This Update covers a range of important developments in Australia and overseas in the area of foreign bribery policy, investigations and regulation to 20 May 2016. These developments will impact on Australian businesses working offshore and reinforce the need to have and to implement an ongoing, pro-active anti-corruption compliance framework within your business.
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The key issues that are covered in this Update include:
- Australia – New False Accounting Criminal Offences
- Australia – Proposed Review of an Australian Commonwealth Deferred Prosecution Agreement Scheme
- Australia – Senate Review of Foreign Bribery Laws
- Australia – The Regulation of Corporate Culture
- Canada – the World Bank Reporting to National Investigation Agencies
- United Kingdom – Anti-Corruption Summit and Australia’s Commitments
- United Kingdom – Australian Securency UK Manager Convicted of Bribery
- United States – the Department of Justice FCPA Enforcement Plan and Guidance
- International – Survey on Business Response to Bribery & Corruption
- International – the Role of Intermediaries: Unaoil and the Panama Papers
Australia – New False Accounting Criminal Offences
As from 1 March 2016, Australia’s new false accounting offences became law.
As reported in the December 2015 Update, these laws have been created as a new division in the Criminal Code Act 1995 (Cth) (Criminal Code).
These laws create offenses for the intentionally false or reckless “making, altering, destroying or concealing” an “accounting document” (defined broadly) in circumstances where the person so acting intended to facilitate, conceal or disguise someone else receiving or giving a benefit to which that other person was not legitimately due or loss is suffered by another person. The prosecutor need not prove a benefit was in fact given or received or that a loss was incurred. These laws apply to conduct within and outside Australia and potentially to a wide range of commercial and financial transactions unrelated to bribery or corruption. The penalties are severe – for an individual, imprisonment up to 10 years and/or a maximum fine up to AU$1,800,000 and for a company, a maximum fine up to AU$18,000,000 or three times the value of the benefit or 12 months turnover. The Australian Securities and Investments Commission (ASIC) has made it clear these new laws will be deployed across the financial sector when assessing a wide range of potential financial offences.
Australia – Proposed Commonwealth Deferred Prosecution Agreement Scheme
During March 2016, after attending the Ministerial Meetings at the OECD, the Australian Attorney General issued a Consultation Paper concerning whether a Commonwealth Deferred Prosecution Agreement (or DPA) scheme should be introduced into Australia.
There is considerable benefit in the introduction of a Commonwealth DPA scheme. Any Commonwealth scheme should be modelled more closely on the United Kingdom model rather than the United States model, as the United Kingdom scheme has greater transparency and the court plays a key role in ensuring that any DPA is not only reasonable and proportionate as between the prosecutor and the offender, but that it is in the interests of justice that a DPA be concluded.
There are considerable weaknesses in the current criminal law regime where not only is there no obligation to report any criminal conduct (save for in NSW) but it remains a lottery under the criminal justice system how the Australian Federal Police (AFP) and/or the Commonwealth Director of Public Prosecutions (CDPP) will treat a company that voluntarily reports potentially criminal conduct. There is little certainty and almost no transparency in the process of how a company might negotiate a resolution of a potential criminal prosecution. In addition, there are substantive principles of law that prevent a criminal prosecutor from making any submissions to a sentencing court as to an agreed settlement (including an agreed sentence) in criminal matters and constitutional limitations on how a court can, exercising judicial power, simply accept an “agreed sentence”.
However, there are very good reasons why a Commonwealth DPA scheme should be seriously looked at, and introduced if Australia seeks to promote and encourage corporate Australia into voluntarily reporting improper and potentially illegal conduct with a clearer sense of certainty of outcome. A number of important issues will need to be addressed in any such scheme:
- whether the scheme should apply to all serious financial crime offences, with the offences identified;
- whether the scheme should be available for companies and other incorporated entities (similar to the United Kingdom model) and not for individuals, who should be held accountable for their individual conduct;
- the role of judicial oversight and the role of the court in supervising, approving or determining a criminal sentence;
- whether all court judgements, agreed statements of facts and the DPA should be published, except where the court is satisfied that exceptional circumstances exist that warrant non-publication (for a defined period of time and no longer than is reasonably necessary);
- whether third parties have any rights to seek access to otherwise confidential information given by a company to an authority (the AFP and/or the CDPP) in seeking to negotiate a DPA;
- whether a DPA should include certain mandatory terms (including a potential acceptance or acknowledgment of guilt);
- how funds raised through a DPA should be used, for example, to be applied towards Consolidated Revenue or used for specific projects such as the funding or the provision of resources so that anti-bribery and anti-corruption efforts are adequately maintained and not constantly operating under a regime of cost-cutting; and
- whether the scheme should allow for the use and appointment, at the company’s cost, of independent monitors following the US model, which should be subject to judicial oversight as to the scope of the monitor’s work and fees.
