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Focus: New legislation introduces criminal offences for false accounting

23 February 2016

In brief: The Federal Government has proposed new legislation that introduces two new criminal offences for false accounting into the Commonwealth Criminal Code. The proposed false accounting offences are designed to help Australia comply with the OECD's Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Partner Rachel Nicolson (view CV) and Senior Associate James Campbell look at the relevance of these developments to your business.

 
 

How does it affect you?

  • Once the Crimes Legislation Amendment (Proceeds of Crime and Other Measures) Bill 2015 (Cth) (the Bill) has been passed, companies will be exposed to the risk of liability and very substantial fines under the new false accounting offences. These offences are broader in scope and operation than current Commonwealth and state offences used to combat foreign bribery.
  • The Bill forms part of the renewed focus on tackling corporate involvement in foreign bribery. Companies should take this time before the Bill is passed to review their policies and compliance programs to ensure they are adequate in responding to the requirements of federal and state anti-bribery related laws, including these new proposed offences.

Background

The Bill was introduced on 26 November 2015 in an effort to improve and clarify Commonwealth criminal justice arrangements in relation to proceeds of crime, foreign bribery, money laundering and terrorist financing.

The Bill was passed by the House of Representatives on 3 December 2015, and recommended by the Senate Standing Committee on Legal and Constitutional Affairs on 3 February 2016 without any amendments. All that remains is for the Bill to be debated in the Senate and passed.

The proposed false accounting offences in the Bill are designed to strengthen Australia's compliance with the Organisation for Economic Co-operation and Development's (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions which came into force on 15 February 1999.

This Bill comes at a time of renewed focus on tackling involvement in foreign bribery, and in response to recommendations by the OECD Working Group on Bribery in 2012 to Australia to tailor existing false accounting offences to address foreign bribery as well as increase the maximum sanctions against legal persons for false accounting. (For further discussion on the recommendations and their context, read our earlier Focus: OECD releases report on anti-bribery enforcement.)

As part of this renewed focus, the Senate Economics Reference Committee is currently conducting a wider inquiry into measures governing the activities of Australian corporations, entities, organisations, individuals, government and related parties with respect to foreign bribery. Submissions for this inquiry have already been received and the matter is due for public hearing over the next few months, with the Committee due to report in July 2016. (For further context of this inquiry, see our earlier Focus: Senate inquiry on foreign bribery – corporate culture to take centre stage.)

False accounting offences

Overview

Schedule 2 of the Bill inserts Division 490 into the Criminal Code Act 1995 (Cth) (Commonwealth Criminal Code) to create two new offences of false dealing with accounting documents:

  • intentional false dealing with accounting documents (Division 490.1); and
  • reckless false dealing with accounting documents (Division 490.2).

Division 490.1 would make it an offence to alter, destroy or conceal an accounting document or to fail to make or alter an accounting document that the person is under a duty under statute or common law to make or alter. In addition, there must be an intention that such conduct would facilitate, conceal or disguise the giving or receiving (by any person) of a benefit that is not legitimately due, or a loss not legitimately incurred.

Division 490.2 would make the same conduct an offence where the person is reckless (rather than intentional) about whether the conduct would facilitate, conceal, or disguise an illegitimate benefit or loss. Recklessness in this context would cover situations where a person was aware of a substantial risk that the conduct would facilitate, conceal, or disguise an illegitimate benefit or loss and it was unjustifiable to take such a risk, but the person went ahead and engaged in the conduct anyway.

Penalties

For the intentional offence (Division 490.1):

  • individual offenders are punishable by up to:
    • 10 years' imprisonment; and/or
    • 10,000 penalty units ($1.8 million).
  • corporate offenders are punishable up to:
    • 100,000 penalty units ($18 million);
    • Three times the value of the benefit if the benefit can be established; and/or
    • 10 per cent of a 12-month turnover if the value of the benefit cannot be established.

For the recklessness offence (Division 490.2), the maximum prescribed penalties are exactly half of the values for the intentional offence.

Accounting documents

Accounting documents are defined broadly and can refer to any account, record or document for an accounting purpose, or any register, financial report or financial record (including, for example invoices, receipts and documents of prime entry) under the Corporations Act 2001 (Cth).

Comparison with current Commonwealth and state offences

At the Federal level, under sections 286 and 1307 of the Corporations Act, persons who fail to keep correct financial records and falsify books respectively are punishable by a fine and imprisonment. The more serious offence, falsifying books, attracts penalties no higher than a fine of $18,000 or imprisonment of two years. However, the proposed false accounting offences attract up to 10 years' imprisonment or a fine of up to $1.8 million for a natural person.

