House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 3 - Improving compliance and additional enforcement tools

Outline of chapter

3.1 Schedules 1 and 2 to the Bill contain amendments to ensure the Treasurer and the Commissioner have appropriate powers to administer the FATA, including enhancements to the Treasurer's power to give directions to investors to prevent or address breaches of conditions.

3.2 Civil and criminal penalties have been increased to ensure appropriate deterrence is achieved and the infringement notice regime is extended to cover all types of breaches.

Context of amendments

3.3 Ensuring compliance with the foreign investment framework is crucial to the credibility and effective functioning of the regime. These reforms update the existing legislative framework to ensure that appropriate scrutiny is given to cases and non-compliance can be appropriately addressed.

3.4 The changes to the compliance framework bring it into line with other comparable regulatory regimes and enable more nuanced and targeted enforcement and compliance activities. These changes modernise the enforcement framework to allow for a graduated and proportional response to compliance issues, which strengthens the overall effectiveness of the regime.

Summary of new law

3.5 Schedules 1 and 2 to the Bill amend the FATA to:

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expand the infringement notices regime to cover all types of foreign investments and introduce a third tier to allow for a more graduated and proportional approach to enforcement;

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increase civil and criminal penalties under the FATA to ensure these penalties act as an effective deterrent;

•

remedy situations where foreign persons are given a no objection notification or an exemption certificate based on a foreign investment application that makes an incorrect statement or omits an important piece of information;

•

require foreign persons who have been issued a no objection notification for a proposed action or an exemption certificate, to notify the Government of certain events, including that the action has occurred;

•

provide the Treasurer with the power to give directions to investors in order to prevent or address suspected breaches of conditions or of the foreign investment laws;

•

provide the Treasurer with the standard monitoring and investigative powers (in line with those of other business regulators), including access to premises with consent or by warrant to gather information, to improve regulators' capability to monitor investor compliance and/or investigate potential non-compliance; and

•

provide the Treasurer with the power to accept enforceable undertakings from foreign persons to manage compliance.

Comparison of key features of new law and current law

3.6 The following table provides a comparison of the key features of the new law and the current law.

Detailed explanation of new law

Harmonising and expanding the availability of infringement notices under the FATA

3.7 Currently, the FATA allows for less serious breaches of the foreign investment rules to be punishable by way of an infringement notice, but only for residential real estate investments. Infringement notices are issued using the framework in the Regulatory Powers Act.

3.8 Infringement notices are commonly used for minor breaches that are likely to occur frequently and can be assessed using objective criteria. For example, an infringement notice can be issued for three successive late submissions of a report where an investor is required to report on a quarterly basis about transactions that have taken place under an exemption certificate. Another example is where the investor submits a retrospective application to rectify the breach and is issued with an infringement notice to penalise the conduct.

3.9 The current framework sets two tiers of infringement notices - tier 1 notices and associated penalties are available where a person discloses the breach to the Commonwealth and tier 2 notices are issued when the breach is discovered by a means other than self-disclosure.

3.10 However, for other breaches of the FATA not currently covered by the infringement notice regime, the only existing mechanism for penalising breaches is to initiate court proceedings to impose civil or criminal penalties and in some cases, a disposal order can be issued.

3.11 The current definition of the tier 1 infringement notice in subsection 101(1) of the FATA requires notification to the Commonwealth. This is a broad provision and the amendment clarifies that it is only information provided directly to the Treasurer (or delegate) for the purpose of foreign investment administration, which could be taken to have met the disclosure requirement. Expanding the infringement notice regime

3.12 Schedule 2 to the Bill enlivens the framework of the Regulatory Powers Act which provides that an infringement officer may issue an infringement notice if the officer believes on reasonable grounds that the person contravened a civil penalty provision of the FATA. This enables the regulators to respond to a range of compliance issues, and aims to provide more credible deterrence for low to mid-range non-compliance with any civil penalty provision of the FATA. [Schedule 2, items 22 to 25, Subdivision AA - Application of the Regulatory Powers Act - Infringement notice, paragraph 100(1)(a), (ba) and (d) of the FATA]

3.13 The FATA provides that an infringement officer is a person who holds an APS 6 Level position or higher who is appointed by the Secretary in relation to issuing any infringement notices under the FATA. In addition to that, the Registrar may also appoint a person as prescribed by regulations, to be an infringement officer specifically in relation to issuing infringement notices in relation to registers. [Schedule 2, items 26 and 27, subsections 100(2) and (3A) of the FATA]

3.14 For the purpose of Part 5 of the Regulatory Powers Act, the FATA provides that the Secretary and the Commissioner of Taxation are the relevant chief executives in relation to any infringement notices under the FATA. In addition to that, the Registrar is also the relevant chief executive in relation to infringement notices that relate to registers. The Registrar may delegate its function to an eligible Registrar appointee or any other person as prescribed by the regulations. In exercising powers, delegates are required to comply with any directions of the delegator. [Schedule 2, items 28 to 30, subsection 100(4), (4BA), and (4C) of the FATA] Update to the definition of tier 1 infringement notice

3.15 The definition of a tier 1 infringement notice has been updated to clarify that it is the Treasurer, or the Commissioner on behalf of the Treasurer, and not the Commonwealth that must be notified through a direct voluntary disclosure by a foreign person of an alleged contravention for the purposes of the FATA. A disclosure made to the Registrar about a contravention involving failing to give notice to the Registrar may also constitute a voluntary self-disclosure for the purposes of meeting the definition of a tier 1 infringement notice .[Schedule 2, items 35 and 36, section 101 (heading) and paragraph 101(1)(b) of the FATA]

3.16 Limiting the disclosure for the purposes of the FATA ensures that other disclosures made to the Treasurer or other part of the Commonwealth under any other legislation within the Treasurer's portfolio will not constitute a self-disclosure for the purposes of working out whether an infringement notice should be classed as a tier 1 infringement notice.

3.17 A disclosure by a person in reaction to engagement from the regulator such as an early show cause notice, or any intimation of impending compliance action is not considered voluntary 'self-disclosure' for the purposes of working out whether an infringement notice should be classed as a tier 1 infringement notice. [Schedule 2, items 36 and 37, paragraph 101(1)(c) and subsection 101(1A) of the FATA]

3.18 Schedule 2 to the Bill further provides that for the purposes of a tier 1 infringement notice, a disclosure must be made in the manner approved by the Secretary under section 135 of the FATA. [Schedule 2, item 45, paragraph 135(3)(ba) of the FATA]

Introduction of tier 3 infringement notice

3.19 A third tier infringement notice is introduced for non-compliance of high-value acquisitions. This enables proportionate and graduated action in response to an investor's non-compliance that is commensurate with the quantum of the investment. Examples of circumstances when a tier 3 infringement notice may be issued could include repeated and systemic failure to comply in a timely manner with reporting conditions for a high-value acquisition, or taking a high value notifiable action before giving notice to the Treasurer.

3.20 A tier 3 infringement notice may apply where a notice is not otherwise classed as a tier 1 or 2 infringement notice. This means a tier 3 infringement notice will generally only apply where the Treasurer, or the Commissioner on behalf of the Treasurer, discovers the conduct through active compliance, such as by undertaking data-matching, or information provided by a member of the public. It will also only apply where the value of the action to which the contravention relates meets certain thresholds, which determine the cut-off between a tier 2 and tier 3 infringement notice. [Schedule 2, items 38, 39 and 1, subparagraphs 101(2)(c)(ii) and (iii), subsections 101(3), (4), (5) and (6), 101AA(1) and section 4 of the FATA]

3.21 A tier 3 infringement notice cannot be issued for certain civil penalty provisions, irrespective of the value of the relevant action. It is considered that it is more appropriate that certain civil penalty provisions are classed as tier 2 infringement notices (or tier 1 if there is a relevant self-disclosure) in order to ensure that penalties in an infringement notice are not higher than the related civil penalty amount. The civil penalty amount for these provisions is 250 penalty units, which is less than the amount payable under a tier 3 infringement notice. This will include certain civil penalty provisions relating to contravening conditions, contravening directions and interim directions, non-compliance with notification requirements, contraventions relating to vacancy fees for foreign acquisitions of residential land and contraventions relating to the new Register provisions. [Schedule 2, item 38, subparagraph 101(2)(c)(i), paragraph 101(4)(b) and subsection 101(3) of the FATA]

3.22 The amount payable under a tier 3 infringement notice is 300 penalty units for an individual and 1,500 penalty units in the case of a body corporate. This penalty amount is necessary to reflect the seriousness of breaches on the part of major investors and potential harm to the national interest that can arise from misconduct in such cases. For these breaches, the standard approach to penalty setting referred to in the Guide would not operate as a sufficient deterrent, nor would it adequately capture the benefits that could flow from misconduct. [Schedule 2, item 34, paragraph 100(6)(c) of the FATA]

