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Doing business in developing countries: developments in anti-corruption law Part 2 1 Doing business in developing countries: developments in anti-corruption law www.carternewell.com Our approach is to be recognised as a premier provider of specialist legal services across Australia and internationally by being the best we can be for our clients and ourselves Carter Newell Lawyers is an award winning specialist law firm that provides legal advice to Australian and international corporate clients in our key practice areas of: §Insurance §Commercial Property §Construction & Engineering §Litigation & Dispute Resolution §Resources §Aviation §Corporate Within each of these core areas we have dedicated experts who are committed to and passionate about their field and have extensive experience and knowledge. 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The material contained in this paper is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon his or her own particular circumstances. © Carter Newell Lawyers 2015 2 Doing business in developing countries: developments in anti-corruption law www.carternewell.com Contents Doing business in developing countries: developments in anti-corruption law The global focus on corruption............................................................. 4 Brazil.................................................................................................... 5 Myanmar.............................................................................................. 7 Indonesia.............................................................................................. 10 Bangladesh.......................................................................................... 12 India...................................................................................................... 15 Papua New Guinea.............................................................................. 18 Top tips to reduce corporate exposure to corruption risks.................... 20 3 Doing business in developing countries: developments in anti-corruption law www.carternewell.com Issues paper Anti-corruption law developments, transparency initiatives & foreign investor risks in developing country jurisdictions In the Part 1 Issues Paper of May 2014 we examined the anti-bribery and corruption laws in Australia, the United States of America (US) and the United Kingdom (UK). This Part 2 Issues Paper examines legal developments in anti-corruption law, related transparency initiatives (or lack thereof), investment risks (relating to corruption, transparency and sovereign risk), and corruption cases in developing country jurisdictions of importance to Australia, namely Brazil, Myanmar, Indonesia, Bangladesh, India and Papua New Guinea. This article has a particular focus on developments affecting foreign investment in the oil, gas and mining sector. We provide some key pointers for companies operating in developing country jurisdictions on how to reduce corporate exposure to corruption risks. unachievable if worldwide corruption is not curtailed. According to the World Bank Economic Forum the global cost of corruption equates to more than 5 percent of global GDP, or about $US2.6 trillion ($3 trillion). The World Bank estimates that $US1 trillion globally is paid in bribes each year. Transparency International’s Corruption Perception Index (CPI) scores and ranks 175 countries and territories from around the world on the perceived level of corruption in the public sector, from 0, being ‘very corrupt’, to 100, being ‘very clean’. The 2014 CPI indicates that 58 per cent of the G20 countries score below 50 out of 100. The global focus on corruption In November 2014 leaders at the G20 meeting in Brisbane committed to a crack down on global corruption by endorsing a ‘2015-16 G20 AntiCorruption Action Plan’. The G20 member countries have committed to taking action in the fight against corruption in certain high priority areas including combating bribery, improving public sector and beneficial ownership transparency, enhancing cross border investigation and enforcement, and developing international best practices in high risk sectors like the extractive industries, customs, fisheries, primary forestry and construction. The G20’s 2.1 per cent growth target is said to be 4 Doing business in developing countries: developments in anti-corruption law www.carternewell.com Brazil Brazil ranks 69th out of 175 countries in Transparency International’s 2014 CPI (a score of 43). Corruption is regarded as a serious problem in Brazil and the country loses 1.38% to 2.3% of its GDP in kickbacks and bribes.1 In 2013, the Brazilian populace, weary of ongoing government corruption took to the streets in mass protests and Brazil took steps to enact a landmark new anti-corruption law. The new law took effect on 29 January 2014 (Clean Company Act, Law no. 12.846/2013) (Law). The new Law (which has some correlations to the US Foreign Corrupt Practices Act 1977 and the UK Bribery Act 2010) was a key recommendation of the Organisation for Economic Cooperation and Development’s (OECD) Working Group on Bribery. The Law applies to foreign companies doing business in Brazil (those established in Brazil with offices, agents or branches and those that are determined to be de facto in Brazil, even if only temporarily) and to Brazilian companies. The Law applies to bribery of Brazilian officials as well as foreign officials. Like the UK law, facilitation payments are illegal. These are payments made to secure routine governmental action of a minor nature that does not result in the obtaining of a business advantage (e.g processing visa applications or providing police protection), although the definition of the term does vary 1 OECD Working Group on Bribery, Phase 3 Report on Implementing the OECD Anti-Bribery Convention in Brazil, October 2014, 9. 5 Doing business in developing countries: developments in anti-corruption law between jurisdictions. They are also referred to as ‘grease payments’. In any case, the penalties for breach of the Law are severe. According to Transparency International, under the new Law: • a company found guilty of corruption can be fined up to 20% of its gross revenues and subject to the publication of the condemnatory decision; • if gross revenue is not able to be ascertained, then alternative fines may range from US$3 million to US$30 million (however, the penalty imposed will never be lower than the benefit obtained due to the illegal act); • leniency agreements may be executed with companies who self report violations. If an accused has cooperated effectively and voluntarily with an investigation, there is an ability to enter into ‘cooperation agreements’ (under a separate law) which can result in sentence reductions. As expected, sanctions are applied according to the peculiarities of the case and the severity and nature of the offence. In applying sanctions, certain mitigating factors may be taken into account such as whether the organisation had appropriate existing internal controls, ethics and compliance programs, provided incentives to staff for reporting irregularities, and engaged in effective enforcement of its anti-corruption policies. www.carternewell.com The OECD Working Group on Bribery completed its report in October 2014 on Brazil’s implementation of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and noted that the Law is a significant step in the effort to fight foreign bribery provided it can be enforced effectively. The Working Group recommends Brazil clarify the procedure to establish liability and impose sanctions, follow up on the ‘arsenal’ available to authorities to encourage self reporting, including co-operative and leniency arrangements, and adopt comprehensive whistleblower protection mechanisms for private sector employees who report bribery. 2 Brazil’s public procurement sector has long had a problem with systemic corruption. This is well illustrated in a huge corruption scandal involving the tender for, and construction of, a regional courthouse in the 1990s. The government awarded a major public works contract and proceeded to pay some R$226 million from 1992 to 1998. Subsequent audits would later reveal that perhaps as little as one quarter of the total sum paid was actually spent on construction costs, leaving the balance unaccounted for. Numerous irregularities were found with respect to the construction contract and bid process. Over 100 law suits (civil, criminal and administrative) in Brazil, Switzerland and the United States have eventuated from the scandal and a Senator was disqualified from public office. Many of these legal proceedings are yet to be resolved.3 for oil projects and construction companies paid bribes worth about 3 percent of the value of the projects to obtain contracts. The illicit funds were then distributed among senior Petrobras executives and channelled to political parties in Ms Rousseff’s coalition. In early February 2015, Petrobras’ CEO was forced to resign. Due to Petrobras’ status as a company listed on the New York Stock Exchange, the US Securities and Exchange Commission (SEC) and Department of Justice are also investigating the corruption allegations.5 In 2012 the US SEC charged Indianapolis-based Eli Lilly and Company with violations of the US Foreign Corrupt Practices Act for improper payments made by its subsidiaries to foreign government officials to win business, including Eli’s Brazilian subsidiary which allowed one of its pharmaceutical distributors to pay bribes to government health officials to facilitate US$1.2 million in sales of a Lilly drug to state government institutions.6 Brazil does have appropriate laws and penalties in place to combat corruption, and whilst federal authorities investigate allegations of corruption, there are inconsistencies with the level of enforcement among individual regions within Brazil. Foreign businesses have reported corruption being most problematic in business dealings with authorities at a municipal level. 