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Security of Critical Infrastructure Bill 2018

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2016 - 2017 - 2018

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

SENATE

 

 

 

 

 

SECURITY OF CRITICAL INFRASTRUCTURE BILL 2017

 

 

 

SUPPLEMENTARY EXPLANATORY MEMORANDUM

 

 

Amendments to be Moved on Behalf of the Government

 

 

 

 

( Circulated by authority of the

Minister for Home Affairs and the Minister for Immigration and Border Protection, the Honourable Peter Dutton MP )

 



 

Amendments to the Security of Critical Infrastructure Bill 2017

 

(Government)

 

OUTLINE

 

1.               The Security of Critical Infrastructure Bill 2017 (the Bill) will strengthen the Government’s capacity to manage the national security risks of espionage, sabotage and coercion arising from foreign involvement in Australia’s critical infrastructure.

2.               The national security risks to critical infrastructure are complex and have continued to evolve over recent years. Rapid technological change has resulted in critical infrastructure assets having increased cyber connectivity, and greater participation in, and reliance on, global supply chains with many services being outsourced and offshored.

3.               The Bill will apply to specific critical infrastructure assets in the electricity, water ports and gas sectors which have been determined to be most at risk from sabotage, coercion, and espionage.

4.               The amendments to the Bill implement recommendations made by the Parliamentary Joint Committee on Intelligence and Security (the Committee) in their report on the Bill dated 15 March 2018. The key amendments are as follows:

·          amending the definition of direct interest holder and introducing definitions of influence or control and associates to ensure direct interest holders provide information for the Register of Critical Infrastructure Assets on all entities who may be in a position to influence or control the asset or the direct interest holder;

·          introducing an exemption from reporting for moneylenders, where the money lending agreement does not put the lender (or a holding entity or subsidiary) in a position to influence or control the asset;

·          requiring an unclassified statement of the grounds of an adverse security assessment to be provided to the affected person (as part of issuing a direction); and

·          including a requirement for the Committee to review the Bill within three years of the Bill receiving Royal Assent.

5.               In addition to responding to the Committee’s report, the proposed amendments also address some minor and technical issues in the Bill, including:

·          refining the definition of critical water asset to clarify that it applies to one or more utilities or systems managed by a utility where those systems ultimately service more than 100,000 connections, and

·          ensuring the definition of protected information applies to documents as well information.

FINANCIAL IMPACT STATEMENT

The financial impact of these amendments is nil.

 

REGULATION MAPPING

The regulation impact statement on the provisions in the Bill, as in the original explanatory memorandum, is not impacted by these amendments.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

The statement of compatibility with human rights on the provisions in the Bill, as in the original explanatory memorandum, is not impacted by these amendments.

AMENDMENTS TO THE SECURITY OF CRITICAL INFRASTRUCTURE BILL 2017

 

NOTES ON AMENDMENTS

 

Amendment 1                        Part 1, Division 2, clause 5, page 5 (after line 14)

6.               This amendment will insert a definition of associate in clause 5 of the Bill. The meaning of an associate will be in clause 8B (to be inserted by item 15). Including a definition of associate in the Bill will ensure there is a more accurate record of all interest holders by capturing interests jointly held by entities with certain relationships. This, in turn, assists to provide a better understanding of who owns and controls our critical infrastructure.  

Amendment 2                        Part 1, Division 2, clause 5, page 5 (after line 17)

7.               This amendment will insert a definition of corporate entity in clause 5. A corporate entity is defined as any entity that is not an individual. Including a definition of corporate entity in the Bill contributes to a clearer distinction between an entity, which can be an individual, and a corporate entity, which cannot be an individual. The term is used in the definitions of senior officer, subsidiary, higher entity and associate , and the inclusion and use of corporate entity provides a clearer explanation of these concepts.

