Scams, Bribery & CorruptionBy Russell WieseHunt & Hunt Lawyers

November 2017

FREE WEBINAR – FREE TRADE AGREEMENTSNovember 2017

This activity has received funding from Austrade as part of the Free Trade Agreement Training Provider Grant Program.

The views expressed within the activities are not necessarily the views of the Commonwealth of Australia, and the Commonwealth does not accept responsibility for any information or advice contained herein.

Topics

1. Corruption risks

2. Bribery and corruption legislation

3. Bribery recent case study

4. Managing corruption risk

5. Scams

6. Due diligence

Why is this important

1. Customs is particularly susceptible to corruption

2. Bribery and corruption compliance activities are on the rise

3. Liable for acts of third parties

4. Costly use of company resources

5. Less predictable supply chain

6. Can end your ability to trade

Corruption IndexCountry Trade rank Corruption rank

China 1 79

United States 2 18

Japan 3 20

Thailand 4 101

Germany 5 10

United Kingdom 6 10

Singapore 7 7

Republic of Korea 8 52

New Zealand 9 1

Malaysia 10 55

Indonesia 11 90

Most corrupt countries

Least corrupt countries

Customs – perfect for corruption

“There are few public agencies in which the classic pre-conditions for institutional corruption are so conveniently presented as in a Customs administration. The potent mixture of administrative monopoly coupled with the exercise of wide discretion, particularly in a work environment that may lack proper systems of control and accountability, can easily lead to corruption.” JW Shaver, former WCO Secretary General

Corruption risks - Customs

The risk in Customs is higher due to:

• customs officials enjoy extensive discretionary power

• high levels of interaction building familiarity

• importer’s strong incentive to influence decisions

• close supervision of officers is rare

• poor pay of customs officials

• low probability of being caught

Corruption risks - Customs

1. Facilitation payments

2. Bribes relating to:a) originb) valuationc) classificationd) cargo examinatione) application of concessionf) allow prohibited imports

3. Customs officials involvement in illegal imports

Australia is not immune

Source: Sydney Morning Herald

Anti-bribery and corruption legislation

What conduct is regulated

Bribery - a bribe is payment or the giving of some other benefit to someone to influence the performance of a person’s duty and/or to encourage misuse of his or her authority

Corruption - a form of dishonest or unethical conduct by a person entrusted with a position of authority, often to acquire personal benefit

Elements – what is the offence of bribing a foreign public officials?

Action required Intention required Other requirement

A person:

• provides a benefit to another person; or

• causes a benefit to be provided to another person; or

• offers to provide, or promises to provide, a benefit to another person; or

• causes an offer of the provision of a benefit, or a promise of the provision of a benefit, to be made to another person

The person:

• intends to influence the foreign public official in the exercise of the official’s duties as a foreign public official

With the purpose of:

• obtaining or retaining business; or

• obtain or retain a business advantage that is not legitimately due to the recipient, or intended recipient, of the business advantage

The benefit is not legitimately due to the person obtaining the benefit.

…Elements continued

The person receiving the benefit does not have to be the public official who it is intended will be influenced.

The offence applies regardless of the outcome or result of the bribe or the alleged necessity of the payment.

In a prosecution for the offence, it is not necessary to prove that business, or a business advantage, was actually obtained or retained.

National and territorial requirements – when does the offence apply?

Territory: The conduct constituting the alleged offence must occur wholly or partly:

i. in Australia; orii. on board an Australian aircraft or an Australian ship.

Or

National: The conduct constituting the alleged offence must occur wholly outside Australia and at the time of the alleged offence the person is:

i. an Australian citizen; orii. a resident of Australia; oriii. a body corporate incorporated by or under a law of the Commonwealth or

of a State or Territory.

Who is a foreign public official?

The definition of ‘foreign public official’ is very broad. It includes:

• an employee / official / contractor of a foreign government body• individuals performing the duties of an appointment, office or position under a law of

a foreign country• individuals holding or performing the duties of an appointment, office or position

created by custom or convention of a foreign country• individuals in the service of a foreign government body (including service as a

member of a military force or police force)• members of the executive, judiciary, magistracy or legislature of a foreign country• employees, contractors and individuals who perform the duties of an office or

position, or are otherwise in the service of a public international organisation (such as the United Nations)

• individuals who hold themselves out to be an authorised intermediary of a foreign public official.