7 In more recent times, Brazil’s state run oil company, Petrobras (Brazil’s largest corporation), has become embroiled in a graft scandal which implicates President Rousseff (who was the company’s chairperson from 2003 to 2010) and other officials within her government. In December 2014, Brazil’s prosecutor-general was preparing to indict company executives on bribery and money laundering charges relating to various illicit dealings between former executives of Petrobras, contractors and politicians in Ms Rousseff’s government. The scandal involves claims that significant bribes were paid in order to win contracts with Petrobras, with one ‘third-tier’ executive at Petrobras earning approximately US$120 million in bribes during his tenure with the company.4 Another former executive testified that Petrobras inflated budgets 2 OECD, Brazil closes legal loophole on foreign bribery: OECD hopes this will now translate into stepped up enforcement, OECD Anti-Corruption Division, 29 October 2014, <http://www.oecd.org/newsroom/brazilcloses-legal-loophole-on-foreign-bribery-oecd-hopes-this-will-nowtranslate-into-stepped-up-enforcement.htm>. 3 Kevin Davis, Guillermo Jorge, Maria Machado, Transitional AntiCorruption Law in Action: Cases from Argentina and Brazil (January 2015), <http://www.law.nyu.edu/sites/default/files/upload_documents/ Transnational%20anti-corruption%20law%20March%202014_ NYU%20Colloquium%20(2).pdf >. 4 Simon Romero, ‘Brazil graft scandal threatens Rousseff’, Australian Financial Review, 9 December 2014, 14. 6 Doing business in developing countries: developments in anti-corruption law 5 Simon Romero, ‘Petrobras executives resign’, Australian Financial Review, 6 February 2015, 30. 6 US Securities and Exchange Commission, ‘SEC Charges Eli Lilly and Company with FCPA Violations’, (2012) < https://www.sec.gov/News/ PressRelease/Detail/PressRelease/1365171487116#.VNMYgv6KCig>. 7 US Department of State, Department of State: 2014 Investment Climate Statement – Brazil (June 2014) <http://www.state.gov/e/eb/rls/othr/ ics/2014/226920.htm>. www.carternewell.com Myanmar Myanmar ranks 156th out of 175 countries in Transparency International’s 2014 CPI (a score of 21). A new Anti-Corruption Law came into effect on 17 September 2013. The objectives of the relatively new law includes eradicating bribery, taking effective action against those that commit bribery and enhancing economic development through greater transparency. The law covers active and passive bribery in Myanmar by citizens, permanent residents and foreigners. The law includes specific offences relating to the illicit enrichment of public officials through bribery and other corrupt activities. The maximum terms of imprisonment for those found guilty of corruption range from seven years for non-officials, 10 years for public servants and up to 15 years for politicians. Each sentence also includes an associated fine. An Anti-Corruption Commission was established in 2014 to enforce the law. However, corruption remains a serious barrier to foreign investment in Myanmar. Foreign companies operating in Myanmar confront the following corruption risks: • a lack of transparency of asset ownership and revenue flows in the oil, gas and mining sectors. For example, the government granted a Chinese state owned enterprise an oil and gas pipeline concession but no information is available on the 7 Doing business in developing countries: developments in anti-corruption law terms of those contracts8 (however this sector is subject to Extractive Industries Transparency Initiative (EITI) reforms – see below); • a lack of transparency in the investor approvals process, which is opaque, bureaucratic and complex. Considerable discretion is granted to the Myanmar Investment Commission (MIC), who approves foreign investment applications, and this creates opportunities for corruption by officials. Investors are often faced with corrupt conduct when seeking investment permits;9 • cronyism is widespread with privatisations resulting in state owned assets being sold (cheaply) to persons with military or senior government connections; • systemic corruption exists within the judiciary where bribes are more or less required in order to secure a successful outcome in court proceedings. Illicit payments or ‘tea money’ is requested at nearly every step of the judicial process (from stenographers and clerks to judges), with the majority of the corruption a product of judicial officers’ poor salaries and working conditions;10 8 Marie Chene, U4 Expert Answer, ‘Overview of corruption in Burma (Myanmar)’, Transparency International No. 349, 1 October 2012, 4. 9 Marie Chene, U4 Expert Answer, ‘Overview of corruption in Burma (Myanmar)’, Transparency International No. 349, 1 October 2012, 3. 10 Thomas Fuller, ‘Myanmar’s Opening Up Hasn’t Loosened Graft in Courts,’ The New York Times (online), 24 October 2014, < http:// www.nytimes.com/2014/10/25/world/asia/myanmars-opening-uphasnt-loosened-graft-in-courts.html?_r=1>. www.carternewell.com • the absence of a land tenure system has resulted in no protection of real property rights, with incidences of ‘land grabbing’ by army owned companies or politically powerful operations with connections to the military increasing, with those displaced receiving little compensation. According to Transparency International, a new law enacted in 2012 to address this issue still allows the ‘confiscation of agricultural land on any pretext associated with a state project or the national interest’.11 Further, there is no legislative guidance on what is appropriate landholder compensation which has led to ongoing disputes between mining companies and local occupiers of land. The new Foreign Investment Law (FIL) allows foreign investors ‘a right to lease or use land for up to an initial 50 years’ (extensions are available) depending on the type and volume of investment. However, the extent of application of the law is unclear. Investors are often confronted with corrupt conduct when negotiating land and real estate leases with government officials.12 In October 2014, the government released a draft national land policy which may eventuate into a codified framework for land tenure management;13 • expropriation of foreign investor assets by the government is still a concern. Whilst the FIL does provide express safeguards against nationalisation of investments approved by the MIC, there are still no safeguards against indirect expropriations (without compensation) or protection for private foreign businesses from ‘predatory practices by regime linked cronies’.14 Myanmar is gradually opening up to foreign investment, however the rule of law is weak and is unlikely to be strengthened in the short term. Laws regarding private enterprise and banking are severely undeveloped. That said, regulatory reforms initiated by President Thein Sein are underway with respect to foreign investment and mining. The quasi-civilian government has sole rights for resource exploration and development but allows private sector involvement.15 The new FIL came into force on 31 January 2013, the object of which is to encourage 100% foreign investment in certain industries, and the establishment of joint ventures with state owned enterprises (SOEs) in other sectors (where a 11 Marie Chene, U4 Expert Answer, ‘Overview of corruption in Burma (Myanmar)’, Transparency International No. 349, 1 October 2012, 5. 12 Marie Chene, U4 Expert Answer, ‘Overview of corruption in Burma (Myanmar)’, Transparency International No. 349, 1 October 2012, 3. 13 Trevor Wilson, ‘Myanmar’s reforms are more than show’, Australian Financial Review, 2 February 2014, 13. 14 US Department of State, Department of State: 2014 Investment Climate Statement – Burma (June 2014) <http://www.state.gov/e/eb/ rls/othr/ics/2014/226926.htm>. 15 Mark Wood, ‘Mining & Resources - Myanmar Overview,’ (Speech delivered at Austrade Brisbane, 11 February 2014). 