Today’s post is from Robert Wyld and Andrew Fish (both with the law firm Johnson Winter Slattery in Australia) regarding anti-corruption and other related developments in Australia.
Foreign Bribery Penalties in Australia – Should a Company be Fined for the Gross Benefit or only the Net Benefit from its Offending Conduct?
The law on foreign bribery cases is sparse in Australia, reflecting a dearth in active prosecutions that run to trial. The few cases that have existed over the last 20 years or more have invariably settled. Rarely have they been contested.
In June 2021, Jacobs Group (Australia) Pty Ltd (Company) pleaded guilty to foreign bribery charges and on conviction and sentencing, was fined approximately AU$1.4m, calculated on the “net benefit” obtained from the illegal conduct. Five individuals were also prosecuted, from a former CEO to a more junior employee. One individual secured a Nolle Prosequi before trial. In one trial (during January to April 2022), 3 individuals were acquitted by the jury after the credibility of the Crown witnesses was shredded. Prior to the second trial commencing in April 2022, the prosecutor filed a further Nolle Prosequi and abandoned the entirety of the case against the individuals. On 10 November 2022, the High Court of Australia granted the prosecutor leave to appeal the Company’s sentence and during 2023, will determine how a penalty imposed for a range of Commonwealth criminal offences (and the meaning of a “benefit”) should apply under Australian criminal law.
The Jacobs prosecution is a salutary lesson in the difficulty of prosecuting foreign bribery cases, the complexity of the law and the failure of the Australian Federal Police (AFP) to present a cogent case with credible witnesses. While the Company admitted to certain offending conduct, all individuals denied that same conduct. Three were acquitted and all other charges were abandoned. How this saga will end, it started in 2012, remains to be seen.
Background Facts
On 9 June 2021, Jacobs Group (Australia) Pty Ltd (Company) was ordered to pay penalties of AU$1,471,500 after pleading guilty to three offences of conspiracy to cause an offer of a bribe to a foreign official contrary to sections 11.5(1) and 70.2(1)(a)(iv) of the Criminal Code Act 1995 (Cth) (Criminal Code) (see R v Jacobs Group (Australia) Pty Ltd [2021] NSWSC 657, Jacobs) (here). Importantly, the case considered the meaning of “benefit” obtained through the offending conduct under s 70.2(5)(b) of the Criminal Code. The judgment has broader implications for the assessment of penalties for Commonwealth offences.
Between January 2000 and June 2012, the Company tendered for, and was awarded, contracts to provide engineering project management services for public works projects in the Philippines and Vietnam which were funded by loans from either the Asian Development Bank or the World Bank.
The three offences related to two conspiracies, the first related to conduct in the Philippines and the second, to conduct in Vietnam. The maximum penalty for each of the first and second offences was AU$330,000 and the third was AU$11 million (representing significant increases in fines over the period).
The offending conduct related to high-ranking Company personnel allegedly arranging to pay funds to a third party agent (in the Philippines and in Vietnam) in order to bribe public officials to secure contracts, or the later performance of contracts, which amounts were built into the bid price and then paid to the third party agent, ostensibly for various services such as project management, marketing and training.
The Meaning of “Benefit” Obtained by the Offending Conduct
The calculation of a penalty for the foreign bribery offence is determined as the greater of a maximum fixed penalty or an amount based on the value of the ‘benefit’ derived from the offending conduct or, if the benefit cannot be determined, the offender’s annual turnover. At first instance, the Court calculated the benefit based on the Company’s gross income from the relevant projects less three categories of deductions:
- First, “pass through costs” comprised Company payments made to third parties in performance of the contacts;
- Second, payments that amounted to bribes; and
- Third, all payments made to the third party agent.
The Court noted that although some of third party’s payments were lawful, the Company agreed to deduct all payments under that category whether unlawful or not. The parties agreed that the net benefit amounted to $2,680,816.
The Significance of the Meaning of “Benefit” and the Maximum Penalty
The Prosecution and the Company did not agree on the maximum penalty applicable to the offences related to the Vietnam offences under Criminal Code s 70.2(5) (which applied to offending conduct after 20 February 2010). The relevant penalty provision reads as follows:
“An offence against subsection (1) committed by a body corporate is punishable on conviction by a fine not more than the greatest of the following:
(a) 100,000 penalty units;
(b) if the court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the conduct constituting the offence—3 times the value of that benefit;
(c) if the court cannot determine the value of that benefit—10% of the annual turnover of the body corporate during the period (the turnover period) of 12 months ending at the end of the month in which the conduct constituting the offence occurred.”
The parties agreed that the ‘benefit’ was determinable under s 70.2(5)(b) (ruling out operation of sub-clause (c)) but disputed the meaning of ‘benefit’ as the basis for calculating the maximum penalty. The Company contended ‘benefit’ referred to ‘net benefit’ and accordingly the maximum penalty was $11,000,000 under s 70.2(5)(a) as $8,042,146 (three times $2,680,816) was less than $11 million (100,000 penalty units times $110). The Prosecutor contended that benefit meant ‘gross income’ or the total value of the contracts resulting in a maximum penalty of $30,391,062 (three times $10,130,354).