Penalties

Penalties on conviction of the offence are:

Individual Body corporate

Either:

• imprisonment for not more than 10 years;

• a fine not more than 10,000 penalty units ($2,100,000); or

• both.

A fine up to whichever is greater of the following:

• 100,000 penalty units ($21,000,000);

• 3 times the value of the benefit obtained (if the value of that benefit can be obtained); or

• 10% of the annual turnover of the body corporate for 12 months when the offence occurred (if the value of that benefit cannot be obtained)

Defences

Conduct is lawful in public official’s country

• if conduct is lawful in the public official's country (ie. there is a written law requiring or permitting the provision of the benefit to the public official) then it may not be a breach of our law to give that benefit

Facilitation payments – currently being reviewed

Qualify if:

• benefit was of a minor nature• conduct was engaged in for the sole or dominant purpose of expediting or securing the

performance of a routine government action of a minor nature• the person made a record of the conduct (that complies with the legislation) and

– that person has a copy of the record– the record has been lost or destroyed because of reasons outside of that person’s

control or– a prosecution for the offence is instituted more than 7 years after the conduct

occurred.

False accounting offences

Relatively new provisions targeting false accounting

• A person makes, alters, destroys or conceals an accounting document; or

• Fails to make or alter an accounting document

With the intention that the conduct would facilitate, conceal or disguise:

• The receipt or giving of a benefit that is not legitimately due; or

• A loss that is not legitimately incurred

International comparisons

Key distinctions between the laws

The Australian Criminal Code and US FCPA are similar

• The penalties under the FCPA (individual: $250 000 per violation; company: $5M per violation, twice the amount of the gain)

• Intention to induce or reward improper performance by giving an “advantage” and “knowledge” or “belief” that acceptance of advantage would constitute improper performance

• Real risk - wide extraterritorial reach

UK Bribery Act is much stricter

• extends to the bribery of public officials, private businesses and individual citizens (rather than simply public officials)

• No defence of 'Facilitation of Payments‘• Corporations not liable for the acts of its individuals where it can show it had adequate

procedures in place proportionate to their business size, industry and the specific bribery risks

• Failure to prevent bribery

Current Laws – jurisdiction

AUS Criminal Code FCPA USA UK Bribery Act

Conduct constituting the alleged offence occurs wholly or partly in Australia or on board an Australian aircraft or ship; or

Conduct constituting the alleged offence occurs wholly outside Australia but culprit is an Australian citizen, resident or is a body corporate incorporated in Australia.

Entities with a class of securities registered under the USA Securities Exchange Act 1934 (US);

US citizens, nationals, residents, and entities which are organised in the US or have the US as their principal place of business;

Persons 'acting on behalf' of US citizens / nationals / residents / entities and entities with US securities; or

'Any' person who corruptly makes use of the mails or any instrumentality of interstate commerce in furtherance of the offence of bribery.

Where any conduct forming part of the offence took place in the UK (England and Wales, Scotland or Northern Ireland) (s12(1));

Perpetrator had a 'close connection' with the UK” – includes British citizens, British nationals, residents, British overseas territories citizens (e.g. citizens of former British colonies),certain persons under the British Nationality Act 1981 and bodies incorporated in UK; or

Organisations which 'carry on a business, or part of a business, in any part of the UK‘.

China

Increasing focus on those giving bribes (as opposed to simply receiving)

Current government actively increasing focus on corruption

Applies to the public and private sectors and within the private sector (commercial bribery)

Bribery defined as “improper benefits”

• where seeking "benefits in violation of laws, regulations, rules or policies, or requests that a receiving party provide any assistance or convenience in violation of laws, regulations, rules or policies, or industry standards"

• includes "a competitive advantage in tendering, government procurement and other commercial activities."

• Recently expanded scope to further include "seeking competitive advantage in economic, organizational, human resource, administrative and other activities in violation of the principles of justice and fairness.”