8 Doing business in developing countries: developments in anti-corruption law maximum of 80% foreign ownership is allowed). However, foreign investments are still not allowed in many sectors (such as small and medium scale mining or operating power plants less than 10 megawatts).16 For investments in the mining, oil and gas sector, foreign companies must enter a joint venture with an SOE, namely the Ministry of Mines and Myanmar Oil & Gas Enterprise, respectively. The FIL provides ‘guarantees’ that a foreign business will not be nationalised or have its permit suspended before the expiry of the contract term without sufficient cause.17 However, there is considerable ambiguity as to how the FIL will be applied in practice and the MIC can make exceptions to the law ‘in the interest of the State’. Whilst the broad discretion granted to MIC may be beneficial to foreign investors (i.e., allowing approval for investment in sectors which are normally restricted), it also creates uncertainty and opportunities for corruption (amongst the officials tasked with recommending to government certain foreign investor proposals). In 2012, Myanmar commenced a process to amend its 1994 Mining Law (Mining Law). The Mining Law lacks transparency, and this has created significant sovereign risk issues for foreign investors. The proposed amending law is still under review (and in a state of flux). The existing Mining Law is a major disincentive to investment in that it mandates the Myanmar Ministry of Mines act as non-equity partner in projects but be entitled to around 30% of minerals extracted, plus taxes and royalties. However, a bigger concern for investors is the requirement that the miner gain permission from the Ministry in order to move from one stage of the mining process to another.18 This poses an unacceptable level of risk for the foreign miner who may proceed to make significant capital expenditures during the exploration phase but fail to gain the necessary legal approval to proceed to production. The proposed amendments seek to address many of these concerns by drafting the law according to internationally recognised standards. A further reform to benefit the mining sector is Myanmar’s acceptance as an EITI candidate on 2 July 2014. EITI is a central part of the government’s reform agenda, in particular with respect to public financial management reforms, and aims to provide access to reliable data about extractive industry revenues in a country where such figures remain 16 US Department of State, Department of State: 2014 Investment Climate Statement – Burma (June 2014) <http://www.state.gov/e/eb/ rls/othr/ics/2014/226926.htm>. 17 Foreign Investment Law, Law No. 21/2012 (Myanmar), Chapter XIII, ss 28, 29. 18 Tim McLaughlin and Soe Than Lyn, ‘Mining Law to get an overhaul, officials say’, The Myanmar Times (online), 13 October 2013, <http:// www.mmtimes.com/index.php/business/8442-mining-law-to-get-anoverhaul-officials-say.html>. www.carternewell.com largely unknown. For example, companies will have to disclose what they have paid in taxes (and other payments) and the government must disclose what it has received. These two sets of figures are then compared and reconciled. A multi-stakeholder group in Myanmar is now developing a work plan for the EITI to set the objectives and priorities for EITI implementation and associated activities. Myanmar will have to produce EITI reports (the first is due in January 2016) that discloses exact revenues from the extraction of its natural resources.19 To prepare for delivery of EITI reports, Myanmar is exploring appropriate mechanisms by which to disclose the beneficial owners of extractive companies operating in Myanmar. This is an important development as historically joint venture arrangements between private companies and SOEs in Myanmar have been devoid of any accountability or transparency. Despite the corruption risks, Myanmar holds significant potential for Australian resource companies due to its wealth of natural resources. The country is rich in oil and gas, gemstones, metals (copper, gold, silver, lead, tin, tungsten, antimony) and industrial minerals. Australian companies that have been or are involved in exploring for minerals in Myanmar include Mineral Commodities, Tigers Realm Group and Eumeralla Resources.20 19 Extractive Industries Transparency Initiative, Extractive Industries Myanmar, (December 2014), <https://eiti.org/Myanmar>. 20 Daniel Clery, ‘Mining & Resources - Myanmar Overview,’ (Speech delivered at Austrade Brisbane, 11 February 2014). 9 Doing business in developing countries: developments in anti-corruption law www.carternewell.com Indonesia term of imprisonment of up to 20 years.22 Indonesia, a populous nation of over 239 million people, ranks 107th out of 175 countries in Transparency International’s 2014 CPI (a score of 34). Indonesia has ratified the UN Convention Against Corruption. Indonesia’s President elect, Joko Widodo, won the July 2014 election on an antigraft platform to bring about a clean and effective government. He took the unprecedented step of asking the Corruption Eradication Commission (KPK) to screen his nominated ministers. The KPK subsequently raised concerns about eight ministerial candidates forcing Widodo to find replacements.21 A 2013 report by Control Risks notes that many dayto-day corruption risks exist for foreign investors in Indonesia. Predominantly, these arise from routine interactions with government officials whereby the official may request a facilitation payment, or a contract kick-back, or per diems for site inspections. To further complicate matters, Indonesia has a decentralised system of governance whereby regulatory decision making is devolved to provincial and local level government officials which provides such officials with considerable opportunities to demand illicit payments from companies when processing routine applications.23 Control Risks provides that it is standard when companies apply for work visas that they will be expected to make between 10 to 14 facilitation payments in cash to officials (anywhere between US$600 and US$5,000) per application. Such payments (usually made through third party agents) are a key source of expected income for officials and in most cases are not recognised as illegal.24 Despite anti-corruption laws regulating the conduct of politicians, civil servants, the public at large and the strong anti-corruption work of the KPK, there has been no tangible reduction in corruption levels in Indonesia. It is therefore a challenging jurisdiction in which to operate. Foreign companies with well known ‘zero tolerance’ anti-corruption policies face difficulties in determining whether certain payments are legal under Indonesian law. There is no facilitation payments exception under Indonesian criminal law but such payments are widely used. This is despite the fact that giving or receiving a bribe is a criminal act, attracting fines and a possible 21 Ben Bland, ‘Widodo cabinet selections vetoed by anti-corruption commission,’ Financial Times (online), 23 October 2014, <http://www. ft.com/cms/s/0/8f124c60-5a6c-11e4-be86-00144feab7de.html>. 10 Doing business in developing countries: developments in anti-corruption law 22 Control Risks Group Limited, Anti-Corruption in Indonesia (2013 Report) at 4, 5, <http://www.controlrisks.com/~/media/Public%20Site/ Files/Oversized%20Assets/indonesia_whitepaper_2013.pdf>. 23 Control Risks Group Limited, Anti-Corruption in Indonesia (2013 Report) at 4, 5, <http://www.controlrisks.com/~/media/Public%20Site/ Files/Oversized%20Assets/indonesia_whitepaper_2013.pdf>. 24 Control Risks Group Limited, Anti-Corruption in Indonesia (2013 Report) at 5, <http://www.controlrisks.com/~/media/Public%20Site/ Files/Oversized%20Assets/indonesia_whitepaper_2013.pdf>. www.carternewell.com Foreign companies operating in the mining sector are particularly likely to be exposed to requests for illegal payments from officials when applying for mining related permits, approvals and certificates in the relevant central and district level government departments and from the Indonesian police.25 reports detailing the fiscal regime applicable to the sector, project level reporting of revenue streams, information on oil allocation to the government as part of production sharing arrangements, data on where companies operate and the size of financial contributions made to the government.29 Another challenge facing foreign miners in Indonesia is the changing regulatory landscape that has emerged in recent years. In 2012, the Indonesian government issued a regulation requiring foreign companies holding mining leases to divest majority equity to an Indonesian participant (a tier of government or Indonesian company) after 10 years of production. While mining companies operating in Indonesia have historically been subject to divestment obligations under Contracts of Work (with the Indonesian government), many now argue that 10 years is insufficient time to make an adequate return on investment. Further, there is uncertainty as to whether the mandatory divestment provisions apply only when existing Contracts of Work expire (and require renegotiation), or whether the government can force renegotiation during an existing term.26 Investor concerns have also arisen in the oil and gas sector where the government has indicated that expiring production sharing contracts operated by foreign companies will be transferred to domestic interests rather than extended. 