Infrastructure owners face Federal regulation of cyber security and general security

By Alexandra Wedutenko and Martha Crnkovic

26 Oct 2017

The Australian Government is looking at federal regulation of infrastructure assets from a national security perspective, which would include significant disclosure obligations and a last resort power to direct entities to take action to mitigate significant national security risks.

This month the Australian Government released the Security of Critical Infrastructure Bill 2017, the first Australian endeavour to regulate energy, port, water and telecommunication assets and infrastructure at the federal level and from a national security perspective, for public consultation by Friday 10 November.

The proposed law seeks:

  • to establish a protected Critical Infrastructure Asset Register and reporting regime for owners and operators of critical assets, requiring the disclosure of beneficial ownership and supplier arrangements; and
  • to create the Ministerial Power of Last Resort to direct owners or operators of a critical asset to take actions to mitigate significant national security risks.

This follows Singapore's key cyber security reforms, including the designation of Critical Information Infrastructure (computer systems essential to Singapore's national security and economy) and the reporting requirements for owners and operators of CIIs to the Commissioner of Cyber Security. An important insight arising from the proposed Singaporean regime is the need for safeguards and structural checks and balances - particularly if requiring companies to disclose sensitive commercial information and directing entities to take action to prevent a cyber threat.

In this article we will consider the key Australian proposed reforms, which will impact:

  • State and Territory governments and agencies;
  • regulators; and
  • owners and operators of critical electricity, ports, water and telecommunications assets.

What are Critical Infrastructure Assets (CIAs)?

CIA are infrastructure assets deemed critical to Australia’s economic interests, the delivery of essential services and national security and include:

  • a critical electricity asset; or
  • a critical port; or
  • a critical water asset; or
  • an asset declared under section 49 to be a critical infrastructure asset; or
  • an asset prescribed by the rules.

The Bill defines CIAs by reference to the ownership and operational information the Australian Government wants to capture. For example, critical port assets are prescribed by name, electricity assets are captured by the magnitude of generation or transmission and distribution (as the case may be) and water assets are critical if they service 100,000 or more water or sewerage connections.

Critical Infrastructure Asset Register

A key reform in the Bill is to enable the Australian Government to access significant information about CIAs through the establishment of a protected Register of Critical Infrastructure Assets. Administered by the Secretary of the Attorney-General's Department, the Register will provide the Australian Government with information about who owns and controls CIAs. The Register is also backed up by an extensive reporting regime which is designed to provide information about the extent of foreign interest in Australia's critical infrastructure assets.

The Australian Government has stated it will use information on the Register to conduct risk assessments to identify national security risks. If a potential risk is identified, the Secretary will have the power to obtain further information or documents to consider the risk and the Minister may direct an entity to take action under the Act (considered below).

Two types of entities who must report

Entities who are either direct interest holders or responsible for the asset will need to provide interest and control information and operational information to enhance the Australian Government's understanding of the ownership and control of listed critical infrastructure assets. Entities responsible for operating assets must disclose to the Australian Government the assets' location, its services, details of arrangements under which it operates and for each responsible entity or operator, its country of incorporation. Entities should be aware they might be required to provide this information by the end of the grace period of the asset (six months) or 30 days after the entity becomes a reporting entity for the asset for the purposes of the Act.

Direct interest holders must provide interest and control information, including details of any ultimate interest holders or beneficial owners. As noted in the explanatory document, the Australian Government is requiring entities to disclose commercially sensitive information. To address the significant risks associated with inadvertent disclosure of this sensitive information, the Bill provides that the information listed on the Register and the Register itself will be treated as "protected information" under the Australian Government Protective Security Policy Framework. Section 43 of the Bill makes it an offence to disclosed protected information, including a penalty of two years imprisonment or 120 penalty units or $25,200, or both.

A new continuous disclosure obligation

Reporting entities also have a continuous disclosure obligation to report on notifiable events within specified timeframes. Notifiable Events are:

  • events that affect the completeness of operational information or interest and control information provided;
  • an entity becomes a reporting entity for the asset or a reporting entity for the asset becoming an entity to which this Act applies.

Section 24 of the draft bill sets out a table of Notifiable Events and the required reporting timeframes.

The Bill prescribes civil penalties for non-compliance with these reporting obligations. Interestingly, the penalties are relatively low - 25 penalty units or $5250. Smaller penalties are typical for infringement notices but more unusual in corporate regulatory regimes - given that civil penalties need to be litigated and thus tend to be set to an amount that is worthwhile pursuing in court.

Ministerial last resort power

The other key reform proposed by the Bill is to grant the Minister the power to direct owners and operators of CIAs to take action to manage national security risks. As currently drafted, the directions power in section 30 of the Bill appears alarmingly broad:

"The Minister may, subject to subsections (3) and (4), give an entity that is a reporting entity for, or an operator of, a critical infrastructure asset, a written direction requiring the entity to do, or refrain from doing, a specified act or thing within the period specified in the direction."

