Yes. If he wrote that initially, I would have reported the discussion and told him to call the county jail for a test stay. Especially in combination with him being resident in Australia.
Is it possibly because some sort of local operation would be carried out by yourself in Australia ? I would think so. Alternatively, if you believe in the product and not much of local involvementbis necessary, go to another country where there are no such legal boundaries and do it there.
If you can setup︀ your company in places like Seychelles or Belize or Mexico you won't get much problems︁ with anything that is illegal in your home country.
depends on what country︀ A is and how you define illegal. If they can make a connection to you︁ and the company in country B and they go after it, they will get you︂ shut down.