Major proposed changes to Australia's Foreign Investment Review Board (FIRB) regime have been announced by the federal government.
It is important that these changes be seen in perspective. So, although the announcement heralds a best practice modernisation of those areas of the legislation focused on breach detection and penalty enforcement, this is consistent with a growing global trend. The announcement does not pose a threat to investment in projects consistent with the national interest and which do not intrude on telecoms or other critical infrastructure. Moreover, the changes leave existing gateways for investment largely untouched. But for temporary COVID-19 related screening adjustments little has changed for key investment sectors such as mining, residential, industrial and commercial real estate and agribusiness land and enterprises.
If passed by the federal parliament, from 1 January 2021:
- A permanent AU$0 threshold for all foreign investments in sensitive national security businesses will be imposed
- The current temporary AU$0 threshold for all other foreign investments will revert to the pre-29 March 2020 thresholds (subject to indexation)
- Where new national security concerns arise the Treasurer will have powers to impose new conditions and to unwind a transaction
- The federal government will have more powers to enforce compliance with FIRB approval conditions, including greater monitoring and investigative powers
- Significant increases to penalties for breaches
- There are no significant changes proposed to the rules regarding residential real estate
Broad new powers granted to the Treasurer
Under the proposed reforms, the Treasurer will be granted additional broad powers relating to foreign ownership of Australian businesses and assets. A permanent AU$0 threshold for all foreign investments in sensitive national security businesses will be imposed. The exact scope of the new national security test has yet to be determined. The Treasurer may review investments (irrespective of their value), and impose conditions or block any transaction if the investment is considered to be contrary to Australia’s national security.
Under the proposed legislative changes, a foreign person that:
- Acquires a direct interest (a minimum of 10% or in a position of control)
- Starts carrying on activities
in a ‘sensitive national security business’ will be required to notify and obtain FIRB approval prior to making the acquisition.
This obligation will apply regardless of the value of the investment or the foreign person’s nationality or if they are classified as either a private foreign investor or a foreign government investor.
Continuing role of the FIRB post completion of a transaction
It is proposed that the Treasurer will also be granted the power to ‘call in’ any transaction that they consider raises national security concerns and has not undergone review under the existing or new national security test. This is despite the fact that the transaction concerning the investment may have already completed. These broad ‘call in’ powers will allow the Treasurer to compel certain investors to submit applications for mandatory screening as, and when, the government considers.
Investors may also voluntarily notify the Treasurer of investments that are not subject to the mandatory notification framework to avoid the risk of the Treasurer calling in the transaction for review on national security grounds in the future. It is proposed that the Treasurer may, within a specific period following the voluntary notification, choose to exercise its call in power to review the investment.
The Treasurer will also be granted an extensive final ‘last resort review’ power which will enable the Treasurer to impose or vary new conditions on previously FIRB approved transactions or, in particular circumstances, order that those transactions be unwound where it is found that:
- The applicant made a material misstatement or omission to The Treasurer which was directly related to national security risks relating to the acquisition
- The investor’s activities have significantly altered, posing national security risks which would not be reasonably foreseen at the time of the approval
- New national security risks have arisen in relation to the parties which could not have been reasonably foreseen at the time of approval
This power will only be applied to FIRB approved transactions that take place once the proposed legislative changes come into effect.
Changes to the definition of a foreign government investor
Under the existing legislative framework, certain entities are deemed to be foreign government investors if:
- Foreign governments and their agencies hold an interest in the entity of at least 20%
- Multiple foreign government investors collectively hold an aggregate interest in the entity of at least 40%
and, as a result of such classification, are required to seek FIRB approval for actions that would not be necessary for a private investor.
If the reform laws are passed next year, entities will not fall within the definition of a ‘foreign government investor’ under the broader national interest test if no foreign government investor has management rights or exercises influence or control over the operation of the investment or its underlying assets. An entity will satisfy this condition if its ownership comprises more than 40% foreign government ownership in aggregate (without influence or control) but less than 20% from any single government.
An entity that has a single foreign government investor with at least 20% ownership (without influence or control) will still be deemed to be a foreign government investor.
Increased powers to enforce compliance with FIRB approval conditions, including greater monitoring and investigative powers
The Treasurer’s information gathering powers will be extended to include site based inspections and investigations to regulate compliance and investigate non-compliance.
Further, the Australian Government is proposing the Treasurer be granted powers to issue directions where there are reasonable grounds to suspect non-compliance with an approval condition, a condition of an exemption or objection certificate, or a breach of foreign investment law.
Significant increases to penalties for breaches
The government is proposing significant increases to penalties for breach of the Foreign Acquisitions and Takeovers Act.
The proposed changes to the penalty regime will see:
- Individuals being fined up to AU$3.15 million (previously AU$157,500) and corporations being fined up to AU$31.5 million (previously AU$787,500) for criminal breaches relating to residential and non-residential investments. Individuals also risk being sentenced to prison for up to 10 years (previously three years).
- Individuals being fined between AU$1.05 million and AU$525 million (previously AU$525,000) and corporations being fined between AU$10.5 million and AU$525 million (previously AU$262,500) for civil breaches relating to non-residential investments.
- Individuals being fined the greater of 25% of the consideration for the residential land acquisition or 25% of the market value of the interest in the property where foreign persons acquire new property without FIRB approval or a temporary resident acquires established property without approval.
The current two tier infringement notice regime that applies to residential real estate investments will be modified to also apply to civil penalty provisions that apply to business investments.
The proposed reforms will also introduce a third tier of notice penalties which will enable the government to respond proportionately to non-compliance breaches associated with high value acquisitions.