Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here ). Wyld is the Australia Expert for FCPA Professor.
According to The Age newspaper, from as early as the late 1990s, Securency International Pty Ltd (Securency) and Note Printing Australia Pty Ltd (NPA), two subsidiaries of Australia’s central bank, the Reserve Bank of Australia (RBA) sought to convince various foreign governments to award them valuable banknote printing contracts, extolling the virtues of the unique polymer plastic note features offered by Securency. Unfortunately, these commercial activities appear to have been associated with substantive allegations of bribes and illegal payments made to public officials to secure these contracts.
On 1 July 2011, the Australian prosecutor, the Commonwealth Director of Public Prosecutions (CDPP) commenced Australia’s first foreign bribery prosecutions against Securency, NPA and various executives.
As reported in the Australian media, it was alleged that Securency and NPA had, for many years, engaged in widespread bribery and corruption of foreign public officials in various Asian and other countries to secure banknote printing contracts either directly or through intermediaries who received large commission payments from where it was alleged bribes to foreign public officials would be paid. The allegations covered commercial activities in Indonesia, Malaysia, Vietnam, Nepal and other unspecified countries.
The committal hearings against the Securency and NPA executives commenced before the Magistrates Court of Victoria on 13 August 2012 and are scheduled to run for between 2 to 3 months.
The reporting of these matters has been patchy over the last year due to national suppression orders preventing the publication of material which might prejudice the fair trial of the Securency and NPA executives. However, what is now emerging from the committal evidence is a disturbing tale from within the RBA and its subsidiaries of secret dealings, a refusal to tolerate criticism and a collective amnesia when pressed for an explanation. What have we learned?
Ellery sentencing judgment
On 20 August 2012, David Ellery a former CFO of Securency was sentenced by the Supreme Court of Victoria to 6 months imprisonment, wholly suspended for 2 years (see R v Ellery  VSC 349, available at www.austlii.edu.au ). Mr Ellery had been charged with one count of false accounting contrary to s 83(1)(a) of the Crimes Act 1958 (Vic). Mr Ellery did not face any foreign bribery charges.
As Securency CFO, Mr Ellery received copies of various documents concerning the payment of monies as a “special commission” to an agent in Malaysia. An amount of $79,502 was authorised for payment to the Malaysian agent to a nominated bank in Singapore. The Court found that Mr Ellery knew that the invoice for the payment was false and that, relevantly, no “marketing expenses” had been incurred, as described on the invoice. In addition, Mr Ellery took steps to conceal what had occurred.
The Court accepted that Mr Ellery was not actively involved within the “inner sanctum” of Securency, where “secrecy and a denial of responsibility for wrongdoing also seem to have been part of a corporate culture at Securency at that time”. However, the Court reminded Mr Ellery that he was the company’s CFO, responsible for authorising and making payments and that his offending “involved a serious and dishonest breach of trust”.
The Court took into account various mitigatory factors in favour of a lesser sentence, from the 10 year imprisonment as a head sentence for the offence. Mr Ellery’s career had effectively ended. He had demonstrated remorse, he was unlikely to re-offend, his prospects of rehabilitation were high and he had not obtained any personal financial benefit from the offending conduct. Mr Ellery had offered an early plea with ongoing cooperation and the investigating police acknowledged that Mr Ellery would be an important prosecution witness in the other criminal proceedings against Securency and NPA executives.
The Court formed the view that the conduct of Mr Ellery was in the mid-range of false accounting offences. Imprisonment for 6 months was the result, but wholly suspended for 2 years.
Lessons for corporate executives
The sentencing of Mr Ellery demonstrates that slowly, Australian courts are starting to reflect what their US counterparts have been doing for some time – treating white collar or economic crime with increasing seriousness, with imprisonment as the probable consequence. This has been an increasing trend in economic crime cases involving, for example, insider trading and revenue or tax fraud prosecutions. It is now being reflected in false accounting offences, often closely associated with allegations of foreign bribery.
The Court accepted that Mr Ellery was not within the group of Securency or NPA executives at the centre of what was alleged by the CDPP to be a conspiracy to bribe public officials for commercial benefit. Rather, as might often be the case with a CFO, Mr Ellery was in the position of knowing enough to contaminate him and then becoming actively involved in creating false records to record (or cover up) the questionable (or illegal) transactions. This reflects the Court’s recent criticism of AWB’s former CFO, in R v Ingolby (see my FCPA Professor post from 16 August 2012 here ). Courts are making it clear that there is a need for “denunciation and just punishment” for these economic crime offences.
CFOs can no longer just authorise for payment transactions in circumstances where they in fact know or indeed perhaps, ought to have known, that the underlying transaction was improper or illegal. To remain silent, do nothing, process the finances and approve payment is no longer acceptable. If they do, even many years later, they run a real risk of detection, investigation, prosecution, a criminal conviction and deprivation of liberty.
