Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery). Wyld is the Australia Expert for FCPA Professor.
There have been a number of recent developments in Australia in relation to the risks associated with foreign bribery and corruption.
The Lessons for Australian Business – Why Proactive Ethical Compliance is Important
The recently published Ernst & Young “Asia-Pacific Fraud Survey Report Series 2013″ makes some important findings from its survey results which will resonate within boardrooms:
- weak systems and controls are exposing companies in the Region to significant risks;
- slower growth is putting management under pressure to take short cuts;
- fraudulent practices are on the increase; and
- there is a disconnect between compliance policies in place and how they are applied in practice.
The recent developments will impact on Australian businesses operating offshore. They highlight the key lesson for all companies and executives with business operations in high risk countries – you must proactively recognise and address potential corruption risks at all levels of your business operations consistent with all Australian and local laws and you must instil a real sense of ethical behaviour throughout your organisation. If you fail to do this, you will be exposed to potentially severe consequences for the company and for individual directors, executives and officers involved in any questionable conduct.
These developments include:
- an increased focus concerning the lack of obvious enforcement activity in Australia;
- the role of Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC) in investigating foreign bribery;
- internal governance issues and offshore commercial behaviour of Australian business highlighted by the Reserve Bank of Australia and Securency and the Leighton Holdings investigations;
Australia’s Regulatory Performance on Foreign Bribery
Over the last few weeks, the media spotlight has turned to examine the conduct of ASIC and the Australian Federal Police (AFP) in investigating foreign bribery and corruption. The issues raised in the media include:
- ASIC’s role in corruption investigations and what it ought to be doing; and
- the political push to inquire into the existing regulatory regime and whether, for example, one coordinating regulatory agency should be created and properly funded and resourced to investigate foreign bribery.
The existing regime in Australia has been criticised by the OECD and others over recent years. Foreign bribery and corruption invariably involve complex international inquiries, formal requests for mutual legal assistance that can take many months to complete and negotiations with foreign agencies and governments to gain the local support critical to undertake a proper investigation. In addition, while ASIC usually waits to undertake its civil investigation until a criminal investigation has been completed before undertaking its civil investigation, there is something to be said for the US approach where the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) conduct parallel investigations and invariably commence parallel prosecutions (usually involving a corporate settlement) even though the criminal hearing takes precedence. These joint prosecutions and ensuing corporate settlements may be in part explained by the severe US fines regime imposed on any company that actively defends a criminal prosecution and loses – the fines may be escalated to a point that the convicted company is unable to pay and is insolvent.
There is considerable merit in Australia reviewing how foreign bribery and corruption investigations are undertaken, how they are properly resourced and funded and the internal procedures that can allow civil and criminal investigations to run concurrently, recognising that a criminal trial ought to take precedence over a civil proceeding even one seeking the imposition of civil penalties. Some independent politicians have called for a substance review of how Australia investigates foreign bribery. This is an important issue that needs to be considered aside from any party-political notions of how business should be regulated.
The Role of ASIC v the AFP in Foreign Bribery Investigations
On 11 October 2013, Mr Greg Medcraft, the Chairman of ASIC gave a speech to the AmCham Business Leaders Lunch and responded directly to the considerable press criticism of ASIC’s handling of foreign bribery matters (which he described as “ill-informed”).
Mr Medcraft described ASIC’s role in investigating foreign bribery as follows:
- ASIC’s strategic priorities are to focus on ensuring there is a fair and efficient financial market with confident and informed investors (enforcement gets no mention as a strategic priority);
- ASIC has limited resources and will target its action primarily against listed companies where wrongdoing affects a wide range of mum and dad investors;
- the AFP is responsible for investigating and prosecuting foreign bribery as a crime under the Criminal Code;
- ASIC will liaise with the AFP and while noting foreign bribery investigations are invariably long, complex and expensive, absent exceptional circumstances or the risk of a limitation time bar arising, ASIC will defer any civil action until the completion of any criminal investigation and/or prosecution; and
- it is primarily the responsibility of directors and executives to exercise what ASIC describes as the appropriate level of scepticism (to avoid a charge of wilful blindness) and to ensure systems and controls reflect sound corporate governance in order to ensure they comply with their statutory duties.
What can be concluded from this approach: hardly the US SEC approach of “bold and unrelenting” enforcement espoused by the new SEC Chairman in a recent speech. At the heart of this speech is confirmation that while ASIC will look at egregious conduct involving foreign bribery (maybe something on the scale of AWB), as to the rest, it is too hard, complex and expensive to allocate ASIC’s limited resources to it. Over to the AFP!
Current Corruption Investigations – Cultures of Compliance or Non-Compliance
The governance issues surrounding the foreign bribery allegations in the media involving the Reserve Bank banknote printing interests and Leighton Holdings’ offshore operations have a number of common themes, whatever the individual merits are of specific allegations. The themes are these:
- the apparent limited investigation by ASIC into the conduct of senior company officers;
- the role and resourcing available to the AFP to investigate allegations of complex commercial corruption;
- the apparent payment of significant fees to overseas intermediaries in countries where there is a recognised high risk of corruption;
- whether internal company records were or were not disclosed to regulators; and
- the treatment of internal whistleblowers.
As an example, the media have reported that a former executive of the RBA company that printed its polymer bank notes is said to have provided a statement to the AFP that accuses a current senior Reserve Bank executive of “directing him never to use email, fax or hard copies to provide information about the company’s allegedly corrupt overseas activities” (Australian Financial Review 1 October 2013).
Whatever the merits of the individual allegations, these events raise serious issues for all companies, boards of directors, institutional investors and shareholders. They go to the heart of how companies actually perform and their professed culture of compliance.
What does all this mean?
It is fundamental to sound ethical business that a corporation must believe in its own integrity and act consistently with that belief. It requires an absolute commitment pervading a company over many years from the top to the bottom. If a corporate structure suggests an absent or disinterested parent, directors and executives being less than diligent and with management, only focused on the bottom-line profit and potential self interest (bonuses and salary benefits on hitting sales KPIs) (Chanticleer: Bribery scandal a question of culture, Australian Financial Review 9 October 2013), the words of Commissioner Cole resonate as to why this sort of conduct occurs (in the context of AWB):
The answer is a closed culture of superiority and impregnability, of dominance and self-importance. Legislation cannot destroy such a culture or create a satisfactory one. That is the task of boards and management of companies. The starting point is an ethical basis. At AWB the Board and management failed to create, instil or maintain a culture of ethical dealing.
These investigations and the Securency prosecutions have some little while to go and developments will be monitored.