The election of Donald Trump as the next US president has raised fundamental questions about the role of the United States going forward, and what implications this will have globally. This presents renewed challenges for Asia Pacific trade; particularly in light of uncertainty arising from increased protectionism as well as broader trade and currency risks for the region. This also has a unique impact for those companies reliant on global supply chains and regional subcontractors for manufacturing. Corruption as an impediment to business remains a theme for the region, and one that adds to the uncertainty.
The recent ASEAN Business Outlook Survey 2017 conducted by AmCham Singapore and the US Chamber of Commerce allows some broad comparisons across the Asia Pacific region to be made. The tone of the (pre-election) survey is optimistic with 87 percent of companies saying that their level of trade and investment in the region will increase in the next five years. Troubling however is the fact that 62 percent say the need to combat corruption is a key priority area to enhance regional economic cooperation. In Australia, understanding corruption risks and consequences is still an area that needs work.
Corruption risks for businesses regionally
As this year’s corruption scandal in the oil and gas sector demonstrated, the issues are not new. Much has been written in recent years about the scope and costs of regulatory investigations and the powers of regulators, in Australia as well as in the UK and US. Bribery and corruption risk is becoming an increasing concern for businesses, and company executives and organisations operating in a range of sectors across the region are among those that have incurred the most significant penalties. How increased regional trade uncertainty affects those in Australia remains to be seen. More importantly for those Australian businesses reliant on regional supply chains, the weapons at the regulator’s disposal in the coming year will be critical to understand, as well knowing what more can be done locally to avoid corruption risks.
Corruption can take many forms. Not all companies bid on government contracts, being a major area of focus for regulators. Companies often underestimate the impact of private sector bribery, which remains a focus for not just Australia’s corruption regulator (the Australian Federal Police) but also its corporate regulator (ASIC). Nevertheless, the ASEAN Business Outlook Survey 2017 demonstrates that pressure for businesses to pay bribes for routine government services around the region remains a significant obstacle, especially when the alternative is to face costly delays within the supply chain.
While the problem potentially affects all businesses operating regionally, the impact on individual companies (and specific transactions) will vary according to the sector and location. Another major variable among organisations is that organisation’s culture, which will also be a factor considered when discussions commence with regulators investigating allegations of wrongdoing. How those discussions proceed, with new enforcement options at the regulators disposal, remains to be seen.
Deferred prosecution agreements in Australia?
In March 2016, the Australian Government released for public consultation its paper for improving enforcement options for serious corporate crime: Consideration of a Deferred Prosecution Agreements scheme in Australia. That paper outlined the Australian Government’s consideration of options to facilitate a more effective and efficient response to corporate crime through encouraging greater self-reporting by companies; the key plank of those options being a deferred prosecution agreement (DPA) scheme. Utilised to great effect in the UK and US, the paper argued that an Australian DPA scheme for serious corporate crime may improve agencies’ ability to detect and pursue crimes committed by companies and help to compensate victims of corporate crime. That paper coincided with the Senate Economics Committee inquiry into foreign bribery and white collar crime, which is now scheduled to report on 30 June 2017, and which will likely include recommendations in relation to DPAs in Australia.
If adopted in Australia, DPAs would be a revolutionary tool for prosecutors addressing corruption issues. It had been thought that deferred prosecution agreements would not be appropriate within the Australian constitutional setting but a series of legislative amendments adopted in the UK could be mirrored in Australia negating that concern. However, risks will still remain for corporations once negotiations with prosecutors commence.
What can Australia learn from the US and UK schemes?
Deferred prosecution agreements were viewed as an attractive alternative to criminal prosecution in the US from around 1999. This grew largely from the need to find a mechanism to bring corporates to account for criminal violations without inflicting harm on innocent victims. These victims included workers left unemployed as a result of a company being found guilty of an economic crime, as well as affected investors and markets.
The US example of a DPA scheme, in operation for much longer than the UK scheme, has shown that deferred prosecution agreements have the capacity to both encourage and enforce cultural and behavioural change amongst corporations, while allowing internal redress in sufficient training and compliance. Negotiated agreements, as opposed to complex investigations and criminal proceedings, are more efficient, less costly and result in a more assured outcome for all parties in many cases. Financial penalties payable under a deferred prosecution agreement also allow both an accrual of government revenue as well as redress for wrongdoing and, in some cases, compensation for victims.
There remains a risk for corporations in entering into deferred prosecution agreement negotiations. There is no assurance that once negotiations are commenced an agreement will be formulated and prosecution deferred. As seen in the US and UK, evidence raised and admissions made by companies throughout negotiations can be used in any later prosecution if an agreement is unable to be reached. The prosecutor may also choose to withdraw unilaterally from negotiations and pursue criminal proceedings based on such information. It is likely that any Australian adoption of deferred prosecution agreements would include similar processes.
