Compliance levels low in bumper foreign investment year

Joseph Brookes
Senior Reporter

Treasury performed fewer audits of foreign investors last year, moving instead to using outside firms to check compliance with rules for high risk and high value investments.

The audits that were performed during a bumper $233 billion 2020-21 financial year for foreign investment uncovered non-compliance in almost half the cases, according to the Foreign Investment Review Board’s annual report.

Despite non-compliance and long-running concerns around enforcement of foreign investment conditions, the Morrison government has already resisted calls to tighten rules as Australia’s foreign investment framework undergoes significant reforms.

FIRB’s latest annual report reveals high levels of non-compliance among foreign investors

The Foreign Investment Review Board (FIRB) last week released its annual report for the previous financial year.

It shows intended foreign investment returning to a pre-pandemic level of $233 billion, driven by a doubling of the total value of commercial real estate deals.

But it also reveals low levels of compliance by investors and strains on Treasury leading to a reduction in its compliance assurance.

Under Australia’s foreign investment framework Treasury can lead its own regulator audits of investors and monitor their compliance with legislation and the conditions attached to the approval of their investments.

The regulator’s audit program is stretched across two streams: Treasury’s own audits and the condition-mandated independent audits performed by outside audit firms for foreign investments considered particularly high risk or high value.

In 2020-21 Treasury brought its own audits back in-house after previously outsourcing them, but was only able to complete seven, finding non-compliance in two.

Treasury had completed nearly three-times as many of its own audits in the prior year and FIRB blamed the downturn on the switch back in-house without enough staff, Covid-19-related recruitment challenges, and the shift to more independent audits of high risk and high value foreign investments.

Under the independent audit stream, foreign investors can select their own audit firm but the Commonwealth must approve the firm and the scope of the audit.

Eleven of these independent audits were completed in the financial year – more than double the previous year – with non-compliance uncovered in six cases.

This means non-compliance was found in eight of the 18 audits, a greater share of the total completed audits compared to last year and potentially more serious breaches because more came from the independent audit stream.

A further 13 independent audits were being finalised at the end of last financial year but the outcome of these is unknown.

Despite the total number of completed audits falling from 24 to 18, the FIRB said Treasury’s move to more independent audits meant the regulator’s audit coverage has actually seen a “significant” increase.

The separate reviews of potential non-compliance also show large levels of contraventions being identified by Treasury. These reviews are overwhelming instigated by reports from the public about potential breaches of foreign investment laws and typically result in moderate enforcement action like warning letters, invertors remediating by submitting a notification for assessment, and / or  increased monitoring and surveillance.

More than 90 instances of this potential non-compliance were reported to Treasury last financial year, which eventually identified at least 51 of them to be contraventions — another 17 of the reports were still under assessment at the end of the financial year.

The low compliance levels came during a financial year which saw intended foreign investment return to pre-pandemic levels, despite fewer applications.

In 2020-21, Australia considered and approved 7614 and 6650 applications respectively, less than each of the previous three years.

The reduced applications were offset by increased deal values, with foreign investment increasing to $233 billion.

In 2018-19 the figure was $231 billion but this fell to $195.5 billion in 2019-20 when the pandemic first struck.

US investors made up nearly a quarter of foreign investment in Australia, followed by Singapore, Canada, China and a fast-rising Germany.

Commercial real estate had the highest number of approvals and total value last financial year, more than doubling in worth to $82 billion. This was followed by the services sector at $76.9 billion, a slight increase on 2019-20.

Earlier this month, the federal government rejected a Senate Committee’s recommendation for an increase in enforceable undertakings for foreign investments, after its 18-month inquiry heard evidence companies had flouted the voluntary agreements.

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