Introduction

The Senate Economics References Committee’s Inquiry into Foreign Bribery (Senate Inquiry) has very broad terms of reference. It places the spotlight on the existing federal legislative framework governing foreign bribery, with a particular focus on non compliant corporate cultures and the liability of directors and senior managers who fail to implement corporate cultures of compliance.

Key Takeaways  

  • The Senate Inquiry is likely to provide the trigger for legislative reform with respect to corporate liability for acts of bribery, the range of penalties available to the courts, and the measures available to encourage companies to self-report serious misconduct.
  • The Australian Securities and Investment Commission (ASIC) has a similar focus on corporate culture with Chairman Greg Medcraft proposing amendments to existing laws to enable the corporate regulator to pursue civil actions against companies for non compliant corporate cultures. This may result in more onerous responsibilities being placed on directors and potentially exposing executives to civil penalties such as compensation claims from victims of non compliant corporate cultures, fines, and disqualification.
  • The Senate Inquiry is also exploring options to introduce a false accounting offence for the purposes of foreign bribery. If enacted, the new law will make bribery prosecutions easier as Australian regulators will only need to show that a false entry in a company’s financial records could be trying to hide an act of bribery.

The Senate Inquiry’s focus on good corporate culture

Corporate liability

The Australian Government is placing the spotlight on the importance of corporate culture and the mechanisms by which a company can be prosecuted for a foreign bribery offence if its corporate culture led to non compliance with the law. On 24 June 2015, the Australian Senate referred an inquiry into foreign bribery to the Senate Economics References Committee (committee) to examine the activities of Australian companies abroad. Public submissions have now closed and the committee will report to the Senate by 1 July 2016.

Importantly, the Senate Inquiry will look at the existing effectiveness of, and possible improvements to, existing Commonwealth law governing foreign bribery, namely the Commonwealth Criminal Code Act 1995 (Cth) (code), including the range of corporate offences, for example:

  • an increased focus on the offence of failure to create a corporate culture of compliance;
  • the liability of directors and senior managers who do not implement a corporate culture of compliance; and
  • the liability of parent companies for subsidiaries and intermediaries, including joint ventures.

The focus on corporate culture is in part due to the Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery’s recommendation that Australia take steps to enhance the usage of the corporate liability provisions under the code, including those on corporate culture and provide training to law enforcement authorities on corporate liability in foreign bribery cases.1 Currently the Australian Federal Police (AFP) operates closely with ASIC to ensure the corporate liability provisions of the code are considered throughout the lifecycle of any foreign bribery investigation. Where appropriate, the AFP will refer matters to ASIC to pursue civil actions.

The corporate liability provisions under the code make it a criminal offence if it can be proven that a corporate culture2existed within a company that ‘directed, encouraged, tolerated or led to non compliance’ with the law or if it can be proven that the company ‘failed to create and maintain a corporate culture that required compliance’ with the law.3 To date, these provisions have not been tested with respect to foreign bribery and corruption cases.

Guidance to companies on what constitutes a ‘culture of compliance’

The Senate Inquiry will also examine what official guidance the Australian Government can give to corporations and others as to what constitutes a ‘culture of compliance’ as well as a good anti-bribery compliance program.

A survey conducted by Deloitte in 2014 of 269 company respondents from various New Zealand and Australian companies found that 73% of respondents felt that organisational culture was one of the ‘top three’ factors in assisting to prevent incidents of bribery and corruption within their own organisations.4 That said, the same survey revealed that many organisations do not believe that bribery and corruption is a risk for their company. Approximately 83% of respondents did not view domestic corruption as a ‘top five’ risk. This is rather concerning given that many of these organisations had neither carried out adequate risk assessments nor put in place effective anti-corruption controls.5