It should be noted that the AFP supported the call for the introduction of a Commonwealth DPA scheme when it appeared before the recent Senate Economics Reference Committee inquiry looking into reforms to Australia’s foreign bribery laws. These developments will be watched with interest.
Australia – Senate Review of Foreign Bribery Laws
In August and September 2015, the Australian Senate received over 40 submissions on the review by the Senate Economics References Committee of Australia’s foreign bribery laws. Numerous submissions called for major changes to the operation and funding of Australia’s endeavours to target commercial bribery and corruption. The Senate is due to report by 1 July 2016. However, the Australian Government has now prorogued Parliament and a general election will be held on 2 July 2016. The fate of this review will fall to a new Parliament and Government after the election.
During April 2016, the Senate Committee held public hearings and the topics of interest to the Committee included the following:
- the extent to which Australian business engages in unacceptable, improper or illegal conduct in offshore, foreign business opportunities;
- whether Australia needed a stand-alone foreign corrupt practices act in the mould of the US and UK legislation;
- whether the equivalent of the section 7 UK Bribery Act offence of deemed corporate liability for the conduct of an “associated person” (and the defence of adequate compliance procedures) should be introduced into the Criminal Code;
- whether facilitation payments should be banned (although this topic has been around for years without any political party in Government being prepared to make a hard decision on whether or not to abolish them);
- proper meaningful, statutory protections for whistleblowers in the private sector allied with a statutory compensation scheme for whistleblowers;
- the liability of parent entities for the conduct of subsidiary entities or other related entities;
- incentivising companies to report potentially criminal conduct by the introduction of a DPA scheme; and
- fundamentally, demonstration of political will and leadership to properly fund Australia’s investigative and prosecution agencies to tackle bribery and corruption, rather than constantly cutting costs.
Whether as a response to the inquiry or the current election campaign, the Australian Government announced increased funding both to ASIC and the AFP. Quite how this extra funding will make a real difference rather than catching up what was or has been lost (and cut) over the last few years from these agencies, remains to be seen. But it is a positive sign of the commitment of the Government to tackle bribery and corruption.
Australia – The Regulation of Corporate Culture
What is “corporate culture”? Can or should it be regulated and a standard of culture enforced? If not, do we leave “culture” to be defined and policed by the corporate world or buy the corporate regulator or the police?
These questions have recently been hot and topical across the Australian media.
Sections 12.1 to 12.6 of the Criminal Code make it clear that culture is important. Criminal liability can be imposed on a company which:
- created a corporate culture that directed, encouraged, tolerated or led to non-compliance with the law; or
- which failed to create or maintain a culture that required compliance with the law.
The Criminal Code defines “culture” as an “attitude, policy, course of conduct or practice existing in the body corporate generally or the part of the body corporate where the conduct occurred.” This reflects sociological definitions which look to a body of values of beliefs that guide a group within society or an organisation.
In a speech in late November 2015, Greg Medcraft, the Chairman of ASIC, raised the difficult questions of what was corporate culture, why it mattered, what it looked like and who is responsible for it. Mr Medcraft made it clear that while culture matters to business “because good culture is good for business” and ASIC encourages business to address and look to their own culture, cultural change required a company to be held responsible for its culture and actions and “those who create or encourage a culture that that breeds misconduct should be held accountable for it.” In March 2016, in a speech at the ASIC Annual Forum, Mr Medcraft said this – “Culture matters to ASIC, to business and to customers…culture matters to ASIC because culture is a key driver of conduct…the converse is also true…culture matters to business. Fundamentally, good future is good for the bottom line and it is critical for business that wants to be around for the long term.” Mr Medcraft went on to say “culture is not something that can be regulated with black letter law…culture is at the heart of how an organisation and its staff think and behave. It is an issue that companies themselves must address.”