3.23 A tier 2 infringement notice applies where the value of the action to which the contravention relates is less than either: $5 million for a contravention relating to residential land, or $275 million for other contraventions which are not related to residential land. The threshold value of $275 million was established to align with the threshold for business investment by non-government foreign investors to be deemed a significant action (prior to implementation of the temporary zero dollar threshold imposed as a result of the COVID-19 pandemic). The threshold value of $5 million for a contravention relating to residential land also reflects investor's sophistication level and tries to align with the notion that an infringement is not simply a cost of doing business. A tier 3 infringement notice applies where the value of the action to which the contravention relates exceeds the monetary thresholds for tier 2 infringement notices. The threshold values may be indexed annually in accordance with regulations made for the purposes of subsection 139(2) of the FATA. [Schedule 2, items 38 and 39, subsections 101(2) and (3), 101AA(1), and (7) of the FATA]

3.24 These amendments introduce a valuation table. This table is used to work out if the value of an action crosses the relevant thresholds to be classed as a tier 3 infringement notice. The table specifies the valuation approach to determine the value of the action to which the contravention of the civil penalty provision relates. If the determined value is lower than the monetary thresholds, a tier 2 infringement notice is issued, provided a person did not make a voluntary self-disclosure of the contravention, in which case a tier 1 infringement notice would apply. [Schedule 2, item 39, subsection 101AA(3) of the FATA, valuation table]

Table 3.1 - Approach for valuing actions for the purposes of assessing value against the tier 2/tier 3 thresholds

Example 3.1

Company I is issued a no objection notification to acquire a direct interest in an Australian business. One of the conditions in the no objection notification is to undertake an audit and provide financial reports of the accounts for the acquired Australian entity on a quarterly basis.

Company I makes late submissions of a report on three successive occasions. This is a contravention of subsection 93(1) of the FATA which is a civil penalty provision. The Treasurer decides to issue an infringement notice to penalise the conduct.

The Treasurer uses the valuation approach provided under item 1 of the valuation table (since the significant action that the contravention relates to is an acquisition of a direct interest in an Australian business). Under item 1 of the valuation table, the value of the action is determined to be $200 million.

Since the value of the action to which the contravention relates does not exceeds the monetary threshold of $275 million, the Treasurer issues a tier 2 infringement notice.

3.25 For a contravention of a civil penalty provision that relates to an exemption certificate, the valuation table should be used to determine the value of the action covered by that exemption certificate, disregarding the effect of the exemption certificate. If the kind of the action to which the contravention relates can be covered by more than one item of the table, the value of that action is determined as being the greatest of the respective amounts worked out under those items. [Schedule 2, item 39, subsections 101AA(3), (4) and (5) of the FATA]

3.26 For a contravention of a civil penalty provision that relates to an acquisition of interests in multiple established dwellings by a temporary resident under subsection 95(1) of the FATA, the value of the action will be the total of the market values of the interests referred. Where a contravention relates to the acquisition of an interest by a foreign person who is not a temporary resident, the value of the action is ascertained as the greater of the value of consideration for the acquisition and the market value of the interest referred. [Schedule 2, item 39, subsection 101AA(6) of the FATA]

3.27 Similar rules apply for a contravention of a civil penalty provision that relates to giving false or misleading information or documents in relation to a no objection notification or an exemption certificate. The value of the action to which the contravention relates will be the sum of the values (worked out in accordance with the valuation table), for each core Part 3 action, where false statements were given in respect of that action. [Schedule 2, item 39, paragraph 101AA(1)(b) and subsection 101AA(2) of the FATA]

3.28 Where the valuation table does not cover an action, the value of the action is the value of the consideration for the acquisition (where the action is an acquisition) or the market value of the benefit obtained by the action. [Schedule 2, item 39, subsection 101AA(3) of the FATA]

3.29 If there is no consideration for the action to which the contravention relates, and the market value of the action cannot be ascertained, the value of the action is taken to be nil. In these cases, tier 2 infringement notices will apply rather than tier 3 notices, as the value of the action will fall short of the relevant thresholds. [Schedule 2, item 39, subsection 101AA(8) of the FATA]

3.30 Where a tier 3 infringement notice could be issued, the Treasurer may decide to issue a tier 2 infringement notice instead, despite the value of the relevant action if the Treasurer considers that a tier 2 notice is more appropriate. [Schedule 2, item 38, subsections 101(5) and (6) of the FATA]

3.31 In making this decision, the Treasurer will have regard to the conduct of the person after the alleged contravention, such as the steps taken by the person to remedy the alleged contravention and level of cooperation with the regulators in addressing the alleged contravention. The Treasurer will also ensure that the imposition of a tier 2 infringement notice is not contrary to the national interest. [Schedule 2, item 38, subsection 101(7) of the FATA]

3.32 For example, an investor was, for a limited period of time, in breach of a condition requiring a certain board composition. However, the investor has quickly rectified the situation and was cooperative during the investigation of the breach. The breach was significant enough to warrant a tier 3 infringement notice. However, due to the quick rectification, steps taken and cooperation of the investor, a tier 2 infringement notice is issued instead.

3.33 Regulator-imposed penalties such as an infringement notice scheme should be limited to situations where imposing the penalty does not reflect a judgment as to the person's guilt or liability.

3.34 The infringement notice regime is expanded to civil penalty provisions, where it is generally expected that an infringement notice be issued on the basis of straightforward factual questions, without involving discretion from the infringement officer. For example, where the contravention involves a failure to notify arising where an objective circumstance, such as an acquisition occurs. However, the FATA regulates actions that can be factually complex. Where the factual circumstances raise doubt as to whether a contravention has occurred, it is not intended that an infringement notice be issued.

3.35 A regulator should not be exercising significant discretion in determining the level of penalty to be imposed on a recipient by way of infringement notice, other than in strict accordance with factual criteria set out in the legislation. The infringement notice framework in the FATA provides some discretion to the Treasurer to impose a tier 2 infringement notice for an alleged contravention where the value of the relevant action is higher than the monetary threshold. However, the amendments to the FATA set out the factors the Treasurer would consider in deciding the level of infringement notice to impose such as an investor's conduct or national interest factors. This limits the element of discretion for the regulator to determine the amount payable under an infringement notice. This approach enables the Treasurer to issue a tier 2 infringement notice where the contravention and the surrounding circumstances, as stated in the legislation, are taken into account to issue a proportionate infringement notice. This also ensures natural justice for a person, and encourages them to actively engage and cooperate with the regulators and take steps to address the breach, which in turn provides better regulatory outcomes.

Exemptions from standard content requirements for infringement notices

3.36 These amendments remove the need for an infringement notice under the FATA to include certain standard content otherwise required under the Regulatory Powers Act, which would be inaccurate in the FATA context. Specifically, the amendments ensure that an infringement notice under the FATA does not need to set out the amount of the penalty worked out in accordance with rules under the Regulatory Powers Act. There are bespoke rules for calculating the penalty amount in an infringement notice under the FATA that depend on whether the notice is a tier 1, tier 2 or tier 3 notice (which replace the standard rules under the Regulatory Powers Act). [Schedule 2, items 33 and 31, paragraph 100(5)(b) and subsection 100(5) of the FATA]

3.37 These amendments remove the need for an infringement notice relating to certain civil offence provisions under the FATA to include certain standard content otherwise required under the Regulatory Powers Act, which may be irrelevant, impracticable or difficult to determine in the FATA context. Specifically, the amendments ensure that for some infringement notices under the FATA, the notice need not set out the maximum civil penalty a court could impose for a contravention of that provision and the time, day and place of an alleged contravention. The particulars of time, day and place are generally not material to contraventions under the FATA, such as failing to provide a notice. It may also be difficult to determine the maximum civil penalty that a court could impose, where this amount is based on the value of an action. [Schedule 2, item 32, paragraph 100(5)(a) of the FATA].

Updating the penalties for certain criminal offences and contravention of civil penalties under the FATA

3.38 Current monetary penalties under the FATA are low compared to those available to other business regulators. Part 5 of the FATA (about offences and civil penalties) is amended to increase the maximum term of imprisonment, maximum financial penalties for certain criminal offences and the maximum financial penalties for the contravention of certain civil penalties.

Increase to imprisonment terms and financial penalties applicable to certain criminal offences

3.39 Schedule 1 and Schedule 2 to the Bill increases the penalties for certain offences to reflect the seriousness of those offences, and to deter and punish such behaviour as appropriate.

3.40 The increases to the maximum penalties applicable to certain offences have been increased to: reflect the seriousness of the offence; act as a deterrent from committing offences; effectively punish those who commit offences; ensure consistency in the penalties for offences compared to other regulators; safeguard Australia's national interest; and maintain the integrity of Australia's foreign investment framework.

