This update covers a range of important developments in Australia and overseas in the area of foreign bribery policy, investigations and regulation to December 2014. These developments will impact on Australian businesses working offshore and only reinforces the need to have and to implement an ongoing, pro-active anti-corruption compliance framework within your business.
Australian Developments Australia’s anti-corruption ranking slips down
On 3 December 2014, Transparency International released its well-known Corruption Perception Index for 2014. Australia slipped out of the top 10 “clean countries” and now sits at No 11 in the ranking of 174 countries.
Prof AJ Brown, a director of Transparency International Australia made the following comments to illustrate why Australia has slipped down the rankings, despite the progress made in leading the G20 to a new Anti-Corruption Implementation Plan (see below):
accumulating corruption scandals; a heightened concern as to whether scandals reported in the media and investigated by authorities actually result in any prosecutions; an increasing public perception that Governments do not do enough to seriously target the “big end of town” with the refusal within the Reserve Bank of Australia to admit any problem (with the Securency banknote printing scandal or to independently investigate the conduct of the relevant companies and their Boards of Directors) is just one example; and the consistent reluctance of the Australian Government to acknowledge that corruption is a national problem and failing to even acknowledge that a robust, properly resourced independent national anti-corruption body has a role to play.
It appears that this reluctance to see corruption as a systemic national and international problem in Australia afflicts both the left and right side of politics. In an era of cost cutting, blow-out fiscal budgets and razor gangs cutting swaths through the public sector, business calling for less regulation, it so often just seems too hard for politicians to address. This is unfortunate given the excellent progress Australia demonstrated in leading the G20 to target foreign bribery – now the challenge is to address initiatives focusing on both domestic and foreign bribery with equal zeal and live up to the G20 ideals, failing which the perception of Australia’s anti-corruption efforts is likely to continue to fall, which reflects poorly on us all.
G20 AC Plan
After the breathless excitement of the G20 meetings in Brisbane in November 2014, the G20 published their collective Anti-Corruption Implementation Plan 2015-2016 (the G20 AC Plan).
The G20 AC Plan identifies key action areas and then for each Action Area, a set of Deliverables over the 2 years of the Plan. The key Action Areas with their identified Deliverables are as follows:
member countries are to identify concrete steps to require the disclosure of ultimate beneficial owners behind any commercial or other structure to promote transparency in all commercial dealings; member countries must promote their own rules on improving transparency in the public sector, including open data, whistleblower protections, immunities from prosecutions, fiscal and budget transparency and standards for public officials, with the Deliverables ranging from practical toolkits, disclosure of assets by public officials to self-assessments of each Members’ compliance with the Plan; to actively promote the criminalisation of foreign bribery and the legal liability of persons (companies and individuals) with a key Deliverable being to focus on the role of intermediaries; improving all levels of government cooperation with a Deliverable focus on acting to identify, recover and return the proceeds of corruption to the victims, countries or entities with enhanced criminal, civil and administrative sanctions and the improved use of anti-money laundering processes; targeting anti-corruption initiatives in high risk areas with a Deliverable focus on customs, extractive industries, fisheries and primary industries and the construction industry; and working to improve private sector transparency and integrity, particularly for small business, incentives for self-reporting, the role of the financial sector in detecting suspicious transactions and for business to adopt robust ethical standards to combat corruption.
The challenge over the next 2 years will be for the G20 member and other countries to take real and meaningful steps to address these issues in the face of inevitable complaints from business about the costs of regulation and compliance, so that these costs and attitudes are seen to work towards sustainable economic growth.
Australia’s Attorney General Department’s Foreign Bribery web module
On 9 December 2014 (world Anti-Corruption Day), the Australian Minister of Justice launched a new interactive module addressing Australia’s key foreign bribery laws, sanctions, international issues and how business should manage its foreign bribery risks.
The Minister said:
"The Australian Government has a zero tolerance approach to foreign bribery and corruption.
This type of criminal offence poses a significant risk to Australian businesses operating in overseas markets. There are serious criminal implications for individuals and corporations, both under Australian and foreign laws. Business needs to be aware of the risks and take action to minimise them.
The online learning module provides advice on Australia's anti-bribery policy, the relevant laws and how they apply, and steps that business can take to help promote compliance. It also assists with our whole-of-government programme on foreign bribery and ensures our awareness-raising efforts are efficient, cost-effective and consistent across Government.
Australia is reporting to the Organisation for Economic Co-operation Working Group on Bribery later this week on initiatives undertaken since their evaluation of Australia in 2012. The online learning module helps address recommendations to continue to educate and engage with the business community."