Amendment 3                        Part 1, Division 2 , clause 5, page 5 (lines 22 to 25)

8.               This amendment will clarify the definition of critical water asset in clause 5 so that it applies to one or more systems or networks managed by a utility where those systems or networks ultimately service more than 100,000 connections. This amendment ensures that only one report is required per water utility and they are not required to report on more than one system or network under their control if those individual systems or networks individually meet the 100,000 connections threshold.

Amendment 4                        Part 1, Division 2 , clause 5, page 6 (after line 24)

9.               This amendment will insert definitions for holding entity , influence or control and interest in clause 5.

10.           The meaning of a holding entity is provided in clause 8C(2) (to be inserted by item 15). Including a definition of holding entity in the Bill incorporates a more commonly used term in the market. This term is then used within the moneylending exemption and associate definition provisions, providing a simpler and clearer method of explaining the type of entity within these provisions.

11.           The meaning of influence or control is provided in clause 8A (to be inserted by item 15).  The term provides a clearer explanation of the intention of the Bill, within the Bill rather than only in the explanatory materials. Defining the term clarifies the criteria for determining which entities are in a position to directly or indirectly influence or control the direct interest holder and therefore need to be reported by the direct interest holder on the Register.

12.           An interest in an asset is defined to be any ‘legal or equitable interest in the asset.’ This definition would include interests held by way of a long term lease. Introducing the definition creates a simpler and clearer use of the term interest in the Bill. For example, use of the term interest in clause 8, when an entity is considered a direct interest holder , can be simplified as a consequence of including this definition.

Amendment 5                        Part 1, Division 2, clause 5, page 6 (after line 28)

13.           This amendment will insert a definition for a moneylending agreement in clause 5. The meaning of a moneylending agreement is provided in clause 8(3) (to be inserted by item 14). This term is being introduced due to the inclusion of the moneylending exemption provisions (clause 8), which uses the term moneylending agreement

Amendment 6                        Part 1, Division 2 , clause 5, page 7 (lines 14 to 22)

14.   This amendment will amend the definition of protected information in clause 5 to ensure that it clearly applies to documents and information

15.   Given the term protected information governs what information is afforded certain protection under the Bill, this amendment will ensure those protections extend to documents that are provided as well as information.

Amendment 7                        Part 1, Division 2 , clause 5, page 8 (after line 34)

16.           This amendment includes definitions for senior officer and subsidiary in clause 5. The meaning of a subsidiary is provided in clause 8C(1). These terms are being included to provide a simpler and clearer method of explaining the types of entities that fall within the newly introduced associate provision (clause 8B).

17.           A senior officer of a corporate entity includes a director, a trustee, a director of the trustee where the trustee is a body corporate, an individual involved in the central management and control of the trust and individuals who have the capacity to affect the business.  

Amendment 8                        Division 2 , clause 6, page 9 (line 33) to 10 (line 8)

18.           This amendment removes existing wording relating to influence or control from sub-subclause 6(1)(f). This wording is being replaced by a new definition of influence or control in relation to an asset in clause 8A(1) (to be inserted by item 15).

Amendment 9                        Part 1, Division 2 , clause 6, page 10 (lines 13 to 20)

19.           This amendment replaces the existing sub-subclause 6(1)(h) with sub-subclauses 6(1)(h) and 6(1)(ha). This amendment responds to recommendation 4 of the Committee’s report into the Bill to provide greater certainty and clarity as to what interest and control information is required to be reported.

20.           The amendment provides further detail on the information that a direct interest holder of a critical infrastructure asset is required to provide. It clarifies the original intention to require direct interest holders to report on all entities (intermediate and ultimate holding entities) that are in a position to directly or indirectly exercise influence or control. Direct interest holders are required to report on all entities that are in a position to directly or indirectly influence and control the direct interest holder , up to the ultimate owner.

21.           This would result in the accurate reporting on entities that influence or control, regardless of the acquisition structure used and provide Government with an understanding of who is in a position to ultimately influence and control the direct interest holder.

UPDATED EXAMPLE to paragraph 153 of EM, page 26

Example

Company A owns an electricity distribution network in Tasmania. Company A is 50 per cent owned by Company X. Company X only has one shareholder, Mr Smith, who is an American citizen and lives at 1 Smith Street, in Auckland, New Zealand.