3.41 Maximum penalties provide a court with guidance on how to punish criminal behaviour. They restrict the court's sentencing discretion as the court is unable to order a penalty in excess of the prescribed maximum penalty. The maximum penalty is generally reserved only for the most egregious cases.

3.42 Offences where the maximum term of imprisonment has been increased are listed in the table below. If the offence does not appear in the table, the penalty for the offence has not changed. The table also includes new offence provisions introduced by Schedules 1 and 2 to the Bill.

Table 3.2 - Offences where the maximum term of imprisonment and monetary penalties have been increased or new offence provisions have been created

[Schedule 1, item 149, 154, 155, 158 and 160, subsections 84(2) and 85(2), sections 85A, 88A and 90 of the FATA; Schedule 2, items 3 to 7 and 44, sections 84, 85, 86, 87, subsection 88(1) and 133(5), of the FATA]

3.43 The corporate multiplier for these offences is a factor of 10 for financial penalties. This higher relative penalty is necessary and appropriate to ensure that a corporation does not obtain financial benefits from illegal behaviour and to recognise the financial benefits that can be obtained by not complying with the law. Corporate bodies can be well resourced and may see the financial penalties as a cost of doing business. To ensure financial penalties act as an adequate deterrent, punish illegal behaviour and are commensurate to the size and capacity of corporate bodies, this higher penalty will apply. This provides an adequate penalty that will deter and punish illegal behaviour.

3.44 The approach to determining the maximum term of imprisonment recognises that criminal breaches relating to conduct that places the national interest at risk require a significant jail term as an option available to the court. In this instance, applying standard ratios of maximum fines to maximum terms of imprisonment would give rise to a manifestly excessive maximum jail term. The prescribed 10 year maximum term reflects the seriousness of these offences.

Increase to financial penalties applicable to certain civil penalty provisions

3.45 The Bill increases the financial penalties for breaches of certain civil penalty provisions. The increase in penalty amounts ensures that investors who do not comply with their legal requirements are appropriately penalised, and aligns civil penalty amounts under the FATA with those of other business regulators.

3.46 Civil penalty provisions where the maximum monetary penalties have been increased are listed in the table below. If the civil penalty provision does not appear in the table, the penalty for the provision has not changed. The table also includes new civil penalty provisions introduced by Schedules 1, 2 and 3 to the Bill.

Table 3.3 - Civil penalty provisions where the maximum monetary penalties have been increased or new civil penalties have been introduced

[Schedule 1, items 167, 179, 172, 176, subsection 91(2), 91(3), 91(4) and 97(1A) and section 92A and 95A of the FATA; Schedule 2, items 9, 10, 12 to 16, subsections 89(2), 89(3), 92(2), 92(3), 93(1) to (7), and 94(4), sections 98A, 98B, 98C, 98D and 98E of the FATA; Schedule 3, item 8, section 130ZV of the FATA]

3.47 Under Part 4 of the Regulatory Powers Act, if a body corporate contravenes a civil penalty provision, the penalty for a body corporate is five times the pecuniary penalty specified for the civil penalty provision. However, the amendments to the FATA deviate from this approach, instead providing that the pecuniary penalty for body corporates is 10 times the penalty specified for some civil penalty provisions. This higher relative penalty is necessary and appropriate to ensure that a corporation does not obtain financial benefits from illegal behaviour. To ensure financial penalties act as an adequate deterrent, punish illegal behaviour and are commensurate to the size and capacity of corporate bodies, this higher penalty will apply. For civil penalty provisions that relate to residential land, the penalty is fixed to the value of the interest so that it will have the same impact on any gain made regardless of the value of the interest. For that reason, if a body corporate contravenes the provision there is no provision that the person pay five times the penalty that could be imposed on an individual. [Schedule 2, items 21, subsection 99(4) of the FATA]

3.48 For the purpose of Part 4 of the Regulatory Powers Act, the FATA provides that the Secretary and the Commissioner are the authorised applicants in relation to any civil penalties provision under the FATA. In addition to that, the Registrar is also the authorised applicant in relation to a civil penalty that relates to registers. The Registrar may delegate its function to an eligible Registrar appointee or any other person as prescribed by the regulations. In exercising powers, delegates are required to comply with any directions of the delegator. [Schedule 2, items 17, 18, 19 and 20, Subdivision A of Division 4 of Part 5 (heading), subsection 99(2), (2BA) and (2C) of the FATA]

3.49 The amendments set out how civil penalty amounts for penalty provisions under the FATA are to be calculated. These calculations are based on the value of the action, and are set out in the valuation table. The civil penalty amount is 75 per cent of the value of the action as determined under the valuation rules. [Schedule 2, item 16, subsection 98F(1) of the FATA]

3.50 Where a contravention of a civil penalty provision that relates to giving false or misleading information or documents in relation to a no objection notification or an exemption certificate; where the no objection notification covers one or more core Part 3 action. The value of the action to which the contravention relates will be the sum of the values (worked out in accordance with the valuation table), for each core Part 3 action, where false statements were given in respect of that action. [Schedule 2, item 16, subsection 98F(2) of the FATA]

Table 3.4 - The value of an action for the purposes of calculating a civil penalty is worked out under a valuation table for the relevant action as follows:

[Schedule 2, item 16, subsection 98F(3) of the FATA, valuation table]

Example 3.2

Company Q repeatedly contravenes a reporting obligation imposed under one of the conditions in a no objection notification.

Rather than issue an infringement notice, the Treasurer decides to seek the imposition of a civil penalty under section 93(1) of the FATA.

The valuation approach under item 1 of the table applies since the significant action that the contravention relates to is an acquisition of a direct interest in an Australian business.

The market value of the interest at the time of the contravention is determined to be $2 million and the value for the consideration was $1.4 million. In this case, the market value of the interest is greater than the consideration value.

Therefore, under item 1 of the valuation table and applying the rules for determining civil penalty amounts for provision based on value, the maximum civil penalty that could be imposed by a court in this instance will be up to $1.5 million (i.e. 75 % of $2 million).

3.51 Where the valuation table does not cover an action, the value of the action is the value of the consideration for the acquisition (where the action is an acquisition) or the market value of the benefit obtained by the action. [Schedule 2, item 16, subsection 98F(3) of the FATA]

3.52 For a contravention of a civil penalty provision that relates to an exemption certificate, the valuation table should be used to determine the value of the action covered by that exemption certificate, disregarding the effect of the certificate. If the kind of action to which the contravention relates can be covered by more than one item of the table, the value of that action is determined as being the greatest of the respective amounts worked out under those items. [Schedule 2, item 16, subsections 98F(4) and (5) of the FATA]

3.53 If there is no consideration for the relevant action, or the market value of the action cannot be ascertained, the value for the action is nil. [Schedule 2, item 16, subsection 98F(6) of the FATA]

3.54 Where the value is nil, the civil penalty would generally be 5,000 penalty units (or 50,000 penalty units if the person is a corporation), capped at a maximum of 2.5 million penalty units.

3.55 The amendments to the maximum penalty are to ensure that appropriate penalties are available when the impact of non-compliance can cause serious harm to Australia's national interest. Failure to comply with these obligations can create community distrust in the foreign investment framework. The maximum penalty is considered appropriate to adequately deter misconduct. The court determines which method provides the greatest penalty, and the court retains its discretion to determine what penalty to impose up to the maximum amount. This discretion would include consideration of proportionality when the foreign investor holds only a part of the total investment. As a model litigant, the Commonwealth would draw any such issue to the attention of the court.

3.56 The method for calculating the pecuniary penalty applicable provides flexibility and ensures the penalty reflects the seriousness of the contravention and is not considered a cost of doing business. The amount is intended to deter and punish serious misconduct.

Example 3.3

A foreign investor has a no-objection notification, with conditions, for a takeover of an Australian corporation with a property portfolio. The takeover costs $4.3 billion and the property portfolio is valued at over $600 million, earning substantial profits for the foreign investor.

Over the years, the foreign investor contravenes a number of conditions in the no objection notification. Treasurer initially works with the foreign investor to educate them on their obligations, before moving to issuing infringement notices and accepting an enforceable undertaking. However, the foreign investor again fails to comply with a number of conditions and the enforceable undertaking.

Considering other civil and administrative measures have been exhausted and the foreign investor's continued failure to comply with the conditions in the no objection notification, the Treasurer decides to commence civil penalty proceedings for contravening the conditions and the enforceable undertaking.

In the application to the court to commence the proceedings, the Treasurer asks the court to impose a maximum possible civil penalty as the foreign investor has shown a continued disregard to the legal requirements of the foreign investment framework, the breach of several conditions and the enforceable undertaking.