These sentiments, of the importance of culture in promoting legal (and ethical) conduct were powerfully echoed by the US Deputy Attorney General Sally Yates in a speech she gave at the New York Bar Association White Collar Crime Conference on 10 May 2016 where she said “holding accountable the people who committed the wrongdoing is essential if we are truly going to deter corporate misdeeds, have a real impact on corporate culture and ensure that the public has confidence in our justice system. We cannot have a different system of justice – or the perception of a different system of justice – for corporate executives than we do for everyone else.”
Mr Medcraft’s speech hit the headlines as the combined tsunamis of the Panama Papers and the Unaoil sagas highlighted allegations of corporate corruption, fraud, bagmen and colourful identities in minimal or tax free locations. Culture was at the forefront of the media coverage of these stories. Indeed, David Murray, a former chief of the Commonwealth Bank of Australia, called for the Government to stop ASIC’s review into corporate culture. He was reported in the media as saying “ASIC is pursuing this notion that you can have liability for a culture breach, it is absolutely impossible to legislate for that in fact you could argue that its anticompetitive…its anticompetitive, its inefficient and to be perfectly candid, there have been people in the world who have tried to enforce culture; Adolf Hitler comes to mind.”
While the references to Nazi Germany and Adolf Hitler are an unhelpful analogy, this criticism misses the point. Since 2001, Australia’s criminal law requires companies to address their culture, to have a culture that is consistent with and which complies with the law and for companies and individuals to realise that they will be held accountable for their misdeeds if the corporate culture of their organisation is found lacking in a material manner (tolerating or condoning conduct inconsistent with the law). If a corporate culture does not promote conduct that is compliant with the law, a company can be held criminally liable. Having a culture that respects the law, respects whistleblowers, has zero tolerance for wrongdoing (as most businesses profess to have), is a “good corporate culture” and is, as Mr Medcraft said, good for business and for society. Again, the US Deputy Attorney General, in her recent speech, put it this way in the US context:
Compliance officers have said that our focus on individuals has helped them steer officers and employees within their organizations towards best practices and higher standards…it is much better to deter bad conduct from happening in the first place than to punish it after the fact… the focus of our civil enforcement has broadened. We recognize that our obligation is about more than recovering the most money from the greatest number of companies. It’s also about deterrence, about stopping fraud from happening in the first place and about redressing misconduct of those responsible. There is a real deterrent value in the prospect of being named in a civil suit or having a civil judgment. And this kind of deterrence can change corporate conduct.
The debate about culture will not go away where the public and society perceive, rightly or wrongly, that business does not care what it does or how it does it, so long as it generates super profits and a healthy return for shareholders. Whether it is domestic Australian banks engaging in what the media report as questionable financing practices or businesses working overseas and being faced with the possibility of having to paying bribes through respectable intermediaries to get that one contract, they all profess to act consistently with the law and to have zero tolerance for illegal conduct. The Australian criminal law requires companies to address culture and it would be unwise for business or directors, in the current regulatory climate, to ignore their own internal culture hoping that no one else will look into it for them.
Canada – The World Bank and National Investigation Agencies
On 29 April 2016, in World Bank Group v Wallace (2006 SCC 15), the Supreme Court of Canada ruled that World Bank investigators can provide information to the Royal Canadian Mounted Police about corruption in Bank projects and that it can do so without becoming subject to Canadian law. The investigators had provided material suggesting executives of a Canadian company, SNC-Lavalin, had paid bribes to win a World Bank-financed contract in Bangladesh. The Court had to rule on whether the World Bank could be subject to a Canadian court production order in light of the Bank’s immunities and whether in challenging certain wiretap authorisations, the documents sought by the individuals charged with offences were relevant.
