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Economics References Committee
07/08/2017
Foreign bribery

LEHMANN, Mr David, Director, KordaMentha Forensic

CHAIR: I now welcome the representative from KordaMentha Forensic. Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so, and then we will open it up for questions.

Mr Lehmann : Dear members of the committee, on behalf of KordaMentha I am pleased to be afforded the opportunity of appearing before you today. Our firm's mindset is to responsibly manage the many and complex issues confronting our clients, with a view to creating a better future for them, our firm and its employees. We see corruption generally and foreign bribery specifically as a significant global scourge, one that seems to be continuing unabated and that has wide-reaching negative consequences for mankind, particularly for the poor and less privileged in developing countries.

Bearing these serious consequences in mind, Australia and our corporations have an obligation to adopt responsible business practices here and abroad, not out of fear of regulatory sanction but due to an obligation borne out of the simple belief that it is the right thing to do. Some might say that this is naive, but it was upon this belief that we drafted our submission for your inquiry into foreign bribery and our submission to the Australian Attorney-General's office for consideration of the implementation of a deferred prosecution regime in Australia. The views expressed in our submissions are also borne out of our experience and knowledge of the issue, derived from experience in law enforcement, regulatory and private sector environments here and abroad. It is this collective experience that enables us to appreciate the complexities and challenges not only for companies operating in foreign high-risk jurisdictions but also for our regulators who are charged with faithfully and diligently enforcing our foreign bribery and other legislation.

Human nature shows a propensity to often unlawfully exploit opportunity for self-enrichment. Our views and recommendations are made recognising this. We believe the primary objectives of any legislative change to the Criminal Code should firstly be to create a disincentive for individuals and corporations to indulge in corrupt practices. The implementation of the false accounting provisions in March 2016, with penalties that mirror the foreign bribery offence, should assist to create this disincentive but should also assist regulators to investigate specific allegations with less difficulty. Aside from responsible ethical leaders setting and reinforcing acceptable standards of business conduct, creating an incentive for corporations to implement better, more effective antibribery compliance systems is the key to organisational cultural change. Implementing the proposed offence of failing to prevent bribery of a foreign public official, with its exception of adequate procedures, should go a long way to creating this incentive.

Where the inevitable breaches occur, it will also be important to foster a willingness on the part of corporations to appropriately and effectively investigate alleged bribery and self-report it to regulators when there is evidence to support the alleged misconduct. A deferred prosecution regime in Australia is a means by which to achieve this. In our submission, we have advocated that any regime implemented in Australia be based on the UK model. The reason for this is that we believe that the courts would provide the required level of oversight and rigor in reaching and ratifying agreements. However, we believe these factors can be achieved by the Attorney-General's proposed model dated March 2017.

Further to this, it is our experience, supported by data from organisations such as the Association of Certified Fraud Examiners, that tips or whistleblowing are the most common means by which fraud is detected. Moving forward, we hope for and encourage a change in the attitude of business leaders and the wider community to one that sees whistleblowers as courageous and as people to be admired. Unfortunately, consequences such as bullying, harassment and loss of livelihood are often the norm. As such, we support the introduction of enhanced legislative protections for whistleblowers and the serious consideration of the implementation of a financial incentivisation model for whistleblowers similar to that adopted in the United States.

In summary, the journey for Australia to become a more active enforcer of our foreign bribery legislation has been a long and evolving one. We believe that the legislative changes being considered and other measures recently implemented can only enhance our international legislation in the fight against foreign bribery.

CHAIR: My first question follows on from your last point. How does Australia's failure to address this issue of foreign bribery and the consequent impact on our international reputation manifest itself? Is the fact that we have a system that doesn't really address this particular issue a problem for Australian businesses seeking to work in other jurisdictions?

Mr Lehmann : In terms of doing business, if you're operating in high-risk jurisdictions where this type of behaviour is seen as a common thing, then it's not necessarily going to have an impact on the corporation doing business there. I think it's perhaps in jurisdictions that have more governance around this issue where it potentially could be more of an issue for a corporation doing business.

CHAIR: I note from your submission that many of the members of your firm have worked in countries where this is a particular issue, so you have firsthand experience of this.

