Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here). Wyld is the Australia Expert for FCPA Professor.
Nearly 13 years after wheat sales to Iraq started under the much maligned United Nations Oil-For-Food Program and 5 years after Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against various former AWB directors and officers, the Supreme Court of Victoria handed down on August 9th and 10th sentences against the former AWB Managing Director, Andrew Lindberg and the former AWB CFO, Paul Ingolby (see judgments at ASIC v Lindberg  VSC 332 and ASIC v Ingolby  VSC 339 available at www.austlii.edu.au).
The Victorian Supreme Court accepted the agreed submissions on facts and penalty as presented to it by ASIC and each defendant although the sentence imposed on Mr Ingolby was reduced.
The Court made the following orders:
- as against Mr Lindberg, declarations that he had contravened his duties as a director and officer contrary to s180(1) of the Corporations Act 2001, fined him $100,000 and disqualified him from managing the affairs of a corporation until 14 September 2014;
- as against Mr Ingolby, declarations that he had contravened his duties as an officer contrary to s180(1) of the Corporations Act 2001, fined him $10,000 and disqualified him from managing the affairs of a corporation until 31 December 2012.
The Court made certain observations about the conduct of each of Mr Lindberg and Mr Ingolby. The Court found that the admitted conduct was akin to an admission of negligence in the performance of their duties. The contraventions against each did not involve deliberate wrongful acts, dishonesty or any moral turpitude. The Court was satisfied that each contravention was serious, thereby warranting the imposition of a fine.
The Lindberg Contraventions
The Lindberg contraventions covered 4 matters, in that Mr Lindberg failed:
- to make inquiries as to whether the recovery of what was known as the “Tigris Debt” was in accordance with the prevailing UN resolutions or had been approved by the UN;
- to inform the AWB Board that the Tigris Debt had been recovered by inflating certain wheat contract prices and the AWB agreement with Tigris Corporation (a Gibraltar company run by a Norman Davidson Kelly, a former BHP Billiton executive) incorrectly stated the payment as a “service fee” rather than a debt and the payment to AWB of a success commission;
- to inform the AWB Board that “Project Rose” (the internal AWB review of allegations from the United States that AWB had paid kickbacks to Iraq to secure wheat contracts) was limited as 3 former employees likely to have knowledge of the kickback scheme had not been interviewed; and
- to inform the AWB Board of the evidence he learned from the UN IIC Inquiry into the Oil-For-Food Program that a Jordanian transport company, Alia For Transportation & General Trade (Alia Transport) had been used as a front to channel funds to Iraq and all suppliers, including AWB, had paid such funds to Alia Transport and then to the Iraq Government.
None of the contraventions save for one involved anything surprising to those who had experienced the Cole Royal Commission into AWB’s wheat sales to Iraq. AWB and all its senior executives had consistently given evidence that they knew nothing wrong and they believed everything they did was approved by the UN and/or the Australian Government. Commissioner Cole did not accept this evidence and delivered a damning indictment on AWB’s corporate conduct.
Interestingly, in relation to the Tigris Debt, both ASIC and Mr Lindberg in their Agreed Facts annexed to the judgment, use as a starting point a proposition that the Iraq Grains Board (IGB) owed BHP Ltd (as BHP Billiton then was) a debt of approximately US$8m for a shipment of wheat (at  of the judgment). This is in direct contrast to the findings of Commissioner Cole who, having heard evidence from executives of both BHP and AWB (but not Mr Kelly who as a resident outside Australia declined to volunteer any evidence to the Commission), concluded that:
- AWB concluded a sale to the IGB of 20,000 tonnes of wheat;
- BHP paid for that wheat against an AWB invoice; and
- BHP entered into the transaction on the basis that, according to the evidence from John Prescott, its former CEO, it was a gift, ostensibly given to the Iraq Government because BHP was dead keen to secure preferential treatment if certain Iraq oilfields were opened up for exploration.
The evidence before Commissioner Cole was clear – the Australian Government had told AWB and BHP that any credit offer to sell wheat in return for payment, even deferred payment outside the UN sanction regime, was not permissible. Mr Prescott said this in his evidence – I did not believe or understand that the grant approved by me was a loan to Iraq. There was no obligation on Iraq to repay any amount to BHP.