27 In recent times, the KPK has worked cooperatively with international anti-corruption counterparts (including with US and Australian regulatory agencies). In 2010, Innospec Inc., a specialty chemical company in the USA and UK, settled charges against it relating to acts of bribery in Iraq and Indonesia with total disgorgement and criminal fines of $40.2 million. In conjunction with its illegal conduct in Iraq, Innospec had in place several schemes to pay bribes to Indonesian government officials to win contracts with state owned oil and gas companies. Bribes were funnelled through an Indonesian agent.30 KPK commenced its own investigations into Innospec Inc. The KPK is also working with its Australian counterparts in the case of Securency International and Note Printing Australia, which involved the bribery of officials in Indonesia to secure contracts for printing the companies’ signature plastic polymer banknotes for the Indonesian central bank.31 The KPK has been involved in numerous domestic anti-corruption investigations, implicating high profile figures such as the former head of Indonesia’s Constitutional Court, Akil Mochtar.32 He was subsequently given a life sentence for accepting bribes and money laundering. In 2015, the KPK and Widodo’s administration will focus on corruption in Indonesia’s oil and gas sector which is the largest contributor to state income making up an estimated 12% of state revenue in 2014. This follows on from an investigation into the mining sector in 2014 that uncovered tax fraud worth US$2.33 billion by several large mining firms.28 That said, Indonesia has made significant progress with respect to improving transparency in its large and complex extractive industries sector, and is now an Extractive Industries Transparency Initiative (EITI) compliant country (as from 15 October 2014). Indonesia’s EITI compliance means citizens of Indonesia have access to extensive information about how Indonesia’s natural resources are governed. Indonesia is required to publish EITI 25 Control Risks Group Limited, Anti-Corruption in Indonesia (2013 Report) at 6, <http://www.controlrisks.com/~/media/Public%20Site/ Files/Oversized%20Assets/indonesia_whitepaper_2013.pdf>. 26 Simon Butt and Luke Nottage, ‘Divestment of foreign mining interests in Indonesia’, East Asia Forum -Economics, Politics and Public Policy in East Asia and the Pacific, 13 May 2012, <http://www.eastasiaforum. org/2012/05/13/divestment-of-foreign-mining-interests-in-indonesia/>. 27 US Department of State, Department of State: 2014 Investment Climate Statement – Indonesia, (June 2014), <http://www.state.gov/e/ eb/rls/othr/ics/2014/226611.htm>. 28 Reuters, ‘Update 2 – Indonesia’s graft watchdog to target energy sector in 2015’, Reuters Online, 27 November 2014, <http://www. reuters.com/assets/print?aid=USL3NOTH29Z20141127>. 11 Doing business in developing countries: developments in anti-corruption law 29 Extractive Industries Transparency Initiative, Extractive Industries Indonesia, (January 2015), <https://eiti.org/indonesia>. 30 U.S Securities and Exchange Commission, Securities & Exchange Commission v. Innospec, Inc, Litigation Release No. 21454 (December 2014), <http://www.sec.gov/litigation/litreleases/2010/ lr21454.htm>. 31 TRACE International, ‘Guilty Plea by former Securency executive; corruption charges pending against others,’ TRACE Blog (online), 26 July 2012, < http://traceblog.org/category/indonesia/>. 32 Peter Alford, ‘Jakarta rocked by justice chief Akil Mochtar’s arrest for bribery’, The Australian, 4 October 2013, <http://www.theaustralian. com.au/news/world/jakarta-rocked-by-justice-chief-akil-mochtarsarrest-for-bribery/story-e6frg6so-1226732545588?nk=97357ffc65d2d 4bda4ad176728c4407d>. www.carternewell.com Bangladesh Bangladesh ranks 145th out of 175 countries in Transparency International’s 2014 CPI (a score of 25). The country is a party to the UN Convention Against Corruption (since 2007). In 2012, a Transparency International Bangladesh survey found that 63.7 percent of households reported having to pay bribes in order to access basic services. This is despite the fact that various Bangladeshi laws criminalise domestic acts of passive and active bribery, extortion, using public resources for private gain, and other corrupt activities. The Prevention of Corruption Act 1947 provides specific offences for public servants who accept bribes, misappropriate public funds, or use their position to obtain or attempt to obtain, any valuable thing or pecuniary advantage. The maximum term of imprisonment is seven years and a fine. Whilst the government has made progress in prosecuting clear cut corruption cases, law enforcement authorities lack the resources to tackle more complex cases involving corruption and money laundering through foreign jurisdictions.33 33 US Department of State, ‘2012 International Narcotics Control Strategy Report Volume II: Money Laundering and Financial Crimes Country Database – Afghanistan through Columbia,’ Bureau of International Narcotics and Law Enforcement Affairs, 30 May 2012, <http://www.state.gov/j/inl/rls/nrcrpt/2012/database/191290.htm>. 12 Doing business in developing countries: developments in anti-corruption law Unfortunately, Bangladesh is a problematic jurisdiction for money laundering (including with respect to terrorist financing) and in line with international efforts, the government is making concerted efforts to further strengthen these laws. Bangladesh is a founding member of the Asia Pacific Group on Money Laundering which is a body enforcing international standards in the region. The Money Laundering Prevention Act 2012 (Act) (and related laws) holds both companies and individuals liable for offences such as bribery, counterfeiting currency and documents, fraud, black marketing, insider trading and market manipulation. The Act criminalises the transfer of ill gotten gains overseas, and the conversion of assets with the intent to hide the source of the earnings.34 The offence of money laundering attracts a term of imprisonment ranging from four to 12 years, and a fine and illegally gained property can be forfeited. Companies may have their business registration cancelled. The Bank of Bangladesh is given significant powers under the Act, and a special financial intelligence unit within the Bank can provide intelligence to domestic and overseas law enforcement agencies on suspected money laundering, terrorist financing and other suspicious transactions. 34 Sofia Wickberg, U4 Expert Answer, ‘Overview of corruption and anti-corruption in Bangladesh’, Transparency International, No. 353, (online) 7 November 2012, <http://www.u4.no/publications/overviewof-corruption-and-anti-corruption-in-bangladesh/>. www.carternewell.com The US State Department warns that whilst Bangladesh has made progress in addressing corruption and has an Anti-Corruption Commission (ACC) in place, there are legitimate concerns with respect to the current government’s efforts to curb the independence of the ACC (by requiring the ACC to seek permission from the government before investigating state officials).35 The ACC was established under the Anti-Corruption Commission Act 2004 to investigate corrupt individuals in an independent and impartial manner but in practice it is systematically subjected to political influence.36 Companies must be aware that corruption is particularly endemic in public procurement, customs and tax collection and regulatory approvals. With respect to public procurement, in a bid to curb the estimated US$3 billion a year lost to corruption in this sector, the government enacted a Public Procurement Act in 2006 and Public Procurement Rule. However, subsequent amendments to the laws have been criticised by the World Bank (and others) for being inconsistent with good procurement practices, such as allowing the award of contracts for work through lottery and without prequalifications, to ruling party activists and people close to the government.37 Foreign companies operating in Bangladesh confront the following business and corruption risks: • significant petty corruption with respect to customs administration where officials routinely exert their power to influence the tariff value of imports and to expedite and delay import and export processing at ports. Chittagong Port (which handles over 80% of imports/exports) is considered one of the most inefficient and corrupt ports in Asia;38 • widespread corruption in public procurement where laws governing conflicts of interest are not enforced, and government officials often favour well connected companies and individuals when awarding contracts. Unfortunately, recent amendments to procurement laws facilitate (not reduce) corruption by significantly relaxing the basic requirement that bidders have the requisite work experience and financial qualifications in 35 US Department of State, ‘2013 Investment Climate Statement – Bangladesh Report’ (February 2013) <http://www.state.gov/e/eb/rls/ othr/ics/2013/204599.htm>. 36 Sofia Wickberg, U4 Expert Answer, ‘Overview of corruption and anti-corruption in Bangladesh’, Transparency International, No. 353, (online) 7 November 2012, <http://www.u4.no/publications/overviewof-corruption-and-anti-corruption-in-bangladesh/>. 37 Shakeel Ahmed Ibne Mahmood, ‘Public procurement and corruption in Bangladesh confronting the challenges and opportunities’ (2010) 2(6) Journal of Public Administration and Policy Research 103, 105-106. 38 Business Anti-Corruption Portal, Bangladeshi Customs Administration (January 2015), <http://www.business-anti-corruption.com/ country-profiles/south-asia/bangladesh/corruption-levels/customsadministration.aspx>. 