2017 is shaping up to be a big year in the anti-bribery and corruption space – particularly from an Australian perspective.
It may seem unusual to make a call so early in the year. It is, after all, only January. However, this month’s conclusion of the overseas actions against Rolls Royce is a major development in the anti-bribery and corruption space.
While not directly affecting Australian law, the developments are nevertheless instructive when considering the risks corporations face and the way they should react in the face of prohibited conduct. From an Australian perspective – there are significant developments that have the potential to change the landscape.
This all underscores the importance of organisations getting their house in order – starting with a review and enhancement of existing procedures and arrangements.
The risk profile is increasing – and the most recent Transparency International Corruption Perceptions Index released in January 2017 shows that Australia’s standing has continued to fall over the last 4 years.
Rolls Royce faced regulator actions in the UK, USA and Brazil – for contraventions of each jurisdiction’s anti-bribery and corruption legislation. The conduct under the microscope spanned from 1989 to 2013. The conduct occurred in, or related to “benefits” being improperly provided to government officials, or concerned contracts in Thailand, Brazil, Kazakhstan, India, Iraq, Angola, Azerbaijan, Russia, Nigeria, Indonesia, and China. The conduct occurred within three of Rolls Royce’s business divisions.
Some of the charges were based on Rolls Royce’s creation of false accounting records to hide the transactions – often easier to prove than the mental and physical element of the actual criminal conduct of bribery.
Rolls Royce is required to make penalty payments totalling more than $US 800M. It entered Deferred Prosecution Agreements (DPA) with the UK Serious Fraud Office and the US Department of Justice – more on these later.
What does Rolls Royce teach us?
Intermediaries: Many of the contraventions concerned the use of agents. A corporation’s clear focus when undertaking due diligence on and approving contracts is to apply appropriate risk matrices – and to look closely at how and why agents are being engaged and remunerated, whether there is a legitimate need for them, and whether the remuneration is proportionate to the work. Supervision needs to be maintained. Agents need to be vetted, as well as the tasks they are undertaking. During its investigation, Rolls Royce reviewed 250 “intermediary relationships” (intermediaries, agents, advisers, consultants) and closely analysed 120, which lead to the suspension of 88 of those arrangements.
Improper benefits can take many forms: Benefits were not only simple cash payments. There was a range, including the provision of Rolls Royce watches and vehicles, the discounting of the service fee to enrol a private jet in a post-sale maintenance programme and the development of and enrolment of officials in a specially designed MBA programme at Columbia University Business School.
Masking: People who engage in corrupt conduct will attempt to hide it. This often occurs by masking payments in the accounts as something else, or by the use of euphemisms or words intended to hide the true transaction. Here, expenses were not properly accounted for and were coded as ‘Non – Project’ or ‘Sales Related non R&D’, ‘Marketing expenses’ or ‘deferred fee’. Auditing procedures and investigations should be alive to these types of non-specific terms used to mask improper benefits.
Cooperation reaps benefits: While Rolls Royce did not inform the regulators of the misconduct, once aware it gave what was described as “extraordinary cooperation” to the regulators in the conduct of their investigations. This influenced the UK Court to approve the DPA and to also accept a 50% reduction in the penalty that would otherwise have been imposed.
Culture matters: The UK court was clear that had Rolls Royce’s current board and senior managers been the same people as when the conduct occurred, the court’s decision to approve the DPA would have been impacted.
Culture spreads: You turn over a rock and what do you find? Rolls Royce interviewed 229 staff and conducted internal disciplinary proceedings against 38 employees with 11 terminated. Improper conduct had spread across levels of seniority in different business units. People knew they were doing the wrong thing.
The Rolls Royce decisions give an impetus to review and consider an organisation’s policies, procedures and risk assessments. Developments over the last 12 months all point to 2017 being a period of activity:
The intelligence from the US, over the last year, is that US regulators are investigating potential actions against a significant number of Australian entities under the US Foreign Corrupt Practices Act (FCPA). The US sees this as a trade issue: the comparatively lax approach taken to corruption due diligence by non-US entities, when compared with the approach of US entities will affect bidding opportunities. With the Trump administration focusing on strengthening US businesses, the incentives to take action are even higher.
In September 2016, Australian Federal Police’s (AFP) announced a Perth-based specialist fraud and anti-corruption team, which prioritises foreign bribery investigations, as part of the AFP’s Fraud and Anti-Corruption Centre.
In October 2016, ISO published the first ever international standards for the prevention and detection of bribery – ISO 37001. ISO 37001 is a “requirements standard.” Companies will be able to obtain certifications from accredited third parties that their anti-corruption and anti-bribery management systems meet the standard. Customers may require their suppliers to comply with this.
In November 2016, the AFP disclosed at a seminar that it has 20 active cross-border bribery investigations.
The new changes to the whistle-blower regime in Australia which were flagged at the end of last year will have a wider remit than the scheme currently in place under the Corporations Law. It will provide greater protections to a wider range of informers across a wider range of conduct. The prospect of paying bounties to informers will also be considered – and so incentives to inform would increase.
On 29 February 2016, further laws as to false accounting came into effect. While not going so far as the ‘books and records’ provisions of the US FCPA, (proof of “deliberate” or “reckless” falsification is still required under Australian law) they are a clear step in that direction.
On 16 March 2016, at the OECD Anti-Bribery Ministerial Meeting in Paris, the Australian Justice Minister announced a discussion paper canvassing the introduction of DPA’s for Australian corporate law offences (including securities fraud, market manipulation, and foreign bribery). Any DPA regime would likely require court approval that it is in the interest of justice. The fact that Rolls Royce was able enter a DPA had significance for its future prospects. Many governments’ procurement rules prohibit the participation of corporations which have been convicted of certain offences, including bribery and corruption. By way of example, the EU published a directive in 2014 – Article 57 of which prevents an organisation which is guilty of corruption (or which still has in its senior management positions individuals convicted of corruption) from being considered in government procurement procedures. The UK, US and World Bank have mechanisms which also achieve the same effect. Australian governments have not formally gone so far, which has been criticised. With the DPA, Rolls Royce avoided the financial impact of debarment (up to 30% of its order book would have been affected by debarment). DPA’s will be beneficial to qualifying organisations if they are implemented in Australia.
The Senate Economics Committee commenced an inquiry in 2015 into the adequacy of Australia’s anti bribery and corruption laws. This inquiry took submissions from over 40 interested parties suggesting changes. It did not get to report as Parliament was prorogued. However, this review is likely to be reinstated in some form.
Together, these developments underscore the importance of organisations getting their houses in order – by reviewing and improving their procedures to detect and address corrupt conduct, as well as reviewing relevant existing arrangements and transactions. Pay close attention to the Corruption Perceptions Index – it identifies those countries where bribery risk is greatest, and present significant risks when you conduct business there.
 Supplier Integrity Due Diligence in Public Procurement: Limiting the Criminal Risk to Australia, Louis de Koker and Kayne Harwood – Sydney Law Review, [Vol 37 - 217].
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