The module is at www.ag.gov.au/foreignbribery and companies should consider incorporating the ideas from the module into their existing e-learning or other training modules.
Australia and ASIC corporate penalties
Over the last few months, the question of the adequacy of corporate penalties for commercial offences has been bubbling along. In light of various scandals involving banks, their financial planning businesses and other ventures where average investors invested lot and lost a lot more, the ability of ASIC to really prosecute individuals, remains a live debate. Many see ASIC as too weak and too beholden to large companies that generate the fees ASIC collects for the Australian Government.
In the wake of the various Libor-related investigations and prosecutions oversea, ASIC’s Chairman was recently quoted in The Sydney Morning Herald (on 2 December 2014) as saying:
"Tougher penalties, such as more jail sentences, would deter would-be white collar criminals…fear had to be lifted in others to ‘smother the greed’…white collar criminals are scared of going to jail. I had 10 years on Wall Street and going to jail is the thing that scares them most…when they come up to the 18th floor and they put people in handcuffs and wheel them off they don’t come back – it sends a message."
Yet, despite this bravado, little is seen of any aggressive pursuit of economic criminals in the manner described by ASIC. Hyperbole is all good and well, but without demonstrable action to back up the emotive statements, ASIC appears to many to be little more than a regulator with an angry feather duster.
Australia and China: Operation Fox Hunt
Since July 2014, there has been a range of media coverage on Operation Fox Hunt, a joint initiative between Australian and Chinese investigators and police forces (in China and overseas), targeting corrupt Chinese officials who are purportedly investing corruptly secured assets in Australia.
The media has reported that China has arrested 288 suspects accused of financial crimes across 56 countries as part of its sweeping Operation Fox Hunt. The Chinese Ministry of Public Security said 126 of those suspects were brought back to China and confessed to their crimes. Some of them were apprehended in the US, Canada, and Australia, which have become popular with white-collar criminals because they do not have extradition treaties with China.
The Chinese government declared a deadline of 1 December 2014 for suspects to come forth and surrender to authorities, which could get them more lenient punishments. The operation has required Chinese authorities to co-operate with law enforcement in each of the countries where fugitives reside. While details are scarce, Chinese media quotes the Ministry of Public Security thanking countries for "cooperation and support" in the operation.
In Australia, these developments and the free trade negotiations between Australia and China there have fuelled debate about whether an extradition treaty might be negotiated between China and Australia. While there are significant issues to address, including the substantial differences in the criminal legal system in the two countries and China’s use of capital punishment, a treaty may not be so insurmountable as some might think, given the new era of trade relationships between China and Australia.
As one Chinese commentator, Yang Hengjun noted in October 2014:
"This is why I believe the “fox hunt” is of the most importance, along with continuing to hunt “tigers and flies” domestically. But compared to “tigers” (which make huge targets) and “flies” (who are everywhere and can be easily caught), the “foxes” are quite cunning. Unless I’m mistaken, the Ministry of Public Security’s “Fox Hunt 2014” has had only limited success. Otherwise, why would the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security, and the Ministry of Foreign Affairs jointly issue a notice urging overseas “economic criminals” to turn themselves in."
OECD Developments OECD Convention Phase 4 Reviews
Under the OECD Convention, member States sign up to a process of intense ongoing peer review of that State’s compliance with the Convention obligations. The preliminary review process contemplated three phases of reviews many of which have now been completed.
The OECD is undergoing a Consultation process to determine how the proposed Phase 4 review process should be run, with a special focus on enforcement and sanctions for member States who fail to comply with their obligations.
The OECD’s Consultation process finished on 1 December 2014. Your Editor was the author of a submission on behalf of the International Bar Association Anti-Corruption Committee. The OECD will likely publish its framework for the Phase 4 reviews in early 2015.
OECD Foreign Bribery Report
On 2 December 2014, the OECD published its Foreign Bribery Report 2014.
The Report makes some cutting assessments on western multinationals and their directors and executives who condone corrupt conduct in the pursuit of commercial success. The Report found that most bribes were paid in developed countries and with the full knowledge of senior management. The Report examined 400 deals over the past 15 years with the average bribe being worth almost US$14m (£8.9m) – typically 11% of the value of the transaction.
