Economics References Committee—Senate Standing—Greenfields, cash cows and the regulation of foreign investment in Australia

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Economics References Committee—Senate Standing—Greenfields, cash cows and the regulation of foreign investment in Australia—Report, dated August 2021

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August 2021

The Senate

Economics References Committee

Greenfields, cash cows and the regulation of foreign investment in Australia

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iii

Members

Chair Senator Alex Gallacher ALP, SA

(Member from 2 July 2019 to 5 February 2020. Chair from 4 July 2019 to 5 February 2020. Member from 16 June 2020. Chair from 17 June 2020.)

Senator Kimberley Kitching ALP, VIC

(Member from 5 February 2020 until 16 June 2020. Chair from 6 February 2020 until 16 June 2020.)

Senator Alex Gallacher ALP, SA

(Member from 16 June 2020 to 16 April 2021. Chair from 17 June 2020 to 16 April 2021.)

Senator Anthony Chisholm ALP, QLD

(Member from 16 April 2021. Chair from 16 April 2021.)

Deputy Chair Senator Slade Brockman LP, WA

Members Senator Andrew Bragg LP, NSW

Senator Jenny McAllister ALP, NSW

Senator Rex Patrick IND, SA

Senator Jess Walsh ALP, VIC

Participating Members Senator Deborah O’Neill NSW, ALP

Senator Nick McKim AG, TAS

Senator Peter Whish-Wilson AG, TAS

Secretariat Mr Mark Fitt, Committee Secretary Dr Fiona Allen, Senior Research Officer Ms Taryn Morton, Administrative Officer

PO Box 6100 Phone: 02 6277 3540

Parliament House Fax: 02 6277 5719

Canberra, ACT 2600 Email: economics.sen@aph.gov.au

Contents

Members ............................................................................................................................................. iii

Acronyms and Abbreviations ........................................................................................................ vii

Executive Summary ........................................................................................................................... ix

List of Recommendations ................................................................................................................. xi

Chapter 1—Introduction .................................................................................................................... 1

Chapter 2—Foreign investment proposals and the national interest ..................................... 21

Chapter 3—Regulating foreign investment: assessing applications and applying conditions ................................................................................................................................ 47

Chapter 4—Regulating foreign investment: compliance and enforcement ........................... 67

Chapter 5—Transparency in foreign investment ........................................................................ 91

Chapter 6—Committee comment ................................................................................................. 103

Dissenting report by the Coalition Senators ............................................................................. 115

Additional comments by Senator Rex Patrick ........................................................................... 119

Additional comments by the Australian Greens ...................................................................... 123

Appendix 1—Submissions and additional information ......................................................... 131

Appendix 2—Public hearings ....................................................................................................... 137

vii

Acronyms and Abbreviations

ACCC Australian Competition and Consumer Commission

AFP Australian Federal Police

ASIC Australian Securities and Investments Commission

ATO Australian Taxation Office

Audit Office Australian National Audit Office

AUSTRAC Australian Transactional Report and Analysis Centre

BEPS Base erosion and profit shifting

CIC Critical Infrastructure Centre

CTFE Chow Tai f*ck Enterprises

FDI Foreign Direct Investment

FIRB/the Board Foreign Investment Review Board

FTE full-time equivalent

KPIs key performance indicators

MPS The Chinese Ministry of Public Security

NZ/OIA New Zealand under the Overseas Investment Act 2005

OECD Organisation for Economic Co-operation and Corporate

Development

OIO New Zealand Overseas Investment Office

PSH Pioneer Sail Holdings

R&D research and development

SARs Special administrative regions of China

the Act Foreign Acquisitions and Takeovers Act 1975

the committee Senate Economics References Committee

TLC Tasmanian Land Company

VDL Van Diemen’s Land Company

Executive Summary

Since the advent of European settlement, Australia has been a net recipient of foreign investment. The Australian Bureau of Statistics estimates foreign-owned capital in Australia is currently around $3.9 trillion—comprised of debt, derivatives, and equity investment. By comparison, Australians invest about $3 trillion abroad.1

Successive Australian governments have welcomed foreign investment on the grounds: it builds the economy and enhances the wellbeing of Australians by supporting economic growth, and introducing technologies, skills and innovation. It provides access to markets and promotes competition among industries. Without foreign investment, governments are of the view production, employment and incomes would be lower.2

The only significant limit on foreign investment in Australia is the judgment of the Treasurer as to whether investments might be contrary to the national interest, and more recently, national security. Figures provided by the Foreign Investment Review Board show this rarely occurs: the vast majority of foreign investment that triggers a review by the Treasurer is found not to be contrary to the national interest.

While the committee recognises the importance of foreign investment to the Australian economy, the inquiry raised several areas of concern that lead it to question whether the community can have confidence all investments that are approved, whether with or without conditions, are not contrary to the national interest. These concerns arise from: the sophistication of the assessment of foreign investment proposals against the national interest; the ability to ensure entities meet the promises they make when proposing an investment; the effectiveness of the Treasury as a regulator; and the secrecy that surrounds the foreign investment process.

Foreign investment is crucial to grow the Australian economy but it does not necessarily follow that all foreign investment is equally productive. The current national interest test, which operates in the negative—an investment will be approved unless found contrary to the national interest—sets a low bar for the benefit expected from foreign investment. It is not the case that foreign investment always unleashes competitive forces, encourages reciprocal innovation, results in the direct transfer of advanced technology, or provides access to international supply

1 Productivity Commission, Foreign Investment in Australia, Research Paper, June 2020, p. 3;

Australian Bureau of Statistics, 5252.0—International Investment Position, Australia: Supplementary Statistics, 5 May 2021.

2 Treasurer, Australia’s Foreign Investment Policy, 24 April 2020, p. 1.

chains. It may do these things, but there is no requirement in the assessment process that such benefits be promised or even delivered.

While some countries have negotiated more ambitious national interest tests and hold their investors to account for delivering the promised benefits, the terms under which Australia has negotiated a myriad of trade agreements would appear to prevent greater Australian ambition.

Nevertheless, there is much the regulator, the Treasury, can do to improve its oversight and enforcement of foreign investment conditions. Treasury appears to have latterly come to the table on the importance of monitoring, compliance and enforcement of conditions placed on foreign investment approvals. There remains doubt as to whether the Treasury has the knowledge, experience, and information management systems to appropriately regulate foreign investment in Australia.

At the very least, it would seem appropriate that if companies make undertakings they should be expected to follow through on these. So-called ‘voluntary undertakings’ made at the time an investor is seeking approval for an investment, but which later fail to materialise, make a mockery of Australia’s assessment process against the national interest and undermine community confidence in the foreign investment framework.

The committee urges the government to accept the findings and recommendations of this report in the spirit in which they are offered—to improve Australia’s foreign investment regime to ensure investments are not contrary to the national interest.

List of Recommendations

Recommendation 1

6.21 The committee recommends that the Australian Government amends regulations to the effect that undertakings made as part of a foreign investment application can be enforced as conditions on an investment approval and that they consider publishing details relating to these decisions.

Recommendation 2

6.29 The committee received evidence of gaps in regulator capability. Accordingly, the committee recommends the Australian Government conducts an audit of the expertise required by foreign investment regulators to thoroughly assess applications against the national interest and establishes a plan to staff these organisations accordingly.

Recommendation 3

6.54 The committee recommends the Australian Government takes note of the Productivity Commission recommendation that consideration be given to the most suitable institutional design to support decision-making on foreign investment and monitoring and enforcement of compliance, and conducts a review to determine the structure necessary for an effective and efficient foreign investment regulator.

Chapter 1 Introduction

Referral and conduct of the inquiry 1.1 On 4 December 2019, the Senate referred an inquiry into foreign investment proposals to the Senate Economics References Committee (the committee) for inquiry and report by 7 September 2020.

1.2 Pursuant to the temporary order agreed to on 23 March 2020, the committee agreed that the time for presentation of the report of the inquiry into foreign investment proposals be extended from 7 September 2020 to 16 December 2020.

1.3 On Thursday, 12 November 2020, pursuant to the temporary order agreed on 23 March 2020, the committee agreed that the time for presentation of the report of the inquiry into foreign investment proposals be extended from 16 December 2020 to 30 June 2021.

1.4 On Thursday, 12 November 2020, pursuant to the temporary order agreed on 23 March 2020, the committee agreed that the time for presentation of the report of the inquiry into foreign investment proposals be extended from 16 December 2020 to 30 June 2021. On Thursday 24 June 2021, the Senate granted a further extension to report by 5 August 2021. On Friday, 30 July 2021, the Senate granted a further extension to report by 20 August 2021. On Friday, 20 August 2021, the Senate granted a further extension to report by 27 August 2021.

Inquiry terms of reference 1.5 Under its terms of reference, the committee was tasked to inquire into the review of foreign investment proposals against the national interest test, with particular reference to:

(a) the protection of Australia’s market-based system from manipulation that would benefit proposed foreign investment; (b) the assessment of the impact of proposed foreign investment on market concentration and competition; (c) the imposition of conditions on foreign investors; (d) the extent to which the risk that foreign investment proposals are being

used for money laundering is examined; (e) the role of the Foreign Investment Review Board; and (f) any other related matters.

Conduct of the inquiry 1.6 The committee advertised the inquiry on its website and wrote to stakeholders and interested parties inviting submissions.

1.7 The committee received 20 submissions. A list of submissions is at Appendix 1.

1.8 Public hearings were held on:

ï 15 May 2020—Canberra and by videoconference; and ï 7 August 2020—Canberra and by videoconference.

1.9 The names of witnesses who appeared at the hearings are listed at Appendix 2.

1.10 The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearings.

Scope of the inquiry 1.11 The evidence received by the committee allowed it to investigate the following issues:

ï assessment of foreign investment proposals against the national interest; ï the imposition of conditions on foreign investors; ï regulatory compliance and enforcement; and ï the secrecy surrounding the foreign investment regime.

1.12 It is around these four issues that the report is structured, interspersed with case studies that were examined during the course of the inquiry. These four issues, either directly or indirectly, related to several of the terms of reference including the protection of Australia’s market-based system from manipulation; the imposition of conditions on foreign investors; the role of the Foreign Investment Review Board (FIRB/ the Board); and related matters.

Australia’s approach to foreign investment 1.13 Successive Australian governments have maintained an open approach to foreign investment—presuming it is beneficial. On the basis of this presumption, a significant amount of foreign investment is not assessed and

can proceed without oversight because it does not trigger the criteria for assessment.

1.14 Investment in any economy is designed to stimulate economic activity and create a return for the investor. Generally, there are two main categories of investment. Portfolio investment is where an investor has bought stocks, bonds, shares or some other financial asset via a third party expecting a return over time. This form of investment is referred to as passive investment. The investment decision making is undertaken by the third party such as a managed investment fund, which makes a range of investments internationally.

1.15 Direct investment at the national level is referred to as Foreign Direct Investment (FDI). This form of investment, at a country level, is where an individual or a firm in one country invests by opening a new business in another country, or acquires an interest in an existing asset or business in another country. The latter form of direct investment involves acquiring a level of control or interest in the asset, more generally a controlling interest, even if it is a minority interest. Nevertheless, the interest gives the buyer effective control of the asset.

1.16 Although there is some variation year to year, the most significant sources of foreign investment are (in current order): the United States of America, the European Union (excluding the United Kingdom), the United Kingdom, Japan, ASEAN countries,1 Hong Kong (Special Administrative Regions (SARs) of China), and China (excluding SARs and Taiwan). Australia’s net international investment position liability is $947.2 billion:

ï $3,990.9 billion foreign investment in Australia; and ï $3,043.7 billion Australian investment abroad.2

1.17 Portfolio investment is the largest proportion of foreign investment—having double the share of FDI.3

Table 1.1 Level of foreign investment by type—December 2020

Type Value ($b) % of total

Direct investment 1,026.6 26%

Portfolio investment 2,072.0 52%

equity 675.8 16%

debt 1,369.2 34%

Financial derivatives 396.4 10%

Other investment 523.0 13%

Total 3,991.0

Source: Australian Bureau of Statistics4

1 Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand,

Vietnam.

2 Australian Bureau of Statistics, 5252.0—International Investment Position, Australia: Supplementary

Statistics, 5 May 2021.

3 Productivity Commission, Foreign Investment in Australia, June 2020, p. 26.

4 Australian Bureau of Statistics, 5252.0—International Investment Position, Australia: Supplementary

Statistics, 5 May 2021.

1.18 Investment from countries tends to concentrate in particular sectors. For instance, investments subject to approval are focussed in:

ï United States—services and real estate; ï UK—services, real estate, and manufacturing, electricity and gas; ï Japan—finance and insurance, real estate, and mineral exploration and development;

ï China (excluding SARs and Taiwan)—real estate, services, and mineral exploration and development (Hong Kong—real estate); ï Singapore—real estate, manufacturing, electricity and gas, and services; ï Canada—real estate and services.5

1.19 Foreign investment is regulated by the Foreign Acquisitions and Takeovers Act 1975 (the Act). Whether a foreign investor is required to notify the Treasurer about a proposed investment depends on a range of factors, including: whether the investor is a foreign government or non-government investor; the type of acquisition; whether the investment is likely to raise national security concerns; the monetary thresholds relevant to the investment, and any free trade agreement commitments.6

Temporary zero-dollar threshold 1.20 As will be discussed below, the value of the investment is a key trigger for the requirement that a proposal is assessed and approved by the Treasurer. In some cases, the value threshold can be more than one billion dollars. During

the course of the inquiry, a temporary zero-dollar threshold was introduced on 29 March 2020.

1.21 The zero-dollar threshold meant all proposed foreign investments in Australia, subject to the Act, required approval, regardless of the value or the nature of the foreign investor. The Treasurer stated the temporary change was a response to the global COVID-19 pandemic, which was putting pressure on the economy and businesses.7

1.22 The Foreign Investment Review Board later added there were concerns about the pressures facing Australian businesses and the potential for them to be sold to foreign interests without any government oversight. This could present a risk to the national interest.8 The thresholds were restored in January 2021 when reforms to the Act came into effect (see below).

5 Foreign Investment Review Board, Annual Report 2018-19, pp. 36-37.

6 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, p. 4.

7 The Hon Josh Frydenberg MP, Treasurer, ‘Changes to foreign investment framework’, Media

Release, 29 March 2020.

8 Foreign Investment Review Board, Annual Report 2019-20, pp. iv, 15.

1.23 Between 29 March 2020 and 30 June 2020 (the most recent statistics available), the Treasury approved 137 applications (totalling $2.7 billion) that related to the zero-dollar threshold. These are applications that would not otherwise have been examined. Of the 137 approved, 116 were approved without conditions, and 21 with conditions. The Treasury states no applications were declined, though 9 were withdrawn and 4 considered exempt.9

Foreign Acquisitions and Takeovers Act 1975

Reforms to the Act 1.24 During the course of the inquiry, the Act was substantially amended by the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020, which made a number of significant changes to Australia’s foreign investment

regime, including:

ï introducing a reviewable national security action and a national security test; ï providing the Treasurer with call-in powers, and a last resort power to issue a divestment order; ï strengthening enforcement powers by increasing penalties, and providing

for directions powers, and new monitoring and investigative powers; ï closing potential gaps in the foreign investment screening regime; ï expanding information sharing arrangements; and ï establishing a new register for some foreign owned assets.

1.25 Prior to the reforms, monetary thresholds were the primary mechanism for determining whether a proposed investment would be subject to an assessment and approval process. Monetary thresholds are still in place and are discussed below.10

1.26 Under previous arrangements, investments that fell under monetary thresholds were not assessed. For investments that were assessed and approved, the Treasurer had only a limited ability to rescind or alter an approval once it had been given, even if circ*mstances changed. Furthermore, assessment was largely limited to one point in time—the point at which the application was made.11

1.27 The amendments to the Act had the effect of bringing the majority of foreign investments, including investments that were not assessed because they fell below relevant thresholds, under the purview of the Act. This does not mean all investments are now assessed under the Act, rather, investments can be

9 Foreign Investment Review Board, Annual Report 2019-20, pp. xii, 22, 24.

10 See: Treasurer, Australia’s Foreign Investment Policy, 24 April 2020.

11 See discussions in: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020,

Explanatory Memorandum, pp. 12, 162.

assessed under the Act against the national interest test and/or the national security test.

Requirement for foreign investment approval 1.28 The requirements for assessment and approval vary depending on the type of investor and the investment. To avoid uncertainty, investors may choose to submit an application for approval, despite it not triggering requirements for

approval. The following summarises some of the key requirements.

Table 1.2 Requirements for foreign investment approval

Category Details

Non-government foreign investors

Business acquisitions

Approval required before acquiring a substantial interest (generally at least 20 per cent) in an Australian entity valued above the relevant monetary threshold.

National Security business Approval required before acquiring a direct interest (generally at least 10 per cent) in a national security

business (discussed below), or starting a national security business, regardless of the value of the business or the country of the investor.

Agribusiness Approval required before acquiring a direct interest (generally at least 10 per cent) in an agribusiness where the value of their holdings in that business are more than the relevant monetary threshold.

Media businesses Approval required before acquiring an interest of at least 5 per cent in an Australian media business, regardless of the value of the investment.

Agricultural land Approval required prior to acquiring an interest in agricultural land where the value of the holdings are more than the relevant monetary threshold.

Commercial land Approval required before acquiring an interest in vacant commercial land, regardless of the value of the land. If an application for investment into vacant land is approved, it will generally be approved subject to development conditions. Approval required before acquiring an interest in developed commercial land, if the value of interest exceeds the relevant monetary threshold.

Mining tenements Approval required before acquiring an interest in a mining or production tenement, regardless of value.

Residential land Approval required before acquiring an interest in residential land, regardless of value. Foreign investors can generally purchase vacant land for residential development or newly constructed dwellings with few restrictions; approvals for established dwellings are limited.

Land entities Approval required before acquiring an interest (generally at least 5 per cent for unlisted land entities and 10 per cent for listed land entities) in land corporations or land trusts that have a majority of their assets in Australian land and where the value of the investment is above the relevant monetary threshold.

National security land Approval required before acquiring an interest in national security land, regardless of the value of the

investment or the country of the investor.

Foreign government investors

In addition to the requirements above, foreign government investors must obtain approval prior to:

ï acquiring a direct interest (generally at least 10 per cent) in an Australian entity or Australian business, regardless of the value; ï starting a new business; ï acquiring an interest in Australian land, regardless of the value of

the investment; ï acquiring a legal or equitable interest in a tenement, or an interest of at least 10 per cent in the securities of a mining, production or

exploration entity, regardless of the value

Source: The Treasury12

Monetary thresholds 1.29 As noted above, under the Act, monetary thresholds are the primary (but not only) mechanism for determining whether a proposed investment must be notified and undergo an assessment and approval process.13

1.30 For foreign government investors there is a zero dollar threshold. For private investors the threshold is ordinarily $281 million or $1.2 billion for investors from countries with which Australia has a free trade agreement. Specific

12 There are also some exemptions to these requirements, and other legislation that imposes

additional requirements or limits on foreign investment in certain instances. See: The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 4-7.

13 Recent changes introduced a range of national security triggers—discussed below.

thresholds apply to national security businesses ($0), sensitive businesses, land and agribusiness.14

Screening tests 1.31 There are two screening tests for investments: a national interest test and a national security test. The majority of investments that require assessment are examined under the national interest test. The government avoids overlap

between the tests by applying only the national interest test when that particular test applies to an action; national security is already a consideration under the national interest test.15

National interest test 1.32 If an investment proposal is subject to review (that is, it meets the various thresholds and requirements), the Treasurer examines the proposal against the national interest. The national interest ‘test’ is framed negatively, meaning

there is a presumption foreign investment proposals should proceed, unless found contrary to the national interest. The Treasury states:

…the framework operates not by approving proposed foreign investments based on their expected benefits, and instead by prohibiting investments if they are considered to be contrary to Australia’s national interest.16

1.33 As a negative test it is not necessary to prove an investment is in the national interest only that it is not against the national interest. According to the Treasury, factors considered as part of the national interest ‘are not limiting factors’.17

1.34 While central to Australia’s foreign policy framework, there is no definition of the ‘national interest’ in the Act. Rather, the Treasurer is empowered to decide in each case what constitutes the national interest and whether an investment would be contrary to the national interest. Guidance provided by the Treasury states the national interest consists of a range of factors; the weight given to each varies depending on the nature of the enterprise and investor.18

1.35 These factors are:

ï national security—the extent to which an investment could affect Australia’s ability to protect its strategic and security assets; ï competition—whether an investment could result in an investor gaining control over market pricing and production of a good or service in

14 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 15-16.

15 Foreign Investment Review Board, Guidance Note 8: National Security Test, p. 4.

16 The Treasury, Submission 6, p. 2.

17 Mr Roger Brake, Head of Foreign Investment Division, The Treasury, Estimates Hansard, 5 March

2020, pp. 93-94.

18 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 9-11.

Australia, or whether an investment could affect the make-up of a global industry and/or distort competitive market outcomes; ï other Australian government policies—the impact on, amongst other things, taxation revenues or the environment; ï economy and community—whether a restructure is proposed, how the

investment will be funded, the level of Australian participation after acquisition, and how the investor will develop the project to ensure a fair return for the Australian people; and ï character of the investor—the extent to which the investor operates on a transparent commercial basis and is subject to adequate regulation and supervision, its corporate governance practices, and whether it complies with the spirit and letter of Australian laws and acts in good faith in complying with conditions.19

1.36 Aside from these factors, there are additional considerations for investments in the agricultural sector, investments in residential land, and investments by foreign government investors.20

National security test 1.37 A range of investment proposals are examined under the national security test, including proposed investments in national security land, interests in exploration tenements over national security land, a proposed direct

investment in a national security business or starting a new national security business21

1.38 It is in relation to potential national security risks that the Treasurer can exercise the ‘call in’ and ‘last resort’ powers (discussed below).22

1.39 As with the national interest, the Act does not define ‘national security’, nor what is contrary to it. The Treasurer is instead empowered to decide in each case whether an investment would be contrary to national security. Treasury guidance indicates the government would consider the extent to which the investment would affect Australia’s ability to protect its strategic and security interests.23

19 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 9-11.

20 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 10-11.

21 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 11-12; Australian

Government Foreign Investment Review Board, Guidance Note 8: National Security Test, p. 4.

22 Australian Government Foreign Investment Review Board, Guidance Note 8: National Security Test,

p. 4.

23 The Treasury, Australia’s Foreign Investment Policy, 1 January 2021, pp. 11-12.

Actions 1.40 The Act defines four types of actions (or foreign investments): significant actions, notifiable actions, notifiable national security actions, and reviewable national security actions. There is overlap between these categories. The

Treasurer has a range of powers to assess foreign investment proposals, including to approve an investment with or without conditions (called a no objection notification, with or without conditions), and to prohibit an investment.

Significant actions and notifiable actions 1.41 Most significant actions are subject to voluntary notifications—that is, an investor can voluntarily advise the government. Notifiable actions are subject to mandatory notifications—that is, the Treasurer must be notified and

approve the action before it can be taken.24

1.42 The Act contains a number of conditions to determine whether a proposed foreign investment is a significant action or notifiable action, including a threshold test and change in control test.25 The Act’s regulations also specify certain significant actions are also notifiable actions. If a foreign person voluntarily chooses to notify the Treasurer of a proposed significant action, it becomes a notifiable action.26

1.43 Regardless of whether a significant action is notified, the Act gives the Treasurer powers to:

ï prohibit a proposed significant action; ï require a significant action to be undone; and ï if a significant action has been taken about which the Treasurer was not notified, and the Treasurer subsequently determines the action is contrary to

the national interest, the Treasurer may make a disposal order to unwind the action, or impose legally enforceable conditions.27

1.44 The Treasurer has the power to:

ï for an action that is notified, provide a no objection notification not imposing conditions; ï for any action (significant or notifiable), provide a no objection notification imposing conditions; or

24 Although not all significant actions must be notified, to obtain certainty some foreign investors

notify the Treasurer voluntarily of a proposed significant action in order to obtain a no-objection notification from the Treasurer.

25 Foreign Acquisitions and Takeovers Act, Part 2—Actions to which this Act applies.

26 Australian Government Foreign Investment Review Board, Guidance note 35: Significant actions and

notifiable actions, 1 July 2017.

27 Foreign Acquisitions and Takeovers Act, sections 67, 69. Australian Government Foreign Investment

Review Board, Guidance note 35: Significant actions and notifiable actions, 1 July 2017.

ï decide the action would be contrary to the national interest and make an order prohibiting the proposed action.28

1.45 In a limited number of circ*mstances, the Treasurer can order the disposal of an asset whose acquisition the Treasurer has previously approved.29 These circ*mstances broadly include the person not complying with conditions attached to the no objection notification and subsequently being convicted of an offense or being the subject of a civil penalty order; and having an order under section 19B of the Crimes Act 1914 made against the person.30

1.46 Although the Treasurer has the power to vary or revoke conditions made in a no objection notification imposing conditions, this may only be done if the person consents to the new condition or variation, or if the new condition or variation does not disadvantage the person.31

Notifiable national security action 1.47 A notifiable national security action operates according to the type of investment, not the value of the investment. A person must notify the Treasurer before taking a notifiable national security action, and must not take

the action unless given a no objection notification (with or without conditions). The Treasurer has the power to prohibit a notifiable national security action.32

1.48 A notifiable national security action encompasses an action to:

ï start a national security business; ï acquire a direct interest in a national security business; ï acquire a direct interest in an entity that carries on a national security business;

ï acquire an interest in Australian land that, at the time of acquisition, is national security land; and ï acquire a legal or equitable interest in an exploration tenement in respect of Australian land that, at the time of acquisition, is national security land.33

1.49 A national security business includes, but is not limited to:

ï the responsible entity or direct interest holder of critical infrastructure assets, or carriage service providers;

28 Foreign Acquisition and Takeovers Act, sections 67, 74, 75; Australian Government Foreign

Investment Review Board, Guidance note 35: Significant actions and notifiable actions, 1 July 2017.

29 Foreign Acquisition and Takeovers Act, section 70.

30 Foreign Acquisition and Takeovers Act, section 70.

31 Foreign Acquisition and Takeovers Act, subsections 74(4), 74(6).

32 Foreign Acquisition and Takeovers Act, sections 55B, 81.

33 Foreign Acquisition and Takeovers Act, section 55B.

ï a business that develops, manufactures or supplies critical goods, technologies or services that will be used by defence and intelligence personnel, including from another countries, in activities that may affect Australia’s national security; or ï a business that owns, stores, collects or maintains classified data, or

personal data relating to Australia’s defence and intelligence personnel.34

1.50 A notifiable national security action can also be a significant action or a notifiable action. For notifiable national security actions that are not also significant actions, the Treasurer can assess the action according to whether it would be contrary to national security. If a notifiable national security action is also a significant action, it is reviewed on national interest grounds.35

Reviewable national security actions 1.51 Reviewable national security actions are actions in any sector or of any value that may raise national security concerns and are reviewable against Australia’s national security. These actions can be ‘called in’ by the Treasurer

(see below).

1.52 There are nine scenarios where a reviewable national security action may arise. Generally, these actions include:

ï acquiring a direct interest in an entity or business (of any percentage), land, or shares; ï issuing securities; ï entering into an agreement relating to the affairs of an entity; ï altering a constituent document of an entity; ï acquiring an interest in assets of an Australian business; ï entering or terminating a significant agreement with an Australian business;

and

ï proposing to start an Australian business.36

1.53 As a consequence of the action:

ï the foreign person may be in a position, or more of a position, to influence or participate in central management and control; ï the foreign person may be in a position, or more of a position, to influence or participate in, or determine policy;

34 For a full explanation, see: The Australian Government The Treasury, Australia’s Foreign Investment

Policy, 1 January 2021, p. 5; Foreign Acquisitions and Takeovers Regulation 2015, section 8AA.

35 Foreign Acquisition and Takeovers Act, sections 66, 67, 67(1), 67(1A).

36 Foreign Acquisition and Takeovers Act, Division 4B—Meaning of reviewable national security action.

See also: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory Memorandum, pp. 20-23.

ï one or more senior officers of the entity will be under an obligation to act in accordance with the directions, instructions or wishes of a foreign person who holds a direct interest.37

Treasurer’s national security powers

Call-in power 1.54 The Treasurer’s call-in power (national security review of actions) relates to actions the Treasurer has not previously considered and approved.38 Using the call in power, the Treasurer may examine reviewable national security actions

and significant actions that are not notifiable actions or notifiable national security actions. Significant actions that have been notified to the Treasurer, notifiable actions, and notifiable national security actions cannot be called in by the Treasurer for review.39

1.55 The Treasurer may start a review of an action within ten years from when the action is taken.40 The Treasurer may not use this call-in power if:

ï the action has been notified to the Treasurer; ï the Treasurer gave a no objection notification in relation to the action (with or without conditions); or ï the action is specified in an exemption certificate.41

1.56 Because the Treasurer cannot call in an action that has been notified to the Treasurer or for which a no objection notification or exemption certificate exists, foreign investors can voluntarily notify an action to extinguish any uncertainty that is caused by the possibility the action may be called in at a later date. This does not, however, extinguish the ability of the Treasurer to examine the investment under the last resort power (discussed below).42

1.57 Under the call-in power, the Treasurer can issue a no objection notification (with or without conditions). The Treasurer has the power to prohibit an action

37 Foreign Acquisition and Takeovers Act, Division 4B—Meaning of reviewable national security action.

See also: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory Memorandum, pp. 20-23.

38 Foreign Acquisition and Takeovers Act, sections 66, 66A.

39 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 13-14, 20-23; Australian Government Foreign Investment Review Board, Guidance Note 8: National Security Test, 17 December 2020, p. 8.

40 Foreign Acquisitions and Takeovers Act, section 66A(2); Foreign Acquisitions and Takeovers

Regulation 2015, section 60A.

41 Foreign Acquisitions and Takeovers Act, section 66A.

42 Foreign Investment Review Board, Guidance Note 8: National Security Test, 17 December 2020, p. 8.

or order an action be undone. The Treasurer can also vary or revoke an order if satisfied it is not contrary to national security.43

Last resort power 1.58 In some instances, the Treasurer has the power to review an action for which a no objection notification, an exemption certificate, deemed approval, or notice imposing conditions has been given. The use of this ‘last resort power’ is

contingent on:

ï the Treasurer being notified of the action after 1 January 2021, an application for an exemption certificate was made or the action was reviewed under the call-in power;

ï since that time, the business, structure or organisation has materially changed, the investor’s activities have materially changed, the circ*mstances or market have materially change, or the Treasurer becomes aware of a relevant and material false or misleading statement or omission by the investor when notifying the action;

ï the Treasurer conducts a review, receives and considers advice in relation to the action from an agency in the national intelligence community, takes reasonable steps to negotiate in good faith with the foreign person, is satisfied that exercising the powers is reasonably necessary for purposes relating to eliminating or reducing the national security risk, and the use of other options under existing regulatory systems would not adequately reduce the national security risk; ï the Treasurer is reasonably satisfied:

â’ the false or misleading statement or omission directly relates to the national security risk; â’ the national security risk could not have been reasonably foreseen or could have been foreseen but was only a remote possibility at the time of

the original approval; â’ the relevant material change alters the nature of the national security risk posed at the time of the original approval.44

1.59 If the required conditions are satisfied, the Treasurer may:

ï impose conditions; ï vary or revoke any conditions that have been imposed; ï make orders prohibiting an action; ï require the undoing of a part or the whole of an action (including

divestment).45

43 Foreign Investment Review Board, Guidance Note 8: National Security Test, 17 December 2020, p. 8.

44 Foreign Acquisitions and Takeovers Act, sections 79A-79Y; Foreign Investment Review Board,

Guidance Note 8: National Security Test, 17 December 2020, p. 9.

Foreign investment regime in comparison 1.60 Few foreign investments proposals are blocked outright—though the Productivity Commission suggests the low rejection rate could be partly explained by the screening regime that discourages some investors from

applying at the outset.46

1.61 The following table outlines foreign direct investment applications considered by the Treasurer between 2015-2016 and 2019-2020. It shows over time, the number of foreign investment applications (aside from real estate, explained in footnote 48) has remained relatively constant.

Table 1.3 Foreign investment applications considered

Outcome 2015-16 2016-17* 2017-18 2018-19 2019-2047

Approved (nc)# 26,954 8,607 6,301 4,575 4,508

Approved (wc)# 14,491 5,750 4,844 4,149 3,713

Residential real estate (40,149) (13,198) (10, 036) (7,513) (7,056)

Commercial real estate (606) (465) (391) (487) (440)

Total approved 41,445 14,357 11,145 8,724 8,211

minus real estate 700 694 718 724 715

Rejected 5 3 2 1 3

Declined - - 3 - -

Total decided 41,450 14,360 11,150 8,725 8,224

Withdrawn 1,319 770 644 670 715

Exempt 244 60 61 71 65

Total considered 43,013 15,190 11,855 9,466 9,004

Source: Foreign Investment Review Board48

45 Foreign Acquisitions and Takeovers Act, sections 79A-79Y; Foreign Investment Review Board,

Guidance Note 8: National Security Test, 17 December 2020, p. 9.

46 Productivity Commission, Foreign Investment in Australia, June 2020, p. 12.

47 The figures for 2019-2020 include the additional applications considered under the zero dollar

threshold.

