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Economics References Committee
07/08/2020
Inquiry into foreign investment proposals

BRAKE, Mr Roger, Division Head, Foreign Investment Division, Department of the Treasury

DEITZ, Mr Andrew, Branch Head, Policy, Foreign Investment Division, Department of the Treasury

KELLEY, Ms Roxanne, Deputy Secretary, Corporate and Foreign Investment Group, Department of the Treasury

NYAKUENGAMA, Ms Sharon, SES Band 1 Officer, Department of the Treasury

WIJEYEWARDENE, Ms Kerstin, Branch Head, Foreign Investment Division, Department of the Treasury

ACTING CHAIR: Thank you very much for appearing before the committee today. Information on procedural rules governing public hearings and officers of the Commonwealth has been provided to witnesses and is available from the secretariat. I would like to advise witnesses that answers to any questions on notice are to be sent to the secretariat by Wednesday 19 August 2020. I invite you to make a brief opening statement should you wish to do so.

Ms Kelley : Good afternoon. Thank you for the opportunity to appear again in front of this committee and to make this opening statement. I would like to update the committee on recent developments in the foreign investment review landscape—namely, the government's announcement of a comprehensive reform package and the ongoing implementation of the temporary zero-dollar screening thresholds.

On 5 June 2020, the government announced the most significant reforms to the foreign investment framework since it was introduced in the mid-1970s. Exposure draft legislation was released last week for public consultation. This reform package will better protect Australia from national security risks that may arise from foreign ownership, improve the integrity and administration of the foreign investment framework for the benefit of both investors and government and significantly bolster the government's tools and powers to monitor and enforce compliance with the rules. The government has announced that the reforms come with a funding package of $62.8 million over four years from 2020-21 and $15.1 million per year ongoing. This is to ensure that the system is adequately resourced.

The underlying principles of Australia's foreign investment framework remain unchanged. Australia continues to welcome foreign investment for the significant economic benefits it brings, where that investment is not contrary to the national interest. These reforms are consistent with similar changes also being made by our international trade and investment partners.

Improved compliance and enforcement capabilities are key features of the package. They include that infringement notices will now be available in relation to all investments, not just for residential real estate. This will provide us with the ability to deal more readily with minor breaches. The Treasurer will be able to issue directions to a person who engages in conduct that constitutes a contravention of the FATA. This will provide a quick and efficient way to remedy breaches of the act. The Treasurer will now have the ability to accept undertakings from investors to manage compliance and will be able to enforce those undertakings if they are not adhered to. We will have monitoring and investigative powers similar to those of other regulators, using the framework of the regulatory powers act. The size of the penalties that can be imposed on investors for noncompliance will also be significantly increased, in some cases up to 20 times, providing a far more effective deterrent, particularly in relation to investments of significant value.

These reforms will greatly strengthen the government's compliance and enforcement capabilities. They will provide more scalable and flexible tools to respond to noncompliance and encourage a stronger culture of compliance amongst foreign investors. This will in turn help maintain the public's confidence in the integrity of our foreign investment regime. As described in my opening statement on 15 May, we will continue to adhere to the requirements of the Regulator Performance Framework, which requires that as a regulator we take actions that are proportionate to the risk being managed. We will continue to work with investors to bring them back into compliance—for example, in circumstances where noncompliance is inadvertent or self-reported by the foreign investor and the investor is willing to remediate the breach as quickly as possible.

The difference post the implementation of these reforms will be that we will have a broader range of compliance and enforcement options available if such an approach of encouraging compliance is inappropriate or ineffective. Treasury has recently brought onboard a new SES band 1 officer, Ms Sharon Nyakuengama, who is here with us today, and she will lead a dedicated compliance branch of the Foreign Investment Division in Treasury. This dedicated compliance branch will be working to establish the compliance approach that's outlined in the reforms.

The reform package does not immediately affect the temporary $0 screening thresholds that came into effect on 29 March this year. These measures were introduced to give the government greater oversight of foreign investment for the duration of the COVID-19 crisis. The intention is for a smooth transition from the current temporary arrangements to the new system, which is scheduled to commence on 1 January 2021, although this will depend on the passage of the legislation by the end of this year. Under the new system, mandatory screening of investments in sensitive national security businesses will continue at the current $0 monetary threshold, and any business that raises national security concerns can be called in. For other investments it is intended that the temporary screening thresholds will not continue beyond the commencement of the new system, subject to any adverse developments with the coronavirus. And, as we have seen in recent weeks, the virus still presents considerable risks and challenges to Australia.

We have seen a significant increase in the number of applications since the introduction of the $0 screening thresholds. For instance, during July we received around 70 new cases a week—about double the volume compared with the same period in recent years. To ensure that we have sufficient time to properly screen these extra cases, the government also announced on 29 March that the FIRB would work with applicants to extend the statutory time frames for decision-making from 30 days to up to six months. The great majority of cases are being processed much faster than six months. The Treasury and the Australian Taxation Office have each put in place administrative measures to handle the surge in case load, including bringing in extra staff. For instance, Treasury's Foreign Investment Division currently has 88 temporary staff and 15 deployees from other agencies in addition to our existing permanent employees.

Priority has been given to processing applications to meet commercial deadlines and for investments that protect and support Australian businesses and Australian jobs. We are working with the state and territory governments to ensure their investment priorities progress in a timely manner.

In addition, a program of work has commenced to ensure compliance with the zero-dollar screening thresholds. Efforts have been focused on communication and education and proactive detection of potential noncompliance. So far, a handful of investments have been identified that were potentially subject to the screening regime but for which no application was received. These investors have been contacted, and to date none of the cases have warranted further action. Our proactive communication and detection work is expected to have a positive signalling effect, reinforcing to investors the priority that the government places on compliance with the rules.

I trust my comments provide the committee with some insights into the reform package and the implementation of the temporary measures. We are happy to provide further details.

ACTING CHAIR: Thank you very much. Firstly, can I just ask you, Ms Kelley, whether it would be possible for us to get a copy of your opening statement?

Ms Kelley : Yes, that is possible.

ACTING CHAIR: Is it possible you can email that to the secretariat, who may be able to distribute it to us now, while you're appearing before the committee?

Ms Kelley : Sure, we'll get someone back in the office to do that.

CHAIR: Thank you very much for that. That's very helpful. I'm going to go to Senator O'Neill and then to Senator Rennick and then to Senator Whish-Wilson.

Senator O'NEILL: Thanks for your evidence. I am looking forward to reading your opening statement a little more closely and I will have more questions later. I have been asking witnesses today about this document from Treasury, Foreign investment reforms: June 2020. I haven't been able to find anybody who was consulted in its development so far. Could you give me a sense of who was actually consulted in the development of this announcement?

Ms Kelley : I will just make a couple of overview comments and then hand over to my colleagues. In terms of the reforms themselves, the relevant ministers and departments were consulted, as is usual in government decision-making processes, and so we did have—

Senator O'NEILL: Could you clarify for me the minister and the departments that were [inaudible]

Ms Kelley : I just said the relevant ministers and departments, in terms of the government decision-making, were involved and—

Senator O'NEILL: [inaudible]

Ms Kelley : Who were the departments?

Mr Brake : Quite a range of departments, including, for example, the Department of Home Affairs, Prime Minister and Cabinet—a wide range.

Senator O'NEILL: Could I get the full list? Is it difficult for you to do that now, on the fly? Do you need to take that on notice?

Ms Kelley : We might take that one on notice to make sure we don't miss anyone.

Senator O'NEILL: The relevant ministers—can you name them?

Ms Kelley : They would be the ministers of those relevant departments.

Senator O'NEILL: So, so far, Mr Frydenberg, Mr Morrison—

Ms Kelley : I think I just need to clarify: the reforms are based on an actual decision of government, so the usual decision-making process that government goes through was followed, and then we have released the information, based on the government's decision.

Senator O'NEILL: So it's all within the government—its departments and the ministers have cooked this up together, and the consultation didn't extend beyond the departments. Is that correct?

Ms Kelley : We're now in a consultation period, where people and all the stakeholders outside of government can actually provide us feedback, which, again, is a pretty standard process that is followed.

