Australia: FIRB Reforms Article Series – Part 6: Penalties and enforcement

Proposed reforms to increase FIRB's enforcement powers and penalties

Over the last six weeks, we have been discussing the proposed reforms to the Foreign Acquisitions and Takeovers Act 1975 (Cth) and regulations (collectively, the FATA). During this series we have examined the proposed increase in the Foreign Investment Review Board's (FIRB) oversight of areas such as national security and data, as well as some other amendments intended to streamline the approval process more generally.

This sixth and final part of the series will discuss the proposed dramatic expansion of FIRB's enforcement powers and the accompanying increase in penalties for non-compliance. This increase in FIRB's and the Australian Taxation Office's (ATO) powers is consistent with the increasing focus on ensuring compliance with Australia's foreign investment rules in recent times. Any suggestions that might have been made during the parliamentary enquiry into Australia's foreign investment regime in 2015 that FIRB is a 'toothless tiger' have now been well and truly dispelled. That said, in the context of the increasingly complex foreign investment rules, the proposed new enforcement powers of FIRB and the ATO and the significantly increased penalties (including criminal charges) for what could be inadvertent breaches of the rules may be seen as a disincentive to inbound investment at a time when Australia's economy could use all the help it can get.

Increased information sharing and gathering

The Commonwealth Government's reforms discussion paper released on 5 June 2020 (Discussion Paper) notes that FIRB and the ATO believe there is a lack of information gathering powers within the FATA impacting FIRB's ability to monitor and investigate non-compliance. New powers are proposed to assist FIRB and the ATO in information gathering, sharing and verification.

Currently, FIRB's auditing and compliance monitoring powers are largely only desktop and paper based. These mechanisms rely on information being provided to the agencies by the applicants and those subject to enforcement action identified through data matching. The draft amending legislation (Amending Legislation) will grant new investigation powers to FIRB and the ATO, allowing them to, either with consent or under warrant, access a premises for the purpose of gathering information to ensure compliance. These processes are provided for in the Regulatory Powers (Standard Provisions) Act 2014 (Cth) which contains its own oversight mechanisms to ensure that the audit and enforcement actions are consistent with other similar regulatory processes.

The Discussion Paper also notes that, other than for agricultural land, there is no standing obligation in the FATA for a foreign investor to confirm that a transaction, which was subject to approval, has completed. The result is that under the current rules FIRB is left unaware if the transaction for which they granted their approval actually proceeds. The Amending Legislation provides for an express obligation to notify FIRB or the ATO once the approved action has taken place. By needing to confirm that an applicant has acquired the asset they sought approval for, FIRB and the ATO have greater power to ensure that the information they were provided during the application process was correct, that the conditions were complied with, as well as monitor foreign ownership of Australian assets more generally.

Consequences for providing misleading information

The Amending Legislation also provides for a mechanism to deal with misleading information provided to, or information intentionally reserved from, FIRB or the ATO. Currently, when an applicant makes a FIRB application it declares that all information it is providing is true and correct. If the declaration is false, there may be penalties imposed in addition to the penalties incurred for misleading an officer of the Commonwealth. However, there is no basis for FIRB to revisit and review its decision in the event that it was based on misleading information. The Amending Legislation includes substantial penalties for providing misleading information or omitting information, but also allows a decision made based on that information to be revoked or amended. For this to occur, the information must have been material to the decision.

Neither the offense nor penalties provision of the Amending Legislation requires that the provision or omission of information be intentional, meaning inadvertent breaches may be caught. However, as part of the consultation process, FIRB has insisted that it will take a proportional approach to penalties and the fact that a breach may have been inadvertent will be a significant factor in mitigating any penalties imposed.

Orders to comply and undertakings

A key theme of the Discussion Paper is the Commonwealth Government's desire for flexibility in the Commonwealth's enforcement options and the ability to more proactively safeguard the national interest. To that end, the Amending Legislation grants the Treasurer power to give a party a direction if the Treasurer has reason to believe that a person has engaged in or is engaging in conduct that constitutes a contravention of the FATA, or the Treasurer has a reason to believe that a person will engage in such conduct. In other words, the powers of the Treasurer can be exercised pre-emptively without the occurrence of a breach.