48 # (nc) no conditions; (wc) with conditions. As of 2017-18, residential land approvals have included

a condition to register on the Residential Land Register. Where this is the only condition, the approval has been classified as ‘approved without conditions’.

* The significant decline in foreign investment approvals between 2015-16 and 2016-17 is almost exclusively the result of a decline in applications for residential real estate. The Foreign Investment Review Board attributes this to a combination of: introduction of application fees in December 2015; capital controls imposed by overseas authorities; additional state government surcharges on

1.62 Australia’s foreign investment regime is considered to be above-average on the Organisation for Economic Cooperation and Development index of FDI restrictiveness, though lower than Canada and New Zealand.49

1.63 However, Australia’s regime is not considered overly restrictive in absolute terms. The cost of added restrictions is material, though according to the Productivity Commission, not large in the context of the economy. It estimates increasing Australia’s restrictions on foreign investment to a level similar to that in New Zealand would reduce gross national income by between $0.8 and $7.1 billion per year, or between $82 and $731 per household per year.50

The Treasurer and foreign investment agencies

The Treasurer 1.64 Under the Act, the Treasurer is the decision-maker with regard to foreign investment, though in practice, there is delegation to the Treasury and the Australian Taxation Office (ATO).

Foreign Investment Review Board 1.65 The Foreign Investment Review Board is a non-statutory body established in 1976 to advise the Treasurer on foreign investment matters. It provides advice only and cannot make binding decisions on foreign investment.51

1.66 The Board examines against the national interest some proposed investments subject to the Act and supporting legislation and makes recommendations to the Treasurer and other Treasury portfolio ministers. It is supported by a secretariat in the Treasury.52

1.67 It also provides advice on the operation of the foreign investment framework; conducts awareness raising activities in Australia and abroad of Australia’s investment policy; provides guidance to entities on the operation of the framework; and monitors compliance with the framework.53

foreign owners of residential land; and Australian market conditions including tighter lending standards by Australian banks.

Treasury, Submission 6, pp. 14-15; Foreign Investment Review Board, Annual Report 2018-2019, pp. 19, 23; Foreign Investment Review Board, Annual Report 2019-2020, pp. 24, 27.

49 Productivity Commission, Foreign Investment in Australia, June 2020, p. 12.

50 This estimate is subject to some uncertainty, as explained in the report. Productivity Commission,

Foreign Investment in Australia, June 2020, p. 14.

51 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 1.

52 Foreign Investment Review Board, Annual Report 2018-19, May 2020, pp. 1-2.

53 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 2.

1.68 The Board considers only the applications provided to the Treasurer for decision (that is, not decisions delegated to the Treasury or ATO—see below). Ordinarily, it meets face-to-face monthly, weekly by telephone, and out-of-session by email. It currently consists of seven part-time members and a full-time executive member (the Head of Treasury’s Foreign Investment Division).54

FIRB agencies 1.69 The Treasury and the ATO are often referred to as FIRB agencies, though they do not report to, or come under the control of, the FIRB. The Foreign Investment Division of the Treasury:

ï advises the government on all aspect of foreign investment policy; and ï is responsible for the day-to-day administration of the foreign investment framework in relation to business, agriculture and sensitive or complex commercial real estate cases.55

1.70 The Public Groups and International area in the Australian Tax Office:

ï administers all aspects of foreign investment in residential real estate (transferred from Treasury in December 2015), non-sensitive commercial real estate and corporate reorganisations (transferred from Treasury in April 2017);

ï collects foreign investment application and vacancy fees; and ï develops and administers the registers of foreign ownership of agricultural land, water entitlements and residential land.56

Decision-making powers of FIRB agencies 1.71 Under the Act, the Treasurer has delegated to senior officers in FIRB agencies, decision-making powers on applications that are consistent with the foreign investment framework. Certain applications are also decided by other

Treasury portfolio ministers.57

1.72 In practice, officers of the Treasury make decisions on some non-sensitive low-value applications for land; senior officers of the ATO generally make decisions relating to investments in residential real estate. The Treasurer remains the actual decision maker for the most sensitive cases.58

54 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 1.

55 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 8.

56 The rationale for the transfer of responsibilities from the Treasury to the ATO was to take

advantage of the ATO’s advanced data matching capabilities. Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 8; Foreign Investment Review Board, Annual Report 2017-18, p. 17; Treasury, Submission 6, p. 6.

57 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 1.

58 Treasury, Submission 6, p. 9.

Previous inquiry reports 1.73 In April 2016, the committee tabled a report into the foreign investment review framework. Key issues of interest during the inquiry were the Port of Darwin and Transgrid leases in the context of foreign ownership of critical

infrastructure. The inquiry also examined foreign ownership of agricultural land and agribusiness, including the blocked sale of S. Kidman and Co. Ltd.59

1.74 The inquiry made three substantive recommendations concerning:

ï providing more detailed information on the foreign investment review process, including the steps of the process; ï publishing the rationale behind positive and negative decisions on foreign investment proposals; and ï establishing a publicly-available agricultural land register.60

1.75 The Government responded to the recommendations in February 2017, undertaking to:

ï review the Foreign Investment Review Board website and publish additional information about the assessment and screening process for foreign investment proposals;

ï maintain the principle of confidentiality in the foreign investment framework and to continue the practice of selectively issuing a press release when making a decision on a significant foreign investment proposal; and

ï in the case of the register of foreign ownership of agricultural land, to continue the practice of strictly limiting the disclosure of any information that might identify any investor.61

Structure of the report 1.76 Chapter two examines the constitution of the national interest, against which foreign investment proposals are examined. A foundational principle of Australia’s foreign investment regime is the presumption of benefit, which

underpins the negatively framed national interest test—applications proceed unless found contrary to the national interest. This results in a predisposition to approving foreign investment.

1.77 The chapter discusses the benefits and disadvantages which potentially flow from foreign investment and whether the national interest test is sufficiently ambitious to ensure Australia benefits to the maximum extent from foreign investments. In this context, the positive approach taken by the New Zealand Government is examined. The chapter closes by examining the influence of

59 Senate Economics References Committee, Foreign investment review framework, April 2016.

60 Senate Economics References Committee, Foreign investment review framework, April 2016.

61 Australian Government, Australian Government response to the Senate Economics References Committee

Report: Foreign investment review framework, February 2017.

‘voluntary undertakings’ in assessments of the national interest and discusses the importance of investors being held to account for the undertakings they make in foreign investment proposals.

1.78 Chapter three looks at the assessment of foreign investment applications by the Treasury and the application of conditions to foreign investment approvals. In so doing, it examines Treasury’s role as regulator, in particular whether it has the capacity to accurately assess foreign investment applications in the national interest. The chapter discusses two case studies: one related to identifying the source of funds (Musselroe Bay), and the second on the application of conditions on foreign investments (Alinta). Views on the nature of conditions imposed by the Treasury are also explored.

1.79 Chapter four examines Treasury monitoring, compliance and enforcement. It begins with a discussion on the responsibilities of regulators before examining the Treasury’s regulatory load and the substance of its compliance and enforcement activity. It continues the Alinta case study, examining the long time frame allowed for compliance with conditions imposed to ensure the investment was not contrary to the national interest. Whether Treasury’s information management system is fit for purpose is discussed, followed by the newly legislated regulatory and enforcement powers. The chapter closes by discussing views on whether the Treasury is the most appropriate regulator.

1.80 Chapter five deals with the issue of transparency, discussing the protected information provisions in the Act, prior to examining how they are interpreted by the Treasury. Several cases are then highlighted where conditions have been made public. The secrecy surrounding the foreign investment regime is compared to other Australian regulators, and also to international foreign investment authorities.

1.81 The final chapter discusses the committee’s views and makes three recommendations to improve Australia’s foreign investment regime, acknowledging the public must have confidence that foreign investments are approved in the national interest.

Chapter 2

Foreign investment proposals and the national interest

2.1 Of the billions in foreign investment made in Australia each year, only a proportion is assessed under the Foreign Acquisitions and Takeovers Act 1975 (the Act). As discussed in chapter 1, if proposed investments exceed relevant thresholds they are assessed against either the national interest test, or the national security test. Investments that do not trigger the thresholds or other criteria are not assessed. As an indication, in three months of the zero-dollar threshold, $2.7 billion in investments were assessed that would not ordinarily be assessed.1

2.2 This chapter begins by discussing the presumption of benefit from foreign investment, and the impact on the assessment of foreign investment proposals of the negative framing of the national interest test. It then examines some of the benefits and potential negative effects that can flow from different types of foreign investment.

2.3 While there is support for the existing approach to foreign investment assessment, some question the presumption of benefit, suggest the test is not sufficiently ambitious, and argue it should be reframed positively. It is in this context that New Zealand’s approach to assessing foreign investment proposals is discussed.

2.4 The chapter closes with a case study of Moon Lake’s 2016 acquisition of the Van Diemen’s Land Company and the impetus this has created for entities to be made more accountable for the benefits they claim will flow from their investments—so-called ‘voluntary undertakings’.

Presumption of benefit 2.5 Longstanding Australian government policy is to presume foreign investment to be beneficial, and this is reflected in the negatively framed national interest test. Foreign investment proposals subject to screening will proceed unless

found contrary to the national interest. In the words of the Treasury:

…the framework operates not by approving proposed foreign investments based on their expected benefits, and instead by prohibiting investments if

1 Figures for the remaining six months of the zero-dollar threshold have not been released at the

time of writing. Foreign Investment Review Board, Annual Report 2019-20, p. 25.

they are considered to be contrary to Australia’s national interest [emphasis in original].2

2.6 As a negative test it is not necessary to prove an investment is in the national interest or that any finite benefits might be derived by the investment, only that it is not against the national interest. For the Treasury, the national interest factors—national security, competition, taxation and other government policies, impact on the economy and the community, and character of the investor—’are not limiting factors’.3

2.7 Although applications are assessed against ‘the national interest test’, there is no ‘test’ per se. When making an assessment, the Treasury’s foreign investment policy states a range of factors is considered (see chapter 1). The weight given to each factor varies depending on the nature of the enterprise and investor. The substance of the test can also vary depending on the type of investor (for instance, foreign governments) and the nature of the investment (such as agricultural land or sensitive infrastructure).4

Conditions 2.8 Consistent with the presumption of benefit, the Act allows the Treasurer to approve an investment with conditions, referred to as providing a ‘no objection notification imposing conditions’. Section 74 of the Act provides the

Treasurer with the authority to impose conditions on an investment approval if the Treasurer is of the view such conditions are ‘necessary to ensure that the action is not contrary to the national interest’.5

2.9 Under section 74 of the Act, after approving an investment, the Treasurer can revoke a condition, impose a new condition, or vary an existing condition only if:

ï the person consents to the new condition or the variation; or ï the Treasurer is satisfied the new condition or variation does not disadvantage the person.6

2.10 The Act provides no guidance on the substance of conditions, only that they are applied to ensure an action is not contrary to the national interest. That is,

2 Treasury, Submission 6, p. 2. This approach reflects the legislation: the Act empowers the Treasurer

to prohibit an investment if satisfied it would be contrary to the national interest. Treasury, Australia’s Foreign Investment Policy, 1 January 2020, p. 8.

3 Mr Roger Brake, Head, Foreign Investment Division, The Treasury, Committee Hansard, 5 March

2020, pp. 93-94.

4 Treasury, Australia’s Foreign Investment Policy, 1 January 2020, p. 8.

5 Foreign Acquisitions and Takeovers Act, section 74(2).

6 Foreign Acquisitions and Takeovers Act, sections 74(4)-74(6).

without the conditions imposed, an investment could harm the national interest.

2.11 There is qualified support for the imposition of conditions on foreign investment approvals. The Law Council of Australia identifies conditions as an important mechanism to protect the national interest while also allowing an investment to proceed. However, the Council also raises a number of concerns in terms of consistency, transparency, and uncertainty.7

Rationale for a negative test 2.12 That the national interest test is not legislated, that it lacks detail, that its substance might change over time, and that it might be applied differently according to the particular investment or investor, could be considered

controversial in many areas of public policy. However, there is support for this approach, particularly from those who agree with the presumption of benefit.8

2.13 The Treasury argues the ‘flexibility’ allows the Treasurer to consider any factors that may be relevant to a particular case.9 This lack of transparency could have the potential to undermine public trust; the Treasury regards it as fundamental to ensuring community confidence in the framework, particularly as the national interest is difficult to define and can change over time.10

2.14 Further, the Treasury argues the lack of specificity in the test allows a broader range of concerns to be considered: ‘Australia’s broader approach to the national interest test allows us to protect against any concern, including national security concerns that may be present in a particular case’.11

2.15 The negative framing and nebulous substance is defended by the Productivity Commission on the grounds the approach:

ï places the onus of proof on the Government to allow all foreign investment unless it can determine that a proposed investment is against the national interest, which is a fairly high bar resulting in few investment applications being blocked outright;

ï gives treasurers discretion to define the national interest as they see fit, in a manner that changes over time, allowing governments to respond quickly to new concerns that are likely to affect the national interest, as well as to avoid blocking investments on grounds that were once relevant, but no longer are; and

7 Law Council of Australia, Submission 2, pp. 2-3.

8 In addition to support noted elsewhere, see, for instance: Herbert Smith Freehills, Submission 5,

p. [2]; Property Council of Australia, Submission 10, p. 2.

9 Treasury, Submission 6, p. 2.

10 Treasury, Submission 6, p. 3.

11 Treasury, Submission 6, p. 4.

ï allows the Treasurer to weigh up the potential benefits of an investment proposal, not just the potential costs.12

2.16 Nevertheless, the Commission argues the current national interest test lacks clarity on how it is interpreted from case to case and calls for tighter policy guidance, and excluding risks from the test that can be mitigated through domestic regulation.13 A similar position is held by Ms Yun Jiang, specifically that the variable nature of the test leads to uncertainty for investors.14

Potential positive and negative effects of foreign investment 2.17 Australia is a net recipient of foreign investment, and it has been an important factor in the growth of the Australian economy. The Department of Foreign Affairs and Trade estimates the gap between national investment and national

savings has been on average around four per cent of gross domestic product (GDP) over the past few decades.15

2.18 The Treasury agrees Australia does not have the capital base to develop the Australian economy:

Australia has historically run current account deficits, and essentially what that means is that our level of investment has been higher than our level of saving. Economists would say that level of investment builds the capital stock which is very important for economic growth, very important for real wages, very important for productivity. In the absence of that foreign investment, you would either need to have a higher level of domestic savings to support a level of investment or you need to have a lower level of investment.

Historically, Australia has had a wealth of investment opportunities, greater than our level of national savings can facilitate, and foreign investment has been able to supplement our level of domestic savings to enable us to exploit more of those investment opportunities that Australia has.16

2.19 Regardless of the need for foreign investment, the inquiry heard it cannot be assumed that all investment is necessarily beneficial. Foreign investment can have both benefits and disadvantages, depending on the type of investment and the manner in which it is regulated.

12 Productivity Commission, Foreign investment in Australia, June 2020, p. 19, 83-84.

13 Productivity Commission, Foreign Investment in Australia, June 2020, p. 2.

14 China Policy Centre, Submission 1, p. 4.

15 Department of Foreign Affairs and Trade, Submission 11, p. 4; Productivity Commission, Foreign

Investment in Australia, June 2020, p. 3. See also: Property Council of Australia, Submission 10, p. 3.

16 Mr Roger Brake, Head, Foreign Investment Division, The Treasury, Committee Hansard, 15 May

2020, p. 62.

Some benefits and disadvantages from foreign investment 2.20 While the Productivity Commission supports foreign investment on the basis it has allowed the Australian economy to make more investments in capital than would be possible if financed through domestic savings, it acknowledges

that in addition to the positive direct and spill-over effects there are potentially some negative effects.17 Other submitters also presented research detailing the potential of foreign investment to deliver positive and negative effects.

Table 2.1 Potential positive and negative effects from foreign investment

Potential positive effects Potential negative effects

- additional funds for investment with positive effect on economic growth

- unleashing of increased competitive forces encourages ‘reciprocal’ innovation in competing Australian-owned companies - expanding capital per worker results in labour productivity growth that generally leads to increased wages - direct transfer of advanced technology and spread of knowledge from world-leading firms - access to new management practices - greater participation in international supply chains - greater ‘human capital’ development

- potential of negative social and environmental spill-overs when foreign investors do not adhere to domestic regulations

- competition from efficient foreign businesses may result in some Australian firms going out of business - foreign direct investment (FDI) reduces the need for foreign-owned firms to innovate - technological transfers through inward FDI reduce the need for domestic innovation - provides opportunities for tax minimisation - increases industry concentration and reduces competition - the capital-intensive nature of FDI has a negative effect on employment growth and real wage growth

Source: Productivity Commission; Professor Clinton Fernandes; Mr David Richardson18

17 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 51-52, 58-59, 62, 69-70.

18 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 51-52, 58-59, 62, 69-70;

Professor Clinton Fernandes, Submission 7, p. 7; Mr David Richardson, Senior Research Fellow, The Australia Institute, Committee Hansard, 7 August 2020, pp. 18-19.

2.21 The 2020 Productivity Commission report into foreign investment in Australia identifies some negative trends observed internationally:

ï wholly-owned foreign projects are less likely to source and supply goods locally; however, this is partly offset by foreign investors transferring more resources, know-how and advanced technology to wholly-owned projects, as the investors can maintain more control and avoid leakages to competitors; and

ï foreign owned firms are significantly less likely to partake in product and process innovations, and those with a foreign owner located in Asia appear to undertake significantly less research and development (R&D) expenditure; international studies point to foreign ownership reducing domestic R&D activity in Northern Ireland and the UK as research generally occurs at the headquarter location, not within the subsidiary. In Germany, service sector firms with headquarters abroad were also significantly less likely to engage in product or process innovations than domestic German firms.19

2.22 The Productivity Commission also states while there is evidence of technology transfers and diffusion through vertical linkages (with suppliers or purchasers in host countries), it is more difficult to observe evidence of horizontal linkages that occur through the demonstration of new technologies and management techniques.20

2.23 The Productivity Commission acknowledges quantifying the benefits of foreign investment can be difficult because it can be hard to identify the direction of causality—is foreign capital attracted to opportunities of an expanding economy, or is it providing impetus to growth. Although the results of studies identified by the Productivity Commission vary, the Productivity Commission is of the view foreign investment is nevertheless a positive for the Australian economy.21

Greenfields versus cash cows 2.24 The diversity of foreign investment makes generalisations about the actual benefit difficult. By their nature, the benefits that might accrue from greenfields and brownfields investments differ—one creates something new,

the other purchases an asset that exists. The Australia Institute questions the effect on innovation and competition in Australia from brownfields investments:

If a foreign investor wishes to set up in Australia they can do so and attempt to compete against incumbents from a greenfield operation. If they

19 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 60-61 (FN).

20 Productivity Commission, Foreign Investment in Australia, June 2020, p. 55.

21 Productivity Commission, Foreign Investment in Australia, June 2020, p. 55.

compete and succeed then they add to competition and choice in Australia. However, in general Australia is a very uncompetitive environment and so a takeover necessarily involves replacing domestic owners in an industry that lacks innovation and dynamism.22

2.25 The presumption of benefit might also be questioned where a foreign interest acquires a profitable Australian company, does not change its business model, and merely collects the profits formerly enjoyed by the previous owners:

Nothing changes with respect to its output, employment and so on and so GDP is exactly what it would have otherwise been in the absence of the foreign investment. However, Australia’s net national income has fallen because the profits generated no longer accrue to Australian owners but to foreign investors. There will also be an outflow of income over the balance of payments.23

2.26 The Productivity Commission agrees in many instances greenfields investment is preferable because it is new, additional investment and this is a key mechanism through which investment provides a broader benefit to the economy as a whole.24

2.27 Nevertheless, although the Productivity Commission has done no research to quantify the difference between greenfields and brownfields investments, it suggests a brownfields investment does provide resources to the seller, who can choose to undertake a new investment in Australia. Further, although spill-over effects are difficult to measure and are not guaranteed, the Productivity Commission suggests there is evidence spill-over effects such as technology transfer occur more in brownfields acquisitions as a new investor integrates itself into existing supply chains.25

Supply chain implications 2.28 Supply chain benefits, though possible, are not guaranteed. The Government of Western Australia is concerned about the recent emergence of investments being tied to project supply chain opportunities linked to the operations of the

investor in their home market.26

2.29 Under such an arrangement, equity or capital contributions can be tied back into procurement decisions—a capital injection or investment will go into a

22 The Australia Institute, Submission 8, p. [3].

23 The Australia Institute, Submission 8, p. [10].

24 Mr Jonathan Coppel, Commissioner, Productivity Commission, Committee Hansard, 7 August 2020,

p. 46.

25 Mr Michael Brennan, Chair, Productivity Commission, Committee Hansard, 7 August 2020, p. 49;

Mr Jonathan Coppel, Commissioner, Productivity Commission, Committee Hansard, 7 August 2020, p. 45.

26 Government of Western Australia, Submission 12, pp. 2-3.

project and some of the supply contracts to that project are tied to the capital injection.27

2.30 The WA Government cites anecdotal evidence where agreements negotiated as part of the foreign investment exclude local companies from bidding for certain supply chain opportunities—opportunities that tend to be lucrative and high-value adding. It suggests the Federal government has no visibility on this. The WA Government is of the view any tie-back supply chain opportunities negotiated should be visible to regulators and their consultation partners. Further, applicants should identify how they will engage with the Australian supply chain and offer full, fair and reasonable access to project supply opportunities.28

Tax minimisation 2.31 The Productivity Commission notes multinational tax minimisation is a growing problem—companies are using an increasingly aggressive range of tools to relocate where profits are reported for tax purposes, including about

where they hold their debt (thin capitalisation) and the pricing of goods, services and intellectual property between group companies (transfer pricing).29

2.32 The Productivity Commission makes the following observations from the Organisation for Economic Co-operation and Corporate Development Group of Twenty (OECD-G20) base erosion and profit shifting (BEPS) work:

ï the profit rates of multinational affiliates in lower-tax countries are higher than their group’s average worldwide profit rate; ï FDI is increasingly concentrated in a few (mostly low-tax) jurisdictions; ï there is some evidence of an increased transfer of intellectual property (IP)

to favourable holding locations, as the ratio of royalty receipts to R&D spending has increased sharply in some countries; and ï effective tax rates paid by large multinationals are estimated to be 4 to 8½ percentage points lower than similar domestic-only enterprises.30

2.33 The Commission states in some cases foreign investment may result in new tax minimisation risks—previously domestic-only businesses gain opportunities for BEPS through an acquiring multinational enterprise.31

27 Mr John O’Hare, Executive Director, Industry Development, Department of Jobs, Tourism, Science

and Innovation, Western Australia, Committee Hansard, 7 August 2020, p. 12.

28 Government of Western Australia, Submission 12, pp. 2-3; Mr John O’Hare, Executive Director,

Industry Development, Department of Jobs, Tourism, Science and Innovation, Western Australia, Committee Hansard, 7 August 2020, pp. 12-13.

29 Productivity Commission, Foreign Investment in Australia, June 2020, p. 17.

30 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 17, 69-70.

31 Productivity Commission, Foreign Investment in Australia, June 2020, p. 17, 69-70.

Operating in the national interest 2.34 The Australia Institute argues the presumption of benefit cannot be made in areas of the Australian economy controlled by large corporations—in particular, banking, retail and resources. When a multinational with significant

world share of a commodity acquires an Australian resources company for instance, the benefits can be uncertain. It becomes a more serious concern where monopoly, duopoly or oligopoly environments exist.32

2.35 By way of example, in 2001, then Treasurer Peter Costello prohibited Shell’s proposed acquisition of Woodside and in so doing acknowledged the government could not require Shell to act in Australia’s national interest, neither could it craft enduring conditions to ensure this occurred—the best that could be obtained through conditions would be ‘best endeavours’.33

2.36 Specifically, the Treasurer stated Australia’s national interest was that resources from the North West Shelf project were developed to their full and sales of the resources promoted in preference to competing sales from projects in other parts of the world. Shell was not in a position to guarantee these outcomes for a number of reasons.34

A more ambitious national interest test 2.37 Given the variability in benefit that might be derived from foreign investment, the current national interest test with its presumption of benefit is, for some, insufficiently ambitious. Several submitters and witnesses argued there should

be higher expectations for foreign investment, beyond an expectation the effect not be negative.

2.38 Professor Clinton Fernandes states the national interest is what you make of it and argues against being bound by a ‘very narrow, unambitious version of the national interest’.35 The national interest should recognise the need to develop Australia’s economic complexity. For Professor Fernandes, policies that would give effect to a more ambitious understanding of the national interest would increase Australia’s economic complexity by diversifying exports into higher value-added sectors:

An economically complex country can ‘combine new capabilities with a wide set of existing capabilities, resulting in new products of higher

32 The Australia Institute, Submission 8, pp. [8, 10].

33 The Hon Peter Costello MP, Treasurer, ‘Foreign investment proposal—Shell Australia Investments

Limited’s (Shell) acquisition of Woodside Petroleum Limited (Woodside)’, Media Release, 23 April 2001; The Hon Peter Costello MP, Treasurer, ‘Shell/Woodside’, Press Conference, 23 April 2001.

34 The Hon Peter Costello MP, Treasurer, ‘Foreign investment proposal—Shell Australia Investments

Limited’s (Shell) acquisition of Woodside Petroleum Limited (Woodside)’, Media Release, 23 April 2001; The Hon Peter Costello MP, Treasurer, ‘Shell/Woodside’, Press Conference, 23 April 2001.

35 Professor Clinton Fernandes, Committee Hansard, 7 August 2020, p. 16.

complexity than those of countries with few capabilities’. A country’s level of economic development is associated with the complexity of its economy.36

2.39 That Australia has low economic complexity was suggested in 2018 by the then Chief Economist of the Department of Industry, Innovation and Science. According to the Chief Economist:

Australia’s economic complexity is an anomaly among advanced economies, with the economic complexity closer to that of a developing country … Countries with highly complex exports include Japan, Germany, Switzerland, Sweden and South Korea. Australia ranks 53rd— comparable to the economies of Kazakhstan, Cambodia, Kenya and Saudi Arabia—and is the least complex of all the OECD countries.

Low complexity in Australia suggests there is significant export and growth potential to diversify its export base. Low complexity also points to risks in Australia’s lack of diversity, with a narrow range of exports meaning the economy is more subject to income volatility through demand shocks for specific goods. While Australia has benefited significantly from China’s demand for commodities, low complexity suggests a negative shock to export demand would be more detrimental for Australia than for a more complex economy. Yet low complexity also indicates that Australia is a highly specialised economy, suggesting it has adapted to competitive trade pressures.37

2.40 A narrowly considered national interest can result in investments that focus on supplying raw materials for other countries to turn into elaborately transformed finished products. A strategic national interest test would include the goals of increasing the complexity of domestic innovation and supporting higher value-added sectors including:

ï high technology R&D; ï advanced manufacturing; and ï energy efficiency.38

2.41 For Professor Fernandes, the national interest should encourage strategic investments in areas that will be vital to world technological development over the next twenty to thirty years. The high-tech world of 5G and advanced materials manufacturing techniques, for instance, rely on certain critical minerals in which Australia happens to be rich. Professor Fernandes stated:

If we are to go to, for example, green technology, with solar panels or with electric cars, you need batteries, and the key things in those batteries are in those critical commodities. Why simply ship the minerals off overseas to a

36 Professor Clinton Fernandes, Submission 7, p. 1.

37 Office of the Chief Economist, Department of Industry, Innovation and Science, Industry Insights:

Globalising Australia, 2018, p. 10.

38 Professor Clinton Fernandes, Submission 7, p. 1.

global supply chain, so that they can manufacture the cars somewhere else, and then we buy the cars back again?...

There is no reason to say that the national interest involves shipping those minerals somewhere else or allowing the foreign company to come in, buy the rights to exploit the minerals, take the minerals somewhere else, manufacture the smart electric cars somewhere else, and then we buy the cars. That, to me, is like a Third World country; it’s like an economic dependency.39

2.42 Professor Fernandes suggests a national company owned by the Commonwealth could enter into partnerships with foreign investors or domestic investors to exploit and strategically develop these resources, ‘there’s nothing wrong with simply establishing a national company which can get the royalties, make investments and then try to get us to a higher level of economic complexity’.40 Rather than assuming foreign investment is automatically in the national interest, the national interest is better served by policies designed to promote technology transfer, local equity participation, and training:

It’s about whether we would like to see an Australia that does more than simply act as a quarry for other people to make smart things.41

2.43 The Western Australia Government similarly suggests applicants should be able to demonstrate how an investment will improve the overall productivity of the economy and provide opportunities for local businesses and workers. Applicants might be required to identify whether the investment would:

ï contribute to more R&D; ï facilitate technology transfer; ï provide for joint venture or partnership proposals; and ï potentially provide for local companies to participate in international

supply chains.42

A positive national interest test 2.44 Few argue foreign investment brings only benefits to the Australian economy; it is widely acknowledged there can be upsides and downsides to foreign investment. There is a general view the current approach to foreign investment

encompasses something of a balance—that is, it allows positives and the negatives to be assessed and comes to a position of approving investments that are not on the negative side of the ledger. The Treasury states the national

39 Professor Clinton Fernandes, Committee Hansard, 7 August 2020, pp. 16-17.

40 Professor Clinton Fernandes, Committee Hansard, 7 August 2020, pp. 16-17.

41 Professor Clinton Fernandes, Committee Hansard, 7 August 2020, p. 19.

42 Government of Western Australia, Submission 12, p. 2.

interest test balances the need for foreign investment against potential threats to the national interest.43

2.45 The Productivity Commission similarly argues a significant advantage of the national interest test is it weighs up not only the costs but also the benefits of a foreign investment proposal. As such, a low level of national security risk need not stop an investment that potentially brings economic and other benefits.44

2.46 Some submitters suggest there may be benefits to legislating a positive test, though this is opposed by others. Professor Allan Fels is of the view ‘the public interest test is so broad it could mean almost anything’, though he did not support a positive list on the grounds it would be restrictive.45

2.47 The Productivity Commission agrees: a positive test would likely require a definition of the national interest in the Act and while this would increase transparency of Australia’s foreign investment policy (something the Commission supports), it would come with the risk of false positives and might stop significant valuable investments.46

2.48 A key issue may be the difficulty in defining the national interest, and accounting for change over time. The Australia Institute argues:

… national interest is the sort of thing that is hard to define, but we know it when we see it. I wouldn’t like to see it defined precisely. On the question of whether we have had a decent definition—when we first started legislating on foreign investment in the 60s and 70s, how could that tackle the issue of Huawei and 5G? That would be impossible to anticipate. It would be impossible perhaps now to anticipate some of the outcomes of artificial intelligence.

So, for those sorts of reasons, I would prefer to leave the question open. But, perhaps in a similar way to the way the tax office gives you guidance if you think you might be sailing against the wind a bit—maybe that’s a role for the Foreign Investment Review Board.47

2.49 Noting the difficulty of settling on a definition of the national interest, Professor Fernandes argues it is not necessary to make the definition particularly prescriptive. The national interest has to be consistent with common sense:

It can’t be used simply as a justification, or a tool for whatever you would like to push … the national interest involves providing us with a decent

43 Treasury, Australia’s Foreign Investment Policy, 24 April 2020, p. 7.

44 Productivity Commission, Foreign investment in Australia, June 2020, p. 84.

45 Professor Allan Fels, Committee Hansard, 15 May 2020, pp. 45-46.

46 Productivity Commission, Foreign investment in Australia, June 2020, pp. 19, 83-84.

47 Mr David Richardson, Senior Research Fellow, The Australia Institute, Committee Hansard,

7 August 2020, p. 21.

standard of living, a good quality of life and a clean environment—and the resources of our country principally benefiting the people of our country.48

2.50 While there is strong support for a negatively framed national interest test, which is not legislated, it is not clear the existing framework operates negatively in all circ*mstances. Although it claims to operate the test negatively, the Treasury’s Foreign Investment Policy identifies positive factors against which the national interest is assessed. For instance, the policy states:

An investment that enhances economic activity such as by developing additional productive capacity or new technology is less likely to be contrary to the national interest.49

New Zealand’s positive test 2.51 During the course of the inquiry, the Senate Economics References Committee (the committee) considered arrangements in other jurisdictions. Of interest was the positive test in New Zealand and the general requirement that

investors deliver on the promises made in their applications.

2.52 New Zealand welcomes foreign investment and acknowledges it supports job creation, the creation and adoption of new technologies, increases human capital and grants New Zealand more diverse international connections. Without foreign investment, New Zealand’s living standards would be lower. Nevertheless, rather than assuming foreign investment will be beneficial, foreign investors in New Zealand must demonstrate how their investment will positively benefit New Zealand. This reflects different starting assumptions— New Zealand tells foreign investors the ability to invest in New Zealand is a privilege, and acknowledges not all foreign investment is beneficial. 50

2.53 The New Zealand Overseas Investment Office (OIO), a unit within Land Information New Zealand, regulates foreign investment in New Zealand under the Overseas Investment Act 2005 (NZ) (OIA). Pursuant to section 34 of the OIA, the Minister of Finance provides a Ministerial Directive Letter to the OIO (which, under section 35 of the OIA, must be published) directing the regulator on:

ï general policy approach of the government to overseas investment; ï relative importance of different criteria or factors in relation to particular assets (see, for instance, section 17 of the OIA); ï level of monitoring by the regulator; and

48 Professor Clinton Fernandes, Committee Hansard, 7 August 2020, p. 21.

49 Treasury, Australia’s Foreign Investment Policy, 1January 2021, p. 9.

50 Land Information New Zealand, ‘Overseas investment’, https://www.linz.govt.nz/overseas-investment (accessed 22 June 2021); New Zealand Treasury, Guidance note: Foreign investment policy and national interest guidance, May 2020, p. 3, https://www.treasury.govt.nz/sites/default/files/2020-05/for-invest-policy-nat-interest-guidance-may20-v2.pdf (accessed 22 June 2021).

