Things To Think About

First: The Regulatory Climate Heats Up

It’s an exciting time of change and new challenges for those working in Australian regulatory compliance at the Commonwealth level: for the regulated, it may be a nervous wait to see how the dust settles on current debates, inquiries and proposals.

The executive seems determined to increase regulatory enforcement activity, improve the tools regulators have available, and foist greater responsibility on corporations for the misconduct of their staff and associates.    The Attorney General is considering introducing capacity to enter deferred prosecution agreements, plans to amend the foreign bribery offence to make it easier to prove, and introduce a quasi-absolute liability corporate offence of ‘failure to prevent’ foreign bribery.

Meanwhile, Senate Inquiries are looking at the introduction of modern slavery supply chain laws (which would force companies to publish information about their efforts to eradicate slavery in their supply chains); increasing whistleblower protection (making it possible for regulators to receive notification and evidence of corporate misconduct that might otherwise be undetectable); and are conducting investigations into corporate tax avoidance, the insurance industry, consumer protection in the banking, insurance and finance sector,  scrutiny of financial advice, and, of course, foreign bribery.

Then there’s the Senate Inquiry’s Report on Criminal, Civil and Administrative Penalties for White Collar Crime, published last month.

And Tax Commissioner Chris Jordan had his tenure extended to 2024 just days after the Chevron litigation concluded in his favour.  In announcing the appointment, the Treasurer noted:

“The ATO recently confirmed that this year alone, it has raised $2.9 billion in tax liabilities against a group of just seven multinational companies. Additionally, the ATO … expects to raise more than $4 billion in additional tax liabilities this year from large public groups and multinationals…”

So the Commonwealth agenda is clear: give corporations more responsibility, give regulators better tools to keep the regulated compliant, and reward regulators taking bold action.

(And as for the United States, there are some indications its major agencies may maintain their corporate and white-collar crime prosecution momentum, at least in the fraud space.)

Second: Supply Chain Regulation

Supply chains are now well and truly on the regulatory policy radar, so if you haven’t reviewed the debates, now might be the time.  The issue is that unethical, improper or criminal activity might be hidden in a company’s supply chain, and “[c]onsumers and businesses are inadvertently promoting and sanctioning these crimes through the purchase of goods and products that have been tainted in the supply chain.” (Section 2(h) TSCA (discussed below))

Traditionally, crimes hidden in supply chains have not been considered the end-producer’s responsibility.  But in some contexts that view has changed: end-producers have some responsibility.  But what responsibility?  An aggressive regulatory approach might make the sale of ‘tainted’ goods illegal, perhaps by the introduction of strict-liability offences: we can see this approach in the New York sale of ivory laws, for example.  But the favoured approach is more moderate: consumers, not the legislature, should determine what is acceptable corporate conduct in the production of goods, and so end-producers owe a responsibility to inform consumers about their efforts to eradicate certain crimes or misconduct from their supply chains.   As the people of California explain:

“Absent publicly available disclosures, consumers are at a disadvantage in being able to distinguish companies on the merits of their efforts to supply products free from the taint of [a particular misconduct]. Consumers are at a disadvantage in being able to force the eradication of [said misconduct] by way of their purchasing decisions.” (Section 2(i) TSCA (discussed below))

The three contexts in which this debate is particularly active at the moment are ‘conflict minerals’, ‘modern slavery’ and palm oil.

Conflict Minerals

Section 1502 of the Dodd–Frank Wall Street Reform and Consumer Protection Act inserted a “conflict minerals” regime into the US Securities Exchange Act.  That regime, which formally commenced in 2013, requires certain companies using gold, tin, tungsten and tantalum to annually and publicly disclose whether those minerals originated from the Democratic Republic of the Congo or an adjoining country.  If the minerals do originate from those countries, certain other data must be included in the disclosure.  (See the 2012 SEC final rule here.)  The Act also provides, rather cleverly:

“a product may be labeled as ‘DRC conflict free’ if the product does not contain conflict minerals that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country.”

