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

BRENNAN, Mr Malcolm, Chair, Foreign Investment Committee, Business Law Section, Law Council of Australia

RAE, Ms Wendy, Deputy Chair, Foreign Investment Committee, Business Law Section, Law Council of Australia

Evidence from Ms Rae was taken via teleconference—

[09:33]

ACTING CHAIR: I welcome representatives of the Law Council of Australia. Thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. I also advise witnesses that answers to any questions on notice are to be sent to the secretariat by Wednesday 19 August 2020. I now invite you to make a brief opening statement, should you wish to do so.

Mr Malcolm Brennan : As the national body representing the Australian legal profession, the Law Council is grateful for the opportunity to appear today. The Foreign Investment Committee of the Business Law Section of the Law Council of Australia comprises senior lawyers from Australia's top tier and specialist law firms and in-house counsel. It is a national body, with members drawn from various states and the ACT. The committee engages with bureaucrats, the Foreign Investment Review Board and Treasury ministers on the foreign investment regime. There is a constructive, two-way engagement which will be continued over the coming weeks in respect of the reform package that was released for consultation last Friday, 31 July.

The Foreign Investment Committee submits that the current foreign investment system works well, is effective and allows investment that is consistent with Australia's national interest. Central to the foreign investment regime is an acceptance that foreign investment is a key to Australia's prosperity and that a loss of foreign investment would itself be contrary to national interest. Australia is an attractive investment destination due to stable government, low sovereign risk and rule of law. This attractiveness is put at risk by making investment increasingly difficult through unclear policy, complex and unsettled process and a challenging compliance approach.

Engagement by foreign investors and their agents with FIRB gives rise to a thorough and comprehensive process that involves the input of key agencies, including the ACCC, ASIO, Austrade, the Australian Federal Police, the Australian Taxation Office and ASIC, amongst many. This across-the-board analysis of the impact of any proposed foreign investment means that it is highly unlikely that any attempted manipulation would be unnoticed, given the number of government agencies involved in the review. The FIRB process is robust, but is only effective if the foreign investor submits to the process—something that a person intent on manipulation would be unlikely to do. The intended call-in power for the Treasurer and national security businesses will plug some of that gap. The Foreign Investment Committee submission outlined potential areas for improvement in Australia's foreign investment regime with respect to each of the inquiry's terms of reference. Central to this submission is a desire to further the national interest by maintaining the regulatory process surrounding inbound investment without the construction of disincentives to investment.

Wendy Rae, the deputy chair of the committee and I are happy to answer any questions the committee may have. Thank you.

ACTING CHAIR: Thank you very much, Mr Brennan. We'll start with Senator Whish-Wilson.

Senator WHISH-WILSON: I'll be as quick as I can and I'll put some more detailed questions on notice. Point 19 in your submission says:

It is highly unlikely that any foreign investor seeking to launder money (a serious criminal offence), would seek FIRB approval in relation to an investment.

Are you aware of the case study that the committee is looking at which relates to Operation Gethen from last year?

Mr Malcolm Brennan : No, I'm not. I don't know about that.

Senator WHISH-WILSON: It was announced in national newspapers on 1 November that the Federal Police, AUSTRAC and Home Affairs had essentially busted a criminal syndicate washing $23 million worth of foreign money, the proceeds of illicit crime, through real estate, including in Tasmanian properties. This is where it got my attention. It's the committee's understanding that the Tasmanian purchasers would have been subject to FIRB approval; does that surprise you, that such a substantial property purchase was subject to FIRB approval and seems to have been purchased with laundered money?

Mr Malcolm Brennan : The thresholds for FIRB applications, where you have residential land, are zero dollars. If it was residential land then that should have gone through FIRB and processed. I don't know whether it went through FIRB. If it went through FIRB I'd be very surprised. The tax office, which deals with the residential land acquisitions by foreign persons, would have picked that up, I would have thought, given that the agencies you've just mentioned would have been consulted in the course of that. If it was developed commercial property then, at $23 million, that is less than the threshold for acquisitions of developed commercial property.