A critical issue with the operation of Australia’s existing foreign anti-bribery and corruption regime is that it falls under the criminal law which means (unlike other proceedings brought by corporate regulators) there is no incentive for companies to self-report to the regulator shortfalls in their compliance processes or incidences of alleged misconduct.6 The Senate Inquiry is to examine measures to encourage self-reporting similar to those used in the United States of America (US), United Kingdom (UK) and Canada (i.e. plea-bargaining, civil resolutions, deferred prosecution arrangements and enforceable undertakings). It is therefore likely that the Senate Inquiry will consider whether a civil penalty regime should be introduced in Australia to enable the regulator to prosecute where evidence is insufficient for a criminal conviction. The Senate Inquiry is set to examine the existing range of penalties available to the courts, including debarment from government contracts and programs (penalties which are available in the US, Canada and the UK).

In any case, it is clear that a wider range of sanctions concerning foreign bribery is needed and that this is a key focus of the Government.

Looking to the UK for guidance

The Senate Inquiry may well look to other jurisdictions for guidance on how Australia can improve the operational effectiveness of its corporate liability provisions such as by examination of the UK Bribery Act 2010. Under UK law, a commercial organisation will be liable if it fails to prevent bribery by a person ‘associated with it’, such as those that perform ‘services’ for or on behalf of an organisation (such as employees, agents, subsidiaries, contractors and even suppliers in some instances). The ‘associated’ person needs to have acted with the intent to obtain or retain business, or a business advantage on behalf of the commercial organisation. However, companies will have a full defence to the charge if they can show they had ‘adequate procedures’ in place to prevent associated persons from engaging in bribery. Whether a company’s procedures are ‘adequate’ will depend on the potential risks the company faces doing business, and the nature, size and complexity of its operations. The standard of proof which a commercial organisation would need to discharge in order to prove the defence, in the event it was prosecuted, is on the balance of probabilities. In contrast, the current standard of proof which the prosecution must discharge with respect to corporate (criminal) liability under Australia’s code is the higher threshold of beyond reasonable doubt. This is a key reason why so few Australian foreign bribery prosecutions have led to convictions.

ASIC keen to ramp up prosecutions against companies with inadequate compliance cultures

ASIC Chairman Greg Medcraft also has set his sights on broadening the operation of the ‘corporate culture’ offence under the code. In June 2015, Mr Medcraft announced that ASIC would consider instigating proceedings against an Australian company if it believes that the company’s culture resulted in its employees breaking the law. ASIC would like to see modification of the corporate culture provisions to enable ASIC to treat the offence of having a non compliant corporate culture as a civil penalty provision which lowers the standard of proof for prosecution to the balance of probabilities.

If ASIC (and its Chairman) can convince the government that ASIC should be allowed to institute civil actions against companies who fail to maintain a culture of compliance, it could potentially have the following ramifications:

  • if ASIC is of the opinion that an individual employee or officer’s misconduct was in some way caused or encouraged by a company’s ‘non compliance culture’, then the company itself may be investigated and prosecuted based on the company having liability as an ‘accessory’. That is, the company would be deemed to have a corporate culture which condoned the individual’s illegal conduct;
  • directors may be exposed to civil penalties such as claims for compensation from victims of non compliant corporate cultures, fines, and disqualification from managing a corporation for a period of time;
  • senior executives and directors will have to actively monitor compliance and respond swiftly and appropriately to inadequacies in company compliance processes and controls; and
  • directors as the ‘guardians of corporate culture’ could potentially be exposed to greater liability with respect to matters of corporate governance.

If the reform initiative proposed by ASIC is eventually taken up by the government, no legislative change is likely prior to the government’s consideration of the final report to be produced from the Senate Inquiry (given the Inquiry’s proposed examination of the corporate culture provisions in the code).

False accounting in the context of foreign bribery

The Senate Inquiry will also examine whether Australia should introduce a new federal offence of false accounting for the purpose of foreign bribery. The government has indicated that a Bill may be introduced into Parliament in 2015 (yet to occur at time of writing) to amend the code to include a false accounting offence. Prosecutions may then be easier as Australian regulators will only need to show that a false entry in a company’s financial records could be to trying to hide an act of bribery.