ï other matters relating to the regulator’s functions, powers and duties.51

Ministerial directive 2.54 While a Ministerial Directive Letter cannot alter the criteria for consent established in the OIA, it can direct the OIO on the relative importance of different benefit factors, allowing the Minister to influence the focus of the

benefit assessment.52

2.55 The current Ministerial Directive Letter (issued on 28 November 2017) provides significant detail on the government’s approach to assessing the benefit to New Zealand of foreign investment.53

The Government welcomes high quality overseas investment that:

ï generates high levels of benefits to New Zealand; ï creates new productive assets (e.g. ‘greenfield’ investments); ï is environmentally sustainable, minimising adverse impacts on the natural environment, and is likely to create positive and long lasting

environmental benefits; ï provides economic, environmental, social and cultural benefits to regional communities; ï significantly increases value added activities in New Zealand; and ï provides for significant participation and oversight by New Zealanders.

However, the Government recognises that not all overseas investments provide high levels of benefits to New Zealand and overseas investment can result in the loss of New Zealand ownership and control of important productive assets such as farm land and strategic infrastructure.

The Government also recognises that while economic goals are important, so too are environmental, social and cultural goals. Overseas investment must deliver for all of New Zealand. It is a privilege, not a right, for overseas persons to own or control sensitive New Zealand assets and that privilege must be earned and maintained.

The Government’s overall policy approach is to achieve a balance between the need for highly beneficial overseas investment and the need for New

51 Overseas Investment Act 2005 (NZ), section 34; Land Information New Zealand, ‘2017 Ministerial

Directive Letter: Technical commentary’, https://www.linz.govt.nz/overseas-investment/ discover/what-we-do/2017-ministerial-directive-letter-technical-commentary (accessed 22 June 2021).

52 Land Information New Zealand, 2017 Ministerial Directive Letter: technical commentary,

https://www.linz.govt.nz/overseas-investment/discover/what-we-do/2017-ministerial-directive-letter-technical-commentary (accessed 21 June 2021).

53 The Hon Grant Robertson, New Zealand Minister of Finance, Ministerial Directive Letter,

28 November 2017, https://www.linz.govt.nz/sites/default/files/media/doc/oio_directive-letter_ 20171128.pdf (accessed 21 June 2021).

Zealand to maintain ownership and control of sensitive New Zealand assets.54

Consent requirements 2.56 Foreign investors in New Zealand require consent to acquire sensitive land (including non-urban land over five hectares, residential land and lifestyle land, and land adjoining sensitive areas such as the foreshore), significant

business assets, and fishing quota. Under New Zealand’s positive approach, potential investors have to demonstrate the benefit to New Zealand of their proposed investment.55

2.57 There are a range of tests that apply either individually or in combination to various investments:

ï benefit to New Zealand test (sensitive land); ï investor test, that focuses on the characteristics of the overseas person (significant business assets, sensitive land, fishing quota); and ï national interest test (fishing quota, land or assets used for strategically

important business, investments associated with foreign governments).56

2.58 The benefit to New Zealand test is legislated under Section 16A of the OIA, and Section 17 of the OIA and Regulation 28 specify overarching factors for assessing the benefit of overseas investments in sensitive land. The factors come under three categories—economic, environmental, and offer of special land to the crown—and include:

ï new job opportunities or retention of existing jobs, introduction of new technology or business skills, increases in export receipts, added market competition, greater efficiency or productivity, enhanced domestic services, introduction of additional investment for development purposes, increase processing of primary products;

ï protecting or enhancing existing areas of significant indigenous vegetation and significant habitats of indigenous fauna; ï protecting or enhancing historic heritage; ï protecting or improving walking access;

54 The Hon Grant Robertson, New Zealand Minister of Finance, Ministerial Directive Letter,

28 November 2017, https://www.linz.govt.nz/sites/default/files/media/doc/oio_directive-letter_ 20171128.pdf (accessed 21 June 2021). See also: Land Information New Zealand, Legislation, Ministers & Delegated Powers, https://www.linz.govt.nz/overseas-investment/discover/what-we-do/legislation-ministers-delegated-powers (accessed 21 June 2021).

55 Land Information New Zealand, ‘Overseas investment: Find out if you need consent’,

https://www.linz.govt.nz/overseas-investment/discover/find-out-if-you-need-consent (accessed 22 June 2021).

56 Land Information New Zealand, ‘Overseas investment: How we assess your application’,

https://www.linz.govt.nz/overseas-investment/discover/how-we-assess-your-application (accessed 22 June 2021).

ï consequential benefits; and ï impact of refusing the application.57

2.59 Section 18A of the OIA establishes the investor test, which must be satisfied for investments in significant business assets.58

2.60 Amendments to the OIA in 2020 introduced the national interest test, and a national security and public order call in power.59 The national interest test is intended as a ‘backstop’ tool to manage significant risks, allowing the minister to consider potential risks of a transaction to New Zealand’s national interest when deciding whether to grant a consent. While the test will always apply to investments in strategically important business assets and investments with a significant foreign government interest, it may be applied to other transactions at the minister’s discretion. If a transaction is determined to be contrary to the national interest, consent may be declined or conditions imposed to mitigate risks. The test is not defined in the Act, giving the minister broad discretion on a case-by-case basis.60

2.61 According to the New Zealand government, the advantages of this approach, over a legislated test, are that it:

ï allows New Zealand’s interests to be protected, without establishing a framework that would likely result in valuable investments being declined; and

ï ensures the OIA is an enduring piece of legislation that can easily respond to changes in the global risk environment, community concerns about foreign investment, and government priorities.61

Conditions 2.62 The OIO can apply a range of conditions to foreign investment consents. Promises made or intentions specified in an application to demonstrate an

57 Overseas Investment Act 2005 (NZ), sections. 16A, 17; Overseas Investment Regulations 2005 (NZ),

reg. 28; Land Information New Zealand, ‘Benefit to New Zealand test’, https://www.linz.govt.nz /overseas-investment/applying-for-consent-purchase-new-zealand-assets/preparing-your-application-oio/benefit-new-zealand-test (accessed 22 September 2020).

58 Overseas Investment Act 2005 (NZ), s. 18.

59 New Zealand Treasury, Guidance note: Foreign investment policy and national interest guidance, May

2020, pp. 3-3, https://www.treasury.govt.nz/sites/default/files/2020-05/for-invest-policy-nat-int erest-guidance-may20-v2.pdf (accessed 22 June 2021).

60 New Zealand Treasury, Guidance note: Foreign investment policy and national interest guidance, May

2020. See also: Hon Grant Robertson, New Zealand Minister of Finance, Supplementary Ministerial Directive Letter, 8 June 2020; Overseas Investment Office, ‘National interest assessment’, https://www.linz.govt.nz/overseas-investment/discover/how-we-assess-your-applicat ion/national-interest-assessment (accessed 22 June 2021).

61 New Zealand Treasury, Guidance note: Foreign investment policy and national interest guidance,

May 2020, p. 6.

investment is positively in New Zealand’s national interest, can be enforced as ‘special conditions’. This is unlike the Australian regime where promises or intentions are regarded as ‘voluntary undertakings’ and are not enforceable (see below). The OIO specifies it will consider taking enforcement action where an investor has ‘failed to deliver the promised benefits from their investment’.62

2.63 The conditions placed on an investment (in particular the undertakings made by an investor in their application), are often identified in the decision summaries the OIO publicly releases each month.63 Since 2015, the OIO has been publishing the records of enforcement actions taken, including court orders, orders for the disposal of property or investments, administrative penalties for the late provision of reports, warnings, and other compliance actions and compliance letters sent to investors.64

2.64 Investors are required to deliver on the promises they make in their applications because the intentions of investors are part of the foreign investment framework. The OIO publishes details of its enforcement actions. For instance, in August 2019, the OIO ordered KBSR to sell an historic Waikato hotel complex after KBSR failed to follow through with an agreed redevelopment. When purchasing the property, KBSR had promised to undertake work to improve the facility, including protecting heritage features and improving public access to the property. It also undertook to construct new guest rooms and other facilities. After engaging with KBSR, the OIO concluded KBSR was not adequately addressing the government’s concerns and was not providing confidence it would be able to complete the developments in future. The OIO ordered KBSR to dispose of the property.65

2.65 The OIO also publishes warning notices. In September 2020, the OIO wrote to Matthew Wakelin of Wairarapa Estate Limited noting annual reports to the OIO indicated Wairarapa was in breach of several conditions it was required to complete by December 2019. These included a failure to upgrade a road; to implement required covenants; to complete a comprehensive archaeological analysis; and to provide public access. The letter warns Mr Wakelin the OIO

62 Land Information New Zealand, Enforcement under the Overseas Investment Act 2015: Overseas

Investment Office, 19 November 2018, p. 3.

63 Overseas Investment Office, Decision summaries, https://www.linz.govt.nz/overseas-investment/decision-summaries (accessed 15 October 2020).

64 Overseas Investment Office, ‘Enforcement action taken’, https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken (accessed 15 October 2020).

65 Overseas Investment Office, ‘Overseas investors ordered to sell historic Waikato hotel’, Media

Release, 9 August 2019, https://www.linz.govt.nz/news/2019-08/overseas-investors-ordered-sell-historic-waikato-hotel (accessed 21 June 2021).

may take enforcement action, including requiring the disposal of the property, if breaches are not remedied.66

Assessing applications against the national interest: voluntary undertakings 2.66 Unlike the foreign investment regime in New Zealand, in Australia, investors are not necessarily held to any undertakings they may make at the time a

foreign investment proposal is submitted.

2.67 Although very few foreign investment approvals are announced, in a small number of cases where there is broad interest, the Treasurer may make an official announcement—this announcement may mention ‘voluntary undertakings’ or guarantees. Voluntary undertakings are actions an entity says it intends to complete following the acquisition—for instance, they may relate to investment, employment, business development, or community benefit.

2.68 The Treasury is unable to identify the number of applications where applicants include voluntary commitments or undertakings in order to demonstrate the investment will not be contrary to the national interest. The Treasury states voluntary undertakings can be offered, but are not suggested or encouraged, or ‘relied upon’ in making the assessment.67

2.69 Voluntary undertakings do not form part of the foreign investment framework and are not enforceable. Nevertheless, the Foreign Investment Review Board (FIRB) does highlight investor intentions in case studies in its annual report.68

Information required in an application 2.70 When an entity submits an application for foreign investment approval, it must include details about the proposed transaction, including why the proposed transaction is not contrary to the national interest, the commercial

rationale behind the proposed transaction, and describe the acquirer’s intentions for the business or land, amongst other things.69

2.71 In practice, it is not clear how voluntary undertakings (or the intentions of an entity), which are required as part of a foreign investment proposal, would not be considered when an assessment as to whether an application might be contrary to the national interest is made. Advice provided by the FIRB, that an investment that enhances economic activity by developing productive capacity

66 Overseas Investment Office, ‘Enforcement action taken’, https://www.linz.govt.nz/overseas-investment/enforcement/enforcement-action-taken (accessed 16 October 2020).

67 Treasury, Answers to Questions on Notice from 22 June 2020, provided 28 July 2020.

68 See, for instance: Foreign Investment Review Board, Annual Report 2017-2018, pp. 14, 36; Foreign

Investment Review Board, Annual Report 2018-2019, pp. 12, 25, 28.

69 Foreign Investment Review Board, ‘FIRB Application Checklist’, https://firb.gov.au/sites

/firb.gov.au/files/2021-03/FIRB_Applicationchecklist_210226.pdf (accessed 22 June 2021).

or new technology is less likely to be contrary to the national interest, would appear to invite applicants to state their intentions following acquisition.70

Box 2.1 : The Moon Lake Case—the role of voluntary undertakings The Treasurer’s announcement: The Treasurer’s announcements about foreign investment approvals can indicate voluntary undertakings are considered when determining investments are not contrary to the national interest.

For instance, on 23 February 2016, then Treasurer, the Hon Scott Morrison, approved the foreign investment application of Moon Lake Investments to acquire the land and assets of the Tasmanian Land Company (TLC)—the Van Diemen’s Land Company (VDL)—from the New Zealand-based New Plymouth District Council. The sale price was reported to be $280 million.71

At the time of its purchase, VDL was the largest dairy farm in Australia, consisting of 25 dairy farms. In total, VDL milked around 18,000 cows over almost 20,000 acres and employed 140 people. The land was granted to VDL by King George IV in 1824, and VDL has always been foreign owned.72

Factors considered by the Treasurer: In announcing the approval, the then Treasurer stated:

In forming my view I have carefully considered the national interest test and how it applies to this case, including the likely impact on local jobs and increased investment to support economic growth.

…

Moon Lake Investments have given guarantees that all current VDL employees will be offered ongoing employment with Moon Lake on terms no less favourable than their current employment arrangements.

Moon Lake has also committed to undertake a number of investment projects in the VDL farms, which will provide additional economic activity to the Tasmanian economy, and based upon Moon Lake’s estimates will result in a near doubling

70 Treasury, Australia’s Foreign Investment Policy, 1 January 2021, p. 9.

71 The Hon Scott Morrison MP, Treasurer, 'Approval of foreign investment application for purchase

of the Tasmanian Land Company', Media release, 23 February 2016; Hugh Hogan and Carrington Clarke, 'Van Diemen's Land Company, Australia's largest dairy, in mutiny amid animal welfare concerns', ABC Rural, 27 June 2019; Angus Grigg, 'Chinese billionaire tried to sell Van Diemen's Land Company before buying it', Financial Review, 2 August 2017; Hannah Lee, 'Moon Lake Investments completes purchase of Tasmanian farms from New Plymouth District Council investment arm', Stuff, 1 April 2016.

72 Hugh Hogan and Carrington Clarke, 'Van Diemen's Land Company, Australia's largest dairy, in

mutiny amid animal welfare concerns', ABC Rural, 27 June 2019; Angus Grigg, 'Chinese investor at mercy of bank over $280 million Tasmanian dairy play', Financial Review, 7 June 2018; Angus Grigg, 'Chinese billionaire tried to sell Van Diemen's Land Company before buying it', Financial Review, 2 August 2017.

of employment at VDL. This will guarantee more than 140 local jobs, generate an intended additional investment of over $100 million and an expected additional 95 jobs.

Moon Lake has advised that it intends to continue to supply the milk produced at VDL under the same contractual terms that are currently in place. This provides assurance that there will not be an impact on the supply of milk and milk products in Australia. Indeed, the investment that Moon Lake proposes to undertake may result in an increased supply.

The land on which VDL operates has important cultural and natural heritage considerations. Moon Lake has committed to honour the terms of all environmental and cultural agreements entered into by VDL, including with the local Aboriginal community. This also includes the ‘in principle’ approval for construction of a ‘Devil Proof Fence’ at its Woolnorth property to help reduce the spread of Devil Facial Tumour Disease among the Tasmanian Devil population.

Given these considerations, I am satisfied that the Moon Lake proposal to purchase TLC is not contrary to the national interest. It will ensure increased employment and investment in an important industry sector in Tasmania, while the safeguards we have put in place will ensure they pay their tax.73

In this statement, the Treasurer linked the various ‘guarantees’ with the assessment the investment would not be contrary to the national interest. It was clarified by Treasury officials during Senate Estimates that these ‘guarantees’ were ‘undertakings’ and not legally binding.74

Concerns raised about progress on meeting voluntary undertakings: In April 2018, following the resignation of five non-executive directors from the board of Moon Lake, and a corporate restructure under Chinese Ningbo Xianfeng New Material Co Ltd (APlus), the Treasurer requested annual updates from Moon Lake (now Van Dairy) on its progress against the commitments made at the time of its proposal to purchase VDL. To May 2020, Van Dairy made three annual reports.75

In these reports, Van Dairy had yet to meet some of the significant undertakings more than four years after they were made in early 2016. Van Dairy, through its lawyers, attested it:

ï continued to honour the terms of its statutory vegetation management agreement with the Tasmanian government;

73 The Hon Scott Morrison MP, Treasurer, ‘Approval of foreign investment application for purchase

of the Tasmanian Land Company’, Media Release, 23 February 2016.

74 Ms Victoria Anderson, Chief Adviser, Foreign Investment Division, The Treasury, Estimates

Hansard, 29 May 2018, p. 123.

75 Treasury, Answers to questions on notice - Moon Lake/Van Dairy (PN-IQ20-76) from public

hearing in Canberra, Friday 15 May 2020.

ï completed installation of a devil proof fence across sections of Woolnorth Road, and continues to support the Devil proof fence project by providing access and accommodation to persons conducting conservation work tagging devils;

ï continued to honour the terms of the Memorandum of Understanding with the local Indigenous community that requires Van Dairy to improve access to, and protection of, Indigenous cultural heritage across Woolnorth; and

ï continued to supply milk to Fonterra on largely the same terms as VDL.76

2.72 However, Van Dairy had yet to meet other commitments:

ï there had been no local equity participation; ï capital expenditure (suggested at over $100 million) had been approximately $20.5 million; ï it had not yet created any new dairy farms and the long term plans

to invest in new dairy farms was reduced from 9 to 6; ï it continued to explore plans for a processing facility; ï because there was no processing facility, it had not been able to

provide site visit opportunities for food technology, processing and engineering or more extensive internships opportunities at AgriTas; and ï it was providing employment for 145 full-time and 34 casual staff (39 on working visas and 16 working holiday makers). At the time of purchase the Treasurer stated the acquisition would guarantee 140 local jobs, and an additional 95 jobs were expected as a consequence of the investment.77

Subsequent developments: Between December 2020 and March 2021, the Circular Head Council issued nine Environment Protection Notices to Van Dairy regarding effluent management systems on its farms that were causing, or likely to cause, material environmental harm.78 A formal audit by the Tasmanian Dairy Industry Authority, which manages licensing, inspection and auditing of dairy

76 Treasury, Answers to questions on notice - Moon Lake/Van Dairy (PN-IQ20-76) from public

hearing in Canberra, Friday 15 May 2020.

77 Treasury, Answers to questions on notice - Moon Lake/Van Dairy (PN-IQ20-76) from public

hearing in Canberra, Friday 15 May 2020.

78 Environment Protection Authority Tasmania, ‘EPA to investigate Van Dairy Limited compliance

with Environment Protection Notices’, Media Release, 14 April 2021,

https://epa.tas.gov.au/epa/news/epa-to-investigate-van-dairy-limited-compliance-with-environment-protection-notices (accessed 21 June 2021).

businesses, found 19 of the 23 farms owned by Van Dairy had significant non-compliance issues.79

The Environment Protection Authority Tasmania announced in April 2021 it would investigate Van Dairy’s compliance with the Environment Protection Notices, on the grounds there are significant allegations of environmental harm.80 The Environment Protection Authority estimates the cost of rectifying the issues will be over $10 million.81 Van Dairy subsequently appointed a consultant to assist it manage compliance with regulatory requirements.82

In April 2017, media reports announced the Fair Work Ombudsman had launched inquiries following claims of worker underpayment and work compliance breaches.83

In May 2021, it was announced Van Dairy had sold 11 of the farms for $62.5 million. The buyer was reported to be Melbourne-based asset manager Prime Value. The sale was reported to include 5,000 cows and 2,200 hectares of land. Mr Lu, owner of Van Dairy, is reported to have stated the sale ‘delivers on our promise for Australian companies to own 10 per cent of the land’.84

Treasury assessments 2.73 Treasury officials have confirmed a variety of elements can be considered in the assessment of a foreign investment proposal, including the contribution of a foreign investment to: domestic innovation, supporting higher-valued add

sectors, R&D, advanced manufacturing, and energy efficiency. For instance,

79 Adam Langenberg, ‘Tasmania’s Environment Protection Authority to Investigate Van Dairy

Limited’, ABC News, 15 April 2021, https://www.abc.net.au/news/2021-04-15/environmental-watchdog-to-investigate-van-dairy/100070206 (accessed 21 June 2021).

80 Environment Protection Authority Tasmania, ‘EPA to investigate Van Dairy Limited compliance

with Environment Protection Notices’, Media Release, 14 April 2021,

https://epa.tas.gov.au/epa/news/epa-to-investigate-van-dairy-limited-compliance-with-environment-protection-notices (accessed 21 June 2021);

81 Andrew Miller & Caitlin Jarvis, ‘Tasmanian EPA says Van Dairy’s effluent fix will be costly’, Stock

& Land, 19 April 2021, https://www.stockandland.com.au/story/7215559/van-dairy-fix-could-cost-millions-epa/ (accessed 21 June 2021).

82 Meg Powell & Caitlin Jarvis, ‘Speculation Van Dairy is set to sell some of its farms’, Stock & Land,

20 April 2021, https://www.stockandland.com.au/story/7216352/vdl-coy-on-farm-sale-queries/?src=rss&utm_email=122ad32c1c (accessed 21 June 2021).

83 Adele Ferguson, ‘Chinese owners of scandal-ridden dairy scramble to sell the farm’, The Sydney

Morning Herald, 17 April 2021.

84 Lachlan Bennett, ‘Australia’s largest dairy operation broken up by Chinese owner in $62.45 million

deal’, ABC News, 31 May 2021; Larry Schlesinger, ‘Prime value adds Tassie Dairy farms to agri fund’, Financial Review, 30 May 2021.

research, further investment, greenfields work, introduction of new technology ‘are all, absolutely, taken into account’, according to a Treasury official.85

2.74 It is unclear how the Treasury can separate out the various elements of an application and ignore those that relate to the intentions of an investor when assessing whether an application is not contrary to the national interest.

2.75 However, regardless of how they affect the decision-making process, unless these undertakings then become conditions imposed on an investment and subject to a reporting regime, the Treasury has no way to ensure such undertakings occur. As they exist outside the foreign investment framework, there are no penalties. The Treasury has stated if voluntary undertakings are not subsequently met by an investor, it may be considered as part of the character of the investor in future applications.86

Can Australia’s foreign investment framework be changed 2.76 The committee asked the Department of Foreign Affairs and Trade and the Office of International Law in the Attorney-General’s Department whether, given Australia’s international trade obligations, changes to the foreign

investment framework could be legislated. In particular, the committee asked the departments whether under international trade obligations, it is permitted for Australia to:

ï introduce a positive national interest test into the act that would require prospective foreign investors to demonstrate how their investment would benefit Australia;

ï introduce a provision in the Act that would define the ‘national interest’; or ï make enforceable any ‘voluntary undertakings’ detailed by an applicant when an application is lodged.

2.77 The departments initially declined to provide a substantive answer to these questions.87 The committee reaffirmed its request. Rather than responding generally to the questions in principle, the departments responded in a manner that was not helpful. The departments stated they could not provide answers to these questions because they would need further detail to undertake a case-by-case analysis of all the relevant facts and circ*mstances. In particular, the departments stated that in order to provide a response, the following information would be required:

85 See: Mr Roger Brake, Division Head, Foreign Investment Division, The Treasury, Committee

Hansard, 7 August 2020, p. 66.

86 Treasury, Answers to Questions on Notice from 22 June 2020, provided 28 July 2020.

87 Department of Foreign Affairs and Trade and Attorney-General’s Department, Answers to written

questions on notice from 29 September 2020 (provided 15 October 2020).

ï positive national interest test: whether this would be defined in legislation or guidance material, the content of any such definition, and how prospective foreign investors would be required to demonstrate that their proposed investments would benefit Australia; ï defining national interest: the content of the proposed definition, whether it

would be an inclusive or an exhaustive definition, and the level of discretion available to the decision maker; and ï making voluntary undertakings enforceable: whether this would apply retrospectively, the types of undertakings that may be sought from

prospective investors, and the available enforcement options.88

2.78 The departments stated:

Only with greater clarity about the nature and content of the proposals would it be possible to step through the legal analysis to determine whether each of the three hypothetical proposals was ‘permitted’ under Australia’s international trade and investment obligations.89

2.79 These steps include identifying the sources of relevant international trade and investment obligations; whether proposed measures are covered by a relevant agreement; where there is a prima facie breach of an obligation; and whether there is a reservation, exception or carve-out available.90

2.80 The departments were also asked for an explanation of the legal basis upon which Australia can impose and enforce conditions on a foreign entity that are not similarly applied to Australian-owned entities, specifically with regard to World Trade Organisation national treatment obligations, or similar provisions in free trade agreements.91

2.81 The departments explained the national treatment obligation is subject to a range of reservations, exceptions, and carve-outs:

For example, in Australia’s free trade agreements, the national treatment obligation does not apply to any measure as set out by Australia in its schedules of non-conforming measures. These schedules include entries relevant to Australia’s foreign investment screening regime. Our GATS [General Agreement on Trade in Services] commitments are subject to a similar reservation for Australia’s foreign investment screening regime.92

88 Department of Foreign Affairs and Trade, Answers to question on notice from 20 October 2020

(provided 23 December 2020).

89 Department of Foreign Affairs and Trade, Answers to question on notice from 20 October 2020

(provided 23 December 2020).

90 Department of Foreign Affairs and Trade, Answers to question on notice from 20 October 2020

(provided 23 December 2020).

91 Department of Foreign Affairs and Trade and Attorney General’s Department, Answers to written

questions on notice from 16 September 2020 (Provided 28 September 2020).

92 Department of Foreign Affairs and Trade and Attorney General’s Department, Answers to written

questions on notice from 16 September 2020 (Provided 28 September 2020).

2.82 However, when asked about stand-still and ratchet mechanisms, the departments responded that while the national treatment obligation in Australia’s free trade agreements, where it applies, does not apply to any measure as set out by Australia in its Annex I schedules of existing nonconforming measures:

… this reservation is qualified by a ‘standstill and ratchet’ mechanism which essentially provides coverage for changes to existing non-conforming measures so long as they do not make the measure less consistent with the national treatment obligation, compared to the situation immediately before the amendment.

One of the entries in Australia’s Annex I schedules of existing non-conforming measures in free trade agreements is for Australia’s foreign investment screening regime which is subject to the standstill and ratchet mechanism described above. However, it is important to note that, apart from this non-conforming measure, a range of other reservations, exceptions and carve-outs are relevant to Australia’s foreign investment screening regime.

Determining whether a particular proposed change to Australia’s foreign investment screening regime would be consistent with Australia’s international trade and investment obligations would involve the provision of legal advice on a case-by-case basis in light of all of the relevant facts and circ*mstances.93

2.83 The Committee surmises the government is likely prevented by international trade obligations from making further amendments to legislation that would ensure foreign investment in Australia provides a positive benefit to all Australians and is positively in the national interest, and that foreign investors are required to carry through with the promises they make when they propose an investment.

93 Department of Foreign Affairs and Trade and Attorney General’s Department, Answers to written

questions on notice from 16 September 2020 (Provided 28 September 2020).

Chapter 3

Regulating foreign investment: assessing applications and applying conditions

3.1 Any regulatory activity involves a level of risk, particularly a regulatory activity that begins with an assumption an action will be beneficial. The integrity of Australia’s foreign investment system turns on the work of the regulator, specifically, the quality of the assessments; the conditions applied to ensure investments are not contrary to Australia’s national interest; and the monitoring and enforcement of those conditions.

3.2 This chapter and the next examine the Treasury’s role as regulator. This chapter focusses on the Treasury’s assessment of foreign investment proposals and the conditions that may be applied to approvals to ensure investments are not contrary to Australia’s national interest. The next chapter discusses monitoring and enforcement of conditions.

3.3 The discussion in this chapter begins with the regulatory responsibilities and the characteristics of sound regulation, before examining Treasury’s capacity to assess foreign investment applications in the national interest. The conditions applied to approvals are then discussed. The chapter includes two case studies: the first into a foreign investment in Musselroe Bay examines the ability of authorities to identify the source of funds; and the second into Chow Tai f*ck Enterprises’ acquisition of Alinta Energy (through subsidiary Pioneer Sail Holdings) illustrates how conditions are applied to acquisitions.

The Treasury as the regulator 3.4 ‘The FIRB’ is often used as a shorthand reference for foreign investment regulation, variously described as the entity that receives applications, assesses and approves applications, applies conditions, and enforces compliance with

conditions. The Foreign Investment Review Board (FIRB) is an advisory body appointed by the government with no statutory powers. It is not mentioned in the Foreign Acquisitions and Takeovers Act 1975 (the Act). Whilst applications are made through the FIRB website or portal, it has no direct role in the processing of applications. In practice, it reviews and makes recommendations on applications that are referred for ministerial decisions.

3.5 Under the Act, it is the Treasurer (or junior portfolio ministers in certain instances) who makes decisions on foreign investment proposals. The Treasurer does this upon advice from the FIRB and FIRB agencies. The FIRB agencies are not answerable to the FIRB, though the Treasury provides the secretariat functions and the head of the Treasury’s Foreign Investment Division sits on the FIRB as an executive member.

3.6 Section 137 of the Act allows the Treasurer to delegate, with very limited exceptions, the Treasurer’s powers and functions under the Act, to the Secretary of the Treasury, the Commissioner of Taxation, and a person engaged under the Public Service Act 1999 who is employed in the Treasury of the Australian Taxation Office (ATO).1 The Treasurer does so.

3.7 The Treasury is the lead agency for the administration of the foreign investment framework. In practice, it is the Treasury that receives applications and Treasury officers who make assessments against the national interest, in conjunction with relevant agencies. If required, for instance if an application is particularly significant or sensitive, the FIRB may be asked to provide advice. Then the Treasurer or delegated decision maker considers the application.2

3.8 It is officers from the foreign investment division of the Treasury who routinely provide advice to prospective investors, develop conditions, and monitor compliance. Despite it not being established as a regulatory agency, the Treasury is, in effect, the regulator for much foreign investment. What the Treasury does not regulate, is regulated by the ATO, specifically residential real estate, and non-sensitive commercial land and internal corporate reorganisations.

Role of the Australian Tax Office 3.9 In 2018, the Australian National Audit Office (Audit Office) reported on its audit into the effectiveness of the management of compliance with foreign investment obligations in residential real estate (the ATO foreign investment

audit). It examined agency performance through three high level criteria:

ï compliance and enforcement strategies and detection arrangements were in place to support compliance activities; ï activities were undertaken to promote voluntary compliance and effectively address identified instances of potential non-compliance; and ï the effectiveness of compliance arrangements was monitored and reported.3

1 Under section 137, the Treasurer may delegate almost all or any of the Treasurer’s powers or

functions under the Act, with various requirements for the person to whom the powers can be delegated. For instance, some powers can only be delegated to SES level employees or specific positions. Powers/functions that cannot be delegated relate to sections 122(4) (determining laws for the purposes of disclosing protected information); 130R (appointing the Registrar of the Register of Foreign Ownership of Australian Assets), and 130ZW (Directions by the Treasurer to the Registrar). The Secretary of the Treasury and the Commissioner of Taxation have some powers to sub-delegate (subsections 137(3) and 137(4)). There are also some limitations on the delegation of powers and functions under the Regulatory Powers Act, though powers and functions of this kind may be delegated under other sections of the Act (see subsection 137(8)).

2 Treasury, Submission 6, pp. 6-7.

3 Australian National Audit Office, ‘Managing compliance with foreign investment obligations for

residential real estate’, ANAO Report No. 48 2017-18, pp. 7-8.

3.10 Amongst other things, the audit concluded the ATO’s management of compliance was becoming effective; while the agency had assessed and addressed compliance risk, it did not have a compliance and enforcement strategy; a number of minor enhancement would improve its largely effective investigation processes; and its monitoring and reporting arrangements were largely effective but could be strengthened.4

3.11 The Audit Office made two recommendations: that the ATO compiles and implements a residential foreign investment compliance and enforcement strategy and that it prioritises developing and finalising data matching rules to address key compliance risks. The ATO agreed to both recommendations.5

3.12 Given the comprehensiveness of the report, the Senate Economics References Committee (the committee) has not examined the effectiveness of the ATO as a regulator. However, this chapter does draw upon broader regulatory insights in this report and the Audit Office’s previous publications on sound regulatory practices.

Characteristics of sound regulation 3.13 The core responsibility of regulatory agencies is to administer regulation to achieve the underlying policy objective, in accordance with the powers and authority provided through legislation and government direction.6 Regulatory

agencies do so by balancing risk with regulatory burden. The Audit Office states:

It is important to highlight that a regulator’s role is not to completely eliminate risk, but to effectively manage risk, as the cost associated with eliminating risk would in most cases be prohibitive. In adopting a risk-based approach a regulator should therefore consider stakeholder expectations, while at the same time acknowledging that some level of residual risk will exist in the system.7

3.14 A characteristic of best-practice regulation is that the objectives of the regulatory regime should be clearly outlined in supporting legislation or legislative instruments, and communicated to key stakeholders. In the case of foreign investment, section 3 of the Act establishes the scope and purpose of the Act, and the Treasurer’s powers to decide the Commonwealth has no

4 Australian National Audit Office, Managing compliance with foreign investment obligations for

residential real estate, ANAO Report No. 48 2017-18, p. 8.