Company A, the first entity and direct interest holder of the critical infrastructure asset (the electricity distribution network in Tasmania) would need to report, in accordance with subclauses 6(a)-(g), its name, business number (if applicable), relevant address, the type and level of interest it holds in the asset, information about the influence or control it is in a position to directly or indirectly exercise in relation to the asset, and information about the ability of a person, who has been appointed by the first entity to the body that governs the asset, to directly access networks or systems that are necessary for the operation or control of the asset.

Company A would also need to report on the name of each other entity that is in a position to directly or indirectly exercise influence or control over it (sub-subclause 6(1)(h)(i) and 6(1)(h)(ii)). For each of the other entity’s that are in a position to directly or indirectly influence or control Company A, it would be required to provide all information covered by subclauses 6(1)(b), (d) and (e) if appropriate (sub-subclause 6(1)(ha)).

Company A would report details on Company X (sub-subclause 6(1)(h)(i)) and details on Mr Smith, an entity that is in a position to directly or indirectly influence or control the Company X (sub-subclause 6(1)(h)(ii)). Company A would need to report on all information covered in subclauses 6(1)(b), (d) and (e), including details on Mr Smith’s shareholding in Company X, Company X’s shareholding in Company A, and Mr Smith’s residential address and citizenship details.

 

Example 
 Entity A holds a 40 per cent interest in the critical infrastructure asset. Entity A is wholly-owned by Holding Entity A, which is wholly-owned by Holding Entity 1, which is a subsidiary of UP Entity A. UP Entity A, holds an interest of greater than 10 per cent in each of the holding entities of Entity A, is in a position to appoint persons to run the asset and exercise veto rights in relation to Entity A. 
 Entity A is required to report on each of these entities, up to the ultimate owner: 
 • Holding Entity A, an entity that is in a position to directly or indirectly influence or control the first entity - sub-subclause 6(1)(h)(i);
 • Holding Entity 1, an entity that is in a position to directly or indirectly influence or control any entity covered by a previous application of this paragraph - sub subclause 6(1)(h)(ii); 
 • UP Entity A, the ultimate owner - sub-subclause 6(1)(h)(ii). 
  
  

 

Amendment 10                      Part 1, Division 2 , clause 6, page 10 (after line 22)

22.           This amendment includes notes at the end of clause 6 to further explain the intention of sub-subclauses 6(1)(h) and 6(1)(ha), refer to the definition of influence or control and refer to clause 53A, which outlines interests held by trusts, partnerships, superannuation funds and unincorporated foreign companies.

Amendment 11                      Part 1, Division 2 , clause 8, page 12 (lines 1 to 3)

23.           This amendment replaces subclause 8(1)(a) to include direct interest holders that jointly hold interests in critical infrastructure assets with an associate or associates. An interest in an asset is defined to be any ‘legal or equitable interest in the asset’.

24.           Including the concept of associate in the Bill provides a more accurate record of interest holders by capturing interests jointly held by entities with certain relationships. This, in turn, assists to provide a better understanding of who owns and controls our highest-risk critical infrastructure.  

25.           In determining whether an entity is a direct interest holder in relation to a critical infrastructure asset , interests held jointly with any associates of the entity are also taken into consideration. If an entity and its associates jointly hold an interest of at least 10 per cent in the asset, the entity is considered to be a direct interest holder.

Example

Entity A holds a 5 per cent interest in the critical infrastructure asset. Entity A carries on a business in partnership with Entity B, which also holds a 5 per cent interest in the asset. While Entity A does not hold an interest of at least 10 per cent in the asset, Entity A and Entity B are considered associates and Entity A, together with its associates (and consequently Entity B, together with its associates) hold an interest of at least 10 per cent in the asset. For the purposes of the Bill, both Entity A and Entity B are considered to be direct interest holders .