China - public

Penalties based on scale and type of bribe

Official bribery – To state functionaries

Over RMB30,000 (two individuals) – prosecution – 5 years

Over RMB100,000 (recipient a company) – prosecution – 15 years

Over RMB 200,000 (offeror a company) – prosecution - life

Commercial bribery – no Government official or entity involved

Over RMB60,000 (two individuals) – prosecution – 3 years

Over RMB 200,000 (offeror a company) – prosecution – 10 years

Assets and illegal proceeds can be confiscated

May also be covered by the Anti-Unfair Competition Law – no threshold

China - private

PRC unfair Competition law:

• offering business counterparts or staff money or property or adopt alternative means to purchase or sell products

• excludes promotional gifts of nominal value and discounts and commissions are acceptable if transparent and clearly reflected in accounts.

Criminal provisions:

• Not able to give money or property of substantial value to an employee or company, government official or an organisation (including civil organisation, state-owned enterprise or government agency) to seek an improper benefit.

Anti-bribery example

R v Jousif; R v I Elomar; R v M Elomar

Facts

• Elmoar brothers were directors and shareholders of Lifese Pty Ltd, an engineering and construction company

• In 2013 Jousif approached the Elomars about expanding into Iraq

• Jousif offered to secure the contracts with the Iraq Government

• After a visit to Iraq a contract was proposed, but subject to final approval

• On return to Australia the Elomars were told that a $100,000 was needed to set up a Iraq premises and $1 million to secure government approval

• After some objection, the Elomars agreed to the bribe

• The funds were transfer to Iraq under the guise of being a donation

• After payment, the contract was signed

R v Jousif; R v I Elomar; R v M Elomar

• The defendants pleaded quilty

• Sentence:• Each defendant 4 years jail• Elomar brothers - $250K fine each

Judges comments

• The crime is hard to detect so a strong penalty is needed as a deterrence

• Bribery of foreign officials needs to be seen as serious as bribery of Australian officials

• Bribery in Iraq is not less serious - Iraq as a country is more vulnerable and where bribes are harder to detect

R v Jousif; R v I Elomar; R v M Elomar

• It does matter that corruptions is more common in a particular country

• No need to show how the bribe was spent – by its nature bribery distorts markers

• It did not matter that the bribe was a one-off

• An argument that the bribe was of a relatively minor amount was rejected

Other examples

Cadbury Limited/Mondelez International - The global snacking business agreed to pay a $13 million penalty for FCPA violations occurring after Mondelez (then Kraft Foods Inc.) acquired Cadbury and its subsidiaries, including one in India that proceeded to make illicit payments to obtain government licenses and approvals for a chocolate factory in Baddi. (1/6/17)

Nordion Inc. and employee - The Canadian-based health science company and a former employee agreed to collectively pay more than $500,000 to settle FCPA charges. Mikhail Gourevitch, an engineer, arranged bribes to Russian officials for drug approvals and received kickbacks in return. Nordion lacked sufficient internal controls to detect and prevent the scheme. (3/3/16)

The future

Australian legislation has been criticised as ineffective

Senate report due on 7 December 2017

• Facilitation payments

• Failure to prevent bribery

• Liability of parent companies

Managing bribery risks

Managing the risk – facilitation payments

Don’t feed the pigeons

Preventing facilitation payments

1. Even if legal in Australia – prohibit them

2. Likely to be illegal in the country in which it is made

3. Monitor for them

4. Require evidence for all generic charges – “administrative fee”, “Customs processing fee”

5. Ensure contracts with third parties contain audit rights

6. Act at first signs of an issue

Preventing facilitation payments

• Train staff on how to respond to them

• Reduce the ability to request a payment – have the paperwork in order

• What is plan B if a particular port is corrupt

• Build more time into the supply chain – reduce the value of speed

• As an alternative to bribes, can the money be spend on:• increase warehousing• sending via a different port• domestic suppliers

Preventing corruption generally

• Engrain the company’s attitudes:• code of conduct• standard operating procedures• corporate governance• top down messaging

• Formalise the commitment in contracts with third party

• Constant training

• Quality assurance

• Tailor the approach to the market – it is not simply about translating the AU/US policy