5 Australian National Audit Office, Managing compliance with foreign investment obligations for

residential real estate, ANAO Report No. 48 2017-18, p. 11.

6 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, pp. 3, 13.

7 Australian National Audit Office, Administering Regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 15.

objection to an action (a proposed foreign investment), impose conditions on an action, prohibit an action, or require an action to be undone.8

3.15 The Act specifies in several places the Treasurer can make these decisions according to a judgement (satisfaction) on whether the proposal will or will not be contrary to the national interest or national security.9 In combination, the Act and various policy and guidance materials establish the objective of the foreign investment regime is to promote foreign investment that is not contrary to the national interest.

3.16 As to the process of assessing risk, best-practice regulation requires that eligibility and assessment criteria should be made readily available to potential applicants and applications are to be consistently assessed against the criteria. Through the FIRB website, the Treasury makes available a range of guidance and explanatory documents on the foreign investment regime.10 These were updated during the course of the inquiry to reflect legislative changes.

3.17 The Audit Office identifies a range of skills and capabilities required to support effective regulatory administration—the maintenance of which can be a challenge for many regulators. In addition to specific regulatory skills, regulators require staff with technical proficiency, formal qualifications and industry experience.11

3.18 Reflective of the complexity of some foreign investment proposals, in addition to the expertise of its own staff, the Treasury calls upon a range of consultation partners when it assesses applications against the national interest.12

3.19 While Treasury documents and evidence from Treasury witnesses speak to the Treasury’s thorough regulation of foreign investment proposals, a number of concerns were raised by witnesses to the inquiry—both in the Treasury’s capacity to assess applications against the national interest, and in the application of conditions.

Foreign investment regulatory performance framework 3.20 Regulators must have a clear understanding of the regulatory outcomes being sought.13 Treasury’s corporate plan for 2020-2021 identified this as

8 Foreign Acquisitions and Takeovers Act, section 3.

9 See, for instance: Foreign Acquisitions and Takeovers Act, sections. 57-59, 62, 67, 69, 71, 74, 76; Foreign

Acquisitions and Takeovers Regulation 2015, regs. 42, 43, 43A, 43B.

10 Foreign Investment Review Board, ‘General Guidance’, https://firb.gov.au/general-guidance

(accessed 23 June 2021).

11 Australian National Audit Office, Administering Regulation: Achieving the right balance, Better

Practice Guide, June 2014, pp. 24-25.

12 Treasury, Submission 6, pp. 7-8.

strengthening Australia’s foreign investment review framework to support and encourage foreign investment and streamlining investment in non-sensitive areas, while ensuring the national interest is protected. The target for foreign investment regulation is that foreign investment regulatory performance meets whole-of-Government standards.14

3.21 The Treasury reports on its performance as a regulator under the government’s regulator performance framework.15 This framework does not assess the substance of Treasury decisions on ensuring investments are not contrary to the national interest, or the substance of its actual compliance and enforcement activity; it assesses administrative efficiency, and does so without identifying any baseline against which performance is measured.

3.22 The framework is structured around six outcomes-based key performance indicators (KPIs) against which regulators develop their own metrics:

ï regulators do not unnecessarily impede the efficient operation of regulated entities; ï communication with regulated entities is clear, targeted and effective; ï actions undertaken by regulators are proportionate to the risk being

managed; ï compliance and monitoring approaches are streamlined and coordinated; ï regulators are open and transparent in their dealings with regulated entities;

and

ï regulators actively contribute to the continuous improvement of regulatory frameworks.16

3.23 Regulators publish a report on their annual self-assessment against the framework. The self-assessment is externally validated through an ‘approved stakeholder mechanism’ prior to its release and publication. The Foreign Investment Committee of the Law Council of Australia externally validates Treasury’s self-assessment.17 Part of Treasury’s self-assessment is informed by a stakeholder survey. Treasury has received the following number of responses to the survey:

13 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, pp. 13, 27.

14 The Treasury, ‘Corporate Plan 2020-21’, https://corporate-plan.treasury.gov.au (accessed 23 June

2021).

15 Australian Government, Regulator Performance Framework, October 2014

16 Australian Government, Regulator Performance Framework, October 2014; The Treasury,

‘Administration of Australia’s Foreign Investment Framework’, Regulator Performance Framework, Report 2019-20.

17 The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator

Performance Framework, Report 2019-20, p. 3.

ï 2019-2020—18 responses (30 recipients); ï 2018-2019—18 responses (survey sent to 326 contacts); ï 2017-2018—6 responses (survey sent to 31 people from 24 organisations).18

3.24 The Treasury’s report on foreign investment performance in 2019-20 depicts an organisation (including the FIRB and the ATO) efficiently and effectively administering Australia’s foreign investment framework, with some minor areas for improvement.19 Many of the ‘measures of good regulatory performance’ require the agencies to minimise the potential for unintended negative impacts of regulatory activities; undertake regular consultations and incorporate stakeholder feedback in their processes; communicate clearly and provide relevant information for foreign investors; make decisions and give advice in a timely manner; take a risk-based approach to compliance and enforcement; and use data from other agencies to minimise information requests of investors.20

3.25 The KPIs against which achievement of an outcome is assessed speak of minimising the potential negative impact of regulatory activities, reducing the cost of compliance, communicating clearly, being open and transparent, and taking proportionate and risk-based actions.21

Treasury’s capacity to assess applications 3.26 The audit of the ATO’s foreign investment activities included ‘key learnings’ for government entities with responsibility for compliance functions, including that entities should monitor the achievement of the broader policy intent. In

the case of the Act, the broader policy intent is that only foreign investment that is not contrary to the national interest is approved.22

3.27 The capacity of the Treasury to accurately assess applications against the national interest, and to formulate appropriate conditions, is central to this function. The committee received evidence during the inquiry about Treasury’s capacity to assess applications against the national interest and whether, despite Treasury’s broad range of consultation partners, it is possible

18 Treasury, Regulator performance framework: Administration of Australia’s foreign investment framework,

2017-18, p. 6; Treasury, Regulator performance framework: Administration of Australia’s foreign investment framework, 2018-19, p. 3; The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator Performance Framework, Report 2019-20, p. 19.

19 The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator

Performance Framework, Report 2019-20, p. 4.

20 The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator

Performance Framework, Report 2019-20.

21 The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator

Performance Framework, Report 2019-20

22 Australian National Audit Office, Managing compliance with foreign investment obligations for

residential real estate, ANAO Report No. 48 2017-18, p. 12.

to be confident foreign investment proposals are not contrary to the national interest.

3.28 In particular, the committee examined:

ï knowledge of foreign jurisdictions; ï ability to identify ultimate beneficial owner and source of funds; and ï level of scrutiny by partner agencies.

Knowledge of foreign jurisdictions 3.29 The China Policy Centre submission states investments from China are challenging for Australian regulators to assess because China has an unfamiliar and complex system of governance and political economy. In

particular, the following aspects are not well understood:

ï how state-owned enterprises are governed and controlled; ï functions of party cells and party-controlled labour organisations in private enterprise; ï the legal and regulatory environment; ï the way business and politics interact; and ï role of the Chinese Communist Party in the economy.23

3.30 According to the China Policy Centre, this lack of knowledge is not solely limited to Treasury or the FIRB; all agencies involved in the foreign investment regime need to better understand the Chinese political economy, including the Critical Infrastructure Centre (CIC), the Department of Defence, the Australian Competition and Consumer Commission (ACCC), intelligence agencies, and law enforcement agencies.24

3.31 Australian Transaction Reports and Analysis Centre (AUSTRAC) agreed that China literacy is imperative:

When it comes with literacy with regard to China, I certainly agree it’s important that government agencies have a sophisticated and developed understanding of other countries that we’re engaging with, whether that’s China or any other…we have an MOU on both the intelligence and the regulatory sides with our Chinese counterparts. We have an officer based within the Australian mission in China, working with Chinese and Australian government agencies. So it is a very important area of work for AUSTRAC.25

23 China Policy Centre, Submission 1, p. 2.

24 China Policy Centre, Submission 1, p. 2.

25 Mr Chris Collett, Deputy Chief Executive Officer Intelligence, AUSTRAC, Committee Hansard,

7 August 2020, p. 33.

Ability to identify the ultimate beneficial owner and source of funds 3.32 Identifying the ultimate beneficial owner or the source of funds is not always straightforward. Investment can be routed through special purpose entities (holding companies) in countries such as Luxembourg or the Cayman Islands

and other low taxing jurisdictions—the International Monetary Fund (IMF) describes such funds as ‘phantom FDI [Foreign Direct Investment]’ passing through ‘empty corporate shells’. The IMF estimated approximately 40 per cent of global FDI in 2017 was ‘phantom FDI’. This share has been increasing over time. The IMF states:

These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration.26

3.33 The Productivity Commission raises the issue of identifying the ultimate beneficial owner in regard to Chinese investments and its impact on the accuracy of foreign investment statistics. Research indicates a large part of Chinese investment flows through Hong Kong, Singapore and other financial hubs. The Commission also highlights that some investors may structure their affairs to avoid FIRB jurisdiction.27

3.34 The Productivity Commission states:

Chinese investors have significantly increased their holdings in the past decade, although identifying the precise value is difficult. Data suggest that flows into Australia for which the ultimate beneficial owner is from China are about three times as high as those for which they are the immediate owner, as funds flow through corporate structures in third countries.28

3.35 This difficulty is experienced by other agencies. The Australian Office of Financial Management is unable to identify the ultimate beneficial owner of all Australian government securities because it has no means by which to compel the provision of information by the beneficial owners of securities or by persons holding securities on their behalf. The Office states:

The figures … represent opinions formed by the AOFM based on limited information. The AOFM does not believe that they provide any indication of the likely distribution by country of the beneficial ownership of securities held by custodian and nominee companies, or are representative

26 IMF quoted in, Productivity Commission, Foreign Investment in Australia, June 2020, p. 107.

27 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 23, 108.

28 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 23, 108.

of the distribution of the beneficial ownership of the total securities on issue.29

Role of corporate service providers 3.36 The Uniting Church of Australia states research has found Australian corporate service providers rank highly globally in terms of their willingness to establish untraceable shell companies, even when there is a risk of such

companies being used for illicit purposes.30

3.37 Some corporate services organisations provide Australian ‘straw’ nominee directors for foreign nationals seeking to invest in Australia. According to the Uniting Church, one such entity, ABN Australia, states on its website:

Maintain your personal privacy—clients are often in a position where it is unwise for their name to appear on the corporate registers of a company, especially where such registers are available to be viewed via a basic company search. We can provide you with a Resident Director as well as registered office and business address—which will help to protect your reputation, other business interest, current employment, family & associates.31

Financial intelligence 3.38 AUSTRAC provides the Treasury with intelligence reports relating to suspicious foreign investment activities. Despite its significant data records, when determining beneficial ownership of a foreign company, AUSTRAC

largely relies on publicly available information, unless it makes a specific request of its partner agencies:

When you’re looking at beneficial ownership of a foreign jurisdiction and a corporation overseas, the information that might be publicly available is the information that we would have available to ourselves to utilise, in terms of open source material. We have the ability and we have used the ability to engage with some of our international partners. We have relationships with 97 jurisdictions at present and we can request information in that respect. Obviously, beneficial ownership is one of those more challenging elements, more broadly, across investigations, whether it be of this nature or looking at serious and organised crimes.32

3.39 Further questions were raised about the ability of authorities to examine corporate structures established overseas—whether they actually or are only purporting to operate in a particular jurisdiction. Officials explained AUSTRAC is not an investigation agency and its level of understanding

29 Australian Office of Financial Management, ‘Public Register of Government Borrowings’,

https://www.aofm.gov.au/public-register-government-borrowings (accessed 23 June 2021).

30 Uniting Church in Australia, Submission 9, p. [4].

31 Uniting Church in Australia, Submission 9, p. [4].

32 Mr Bradley Brown, National Manager of Intelligence Partnerships, AUSTRAC, Committee Hansard,

7 August 2020, p. 29.

behind actual beneficial ownership is dependent on the information in corporate registries or other records made public in international jurisdictions. In some cases it could use a mutual legal assistance request to obtain further information.33 It is not clear how often this occurs with regard to foreign investment proposals.

Capacity to identify laundered money 3.40 The Australian Federal Police (AFP) acknowledged the difficulty of identifying whether funds were being laundered through real estate transactions. It stated:

… in the real estate context, unless somebody is bold enough to put a pile of cash on your desk and say, ‘I want to buy the property with cash,’ a lot of other indicators might not be that obvious.34

3.41 The Musselroe Bay case study below shows foreign investment officials cannot always identify when illicit funds are being used to fund acquisitions in Australia.

Box 3.1 : The Musselroe Bay Case—identifying laundered money Resort development: Musselroe Bay is in north-eastern Tasmania, around four and a half hours from Hobart. In October 2019, the Dorset Council approved an application to commence the construction of a resort on a 3,000 acre property in Musselroe Bay.35

Planning applications for the land had previously been approved. A permit for a resort development had been granted in 2006 to Spencer Morgan Group. Banks reportedly withdrew funding for the project in late 2008 and the company applied for an extension to its planning application. The planning application lapsed in 2010 and the company was deregistered in November 2013. The property was reportedly put on the market with a valuation of around $4 million.36

33 Mr Bradley Brown, National Manager of Intelligence Partnerships, AUSTRAC, Committee Hansard,

7 August 2020, p. 31.

34 Mr Stefan Jerga, Acting National Manager of Criminal Asset Confiscation, Australian Federal

Police, Committee Hansard, 7 August 2020, p. 39.

35 Michael Dalla Fontana, ‘AFP seizes $17.3m worth of property in Victoria, Tasmania in Chinese

money laundering probe‘ ABC News, 31 October 2019, https://www.abc.net.au/news/2019-10-31/afp-melbourne-tasmania-property-alleged-chinese-money-laundering/11657344 (accessed 23 June 2021); ‘Musselroe Bay property seized by AFP‘, North Eastern Advertiser, 31 October 2019, https://northeasternadvertiser.com/featured-articles/titlegoeshere-KDXek-fnp8x (accessed 23 June 2021).

36 ‘Council backs revived resort proposal for north-east‘, ABC News, 22 October 2013,

In 2013, the Dorset Council approved a planning permit for the Musselroe Bay Resort to Melbourne Resort Development. This company was established in September 2012 and changed its name to Resort Development Tasmania in September 2015. Funding for the development was coming from China. Similar to the previous proposal, this was to be a $185 million complex including a 100-guest suite resort building, 300 units, an 18-hole golf course and an airstrip.37

Seizure: On 29 October 2019, the AFP restrained the Musselroe Bay land and six properties in Melbourne. The AFP alleges two Chinese nationals had moved approximately $23 million of fraudulently-obtained funds from China since late 2012 and used these funds to purchase and develop properties in Melbourne and Tasmania.38

The local council expressed surprise at the seizure, though noted they believed there were issues around the proponents of the project getting their money out of China and into Australia to commence the project.39

Involvement of Chinese police: Australian authorities had not previously identified any concern with funding for the project. Rather, the AFP investigation, Operation Gethen, followed a request from the Chinese Ministry of Public Security (MPS) in 2017. The MPS was seeking AFP assistance to identify two Chinese nationals suspected of laundering proceeds of crime in Australia. Chinese authorities are of the view the money was raised through real estate and bank loan fraud and being laundered through property purchases in Australia.40

37 ‘Council backs revived resort proposal for north-east‘, ABC News, 22 October 2013,

https://www.abc.net.au/news/2013-10-22/council-backs-revived-resort-proposal-for-north-east/5037406 (accessed 23 June 2021); ‘Lifeline for five-star resort project‘, ABC News, 17 July 2013, https://www.abc.net.au/news/2013-07-17/green-light-for-five-star-resort/4825478 (accessed 23 June 2021); Tony Briscoe, ‘Chinese backing for rural resort‘, ABC News, 22 October 2013, https://www.abc.net.au/news/rural/2013-10-22/chinese-backing-for-rural-resort/5038012 (accessed 23 June 2021); ‘Chinese investment for Musselroe Bay Resort‘, ABC News, 22 October 2013, https://www.abc.net.au/news/rural/2013-10-22/musselroe-bay-resort-approved/5037702 (accessed 23 June 2021); Georgie Burgess, ‘$185 million Tasmanian tourism boost‘, Newcastle Herald, 16 February 2014, https://www.newcastleherald.com.au/story/2091308/185-million-tasmanian-tourism-boost/ (accessed 23 June 2021).

38 Australian Federal Police, ‘$17.3m restrained in AFP investigation into Chinese nationals allegedly

laundering proceeds of crime‘, Media Release, 31 October 2019, https://www.afp.gov.au/news-media/media-releases/173m-restrained-afp-investigation-chinese-nationals-allegedly-laundering (accessed 23 June 2021); ‘Musselroe Bay property seized by AFP‘, North Eastern Advertiser, 31 October 2019, https://northeasternadvertiser.com/featured-articles/titlegoeshere-KDXek-fnp8x

(accessed 23 June 2021).

39 Michael Dalla Fontana, ‘AFP seizes $17.3m worth of property in Victoria, Tasmania in Chinese

money laundering probe‘ ABC News, 31 October 2019, https://www.abc.net.au/news/2019-10-31/afp-melbourne-tasmania-property-alleged-chinese-money-laundering/11657344 (accessed 23 June 2021).

40 Australian Federal Police, ‘$17.3m restrained in AFP investigation into Chinese nationals allegedly

According to the AFP, Chinese authorities only became aware of the issue in March 2017 when a company who felt aggrieved that a contract had not been honoured relating to a real estate venture in China, contacted the MPS. The real estate contract itself had been signed in 2012—with a five-year settlement (2017). In July 2017 the MPS had identified the persons of interest and assets in Australia and contacted the AFP for assistance.41

Operation Gethen was the fifth investigation since November 2017 involving Chinese nationals allegedly laundering proceeds of crime in Australia.42 It is not clear what the other four investigations were.

Laundered funds are difficult to identify: The AFP told the committee some foreign companies operate with a sophisticated veneer and it is difficult to identify wrongdoing. With regard to Operation Gethen, the AFP stated:

To any facilitators—whether it be lawyers or real estate agents or others in Australia—back in 2012, when these properties were acquired, five years before the local company in China that felt aggrieved even reported it, on the face of it there was nothing noticeable. No alarm bells would have been ringing, or things like that. It was quite sophisticated.43

Level of scrutiny by partner agencies 3.42 That approximately fifteen partner agencies may be consulted on a foreign investment application suggests a thorough and exhaustive examination from every angle, leaving no stone unturned and no avenue investigated.

Depending on the nature of the proposal and concerns it raises, the Treasury may consult with a variety of partner agencies as it assesses the application against the national interest, including:

ï state and territory government departments; ï Department of Foreign Affairs and Trade; ï national security agencies; ï the Australian Competition and Consumer Commission (ACCC);

October 2019, https://northeasternadvertiser.com/featured-articles/titlegoeshere-KDXek-fnp8x (accessed 23 June 2021).

41 Mr Stefan Jerga, Acting National Manager of Criminal Asset Confiscation, Australian Federal

Police, Committee Hansard, 7 August 2020, p. 38.

42 Australian Federal Police, ‘$17.3m restrained in AFP investigation into Chinese nationals allegedly

laundering proceeds of crime‘, Media Release, 31 October 2019, https://www.afp.gov.au/news-media/media-releases/173m-restrained-afp-investigation-chinese-nationals-allegedly-laundering (accessed 23 June 2021); Erin Pearson, ‘Supersized Melbourne mansion among $17.3m in assets seized in AFP probe’, The Age, 31 October 2019, https://www.theage.com.au/national/victoria/ supersized-melbourne-mansion-among-17-3m-in-assets-seized-in-afp-probe-20191031-p5360c.html (accessed 23 June 2021).

43 Mr Stefan Jerga, Acting National Manager of Criminal Asset Confiscation, Australian Federal

Police, Committee Hansard, 7 August 2020, p. 38.

ï Australian Federal Police (AFP); ï Australian Criminal Intelligence Commission (ACIC); ï Australian Transaction Reports and Analysis Centre (AUSTRAC); ï Australian Tax Office (every investment proposal in relation to potential tax

risks); ï Australian Securities and Investments Commission (ASIC); ï Department of Defence; and ï Department of Home Affairs (including the Critical Infrastructure Centre).44

3.43 Agencies are not routinely asked for input on every foreign investment proposal—only on those proposals where the Treasury has concerns that relate to the agency’s area of expertise. The committee received the following information on the number of times agencies in the Home Affairs portfolio are consulted by the Treasury and ATO on foreign investment proposals.

Table 3.1 Foreign investment consultation with Home Affairs agencies

Australian Federal Police

2019-2020: ATO referrals to the AFP 124

2019-2020: Treasury referrals to the AFP 13

AUSTRAC

Approximate number of times Treasury requests information from AUSTRAC each year 10

Approximate number of times AUSTRAC proactively refers information on a matter of interest to Treasury each year 10

Critical Infrastructure Centre (CIC)

1 June 2019-29 February 2020: Number of foreign investment applications referred to Home Affairs 380

ACIC

Approximate annual number of Treasury requests for information from ACIC 10

Source: Department of Home Affairs 45

3.44 Depending on the capacity of the agency, the extent of the scrutiny may vary:

ï ACIC discloses relevant information from its criminal holdings data on the applicant providing it is legal to do so; ï CIC conducts assessments on referred applications and may assist in compliance activities if conditions are imposed on an approval;

44 Treasury, Submission 6, pp. 7-8.

45 Department of Home Affairs, Submission 14, pp. 1-6.

ï AUSTRAC does not undertake investigations, it uses alerts and risk profiles to identify suspicious foreign transactions; ï AFP checks whether an entity connected with a foreign investment application has been convicted of a Commonwealth criminal offence, it may

advise about any suspicious matter records it holds, it does not provide an opinion as to whether an individual foreign investment proposal would be contrary to the national interest. Referrals from the Treasury are able to be dealt with in a ‘pretty quick fashion’ and are a ‘reasonably modest impost’ on AFP resourcing.46

Applying conditions to foreign investment approvals 3.45 As discussed in the previous chapter, the Act specifies a condition can only be imposed on an investment approval if ‘the condition is required to ensure the investment is not contrary to Australia’s national interest’.47 Thus, to be lawful,

any conditions applied to an investment approval must be necessary to protect Australia’s national interest. The Alinta Case study discussed in below and in the following chapter traces the imposition and enforcement of conditions.

Box 3.2 : The Alinta Case—applying conditions to a foreign investment approval In April 2017, Hong Kong-based Chow Tai f*ck Enterprises (CTFE) gained approval from the Treasurer to acquire Alinta Energy. The acquisition was reported to be worth around $4 billion and subject to strict conditions that were not made public (a record of some conditions was tabled during committee hearings). Chow Tai f*ck Enterprises, through its wholly owned subsidiary, Pioneer Sail Holdings (PSH), acquired Alinta on 28 April 2017.48

Conditions: A range of conditions was attached to the sale of Alinta to CTFE, including:

ï composition of the board, including requirement for independent chair and majority of directors to be Australian citizens and residents;

ï no bulk customer data, personal information or electricity or gas data be provided to the PSH director and executive manager;

46 Department of Home Affairs, Submission 14; Mr Ian McCartney, Deputy commissioner of

Investigations and Mr Stefan Jerga, Acting National Manager of Criminal Assets Confiscation, Australian Federal Policy, Committee Hansard, 7 August 2020, pp. 35-36, 40-41.

47 Treasury, Submission 6, p. 11. See: Foreign Acquisitions and Takeovers Act, section 74(2).

48 A document containing some of the conditions was tabled during the inquiry. Documents tabled

by Senator O’Neill, public hearing 15 May 2020, ‘Privacy review: Internal audit report, Alinta Energy, June 2019’; Mr Jeff Dimery, Chief Executive Officer, Alinta Energy, Committee Hansard, 15 May 2020, p. 12; David Stringer and Edward Johnson, ‘FIRB approves Chow Tai f*ck’s takeover of Alinta‘, The Sydney Morning Herald, 23 April 2017, https://www.smh.com.au/business/firb-approves-chow-tai-f*cks-takeover-of-alinta-20170423-gvqogw.html (accessed 24 June 2021).

ï data must be stored in Australia; ï data must only be accessible within Australia; ï security controls must be in place to ensure no bulk personal data records are exported;

ï cloud storage provider must be approved by the Australian Signals Directorate; ï maintenance of generation, transmission and distribution systems must only be carried out in Australia with some minor exceptions; ï infrastructure must only be accessed, operated and controlled from

within Australia; and ï specification that certain executive directors hold NV1 security clearances or have the capacity to obtain one.49

This case study is continued in chapter four in the context of the Treasury’s monitoring and compliance activities.

Types of conditions 3.46 In 2017-18, the Treasury applied conditions to 43 per cent of approved applications—representing 75 per cent of the value of approved applications.50 However, it is only rarely that conditions with regard to a foreign investment

approval are made public. Conditions are regarded as ‘protected information’ under the Act (see discussion in chapter five). The Treasury, though, provided some broad categories for conditions that are applied.

Table 3.2 Categories of conditions applied to foreign investment approvals

Category of condition Frequency of application

Board and governance controls

Commonly applied for significant assets

Commercial tenancies

ï access conditions ï notification of ownership and operational changes ï sensitive commercial information

Commonly applied

Exemption certificate limitations covering business and entities and/or land Commonly applied

49 Documents tabled by Senator O’Neill, public hearing 15 May 2020, ‘Privacy review: Internal audit

report, Alinta Energy, June 2019’, p. 42; ‘Alinta Energy FIRB Condition Compliance Policy - October 2019’.

50 Productivity Commission, Foreign Investment in Australia, June 2020, p. 39. See also: Mr Roger

Brake, Head of Foreign Investment Division, the Treasury, Committee Hansard, 15 May 2020, pp. 58, 60.

Tax

Most commonly applied conditions

Data

Increasingly applied where the case involves sensitive data

Vacant commercial land—for development or a business Commonly applied

Compliance reporting and independent audit Commonly applied

Source: The Treasury51

Taxation 3.47 The majority of conditions for non-real estate approvals apply to taxation.52 In 2016 the government introduced generic taxation conditions for foreign investments to the effect that investment approvals would be conditional on

companies:

ï complying with Australian taxation law; ï complying with ATO directions to provide information in relation to the investment; and ï advising the ATO if they enter into any transaction with non-residents to

which the transfer pricing or anti-avoidance measures of the tax law may potentially apply.53

National security 3.48 The Treasury and the FIRB have more recently provided information about national security concerns that have led to the imposition of conditions on foreign investments. The Treasury states risks to the national interest have

arisen as a result of a confluence of developments including:

… the rapid pace of technology change; the convergence of civil and military applications; and changes in the international security environment. Conditions provide a mechanism for the Government to mitigate these risks without having to prohibit an investment from going ahead.54

51 Treasury, Answers to Questions on Notice, provided 8 May 2020, pp. 1-2.

52 Productivity Commission, Foreign Investment in Australia, June 2020, p. 39. See also: Mr Roger

Brake, Head of Foreign Investment Division, the Treasury, Committee Hansard, 15 May 2020, pp. 58, 60.

53 The Hon Scott Morrison MP, Treasurer, ‘Turnbull government makes paying tax in Australia a

condition for foreign investment‘, Media Release, 22 February 2016.

54 Treasury, Submission 6, p. 11.

Data 3.49 In an August 2019 speech to the Australia-China Business Council, Chair of the FIRB, David Irvine stated:

Another area the FIRB is increasingly being required to look at more closely is the protection of sensitive Australian data—and not just sensitive national security data. In recent years, the FIRB has seen an increased number of foreign investment proposals seeking access to data centres and other facilities, that house, or have access to, sensitive private data about Australians. Consistent with our preference for mitigation, rather than prohibition, the development of data security conditions continues to be a key area of focus for the FIRB.55

Concerns with consistency in applying conditions 3.50 The Audit Office emphasises decision-making procedures should ensure consistency, transparency and accountability for decisions. If conditions are imposed, applicants should be provided with the reasons for the conditions,

and conditions themselves should be applied consistently, be capable of monitoring and enforcement, and support policy objectives.56

3.51 The Law Council of Australia states since 2007 there has been a perception of mixed and at times complicated signals in respect to the conditions placed on foreign investment. The policies that drive conditions are not always transparent and may alter significantly over short periods of time. It calls for a ‘more settled and explicit policy settings agreed with bipartisan support and consistency in conditions that reflect those settings, together with publicly available guidance’.57

3.52 In particular, the Law Council is concerned the practicality of conditions imposed is not always considered within the business context to which they relate. It suggests there is a perception the regulator ‘lacks understanding of the business environment in which applicants operate and ensuring that conditions which are imposed on FIRB approval are realistic within that context’.58

3.53 In 2020, the Treasury noted it had been ‘working with consultation partners to achieve more consistency in the conditions imposed on applications’.59 In 2021,

55 David Irvine, ‘Address to the Australia-China Business Council‘, Speech, 19 August 2019,

https://firb.gov.au/about-firb/news/address-mr-david-irvine-ao-firb-chair-australia-china-business-council (accessed 24 June 2021).

56 Australian National Audit Office, Managing compliance with foreign investment obligations for

residential real estate, Audit Report No. 48 2017-18, p. 38.

57 Law Council of Australia, Submission 2, pp. 2-3.

58 Law Council of Australia, Submission 2, p. 3.

59 Foreign Investment Review Board, Regulator performance framework: Administration of Australia’s

Foreign Investment Framework 2018-19, 2020, p. 5.

it is ‘working with consultation partners to achieve greater consistency’.60 When asked to provide more detail on its consistency problems, the Treasury did not answer directly and responded that the use of conditions to address potential risks to the national interest has increased:

As applications are assessed on a case by case basis, customised conditions were often developed having regard to:

a) input from consultation partners, which changed over time as risk assessments changed; and

b) input from applicants as part of the natural justice process.61

Conditions versus regulation 3.54 Both the Productivity Commission and the China Policy Centre have questioned the use of foreign investment conditions as a tool to enforce domestic regulations or promote certain business behaviours, for instance with

regard to taxation or data storage, or to prevent practices such as land banking.62

3.55 The China Policy Centre states this is undesirable for two reasons:

ï taxation, data storage and land banking risks apply to all businesses—tax avoidance strategies are not the sole purview of foreign investors, domestic businesses send personal data (including medical, financial, and travel data) offshore for processing, and Australian businesses can also land bank; and ï foreign investment screening can only deal with risks at one point in time—

it cannot be used to deal with emerging risks or risks unknown at the time of screening, for instance, the challenges posed by big data.63

Too many conditions 3.56 The Productivity Commission argues too many conditions are being imposed and while they are one way to address potential risks or policy concerns without having to block an investment outright, risks can be addressed

through national regulations such as tax and competition law, and environmental regulation.64

3.57 The commission argues the effectiveness of conditions in mitigating risk is limited in comparison with domestic regulation:

60 The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator

Performance Framework, Report 2019-20, p. 18.

61 Treasury, Answers to Questions on Notice, provided 8 May 2020, p. 6.

62 Productivity Commission, Foreign Investment in Australia, June 2020, p. 20.

63 China Policy Centre, Submission 1, pp. 3-4.

64 Productivity Commission, Foreign Investment in Australia, June 2020, p. 19.

ï while conditions can be imposed at the point of investment approval, national security, taxation and competition risks evolve, so the conditions become less effective over time; ï normally, only foreign acquisitions with values above specific thresholds

are subject to FIRB screening, smaller investments are not reviewable by FIRB; ï conditions that duplicate existing legal requirements on businesses operating in Australia add to the regulatory burden without delivering

additional benefits. For example, ‘standard tax conditions’ in response to the risk of multinational tax avoidance mostly require companies to comply with Australian tax laws.65

3.58 The Commission is of the view sometimes conditions may be necessary to mitigate particular risks, however, their necessity suggests national laws and regulations need to be strengthened.66

3.59 The principle of using domestic regulation to mitigate risks in foreign investment proposals rather than conditions is embodied in the CIC, which will develop national regulations to address risks, regardless of ownership. The minister’s directions power in the Security of Critical Infrastructure Act 2018 is more extensive than that under the foreign investment regime. For instance, the Act allows conditions to be imposed to mitigate risks as they emerge and evolve. It demonstrates how national laws and regulations are more responsive and proactive in identifying risks and more effective in managing those risks.67

Timeframes for conditions 3.60 Evidence presented by the Treasury suggests the timeframes the Treasury sets for compliance with conditions it imposes, reflect its approach to compliance. That is, the regulatory approach drives the policy on enforcement of conditions

to ensure an investment is in the national interest.

3.61 Deputy Secretary of the Treasury, Roxanne Kelley stated:

I think, in terms of being a regulator, it’s also being mindful of what is actually—you actually want to get compliance. By setting unreasonable time frames, when it might be a very complex issue that they’re dealing with, in terms of achieving compliance—it’s not in our interests to set people up. We want to encourage compliance, and we want people to do the right thing. And so that’s part of what we take into account in terms of agreeing time frames.68

65 Productivity Commission, Foreign Investment in Australia, June 2020, p. 20.

66 Productivity Commission, Foreign Investment in Australia, June 2020, p. 86.

67 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 2, 20, 86-88.

68 Ms Roxanne Kelley, Deputy Secretary, Treasury, Committee Hansard, 15 May 2020, p. 64.

3.62 When a timeframe is specified, according to the Treasury, it is determined on a case-by-case basis, in consultation with partners, and having regard to the assessed risk to the national interest from non-compliance, and natural justice.69

3.63 The appropriateness of timeframes to achieve compliance with conditions is discussed in the next chapter in the context of the Alinta case study.