The regime has been criticised by… everyone.  Supporters say its scope is too narrow – why only list minerals linked to armed conflict in the DRC?  Why not put other minerals on the list, like cobalt, which is not necessarily connected to armed conflict, but is often mined by underpaid, sometimes underage, workers in unsafe conditions. (Last month, Apple announced it has “stopped buying cobalt mined by hand in Congo following reports of child labor and dangerous work conditions there.”  It also plans to “pioneer a closed-loop supply chain, where products are made using only renewable resources or recycled material“. )

On the other hand, many companies and business associations decried the regime as a draconian and unlawful assault on companies’ first amendment rights.  The US Court of Appeals for the District of Columbia Circuit (to some extent) agreed, and, following the final determination of that litigation this month, the SEC is enforcing only parts of its own rule; in fact the entire regime is under reconsideration.  Unsurprisingly, there was, back in February, a rumour afoot that President Trump planned to suspend the regime; it seems the regime has been dismantled for him.

Nonetheless, the US law inspired the EU to propose a similar regime; the draft regulations are expected to pass next month; however, the proposed regulation has been criticised by Amnesty International and other NGOs as “half-hearted”.  There is no appetite to introduce similar legislation in Australia.

Modern Slavery

In 2010, California introduced its Transparency in Supply Chains Act (TSCA); the UK introduced its Modern Slavery Act (MSA) in 2015.   The US may introduce a Federal Act, similar to the Californian legislation: the Business Supply Chain Transparency on Trafficking and Slavery Bill 2015 is before the House Committee on Financial Services.

The Californian Act requires certain companies to disclose on their websites the extent to which they:

(1) engage in verification of product supply chains to evaluate and address risks of human trafficking and slavery;
(2) conduct audits of suppliers;
(3) require direct supplies to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the countries in which they are doing business;
(4) maintain accountability standards and procedures for employees or contractors that fail to meet company standards regarding slavery and human trafficking; and
(5) provide employees and management  training on slavery and human trafficking.    (Section 3(c)TSCA )

Section 54 of the UK Act requires that “[a] commercial organisation… must prepare a slavery and human trafficking statement for each financial year of the organisation.”  The explanatory memorandum provides the background of the UK legislation.

Human rights groups have criticised the laws as lacking teeth: the two Acts require disclosure of efforts to identify and eradicate modern slavery from supply chains, but not to actually take eradicative steps; a properly published statement that no efforts have been made satisfies the obligation.  But there is real merit in a regime requiring disclosures to consumers.  The practical challenge under this framework is to ensure companies comply with their reporting obligations, and that consumers have very easy access to the information in those reports.  Neither of the current Acts gets this right.

The only enforcement action available for violation of the obligations under each Act is civil action for injunctive relief; and only the Attorney-General (US) and Secretary of State (UK) have standing to seek relief.  This is the most obvious failing of the Acts, and provides an explanation for the very low rates of compliance in both jurisdictions (US here; UK here).  A second criticism is, as Sinclair and Weber noted in their piece for the Guardian,  consumers have trouble accessing these reports for comparative purposes, because there is no central database.

Australia is currently considering introducing similar legislation: the Inquiry into Establishing a Modern Slavery Act closed submissions this month, though it is accepting submissions from foreign governments and groups up until 19 May 2017.  Andrew Forrest told the GCNA Modern Slavery Forum this month that he had “uncovered slavery in at least 12 suppliers as he tried to stamp out forced labour from the business chain of his mining company.”  He visited one of those suppliers and found workers who had

“a life expectancy of five years and food which just kept them alive … 18 to a room which you wouldn’t call your larder … and not able to leave,” … “That company ladies and gentlemen was supplying goods to us and to companies all over … Australia.  We all had slavery in our supply chains.” (Quoted in The Guardian)

Palm Oil

In Australia, there has been a push for many years to require food and other manufacturers who use palm oil in their products to say so on the label, allowing consumers to avoid products with palm oil, if they wish.  Current Australian laws do not require all palm oil to be identified – which sets us apart from the EU, US and Canada.  It’s an issue because palm oil production is linked to rainforest destruction and wild orang-utang deaths.  But so far, there appears to be little will to make the proposed labelling law changes.

