Failings in foreign investment oversight
At the first hearing of a senate inquiry into foreign investment last week, Treasury officials were questioned on the business connections of Dr Henry Cheng, the man behind the Chinese company that bought major Australian energy generator Alinta three years ago.
Specifically, they were asked about his business ties to Chinese gambling moguls Stanley and Lawrence Ho, who have been banned, according to news reports, from investing in Crown’s casino development at Sydney’s Barangaroo because of organised crime links.
“Is this the first time that you’ve become aware of this?” Labor senator and acting committee chair Deborah O’Neill asked.
“I can certainly say, yes, it is the first time I have,” Treasury deputy secretary Roxanne Kelley replied, explaining she had only been in the job a short time.
Four officials from the foreign investment division also couldn’t assist. Alinta’s Australian executives were also unable to offer enlightenment.
Daniel McClelland, the company’s corporate services director, told the committee he was unaware that Alinta’s Hong Kong-based parent company, Chow Tai Fook, also held a 9.6 per cent stake in the Ho family’s casino company, SJM.
“That’s the first time I’m hearing that,” McClelland said. He undertook to check details and report back.
Australia’s foreign investment law and associated restrictions are part of a complicated array of pressure points in the relationship.
That relationship has now descended into open hostility, with China imposing punitive trade sanctions on Australian agricultural imports.
Australia’s foreign investment policy – which China sees as increasingly discriminating against it – was an early irritant as the two countries’ relations began deteriorating several years ago.
The extra restrictions on sovereign-linked entities and those seen to be not sufficiently independent infuriated China, as did subsequent decisions to block proposed Chinese investments in Australia’s electricity network manager, Ausgrid; the nation’s biggest cattle station through S. Kidman and Co; and Australia’s 5G communications network.
On the Australian side though, there are concerns the system is not working as well as it could to protect our interests in an era when national security is a vital consideration.
Senator O’Neill is accusing the government of under-resourcing scrutiny of foreign investment proposals and failing to properly police approval conditions.
“I believe in foreign investment and a global economy with Australia as a part of a proper rule-abiding and rule-of-law management of that process,” she told The Saturday Paper this week.
“We need money from overseas. It’s been a really important part of this country’s development. But we shouldn’t be just taking money from anybody and not asking them to comply with Australian standards and conditions…
“We need proper scrutiny and I’ve got no confidence that that’s happening. ”
O’Neill’s grilling of executives and officials last week stemmed from leaked documents she had received revealing Alinta’s ongoing failure to comply with some of the conditions of its 2017 takeover deal.
It has conceded that, three years on, its parent company is still not fully compliant.
“We have a number of actions within the agreed remedial plan relating to those conditions, which are still the subject of activity in being compliant,” Alinta’s Daniel McClelland told the committee.
Roxanne Kelley defended Treasury’s lenient approach.
“By setting unreasonable time frames, when it might be a very complex issue that they’re dealing with in terms of achieving compliance, it’s not in our interests to set people up,” Kelley said. “We want to encourage compliance and we want people to do the right thing.”
The compliance issues did not trigger any warning dialogue in advance of a $90 million government loan Alinta received last year through the Northern Australia Infrastructure Facility (NAIF), a government fund that finances major projects across Western Australia, the Northern Territory and Queensland.
At the hearing last week, NAIF chief executive Christopher Wade was asked if his organisation was aware when the loan was approved that Chow Tai Fook still had not complied with the conditions.
“As far as I’m aware, we never received any notification of that kind,” Wade replied.
The loan is designed to help Alinta supply electricity to Andrew “Twiggy” Forrest’s Fortescue Metals Christmas Creek and Cloudbreak mines and the Roy Hill mine, near Newman in WA, of Gina Rinehart’s Hancock Prospecting.
Asked for more details on foreign-investment applications and compliance generally, Kelley explained that there were limits on Treasury’s computer system “which mean that some of this type of information requires a manual sort of process”. Officials were trying to focus on processing cases “in a timely manner”, she said.
Senator O’Neill is concerned the “left hand doesn’t know what the right hand is doing”.
“The resource capacity of Treasury is critical in this,” she says. “There is no statutory authority that can undertake enforcement. It’s totally down to the treasurer and his department to make sure that Australians are getting the benefit of foreign investment.”
Traditionally, Treasury’s Foreign Investment Review Board (FIRB) scrutinises the biggest and most contentious investment proposals. The most sensitive go to Treasurer Josh Frydenberg for decision, while others go to Assistant Treasurer Michael Sukkar. The rest that meet the threshold test for FIRB scrutiny are decided by senior Treasury officials under a delegated ministerial authority.