Australia’s first prosecution for a foreign bribery related offence was that of Mr David Ellery, a former CFO and company secretary of Securency International who pleaded guilty to a charge of false accounting under the Victorian crimes legislation. It is important to note that directors of companies that are found to have engaged in false accounting may be liable for a range of sanctions (including disqualification) under the existing Corporations Act 2001 (Cth) (Corporations Act). All foreign bribery investigations undertaken or evaluated by the AFP currently involve an analysis of whether false accounting offences are applicable, whether that be under state or territory laws or the Corporations Act.7 The OECD Working Group on Bribery has recommended that Australia ‘vigorously pursue false accounting cases’ and take all steps to ensure such cases are investigated and prosecuted where appropriate.8

The Bill proposed by the Government is described as likely to be based on the ‘books and records’ offence provisions under the US Foreign Corrupt Practices Act 1977 (FCPA) which allows the prosecution to secure a conviction in lieu of foreign bribery. Under the FCPA, companies are obliged to maintain accurate books and records which ‘in reasonable detail’, accurately and fairly reflect the transactions and dispositions of the assets of the company (amongst other matters). The phrase ‘in reasonable detail’ is intended to make it clear that a company’s records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent ‘off the books’ slush payments and the payment of bribes.9 Bribes are often mischaracterised in company books (e.g. as things like consulting fees, supplier payments, miscellaneous expenses and even customs intervention payments).

Thus, a conviction under the ‘books and records’ provisions does not require the prosecution to prove a person engaged in a specific act of bribery, as it is enough if it can be proven that the person maintained false accounts, records or other documentation (e.g. sham consulting agreements). Under the FCPA criminal liability will be imposed on companies and individuals for knowingly (wilfully) failing to comply with the FCPA’s books and records or related internal controls provisions. The US regulators’ enforcement of the books and records provisions has typically involved cases where there was a misreporting of either large bribe payments or widespread inaccurate recording of smaller payments made as part of a systemic pattern of bribery.

While Australia may look to the FCPA for guidance, if the government intends to introduce a ‘books and records’ provision as a federal criminal offence it may have a closer correlation with Canadian law. In response to recommendations from the OECD Working Group on Bribery, Canada introduced a false accounting criminal offence into its Corruption of Foreign Public Officials Act (CFPO Act), which covers conduct such as maintaining ‘secret’ accounts, making transactions that are not recorded or inadequately identified in company books, recording non-existent expenditures, knowingly using false documents, or intentionally destroying accounting books and records earlier than permitted by law.10 Persons are liable to imprisonment for a term of up to 14 years, and companies are liable for a fine. There is no civil resolution option under the CFPO Act.

However, it remains to be seen what form the proposed false accounting offence will take, if and when it is introduced into the Australian Parliament.

Conclusion

The Senate Inquiry has very broad terms of reference with a particular focus on the adequacy of existing laws relating to corporate liability for a non compliant corporate culture in the context of foreign bribery. ASIC also has a focus on improving the effectiveness and ability of the regulator to prosecute companies for non compliant corporate cultures. Legislative reform in this area of corporate responsibility is highly likely. Further, the introduction of a specific offence for false accounting as it pertains to foreign bribery is pending and, if enacted, will better align Australia with jurisdictions such as Canada and the US.

In addition to the potential legislative reform outlined in this newsletter, the AFP announced in August that it was ramping up investigations into Australian companies paying bribes to foreign officials with a ‘good handful’ of prosecutions in the pipeline, and investigations into large corporations are ongoing. In light of these developments, now is the time for companies to formulate (if they have not done so already) more rigorous anti-corruption compliance processes to mitigate the risk of company personnel engaging in corrupt acts overseas, and to assist in a defence to any potential enforcement action.