Are Australia and New Zealand Corrupt?

ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

charteredaccountantsanz.com/futureinc Chartered Accountants Australia About Dr Lisa Marriott and New Zealand Dr Lisa Marriott is an Associate Professor of Chartered Accountants Australia and New Taxation at Victoria University of Wellington’s Zealand is made up of over 100,000 diverse, School of Accounting and Commercial Law. talented and financially astute professionals Lisa is a Chartered Accountant and a member who utilise their skills every day to make a of Chartered Accountants Australia and New difference for businesses the world over. Zealand. Lisa has publications in a range of international refereed journals and is the Members of Chartered Accountants Australia author of The Politics of Retirement Savings and New Zealand are known for professional Taxation: A Trans-tasman Perspective. Lisa integrity, principled judgement, financial discipline was recently awarded a Royal Society of and a forward-looking approach to business. New Zealand Marsden Grant to investigate the We focus on the education and lifelong learning different treatments of tax evasion and welfare of members, and engage in advocacy and fraud in the New Zealand justice system. Lisa thought leadership in areas that impact the has worked in industry in the private sector in economy and domestic and international the United Kingdom and in the New Zealand capital markets. public sector. For the past eight years, Lisa We are a member of the International Federation has worked in academia. of Accountants, and are connected globally through the 800,000-strong Global Accounting Alliance and Chartered Accountants Worldwide which brings together leading Institutes in Australia, England and Wales, Ireland, New Zealand, Scotland and South Africa to support and promote over 320,000 Chartered Accountants in more than 180 countries.

Copyright © August 2015 Chartered Accountants Australia and New Zealand. All rights reserved. DISCLAIMER This document was prepared by Chartered Accountants Australia and New Zealand with the assistance of Dr Lisa Marriott. The information in this document is provided for general guidance only and on the understanding that it does not represent, and is not intended to be, advice. Whilst care has been taken its preparation, it should not be used as a substitute for consultation with professional accounting, tax, legal or other advisors. Before making any decision or taking any action, you should consult with an appropriate specialist or professional. Chartered Accountants Australia and New Zealand. Formed in Australia. Members of the organisation are not liable for the debts and liabilities of the organisation. ABN 50 084 642 571

0415-45 FOREWORD

In Australia and New Zealand we Regulation alone doesn’t appear have long traded on our reputations to be the solution. I encourage you for high ethical standards. They are to consider the “suggestions for the reputations that have supported way forward” discussed in the paper. strong positions in the global economy. Don’t think of them as answers, but This latest paper from future[inc] as catalysts for stimulating debate. questions whether or not we deserve We need to be more proactive in our squeaky clean reputations, and the fight against corruption and what we should be doing to protect send the message that we take them. Not only do reports indicate that the issue seriously. rates of corruption in our two countries Rethink what you thought you knew may be rising, we are also doing more about corruption. business with countries that have Read on and join the debate. different ethical frameworks from our own. With reference to data and case Fred Hutchings studies from both New Zealand and President, Australia, and from the public and Chartered Accountants ANZ private sectors, the paper looks at what our areas of weakness are, what anti-bribery and corruption tools we have in place, and whether they are being used effectively.

charteredaccountantsanz.com/futureinc 4 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

CONTENTS 05 06 10 SUMMARY INTRODUCTION WHAT DO WE KNOW ABOUT CORRUPTION? 22 31 34 WHAT DO WE KNOW WHAT SHOULD WE CONCLUSION ABOUT CORRUPTION BE DOING ABOUT IN AUSTRALIA AND CORRUPTION? NEW ZEALAND? 36 REFERENCES 5 future[inc]

SUMMARY

Australia and New Zealand perform well in Relying on our historic reputation as global measures of corruption, and both of “fair dinkum” countries is no longer enough. our countries trade on reputations for honesty We need to not only be better in reality at and integrity. However, rates of corruption addressing corruption than other countries – are reported to be rising and we are trading we also need to be perceived to be better. increasingly often with countries that are Our two countries need to be more considered to be highly corrupt. Additionally, proactive in the fight against corruption. despite our positive survey rankings, Australia In this report, we examine what we are and New Zealand have been subject to harsh currently doing to mitigate corruption in criticism in recent years for what is perceived Australia and New Zealand and what to be a lackadaisical approach to corruption. we should be doing. We then present ten How justified are our good reputations? options for consideration; our aim is to Countries such as the United Kingdom start a broad debate on corruption and (UK) have been lauded by international the role of Australia and New Zealand in organisations for initiatives such as the the international context. Bribery Act 2010, a tough anti-bribery and corruption law. We need to consider how Australia and New Zealand are currently perceived in the domain of global corruption and how we wish to be perceived in the future. 6 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

We set out to ask not only are we corrupt? But also how corrupt are we? And perhaps more importantly, what are we doing about it? INTRODUCTION