Senator O'NEILL: I did ask the representatives of the government of Western Australia if they were engaged in consultation, and they said that had just commenced this week. Is that the timing?

Ms Kelley : That's right. The exposure draft of the legislation was released last Friday. Previously, the document that you just showed on screen before was released on 5 June. We're now in a four-week consultation period, where we will consult with a lot of people. But since 5 June—and probably even before then—we have been talking with a range of people and stakeholders about it. We can provide some further detail on that if you need that.

Senator O'NEILL: Could you provide on notice the range of people and stakeholders you engaged with prior to the June release of the document and also prior to the release of the exposure draft.

Senator PATRICK: Could you also provide the committee with a time line of, for example, when you first sent a brief to the minister, the points in time where the minister might have sought approval from the Prime Minister to propose legislation, and the approval processes—a time line of how we got to the point where the exposure draft was released.

Ms Kelley : Yes, we can take that on notice.

Senator O'NEILL: The ministers and departments you referred to were Mr Freydenberg, and the Treasury; Mr Morrison, and PM&C; Mr Dutton, and Home Affairs; and Senator Payne, and Foreign Affairs. You are confident that each one of those was involved in the development of policy and the exposure draft?

Ms Kelley : We'll come back to you with further detail. We're just saying that, as is the case with the usual processes of government decision-making, the relevant ministers and their departments are consulted.

Senator O'NEILL: Okay. With regard to the exposure draft, have you engaged with each of the state governments?

Mr Brake : I think we have reached out to the state governments. Mr Deitz might be able to provide some more information.

Mr Deitz : I will step back for a moment and say that, since the 5 June release of the summary booklet, we have engaged with over 1,000 different stakeholders across industry, government, peak bodies, investors and advisory more broadly. That has included state and territory governments, in various parts of those governments. There is an intention in our consultation plan under the exposure draft to consult with state and territory governments. We expect to hold at least two consultation sessions with them in the coming weeks.

Senator O'NEILL: How will you convene those? Will they be held separately, or will you get the whole Commonwealth together as a job lot for those two meetings?

Mr Deitz : Sorry, what do you mean by 'the whole of the Commonwealth'?

Senator O'NEILL: Will you have all of the states and territories together on a COAG type hook-up, or will you have two meetings with each state separately from each another?

Mr Deitz : Since the summary booklet was released, but also since the temporary changes were implemented, we've had roundtable discussions with the states and territories as a whole, with the treasuries. We have also met with the state and territory defence advocates. We've met with their investment facilitation areas as well. So we would likely meet with all of them as a group.

Senator O'NEILL: On two occasions in the three remaining weeks of your consultation period?

Mr Deitz : There will be at least two key stakeholder meetings. Of course, we're open to dialogue with anyone at this point. It is a public consultation process and we'll continue to engage at their request.

Senator O'NEILL: How many people are typically at these roundtables?

Mr Deitz : They haven't been held yet. It will be as many as those states feel free to send along.

Mr Brake : As Mr Deitz said, we have undertaken a very large amount of consultation even prior to the exposure draft being released. I think Mr Deitz may have said we've met over 1,000 people. A lot of those were people we reached out to, and there were other people who reached out to us. The size of those groupings varied considerably, but some of them were quite large.

Senator O'NEILL: Thank you very much. If you could provide on notice some detail about that that would be very helpful. What are the biggest concerns and issues that have been raised so far in these consultations? Can I ask for the two periods, between the release of the draft—with the green cover page—and then post the release of the exposure draft?

Mr Brake : I think there's been considerable support for the broad policy intent of the reforms. Prior to the releasing of the exposure draft legislation, a number of groups were keen on seeing more detail and, of course, the purpose of draft legislation is to provide that detail. That would be my overarching summary.

Senator O'NEILL: What are the biggest concerns and issues that have been raised at any point in that process?

Ms Kelley : I think that because we're just a week in from when the detail was released, particularly around some of the national security aspects of the reforms, we're in the very early stages of that engagement. I think what Mr Brake was saying is that, prior to last week, people were supportive but were wanting to see the detail. We've now released the detail and we're in the process right now of gathering that feedback from people, in terms of whether they have any concerns. At this point in time, we probably can't answer that question until we finish the four-week consultation period.

Senator O'NEILL: Noting the limited time that you've had—but you have been in a week—have concerns been raised with you about the definition of 'sensitive national security business' or what national security concerns involve?

Mr Brake : When the booklet came out, there was a definition in the booklet. One of the purposes of the exposure draft, which includes the draft regulations that go to the definition of a national security business, is that it provides a lot more information than what was in the summary booklet around that definition. As Ms Kelley mentioned, people have now had one week to start considering the definition put forward in the regulation. I'd expect that we would see more discussion and information from stakeholders over the next little while on that definition.

Senator O'NEILL: How are you dealing with the issue of retrospectivity? Is it right to say that under the new last-resort power you cannot claw back investments before the changes are implemented, but, from then on, it can be retrospective relative to the investment occurring?

Mr Brake : The legislation will provide the capacity for the last-resort power. That power will not apply to acquisitions made prior to the commencement of the legislation.

Senator O'NEILL: Which is timed to be passed through the parliament by the end of the year and to receive royal assent sometime in the new year. Is that roughly the time line?

Mr Brake : That's right. It's proposed to commence from 1 January 2021, but, as Ms Kelley said, that's subject, obviously, to parliamentary passage.

Senator O'NEILL: So it's basically the line in the sand—after this legislation. Before that, there's no retrospectivity in terms of the last-resort power?

Ms Kelley : That is correct.

Senator O'NEILL: So , if the people of the Northern Territory and the rest of Australia decided that the port of Darwin be recovered—and this is a signature issue for many Australians in terms of foreign ownership—this legislation, as its proposed by the government, would not be able to be activated for Australians to recover the port of Darwin if the government so wished?

Mr Brake : Sorry, can you repeat that last part for me?

Senator O'NEILL: If the government wanted to recover the port of Darwin for the people of Australia, this last-resort power would not be available to them because that sale happened prior to this legislation. Is that correct?

Mr Brake : The last-resort power would not be available under the draft legislation.

Senator O'NEILL: That's important to—

ACTING CHAIR: Could I break in there to let committee members know that the opening statement from Treasury officials delivered by Ms Kelley is in our respective inboxes. Thank you very much for providing that so promptly.

Senator O'NEILL: Could you explain to me, Ms Kelley or Mr Brake, how sovereign risk concerns are being managed so far?

Ms Kelley : Are you talking about under the reforms, or—

Senator O'NEILL: Let's get an answer to it in your conversations with stakeholders currently and then also under the proposed legislation.

Mr Brake : At present, the law provides the Treasurer can make a decision and conditions can be imposed. As we've discussed previously, there are very limited circumstances for those approvals to be varied after the event. Under the proposed legislation, there will be this last-resort power, and we can go into the details of that. But I note that there are very strong safeguards which would relate to when that last-resort power could be utilised by the Treasurer.

Senator O'NEILL: For ordinary Australians, the issue of sovereign risk matters but might not be something that they discuss in the way that you discuss sovereign risk. So, from your answer there, you are explaining to me that, until this legislation is passed, we're stuck with all the investment decisions that have happened in Australia, no matter how we might find them at odds with our national security. Is that right?

Ms Kelley : I'm not sure that that's an entirely accurate description of it, because the investments now are all screened in terms of national interest, as we've talked about at our previous time here at the committee. We talked extensively around the national-interest test and what's considered there. Conditions are applied where that is required, and so investments are being agreed to now where there's an increasing use of conditions on those investments. As we've also talked about, we've been progressively strengthening our compliance function in monitoring compliance with those conditions. So I don't think we can say—

Senator O'NEILL: I did want to talk about it later on.

Ms Kelley : that we're stuck with it, and we're not addressing issues that you've described as sovereign risk. I think that we are addressing the risk that investments present as part of the process.