Preventing corruption generally

• Ensure the entire supply chain understands how the company views corruption

• Limit the number of brokers/forwarders you use

• Speak to service providers in foreign countries• understand the challenges• reinforce your company’s message• only allow senior staff to deal with Government officials

• Customs brokers• Never depend on one main customer – it makes you vulnerable• Avoid sub-contracting where possible• Ensure the importance of customs compliance is understood by legal

and management

Contractual terms

• Imparts a level of seriousness

• Objection to the clause by the other party will be a clear warning

• Expected by regulators

• Examples• compliance with laws• anti-corruption representations• right to audit books and records of the service provider• right to terminate as a result of a breach of any corruption laws• undertaking to follow your anti-corruption policy• indemnity for any loss flowing from a breach

If an issue is discovered

• Act quickly

• Seek legal advice

• Determine the extent of the problem

• Self reporting and cooperating with authorities

• Adopt measure to prevent the issue occurring again

Scams

Incorrect bank account

• An order of goods is made from a foreign vendor• Terms are that payment will be made once the goods are loaded on the

vessel and that the original BOL will be provided once payment is received

• A copy BOL is provided and payment made• The vendor claims that payment is never received

– The person you thought was a vendor was a middle man– An employee within the vendor has provided their own bank account

• You need to verify– who you are contracting with– Bank account details

• Variant – new bank account details

Request for additional payments

• Pushing for additional payment once a victim has sent the first one

• Various explanations given• Sunk cost fallacy• Claim is usually for an amount less than the cost of using

lawyers• Have a contract in place so that there is less wiggle room• Payment terms• Letter from lawyer in supplier’s country

Certificates of origin

• Details on the Chinese CoO do not match with the commercial details

• Risk – CoO will be denied – AU importer liable for the duty• Reason

– The Chinese company does not have a license to export the actual goods

– There is a better VAT outcome for the goods described in the CoO than the actual goods

– The goods are not made in China

Avoiding dumping duties

• Circumvention via third country• Freight forwarder may be involved• May be hard to detect due to legitimate manufacturer in the third

country

• False supplier/exporter details

• Changing tariff classification

Customs valuation

• You are asked for a customs invoice that does not match the commercial invoice

• You are asked to invoice separately for the goods and management/market development

• The customer asks that amounts on the CoO be altered

• The customer simply declares a false customs value

Risk to supplier

• If discovered it will impact future supplies to other customers

• Do you have any personal in the import country

• Some countries will go after a well known exporter – Zespri

Ask to see the import declaration to verify that the correct valuation is being used

Counterfeit goods

• Very few people can legitimately sell genuine branded goods below market price

• If its too good to be true – the goods are probably counterfeit

• Risk to you:• Goods held by the ABF• You have overpaid for goods• You cannot legally sell the goods in Australia• Your other imports may be held by the ABF

Due diligence

Due diligence

1. Needs to be tailored around the risk profile:

a) service providerb) transactionc) frequency of transactiond) country

2. Goal is to identify risk, but also may help reduce/avoid any penalties

3. It needs to be continuing

Types of due diligence

• Commercial:• Do they have the knowledge and skills to deliver on their promises

• Financial• If supplying on credit this is crucial• Seeking general assurance that the company has assets/cash flow to

deliver on promises

• Legal• This is the key to detecting scams and preventing corruption

Due diligence

• Basic – any public record of non-compliance

• Databases – World Bank

• Legal proceedings

• References from suppliers/customers/bank/business associations

• Proof of bank account details – statement, contact at the bank – payment of initial small amount

• If it is significant enough transaction – third party review

• Anti-corruption policies

• Right to import/export

• Required licences

Due diligence

• Company check:

• will need it to ensure binding contract• company chop

• Face to face meeting:

• it will also help build the relationship• Austrade

• Ongoing

• IP – check with holder of the trademark

• Do they have sufficient resources – or is main business asset “close connections”

Bottom line – there are a lot of people to scam – Give them incentive to choose someone else

Questions

54

CONTACTSRussell WieseT: 61 3 8602 9231E: rwiese@huntvic.com.au

Lynne GrantT: 61 3 8602 9246E: lgrant@huntvic.com.au