Further, the proposed offences are broader in scope than, for example, the offence of falsifying books, which is limited to the concealment, destruction, mutilation or falsification of any securities of or belonging to the company or any books affecting or relating to affairs of the company.

At the state level, there are general fraud and false accounting offences which may overlap with the proposed false accounting offence. For example, Victoria has a false accounting offence in s83 of the Victorian Crimes Act 1958 (Vic). Although, this offence attracts a maximum imprisonment of 10 years, this offence does not apply to situations where recklessness was involved in the commission of false accounting.

Operation of the offences in practice

Scope of the proposed offences

The proposed offences in the Bill apply to any Australian resident, citizen or corporation as well as any employees or persons engaged to do work for the corporation, whether within Australia or outside Australia. The accounting documents themselves need not be in Australia, and can apply to accounting documents that are kept under Commonwealth law, or kept to record the receipt or use of Australian currency.

Further, the prosecution does not have to prove:

  • actual receiving or giving of the benefit; or
  • actual loss to another person; or
  • intention that a particular person receive or give a benefit, or incur the loss.

This means that the proposed offences potentially have a broad operation, given that:

  • the above elements need not be proved;
  • the element 'not legitimately due' is not clearly defined (and appears to set at a substantially lower threshold than the existing state-based offences, which generally require proof of dishonesty); and
  • the offences have broad extra-territorial application.

Despite the potentially broad operation of the proposed offences, the Senate Standing Committee on Legal and Constitutional Affairs reported that the breadth and penalties which the proposed offences attract are appropriate in the circumstances.

ASIC's interest in the proposed offences

ASIC has indicated its intention to use the broad scope of the proposed false accounting offences to pursue errant behaviour beyond the foreign bribery context. ASIC's role in relation to the proposed offences is currently unclear. Under a Memorandum of Understanding between the Australian Federal Police and ASIC, it would generally be the AFP that would take the lead role in relation to investigations of potential breaches of the Commonwealth Criminal Code. However there may be situations in which suspected contraventions are uncovered in the course of, or in connection with, an ASIC investigation. ASIC has the power to investigate suspected contraventions of any Commonwealth law (including the Commonwealth Criminal Code) where the contravention concerns the management or affairs of a company and there is also a large degree of overlap between the proposed offences and existing Corporations Act offences. In those circumstances, there may be occasions where ASIC considers it expedient to use its compulsive powers, including the power to examine witnesses and to require the production of books, before handing matters over to the AFP.

Attribution to companies and corporate culture

Regulators have recently been emphasising the importance of corporate culture in deciding when companies should be penalised for misbehaviour of employees. The proposed offences will provide an ideal tool for regulators to use against companies that they consider to have a poor corporate culture: firstly, the scale of potential penalties against companies dwarfs the scale of penalties generally available under the Corporations Act; secondly, the Commonwealth Criminal Code expressly provides that companies can be liable where their corporate culture encouraged, tolerated or led to a non-compliance:

  • Under Division 12.2 of the Commonwealth Criminal Code, the physical element of the proposed offences (making, altering etc an accounting document) will be attributed to a company wherever done by an employee acting within the actual or apparent scope of their employment.
  • Under Division 12.3, the mental element of the proposed offences (facilitating, concealing or disguising the giving or receiving of a benefit that is not legitimately due etc) will be attributed to the company if it expressly, tacitly or impliedly authorised or permitted the commission of the offence, including where:
    • a 'high managerial agent' of the company authorised or permitted the commission of the offence (unless the company proves that it exercised due diligence to prevent the commission of the offence); or
    • the company's corporate culture directed, encouraged, tolerated or led to the non-compliance; or
    • the company did not create or maintain a corporate culture that required compliance.

With the new offences likely to be enacted shortly, companies should be reviewing their compliance, training and remuneration systems and ensuring that relevant employees understand the implications if any falsification of books can be said to have been 'tolerated' by the company, or if its systems, including, for example, remuneration structures, can be said to have 'led to' the non-compliance.  

Conclusion

Due to the broad operation of the proposed false accounting offences, as well as a renewed focus on tackling corporate involvement in foreign bribery and corporate culture generally, companies with a nexus to Australia would be prudent to act now to ensure standards are both in place to ensure that there is no possibility that conduct can be construed as false accounting under the proposed offences.

Companies should take this time before the Bill is passed to review their policies to ensure that training on anti-bribery laws is provided to domestic and overseas staff, and that self-reporting mechanisms are considered in order to limit the risks of exposure to penalties and, importantly, reputational damage.

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