Mr Deitz : If I may—

Senator O'NEILL: Thank you very much. I do want to ask questions about conditions, application of conditions, compliance and capacity, and resources as well, but I'm just trying to be very clear for ordinary Australians who are caught up in the COVID crisis and are worried about Australia at this time—chains of supply and jobs and all those sorts of things. They're concerned about all of that. The government are talking about changes to foreign investment, but none of the changes that they are discussing or that we'll be debating in the coming months can change anything that's already been done or will be done until that law is passed, and then it's after that law is passed that this last resort power can be activated, if the parliament passes it. That's what I mean. We're stuck with whatever decisions have been made and will be made up until this new legislation is through the parliament. That's what I mean. That's true, isn't it?

Ms Kelley : I understand what you're saying, but I do not entirely agree with how you're describing it when you use the term 'stuck with'. Decisions have been made, and if there are concerns about the investment then the conditions are put in place and monitored. As part of this reform, we're getting increasing ability, with our compliance powers, to monitor all investments and compliance with conditions as well. I think you're specifically talking about the last resort power, which, yes, is not retrospective. But other elements, particularly the compliance powers, will apply to any case that has conditions.

Senator O'NEILL: Whether it's old or new?

Ms Kelley : Yes.

Senator O'NEILL: In terms of sovereign risk for foreign entities looking at Australia, that's of very considerable comfort to them because they've got their approvals. They've bought their water resources, the Port of Darwin or Alinta Energy. What's done is done, and that doesn't change until after these laws pass, and that's of comfort to those who have invested in Australia. In terms of the resourcing and implementation, what additional resourcing is being provided to Treasury to communicate and implement the reforms? I think you mentioned a sum of $61 million.

Mr Brake : I think $62.8 million was the figure used.

Senator O'NEILL: Actually, it's right here on my desk. Thank you. So it is $62.8 million over four years?

Mr Brake : That relates to a number of agencies, not just Treasury. I don't know if we have the breakdown.

Senator O'NEILL: Does somebody have the breakdown of how much is actually going into Treasury?

Ms Kelley : We're checking whether we have the breakdown.

Senator O'NEILL: Thank you. While you're waiting for that, what about the $15.1 million per year ongoing? Is that specifically for Treasury?

Mr Deitz : No, it's for the same group of agencies. The breakdown of these amounts would be provided for in the July statement, which I don't have.

Mr Brake : I don't have it. I've written down here that it's on page 170, but I don't think I actually have it.

Ms Kelley : Sorry, we don't have that document with us. We can provide that to you.

Senator O'NEILL: Somebody might be able to send it through in the course of the afternoon. Thank you for making that so clear. How will Treasury monitor investments to be able to use the call-in and last resort powers effectively?

Mr Brake : There are two separate matters you raise there, Senator. One is: how will we call in cases? I will just set the scene a little bit. The legislation provides for one group of businesses, defined in the regulations, where it will be mandatory for a foreign investor acquiring that type of business to seek approval from $0. So those cases will come through, just as the existing cases we get now under the national interest test come through. There's an ability for the Treasurer to call in other acquisitions, which may give rise to national security concerns from dollar zero, and we will be having a capacity to look across acquisitions or proposed acquisitions which might give rise to those national security concerns and to call them in. In terms of the last-resort power—

Senator O'NEILL: Just before you go to the last-resort power, can I ask: which agencies will be involved and what mechanisms are you going to use to determine when such things should be called in? And how is that different from your current practice? What additional things are you going to be doing?

Mr Brake : We'll be looking for a range of data sources and, as you say, Senator, working with a range of consultation partners to identify these types of transactions.

Senator O'NEILL: Could you give me some more detail about the range of partners? I'd like you to articulate that: who are the agencies in that range?

Mr Brake : Senator, they'd be a range of agencies including—because it's national security focused, we'd be working closely with national security agencies.

Senator O'NEILL: By that, are you referring to ACIC? Or the AFP?

Mr Brake : Particularly agencies such as Defence, Home Affairs, ASIO, Senator.

Senator O'NEILL: Will there be a new structure to better integrate the knowledge-sharing across the departments?

Mr Brake : I think, Senator, I would say that we already have a very close relationship with all of those agencies as part of our existing work. Under the current national interest test, the national security element of that is critically important across a range of sectors—including critical infrastructure, for example, but there are others. So we work very closely with those agencies now, in terms of any transaction that gives rise to potential national security risks. I think, in terms of those relationships and so on, that is already very, very solid at the moment.

Senator O'NEILL: So my question then goes to this: if that's already what you're doing, what is the proposed 'call-in power' delivering that is extra—apart from naming some mythical beast? What is it about the call-in power that's different from current practice?

Mr Brake : We have the $0 thresholds at the moment, but let's just abstract from that for a moment. Normally—and this is really the key reason why these reforms are being put in place—at the moment under the Foreign Acquisitions and Takeovers Act there are generally these monetary thresholds, which can be quite substantial. For example, in the case of some transactions it might be $1.2 billion. That means that if a transaction is less than that amount, there is no requirement for approval under the legislation, so there is no ability to call in those transactions, there's no ability to put conditions on, and so on. The recognition that there can be national security risks from lower-value transactions is why the government is proposing both the mandatory screening of certain national security businesses and also this ability to call in other, lower-value transactions that it's not mandatory for them to notify but for which there may be national security risks.

Senator O'NEILL: So when the 'drop it down to the dollar' disappears and there's a change of government policy, this is now a bridge between $0 and $1.2 billion where there's a call-in capacity. Is that right?

Mr Brake : Yes, that's exactly right—on national security grounds, not on broader national interest grounds.

Senator O'NEILL: So that is only on national security grounds. What will be the process for consultation on individual proposals to deal with national security issues?

How is it going to be coordinated across agencies and state governments as required?

Ms Kelley : It will be how we do it at the moment, which, I think Mr Brake can describe in detail, but we have quite an extensive consultation process now with our consultation partners. That is built into the process already.

Senator O'NEILL: So, in fact, there is no significant change?

Ms Kelley : In terms of the consultation with those partners, no.

Senator O'NEILL: What's the mechanism that you use for coordination across agencies and state governments? Who ultimately is responsible for ensuring the whole thing is coordinated?

Mr Brake : That's the foreign investment division; that's us. We have daily contact with consultation partners. Our case officers would be engaging daily with counterparts from a wide range of Commonwealth and state agencies. And then we have various other meetings—for example, there is a monthly meeting of people at my level to talk about strategic foreign investment issues and major cases, all designed to ensure that, yes, we have a joined-up approach so that the program of cases and workers is well coordinated.

Senator O'NEILL: In terms of the call-in power, does that exist for the entire life of the investment in the country or is it time limited?

Mr Deitz : The exposure draft bill provides for a time limit to be prescribed through regulations. What the time limit will be is something that will be consulted on in the second tranche of consultations in September.

Senator O'NEILL: Do you have any thoughts about that at this point in time, Mr Deitz?

Mr Deitz : The reason why it's provided for in regulation is the government is engaging in genuine consultation on what the time limit ought to be.

Senator O'NEILL: Okay. With that range of questions, I asked about the call-in. The new part is the last resort. How will that process be managed? What will trigger it? Who will be involved? What are the processes around that, and are there time limitations on that as well?

Mr Deitz : There are no time limits around the use of that power. Once an approval has been given, it is available, essentially, from the next day, and there is no expiry on that time. The process requires the Treasurer to form a view that there may be a concern. At that point the Treasurer can commence a review. In that review he is required in the bill to have regard to any advice that's available from any of our national intelligence agencies, and then, from there, there is a series of steps that are gone through to finalise the findings of that review, at which point the parties have an opportunity to seek a review of that before the Treasurer's powers are then enlivened.

Senator O'NEILL: What sort of time period are we talking about for this sort of last-resort process, Mr Deitz?

Mr Deitz : There is no time period prescribed in the bill.

Senator O'NEILL: Practically, how long do you think it would take to give effect to the process you've just described?

Mr Brake : I think it would vary quite a lot on the proposal depending upon the complexity of the issues raised. We get asked how long our cases take, and simple cases don't take that much time, but very complex cases take considerably more time. I expect it would be similar in this regard: it would very much depend on the complexity and how much information we require to undertake those steps that Mr Deitz outlined.