Senator WHISH-WILSON: It was undeveloped commercial property. It was for a property development in north-east Tasmania at Musselroe Bay, but with undeveloped commercial property. So, it should have been subject to FIRB approval.

Mr Malcolm Brennan : Well, it was. The FIRB rules would have applied, but that's the point that's being made: that an investor intent on nefarious activity such as you've described is hardly likely to go to FIRB, when going to FIRB means that the consult process that the FIRB undertakes in respect of every application would mean that they are immediately exposed to the tax office and other agencies that you mentioned.

Senator WHISH-WILSON: It seems—and we'll be asking questions about this a little bit later, and we'd be happy to forward you the transcripts, depending on what we find—as though the Chinese authorities were the ones who handed the information to our regulators, and that's why the bust happened. What I'm particularly interested in today: as you know, the Financial Action Task Force for a number of years now has been talking about the importance of gatekeeper professions, such as the legal profession, accountants and real estate agents, having proper criminal reporting requirements in relation to money laundering. Their own report in 2015 suggested that about $1 billion worth of illicit funds would be going through Australian real estate every—I think it's quite broadly acknowledged, and certainly Peter Dutton's made public comments about public interest, of laundered money going into Australian real estate. Has your body actively lobbied against tranche 2 anti-money-laundering and counterterrorism financing laws in Australia?

Mr Malcolm Brennan : That's not my area, but I have brought with me the anti-money-laundering guide produced by the Law Council.

Senator WHISH-WILSON: Thank you.

Mr Malcolm Brennan : Perhaps I could read from that for you:

The Law Council has maintained a strident and steadfast opposition to the proposed extension of the regulatory requirements of the AML/CTF regime to the legal profession in Australia for the following reasons:

• Certain obligations are fundamentally incompatible with the necessary role contemplated for legal practitioners within the system of justice.

• There is a lack of empirical or typological evidence of systemic involvement or risk of involvement of legal practitioners in facilitating (unwittingly or otherwise) money laundering or terrorism financing.

• The legal profession is subject to an extensive existing regulatory system and core professional obligations not to break or facilitate breaching of the law. The legal, regulatory and professional standards that already exist for the legal profession have been outlined in this Guide. The existing regulatory scheme operates well and is a key point of difference between the legal profession and other Designated Non-Financial Businesses and Professions likely to be targeted by Tranche 2 reforms.

Senator WHISH-WILSON: With due respect, because my time's so limited, perhaps I could just get you to put the rest of that on notice and the committee will look at it.

Mr Malcolm Brennan : Sure. If you want, we can send that in to you.

Senator WHISH-WILSON: Okay. And thank you for raising this, because I did ask the secretariat to get in touch with you yesterday just to let you know I'd be asking these questions. And I will put a lot more detailed questions to you on notice. But are you aware that countries such as the UK, Hong Kong, Malaysia, Singapore, New Zealand and Canada have gone down the road of putting these reporting requirements into common law for gatekeeper professions such as the legal fraternity? Indeed, Australia's been under significant international pressure now for nearly a decade to do so.

Mr Malcolm Brennan : As I said before, it's not my area of expertise, so I will have someone with that expertise respond to questions, together with a copy of the guidance note.

Senator WHISH-WILSON: Alright. Chair, I'll put a series of questions on notice, but could you come back to me if you have any further time in this lot?

ACTING CHAIR: Absolutely. Senator Patrick.

Senator PATRICK: My questions go to issues of confidentiality. You touched on confidentiality in your submission. I note there's a connection between public interest and national interest. There's also a connection between openness and transparency and responsible government, and there's a link between good decision-making and the publishing of decisions. With all of that in mind, what's the Law Council's view on the publication of three things: firstly, the publishing of the transitional fact that an application has been made; secondly, the publishing of a decision, as they do in places like New Zealand; and, thirdly, the publishing of conditions associated with acquisitions?