Mr Lehmann : That's right. I was mentioning to my ex-colleague in the back of the room that I've lived and worked in Malaysia for 5½ years. I listened to Nick McKenzie's comments about that particular jurisdiction. It is a place where there is a lot of smoke and mirrors when it comes to addressing this issue. You see lots of announcements by the Malaysian anticorruption commission about the measures that they're taking, but, from my perspective and that of the people you talk to in the street in Malaysia, it's viewed as smoke and mirrors. You won't find any significant politician or parliamentarian caught up in a bribery scandal in Malaysia despite, I would say, a large proportion of the population believing that everyone in politics there is corrupt.

Senator XENOPHON: And the ones who do complain about it are in jail.

Mr Lehmann : Yes—correct. I've spoken to Australian expats who have businesses there and they've indicated to me that they budget for payments to be made so that they continue business and can win contracts in Malaysia. If you're willing to make the payments and indulge in that sort of conduct, your business can run quite smoothly. But, if you don't and if you don't have the right connections, particularly with a bumiputra company or individuals, it's very difficult.

CHAIR: I'm interested in your view on the proposition that, given that Australia has many of its major training partners in jurisdictions where this issue is perhaps problematic, does this go some way to explaining the lethargy in our bureaucracy in terms of dealing with this issue? Is there some sort of misguided view that perhaps the less we do about this the more we can facilitate Australian companies doing well in these types of jurisdictions?

Mr Lehmann : There is a recognition that it happens, but corporations and people with influence turn a blind eye to it. I don't think that in today's environment anyone can deny that it's an issue and it's not happening. The other aspect of that is that, as you all know, our enforcement regime, in terms of dealing with this issue, has been lacking. We've only had two corporate convictions for this particular issue. To say that they're the only two companies that have been involved in this is a nonsense. It's something that companies, boards and the senior management of our corporations have seen as a lower risk in terms of possible regulatory sanctions.

CHAIR: Quite appropriately, in your submission you first turn to the issue of books and records provisions. I am interested in the comment in your opening statement about the legislative changes in March last year in this regard. Do those changes meet your recommendation or is there still some way to go?

Mr Lehmann : I believe they significantly address our recommendation. The difficulty for law enforcement—and this is something that can be related to the FCPA in the US—is that most of the settlements that are reached in the US are to do with not meeting the accounting provisions of the Foreign Corrupt Practices Act. As Nick alluded to in his discussion with you before, when you're investigating these cross-jurisdictional issues it's very difficult to gain assistance to obtain the information that's required for an investigation and potentially a successful prosecution. So, if an obligation is imposed upon corporations to ensure that their books and records reflect the actual transactions that are occurring within their business, that goes a long way to disincentivising corporations to be involved in the conduct, but it also makes it a little easier for regulators to investigate these issues.

CHAIR: In fact, you're calling for the sanctions for breaches in relation to books and records to be equivalent to the bribe paying offence.

Mr Lehmann : And I believe they are. For example, if someone makes a bribe payment and the books and records treat it as a consultancy payment, then the regulator or the person investigating that issue may not necessarily have to rely on evidence that a bribe was actually paid as long as the regulator can show there is evidence to suggest that the entry in the books of the company is incorrect or false. That then serves the purpose of being able to enforce the legislation more effectively.

CHAIR: You're supportive of this proposed new offence of failing to prevent foreign bribery. In your submission, you call out some of the guidance that could be brought about to assist businesses in doing that. Do you have a view about the use of ISO 37001 as a standard there?

Mr Lehmann : A lot of people cynically say that the release of ISOs creates a work stream for consultants like my firm and others in the industry. I don't necessarily think that just because you have an ISO certification means you're making your best efforts to deal with the issues specifically. I think what it gets back to is senior management and the board setting the tone and the culture within their organisation. Look, let's face it: there are copious amounts of guidance about what compliance programs should look like. You've got the Foreign Corrupt Practices Act resources guide and you've got the UK Bribery Act adequate procedures guidance, and they all talk about the key elements of a compliance program: culture and doing due diligence. I don't necessarily think that having an ISO certification is going to ensure that a company is complying with the legislation, but, by the same token, it's probably a good step in the right direction.

CHAIR: What's your view about the appropriate regulator that should have responsibility for enforcing this compliance requirement?

Mr Lehmann : I think it's probably the AFP supported by ASIC, because ASIC has the duty to deal with false accounting and those types of issues within the corporate environment and under the Corporations Act. I think the Australian Federal Police, because they have the ability to conduct multijurisdictional investigations, are probably the most appropriate regulator to deal with the issue.