The Court ruled that the World Bank, including its Integrity Vice Presidency (the independent Bank unit responsible for investigating fraud, corruption and collusion on Bank-financed projects) was immune from court production orders under Canadian law and that the challenge to the wiretap authorisation failed due to the incorrect analysis of relevance under Canadian law. The judgment delivered by Moldaver & Côté JJ for a unanimous Court, contained the following passage opening the judgment:
Corruption is a significant obstacle to international development. It undermines confidence in public institutions, diverts funds from those who are in great need of financial support and violates business integrity. Corruption often transcends borders. In order to tackle this global problem, worldwide cooperation is needed. When international financial organisations, such as the appellant World Bank Group, share information gathered from informants across the world with the law enforcement agencies of member states, they help achieve what neither could do on their own.
This reinforces the approach that encourages multinational agencies to formally cooperate with national police forces. As Rick Messick observed on the Global Anti-Corruption Blog in the US published by Prof Stephenson at Harvard Law School (where this information is sourced with acknowledgment) “had the Canadian Supreme Court ruled against the Bank, it would have dealt a major blow to the fight against transnational corruption. It has instead done the opposite. By permitting multilateral development banks to share information with national law enforcement agencies — without waiving their immunity — the Court has given the struggle against international corruption a major boost. That’s a decision, and a victory, worth savouring.”
United Kingdom – Anti-Corruption Summit and Australia’s Commitments
On 12 May 2016, the UK Government hosted an Anti-Corruption Summit. Over 41 countries attended (from the UK hosts, to China, Russia, the US and many other countries from Africa, Europe, the Middle East and Asia) together with senior leaders from international organisations.
The Summit focused on a number of initiatives, many of which are not new and indeed are a repeat of laudable values and goals from the November 2014 G20 meetings in Australia. The Summit demonstrated an increased focus on an international, coordinated drive to target corruption. Whether that is by the disclosure of beneficial owners (in public registers), having effective rules and practices to investigate, prosecute and convict corrupt entities (corporate, business, individuals and officials) or to return stolen assets to the country or government of origin, the values are of themselves meaningless without real, consistent political leadership. Too often, governments of all persuasion espouse these values, then simply ignore or sideline them when in power, cutting costs or focusing on other priorities.
While many countries at the Summit acknowledged the value of investigative journalists, many national governments are the first to persecute, harass, prosecute or deport journalists who expose uncomfortable home truths that embarrass local politicians or influential members of a community. One need only think of Malaysia or Egypt where governments have regularly used sedition or other criminal laws to seek to silence public critics of incumbent governments where there are widespread social concerns as to the probity of conduct by those holding public office. Thus corruption and abuse of power and positions of trust flourishes.
For its part, the Australian Country Commitments include the following:
- to explore, via public consultation, options for a beneficial ownership register for companies so adequate and accurate information is available to authorities (yet this has been on the agenda for several years);
- to work with the new International Anti-Corruption Coordination Centre;
- additional funding to ASIC and the AFP;
- a new Government Business Roundtable on Corruption to engage with the private sector;
- to enhance company disclosures in the mining and extractive sectors consistent with the Extractive Industries Transparency Initiative;
- a raft of taxation measures to target tax evasion and multinational tax avoidance;
- to strengthen whistleblower protections (although how and when remains unclear); and
- to use Australia’s effective Proceeds of Crime Act to restrain and forfeit corrupt and other criminally obtained assets and to develop common principles to allow for compensation to the affected countries.
These goals are admirable yet as always, they are likely to take some time to come to fruition. While a number of these goals have been on the agenda in Australia for a few years, it is encouraging to see them reinforced as a global commitment. A number of other countries, including the UK and the US have moved without delay to establish public beneficial ownership registers (the UK) or to propose laws to Congress (the US). Why Australia still has to evaluate options for beneficial ownership disclosure remains unclear and the risk is that ongoing “evaluations” lose sight of the real goal – transparency to target opaque business structures within with corrupt conduct flourishes. Nevertheless, there are some new, restated benchmarks that should remind us all of the importance of promoting sustainable, ethical and commercial conduct which can only help to target corruption. The Summit agreed to meet again at the United Nations General Assembly in the US in 2017. We shall watch these developments with interest.
United Kingdom – Australian Securency UK Manager Convicted of Nigerian Bribery
While the Australian Securency criminal prosecutions in Victoria lie hidden under a blanket of non-publication orders (since July 2011), on 11 May 2016, Peter Chapman, the former Securency director of business development in Africa, was convicted in London at the Southwark Crown Court for paying 4 bribes of £40,000, US$34,927.50, US$54,915 and US$54,9125 to a Nigerian official to secure valuable banknote printing contracts in Nigeria (and in the process earn significant commission payments to himself).