69 Treasury, Answer to Questions on Notice 13, 14 (PN-IQ20-43, 44) from 1 May 2020.

Chapter 4

Regulating foreign investment: compliance and enforcement

4.1 This chapter continues the examination of Treasury’s role as the regulator of foreign investment. The previous chapter examined views on the Treasury’s capacity to assess investment proposals and formulate conditions to ensure an investment is not contrary to the national interest. This chapter examines the other side of regulation—compliance and enforcement.

4.2 It begins by discussing the responsibilities of regulators for compliance and enforcement activities, and the compliance culture among foreign investors in Australia. An examination of the Treasury’s regulatory load and its capacity to carry out its functions is followed by discussion of the foreign investment compliance framework and the Treasury’s monitoring and compliance activity. The chapter closes with a discussion on whether the Treasury is the most appropriate regulator of foreign investment.

Principles of regulatory compliance and enforcement and Treasury practice 4.3 A key regulatory responsibility is to maintain the confidence of the Parliament, the government and the community that entities participating in a regulated

activity are complying with obligations and the potential for harm is minimised. 1

4.4 The Productivity Commission has noted public opinion can often be opposed to foreign investment, despite the benefit it brings to the economy.2 Treasury officials certainly recognise the connection between their regulatory role and ensuring community confidence in the foreign investment framework.3

4.5 As discussed in the previous chapter, sound regulatory administration is risk-based and should generally be proportionate to the risk of non-compliance or regulatory failure.4 In foreign investment, aside from the risk the Treasury will not accurately assess an application against the national interest; there is a risk

1 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 41.

2 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 3, 77, 93.

3 The Treasury, Submission 6, pp. 3, 10.

4 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 3.

that an entity will not comply with conditions placed on an approval; and the risk that is posed by the particular nature of the non-compliance itself.5

4.6 Through a compliance monitoring plan, regulators should be actively monitoring and analysing the risk of non-compliance to understand the level and nature of non-compliance. This requires a robust information management system. Data analysis can inform decisions about where a regulator focuses its attention and the strategies to be used to address non-compliance.6

4.7 During the inquiry, concerns were raised as to the capacity of the Treasury’s information management system and the appropriateness of its procedures to evaluate compliance. These are discussed further below, but it is relevant to note here that the Treasury’s compliance and enforcement capacity stood at two people until 2019. Officials stated that during the inquiry, ‘we are actually establishing … our compliance function’.7

4.8 When non-compliance is detected, the Australian National Audit Office (Audit Office) states best practice is to:

ï encourage regulated entities to comply with regulatory requirements; ï address serious risks arising from non-compliance by regulated entities; and ï manage non-compliant entities’ return to compliance.8

4.9 Treasury officials confirmed their approach is one of encouraging and assisting entities to comply with conditions placed on investment approvals, ‘we want people to do the right thing’.9 The Treasury states:

In instances where investors have been found to be non-compliant or partially compliant, Treasury works with them to bring them into compliance ... In general, Treasury will work with foreign investors to achieve compliance in cases where non-compliance is inadvertent, self-reported by the foreign investor, the breach is administrative, and the investor is willing to remediate the breach as quickly as possible.10

5 See: Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 45.

6 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 41.

7 Ms Roxanne Kelley, Deputy Secretary, Department of the Treasury, Committee Hansard, 15 May

2020, p. 67.

8 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 45.

9 Ms Roxanne Kelley, Deputy Secretary, Department of the Treasury, Committee Hansard, 15 May

2020, p. 63.

10 Foreign Investment Review Board, Regulator performance framework: Administration of Australia’s

Foreign Investment Framework 2018-19, 2020, p. 11.

4.10 For Treasury officials, an important aspect of encouraging compliance is not ‘setting unreasonable time frames, when it might be a very complex issue that they’re [investors] dealing with, in terms of achieving compliance’.11

4.11 This though, must be balanced against the reason for imposing conditions in the first place. Under the Foreign Acquisitions and Takeovers Act 1975 (the Act), conditions can only be applied to prevent an investment being contrary to the national interest, suggesting the consequences of non-compliance could be significant. As such, complying with conditions might seem to be of greater import than an ‘encouraging’ approach suggests. This potentially has implications for community confidence. The Productivity Commission highlights the importance of conditions in maintaining public confidence that the national interest is being protected.12

4.12 To encourage compliance, the Audit Office recommends:

ï developing a set of relevant graduated responses to address non-compliance; and ï developing and communicating criteria to assist decision-makers in designing a regulatory response that is consistent and proportionate to the

risks posed by the non-compliance. 13

4.13 The current legislative framework for foreign investment was established with the Foreign Takeovers Act 1975. Although conditions were applied to investments at least from 1977, the Foreign Takeovers Amendment Act 1989 gave the Treasurer a legislated ability to apply conditions to foreign investment approvals.14 In 2017, the Treasury introduced an ‘enhanced’ foreign investment compliance framework to monitor compliance with conditions (see below). A 2018 audit of the ATO’s foreign investment activities included a ‘key learning’ that entities should monitor the effectiveness of compliance activities.15

4.14 The Treasury’s self-assessment against the regulator performance framework states it is meeting key performance indicators with regard to compliance obligations and enforcement actions. The measures of good regulatory performance against which the Treasury reports in this instance are that the

11 Ms Roxanne Kelley, Deputy Secretary, Department of the Treasury, Committee Hansard, 15 May

2020, p. 63.

12 Productivity Commission, Foreign Investment in Australia, June 2020, p. 86.

13 Australian National Audit Office, Administering regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 47.

14 See discussion in: R Chambers, 1978, ‘Government regulation of foreign investment in the

Australian mineral industry’, Australian Mining and Petroleum Law Journal, vol. 1, no. 2, pp. 241- 242; Foreign Takeovers Amendment Act 1989.

15 Australian National Audit Office, Managing compliance with foreign investment obligations for

residential real estate, ANAO Report No. 48 2017-18, p. 12.

Treasury is using existing information to limit the reliance on requests made to foreign investors; and any monitoring and inspection approaches are based on risk and take into account the circ*mstances and operational needs of foreign investors.16

Compliance culture among foreign investors 4.15 An important consideration in a risk-based approach to compliance and enforcement is the existing culture of compliance amongst investors. The Treasury has acknowledged shortcomings in compliance culture of foreign

investors, though it would not specify what these were:

These reforms [legislative reforms of late 2020] will greatly strengthen the government’s compliance and enforcement capabilities. They will provide more scalable and flexible tools to respond to noncompliance and encourage a stronger culture of compliance amongst foreign investors.17

4.16 Mr David Richardson from the Australia Institute told the Senate Economics References committee (the committee):

I was once asked by a stockbroker who was acting for foreign interests, ‘If we go ahead with this proposal and they apply these conditions, do we really have to abide by them?’ And I had to give the honest answer: well, nobody’s going to check whether you do or not.18

4.17 The Australia Institute cited a number of historical instances where conditions were not met but no apparent sanction resulted, including:

ï AXA SA did not fulfil a condition on its acquisition of National Mutual to generate Asian business through National Mutual, instead business in Asia was undertaken by the parent AXA SA and Australian operations remained domestically focussed;

ï foreign-owned broking firm Wigham Poland Australia (WPA) agreed to increase its Australian shareholding from 15 per cent to 50 per cent within two years, it did not and the government took no action other than to prevent it acquiring H.S. Harvey;

ï CRA (now Rio Tinto) appears to never have reached the threshold for ‘naturalising status’ (50 per cent Australian ownership) but was nevertheless granted the status and subsequently purchased mining and biotech companies;

16 The Treasury, ‘Administration of Australia’s Foreign Investment Framework’, Regulator

Performance Framework, Report 2019-20, pp. 12-13.

17 Ms Roxanne Kelley, Deputy Secretary, The Treasury, Committee Hansard, 7 August 2020, p. 51.

18 Mr David Richardson, Senior Research Fellow, The Australia Institute, Committee Hansard, 7

August 2020, p. 20.

ï despite not fully meeting the requirements for 75 per cent Australian equity and Australian control, Western Mining Corporation was granted ownership permission for Yeelirrie uranium mining management.19

4.18 Given the lack of transparency that surrounds foreign investment approvals (see chapter five), the extent of non-compliance with conditions cannot be accurately and independently assessed as very few conditions are ever publicly announced.

Treasury’s regulatory load 4.19 In addition to providing policy advice, the Treasury is responsible for the day-to-day administration of the foreign investment framework in relation to business, agriculture, and sensitive or complex commercial real estate cases.20

Details of the regulatory load are provided below.

Table 4.1 Treasury regulatory case load

2016-17 2017-18 2018-19 2019-20

Treasury approved applications 1,172 793 882 1,15521

Approvals with non-standard conditions22 288 215 328 n/a

Number of staff in division 98FTE23

Compliance staff in division 2FTE 2FTE 12FTE24

Compliance audits completed 11 9 425

Remedial action plans 11

Number of annual compliance reports received—certified by company officer

Treasury is unable to provide this information

19 The Australia Institute, Submission 8, pp. [12-14].

20 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 8.

21 This figure is an approximation based on the 2019-2020 FIRB annual report and is calculated by

subtracting residential real estate approvals from total approvals. It is likely an over-estimation as non-complex commercial real estate assessments are undertaken by the ATO. Figures for other years were provided in response to an earlier question on notice.

22 Standard conditions include generic-type conditions that companies must follow Australian

taxation or company law or similar.

23 Including staff redeployed from other agencies following changes to thresholds; ordinary

complement approximately 80 FTE.

24 As at 11 May 2020. At 28 July 2020, the number was 13.5 FTE.

25 15 were planned. Five remain in progress.

Number of annual compliance reports received—certified by auditor

Treasury is unable to provide this information

Number of annual compliance reports received—tax conditions

Treasury is unable to provide this information

Number of reviews conducted through Treasury’s program to review reporting, independent compliance audits and Treasury audits

Treasury is unable to provide this information but advises it has examined 90 compliance reports between July 2019 and July 2020; and conducted a

compliance review of 150 cases, though the substance of this activity is unclear.

Number of targets for compliance under remedial action plans not being met

No record

Source: The Treasury26

4.20 For the year 2019-2020, the Treasury’s Foreign Investment division employed an average of 67.5 full-time equivalent (FTE) Treasury staff and a number of external contractors and consultants.27 From a base of two people in 2019,28 as part of its process to establish and strengthen compliance, as of 7 August 2020, there were 15.5 FTE positions in compliance monitoring and enforcement. Assistant Secretary of the Treasury, Ms Roxanne Kelley, told the committee there had been ‘a recognition that more conditions were being applied and that we needed to increase our effort, in terms of monitoring the compliance with those conditions’.29

4.21 The Treasury attributes the increase in conditions placed on foreign investment approvals to a changing environment:

If we step back and look at the situation five years or so ago, relatively few conditions were placed on foreign investment proposals. With the changing environment, the government is now imposing conditions on a

26 Treasury, Answers to Questions on Notice 1, 3, 4, 7, 10, 20 (PN-IQ20-31, 33, 34, 37, 40, 50) from 1

May 2020, provided 8 May 2020; Ms Roxanne Kelley, Deputy Secretary & Mr Roger Brake, Head of Foreign Investment Division, Treasury, Committee Hansard, 15 May 2020, p. 64; Treasury, Answers to Questions on Notice from 22 June 2020, provided 28 July 2020.

27 Foreign Investment Review Board, Annual Report 2018-19, May 2020, p. 11.

28 Ms Roxanne Kelley, Deputy Secretary, Department of the Treasury, and Ms Bridie McAsey,

Manager, Foreign Investment Division, Department of the Treasury, Committee Hansard, 15 May 2020, p. 64.

29 Ms Roxanne Kelley, Deputy Secretary, Department of the Treasury, Committee Hansard, 7 August

2020, p. 63.

much larger number. I think it’s roughly 40 per cent of the cases, and it’s something like 60 to 70 per cent in terms of the value of the cases.30

4.22 The Audit Office identifies a broad range of skills required by regulators, including risk and quality management; data analysis and management; audit and inspection; and legal and criminal investigation.31 The Treasury advised that of the staff in its recently expanded compliance section, two are chartered accountants; and all but two staff have previous regulatory experience, though the nature of this experience was not specified. One staff member has fifteen years’ experience with the Australian National Audit Office.32

Foreign investment compliance framework 4.23 Recognising the importance of compliance, in 2017 the Treasury introduced an enhanced foreign investment compliance framework which covers:

ï compliance assurance; ï enforcement—developing the capacity to undertake enforcement activities; ï stakeholder engagement—educating foreign investors and their advisers on compliance obligations; and

ï market intelligence—using data and information to better understand and address non-compliance.33

4.24 It is not clear what activities the Treasury undertook previously, or how far it has progressed in embedding this new compliance framework. For instance, it is only since October 2019 that all investors that receive a conditional no objection decision (that is, approval subject to conditions) are required to report on their compliance with conditions.34 Treasury states ‘the nature and intensity of these reporting requirements varies depending on the assessed risk being addressed’.35

Compliance assurance 4.25 The Treasury’s compliance assurance includes an audit program, reviews, and compliance monitoring. Using a ‘risk-based approach’, the Treasury identifies a number of transactions that are subject to a Treasury-led audit each year. The

30 Mr Roger Brake, Head, Foreign Investment Division, Department of the Treasury, Committee

Hansard, 15 May 2020, p. 60.

31 Australian National Audit Office, Administering Regulation: Achieving the right balance, Better

Practice Guide, June 2014, pp. 24-25.

32 Treasury, Answers to Questions on Notice (PN-IQ20-143) of 22 June 2020, provided 28 July 2020.

33 Treasury, Submission 6, p. 12. See also: Foreign Investment Review Board, Compliance Framework

Policy Statement, https://firb.gov.au/compliance-reporting (accessed 24 June 2021).

34 Previously, this requirement was limited to investors with particularly sensitive, large-scale or

complex investments. Treasury, Submission 6, p. 12.

35 Treasury, Submission 6, pp. 12-13.

factors that are considered in the risk-based approach are the nature of conditions imposed on an investment proposal, the impact of non-compliance on the national interest, and indicators of potential non-compliance.36 As discussed above, between July 2017 and June 2020, the Treasury completed 24 audits. It is not clear what is involved in an audit.

4.26 Under the review aspect, the Treasury examines potential non-compliance with the Act. Reviews are often triggered from members of the public. In 2019- 20, the Treasury received 24 reports of potential non-compliance.37

4.27 By either examining the compliance reports of foreign investors, or through its own monitoring efforts, the Treasury has an ongoing program of monitoring compliance. If the Treasury finds instances of non-compliance, it will engage in ‘compliance monitoring activities’ such as ‘remediation action plans’ (sometimes called remedial action plans or remedial implementation plans— see below) to bring investors back into compliance.38

Remedial action plans 4.28 Remedial action plans are used when non-compliance is identified; but they can also be a condition placed on an investment. A condition may require an entity to undertake a compliance/baseline audit within a specified period of

time after an acquisition, and for a remedial action plan to be put in place to address any non-compliance with other conditions identified in the audit.39

4.29 A remedial action plan establishes the timeline for achieving a condition.40 A plan submitted by a foreign investor has to show:

ï all aspects of non-compliance or partial compliance are addressed; ï that remediation action embeds policy and procedure to ensure compliance will be achieved on an ongoing basis, rather than just at a point in time; ï the proposed remediation is comprehensive (for example, that it extends to

the behaviour of subcontractors to the business where they act as agents for the business); and ï the plan is completed within an acceptable timeframe.41

4.30 Having a remedial action plan in place means an investor, despite not actually complying with a condition, is considered to be complying with a condition. The justification for this is explained by the Treasury:

36 Foreign Investment Review Board, Annual Report 2019-20, p. 47.

37 Foreign Investment Review Board, Annual Report 2019-20, p. 47.

38 Foreign Investment Review Board, Annual Report 2019-20, p. 47.

39 Treasury, Answer to Questions on Notice 7 (PN-IQ20-37) from 1 May 2020.

40 Treasury, Answer to Questions on Notice 7 (PN-IQ20-37) from 1 May 2020.

41 Treasury, Answer to Question on Notice 25 (PN-IQ20-55) from 1 May 2020.

When a foreign investor purchases an Australian business, it may not be able to instantaneously transform its operations. If conditions imposed on the acquisition require substantive change, the wording of the condition typically specifies the required end-point—for example that all data of Australian customers of the business be stored in Australia.42

4.31 Chow Tai f*ck’s acquisition of Alinta Energy (discussed in chapter three and below) illustrates how remedial action plans can be used in practice in pursuit of compliance with the conditions placed on a foreign investment approval.

Box 4.1 : The Alinta Case—monitoring compliance with conditions Remedial action plan: One condition (6.2) attached to Chow Tai f*ck Enterprise’s (CTFE) approval to acquire Alinta Energy specified a remedial action plan ‘should be prepared if a compliance [baseline] audit identified non-compliance’ with any conditions that were part of the approval. This baseline audit was to address the three months from when the acquisition occurred. Treasury set no specific timeframe for the completion of the baseline audit report and it was undertaken by EY (Alinta’s internal auditor) and provided to Treasury in August 2018, more than a year after the sale.43

Alinta Energy did not then submit a remedial action plan until 27 September 2019, more than one year after the baseline audit was finalised that identified Alinta was not achieving some of the conditions on the foreign investment approval. The remedial action plan was approved by the Treasury on 21 October 2019—two and a half years after acquisition.44

The Act specifies conditions can only be applied to a foreign investment proposal if they are necessary to ensure an investment is not contrary to the national interest.45 Treasury is of the view it is appropriate to treat an investor as complying so long as it is implementing an approved remedial action plan to achieve full compliance within a timeframe agreed by the Commonwealth—in this case it was more than two and a half years after the acquisition that the Treasury agreed to the remedial action plan.46

Alinta’s compliance with conditions: Alinta Chief Executive Officer, Jeff Dimery,

42 Treasury, Answer to Question on Notice 26 (PN-IQ20-56) from 1 May 2020.

43 Treasury, Answer to Questions on Notice, Additional Estimates, 5 March 2020, question no.

AET47. Deloitte is Alinta’s external auditor. See also, Mr Daniel McClelland, ED of Corporate Services, Alinta Energy, Committee Hansard, 15 May 2020, pp. 9-10; Mr Rob Locke, Managing Partner, Forensic and Integrity Services, Oceania, EY & Mrs Leigh Walker, Regional Independence Leader, Oceania, EY, Committee Hansard, 15 May 2020, p. 28.

44 Documents tabled by Senator O’Neill, public hearing 15 May 2020 , ‘Privacy review: Internal audit

report, Alinta Energy, June 2019’, p. 42; Lanai Scarr, ‘Chinese-owned energy company Alinta powered by $100 million taxpayer-funded loan for East Pilbara project‘, The West Australian, 15 May 2020; Treasury, Answers to Questions on Notice (PN-IQ20-143) of 22 June 2020, provided 28 July 2020.

45 Foreign Acquisitions and Takeovers Act, section 74; Treasury, Submission 6, p. 11.

46 Treasury, Answer to Question on Notice 26 (PN-IQ20-56) from 1 May 2020.

told the committee in May 2020, some conditions were met quickly, for instance, majority Australian representation on the board and an independent Australian Chair. However, Mr Dimery explained:

… requirements relating to data security and the operation and maintenance of power generation assets require significant investment and variations to more than 40 complex IT systems and 560 data sets as well as the review of 1,400 contracts. FIRB [Foreign Investment Review Board] compliance is an extensive and significant exercise.47

The Treasury confirmed Alinta was considered compliant with its foreign investment conditions, despite not yet meeting all conditions, ‘because they have implemented a remedial action plan’. The Treasury confirmed the agreed implementation plan ‘requires full compliance with all conditions by December 2020’.48

Mr Dimery assured the committee, ‘we remain on track to complete … all of the FIRB conditions by the end of 2020, on schedule and as agreed in 2017’.49

This statement implies the Treasury agreed to a three and a half year timeframe for Alinta to meet the conditions when the acquisition was approved, prior to any independent baseline audit as to Alinta’s compliance or submitted remedial action plan to come into compliance.

Meetings between Alinta and officials and the Treasurer: Prior to CTFE’s acquisition, Alinta met with Treasury officials in April 2017 to share information on how Alinta operated and how it was structured. This was before the Treasury finalised the conditions that would be placed on the sale.50

Following the sale, Alinta stated it has had several meetings with Treasury officials so Alinta could:

… understand how to progress a number of those key conditions that were going to be absolutes and require our immediate attention, particularly having regard to the requirements for the directors and the process for directors to be compliant with those conditions.51

Since the change in ownership in 2017, Alinta stated it has been ‘in constant dialogue’ with Treasury and the FIRB. There have been ‘dozens of interactions with FIRB [and the Treasury] throughout the period of Chow Tai f*ck Enterprises ownership’. While the majority of these interactions have been by

47 Mr Jeff Dimery, CEO, Alinta Energy, Committee Hansard, 15 May 2020, p. 1.

48 Mr Roger Brake, Division Head, Foreign Investment Division, Committee Hansard, 5 March 2020,

p. 91.

49 Mr Jeff Dimery, CEO, Alinta Energy, Committee Hansard, 15 May 2020, p. 1.

50 Mr Daniel McClelland, Executive Director of Corporate Services, Alinta Energy, Committee

Hansard, 15 May 2020, p. 13.

51 Mr Daniel McClelland, ED of Corporate Services, Alinta Energy, Committee Hansard, 15 May 2020,

p. 13.

email or telephone, officials have also travelled to Canberra ‘on many occasions’, and have met with FIRB [the Treasury] on ‘probably ten occasions’.52

Alinta Energy also confirmed Chief Executive Officer, Mr Dimery, had met with Treasurer Josh Frydenberg on 17 September 2019 in Canberra:

… the purpose of the meeting was also to understand the Treasurer’s general views on the conditions, how they were viewed alongside broader energy policy objectives and the Commonwealth’s recommendations/views on changes if they became required at any point in time. There was no follow up or requests from that meeting.53

Privacy review shows weaknesses in management of personal information: In addition to conditions relating to data security and access, Alinta’s management of personal information is subject to the Privacy Act 1988. In 2019, EY conducted an audit of Alinta’s compliance with obligations under the Privacy Act 1988.

The report identified a range of control weaknesses, and informal or immature procedures, including the possible contravention of the Privacy Act 1988, and made a number of findings, including:

ï privacy is not managed in a coordinated manner; ï required personal information collection consent/notification is lacking in key areas; ï access to personal information is not adequately monitored or

controlled; ï there is exposure to potential breaches by third parties; and ï there is no central mechanism to ensure all third party agreements

and contract renewals include appropriate privacy provisions, including mandatory data breach notification obligations.54

In responding to questions about the timeframe for Alinta to comply with conditions on the investment approval, Professor Allan Fels told the committee:

On the face of it, it seems to have taken too long and, as you said, it’s not complete, so I’m very sceptical of that. Another thing is that you may want to take a long time to comply, but, if you’re doing things which immediately, on day one of the merger or whatever, look bad, you’ve got to act on them quickly. You can’t just say, ‘We’ll spend three years getting to the bottom of this’… I

52 Mr Daniel McClelland, ED of Corporate Services, Alinta Energy, Committee Hansard, 15 May 2020,

p. 7. See also: Treasury, Answer to Question on Notice 11 (PN-IQ20-82) from public hearing in Canberra, 15 May 2020, provided 25 May 2020.

53 This was also confirmed by the Treasury. Alinta Energy, Answers to Questions on Notice from 15

May 2020, provided 27 May 2020, p. 20; Treasury, Answer to Question on Notice 12 (PN-IQ20-83) from public hearing in Canberra, 15 May 2020, provided 25 May 2020.

54 Documents tabled by Senator O’Neill, public hearing 15 May 2020, ‘EY - Privacy review: Internal

Audit Report, Alinta Energy, June 2019’, pp. 6-7.

regard it as a failure of compliance, yes. There’s something wrong with the system when that happens.55

Use of auditors to verify compliance 4.32 The Alinta case study also illustrates how the Treasury uses audit firms to assess and monitor compliance with foreign investment conditions. These ‘independent’ audits of an entity’s compliance with conditions are procured by

the entity, not Treasury. Treasury, though, generally approves the scope of the audit, and the identity of the audit firm or auditors who will undertake the audit.

Box 4.2 : The Alinta Case—auditing compliance with conditions Auditing Alinta’s compliance: The conditions placed on the sale required Alinta to appoint an independent party to conduct a compliance assessment against the conditions. While the ‘ultimate engaging party’ is Alinta, this occurs with the approval of Treasury.56 EY is Alinta’s internal auditor.57

Alinta sought a proposal from EY to complete the required audit work. Alinta then provided this proposal to the Treasury. The Treasury approved the provider (EY), the team that worked on the contract, and the scope of the work proposed. It requested the second audit be conducted under the Australian standard on assurance engagements, ASAE 3100—compliance engagements.58

The Treasury has confirmed it considers existing or potential conflicts of interest when approving an audit firm to undertake audit work. It undertook enquiries about the suitability of EY, including in respect of its independence. The Treasury’s approach is outlined in FIRB guidance Note 52.59

According to EY, the Treasury was of the view EY was sufficiently independent to contract the work.60 This is despite EY being Alinta’s internal auditor since 2011, and EY partner, Anton Ivanyi, also directly working for Alinta. Between 7 February 2019 and 6 June 2019, Mr Ivanyi fulfilled some aspects of the role of

55 Professor Allan Fels, Committee Hansard, 15 May 2020, p. 47.

56 Mr Rob Locke, Managing Partner, Forensic and Integrity Services, Oceania, EY, Committee Hansard,

15 May 2020, p. 20.

57 Mr Daniel McClelland, ED of Corporate Services, Alinta Energy, Committee Hansard, 15 May 2020,

pp. 9-10; Mr Rob Locke, Managing Partner, Forensic and Integrity Services, Oceania, EY & Mrs Leigh Walker, Regional Independence Leader, Oceania, EY, Committee Hansard, 15 May 2020, p. 28.

58 Mr Rob Locke, EY, Committee Hansard, 15 May 2020, pp. 18, 19-20, 29.

59 Treasury, Answers to Questions on Notice, Additional Estimates, 5 March 2020, question no.

AET48.

60 Mr Rob Locke, EY, Committee Hansard, 15 May 2020, p. 29.

Alinta’s Chief Financial Officer for 25 hours per week, reporting to Daniel McClelland, Alinta’s Executive Director of Corporate Services.61

EY says it is independent of the foreign investment conditions because it is not responsible for implementing or monitoring Alinta’s compliance, only with testing its compliance.62 Further, EY states it conducted the second audit in compliance with ASAE 3100—one it says contains strict requirements around independence and specified protocols and procedures for the conduct of an audit.63

Despite these standards, in practice it is EY certifying its own independence. EY states it undertakes conflict assessments and independence assessments, and if required, puts in place ‘ethical dividers’ that separate teams and support staff.64 With regard to conflict assessments, the team responsible for conducting the Treasury compliance audit performed the conflict check themselves and submitted this information to an internal EY system—there was no further assessment as to whether there was a conflict.65

4.33 When the Treasury cites ‘independence’ in the context of an audit, it is independence in terms of the audit being conducted independent of the Treasury. The Treasury states:

It is important to note that it is a requirement that the audit must be conducted independently and, therefore, the Commonwealth cannot be party to the audit. The audit must also be carried out at the cost of the entity to which it relates.66

4.34 Guidance Note 52 outlines the requirements for an independent audit, and refers to the Framework for Assurance Engagements published by the Auditing and Assurance Standards Board. This framework establishes

61 Mr Rob Locke, Managing Partner, Forensic and Integrity Services, Oceania, EY, Committee Hansard,

15 May 2020, p. 18; Mr Anton Ivanyi, Assurance Partner, EY, Committee Hansard, 15 May 2020, p. 23; EY, Responses to questions on notice from 15 May 2020, p. 4.

62 Mr Rob Locke, Managing Partner, Forensic and Integrity Services, Oceania, EY, Committee Hansard,

15 May 2020, p. 18; Ms Leigh Walker, Regional Independence Leader, Oceania, EY, Committee Hansard, 15 May 2020, p. 24.

63 Mr Rob Locke, Managing Partner, Forensic and Integrity Services, Oceania, EY, Committee Hansard,

15 May 2020, p. 28; Ms Leigh Walker, Regional Independence Leader, Oceania, EY, Committee Hansard, 15 May 2020, pp. 24, 28.

64 Ms Leigh Walker, Regional Independence Leader, Oceania, EY, Committee Hansard, 15 May 2020,

pp. 20-21.

65 Ms Leigh Walker, Regional Independence Leader, Oceania, EY, Committee Hansard, 15 May 2020,

p. 28.

66 Foreign Investment Review Board, ‘ Compliance - independent audit conditions‘, Guidance Note

52, https://firb.gov.au/sites/firb.gov.au/files/guidance-notes/52_GN_FIRB_1.pdf (accessed 28 June 2021).

expectations in relation to ethical standards and quality control.67 The Treasury appears to rely on auditors meeting these standards, rather than investigating this directly.

4.35 The note identifies several factors the Treasury is likely to consider in determining whether to approve a particular audit firm, including:

ï absence of any existing or potential conflicts of interest; ï depth and quality of the pool of people dedicated to the audit; ï knowledge and understanding of the relevant industry, governance, policy and regulatory issues; and

ï ability to work with government.68

4.36 In only some circ*mstances will a condition placed on an investment permit the Treasury to speak directly to the auditors prior to the commencement of any works. If this is permitted in the condition, the Treasury may provide context to the auditor on the intent of the conditions and requirements to be compliant, however it will not seek to change the agreed audit scope.69

4.37 Professor James Guthrie, Distinguished Professor of Accounting at the Macquarie Business School, stated to the media that EY appeared to be conflicted over its multiple roles at Alinta and was overly relying on exemptions in accounting professional standards to enable its dual roles at Alinta—specifically a safeguard in the standards that no members of the EY internal audit team would be a member assessing Alinta’s adherence to the foreign investment conditions.70

4.38 Professor Guthrie stated:

It would seem to me they are using this exemption for wriggle room. This means it is effectively left up to partnerships to self-assess with little chance of the professional body testing the standards for compliance.71

67 Treasury, Answer to Question on Notice 19 (PN-IQ20-49) from 1 May 2020.

68 Foreign Investment Review Board, ‘ Compliance - independent audit conditions‘, Guidance Note

52, https://firb.gov.au/sites/firb.gov.au/files/guidance-notes/52_GN_FIRB_1.pdf (accessed 28 June 2021).

69 Foreign Investment Review Board, ‘ Compliance - independent audit conditions‘, Guidance Note

52, https://firb.gov.au/sites/firb.gov.au/files/guidance-notes/52_GN_FIRB_1.pdf (accessed 28 June 2021).

70 Edmund Tadros, ‘EY ‘conflicted’ over Alinta work‘, Financial Review, 19 May 2020,

https://www.afr.com/companies/professional-services/ey-conflicted-over-alinta-work-20200518-p54u4g (accessed 28 June 2021).

71 Edmund Tadros, ‘EY ‘conflicted’ over Alinta work‘, Financial Review, 19 May 2020,

https://www.afr.com/companies/professional-services/ey-conflicted-over-alinta-work-20200518-p54u4g (accessed 28 June 2021).

Outcomes of Treasury monitoring and compliance activities

Findings from compliance audits 4.39 As discussed above, in 2018-19, the Treasury completed nine audits considering seventeen foreign investment transactions. In 2019-20, 15 audits were planned—of these, four were completed and five remained underway at

the conclusion of the financial year.72 Of the compliance audits conducted since 2017, the Treasury provided the following details (to 5 March 2020).

Table 4.2 Outcomes of Treasury compliance audits

Findings Frequency

Identified substantive breaches of conditions by a foreign entity given a no objection notification over the last two years 1

Findings of ‘partially compliant’ Some

Findings of ‘compliant with caveats’ Some

Non-compliance with compliance reporting obligations Some

Action taken to demand compliance with conditions over the past three years Some

Source: The Treasury73

Rate of non-compliance 4.40 The committee sought further information from the Treasury on how many entities that obtained foreign investment approvals subject to conditions, have not met those conditions within the timeframe established in the initial

approval. The Treasury has stated it has no record of non-compliance with a range of condition categories. These are summarised below.

Table 4.3 Record of non-compliance with condition categories

Category of condition Record of non-compliance

Conditions where a specific timeframe is included in relation to a specific condition, for example, to maintain headquarters in Australia for a specified amount of time.

There is no record of non-compliance in relation to such conditions.

Conditions requiring a compliance audit to take place within a specified period of time There is no record of any targets for compliance

72 Treasury, Submission 6, pp. 12-13; Treasury, Answers to Questions on Notice, provided 8 May

2020, p. 10; Foreign Investment Review Board, Annual Report 2019-20, p. 47.

73 Treasury, Answers to Questions on Notice AET51 and AET53, Senate Economics Legislation

Committee, Additional Estimates 2019-20, 5 March 2020, (received 15 May 2021).

after the acquisition took place, and for a remediation plan to be put in place to address any non-compliance identified in that audit. The remediation plans establish timelines for action.

under remediation plans not being met.

Obligations are ongoing: These categories do not encompass timeframes for compliance reporting that are specified in conditions.