13 Doing business in developing countries: developments in anti-corruption law order to submit tender bids, and requiring that tender prices be capped; • use of facilitation payments to do business is widespread; • systemic corruption in the judiciary and law enforcement sectors. The main causes of corruption in the judiciary relate to the poor working conditions and salaries for judicial officers, lack of accountability mechanisms and political interference in the judicial process. Bribery is the most common form of corruption, where bribes are paid to expedite the hearing of trials and influence verdicts. Critically, the lack of effective judicial and alternative dispute resolution procedure impedes the enforcement of contracts and the resolution of disputes;39 • a lack of transparency in regulatory processes encourages rent-seeking opportunities;40 • antiquated real property laws can unduly complicate land and property transactions, and land registration records are historically prone to competing claims. A bona fide purchaser can therefore never gain complete security of title. 41 In 2011, the Canadian government, pursuant to its foreign anti-bribery laws fined Canada based Niko Resources Ltd CDN $9.5 million for bribing Bangladeshi officials. Two sets of illegal benefits were provided through Niko’s local subsidiary to the Bangladeshi Minister of Energy: a $190,984 SUV vehicle and payment of a trip to Calgary for business, and on the way, a side trip to New York and Chicago to visit relatives (the total value of those benefits were in the range of $196,000). The bribes were intended to guarantee the award of gas purchase and sale agreements with the Bangladeshi government. In conjunction with the fine, the Canadian court also imposed on the company a three year probation order to ensure that it established and implemented an effective internal compliance programme for preventing and detecting foreign bribery, namely: • a written policy against violations and compliance standards and procedures applicable to all directors, officers, employees, and outside parties acting on behalf of the company; and 39 Sofia Wickberg, U4 Expert Answer, ‘Overview of corruption and anti-corruption in Bangladesh’, Transparency International, No. 353, (online) 7 November 2012, <http://www.u4.no/publications/overviewof-corruption-and-anti-corruption-in-bangladesh/>. 40 US Department of State, ‘2014 Investment Climate Statement – Bangladesh Report’ (June 2014) <http://www.state.gov/e/eb/rls/othr/ ics/2014/228770.htm >. 41 US Department of State, ‘2014 Investment Climate Statement – Bangladesh Report’ (June 2014) <http://www.state.gov/e/eb/rls/othr/ ics/2014/228770.htm >. www.carternewell.com • explicit policies and control systems regarding gifts, entertainment expenses, customer travel, political contributions, charitable donations, and sponsorships. The compliance order was the first of its kind imposed by a Canadian court under Canada’s antibribery laws. Another Canadian company has become embroiled in a corruption scandal involving Bangladeshi government officials. The ‘Padma Multipurpose Bridge Project’ case involving SNC-Lavalin Group aptly illustrates the rampant corruption affecting Bangladesh’s public procurement sector, most notably in the construction industry.42 In 2012, the World Bank decided to cancel its $1.2 billion International Development Association credit in support of this major infrastructure project when it became apparent that SNC-Lavalin executives had bribed Bangladeshi government officials in order to win a public tender related to the construction of the bridge. The remedial actions taken by the Bangladeshi government to address the corruption allegations proved unsatisfactory to the World Bank. The case has led to prosecutions under Canada’s foreign anti-bribery laws, debarment of SNC Lavalin Group from bidding on World Bank development projects, and investigation of Bangladeshi public officials by the ACC. 42 David Theis, ‘World Bank Statement on Padma Bridge’, World Bank Press Release (online), 29 June 2012, <http://www.worldbank.org/ en/news/press-release/2012/06/29/world-bank-statement-padmabridge>. 14 Doing business in developing countries: developments in anti-corruption law www.carternewell.com India India ranks 85th of 175 countries in Transparency International’s 2014 CPI (a score of 38). India is emerging as a significant market for Australian companies, however challenges exist when doing business in India due to widespread problems with corruption in all sectors of Indian society. The fight against corruption featured prominently in Prime Minister Narendra Modi’s 2014 election campaign. Narendra Modi’s anti-corruption agenda has instigated a cultural shift for many Indian companies where graft is a normal part of doing business. Examples of the corruption and business risks faced by companies operating in India include: • Demands for operational bribes: small bribes or facilitation payments made to support the smooth operation of company business. Common examples include demands from government officials to process licence applications or from customs officers to expedite the clearance of goods. Non-payment of such bribes may often result in delay and inconvenience to the company concerned. • Commissions to commercial agents: many foreign companies are told on entering the Indian market that they will need to use the services of a commercial agent and are expected to pay a commission of 10% of the contract value. 15 Doing business in developing countries: developments in anti-corruption law • Low transparency: procurement practices lack transparency and local regulations can be amended without consultation and their application can be inconsistent and nontransparent.43 • Business hospitality: business hospitality and gifting is widely accepted and even expected in Indian business dealings. • Inefficient dispute resolution process: foreign investors face a lack of ‘sanctity of contracts’ as it takes on average, nearly four years to resolve a commercial dispute in India (the third longest average rate in the world).44 India is making efforts to combat bribery and corruption with the introduction of a range of legislative measures covering public procurement, the protection of whistle blowers and domestic and foreign bribery. The widely anticipated Lokpal and Lokayuktas Act 2013 came into force in early 2014. This law provides for the establishment of a federal anti-corruption body to inquire into complaints of corruption against certain public servants (including former and current Prime Ministers, members of parliament, officers of companies established by an 43 Australian Trade Commission, Doing business in India, managing business risks – bribery and corruption, Australian Trade Commission (Discussion Paper, October 2013), <file:///H:/Doing-business-in-IndiaBribery-and-corruption.pdf>. 44 US Department of State, ‘2014 Investment Climate Statement – India Report’ (June 2014) < http://www.state.gov/e/eb/rls/othr/ ics/2014/228298.htm >. www.carternewell.com act of parliament, and officers of organisations partly financed by the government). The law provides for the prosecution of public servants for offences punishable under India’s Prevention of Corruption Act. India has also amended its money laundering laws to expand the definition of what constitutes money laundering. The Prevention of Corruption (Amendment) Bill 2013 (Bill) was introduced on 19 August 2013 and seeks (amongst other things) to amend India’s Prevention of Corruption Act to make ‘giving a bribe’ to a public servant, (to induce or reward the public servant to perform improperly any public function), a specific offence. The existing law does not deal with the ‘supply side’ of corruption directly. The minimum punishment for the offence is three years, extendable to seven years imprisonment and a fine. Importantly, the Bill also introduces corporate liability for a commercial organisation if a person associated with it bribes a public servant intending to obtain business or a business advantage. Company officers can face similar terms of imprisonment and a fine. As provided under UK anti-bribery law, the defence of ‘adequate procedures’ is available if the company can prove they had adequate procedures designed to prevent personnel from engaging in corrupt conduct.45 The enactment of this Bill is pending. The Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill 2011 was introduced to Parliament on 25 March 2011 (as a requirement for India’s ratification of the UN Convention Against Corruption). The proposed law provides a mechanism to deal with bribery of foreign public officials (FPO) and officials of public international organisations (OPIO). The Bill criminalises the following acts: • acceptance or solicitation of bribes by FPO and OPIO for acts or omissions in their official capacity; • offering or promising to offer a bribe to any FPO and OPIO for obtaining or retaining business; • abetment or attempting either of the above acts. Any person who commits offences under the law shall be liable for imprisonment between six months and seven years and a fine. The proposed law has extra-territorial reach as it empowers the Indian Central Government to enter into agreements with other countries in order to carry out cross border 45 The Prevention of Corruption (Amendment) Bill, 2013 (Republic of India), 69th Report, Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice, Parliament of India, Rajya Sabha, February 2014. 