CHAIR: The head of ASIC has often talked about changing the culture of corporate Australia, particularly in the financial sector. Although one can't regulate culture, to some extent, there's already a regulator that's looking at this particular issue and different parts of it. You clearly say that they shouldn't be involved in monitoring the procedures and systems that are in place in companies in this area.

Mr Lehmann : No, I think there's a role for them to play, but, if we're talking about the actual investigation of foreign bribery allegations, I think the AFP is probably the most appropriate regulator to deal with that. There should be some cooperation between the regulators. I think there is an overlap there, but I think, primarily, the AFP should take leadership in this, supported by ASIC. I think that would be the most appropriate regime.

CHAIR: You're also supportive of impacts on things like debarment from government contracting as part of a disincentive for dishonesty. Would you care to elaborate on how far you think that should go?

Mr Lehmann : As I mentioned in my opening, a lot of this is about incentive and disincentive. If a corporation is reliant to a large extent on foreign contracts, working in foreign jurisdictions, and there's a possibility of them being debarred for a period of time from undertaking their business, then that creates a real disincentive for corporations to indulge in this type of conduct. It's only one measure. If we're talking about deferred prosecution agreements, there needs to be an assessment on a case-by-case basis of what the most appropriate arrangement would be under these agreements—as I say, case-by-case.

CHAIR: The idea, I think, is for companies to be able to come forward and self-report on this issue, rather than relying on whistleblowers to come forward after the event. What do you think that system looks like where companies in Australia are encouraged to come forward and self-report? What do we need to do to get to that point?

Mr Lehmann : At the moment, companies and their legal advisers are reluctant to come forward because, at the moment, there's a lack of certainty about what may happen. A deferred prosecution agreement where there is a more certain process that can be adopted—and that companies are aware of and know that there is a commitment by the regulators to working with corporations through these issues—would lend itself to an environment which is more inductive for companies to come forward. If there's more certainty about what the process is and what might happen, then therein lies the incentive for people to come forward.

CHAIR: I was looking through the list of companies that allow for the use of facilitation payments. I saw that at least two of the major four Australian banks allow facilitation payments. Do you think there are any reasons as to why that defence should be retained?

Mr Lehmann : Personally, no. As we say in our submission, it muddies the waters somewhat. If you're in, say, West Africa with a mining venture and you're paying facilitation payments to government officials to get things done, the bottom line is that they're bribes—it's just that there's a defence to it. If you follow a certain procedure, then potentially you're not going to be caught up in a bribery issue.

When it comes to the frequency of the facilitation payments that you make, how do you determine what the purpose of these payments are? I find that it's a very, very grey area and, potentially, if a regulator looked at a company who documented their facilitation payments, it could still—on the whole amount of the conduct—amount to a bribery offence. I just think it's very grey.

CHAIR: I agree with what you're saying, but fortunately the US seem to allow this. Do you think there is any prospect of change in that area?

Mr Lehmann : Not that I'm aware of. I gather in Australia that, in the current environment, that's not going to happen either. The mid-tier junior miners have a loud voice when it comes to this, and a lot of them say that they really cannot do business in places like West Africa without being able to make facilitation payments. It's a very vexed but grey area.

CHAIR: Is that because US companies are leading the charge in that area?

Mr Lehmann : I've no doubt that US companies are paying facilitation payments. As I say, I don't have all the answers on the best way to go but, for my liking, it's a little too grey and companies can still find themselves in hot water, if we have an effective enforcement regime in place.

CHAIR: Just finally, what's your view about ASIC's role in this area at the moment; and how can we improve ASIC's role?

Mr Lehmann : I think this goes back to my earlier point that there needs to be collaboration between regulators. They cannot work in isolation and I think having the fraud and corruption centre is a step in the right direction where you have people from ASIC being seconded and working together closely with the AFP. It needs to be a joint effort, because ASIC looks at different aspects of corporate conduct to what the AFP does. So there needs to be a meeting of minds and collaboration between the regulators about the approach and what should be done.

CHAIR: Thank you.

Senator HUME: Thank you, first of all, for including this copy of the guidance note for the UK's Bribery Act 2010. I found that very informative, and I was particularly interested in its effort to ensure that the act is implemented in a workable way and does not place an unnecessary burden on, in particular, small firms that are not well resourced. Do you think this is something that we could, essentially, replicate in Australia? What steps do we need to take in order to replicate this type of approach?

Mr Lehmann : A lot of the time there are things happening around the world which are being done quite effectively in a particular area. Sometimes I think we're slow to adopt what other regimes or environments are using to deal with a particular issue. What we should be doing is leveraging off the guidance that is there already but making it relevant to our corporations—adopt the best of the best that's going around but have our Australian emphasis on any guidance that's provided to corporations.