Nevertheless, history has also shown that corporations are incentivised by the prospect of entering into a deferred prosecution agreement and avoiding criminal prosecution. This is especially so given the reduction in legal uncertainty and costs, negative publicity and the ability to avoid criminal liability and associated consequences. In the US, companies are increasingly more likely to self-report, thereby improving enforcement rates and outcomes for serious economic crimes.
In Australia, adopting the improvements made to the deferred prosecution agreement framework by the UK legislature (by incorporating a judicial function and oversight) would make deferred prosecution agreements an effective option for authorities here in pursuit of corporate wrongdoers. The potential for alternative and individually negotiated outcomes, as well as heightened levels of voluntary reporting and compliance as provided by deferred prosecution agreements cannot be overlooked.
What more can businesses do to combat a “culture of corruption”?
In February 2016, the chairman of the Australian Prudential Regulation Authority (APRA), Wayne Byres, informed a Senate Estimates Committee hearing that APRA and the Australian Securities and Investment Commission (ASIC) had each set up teams specifically to focus on “fixing corporate culture”. He went on to say that those teams would be sharing information about organisations, but acknowledged that “you can’t just regulate [appropriate culture] into existence”. Mr Byres saw leadership from executives as the key plank to improving behaviour within organisations. The difficulty for organisations is identifying “appropriate culture” and, perhaps more importantly, knowing how to fix “bad culture”. Striking the right culture balance will be key to ensuring that regulatory compliance is adhered to and also key to minimising fraud and corruption risks.
Attributing liability to an organisation for a breach of Australia’s Commonwealth anti-bribery legislation requires that organisation to have expressly, tacitly or impliedly authorised or permitted the commission of the relevant offence. In practice, the means by which such authorisation or permission is established includes proving that a corporate culture existed that directed, encouraged, tolerated or led to non-compliance or that the organisation failed to create and maintain a corporate culture that required compliance. Similarly, for those facing investigations of fraud or wrongdoing by other regulators (such as ASIC’s recently proposed action against those financial institutions allegedly engaged in the rigging of Australia’s bank bill swap rate, or BBSW), demonstrating that wrongdoing was the work of individual “bad apples” and not the barrel in which they were stored may prove critical. Establishing a culture of compliance to the satisfaction of regulators may help an organisation escape from liability, but begs the question: what is required to create “good culture”?
How do you create “good culture”?
In Australia, certainly in the context of anti-corruption regulation, there is very little guidance about what constitutes a compliant “corporate culture”. This is in stark contrast to the United States and the United Kingdom, where comprehensive guidance is offered to organisations across a range of white collar crime offences, including bribery and corruption. In the absence of clear guidance in Australia, organisations might look to generally recognised compliance standards to assist in understanding an approach to creating good culture.
To embed a true culture of compliance, a focus on more than just leadership (or “tone at the top”) is required. It must extend to things such as appropriate hiring (and increased vetting procedures for staff), proper incentives tied to long term performance of the organisation, adequate internal controls (such as dual authorisations, segregation of duties and suitable reporting structures), efficient internal audits (including use of data analytics), budget support for internal audit and compliance functions, promotion of an open communication channel throughout the organisation (including a robust whistleblower regime), competent and empowered compliance personnel as well as appropriate and tailored training for all staff. Focussing only on the “bad apples” within an organisation ignores the bigger issues: a true culture of compliance requires weeding out the structures, processes and social systems of organisations that lead to opportunities for wrongdoing to occur.
Where to from here?
Australia has already been criticised by the lack of anti-corruption proceedings under the OECD Anti-Bribery Convention, enacted in 1999. This dearth of enforcement more probably signifies inadequate strategies for prosecution and a lack of incentives for voluntary reporting than it does the absence of fraudulent or corrupt practices among Australian and foreign companies. The recent scandal involving Unaoil may change that landscape. Against this backdrop, it is clear that new strategies to address corporate wrongdoing, fraud and corruption would assist Australian authorities and enforcement bodies in their endeavours. A new weapon in the arsenal such as deferred prosecution agreements may be the next logical step to take up the fight against serious economic crime. In addition, being ready to respond to an allegation and demonstrate “good culture” will be critical. Conversations with risk and compliance officers and those with governance oversight need to start now as such areas are increasingly in the spotlight when it comes to how organisations manage their affairs, particularly in relation to their compliance obligations and what will be seen as “good culture” when it comes to avoiding corruption.