Corruption in the upper echelons of the corporate world has resurfaced with the recent resignation of ASX Chief Executive, Elmer Funke Kupper (Kupper).
Kupper’s sudden resignation was in response to an Australian Federal Police cross border bribery investigation into Tabcorp’s 2010 payment via the US banking system of $200,000 to a ‘consulting firm’connected to the family of the Cambodian Prime Minister, Hun Sen. The payment took place whilst Kupper was Chief Executive of Tabcorp and he had allegedly been warned by senior Tabcorp staff about the legal and integrity risks relating to the payment. At the time of the alleged offence, Tabcorp was planning to launch an online sports betting platform in Cambodia and required Government backing to gain entry into the market.
The Tabcorp case is yet to play out in court, however, it reaffirms the importance of the Australian Government’s agenda to improve the ability of law enforcement agencies to detect, investigate and prosecute serious corporate crime including offences relating to fraud, foreign bribery and money laundering. An improvement currently in the mix for discussion is the potential to introduce an Australian deferred prosecution agreement (DPA) scheme. The Attorney General’s Department (AGD) has recently released a public consultation paper on the topic.1
What is a DPA?
The US has relied heavily on the use of non-prosecution agreements (NPA) and DPAs in foreign bribery cases. The Australian Government is now considering its options to encourage greater self-reporting by companies through the potential introduction of a DPA scheme. At present there is very little incentive for companies to self-report to regulators suspected corporate incidents of bribery, fraud and other corrupt practices.
Under a DPA scheme, where a company or a company officer has engaged in serious corporate crime, prosecutors can opt to invite the company to negotiate an agreement under which compliance with certain conditions is required in exchange for deferral of the prosecution. At the fulfilment of the terms of the DPA, the prosecution will be discontinued. The key feature of a DPA is that it enables a corporation to make full reparation for criminal behaviour without the ‘collateral damage’ of a conviction.2 It also avoids a costly and drawn out litigious process.
Any decision to enter into a DPA negotiation is at the discretion of the prosecuting agency. Australia is already familiar with similar negotiated settlement arrangements such as ASIC’s enforceable undertakings.
What are the potential pros and cons of a DPA scheme?
The AGD notes that DPAs may:
- Encourage greater self–reporting of misconduct (as a DPA will allow a company to escape a formal conviction and the associated reputational and financial costs). Where law enforcement has a strong suspicion that a company is or has engaged in criminal activity, a DPA can be a measure to get companies to ‘come clean and cooperate’. In identifying corporate misconduct regulators are heavily reliant on information provided by whistle-blowers or the co-operation of companies;
- Allow an alternative option to overcome the myriad of challenges faced by investigating agencies in compiling briefs of evidence for potential prosecutions involving complex cross-border corruption;
- Provide an incentive for companies to proactively improve internal compliance controls given such factors are important in determining the leniency given to companies in any enforcement action (including whether a DPA is appropriate); and
- Mitigate the potential consequences to third parties from the result of company prosecutions such as job losses and loss of investor confidence.
However, the argument against the use of DPAs for serious corporate crime is twofold. It is uncertain whether they will in fact encourage the voluntary self-reporting that is envisaged. A company will not be incentivised to voluntarily self-report if there is any uncertainty as to whether it will be invited to discuss a DPA arrangement. Clarity and guidance on the specifics of how a DPA would work in practice needs to be available in order for Australian companies to be incentivised to self report misconduct. Further, the use of DPAs may encourage the perception that companies can simply ‘pay their way out of trouble’ which may weaken the deterrent effect of prosecutions.3
Looking towards the UK and US for guidance
The US corporate regulators (the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC)) have fervently embraced the use of DPAs and NPAs as a critical tool to deal with corporate crime. Since 2010, 86% of enforcement actions under the US Foreign Corrupt Practices Act 1977 involved either a DPA or NPA.4 The regulators often use DPAs in criminal cases to encourage individuals and companies to share information and assist in other investigations. In February 2016, SEC is reported to have used its first DPA with an individual in relation to a foreign bribery case.
DPAs are used where the defendant is charged with an offence or where they have self-reported a suspected violation of the law. The key features of the US scheme are as follows:
- It is entirely at the discretion of the prosecutors whether they will initiate a DPA discussion with a company or individual, which may occur at any point in time before a trial;
- Participation in the process is voluntary and the defendant is not required to admit any guilt as part of the process;
- DPAs are used for a broad range of federal crimes, with some specific exclusions;
- There is relatively limited judicial oversight, although it may vary from case to case;
- DPAs generally require (where DOJ initiated) a defendant to agree to a monetary penalty, waive the statute of limitations, co-operate with the government, admit the facts and comply with certain compliance and remediation commitments, potentially including (in serious cases) a corporate compliance monitor;5 and
- Formal guidance on how the regulator uses DPAs is available, and the DOJ and SEC publish DPAs on their websites.
