There have been a number of recent developments in Australia and overseas in relation to the risks associated with foreign bribery and corruption. Please insert this 5th Update behind the Updates tab in your copy of the JWS Foreign Bribery Guide.
The lessons for Australian business – why proactive ethical compliance is important
The recently published Ernst & Young Asia-Pacific Fraud Survey Report Series 2013 makes some important findings from its survey results which will resonate within boardrooms:
- weak systems and controls are exposing companies in the region to significant risks;
- slower growth is putting management under pressure to take short cuts;
- fraudulent practices are on the increase; and
- there is a disconnect between compliance policies in place and how they are applied in
The recent developments will impact on Australian businesses operating offshore. They highlight the key lesson for all companies and executives with business operations in high risk countries – you must proactively recognise and address potential corruption risks at all levels of your business operations consistent with all Australian and local laws and you must instil a real sense of ethical behaviour throughout your organisation. If you fail to do this, you will be exposed to potentially severe consequences for the company and for individual directors, executives and officers involved in any questionable conduct.
These developments include:
- an increased focus concerning the lack of obvious enforcement activity in Australia;
- the role of Australia's corporate regulator, the Australian Securities and Investments Commission (ASIC) in investigating foreign bribery;
- internal governance issues and offshore commercial behaviour of Australian business highlighted by the Reserve Bank of Australia and Securency and the Leighton Holdings investigations;
- ongoing corruption enforcement in China and managing risks of corruption in China;
- the OECD's updated Bribery and Corruption Awareness Handbook for Tax Examiners and Tax Auditors;
- the first prosecution under the United Kingdom Bribery Act; and
- important developments from the United States.
Australia's regulatory performance on foreign bribery
Over the last few weeks, the media spotlight has turned to examine the conduct of ASIC and the Australian Federal Police (AFP) in investigating foreign bribery and corruption. The issues raised in the media include:
- ASIC's role in corruption investigations and what it ought to be doing; and
- the political push to inquire into the existing regulatory regime and whether, for example, one coordinating regulatory agency should be created and properly funded and resourced to investigate foreign bribery.
The existing regime in Australia has been criticised by the OECD and others over recent years.
Foreign bribery and corruption invariably involve complex international inquiries, formal requests for mutual legal assistance that can take many months to complete and negotiations with foreign agencies and governments to gain the local support critical to undertake a proper investigation.
In addition, while ASIC usually waits to undertake its civil investigation until a criminal investigation has been completed before undertaking its civil investigation, there is something to be said for the US approach where the Department of Justice (DOJ) and the Securities and Investments Commission (SEC) conduct parallel investigations and invariably commence parallel prosecutions (usually involving a corporate settlement) even though the criminal hearing takes precedence. These joint prosecutions and ensuing corporate settlements may be in part explained by the severe US fines regime imposed on any company that actively defends a criminal prosecution and loses – the fines may be escalated to a point that the convicted company is unable to pay and is insolvent.
There is considerable merit in Australia reviewing how foreign bribery and corruption investigations are undertaken, how they are properly resourced and funded and the internal procedures that can allow civil and criminal investigations to run concurrently, recognising that a criminal trial ought to take precedence over a civil proceeding even one seeking the imposition of civil penalties. Some independent politicians have called for a substance review of how Australia investigates foreign bribery. This is an important issue that needs to be considered aside from any party-political notions of how business should be regulated.
The role of ASIC v the AFP in foreign bribery investigations
On 11 October 2013, Mr Greg Medcraft, the Chairman of ASIC gave a speech to the AmCham Business Leaders Lunch and responded directly to the considerable press criticism of ASIC's handling of foreign bribery matters (which he described as "ill-informed") (the speech can be downloaded at www.asic.gov.au).
Mr Medcraft described ASIC's role in investigating foreign bribery as follows:
- ASIC's strategic priorities are to focus on ensuring there is a fair and efficient financial market with confident and informed investors (enforcement gets no mention as a strategic priority);
- ASIC has limited resources and will target its action primarily against listed companies where wrongdoing affects a wide range of mum and dad investors;
- the AFP is responsible for investigating and prosecuting foreign bribery as a crime under the Criminal Code;
- ASIC will liaise with the AFP and while noting foreign bribery investigations are invariably long, complex and expensive, absent exceptional circumstances or the risk of a limitation time bar arising, ASIC will defer any civil action until the completion of any criminal investigation and/or prosecution; and
- it is primarily the responsibility of directors and executives to exercise what ASIC describes as the appropriate level of scepticism (to avoid a charge of willful blindness) and to ensure systems and controls reflect sound corporate governance in order to ensure they comply with their statutory duties.
What can be concluded from this approach: hardly the US SEC approach of "bold and unrelenting" enforcement espoused by the new SEC Chairman in a recent speech. At the heart of this speech is confirmation that while ASIC will look at egregious conduct involving foreign bribery (maybe something on the scale of AWB), as to the rest, it is too hard, complex and expensive to allocate ASIC's limited resources to it. Over to the AFP!
