFR §§ 850.104, 850.216
In assessing whether a U.S. person knew a fact, Treasury considers what the person had or could have had through a reasonable and diligent inquiry at the time of the transaction, including the questions asked of the target or counterparty, the contractual representations and warranties obtained or attempted, efforts to obtain and consider non-public information, available public information and its consistency with other information, whether the person purposefully avoided learning relevant information, the presence or absence of warning signs such as evasive or non-responses or refusal to provide information or warranties, and the use of public and commercial databases. A person that failed to conduct such an inquiry may be assessed to have had reason to know.
- Applies when
- Every U.S. person party to an investment involving a Chinese target, and Chinese targets that must furnish representations and warranties to U.S. investors.
- Evidence to retain
- · Diligence questionnaire and the original responses from the target
- · Text of the representations and warranties in the transaction documents
- · Search records from public and commercial databases
- · Memo identifying warning signs and how they were resolved
Estimated first-time effort: 5–15 person-days (estimate, not a commitment)
Take all reasonable steps for controlled foreign entities and avoid knowingly directing
Severity High31 CFR §§ 850.302, 850.303
A U.S. person must take all reasonable steps to prohibit and prevent transactions by its controlled foreign entities that would be prohibited if undertaken by a U.S. person. Treasury considers compliance agreements with the controlled foreign entity, the existence and exercise of governance or shareholder rights, periodic training and internal reporting, documented internal controls that are periodically reviewed, and a documented testing or auditing process. Separately, a U.S. person may not knowingly direct a transaction by a non-U.S. person that would be prohibited if undertaken by a U.S. person. A U.S. officer or director can avoid being treated as directing by recusing from formal approval and decision-making, from reviewing, editing, commenting on, approving and signing transaction documents, and from negotiations.
- Applies when
- Offshore entities of Chinese AI groups that are controlled by a U.S. person, and U.S.-person officers, directors or investor-designated board members serving in Chinese companies.
- Evidence to retain
- · Compliance agreements executed with controlled foreign entities
- · Internal control documents, periodic review records and testing or audit reports
- · Records of training and internal reporting mechanisms
- · Recusal statements by U.S. directors or officers, corroborated by meeting minutes
Estimated first-time effort: 8–20 person-days (estimate, not a commitment)