ACTING CHAIR: Senator O'Neill, I might go to Senator Rennick. Are you at a natural break in your questions?

Senator O'NEILL: Yes, I am.

ACTING CHAIR: I might go to Senator Rennick, then Senator Whish-Wilson and then Senator Patrick, and then come back to you; is that okay?

Senator O'NEILL: That would be great, thank you.

Senator RENNICK: My question is to anyone who would like to answer it. You talk about safeguarding the national interest—

Teleconference interrupted—

ACTING CHAIR ( Senator O'Neill ): Senator Kitching, are you still there? No. Continue your questions, Senator Rennick, while Senator Kitching is reconnecting.

Senator RENNICK: I'll start again. You talk about safeguarding the national interest. My concern is around both our monetary policy and our taxation system in regard to foreign investment. With our monetary policy, we are allowing money—or capital, as people like to call it—printed off printing presses overseas to come here. It comes to Australia in one of two forms: either it's lent to us, and we pay interest to use that printed money; or they use that printed money to buy up our assets. I will give you an example. The ECB regularly issues corporate bonds to European corporations at negative yields, which means it lends money and the corporations don't have to repay the interest. I cannot see how Australian companies can compete against foreign companies if their central banks are lending them money and there is no cost whatsoever on that money. The RBA has recently lowered its rate to a very low rate, but for a long time the ECB had much lower rates than Australia; they've actually got negative rates, and that is giving European corporations an advantage over Australian corporations.

The second issue—I raised this earlier this morning—is our taxation system, whereby multinationals can structure their arrangements so that the tax rate on profits shifted offshore is lower than the tax rate here in Australia. My opinion is that we should retain our earnings before we attract foreign investment. You mentioned that there are benefits to foreign investment. That may be true, but ultimately wealth comes from toil; it doesn't come from capital. Capital controls wealth. When people encourage foreign investment, that's another way of saying, 'You want foreigners to control our wealth.' There may be times when that is in the national interest, but I think we're seeing more and more that it's not the national interest.

If we look at the neoliberal policies introduced in the eighties, we are seeing an increase in the amount of debt Australia carries and a decrease in the amount of critical infrastructure owned by Australian corporations. I know you guys have a narrower mandate in looking at the acquisition side of it, but as a broader viewpoint, being in the overall Treasury, what is Treasury doing to stop these tax breaks and monetary advantages being given to foreign corporations that are making it very difficult for Australian corporations to compete?

Mr Brake : As I think you said, our mandate is bit narrower than some of the big concepts you talk to. On tax, within Treasury taxation is handled by Revenue Group. Governments have made a number of very substantial initiatives in recent years around multinational tax arrangements. That's been quite significant. In terms of our work in the Foreign Investment Division, which is case by case, as part of the national interest we can consider tax matters, and we consult with the tax office on particular proposals. What you're talking about there are some systemic issues. As I mentioned, there have been a range of initiatives in that regard, and then there's the specific—that's probably all I can say on that, because those systemic tax matters are matters for Revenue Group. On your point about capital movements, the structure of the Foreign Acquisitions and Takeovers Act is that the regulation is of direct equity investment from overseas—so it does not go to questions of portfolio or debt flows, which I think is what you were talking about.

Senator RENNICK: Yes. That's something that I think you should consider. A foreign bank or a foreign creditor can lend to an Australian company and secure that asset against the debt, and if that company were to go bankrupt for whatever reason the creditor, because they have security over the asset, would get ownership of that asset. I think that is something you should track. I suppose my question to you is—and you've sort of already answered it: is it correct that you don't track that?

Mr Brake : One thing you mentioned is money lending arrangements. Mr Deitz may want to talk about that.

Mr Deitz : There has been a longstanding exemption under the act for pure money lending arrangements which have securitisation of the kind you refer to. As part of the government's reform package there will be a reduction in the scope of that money lending exemption, in that it will no longer be available for national security businesses. So where a money lending arrangement is entered into with respect to a business that is in the list of mandatorily notified businesses that Mr Brake referred to earlier, those entities entering into those money lending arrangements with respect to those businesses will need to notify us and seek approval.

Senator RENNICK: Do you keep a publicly available list of foreign owned assets? If I wanted to go and look at what was foreign owned in Australia, to get scope on what infrastructure is and isn't owned by Australian companies and/or governments, would there be something out there that would give me an idea of what is and isn't foreign owned?

Mr Brake : There are a number of registers. There's an agricultural land register, a water register and a media register of foreign ownership. They provide for aggregate information only—so, for example, you can determine how much agricultural land is foreign held in particular states, but the register doesn't go down to individual properties. The policy decision was taken to provide aggregate information only.

Senator RENNICK: So we don't have a list of who owns ports, airports, power stations and things like that?

Mr Brake : Not as part of the Foreign Acquisitions and Takeovers Act.

Senator RENNICK: I think that is something that we should do, because it's critical infrastructure and I think people have a right to know who owns what. What's our view towards state owned enterprises buying critical infrastructure here in Australia as well?

Mr Brake : The government has an open and transparent regime. There are no blacklists as part of the regime. For a considerable period of time there have been different monetary limits between state-owned enterprises and private corporations. Even prior to the temporary $0 arrangements, state-owned enterprises required approval for acquisitions from dollar zero.

Senator RENNICK: Okay, so that's always been the case. I have a problem with state-owned enterprise buying assets here if that particular state doesn't let us buy assets there. I mean, shouldn't it be a reciprocal arrangement whereby if you're going to buy assets here we can buy assets there? And if not, why do we give other countries more rights here than they would give us there?

Senator O'NEILL: Good question—especially for a member of the government!

Senator RENNICK: Well it's been a longstanding practice, which I think goes beyond party lines.

Senator O'NEILL: But it is critical now. It's a good question.

Mr Brake : I think you're going to a question of policy, Senator.

Senator RENNICK: Fine. I'll just leave it at that, then. Thanks for your time.

ACTING CHAIR ( Senator Kitching ): I want to thank Senator O'Neill for jumping into the chair. I really thought I would be just 30 seconds, doing a test for vision for television. But I am back in the chair, and thank you, Senator O'Neill.

Senator WHISH-WILSON: What kind of interface do you have with the anti-money-laundering, counterterrorism finance laws? I know there's been a task force approach to implementing anti-money-laundering measures, including using ASIC and ATO. But do you have any interface with the development of those two laws?

Mr Brake : We interact with those agencies largely on operational grounds. Whether other parts of Treasury engage on those policy questions I don't personally know.

Ms Kelley : We may just have to take it on notice as to whether other parts of Treasury were engaged.

Senator WHISH-WILSON: Okay. I was asking some questions about a case study of a fairly prominent bust of money laundering in Australia—$23 million—called Operation Ghethen. You may be familiar with it. The committee looked at whether some of the acquisitions that were involved—certainly the confiscation of those assets—would have had to have FIRB approval, including some high-profile properties here in Tasmania, one of which was going to be a significant property development at Musselroe Bay. Are you familiar with the details of that operation? And can you confirm that FIRB would have had to have given those companies approval to buy that undeveloped commercial land?

Ms Kelley : We're aware of the investigation by the relevant law enforcement agencies on this matter, and we are liaising closely with them. We would probably be happy to talk with you further about our involvement in a private hearing. Particularly given the ongoing investigation by the AFP, it wouldn't be appropriate for us to comment any further at this point.

Senator WHISH-WILSON: I'm aware of that—and the Federal Police and AUSTRAC were fairly forthcoming this morning and we're going to seek a private briefing. I suppose what I'm checking up on is whether there were any flags raised, particularly when the corporate veil that was buying these properties would have had to have gone through some kind of FIRB process. Was anything raised with you by AUSTRAC about the individuals involved, the companies involved or even the gatekeepers involved? I understand that you are very under-resourced and you get thousands of these applications all the time. But, given some of the individuals involved, I'm just wondering whether anything was picked up during the FIRB process. Can you at least confirm that there was a FIRB process for that?

Ms Kelley : Yes. Again, I think we'd be happy to talk to you about the matter in a private briefing.