Other highlights from the Report include the following:
bribes were usually paid to win contracts from state-owned or controlled companies in the West, rather than in the developing world, and most bribe payers and takers were from wealthy countries; the sums handed out in bribes were worth 34.5% of the average profit on a transaction, but the complexity and concealed nature of many deals meant its findings revealed only “the tip of the iceberg”; almost two-thirds of cases occurred in four sectors: mining (19%); construction (15%); transportation and storage (15%); and information and communication (10%); more than a quarter of the bribes were promised or given to employees of state-owned companies and a further 11% involved customs officials, while heads of state and ministers were bribed in 5% of cases, but received 11% of total bribes; in most cases (57%), bribes were paid to win public procurement contracts, followed by clearance of customs (6%) and attempts to gain preferential tax treatment (6%); in 41% of cases, management-level employees paid or authorised the bribe, whereas chief executives were involved in 12% of cases; and intermediaries were involved in three out of four cases.
The OECD made it clear that:
Governments around the world should strengthen sanctions, make settlements public and reinforce protection of whistleblowers as part of greater efforts to tackle bribery and corruption. The overwhelming use of intermediaries also demonstrates the need for more effective due diligence and oversight of corporate compliance programmes, and for company executives to lead by example in fighting foreign bribery.
The figures compiled by the OCED give a picture of a consistent growth in foreign bribery cases, spiking around 2011, a particularly active year in the US, dropping slightly and then trending at a consistent level (see Figure 1 from the Report below).
One of the most alarming features for business is the time taken by internal investigations, reports to authorities, formal investigations and should they occur, prosecutions. It goes without saying that if you think the cost and time of compliance is a commercial inconvenience, think about the time (and cost) involved with non-compliance (see Figure 2 from the Report below).
The Report found that 3 out of 4 cases involved intermediaries and the detection of foreign bribery occurred in 31% of cases from self-reporting by companies and individuals. When the process of detection was examined, it was found that:
31% of cases arose from an internal audit; 28% of cases arose from an M&A due diligence; and 17% of cases arose from an internal whistleblower.
For company Boards of Directors, it is critical to understand that based on the OECD findings, it is clear that management plays a key role in implementing foreign bribery and corruption schemes (see Figure 10 from the Report, below). The OECD findings belie the argument that management invariably did not know about it or the employee at the center was a rogue – increasingly sophisticated companies have reporting structures and processes that mean a significant number of management employees need to be involved in a foreign bribery or corruption scheme to make it work effectively.
The OECD Report found the following (at page 22):
There were often overlaps between the categories (of employees) in a single case when numerous individuals at various levels of the company were involved and multiple entries were each therefore counted individually. In the majority of cases, corporate management (40%) or even the CEO (12%) was aware of and endorsed the bribery, debunking the “rogue employee” myth and demonstrating the need for a clear “tone from the top” in implementing corporate anti-bribery policies”.
The role of intermediaries, complex third party offshore structures and entities simply enhances the risk that a company has no or only limited control on what the intermediary in fact does. Once a potential issue is detected, the real question in Australia of self-reporting in a vacuum with no transparent structure identifying how to self-report, the real benefits of doing so and the consequences absent a regime for self-reporting remains a real problem under Australia’s criminal law. The UK Deferred Prosecution Agreement scheme, judicially controlled, remains a viable option that should be seriously considered by the Australian Government, so creating a statutory scheme that gives a real, meaningful clarity to companies to self-report rather than having to worry about whether to report and the uncertainty as to the consequences.
The release of the Report was attended by various leading regulators including Leslie Caldwell, the US Assistant Attorney General for the DOJ’s Criminal Division. Ms Caldwell highlighted the value of corruption by confirming that not only did it remain a high priority within the US Government and the DOJ, but that the value of corrupt conduct remains undiminished – since 2009, the US DOJ and SEC have collected combined FCPA penalties and forfeiture of US$4.5 billion.
Asia-Pacific Anti-Corruption Network
At the 2014 APEC leaders’ meeting in Beijing held in November 2014, APEC agreed to establish an informal structure to facilitate "information sharing" among anti-corruption and law enforcement authorities in the Asia-Pacific region.
It commits the 21 APEC countries, including the United States and China, to "deny safe haven to those engaged in corruption, including through extradition, mutual legal assistance and the recovery and return of proceeds of corruption," a joint-statement from APEC members said.
Western governments have resisted making extradition deals with China in the past because corruption crimes there are often punished with the death penalty. China has extradition treaties with 38 countries, but not with the United States, Australia or Canada, which have "the highest concentrations of corrupt officials" using those countries to safeguard their illicit assets according to Wang Yukai, an anti-corruption expert at the Chinese Academy of Governance. Mr Yukai also said that:
It will be of great significance if China can build cooperative mechanisms with these countries to capture corrupt officials on the run and recover some economic losses.
The Terms of Reference, adopted at the November APEC meeting require APEC Member States to:
establish the ACT-NET as an informal regional anti-corruption platform to permit prosecutors to consult and share practices to improve their investigation and prosecution of corruption (with China as the initial host for 2014 and 2015); help in the training and targeting of corrupt assets to secure their capture and return; and to promote bilateral and multilateral cooperation.
