August « 2005 « Australian Regulatory Compliance Review from Langes+ Lawyers

August 31, 2005

8 former US KPMG partners indicted

This New York Times story carries details of indictments presented against 8 former partners of the US branch of KPMG accountants (a separate firm from KPMG Australia) together with an outside lawyer.

The indictments allege not only that the accused conspired to defraud the government by advising clients to enter fraudulent tax shelters and preparing tax returns to conceal them but also that they concealed information from investigators.

The article says "According to the indictment, one defendant, Mr. Eischeid, gave "false,
misleading and evasive" testimony to the I.R.S. in 2002 about certain
tax shelters. The indictment cited an e-mail message from one KPMG
partner who wrote that the firm’s general counsel and outside lawyer
"determined that the best strategy was ‘the less said the better.’ " As
a result, the e-mail message continued, "the record will reflect
repeated ‘I don’t knows,’ ‘I don’t recalls,’ and ‘I was out of the
loops’ – the rope-a-dope/Enron defense."

A federal judge has approved a US$456 million (AUD 606 million) settlement between KPMG and the
Justice Department that allows the firm to avoid a criminal indictment.

UPDATE 18 July 2007: Washington Post reports that a federal judge has tossed out indictments against 13 former KPMG
executives in the government’s largest criminal tax-fraud
case ever, citing "intolerable" prosecutorial abuses that deprived the
officials of their constitutional right to a defense.

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Posted 31st August 2005 by David Jacobson in Current Affairs

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Dealing with regulators

Even though there is always a feeling by business managers that regulators are, at the least, not there to help them, it is important that you maintain good day to day working relationships with government bodies that regulate your business.

A business should have a clear published policy that its officers and employees must treat regulators with courtesy and respect, and not obstruct them in their lawful activities. If they are asked by a regulator to provide information, your employees must not intentionally mislead or deceive them or destroy or conceal relevant information.

The regulatory officials will quickly sense whether you are being open or trying to mislead them and this assessment will influence their dealings with you. You can unwittingly turn a technical mistake into a criminal offence.

In Why have a compliance program? a former director of the US Office of Export Enforcement says:

An experienced federal investigator knows that when he or she finds a company operating without an effective compliance program, the odds are in favor of discovering evidence of a crime.

In Responding to Business Crimes Investigations a former deputy US Attorney General says:

Where a company ends up has as much to do with how it manages the response to a business-crime challenge as it does with the attitude and policies of prosecutors.

It is worth noting that the 8 former US partners of KPMG have been charged with concealing information as well as the original creation of the alleged fraudulent tax shelter.

In The regulator’s approach to compliance ACCC Commissioner David Smith says:

"Given the massively increased financial penalties and possible criminal sanctions that corporations and their executives now face for ignoring this obligation, I suggest it will now be crucial that a corporation be able to demonstrate to its shareholders the existence of a corporate culture that is effective in the management of compliance.

To do this, a company needs a system of deep-rooted values, attitudes and beliefs that affect the way those within the company perceive the
company itself and what it stands for and the way it perceives its relationship with suppliers, customers and regulators."

Read the complete pdf article(new window)

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Posted 31st August 2005 by David Jacobson in Business Planning

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August 29, 2005

Operational risk management in financial services

APRA Chairman John Laker has outlined prudential issues relating to operational risk management.

In particular he discussed the role of the board and senior management:

We expect the board to be aware of the institution’s major operational risks and how they are controlled. The board should set the institution’s tolerance for risk or “risk appetite”, through its approval of policies for managing operational risk.

These policies should outline the institution’s approach to the identification, assessment, monitoring, control and mitigation of this risk. The board is also responsible for regular review of the institution’s operational risk management framework and for ensuring that senior management is actively monitoring the effectiveness of risk controls. Accordingly, the board should establish a
management structure for operational risk based on clear lines of responsibility, accountability and reporting.

He identifed information technology, outsourcing, business continuity management, and project management and product development as key operational risk areas.

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Posted 29th August 2005 by David Jacobson in Financial Services

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ACCC’s leniency policy for cartel conduct

ACCC has released its new leniency policy for cartel conduct which will apply to applications from 5 September 2005.