The valuation approach under item 1 of the valuation table applies since the significant action that the contravention relates to is an acquisition of a direct interest in an Australian business. Therefore, the maximum civil penalty that could be imposed in this instance will be lesser of 2.5 million penalty units or 75 % of the value of the consideration for the acquisition (i.e. 75 % of $4.3 billion). Considering the facts of the case, the court imposes a maximum possible civil penalty of $555 million (i.e. 2.5 million penalty units).

3.57 The financial penalty for failing to make and keep records in accordance with Division 2 of Part 7 of the FATA has been increased from 30 penalty units to 250 penalty units. It is an offence of strict liability. [Schedule 2, item 43, section 119 of the FATA]

3.58 This penalty amount for a strict liability offence for an individual reflects the seriousness of the offence and the manner in which breaches of the law can occur, and is appropriate as it makes the amounts proportionate to the other penalty increases and acts as a sufficient deterrent.

Infringement notices and civil penalty for vacancy fee lodgements

3.59 The Bill establishes a new civil penalty, where the information provided in a vacancy fee return to the Commissioner under subsection 115D(1) contains false or misleading information or omits a material fact or a thing. The maximum penalty is 250 penalty units. Alternatively, the person may be liable for a tier 1 or tier 2 infringement notice for making a false or misleading statement in a vacancy fee return. [Schedule 2, item 41, section 115DA of the FATA].

3.60 The Treasurer may declare that a charge applies to Australian land owned by the foreign person if the Treasurer is satisfied that the declaration is necessary to secure the payment of the unpaid vacancy penalty for the false or misleading information given in the vacancy fee return. [Schedule 2, item 42, subparagraph 115K(2)(b)(ia) of the FATA]

Remedy incorrect statements

3.61 Currently, criminal prosecution is the only avenue for addressing false or misleading statements under the FATA.

3.62 Schedule 2 to the Bill amends the FATA to provide the Treasurer with adequate powers to remedy a situation where a foreign person is given a no objection notification or exemption certificate based on an application that is false or misleading. This includes where the information or documents given are false or misleading by omission. The Treasurer can revoke the no objection notification or exemption certificate and the person may also be liable to a civil penalty or an infringement notice.

Revocation of no objection notification

3.63 These amendments allow the Treasurer to revoke a no objection notification where the Treasurer is satisfied that a person has given false or misleading information or documents, or omitted a material fact or a thing where this information is relevant and given before the no objection notification is issued. This new power applies in addition to and does not limit the other circumstances in which the Treasurer may revoke a no objection notification. [Schedule 1, items 110 and 126, subsections 70(3), 76A(2), (3), (4) and (6) of the FATA]

3.64 Prior to exercising the new power, the Treasurer must give the person who was given the no objection notification notice, in writing, that the Treasurer is considering revoking the no objection notification on these grounds and must not make the revocation decision later than 120 days after this notice. The 120 day time limit for the Treasurer to make a revocation decision provides investor certainty. Before giving the notice, the Treasurer must reasonably believe that false or misleading information or documents were given. [Schedule 1, item 126, subsections 76A(1), (2) and (3) of the FATA]

3.65 In order to comply with procedural fairness obligations, it is expected that the Treasurer will give a person an opportunity to make submissions on the matter before the Treasurer makes a revocation decision.

3.66 The Treasurer has 10 days to notify the person of the revocation decision. The 10 day requirement is consistent with other provisions in the FATA. [Schedule 1 , item 126, subsection 76A(5) of the FATA]

3.67 After the no objection notification is revoked, the Treasurer is allowed to rectify an unsatisfactory outcome by making an order prohibiting the action or requiring the person to dispose of the acquisition, or reissuing a new no objection notification with different conditions responding to the relevant national interest considerations.

3.68 The decision to issue an order or a new no objection notification should be made by the Treasurer as if the no objection notification had never been given. A decision to make an order or issue a new no objection notification needs to be made within 30 days after the Treasurer gives notice that the initial no objection notification is revoked. This is consistent with the decision period the Treasurer normally has to consider a notification from a person stating that a significant action (including a significant action that is a notifiable action) is proposed to be taken. [Schedule 1, items 126 and 129, subsection 76A(7) and table item 3 in subsection 77(6) of the FATA]

3.69 The Treasurer's powers cannot be exercised again in certain instances. For example, prohibiting a person from doing something where the relevant action has already been taken before the order was made. These amendments include a note to clarify that the Treasurer cannot make an order prohibiting proposed actions under section 67 of the FATA, or an interim order under section 68 of the FATA about the action which a person has already taken before the revocation. [Schedule 1, item 126, note to section 76A of the FATA]

Revocation or variation of exemption certificate

3.70 These amendments allow the Treasurer to vary or revoke an exemption certificate where the Treasurer is satisfied that a person has given false or misleading information or documents, or omitted a material fact or a thing where this information is relevant and given before the exemption certificate is issued. [Schedule 1, item 79, subsections 62A(3) and (4) of the FATA]

3.71 This new power applies in addition to and does not limit the Treasurer's existing powers to vary or revoke an exemption certificate. [Schedule 1, item 79, subsection 62A(6) of the FATA]

3.72 The new power is available in relation to an exemption certificate that is taken to be given under section 61 of the FATA, which operates to deem a certificate as being given where the Treasurer does not make a decision on an application within the relevant decision period. [Schedule 1, item 79, subsections 62A(7) of the FATA]

3.73 The same requirements will apply for the exercise of the Treasurer's power as those that apply when revoking a no objection notification involving false or misleading information. That is, the Treasurer will be:

•

required to provide a notice that the Treasurer is considering revoking the exemption certificate on the grounds that the Treasurer reasonably believes that the information was false or misleading; and

•

subject to the 120 day time limit for exercising the power, starting from the date of the notice; and

•

required to notify the person, in writing, of the revocation or variation before the end of 10 days after the revocation or variation is made.

[Schedule 1, item 79, paragraphs 62A(3)(b) and (c) and subsections 62A(1), (2) and (5) of the FATA]

3.74 In order to comply with procedural fairness obligations, it is expected that the Treasurer will give a person an opportunity to make submissions on the matter before the Treasurer makes a revocation or variation decision.

3.75 The new power would allow the Treasurer to choose to vary an exemption certificate, with effect from the time the variation is made or from the date of effect of the variation if the variation specifies such a time. For example, the Treasurer could vary the exemption certificate to include new or different conditions.

3.76 If the Treasurer chooses to revoke an exemption certificate, the Treasurer could still consider a new application for an exemption certificate involving the same subject matter.

Effect of revocation or certain variations of exemption certificates - Clarifying the status of actions taken prior to variation or revocation

3.77 The amendments clarify that actions already taken whilst a revoked or varied exemption certificate was in force would not retrospectively become a significant action or other 'core Part 3 action' (introduced as part of this Bill) as a consequence of the exemption certificate being revoked or varied. The relevant action may become a significant action or other core Part 3 action from the time when the revocation or variation is made or takes effect according to its terms. [Schedule 1, item 79, subsections 62B(1), (2) and (3) of the FATA]

Effect of revocation or certain variations of exemption certificates - Prohibition and interim orders available for actions not yet taken

3.78 The amendments clarify that an action covered by an exemption certificate may become a significant action or other core Part 3 action following the revocation or variation of that exemption certificate. This may mean that the Treasurer is able to exercise powers that are available in relation to significant actions or other core Part 3 actions. For example, where the action has not yet been taken, the Treasurer may make orders under sections 67 and 68 of the FATA prohibiting the action, in accordance with those provisions. [Schedule 1, item 79, subsections 62B(1), (2) and (3) of the FATA]

3.79 A decision to make an order must be made within 30 days after the action becomes a core Part 3 action, as a result of the revocation or variation. [Schedule 1, item 129, table item 2 in subsection 77(6) of the FATA]

Effect of revocation or certain variations of exemption certificates - Allowing disposal orders

3.80 In accordance with section 69 of the FATA and pursuant to other amendments in this Bill, in order to make a disposal order the Treasurer must be satisfied that, at the time of making the order, a significant action or other core Part 3 action has been taken and the result is contrary to the national interest.

3.81 Without the amendments introduced by this Schedule, these pre-conditions for the Treasurer's disposal powers will not be met where an exemption certificate covered the action due to section 45 and similar provisions in the FATA. Section 45 of the FATA deems specified actions covered by an exemption certificate as not being significant actions.