Amendment 12                      Part 1, Division 2 , clause 8, page 12 (line 4)

26.           The amendment removes the reference to ‘lease’ in the definition of a direct interest holder . A lease is considered an interest under the Bill and the inclusion of the definition of interest in clause 5 (inserted by amendment 4) results in the ability to simplify subclause 8(1)(b).

Amendment 13                      Part 1, Division 2 , clause 8, page 12 (after line 6)

27.           This amendment includes a note at the end of clause 8 to refer to clause 53A, which outlines interests held by trusts, partnerships, superannuation funds and unincorporated foreign companies. This provision was previously included within clause 6, but has been deleted (by amendment 14) and moved to clause 53A (by amendment 18).

Amendment 14                      Part 1, Division 2 , clause 8, page 12 (lines 7 to 17)

28.           This amendment replaces the existing subclause 8(2) (which is being amended and moved by amendment 18) with two new subclauses which provide an exemption to the definition of a direct interest holder for moneylenders.

29.           New subclause 8(2) will ensure that moneylenders, in most circumstances are not considered to be a direct interest holder and therefore do not have to report interest and control information in respect of the asset.

30.           The definition of a moneylending agreement at new subclause 8(3) captures agreements to lend money, or other agreements to provide financial accommodation, entered into in the ordinary course of a moneylending business. The definition also captures any subsidiaries or holding entities of the moneylender that are entitled to the security interest arising from the moneylending agreement, even if these entities were not the moneylender in the moneylending agreement.

Example

A moneylender enters into an agreement with a critical infrastructure asset operator. The loan is secured and the security interest provided as part of the moneylending agreement is considered an interest in the critical infrastructure asset. The entity entitled to take and hold the security in the event of a default is not the moneylender, but a subsidiary of the moneylender. The moneylending exemption and the moneylending agreement definition provide an exemption for the moneylender, as well as any subsidiary and holding entity that hold an interest in the critical infrastructure asset for the purposes of a moneylending agreement. These entities (the moneylender, any subsidiary and holding entity), are not considered direct interest holders and are not required to report under the Bill. 

31.           The moneylending exemption applies where the security interest in the asset is held as part of a security interest for the purposes of a moneylending agreement (sub-subclause 8(2)(a)(i)) and enforcing the security would not put the moneylender, its subsidiary or holding entity, in a position to directly or indirectly influence or control the asset (sub-subclause 8(2)(c)). The moneylending exemption still applies if the security is enforced as a result of a default, and the moneylender, subsidiary or holding entity enforce the security over the critical infrastructure asset and hold an interest in the asset (sub-subclause 8(2)(ii)). However, the exemption only applies where the interests are held in the ordinary course of a moneylending business, and the entities are not in a position to directly or indirectly influence or control the asset (sub-subclause 8(2)(b)).

Example

Company A, a moneylender, holds a security interest over a critical infrastructure asset. Company B, the borrower, defaults on the loan and Company A is required to enforce the security interest. This results in Company A acquiring an interest in the critical infrastructure asset.

Company A, after acquiring the interest, obtains control and influence over the critical infrastructure asset, and begins to control the asset for purposes outside of the usual business of a moneylender.

The moneylending exemption would no longer apply and Company A would be considered a direct interest holder and would be required to report on interest and control information in respect of the asset. 

 

Amendment 15                      Part 1, Division 2 , clause 8, page 12 (after line 17)

32.           This amendment inserts new provisions to the Bill, clauses 8A, 8B and 8C.

33.           Clause 8A defines the meaning of influence or control . The new provision provides a list of situations where an entity is considered to be in a position to influence or control an asset (subclause 8A(1)), or another entity (subclause 8A(2)). The provisions assists direct interest holders to determine which entities are in a position to directly or indirectly influence or control the direct interest holder and therefore which entities they are required to report on.

