On 5 June 2020, the Treasurer, Mr Josh Frydenberg, announced a comprehensive reform package intended to amend the current foreign investment review framework. On 31 July, the Government released the exposure draft legislation (the draft Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 (Cth) (‘the draft Bill’)) for the purposes of stakeholder consultation. The 6-week consultation process is currently ongoing and will conclude on 31 August.
In a June Media Release, the Treasurer, Mr Josh Frydenberg, stated that the reforms are intended to reinforce Australia’s position on foreign investment:
“Australia welcomes foreign investment for the significant benefits it provides but also ensures that investments are not contrary to the national interest.”
According to the summary of the draft legislation released by the Treasury, the new national security test will “enable the Treasurer to impose conditions or block any investment by a foreign person on national security grounds regardless of the value of investment”. The draft Bill will require mandatory notification for:
The Explanatory Memorandum clarifies that the new national security test will not replace the existing statutory national interest test. Where the two tests overlap in application, the draft Bill prescribes that only the national interest test will be used since national security is integrated as a factor in the national interest test.
Secondly, the draft Bill states that for any investment not notified under the national interest or national security mandatory pre-investment notification processes, the Treasurer will be able to “call in” the investment for review if the Treasurer considers the investment poses a national security concern.
Thirdly, the draft Bill intends to establish a national security last resort power that will enable the reassessment of previously approved foreign investments where subsequent national security risks arise. According to the summary provided by the Treasury, the last resort power acknowledges that conditions imposed to protect national security can become redundant in light of rapid technological change and the evolving nature of security threats. The power will enable the Treasurer to to impose or vary conditions and in extraordinary circumstances, order disposal on national security grounds. The draft Bill acknowledges that the last resort power poses serious implications for investors and contains a series of safeguards to ensure transparency and investor certainty. For instance, the draft Bill requires that before exercising the last resort power, the Treasurer be satisfied that reasonable attempt to negotiate in good faith has been made, no other regulatory mechanism will address the identified risk and that action is reasonably necessary to eliminate or reduce the identified risk.
Stronger and more flexible enforcement options including the expansion of infringement notices and higher civil and criminal penalties. According to the Explanatory Memorandum, the draft Bill expands 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.
Furthermore, the draft Bill increases the penalties for certain offences to better reflect the seriousness of the offence and deter investors from engaging in such conduct. For instance, the maximum penalty that can be imposed on an individual for criminal offences such as failure to give notice and contravention of orders or conditions will be increased to 15,000 penalty units or 10 years of imprisonment. Under the current law, such offences attract a criminal penalty of 750 penalty units or 3 years of imprisonment. Likewise for corporations, the draft Bill proposes that the current criminal penalty of 3,750 units be raised to 150,000 penalty units. Similarly for the maximum penalty for a breach of a civil penalty provision, the draft Bill proposes that maximum penalty should be the greater sum between:
The draft Bill also intends to streamline approval for passive investors and investments into non-sensitive businesses. Under the current law, some privately controlled and managed institutional investors are regularly screened due to large investments by Foreign Government Investors (‘FGIs’) into their funds. However the draft Bill acknowledges that for certain investments where no foreign government investor has or could be perceived to have influence or control over the investment or operational decisions of the entity or any of its underlying assets, those investments undergo needless and rigorous levels of screening. Under the draft Bill, certain entities will no longer be treated as FGIs. This will not mean the investments are not screened at all since they will still be subject to screening at the thresholds for private foreign investors and if the investment raises security concerns, then also the new national security test.
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[Draft] Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 and explanatory materials available from TimeBase's LawOne Service
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