On 2 May 2015 the federal Treasurer, the Hon Joe Hockey MP, announced a reduced penalty period (running from 2 May to 30 November 2015) in which people who have purchased Australian real estate without the necessary approval (or contrary to the conditions on an approval) under the Foreign Acquisitions and Takeovers Act 1975 (Cth) can come forward and voluntarily disclose. The full details of the announcement have since been made available.
Given my background as a former federal prosecutor, and a former federal proceeds of crime lawyer, the announcement caught my eye for several reasons. I share a few observations below in the hope that they may assist practitioners with clients who may be considering making a voluntary disclosure. In a nutshell I suggest that making a disclosure presents a number of issues that need to be carefully worked through.
It is important to note that the relevant Foreign Acquisitions and Takeovers Act 1975 provisions deal with “Australian urban land”. That term captures all land situated in Australia that is not used wholly and exclusively for carrying on a business of primary production. Thus, although the current political focus has and is likely to remain on residential land, the Act already captures land used for manufacturing, warehousing and retail. That is likely to remain the case into the foreseeable future.
The current voluntary disclosure regime
The ‘form’ for making a voluntary disclosure was initially available on the FIRB website but has since been removed. It provided:
Depending on individual circumstances, investors who voluntarily come forward may:
- be given twelve months to divest, rather than a shorter period determined by the Treasurer.
- not be referred to the Commonwealth Director of Public Prosecutions for criminal prosecution.
The wording above is clear. There are no guarantees. This is not a true ‘amnesty’. People who come forward “may” receive these benefits. The inverse must also hold true; they may not receive the benefit. They may simply ‘dob themselves in’ for no real benefit. There is no explanation of which “individual circumstances” may, and thus may not, attract beneficial treatment.
The role of the Commonwealth DPP
The Commonwealth Director of Public Prosecutions (“Commonwealth DPP”), and only the Commonwealth DPP, can offer immunity from criminal prosecution. Neither the Foreign Investment Review Board (“FIRB”), the Australian Taxation Office (“ATO”) or the Treasurer can bind the Commonwealth DPP: see s 9(6D) of the Director of Public Prosecutions Act 1983 (Cth) which provides:
The Director may, if the Director considers it appropriate to do so, give to a person an undertaking that the person will not be prosecuted (whether on indictment or summarily):
(a) for a specified offence against a law of the Commonwealth; or
(b) in respect of specified acts or omissions that constitute, or may constitute, an offence against a law of the Commonwealth.
For more information on that provision see the Commonwealth DPP’s guidelines and directions on the topic.
Proceeds of Crime laws
Further, property that has been purchased contrary to the Foreign Acquisitions and Takeovers Act 1975 is certainly an ‘instrument of crime’, and in some circumstances probably also ‘proceeds of crime’ as defined in section 329 of the Proceeds of Crime Act 2002 (Cth).
Accordingly the Commissioner of the Australian Federal Police (or theoretically at least, the Commonwealth DPP) can already apply for forfeiture of property purchased in breach of the Foreign Acquisitions and Takeovers Act 1975.
Instruments of crime can only be forfeited under the Proceeds of Crime Act 2002 absent a conviction if the underlying offence carries a maximum penalty of three years or more: see paragraph (a) (iii) of the definition of “serious offence” in section 338 of the Proceeds of Crime Act 2002. The government proposes to increase the penalties under the Foreign Acquisitions and Takeovers Act 1975 to three years.
Of further potential concern, Division 400 of the Criminal Code (Cth) provides for penalties of up to 25 years imprisonment for people who deal with (which can be as simple as possessing or engaging in a banking transaction) money or property that is the proceeds or an instrument of crime.
These provisions can already be triggered by the existing offences in the Foreign Acquisitions and Takeovers Act 1975.
What will happen after 30 November 2015?
No one has a crystal ball, but politically it would seem more likely than not that the Parliament will pass the Government’s proposed amendments to the Foreign Acquisitions and Takeovers Act 1975. The Government clearly hopes to have the amendments up and running by 1 December 2015.
So what are the proposed amendments? No Bill has been presented as yet, so the precise detail of the amendments is unknown. What we do know is that there have been two significant reports on the foreign ownership of Australian urban land (as it is called in the Foreign Acquisitions and Takeovers Act 1975). They are:
- The November 2014 report of the House of Representatives’ Standing Committee on Economics entitled Report on Foreign Investment in Residential Real Estate; and
- The February 2015 options paper by the Treasury entitled Strengthening Australia’s Foreign Investment Framework.