Senator WHISH-WILSON: Why would there be a problem, whether you are saying there is an affirmed approval for this or not? The committee's understanding is that there probably should have been an approval because it was undeveloped commercial land. Does that sound right to you? Does all undeveloped commercial land require a FIRB approval process?

Mr Brake : Whether we've given approval to a particular case or not is protected information under our act. We are aware of the powers of the Senate, but this is why we prefer to have these matters dealt with through a private hearing.

Senator WHISH-WILSON: Okay. I'm alright with that if you are restricted under your act. I have a number of questions around the development of tranche 2 anti-money-laundering laws. Have you had any input to the process around 'phase 1.5', as the Federal Police call it?

Ms Kelley : Not us directly, as it's a foreign investment area.

Mr Brake : Our Markets Group, which has responsibility for the financial sector, may have, but we would have to check with them.

Senator WHISH-WILSON: We've talked a bit at previous hearings about the acquisition of Bellamy's. Has your division followed up on whether there have been any developments with the purchase of Bellamy's and, I suppose, the approval of licences to sell infant formula in China? Do you have a watching brief on whether the buyer has now been given licences to access the Chinese market?

Mr Brake : I'd have to take that on notice. As I'm sure you would recall, there were a number of conditions imposed on Bellamy's. From the perspective of a foreign investment division and regulator, we obviously have a focus on those conditions and whether they are being met. But licensing and all those sorts of matters are separate to that.

Senator WHISH-WILSON: I understand. I am glad you put conditions on it, but I was just wondering whether anyone in the team had followed it up to find out whether there had been any developments. I will take that up with you privately as well. Is your division following the joint parliamentary committee inquiry into the US Congress and Senate into foreign investment and national security implications in the US markets? I think they are also doing Senate hearings on how money laundering is being used as potentially a threat to national security.

Mr Brake : In terms of US processes?

Senator WHISH-WILSON: Yes.

Mr Brake : We follow US legislative processes regarding foreign investment. They have a thing they call the FIRRMA, the Foreign Investment Risk Review Modernization Act, which strengthens their own foreign investment regime. We keep an eye on international developments, including those in the US.

Senator WHISH-WILSON: That's all I have for today. Thanks.

Senator PATRICK: The committee has been looking at the national interest test, and there have been submitters that have talked about the national interest test. I note that in the new legislation there is no test, or no definition of 'national interest'. Can you explain the rationale behind the decision not to have a test like they do in New Zealand, for example, where they spell it out a bit more?

Ms Kelley : As we've probably talked about before, it's because having some elements very clear as to what we take into consideration being publicly available but not strictly defining it does allow us to take account of changing environments quickly. If you've got your definition set quite strictly in legislation, then it does mean that it takes time for you to be able to pivot when circumstances change. Listening to a number of people who have appeared before the committee over your hearings, I think there seems to be more of a consensus view that having that flexibility is actually useful in the government being able to adapt to changing environments as well.

Senator PATRICK: I appreciate the motive and I don't disagree with that, but it's good to have people understand what the words mean, and perhaps that can be addressed by way of putting the definition in the legislative instrument, for example, perhaps even a non-disallowable instrument that enables Treasury to update that from time to time as it sees fit, but once again be transparent about what it is.

Mr Brake : Maybe I can just add a little bit there. In part of the guidance we talk through the various factors which we typically examine as part of the national interest. You're probably familiar with them: national security, community and the economy, character, competition and tax and other policies. It is a very wide remit and deliberately so, for the reasons that Ms Kelley explained. We have that guidance as part of our application arrangements, as part of our engagement with investors and their clients, and we always encourage early engagement on matters so that foreign investors have a good sense of those sorts of factors that might be relevant to the government's consideration of national interest as it applies to a particular case, because obviously those factors can vary across different parts of the economy and so on. On this point around certainty versus flexibility, we've tried to manage that through the guidance process.

Senator PATRICK: Okay. I might now move to one of the proposals in the exposure draft. I will read it. The provision would 'allow the Treasurer to impose conditions, vary existing conditions, or, as a last resort, require the divestment of any realised investment which was approved under the FATA where national security risks emerge'. Working on the principle that laws are designed to solve controversies, to enable us to arbitrate real-life situations and get some sort of outcome, what was the rationale for that particular proposal? Is it that you've come across examples where you haven't been able to deal with that properly? If not, why is there an expectation that that is needed?

Mr Brake : I think it recognises that, at the time of an approval, the decision is made with the information that is available at the time, but there can be changes to circumstances over time which are sufficiently significant that it's appropriate for the government to be able to take action. It says:

… where …

the activities the investor have changed substantially posing national security risks which could not be reasonably foreseen at the time of approval

or a material change occurs, the operating environment—

and so on. So it was dealing with, I guess, the fact that the legislation currently is very much focused on approval at a point in time. It goes back, I think, to some of maybe Senator O'Neill's questioning earlier.

Senator PATRICK: Yes, I know she touched on this. Is that provision retrospective? Assuming that got enacted, would that apply to existing investments in circumstances where a national security aspect changed?

Senator O'NEILL: This is the question that I asked, and I couched it in the phrase 'we're stuck with it'—for the old rules. But, anyway, let's come back to your question.

Mr Brake : Just to be really clear on that, the 'last resort' power will only apply to acquisitions following the commencement of the legislation as passed by parliament.

Senator PATRICK: Okay. We currently have the Security of Critical Infrastructure Act 2018 that permits the Minister of Home Affairs to review assets in Australia and identify if there's a problem with critical infrastructure. Does the current regime allow any action in the event that one of those reviews identifies a problem that centres around ownership or control or influence?

Mr Deitz : Yes, it does. The Security of Critical Infrastructure Act includes a directions power which, in this context, can be thought of as broadly equivalent to the Treasurer's 'last resort' power here. The Treasurer's 'last resort' power here contemplates that the power would not be used in a circumstance where an existing regulatory system of the Commonwealth or a state or territory is capable of addressing the scenario. When it comes to questions of critical infrastructure and critical ports, those are listed or covered in that Security of Critical Infrastructure Act. Many of those, including the examples raised today, would be covered by that act but would not be covered by this power—including because one of the safeguards is that, if there is another Commonwealth system available, that system will be relied upon in the first instance.

Senator PATRICK: Does that act apply retrospectively?

Mr Deitz : Yes, it does.

Senator PATRICK: Let's use this as a fictitious example that's not beyond the realms of possibility. If, for example, under that legislation there was an issue identified for the port of Darwin or a power station procurement or an electricity grid procurement, the direction that can be made under that act by the home affairs minister is one where divestiture is in fact an option.

Mr Deitz : Yes, it is.

Senator PATRICK: So, in some sense, the new provision that you're seeking the parliament's assent for is one that covers other scenarios?

Mr Deitz : That's correct—it covers scenarios which are not covered by other pieces of legislation now or in the future.

Senator PATRICK: Thank you for your help on this. Do you have a ready reckoner guide that says which areas this is trying to fill? Or it might be the other way—where other legislation can affect foreign acquisitions, you may have some information that helps us better understand the limits of the power that's been sought here.

Mr Deitz : We might need to take that on notice. The main pieces of legislation include the one that you've already referred to at the Commonwealth level. The others are what are known as the telecommunications sector security reforms to the Telecommunications Act, which are also powers of the Minister for Home Affairs. In terms of the broader question of 'What else is there, including at the state and territory level?' we would need to take that on notice.

Senator PATRICK: What you have told me today is very helpful. I thank you for that. If you could perhaps provide some more information that would help us. There might be an inquiry into the legislation when it finally gets tabled, but that would be very helpful. Thank you.

Senator O'NEILL: Could I go to the issue of the legality of conditions placed on the approval of the process of purchasing Australian interests by foreign entities. At this point Treasury have been asked twice for the legal basis upon which you can enforce conditions on a foreign entity that are not similarly applied to Australian owned entities, but we have not yet been able to get a response from you. Will you respond today on the record? What is the legal basis?