Mr Malcolm Brennan : The challenge with all three of those is really what we do in a market place as to what impact that level of information has on the market itself. In particular, where it's a takeover bid or where it's a contested bid, if one of the parties has their commercial details open to all, that has the effect of distorting the way in which a bid will be run and perhaps makes for less competitive tension in the bid process and perhaps also results in an undervalue to the Australian asset.

Senator PATRICK: I'm not suggesting the content of an application be published but the fact of an application. Maybe that requires, additionally, under continuous disclosure laws, some sort of disclosure by the company to which the application is the subject of.

Mr Malcolm Brennan : Again, Senator, say, in a listed circumstance, particularly when you're dealing with a FIRB process that currently has a six-month deadline attached to it, if it's out there for six months that a particular investor is looking at a transaction, that does have a distorting market impact. At the present time, you've got a market that is free flowing with information, but, because of continuous disclosure, you have certain aspects put out there when a decision is made. But a FIRB application is made at a point in time well before any transaction is actually going to happen. In fact, FIRB welcomes early engagement with applicants, and that of itself could have enormous impact on not only the market but, for example, the current concerns we have in, say, agricultural transactions where we've got the open and transparent marketing process. What we see with that, quite challengingly for employees—and employees in the agricultural sector are notoriously itinerant. If they're concerned there will be a change in ownership—it doesn't mean it's going to foreign; it's just the mere fact that it's up for sale—that has an impact on employment and an impact on the business of the vendor. So there is real need in certain cases for that sort of confidentiality. With the FIRB process, it's a lot earlier in the deal-thinking, if you like, that you can be going to FIRB.

Senator PATRICK: Let's go to decisions, which obviously occur after the fact. You'd be well aware that with administrative decisions, for example, one of the reasons for publishing decisions, apart from informing the parties and allowing for judicial review, is in fact the effect it has on the decision-making process itself.

Mr Malcolm Brennan : Decisions are interesting—again, you end up in a similar position; it has been a mixed bag over the years. Obviously, some decisions are announced. Some decisions, particularly those that are prohibitions, do send a message of what is of national interest concern to the government of the day. There are some decisions where the decision is coming during the course of that competitive process that we're talking about. So, again, it comes back to the need—what would be the impact if the Treasurer announced that bidder X has an approval in a process where you don't know who your competitors are? If bidder X is seen as perhaps the most likely winner, you may see the others just pull out and bidder X will suddenly get a free run.

Senator PATRICK: Again, as you know in court cases, you can delay the publication of a decision in circumstances where it might cause a harm. So it might be, perhaps, two months after the sale is complete that the decision is published. It's about openness and transparency. The fact that New Zealand can do it just seems to—

Mr Malcolm Brennan : The practical issue then, of course, is that if the transaction is complete, the parties will themselves have already said they’ve got FIRB approval. Or, if it's in a market setting where someone's gone for a takeover bid, the FIRB approval is a precondition to the bid. So, if the transaction then proceeds, it's clear that FIRB approval has been obtained. The interesting question, though, is—if there is a prohibition order or a publication, even if it's not made public—does the Treasurer give reasons to the bidders for the decision? That's something that we haven't necessarily seen. In the prohibitions, we do get the message. For example, in APA and CKI, the decision was clear that there would have been a concentration of foreign ownership in the gas pipeline sector. That made it clear to investors, for future proposals in that sector, what the government thinking in that space is.

ACTING CHAIR: Senator, that will have to be your last question. I'm sure you have more that you will want to put on notice. Can I just point out to you, Mr Brennan, that the submission from the first witness actually expressed significant concern about a lack of transparency in this area: 'Lack of transparency creates uncertainty for investors as to whether an investment will be considered by the Australian government to be in the national interest or not, and the discretionary power held by the Treasurer can provide opportunities for corruption or lead to the perception of corruption among the public and investors.' That's a very different view to what we've been hearing from the Law Council this morning.