The Court agreed with the Company’s approach for the following reasons:
- the policy intent behind the calculation of maximum penalty is clear and “there are powerful reasons why a penalty ought be calibrated by reference to the gains of the offender” on the basis that a “flat maximum” could potentially “disadvantage the impecunious and benefit the wealthy” and “[f]or commercial crimes, such as bribing a foreign official, the law seeks to achieve the consequence that crime does not pay … [t]o calibrate the penalty by reference to the benefit received makes the penalty both rational and commensurate (since three times a sum, whether measured as profit or damages, is accepted to be penal)” [at 129]; and
- “… the legislative policy accords with the plain meaning of the word “benefit”. The contract sum may confer a benefit, but it also may not. Thus … liquidators are entitled to disclaim onerous contracts: that is, contracts which do not confer a benefit on the company for the reason that they are unprofitable” [at 120];
- the Company’s construction made sense in the light of 70.2(5)(c) because “benefit requires a comparison between income and the costs incurred in earning that income” and turnover, “referable to gross income, requires no such comparison” and it would be “odd” if the operation of ss 70.2(5)(b) and (c) resulted in the same number [at 130]; and
- “[t]he evident purpose of s 70.2(5) is to provide a significant incentive to offenders … to establish the benefit obtained from the offending conduct, which, especially for large companies … is likely to be less than 10% of their annual turnover.”
The Court found that Crown did not provide a basis for its formulation of the ‘benefit’ received from offending conduct and conceded that by its preferred approach the maximum penalty would be the same for loss-making, profitable or break-even contracts because the contract price was easier to calculate than the net benefit and “… it could not be expected that such an important guidepost in the sentencing process as maximum penalty would require, potentially, detailed calculations and value judgments” [at [127].
Sentencing Discounts for the Plea of Guilty, Past Assistance and Undertaking to Give Future Assistance
The Court considered the two most important factors in this case to be the seriousness of the offending and the Company’s past and promise of future cooperation with authorities. Based on these factors the Court applied significant sentencing discounts of 25% for the guilty plea and 40% for the Company’s assistance. Of the 40% discount, 30% was attributed to the past assistance and 10% to the undertaking to give future assistance (under s 16AC of the Crimes Act 1914 (Cth)).
The Court explained that the discounts were warranted because the Company’s actions were “a truly extraordinary case of self-reporting of a practically undetectable crime and the provision of substantial assistance to the investigating and prosecuting authorities, without which it would have been almost impossible to bring either the company or the individual accused (who are yet to be tried) to justice” [at 190].
The Company’s Post-Offence Conduct
In early 2012, the Company engaged lawyers to assist with a potential merger and commenced internal due diligence of its anti-bribery and corruption compliance procedures. In the course of the due-diligence the Company’s commercial manager innocently disclosed that the Company had being paying bribes in Vietnam for years guise of training contracts or tours and this activity was “endorsed” by Company senior management.
Following the disclosure, the Company engaged external lawyers (law firm Jones Day) to conduct an independent investigation covering the Asian subsidiary’s operations for the period of 2002-2012. The investigation concluded that certain Company employees had allegedly arranged to paid funds to third parties that were intended as bribes to public officials in the Philippines and Vietnam and there was evidence that the Company’s senior management was allegedly complicit in the conduct.
In response to the investigation, the Company terminated the employment of those involved, self-reported the matters subject of the investigation to the AFP, the World Bank, the Asian Development Bank, AusAid and the Australian Securities and Investments Commission, cooperated with authorities in their investigations (including sharing its internal investigation findings) and made “very significant changes” to policies and procedures to prevent such offending behaviour from recurring in the future.
Appeal – R v Jacobs Group (Australia) Pty Ltd [2022] NSWCCA 152 (11 July 2022)
On 11 July 2022, the NSW Court of Criminal Appeal, in R v Jacobs Group (Australia) Pty Ltd [2022] NSWCCA 152, dismissed the Crown’s appeal (here). However, the Court of Criminal Appeal did find the sentencing Judge made an error in reasoning, by factoring Jacob’s self-reporting and cooperation into an evaluation of the level of discounts as well as the principles of general deterrence, which risked double counting its value.
The Court of Appeal’s Reasons
The Court of Criminal Appeal upheld the primary Judge’s construction of the term “benefit” in section 70.5 of the Criminal Code.
The Court held that that the primary Judge did not fail to consider that the fine would be treated as a cost of doing business, attributing significant value to the Company’s post conduct cooperation and the amount of the fine, prior to discounting, being greater than the benefit agreed by the parties.
The Court of Appeal did find that the primary Judge erred by factoring in a ‘reward’ for the Company’s self-reporting and cooperation when considering general deterrence principles, because reward may have already been factored into the sentencing discount, and described this approach as a “double counting” risk. Further, it was found that the fine imposed for the later Vietnam conduct relative to the maximum penalty, suggested that “either that the importance of general deterrence has been given effect to in name only or that the sentencing discretion has miscarried so as to result in an inadequate penalty, or both”. However, the Court did not regard the identification of the error in sentencing as sufficient to justify imposing a new sentence.
