Industry Committee on June 18th, 2020

[The Chair, Liberal, Sherry Romanado]

I call this meeting to order.

Welcome to meeting 25 of the House of Commons Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108(2) and the motion adopted by the committee on June 1, we are meeting to study the Investment Canada Act.

Today's meeting is taking place by video conference, and the proceedings will be made available via the House of Commons website.

As a reminder to members and witnesses, before speaking, please wait until I recognize you by name. When you are ready to speak, please unmute your microphone and return it to mute when you are finished. When speaking, please speak slowly and clearly so the interpreters can do their work. Please make sure that you are on the language you will be speaking on the Zoom app.

As is my normal practice, I will hold up a yellow card when you have 30 seconds left in your intervention and a red card when your time is up.

We have two panels today. The first panel will be from 3:00 p.m. to 4:00 p.m. We will take a break at 4:00 p.m. so we can switch out the witnesses and have a little health break, because we will then go into a two-hour meeting for the second panel.

I'm not going to read out all of your titles again, as I did that last week, but I want to welcome back Mr. Hahlweg, from the Canadian Security Intelligence Service; Mr. Davies, from the Department of Industry; and Mr. Dominic Rochon, from the Department of Public Safety and Emergency Preparedness.

You will each have five minutes to testify, followed by the rounds of questions.

I will start with Mr. Hahlweg.

Mr. Hahlweg, you have the floor for five minutes.

[Tim Hahlweg, Assistant Director, Requirements, Canadian Security Intelligence Service]

Thank you, Madam Chair and members of the committee. Good afternoon.

I'm currently the assistant director of requirements at the Canadian Security Intelligence Service. Among other things, my directorate is responsible for the analysis of intelligence that CSIS collects on threats to the security of Canada. Our intelligence assessments and the advice are provided to the government to inform decision-making.

I want to thank you for the invitation today to participate in the committee's study of the Investment Canada Act.

I want to begin by briefly outlining CSIS's mandate, which is to investigate activities suspected of constituting a threat to the security of Canada, to advise the Government of Canada on these threats, and to take measures to reduce these threats. The threats to the security of Canada are defined in section 2 of the CSIS Act as espionage or sabotage, foreign-influenced activities, terrorism and subversion of government through violence.

As discussed in our recent public report, state-sponsored economic espionage activities in Canada continue to increase in breadth, depth and potential economic impact. In order to fulfill their national economic, intelligence and military interests, some foreign states engage in espionage activities. Foreign espionage has significant economic ramifications for Canada, including lost jobs, intellectual property, and corporate and tax revenues, as well as competitive advantages.

With our economic prosperity and our open academic and research communities, Canada offers attractive prospects to foreign investors. Although foreign investment is a key driver of Canada's economic prosperity, it also has the potential, in certain cases, to adversely affect our national security. The acquisition of sensitive intellectual property, technology, or vast amounts of Canadian citizens' private data for foreign use, or with foreign-state control, can threaten national security. While the vast majority of the foreign investment in Canada is carried out in an open and transparent manner, some state-owned enterprises and private firms with suspected or known ties to their government and/or intelligence services can pursue corporate acquisition bids in Canada or other economic activities on a non-commercial basis for their own strategic objectives.

Foreign states have engaged in espionage and foreign interference targeting Canada for years. This is not a new activity. CSIS director Vigneault has spoken publicly about the impact of these threats to Canada's economy and national interests, including the threats posed by China and Russia. In its 2019 review of foreign interference and public report, the National Security and Intelligence Committee of Parliamentarians also reflects that these, among other states, are of concern.

While I cannot speak in detail about any operational matters, I can assure you that CSIS is actively investigating all suspected threats of foreign interference and espionage, and we engage with your NSICOP colleagues on these important matters in a classified space.

These threats pose particular concerns during the COVID-19 pandemic, which has created economic vulnerabilities for Canadian companies upon which foreign threat actors may seek to capitalize.

To assess such impacts, the ICA authorizes the government to review foreign investments on national security grounds. CSIS is a prescribed investigative body under the national security provisions of the ICA. As such, the service conducts investigative efforts related to national security concerns arising from foreign investments linked to foreign government entities. CSIS obviously works with other government departments and agencies—these include Innovation, Science and Economic Development Canada, the Department of National Defence, the Communications Security Establishment and the RCMP—to provide advice in support of the national security review process.

