The Foreign Investment Review Board (FIRB) intends to redouble its efforts to safeguard Australia's national interest, with a sharp focus on surveillance and enforcement. Recent developments highlight this ongoing priority, with important actions being taken to scrutinise foreign investments in critical sectors.

Read MinterEllison's recent analysis of FIRB's updated Foreign Investment Policy.

Prohibition and divestment orders

The Treasurer's powers to prohibit transactions and order divestment are the strongest tools in Australia's foreign investment review toolbox. The Treasurer, who takes advice from FIRB, rarely prohibits proposed investments outright. In 2023, only two prohibition orders were made, and none have been made so far in this calendar year. The rarity of prohibition orders partly reflects the practice of investors to withdraw their investment applications before a formal (and public) prohibition order can be issued. It also reflects the Treasurer's (and FIRB's) preference to manage any national interest concerns by imposing conditions on FIRB approvals. We are seeing conditions being imposed on FIRB approvals with greater frequency, discussed further below. The Treasurer also has the power to order divestment where transactions have completed. Importantly, the Treasurer also has a 'last resort' power to examine transactions even if they have previously been approved, and to make orders (including divestment orders) necessary to protect Australia's national security.

The Treasurer's recent widely reported decision forcing several Chinese-linked investors in Northern Minerals Limited (a rare earth producer) to divest a portion of their shares is a salutary reminder of FIRB’s active role in supervising foreign investment and enforcing Australia's foreign direct investment screening laws. In February 2023, the Treasurer made an order prohibiting an investor, Yuxiao Fund, from increasing its stake in Northern Minerals above 10%. The divestment order made in June this year followed an investigation by FIRB launched after Northern Minerals flagged concerns about allegedly covert attempts being made by certain entities linked to Yuxiao Fund to gain control of the company. The Treasurer did not provide detailed reasoning for the divestment order (nor was he required to), with a spokesman confirming the order was made simply to protect the national interest. The Treasurer's divestment order in relation to Northern Minerals suggests a stronger approach is being taken by the government to scrutinise foreign investment in sensitive sectors, particularly critical minerals.

Broader Enforcement Themes: Compliance and Audits

Over the last 12 months in particular, FIRB has flagged an intensification of its audit and compliance activities. The enhanced focus on compliance will involve more detailed monitoring of approved investments to ensure compliance with any conditions that have been imposed. Non-compliance can lead to significant penalties, including fines and imprisonment.

Across our desk, we are already seeing FIRB becoming increasingly proactive in its surveillance efforts. Site visits and audits will become more common (to date they have not frequently been utilised), serving as deterrents to potential non-compliance. Treasury has also indicated that this strategy will support the use of the Treasurer's call in power to review investments that may come to pose a national security concern in time. Foreign investors will need to remain vigilant about adhering to FIRB's requirements, both at the outset of proposed transactions and once they are completed. Investors should also be aware that FIRB may become more active in investigating transactions that did not originally require FIRB approval, to see if there are grounds to call in such transactions for review.

What foreign investors need to do

Long gone are the days when foreign investors could stop thinking about FIRB once they had an approval in hand. The Treasurer's recent actions show that existing shareholders can be investigated and that the Treasurer is prepared to use the broad powers at his disposal to make orders to secure the national interest. The Treasurer has broad discretion to decide what is contrary to the national interest and national security – and he is not required to provide an in-depth explanation of his reasoning.

• Foreign investors should monitor FIRB's evolving attitude to foreign investment, for example by becoming familiar with the recent changes to Australia's foreign investment policy, as outlined in our recent update explaining the revamped policy.). Investors should also take seriously any conditions imposed on an approval, noting that conditions are now routinely imposed to mitigate a broad spectrum of risks to the national interest that FIRB identifies during its assessment of applications. In the race to close deals, investors can hastily agree to proposed conditions from FIRB, only to find them onerous or in some cases impossible to comply with in practice after closing. We are already seeing FIRB increase its scrutiny of foreign investors' compliance with conditions imposed on previous approvals. We expect this scrutiny to continue as part of FIRB's commitment to surveillance and enforcement. Therefore, foreign investors should bear this in mind when negotiating the wording of conditions to be included in the approval document.
• In particular, foreign investors should negotiate the wording of proposed conditions so that they are capable of being complied with, without placing an undue administrative or operational burden on their business. Once the approval is issued, foreign investors should have appropriate internal processes to ensure that the conditions are complied with – not ignored or forgotten about.
• Finally, foreign investors should take stock of their reporting obligations under the Register of Foreign Ownership of Australian Assets. Sometimes viewed as an afterthought (given obtaining FIRB approval is often the primary focus), we expect to see the Australian Taxation Office to start chasing investors who fail to register acquisitions as they are required to.

In the current global climate, there is a lot to navigate and be excited about in terms of opportunities available to clients across a number of industry sectors. Our national FIRB team remains dedicated to working with clients globally to tailor solutions for their business goals. We look forward to connecting with you throughout the remainder of 2024.

For further information on navigating Australia's foreign direct investment regime, please contact our team of specialists who are dedicated to supporting your investment endeavours in Australia.