Improving compliance and additional enforcement tools

On 9 December 2020, the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 (Amending Act) and the Foreign Acquisitions and Takeovers Fees Imposition Amendment Act 2020 were passed. The changes to the foreign investment regime came into effect on 1 January 2021.

Schedules 1 and 2 of the Amending Act introduce significant amendments to Australia’s current foreign investment compliance framework. These changes include increases in civil and criminal penalties and additional regulatory powers given to the Treasurer (as well as the Commissioner of Taxation). These amendments aim to protect Australia’s national interest and to ensure compliance and strict adherence with the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).  

Infringement Notices

Previously, an infringement officer could only issue an infringement notice if the officer believed, on reasonable grounds, that the person had contravened a civil penalty provision relating to residential land. Examples of instances punishable by way of an infringement notice included:

• where a foreign person acquired new property but purchased that land before approval was granted; or

• where a property developer failed to comply with the reporting conditions associated with the approval.

Previously, there were two categories of infringement notice - a tier 1 notice or a tier 2 notice.

A tier 1 notice penalty applied if the person self-disclosed the conduct to the Commonwealth (former section 101(1), FATA).

A tier 2 notice could be issued when the breach was discovered by a means other than self-disclosure.  

Expansion of infringement notice

Formerly, the only other mechanism for penalising other breaches of the FATA was to initiate court proceedings to impose civil or criminal penalties. The Amending Act expands the meaning of infringement notices to relate to an alleged contravention of any civil penalty provision in the FATA (rather than limiting it to residential property investment) (section 100(1)(a), (ba) and (d), FATA). 

Tier 1 Infringement Notice

The definition of a tier 1 infringement notice has now been amended so that it is the Treasurer (or delegate) or the Commissioner of Taxation on behalf of the Treasurer, and not the Commonwealth, that must be notified through direct voluntary disclosure by a foreign person of an alleged contravention, for the purposes of foreign investment administration (section 101(1)(b), FATA).

The disclosure to the Treasurer must also be made in the manner approved by the secretary of the Department of the Treasury (section 135, FATA).  This provides greater clarity and certainty around what information may be disclosed to the Treasurer.

Tier 3 Infringement Notice – Part 5 Division 4 Subdivision AA of the FATA.

There is now a tier 3 infringement notice to address non-compliance of high value acquisitions.

A tier 3 infringement notice can be issued where the Treasurer (or the Commissioner of Taxation on behalf of the Treasurer) discovers a breach through active compliance (i.e. data matching or information provided by a member of the public) (section 101(4), FATA). 

The market value of the relevant action to which the contravention relates must be equal to or more than:

1. $5 million for residential acquisition; or
2. $275 million for business acquisitions and other non-real estate acquisitions.

(section 101AA(1), FATA).

The $275 million threshold aligns with the threshold for business investment by non-government foreign investors to be deemed a significant action.

The $5 million threshold is to reflect the level of sophistication of investors and emphasise that an infringement should not be absorbed as the cost of doing business.

A tier 3 infringement notice cannot be issued in relation to certain civil penalty provisions – even if the value of the relevant action meets the above thresholds. This is to ensure that penalties in an infringement notice do not exceed the related civil penalty amount.¹

Tier 2 Infringement Notice

A tier 2 infringement notice applies where the value is less than the thresholds listed above.

The applicability of a tier 2 infringement notice or a tier 3 infringement notice depends on the value for the relevant notifiable action.

The Amending Act also introduced a valuation table set out in section 101AA(3) of the FATA.  The table is used to determine the value of an action which crosses the relevant tier 3 infringement notice thresholds. A tier 2 infringement notice will be issued where the determined value is lower than the monetary thresholds.

Under the FATA, where a tier 3 infringement notice could be issued, the Treasurer has the discretion to issue a tier 2 infringement notice if the Treasurer considers it more appropriate, regardless of the value of the action (section 101(5) and (6), FATA).

However, this discretion is limited as the Treasurer will have regard to the conduct of the person after the alleged contravention including:

• the nature of steps that the person has taken to address the contravention; and

• the extent to which the person has cooperated with the Treasurer,

(section 101(7), FATA).

The Treasurer will also ensure that the issue of tier 2 infringement notice is not contrary to the national interest.²

A regulator should not be exercising significant discretion when determining the level of infringement notice. In most circumstances, infringement notices will be imposed in strict compliance with the FATA.