As part of compliance monitoring, where issues with the timeliness in delivering such reports are identified, these are followed up with investors.

Source: Treasury74

Compliance actions undertaken by the Treasury 4.41 When non-compliance is identified, the Treasury tries first to work with the investor to bring the investor into compliance. Where it is not appropriate for non-compliance to be addressed through a remediation plan, or the investors

is unable to provide an acceptable remediation plan, the Treasury states other enforcement options are available.75 The Act provides for both criminal and civil enforcement actions, though the Treasury was unable to identify when they have been used.

Table 4.4 Compliance actions taken by the Treasury

Action Number

Criminal or civil enforcement actions taken under the Act over the past three years 0

Implementation of remedial action plans to address non-compliance 1176

Seeking clarification of reasons for late provision of required reporting Some

Requiring urgent preparation of reports if reasons not adequate Some

Implementation of processes by the investor to ensure future compliance Some

Source: The Treasury77

74 Treasury, Answers to Questions on Notice IQ20-37, provided 8 May 2020.

75 Treasury, Answers to Questions on Notice IQ20-37, provided 8 May 2020.

76 Current remedial action plans as at May 2020.

New regulatory powers 4.42 In January 2021 during the course of the inquiry, amendments to the Act provided the Treasurer with an additional range of regulatory and compliance tools. These amendments enlivened provisions in the Regulatory Powers Act to

provide for infringement notices, the ability to require enforceable undertakings, and various monitoring, investigation and search powers.

Infringement notices 4.43 Prior to the changes, infringement notices were only available for ‘less serious’ breaches of the Act and only for residential real estate investments. The Act now allows for infringement notices to be issued in a range of situations,

including for contravening conditions in a no objection notification or in a notice imposing conditions, and conditions in an exemption certificate in relation to residential land.78

4.44 The legislation allows for three tiers of infringement notices:

ï tier 1—the investor self-notifies of the breach of the Act prior to any investigation of the conduct; ï tier 2—the investor does not self-notify voluntarily of a breach of the Act; ï tier 3—instance of non-compliance of high-value acquisitions.79

4.45 In explaining the new regime, the Treasury stated infringement notices would be used for minor breaches that are likely to occur frequently and could be assessed using objective criteria—for instance where reporting requirements are not met, or where an investor submits a retrospective application to rectify a breach. It further explained infringement notices should be limited to situations where imposing the penalty does not reflect a judgement as to the person’s guilt or liability.80

Enforceable undertakings 4.46 The Treasurer can now enforce provisions in the Act with an enforceable undertaking. These need not be made public, if the Treasurer decides publishing an enforceable undertaking would be contrary to the national

interest, the enforceable undertaking can remain secret.81

Monitoring and investigation powers

77 Treasury, Answer to Question on Notice 15 (PN-IQ20-86) from public hearing in Canberra, 15 May

2020, provided 25 May 2020.

78 See: Foreign Acquisitions and Takeovers Act, sections 100.

79 See: Foreign Acquisitions and Takeovers Act, sections 101, 101AA.

80 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 82.

81 Foreign Acquisitions and Takeovers Act, section 101C, 101D,

4.47 Prior to the amendments, the information gathering powers under the Act relied on the ability of the Treasurer to require information, and on desktop and paper-based auditing and compliance monitoring. When the amendments were presented to the Parliament, the Treasury stated the then existing information gathering powers were at times insufficient to draw compliance conclusions with respect to certain conditions—for instance where conditions required the installation or removal of surveillance and communication equipment.82

4.48 By enlivening parts of the Regulatory Powers Act, under section 101A of the Act, there is now a framework for:

ï monitoring whether the provisions of an Act or legislative instrument have been, or are being, complied with; and ï monitoring whether information given in compliance, or purported compliance, with a provision of an Act or legislative instrument is correct.

4.49 Similarly, under section 101B, there is now a framework for gathering material with regard to compliance. Specifically—an authorised person may enter premises if the authorised person suspects on reasonable grounds that there may be material on the premises related to the contravention of an offence provision or a civil penalty provision under that Act that is subject to investigation. Entry must be with the consent of the occupier or under an investigation warrant.83

4.50 Given the powers are recent, the committee did not examine any evidence on their use.

The Treasury’s information management capabilities 4.51 An effective regulatory system requires sound information management practices, a key element of which is an appropriate regulatory information management system. Such a system, according to the Audit Office:

ï facilitates the capture of data that may provide insight into regulatory risk, non-compliance by regulated entities and potential negative regulatory outcomes;

ï supports analysis of data to assist in identifying trends and patterns that may be indicative of systemic risks or weaknesses in the regulatory regime; ï disseminates information in a timely way only to those who have a legitimate interest in the information and a need to know; ï creates a repository of information that supports consistency in decision-

making; and

82 Foreign Acquisitions and Takeovers Act, section 133; Foreign Investment Reform (Protecting

Australia’s National Security) Bill 2020, Explanatory Memorandum, p. 113.

83 Foreign Acquisitions and Takeovers Act, section 101B; Regulatory Powers (Standard Provisions) Act 2014,

section 36.

ï assists regulators in meeting their statutory record-keeping obligations.84

4.52 The Treasury information management system has two portals:

ï application portal allowing investors to submit an application, require a range of mandatory information to be submitted, and estimate the associated fee; and

ï a case management and repository portal.85

4.53 Responses provided by the Treasury to questions on notice suggest the information management system used by the Treasury is not fit for purpose. Deputy Secretary, Roxanne Kelley acknowledged, ‘there are some limitations in our IT system which mean that some of this type of information [information sought by the committee] requires a manual sort of process’.86

4.54 The following limitations of Treasury’s IT system, FIMS3 (built on Microsoft Dynamics 365), have been identified in response to questions on notice:

ï cannot provide a breakdown of foreign investment proposals on the basis of greenfields investments versus an acquisition of an existing business;87 ï without a manual and time consuming process, cannot provide a breakdown of applicants according to whether they are new applicants or

existing foreign investors;88 ï cannot identify the proportion of approvals to which the broad categories of conditions are attached;89 ï no record on the number of targets for compliance under remedial action

plans not being met;90 ï unable to identify in how many instances companies have failed to comply with foreign investment conditions and not been penalised;91 ï cannot say how many investment approvals contain best endeavours

clauses; 92

84 Australian National Audit Office, Administering Regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 19.

85 Ms Roxanne Kelley, Deputy Secretary, Treasury, Committee Hansard, 7 August 2020, pp. 62-63.

86 Ms Roxanne Kelley, Deputy Secretary, Treasury, Committee Hansard, 15 May 2020, p. 73.

87 Mr Roger Brake, Head of Foreign Investment Division, Treasury, Committee Hansard, 15 May 2020,

p. 55; Treasury, Answer to Question on Notice 2 (PN-IQ20-72) from public hearing in Canberra, 15 May 2020, provided 25 May 2020.

88 Treasury, Answer to Question on Notice 13 (PN-IQ20-72) from public hearing in Canberra, 15 May

2020, provided 25 May 2020.

89 Treasury, Answer to Questions on Notice 5 (PN-IQ20-35) from 1 May 2020, provided 8 May 2020.

90 Treasury, Answer to Questions on Notice 7 (PN-IQ20-37) from 1 May 2020, provided 8 May 2020.

91 Treasury, Answer to Questions on Notice 24 (PN-IQ20-54) from 1 May 2020, provided 8 May 2020.

92 Treasury, Answers to Questions on Notice from 22 June 2020, provided 28 July 2020.

ï cannot say, without significant manual work, how many annual compliance reports are received, and of these, how many are certified by a company officer and how many are certified by an external auditor;93 and ï cannot say how many reviews over the past four years it has conducted

through its own internal program of reviews of reporting, independent audits and Treasury audits.94

4.55 Treasury officials described the capabilities of the current system as case management and document storage. As a source of data on foreign investment applications screened by the Treasury, officials can identify the number and proportion of approvals, with or without conditions, but it is a manual task to review each case to identify the different types of conditions that are attached to an approval.95

4.56 The Treasury has made a number of recent changes, including implementing data entry and case closure procedures to improve the consistency and quality of its data and improve its record-keeping. The Treasury is currently undertaking work to upgrade the system, including:

ï implementing fields to help identify the nature of conditions that are attached to a particular approval to allow Treasury to better report on conditions attached to cases;

ï improving case tracking to allow better internal tracking of the progress and status of a case; ï capturing of a range of new data points to allow improved case reporting and analysis; ï upgrading the application portal to reduce the incidence of incorrect

information being submitted by investors; and ï making necessary enhancements to implement policy reforms, including enhanced compliance and enforcement powers.96

4.57 A comprehensive approach to identifying regulatory risk requires data to be combined and examined through the use of analytical tools and other research methods. It may only be through such processes that evidence of heightened regulatory risk warranting investigation may be identified.97 According to the Audit Office, examining trends in available data may identify deficiencies and concentrations of risks and can provide insights into the level of regulatory compliance. This can assist regulators in tailoring their compliance monitoring

93 Treasury, Answers to Questions on Notice from 22 June 2020, provided 28 July 2020.

94 Treasury, Answers to Questions on Notice from 22 June 2020, provided 28 July 2020.

95 Ms Roxanne Kelley, Deputy Secretary, Treasury, Committee Hansard, 7 August 2020, pp. 62-63.

96 Ms Roxanne Kelley, Deputy Secretary, Treasury, Committee Hansard, 7 August 2020, pp. 62-63.

97 Australian National Audit Office, Administering Regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 19.

activities to identify the prevalence and nature of non-compliance by regulated entities.98

The extent of the Treasury’s regulatory role 4.58 The Treasury does not take full responsibility for ensuring investments are not contrary to the national interest. It describes itself has having a gatekeeper role—though it also has a significant monitoring and compliance role. With

regard to the foreign investment framework, Treasury states its:

… functions and powers are generally limited to the upfront assessment process and any conditions that may be imposed. Otherwise, once established, foreign investors are generally treated the same as domestic investors under Australia’s laws, in accordance with our international commitments.99

4.59 The Treasury argues it is not feasible for the department to monitor and enforce compliance by all foreign investors with all Australian laws to which an investor is subject, stating:

Other regulators, such as the ACCC [Australian Competition and Consumer Commission], ASIC and AUSTRAC [Australian Transaction Reports and Analysis Centre], can—and often are best placed to—take action under their own laws to protect Australia’s national interest in relation to any existing or proposed foreign investment.

In some cases, the FATA [the Act] is used to mitigate risks from a foreign investment where it is not possible to address those risks through other regulatory mechanisms, or in support of those mechanisms. In addition, while the screening process is robust and provides assurance that risks are appropriately managed, it is not feasible to eliminate all risk from all proposals, even with the use of conditions.100

4.60 Though this may be the case, agencies such as the ACCC, ASIC and AUSTRAC do not have a mandate to determine whether investments are contrary to the national interest. It is not clear where the Treasury locates the transfer of responsibility for ensuring compliance with foreign investment conditions, and whether the agencies are aware responsibility has been transferred.

Should the Treasury be the regulator 4.61 Over time, as the application of conditions to foreign investment approvals has increased, the Productivity Commission argues the Treasury has become less a gatekeeper and more a regulator—and one that up until recently lacked the

graduated enforcement toolkit available to other regulators. While the Foreign Investment Review Board is well-positioned to provide advice on

98 Australian National Audit Office, Administering Regulation: Achieving the right balance, Better

Practice Guide, June 2014, p. 41.

99 Treasury, Submission 6, p. 15.

100 Treasury, Submission 6, p. 9.

economically and politically difficult approval decisions, the Productivity Commission is of the view the Treasury is not suited to the role of regulator.101

4.62 The Productivity Commission states it is unusual for regulatory roles to be situated within departments of state—regulators are normally established as statutory bodies at arm’s length from the government of the day.102 The Foreign Investment Division of the Treasury is neither a statutory authority, nor is the division a Commonwealth Entity under the Public Governance, Performance and Accountability Act 2013. The division’s funding is appropriated within that of the Treasury’s. The division operates within the legal framework of the Treasury and is accountable to the Treasurer. Staff members are engaged under the Public Service Act 1999 and are employees of the Treasury.

4.63 Modern regulatory practice separates policy advice from the ongoing implementation and administration of the policy. The intent of this separation is to avoid regulatory capture by interest groups. It also helps build expertise, skills, resources and incentives to become high-quality administrators or regulators.103

4.64 A further advantage is the contribution to independence. The Australia Institute proposed the following scenario:

… a boffin in Treasury reports to the minister, ‘Hey, look, we’ve got a problem with so-and-so.’ The natural inclination of the Treasurer of the day is going to be: ‘Well, is that going to be public? Can we sit on it?’ And who is to blame them? Whereas if it’s an independent authority then they’re not beholden to the Treasurer of the day and, hopefully, do act fearlessly.104

4.65 Professor Allan Fels commented on the foreign investment regulatory arrangement:

I think [its] very clear that FIRB does not meet the standard practices and criteria that characterise normal best practice regulation, independent final decision-making power, accountability, transparency et cetera …

However, there are counterarguments that the FIRB role and decisions are different and of a special kind that are different from normal regulatory ones …

In competition law, there’s a well-established set of principles in the Act, and … there’s generally agreed criteria and approaches, guiding principles, practices and also procedures and methods of analysis that mean that things can be handled by an independent body in accordance

101 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 20, 88-89.

102 Productivity Commission, Foreign Investment in Australia, June 2020, p. 89.

103 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 88-89.

104 Mr David Richardson, Senior Research Fellow, The Australia Institute, Committee Hansard,

7 August 2020, p. 23.

with established principles. The point may be that FIRB is different because it’s more political.105

4.66 The Productivity Commission recommended consideration be given to the most suitable institutional design to support decision-making on foreign investment and monitoring and enforcement of compliance.106 Commissioner Coppell told the inquiry:

FIRB’s and Treasury’s powers and institutional arrangements have changed little. Attaching conditions to foreign investment approvals with limited enforcement capability provides only limited means to mitigate risks and foster community confidence.

We think national laws and regulations, together with purpose-built and adequately resourced regulators such as the ACCC, provide a more flexible risk management capability and, where available, they should be preferred.

If conditional approvals remain prevalent, we think consideration needs to be given to whether FIRB’s monitoring resources and enforcement toolkit are adequate to ensure compliance.107

105 Professor Allan Fels, Committee Hansard, 15 May 2020, p. 42.

106 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 88-89.

107 The Productivity Commission stated its analysis predated the significant changes to Australia’s

foreign investment policy, including new enforcement powers provided for the Treasury. Mr Jonathan Coppel, Commissioner, Productivity Commission, Committee Hansard, 7 August 2020, p. 44.

Chapter 5

Transparency in foreign investment

5.1 In comparison to foreign investment regimes elsewhere, Australia’s foreign investment regime is secretive. This secrecy is enabled in large part by the protected information provisions in the Foreign Acquisitions and Takeovers Act 1975 (the Act), and maintained by the preference of successive governments that foreign investment decision remain within the purview of the Executive.

5.2 This chapter examines the operation of the protected information provisions in the Act, before canvassing views on the necessity for confidentiality in foreign investment transactions, then discussing transparency in regimes elsewhere in the world.

Protected information provisions 5.3 Most information with regard to foreign investment approvals, conditions attached to approvals, and compliance remains secret under the provisions in the Act. The Act defines a class of information called ‘protected information’ as

information:

… obtained under, in accordance with or for the purposes of this Act.1

5.4 This broad definition is taken by Treasury officials to cover all information on foreign investment proposals, conditions and compliance, beyond the anonymised statistical reporting of the Foreign Investment Review Board (FIRB).

5.5 The Act imposes limitations on the disclosure of protected information, allowing disclosure for specified purposes subject to some limitations, including:

ï law enforcement; ï to disclose de-identified data on an aggregated basis for reporting on the administration of the Act; ï if the information is in the public domain; ï if consent is given by the person to whom the information relates; ï to a court or tribunal; ï to a minister administering the provisions of specified legislation, and the

minister’s staff; ï to a state or territory minister or employee of a state or territory government body;

1 There are a small number of minor exceptions with regard to some exemption certificates and

information obtained by an employee of the ATO under certain circ*mstances. Foreign Acquisitions and Takeovers Act, section 120.

ï to perform a person’s functions or duties, or exercise the person’s powers by providing information to specific minsters and officers; and ï to foreign governments or separate government entities in relation to a foreign country (subject to an agreement being in force).2

5.6 Australia’s Foreign Investment Policy document states:

The Government will not provide applications to third parties outside of the Government unless it has permission or it is ordered to do so by a court of competent jurisdiction.

The Government will defend this policy through the judicial system if needed.3

5.7 Treasury officials classify almost all information as protected information. The Treasury states:

Case applications, audit reports, letters or correspondence from applicants, as well as no objection notifications, conditions and advice to the Treasurer (or delegated decision maker), are likely to contain protected information.4

5.8 Nevertheless, the Treasurer has the power to make public information about foreign investment proposals, including approvals, conditions and compliance, and does so from time to time (see discussion below).

Protected information and commercial-in-confidence 5.9 The Treasury defends its lack of transparency not only by reference to the protected information provisions of the Act, but also on the basis much information is commercial-in-confidence and if disclosed, could:

ï affect the commercial value or interests of the individual firm; ï affect the operations of markets; and ï make people less likely to provide information to regulators.5

5.10 Because of the protected information provisions, the Treasury, in refusing to disclose such information, does not examine the grounds upon which commercial-in-confidence might be claimed—for instance whether harm might actually be caused, or whether any harm might cross a particular threshold.6

5.11 Treasury states when the terms of commonly used conditions have been made public (for instance, standard tax conditions), this has been done to provide potential foreign investors with visibility of the type of conditions that can be

2 Foreign Acquisitions and Takeovers Act, sections 120-130. See also: Treasury, Submission 6, p. 10.

3 The Treasury, Australia’s Foreign Investment Policy, January 2021, p. 13.

4 Treasury, Submission 6, p. 10.

5 Mr Roger Brake, Head of Foreign Investment Division, Treasury, Committee Hansard, 15 May 2020,

p. 62.

6 See: Ms Roxanne Kelley and Senator Rex Patrick, Committee Hansard, 15 May 2020, p. 63.

applied to them.7 On occasion, the Treasurer has made public statements in relation to high profile cases where there is strong community interest,8 for instance in the Moon Lake acquisition of Van Diemen’s Land Company (VDL) discussed in chapter four (though the conditions on this investment were not fully revealed), and the three cases discussed below: Bellamy’s, BHP, and Transgrid.

5.12 The Treasury would not provide an explanation as to how a range of conditions could, if made public, cause harm to the interests of a company— for instance the composition of a company board; nationality and residence of directors and senior officers; location of company headquarters; storage and access of data; and maintenance of equipment. Instead, the Treasury stands behind the protected information provisions of the Act, stating it is ‘generally prohibited from publishing the conditions imposed in an individual case’.9

Box 5.1 Foreign investment conditions exempted from protected information provisions Bellamy’s—On 15 November 2019, Treasurer the Hon Josh Frydenberg, provided conditional foreign investment approval for the proposed acquisition of Bellamy's Australia by China Mengniu Dairy Company. The Treasurer made a number of enforceable conditions on the acquisition to ensure the acquisition was not contrary to the national interest.10

These conditions included (the wording of the release suggests additional conditions were also applied):

ï a majority of the Bellamy's Board of Directors to be Australian resident citizens; ï maintenance of the Bellamy's headquarters in Australia for at least ten years; and ï an investment of at least $12 million in establishing or improving

infant milk formula processing facilities in Victoria.11

The Treasurer stated the conditions would ensure Bellamy's maintains its presence in Australia and proceeds with the previously announced investment in infant milk formula processing facilities.12

7 Treasury, Answer to Question on Notice 15 (PN-IQ20-45) from 1 May 2020.

8 Treasury, Answer to Question on Notice 16 (PN-IQ20-46) from 1 May 2020.

9 Treasury, Answer to Question on Notice 17 (PN-IQ20-47) from 1 May 2020.

10 The Hon Josh Frydenberg MP, Treasurer, 'Conditional approval—acquisition of Bellamy's

Australia', Media Release, 15 November 2019.

11 The Hon Josh Frydenberg MP, Treasurer, 'Conditional approval—acquisition of Bellamy's

Australia', Media Release, 15 November 2019.

12 The Hon Josh Frydenberg MP, Treasurer, 'Conditional approval—acquisition of Bellamy's

Australia', Media Release, 15 November 2019.

BHP—In May 2017, then Treasurer The Hon Scott Morrison issued a statement on a proposal ‘being circulated in investment markets’ under which BHP Billiton Limited would cease to be listed on the Australian Securities Exchange and its assets would be transferred to a new company that, although headquartered in Australia, would be incorporated in England and Wales and listed on the London Stock Exchange.13

In so doing, the Treasurer released a list of eight conditions imposed in 2001 by then Treasurer, Peter Costello, when he agreed to a merger between BHP Limited and Billiton plc. The Treasurer stated if the conditions were breached, BHP Billiton may commit a criminal offence and could be subject to civil penalties under the Act. If the company was convicted of an offence, the directors could be held personally liable. Further, any such action would be a significant action under the Act that would require evaluation and assessment. If the acquisition proceeded without the Treasurer’s consent, the Treasurer would be able to order a divestment.14

The conditions imposed by then Treasurer in 2001 were:

ï BHP Limited remains an Australian resident company, incorporated under the Corporations Law, that is listed on the Australian Stock Exchange under the name “BHP Limited” and trades under that name;

ï BHP Limited remains the ultimate holding company of, and continues to ultimately manage and control the companies conducting the businesses which are presently conducted by the subsidiaries of BHP Limited, including: the Minerals, Petroleum, Steel and Services businesses for so long as those businesses form part of the combined BHP Billiton Group (“the Group”);

ï the headquarters of BHP Limited and the global headquarters of the Group are to be in Australia; ï the headquarters of BHP Limited and the global headquarters of the Group are publicly acknowledged as being in Australia in

significant public announcements and in all public documents (as that term is defined in section 88A(1)(a) of the Corporations Law); ï that both the Chief Executive Officer of the Group and Chief Financial Officer of BHP Limited have their principal place of

residence in Australia; ï the majority of all regularly scheduled Board meetings and Executive Committee meetings of BHP Limited in any calendar year

occurs in Australia; ï the Board of directors of BHP Limited is elected in accordance with

13 The Hon Scott Morrison MP, Treasurer, ‘Treasurer statement on Elliott’s BHP Proposal’, Media

Release, 4 May 2017.

14 The Hon Scott Morrison MP, Treasurer, ‘Treasurer statement on Elliott’s BHP Proposal’, Media

Release, 4 May 2017.

the procedures notified in the proposal or in accordance with procedures approved by the Treasurer; and ï that if BHP Limited wishes to act differently to these conditions, it seeks and obtains the prior approval of the Treasurer.15

‘Global headquarters’ was clarified to ‘include the requirement that both the Chief Executive Officer and the Chief Financial Officer of the dual listed entities (i.e. BHP Limited and Billiton Plc) will be based in Australia and have their principal offices and key supporting functions in Australia. In addition, the centre of administrative and practical management of BHP Limited shall be in Australia and BHP Limited’s corporate head office activities, of the kind presently carried on in Australia, will continue to be carried on in Australia’.16

Transgrid—In November 2015, the Treasurer approved the 99 year lease of New South Wales electricity transmission network, Transgrid, to NSW Electricity Networks. In making the announcement, the Treasurer made public a number of conditions:

ï the operation and control of TransGrid’s transmission system and telecommunications business is undertaken solely from within Australia;

ï maintenance is also to be undertaken in Australia other than where it is not possible to do this on reasonable commercial terms; ï electricity supply data and personal information is accessible and held solely within Australia; ï foreign consortium members maintain their interest in TransGrid at

no more than 50 per cent; ï 50 per cent of TransGrid’s boards comprise Australian citizens and residents; ï TransGrid has an independent chairperson and an independent

director on the board who are Australian citizens and residents, one of whom is required for all board quorums; ï senior personnel in critical positions to hold security clearances; and ï audited annual reporting certifying compliance with NSW’s critical infrastructure licence conditions and annual reporting to FIRB, approved by the independent chairperson, certifying compliance with the safeguards imposed.17

15 The Hon Scott Morrison MP, Treasurer, ‘Treasurer statement on Elliott’s BHP Proposal’, Media

Release, 4 May 2017.

16 The Hon Scott Morrison MP, Treasurer, ‘Treasurer statement on Elliott’s BHP Proposal’, Media

Release, 4 May 2017.

17 The Hon Scott Morrison MP, Treasurer, ‘Foreign investment approval - 99 year lease of

Transgrid’, Media Release, 25 November 2015.

Views on foreign investment secrecy 5.13 There is little support for the level of secrecy that surrounds the foreign investment regime because of the implications it has for clarity and accountability for the decisions made.

5.14 The Productivity Commission states the government is 'unusually secretive' and transparency in foreign investment decision making is 'low' and 'opaque'. It calls for greater clarity through the routine publication of the reasons for decisions.18

5.15 Former Chairman of the Australian Competition and Consumer Commission (ACCC), Professor Allan Fels, has questioned whether the Treasury is sufficiently accountable and transparent with regard to its regulation of foreign investment. Because of this, he has expressed concern the Treasury may not be properly enforcing the conditions it imposes. He has stated, ‘FIRB isn’t independent, politically … It’s not transparent. You don’t know the reasons or the nature of its decisions, especially conditions it sets, and it isn’t accountable or answerable to anyone’.19 These concerns are exacerbated by doubts discussed in chapter four as to whether the Treasury has the power, resources or inclination to enforce or follow-up its decisions.20

5.16 The China Policy Centre suggests greater transparency would result in more accurate foreign investment statistics. For instance, investors may be advised by the Treasury during the ‘natural justice period’ that the preliminary view is that the application may be rejected. To avoid receiving an official order prohibiting the investment, investors may withdraw the proposal so they do not receive an official order prohibiting the investment. The consequence is the statistics are skewed where rejections are hidden as withdrawals. This has the effect of making Australia’s foreign investment regime appear more welcoming than it might be.21

Practices of other regulators 5.17 Other regulators in Australia have greater transparency than the Foreign Investment Division of the Treasury or the Treasurer, including agencies that

18 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 2, 20-21, 89-91.

19 Adele Ferguson and Chris Gillett, ‘Alinta Energy under fire as regulators pounce’, The Sydney

Morning Herald, 2 March 2020, https://www.smh.com.au/business/companies/alinta-energy-under-fire-as-regulators-pounce-20200302-p5466c.html (accessed 26 June 2021).

20 Adele Ferguson, ‘A ‘black box’ that needs an overhaul: How has FIRB escaped scrutiny’, The

Sydney Morning Herald, 7 March 2020, https://www.smh.com.au/business/companies/a-black-box-that-needs-an-overhaul-how-has-firb-escaped-scrutiny-20200306-p547h3.html (accessed 26 June 2021).

21 China Policy Centre, Submission 1, p. 5.

fall within the Treasury portfolio: the ACCC, and the Australian Securities and Investment Commission (ASIC).

Transparency at the Australian Competition and Consumer Commission 5.18 The Productivity Commission states the lack of public disclosure is at odds with good regulatory practice. The commission is of the view any need to preserve confidentiality is not an insurmountable obstacle to greater

transparency:

The ACCC faces similar issues with its merger review process and manages to be transparent while preserving confidentiality.22

5.19 The ACCC makes a range of information on its processes, procedures and decisions publicly available, including that relating to mergers, authorisations for anti-competitive arrangements including conditions imposed, and enforcement actions. The ACCC’s merger authorisation process is public and the application for merger authorisation, all related submissions by the applicant and interested parties, and the ACCC’s determination are placed on the merger authorisations public register.23

5.20 Applicants and interested parties providing information to the ACCC regarding an authorisation may make a claim for confidentiality and ask that information, or parts of it, be excluded from the public register. All confidentiality claims must be substantiated and a public version of the application must contain sufficient information to enable consultation.24

5.21 With regard to consideration of authorisations for anti-competitive arrangements, the ACCC is required to keep a public register containing, amongst other things:

ï applications for authorisation; ï documents and submissions provided to the ACCC in relation to any application; ï particulars of any oral submissions; ï draft determinations; ï ACCC proposals; ï records of conferences; and ï final determinations.25

22 Productivity Commission, Foreign Investment in Australia, June 2020, p. 90.

23 Australian Competition and Consumer Commission, ‘Merger authorisation,’

https://www.accc.gov.au/business/mergers/merger-authorisation (accessed 26 June 2021).

24 Australian Competition and Consumer Commission, ‘Merger authorisation,’

https://www.accc.gov.au/business/mergers/merger-authorisation (accessed 26 June 2021).

25 Australian Competition and Consumer Commission, ‘Guidelines for authorisation of conduct

(non-merger)’, 5 March 2019, https://www.accc.gov.au/publications/guidelines-for-authorisation-of-conduct-non-merger (accessed 27 June 2021).

5.22 The ACCC considers requests for confidentiality on a case-by-case basis and where it accepts confidential information, it remains able to use this information for internal use, and disclose it to external advisors, consultants and third parties (subject to some restrictions). All requests must be substantiated.26

5.23 The ACCC also publishes its competition enforcement interventions, and significant outcomes in competition matters.27

Transparency at the Australian Securities and Investments Commission 5.24 ASIC maintains a number of public registers that record compliance and enforcement actions taken by the commission.28 These include:

ï record of infringement notices paid under the National Consumer Credit Protection Act 2009, and National Consumer Credit Protection Regulations 2010, and the ASIC Act, including a copy of the infringement notice;29 ï enforceable undertakings register, including a copy of the enforceable

undertaking document;30 ï register of persons banned from engaging in a credit activity under a law of a state or territory;31 ï register of banned bodies corporate;32 ï register of summary prosecutions of companies and directors;33

26 Australian Competition and Consumer Commission, ‘Guidelines for authorisation of conduct

(non-merger)’, 5 March 2019, https://www.accc.gov.au/publications/guidelines-for-authorisation-of-conduct-non-merger (accessed 27 June 2021).

27 See, for instance: ACCC, ‘Annual Report 2018-19’, October 2019.

28 Australian Securities and Investments Commission, ‘Public comment on ASIC’s regulatory

activities’, https://asic.gov.au/about-asic/asic-investigations-and-enforcement/public-comment-on-asic-s-regulatory-activities/ (accessed 30 June 2021).

29 Australian Securities and Investments Commission, ‘Credit and ASIC Act Infringements notices

register’, https://asic.gov.au/online-services/search-asic-s-registers/additional-searches/credit-and-asic-act-infringements-notices-register/ (accessed 30 June 2021).

30 Australian Securities and Investments Commission, ‘Enforceable undertakings register’,

https://asic.gov.au/online-services/search-asic-s-registers/additional-searches/enforceable-undertakings-register/ (accessed 30 June 2021).

31 Australian Securities and Investments Commission, ‘Register of persons banned from engaging in

a credit activity under a law of a state or territory’, https://asic.gov.au/online-services/search-asic-s-registers/additional-searches/register-of-persons-banned-from-engaging-in-a-credit-activity-under-a-law-of-a-state-or-territory/ (accessed 30 June 2021).

32 Australian Securities and Investments Commission, ‘Register of banned bodies corporate’,

https://asic.gov.au/online-services/search-asic-s-registers/additional-searches/register-of-banned-bodies-corporate/ (accessed 30 June 2021).

33 Australian Securities and Investments Commission, ‘Summary prosecutions of companies and

directors’, https://asic.gov.au/online-services/search-asic-s-registers/additional-searches/summary-prosecutions-of-companies-and-directors/ (accessed 30 June 2021).

ï register of public warning notices issued about the conduct of a person in relation to financial services, including a copy of the public warning notice.34

5.25 The commission states it may release ‘market sensitive information’ if it is in the public interest to release the information.35

Practices in other jurisdictions 5.26 Foreign investment screening processes in other countries, according to the Productivity Commission seem able to strike a better compromise between confidentiality and transparency than Australia.36

5.27 The following arrangements operate in other jurisdictions:

ï the President of the United States publicly announces decisions to block investment, and the Committee on Foreign Investment in the United States (CFIUS) reports annually to Congress (confidentially) on its investigations;

ï the Canadian government publishes a list of completed decisions and notifications of foreign investments each month; and ï the New Zealand Overseas Investment Office (OIO) publishes reasons for granting or declining applications every month.37

Transparency in New Zealand 5.28 The approach of New Zealand regulators provides a model for maintaining confidentiality where required, while ensuring a transparent and accountable process. Foreign investment applications submitted to the OIO are a public

record. Some information within an application may be withheld in accordance with the provisions of the Official Information Act 1982. If, for reasons provided for in the Official Information Act, there is a good reason to withhold the existence of an application from the public, the OIO will not disclose the existence of the application while it is being considered. However, once an application is determined, the OIO can issue a public decision summary.38

34 Australian Securities and Investments Commission, ‘Public warning notices’,

https://asic.gov.au/online-services/search-asic-s-registers/additional-searches/public-warning-notices/ (accessed 30 June 2021).

35 Australian Securities & Investments Commission, ‘Public comment on ASIC’s regulatory

activities’, https://asic.gov.au/about-asic/asic-investigations-and-enforcement/public-comment-on-asic-s-regulatory-activities/#release (accessed 2 July 2021).

36 Productivity Commission, Foreign Investment in Australia, June 2020, p. 90.

37 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 90-91.