Features of the evidence that led to the jury convicting Mr Chapman included the following (as reported in the media) which highlight the role that intermediary entities and opaque corporate structures play in facilitating corruption:
- payments were initially made directly to the Nigerian official through a Seychelles company used by Mr Chapman for what was described in evidence as “various side purposes”;
- money paid to the Nigerian official between July 2007 and March 2009 was paid via a company Mr Chapman used as a consultancy business to work on oil contracts between Russia and the UK;
- other payments were made to a company set up by the Nigerian official using false documents; and
- the bribes were paid with the alleged knowledge and approval of some Securency executives.
On 12 May 2016, the Court sentenced Mr Chapman to 2 years, 6 months’ imprisonment, with immediate release due to a year and half already spent in prison, including 6 months in a Brazilian jail. In passing sentence, the Court said that while the seriousness of the conduct required a custodial sentence, the total sum of bribes was “small in comparison” to other bribes Securency had allegedly paid in other parts of the world. The Court noted that a significant factor in mitigating the sentence was that Mr Chapman was “put under considerable pressure by your superiors to achieve sales and you complained to them about that…senior management from the managing director down gave you the go-ahead (for the bribes).” It should be noted that none of the superiors gave evidence in the trial and may, if subject to the Victorian proceedings, deny any liability for the transactions which resulted in Mr Chapman’s convictions. It will be interesting to see how this case, the evidence and the sentencing findings, play out in the current Victorian Securency prosecutions.
As a side issue, Mr Chapman’s counsel sought to have the trial abandoned and the jury discharged in the 4th day of jury deliberations due to the publicity surrounding the UK Prime Minister’s injudicious observations to Queen Elizabeth (in relation to the UK Government sponsored Anti-Corruption Summit in London) to the effect that “we have got the Nigerians – actually we have got some leaders of some fantastically corrupt countries coming to Britain…Nigeria and Afghanistan – possibly two of the most corrupt countries in the world”.
The Court noted the comments and rejected the jury discharge application, instructing the jury to ignore the comments, saying “You must ignore completely anything you may have seen or heard or read about what the prime minister said. It was almost certainly a gross generalisation and certainly had no direct relevance to anyone involved in this case.” No doubt we shall hear more of this if Mr Chapman appeals his conviction and sentence.
United States – Department of Justice FCPA Enforcement Plan and Guidance
On 5 April 2016, the Fraud Section of the Criminal Division of the Department of Justice (DOJ) responsible for criminal investigations and prosecutions of FCPA offences published an Enforcement Plan and Guidance (the Guidance). The Guidance set out 3 steps to enhance the DOJ’s enforcement strategy:
- substantially increasing FCPA law enforcement resources by more than 50%;
- strengthening cooperation with foreign counterpart agencies; and
- Conducting a 1 year FCPA enforcement pilot program designed to promote greater accountability and to motivate companies to voluntarily report misconduct, to fully cooperate and to receive substantial reductions in fines and penalties, even declinations of prosecutions.
The Guidance sets out clear criteria on what the DOJ expects of companies who self-report, what companies must ordinarily do and how that cooperation translates into material benefits.
The three principal criteria are set out below.
Voluntary self-disclosure requirements
- Disclosure occurs “prior to an imminent threat of disclosure or government investigation.
- Disclosure is “within a reasonably prompt time after the company becomes aware of the offence”.
- The company discloses all known facts including facts about the individuals involved in the conduct.
Full cooperation to secure credit
- Full disclosure of all conduct of company officers, employees and agents.
- Proactive cooperation, identify opportunities where evidence might be located.
- Preservation, collection and disclosure of documents and information.
- Provision of timely updates on any internal investigation.
- When requested, give any government investigation priority over an internal investigation.
- Provision of all facts relevant to assess conduct of any third parties.
- Make company officers and employees available for interviews.
- Disclosure of all material gathered during an internal investigation (but excluding material subject to legal professional privilege claims (or attorney-client privilege).
