Covered Foreign Persons Explained: Navigating Treasury’s New Investment Rules

A new era of regulatory oversight is here for U.S. investors. On January 2, 2025, the U.S. Department of the Treasury’s final rule on the outbound investment security program took effect, introducing significant compliance obligations for certain foreign investments. Known as the Outbound Investment Rules, this regulation establishes new requirements for identifying and reporting investments – direct or indirect – in foreign entities tied to sensitive technologies in China and other jurisdictions of concern.

At the heart of the rule is a targeted set of national security concerns: to prevent U.S. capital and expertise from inadvertently supporting foreign military, cybersecurity, or surveillance advancements in countries of concern. U.S. investors and their foreign subsidiaries must now conduct a new level of due diligence to identify and disclose investments in entities involved in sensitive sectors.

Who Is Considered a “Covered Foreign Person”?

Investments subject to the rule are those involving Covered Foreign Persons (CFPs). CFPs include entities or individuals that meet any of the following criteria:

• Located in China, Hong Kong, or Macau and involved in:

  • Semiconductors and microelectronics

  • Artificial intelligence

  • Quantum computing

• Located outside of China but owned or controlled by Chinese entities or persons

• Owned by non-Chinese entities that either:

  • Derive 50% or more of their revenue or income from CFPs, or

  • Spend 50% or more of their capital expenditures or operating expenses on CFPs

Who Must Comply?

The Outbound Investment Rules apply to a wide range of individuals and entities, including:

• U.S. citizens and lawful permanent residents

• Entities organized under U.S. law, including U.S. subsidiaries of foreign companies

• Foreign entities with U.S. operations

• U.S. individuals in decision-making roles at foreign companies who must not “knowingly direct” those companies to engage in covered transactions

The broad scope means that compliance teams, legal counsel, and investment decision-makers across a wide range of organizations must now integrate these new requirements into their due diligence workflows.

How Due Diligence Helps Navigate the Rules

Compliance with the Outbound Investment Rules hinges on what the Treasury calls a “reasonable and diligent inquiry.” Effective due diligence is key to making that possible, both before an investment is made and on an ongoing basis.

Here are the core areas where due diligence supports compliance:

1. Determine Applicability

Organizations must first assess whether the rule applies to a specific transaction based on the investment’s profile and the nature of the investment target.

2. Investigate Ownership and Affiliations

A clear understanding of ownership structures, key personnel, and affiliated entities is crucial to identifying any direct or indirect ties to China or other jurisdictions of concern.

3. Evaluate Business Activity and Potential

Even if a target entity is not currently a CFP, it may become one. Due diligence should assess future business trajectories, R&D initiatives, and industry involvement.

4. Use Credible Data Sources

Public records, commercial databases, and media sources provide critical insights into company activities and affiliations. Automating these checks ensures consistency and speed.

5. Enable Ongoing Monitoring

Changes in ownership, leadership, or operational focus can quickly change an entity’s compliance status. Continuous monitoring ensures investors are alerted to these shifts in real time.

Stay Ahead of the Compliance Curve

With the Outbound Investment Rules now in effect, it’s essential for investment firms, multinational companies, and compliance teams to modernize their due diligence strategies. The ability to identify CFPs, both at the time of investment and as business relationships evolve, can help protect firms from regulatory risk and reputational damage.

At Intelligo, we make it easier to stay ahead. Our AI-assisted platform transforms public records research into a proactive, real-time solution – giving you the clarity and confidence to make informed decisions in a changing regulatory landscape.

Need help navigating the compliance landscape? Request a demo to see how Intelligo can support your due diligence and risk management workflows.