Global reports suggest that rates of corruption are low in Australia and New Zealand. Is this view warranted? A brief look at newspaper headlines would suggest not. Cases already reported in the media in 2015 include the payment or receiving of bribes,1 misconduct in public office,2 and undisclosed gift-giving and receiving.3 The Australian media has reported over the past few months that “Australia’s slide into corruption must be stopped”, while New Zealand’s media recently labelled the Minister of Justice as the “Minister of Corruption.”4 We have even become accustomed to media reports about corruption on the sports field, including recent accusations of bribery and match fixing in football and cricket. 7 future[inc]

FIGURE 1: CORRUPTION IN AUSTRALIA AND NEW ZEALAND

increase in fraud, bribery and % corruption over $1 million in 82 Australia and New Zealand5

% % PwC survey respondents + report experiencing 33 57 6 OF NEW ZEALAND OF AUSTRALIA economic crime in 2014

increase in losses due to economic % crime in Australia and New Zealand 300 between 1997 and 20127

fraud, bribery and corruption incidents in Australia and 194,454 New Zealand in 20128

What should we be paying more attention Before we start, we need to clarify what to: statistical rankings or national reports? we mean by “corruption.” The definition of We set out to ask not only “are we corrupt?” corruption used by the Asian Development but also “how corrupt are we?” And Bank is “Behaviour on the part of officials perhaps more importantly, “what are in the public or private sector in which they we doing about it?” improperly and unlawfully enrich themselves or those close to them, or induce others to do so, by misusing the position in which they are placed.” This definition of corruption is also used by the New Zealand Serious Fraud Office. CORRUPTION: the abuse of public The victims of corruption may be individuals, or private office for personal gain. private sector organisations or public sector institutions. Corruption may be considered a subset of fraud, and incorporates a broad range of activities (see Figure 2). For the purposes of this paper we consider financial crime to be a subset of corruption. 8 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

FIGURE 2: ASPECTS OF CORRUPTION9

Illegal gratuities

Purchasing Invoice schemes kickbacks

Conflicts Bribery of interest CORRUPTION

Sales Bid rigging schemes Economic extortion

But what impact does corruption have The issue of corruption – and what can on the Australian and New Zealand general be done about it – needs to be debated. public and our businesses? Perhaps the Can we be comforted by our positions in most important financial incentive to international rankings, or do we need to minimise corruption is the reduction of determine for ourselves whether the level reputational risk. In the private sector, a of corruption in our society is acceptable? strong reputation means lower costs of Are we doing enough to combat corruption doing business, a lower cost of capital, and in Australia and New Zealand? easier access to international markets.10 Corruption can impact on employee morale, business relations and an organisation’s share price. The public sector also benefits when corruption is minimised: government resources are increased and greater investment can be made in health, education and other services. 9 future[inc]

FINANCIAL CRIME is the foundation for most serious crime.11

JULIE READ DIRECTOR AND CHIEF EXECUTIVE OF THE SERIOUS FRAUD OFFICE IN NEW ZEALAND. 10 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

WHAT DO WE KNOW ABOUT CORRUPTION?

We know an issue has become significant It is difficult to measure corruption when it has a day named after it, and accurately. As will be seen, many reports even its own acronym. The United Nations are based on perceptions of corruption, has an annual designated “International rather than absolute measures. These Anti‑Corruption Day” – 9 December – perception surveys are seen as the most aimed at raising awareness of corruption. reliable method for comparative analysis Meanwhile, anti‑bribery and corruption of international corruption. Many corrupt activity has become commonly known by activities will not be captured in crime the acronym AB&C. statistics, as they are by their nature hidden. Nonetheless, we can attempt to assess the harm caused by corruption. 11 future[inc]

FIGURE 3: TRANSPARENCY INTERNATIONAL 2014 CORRUPTION PERCEPTIONS INDEX12

RANK COUNTRY SCORE 1 Denmark 92 2 New Zealand 91 3 Finland 89 EAST CORRUPT L 4 Sweden 87 5 Norway 86 5 Switzerland 86 7 Singapore 84 8 Netherlands 83 9 Luxembourg 82 10 Canada 81 11 Australia 80 12 Germany 79

12 Iceland 79 14 United Kingdom 78 15 Belgium 76 15 Japan 76 MOST CORRUPT

Ranking is from least corrupt to most corrupt; scale for score is 0-100, where 0 means extremely corrupt and 100 means not corrupt. SOURCE: Corruption Perceptions Index 2014 Transparency International.