Third: Panama Papers Anniversary

It’s now been a year since the ICIJ broke the “Panama Papers” stories, and the ICIJ has just won a 2017 Pulitzer Prize for the work.

Fourth: Individual Responsibility for Corporate Crime

Now’s the time for reflection on the movement to increase accountability of individuals for corporate crime and misconduct.  It’s been a year since the UK introduced its “Senior Managers Regime“, an effort “to embed a culture of personal responsibility within the banking sector”.  That regime followed on the heels of the US Yates memo on Individual Accountability.  And that, as you know, was a response to community indignation that more individuals weren’t jailed (or fined, or charged, or investigated) for their role in the GFC.   So where has the renewed focus on individual responsibility gotten the US and the UK?  Professor Oded makes a case for changes to the Yates memo; the FCA’s Mark Steward provides an entertaining reflection on the Senior Managers Regime here.

Notable Litigation & Regulatory Actions

The Commissioner of Taxation has prevailed against Chevron, who must pay approximately $300 million in additional taxes: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62.  (An application to appeal to the High Court may be made.)  Later in the month, both Chevron and the ATO participated in a public hearing before the Senate Standing Committee on Economics’ Corporate Tax Avoidance Inquiry; and the Commissioner had his tenure extended.

An accountancy firm has been found to have been ‘knowingly concerned’ (s550(c) of the FW Act) in its client’s underpayment of staff: it now faces a civil pecuniary penalty, to be determined at a later date. FWO v Blue Impression Pty Ltd & Ors [2017] FCCA 810.  The case is essential reading for practitioners, but also those interested in corporate crime theory, as it revisits the theories of attribution of corporate knowledge threaded through Eurolynx, Sixty-Fourth Throne and other classic cases, and is a wilful blindness case – always interesting.  Perhaps it should be paired with a reading of last month’s case of Optus Administration Pty Limited v Glenn Wright by his tutor James Stuart Wright [2017] NSWCA 21.

The Federal Court handed down its penalty orders in ACCC v Kobelt [2017] FCA 387 – you will recall this is the case concerning unconscionable provision of ‘bookup’ financial services to a remote indigenous community in Mintabie, South Australia.  It was a very interesting case and recommended reading for anyone interested in regulatory activity in remote indigenous communities, or statutory unconscionability, or both.  Mr Kobelt is appealing the findings of the court.

The Victorian EPA has issued its first infringement notice based on evidence recorded by a surveillance drone.

The Federal Court has handed down its “first finding of liability against a licensee for a breach of the FOFA reforms“: ASIC, in the matter of NSG Services Pty Ltd v NSG Services Pty Ltd [2017] FCA 345.

In a move that may make iPhone users rejoice, the ACCC has “has instituted proceedings in the Federal Court against Apple Pty Limited and its US-based parent company, Apple Inc., (together, Apple) alleging that Apple made false, misleading, or deceptive representations about consumers’ rights under the Australian Consumer Law.”  The case concerns Apple’s communication to consumers of its policy not to “look at or service consumers’ defective devices if a consumer had previously had the device repaired by a third party repairer, even where that repair was unrelated to the fault.”

When and how can a presiding judge interrupt the defence opening address to a jury?  And what is the purpose of that address?  An interesting review in Duong v The Queen [2017] VSCA 78.

The US DOJ Antitrust Division’s prosecution of Deutsche Bank AG and its London subsidiary for manipulation of LIBOR is now completed, bringing “the total amount of penalties to approximately $2.519 billion“.

The US OSHA has unilaterally ordered the reinstatement and compensation of a Wells Fargo employee whistleblower, who was sacked after raising suspicions about fraudulent behaviour in 2010.  No fine or other punitive action, however.

