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 Fook 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). 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.
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:
compliance and enforcement strategies and detection arrangements were in place to support compliance activities;
activities were undertaken to promote voluntary compliance and effectively address identified instances of potential non-compliance; and
the effectiveness of compliance arrangements was monitored and reported.
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.
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.
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. 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.
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 objection to an action (a proposed foreign investment), impose conditions on an action, prohibit an action, or require an action to be undone.
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. 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. 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.
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.
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. Treasury’s corporate plan for 2020-2021 identified this as 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.
3.21
The Treasury reports on its performance as a regulator under the government’s regulator performance framework. 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:
regulators do not unnecessarily impede the efficient operation of regulated entities;
communication with regulated entities is clear, targeted and effective;
actions undertaken by regulators are proportionate to the risk being managed;
compliance and monitoring approaches are streamlined and coordinated;
regulators are open and transparent in their dealings with regulated entities; and
regulators actively contribute to the continuous improvement of regulatory frameworks.
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. Part of Treasury’s self-assessment is informed by a stakeholder survey. Treasury has received the following number of responses to the survey:
2019–2020—18 responses (30 recipients);
2018–2019—18 responses (survey sent to 326 contacts);
2017–2018—6 responses (survey sent to 31 people from 24 organisations).
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. 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.
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.
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.
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 to be confident foreign investment proposals are not contrary to the national interest.
3.28
In particular, the committee examined:
knowledge of foreign jurisdictions;
ability to identify ultimate beneficial owner and source of funds; and
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:
how state-owned enterprises are governed and controlled;
functions of party cells and party-controlled labour organisations in private enterprise;
the legal and regulatory environment;
the way business and politics interact; and
role of the Chinese Communist Party in the economy.
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.
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.
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.
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.
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.
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 of the distribution of the beneficial ownership of the total securities on issue.
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.
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.
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.
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 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. 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.
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.
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.
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.
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.
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.
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.
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.
Operation Gethen was the fifth investigation since November 2017 involving Chinese nationals allegedly laundering proceeds of crime in Australia. 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.
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:
state and territory government departments;
Department of Foreign Affairs and Trade;
national security agencies;
the Australian Competition and Consumer Commission (ACCC);
Australian Federal Police (AFP);
Australian Criminal Intelligence Commission (ACIC);
Australian Transaction Reports and Analysis Centre (AUSTRAC);
Australian Tax Office (every investment proposal in relation to potential tax risks);
Australian Securities and Investments Commission (ASIC);
Department of Defence; and
Department of Home Affairs (including the Critical Infrastructure Centre).
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
3.44
Depending on the capacity of the agency, the extent of the scrutiny may vary:
ACIC discloses relevant information from its criminal holdings data on the applicant providing it is legal to do so;
CIC conducts assessments on referred applications and may assist in compliance activities if conditions are imposed on an approval;
AUSTRAC does not undertake investigations, it uses alerts and risk profiles to identify suspicious foreign transactions;
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.
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’. 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 Fook 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 Fook Enterprises, through its wholly owned subsidiary, Pioneer Sail Holdings (PSH), acquired Alinta on 28 April 2017.
Conditions: A range of conditions was attached to the sale of Alinta to CTFE, including:
composition of the board, including requirement for independent chair and majority of directors to be Australian citizens and residents;
no bulk customer data, personal information or electricity or gas data be provided to the PSH director and executive manager;
data must be stored in Australia;
data must only be accessible within Australia;
security controls must be in place to ensure no bulk personal data records are exported;
cloud storage provider must be approved by the Australian Signals Directorate;
maintenance of generation, transmission and distribution systems must only be carried out in Australia with some minor exceptions;
infrastructure must only be accessed, operated and controlled from within Australia; and
specification that certain executive directors hold NV1 security clearances or have the capacity to obtain one.
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. 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
|
|
|
|
Board and governance controls
|
Commonly applied for significant assets
|
|
Commercial tenancies
access conditions
notification of ownership and operational changes
sensitive commercial information
|
Commonly applied
|
|
Exemption certificate limitations covering business and entities and/or land
|
Commonly applied
|
|
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 Treasury
Taxation
3.47
The majority of conditions for non-real estate approvals apply to taxation. In 2016 the government introduced generic taxation conditions for foreign investments to the effect that investment approvals would be conditional on companies:
complying with Australian taxation law;
complying with ATO directions to provide information in relation to the investment; and
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.
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.
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.
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.
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’.
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’.
3.53
In 2020, the Treasury noted it had been ‘working with consultation partners to achieve more consistency in the conditions imposed on applications’. In 2021, it is ‘working with consultation partners to achieve greater consistency’. 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.
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.
3.55
The China Policy Centre states this is undesirable for two reasons:
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
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.
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.
3.57
The commission argues the effectiveness of conditions in mitigating risk is limited in comparison with domestic regulation:
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;
normally, only foreign acquisitions with values above specific thresholds are subject to FIRB screening, smaller investments are not reviewable by FIRB;
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.
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.
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.
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.
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.
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.