3.82 These amendments ensure that once an exemption certificate is revoked or varied (such that it no longer relates to an action) on the grounds that information was false or misleading, the relevant action can prospectively be considered a significant action. This ensures that disposal order powers may be available in accordance with section 69 of the FATA. The amendments also ensure disposal orders are available for other core Part 3 actions that were covered by a revoked or similarly varied exemption certificate. The action may be considered a core Part 3 action from the time the revocation or variation is made, or in accordance with its date of effect if the revocation or variation specifies such a time. [Schedule 1, item 79, subsections 62B(1), (2) and (3) of the FATA]

3.83 The amendments clarify that disposal order powers under section 69 of the FATA may be utilised, even if at the time an action covered by a revoked or varied exemption certificate was taken, it was not a core Part 3 action or it was not contrary to the national interest or to the national security. [Schedule 1, item 79, subsections 62B(4) and (5) of the FATA]

Penalties for making false or misleading statements

3.84 A person is liable for a civil penalty or an infringement notice can be imposed, if the Treasurer finds that an incorrect outcome has arisen because a person gave false or misleading information or documents, or omitted an important piece of information in seeking a no objection notification or exemption certificate. Establishing a civil penalty and an ability to issue an infringement notice provides the regulator with a number of avenues and tools to seek enforcement action against an applicant or their representative where they provide false or misleading information. This is intended to operate as a significant disincentive to giving incorrect information or documents to the Treasurer and to ensure that appropriate penalties are available depending on the nature of the breach.

3.85 The civil penalty for making false and misleading statements (including by omitting material) in seeking a no objection notification is the greater of:

•

5,000 penalty units (or 50,000 penalty units if the person is a corporation);

•

the sum of the value amounts worked out for each core Part 3 action to which the no objection notification relates, calculated in accordance with the valuation rules introduced by this Bill.

3.86 However, the maximum civil penalty is capped at a monetary value of 2.5 million penalty units. [Schedule 2, item 16, subsections 98B(2) and (3) and section 98F of the FATA]

3.87 The maximum civil penalty for making false and misleading statements (including by omitting material) in seeking an exemption certificate is 5,000 penalty units (or 50,000 penalty units if the person is a corporation). [Schedule 2, item 16, subsections 98B(5) and (6) of the FATA]

3.88 The Guide was considered in determining the applicable civil penalty amounts. It is important that an appropriate range of options are available for responding to situations where false or misleading information relevant to a no objection notification or exemption certificate is provided. The ability to issue civil penalties provides a deterrent for such behaviour, and supports the integrity of the FATA framework by encouraging the provision of accurate and honest information in a context where inaccurate information may result in outcomes contrary to Australia's national interest.

3.89 The maximum civil penalty is generally reserved only for the most egregious cases, and it is expected the court will exercise its discretion and consider a range of factors making it unlikely that the maximum penalty would be imposed in every instance. Factors typically considered by the court will include:

•

the nature and extent of the conduct which led to the contravention;

•

the relevant circumstances;

•

the size of the organisation involved; and

•

whether or not the contravention was deliberate.

Notification requirement

3.90 It is fundamental for a regulator to know the population it is expected to regulate. However, currently there is no uniform notification requirement that exists under the FATA. A foreign person is required to notify the Treasurer of taking an action if the requirement to notify is included as a condition in a no objection notification. However, there is no notification requirement if the person is issued an unconditional no objection notification under section 75 of the FATA.

3.91 Schedule 2 to the Bill introduces uniform notification requirements for foreign persons issued with a no objection notification or an exemption certificate for a proposed core Part 3 action. The notification requirement applies if the person takes that action. [Schedule 2, item 16, subsections 98C(1), 98C(2), 98D(1) and 98D(2) of the FATA]

3.92 The person is also required to notify the Treasurer after the action has been taken, when specified related events take place, where the person becomes aware, or ought reasonably to have become aware, of that situation. [Schedule 2, item 16, subsection 98E(1) of the FATA]

•

A person must notify the Treasurer if there is a subsequent change of control of the entity or business to which the core Part 3 action relates. [Schedule 2, item 16, subsection 98E(1) and paragraphs 98E(2)(a) of the FATA]

•

A person must notify the Treasurer where the person ceases to have a direct interest in the Australian entity or a part of their interest in Australian land. [Schedule 2, item 16, subsection 98E(1) and paragraphs 98E(2)(b) and (d) of the FATA]

•

A person must notify the Treasurer where there is a decrease in the percentage of interest held by the person in an entity or a business after the acquisition where that decrease means the person's holding is less than or equal to the person's holding immediately before the initial increase [Schedule 2, item 16, subsection 98E(1) and paragraph 98E(2)(c) of the FATA]

•

A person must give a notice to the Treasurer, if the regulations made for the purposes of section 44 of the FATA specify that a notice is required for one or more situations about the relevant core Part 3 action, and any of those situations cease to exist. [Schedule 2, item 16, paragraph 98E(2)(e) of the FATA]

•

If the core Part 3 action is covered by regulations made for the purposes of section 44 of the FATA, and relates to acquiring either a direct interest or an interest of at least a certain percentage in an entity or business, and the person ceases to hold a direct interest or an interest of at least that percentage in the entity or business, they are required to notify that action. [Schedule 2, item 16, subparagraphs 98E(2)(f)(i) and (ii) of the FATA]

•

Where the core Part 3 action was starting an Australian business, the foreign government investors need to notify when they cease to carry on that business. The notification requirement would also apply for the core Part 3 action that relates to acquisition of interest in a tenement, and the person ceases to hold all or part of that interest. [Schedule 2, item 16, subparagraphs 98E(2)(f)(iii) and (iv) of the FATA]

•

This notification requirement also extends to acquiring an interest of at least a certain percentage of the securities of an entity. A notification requirement applies to foreign government investors where they cease to have an interest of at least that percentage of the securities of the entity. [Schedule 2, item 16, paragraph 98E(2)(f)(v) of the FATA]

3.93 The notification requirement will not apply to certain acquisitions administered by the ATO, mainly acquisitions of interests in commercial or residential land. It is intended that these exemptions be prescribed by regulations.

Time period for notice to be given

3.94 In order to comply with the notification requirement, the person must notify the Treasurer within 30 days after the later of the following:

•

the day on which the person took the relevant core Part 3 action or the day a specified related event that needs to be notified took place;

•

the day on which the no objection notice or exemption certificate was given.

3.95 For the purposes of the new notification requirements, the effect of section 15 of the FATA (which deems a person to have acquired an interest in certain circumstances) should be disregarded if the core Part 3 action relates to the acquisition of an interest in a security, asset, trust or Australian land. The 30 day count for any core Part 3 action in relation to such an acquisition will be later of the day on which the person acquired the interest in a security, asset, trust or Australian land, or the day on which the no objection notice or exemption certificate was given. [Schedule 2, item 16, subsections 98C(2), 98D(2), and 98E(3) of the FATA]

3.96 The notice must contain relevant details such as describing the action that has been taken and the date when the action was taken. The regulations may specify any additional content required in the notice. The notice must be made in the manner approved by the Secretary under section 135 of the FATA. [Schedule 2, items 16 and 45, subsections 98C(3), 98D(3), and 98E(4), and paragraph 135(3)(bb) of the FATA]

Contravention of notification requirement

3.97 A person may be liable for a civil penalty or receive an infringement notice for failing to comply with the notification requirement. The civil penalty for contravention of the notification requirement is 250 penalty units. This is consistent with the maximum civil penalty amounts specified for similar contraventions under the FATA relating to a failure to give a notice. See for example, section 97 of the FATA (about a person contravening a condition requiring the giving of a notice). [Schedule 2, item 16, subsections 98C(2) and 98D(2) of the FATA]

Direction Powers

3.98 The Treasurer may give a direction to a person where the Treasurer has a reason to believe that a person has engaged, is engaging, or will engage in conduct that constitutes a contravention of a provision of the FATA. A direction can be given in relation to one or more suspected contraventions. [Schedule 1, item 132, subsections 79R(1) and (2) of the FATA]

3.99 Directions may be issued where the contravention or possible contravention involves conduct relating to a failure to act.

3.100 The Treasurer's directions are designed to provide a quick and efficient response to the conduct of a person and to require the person to promptly remedy a breach of the FATA. The power supports early regulatory intervention in order to protect further or ongoing harm to the national interest.