Mr Deitz : I think we have sought to answer the question by explaining that it is a complicated question and it is ultimately a matter for the Office of International Law, depending upon the nature of the query that you're making. It is the case that the Foreign Acquisitions and Takeovers Act is often included in what are known as the non-conforming measures to our free trade agreements. Those agreements often also include exceptions and reservations for the kinds of reforms that the government has proposed in its bill. But if the question is with respect to a particular set of conditions on a particular case, that is perhaps better directed towards the Department of Foreign Affairs and Trade and the Office of International Law in the Attorney-General's Department.

Senator O'NEILL: Is there a punitive structure for breaches of conditions?

Mr Brake : Are there penalties for breaches of conditions?

Senator O'NEILL: Yes.

Mr Brake : Yes. A key part of the reform will be extending and increasing the range of penalties available for contraventions of the act.

Senator O'NEILL: Going to the issue of conditions, today I have asked a few people if they are aware of the problems that we've had in getting information. From the questions on notice that we've asked, it appears that Treasury's IT system is limited and you have not been able to provide the following pieces of information. Treasury has not been able to provide a breakdown of foreign investment proposals on the basis of greenfields investments versus an acquisition of existing businesses; not been able to provide, without manual and time-consuming processes, a breakdown of applicants, according to whether they're new applicants or existing foreign investors; unable to provide and identify the proportion of approvals to which the broad categories of conditions are attached; unable to provide a record, because there is no record, of the number of targets for compliance under remedial action plans not being met; unable to identify how many instances companies have failed to comply with foreign investment conditions and not been penalised; cannot say how many investment approvals contain best endeavours clauses; cannot say, without significant manual work, how many annual compliance reports were received that are certified by a company officer and external auditors; and cannot say how many reviews over the past four years it's conducted through its own internal program of reviews of reporting independent audits and Treasury audits. That is our experience, in terms of seeking information from your part of the Treasurer's department. It seems to me that there's a huge hole in information about what's going on in the foreign investment space. Do you have any comfort to offer me, Ms Kelley?

Ms Kelley : Yes, I think I may. I think there are a couple of factors. I will talk firstly about what our information system does enable us to do. I would also note that in some of our responses to the questions on notice we have outlined that it was about diversion of resources, because there are aspects of our system that require manual work. At this point in time, when we have a significant increase in case load, we actually need people focused on processing cases. That has been part of the issue. But let me just describe what our foreign investment management system does enable us to do and what we are currently doing to improve it. The system at the moment has a foreign investment application portal, which allows investors and their representatives to submit an application. It requires a range of mandatory information to be submitted. It also provides an estimate of the associated fee. The second part of the system is a case management and repository of foreign investment application data and approvals. We call the system FIMS3. It performs critical functions, but we acknowledge that it has some limitations in regard to our compliance work. The functions it does perform are case management and document storage and it is a Treasury source of data on foreign investment applications we've screened. We can extract the number and proportion of approvals, with or without conditions. However, as we've noted in our responses to you, it is a manual task for us to review each case to accurately identify the different types of conditions that are attached to the approval—for example, whether they are standard tax conditions, or conditions relating to the proximity of an asset to a defence establishment or conditions relating to the management of data.

We are currently undertaking work to enhance the system and our business processes, to ensure that they are more fit for purpose and can support the policy reforms. With the enhancements that we've either implemented or are proposing to do, we're going to implement fields to help identify the nature of conditions that are attached to a particular approval. This will provide us with the capability to better report on conditions attached to cases. There will be improvements to case tracking to allow better internal tracking of the progress and status of a case; capture of a range of new data points to allow improved case reporting and analysis, including for cases captured under the temporary changes; improvements to the portal to reduce the incidence of incorrect information being submitted by investors; and there will be a range of changes to the portal and the case management system as a result of the policy reforms—for instance, to facilitate notifications that are made under the new national security test—to support enhanced compliance and enforcement powers. There are also complementary process improvements that we are implementing. We're implemented a risk based triaging methodology to ensure appropriate and timely assessment and processing of all applications. Data entry and case closure procedures have been implemented to improve the consistency and quality of data capture and improve record-keeping. And process redesign requirements have been identified and prioritised to ensure that we're able to meet our regulatory reform requirements.

Senator O'NEILL: Thank you for the fulsome answer. I might ask you to provide on notice what you were reading from. It will be helpful, I'm sure. It sounds like there's been a lot of change since our first meeting with you, where I raised concerns about Chow Tai Fook's Alinta purchase and the ongoing lack of compliance. In what period of time have the changes that you just outlined been implemented, to what extent are those changes implemented and how much were they driven by the work of this committee?

Mr Brake : With IT, and other systems, it always seems to be that you're continually working on them. FIMS3 came in on 19 July, I think—we will have to check on that. The enhancements that Ms Kelley is talking about have come in since that period of time and there's certainly been quite a focus for this calendar year.

Senator O'NEILL: Going to staffing, in 2019 there were only two people monitoring enforcement, as I recall. When we last heard from you, I think that had gone up to 12.5 FTE at that point in time. What's the situation currently?

Ms Kelley : 15.5 FTE.

Senator O'NEILL: Why has there been such a rapid increase in the number of people there?

Ms Kelley : I think there's a recognition that more conditions were being applied and that we needed to increase our effort, in terms of monitoring the compliance with those conditions. Also, in terms of the reforms that the government is proposing to implement from, hopefully, 1 January next year, it's recognition that we do actually need to start getting ahead and being ready to implement those, from 1 January, once we have those additional powers, as well.

Senator O'NEILL: In terms of the data that you've been able to provide about the outcomes of compliance audits that you've undertaken, so far I've been able to identify one instance of your identifying substantive breaches of conditions by a foreign entity, given a no-objection notification over the last two years. Is that the case—just one? This is from the QONs, where you said you've conducted between 9 and 15 compliance audits each year since 2017. There was one. Then 'partially compliant', some; 'compliant, with caveats', some—which points to paucity of detail about—

Ms Kelley : I'm not sure it points to a paucity of compliance activity. As we've discussed previously, every regulator, in terms of their approach, has a focus on helping people to comply and encouraging compliance. As I said in my opening statement, our intent is to work with people to comply. It's more about when people are wilfully non-compliant that you need to have more tools available to deal with that, which is what the reforms are proposing. I think we've talked about this before as well—the vast majority of foreign investors want to comply. They want to invest in Australia. They want to comply and to work with us to ensure that their investment is successful and that they are complying both with our conditions, if we have applied them, and with domestic law.

Senator O'NEILL: We've heard evidence this morning that's quite contrary to that. It said, 'Yes, foreign companies and foreign entities do want to invest and they are investing, but it's an open secret that there's no compliance, there's no enforcement and they'll never get caught.' That was the evidence this morning from a couple of different participants in this inquiry.

In terms of criminal or civil enforcement actions under the act, has the department taken any action at all over the past three years?

Mr Brake : I think we answered that previously. We've taken no legal action. The government's reforms recognise that it's appropriate to have a wider and more flexible range of penalties because taking court action is not always going to be appropriate for noncompliance. If you take residential real estate—where the tax office has got a wider, more flexible, range of arrangements—they have been able to take significantly more action in terms of infringement notices and the like than we have been able to, because there are no infringement notices able to be utilised under the law with respect to business acquisitions.

Senator O'NEILL: So there's no capacity at the moment but you're anticipating that might happen. In terms of the implementation of remedial action plans to address noncompliance—and I have more questions than I can really ask in this time—has the matter of the Chow Tai Fook purchase of Alinta Energy been resolved yet? Have Alinta actually complied yet?

Ms Kelley : As we talked about last time, they have until December 2020 to be fully compliant.

Senator O'NEILL: So it's not done yet. They're still not compliant, because they're engaged in remedial action.

Ms Kelley : They're engaged in remedial action and they have until December 2020.

Senator O'NEILL: I'll just go to a couple of examples of where foreign investors have contravened conditions. CRA, now Rio Tinto, appears to never have reached the threshold for naturalising status, which is 50 per cent Australian ownership. That was one of the conditions. Nevertheless, they were granted that status and subsequently purchased mining and biotech companies. Is that correct?

Mr Brake : CRA? We'd have to take that on notice. I'm not familiar with the conditions which were imposed, or undertakings. I think it was some time ago.