Current corruption investigations – cultures of compliance or non-compliance
The governance issues surrounding the foreign bribery allegations in the media involving the Reserve Bank banknote printing interests and Leighton Holdings' offshore operations have a number of common themes, whatever the individual merits are of specific allegations. The themes are these:
- the apparent limited investigation by ASIC into the conduct of senior company officers;
- the role and resourcing available to the AFP to investigate allegations of complex commercial corruption;
- the apparent payment of significant fees to overseas intermediaries in countries where there is a recognised high risk of corruption;
- whether internal company records were or were not disclosed to regulators; and
- the treatment of internal whistleblowers.
As an example, the media have reported that a former executive of the RBA company that printed its polymer bank notes is said to have provided a statement to the AFP that accuses a current senior Reserve Bank executive of "directing him never to use email, fax or hard copies to provide information about the company's allegedly corrupt overseas activities" (Australian Financial Review 1 October 2013).
Whatever the merits of the individual allegations, these events raise serious issues for all companies, boards of directors, institutional investors and shareholders. They go to the heart of how companies actually perform and their professed culture of compliance.
What does all this mean?
It is fundamental to sound ethical business that a corporation must believe in its own integrity and act consistently with that belief. It requires an absolute commitment pervading a company over many years from the top to the bottom. If a corporate structure suggests an absent or disinterested parent, directors and executives being less than diligent and with management, only focused on the bottom-line profit and potential self interest (bonuses and salary benefits on hitting sales KPIs) (Chanticleer: Bribery scandal a question of culture, Australian Financial Review 9 October 2013), the words of Commissioner Cole resonate as to why this sort of conduct occurs (in the context of AWB):
The answer is a closed culture of superiority and impregnability, of dominance and self-importance. Legislation cannot destroy such a culture or create a satisfactory one. That is the task of boards and management of companies. The starting point is an ethical basis. At AWB the Board and management failed to create, instil or maintain a culture of ethical dealing.
These investigations and the Securency prosecutions have some little while to go and developments will be monitored.
Developments in China
For many years, doing business in China has been fraught with the risk of corruption and illegal conduct impacting foreign business. The Chinese Government has recently been taking very proactive steps to combat commercial corruption.
The most significant development concerns the alleged corruption involving senior executives in the Chinese division of UK pharmaceutical group GlaxoSmithKline in paying or offering to pay bribes to Chinese officials and doctors to boost company sales by channelling funds through intermediaries such as travel agents and consultants. The amount of money was alleged to exceed 3 billion Renminbi (or about US$489m).
The company subsequently acknowledged that certain employees appear to have breached Chinese laws and the company was cooperating with the Chinese authorities. Traditionally, the Chinese Government has focused on the conduct of its own officials. It now appears to recognise that to combat corruption, it needs to focus attention of those who offer bribes for commercial gain.
Like the US DOJ, the Chinese authorities have started a coordinated focus in looking at corruption in the health care and pharmaceutical industries. Reports in China suggest police have visited sites operated by various international companies including Novo Nordisk A/S, AstraZeneca Plc and UCB SA.
Australian business should be aware of the following when doing business in China:
- while the nature of close business relationships, or "Guanxi" is critical to successful business in China, great care must be taken to ensure the corporate networking and giftgiving is reasonable and proportionate, for a legitimate business purpose, is transparently recorded in the company's accounts and is not intended to act as an improper influence over a decision-maker to dishonestly advance the company's commercial interests;
- any foreign executive who is the legal representative of a Foreign Invested Enterprise is directly responsible for the conduct of the enterprise;
- under Chinese law, senior executives (directors, supervisors, general managers or financial officers) owe duties to the enterprise and face potential personal liability for improper or illegal conduct undertaken by or in the name of the enterprise;
- liability can arise in various ways:
- civil: executives may be liable for any loss to a company due to gross negligence or wilful misconduct or otherwise in breach of fiduciary duties owed to the company while senior management can be liable if they use their affiliation to harm the interests of the company;
- administrative: a legal representative or de facto controlling person can be sanctioned and fined where regulations are contravened, with such examples to include the concealment of facts, the secret use of company funds, disposing of company property and engaging in conduct prohibited by law or damaging the interests of the state or the public;
- criminal: while a company will usually be fined if it is convicted of a criminal offence, those company officers directly responsible for that conduct, or who approve, instruct, abet or coordinate such conduct, are likely to face personal criminal investigation and potential prosecution under the Chinese Criminal Law;
- the Chinese authorities rely to a significant extent on whistleblowers reporting potential offences and it is critical that companies respond proactively to any complaint in order to assess whether it is legitimate and if so, what action should be taken by the company to deal with it.