Small proposed investments have not required FIRB approval in the past, although in recent years the government has upped the scrutiny of residential real estate purchases – and forced some divestment – and created a register of foreign-owned agricultural land.
In late March, as the coronavirus pandemic descended on Australia, the treasurer tightened foreign investment controls so FIRB would examine every proposal. Roxanne Kelley reported that, as of last week, there were 427 cases in train. Almost 40 per cent had been received in the three weeks prior.
Treasury confirmed that, until recently, the compliance division had only two staff. On May 1, that was increased to the equivalent of 10.8 full-time staff and, last week, to 12.
O’Neill doesn’t believe that’s enough.
“I mean, there are more people doing a shift at McDonald’s to look after the local food supply than we’ve got overseeing the national security and sovereignty of our economy,” she says.
Treasurer Josh Frydenberg told The Saturday Paper that “foreign investment that is in the national interest drives economic growth, creates skilled jobs, improves access to overseas markets and enhances productivity”.
“The foreign investment review framework allows the government to assess investment proposals against Australia’s national interest while ensuring Australia remains an attractive place to invest,” he said. “Treasury’s compliance efforts are focused on areas of risk to the national interest and aim to achieve a balance between providing assurance [and] detecting and remedying non-compliance.”
A Treasury spokesperson added that Alinta was engaging with the FIRB on compliance and was due to complete its remedial action by December this year.
Others are also raising concerns about the foreign investment review system, arguing it provides an easy opportunity for criminals.
The Uniting Church’s Victorian and Tasmanian synods have expressed concern the system is being used to launder money through residential real estate, including by people with foreign political connections.
The church’s senior social justice advocate, Dr Mark Zirnsak, told The Saturday Paper the church is concerned about the harm criminal activity causes and occasionally engages a private investigator to examine suspect investments to which it is alerted, passing details to authorities.
He said real estate agents, lawyers and accountants should be obliged to report suspect transactions.
Zirnsak argues the current tensions with China could exacerbate the problem, if they restricted co-operation between Australian and Chinese law-enforcement agencies. “You might feel, if you were a Chinese criminal wanting to transfer money to Australia, that might be attractive for those reasons as well,” he says.
The FIRB’s 2018-19 annual report, tabled in parliament last week, shows China slipped to fifth among source countries for foreign investment due to a steep decline in real estate investment. The report suggests greater Australian scrutiny and increasing Chinese restrictions on taking money out of their country have contributed to the fall.
Others in Australia are concerned the current undefined “national interest” foreign investment test is inadequate.
WA Premier Mark McGowan has urged the senate inquiry to consider adopting a New Zealand-style test, with applicants assessed on how their proposals serve Australia’s interest, not just any risk they pose.
McGowan said foreign investors should have to give Australian companies “full, fair and reasonable access” to supply chain opportunities. He also called for monthly updates on proposals approved and declined.
In last week’s hearing, Treasury officials defended the secrecy surrounding all FIRB decisions, saying the information was “commercial in confidence” and protected.
When the then treasurer Scott Morrison approved the Chow Tai Fook purchase of Alinta in 2017 – as the government was seeking to strike a free trade deal with China – he did not issue any public statement explaining why.
Farmers in McGowan’s home state of WA grow 88 per cent of Australia’s barley exports to China, a sector Beijing hit this week with an 80 per cent tariff. The moves are seen as retaliation for Australia’s advocacy for an independent international investigation into the origins of the Covid-19 coronavirus.
But they also reflect a long-running volatility in the Australia–China trade relationship, one linked to rising foreign investment scrutiny and foreign-interference laws seen to be targeting China.
Australia’s drive for an inquiry won international support this week at the World Health Assembly. Under the weight of numbers, China acquiesced to an inquiry – and ended up co-sponsoring the motion – but succeeded in changing the parameters to have the World Health Organization conduct it, something Australian Foreign Minister Marise Payne previously said would amount to a “poacher and gamekeeper” situation.
China’s embassy in Australia issued a statement, saying that for Australia to claim the WHA vote as vindication was “nothing but a joke”.
Late this week, the US administration condemned China for its trade retaliation towards Australia.
“We stand with Australia and the more than 120 nations now who have taken up the American call for an inquiry into the origins of the virus,” US Secretary of State Mike Pompeo told journalists.
“We greatly underestimated the degree to which Beijing is ideologically and politically hostile to free nations. The whole world is waking up to that fact.”
In Australia, the question now is how much domestic law and policy will be adjusted to account for that growing view.
This article was first published in the print edition of The Saturday Paper on May 23, 2020 as "Balancing checks".
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