High Court of Australia Appeal
On 10 November 2022, the High Court of Australia granted the prosecutor’s application for special leave to appeal the ruling of the NSW Court of Criminal Appeal. No reasons were given (here) The appeal will be listed before the Full Court of the High Court of Australia on a date to be fixed in 2023.
Establishment of the New Commonwealth Anti-Corruption Agency, the National Anti-Corruption Commission (NACC).
For many years, Australia has had State-based anti-corruption commissions, to investigate State-based misconduct by public officials and private interests seeking to corrupt public officials. In contrast, the Commonwealth Government has long resisted any such independent body, fearing that Commonwealth officials, politicians and their staff may be subject to independent oversight. After the last Commonwealth election in May 2022, numerous conservative politicians lost their seats to a wave of independents who campaigned strongly on integrity and accountability issues and for the establishment of a national anti-corruption agency with real oversight and real powers.
Finally, it appears to be on the horizon with the new Labor Government moving to create such a body. There appears to be broad support for the new body (even from the resisting right side of politics) subject to resolving whether the legislation should set (and limit) the criteria for holding public hearings, or leave it more to the discretion of the Commissioner.
Structure and Oversight of the NACC
The National Anti-Corruption Commission Bill 2022 (Cth) (Bill) outlines the structure of the NACC and its powers (here). The NACC Commission will be an independent agency led by the Commissioner with three Deputy Commissioners. Oversight of the new agency will be the responsibility of an Inspector, being an independent officer of the Parliament, appointed by the Governor and the Parliamentary Joint Committee on the NACC.
The Inspector will have power to investigate allegations of serious or systematic corrupt conduct within the NACC and investigate complaints about the NACC.
Jurisdiction
The NACC may investigate where the Commissioner is of the opinion that an issue could involve ‘corrupt conduct that is serious or systematic’. Corrupt conduct includes any conduct that could adversely affect, either directly or indirectly, the honest or impartial exercise of any powers, functions or duties of a public official. The NACC will also investigate any conduct of a public official that constitutes or involves a breach of public trust, an abuse of office, the misuse of information or documents or any conduct that constitutes, involves or is engaged for the purpose of corruption of any kind.
The NACC can investigate corrupt conduct involving Commonwealth Ministers, Parliamentarians and their staff, the heads and employees of Commonwealth agencies, government contractors and their employees, members of the defence forces, statutory office holders and appointees, officers and directors of Commonwealth companies, and people or bodies providing services, exercising powers or performing functions on behalf of the Commonwealth. Importantly, the NACC will have the power to investigate private companies who have or who are working for the Commonwealth.
‘Serious or systemic’ has not been defined and will have their ordinary meaning as applied by the Commissioner. The NACC will have retrospective powers to investigate conduct that occurred before it was established. The commission will have discretion as to how far back in time this may go (see the speech of the Commonwealth Attorney General, Mark Dreyfus KC MP speech).
NACC Powers
The Commission may:
- hold hearings, to be conducted in private unless the Commissioner is satisfied that there are exceptional circumstances that justify the holding of a public hearing and it is in the public interest to do so;
- summon any person to give evidence at a hearing where there are reasonable grounds to suspect that a person has evidence relevant to a corruption investigation;
- serve a ‘notice to produce’ on any person where there are reasonable grounds to suspect that a person has information, or a document or thing, relevant to a corruption investigation and failing to comply with such notice, will be an offence; and
- use the search powers under the Crimes Act 1914 (Cth) to enter premises and seize evidence without a warrant (being material relevant to an offence or material that, if required to be produced under a notice to produce, would be lost or destroyed).
The Commission will be prevented from making findings of criminal guilt. However, the Commissioner can make recommendations including:
- taking action in relation to a person with a view to improving their performance;
- terminating employment;
- taking action to rectify the effects of the conduct; and
- adopting measures to remedy deficiencies in relevant policy, procedures or practices that facilitated: the employment or engagement of unsuitable person; a person engaging in the conduct; or the failure to detect the corrupt conduct.
Consequential amendments will allow the Commission to access other law enforcement powers, including telecommunications interception, surveillance devices, computer access, controlled operations, and assumed identities (see the detailed summary of the Bill). As with State-based commissions, legal professional privilege is abrogated, so the Commissioner can compel production of what might otherwise be privileged communications.
NACC Reporting Obligations
The Commission will be required to prepare a report on each investigation, which must set out:
- the Commissioner’s findings or opinions on the corruption issue;
- a summary of evidence and other material on which the findings or opinions are based; and
- any recommendations the Commissioner sees fit to make and the reasons for those recommendations.
Protections for Whistleblowers
Under the Bill, Whistleblowers will be protected and will not be subject to any civil, criminal or administrative liability. Additionally, contracts cannot be terminated on the basis that the NACC disclosure is a breach of the contract. These protections are in addition to whistle-blower protections that exist under the Public Interest Disclosure Act 2013 (Cth).
The protections extend to all person who refer allegations or provide information concerning corruption issues to the NACC and there will be criminal offences for taking, or threatening to take any reprisal action against a person who is providing information to the Commission.
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