The proposed new direction powers will allow the Treasurer to direct a party to carry out a specific act or conduct within a specific period of time. A non-exhaustive list of possible directions are contained in the Amending Legislation and include directions to:

It is difficult to see where these pre-emptive powers will be utilised in a situation other than enforcing compliance with an imposed condition. One scenario may be where the Treasurer becomes aware of a proposed transaction, for example by way of media alert or an ASX announcement, and no FIRB application is being made for the same action. Under the proposed new section the Treasurer would have the ability to order an application be made. Previously, in situations where FIRB had become aware of a transaction, FIRB's engagement with the relevant parties usually resulted in an application being made or an understanding being reached as to why FIRB approval was not required. The risk of potentially being considered of poor character for not complying with Australian law during future applications has generally been sufficient to encourage compliance. Under these new rules FIRB can be much more proactive.

Another element to this increased desire for flexibility is the introduction of the ability for the Treasurer to accept binding undertakings from a party who is subject to the FATA. The Discussion Paper states that enforceable undertakings are a credible and flexible part of the effective deterrence regime. Simply put, it is a mechanism of reaching a settlement with a party in a cost effective way.

It appears that these binding undertakings will most likely be in relation to compliance with, or rectification of a breach of, a condition. For example, if there was a failure to develop a project within the nominated period a party could seek to remedy this breach of its conditions by undertaking to take certain steps towards development within a period of time. Such a course of action may be considered to be in the national interest, rather than issuing a divestment order, because ultimately it is still recognised that foreign investment into Australia brings economic benefits and should be encouraged so long as the relevant conditions will be met.

It is worth noting that the proposed new undertaking provisions provide that any undertaking agreed to must be published on the Department's website as soon as practical unless the Treasurer deems such publication to not be in the national interest. A key aspect of FIRB applications is that they are confidential, therefore the prospect of publication of undertakings in relation to an investment is likely to cause concern to the market and may limit their appeal to investors. Hopefully, guidance will be provided as to what factors the Treasurer will consider when deciding whether to publicise an undertaking or not.

Penalties and infringement notices

The increasing focus on FIRB compliance can be seen through the proposed dramatic increase to maximum penalty amounts and powers available under the Amending Legislation for all breaches of the FATA and any conditions imposed by the Treasurer on an investment.

The Discussion Paper states that the previous penalty amounts were insufficient to discourage noncompliance. For example, a penalty for a company failing to obtain approval is currently 1,250 penalty units or $277,500. This was understandably seen as an insufficient deterrent in the context of large, potentially multi billion dollar, transactions. The Amending Legislation seeks to increase penalties for the same type of breach to the greater of 50,000 penalty units ($11,100,000) or 75% of the value of the investment capped at 2.5 million penalty units ($555,000,000). This level of increase is across all types of non-compliance.

It is not only monetary penalties which have increased. Criminal offences under the FATA which carried a possible prison sentence have been increased from a maximum of three to 10 years. As far as we are aware, these criminal penalty powers have never been utilised by FIRB, however, the risk of 10 years' jail time is enough to put any director on notice.

Somewhat more pleasantly, the Amending Legislation seeks to introduce a new tier of infringement notices. Infringement notices are the lesser penalty level allowed to be issued by FIRB without needing Court intervention. Tier 1 is reserved for those who self disclose whereas Tier 2 and the new Tier 3 can be used at the Treasurer's discretion based on the nature and severity of the breach. The Tier 3 notices will carry a 1,500 penalty unit fine ($333,000), and will generally apply to breaches relating to transactions with a value over $5 million. This again provides a significant deterrent but also offers flexibility in enforcement options.

What does this all mean?

After the last series of reforms, FIRB and the ATO drastically scaled up their compliance monitoring. Most notably, individuals breaching the residential property rules were caught and divesture orders were issued. Since then, we have seen an increasingly pro-active approach by FIRB to their audit activities and the increase in penalties, information requirements, and ongoing reporting obligations contained in these latest proposed reforms all suggest that FIRB's strong handed approach will continue.

The liability faced by foreign individuals or entities (including company directors) for breaches of the FIRB rules is increasing to such a significant level that internal FIRB compliance monitoring and reporting will need to become a standard process for inbound investors. These processes will need to be ongoing and it will no longer be acceptable to simply consider FIRB at the time of a relevant investment transaction.

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