While I cannot comment publicly on any specific advice that CSIS has provided, or on any specific ICA transactions, I would note that it's ultimately within the prerogative of the Governor in Council to allow, disallow or impose mitigation measures on investments that would be injurious to Canada's national security.

Corporate acquisition is not the only way through which hostile actors can threaten Canada's economic security. Threat actors can also access proprietary government information through cyber-attacks, espionage and insider threats. Insiders are individuals with direct access to the systems and intellectual property in corporate and research environments. This could potentially include business people, scientists and researchers. Put another way, today's spies also wear lab coats, not just trench coats.

CSIS observes that technology or know-how particularly in academia and small to medium-sized enterprises is often less protected and more vulnerable to state-sponsored espionage.

Thank you very much. That ends my opening comments.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

We'll now go to Mr. Davies.

You have the floor for five minutes.

[Mitch Davies, Senior Assistant Deputy Minister, Industry Sector, Department of Industry]

Thank you, Madam Chair, for this opportunity to discuss the Investment Canada Act as related to the committee's study.

I'm the senior assistant deputy minister of the industry sector for Innovation, Science and Economic Development Canada and the deputy director of investments, responsible for supporting the director of investments and advising the Minister of Innovation, Science and Industry on the Investment Canada Act.

In my brief opening remarks, I would like to provide background to the committee on how we administer the act, including in the current context shaped by COVID-19.

As has been widely recognized, foreign direct investment, or FDI, plays an important role in the development of Canada's economy, contributing to productivity and providing vital links to global value chains. It fuels innovation and creates well-paying jobs. FDI will be an important component as the economy recovers from the effects of the pandemic. At the same time, the government has a responsibility to ensure that FDI benefits Canada and to protect Canadians against national security threats that can arise through foreign investment.

With respect to how the authorities in the act are administered, information about decisions is made public through an annual report on the ICA, including disclosure of summary statistics on the operation of the net benefit and national security review processes.

The government's net benefit review authorities are based on the value of the Canadian business. Based on the recommendations of a blue-ribbon panel in 2008, successive governments have raised the net economic benefit review threshold for private, WTO and trade agreement investors. The threshold now stands at $1.613 billion in enterprise value for private investors from Canada's trade agreement partners and $1.075 billion for private investors from other WTO investors, while it is at $428 million in asset value for state-owned WTO investors. These amounts are updated each calendar year in accordance with changes in nominal GDP.

The top three source countries or regions of investors by number of ICA filings were the United States, at 59%; the European Union, at 24%; and China, as a third, at 4%. The United States and the European Union have been historically Canada's largest investors under the act. Additionally, all foreign investments—regardless of value, regardless of the investor or country of origin—are subject to review under the act's national security review process.

Threats to national security are complex and evolving. Accordingly, the ICA and its associated regulations do not define national security. However, to provide transparency for investors and Canadian businesses, the government published national security review guidelines in December 2016. These guidelines are complementary to the national security provisions of the act.

Recognizing the unique challenges brought about by COVID-19, the minister issued a policy statement on April 18, 2020, which indicates that the government will apply “enhanced scrutiny” under both the net benefit and national security provisions of the ICA to foreign investments related to “public health or...in the supply of critical goods and services”.

In addition, given that “investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada's economic or national security interests”, the statement indicates that all foreign investments by state-owned investors will be subject to “enhanced scrutiny” under the ICA. Enhanced scrutiny could involve the minister requesting additional information during the course of a review or extended review timelines in order to ensure the government can fully assess these investments.

The goal of the statement was to inform foreign investors that we would exercise these authorities to their utmost, with a focus to preserve net benefits to Canada of proposed investments and to protect Canada's national security. In particular, the review processes would consider closely the effect of proposed transactions on potential risks to the supply of critical goods and services during the period of the pandemic.