Senator O'NEILL: As it was conveyed to us this morning, the longstanding cultural practice—which is of concern to me—is 'We'll get the money in; we'll put some conditions on it, but no-one's watching closely,' and you can get away with what you want. For example, Western Mining Corporation, according to the evidence that I have, did not meet its requirements for 70 per cent Australian equity and Australian control, yet it was granted ownership permission for the Yeelirrie uranium mining management. Do you have any oversight of that?

Mr Brake : We'd have to take that on notice, but I would say that for the Department of the Treasury over the last few years, as Ms Kelley mentioned, there's been a recognition that we needed to put more resources and attention into our compliance work and we've been working hard to build that up. As Ms Kelley said, we've now introduced a whole compliance branch to take this to another level.

Senator O'NEILL: Do you have any examples at all of FATA imposing any kind of civil, financial or criminal penalties against an organisation in breach of the FIRB conditions? How bad do they have to be before something actually happens?

Ms Kelley : I think we've already answered that question in terms of the civil and criminal penalties have not been pursued. Certainly the ATO in terms of residential real estate has the power to impose infringement notices. The new act, the new reforms, will actually give us the power to use infringement notices across all investments.

Mr Brake : Again, if you take the tax office there was a significant number of cases where people had to divest their holdings or otherwise face penalties under the arrangements that apply to residential real estate.

Senator O'NEILL: The fact remains that at this point of time the data poverty, the previous staffing levels, the level of attention has meant it's been pretty free rein for foreign companies to come in, buy Australian assets, not comply with terms and conditions and just do business with limited or no scrutiny.

Ms Kelley : I think that's a fairly harsh assessment and one that probably doesn't accurately portray the true nature of the situation. I wouldn't say that people have been able to do whatever they like. People have to apply. They have to go through a process where we consider their application, that is considered by Treasury and a range of other departments. The Foreign Investment Review Board then makes a recommendation to the Treasurer who then makes a decision. If conditions are applied, then there has been a process where they do have to provide regular audits and reporting to us. We have adopted a risk based approach in terms of where we intervene. We have significantly increased our resources in terms of compliance. The government has recognised as well that we need the full suite of regulatory powers which are now recognised in the exposure draft of the legislation. I'm highly commending that we need to make sure we have those full suite of powers so that we can continue to monitor foreign investments effectively. But I would not say that it's been free and easy and it's been a laissez faire approach, which is the impression that could be created by some of the words that have been used.

Senator O'NEILL: The powers you're seeking though, if the legislation is passed, are significantly different from the powers that you've had to this point. The action for financial, civil or criminal penalties is testimony to the fact there's been little or no action in that space. Could I go to—

Ms Kelley : In terms of pursuing that level of enforcement you have to have considerable evidence. Again, I'll go back to the vast majority of people and companies want to comply and do comply with their conditions.

Senator O'NEILL: I will go to the issue of voluntary undertakings. When Mr Morrison, the now Prime Minister, was the Treasurer he stated with regard, in particular, to Moon Lake, that there were a series of voluntary undertakings, and in his press release and in the presentation this seemed to feature quite significantly. Then Treasurer Scott Morrison stated Moon Lake had made a number of guarantees with regards to local employment, investment in infrastructure, continuing milk supply, and environmental and cultural agreements.

The way that was constructed by Mr Morrison as the Treasurer implies voluntary undertakings are a factor in the decision by the Treasurer to approve that investment. But Treasury's evidence advised that voluntary undertakings do not influence the assessment of a foreign investment proposal. So if voluntary undertakings—which, increasingly to me, seem to be window dressing, spin and marketing—are not engaged in assessment by the Treasurer and they're not enforceable, they can't be taken seriously. Why are they still a part of the FIRB structure? Are they a part of the FIRB structure?

Mr Brake : The legislation talks about conditions which can be imposed, where the Treasurer is satisfied that the imposition of those conditions is needed to ensure a proposal is not contrary to the national interest. As we have spoken about in the past, there is very much an increasing use of conditions in that regard. About 40 to 50 per cent of business cases have those conditions imposed and 70 to 80 per cent by value. Those cases on which those conditions are imposed, they are legally enforceable conditions. There is no voluntary opt-out or anything in that regard for those conditions. They are legally binding on the applicant. I think we've had that conversation previously about Moon Lake and the requirement by the government that Moon Lake report annually with regards to progress on the commitments they made.

Senator O'NEILL: How would you characterise that compliance? What are you going to do if they don't comply?

Mr Brake : As I noted and as you are aware, they were commitments, not conditions. I don't really want to get into details of a specific case, but the character of the investor can be a factor that's taken into account in any decisions which are before the government.

Senator O'NEILL: Local communities might be concerned about a takeover of local assets by a foreign entity, particularly from China. We heard evidence early this morning about concerns from the China Policy Centre that Australia lacks a cultural literacy, a deep knowledge, about how China regulatory action happens and the interface between private investors and the Chinese Communist Party. If you are in a local community and you get these promises that things are going to happen, they're really not worth anything, are they? They're just words in the air to dress up a proposal, and there's no enforcement capacity around them.

Mr Brake : I don't think there's much more I can add to my previous answer. Certainly conditions have been imposed going to those sorts of questions you have raised and they are legally binding.

Senator O'NEILL: But no-one has been taken to court about any of them?

Mr Brake : I think Ms Kelley explained that if we formed the view that there was noncompliance that warranted court action then we would be pursuing that.

Senator O'NEILL: But you haven't, because you're trying to get them to comply, but compliance with conditions and compliance with voluntary undertakings is a blurry zone. Even where it is conditions rather than undertakings, there's been no action in the courts to act as a significant deterrent to others who might try to exploit the system as it stands.

In terms of the supply chain issues, I want to point to a submission we received from the Western Australian government and a discussion that we had a little earlier. You might have been there when we were talking about a positive verses negative assessment of foreign investment. Professor Fernandes indicated that Australia has a very low ranking, ranking 53rd, among nations for low economic complexity, and that we are the least complex of all OECD countries. The Western Australia jurisdiction indicated they had some very significant concerns about emerging practices where foreign entities were purchasing assets in Western Australia—I'm assuming, but that mightn't be right—and then constructing it so that the supply chains went back to the country from which the original investment came. That was certainly not helping to grow jobs in Australia. What do you have to say about the possibility of having to meet a positive test with regard to the creation of jobs, the sharing of intellectual capacity and the enhancement, formally agreed prior to receiving assent to invest in Australia, rather than the negative test?

Mr Brake : That goes to the framing of the legislation. The legislation provides a negative test, so the Treasurer needs to be satisfied that a proposal is contrary to the national interest. The legislation does not provide that the Treasurer needs to be satisfied that something is positively in the national interest. That's a legislative and policy matter.

Senator O'NEILL: Has that been raised in any consultation so far? It came to us in the Western Australian government submission and in other submissions as well.

Mr Deitz : It has not been raised with us at this time. I refer you back to my previous answer around the status of this act as a non-conforming measure under our free trade agreements. That has the effect of standing still these arrangements. Again, I would suggest that these questions are also questions that the department of foreign affairs and the Attorney-General's Department would be appropriate areas to consult on the extent to which a positive test might have implications for those agreements but also on the kinds of matters that that particular Western Australian department referred to, whether or not they would constitute performance requirements and how those would play out under the same kinds of agreements. They are our experts on those matters, and we would defer to them.

Senator O'NEILL: Thank you for your answer. That seems very frank. My concern is that there's a constant mantra—and I see it in the language in this book—that foreign investment is good. Potentially that can be the case, but Australia is right now in the midst of this global pandemic. We've got problems with decreasing demand for skilled labour, we've got wage stagnation—that was happening before the pandemic even happened—we've got unemployment on the rise and we've got the government now creating a piece of legislation that's going to undertake some significant change, if it's given assent in the new year, in terms of what foreign investment we will accept into the country. It seems like now is the perfect moment for a conversation about: if foreign investment is going to come in and support the economy, there needs to be job creation embedded in it and confidence that this is going to improve the lives of ordinary, hardworking Australians—or ordinary Australians who want to be hardworking but can't get a go if foreign investment takes jobs out of the economy and takes money back to another entity and creates supply chains that go back to another country. I consider this to be a very important part of the conversation that you might be having in the next four weeks in the development of legislation. Do you have a view about that, given you were the lead government department in the development of the foreign investment reforms?