All Australian business must understand that the prevailing view of the Chinese authorities is that corruption is viewed as a significant threat to the stability and control exercised by the exiting regime. Any business operating in China must be aware of these matters and should have a proactive plan in place to monitor and respond to these risks.
OECD updated Handbook for targeting corruption in taxation audits
In November 2013, the OECD published its revised Bribery and Corruption Awareness Handbook for Tax Examiners and Tax Auditors.
The purpose of the Handbook is to highlight the various forms of corruption that might arise in the tax and audit sphere and to alert examiners and auditors how corruption can arise. For governments, the OECD is promoting a "whole of government" approach to ensure that there is no taxation benefit in making bribes and where suspicious conduct is detected, that conduct is referred to investigative agencies for investigation and prosecution.
A copy of the Handbook can be found at www.oecd.org/tax/crime/bribery-corruptionawareness- handbook.htm.
The UK Bribery Act's first prosecution – Cambodian land deals
On 14 August 2013, the Serious Fraud Office (SFO) charged 3 individuals with offering and receiving bribes in contravention of the UK Bribery Act. The SFO alleged the individuals committed the offences "in connection with the promotion and sale of bio fuel investment products to UK investors by Sustainable AgroEnergy plc, with a value of the alleged fraud put at Ł23m between April 2011 and February 2012".
The prosecutions resulted from a covert operation where the company was suspected of operating as a Ponzi scheme and fraudulently trading. The scheme involved the purchase of tracts of land in Cambodia on which bio fuels were to be grown. The Chairman of the Sustainable Growth Group's offices has been arrested in Cambodia and charged with forgery in connection with the Cambodian land contracts. While the SFO is seeking his extradition, absent any treaty between the UK and Cambodia, the Chairman is likely to remain under arrest in Cambodia for some time.
This case will be monitored to see how it progresses and any judicial views expressed by the UK courts on the implementation of the Bribery Act and how any convicted offenders are sentenced.
United States Foreign Bribery Developments
A number of developments coming out of the US are of interest to Australian businesses that operate in the US and which use the US banking and/or internet systems to undertake transactions so as to be potentially subject to US extra-territorial jurisdiction.
- The number of declinations by the US DOJ and the SEC (where they decline to prosecute companies for foreign bribery offences) appears to be steadily increasing. This may reflect an increasing willingness of the US authorities to recognise the value of robust compliance cultures when companies self-report potential offences.
- The DOJ and SEC are looking closely at anti-competitive conduct which can often involve potential corruption, particularly where the conduct concerns arrangements to rig market bids or tenders with the offer or payment of bribes or commissions to secure a financial advantage.
- The DOJ continues to target industries susceptible to corruption, particularly the pharmaceutical and medical devices, the energy and the construction (public procurement) industries.
- The SEC has reinforced its commitment to "bold and unrelenting" enforcement of the FCPA by targeting commercial corruption.
- The SEC-sponsored whistleblower program under the Securities Exchange Act made news earlier this month when the SEC announced that an unidentified whistleblower who volunteered information to the SEC that led to a successful corporate prosecution, was awarded US$14m. This is the third award since the reward program was established in 2010.
- Traditionally, Deferred Prosecution Agreements (DPAs) have, in the foreign bribery arena, been offered by the DOJ and SEC only to corporations. On 12 November 2013,the SEC entered into its first DPA with Scott Herckis, a former employee of Heppelwhite Fund LP who provided significant assistance to the SEC bringing charges against the Fund and its founder for misappropriation of monies and overstating the Fund's financial performance. While Herckis was held accountable for his role as the Fund administrator, aiding and abetting the Fund's illegal conduct, the SEC accepted undertakings from him in relation to his future employment and a fine of $50,000 payable to a fund for the company's investors. The use of a DPA between the US regulators and an individual may signify a greater opportunity for individuals to negotiate a meaningful resolution of a likely prosecution which avoids the stigma of any criminal charges or ultimate conviction.
The activities of the US regulators again highlights what Australian business, exposed to any US-related business opportunities, must do to properly protect themselves. The importance of corporate accountability and a robust culture of ethical behaviour cannot be over-emphasised. If nothing else, Board and senior executives (with management) ought to ensure their collective behaviours address the following five key criteria:
- culture – the values, attitudes and styles of the organisation, reflected by what its Board, executives and management do and say;
- people – the identity of the individuals and their strengths, skills and competencies;
- policy – the rules governing the organisation and the conduct of all individuals;
- process – the methods by which individuals act and how all individuals learn from the conduct of others;
- structure – the duties and functions within the organisation.
You may never completely abolish the existence of corruption and the temptation to cut corners, secure that big deal and be "one of the team".
However, with the right people, transparent structures and policies, policies that are implemented and a robust ethical culture of compliance, you can go a long way to minimise or even avoid the risk of everything collapsing around a criminal investigation into your company and your conduct.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.