34.           While influence or control over an asset or another entity is not limited to the situations detailed in subclauses 8A(1) and 8A(2), it includes the following:

·          Example
 The Chief Executive Officer of a company related to the ultimate holding company holds veto rights in relation to the direct interest holder, which is also the body that governs the asset. The Chief Executive Officer is in a position to influence or control the direct interest holder.
 The direct interest holder is required to report on the following: 
 o the name of the Chief Executive Officer and the company - sub subclause 6(1)(a); 
 o the ABN or business number of the company - sub subclause 6(1)(b); 
 o the address of the head office or principal place of business and the country of incorporation or formation - sub subclause 6(1)(c); 
 o the residential address, the country of residence and citizenship of the Chief Executive Officer; 
 o the name, ABN or business number, the address of the head office or principal place of business and the country of incorporation or formation of the ultimate holding company - sub-subclause 6(1)(a)-(d) and sub subclause 8A(1)(a).
 
 the entity is in a position to exercise voting or veto rights in relation to the body that governs the asset.



 

 

·          Example 
 The Managing Director of an intermediate holding company is responsible for the financing and expenditure decisions of each of its subsidiaries, including the direct interest holder. 
 The Chief Executive Officer of the ultimate holding company has an overarching right to influence financing and expenditure decisions of the subsidiaries, including the asset. 
 The direct interest holder is required to report on the Managing Director, the intermediate holding company, the Chief Executive Officer and the ultimate holding company due to sub subclause 8A(1)(d) and the influence or control they are each able to exercise. The required reporting details are: 
 o the name of the Managing Director and the intermediate holding company and the name of the Chief Executive Officer and the ultimate holding company - sub subclause 6(1)(a); 
 o the name of the ABN or business number of the intermediate and ultimate holding companies - sub subclause 6(1)(b); 
 o the address of the head office or principal place of business and the country of incorporation or formation of the intermediate and ultimate holding companies - sub subclause 6(1)(c); 
 o the residential address, the country of residence and citizenship of the Managing Director and Chief Executive Officer.
 
 the entity is in a position to influence or determine decisions relating to the business plan, asset management plan, major expenditure and major loans involving the asset.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

·          the entity is in a position to directly or indirectly influence or control another entity if together with any associates of the controlling entity, they hold an interest of at least 10 per cent in the controlled entity (including if any of the interests are held jointly with one or more other entities). An a ssociate is defined in clause 8B.

 

Example 
 Entity A, the direct interest holder is 50 per cent owned by Holding B. Entity A is the controlled entity and Holding B is the controlling entity. Holding B also holds a 50 per cent interest in Holding A, which holds a 5 per cent interest in Entity A. Holding A is also a controlling entity of Entity A, as Holding A and Holding B are considered to be associates under clause 8B. Holding A, together with its associate Holding B, jointly hold an interest of 55 per cent in Entity A. Ultimate Co is the ultimate holding company of both Holding A and Holding B. 
 Entity A, as the direct interest holder would be required to report details on Holding A, Holding B and Ultimate Co.

35.           The amendment also includes subclause 8A(3) to clarify that the list of situations listed where an entity is in a position to directly or indirectly influence or control an asset or another entity are not exclusive and entities may be deemed in future to be in a position to directly or indirectly influence or control in situations other than those listed in the Bill.

36.           These amendments provide greater clarity on the requirements of the Bill and allow these terms to be used within other provisions of the Bill. For example, these terms provide clarity to the scope and intent of clause 8, the meaning of a direct interest holder .

37.           Clause 8B defines an associate broadly. The new provision provides a list of situations where a person is considered an associate of a person. Including a definition of associate in the Bill will ensure there is a more accurate record of all interest holders by capturing interests jointly held by entities with certain relationships. This, in turn, assists to provide a better understanding of who owns and controls our critical infrastructure.  

38.           The following people are associates of a person:

·          a person’s ‘relative’ within the meaning given by the Income Tax Assessment Act 1997 (defined below);

·          any person with whom the person is acting, or proposes to act, in concert in relation to a critical infrastructure asset;

·          any person with whom the person caries on a business in partnership;

·          any entity of which the person is a senior officer;

·          any entity whose senior officers are accustomed to or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the person, or, if the person is an entity, the senior officers of the person;

·          an entity if the person is accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the entity or the senior officers of the entity;

·          any corporation in which the person holds an interest;

·          if the person is a corporation, a person who holds an interest in the corporation;

·          the trustee of a trust in which the person holds an interest;

·          if the person is a trustee of a trust, a person who holds an interest in the trust.