Mr Malcolm Brennan : It is a different view. I think that is an observation from outside of a deal. So, from within the deal, a proposal goes through the FIRB process in accordance with, firstly, the legislation that requires the notification to be made. Then, dealing with the policy parameters and engaging with FIRB—engaging through FIRB with the various agencies that have input into the process, which raise questions through the process—is a challenge for investors, because there is sometimes, as we note in our submission, some complexity in some moving goalposts, if you like, around the policy settings, but ultimately—

ACTING CHAIR: Can I stop you there. Would it concern you if I said that one of the limitations of Treasury's IT system that has become apparent to us in the course of this hearing, because of a failure to be able to respond to questions on notice, is that Treasury cannot provide a breakdown of foreign investment proposals on the basis of greenfield investments versus acquisition of an existing business without a manual time-consuming process, cannot provide breakdowns of applicants according to whether they're new or existing foreign investors, and cannot identify a proportion of approvals to which broad categories of conditions are attached. That doesn't sound to me like a transparent regime that's operating at peak capacity. Can I also ask you have you engaged with the government on the foreign investment reform exposure draft?

Mr Malcolm Brennan : We're starting that process. We had an initial discussion on Monday afternoon around ensuring compliance reporting is a system that is going to work going forward. Once I leave here, we're joining Treasury for the next couple of hours—on the national security business, firstly, and then, again, on the compliance work. I think we're scheduled for another four sessions over the next two to three weeks with Treasury on that reform package.

ACTING CHAIR: Given that this inquiry is underway, can I ask you to provide this committee with materials that are related to your conversations with the government so we can keep an eye on what it is that you're suggesting and recommending.

Mr Malcolm Brennan : If we prepare a submission, we can do that.

ACTING CHAIR: In addition to a submission, we would be interested in your thoughts as the process develops. The secretariat will be in touch with you about that. Because of your answer, I want to point out that, further to the problems that I recorded a little earlier, there is no record of the number of targets for compliance under remedial action plans not being met. That knowledge is not available from Treasury at the moment. So there are many, many concerns that I have. Senator Whish-Wilson.

Senator WHISH-WILSON: Thanks, Chair. I apologise to the two witnesses about the lack of time we've got today. Perhaps we could do some follow-up with you some other time. I have another question in relation to the tranche 2 laws. The Australian Criminal Intelligence Commission, in 2017, released a report that stated: 'The most common professions exploited by organised crime include lawyers, accountants, real estate agents and brokers.' AUSTRAC, in 2015, released a report called Strategic analysis brief: money-laundering through real estate. In that report they outlined how company structures are set up to essentially hide beneficial ownership et cetera and launder money. The legal profession, as one of the key gatekeepers, is not accepting of anti-money laundering reporting requirements. Could you take it on notice to provide suggestions to the committee for tightening up on your profession's potential involvement in reporting suspicious transactions? Although it may not relate to the FIRB, the overall issue of money-laundering into real estate is a very significant matter of public interest in this country, and it is part of the terms of reference for this inquiry.

Mr Malcolm Brennan : Thank you, Senator. I will get the appropriate Law Council representative informed and we'll come back to your questions.

Senator WHISH-WILSON: And I'll send you some more detailed questions. Thank you.

Senator PATRICK: In relation to section 120 of the Foreign Acquisitions and Takeovers Act—and this goes to my question of confidentiality—is it your understanding that 'protected information' applies only to information provided by the FIRB applicant, that it doesn't in its current form place a constraint were the Treasurer to publish decisions?

Mr Malcolm Brennan : I think there would still be a restraint on the issue of protected information under a decision. The protected information status would remain, I would think. So, if the Treasurer published a decision, it would need to be carefully crafted around ensuring that protected information is not released as a result.

ACTING CHAIR: Further to the senator's question, I note that the committee has asked Treasury for an explanation on how decisions, if they were made public, would cause harm to the interests of the company. To date, we haven't had a particularly fulsome response. So perhaps that might be the subject of some discussions with the Law Council going forward. I thank you very much for your evidence today, Mr Brennan and Ms Rae. Please be mindful that responses to questions on notice should be returned by Wednesday, 19 August. Thank you very much.