- Disclosure and where possible, access to overseas documents subject to any applicable overseas laws preventing or limiting access or disclosure.
- The provision of documents in a foreign language translated into English.
Timely and appropriate remediation
- Implementation of an effective compliance and ethics program and to look within the company at how such a program is implemented in fact.
- Appropriate discipline of employees involved in the conduct and those with responsibility for such employees.
- Any additional steps that reflect recognition within a company of the seriousness of the alleged misconduct.
The key part of the Guidance is a pilot program focusing on FCPA enforcement, to encourage companies to disclose conduct, to permit the US authorities to offer serious credit on penalties (for early and meaningful cooperation) hold individuals accountable and to allow companies to resolve corporate claims.
This seems, with respect, to be nothing new as has been reflected in the US commentary on the Guidance and recent comments by the US Deputy Attorney General Sally Yates who acknowledged that what the well-known “Yates Memorandum” (or the Individual Accountability Policy) made clear, which the Guidance and the pilot program were designed to address, was the prosecutorial practice that had existed but had not been as clearly articulated.
While the DOJ may have been saying the same message for a number of years, it is not something we readily hear in Australia. This debate also gives rise to that old dilemma – whether it is better for companies to have a statutory “compliance defence” (to a charge of bribery) thereby incentivising proactive compliance, as opposed to a change in policy to encourage companies to disclose offending conduct (which might never otherwise be detected by the authorities) during the life of the pilot program in the hope of better credit is difficult to judge. Only time will tell how the pilot program plays out in practice.
International – “Beneath the Surface” Survey on Business Response to Bribery & Corruption 2016
On 10 May 2016, the London law firm Eversheds published a survey Beneath the surface: The business response to bribery and corruption 2016.
The major findings of the survey across board level directors of companies employing 500 or more employees in 12 countries from the UK to China to Dubai with 500 respondents are as follows:
- 95% of respondents said bribery and corruption was a serious issue and a threat to legitimate business;
- less than 33% actually understood their anti-corruption policies, with most regarding their anti-corruption training as insufficient;
- 90% of respondents would reject a business opportunity tainted by corruption and 72% had already done so;
- 80% of companies had discovered corruption within their own business yet only 41% had reported that conduct to authorities;
- while 99% of respondents said they would self-report conduct “tomorrow” very few understood the process of self-reporting and how it operated;
- 67% of respondents conducted specific anti-corruption due diligence in M&A activity, more so in high risk jurisdictions (yet within this figure 81% of finance directors said they conduct M&A anti-corruption due diligence but only 43% of operations directors agreed); and
- 19% of senior executives were worried employees would resort to bribery and corruption when faced with challenging (or tough) growth (sales) targets.
The survey makes for interesting reading and points to research at Harvard University that found that the growth in business that companies experienced in tackling bribery and corruption in high risk countries increased by nearly 15% over a three year period as opposed to growth on only 2.6% over the same period where companies simply ignored it and did what had to be done to secure that big deal.
That element of sustainable growth is what should drive a large element of self-interest in creating and maintaining a clear ethical corporate culture – it is good for business and good for the corporate and individual reputation of those concerned to tackle and reject bribery and corruption.
International – The Role of Intermediaries: Unaoil and the Panama Papers
In 2014, the OECD Foreign Bribery Report, in surveying all resolved (by trial or settlement) foreign bribery cases, found that over 70% of foreign bribery cases involved an intermediary.
Click here to view the image.
If anyone was in any doubt that opaque complex business structures and lax regulatory, reporting or ownership identification laws contribute to a widespread perception amongst the public (reported in the media) that corruption is rampant and the rich, wealthy and well-connected do not get prosecuted (or if they are investigated, quiet deals are done with confidential settlements), the publicity generated by Unaoil in the Middle East and the Panama Papers illustrates the social cynicism that can be so destructive of social cohesion.
Fairfax Media and The Huffington Post secured an astonishing story of allegedly endemic and systemic corruption involving a Monaco-based company, Unaoil, its principals and potentially willing commercial participants seeking the benefit of lucrative contracts across the Middle East, with a particular focus on projects in Iraq.