US and Canadian Developments 2014 Annual Report Dodd-Frank Whistleblower Program
In 2011, the Securities and Exchange Commission (SEC) created the Office of the Whistleblower. The Office was created as part of the Dodd-Frank reforms to the US financial system. The Office Annual Report to Congress was published in November 2014.
The key highlights from the Report include the following:
the SEC has made 14 awards to whistleblowers since 2011, with 9 in 2014; over 40% of whistleblowers were current or former employees; over 80% of complaints were first raised within a company before a whistleblower reported the matter to the SEC, with nearly 20% going straight to the SEC; in June 2014, the SEC prosecuted a hedge fund advisory firm against retaliation against a former employee, with the firm and owner being fined US$2.2 million; and in September 2014, the SEC made the highest award, of over US$30 million.
While the Whistleblower Program operates in the US across the financial sector and is not limited to foreign bribery cases, it is playing a powerful role in ensuring that improper and/or illegal commercial conduct is exposed in a manner that make’s Australia’s reluctance to delve into the private sector’s responsibilities to look after whistleblowers, that much more puzzling to understand.
While Part 9.4AAA of the Corporations Act 2001 (Cth) provides some protection for whistleblowers in the private sector, it is of limited value when the pervading business culture towards corporate whistleblowers in Australia is that they face persecution, humiliation and hostility rather than any real help. This is contrary to the June 2012 research published by Prof AJ Brown for Griffith University and the University of Melbourne that 81% of adult Australians believe whistleblowers should be supported, rather than punished, for revealing inside information about serious wrongdoing.
US Department of Justice FCPA Opinion 14-02
On 7 November 2014, the US DOJ published its FCPA Opinion 14-02 which covered the important topic of the DOJ’s views on successor liability under the FCPA where no liability existed before.
A US company sought to acquire foreign company A, owned by foreign company B, with both A and B companies outside US jurisdiction. The US company, working with due diligence forensic accountants, found what the DOJ described as “glaring compliance, accounting and record-keeping deficiencies” involving transactions valued at nearly US$12.9 million. At the request of the US company, the DOJ confirmed it would take no action, due to a number of reasons:
both the target and selling company were outside the US, operated only in a foreign country and had never sold or distributed products in the US; while significant payments, including bribes were detected, they were historic and had no impact on any current or new business that the target company would continue to perform; and the US company undertook to implement full compliance integration within 12 months, implement training programs and standardise third party business relationships and accounting functions.
The key lessons for companies coming out of this Opinion looking to acquire other businesses are to ensure that:
any potentially illegal conduct does not taint operative contracts generating a current financial benefit; carefully examine existing contracts and third party relationships; and assess whether any risks, once identified, can be properly quarantined.
US DOJ Continues to Target Individuals in FCPA Investigations
In a speech to the American Conference Institute’s National Conference on FCPA in November 2014, Ms Caldwell from the DOJ warned that prosecutions will increasingly target individuals rather than companies.
Ms Caldwell highlighted the DOJ’s focus on:
bringing individuals to justice, no matter how rich or powerful they are; seizing assets of corrupt foreign officials; enhanced international cooperation; and while encouraging self-reporting and cooperation, the DOJ expected to hear not only what happened, by “who did what, when and where”.
The respected Miller & Chevalier Autumn 2014 FCPA Review discloses some interesting statistics that appear to bear out the observations by Ms Caldwell. The firm noted that while investigation activity levels remain strong, the overall pace of enforcement in 2014, in terms of resolved dispositions, remains at low levels when compared to recent years.
In contrast to the slow pace of corporate enforcement actions, Miller & Chevalier noted that FCPA enforcement activity against individuals, at least on the DOJ side, has been on the increase (although there is clearly some overlap, with many cases mixing individual and corporate actions). The DOJ has announced FCPA-related charges against 11 individuals thus far in 2014, most of who were actually charged in 2013 under seal so as not to compromise the confidentiality of ongoing investigations. The firm concluded that these newly revealed FCPA cases make 2013 one of the busiest on record in terms of the DOJ's prosecution of individuals for FCPA-related misconduct, second only to 2009 when the DOJ brought charges against, among others, 22 executives in connection with a sting operation in the defense and law enforcement product industries
The first table (see below) highlights the resolved FCPA enforcement action by calendar year.
The second table (see below) looks at the trend of SEC enforcement action against individuals.