16 Doing business in developing countries: developments in anti-corruption law investigation and enforcement actions.46 The progress of this Bill appears to have lapsed, and it will have to be re-introduced into Parliament. Until recently, a significant impediment to fighting corruption in India has been the lack of adequate whistle blower protections. The Whistle Blowers Protection Act 2011 commenced on 9 May 2014 and is thus a step in the right direction. The law provides a mechanism to register complaints of allegations of corruption or wilful misuse of power against a public servant and provides protections against victimisation for the whistle blower.47 Another long overdue development is India’s enactment of the Companies Act 2013 which hopes to significantly improve corporate governance in India. The law aims to facilitate more transparent and efficient corporate behaviour by better regulating a variety of areas, including: • Corporate audit procedures: the law seeks to provide for more stringent rules regarding the appointment, role and responsibilities and liability of auditors, the content of financial statements and the composition of corporate boards (i.e., publicly-listed companies must have at least one third of its total number of directors as ‘independent directors’). Notably in the context of anti-corruption, auditor’s reports are required to indicate whether a company has adequate internal financial controls in place and the operating effectiveness of such controls. Auditors have an obligation to report to the government if they have any reason to believe an offence involving fraud is, or has been, committed by company officers or employees. • Enforcement actions: the law provides for the multi-disciplinary Serious Fraud Investigation Office as the sole authority to investigate corporate crimes (which are complex in nature, involve a public interest component, and if investigated may lead to a clear improvement in law and procedure). Fraud related offences are now extensively dealt with under the law and the penalties clearly prescribed. • Corporate social responsibility (CSR): the law seeks to define norms for mandatory corporate philanthropy for companies that exceed certain net worth, turnover or profit thresholds to clarify what is acceptable CSR spend. The law 46 The Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill, 2011 (Republic of India), 50th Report, Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice, Parliament of India, Rajya Sabha, March 2014. 47 PRS Legislative Research, The Whistle Blowers Protection Bill, 2011 (January 2015), <http://www.prsindia.org/billtrack/the-public-interestdisclosure-and-protection-of-persons-making-the-disclosuresbill-2010-1252/>. www.carternewell.com specifies that these companies will be required to spend at least 2% of the average net profits of the immediately preceding three years on CSR activities.48 Public reporting of CSR expenditures is mandatory and directors of companies who fail to report may face personal liability. The enactment of this new law is a cause for optimism because it may become an important mechanism in the fight to tackle corporate corruption. In recent times in India, the Second Generation (2G) telecom spectrum corruption scandal involved illegal awards by the government on a ‘first come, first serve basis’ of 122 2G licences to private telecom companies at discount prices. In 2012, the Supreme Court of India struck down all the licences granted by the Minister under this policy on the basis that an auction/competitive tender process was the correct and only method by which to allocate public resources. The licence cancellations led to the Indian government and many foreign companies, (involved in joint venture arrangements with Indian telecoms conglomerates), suffering major financial loss. In an interesting case development, US regulators are investigating Walmart India for alleged violations of US Foreign Corrupt Practices Act (FCPA). The on-going US bribery investigation into Walmart’s Mexico operations has led the company to review and reinforce its FCPA compliance program in other countries, including India. The Mexican bribery scandal relates to allegations that company officials in Mexico bribed local officials to allow a rapid expansion of stores in the country, including the location of a store near an ancient pyramid site (despite zoning changes which aimed to limit urban development). Further, Canada’s first individual prosecution under its foreign anti-bribery laws relates to an attempt by a Canadian executive to bribe Indian government officials. The executive was convicted in May 2014 for his leading role in a conspiracy to bribe India’s Minister of Civil Aviation and certain Air India officials in order to facilitate the award of a contract to a Canadian company to supply facial recognition software. The company failed to win the tender however the Canadian court found it enough that the executive ‘conspired’ to provide a financial benefit to a foreign public official. 48 Control Risks Group Limited, India’s Companies Act – Big step ahead, but with challenges, Integrity Matters, Issue 12, March 2014 (December 2014), <http://www.controlrisks.com/en/newsletters/ integrity-matters/issue-12/india-company-act-in-detail>. 17 Doing business in developing countries: developments in anti-corruption law www.carternewell.com Papua New Guinea Papua New Guinea (PNG) is a very corrupt country, with more than 40 percent of PNG’s national budget lost to corruption. PNG ranks 145th out of 175 countries in Transparency International’s 2014 CPI (with a score of 25; equal to Bangladesh). PNG is rated as the most corrupt nation in the Pacific, a product of corruption being institutionalised at the highest levels of PNG’s socio-political order. Since 2007, PNG has been a party to the UN Convention Against Corruption (Convention), however the country’s implementation of the Convention is unsatisfactory.49 Bribery of foreign officials is not criminalised in PNG. PNG’s Criminal Code Act 1974 contains anti-bribery provisions criminalising domestic acts of bribery including those which make it an offence to bribe a member of the public service and to accept bribes. The PNG judiciary is largely seen to be independent (although corruption does persist at lower levels) but it suffers from inadequate financial and human resources. Unfortunately, this situation has led to a lack of enforcement of the law and judicial backlogs, with many public officials evading prosecution for abuse of power and corruption. 49 Sofia Wickberg, U4 Expert Answer, ‘Papua New Guinea: overview of corruption and anti-corruption,’ Transparency International – U4 AntiCorruption Resource Centre (online), 1 March 2013, <http://www. u4.no/publications/papua-new-guinea-overview-of-corruption-andanti-corruption/>. 18 Doing business in developing countries: developments in anti-corruption law Some examples of the business and corruption risks faced by companies operating in PNG include: • Demands for small bribes: a poorly functioning public sector encourages widespread use of bribes, facilitation or ‘grease payments’ to speed up administrative processes (e.g the issuing of permits or licences), avoid inspections, or allow the use of false declarations (etc). This is particularly problematic in the area of natural resource management (such as in the mining, petroleum and forestry sectors). • ‘Wantok’ (mutual assistance to kin): ‘Wantokism’ plays a central role in the social, economic and political life in PNG, and seeks to transfer clan loyalties and traditional norms into the modern political system. This process creates significant opportunities for corruption namely, kin being nominated for positions of influence within government, endemic corruption in the government procurement tendering process, and the embezzlement of state funds.50 • Contractual repudiation: a difficult relationship exists between the extractive industries sector and local populations due in part to PNG’s system of customary land ownership (over 50 Sofia Wickberg, U4 Expert Answer, ‘Papua New Guinea: overview of corruption and anti-corruption,’ Transparency International – U4 AntiCorruption Resource Centre (online), 1 March 2013, <http://www. u4.no/publications/papua-new-guinea-overview-of-corruption-andanti-corruption/>. www.carternewell.com 90% of land is owned informally by indigenous communities) and high levels of corruption among officials in the Department of Lands. The Department does not often adequately consult or engage with indigenous populations during the pre-project development approval process. This has the capacity to result in opposition to projects already approved, pressuring the government to take action against investors and repudiate contractual arrangements. 