For eligible applicants the Immunity Policy will:

provide automatic full immunity to the first person who self
reports his or her involvement in a cartel up until the point where the
ACCC has legal advice that it has enough evidence. Under the former
policy, full immunity was only available if the ACCC was unaware of the
cartel when the participant self reported
implement a ‘marker’ system allowing potential applicants to secure
their place in the immunity queue while they complete internal
investigations
remove the requirement for immunity applications to be in writing
provide that where a corporation qualifies for immunity the default
position is that all current and former employees will also have
immunity
clarify that if the first to apply for immunity is unable or
unwilling to meet all the requirements for immunity, a subsequent
applicant may still qualify for immunity. This will maximise the
incentive for applicants to cooperate fully with the ACCC, and
clarify that the ACCC may, in appropriate cases, approach an
individual cartel participant about the availability of immunity.

The ACCC has also issued a guideline to assist the interpretation of
the Immunity Policy and a position paper on the issues arising from the
use of leniency in cartel investigations.

The policy will not apply to cartel ringleaders.

It also does not apply to other competition offences.

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Posted 29th August 2005 by David Jacobson in Trade Practices

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August 28, 2005

The regulator’s approach to compliance

In The regulator’s approach to compliance: Crackdown, confrontation or compliance culture ACCC Commissioner David Smith provides some insights into what influences the ACCC’s dealings with businesses:
"The kinds of things that influence the Commission in our decision making when potentially unlawful conduct is detected and investigated include:
• whether the conduct involves a blatant disregard of the law
• whether the person, business or industry has a history of previous contraventions of competition or consumer laws
• the detriment caused by the conduct and avenues available to redress that detriment
• whether the conduct is of major public interest or concern
• whether the conduct is “industry wide” or is likely to become widespread if the Commission doesn’t intervene
• the potential for action to educate and deter future conduct"

It is significant that the first 2 points are in the hands of the business itself.

This point is reflected in Mr Smith’s closing comments:
"It’s still a fact that most businesses implement trade practices compliance programs only after the event, as a result of a direct ACCC action against them or another business in their industry.

As I said at the outset, particularly in this new environment, it is eminently more sensible to have business comply with the Act in the first place, rather than act in a way that does damage to both consumers and the business, and then to try to undo the damage later.

Given the massively increased financial penalties and possible criminal sanctions that corporations and their executives now face for ignoring this obligation, I suggest it will now be crucial that a corporation be able to demonstrate to its shareholders the existence of a corporate culture that is effective in the management of compliance.

To do this, a company needs a system of deep-rooted values, attitudes and beliefs that affect the way those within the company perceive the company itself and what it stands for and the way it perceives its relationship with suppliers, customers and regulators."

There’s always a gap between what a business sees as appropriate and what a regulator would prefer (assuming both views are within the law) but these comments give some clear guidelines to anty business trying to persuade a regulator that their view is correct.

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Posted 28th August 2005 by David Jacobson in Business Planning, Trade Practices

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August 24, 2005

Privacy guidelines for broadcasters

Section 7B(4) of the Privacy Act provides an exemption for ‘acts and practices engaged in by media organisations in the course of journalism’. A media organisation is an organisation whose activities consist of the collection, preparation and dissemination of news, current affairs, information or documentaries.

The Australian Communications and Media Authority has released a booklet called Privacy Guidelines for Broadcasters.

The guidelines are intended to assist broadcasters and members of the public to better understand the operation of the privacy provisions in the various codes of practice in realtion to their journalism activities. The guidelines provide an overview of the way in which ACMA will assess complaints by listeners or viewers which allege breaches of the privacy provisions in the broadcasting codes of practice. The guidelines are not legally binding.

The core notion found in the various code provisions is that broadcasters should not use material relating to a person’s private affairs without that person’s consent, unless there is an identifiable public interest reason for the material to be broadcast.

In considering complaints about intrusions into privacy ACMA will consider two main questions:
? did the material relate to a person’s private affairs? and
? was its broadcast warranted in the public interest?

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Posted 24th August 2005 by David Jacobson in Privacy

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Debt collection practices reviewed

The ACCC is continuing its policy of seeking to obtain enforceable out of court settlements rather than pursue lengthy court actions. ACCC’s latest announcement deals with its settlement with Alliance Factoring over its debt collection procedures.

The ACCC was concerned that
Alliance had engaged in misleading and deceptive conduct and undue
harassment and coercion in relation to its debt collection practices in
attempting to recover Telstra debts it purchased in 2002 and 2003.

Alliance has agreed to:

establish a 1300 hotline for 12 months in which complainants can
lodge a dispute in relation to money paid to Alliance where the
complainant claims the money was not owed; and/or disputes liability;
or where a default listing has resulted from debt which the complainant
claims was not owed.
Where Alliance is reasonably satisfied a debt was not owed it will:
- refund the money paid;
- remove the default listing; and
- reimburse the alleged debtor’s legal costs.
Alliance will advertise this process in all metropolitan
newspapers. In addition, Alliance will advise key financial advisers
and State Fair Trading offices of this process.

Alliance has also agreed to:

sponsor a two day forum for the debt collection industry
review its existing compliance program/implement a trade practices law compliance program
review its complaints handling procedure
review its standard form letters
review of call guides
produce a written policy for handling of bankrupt debts, and
cause an independent review of its compliance program, once a year for three years.

It appeared the conduct of concern arose from a number of factors, including:

the age of some of the debts and the level of information provided
to alleged debtors, making it difficult for them to determine whether
the debt was theirs, and/or whether the debt had been paid or otherwise
dealt with
Alliance’s systems were also unable to readily and accurately
determine whether particular debts had been the subject of bankruptcy
proceedings or whether legal proceedings to recover the alleged debt
may have become statute barred, and
alleged debtors had difficulty in resolving disputes with Alliance because of a lack of clear complaints handling procedures.

Complaints received included allegations that alleged debtors were
harassed by the frequency with which Alliance contacted them by mail,
telephone and/or text message (SMS); contacted alleged debtors at work
when they had requested Alliance not do so; and used threatening and on
some occasions abusive language.

The ACCC also considered Alliance may have inappropriately listed
debts that were in dispute with a credit reporting agency. In some
cases it appears Alliance indicated that an alleged debt would be
listed as a default on the consumer’s credit file unless the alleged
debt was paid when, in some cases, the debt had already been listed as
a default.

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Posted 24th August 2005 by David Jacobson in Trade Practices

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August 23, 2005

Online calculators

ASIC has released a consultation paper which discusses the licensing and regulatory issues associated with online calculators.

The paper contains proposals for 3 types of calculators:
(a) generic calculators;
(b) product-specific calculators; and
(c) risk profilers.

ASIC distinguishes them as follows:

"Generic calculators
1.2 Generic calculators are:
(a) mathematical tools (i.e. they only produce numerical results)
(b) that do not produce results relating to one or more specific financial products.

1.3 Examples of generic calculators include the following (but only where they do not relate to specific financial products):
(a) savings calculators;
(b) managed investment calculators; and
(c) life insurance calculators.

1.4 Typically, generic calculators help the user calculate:
(a) the estimated value of total savings or investments at a future point in time; and/or
(b) the estimated level of saving, investment or life insurance cover required to achieve a particular financial goal.

Product-specific calculators
1.5 Product-specific calculators are:
(a) mathematical tools (i.e. they only produce numerical results)
(b) that produce results relating to one or more specific financial products.

1.6 Examples of product-specific calculators include:
(a) calculators that are connected to promotional material for a named financial product (e.g. by including a link to the Product Disclosure Statement for the product or a link to ‘Apply now’ on the calculator’s results page);
(b) superannuation or managed investment calculators that allow the user to select, perform calculations on, and compare the estimated performance of named financial products (or investment strategies within a product);
(c) life insurance calculators that enable the user to calculate the sum insured (i.e. the amount of insurance they should take out) as part of the process of applying for, or obtaining a quote for, a specific life insurance product; and
(d) warrant calculators that enable the user to calculate and compare the projected income and taxation for specific instalment warrant products.

Risk profilers
1.7 Risk profilers are tools that, based on the user’s answers to a series of questions about investment preferences, assess the user’s attitude to risk.

1.8 Risk profilers are generally not mathematical tools (i.e. they do not produce numerical results). Although the result may be derived using mathematical formulae (e.g. by assigning the user’s answers scores and using the total to produce a result), the results themselves are not numerical (e.g. the output is that the client has a risk weighting, such as ‘conservative’ or ‘aggressive’)."

Comments are due by 23 September.

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Posted 23rd August 2005 by David Jacobson in Financial Services

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GIO managers breached their duties in takeover defence

Justice Austin of the Supreme Court of New South
Wales has found that Messrs Vines, Robertson and Fox breached their
duties during the course of AMP’s 1998–99 takeover bid for GIO
Australia and further found Mr Fox to have breached his duty to act
honestly. (ASIC Media release. Judgment not yet online)

ASIC sued the 3 managers under the Corporations Act civil penalty provisions.

Specifically, Justice Austin found that:

Mr
Vines breached his duty as a director of GIO Insurance and as an
executive officer of GIO Australia to act with reasonable care and
diligence on eleven occasions, including failing to ensure the due
diligence committee was properly informed and the Part B statement
remained correct, especially in light of the effect of claims flowing
from Hurricane Georges on the GIO Re profit forecast and doubts about
the efficacy of a financial reinsurance agreement with America Re.
Mr
Robertson breached his duty as an executive director of GIO Insurance
and an executive officer of GIO Australia to act with reasonable care
and diligence on ten occasions including failing to inform GIO
Australia, GIO Insurance, their auditors or the due diligence committee
about the true potential effect of claims flowing from Hurricane
Georges on the profit forecast contained in the Part B statement;
Mr
Fox breached his duty as an executive director of GIO Insurance and an
executive officer of GIO Australia to act with reasonable care and
diligence on seven occasions including failing to ensure the auditors
were properly informed; and
Mr Fox
breached his duty to act honestly on two occasions in relation to an
uncommercial financial reinsurance agreement entered into by GIO Re
with American Re which was not in the best interests of GIO Re and in
writing a side letter to American Re offering to take back a major
share of the defined event risk.

Justice
Austin found that these failures ultimately led to false and misleading
information being published in the Part B Statement.

ASIC’s case focused on the conduct of the three former directors of GIO Insurance regarding two broad areas:

the
formulation and methodology used to maintain an $80 million profit
forecast for GIO Re in response to the takeover offer from AMP, and
entering
into a financial reinsurance agreement with American Re, which
allegedly purported to protect the $80 million profit forecast.

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Posted 23rd August 2005 by David Jacobson in Corporate Governance, Financial Services

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August 19, 2005

Privacy Case Notes

The Privacy Commissioner, Karen Curtis, has released case notes 8
to 18 regarding personal information handled by credit providers,
insurance providers, employment agencies, a telecommunications service
provider, an internet service provider and federal government agencies.

The cases include:

OPC v Banking Institution [2005] PrivCmrA 11
: the Office conducted an own motion investigation (OMI) into the
automated disclosure, by a banking institution, of personal information
following the use of an incorrect facsimile number.

Following
the Office’s OMI, the banking institution stopped using a
facsimile-based service to receive customers’ personal information, and
introduced a secure on-line service and permanently decommissioned the
fax number. The other organisation involved also confirmed that it
blocked all faxes other than those from designated numbers.

Q v Credit Provider B [2005] PrivCmrA 16:
it was alleged that credit provider B had re-listed an overdue account
on an individual’s consumer credit information file after it had been
purged from their record.

Following the Commissioner’s
investigation credit provider B acknowledged that it had made an error
and that the listing should be removed. Credit provider B contacted the
credit reporting agency and instructed the credit reporting agency to
remove the listing immediately.

S v Credit Provider [2005] PrivCmrA 18:the complainant alleged that a commercial credit default was listed on
their consumer credit information file and an enquiry was listed
without a loan application.

Following an investigation by the
Office, both the enquiry and the payment default were removed from the
complainant’s credit file. The Commissioner sought from the credit
provider written evidence that its staff were provided with Privacy Act
training. The credit provider also provided a written apology to the
complainant.

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Posted 19th August 2005 by David Jacobson in Privacy

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