Treasurer may give interim directions

3.101 The Treasurer may give an interim direction to a person if the Treasurer considers that a delay in giving an interim direction to address or prevent the relevant contravention would be contrary to the national interest. Similar to directions, interim directions can also be given in relation to one or more possible contraventions and the Treasurer must have reason to believe that a person has engaged, is engaging, or will engage in conduct that constitutes a contravention of a provision of the FATA. [Schedule 1, item 132, subsections 79V(1) and (2) of the FATA]

3.102 An interim direction will expire if a direction about the same contravention is given to the person. The interim direction ceases to have effect at the time the direction takes effect. The Treasurer may also revoke an interim direction prior to its expiration. [Schedule 1, item 132, sections 79X and 79Y of the FATA]

Scope of directions and interim directions

3.103 The Bill provides a non-exhaustive list of directions and interim directions that the Treasurer may give to a person. The list is indicative of the kinds of directions and interim directions that could be issued by the Treasurer. The list of directions can be extended by regulations. Any directions of a kind that are being regularly made by the Treasurer, but are not listed in the Bill, are expected to be prescribed in the regulations to provide transparency to investors. Any regulations made are subject to disallowance and parliamentary scrutiny. [Schedule 1, item 132, subsections 79R(5) and 79V(5) of the FATA]

3.104 Where the contravention, or possible contravention, relates to the composition of the group of senior officers and the Treasurer is satisfied that the composition of the group of senior officers of a corporation is contrary to the national interest, the Treasurer can give a direction to address or prevent this by ensuring that specified persons (including persons who are not Australian citizens, or who are foreign persons) cease to be, or do not become senior officers of the corporation. The Treasurer can give a direction to ensure a specified proportion of senior officers of a corporation are not specified kinds of person (such as persons who are not Australian citizens, or who are foreign persons). [Schedule 1, item 132, subsections 79R(6) and (7) of the FATA]

3.105 A direction or interim direction must be given to a person in writing, and must direct the person to engage in conduct to either address or prevent the suspected contravention that resulted in the direction or interim direction being issued, or prevent a similar or related contravention. The Treasurer can also give directions that direct the person to take ancillary steps required to address or prevent a suspected contravention. [Schedule 1, item 132, paragraphs 79R(5)(d), 79V(5)(d) and subsections 79R(3) and 79V(3) of the FATA]

Example 3.4

A foreign investor who holds a substantial interest in an Australian entity enters into an agreement that enables them to direct two non-independent board members. The foreign investor holds a no objection notification with conditions under the FATA for taking the significant action (that is, entering into the agreement).

A year later, information is obtained showing that the foreign investor had been directing four non-independent board members. Furthermore, the board of the Australian entity had made some recent decisions about future decisions that favour the foreign investor.

As a result, the Treasurer has reason to believe that the foreign investor has engaged in conduct that is inconsistent with the conditions attached to the no objection notification, which constitutes a contravention of the FATA. The Treasurer issues directions to the foreign person to immediately stop giving instructions to any non-independent board members of the Australian entity until further notice.

Issuing directions is preferred in this instance to prevent the foreign investor from continuing to benefit from a contravention whilst an investigation is conducted and an opportunity for the investor to provide clarifying information afforded. The direction is aimed at preventing contraventions occurring as well as addressing a suspected contravention.

3.106 A direction or interim direction may specify a time during or by which compliance with a direction must be completed. Where a time is specified in a direction, a person must comply with the direction within that period, however described. The Treasurer may limit a direction so that a person must engage in specified conduct until a condition in a direction is met. [Schedule 1, item 132, subsections 79R(4) and 79V(4) of the FATA]

3.107 A direction or interim direction may also include a matter, detail or instruction contained in any instrument (legislative or not) or other writing such as guidance by referring to that material without recreating it in the direction or interim direction. [Schedule 1, item 132, subsections 79R(8) and subsection 79V(6) of the FATA]

3.108 The ability to incorporate material into a direction or interim direction, from time to time, is essential to ensure the effectiveness of directions and to minimise the compliance burden. There is a particular need for this in the context of foreign investment screening given the breadth of investments that may be involved, which may make it necessary to refer to documents that have been developed using the technical expertise of, for example, a specialist government agency. If the Treasurer gives a direction, it is possible that the Treasurer will need to refer to concepts and expectations that are already defined in existing guidance and other materials, such as national auditing standards. If this is the case, it is clearer to incorporate the source material that details these matters by reference rather than seeking to duplicate them in the direction.

3.109 Referring to external material can also help to avoid a direction becoming dated or out of step with industry practice. It is sometimes necessary to apply these documents as in force or existing from time to time due to the fact that reference to static documents may not provide responsive and up-to-date detail in the same manner and could also necessitate frequent variations being made to the directions. Referring to the latest standards is also expected to be simpler for investors whom are likely to have updated their processes in line with the latest standards and professional requirements. The Treasurer may also refer to external materials as in force at a particular point in time if that is more appropriate.

3.110 It is expected that any material incorporated by reference will be publicly accessible or could be provided to a person by the Treasurer.

3.111 A written direction or interim direction given by the Treasurer is not a legislative instrument within the meaning of section 8 of the Legislation Act 2003. [Schedule 1, item 132, subsections 79R(9) and 79V(7) of the FATA]

Procedure when giving a direction or interim direction

3.112 In order to comply with procedural fairness obligations, it is expected that the Treasurer will give a person an opportunity to make submissions on the matter before the Treasurer makes or varies a direction (other than an interim direction).

3.113 Generally, as soon as practicable after a direction is made, it must be published on a website maintained by the Treasury. An interim direction does not need to be published. The Treasurer can decide, in writing, not to publish a direction, if it is determined that it is sensitive information and the release of contents of the given direction would be contrary to the national interest. This will not make the direction invalid. [Schedule 1, item 132, section 79S of the FATA]

3.114 There are strong public interest grounds in requiring directions to be published on a website maintained by Treasury, as this serves to increase public confidence that appropriate steps have been taken to ensure compliance with the FATA. However, it is important that the amendments clarify that a failure to publish a direction will not invalidate the direction. Any failure to publish the direction will not disadvantage a person or affect the provision of procedural fairness to the person, as publication is required after the decision to issue a direction has already been made and regardless of whether the direction is published or not, the Treasurer is still required to provide the direction in writing to the person and any variations or revocations must also be notified in writing to a person.

3.115 A direction and an interim direction to a person takes effect from the later of the time when it is given to the person in respect of which it was made, or the time specified in the direction or interim direction. Compliance with the direction or the interim direction is required from that time. [Schedule 1, item 132, sections 79T and 79W of the FATA]

3.116 The Treasurer can delegate, in writing, a power to give directions in accordance with section 137 of the FATA. The delegation provisions allow the Treasurer to delegate the directions power to the Secretary, the Commissioner, or a person engaged under the Public Service Act 1999 who is employed in the Treasury or the ATO. However the Treasurer cannot delegate a function or power that a person has under the Regulatory Powers Act. [Schedule 2, item 46, subsection 137(8) of the FATA]

Treasurer may vary or revoke a direction

3.117 The Treasurer can vary a direction or an interim direction given to a person, by notice in writing, if the Treasurer considers that this is appropriate and not contrary to the national interest. [Schedule 1, item 132, subsections 79U(1) and 79Y(1) of the FATA]

3.118 The Treasurer can revoke a direction or an interim direction given to a person, by notice in writing, if the Treasurer considers that the direction or interim direction is no longer appropriate, and revoking the direction is not contrary to the national interest. [Schedule 1, item 132, subsections 79U(2) and 79Y(2) of the FATA]

3.119 The variation or revocation of the direction takes effect from the later of the time when it is given to the person in respect of which it was made, or the time specified in the direction or interim direction. [Schedule 1, item 132, subsections 79U(7) and 79Y(3) of the FATA]

3.120 Generally, as soon as practicable after varying or revoking a direction, the Treasurer must ensure that the variation or revocation is published on a website maintained by the Treasury. The Treasurer can decide not to publish a variation or revocation, if it is determined that it is sensitive information and the release of contents of the direction would be contrary to the national interest. As with a failure to publish the direction, failing to publish the variation or revocation does not make that varied direction or revocation invalid and this would not disadvantage a person or affect the provision of procedural fairness to the person. [Schedule 1, item 132, subsections 79U(3), (4), (5) and (6) of the FATA]

Penalties for contravention of a direction or interim direction

3.121 A contravention of a direction or interim direction is a criminal offence and is punishable by imprisonment for 10 years or 15,000 penalty units (or 150,000 penalty units if the person is a corporation), or both. [Schedule 1, item 158, section 88A of the FATA]

3.122 Providing criminal sanctions for contravening a direction or interim direction reflects the potential for the conduct involved in such contraventions to cause harm to Australia's national interests. Generally, the direction or interim direction will relate to preventing or addressing a contravention or possible contravention of the FATA. The additional penalties that can apply for contravening a direction or interim direction provides additional incentives for investors to ensure they are fully compliant with their other obligations under the FATA.

3.123 The penalties are subject to section 4D of the Crimes Act 1914, meaning that the specified amounts are the maximum penalties that can be imposed. Maximum penalties provide a court with guidance on how to punish criminal behaviour. They restrict the court's sentencing discretion as the court is unable to order a penalty in excess of the prescribed maximum penalty. The maximum penalty is generally reserved only for the most egregious cases.

3.124 The maximum penalty and maximum term of imprisonment reflect the seriousness of this offence and need to deter and punish such behaviour as appropriate.