Those reports, read with the Treasurer’s announcement on 2 May 2015, suggest the amendments will introduce the following key features:
- An increase in criminal fines from $85,000 to $127,500 (for individuals; more for companies). As noted above, the maximum jail sentence will increase to 3 years.
- Introduction of civil pecuniary penalties. I address this further below.
- Introduction of penalties (both civil and criminal) for third parties who knowingly assist a foreign investor to breach the rules. I address this further below.
For an offshore client (who is not overly concerned about a criminal prosecution) this may be significant. The Government proposes to introduce civil penalties for the following:
- A non-resident acquiring established property or a temporary resident acquiring more than one established property;
- A temporary resident failing to sell an established property when it ceases to be their principal residence;
- A temporary resident renting out an established property; and
- Failing to begin construction within 24 months without seeking an extension.
The proposed penalty for each will be the greater of the following:
- The capital gain made on divestment of the property;
- 25 per cent of purchase price; or
- 25 per cent of market value of the property.
It would not surprise me to see the Act introduce a provision that enables the Treasurer to record a memorial or caveat on title in order to extract the penalty.
Third party liability
This seems to be something of a misnomer. The political explanation for the proposal appears to have its roots in the House Economics Committee report (at [2.96]) which asserted “that the criminal penalty regime only applies to foreign investors personally.” The Committee went on to make recommendation 4 (at [2.117]) that the new regime should also apply to:
“…any third party who knowingly assists a foreign investor to breach the framework.”
A person who aids, abets, counsels or procures the commission of an offence by another person is taken to have committed that offence and is punishable accordingly.
Of potentially greater concern, the money laundering offences referred to above are already a means of prosecuting those who assist a foreign investor by, for instance, handling financial transactions on their behalf. A third party can commit a money laundering offence simply by being ‘reckless’ or even ‘negligent’ as to whether money or property was the proceeds or an instrument of an offence against the Foreign Acquisitions and Takeovers Act 1975.
One provision that may be amended is s 5(6) of the Foreign Acquisitions and Takeovers Act 1975 which provides:
In this Act, an act done or proposed to be done by an agent on behalf of his or her principal shall be deemed to be done or proposed to be done by his or her principal.
It could be amended to provide clarity that the agent can still be liable if the act done or proposed to be done is a contravention of the Act.
Other possible amendments
Thus far it appears the reviews of the foreign investment rules have assumed that the anti-avoidance provision, section 38A of the Foreign Acquisitions and Takeovers Act 1975, is adequate. It seems to me however that there are several loopholes in the current provision.
Even if the Government is not positively suggesting it; the logic behind voluntary disclosure appears to be that people who currently own property contrary to the Foreign Acquisitions and Takeovers Act 1975 may, if they do not self disclose, be subjected to the increased criminal penalties, and to the proposed civil penalty regime. That is potentially flawed logic.
I would be surprised if the final amendments provide for retrospective increases in criminal penalties. Such an approach would raise many issues, including issues of constitutional significance. The same may (although I express no firm view on it) be true of the proposed new civil penalties.
One way the Government might deal with retrospective cases is to rely upon the ‘continuing offence’ provisions in s 30(3) of the Act. That would allow the new penalties to cover any ongoing non compliance (but not an acquisition that occurred prior to the passage of the amendments).
Before a client voluntarily discloses, I suggest:
- Advice be sought on the likely consequences to the client under both the proposed amendments and the law as it stands now (if enforced). These should be compared to what “may” be on offer if the client voluntarily discloses. It should be remembered that if the client is offshore the risk of criminal prosecution is fairly low (extradition for these offences seems unlikely to say the least).
- An assessment should be made as to the likelihood that the client’s interest will be detected if they do not voluntarily disclose. In some cases the likelihood may be reasonably high. This assessment will require a sound understanding of how law enforcement agencies share information (in particular the ATO, AUSTRAC and the Department of Immigration and Border Protection).
- Consideration should be given to tax consequences that may result from divestiture.
- Consideration should be given to the potential Proceeds of Crime Act 2002 and money laundering consequences of the transactions that have already been undertaken (for instance the acquisition of the property in the first place) and any proposed transactions.
- If the client decides to voluntarily disclose, an approach should be made to FIRB/ATO/Treasury and also to each of the Commonwealth DPP and the Australian Federal Police. I would strongly discourage use of the online form on the FIRB website.
Please note the above does not constitute advice.
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