In light of this evidence, ASIC’s starting point, accepted by the Court, appears very peculiar. It must be acknowledged that these events occurred long before Mr Lindberg became AWB’s Managing Director. By the time he was in charge at AWB, the “Tigris Debt”, once a gift had transmogrified into a debt and then a payment for services rendered, involving an undisclosed success fee. Some might think this gets very close to a secret commission involving the creation of false or misleading documents, while others may legitimately say no, particularly as the intent of the parties to the Tigris Debt is still hotly contested and before the Victorian Court. Perhaps it was sufficient for ASIC to start from a base upon which it could secure a successful result. After all, a regulator needs to win, even if by winning only half the story is told.
The Ingolby Contraventions
In contrast to Mr Lindberg, the Ingolby contraventions appeared more prosaic.
Mr Ingolby was subjected to one alleged contravention – that between December 2001 and September 2004, as AWB’s CFO, he failed to discharge his duties as an officer of the company, in that he:
- co-authorised payments to Alia Transport for inland transport fees;
- had information available to him that questioned the legitimacy of those fees and that they were ultimately being paid to the Iraq Government;
- took no steps to ascertain the true position;
- took no or no reasonable steps to inform the AWB Board of the information available to him,
in circumstances where he knew that the Oil-For-Food Program prohibited direct payments to Iraq and payments from the escrow account controlled by the UN could only be made for the purposes of the Program.
The Court took into account the role actually played by Mr Ingolby within AWB and the nature of how AWB conducted its wheat sale business. In short, Ingolby admitted that he failed to “join the dots” and had he done so with the benefit of hindsight, he would have realised that AWB was acting in breach of the UN sanctions (which did not, at that time, give rise to any direct civil or criminal offence in Australia). The Court accepted, in particular, that Mr Ingolby:
- acted with the degree of care and diligence consistent with his statutory obligations;
- he was not involved in making the wheat contracts;
- his areas of responsibility concerned areas outside the sales and marketing of wheat contracts; and
- he had cooperated with ASIC.
The Court therefore reduced the proposed penalty from $40,000 to $10,000 and shortened the period of disqualification.
The question still remains what would have Mr Ingolby or any other AWB executive done had they “joined the dots” – continue a very lucrative commercial relationship with Iraq selling Australian wheat to the benefit of the company and Australian wheat farmers with bumper wheat crops, or investigating and reporting the conduct to the UN with the risk of losing out on future wheat sales – therein lies the moral barometer!
In one sense, Mr Ingolby was in the classic position of a corporation CFO – not directly involved in the sales relationship with the customer, but was sufficiently across the financing processes that he was “involved” in the transactions by co-authorising payments. It is this salutary lesson to CFO in any large corporation engaged in trade in “high risk” jurisdictions – know your customer and know your business. Whether you can rely on what others tell you will depend upon the circumstances, but the more complex and lucrative the commercial pressures are, the greater the personal risk if it all goes pear-shaped.
In both judgments, the Court made it clear that it treated the allegations and contraventions as serious, and worthy of a penalty that acted to provide sufficient general deterrence to others committing similar offences. The Court’s attitude to directors and officers who are found to have contravened their clear statutory duties is best described by Justice Robson:
The obligation imposed by s 180(1) demands a standard of care and diligence in directors and other officers of the corporation in managing the affairs of the corporation…The obligation is important in ensuring that proper standards of care and diligence are maintained in our corporations…The punishment determined by the Court may appear harsh in light of a career of honest and loyal conduct particularly where the personal and family hardship experienced by the defendant (Lindberg) is taken into account. Nevertheless, there is a significant public importance in appropriate standards being expected of directors and other officers of corporations. These standards of conduct are not unduly high…The contraventions…involved a lack of care and diligence in the performance of his duties that a reasonable director or other person would exercise in his position.
The ASIC proceedings continue on against the remaining defendants although for how long the war of attrition will continue, is anyone’s guess!
 A copy of the 5 volume report can be found at www.oilforfoodinquiry.gov.au.
 Cole Report, Vol 3, page 163, para 27.84.
 Cole Report, Vol 3, page 162, para 27.79.
 Justice Robson delivered the 2 sentencing judgments, at  to  of ASIC v Lindberg and  to  of ASIC v Ingolby: