Australia – Industry Update: Books And Records Provisions.

14 August, 2015

 

The Future Implications for Australian Businesses Operating Overseas

 

Recent enforcement actions and fines from the U.S. Securities and Enforcement Commission (“SEC”) have not always been levied pursuant to actual alleged bribery and have in some cases been ‘books and records’ violations. These matters underscore the importance of understanding both the U.S. ‘books and records’ provisions as well as the emerging legal and regulatory environment in Australia which may mirror such provisions in the future. 

 

Australia is exploring options to introduce a new false accounting offence to complement existing provisions to detect, deter and prosecute acts of foreign bribery. In Australia at the moment, the situation appears to be that directors of companies found to be engaged in false accounting may only be liable for sanctions (such as disqualification) under the Corporations Act, misdemeanor or summary offences under relevant State or Territory accounting offences.

 

Recent proceedings pursued by the SEC against a number of multinational corporations highlight a number of important aspects surrounding the US Exchange Act ‘books and records’ provisions. In some cases the violations pressed by the SEC have arisen for example because of companies not accurately reflecting relationships concerning entertainment and hospitality expenses, or where internal accounting or authorisation controls for monitoring on-going relationships have been deficient. 

 

Recent ‘books and records’ violation actions and fines by the U.S. SEC underscores the importance of understanding both the U.S. provisions as well as the emerging legal and regulatory environment in Australia which may mirror such provisions in the future. 

 

The Australian Context

 

Historically in Australia, the falsification or misrecording of accounting information or documents is seen as inchoate conduct or as part of some larger wrong-doing. For example, in 1880, the Victorian Government passed an amendment to the Crimes Act1 to insert the offence of falsification of ‘accounts, books, writings or documents’ by ‘clerks, officers, servants and others.’ The act of falsification however, still required a general intent to defraud; that is, misrecording a transaction, absent of any will to defraud anyone, would not complete the offence. This generally remains the case today.2

 

At the Commonwealth level in Australia, the situation seems even more problematic because most provisions that relate to, or in some way mention ‘false’ information or documents are also dependent upon either defrauding the Commonwealth or other specific agencies, functions or outcomes of the Government. For example, section 137.2(1) of the Commonwealth Criminal Code requires that any false document in question be produced ‘in compliance or purported compliance with a law of the Commonwealth.’3

 

Is a Books and Records Provision Required if There is Already an Offence for Bribery?

 

In the Australian context, ‘facilitation payments’ (i.e. payments said to be to expedite small, routine, non-discretionary government actions, such as licenses and permits) are a defence to an allegation of foreign bribery. By comparison, within the U.S. it is an exception to bribery. Despite there being an evidential burden to produce records that a questioned payment was a ‘facilitation payment’4 it seems that a person must first be charged and a specific instance particularised before this onus would actually be required.

 

As such, it seems that the Australian laws may not currently have the strong counterweight that the U.S. FCPA and Exchange Act ‘books and records’ provisions bring to these complex equations. Please see below for a brief overview of the U.S. ‘books and records’ provisions within this area.

 

The Implications for Australian Businesses

 

As indicated in a previous FTI Industry Update, the OECD reported that a ‘books and records’ style provision, potentially without the need to show corrupt or other intentions may be introduced in 2015.5

 

Many accounting systems may rely on local, in country account keepers who might aggregate transaction level detail into weekly, monthly or quarterly reports to their head offices. These reports may simply be spreadsheets or other database summations.

The prospect of new U.S. style ‘books and records’ requirements for Australian companies operating internationally means that access to the most granular level detail of procurement and purchase requests, orders, petty cash receipts, invoices and payments from all foreign offices will be required. However, as shown by the BHP case, systems will also need to be in place to coordinate and work closely within policies, guidelines and anti-bribery and corruption programmes.

 

In particular, line item level reviews, controls and analysis of payments to consultants, customs, transport and shipping agents, gifts, meals and entertainment of customers, charitable contributions will be vital. In particular, all documentation relating to dealings with government officials will need to be accessible, highly monitored, coordinated and controlled for review by Australian company directors. 

 

U.S. ‘Books and Records’ Provisions Overview

 

Working in tandem with the criminal bribery offences of the U.S. Foreign Corrupt Practices Act (“FCPA”), the ‘books and records’ provisions require U.S. companies to keep detailed records that accurately reflect corporate transactions and internal accounting controls.6 In particular, the laws are specifically designed with specifications and requirements to deter, detect and criminalise the falsifying of corporate records that might otherwise conceal bribes or other improper payments to officials.7 Notably, the provisions do not have a materiality threshold nor require ‘corrupt intent.’

 

Other U.S. Acts have mirroring provisions. One such example is Section 13(b) (2)(A) and (B) of the Exchange Act wherein, issuers of securities in the U.S. are required to make and keep books, records, systems and accounts which accurately control and reflect transactions and dealings of assets.

 

Mischaractersing a bribe or a facilitation payment as an operational, gift or entertainment expense, may be considered a ‘books and records’ violation under both the FCPA and Exchange Act. Recording a grease payment to a customs official as a ‘freight’ expense ‘customs duty levy’ or ‘site tour travel expenses’ might be typical examples. 8 

 

For further information, please contact:
 
David Wildman, Managing Director, FTI Consulting
david.wildman@fticonsulting.com