AUSTRALIA AND NEW ZEALAND IN THE GLOBAL CONTEXT PUBLIC SECTOR Transparency International describes global Both nations rank favourably in public sector corruption as “alarming.” In the global surveys of fraud and corruption, most recent Perceptions Index more than New Zealand even more so. two‑thirds of the 175 measured countries rank below 50 on a scoring system ranging from Perhaps the best-known international 0 (highly corrupt) to 100 (not corrupt).13 organisation addressing corruption is Transparency International; its annual What is also important to note from Corruption Perceptions Index “ranks this survey, however, is a visible trend (see countries and territories based on how Figure 4): both countries have dropped from corrupt their public sector is perceived their 2013 ranking. New Zealand, having to be.”12 Figure 3 lists the top sixteen occupied the first position for many years, countries in the 2014 rankings, from is now in second place. Australia’s position least corrupt to most corrupt. At the has dropped for two consecutive years, present time, New Zealand and Australia from seventh equal in 2012, to ninth equal are well placed on this index, ranking in 2013 and eleventh in 2014. second and eleventh respectively. 12 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

FIGURE 4: TRANSPARENCY INTERNATIONAL INDEX RESULTS FOR AUSTRALIA AND NEW ZEALAND 2012–201414

2012 2013 2014

Ranking 7=/176 1=/176 9=/177 1=/177 11/175 2/175

Score 85/100 90/100 81/100 91/100 80/100 91/100

These findings are also reflected in the PUBLIC AND PRIVATE SECTORS results of the 2014 World Justice Project In Figure 5 we look at perceptions of (WJP) Rule of Law Index. WJP publish corruption in a range of institutions – this an annual index of 99 countries using time including both the public and private 47 indicators based around eight themes. sectors. Results are taken from Transparency One of the themes is corruption. Like International’s Global Corruption Barometer. Transparency International, this Index is Respondents were asked to what extent concerned with corruption in the public they saw each of the institutions as being sector, including behaviours such as affected by corruption. The scale is 1 to 5, bribery, extortion, and misappropriation where 1 means not at all corrupt and 5 of public funds or resources. The Absence means extremely corrupt. of Corruption measure produced by the Index, ranks countries on a scale of 0 – 1, with higher values indicating lower levels of corruption. In 2014, New Zealand scored an impressive 0.91, with Australia lagging slightly at 0.86.15 13 future[inc]

What is apparent is that New Zealand Trade unions – though not included in Figure scores lower than Australia for each of the 5 – are also perceived to have high levels institutions. In most cases, both Australia and of corruption in Australia.16 Indeed, a Royal New Zealand scored lower than the global Commission into Trade Union Governance rating. The media was perceived to have and Corruption is ongoing in Australia in 2015. higher levels of corruption than the global The Interim Report, published in December scale in both countries. Non-government 2014, raises multiple issues with governance organisations and the business/private sector among trade unions in Australia, including: scored higher than the global average in • conflicts of interest with funds held for a Australia but lower than the global average variety of purposes in New Zealand. • fraudulent and other misconduct by former In both Australia and New Zealand, the media union officials, and and political parties were perceived to be the • improper use of funds.17 most corrupt institutions. Globally, the most corrupt institutions were perceived to be political parties and the police.

FIGURE 5: PERCEPTIONS OF CORRUPTION IN MAJOR INSTITUTIONS18

PUBLIC OFFICIALS/CIVIL SERVANTS

POLICE

MEDICAL/HEALTH SERVICES

JUDICIARY

EDUCATION SYSTEM

BUSINESS/PRIVATE SECTOR

RELIGIOUS BODIES

MEDIA

NON-GOVERNMENT ORGANISATIONS

MILITARY

PARLIAMENT/LEGISLATURE

POLITICAL PARTIES 1 2 3 4 5 SCALE 1-5, where 1 means not corrupt and 5 means extremely corrupt

New Zealand Australia Global

SOURCE: Global Corruption Barometer 2013 Transparency International. 14 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

“Every year, WESTERN BUSINESSES pay huge amounts of MONEY IN BRIBES to win friends, influence and contracts.”19 Dr Susan Hawley

CORRUPTION ON THE INCREASE? CRIMINAL CONVICTIONS FOR CONFLICTING REPORTS DECEPTIVE PRACTICES Figure 6 suggests that convictions for Australia and New Zealand use the same corruption offences are not increasing in standard classifications for criminal offending. Australia and New Zealand. However, in its Corruption is not measured as a category in Global Economic Crime Survey 2014, PwC itself. However, within the broader category reported that every region surveyed (99 of “fraud, deception and related offences”, a countries in total) observed an increase in measure is captured for “deceptive business/ cases of bribery and corruption between government practices.” This includes illegal 2011 and 2014.21 Moreover, threats of bribery non-fraudulent trade practices, fraudulent and corruption were reported as having risen trade practices20 and misrepresentation more quickly than most other categories of of professional status. Figure 6 reports on economic crime.22 PwC’s survey showed an the number of adults convicted in court for increase in reported bribery and corruption this offence over a 14-year period in New in New Zealand from 7% to 15% between 2011 Zealand being from 2000-2013, and over a and 2014, and a global increase from 24% 5-year period in Australia, from 2008/9 – to to 27%.23 Other studies support this finding, 2012/13. During this period in New Zealand, with an Australian study finding that 43% of the average number of offences was 55 per respondents believed that corruption had year. No clear trend is apparent amongst increased in the three year period to 2012;24 the undulating results. Neither is a clear and Transparency International reporting pattern visible in Australia, although the that 53% of respondents perceive corruption most recent year reported (2012–13) shows a has increased or significantly increased significantly lower level of convictions for this over the previous two year period.25 Why crime category than for previous years. When aren’t convictions for corruption increasing adjusted for the different population sizes, in line with threats and observed cases Australia and New Zealand report similar of corruption? proportions of convictions in this category. 15 future[inc]