Senator HUME: Before I entered parliament, I was a director of two companies. I did the Australian Institute of Company Directors company directors course—it must have been at least six or seven years ago now—and there was a significant emphasis on foreign bribery and corruption for directors at that stage. It was quite terrifying, to tell you the truth, and a lot of us doing the course looked at each other and thought, 'Gosh, this one's going to be really hard to'—we realised that we would be personally responsible for what might be going on somewhere down the bottom of the chain of an organisation that we were involved with. Do you think that the understanding that directors have now is adequate? Do you think that the penalties that are placed on directors, if foreign bribery is occurring in their organisations, are sufficient? If not, for either of those two issues, what more should we be doing in that space?

Mr Lehmann : The guidance on and knowledge of this issue is much better, I think. In the past, it has been a risk that probably hasn't been given enough emphasis—and of course this varies from corporation to corporation.

But you touched on it—the key to this issue and many other risk issues for corporations is the level of communication to create awareness, with training provided to employees right across the organisation. This gets to creating culture, and the key to it is leadership, with communication training being cascaded down throughout the organisation and, of course, leaders setting the example. I'm not exactly sure what the penalties are for directors. For example, if a corporation was fined for or convicted of this offence, it is liable to quite significant penalties now, and so I guess it's with that in mind that directors need to take a very proactive view of risk and make sure they have adequate procedures in place within their organisation so that, if someone in a foreign jurisdiction's local management pays a bribe, they can say to the regulator, 'Well, we made our best efforts to implement an effective program and this is the evidence of it.'

Senator HUME: I have a question that may seem bit out there, and so please forgive me. How many people are involved in the KordaMentha Forensic services practice? What sorts of skills and experience do they have? Before you answer, let me contextualise the question. Our two previous witnesses suggested that the AFP and potentially ASIC were not sufficiently resourced in this area, and yet I have no sense of what it might cost to resource those two agencies appropriately to deal with this issue. I don't know whether there is a shortage of skills for forensic accountants or lawyers who deal in this particular space. I am interested in your organisation's unit and where you are recruiting from. You don't need to tell me exactly their numbers or their salaries, but I'd like a sense of the level of profession we are dealing with here in order to ensure we can adequately resource our agencies.

Mr Lehmann : Corruption, by its very nature, is about deceptive conduct and so is very difficult to investigate and to enforce. In our forensic practice we have forensic accountants, we have people from law enforcement backgrounds, we have people from technology backgrounds—computer forensic and other forensic technology services. Typically, when we are dealing with an issue like fraud or corruption, it takes a combined effort of the team. It's not just one individual within the team who can effectively deal with the issue. We rely on a very multidisciplinary approach to the issue. We stated in our submission that we thought that for this issue the AFP was under-resourced and we also put forward a proposition for a public-private partnership when dealing with this type of issue. I believe in the UK, the Serious Fraud Office has quite often engaged with the private sector to help them investigate issues. The multimillion dollar question is: what would it cost to build an effective agency to deal with this?

Senator HUME: It is literally the multimillion dollar question. As an idea, what approximately would a forensic accountant with 15 years experience be paid in KordaMentha?

Mr Lehmann : I'm not a forensic accountant and so—

Senator HUME: I have no idea of whether I'm dealing with someone who is on $80,000 a year or $800,000 a year. I really don't know.

Mr Lehmann : Say you're talking about someone at manager level, you might be looking at—and they certainly wouldn't have 15 years experience—probably $110,000 to 120,000 per year. That's a guess. I'm not privy to—

Senator HUME: That's all right. I'm trying to work out in my head what it might look like. Thank you.

Senator XENOPHON: You refer to the issues of leadership. We've heard from previous witnesses, Dr Zirnsak and Nick McKenzie, who basically said that there seems to be a lack of will in terms of dealing with these issues. The implication from what Nick McKenzie said was that there are some issues that are just political hot potatoes or are seen as being too contentious, if it involves Nauru or Malaysia. I think, to be fair to the AFP, that should be put to them as to whether it is a question of resources or whether there are issues that might impinge on their independence—and I would like to think there aren't. I am trying to establish whether the benchmark legislation that we should be looking at is the US and the UK foreign bribery acts—is that correct?

Mr Lehmann : Yes.

Senator XENOPHON: We are nowhere near that, are we?

