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What you need to know about the Foreign Influence Transparency Scheme Act 2018 (Cth)

As our world continues to grow evermore interconnected, and interests both foreign and domestic seem to overlap, how can the government and the public distinguish a purely domestic interest from one that may have an element of foreign interest – especially if the position is being espoused by a domestic figure? 

With the Foreign Influence Transparency Scheme Act 2018 (Cth) (Scheme), which commenced on 10 December 2018, the Government is seemingly trying to address this question.

What is the aim of the Scheme?

The Scheme aims to make transparent any attempts by ‘foreign principals’ to influence governmental and political decision-making. In the M&A context, the Scheme will impact how foreign investors approach the Foreign Investment Review Board (FIRB) process, which itself can be a highly political process (this is discussed in more detail below).

For the purposes of the Scheme, it does not matter whether the attempt to influence the decision-making is successful or not, or even whether there is an element which benefits domestic interests. The Scheme does not criminalise lawful activities, but rather aims to ensure that lawful activities being carried out on behalf of a foreign principal are made abundantly clear for the public.

The Scheme hopes to achieve this by imposing registration requirements and other obligations on certain individuals or companies that undertake various types of activities on behalf of ‘foreign principals’. To date, 33 companies or individuals have registered their activities for numerous organisations on the Scheme’s register.

The application of the Scheme can be summed up in the following sentence:

“A person must register with the Scheme if they undertake a registrable activity on behalf of a foreign principal unless that person is entitled to an exemption from registration under the Scheme.” 

Below, we break down exactly what this means.

Foreign principals

There are four types of ‘foreign principals’ under the Scheme:

1. Foreign governments. These range from the government of a foreign country or a part of it to a foreign local or regional government body. The definition seeks to capture all levels of government.

2. Foreign political organisations. These include a foreign political party or a foreign organisation that exists primarily to pursue political objectives.

3. Foreign government-related individuals (FGRI). These are individuals that are controlled by (taking instructions or directions from) a foreign principal and are not Australian citizens or Australian permanent residents.

4. Foreign government-related entities (FGRE).
A company will be considered a FGRE if either:

  • a foreign government or foreign political organisation:
    • the directors of the company are accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the foreign government or foreign political organisation.
    • holds more than 15% of the issued shares of the company;
    • holds more than 15% of the voting power in the company;
    • can appoint at least 20% of the company’s board of directors;
    • can exercise total or substantial control over the company; or
  • the directors of the company are accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the foreign government or foreign political organisation.

Registrable activities

Under the Scheme, ‘registrable activities’ include the following:

  • Parliamentary lobbying.This includes lobbying a:
    • member of Federal Parliament; or
    • staff member of a Senator or Member of the House
  • General political lobbying.This includes lobbying a:
    • commonwealth public official;
    • department/agency/authority of the Commonwealth;
    • registered political party;
    • federal election candidate;
    • political campaigner (registered under the Commonwealth Electoral Act 1918)
  • Communications activity. All circumstances where information or material is disseminated, published, disbursed, shared or made available to the public for the purpose of political or governmental influence. The communication must include a disclosure of the foreign principal’s identity
  • Disbursement activity. This includes the distribution of money or things of value on behalf of a foreign principal for the purpose of political or governmental influence. This must be disclosed if the person or recipient of the disbursement is not required to disclose the activity under Part XX of the Commonwealth Electoral Act 1918 and the activity is for political or governmental influence.
  • Any activities by a former Cabinet Minister
  • Any activities by a ‘recent designated position holder’

For further information on individuals that qualify as a former Cabinet Minister or a ‘recent designated position holder’ please see Factsheet 8 of the Foreign Influence Transparency Scheme.

On behalf of a foreign principal

A person undertakes a registrable activity ‘on behalf of a foreign principal’ if:

  • there is an arrangement with the foreign principal;
  • it is conducted in the service of the foreign principal;
  • it is conducted on the order or at the request of the foreign principal; or
  • it is conducted under the direction of the foreign principal

Regardless of the nature of the relationship, both the foreign principal and the person must know or have expected that the person would or might undertake registrable activities.

There is no obligation to register under the Scheme if a person undertakes an activity without the foreign principal’s knowledge or expectation. This second qualifier is to prevent scenarios where the interest of a foreign principal and the activities of a person are merely coincidental.

Exemptions

The Scheme includes numerous exemptions from registration. If any of the exemptions apply, a potential registrant may not need to register even if they undertake activities on behalf of a foreign principal. Some examples of exemptions include:

  • providing legal advice;
  • providing legal representation in judicial, criminal or civil inquiries, investigations or proceedings;
  • undertaking a religious activity (consistent with the principals of the religion) on behalf of a foreign principal and the activity is undertaken in good faith; and
  • undertaking a registrable activity while employed as an officer of a foreign government and the activity is undertaken in the name of the foreign government.

For more information about exemptions under the Scheme please see Fact Sheet 7 of the Foreign Influence Transparency Scheme.

Penalties

The Scheme imposes a number of criminal penalties for those that do not adhere to the obligations it sets out. Most of the obligations are owed by the person that needs to register, however the foreign principal owes certain obligations as well.

These penalties that arise under the Scheme include but are not limited to the following:

Offence

Criminal Penalty

Failure to apply for registration or renew registration.

Imprisonment of up to 5 years.

Provision of false or misleading documents to the Secretary in response to an information notice.

Imprisonment of up to 3 years.

Destruction of relevant records (which the person is required to keep under section 40 of the Act).

Imprisonment of up to 2 years.*applicable to the registrant as well as the foreign principal

Failure to comply with a transparency notice.

Imprisonment of up to 6 months.

The FIRB process

Standard practice in connection with potential investments in sensitive parts of the Australian economy would suggest that the foreign investor develop a political engagement strategy – if for no reason other than to test the appetite of the review board and Federal Treasurer for the proposal under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).

It is clear from the terms of the Scheme that it will encompass third party consultant activity on behalf of the foreign investor.

Accordingly, foreign investors should clearly understand whether consultants they engage to assist with the FIRB process are required to register, and the terms of their registration. While criminal penalties do not attach to the foreign investor if their consultants are not registered, given the inherently controversial nature of foreign investment in sensitive sectors the reputational damage and risk to the application process remains a key consideration. As explained above, however, the record keeping obligation will attach to the foreign investor.

Consultants and principals will also need to be vigilant in considering the expansive definition of ‘foreign principal’ (as we have covered above). It should be noted that an entity will be a FGRE for the purposes of the Scheme when it has 15% foreign government ownership. For the purposes of FATA however, an entity will not be a foreign person below 20% foreign ownership. This creates a scenario where largely domestic companies with foreign government ownership who do not find themselves dealing with FIRB will be caught up by the operation of the Scheme.

Key takeaway

Given the potentially severe penalties under the Scheme, consultants working for foreign clients in connection with their foreign investment initiatives, as well as foreign principals, should review whether registrable activities are being carried out by them or on their behalf (as appropriate) and ensure that the Scheme is being complied with if necessary.


Authors

CLARKE_Robert_SMALL
Robert Clarke

Head of Financial Sponsors Group


Tags

Banking and Financial Services

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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