FIGURE 6: CONVICTIONS FOR “DECEPTIVE BUSINESS/GOVERNMENT PRACTICES” IN AUSTRALIA AND NEW ZEALAND

350

300

250

200

150

100

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

New Zealand Australia

SOURCE: Adapted from “Statistics New Zealand, Customised Dataset – Charges prosecuted against adults by offence type. Data extracted 30 October 2014”26 and “Australian Bureau of Statistics, Recorded Crime – Offenders, Principal offence (divisions and selected subdivisions) 2008-09 to 2012-13, Table 4, Commonwealth of Australia, 2014.”27

“We believe that one driver of the HIGH REPORTED FIGURES OF BRIBERY AND CORRUPTION may be the megatrend of the shift in wealth from the developed economies of the West to the emerging high-growth economies of the South and East.” PwC Global Economic Crime Survey 201428 16 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

FIGURE 7: TOP TRADING PARTNERS OF AUSTRALIA AND NEW ZEALAND – TRANSPARENCY INTERNATIONAL RANKINGS29

TRANSPARENCY TRANSPARENCY TRADING POSITION TRADING POSITION INTERNATIONAL INTERNATIONAL COUNTRY (AUSTRALIA) (NEW ZEALAND) RANKING (2014) SCORE (2014) CHINA 1 1 100/176 36 USA 3 3 17/176 74 JAPAN 2 4 15/176 76 REPUBLIC OF KOREA 4 5 43/176 55 SINGAPORE 5 6 7/176 84 UNITED KINGDOM 7 7 14/176 78 GERMANY 10 8 12/176 79 MALAYSIA 9 9 50/176 52 THAILAND 8 10 85/176 38

Ranking is from least corrupt to most corrupt; scale for score is 0-100, where 0 means extremely corrupt and 100 means not corrupt

CORRUPT TRADING PARTNERS? Corruption is a global issue, and organisations Australia and New Zealand have the doing business with countries that have same top ten trading partners, some of high levels of corruption are more likely to be which, such as Thailand and China, rank exposed to corrupt practices. Australia and poorly in Transparency International’s Global New Zealand both trade in a large number Corruption Index (see Figure 7). China, the of jurisdictions: KPMG report that Australian number one trading partner of both Australia organisations operate in 171 countries outside and New Zealand, is ranked 100 out of Australia, and New Zealand organisations 176 countries on the index, scoring 36/100 operate in 169 countries outside New (where 0 is highly corrupt and 100 is not at all Zealand.30 Survey results reported by PwC corrupt). Thailand’s measure is only slightly indicate that 50% of organisations around better at 38/100. the world operate in areas identified to have a high corruption risk.31 17 future[inc]

“While it is not the most common form of crime reported, of all the types of fraud covered in our survey, BRIBERY AND CORRUPTION MAY POSE THE GREATEST THREAT TO GLOBAL BUSINESSES because of the number of business processes it threatens.” PwC Global Economic Crime Survey 2014.32

KEY RISK AREAS Figure 8 extracted from EY’s 2013 Asia- Pacific Fraud Survey examines compliance THIRD PARTIES options for third-party contracts. The International trade presents significant survey data has been collected from 681 challenges to multinational organisations. professionals and executives across eight One practice identified with an increased Asia Pacific countries, including Australia and risk of corruption is the use of vendors or New Zealand. What it shows is that most of third parties. In 2013, around 90% of cases these tools are not widely used. Just over a reported under the United States (US) Foreign quarter of respondents had no processes Corrupt Practices Act involved third parties. at all to monitor third parties. Only 37% had Third parties are also seen as generating the an approved supplier database and 38% highest compliance risks for businesses.33 had a background checking system – these The three most significant bribery and are two of the fundamentals of good control corruption challenges reported in a survey systems. Also surprising is the low percentage of 214 UK and US executives were: auditing of respondents that were regularly auditing third parties for compliance; issues in third parties with which they were doing performing due diligence on foreign agents business. Even more surprising is that most or third parties; and variations in different of these companies were not small: 32% jurisdictions on issues such as facilitation of respondents had over 500 employees, payments (see page 20).34 55% had between 50 and 500, and only 10% had fewer than 50.

HIGH-RISK INDUSTRIES The highest levels of bribery and corruption worldwide are reported in engineering, construction and energy, utilities and mining. Professional services and hospitality are two examples of industries that fall below the global average of 27% across all industries.35 18 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

FIGURE 8: SYSTEMS AND CONTROLS FOR MONITORING THIRD PARTIES36

BACKGROUND CHECKING SYSTEM 38%

APPROVED SUPPLIER DATABASE 37%

CHECK ON OWNERSHIP OF THIRD PARTY 29%

EXTERNAL PROVIDERS TO RUN CHECKS 28%

NO PROCESSES 26%

AUDIT RIGHTS OF THE THIRD PARTY 23%

TECHNOLOGY BASED CHECK OF THIRD PARTY 22%

OTHER 18% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

FIGURE 9: REPORTED BRIBERY AND CORRUPTION WORLDWIDE, BY INDUSTRY

ENGINEERING AND CONSTRUCTION 50%

ENERGY, UTILITIES AND MINING 42%

GOVERNMENT/STATE OWNED ENTERPRISES 35%

TECHNOLOGY 32%

PHARMACEUTICALS AND LIFE SCIENCES 31%

COMMUNICATION 30%

TRANSPORTATION AND LOGISTICS 30%

INDUSTRIAL PRODUCTS 28%

GLOBAL 27%

RETAIL AND CONSUMER 25%

HOSPITALITY AND LEISURE 24%

INSURANCE 24%

OTHER INDUSTRIES 22%

FINANCIAL SERVICES 19%

PROFESSIONAL SERVICES 18%

ENTERTAINMENT AND MEDIA 14% 0% 10% 20% 30% 40% 50% 60%

SOURCE: PwC Global Economic Crime Survey 2014. 19 future[inc]

CORRUPTION – THE PRICE Corruption is estimated to cost the private OECD publications suggest the cost of sector around 5% of revenues each year. corruption is in excess of 5% of global GDP, Added to these losses are the costs of or US$2.6 trillion. A significant portion of this detecting corrupt activity, the costs incurred figure (US$1 trillion) is made up of bribes.37 in reputation damage (including reduced In recent international survey results from share prices), increased costs of doing PwC, 53% of respondents believed that business and diminished employee morale. the greatest economic crime risk was from Corruption within the public sector is no less bribery and corruption.38 The level of concern damaging. Instead, the costs are reflected was slightly higher in the Asia Pacific region, in increased taxes or reduced services. The with 56% of respondents believing the highest significant financial impact of corruption is relative economic crime risk was from bribery outlined in the case studies below. and corruption.39

CASE STUDY 1: Public sector corruption in New Zealand The Chief Information Officer (CIO) of the Otago District Health Board (DHB), together with a Queenstown surveyor, defrauded nearly NZ$17 million from the DHB over a period of six years. The offenders raised 198 invoices from associated companies to charge the DHB for IT-related services that were not provided. The corruption was discovered in 2008. Both offenders received prison sentences: nine years and six months for the former CIO and four years and three months for the surveyor.40

CASE STUDY 2: Insider trading CASE STUDY 3: Finance company in Australia corruption in New Zealand In 2014, the Australian Federal Police and Finance companies have been particularly the Australian Securities and Investments prominent as settings of corruption in New Commission engaged in a joint investigation Zealand in recent years. Company directors into an insider trading scheme involving a have been prosecuted for a wide range of National Australia Bank employee and an offences, including making false statements employee of the Australian Bureau of in offer documents, false accounting, and Statistics. They found that the National theft by a person in a special relationship. Australia Bank employee had made use of Corruption in finance companies causes market-sensitive statistical information significant losses to many individuals. to engage in foreign exchange derivative The Bridgecorp group collapse in 2007 left contracts. Both employees were charged NZ$460 million outstanding, representing with insider trading, money laundering, 14,500 investors. The Hanover Finance corruption and abuse-of-office offences. As collapse in 2008 left 13,000 investors with a result of the investigation, the Australian losses totalling NZ$465 million. These are Federal Police restrained cash and property just two of the 66 finance company collapses worth AUD$7 million.41 reported in New Zealand since 2006.42 20 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

In New Zealand… payments to INFLUENCE FOREIGN PUBLIC OFFICIALS ARE NOT ILLEGAL if their purpose is ‘ensuring or expediting the performance by a foreign public official of a routine government action; and the value of the benefit is small as defined in legislation.