3.125 A contravention of a direction or interim direction is a civil penalty provision, if the underlying provision to which the relevant contravention relates to is a civil penalty provision. A maximum civil penalty for contravening a direction or interim direction is 5,000 penalty units (or 50,000 penalty units if the person is a corporation). The Guide was considered in determining the applicable civil penalty amounts. [Schedule 2, item 16, section 98A of the FATA]

3.126 Directions given by the Treasurer are aimed at protecting Australia's national interest and preventing or addressing suspected breaches of the law. The potential for significant consequences to the national interest if a direction is not complied with makes it appropriate for such conduct to form the basis for a civil penalty. Liability for a civil penalty is also likely to significantly enhance the effectiveness of a direction as a regulatory tool to improve compliance with the FATA.

3.127 The maximum civil penalty is generally reserved only for the most egregious cases, and it is expected the court will exercise its discretion and consider a range of factors making it unlikely that the maximum penalty would be imposed in every instance. Factors typically considered by the court will include:

•

the nature and extent of the conduct which led to the contravention;

•

the relevant circumstances;

•

the size of the organisation involved, and

•

whether or not the contravention was deliberate.

Monitoring and Investigation Powers

3.128 Currently, the Treasurer relies on the general information gathering power under section 133 of the FATA to monitor and investigate non-compliance, while the Commissioner utilises powers under the TAA. Both also undertake open source surveillance and engage proactively with applicants.

3.129 While the information gathering powers under the FATA support desk-top and paper-based auditing and compliance monitoring, the powers do not establish a specific framework for site or site-based inspections or investigations. At times the existing information gathering power is insufficient to draw compliance conclusions with respect to certain conditions (for example, conditions requiring the installation or removal of surveillance and communications equipment).

3.130 The Bill triggers the Regulatory Powers Act, which provides a standard suite of provisions in relation to monitoring and investigation powers. ATO officers working under the delegation of the Treasurer would continue to access powers under the TAA.

Monitoring Powers

3.131 Part 2 of the Regulatory Powers Act creates a framework for monitoring whether the provisions of an enlivening Act or a legislative instrument have been, or are being complied with, and that information given in compliance with a provision of that Act or legislative instrument is correct. Part 2 of the Regulatory Powers Act includes powers of entry and inspection.

3.132 These amendments create a framework for monitoring compliance with the provisions of the FATA and whether correct information has been provided. Provisions of the FATA which are offences for the purposes of the Crimes Act 1914 or the Criminal Code are also subject to monitoring. [Schedule 2, item 40, subsections 101A(1) and (2) of the FATA]

3.133 The amendments include a note, which clarifies that some provisions of the FATA are taxation laws for the purposes of the TAA and that therefore the Commissioner's powers to obtain information and evidence under Division 353 in Schedule 1 to the TAA may be available. [Schedule 2, item 40, note 2, subsection 101A(1) of the FATA]

Investigation Powers

3.134 Part 3 of the Regulatory Powers Act creates a framework for gathering material that relates to the contravention of offence and civil penalty provisions of an Act or legislative instrument.

3.135 A provision under the FATA is subject to investigation under Part 3 of the Regulatory Powers Act if it is an offence against the FATA, or a civil penalty provision of the FATA, or an offence against the Crimes Act 1914 or the Criminal Code that relates to the FATA. [Schedule 2, item 40, subsection 101B(1) of the FATA]

Operation of Monitoring and Investigation Powers

3.136 For the purposes of Part 2 of the Regulatory Powers Act the operative provisions apply in relation to the provisions identified and information mentioned in the FATA. For the purpose of Part 3 of the Regulatory Powers Act the operative provisions apply in relation to evidential material that relates to a relevant provision in the FATA.

3.137 Related provisions for the purpose of monitoring and investigative powers under the FATA are offence provisions, or civil penalty provisions, of the TAA or the Corporations Act 2001 and provisions of Part 3 or 3B of the Agricultural Land and Water Register Act. If a thing is found in the course of executing a monitoring or investigation warrant that may be evidence of the contravention of a related provision, an authorised person is permitted to secure that thing in serious or urgent circumstances to prevent it from being concealed or destroyed. [Schedule 2, item 40, subsections 101A(3) and 101B(2) of the FATA]

3.138 With the exception of the Corporations Act 2001, the other listed legislation are also administered by the Treasury or the ATO. From an operational perspective, an authorised officer is likely to be an authorised person for multiple pieces of legislation. Therefore in the course of exercising their monitoring or investigative powers they may come across evidence that relates to compliance for a number of legislative obligations and by incorporating the related provisions, they can secure the evidence from concealment or destruction. Further, both agencies will work collaboratively with the Australian Securities and Investment Commission and in monitoring or investigating corporate compliance with the FATA, evidence may be gathered that is relevant to compliance with the Corporations Act 2001.

3.139 The Secretary of the Treasury and an authorised officer as defined in the FATA are both authorised applicants. This enables the Secretary or an authorised officer to apply to an issuing officer for a monitoring warrant or an investigation warrant in relation to premises. [Schedule 2, item 40, subsections 101A(4), 101B(3) of the FATA]

3.140 An authorised officer is an authorised person, allowing them to enter any premises and exercise monitoring powers for either the purpose of determining whether provisions subject to monitoring have been, or are being, complied with, or for the purpose of determining whether information subject to monitoring is correct. An authorised officer may also exercise investigation powers where they suspect on reasonable grounds that there may be material on the premises related to the contravention of a relevant provision identified in the FATA. However, an authorised person may not enter the premises unless the occupier has provided consent, or the authorised person is in possession of a monitoring or investigation warrant. [Schedule 2, item 40, subsections 101A(5) and 101B(4) of the FATA]

3.141 The Secretary may appoint a person as an authorised officer, for the purposes of Parts 2 and 3 of the Regulatory Powers Act. The person must be an APS employee performing the duties of an APS Level 6 position, or an equivalent or higher position, in the Treasury. The Secretary must be satisfied that the person has suitable training or experience to properly perform the functions, or exercise the powers, of an authorised officer. This is consistent with Australian Government policy and is appropriate given authorised officers will exercise coercive powers. An authorised officer must comply with the directions of the Secretary in relation to an authorised officer's exercise of powers or the performance of functions. The status of such a direction given by the Secretary is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003, and is merely declaratory of the law and not intended as an exemption from that Act. [Schedule 2, items 1 and 40, sections 4 and 101E of the FATA]

3.142 An issuing officer can either be a magistrate, a Judge of a court of a State or Territory, a Judge of the Federal Circuit Court of Australia or a Judge of the Federal Court of Australia. A Judge of the Federal Circuit Court of Australia or of the Federal Court of Australia will only act as an issuing officer if the relevant Minister has nominated that Judge to be an issuing officer, and the Judge has consented and while that consent is still in force. Under Part 2 and Part 3 of the Regulatory Powers Act an issuing officer may issue a monitoring or an investigation warrant only when satisfied, by oath or affirmation, that there are reasonable grounds for monitoring premises for compliance with provisions of the FATA or suspecting that there is, or may be an evidential material on the premises. An issuing officer must not issue a warrant unless the issuing officer has been provided, either orally or by affidavit, with such further information as they require concerning the grounds on which the issue of the warrant is being sought. These constraints ensure adequate safeguards against arbitrary limitations on the right to privacy in the issuing of warrants. [Schedule 2, item 40, subsections 101A(6) and 101B(5) of the FATA]

3.143 The Secretary is the relevant chief executive. The Secretary may, in writing, delegate the Secretary's powers or functions to the Commissioner, or a SES employee, or acting SES employee, in the Treasury. If a power or function is delegated to the Commissioner, they may sub-delegate the power or function to an SES employee, or acting SES employee, in the ATO. The delegation is necessary to the senior members of the organisation and appropriate as these powers are coercive in nature and delegates are required to comply with any directions of the delegator and powers can only be delegated for specified matters. [Schedule 2, item 40, subsections 101A(7), 101B(6) and section 101F of the FATA]

3.144 The Federal Court of Australia, the Federal Circuit Court of Australia, and a court of a State or Territory that has jurisdiction in relation to matters arising under the FATA are relevant courts. This jurisdiction has been conferred widely to ensure that disputes can be resolved in the lowest level of court appropriate, and allow the resulting workload to be distributed between courts. [Schedule 2, item 40, subsections 101A(8) and 101B(7) of the FATA]

3.145 Under paragraph 23(1)(a) of the Regulatory Powers Act an authorised officer may be assisted by other persons in exercising powers or performing functions or duties, only where it is necessary and reasonable to do so. [Schedule 2, item 40, subsections 101A(9) and 101B(8) of the FATA]

3.146 Parts 2 and 3 of the Regulatory Powers Act, as they apply to the provisions identified and information mentioned in the FATA, extend to the external Territories. [Schedule 2, item 40, subsections 101A(10) and 101B(9) of the FATA]

Enforceable Undertakings

3.147 Currently, under the FATA, the Treasurer does not have the power to accept enforceable undertakings as a way of managing compliance with the FATA. The FATA is amended to provide for undertakings enforceable under the Regulatory Powers Act.