39.          The Minister may prescribe by legislative instrument any other person or body as an associate (sub-clause 8B(l)). This ensures the Minister can in the future capture other relationships that would amount to an associate that are not currently captured by this Bill.  

40.           Clause 8C provides a definition of subsidiary and holding entity , and the situations in which a corporate entity is considered a subsidiary or a holding entity of a corporate entity. These terms are being included to provide a simpler and clearer method of explaining the types of entities that fall within the newly introduced associate provision (clause 8B) and the moneylending exemption (clause 8).

Amendment 16                      Part 1, Division 2, clause 12 (line 18)

41.           This amendment addresses an error in subclause 12(1)(b) and clarifies that a gas storage facility is captured if its maximum daily quantity is at least 75 terajoules per day.

42.           The intent of the amendment to subclause 12(1)(b) is reflected in the original explanatory memorandum.

Amendment 17                      Part 7, Division 1, clause 53 (lines 5 to 7)

43.           The amendment simplifies the explanation of provisions within the simplified outline of Part 7. This provides a more concise outline, which is then explained in greater detail in the newly inserted clause 53A (to be inserted by item 18).

Amendment 18                      Part 7, Division 2, page 45, before clause 54 (before line 2)

44.           The amendment moves existing subclause 8(2) to clause 53A. This provision was previously included within clause 6, but has been moved to clause 53A. This provision clarifies the operation of clause 8, it is considered to be a miscellaneous provision, rather than a subset of clause 8.

45.           While clause 8 defines the meaning of direct interest holders, applying to interests held by entities, clause 53A clarifies that due to the nature of trusts, partnerships, superannuation funds, and unincorporated foreign companies, the entities themselves are unable to hold an interest. In these situations, the interest is held by the trustee on behalf of the beneficiaries, partner on behalf of the partnership or appointed officers on behalf of the company. The clause deems the interest to be held by the trust, partner or officers for the purposes of the Bill.

Amendment 19                      Part 7, Division 4, page 49 (line 1)

46.           The amendment inserts ‘reviews’ into the heading of Division 4. This amendment is required as a proposed new provision, clause 60A, which to be included in Division 4, provides a review mechanism for the Parliamentary Joint Committee on Intelligence and Security.

Amendment 20                      Part 7, Division 4, page 49, after clause 60 (after line 25) 

47.           This amendment introduces a new provision, clause 60A, which requires the Parliamentary Joint Committee on Intelligence and Security (Committee) to review the Bill, commencing within three years of the Bill receiving Royal Assent. The review mechanism will provide confidence that the Bill is operating as intended and that the powers vested in the Bill are not used beyond the intended scope. This provision also ensures that the Bill is effective in achieving its purpose and intention as per the Objects of the Bill (clause 3). The nature of the review will be at the discretion of the Committee.

48.           The Committee is required to have consideration for a number of factors when reviewing the Bill.

49.           Subclause 60A(1)(a) specifically requires the Committee to consider the operation, effectiveness and implications of the Bill. The Committee will particularly consider the operation, effectiveness and implications of the key mechanisms in the Bill including the Register (Part 2, Division 2), the directions power (Part 3, Division 2) and the information gathering power (Part 4, Division 2).

50.           Subclause 60A(1)(b) requires the Committee to have consideration for the circumstances upon which the Minister has privately declared an asset to be a critical infrastructure asset for the purposes of the Bill (Part 6, Division 2).

51.           Subclause 60(1)(c) requires the Committee to consider the appropriateness of a unified scheme to cover all critical infrastructure assets, including telecommunication assets.

52.           Subclause 60(1)(2) requires the Committee to report to each House of the Parliament on the outcome of the review into the Bill.