Mr Lehmann : No, but this is why we made the recommendations we have, particularly around the failure of corporations to prevent bribery. The UK Bribery Act, I think, is one of the key pieces of legislation. It gets back to creating the incentive for corporations to do the right thing. It's imposing an obligation on corporations to ensure that they have an effective compliance program in place, otherwise that incentive is just not there. Coupled with the lack of enforcement that we've had since the offence came under the Criminal Code—

Senator XENOPHON: It's been largely ineffective, has it not?

Mr Lehmann : Yes.

Senator XENOPHON: Nick McKenzie said that we could look at what they're doing in the UK in terms of a reverse onus of proof. The current issue is the Commonwealth Bank, and eventually AUSTRAC got involved in that. But we are talking about billions of dollars of potentially laundered money that could have gone through those so-called intelligent deposit machines. Do you think a reverse onus of proof to show that if you didn't have the systems in place that there is liability imputed? Ought there be, as in the UK, that criminal level of liability on boards of directors and senior executives, including CEOs, where there is a reckless indifference to dealing with corruption and bribery matters?

Mr Lehmann : To both questions, yes. I believe that's correct. It's such a complex issue and very difficult to deal with. If the penalties imposed upon an individual and a corporation are significant, therein lies the disincentive to indulge in the conduct. I think having a reverse onus would make it potentially easier for regulators and prosecuting authorities to deal with the issue. I'm sure that, even without there being criminal offences for boards of directors—if, for example, there is a class action against the corporation or the board of directors for a significant breach of this legislation, then their civil liability would be quite significant as well.

Senator XENOPHON: But there's nothing like criminal liability that might sharpen the thinking to have systems in place.

Mr Lehmann : I believe so, yes.

Senator XENOPHON: Finally, do you have any comments on the fact that when it came to Securency, despite the fact that we spend hundreds and hundreds of millions of dollars on law enforcement agencies and regulators such as ASIC and the AFP, it took the work of some investigative journalists such as Nick McKenzie and Richard Baker, and presumably others, to dig up this story—something the regulators weren't capable of? I'm not sure if you heard Nick McKenzie's evidence, but I think the whistleblowers actually went to the AFP but the AFP brushed them off. They obviously have a different approach now. Do you want to comment on that?

Mr Lehmann : I followed that story very closely. The evidence that I believe would have been provided by the whistleblower to the AFP should have been compelling enough for them to institute an investigation. The reasons why they didn't do that I'm not privy to, but to me, reading between the lines, it seems that there was a lack of will combined with a lack of ability to investigate that issue.

Senator XENOPHON: Or a lack of appreciation as to the seriousness of the allegations?

Mr Lehmann : Potentially a lack of appreciation of the issues, but a lack of will to investigate. I'm not sure that the resources that were available were adequate enough to investigate it in an effective way. I'm only speculating, but, reading between the lines, that is the feeling that I got in following that story.

Senator XENOPHON: You may want to take this on notice, considering the time: have you had a chance to look at the whistleblower protections in the registered organisations legislation that has already been passed and is the subject of an inquiry by the Joint Committee on Corporations and Financial Services?

Mr Lehmann : No, I've not looked at that legislation.

Senator XENOPHON: If you could, and comment on whether you think that's useful. Also, there's been an ongoing inquiry through the Joint Committee on Corporations and Financial Services as part of an agreement with the government to improve whistleblower laws. If you could look at that, that would be quite useful.

Mr Lehmann : Certainly.

CHAIR: In terms of facilitation payments—and you may not be in a position to answer this question—is there any evidence that UK companies are disadvantaged or struggling out there, particularly in the resource area, because of the fact that their jurisdiction has now changed in respect of facilitation of payments and yet Australian and US companies continue to have this—

Mr Lehmann : I'm not aware of that, even though they don't have that defence in the UK. I'm sure that there would be UK corporations that are still paying facilitation payments, because I think the department of justice there have indicated that, whilst it is illegal, they probably have bigger fish to fry. There will be companies that are still paying facilitation payments, but I get the sense that they would be very low value type payments—

CHAIR: So there is a calculated risk involved in it?

Mr Lehmann : Yes. It will be interesting to see whether, over the course of time, there are prosecutions for UK companies that are paying low-value facilitation payments based on their frequency and what's being achieved as a result of them. I don't think there's evidence yet to suggest that UK corporations are being disadvantaged by that change in the legislation.

CHAIR: Thanks for appearing before us.