51 PNG Prime Minster, Peter O’Neill has stated he is committed to tackling endemic corruption in the country. However, his sudden dismantling of Taskforce Sweep in June 2014 on the grounds that it had become ‘politically compromised’ (after the Prime Minister himself became the subject of serious corruption allegations) is not encouraging. Taskforce Sweep was the country’s main anticorruption body and was set up in 2011 with the assistance of the Australian Federal Police to fight cross border corruption with an anti-corruption taskforce. The work of the Taskforce led to the April 2014 conviction by the PNG National Court of politician Paul Tiensten to nine years imprisonment with hard labour for misappropriating AU$4 million of public funds. It is said to be the harshest sentence handed to a corrupt public official since PNG’s independence.52 As at November 2014, PNG police were investigating 15 members of PNG’s parliament for corrupt activities. Maprik MP John Simons was charged with 38 official counts of corruption relating to state monies paid to construction and rental car companies owned by Mr Simons.53 Following the axing of Taskforce Sweep, the government set up a temporary anti-corruption body (the Interim Office for Anti-Corruption) chaired by retired Australian judge, Justice Graham Ellis. This body is a precursor to the formal establishment of PNG’s Independent Commission Against Corruption (ICAC). The legislation (a Constitutional amendment)54 to develop the framework for ICAC passed in February 2014 however the Organic Law must be passed in Parliament before ICAC will become operational. As at 19 January 2015, PNG’s Government Chief Secretary Sir Manasupe Zurenuoc indicated that the Organic Law for ICAC was tabled on the floor of parliament when 51 Elizabeth Stephens, ‘World Risk Review – Papua New Guinea Country Risk Report April 2014’, World Risk Review, JLT Specialty Limited, April 2014 (online), <www.worldriskreview.com>. 52 Bal Kama, ‘A victory over corruption in PNG’, The Lowy Interpreter (online), 4 April 2014 <http://www.lowyinterpreter.org/post/2014/04/04/ A-victory-over-corruption-in-PNG-paul-tiensten.aspx?p=true>. 53 ABC Radio National, ‘Ten per cent of Papua New Guinea MPs under corruption investigation’, 11 November 2014, (Liam Cochrane). 54 Constitutional Amendment (No. 40) (Independent Commission Against Corruption) Law 2014 (Republic of Indonesia). 19 Doing business in developing countries: developments in anti-corruption law parliament resumed sitting on 10 February 2015. 55 The amendments to the Constitution provide that ICAC will be independent and headed by a commissioner and two deputy commissioners. The purpose of ICAC is to contribute, in cooperation with other agencies, to preventing, reducing and combating corrupt conduct. Thus, it will complement the work of the existing Ombudsman Commission and the police but not subsume their functions. The key functions of ICAC56 will include: • considering complaints regarding alleged or suspected corrupt conduct and investigate (if appropriate) as well as investigate on its own initiative; • if of the opinion that an offence has been committed, referring the matter to the public prosecutor or police; • exchanging information on alleged or suspected corrupt conduct with law enforcement agencies in PNG and overseas; • cooperating and coordinating with other public and private sector agencies in research, development and education on corrupt conduct and anti-corruption strategies (etc). • the ICAC initiative is in conjunction with proposed new laws to protect whistle-blowers and encourage freedom of information. In other developments, the PNG Government is now participating in the global Extractive Industries Transparency Initiative (EITI) with its admission as a candidate country on 19 March 2014. This is an important step in improving transparency in revenue flows to government from resources companies in PNG (considering that mineral exports account for around 70% of PNG’s export earnings and the oil and gas sector has attracted large scale investment in recent times). Pursuant to the EITI, PNG has to commence disclosing payments and other data about its extractives sector, including information on licence holders, allocations and production data. It will be required to publish its first EITI Report within two years of becoming a candidate (by 19 March 2016).57 Thus, the PNG Government’s commitment in working towards meeting the EITI standard means companies operating in PNG’s extractive industries sector can expect improvements in the transparency of business dealings with government. 55 Online Editor, ‘PNG Parliament to consider anti-corruption law next month’, Pacific Islands News Association (online), 19 January 2015. < http://www.pina.com fj/?p=pacnews&m=read&o=134295509154bdc3f4dc78bdb5b183>. 56 Constitutional Amendment (No. 40) (Independent Commission Against Corruption) Law 2014, (Republic of Indonesia). 57 Extractive Industries Transparency Initiative, Extractive Industries Papua New Guinea, (December 2014), < https://eiti.org/papua-newguinea>. www.carternewell.com Top tips to reduce corporate exposure to corruption risks We provide below some tips for companies proposing to, or currently operating in, a developing country jurisdiction.58 These takeaways can be read together with the recommendations provided in our May 2014 Issues Paper. Tip 1: Corruption risk assessments It is critical that companies develop appropriate risk management strategies to navigate successfully the challenges of operating in a developing country. It is advisable to undertake a detailed corruption risk assessment given the higher prevalence of corruption. Any risk assessment should involve not only desk top research (and an assessment of reports from the internal audit function), but in-depth discussions with, including the surveying of, personnel in-country that have regular interactions with government officials as part of their job. This research will yield important information on gaps in existing corporate policies, procedures and training within the organisation with respect to activities in the relevant jurisdiction.59 When the inherent risk factors have been identified, each risk should be rated so company resources can be allocated most effectively (i.e., rate both the probability that the risk will occur and the potential impact it may have on the business). It is then important to identify mitigating controls for each risk which are commensurate to the probability of the risk arising. Anti-corruption risk assessments are best documented in detail in a company risk register. The register can be used to document the rating for each risk and well as the anti-corruption programs and controls that mitigate that risk. A company may find ‘heat maps’ an effective tool to summarise the results of a corruption risk assessment. A corruption risk ‘heat map’ sets out the risks identified by the company, placing them according to their likelihood and potential impact on a background of colours, with each colour representing a different overall level of risk (i.e. high, medium and low risk respectively). 58 Many of these tips are derived from guidance contained in the AntiCorruption Ethics and Compliance Handbook for Business (2013) published by the OECD, UN Office on Drugs and Crime, and the World Bank. 59 Control Risks Group Limited, ‘Anti-Corruption in Indonesia’ (2013 Report) 9 <http://www.controlrisks.com/~/media/Public%20Site/Files/ Oversized%20Assets/indonesia_whitepaper_2013.pdf>. 20 Doing business in developing countries: developments in anti-corruption law Overall, a risk assessment is an on-going and dynamic process. To be truly effective, it needs to be performed periodically (e.g, annually). It is important to revisit a risk assessment if the company enters new markets, or is subject to a merger or reorganisation. Further, without the active and enthusiastic involvement of executive level management in the risk assessment process it will have no practical impact on the operation of a company. Tip 2: Charitable donations Many companies undertake genuine corporate social responsibility initiatives in developing jurisdictions, such as providing improvements to sanitation, health services or building schools. However, problems can arise where companies are asked to make donations to support charities run by local partners but fail to ascertain how the funds will be managed and who runs the charity in question. It is important to undertake adequate due diligence on the charity and its management structure. Companies need to ensure, at the very minimum, that all donations and sponsorships are made public and that the recipients have a legitimate social purpose. Tip 3: Selection and use of third party agents and business partners Without careful selection of third party intermediaries (whether they be local partners, suppliers, agents, distributors or subcontractors) there is heightened risk that the intermediary may not act in the best interests of the company. All third parties should be subject to a thorough due diligence process. If a third party is engaged, contractual documentation will ideally contain: • a detailed description of the company’s anticorruption policies and a stipulation that the third party is not to engage in any corrupt practices; • a provision allowing the company’s independent auditor to audit the books and records of the third party agent/business partner to verify its compliance with the law and company rules; • (if there is a heavy reliance on third party agents) a process by which the company can monitor the activities of the agent by making it a requirement