This approach under the ICA, including as articulated in the COVID-19 policy statement, is consistent with general intelligence assessments shared by the national security departments and agencies. I am pleased that my colleagues from Public Safety Canada and the Canadian Security Intelligence Service are with me here today to speak to the important roles their organizations play in the administration of the national security provisions of the act.

Thank you, Madam Chair. I'm happy to answer any questions the members may have.

I should note that I am unable to speak to or respond to questions with respect to specific investment reviews due to the strict confidentiality provisions of the act.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much, Mr. Davies.

Our next guest is Mr. Rochon.

You have the floor for five minutes.

[Dominic Rochon, Senior Assistant Deputy Minister, National Security and Cyber Security Branch, Department of Public Safety and Emergency Preparedness]

Thank you, Madam Chair, for this opportunity to discuss the Investment Canada Act. Good afternoon, everyone.

I am the senior assistant deputy minister of the national and cyber security branch here at Public Safety Canada, responsible, among other things, for advising the Minister of Public Safety and Emergency Preparedness on the national security dimensions of the ICA. My remarks will focus on the national security provisions under the ICA, which is administered by the Minister of Innovation, Science and Industry, as we just heard, who consults with the Minister of Public Safety and Emergency Preparedness as part of his deliberations.

The national security provisions of the ICA are broad by design and enable Canada to assess all inbound foreign investments, including the establishment of a new Canadian business or an entity carrying on operations in Canada, the acquisition of control of a Canadian business of any dollar value, and the acquisition of all or part of an entity carrying on operations in Canada.

National security is not explicitly defined within the ICA, as this allows the government to remain nimble in response to the ever-changing threat environment. Public Safety Canada manages a national security review process in collaboration with 18 departments and agencies. As we heard Mr. Hahlweg point out, this ranges from CSIS, the Communications Security Establishment, the Department of National Defence, the RCMP and Global Affairs Canada to Natural Resources Canada, the Public Health Agency and the Department of Finance. This whole-of-government approach brings the relevant expertise to bear as we assess the national security risks of each transaction.

The review takes into account a variety of factors, including the potential effects on Canada’s defence capabilities and interests; the potential effects on the transfer of sensitive technology or know-how outside of Canada; involvement in the research, manufacture or sale of goods or technology important to Canada’s national defence; the potential impact on the security of Canada’s critical infrastructure; the potential to enable foreign surveillance and espionage; the potential to hinder current or future intelligence or law enforcement operations; the potential impact on Canada’s international interests, including foreign relationships; and the potential to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

In light of COVID-19, we have also applied increased scrutiny to all foreign direct investments in Canadian businesses that are vital to public health and the security of supply of critical goods.

The national security review is rigorous, with multiple steps and thresholds that must be met before taking action. Unlike many countries, Canada has a mandatory notification scheme where an investor must let the Department of Innovation, Science and Economic Development know when they establish or take control of a company.

The process begins once we become aware of a transaction, with a preliminary assessment of all filings and information sharing among partners. If there are reasonable grounds to believe that the investment could be injurious to national security, the process moves into a notice period, with a 45-day window for the community to investigate concerns. If, after this period, concerns remain that the transaction could be injurious to national security, a national security review is ordered by the Governor in Council on the recommendation of the Minister of Innovation, Science and Industry, after consultation with the Minister of Public Safety and Emergency Preparedness.

The national security review period provides Canada with another 45 calendar days, with an optional 45-day extension, to investigate whether this investment would be injurious to national security. In total, from receipt of notification to recommendation to cabinet, the process can take up to 200 days. Further extensions, of course, may also be granted with the investor’s consent.

At the end of the national security review period, the government has three options. If it is determined that the investment does not meet the threshold of “would be injurious to national security”, the investment is allowed to proceed. If the government determines that an investment meets the threshold, then it may decide to either allow it, subject to the imposition of mitigation measures to address residual risk, or order that the investment be blocked, if it hasn’t been implemented yet, or divested, if it has been implemented.

To conclude, the national security review process is a robust one, involving a multitude of investigative bodies that work collaboratively to ensure that Canada is safeguarded against national security threats that can arise through foreign direct investment.