38 Land Information New Zealand, ‘Privacy, confidentiality, and sharing of information’,

https://www.linz.govt.nz/overseas-investment/apply/you-apply/privacy-confidentiality-and-sharing-information (accessed 30 June 2021). See also: Land Information New Zealand, ‘How the OIO assesses your application’, https://www.linz.govt.nz/overseas-investment/discover/how-we-assess-your-application (accessed 30 June 2021).

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5.29 There are grounds upon which the details of an application may be withheld. Some of these reasons include:

ï privacy of natural persons; ï free and frank expressions of opinion; ï legal professional privilege; ï prejudice to the maintenance of the law; and ï prejudice to a person’s commercial position.39

5.30 If an applicant wishes to claim confidentiality on the grounds the release of information would prejudice a commercial position, they must:

ï identify the prejudice that would likely result to that commercial position if the requested information were to be made available; ï assess how likely it is that disclosure of the information at issue would cause the predicted prejudice to occur; ï explain how that prejudice would be unreasonable; and ï explain why withholding the information will not outweigh public interest

in its release.40

5.31 Each month, the OIO publishes a summary of each of the decisions it has made in that month (since 2005). Each summary contains information including:

ï section of the legislation under which the application was made; ï whether some information has been withheld from the decision summary; ï the investment and value; ï the foreign investor and the vendor; ï background on the decision, including any requirements or plans the

investor has (including in some cases the conditions placed on the investment); and ï contact for further information.41

5.32 The OIO also publishes details of enforcement actions taken, including court orders, settlements, orders to dispose of property, enforceable undertakings, administrative penalties, and warnings. Warning letters are also published,

39 Land Information New Zealand, ‘Privacy, confidentiality, and sharing of information’,

https://www.linz.govt.nz/overseas-investment/apply/you-apply/privacy-confidentiality-and-sharing-information (accessed 30 June 2021).

40 Land Information New Zealand, ‘Privacy, confidentiality, and sharing of information’,

https://www.linz.govt.nz/overseas-investment/apply/you-apply/privacy-confidentiality-and-sharing-information (accessed 30 June 2021).

41 Land Information New Zealand, ‘Overseas Investment: Latest decisions’,

https://www.linz.govt.nz/overseas-investment/latest/latest-decisions (accessed 30 June 2021).

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which detail the actual breaches of conditions that are the subject of the warning.42

Other transparency issues 5.33 In making recommendations about foreign investment proposals, the Treasury often requires the assistance of other parties. In some cases state and territory governments will be called upon to provide input into the consideration of a

proposal. However, there appears to be a lack of transparency with state and territory governments that hinders the provision of advice on whether an investment is contrary to the national interest. Similarly, given the secrecy that accompanies investment proposals (in contrast to acquisitions examined by the ACCC), takeover targets are not consulted and provided the opportunity to contribute their views.

Transparency with consultation partners 5.34 The Government of Western Australia suggested consultation partners, like state and territory governments, may not have as much insight into the foreign investment assessment and approval process as they might find useful. As

state and territory governments are called upon to review proposals, the Western Australian Government stated it would be helpful to receive feedback as to the outcome of these proposals. It suggested an in-confidence summary of the proposals rejected and approved with conditions and a brief explanation would be useful.43 Amendments to the Act, which now allow the Treasury to share protected information more broadly, may ameliorate this problem.

5.35 The Western Australian Government also called for clarification on issues to allow consultation partners to make meaningful contributions to the assessment of foreign investment proposals including:

ï the difference between a 'foreign person' investor and a 'foreign government' investor as in some proposals there is a potential for distinctions to blur; and

ï the weight the Treasurer might apportion between government-sanctioned and private business investment.44

Transparency with takeover targets 5.36 The secrecy that surrounds foreign investment proposals means takeover targets or other interested parties have no opportunity to provide information that would assist with the assessment of the proposal against the national

42 Land Information New Zealand, ‘Overseas Investment: Enforcement action taken’,

https://www.linz.govt.nz/overseas-investment/latest/enforcement-action-taken (accessed 30 June 2021).

43 Government of Western Australia, Submission 12, p. 2.

44 Government of Western Australia, Submission 12, p. 3.

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interest. This means decisions about an investment proposal can be made without any substantive testing of the applicant’s submissions and assertions.45

5.37 Providing targets with notification of foreign investment applications (including key dates and deadlines), according to the Group of 100, would allow the Treasurer and FIRB to make better informed decisions and provide procedural fairness to Australian target companies.46

5.38 For the Group of 100, the practicalities are not insurmountable—a model is provided by the ACCC merger clearance process. Hostile takeover bids would need to be made on a ‘subject to FIRB’ basis and the decision in relation to the application would be made after the proposal was public and the target was given the opportunity to make a submission on the proposal.47

5.39 Under ACCC procedures, decisions on whether to grant merger clearances are only made in contentious cases after public consultation, allowing the ACCC to take into account information provided by all relevant stakeholders— acquirers, targets, and other affected parties including Australian customers and suppliers. The ACCC is able to assess the veracity of information it receives from the acquirer and test it against the views and information provided by other affected parties.48

45 Group of 100, Submission 16, p. 1.

46 Group of 100, Submission 16, p. 1.

47 Group of 100, Submission 16, p. 1.

48 Group of 100, Submission 16, p. 1.

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Chapter 6

Committee comment

6.1 During the course of this inquiry, the Senate Economics References Committee (the committee) has received evidence from a range of witnesses and examined a number of matters of concern. In the evidence presented to the committee, a number of common themes emerged that have implications for public sentiment regarding the administration and regulation of foreign investment in Australia. Broadly, these go to the confidence the community can have that foreign investment approvals are made in the national interest and foreign investors are held to account for the undertakings they make; the capacity of the Treasury to assess foreign investment applications and monitor and enforce conditions; the institutional design most appropriate for a regulator; and the excessive secrecy that surrounds the foreign investment regime.

6.2 Foreign investment has been crucial to the growth of many sectors of the Australian economy and more broadly, to the transfer of new technologies, skills and innovations. There can be little doubt that foreign investment has made possible Australia’s prosperity. However, key to a successful foreign investment regime is public confidence that foreign investment decisions are in fact made in the national interest and foreign investors are held to the terms of foreign investment approvals. The lack of transparency in the foreign investment regime, to which the committee will return shortly, is a factor that has the potential to undermine this trust.

6.3 While it is the case that foreign investment can be beneficial, it is certainly not true that all foreign investment is beneficial. The legislation that governs foreign investment in Australia, the Foreign Acquisitions and Takeovers Act 1975, recognises this when it provides for the screening of foreign investment proposals. Investments that reach certain thresholds are examined to ensure they are not contrary to the national interest—in practice, however, this is something of a generous assessment.

6.4 Whilst acknowledging the benefits that might come from foreign investment, the committee is of the view these should not be overblown. The rhetoric of benefit has the potential to overshadow the possibility foreign investment is not in the national interest. If the potential for foreign investment to harm Australia’s national interest is not appropriately acknowledged, there is a danger investments may proceed when they ought not.

Holding foreign investors accountable 6.5 The negative national interest test, which allows foreign investments to proceed unless they can be shown to be contrary to the national interest, means foreign investors do not need to show an investment will benefit in any

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form the Australian economy—this is assumed. The test merely provides some level of implied confidence the investment will not harm the national interest. That investors are not held to any of the intentions they claim about future activities when they make an application is a concerning matter to which the committee will turn shortly.

6.6 For now, it is sufficient to note some foreign investment does not bring the benefits hoped—investments into existing businesses may be less beneficial than the establishment of new businesses; supply chain opportunities or the transfer of technology may not eventuate; foreign investors may engage in aggressive tax minimisation activities; others may be structurally incapable of operating in Australia’s national interest. Foreign investment may reduce the need for foreign-owned firms to innovate; technological transfers from foreign investment may reduce domestic innovation; increased concentration may reduce competition; the capital-intensive nature of foreign investment may have a negative effect on employment growth and real wage growth.

6.7 What is clear, is Australia’s foreign investment regime does not provide the government of the day with the ability to consider these eventualities, or act on them when they occur. Assessment of foreign investment proposals, for the most part, occurs at a single point in time—what happens after that assessment, absent a significant national security concern, is largely irrelevant to the assessment of a foreign investment application.

6.8 The case of the then Treasurer Peter Costello’s rejection of Shell’s proposal to acquire Woodside is a good illustration of the fact governments have only one point in time policy lever to determine whether an investment may be contrary to the national interest. By rejecting the proposal and publishing the rationale, the Treasurer acknowledged that what might be in the best interests of a foreign investor, may not be in Australia’s national interest, and further the government would not be able to do anything about this in the future, other than prohibit the investment at the outset.

6.9 In light of the variability of benefit that might accrue from foreign investment, the committee acknowledges the views of submitters and witnesses that Australia might consider a more ambitious national interest test—one that attempts to better define what is in the national interest. Such an approach would require greater scrutiny of foreign investment proposals at the lodgement phase and over the duration of the investment related to any claims that investors might advance in support of their investment proposals.

6.10 The present ambiguity in the national interest test means there is a great deal of leeway for governments when they approve foreign investment decisions. However, without some tangible definition of the national interest, whether acknowledged or otherwise, the means becomes the ends of the policy— promoting foreign investment becomes the sole goal, not other factors such as

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developing the complexity of the Australian economy. When an assessment starts with an assumption of a positive and only requires that there be no evidence of harm, the balance may be somewhat different than an assessment that begins from a neutral position and requires evidence of benefit.

6.11 In contrast, the positive approach taken by New Zealand—that foreign investment must be proven to be in the national interest, rather than not contrary to it—is of interest to the committee. The committee understands that New Zealand’s Ministerial Directive Letter provides guidance to the regulating agency without altering the criteria for consent established in New Zealand legislation. It demonstrates that the enforcement of undertakings and conditions is an important factor in maintaining public confidence and transparency in New Zealand’s foreign investment framework.

6.12 It is apparent that Australia’s foreign investment regime places no such importance on foreign investors being held to the promises they make when they apply for approval—even though these intentions are relevant to an assessment of whether an investment is contrary to the national interest.

6.13 The case of Moon Lake’s acquisition of the Van Diemen’s Land Company demonstrates the influence the intentions of an investor can have on the decision to approve a foreign investment proposal. The Treasurer’s statement announcing approval for Moon Lake’s acquisition of Van Diemen’s Land Company made it clear voluntary undertakings are considered in the national interest analysis. Yet the investor has failed to meet many of these conditions and there is no avenue within the legislation currently to hold this investor to account.

6.14 The committee agrees that if the intentions of an investor are considered in the approval of a foreign investment proposal, it is important that there be some requirement of an investor to genuinely follow through on the proposed activities. It is also necessary that this is publicly articulated in some form so that the Australian public can have confidence that it is being met.

6.15 It is clear from the evidence provided by Treasury officials and from guidance material issued by the Foreign Investment Review Board (FIRB) that the intentions of an investor do influence the consideration of whether an investment is contrary to the national interest. Treasury officials stated very clearly to the committee that factors such as the contribution a foreign investor intends to make to domestic innovation, supporting higher-value add sectors, research and development, advanced manufacturing, and energy efficiency are considered in the assessment of a foreign investment proposal.

6.16 Without a mechanism that reinforces the seriousness of these so-called intentions or voluntary undertakings, there is a danger foreign investment proposals are or will come to resemble works of fiction—crafted so as to pass the test, but discarded at the convenience of the investor.

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6.17 The committee is of the view it is not credible for Treasury officials to suggest voluntary undertakings have no influence on the assessment of a proposal against the national interest when they are expected as part of the application process. Foreign investment applications cannot be accurately assessed against the national interest if investors are able to make certain undertakings that they are then under no obligation to carry out.

6.18 If foreign investors are not held to account for the undertakings they make, and upon which their applications are assessed against the national interest, the integrity of the entire foreign investment framework is jeopardised.

6.19 The committee is aware the trade agreements to which Australia is a party limit changes that can be made to Australia’s foreign investment regime. The committee is disappointed the Department of Foreign Affairs and Trade and the Attorney General’s Department did not respond in good faith to committee’s requests for information. However, from the unhelpful responses provided, the committee concludes the trade agreements to which Australia is party will not allow substantive alterations to the national interest test.

6.20 Nevertheless, recognising that public support is crucial to a successful foreign investment regime, the government must investigate how regulations might be made that reflect the need for foreign investment to contribute to activities that are in the national interest, and for investors to be rightly held to account for the promises they make when they propose an investment. Such a requirement is not a high hurdle and should not be conceived as being restrictive.

Recommendation 1

Assessing applications, applying conditions and monitoring compliance 6.22 The committee will turn shortly to the imposition of conditions on foreign investment approvals. First, however, it is relevant to discuss risk in the foreign investment regime because if the Treasury does not have the expertise

to examine foreign investment proposals, the ability to apply conditions to an approval carries little weight. The assumption foreign investment is beneficial, in combination with the necessity that regulation must not stifle the investment required for economic growth, means risk must be finely balanced in the Treasury’s assessment of foreign investment proposals.

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6.23 While the Treasury states it takes a risk-based approach to its regulatory role,1 risk exists at several levels, including in the accuracy of the Treasury assessment against the national interest. The balancing of risk, in the context of a nebulous national interest test, can result in assessments on risk sitting on a presumption of benefit—itself something of a risk.

6.24 Many aspects of a sound regulatory framework are evident in the Treasury’s practices and procedures. The objectives of the regulatory regime are clearly outlined and communicated to key stakeholders, as are the eligibility and assessment criteria. The Treasury states it calls upon expertise as required to assist in the evaluation of proposals. On the basis of the Regulatory Performance Framework, the Treasury is able to demonstrate it performs well.

6.25 However, none of this guarantees the outcome. The Treasury’s self-assessment against the regulator performance framework does not investigate whether its examination of foreign investment proposals has ensured investments have not been contrary to the national interest, neither does it assess whether the conditions applied sufficiently ameliorate risk to the national interest, or whether entities are complying with conditions. It is left to trust that Treasury’s screening, assessment, monitoring and enforcement processes are robust and provide assurance risks are appropriately managed.

6.26 As to screening and assessment, the committee received evidence suggesting the Treasury requires greater expertise and resources to appropriately examine foreign investments against the national interest. In particular, the committee notes evidence to the inquiry that the Treasury requires greater knowledge of foreign jurisdictions; and that its use of the expertise of partner agencies may not be optimised or efficient.

6.27 Some of these concerns are illustrated by the Musselroe Bay case, and by the data of the number of consultations Treasury has with partner agencies. For instance, in 2019-20, Treasury referred only 13 matters to the Australian Federal Police (AFP) for advice, and generally requests information from the Australian Transaction Reports and Analysis Centre only 10 times each year. Evidence given by witnesses suggests that the information provided by some partner agencies may be limited. The committee notes the AFP primarily checks if any applicants have been convicted of a Commonwealth criminal offence and deals with Treasury requests in a ‘pretty quick fashion’.

6.28 The committee is left with the impression it may be wrong to assume foreign investment applications are always thoroughly examined to ensure they are not contrary to the national interest. It is important to again note at this point that the success of the foreign investment regime relies to a significant extent on the confidence the public has in the government to approve foreign

1 Ms Roxanne Kelley, Deputy Secretary, Treasury, Committee Hansard, 15 May 2020, p. 54.

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investments in the national interest. The committee is of the view there can be improvements in the Treasury’s assessment procedures and without the requisite skills and knowledge, there is a risk investments contrary to the national interest will be approved.

Recommendation 2

6.30 Turning now to monitoring and enforcement, the committee agrees a key responsibility of regulators is to maintain the confidence of not only the Parliament, but importantly also of the community. Assessments against the national interest must be robust, and equally robust must be monitoring of compliance and enforcement of conditions attached to investment approvals.

6.31 Of significant concern to the committee is the fact Treasury did not appear to take seriously its compliance and enforcement functions prior to 2019—before which the sum total of its compliance and enforcement capacity was two people. When the Treasury states it is strengthening its compliance function, it is starting from a woefully low level.

6.32 While the Treasury rightly takes a risk-based approach to compliance and enforcement, it can be difficult to reconcile an ‘encouraging’ approach that provides generous timeframes for compliance with conditions, with the requirement to ensure an investment is not contrary to the national interest.

6.33 That conditions can legally only be applied in the first place to prevent an investment being contrary to the national interest means the risk from non-compliance would appear high, and the requirement to be in compliance would seem immediate. If conditions are legally placed on an investment approval, it is only if conditions are met that an investment is not contrary to the national interest.

6.34 As has become clear during the course of this inquiry, despite the Treasury’s regulator self-assessments suggesting it is meeting its regulatory obligations, there are grounds to believe that this amounts to little in substance. The self-assessment does not examine how effectively compliance and enforcement is undertaken, only that the Treasury does not unnecessarily inconvenience foreign investors when seeking information, and when monitoring a foreign investor that it considers the operational needs of the investor.

6.35 The lack of transparency in the foreign investment regime means any weaknesses in the Treasury’s assessment and compliance processes can easily go unnoticed. The committee’s work has been hampered by this lack of

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transparency. It is not possible to verify whether companies are complying with conditions on foreign investment approvals because neither the approvals nor the conditions are publicly released. One must guess.

6.36 In explaining new legislative measures, the Treasury indicated some breaches of conditions resulting in the serving of infringement notices were likely to occur frequently. This suggests areas of the Foreign Acquisitions and Takeovers Act 1975 (the Act) were unenforced prior to the legislative changes.

6.37 Confidence in the Treasury’s compliance processes are undermined by the fact that even with the expansion of the compliance section to around 15 staff, Treasury remains unable to identify the number of annual compliance reports it receives, or the number of these reports it examines for accuracy. This is despite introducing an ‘enhanced compliance framework’ in 2017.

6.38 The case study of conditions placed on the Alinta acquisition by Chow Tai f*ck Enterprises shows the Treasury’s approach to compliance. The Treasury appears to have taken a relaxed approach to ensuring Alinta Energy was compliant with the conditions placed on the acquisition by Pioneer Sail Holdings. One must bear in mind conditions can only be applied to an approval if they are necessary to ensure the acquisition is not contrary to the national interest.

6.39 Astoundingly, the company was given more than a year to identify whether it was in compliance with conditions, and then another year to submit a remedial action plan. This action plan was not approved by the Treasury until two and a half years after the sale, and the company was not required to come into compliance with all conditions until December 2020. Whether Alinta did come into compliance with conditions by this date remains a secret.

6.40 Nevertheless, it is not clear on what grounds it is appropriate for a period of more than three years to pass before an entity complies with a particular condition—the rationale for which is to ensure an investment is not contrary to the national interest. According to Alinta, this timeframe was agreed with Treasury when the acquisition was approved.

6.41 In May 2020, Alinta confirmed systems were still not in place to prevent the transfer of mass consumer information as per the conditions on the investment approval. The timeframe agreed with the Treasury implies that the transfer of information internationally would only pose a risk to the national interest if it occurred after December 2020, and not before. A preposterous assessment, particularly given the fact the FIRB itself has highlighted the importance of personal data security.

6.42 Despite recognising the strategic importance of personal data, the Treasury appears to have taken a lax approach to its security at Alinta. The concerns do not end at this point. That the Treasury would approve Alinta’s own internal auditor to conduct baseline and assurance audits, in spite of its own guidance

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notes that state there should be an absence of any existing or potential conflicts of interest, leaves the committee to ponder what constitutes an existing or potential conflict of interest. As was noted in the case study, assurance that EY was independent and not conflicted was undertaken by EY staff themselves and reviewed no further.

6.43 It is possible the Alinta situation—where Alinta’s internal auditor, EY, was approved to complete an audit of Alinta’s compliance with foreign investment conditions—has occurred elsewhere and will again occur.

6.44 The committee notes the additional regulatory powers that were provided to the Treasury through recent amendments to the Act, including the ability to issue infringement notices and enforceable undertakings, and enhanced monitoring, investigation and search powers. The effective use of these powers, however, is dependent on the regulatory culture in the agency. That the Treasury cannot identify any instance where it has taken legal action under the previous provisions in the Act for non-compliance suggests there may be weaknesses in the Treasury’s recently established compliance and enforcement capacity.

6.45 It is the case the new powers are being provided to the agency without any change to its institutional design or demonstrable efforts to reform an organisational culture that appears historically and very recently to have put limited emphasis on compliance and enforcement. The extraordinarily lax attitude to compliance highlighted with Alinta firmly cements questions on the Treasury’s ability to navigate and manage a regulatory compliance regime in the national interest.

6.46 In addition, the division is hamstrung in the protection of Australia’s national interest by an inadequate and antiquated information management system. It is difficult to see that the Treasury’s information management system is capable of capturing data that may provide insight into regulatory risk, or that it could support any form of analysis of data to assist in identifying trends and patterns that may be indicative of systemic risks.

6.47 Significant shortcomings were identified in the Treasury’s system such that it could not be confident it had comprehensive and comprehensible oversight of all investments, the conditions applied to investments, and whether investors were complying with conditions. The committee is of the view the current information management system does not have the attributes necessary to allow for the complex analysis required of regulatory agencies that oversee compliance with obligations believed necessary to protect the national interest.

6.48 At this point in time, the committee cannot be confident Treasury information management systems are sufficient to support its key regulatory functions. The committee cannot be confident the Treasury has reliable and full

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documentation of all regulatory decisions taken when addressing non-compliance.

Who should be the regulator? 6.49 Much came to light during the inquiry about the regulation of Australia’s foreign investment regime. It was noted earlier that some, including the Productivity Commission, have questioned whether regulation of foreign

investment should be within the purview of a policy agency.

6.50 Evidence received by the committee suggests the Treasury, in some instances, may be conflicted by its policy role to promote foreign investment, its regulatory role to ensure compliance with conditions, and a regulatory approach that specifies foreign investors should not be excessively inconvenienced by compliance obligations. While it describes itself as having a gatekeeper role, the conditions imposed on investments can be enduring, as must be the monitoring of compliance of conditions.

6.51 The committee leaves the government to consider the Productivity Commission’s view that while conditions may be necessary to mitigate particular risks, their necessity suggests national laws and regulations need to be strengthened.

6.52 The committee is also of a mind to point out that while Treasury officials state they work under the authority provided through legislation, this legislation can be changed if required.

6.53 The committee notes suggestions foreign investment regulation should be undertaken by an independent final decision-making power acting in an accountable and transparent manner. However, ensuring community confidence in the foreign investment regime requires the authority to balance technocratic regulations with genuinely held community sentiment. As such, the committee does not recommend ultimate decision making on foreign investment approvals be removed from the Treasurer—though it does recommend a thorough review of regulatory responsibility for foreign investment.

Recommendation 3

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Secrecy 6.55 As to whether the Treasury is an effective regulator: ultimately it is difficult to know whether investments approved are not contrary to the national interest, whether conditions are sufficient to ensure an investment is not contrary to the

national interest, whether conditions are complied with, or understand the Treasury’s performance as regulator due to the extreme secrecy that surrounds the foreign investment regime—something that is not a feature of the frameworks in other countries. And it is to the issue of transparency that the committee now turns.

6.56 Transparency in Australia’s foreign investment regime is complicated by the long-standing convention across all governments, reflected in legislation since 1975, that foreign investment decisions are the purview of the Executive.

6.57 The secrecy provisions in the Act, known as the protected information provisions, allow governments a large amount of leeway in their decisions on whether to approve an investment. They allow for inconsistency in decision making, for decision makers to be unaccountable for the decisions made, and for the community to remain uninformed about foreign investment approvals and the conditions attached to the approvals that are ostensibly to ensure investment is not contrary to the national interest. The fact, other than in very limited circ*mstances, foreign investment decisions cannot be challenged adds further to the secrecy and absence of accountability.

6.58 During the course of the inquiry, the committee was repeatedly stonewalled by Treasury officials who argued information sought by committee members was protected information and could not be disclosed without the permission of the investor concerned.

6.59 The committee informed the Treasury the protected information provisions do not bind the Parliament. For clarity, the committee advises the Treasury and other departments:

ï committees have the power to seek information that may be covered by a statutory secrecy provision; ï a statutory secrecy provision does not prevent the disclosure of information covered by the secrecy provision to the committee; and ï parliamentary privilege protects any such disclosures with absolute

immunity for those involved in disclosing the information.2

6.60 The committee is of the view, it is past time departmental officers recognised they are accountable to the Parliament, the ultimate lawmaking body under the Constitution.

2 The Senate, Guide to committee procedure and practice, 2014, pp. 115-116; Odgers’ Australian

Senate Practice, 2016, pp. 68-73.

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6.61 The Treasury’s routine reference to the protected information provisions creates an environment of opacity around the foreign investment regime. This is an environment where no questions are asked about the appropriateness of the secrecy and lack of transparency—action by officials merely proceeds from this point. As such, there is no routine analysis of whether harm might result from making public information about foreign investment applications.

6.62 It can be difficult to understand what harm might be caused by publishing conditions that require a foreign investor to ensure the majority of the board are Australian resident citizens or that board meetings occur in Australia, that headquarters be located in Australia, that data is located in Australia, that maintenance of equipment is undertaken in Australia, or that certain investments are made legally in Australia.

6.63 Information relating to mergers and acquisitions, prior to any action occurring, is routinely made public by the Australian Competition and Consumer Commission (ACCC). It is an argument that cannot be sustained that a foreign investor might be harmed by the release of certain information, but a domestic investor would not be harmed by the release of the same information.

6.64 That foreign investors might be reticent to invest in Australia if they cannot proceed with secrecy would not seem a valid justification in an open and democratic country that respects the rule of law. The making public of conditions imposed on foreign investments would do two things: it would assure the community foreign investment approvals, for example foreign investment in over-inflated real estate, are being made in the national interest; and it would assure the business community there is consistency and fairness in investment approvals.

6.65 The committee notes at the same time the Treasury was defending the protected information provisions and refusing to provide information to the Parliament, it was gaining powers to share protected information with ministerial staffers and foreign overseas governments through amendments to the Act made by the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020.

6.66 The committee accepts there is an argument for maintaining Executive flexibility to make decisions in the national interest, an interest that may manifest in different ways; this is not an argument for secrecy.

6.67 Cases where the Treasurer has announced conditions attached to an investment approval provide evidence there is little likelihood of significant adverse consequences in all but the most exceptional cases. The practices in other jurisdictions, and indeed in Australia through the operation of other regulatory agencies like the ACCC, demonstrate the lack of substance to arguments that secrecy must be maintained.

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6.68 The committee is of the view a positive transparency regime, where information is made available until such time as harm can be demonstrated should be considered. It should rightly be the responsibility of the investor to demonstrate the prejudice that would likely result, and for the veracity of such claims to be thoroughly examined, not merely accepted. Transparency, as a principle, should apply not only to foreign investment applications, but also to any conditions attached to approvals, and any enforcement actions. Transparency in the foreign investment regimes in the United States, Canada, and New Zealand cannot be shown to have hampered foreign investment.

6.69 Without a reasonable level of transparency it is not possible to know if Australia’s foreign investment framework is fit for purpose. This report began by emphasising the importance of public confidence that foreign investment decisions are ensuring the national interest is protected. Without transparency, there can be no way to provide this confidence.

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Dissenting report by the Coalition Senators

1.1 Coalition senators do not agree with the recommendations of the majority report and believe the 2020 reforms, as outlined below, should be allowed to bed-down before further changes are undertaken. We also wish to emphasise ongoing support for, and the importance of, investment flows into Australia.

1.2 With a strong and stable democracy, the rule of law, a skilled and educated workforce, and a well-managed economy, Australia continues to be an attractive destination for foreign investment. Australia’s foreign investment framework is open, transparent, non-discriminatory and welcoming. Australia has one of the most liberal foreign investment regimes in our region, as foreign investment is not prohibited by any sector, or from any country.

1.3 Coalition Senators support foreign investment that is in our national interest, and back a foreign investment framework is strong and enforceable. A lack of foreign investment would reduce productivity, employment and household incomes.

1.4 If Australia’s regulatory regime determines that a proposed investment is contrary to the national interest, it will not be approved or conditions will be applied to safeguard the national interest.

1.5 Australia’s longstanding approach of assessing proposed foreign investment upfront has served us well in this regard. However, national security risks have increased in recent years and have been evolving rapidly.

1.6 That is why on 5 June 2020 the Morrison Government announced the most significant reforms to the foreign investment framework since it was introduced in the mid-1970s. The reforms addressed national security risks, strengthened compliance and enforcement powers, streamlined certain approvals, and introduced a new fee regime.

1.7 However, the underlying principles of Australia’s foreign investment framework remain unchanged—Australia continues to welcome foreign investment for the significant economic benefits it brings, and where that investment is not contrary to the national interest.

1.8 Coalition senators believe that it is important to understand the changes to the system these reforms introduced, including:

National Security Test 1.9 An important aspect of the reforms was the establishment of a new national security test to assess certain proposed investments against factors that give rise to national security concerns. This includes investments that meet the

definition of ‘national security business’ or ‘national security land’, which are subject to a mandatory notification, irrespective of value. This provides a

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degree of certainty to investors about what types of investments need government approval.

ï This is complemented by a ‘call-in’ power to allow investments that do not require mandatory screening to be ‘called in’ for review where they present a national security risk. Investors can obtain certainty from being ‘called in’ by voluntarily notifying.

ï Public guidance is available to investors on the likely scenarios that would lead to a transaction being called in, and which investors should consider voluntarily notifying.

ï Lastly, the additional national security powers include the ability in exceptional circ*mstances to conduct a last resort review of a previously approved transaction, where national security risks emerge post investment.

Improved compliance and enforcement 1.10 The 2020 reforms introduced scalable and flexible tools to respond to non-compliance and encourage a stronger culture of compliance amongst foreign investors. This includes:

ï Increased penalties for infringements of the framework, and tying penalties to the consideration of investments; ï The ability for approvals to be revoked if false or misleading information is given in an application; and ï Standard monitoring, investigation and enforcement powers for the

Treasurer and the Treasury that align with comparable regulatory bodies.

1.11 This helps maintain the public’s confidence in the integrity of our foreign investment regime. While this increases capability to pursue and penalise breaches of the law, the compliance approach remains risk-based, to minimise the burden on investors that do the right thing.

Streamlining regulations 1.12 In recognising the many benefits of foreign investment, the new reforms have also reduced the regulatory burden on investors by streamlining less sensitive, low risk investments. As a result:

ï Privately-controlled investment funds that have passive foreign government investors may now be eligible to be considered as a private investor, rather than a foreign government investor. This change means that fewer of their investments will require mandatory screening and they will be eligible for higher monetary screening thresholds.

ï Exploration tenements acquired by private investors, and acquisitions of certain royalty interests in respect of mining tenements, are now exempt from requiring screening.

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Fees 1.13 The reforms also introduced an updated fees framework that ensures the cost of administering the foreign investment review framework continues to be borne by foreign investors, but in a way that is simpler and fairer.

Resourcing 1.14 In addition to the reforms to the fees framework, the 2020-21 Budget provided $86.3 million over four years from 2020-21 to implement a new information technology system to support more effective and efficient foreign investment

application processing, case management and compliance activities—as well as the new Register for Foreign Ownership.

1.15 This is on top of the $62.8 million provided over four years from 2020-21 in the 2020 July Economic and Fiscal Update to support the foreign investment reforms.

Conclusion 1.16 Coalition senators support the policy intent behind and implementation of the 2020 reforms. It may be that, over time, minor and technical issues with the law are identified or that, for example, provisions need to be tweaked to better

capture or exclude types of businesses, but the Coalition senators support these sensible, incremental and important changes to the law. Coalition senators recommend that any future changes should flow from the report on the operation of the reforms and the Act which will be provided by the Treasury Secretary by the end of the year.

Senator Slade Brockman Senator Andrew Bragg

Deputy Chair Member

Liberal Senator for Western Australia Liberal Senator for New South Wales

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Additional comments by Senator Rex Patrick

A little light over here, please The thing that people who operate in dark places fear the most, is light.

Introduction 1.1 I would like to thank the contributors, witnesses, and committee secretariat for their support to and participation in this inquiry.

1.2 Firstly, I support foreign investment. It plays a significant element of the Australian economy and the country has by and large done quite well from such investment. But as its benefits are recognised it’s prudent to appreciate that there can be down sides to foreign investments, and indeed circ*mstances where foreign investment is unquestionably against the public interest. Foreign investment approval processes and ongoing activities associated with compliance needs to be undertaken carefully and thoughtfully.

1.3 I support the recommendations of the Committee but make additional remarks in relation to transparency associated with the scheme.

Publication of Applications and Approvals 1.4 There are many reasons for information to be kept confidential, especially during an acquisition process, however perpetual and unjustified confidentiality can erode public confidence in the implementation of the

scheme and lead to adverse outcomes.

1.5 Foreign investment is infected with the secrecy bug, with the Act encapsulating protected information provisions, ensuring the information is hidden from the public, an environment that has been maintained by successive governments. Not only have they maintained it, officials have permitted and propagated abuse in a statutory arrangement that only properly protects information obtained from companies (no matter how benign the information is), but officials then say also extends to any information in relation to the acquisition.

1.6 Treasury could not explain why certain information could actually cause harm to the company or its interests and thus should not be disclosed, instead they refer to the Act, a self-sustaining circular argument.

1.7 Other jurisdictions publish information about foreign investment and there is no evidence that this has hindered investment in their countries. New Zealand’s approach to transparency of foreign investment, as covered in chapter 5 of the report, is a good example of what could and should be done in Australia.