CORRUPTION AND WEALTH Other determinants of corruption include Real GDP per capita has been described inflation (periods of high inflation are linked 47 as “the most important determinant of to increased corruption), and development corruption.”43 Research has found that (more developed economies have lower 48 as a country’s wealth increases, corruption levels). This second point may be somewhat decreases.44 New Zealand’s corruption circular, as it is widely understood that ranking challenges this finding, as corruption hinders growth. The OECD has New Zealand typically falls outside the stated that “Corruption is one of the main top 20 countries in terms of GDP per obstacles to sustainable economic, political capita (based on purchasing power parity). and social development, for developing, 49 For example, the IMF place New Zealand’s emerging and developed economies alike.” GDP per capita at 31 out of 183 countries45 and the Social Progress Index positions WHEN IS A BRIBE A New Zealand’s GDP per capita at 21 out of “FACILITATION PAYMENT”? 133 countries.46 Australia ranks 16/183 and Transparency International defines a bribe 11/133 under the same measures. as “a favour or gift offered or given with the It is problematic to attempt to explain intention of influencing behaviour or opinions 50 New Zealand’s low levels of corruption by of the recipient.” The OECD, however, pointing to its wealth: by the same rationale classifies “facilitation payments” separately. we would expect Australia to be less corrupt Facilitation payments are made to expedite than New Zealand when it is reported an outcome rather than to change it. While consistently to be more corrupt. bribery is illegal in most countries, the legality of facilitation payments is jurisdiction-specific. OECD publications suggest the cost of corruption is in excess of 5% of global GDP, or US$2.6 trillion. A significant portion of this figure (US$1 trillion) is made up of bribes.51 21 future[inc]

NEW ZEALAND AUSTRALIA In New Zealand, section 105C(3) of the In Australia, division 70.4 of the Criminal Code Crimes Act 1961 covers bribery of foreign Act 1995 covers bribery of foreign public public officials. Under this legislation, officials. This section provides a defence for payments to influence foreign public facilitation payments where: the value of the officials are not illegal if their purpose is benefit was minor; “the person’s conduct was “ensuring or expediting the performance engaged in for the sole or dominant purpose by a foreign public official of a routine of expediting or securing the performance government action; and the value of the of a routine government action of a minor benefit is small.” The Income Tax Act 2007, nature”; the conduct was documented; and section DB 45, provides for such payments the documents have been retained. to be tax deductible outside New Zealand The Australian Federal Police have said the if they are not illegal in the country where facilitation payment defence is currently the funds are received and (using the being considered for repeal.52 Nonetheless, same phrasing as the Crimes Act 1961), facilitation payments remain tax deductible in the payment is small, and is intended to some situations. Section 26.52 of the Income ensure rather than change an outcome. Tax Assessment Act 1997 specifies that an amount is not a bribe (to a public foreign official) where the value of the benefit is minor and, using the same language as the Criminal Code Act 1995, the payment is made to OECD publications suggest the COST OF ensure an outcome rather than to change it. CORRUPTION IS IN EXCESS OF 5% OF GLOBAL GDP, or US$2.6 trillion. A significant portion of this figure (US$1 trillion) is made up of bribes. 22 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

WHAT DO WE KNOW ABOUT CORRUPTION IN AUSTRALIA AND NEW ZEALAND?

It is widely believed that Australia and Assuming we wish to maintain and New Zealand have relatively low levels potentially improve our reputations for of corruption. New Zealand is perceived honesty and integrity, we need to ask what consistently to be less corrupt than we are doing about corruption. Is it enough? Australia, but Australia is still seen as less corrupt than most other countries. Rankings aside, levels of corruption are reported to be rising in both countries, and we are trading increasingly often with countries that are more corrupt than ours. The issue of corruption can no longer be dismissed. Even New Zealand, long regarded as one of the least corrupt countries in the world, is “not immune from the threats associated with bribery and corruption.”53 23 future[inc]

What are we doing about corruption? INSTITUTIONS Despite our strong international rankings, The public sector institutions in New Zealand Australia and New Zealand have recently that are most involved in combatting been called on to pay greater attention to corruption are the New Zealand Police corruption. For example, PwC argue: and the Serious Fraud Office (SFO). New New Zealand CEOs should be more Zealand Police is the institution with primary cognisant when it comes to considering the responsibility for investigating fraud and risks associated with this type of economic corruption. Within the police, the Financial crime. Not only are the numbers of reported Intelligence Unit assists with the detection and occurrences increasing but, of the three investigation of serious financial offending economic crimes falling under government (including money laundering and the financing enforcement, almost half of our survey of terrorism) by collecting and analysing respondents (49%) perceived bribery and information that is used by a range of other corruption as having the most severe impact entities, such as Interpol, the Inland Revenue on their corporate reputation.54 and the New Zealand Customs Service. This section considers how we are fighting The SFO is responsible for the investigation corruption in Australia and New Zealand, and and prosecution of complex or serious fraud. the methods being used in other countries. While it does not have a mandate to look for fraud, it does have mechanisms for active monitoring within the corporate environment. The SFO gives priority to cases of multi‑victim fraud; fraud involving those in positions of trust, such as lawyers or accountants; matters of bribery and corruption; and cases that could significantly damage New Zealand’s reputation for fair and free financial markets.55 24 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

