The Australian Government has announced several proposed reforms to combat bribery of foreign public officials, including the possibility of creating a new corporate offence for failing to prevent bribery, and the introduction of a deferred prosecution agreement (DPA) scheme to encourage companies to self-report serious corporate crime.
Amendments to Australia's foreign bribery regime
Australia has been criticised over recent years for the limited number of enforcement actions it has commenced for bribery of foreign public officials. On 4 April 2017, the Australian Government released a consultation paper setting out a raft of proposed changes designed to strengthen Australia's foreign bribery regime and assist law enforcement agencies to more effectively prosecute these offences. Submissions on the proposed changes are due by 1 May 2017.
New corporate offence for foreign bribery
In respect of the current foreign bribery framework, it is already possible to rely upon the corporate criminal liability provisions in the Criminal Code to penalise a company for these offences. However, given the elements of the foreign bribery offences, it is very difficult to establish each element in respect of a company and, as a result, there have not been any instances where the prosecutors have tried to prove corporate criminal liability.
One of the proposals is the creation of a new corporate offence of failing to prevent foreign bribery. Under this offence a company would be automatically liable for bribery by employees, contractors and agents (including those operating overseas), except where they can show they had a proper system of internal controls and compliance in place to prevent the bribery from occurring.
A similar offence exists in section 7 of the Bribery Act 2010 (UK). With the introduction of this provision, many companies caught by the UK legislation took significant efforts to improve their risk and compliance frameworks to prevent foreign bribery.
New foreign bribery offence based on recklessness
Intention is a key element of the current foreign bribery offence. It is proposed that an additional offence could be introduced to deal with the situation where a person is "reckless" as to whether conduct would improperly influence a foreign public official in relation to obtaining a business advantage. There is already a definition of reckless in section 5.4 of the Criminal Code. The new offence would attract half the penalty that applies to the intention offence.
Changes to the existing foreign bribery offences
A number of changes are proposed to be made to the existing foreign bribery offences to broaden its potential operation and assist law enforcement agencies to achieve prosecutions. These changes include:
extension of the definition of "foreign public official" to include candidates for office;
removal of the concept of receiving a benefit or advantage "not legitimately due" and replacing it with the concept of "improperly influencing" or "dishonesty";
extension of the offence to apply to obtaining a "personal advantage" in addition to a "business advantage";
removal of the requirement to influence a foreign official "in their official capacity" to deal with the situation where a person may have been bribed to act beyond the official scope of their work;
clarification that the business or advantage may be obtained for someone else (not only the person receiving the bribe); and
clarification that the accused does not need to have a specific business or advantage in mind and may be seeking an unspecified undue advantage in the future.
Investigations and prosecutions of corruption on the rise
The Australian Federal Police (AFP) currently has 35 ongoing foreign bribery matters. This includes: two matters that are still before the courts (Securency and Lifese Engineering); four matters that have been referred to the Commonwealth Director of Public Prosecutions (DPP) for consideration; and 29 ongoing investigations.
If the proposed changes to the foreign bribery regime are introduced, we expect to see a rise in the number of investigations that are pursued by the AFP and ultimately a significant uptick in the number of prosecutions for foreign bribery offences. For insurers, this means a rise in the number of directors and officers subject to investigation and potentially an increase in claims under directors' and officers' (D&O) policies.
At the same time, State and Territory police are continuing to target white collar crime and corruption and are pursuing domestic corruption cases under their respective Crimes Acts.
Deferred prosecution agreements to encourage self-reporting
The Minister for Justice has also released a consultation paper setting out details of a proposed Deferred Prosecution Agreement (DPA) scheme. This is designed to strengthen the Australian Government’s arsenal of enforcement mechanisms for serious corporate crime. Submissions on the proposed scheme are also due by 1 May 2017.
Under the proposed scheme, where a company self-reports misconduct, the Commonwealth DPP will have the discretion to invite a company to enter into negotiations for a DPA. The company will have to agree to certain specified conditions such as:
ongoing cooperation with an investigation;
admitting to agreed facts;
payment of financial penalties; and
implementing or improving compliance programs.
Similar schemes are already in place in the United States (introduced in 2000) and the United Kingdom (introduced in 2012).