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Recommendation: The Australian Government should amend the Foreign Acquisitions and Takeovers Act 1975 to enable publication of foreign investment applications and approvals, including relevant associated information.

Corporate structure 1.8 The saga of tax havens, profit shifting and transfer pricing continues, and whilst there is a global intention to resolve this, it is slow moving. If foreign investors were required to provide a clear explanation of the associated global

structure and the role each entity performs in the delivery of the Australian entities output, their relevance in the movement of money would be clear. Such disclosure would assist the Australian Taxation Office in their efforts to counter inappropriate transactions.

1.9 This information is relevant if the investment proceeds, it has relevance to the ATO and will assist in raising public confidence and should be publicly available.

Recommendation: The corporate structure of the foreign investor and the role of related foreign entities in the Australian entities output should be defined and be part of the investment application.

The corporate structure of the foreign investor as it pertains to the Australian operations, including the role of related foreign entities in the Australian entities output should be deemed relevant associated information and publicly available.

Open undertakings 1.10 Public wariness of and opposition to foreign investment will only be sated when the public can quantify the performance of the investor, and this will only be possible when they understand what was proposed and can determine

if those claims have been, largely, satisfied.

1.11 The foreign entity will likely propose to do a range of things in relation to their investment, ‘voluntary undertakings’, and the Treasurer may impose certain conditions. Whilst the Treasury has advised these ‘voluntary undertakings’ are ancillary to the considerations, they shouldn’t be. They form a fundamental component of the investment, on top of which they provide some ability to measure performance.

1.12 Unfortunately these ‘voluntary undertakings’ are not properly monitored nor are they enforced, and the committee’s recommendation that these ‘voluntary undertakings’ become enforceable is a step in the right direction, but it stops short.

1.13 These undertakings were proposed by the company and should be made public, enabling the Australian population to better understand the basis for

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the investment going ahead and able to judge for themselves how compliant the foreign investor has been with what they proposed.

Recommendation: Voluntary undertakings should be accepted as a self-imposed condition of the investment proposal, and thus be relevant associated information publicly disclosed. A little light over here, please.

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Additional comments by the Australian Greens

Still in the dark

Acknowledgement 1.1 The last time Australia was free from foreign ownership was 1788. This nation was founded on the forceful dispossession of First Nations people from their lands. Sovereignty was never ceded. Most of the wealth of this nation is stolen

wealth. Whenever considering foreign investment in Australia we should acknowledge that unless investors are First Nations people or organisations, they are foreign investors. Issues regarding foreign investment in Australia today must be considered in light of these facts.

Recommendation: That the forceful dispossession of First Nations people from their lands be acknowledged, by: first establishing a Truth & Justice Commission; then enacting a national Treaty and/or Treaties with First Nations peoples in this country, sovereign to sovereign; and then, subject to Treaty negotiations, establishing a national First Nations Voice to be included in the governance of Australia, as determined by First Nations peoples.

Introduction 1.2 This inquiry was established late 2019 through a motion moved by Senator Whish-Wilson in the Senate. The inquiry was established in response to concerns that Australia’s foreign investment approval process was not

transparent or accountable. A number of high profile cases—that are well documented in the Chair’s report—illustrated these concerns. These cases include:

ï the sale of Van Diemen’s Land (VDL) dairy to Moon Lake Investments; ï the takeover of Bellamy’s by Mengniu; and ï the proposed Musselroe Bay resort development.

1.3 In apparent response to these concerns the government introduced the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020. This Bill addressed some of the shortcomings with the foreign investment approval process. In particular, the Bill gave much clearer powers to the Treasurer to enforce conditions upon foreign investment, as well as consolidating public registers of foreign ownership.

1.4 Since this inquiry was established there has also been a global pandemic. In response, the government temporarily removed monetary thresholds for the screening of foreign investment.

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1.5 The combined result is that the conditions which led to the establishment of this inquiry are quite different to the conditions in which this Chair’s report has been prepared. In particular, there has been a dramatic decline in foreign investment. The Productivity Commission recently reported that “foreign direct investment into Australia fell from over $56 billion in 2019 to under $30 billion in 2020”.1

1.6 However, there remain serious flaws in Australia’s foreign investment approval process, and Australia's corporate transparency and anti-money laundering regime. Left unaddressed, these flaws will manifest again in due course. And while the Chair’s report does a good job of identifying these flaws, the recommendations do not address these issues with conviction.

1.7 We should stop puss*footing around. We have an opportunity, given the current downturn in foreign investment, to get our house in order without being accused of targeting any particular investment or group of investors.

1.8 In these Additional Comments, the Australian Greens propose a set of recommendations to resolve three of the major flaws in Australia’s regulatory framework, namely:

ï the transparency of foreign investment assessment and approval; ï the identification of the ultimate beneficial owner; and ï the exemption of professional services who facilitate real estate transactions from anti-money laundering reporting requirements.

Publishing foreign investment approvals 1.9 Foreign investment approval in Australia largely occurs in the dark. Publication of any decision to approve a foreign investment, the reasons for approving a foreign investment, and any conditions placed on the approval of

a foreign investment are at the discretion of the Treasurer. If the government of the day wants to keep quiet who, from where, is buying what, and on what condition, then that’s entirely up to them.

1.10 Moreover, regulators themselves often don’t know who the ultimate beneficiary of any proposed foreign investment is. Australia’s failure to establish a comprehensive framework to both identify and publish the ultimate beneficial owners of corporations operating this country leaves us languishing behind most of the developed world and international standards.

1.11 The lack of transparency around foreign investment approvals affects potential foreign investors' expectation of what is or isn’t acceptable. It creates a system that is intrinsically politically biased. In turn, this creates opportunities for the government to extract from foreign investors an arrangement, free from public scrutiny, that suits its political ends rather than the national interest. In a

1 Productivity Commission, Trade and Assistance Review 2019-20.

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country where there is no independent national integrity commission, this creates an environment where corruption can flourish.

Case Study: VDL Dairy 1.12 The sale of VDL Dairy to Moon Lake is a perfect example of a dodgy foreign investment approval being used for political purposes. With great fanfare, the then Treasurer, Scott Morrison, approved the sale of VDL to the Chinese

company Moon Lake in 2016, with the promise of $100 million to be invested and a "near doubling" of jobs.2

1.13 As is well documented in the Chair’s report, there has been nothing but trouble since. Soon after the approval, Moon Lake’s financial precarity was revealed.3 In 2018 five members of the board quit.4 In 2019, senior farm managers sought indemnity from liability because of concerns regarding operating standards and practices.5 In 2021, the Tasmanian Dairy Industry Authority found that 19 of VDL 23 farms failed to meet the Farm Dairy Effluent Management Code of Practice.6 There has been nowhere near the $100m invested in the farm and nowhere near the promised doubling of jobs. However, the company was able to find $25,000 to donate to the Tasmanian Liberals in 2017-18.7

1.14 While the announcement of this approval was very public, the documentation of the approval was not. Through senate estimates it was subsequently revealed that, despite the promises touted publicly by Moon Lake and Mr

2 The Hon. Scott Morrison MP, Treasurer, ‘Approval of foreign investment application for purchase

of the Tasmanian Land Company’, Media Release, 23 February 2016.

3 Angus Grigg, ‘Chinese billionaire tried to sell Van Diemen's Land Company before buying it’,

Australian Financial Review, 2 August 2017, https://www.afr.com/companies/agriculture/the-chinese-billionaire-who-tried-to-sell-giant-tasmanian-dairy-before-buying-it-20170802-gxnq4m (accessed 26 August 2021).

4 Laura Beavis and Margot Kelly, ‘Directors of Australia's biggest dairy company quit board over

VDL's future direction’, Australian Broadcasting Network (ABC), 24 April 2018, https://www.abc.net.au/news/2018-04-24/moon-lake-investments-vdl-dairy-board-resigns/9692286 (accessed 26 August 2021).

5 Hugh Hogan and Carrington Clarke, ‘Van Diemen's Land Company, Australia's largest dairy, in

mutiny amid animal welfare concerns’, Australian Broadcasting Network (ABC), 27 June 2019, https://www.abc.net.au/news/rural/2019-06-27/vdl-dairy-in-mutiny-amid-animal-welfare-concerns/11243876 (accessed 26 August 2021).

6 Ellen Coulter, ‘Audit finds Van Dairy Group farms failed to meet operating effluent requirements’,

Australian Broadcasting Network (ABC), 9 April 2021, https://www.abc.net.au/news/2021-04-09/van-dairy-group-audit-finds-farms-fail-meet-effluent-standards/100059316#:~:text=The%20Tasmanian %20Dairy%20Industry%20Authority,completed%20within%20the%20next%20fortnight

(accessed 27 August 2021).

7 www.aec.gov.au

126

Morrison, the approval did not stipulate that these commitments were a condition of approval.8

1.15 Nevertheless, the government does have powers—that pre-dated the establishment of additional powers in the 2020 Bill—to seek to impose new conditions where this would “not disadvantage” the purchaser.9 Having made the commitments in the first place, it cannot reasonably be argued that holding Moon Lake to its word would be a disadvantage. But the government has not sought to enforce these undertakings in any way, shape or form. Moon Lake has simply been allowed to break the deal and nothing has been done about it, so far as we know, because the government isn't obliged to inform the public of any new conditions they might have imposed.

1.16 In summary: a deal, between a foreign political donor and the government, announced as a public relations exercise light on detail, contained no enforceable conditions, and, despite going sour, has not been remedied at all by the government. All of which looks suspiciously like the institutionalised bribery of corporate political donations, and undermines public confidence in foreign investment.

Recommendations 1.17 There is a case for foreign investments that are directly related to the maintenance and enhancement of Australia’s national security being undertaken in secret. However, for the vast bulk of foreign investment, which

is purely commercial in nature, there is no good reason for the public not to be informed about any decision of the Treasurer to issue an approval. The Chair’s report lays out the case for transparency, but falls short of calling for it. This is a cop-out.

Recommendation: The decision to grant proposed foreign investments a ‘no objection notification’ (approval) or an ‘exemption certificate’ should be made public, along with a statement of reasons, with an exemption from this publication requirement being available on national security grounds, along with a statement of reasons for the exemption.

1.18 The case for public undertakings given in respect to proposed foreign investments to be made a condition of any subsequent approval is also clear. In many cases, public undertakings are part of a public relations offensive designed to placate community concerns. Any failure to hold foreign investors to these commitments treats the Australian public as mugs. Again, Chair’s

8 The Hon. Scott Morrison MP, Treasurer, ‘Approval of foreign investment application for purchase

of the Tasmanian Land Company’, Media Release, 23 February 2016.

9 Foreign Acquisitions and Takeovers Act 1975, s. 74.

127

report makes the case to support a compulsory conditioning of any undertakings, but the recommendations fall short of this mark.

Recommendation: All undertakings made public in respect of a proposed foreign investment, by either the purchaser or government bodies, are to be held to be a condition of any subsequent approval; with powers to issue a divestment order being available for the breach of any such conditions.

1.19 A lack of transparency also exists in the reporting of the levels and origin of foreign ownership in Australia, particularly in relation to land. The newly established Register of Foreign Ownership of Australian Assets is required to create annually a publicly available report containing aggregate statistical information on foreign ownership, as was the previous Register of Foreign Ownership of Agricultural Land.

1.20 To date, these statistical reports, prepared by the Australian Taxation Office, have only included information on the area of agricultural land in which there is a foreign interest, and not the value of agricultural land in which there is a foreign interest. This presents a distorted picture of the level of foreign ownership, particularly given the variation in quality of agricultural land in Australia. The current approach fails to adequately represent the importance of the amount of land in which there is a foreign interest.

Recommendation: The annual statistical report contain information on the area, current value, tenure, beneficial owner, country of origin of beneficial owner, use and

jurisdiction (state or territory) of all land in which there is a foreign interest.

Stopping money laundering through real estate 1.21 An issue closely related to a country’s process for assessing foreign investment proposals, and included in the terms of reference for this inquiry, is a country’s anti-money laundering and counter-terrorism financing (AML/CTF)

framework.

1.22 Internationally, AML/CTF frameworks are integral to the fight against organised crime and curbing the flow of illicit capital. But Australia’s AML/CTF framework is woefully deficient.

1.23 The gaping hole in Australia’s AML/CTF framework is the failure to include real estate agents, accountants and lawyers—the ‘gatekeepers’—as providers of designated services and require these professions to report to AUSTRAC. Australia is now one of only six countries in the world not to have included the

128

gatekeepers within the scope of AML/CTF laws, alongside the US and China, and Mongolia, Madagascar, and Mauritius.10

1.24 As a result, Australia has become a hot-spot for illicit capital, and money laundering through real estate in particular. The Financial Action Task Force (FAT-F) is the world’s standard setting body for anti-money laundering and counter-terrorism financing. Their 2015 Mutual Evaluation Report stated:

Australia is seen as an attractive destination for foreign proceeds, particularly corruption-related proceeds flowing into real estate, from the Asia-Pacific region.11

1.25 Other international bodies have highlighted the inadequacy of Australia’s AML/CTF framework, including:

ï The OECD, who in their December 2017 Phase 4 Report on Australia’s implementation of the OECD Anti-Bribery Convention recommended that Australia address the risk that the real estate sector could be used to launder the proceeds of foreign bribery.12 ï The IMF, who in their 2019 Staff Country Report on Australia called for real

estate agents, accountants and lawyers to be listed as designated services under anti-money laundering laws.13 ï The Tax Justice Network, who in their 2020 Financial Secrecy Index Narrative Report on Australia stated that Australia is undoubtedly a host of

significant quantities of illicit funds from outside the country.14

1.26 So lax is Australia’s AML/CTF framework that, as the inquiry heard, the action taken by the AFP to seize assets in relation to the Musselroe Bay development only occurs following a tip-off from Chinese authorities. We’re literally dependent on the host country’s police telling us if their citizens are using Australian real estate to wash hot money.

1.27 For Australia’s foreign investment approval process to have any integrity, Australia’s AML/CTF framework must be strengthened. A failure to do so, coupled with ongoing secrecy around foreign investment approvals, will foster

10 Neil Jeans, A Tranche Too Hard? The AML/CTF Regulation of Australian Designated Non-Financial

Businesses and Professions, July 2019.

11 Financial Action Task Force, Anti-money laundering and counter terrorism financing measures

Australia: Mutual Evaluation Report, April 2015.

12 OECD Working Group on Bribery, Implementing the OECD Anti-bribery Convention: Phase 4 Report:

Australia, December 2017.

13 International Monetary Fund Asia and Pacific Dept, Australia: 2019 Article IV Consultation-Press

Release; Staff Report; and Statement by the Executive Director for Australia, 5 March 2020, https://www.imf.org/en/Publications/CR/Issues/2020/03/03/Australia-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-49241.

14 Tax Justice Network, Financial Secrecy Index - 2020 Results, 2020,

https://fsi.taxjustice.net/en/introduction/fsi-results.

129

an environment where illegal activity is tolerated and where corruption can flourish.

Recommendation: The Australian Government introduce legislation that would include real estate agents, accountants and lawyers as designated services under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Register of beneficial owners 1.28 The lack of transparency regarding the nature of proposed foreign investment is not limited to information that is made public. Financial regulators themselves are often in the dark.

1.29 The inquiry heard that regulators are not able to establish the ultimate beneficial owners of foreign investors. Because of the shortcomings in Australia’s regulator regime, the Australian Office of Financial Management (AOFM) is not able to establish the ultimate beneficiary of foreign buyers of Australian Government Securities, and AUSTRAC relies on publicly available information regarding beneficial ownership. This is despite the FAT-F recommending that countries ensure regulators can establish ultimate beneficial ownership in order to help stop money laundering.15

1.30 And, again, there is no obligation for the Treasurer to establish the ultimate beneficial owner of any proposed foreign investment, let alone publish that information.

1.31 However, the issue of transparency regarding beneficial ownership extends beyond foreign ownership and money laundering, and into corruption and tax transparency more broadly. The Open Government Partnership, of which Australia is a participant, has recommended that countries allow the public to “actively use ownership data to uncover networks of corruption.”16 In 2017, the government released a consultation on how to improve transparency of beneficial ownership. 17 This included consultation on the establishment of a public register of beneficial owners, a commitment the government made at the UK Anti-Corruption Summit in May 2016.18

15 Financial Action Task Force, International Standards on Combating Money Laundering and the

Financing of Terrorism and Proliferation: The FAT-F Recommendations, Updated June 2021.

16 Open Government Partnership, Beneficial Ownership, 2021,

https://www.opengovpartnership.org/policy-area/beneficial-ownership/#recommendations.

17 Australian Government the Treasury, Increasing Transparency of the Beneficial Ownership of

Companies, February 2017.

18 The Hon Kelly O’Dwyer MP, 'Consultation on increasing transparency of the beneficial ownership

of companies', Media Release, 13 February 2017.

130

1.32 But, once again, the government has failed to follow through on this commitment, and, once again, has made Australia an international laggard on this issue.

Recommendation: That a public register of companies registered or operating in Australia be establishing providing detail on the ultimate beneficial owners.

Senator Nick McKim Senator Peter Whish-Wilson

Greens Senator for Tasmania Greens Senator for Tasmania

131

Appendix 1

Submissions and additional information

1 China Policy Centre 2 Law Council of Australia 3 Scentre Group 4 Dr Yongqiang Li 5 Herbert Smith Freehills 6 The Treasury 7 Professor Clinton Fernandes

ï 7.1 Supplementary to submission 7

8 The Australia Institute 9 Uniting Church in Australia 10 Property Council of Australia 11 Department of Foreign Affairs and Trade 12 Premier of Western Australia 13 Mr Joel Bunn 14 Joint Submission - Department of Home Affairs, AUSTRAC, AFP, ACIC 15 Professor Allan Fels 16 Group of 100 17 Associate Professor Shumi Akhtar 18 Dr Farida Akhtar 19 Dr Kiah Smith 20 Dr Remy Davison

Answer to Question on Notice 1 Treasury Answer to Questions on Notice 1 (PN-IQ20-31) from Friday 1 May 2020. 2 Treasury Answer to Questions on Notice 2 (PN-IQ20-32) from Friday 1 May

2020.

3 Treasury Answer to Questions on Notice 3 (PN-IQ20-33) from Friday 1 May 2020. 4 Treasury Answer to Questions on Notice 4 (PN-IQ20-34) from Friday 1 May 2020. 5 Treasury Answer to Questions on Notice 5 (PN-IQ20-35) from Friday 1 May

2020.

6 Treasury Answer to Questions on Notice 6 (PN-IQ20-36) from Friday 1 May 2020. 7 Treasury Answer to Questions on Notice 7 (PN-IQ20-37) from Friday 1 May 2020.

132

8 Treasury Answer to Questions on Notice 8 (PN-IQ20-38) from Friday 1 May 2020. 9 Treasury Answer to Questions on Notice 9 (PN-IQ20-39) from Friday 1 May 2020. 10 Treasury Answer to Questions on Notice 10 (PN-IQ20-40) from Friday 1 May

2020.

11 Treasury Answer to Questions on Notice 11 (PN-IQ20-41) from Friday 1 May 2020. 12 Treasury Answer to Questions on Notice 12 (PN-IQ20-42) from Friday 1 May 2020. 13 Treasury Answer to Questions on Notice 13 (PN-IQ20-43) from Friday 1 May

2020.

14 Treasury Answer to Questions on Notice 14 (PN-IQ20-44) from Friday 1 May 2020. 15 Treasury Answer to Questions on Notice 15 (PN-IQ20-45) from Friday 1 May 2020. 16 Treasury Answer to Questions on Notice 16 (PN-IQ20-46) from Friday 1 May

2020.

17 Treasury Answer to Questions on Notice 17 (PN-IQ20-47) from Friday 1 May 2020. 18 Treasury Answer to Questions on Notice 18 (PN-IQ20-48) from Friday 1 May 2020. 19 Treasury Answer to Questions on Notice 19 (PN-IQ20-49) from Friday 1 May

2020.

20 Treasury Answer to Questions on Notice 20 (PN-IQ20-50) from Friday 1 May 2020. 21 Treasury Answer to Questions on Notice 20 Attachment A (PN-IQ20-50) from Friday 1 May 2020. 22 Treasury Answer to Questions on Notice 20 Attachment B (PN-IQ20-50) from

Friday 1 May 2020. 23 Treasury Answer to Questions on Notice 21 (PN-IQ20-51) from Friday 1 May 2020. 24 Treasury Answer to Questions on Notice 22 (PN-IQ20-52) from Friday 1 May

2020.

25 Treasury Answer to Questions on Notice 22 Attachment C (PN-IQ20-52) from Friday 1 May 2020. 26 Treasury Answer to Questions on Notice 23 (PN-IQ20-53) from Friday 1 May 2020. 27 Treasury Answer to Questions on Notice 24 (PN-IQ20-54) from Friday 1 May

2020.

28 Treasury Answer to Questions on Notice 25 (PN-IQ20-55) from Friday 1 May 2020.

133

29 Treasury Answer to Questions on Notice 26 (PN-IQ20-56) from Friday 1 May 2020. 30 Electricity and Internet Monster Answers to Questions on Notice from public hearing in Canberra, Friday 15 May 2020. 31 EY Answers to Questions on Notice from public hearing in Canberra, Friday 15

May 2020.

32 OAIC Answers to Questions on Notice from public hearing in Canberra, Friday 15 May 2020. 33 Treasury Answer to Questions on Notice 1 (PN-IQ20-71) from public hearing in Canberra, Friday 15 May 2020. 34 Treasury Answer to Questions on Notice 2 (PN-IQ20-72) from public hearing

in Canberra, Friday 15 May 2020. 35 Treasury Answer to Questions on Notice 3 (PN-IQ20-73) from public hearing in Canberra, Friday 15 May 2020. 36 Treasury Answer to Questions on Notice 4 (PN-IQ20-74) from public hearing

in Canberra, Friday 15 May 2020. 37 Treasury Answer to Questions on Notice 5 (PN-IQ20-75) from public hearing in Canberra, Friday 15 May 2020. 38 Treasury Answer to Questions on Notice 6 (PN-IQ20-77) from public hearing

in Canberra, Friday 15 May 2020. 39 Treasury Answer to Questions on Notice 7 (PN-IQ20-78) from public hearing in Canberra, Friday 15 May 2020. 40 Treasury Answer to Questions on Notice 8 (PN-IQ20-79) from public hearing

in Canberra, Friday 15 May 2020. 41 Treasury Answer to Questions on Notice 9 (PN-IQ20-80) from public hearing in Canberra, Friday 15 May 2020. 42 Treasury Answer to Questions on Notice 10 (PN-IQ20-81) from public hearing

in Canberra, Friday 15 May 2020. 43 Treasury Answer to Questions on Notice 11 (PN-IQ20-82) from public hearing in Canberra, Friday 15 May 2020. 44 Treasury Answer to Questions on Notice 12 (PN-IQ20-83) from public hearing

in Canberra, Friday 15 May 2020. 45 Treasury Answer to Questions on Notice 13 (PN-IQ20-84) from public hearing in Canberra, Friday 15 May 2020. 46 Treasury Answer to Questions on Notice 14 (PN-IQ20-85) from public hearing

in Canberra, Friday 15 May 2020. 47 Treasury Answer to Questions on Notice 15 (PN-IQ20-86) from public hearing in Canberra, Friday 15 May 2020. 48 NAIF Answers to Questions on Notice from public hearing in Canberra, Friday

15 May 2020. 49 Alinta Energy - Answers to Questions on Notice from public hearing in Canberra, Friday 15 May 2020.

134

50 NAIF Answers to Questions on Notice from public hearing in Canberra, Friday 15 May 2020. 51 Treasury Answer to Question on Notice (PN-IQ20-000129) - Written Question on Notice relating to Goldwind. 52 Treasury Answer to Question on Notice (PN-IQ20-000136) - Written Question

on Notice relating to Goldwind. 53 Treasury Answer to Question on Notice (PN-IQ20-000137) - Written Question on Notice relating to DNATA acquisition of Toll. 54 Treasury Answer to Question on Notice (PN-IQ20-000143) - Written Question

on Notice relating to foreign investment assessments/approvals/conditions/compliance undertaken by the Treasury - Received 28 July 2020. 55 David Richardson's Answers to Questions on Notice from the public hearing in Canberra, Friday 7 August 2020. 56 AUSTRAC Answers to Questions on Notice from the public hearing in Canberra, Friday 7 August 2020. 57 Yun Jiang's Answers to Questions on Notice from the public hearing in Canberra, Friday 7 August 2020. 58 Law Council of Australia responses to Questions on Notice from the public hearing on 7 August 2020. 59 Treasury Answers to Questions on Notice of 20 May 2020, received 12 June 2020. 60 AFP Answers to Questions on Notice from public hearing in Canberra on Friday 7 August 2020, received 1 September 2020. 61 Treasury Answers to Questions on Notice from public hearing in Canberra on Friday 7 August 2020, received 1 September 2020. 62 Treasury Answer to Questions on Notice Moon Lake/Van Dairy (PN-IQ20-76) from public hearing in Canberra, Friday 15 May 2020. 63 Treasury Answers to Questions on Notice from public hearing in Canberra on Friday 7 August 2020, received 14 September 2020. 64 Treasury Answers to Questions on Notice from public hearing in Canberra on Friday 7 August 2020, received 15 September 2020. 65 Chow Tai f*ck Enterprises Answers to written Questions on Notice from Wednesday, 16 September 2020 - Provided Friday, 25 September 2020. 66 Department of Foreign Affairs and Trade and the Attorney-General's Department Answers to written Questions on Notice from Wednesday, 16 September 2020 - Provided Monday, 28 September 2020. 67 Department of Foreign Affairs and Trade and Attorney-General’s Department answers to written Questions on Notice from 29 September 2020, provided 15 October 2020. 68 Treasury Answers to Written Questions on Notice on VinFast (PN-IQ20-251, 282) of 15 September 2020, provided 4 October 2020 and 19 October 2020.

135

69 Treasury Answer to Question on Notice (PN-IQ20-252) from public hearing on 7 August 2020, provided 19 October 2020. 70 Treasury Answers to Written Questions on Notice from 2 September 2020, provided Friday, 6 November 2020. 71 Department of Foreign Affairs and Trade Answers to Questions on Notice

from 20 October 2020 (Provided 23 December 2020). 72 Treasury Answer to written Question on Notice of 2 September 2020, reaffirmed 11 March 2021, provided 9 April 2021.

Tabled Documents 1 Documents tabled by Senator O'Neill at Public Hearing Friday, 15 May 2020. 2 Opening statement from EY at Public Hearing Friday, 15 May 2020. 3 Opening statement from Treasury by Roxanne Kelley at Public Hearing Friday,

15 May 2020.

137

Appendix 2 Public hearings

Friday, 15 May 2020 Parliament House Canberra

Alinta Energy ï Mr Jeff Dimery, Chief Executive Officer ï Mr Daniel McClelland, Executive Director—Corporate Services ï Mrs Sharon Eacott, General Counsel and Company Secretary

Ernst & Young ï Mrs Leigh Walker, Regional Independence Leader Oceania ï Mr Rob Locke, Managing Partner—Forensic & Integrity Services Oceania ï Mr Anton Ivanyu, Assurance Partner

Electricity and Internet Monster ï Mr David Fitzgerald, Director

Office of the Australian Information Commissioner ï Ms Angelene Falk, Information Commissioner and Privacy Commissioner

Professor Allan Fels, Private capacity

Northern Australia Infrastructure Facility ï Mr Chris Wade, Chief Executive Officer

Treasury Foreign Investment Division ï Ms Roxanne Kelly, Deputy Secretary—Corporate and Foreign Investment Group ï Mr Roger Blake, Division Head—Foreign Investment Division ï Mr Andrew Deitz, Foreign Investment Division ï Ms Bridie McAsey, Manager—Compliance and Legal, Foreign Investment

Division ï Ms Kerstin Wijeyewardene, Foreign Investment Division

138

Friday, 7 August 2020 Parliament House Canberra

China Policy Centre ï Ms Yun Jiang

Law Council of Australia ï Mr Malcolm Brennan, Chair of Foreign Investment Committee of the Business Law Section ï Ms Wendy Rae, Deputy Chair of Foreign Investment Committee of the

Business Law Section

Government of Western Australia - Department of Jobs, Tourism, Science and Innovation ï Mr Richard Sellers, Acting Director General ï Ms Simone Spencer, Acting Director General—Strategy and International Engagement ï Mr John O’Hare, Executive Director—Industry Development

The Australia Institute ï Mr David Richardson, Senior Research Fellow

Professor Clinton Fernandes

Australian Federal Police ï Mr Stefan Jerga, National Manager Criminal Assets Confiscation ï Mr Ian McCartney, Deputy Commission of Investigations ï Mr Nigel Ryan, Assistant Commissioner Crime Command ï Ms Susan Williamson-de Vries, Manager Government and Executive Advice

Australian Transaction Reports and Analysis Centre (AUSTRAC) ï Mr Chris Collett, Deputy CEO Intelligence ï Mr Bradley Brown, National Manager—Intelligence Partnerships

Productivity Commission ï Mr Michael Brennan, Chair ï Mr Jonathan Coppel, Commissioner

The Treasury ï Ms Roxanne Kelly, Deputy Secretary—Corporate and Foreign Investment Group ï Mr Roger Blake, Division Head—Foreign Investment Division ï Mr Andrew Deitz, Branch Head—Policy, Foreign Investment Division ï Ms Bridie McAsey, Manager—Compliance Branch—Foreign Investment

Division

139

Economics References Committee—Senate Standing—Greenfields, cash cows and the regulation of foreign investment in Australia—Report, dated August 2021 (2024)

FAQs

What are the statistics for foreign investment in Australia? ›

Key statistics

Australia's IIP was a liability of $836.6b at 31 December 2023, a decline of $107.5b from the end of 2022. Foreign investment in Australia rose $62.8b to $4,659.5b. Australian investment abroad rose $170.3b to $3,822.9b.

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Australia has about 400 million hectares of agricultural land and about 14 per cent is foreign-owned. China is fourth on the list of countries with property in Australia with just 2.2 per cent, much less than the Netherlands, the US, and the UK.

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“China is still the number one investor, but what we see with our clients is that fewer offshore Chinese and Hong Kong buyers are purchasing. “Instead of buying as non-residents, most are waiting until they have permanent residency in Australia.

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Who is the regulator concerned with foreign investment in Australia and what legislation do they administer? ›

The Foreign Investment Review Board (FIRB) is a non-statutory body established in April 1976 to advise the Government on foreign investment policy and to advise on the administration of the Foreign Acquisitions and Takeovers Act 1975 (the Act).

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Foreign investment helps Australia reach its economic potential by providing capital to finance new industries and enhance existing industries, boosting infrastructure and productivity and creating employment opportunities in the process.

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Foreign and temporary resident income

Income you need to declare and pay tax on if you are in Australia as a foreign or temporary resident.

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Australia's biggest landholder is Gina Rinehart, controlling 9.2m hectares | Business | The Guardian.

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Aggregating total freehold and leasehold foreign ownership interests, China and the UK hold the largest area of total Australian agricultural land (each with 2.4 per cent), followed by the Netherlands (0.7 per cent) and the US (0.6 per cent).

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Triguboff, aka 'high-rise Harry' is an Australian billionaire real estate developer, and is the highest ranking property mogul on the list. He is the founder and managing director of Meriton.

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AustralianSuper has usurped the Future Fund as the biggest Australian asset owner, jumping from 43rd to 36th place globally. In total, five Australian funds featured in The Asset Owner 100 that gathered data on the total assets of the top 100 asset owners globally by the Thinking Ahead Institute.

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Investors seeking maximum returns in Australia should consider investing in Australian shares for long-term gains, as they offer high potential returns. Government and corporate bonds also present a safe option for low-risk, fixed-rate returns.

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What are the risks of foreign investment in Australia? ›

Foreign investment carries risks related to the potential access and control investors may obtain over sensitive organisations and assets such as critical infrastructure assets, which may provide opportunities for espionage, sabotage or other activities contrary to Australia's national security interests.

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Corporations, limited liability companies and partnerships can have foreign investors as stockholders , members or partners. Before raising money from foreign investors, however, be aware of the following issues: Potential tax issue.

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Who are the foreign investors in Australia? ›

The United States and United Kingdom are the biggest investors in Australia, followed by Belgium, Japan and Singapore. China is our tenth largest foreign investor, with 1.9 per cent of the total.

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51 per cent of Australians (10.2 million people) hold investments in addition to their home and their super fund. This is a rise of 13 per cent (or 1.2 million investors) since the last survey in 2020. 58% of investors hold Australian shares and 20% hold ETFs.

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What percentage of Australian businesses are foreign owned? ›

SUMMARY OF FINDINGS

In 2014-15, the 9,946 foreign owned businesses operating in Australia accounted for 0.5% of all businesses of all Australian businesses, but contributed 20.8% of all industry value added (IVA). The majority of foreign and Australian owned businesses operated with fewer than 20 employees in 2014-15.

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The proportion of Australia's population born overseas increased to 30.7% in 2023 (up from 29.5% in 2022).

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Australia Net International Investment Position reached -571.254 USD bn in Dec 2023, compared with -523.286 USD bn in the previous quarter.

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Economics References Committee—Senate Standing—Greenfields, cash cows and the regulation of foreign investment in Australia—Report, dated August 2021 (2024)

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What are the statistics for foreign investment in Australia? ›

Who owns the most assets in Australia? ›

References