Other New Zealand institutions purposed The Australian Securities and Investment with combating fraud include the Financial Commission (ASIC) administers and Markets Authority (FMA), the Commerce enforces laws relating to financial markets, Commission, the Office of the Auditor financial services organisations and financial General, and Audit New Zealand. professionals. There is no equivalent to the New Zealand Among the many other organisations SFO in Australia. Instead, corruption is that work to combat fraud in Australia (both investigated by state or territory police public and private sector), are the Insurance or the Australian Federal Police (AFP). Fraud Bureau of Australia, the Australian The AFP investigate fraud and corruption Cybercrime Online Reporting Network, against Commonwealth law, which applies and the Australian Prudential Regulatory nationwide. These are likely to be serious or Authority (APRA). The Commonwealth Fraud complex cases. The state police prosecute Control Framework outlines the Australian fraud under local legislation. Some cases Government’s approach toward fraud control. may involve breaches of both state and Commonwealth legislation.

TRANSPARENCY INTERNATIONAL “PILLARS” Under its National Integrity System, Transparency International describes the important “pillars” for a nation’s governance (see Figure 10).56 If the pillars are well formed and function as intended, corruption levels are likely to be lower. According to Transparency International’s assessments, all of these pillars function well in Australia and New Zealand.

FIGURE 10: PILLARS OF NATIONAL INTEGRITY57

LEGISLATIVE BRANCH OF GOVERNMENT EXECUTIVE BRANCH OF GOVERNMENT

Public sector Law enforcement Judiciary

Ombudsman Media Business

Political parties Audit institution Civil society

Anti-corruption agencies Electoral management body 25 future[inc]

FIGURE 11: UK AND US ANTI-BRIBERY AND CORRUPTION STRATEGIES (2010)58

None

Full-time AB&C officer

AB&C committee

Periodic compliance certification

“Right to audit” in third-party contracts

AB&C compliance risk assessment

Continuous monitoring and internal audit

Communication and training

Whistle-blower mechanisms

AB&C policies 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% US UK

TOOLS TO DETECT CORRUPTION WHISTLE-BLOWING In general, academic research tends to Reports indicate that the most common agree that greater likelihood of detection method of detection for economic crime in is a stronger deterrent to non-compliant Australia and New Zealand is whistle‑blowing. behaviour than increased severity of A 2014 PwC survey of private sector punishment. Where corruption is concerned, organisations found that in Australia, 29% of detection methods are directly related to organisations were detecting economic crime prevention.59 Figure 11 shows survey results through tip-offs and formal whistle‑blowing from 214 executives in the US and the UK, who initiatives.60 The figure was even higher in reported on the measures their organisations New Zealand, where tip-offs and formal had in place to detect and monitor bribery whistle‑blowing initiatives detected 37% and corruption risk. The methods most of discovered economic crime.61 frequently adopted were monitoring and Anonymous tip-off lines for reporting fraud internal audit, communication and training, and corruption are used in both the public whistle-blower mechanisms, and anti-bribery and private sectors. For example, KPMG and corruption (AB&C) policies. has an Ethics and Compliance Hotline, which is a mechanism for reporting illegal or unethical activity or improper conduct as outlined in the KPMG Code of Conduct. Insurance companies, banks and consumer organisations also provide tip-off lines. Perhaps unsurprisingly, organisations with whistle-blower hotlines reported more instances of fraud than those without.62 26 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

CODES OF ETHICS Research also suggests a link between It is inevitable that there will always be financial performance and an increased some individuals who will engage in corrupt emphasis on ethics. A study from the US behaviour. To minimise the risk, organisations reports that the 27% of the 500 largest can use mechanisms such as codes of public companies that committed to ethical conduct and codes of ethics to guide their behaviour toward their stakeholders, or who members in knowing the behaviours that emphasised compliance with their code of are expected and acceptable. However, conduct, had significantly improved financial as reported in our recent publication Why performance compared to those that 66 business ethics matter to your bottom line,63 had not. just having a code of ethics is not enough. New Zealand has been criticised for Organisations need to go further and create paying comparatively less attention to an environment that supports employees to codes of ethics than other countries. make ethical decisions. In these environments, Transparency International claimed in corruption is unlikely to thrive. 2010 that in New Zealand “few companies The argument is made that business augment their [AB&C] policy with an needs to completely rethink the way we adequate system to encourage a culture approach the management of business of compliance with anti-corruption policies.” ethics. This situation is generated from They cited research carried out by CAER increasing globalisation; the changing (Corporate Analysis, Enhanced Responsibility) use of technologies in business; and the in 2009 (see Figure 12), which showed that fallout from what is now known to be poor only 16% of NZX companies had a corporate ethical decision-making playing a role in ethics system that rated as advanced. “The the Global Financial Crisis. Our publication bottom line of this research” Transparency argues that business ethics in Australia (and International observes, “appears to be therefore presumably also in New Zealand) that many of New Zealand’s largest listed is less mature than other parts of the globe. businesses don’t pass some fundamental 67 Thus, what appears to be a reliance on the best practice ethics tests.” presence of a code of ethics, rather than a strong enforcement of the code of ethics, appears to dominate in Australia and New Zealand. “THERE IS ALWAYS FRAUD. That is not a function While professions such as accountancy and law have utilised written codes of ethics of society being corrupt: that is a function of for decades, such codes have recently been individuals being corrupt.” applied across many other sectors.64 Codes Julie Read, Director and Chief Executive of the Serious of ethics exist for a number of reasons: Fraud Office, New Zealand they establish acceptable practices, outline approaches to managing both ethical dilemmas and unethical behaviour, and signal to stakeholders outside the organisation the standards of behaviour they may expect. Research suggests that employees of organisations with codes of ethics rate their companies more highly for ethical support and feel more satisfied with the outcomes of ethical dilemmas.65 27 future[inc]

