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.
4.4
The Productivity Commission has noted public opinion can often be opposed to foreign investment, despite the benefit it brings to the economy. Treasury officials certainly recognise the connection between their regulatory role and ensuring community confidence in the foreign investment framework.
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. In foreign investment, aside from the risk the Treasury will not accurately assess an application against the national interest; there is a risk 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.
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.
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’.
4.8
When non-compliance is detected, the Australian National Audit Office (Audit Office) states best practice is to:
encourage regulated entities to comply with regulatory requirements;
address serious risks arising from non-compliance by regulated entities; and
manage non-compliant entities’ return to compliance.
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’. 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.
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’.
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.
4.12
To encourage compliance, the Audit Office recommends:
developing a set of relevant graduated responses to address non-compliance; and
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.
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. 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.
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 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 circumstances and operational needs of foreign investors.
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.
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.
4.17
The Australia Institute cited a number of historical instances where conditions were not met but no apparent sanction resulted, including:
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;
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;
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;
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.
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. Details of the regulatory load are provided below.
Table 4.1: Treasury regulatory case load
|
|
|
|
|
|
|
Treasury approved applications
|
1,172
|
793
|
882
|
1,155
|
|
Approvals with non-standard conditions
|
288
|
215
|
328
|
n/a
|
|
Number of staff in division
|
|
|
|
98FTE
|
|
Compliance staff in division
|
|
2FTE
|
2FTE
|
12FTE
|
|
Compliance audits completed
|
|
11
|
9
|
4
|
|
Remedial action plans
|
|
|
|
11
|
|
Number of annual compliance reports received—certified by company officer
|
Treasury is unable to provide this information
|
|
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 Treasury
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. From a base of two people in 2019, 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’.
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 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.
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. 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.
Foreign investment compliance framework
4.23
Recognising the importance of compliance, in 2017 the Treasury introduced an enhanced foreign investment compliance framework which covers:
enforcement—developing the capacity to undertake enforcement activities;
stakeholder engagement—educating foreign investors and their advisers on compliance obligations; and
market intelligence—using data and information to better understand and address non-compliance.
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. Treasury states ‘the nature and intensity of these reporting requirements varies depending on the assessed risk being addressed’.
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 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. 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.
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.
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.
4.29
A remedial action plan establishes the timeline for achieving a condition. A plan submitted by a foreign investor has to show:
all aspects of non-compliance or partial compliance are addressed;
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;
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
the plan is completed within an acceptable timeframe.
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:
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.
4.31
Chow Tai Fook’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 Fook 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.
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.
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. 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.
Alinta’s compliance with conditions: Alinta Chief Executive Officer, Jeff Dimery, 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.
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’.
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’.
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.
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.
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 Fook Enterprises ownership’. While the majority of these interactions have been by email or telephone, officials have also travelled to Canberra ‘on many occasions’, and have met with FIRB [the Treasury] on ‘probably ten occasions’.
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.
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:
privacy is not managed in a coordinated manner;
required personal information collection consent/notification is lacking in key areas;
access to personal information is not adequately monitored or controlled;
there is exposure to potential breaches by third parties; and
there is no central mechanism to ensure all third party agreements and contract renewals include appropriate privacy provisions, including mandatory data breach notification obligations.
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 regard it as a failure of compliance, yes. There’s something wrong with the system when that happens.
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. EY is Alinta’s internal auditor.
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.
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.
According to EY, the Treasury was of the view EY was sufficiently independent to contract the work. 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 Alinta’s Chief Financial Officer for 25 hours per week, reporting to Daniel McClelland, Alinta’s Executive Director of Corporate Services.
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. 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.
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. 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.
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.
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 expectations in relation to ethical standards and quality control. 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:
absence of any existing or potential conflicts of interest;
depth and quality of the pool of people dedicated to the audit;
knowledge and understanding of the relevant industry, governance, policy and regulatory issues; and
ability to work with government.
4.36
In only some circumstances 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.
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.
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.
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. 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
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|
|
|
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
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|
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 Treasury
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
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|
|
|
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 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.
|
There is no record of any targets for compliance 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: Treasury
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. 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
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|
|
|
Criminal or civil enforcement actions taken under the Act over the past three years
|
0
|
|
Implementation of remedial action plans to address non-compliance
|
11
|
|
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 Treasury
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.
4.44
The legislation allows for three tiers of infringement notices:
tier 1—the investor self-notifies of the breach of the Act prior to any investigation of the conduct;
tier 2—the investor does not self-notify voluntarily of a breach of the Act;
tier 3—instance of non-compliance of high-value acquisitions.
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.
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.
Monitoring and investigation powers
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.
4.48
By enlivening parts of the Regulatory Powers Act, under section 101A of the Act, there is now a framework for:
monitoring whether the provisions of an Act or legislative instrument have been, or are being, complied with; and
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.
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:
facilitates the capture of data that may provide insight into regulatory risk, non-compliance by regulated entities and potential negative regulatory outcomes;
supports analysis of data to assist in identifying trends and patterns that may be indicative of systemic risks or weaknesses in the regulatory regime;
disseminates information in a timely way only to those who have a legitimate interest in the information and a need to know;
creates a repository of information that supports consistency in decision-making; and
assists regulators in meeting their statutory record-keeping obligations.
4.52
The Treasury information management system has two portals:
application portal allowing investors to submit an application, require a range of mandatory information to be submitted, and estimate the associated fee; and
a case management and repository portal.
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’.
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:
cannot provide a breakdown of foreign investment proposals on the basis of greenfields investments versus an acquisition of an existing business;
without a manual and time consuming process, cannot provide a breakdown of applicants according to whether they are new applicants or existing foreign investors;
cannot identify the proportion of approvals to which the broad categories of conditions are attached;
no record on the number of targets for compliance under remedial action plans not being met;
unable to identify in how many instances companies have failed to comply with foreign investment conditions and not been penalised;
cannot say how many investment approvals contain best endeavours clauses;
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; and
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.
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.
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:
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;
improving case tracking to allow better internal tracking of the progress and status of a case;
capturing of a range of new data points to allow improved case reporting and analysis;
upgrading the application portal to reduce the incidence of incorrect information being submitted by investors; and
making necessary enhancements to implement policy reforms, including enhanced compliance and enforcement powers.
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. 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 activities to identify the prevalence and nature of non-compliance by regulated entities.
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.
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.
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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
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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 economically and politically difficult approval decisions, the Productivity Commission is of the view the Treasury is not suited to the role of regulator.
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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. 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.
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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.
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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.
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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 with established principles. The point may be that FIRB is different because it’s more political.
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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. 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.