that the agent provide monthly reports detailing its activities (and any payments made) and a requirement for the agent to sign an annual www.carternewell.com certification to the effect that it has not violated laws relating to anti-corruption or company policies; • anti-bribery and business ethics provisions. These can be based on Australian foreign bribery laws and/or the laws of the jurisdiction in which the company predominantly operates; • provisions stipulating the penalties and sanctions for misconduct and an ability of the company to terminate the contract in event the third party agent or business partner engages in corrupt activities; and • a provision noting that, under no circumstances, will any agents’ remuneration be paid in cash. It is preferable to minimise dependence on third party intermediaries however this is not always possible. Only hire third parties to the extent appropriate for the regular conduct of company business and do not pay them more than what is appropriate remuneration for the services being performed. Tip 4: Communicating externally Clear and unambiguous external communication of corporate anti-corruption policies to prospective and current business partners, agents and government officials is vital if operating in developing countries because corruption is often ingrained in the business culture. Thus, companies that take a strong and visible stance on corruption can dissuade prospective or current agents of the company from engaging in illicit conduct. Tip 5: Company training (in-country) All employees, contractors, secondees and agents working in-country in a developing country jurisdiction or working in high risk roles (such as procurement, marketing or project approvals) should be subject to more in-depth anti-corruption training compared to personnel based in Australia and not undertaking high risk functions. It is important to use ‘real life’ examples, case studies, role plays and quizzes in training packages for in-country staff. Company personnel who have regular interactions with foreign government officials are well placed to train other staff on how to best handle situations where bribes may be sought. It may be preferable to conduct training in English as well as the in-country language to enable local employees to pose questions and obtain answers in their local language. 21 Doing business in developing countries: developments in anti-corruption law By way of example, an anti-corruption training session could cover the following topics: • in-country case studies that highlight corruption risks and the need for personnel to properly assess risk, identify red flags, and report concerns as soon as practicable; • the consequences for the individual and a company that engages in prohibited conduct or whose third party business partner does so, on its behalf; • the way that personnel can promote a culture of ethics in the organisation; • company anti-corruption policies and guidelines on gifts or entertainment offered, provided or received from government officials; • the importance of accurate record keeping; • the identity of the persons nominated as compliance specialists within the organisation and the procedures available for whistle blowers; • relevant anti-corruption laws, including Australian law, the UK Bribery Act and the US Foreign Corrupt Practices Act. Tip 6: Gifts, entertainment, travel and hospitality Gift giving and hospitality are seen as important to doing business in many developing country jurisdictions, especially in India. Thus, it is critical that company policies clearly define the acceptable monetary limits for gifts, entertainment, travel and hospitality and the approval levels required for internal sign-off. There must be a process in place to record the details of all such expenditures by employee and/or client. Key points: • gifts should be given openly and transparently, properly recorded in company books, permitted under local law, and appropriate for the context in which they are given (not extravagant). • hosting and entertainment expenses must be ‘reasonable’ and reflect a desire to cement good relations and show appreciation. • promotional expenditures should be for the purpose of improving company image, better presenting products and services, or establishing cordial relations. • travel expenses for foreign officials must be limited to those required as part of business operations and reasonable in the circumstances. For example, it would be acceptable for a company to pay for flights and modest accommodation on site for a government official in order for them to www.carternewell.com undertake workplace health & safety inspections at a remote production site in the PNG highlands (in a context where such inspections are a legal requirement in order for the company to remain in operation). Tip 7: Whistle blowers It is important to establish a secure and accessible ‘whistle blower’ procedure so staff are encouraged to raise concerns regarding corruption as early as possible and without the risk of reprisal or fear of discriminatory action. All bona fide reports should be investigated. A company should provide personnel with guidance on how (and when to) seek urgent advice if they find themselves in difficult situations ‘out in the field’. A company must have designated personnel that staff can contact to raise any concerns. These personnel require adequate training on how to handle both the concerns raised and the whistle blower. Training can also cover a variety of other issues including topics such as the key reasons individuals keep silent, the complex in-field situations personnel face, and the relevant laws protecting whistle blowers. Larger organisations who operate in numerous jurisdictions may wish to put in place an ethics/ compliance ‘hotline’ as a confidential and anonymous reporting mechanism where employees, agents, distributors and/or suppliers can report concerns and obtain advice on potentially unethical actions or other situations that may affect company interests. Any bona fide reports are subject to internal review and are prioritised according to their potential impacts on the company. The benefits of implementing an ethics hotline is that it engenders a stronger culture of anti-fraud and ethical behaviour within the organisation which may in turn lead to a reduction in company employees and stakeholders engaging in misconduct. Tip 8: counsel to assist in this process. Where complex investigations need to be carried out in developing country jurisdictions, the company may wish to engage local legal counsel and the services of a professional investigative firm which can more easily accomplish tasks such as the securing of company servers, interviewing personnel in-country, conducting a forensic IT investigation for collection and preservation of all electronic evidence and asset tracing. If the company is, for example, a subsidiary of a US or UK based parent, and the allegations of misconduct are very serious, the parent company board must be fully briefed on developments and investigation outcomes. The board can then make an assessment of the facts and decide whether it is necessary or not to self-report to the US or UK regulators. If the investigation reveals that the person or persons have engaged in corrupt conduct, the company must consider appropriate disciplinary measures (including termination) and take appropriate corrective action to prevent further or similar incidents from occurring. It may be a good opportunity to review and evaluate the company’s anti-corruption program to assess whether improvements are required. With respect to a targeted investigation into company activities by anti-corruption regulators, the company should fully co-operate with the regulator. The company must have a clear procedure for personnel to follow in event that a regulator makes inquiries or commences an investigation. It is advisable that all company communications with the regulator be funnelled through a nominated person, such as inhouse legal counsel, in order for legal professional privilege to be appropriately maintained. Author Addressing violations – internally and externally with authorities If internal allegations arise implicating an employee, partner, agent or contractor in corrupt activity, a key challenge for a company is to ascertain the veracity of the allegations and whether there have been any violations of the relevant anti-corruption laws. The company needs to proceed quickly, collecting information through interviews with employees and investigative evaluation of company documents and other sources, while making sure that legal professional privilege is protected at all times. It is often advisable to retain outside legal 22 Doing business in developing countries: developments in anti-corruption law Audine Bartlett Senior Associate +61 7 3000 8331 @ [email protected] www.carternewell.com Brisbane Level 13, 215 Adelaide Street Brisbane QLD Australia 4000 GPO Box 2232 Brisbane 4001 Phone +61 7 3000 8300 Email [email protected] Sydney Level 6, 60 Pitt Street Sydney NSW Australia 2000 Phone +61 2 9241 6808 Melbourne 280 Queen Street Melbourne VIC Australia 3000 (Via Agency) www.carternewell.com 23 Doing business in developing countries: developments in anti-corruption law www.carternewell.com