Penalty for Infringement Notices – section 100(6)

The amount to be stated in an infringement notice for the purposes of paragraph 104(1)(f) of the Regulatory Powers (Standard Provisions) Act 2014 (Regulatory Powers Act) for the alleged contravention of a civil penalty provision is set out below.

The introduction of a tier 3 infringement notice and the abovementioned measures enable the Federal Government to address contraventions of the FATA and issue infringement notices to all types of breaches.

The infringement notices (tier 1 -through to tier 3) are graduated to enable a more proportional approach to contraventions of the FATA.  

The expansion of the applicability of an infringement notice means that investors will be caught where they contravene any civil penalty provision of the FATA.  

Penalties

Civil and criminal penalties have substantially increased under the FATA.

For instance, under section 84 of the FATA, a person must provide notice under section 81 before taking a notifiable action or notifiable national security action.  Formerly, the maximum penalty was imprisonment for 3 years or a financial penalty of 750 penalty units ($157,500), or both. This has now increased to imprisonment for 10 years, or a financial penalty of 15,000 penalty units ($3.15 million), or both. The updated penalties are set out in the table below.

Proposed Criminal and Civil Penalties

* A core Part 3 action is:

• a significant action;
• a notifiable national security action that is not a significant action;
• an action in respect of which the Treasurer has given notice under subsection 66A(4) (national security review of actions: notice of review); and
• a reviewable national security action notified to the Treasurer.

Under Part 4 of the Regulatory Powers Act, if a body corporate contravenes a civil penalty provision, the penalty is five times the pecuniary penalty specified for the provision. The pecuniary penalty for body corporates has been increased to 10 times the penalty specified for some civil penalty provisions.

The civil penalty amounts for penalty provisions are now determined in accordance with the valuation table set out in section 98F of the FATA. The table provides calculations for 15 types of actions. For instance, where a company contravenes a reporting obligation under one of the conditions in a no objection notification, the valuation approach in item 1 of the table contained in section 98F of the FATA will apply. 

These significantly high penalties aim to act as a deterrent, particularly to companies which profit from illegal behaviour.  Some businesses accept penalties as a part of conducting their business, and the penalties have increased so that they are proportionate to the size and financial capacity of these companies.  

The maximum penalties are intended to be commensurate with the seriousness of the offence, aiming for greater compliance with the FATA in future. The penalty increases work to strengthen community confidence in the foreign investment framework. The explanatory memorandum draws strong comparison between these prescribed maximum penalties and those implemented by other regulators, such as the Australian Investment And Securities Commission and the Australian Competition and Consumer Commission. 

However, the significant increase in both civil and criminal penalties may inevitably deter foreign investors from making significant investments, which may have broader implications for Australia’s economic growth. 

Remedy incorrect statements (section 76A of the FATA)

Under the old framework, there was limited remedy available where a person made a false statement or omitted certain information when notifying the Federal Government of a proposed investment (save for the former section 78 of the FATA). The Treasurer now has the power to revoke a no objection notification or exemption certificate, where that no objection notification or exemption certificate is issued based on an application that is false or misleading or omitted a material fact (sections 76A(2), (3), (4) and (6), FATA).

At the time the Treasurer forms the belief, and before exercising the power, the Treasurer may provide written notice to the person who was given the no objection notification notice that the Treasurer is considering revoking that notice on the grounds set out in section 76A of the FATA. The revocation decision must then be made within 120 days of the Treasurer notifying the person.

It is expected that the person will be provided with the opportunity to make a submission to the Treasurer. However, this is not specifically stated in the FATA.

The Treasurer then has 10 days to notify the person of the revocation decision.  Following this, the Treasurer may, within 30 days of the revocation, make an order prohibiting the action and/or requiring that person to dispose of the acquisition.

Alternatively, the Treasurer may reissue an exemption certificate with additional or different conditions.

The person may be liable to an infringement notice or to a civil penalty. The Treasurer may choose the most appropriate enforcement action against the applicant when they provide false or misleading information. The provision of a penalty (whichever avenue is deemed appropriate) is intended to operate as a significant deterrent to giving false or incorrect information. It also supports the integrity of the current framework by encouraging the provision of accurate documentation.

Introducing this framework to remedy these circumstances of incorrect reporting creates a system of accountability for investors. However, the amendments to the FATA fail to address instances where a no objection notification or exemption certificate is issued by the Treasurer in error or where the investment by a foreign investor did not eventuate due to the Treasurer’s oversight. 

