The effectiveness of the Australian Federal Police (AFP) and the Australian Securities and Investments Commission (ASIC) investigating and prosecuting white collar crime has recently been criticised following allegations of corruption and misconduct involving an Australian company.
As Australia’s corporate regulator, ASIC, has to keep pace with the corporate environment. However it acknowledged on 20 November 2013 that it has “limited resources” and continues to experience budgetary cuts and falling levels of staff.[1] Mr Greg Medcraft, Chairman of ASIC, emphasised that enforcement was a “contested process that takes time and resources.”[2] A lack of both manpower and funding has led the regulator to focus on taking cases “where the extent of harm or loss has a broader market impact” like “mum and dad investors.”[3]
ASIC remains constrained despite recommendations from the International Monetary Fund (IMF) in November 2012 calling for “increased resources and budgetary flexibility.”[4] ASIC cost about AU$350 million a year to operate yet it delivers revenues of AU$700 million to the Australian Federal Government.[5] Earlier this month, the AFP admitted that it also faces significant challenges investigating and prosecuting complex foreign bribery cases.[6]
Deferred Prosecution Agreements (DPAs) offer an alternative tool for Australian regulators and their fight against increasingly complex and sophisticated economic crime. Executives have raised this more frequently in discussions so we have provided the following for consideration.
What is a DPA?
A DPA is a voluntary alternative to prosecution in which a company undertakes specified actions in exchange for prosecution being suspended, pending successful completion of the agreement. Material terms of a DPA may include an agreed fine, disgorgement of profits, undertakings to enforce or introduce compliance procedures and the imposition of a monitor to oversee the implementation of remedial steps.
If, at the end of a specified period (usually 2-3 years), the prosecutor is satisfied that the corporation has fulfilled its obligations under the contract, there may be no criminal conviction entered against the company and the threat of prosecution may be dropped. However, if the agreement is breached, the prosecutor may be permitted under the terms of the agreement to restart the case and use any admissions by the company in subsequent proceedings.
Brief History: US
DPAs came to prominence in the US in 2004 following the collapse of Arthur Andersen as a result of the firm’s prosecution in the wake of the Enron scandal. Although its conviction for the obstruction of justice in 2002 was later overturned, by that stage, the damage to the firm’s reputation prevented it from continuing as a viable business. The case illustrated that prosecution can sometimes subject a business to disproportionate consequences that risk causing social and economic harm.
These agreements have since been utilised in relation to matters arising under the Foreign Corrupt Practices Act (FCPA) and more recently, on 12 November 2013, the Securities and Exchange Commission (SEC) announced that it had entered into its first DPA with an individual. Prosecutors have subsequently welcomed DPAs as a supplement to their existing tools. They give flexibility when a civil remedy is insufficient, but where prosecution and the potential for serious detrimental harm to a variety of innocent stakeholders (employees, customers, suppliers, and investors) may be avoided.
The DOJ reaped over US$5 billion in revenues to the US Treasury in 2012 by entering into DPAs in the context of investigations involving fraud and corruption. In 2013, to date, a further US$1 billion in fines, penalties and disgorgements have been imposed through the use of these agreements.[7]
Australian regulators do not have the significant resources that the DOJ and SEC have available. Criminal charges may not always be the most effective way to regulate companies and a full scale prosecution of large corporations are a rarity in this country. Such cases are usually complex and costly (such as the Australian Wheat Board investigation). A DPA could be appropriate where the public interest is not best served by mounting a prosecution. Furthermore, private enforcement (such as class actions) should never ‘supplement’ the work of regulators. Rather, regulators should have access to a wider range of instruments to deploy when they see fit. For example, ASIC’s approach of using “cost-benefit equations to quarantine cases that it might otherwise pursue” [8] could be curtailed should DPAs be introduced.
UK’s recent implementation of DPAs
In May 2012, the UK’s Ministry of Justice (MOJ) ran a consultation to introduce DPAs as a means of addressing their existing inadequate prosecution tools and to give greater flexibility to the regulators to secure appropriate penalties for wrongdoing. In April 2013, DPAs were successfully introduced and are expected to be available to prosecutors from February 2014. They will initially cover crimes relating to bribery (in particular, the offences under the UK Bribery Act 2010), money laundering and fraud committed by organisations, partnerships and unincorporated associations.
Like the UK, who sought to cherry-pick from the US model, Australia could look to both the US and UK to develop its own model which operates effectively within the existing Australian framework. For example, unlike in the US where DPAs have been criticised for usurping the role of the courts, the Australian judiciary may retain an important supervisory role in the DPA process and participate in negotiations at the preliminary hearing with the assistance of legal counsel.
The prospect of settlement may be attractive for some organisations hoping to avoid negative publicity and a protracted and uncertain court battle. Thus the primary reason for a company to enter into a DPA may be certainty in managing potential issues and consequences. Understanding the likely scale for remediation a company may have to fulfill under the terms of the agreement in advance would provide businesses with the ability to assess the commercial impact. It may also encourage certain businesses to self-report or make voluntary disclosures.
In reality, businesses seek to resolve allegations, address corporate or cultural problems and move forward rather than be faced with a drawn-out investigation and consequential damage to their reputation and share price.
The Federal Government may consider the use of DPAs to demonstrate Australia is enhancing the regulation and policing mechanisms which include voluntary alternatives to immediate prosecution. Australian regulators could benefit from new tools to secure appropriate penalties for wrongdoing to achieve better outcomes that advance the interests of prosecutors, the judiciary and the public.
Conclusions: So what does this mean for Australian corporations?
Australian companies often grapple with decisions when they are faced with self-reporting, negative publicity, and uncertain commercial outcomes when responding to allegations of bribery and corruption. Our clients often express their frustration at the uncertainty when reporting matters to law enforcement or the corporate regulator. By providing a more efficient process for regulatory and law enforcement enquiries, DPAs may be more attractive for companies to take a proactive approach and therefore bolster corporate Australia’s response to fraud, bribery and corruption.
More related publications:
[1] Osborne, P. “Watchdogs lose bite through funding cuts” The Australian 20 November 2013
[2] Medcraft, G. “Setting the record straight” ASIC Speech AmCham Business Leaders Lunch 11 October 2013
[3] Medcraft, G. “Setting the record straight” ASIC Speech AmCham Business Leaders Lunch 11 October 2013
[4] International Monetary Fund, Australia: Financial System Stability Assessment, 15 November 2012 (p.25)
[5] Kylan, A “Medcraft criticizes ‘slow courts;” The Australian 21 November 2013
[6] Australian Federal Police “Media statement: Foreign bribery cases” 3 October 2013
[7] The United States Department of Justice http://www.justice.gov/ 17 October 2013
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