Here’s an interesting one: imagine contracting with the US government to build a nuclear waste treatment facility, then using defective materials, not performing agreed quality performance testing on materials and giving the client false certificates of testing.  This resulted in a $4.6 million out-of-court settlement.  But how often is this sort of behaviour undetected?

The latest US SEC Whistleblower payout is a cool $4 million – and, as always, the whistleblower remains anonymous.

Over in the UK, the SFO’s fourth Deferred Prosecution Agreement (DPA) has been reached, this time with Tesco Stores Ltd.  Details are suppressed until the completion of criminal cases against three individuals alleged to have been involved.  It is a significant DPA because, “given the relatively short four-month timeframe in which the conduct in question took place, the $129 million fine appears significant and, as with the Rolls Royce fine, comparable to a US penalty.”

Law & Policy Updates

Consumer Affairs Australia and New Zealand (CANZA) has published its recommendations on changes to the ACL: they are a very bold set of proposals, including the introduction of a requirement that traders ensure the safety of goods before selling them, and a prohibition on unfair trading.  According to CANZA, “Consumer affairs ministers will consider the report in the second half of 2017.”

Ever wanted to watch the appeals running in the Victorian Court of Appeal, but can’t bear the frosty environs of the Green Court?  You’re in luck!  You can, for a limited time, watch these proceedings from the warmth of your office/fireside chaise longue, as the VSCA pilots a streaming-of-proceedings program from 1 June 2017.  Too late to watch the Crown concede all appeal grounds in the case of the “fake” Whiteleys, but who knows what interesting things you might see.  Tune in here.

The Crimes Legislation Further Amendment Act 2017 came into effect this month; it modifies the Criminal Procedure Act 2009 (Vic) to allow for prosecution and defence expert evidence to be heard concurrently or consecutively.  The hot tub comes to the jury!  But I wonder how many defence counsel will want their evidence led this way? (Prior to the amendment, any defence expert evidence would necessarily be heard after the conclusion of the Crown case.)

This month the Attorney-General announced his intention to make the Commonwealth foreign bribery offence (s70.2 of the Criminal Code Act 1995) easier to prove when offences “involve the use of third party agents or intermediaries, instances of wilful blindness by senior management to activities occurring within their companies and a lack of readily available written evidence”.  The proposed new section 70.2 offence and new offences for reckless bribery and failure to prevent bribery are fascinating demonstrations of how the conceptualisation of corporate offending has evolved since the 1970s: one would never have seen the kind of quasi-absolute liability (can such a thing exist?) for failure to prevent the offending of an associate of a corporation back then.  But the evolution is, primarily, a response to two things: the difficulty of collecting evidence of the internal workings, failures, culture and intentions of corporations, and an increased determination to force corporations to obey the law.  The ‘failure to prevent’ offence, in making ‘adequate procedures to prevent’ foreign bribery a defence, relieves the prosecutor of the investigative and evidentiary burden of proving inadequate internal controls.  Wondering why corruption and foreign bribery has become such a vibrant legal space in recent years? Samuel Buell offers his explanation, from a US perspective.

The US DOJ Antitrust Division gives a brief insight into its handling of parallel civil and criminal enforcement.

US Academics Verity Winship and Jennifer Robbennolt have published an interesting review, analysis and critique (with proposals) of admissions of guilt in US regulatory civil enforcement: “Should agencies require admissions of guilt from the targets of civil enforcement? Administrative agencies rely heavily on settlement as a key enforcement tool. Admissions of guilt—or, more commonly, declarations that nothing is admitted—form part of these settlement agreements and the underlying negotiations. … We use the explicit debate over the SEC’s practices to draw attention to the high (and mostly unexamined) stakes of admissions for enforcement throughout the administrative system.”

Event Calendar

11 May 2017: International Foreign Bribery Taskforce Open Day (Sydney)

20-21 July 2017: Competition Matters 2017 (Wellington)

27-28 July 2017: ACCC & AER Regulatory Conference (Brisbane)

27 November 2017: UN Forum on Business and Human Rights (Geneva)