Mr Brake : The legislation is framed as I described, but all of our decision-making is case by case, so if there are concerns that a particular proposal will be contrary to the impact on the community or the economy for any given reason, then those matters can and would get taken into account, and it would be open to the Treasurer or other minister to form the view that, in that particular instance, that proposal is contrary to the national interest.

Ms Kelley : We've provided this both in our submission and I think we may have talked about it, but, certainly, the data around foreign investment shows that it supports one in 10 Australian jobs, it makes a significant contribution to our economy, and businesses supported by foreign investment contribute more than a quarter of total industry value-add. There's also evidence that foreign investment supports higher wages and that foreign businesses pay wages on average $20,000 a year higher. I think we provided that sort of data previously to the committee. While I acknowledge that individuals will raise particular cases that may present some of the concerns that you've outlined, I think we've got to look at that in the context of the total picture of foreign investment into Australia.

Senator O'NEILL: One of the areas of concern was research and development. Professor Fernandes suggested in his contribution that one of the goals of any strategic investment in the national interest should definitely be directed at increasing domestic innovation and supporting higher value-add sectors, including high-technology research and development, advanced manufacturing and energy efficiency. Are these elements that the department is giving any consideration to in the national interest test?

Mr Brake : They certainly can, and if they're investments which are providing special benefits—for example, research, further investment, greenfields work—one of the very big benefits of foreign investment to a country like Australia, which is relatively small by global standards, is the introduction of new technology, which can then be absorbed throughout the Australian economy. So those factors are all, absolutely, taken into account. Of course, also, as you'd be aware, there's obviously a very wide range of other government programs which are designed to support innovation in the economy. But in terms of our work in the foreign investment screening process, yes, we can take those matters into account.

Senator O'NEILL: Could I just return to make sure I'm clear about the enforcement of voluntary undertakings. Will your powers change if the new proposed legislation comes into force with regard to voluntary undertakings?

Mr Deitz : There is provision in the bill for the use of the enforceable undertakings provisions of the regulatory powers act. Those, however, are only acceptable in relation to compliance with the act.

Senator O'NEILL: I'm not quite sure I understand what that means. Where people have given me general, nice statements about how much they're going to make life better in the community that I live in as they acquire this critical asset, I want to understand how a voluntary undertaking made at the time of an application can become enforceable and what new power you will have in relation to various contraventions in the act.

Mr Brake : I guess our starting position is, again, the government can require, and has on occasion required or imposed, conditions to ensure that a proposal is not contrary to the national interest. That has happened, and that will remain open to the government if it chooses to do so.

Senator O'NEILL: Can you explain to me how the enforcement of voluntary undertakings will be consistent with the national treatment obligations?

Mr Brake : As we've set out, because a voluntary undertaking is not a condition if it's voluntary, it is not a legal requirement. I may be getting mixed up here, but, if there is a legally binding condition, as Mr Deitz explained, in terms of our international obligations, the key responsibility for Australia meeting its international obligations really rests with the Office of International Law.

Ms Kelley : I think we've indicated previously that our preference is not to have any voluntary undertakings. If conditions were required, then we'd prefer to use the conditions rather than voluntary undertakings, and the new legislation gives the government the power to accept enforceable undertakings from foreign persons.

Mr Brake : I will make one broad point, which is that, obviously, in preparing the legislation, we went through all the appropriate checks, as you would expect, to ensure that we are consistent with our international obligations.

Senator O'NEILL: And did you take legal advice about the eligibility of what you proposed?

Mr Deitz : I'd need to take that on notice. With respect to which part is your question, Senator?

Senator O'NEILL: I'm coming out of the robodebt inquiry and concerned that the government takes legal advice to make sure that whatever it proposes is legal.

Mr Deitz : We did seek advice.

Senator O'NEILL: Would you be able to provide details of that advice—the date on which it was sought and from whom, and, if possible, give us the advice? That would be very interesting. I have so many more questions. In his submission, Professor Alan Fels states that he thinks it's very clear:

FIRB does not meet the standard practices and criteria that characterise normal best practice regulation i.e. independence, final decision making powers, accountability, transparency.

We've heard a lot of concerns about transparency and access to data. Senator Rennick asked about being able to see what's gone on, what conditions were applied, who's got what, where they've got it. The new legislation is proposed to give you stronger penalty compliance and enforcement powers, but it doesn't address the cultural practice of Treasury as a regulator, which has been to gently encourage, if noticed, that people were not complying. There was a sort of gentle encouragement to try and bring them on board. How do you see the cultural practices embedded in Treasury meeting with the implied action of the powers that are proposed to be given to the agency, if there is no change in institutional design? Is this the moment when enforcement needs to come out of Treasury and into a statutory authority rather than stay with you?

Ms Kelley : The governance arrangements are actually a decision for government, but I would just make a couple of points. As I noted in my opening statement, we have established a compliance branch now. It is headed by an SES band 1 officer who has extensive experience in compliance across numerous government departments. We do need to think about the cost benefits of creating additional standalone agencies as well, given that the Treasurer is the decision-maker, and what's the best way of supporting the Treasurer in that process but also about then ensuring that conditions are appropriately enforced. I don't necessarily agree with you that we've got the gently, gently encourage. We are actually establishing and have strengthened our compliance function and are further doing that. But at the end of the day the appropriate institutional settings for foreign investment regulation is a question for government.

Senator O'NEILL: In terms of monitoring compliance, you relied very heavily on the auditing profession to describe what's required in terms of compliance, then to monitor the actual entity who's paying them to do that work. Is Treasury now collecting the identity of the internal auditor for an applicant or target entity so that you can actually confirm that when they get independent assessment of compliance that's come from a different audit company? Are you watching that space? That was a very big problem, in my view, with the Alinta Energy case. There were delays and there was not an independent audit, in the proper sense of that word, according to the standards. It was a report by the company that designed the realignment.

Ms Kelley : I think we've had this discussion the last couple of times that we've met. I think we've got a different view around the independence and the issues associated with that matter. Noting the issue that's been raised, yes, we are monitoring that.

Senator O'NEILL: So you'd now note who is the internal auditor of any of the companies that you are asking to comply?

Mr Brake : We certainly monitor the auditor's requirements to meet their professional and statutory obligations. I can certainly say that.

Senator O'NEILL: When you ask for an independent audit, in your view is the internal auditor sufficiently independent to audit their own work, or do you require a separate auditor to audit the internal auditor's work plans?

Ms Kelley : As we've said before, we have to agree to who the auditor is. We have, I suppose, a difference of opinion around the issue with the auditor in the matter that we're talking about, but we are very, I suppose, conscious in terms of agreeing to make sure that the auditing standards et cetera are complied with.

Ms Wijeyewardene : If you look at guidance note 52, which is available on the FIRB website, that goes through the factors that we will consider when an internal auditor is appointed. Basically, one of the considerations in that is the absence of any potential conflicts of interest. So it is something that is forefront of our mind and that will certainly come into consideration when we're looking at the appointment of auditors.

Senator O'NEILL: I'll continue to raise concern about the auditors auditing themselves. It's a bit like checking your own homework. If the integrity of the system relies on auditors, then the highest standards of the regulations—the standards they should be adhering to—need to be articulated very clearly, especially by the Foreign Investment Review Board advisers, which is you guys. Any little dodgy con job of 'We'll mark our own work and we'll give you delayed report', which is how I would characterise the Chow Tai Fook purchase of Alinta—I think what has happened there is shameful. It reveals a lack of integrity in the system that I think is a critical failure point. Thank you.

ACTING CHAIR: Can I thank Treasury officials for their time this afternoon and for their evidence. I hope you have a good evening in Canberra, which is not in lockdown. I'm in Melbourne. Thank you very much for your time this afternoon.

Ms Kelley : Thank you, Senator, and take care.

Mr Brake : Thank you, Senator.

ACTING CHAIR: Thank you to the secretariat as well.

Committee adjourned at 17:06