Morrison government toughens foreign investment scrutiny to protect 'national security'

The Morrison government will significantly strengthen its scrutiny of foreign investment to protect sensitive national security technology and information and further ring fence the nation’s critical infrastructure.

It will insert a new “national security test” on bids, in a sweeping overhaul of the foreign investment regime.

The action follows mounting public concern about Chinese investment, although the government - already under harsh criticism from China - will seek to play down suggestions it relates to any one country, and point out it has been a long time in the pipeline.

Planned new legislation will also strengthen compliance provisions to ensure foreign investors follow conditions attached to approvals.

During the pandemic, all foreign investment bids are being scrutinised to ensure unfair advantage is not taken of distressed companies.

But in normal circumstances those under certain thresholds escape examination by the Foreign Investment Review Board (FIRB), the body that makes recommendations to the treasurer.

While all bids from foreign governments are screened, most private investments under $275 million - or $1.2 billion if the country has a free trade agreement with Australia, as China and a number of other major trading partners do – are not scrutinised.

The government is concerned investments in some very sensitive sectors are escaping screening even when there are national security concerns. Of particular worry is the vulnerability of small and medium sized companies that have specialised expertise, but fall below the threshold in value.

Under the new test, foreign investors will have to notify FIRB if they propose to start or acquire an interest – generally 10% or a position of control - in a “sensitive national security business”.

This will mean all foreign investments in sensitive national security businesses will be examined.

Businesses which raise sensitive national security concerns are those involved in critical infrastructure, including telecommunications, energy, ports and water, as well as those which service defence and national security organisations.

The national security test will also involve new powers.

The treasurer will be able to “call in” an investment before, during or after an acquisition for review if it raises risks which were not picked up earlier.

The treasurer will also have a new “last resort” power enabling them to apply or vary conditions or order disposal of an investment where national security concerns emerge after approval. This last resort power would not be retrospective - it would only apply to future approvals under the revised regime.

The government will release draft legislation next month for consultations. It wants it passed this year, to apply from January 1 next year.

It is estimated the new security arrangements will affect only a very small proportion of total foreign investment.

The tougher compliance measures follow complaints that some foreign investors ignore the conditions that are attached to approved bids. Recently fingers were pointed at Alinta for not implementing conditions about information storage. The company was told to comply.

Increasingly, conditions have been applied to allow bids to pass. In 2018-19, 4149 applications were approved with conditions attached. This was 47.6% of total approvals. By value, more than 80% of investment was approved subject to conditions.

The government says the monitoring and enforcement powers of Treasury and the Australian Taxation Office need expansion because of the extensive use of conditions and “emerging risks caused by global developments and rapid advances in technology”.

It notes that apart from residential property investments, the treasurer’s enforcement powers are limited to taking civil action or seeking a criminal prosecution. This inhibits the government’s ability to respond proportionately, for example to a minor breach.

Under the changes, the government will have a wider range of tools for enforcement, including access to premises to collect information and powers to give directions to investors in order to prevent or address suspected breaches.

While most of the announced changes are about toughening the scrutiny regime, the government will at the same time streamline the approval process for investments that do not raise national interest concerns.

Aware of the need to attract passive investment as part of the post COVID recovery, it will narrow the definition of a foreign government investor to exclude certain passive investments in funds where the investors have no influence over the investment or operational decisions of the entity.,

The government is committing $54 million over four years to step up compliance and monitoring capability. Funding will go to Treasury, the ATO and “relevant agencies such as the Department of Home Affairs”.

Treasurer Josh Frydenberg said the changes were the most significant made to the foreign investment regime since it was introduced in 1975.

“The reforms will ensure that our foreign investment regime is able to respond to emerging risks and global developments,” he said.

“Through the introduction of a new national security test, stronger enforcement powers and enhanced compliance obligations, we will ensure that Australia can continue to benefit from foreign investment while safeguarding our national interest.”

The reforms were developed with the support of FIRB whose chairman David Irvine has a national security background, including as head of ASIO.

Irvine said the package “appropriately addresses increasing risks to the national interest whilst ensuring Australia remains welcoming and open to foreign investment”.