Change or control of the entity (sections 98C - E of the FATA)

Formerly, there was no uniform notification requirement. The FATA has been amended to include a notifications obligation for certain actions. These actions include where there is a change of control of the entity or business to which the significant action relates or where a foreign person ceases to have a direct interest in the Australian entity or part of their interest in Australian land (section 98E, FATA).

There is also a uniform notification requirement for foreign persons issued with no objection notifications or exemption certificates for a proposed core Part 3 action. The notification requirement applies if the person proceeds to take that action (sections 98C and 98D, FATA).

A person has 30 days after the relevant action has been taken to notify the Treasurer and comply with the notification requirement. The person must disclose their contact details and the date and details of the action that has been taken. Contravention of this requirement may result in a civil penalty of 250 penalty units or an infringement notice.

This requirement places a positive obligation on the investor. These obligations ensure an active, healthy market by removing stale investors and safeguarding Australia’s national interests. It also creates transparency for the Australian consumer and allows competitors to understand who they are operating alongside of.

Direction Powers                                          

The Treasurer has new monitoring and investigative powers to detect non-compliance by foreign investors and enable early regulatory intervention. These are contained in sections 79R, 79V and 79Y of the FATA.

The scope of directions is broad and may be extended by regulations. These additional powers support early intervention, by requiring a person to rectify a breach of the FATA. For instance, the Treasurer can give directions to a person when the Treasurer has reason to believe that the person has or will engage in conduct that constitutes a contravention of the FATA (section 79R(1), FATA).  

The Treasurer may also give an interim direction to a person if the Treasurer considers that a delay in giving a direction to address or prevent the relevant contravention would be contrary to national interest (section 79V(1)(b), FATA).

The direction or interim direction must be given to a person in writing and direct the person to engage in conduct to either address or prevent the suspected contravention (for example section 79R(5), FATA). The direction may also specify a time by which compliance with a direction must be completed to prevent a suspected contravention (for example 79R(4), FATA).

Whilst the person may be given the opportunity to make submissions to the Treasurer to which the direction relates, foreign investors can expect the Treasurer (or its delegate) to be strict in its approach to assessing non-compliance.  The maximum criminal penalty for contravention of a direction or interim direction is imprisonment of 10 years or 15,000 penalty units, or both (section 88A, FATA). As at the date of this article, each penalty unit is $222.

Under the old regime, the Treasurer was only able to take punitive action after the breach had occurred. These new enforcement powers enable the Treasurer to take a proactive approach to potential breaches of the FATA.

Monitoring and Investigative Powers (section 101A of the FATA)

Formerly, the Treasurer derived its monitoring and investigative powers under section 133 o f the FATA. Otherwise, the Treasurer was only able to rely upon voluntary cooperation of foreign investors.

Part 2 and Part 3 of the Regulatory Powers Act, establishes a framework for monitoring compliance with the FATA and gathering information which relates to the contravention of criminal and civil penalty provisions of the FATA.

An authorised officer now has the power to conduct site-based inspections with consent or by warrant to examine whether certain conditions are being complied with.

Although the Treasurer’s powers have expanded from desk-top and paper-based auditing to site-based inspections, these measures appear quite invasive. It will be interesting to see whether a need to limit the scope of these powers arises.

Enforceable Undertakings

Formerly, the Treasurer did not have the power to accept enforceable undertakings to manage compliance of the . Section 101C has been introduced into the FATA making the provisions of the FATA enforceable under Part 6 of the Regulatory Powers Act. This means that the Federal Government will be able to accept enforceable undertakings from foreign persons to manage non-compliance.

Under Part 6 of the Regulatory Powers Act, undertakings may also be enforced in a relevant court. Orders that may be made by a relevant court include an order:

• directing compliance;

• requiring any financial benefit from the failure to comply to be surrendered; and

• or damages.

Enforceable undertakings are available where an investor faces costly litigation for a civil penalty order as a result of a contravention of a condition and offers an undertaking as a lower cost and more flexible alternative. Investors may also undertake to satisfy certain conditions in order to ensure that any potential national interest risk is reduced, and the decision maker accepts the proposed investment.

This additional power is intended to eliminate misconduct from foreign investors. Consumers often want decisive action and expect a regulator to take decisive action. This means publicly denouncing an investor who contravenes the FATA through the courts.  It will be interesting to examine the practical effects of this power and whether it is an effective strategy to deter non-compliance.