In the UK, DPAs, which were introduced on 24 February 2014, are agreements between a prosecutor and an organisation which could be prosecuted, under the supervision of a judge. The key features of the UK scheme are as follows:
- DPAs are used for fraud, bribery and other economic crimes of commercial organisations (i.e companies, partnerships and unincorporated associations);
- DPAs are not available for individuals;
- A company will only be invited to take part in the process if there has been full cooperation with a Serious Fraud Office (SFO) investigation. Generally, the regulator will consider factors such as the seriousness of the crime, the way in which the organisation dealt with the issue upon its discovery, any history of previous similar conduct, and if so, the extent to which the current corporate entity has changed, when considering whether it is appropriate to resolve a case by way of a DPA;
- There is significant judicial oversight. DPAs are concluded under the supervision of a judge who must be convinced that the DPA is in the ‘interests of justice’ and that the terms are ‘fair, reasonable and proportionate’;
- DPAs will require the defendant to agree to certain conditions such as paying a monetary penalty, paying compensation, and co-operating with future prosecutions; and
- Formal guidance on how the regulator uses DPAs is available, and the DPAs are published.
First UK DPA case
In November 2015, the first UK DPA was entered into with a company for failing to prevent bribery contrary to the provisions of s 7 of the UK Bribery Act 2010 for acts of bribery that occurred outside of the UK. The case related to a US$6 million payment by a former sister company of Standard Bank, Stanbic Bank Tanzania, to a local partner in Tanzania. The payment was intended to induce members of the Government of Tanzania to show favour to Stanbic for a US$600 million private placement to be carried out on behalf of the Government of Tanzania, which generated transaction fees of US$8.4 million.
As a result of the illegal transaction, the indictment was suspended for three years and Standard Bank was ordered to pay financial orders of US$25.2 million and compensate the Government of Tanzania a further US$7 million. The bank also agreed to pay the SFO’s reasonable costs in investigating and resolving the DPA.6 Standard Bank is required to implement certain compliance recommendations and continue to co-operate fully with the SFO.
In this case, the SFO and the judge decided it was in the ‘interests of justice’ to approve the DPA due to the promptness of the bank’s self-reporting and the degree of co-operation with regulators. The bank had no prior convictions.
Whilst the US and UK DPA regimes are useful in considering a potential model, any Australian scheme will need to be assessed in light of Australia’s differing governance and regulatory environment. The AGD consultation paper seeks the views of the public on a range of matters, including:
- The type of conduct for which a DPA may be sought (i.e. is it to be confined to purely economic crimes);
- Whether it should apply to both individuals and companies;
- The content of a DPA (e.g. obligations to cooperate, the consequences if the defendant engages in further misconduct, and the payment of financial penalties);
- Whether the DPA should be publicly available, and should there be circumstances where publication is restricted;
- The extent to which courts should be involved in the DPA process (e.g. there is limited involvement by the courts in the US, however there is a reasonable degree of oversight by the courts in the UK);
- The measures needed to provide certainty and predictability to companies to encourage self-reporting (i.e clear guidance on the factors a prosecutor will consider when deciding whether to invite a company to enter into a DPA); and
- The potential ramifications for breach.
The Australian Government is seeking public comment until close of business on Monday, 2 May 2016 as to whether a deferred prosecution system should be introduced in Australia.
What this means for you
This consultation process dovetails with the issues currently being examined in the Senate Economics Committee Inquiry into Foreign Bribery. If DPAs were to be introduced into Australia they will increase the enforcement tools available to law enforcement agencies to combat the increasingly complex and serious corporate crime that has, and continues to implicate Australian company officers and some of Australia’s largest corporations. A degree of momentum is building in this space off the back of the Senate Inquiry with a sequence of reforms to address corporate crime having been passed, (such as the new false accounting laws), or that are currently under consideration.
It is worth noting that the Australian Government has, and is continuing to indicate a commitment to crack down on companies with a poor corporate culture. Poor corporate culture is often a driver of poor corporate conduct. The hallmarks of ‘good culture’ can be described as:
- Effective communication (setting the right tone and then ensuring it is effectively communicated);
- Allowing and encouraging challenges to existing organisational practices; and
- Guarding against complacency.7
In this context, the introduction of a DPA scheme is likely given that DPAs operate as an important punitive tool to improving corporate culture. DPAs require companies to take action to change organisational cultures which encourage, tolerate or facilitate misconduct.
In response to these developments it is timely for companies to review their corporate anti-corruption policies and procedures, and assess whether any gaps exist, especially with respect to anti-corruption compliance training of personnel in high risk positions.