These tables and the flow of investigations leading to individual prosecutions confirm that the risk for companies, directors and officers remains high if they engage in foreign corruption – the take-out lesson is that if you do it, you face a high and increasing risk of being caught.
The latest developments out of the UK include the following:
in October 2014, the International Association of Insurance Supervisors published an Issues Paper on Combating Bribery and Corruption, which focused on the consequences of insurance policies being tainted by corruption and to ensure insurance companies and insurance supervisors responded to the increased risk of corruption; and in November 2014, the Financial Control Authority published a Thematic Review, TR14/17, entitled Managing Bribery and Corruption Risk in Commercial Insurance Broking which focused on how insurance broking intermediaries had addressed corruption risks, finding that more than half of the intermediaries had taken some steps to assess and manage bribery and corruption risk, but for the majority of these intermediaries, this work was still in progress and more had to be done before their anti-corruption systems and controls would be fully effective.
On 8 December 2014, the SFO’s prosecution of Sustainable Growth Group’s conduct promoting investment products based on “green biofuel” tree plantations in Cambodia came to a conclusion, with sentences imposed on former directors and a CEO totaling 28 years for a fraud estimated to be valued around £23 million. While the sentences were primarily for fraud-based charges, the sentencing Judge, HHJ Beddoe described the fraud as a “thickening quagmire of dishonesty…there were more than 250 victims of relatively modest means some of whom have lost all of their life savings and their homes…” and that bribery by the participants was an aggravating feature. There are ongoing compensation and confiscation order proceedings against the defendants.
Other International Developments
The latest developments out of the Asia Pacific Region include the following:
in August 2014, the Indonesian Corruption Eradication Commission (KPK) launched its own television channel, KPK TV, which will serve to educate the public about preventing corruption (available for streaming at kpk.go.id/kanalkpkKPK) as KPK had decided to build its own channel after learning that the mainstream Indonesian media had lost interest in broadcasting news about graft prevention; on 27 October 2014, the Chinese Supreme People’s Procuratorate amended its Rules of the People’s Procuratorates on Whistleblowing Work, to ensure the “smooth progress of whistleblowing work”, the rights of whistleblowers and how an individual should be dealt with, including real and effective protection to prevent reprisals and the payment of rewards up to RMB200,000 (or approximately AU$40,000) or higher amounts for particularly significant reporting of serious crimes; and in late November 2014, the South Korean Parliament National Policy Committee reviewed its domestic anti-corruption laws, imposing harsher penalties on public misconduct.
Lastly, in November 2014, the World Bank published a report entitled Drivers of Corruption: A Review (at www.worldbank.org). The Report looked at the cultural, social, political and behavioral factors that exist to allow corruption to exist and perhaps, even flourish. The Report concluded with these thoughts:
Corrupt assets can be generated and grabbed in many different ways. This review describes how profits are created through market failure and the external rents from the export of natural resources and foreign aid; how the opportunity to commit a crime is improved with a hidden identity; and how the risk of power misuse depends on bureaucratic organization, while the lack of reliable estimates on the extent of corruption may in fact provide players with opportunities for corrupt revenues. Whether such opportunities for corruption are exploited depends not only on the individual but also on the institutional and moral environment, and, especially, on the extent to which this environment allows corruption to endure. The performance of corrupt civil servants is difficult to observe, but there are also managers who do not want to control them; they let the corruption go on. Many factors, such as culture, market mechanisms, and politics in particular, explain why corruption persists. The problem also depends on the way in which law enforcement systems function; in many countries, the law enforcement system is itself ingrained with corruption, thus hampering any attempt to clamp down on corruption and to strengthen anticorruption norms by holding those involved responsible.
A wishlist for 2015
There has been some considerable work undertaken by Australia in hosting the G20 meetings and to put anti-corruption initiatives on the agenda.
My wish-list of initiatives for 2015 in Australia includes the following:
meaningful progress on the G20 AC Plan; a final decision to abolish the “facilitation payment’ defence to foreign bribery under the Criminal Code; introduction of a statutory DPA scheme, modelled on the UK version; to strengthen the protections for whistleblowers in the private sector and the consider the creation of a whistleblower bounty scheme and a statutory Whistleblower Office (based on the existing US-SEC scheme); enhancing resources for the AFP and ASIC to properly investigate and where a case exists, to prosecute companies and individuals for foreign bribery; and publication of an Australian-focused Foreign Bribery guide, similar to the US DOJ-SEC FCPA Resources Guide as a tool for use by companies, directors and executives to better manage their legal and commercial risks and to promote a greater awareness in the business community of the serious consequences or illegal conduct and that in the long term, bribery and corruption does not work and cannot lead to a sustainable business model.