Then, a few weeks later, the International Consortium of Investigative Journalists and selected media outlets published a trove of records sourced from a previously unpublicised Panama law firm, Mossack Fonseca, disclosing tens of thousands of records evidencing the establishment of corporate structures and vehicles used by the wealthy and famous (or infamous) who seek for various reasons (many legitimate, some perhaps not so), to hide details of their ownership in, involvement with or financial benefits from, structures in low to minimal tax jurisdictions, or havens.
How these matters will play out as international investigative authorities seize records and emails and build a picture of what allegedly occurred, remains to be seen. In Australia, ASIC has moved to use its statutory powers to obtain copies of the Unaoil documents. These will no doubt be carefully reviewed by ASIC and the AFP. Unaoil through its lawyers and The Australian have denied any wrongdoing and are now characterising the business as the victim, questioning the credibility of the whistleblower, and indirectly, Fairfax Media, by suggesting the whistleblower was the same person as an unnamed individual who sought to blackmail US$5m in Bitcoin from Unaoil in return for the documents. The Australian Taxation Office (ATO) is already investigating a large number of Mossack Fonseca-related clients and in particular, Australian taxpayers with a connection to Hong Kong transactions referred to in the Panama Papers. While a number of wealthy Australian taxpayers took advantage of a recent amnesty with the ATO to self-report undeclared income and to settle outstanding claims with the ATO, any material non-disclosure of financial affairs through the Panama Papers may threaten those deals if the ATO forms the opinion that a taxpayer was less that frank in what was disclosed in the past. No doubt, these investigations will determine whether any criminal conduct has occurred and if so, where and involving who.
In the US, the Government has been finally moved to tighten checks on anonymous companies, something that was on the top of the list of the November 2014 G20 Anti-Corruption Implementation Plan, but seems too hard to in fact implement. The fact that the US authorities cry tough on anti-corruption enforcement yet at the same time, allow laws in US States such as Delaware and Nevada to operate almost as a black hole in terms of transparency and public records disclosing ultimate beneficial owners of corporate structures strikes one as unusual.
There are some clear lessons to be learned for business, directors and those wealthy enough to be interested in offshore corporate, tax driven structures:
- the engagement of intermediaries in any jurisdiction requires careful thought, appropriate due diligence and an understanding of how business is or may occur in a foreign country;
- the “plausible deniability” theory of engaging a third party (whether a specialist law firm like Mossack Fonseca or business consultants like Unaoil) and leaving it to them to do your work is over, as their conduct in foreign jurisdictions can come home to bite the principal in very nasty and often unexpected ways;
- while many of the Mossack Fonseca clients have done nothing more than order their personal or corporate tax affairs so as to minimise their tax, which is generally, perfectly legal, risks arise in the use of opaque foreign structures that have the potential to be misused or in fact to hide transactions that might otherwise give rise to, for example, tax liabilities;
- lawyers are as much third party intermediaries as any other entity, and run the risk of suffering serious professional consequences if they are found to have engaged, even as an indirect participant, in potentially illegal conduct; and
- the reputational damage of being “named” as a client of Unaoil or of Mossack Fonseca has now been done, even to an Australian company as significant as BHP Billiton and to an individual as prominent as the current Australian Prime Minister. While there is no evidence of any impropriety by these two entities and the publicised transactions having occurred well in the past, or of many others, the association with “tax minimisation schemes” or “tax havens” (for Mossack Fonseca) or shady deals where foreign public officials request “an extra day’s holiday” (allegedly a code for a bribe) tarnishes corporate and political leaders who rail against corruption and tax minimisation on the one hand yet seem unaware that they or their associates (or family members or business interests) may have become involved with such colourful third parties in their own affairs on the other hand.
What these sagas have highlighted is the increasing likelihood that the more a business or an individual seeks to hide information, the greater the risk is when that information becomes public. Whatever the motivations behind the release and publication of the Unaoil and Panama Papers documents, they may have unintentionally done the anti-corruption march a great service in highlighting the risks in offshore transactions for commercial gain where there still seems to be one rule for the rich and wealthy and another rule for the rest of society. It is that perception that can often be so damaging to society and which drives the need of governments (as reflected in the recent UK-sponsored Anti-Corruption Summit) to proactively target bribery and corruption in a coordinated international manner.