The explanatory document states that the Minister's power will be used as a last resort. Subsection 30(1) makes it clear that the Minister must be satisfied that the act or omission would be prejudicial to "security" within the meaning of the ASIO Act. "Security" under the ASIO Act is defined as:

"(a) the protection of, and of the people of, the Commonwealth and the several States and Territories from:

  1.                 espionage;
  2.                sabotage;
  3.                politically motivated violence;
  4.                promotion of communal violence;
  5.                attacks on Australia’s defence system; or
  6.                acts of foreign interference;

 whether directed from, or committed within, Australia or not; and

 (aa) the protection of Australia’s territorial and border integrity from serious threats; and

 (b) the carrying out of Australia’s responsibilities to any foreign country in relation to a matter mentioned in any of the subparagraphs of paragraph (a) or the matter mentioned in paragraph (aa)."

Further, subsections (3) and (4) provide important safeguards for owners and operators of CIAs. Unlike the Singaporean equivalent directions power which is investigative and may be exercised for threats less than national security risks, the Minister's proposed directions power is subject to a number of preconditions - the most decisive of which is that entity has had an adverse security assessment. The other key precondition is that the direction must be reasonably necessary to reduce the national security risk; presumably this means the direction must be in a sense proportional to the extent of the risk identified.

Before exercising his or her power, Minister will also consider whether existing alternatives are available, including whether any regulatory system could be used to reduce the risk. The Minister will also have regard to the potential impact of exercising the power on both the relevant industry and the customers of that entity. Further still, section 31 requires the Minister to consult with the relevant State or Territory Minister, the relevant entity and any other persons at the Minister's discretion. The relevant entity will also be able to make representations to the Minister in relation to any proposed direction within certain timeframes under the Act.

Key concerns for infrastructure owners and other businesses

This being so, entities will no doubt be concerned about the range and magnitude of the directions issued by the Minister. This is especially so given the civil penalty for non-compliance with a direction is, in contrast to reporting breaches, 250 civil penalty units or $52,500 for each day of non-compliance. Enforceable undertakings and injunctions as prescribed in the Regulatory Powers Act might also be used to compel compliance with a direction under the Bill.

The explanatory document for the Australian Bill offers an example of the type of direction the Minister may issue under this section of the Bill:

"…the Minister directs a critical infrastructure asset operator to move currently stored offshore corporate and operating data to a more secure data storage provider. The direction will provide a specific timeframe within which the entity must comply. A further example of a direction is the Minister may direct a critical infrastructure asset owner to not outsource operations of its core network to certain providers. This direction may specify that the condition exists in perpetuity. Alternatively, the Minister may specify in the direction that the entity must consult the Government before entering into future outsourcing arrangements." [emphasis added]

The examples suggest the Minister's directions may have significant commercial implications for businesses that own and operate CIAs. For instance, a direction to relocate operating data from an offshore data centre to an Australian-based centre may require extensive, and costly, operational restructuring. As extracted above, the Australian Government has also indicated the Minister may issue directions which apply in perpetuity. While the Australian Government has indicated that the Minister only expects to exercise his or her power once every three years across CIAs, the significant costs associated with any exercise of the power indicates that entities should begin re-evaluating their relationships with offshore entities that may be the focus of regulatory action, with a view to minimising their expose to commercial risk.

Another key concern, as identified from the Singapore reforms, is whether a direction will involve the acquisition of property by the Australian Government. Section 33 of the Bill provides that any direction by the Minister will not be of a kind that results in an acquisition of property on just terms as defined under section 51(xxxi) of the Constitution. The Australian Government states in the explanatory document that entities only need to comply with a direction to the extent the outcome of compliance is not an acquisition of property on just terms. However the onus is on the entity to prove with supporting evidence that section 51(xxxi) of the Constitution would apply in their case. Further, while short of acquiring property, it is open to the Minister on the current construction of section 30(2) to issue directions that interfere with property rights. For instance, the Minister might direct an entity to install, or have installed by a third party, anti-threat software into proprietary computers or systems - which may store customer data.

Next steps for the Security of Critical Infrastructure Bill 2017

If passed, the Security of Critical Infrastructure Bill 2017 would be a new world order for owners and operators of critical infrastructure assets in Australia. The measures proposed by the Bill are more invasive than expected, granting the Minister the power to directly interfere with business activities (including foreign investment) and property.

It will be interesting to see what amendments are made to the exposure draft following public consultation with key stakeholders including the States and Territories and the affected industries. Given its national security focus, the Bill will be scrutinised by the consequential Parliamentary Joint Committee on Intelligence and Security after the Bill's introduction into the Senate.

We will be keeping a close eye on the Bill's progress through the legislative process. 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.