The proposed Australian DPA scheme
The key features of the proposed model for Australia's DPA scheme are:
DPAs will be available to companies that self-report or offer full and genuine cooperation as part of an investigation, in respect of defined set of serious offences including foreign bribery, fraud, specific offences under the Corporations Act 2001 (Cth) and money laundering. It is possible that the Australian DPA scheme will also apply to environmental, tax and workplace safety offences;
only the Commonwealth DPP will be able to enter into DPAs on behalf of the Commonwealth (i.e. this will not be a scheme available to enforcement agencies such as the AFP or to other regulators such as ASIC or ACCC);
there will be certain mandatory elements of a DPA (e.g. agreed statement of facts, formal admission of criminal liability, agreement to cooperate with investigation and DPA to be publicly accessible after approval);
a DPA may be approved by a retired judge where it is determined that the terms of the DPA are determined to be in the interests of justice and fair, reasonable and proportionate.
it is proposed that an independent monitor will be appointed, at the company's expense, to oversee compliance with DPAs as the Commonwealth DPP does not have the capacity to monitor DPA compliance;
where there is a subsequent material breach of the terms a DPA, the DPA can be terminated and a prosecution against the company commenced. It has not yet been determined which third party will be responsible for determining whether there has been a breach of the DPA; and
material disclosed by a company in DPA negotiations can be disclosed to relevant enforcement and investigative agencies but where information is used solely to facilitate the DPA negotiations, it cannot be used in subsequent criminal or civil proceedings (except in certain cases such as where the DPA is materially breached).
Lessons from the UK Experience
Given the similarities between the Australian Model and the UK DPA scheme, there are a number of lessons to be learned from the UK experience.
Incentive to Self-Report and Cooperate
Three DPAs have been approved in the UK since the scheme’s inception in 2012, suggesting that the scheme has successfully encouraged some companies to self-report corporate crime and cooperate with the Serious Fraud Office.
The first DPA against Standard Bank was approved by the Court in November 2015. The DPA required Standard Bank to:
pay compensation of USD 6 million plus interest;
pay a financial penalty of USD 16.8 million; and
disgorge USD 8.4 million profit relating to the offending transaction.
The second approved DPA was entered into with anonymous company XYZ in 2016. Under the DPA, XYZ was obliged to pay financial orders of GBP 6.5 million comprised of GBP 6.2 million for the disgorgement of profits and GBP 352,000 in financial penalties.
The third and most recent DPA involved Rolls Royce. The company did not self-report any wrong-doing but, during the course of an investigation by the Serious Fraud Office, was considered to have been highly cooperative and voluntarily provided pertinent information.
In approving the DPA, the Court arrived at a disgorgement figure of GBP 258 million. In considering the harm caused and the company’s culpability, the Court applied a 50% discount (resulting in a penalty of GBP 239 million), which was deemed just and appropriate given Rolls Royce’s corporation with the investigation.
This decision has been the subject of some criticism, given that Rolls Royce did not self-report yet still reaped the benefit of a penalty discount. However, it serves as a recognition that, in some circumstances a regulator, rather than the company itself, may first become aware of information and instigate an inquiry. If DPAs continue to be used in this manner then, in these circumstances, the scheme also encourages companies to cooperate with the regulator once an investigation has been commenced.
A Focus on Corporate Culture
Each of the UK DPA agreements contained measures to promote change in corporate culture. Both Standard Bank and XYZ were required, under the terms of their respective DPAs, to commission and submit to an independent review of its existing internal anti-bribery and corruption controls, policies and procedures regarding compliance with the Bribery Act 2010 (UK) and other anti-corruption laws. Rolls Royce was required, at its own expense, to enhance its approach to anti-bribery and corruption compliance in its compliance program.
Implications for Insurers
As noted above, under the proposed Australian DPA scheme, a DPA may incorporate various penalty provisions, disgorgement of any profits from the offending transactions and the requirement to implement or change the company’s internal compliance framework.
Companies may seek to claim the costs imposed by a DPA under a D&O policy or a crime policy. In assessing such claims, insurers will need to consider the insureds under the relevant policy and the definition of loss under the policy. Based on current wording in the market, we think that it is unlikely that financial penalties or disgorgement payments that a company may be required to pay under a DPA will be covered under these polices.
However, it is important to note that the entry into a DPA will not prevent separate proceedings being brought against individual directors and officers of an offending company. Further, the DPAs will require the company to cooperate in any subsequent investigation. Accordingly, if there is a take up in companies using DPAs to self-report issues, this could potentially result in greater regulatory scrutiny of companies and lead to an increase in prosecutions of directors and officers.