Madam Chair, I would be pleased to now answer questions that members may have. I'll offer up the same disclaimer as my colleague from ISED, in that I may be unable to speak to, or respond to, questions related to specific investment reviews that are currently under way or that have taken place.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

We will start our round of questions with MP Rempel Garner.

You have the floor for six minutes.

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Thank you, Madam Chair.

I'll start by directing my questions to Mr. Hahlweg. I'll begin by pointing to a part of the department's 2019 report that discusses SOEs “with close ties to their government and or intelligence services”, and acquisition bids and economic activity in Canada.

The report says specifically this:

Corporate acquisitions by these entities pose potential risks related to vulnerabilities in critical infrastructure, control over strategic sectors, espionage and foreign influenced activities, and illegal transfer of technology and expertise.

I'm interested in knowing which countries you were referring to within this section of the report.

[Tim Hahlweg]

As stated in the public report, and as indicated by our director in public, there are many countries of concern in this space. I specifically noted Russia and China. The NSICOP review of 2019 also reflects that those two countries are countries of concern, but there are others. Foreign interference and economic espionage have been around for a long time in this country, unfortunately. We are bringing all of our investigative efforts to bear to make sure we identify those countries and advise the government in a proactive manner.

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Can you provide the committee with a list of recent SOE acquisitions in Canada that raise the specific concerns noted in your report?

[Tim Hahlweg]

Unfortunately, given the unclassified nature of this committee and this conversation today, I can't get into any specific SOE acquisitions and talk about any specific cases.

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Can you perhaps table with the committee a table of the countries and the number of acquisitions that would have led to this recommendation?

[Tim Hahlweg]

I would defer to my colleagues from either Public Safety or ISED to comment on that. I believe they would have those numbers from specific countries.

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Thank you.

Has CSIS noticed any use of shell companies that are heavily influenced or connected to undemocratic countries? What I'm trying to get at here is whether your department has flagged the use of shell companies, or companies that may be from a country that we wouldn't necessarily flag but that have been owned or significantly owned by an authoritarian government. Is this something that has come up frequently in your review?

[Tim Hahlweg]

It's a very good question. I can't speak to specific operational matters and get into any specific details, but I can tell you that acquisitions by shell companies, state-owned enterprises, or ones directly linked to intelligence services or foreign governments are the ones that we focus our energy and our attention on.

Specifically related to the sectors that were already discussed, the threat landscape changes, as you can imagine, frequently. We have to make sure we are alive to what those current threats are, and make sure sure we're focused on the right sectors, to make sure that we can inform the government appropriately.

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

To the panel as a whole, I have heard concerns that because some of the screening that happens under the ICA happens under a division of Global Affairs that is also responsible for the promotion of trade, this might be an actual conflict of interest within the government department.

Do you think the responsibility for screening should be separated out from any department that has responsibility for the promotion of trade?

[Mitch Davies]

Madam Chair, perhaps I could address the question.

The screening process is initiated in part by notices. Some 900 notices are received under the Investment Canada Act each year. There were over 900 the last fiscal year. Those are all made available in the system to our investigative bodies. They are able to come to their own conclusions and review the information—

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

That is not the question I asked. I asked if you thought there was a conflict of interest in having screening happen in a department that also has a mandate or deliverable where they are measured on the attraction of trade and FDI.

[Mitch Davies]

Madam Chair, in this case the two ministers involved in the process are the Minister of Public Safety and the Minister of Innovation, Science and Economic Development. Those are the two ministers who are involved in the identification of cases for which notices need to be offered, and also the recommendation of the Governor in Council. So to that extent—

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Thank you. That's [Inaudible—Editor].

[Mitch Davies]

—that's a strong process built into the law.

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Thank you.

Also, I note that there's a difference between a security screening and a security review. How many cases go through a security screening versus a security review? What's the threshold?

[Mitch Davies]

Madam Chair, I'll just start, and then my colleagues may wish to comment.

I mentioned over 900 notices received under the Investment Canada Act in the last fiscal year. All of those notices—

[Michelle Rempel, Conservative, Calgary Nose Hill, AB]

Okay, that's not the question I asked. I asked about screening versus review.

[Mitch Davies]

—are part of the information. Those are then reviewed to determine which ones are prioritized.