The role of the RBA – should it have done more sooner?
In May 2009, The Age broke the story of alleged widespread and systemic corruption involving Securency, NPA, its various intermediaries or agents and payments to foreign officials to secure banknote printing contracts. It appears to be the case that Securency and NPA worked closely together, with Securency developing the substrate technology for polymer banknotes (as a 50-50 joint venture between the RBA and a Belgian company, Innovia Films) and NPA being the banknote printer. A former RBA Deputy Governor, Graeme Thompson chaired both companies. In May 2008, Thompson was replaced as chairman of both companies by Bob Rankin, the RBA’s Assistant Governor. It could not be said that the RBA was unrelated to its subsidiaries although its knowledge of their operational activities is far from clear.
The RBA, it seems, was unaware of the alleged corruption. Its reaction was to call in the AFP and KPMG to investigate and ultimately to cooperate with the AFP to the point where criminal charges were laid in July 2011.
However, in June 2007, an NPA senior manager Brian Hood (with responsibility for finance, security and compliance) wrote an extensive memorandum to the RBA’s Deputy Governor, Ric Battellino (a copy of what is now known as the Battellino memo is at www.theage.com.au ). The Battellino memo was disclosed in evidence during the Securency committal hearings. It had not been disclosed in any previous statements made by the RBA, which created the impression that the first the RBA knew of the alleged corrupt conduct was when The Age broke the story in May 2009.
The Battellino memo tells a very different story. The crucial features of the memo can be summarised as follows:
- while the NPA Board wanted all agents to sign up to new agency agreements, the NPA management did not see this as important;
- Securency used the same agents and did not change its agency agreements;
- many communications with agents were informal, by mobile or text messages, with little or no documentation;
- numerous overseas trips were not reported outside NPA management;
- commission rates payable to agents greatly exceeded industry average rates;
- there were numerous occasions when agents, particularly those in Nepal and Malaysia, indicated that they had to “service others” and that there were matters that senior executives “didn’t want to know about”;
- all meetings with agents, particularly with the Malaysian agent, had to take place in Malaysia; and
- when Hood tried to take his concerns up with NPA executives, every support was given to the agents and NPA management reacted with hostility to any criticism of their conduct.
What did the RBA do?
Well, it did what AWB did and called in its lawyers, Freehills. As Commissioner Cole noted in the AWB saga, any legal advice is only as good as its instructions. It seems Freehills found “serious problems with business practices” but no illegality (see Black stain of corruption touches RBA in The Australian Financial Review, 22 August 2012). Despite the fact that NPA’s management had, according to Hood, adopted a very secretive culture, and Securency used the same agents and had done so for many years, no one within the RBA (or maybe Freehills) considered a further investigation of Securency was warranted. Life went on and the highly successful and profitable commercial operations of Securency and NPA continued to thrive.
The current RBA Governor, Glenn Stevens faced questioning on these issues before a Commonwealth Parliamentary committee on 24 August 2012. The Age described his testimony as “faltering, defensive and, at time, evasive” (see Still in the dark, with governor on the defensive, The Sydney Morning Herald 25-26 August 2012). The media suggested the Governor’s approach reflected the attitude of the current Australian Treasurer, Wayne Swan, which was “to say nothing and do nothing”. One only has to look at the consequences suffered by AWB to hope that the RBA does not suffer the same ignominious fate, metaphorically speaking!
One might think that in a matter involving such serious allegations, the RBA as Australia’s central bank, might have informed the Australian Treasurer, then Peter Costello. But no, that did not occur. Mr Costello has said that he had no knowledge of these facts and was not told of any RBA suspicions of wrongdoing up to November 2007 when he ceased to be Treasurer after a general election (see Awaiting a true account by Peter Costello in The Age, 23 August 2012). Clearly the RBA had no suspicions or if it had, it relied on its legal advice to satisfy itself that it had acted appropriately.
But had the RBA acted appropriately?
That is at the heart of corruption scandals, the difficult issue facing a corporation when it is faced with alleged corruption on the one hand and a profitable line of business sustained by that corruption on the other hand. Which has to stay and which has to go?
The lack of transparency, the reliance on legal advice (quite common amongst any person or corporation faced with allegations of impropriety) and the inevitable “I do not remember” makes the average person wonder whether anybody involved really cares about the law, about Australia’s international obligations or whether, simply, the pursuit of profit (the means) justifies the ends. Regulators are increasingly requiring corporations to give priority to ethical behaviour which requires, in the words of Richard Alderman, the former Director of the UK Serious Fraud Office, a constant and self-reinforcing cycle of directed behavioural change.
It seems as if the lessons of AWB have not been learned. This story has a long way to go and the ultimate consequences that might be visited upon the RBA, Securency, NPA and its executives is a road where judge and jury views may rule the world of those involved, whose lives will be fraught with unending time, cost and uncertainty.