3.148 All provisions of the FATA are enforceable under Part 6 of the Regulatory Powers Act. This Part creates a framework for accepting and enforcing undertakings relating to compliance with provisions of the FATA. [Schedule 2, item 40, subsection 101C(1) of the FATA]

3.149 If an action by a foreign person places Australia's national interest at risk, enforceable undertakings will act as a credible and flexible element of an effective deterrence regime to restore investor compliance without recourse to the courts.

Example 3.5

A serious data breach reveals that the foreign investor failed to put in place data security measures as required under conditions. To remedy this breach, the foreign investor offers to conduct a full audit of its systems from the past five years to detect any other breaches, to advise (and possibly compensate) clients whose data was compromised, and to put in place the required security measures together with annual auditing of their effectiveness, which had not been required under the original conditions.

The Treasurer accepts a written undertaking to this effect from the investor as a more flexible but effective alternative to imposing civil penalties.

3.150 The Treasurer is an authorised person in relation to the provisions subject to enforceable undertakings under the FATA, which enables the Treasurer to accept and enforce undertakings relating to compliance with the FATA. The Treasurer may, in writing, delegate the Treasurer's powers or functions to the Secretary, the Commissioner or an SES employee, or acting SES employee, in the Treasury. The Commissioner may in writing, sub-delegate the power or function to an SES employee, or acting SES employee, in the ATO. The delegation is necessary to the senior members of the organisation and appropriate as these powers are coercive in nature and delegate is required to comply with any directions of the delegator and powers can only be delegated for specified matters. [Schedule 2, item 40, subsections 101C(2), and section 101F of the FATA]

3.151 The Federal Court of Australia, the Federal Circuit Court of Australia, and any court of a State or Territory that has jurisdiction in relation to matters arising under the FATA, are relevant courts in relation to provisions of the FATA that are enforceable under Part 6 of the Regulatory Powers Act. Part 6 of the Regulatory Powers Act gives a relevant court the power to make orders where there is a breach of an enforceable undertaking. [Schedule 2, item 40, subsection 101C(3) of the FATA]

3.152 Part 6 of the Regulatory Powers Act, as it applies to the provisions in the FATA, extend to the external Territories. [Schedule 2, item 40, subsection 101C(4) of the FATA]

3.153 Generally, after an undertaking is accepted by the Treasurer, it must be published on a website maintained by the Treasury as soon as practicable after it is accepted. A failure to publish the undertaking does not affect the enforceability of the undertaking. The Treasurer can decide not to publish an undertaking if it is determined that it is sensitive information, and that the release of the contents of the accepted undertaking would be contrary to the national interest. [Schedule 2, item 40, subsection 101D of the FATA]

3.154 There are strong public interest grounds in requiring undertakings to be published on a website maintained by Treasury, as this serves to increase public confidence that appropriate steps have been taken to ensure compliance with the FATA. However, it is important that the amendments clarify that a failure to publish an undertaking will not affect its enforceability. Any failure to publish the undertaking will not disadvantage a person or affect the provision of procedural fairness to the person, as publication is required after the person has given the undertaking.

Powers of Commissioner as a result of delegation under monitoring, investigative and enforceable undertaking powers

3.155 If the Commissioner is delegated powers to monitor, investigate or accept an undertaking under the FATA, Schedule 2 to the Bill provides that the Commissioner has the general administration of this Act to the extent of administering the provision. However, where a power is delegated to the Commissioner to monitor, investigate or accept enforceable undertakings, the Commissioner will not automatically be able to exercise the special investigative powers given by sections 353-10 and 353-15 of Schedule 1 to the TAA. The title of this section has also been updated. [Schedule 2, item 48 and 47 subsections 138(3A) and (3B), and subsection 138(1) (heading) of the FATA]

3.156 Enabling the Commissioner to apply the Commissioner's existing access and information gathering powers will help to minimise costs for both regulated persons and the ATO. This is because in many situations where information is required for the administration of the FATA, that same information is also required to administer taxation laws. For example, if a foreign investor has acquired an interest in a property, in addition to questions about whether the person has complied with the FATA, there may also be questions as to whether that property has been used for income producing purposes and, if so, how that income has been treated for taxation purposes.

References to the Federal Circuit Court

3.157 These amendments update references to the 'Federal Circuit Court of Australia' to 'Federal Circuit and Family Court of Australia (Division 2)' reflecting the new nomenclature introduced by amendments in the Federal Circuit and Family Court of Australia Bill 2020. The amendments do not commence if the Federal Circuit and Family Court of Australia Bill 2020 never commences. [Commencement table and Schedule 2, items 58 to 62 , subparagraphs 101A(6)(a)(iii) and 101B(5)(a)(iii) and paragraphs 101A(8)(b), 101B(7)(b) and 101C(3)(b) of the FATA]

Application and transitional provisions

Expanding the availability of infringement notices under the FATA

3.158 The amendments relating to infringement notices will apply in relation to contraventions of the foreign investment rules that occur on or after 1 January 2021. [Schedule 2, item 52]

Updating the penalties for certain criminal offences and contravention of civil penalties under the FATA

3.159 The amendments relating to updating criminal and civil penalties and the amendments introducing valuation rules for the purposes of calculating civil penalties will apply in relation to contraventions that occur on or after 1 January 2021. [Schedule 2l, item 51]

Failing to give notice

The amendments relating to updating the civil penalties for failing to give notice of a notifiable action or a notifiable national security action apply to contraventions that occur on or after 1 January 2021. [Schedule 1, item 46]

Infringement notices and civil penalty for vacancy fee lodgements

3.160 The amendments will apply in relation to the vacancy fee returns given on or after 1 January 2021. [Schedule 2, item 53]

Remedy incorrect statements

3.161 The Treasurer can revoke a no objection notification or revoke or vary an exemption certificate where information or documents that were false or misleading were given in relation to the no objection notification or exemption certificate to the Treasurer before, on or after 1 January 2021. As the amendments apply in relation to information or documents given to the Treasurer before, on or after 1 January 2021, the amendments may apply for no objection notifications and exemption certificates issued before, on or after 1 January 2021. The amendments providing for the effect of revoking or varying an exemption certificate apply to revocations or variations made on or after 1 January 2021. [Schedule 1, items 166 and 243]

3.162 Civil penalties or infringement notices may apply for contraventions involving false or misleading information or documents given on or after 1 January 2021. A civil penalty or infringement notice will not apply for information or documents given before 1 January 2021. [Schedule 2, items 49 and 52]

Notification of actions

3.163 The notification requirements will apply in relation to no objection notices and exemption certificates given on or after 1 January 2021. [Schedule 2, item 50]

Direction Powers

3.164 The Treasurer can give directions and interim directions to a person where the relevant conditions for making a direction or interim direction were met on or after 1 January 2021. [Schedule 1, item 245]

3.165 The amendments which provide that a person is liable to a civil penalty for contravening a direction or interim direction will commence on 1 January 2021. [Commencement table]

Monitoring Powers

3.166 Amendments apply in relation to compliance with the provisions of the FATA and information given in compliance with a provision of the FATA before, on or after 1 January 2021. [Schedule 2, item 55]

Investigation Powers

3.167 Amendments apply in relation to contraventions or suspected contraventions of any offence provision or civil penalty provision of the FATA, or an offence against the Crimes Act or the Criminal Code that relates to the FATA that occurs before, on or after 1 January 2021. [Schedule 2, item 56]

Enforceable Undertakings

3.168 The Treasurer can accept and enforce undertakings relating to compliance with the FATA given on or after 1 January 2021. [Schedule 2, item 57]

Application of Regulatory Powers (Standard Provisions) Act 2014

3.169 In this Division the terms 'act', 'amended Act' and 'commencement time' have certain meanings. [Schedule 2, item 54]

Consequential amendments

3.170 As a result of the compliance changes above, a number of consequential amendments were made to the simplified outline of section 83 which details the offences and penalties under the FATA. [Schedule 2, item 2, section 83 of the FATA].

3.171 Due to the penalty provisions being updated, consequential amendments are made to update the section number reference for sections 89 and 92. [Schedule 2, items 8 and 11, sections 89 and 92 FATA]

3.172 As the variation of revocation of exemption certificate sections have been updated, the reference to 'subdivision' in subsection 62(3) is updated to refer to 'division'. [Schedule 1, item 78, Subsection 62(3) of the FATA]

3.173 A new term is also added to the FATA to assist to understand the application of the new compliance and enforcement provisions to certain actions. The term 'core Part 3 action' is included in the FATA to refer to a significant action, notifiable national security action that is not a significant action, an action where the Treasurer has given the person a notice that the action may pose a national security concern, or a reviewable national security action that is notified to the Treasurer. [Schedule 1, item 11, section 4 of the FATA]