FIGURE 12: CODES OF ETHICS SYSTEMS FOR THE NZX 50

% of companies 15

0 ADVANCED INTERMEDIATE BASIC LIMITED SYSTEM RATING Companies prohibiting bribery Companies prohibiting facilitation payments Overall

A CULTURE OF CORRUPTION The culture of an organisation may be said to be corrupt if it either supports corrupt activity or fails to address corruption. One of the best-known examples in Australia is the case of the Australian Wheat Board (see Case Study 4). In this case, a culture of corruption created by the individuals in power at the time allowed the illegal activity to continue over a long period.

CASE STUDY 4 The Australian Wheat Board case has become The Australian Wheat Board held a monopoly over synonymous with corrupt corporate culture. Research Australian wheat exports and was the largest supplier has shown how the culture within the Australian Wheat of humanitarian goods to Iraq during the Oil-For-Food Board created an environment where senior managers Programme. In the mid-2000s, the Australian Wheat placed performance measures above the sanctions 68 Board was found to have been paying “kickbacks” to that were clearly established by the United Nations . Saddam Hussein’s regime, in exchange for valuable Subsequent reviews of performance at the Australian wheat contracts. This contravened the United Nations Wheat Board clearly established the link between the sanctions that were in place at the time (including a culture at the organisation and the illegal activity: “The financial and trade embargo), as well as Australian conduct of AWB and its officers was due to a failure in 69 law and the OECD anti-bribery convention. A number corporate culture.” The subsequent Cole report was of successful civil prosecutions were taken against damning of the organisation, stating: “The answer is individuals in response to the scandal. One civil case, a closed culture of superiority and impregnability, of taken by shareholders of the Australian Wheat Board, dominance and self-importance. Legislation cannot was settled for AUD$39.5 million in 2010. destroy such a culture or create a satisfactory one. That is the task of boards and the management of companies. The starting point is an ethical base. At AWB the Board and management failed to create, instil or maintain a culture of ethical dealing.“70 (page xii). 28 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

ANTI-BRIBERY POLICIES Key measures introduced by the Bill include: Transparency International has also found • the requirement for entities such as New Zealand companies to be wanting in banks to report all international transfers their AB&C policies. Figure 13, taken from a above NZ$1,000 and all physical cash report issued by Transparency International transactions above NZ$10,000 to the in 2010, compares the proportion of New Financial Intelligence Unit within the Zealand companies that prohibit giving and New Zealand Police Department receiving bribes to that in other countries. • increased information sharing with Less than half of NZX-listed companies other jurisdictions had policies prohibiting bribery, ranking • increasing penalties for bribery and New Zealand below the UK, the US, Europe corruption in the private sector, and and Australia on this measure.71 The same • updating the definition of crime involving report found that only 18% of New Zealand dishonesty in the Crimes Act 1961 to companies had policies on facilitation ensure that those convicted of corruption payments. New Zealand’s poor showing offences cannot hold positions of trust in may perhaps be expected when the NZX the community. listing rules do not require specific policies Other legislation with relevance to economic on bribery and corruption. crime in New Zealand includes the Crimes Act 1961 (which is relevant to public sector REGULATION corruption); the Secret Commissions NEW ZEALAND Act 1910 (which relates to the giving and Perhaps the best-known legislation receiving of gifts or other forms of payment aimed at minimising fraud and corruption in exchange for the rewarding of contracts); in New Zealand is the Protected Disclosures the Commerce Act 1986 and the Financial Act 2000, more commonly known as the Markets Conduct Act 2013. whistle-blowing act. The protection offered AUSTRALIA under the legislation is that no civil, criminal Legal commentators have observed that or disciplinary proceedings may be taken Australia has a plethora of regulatory tools against a person who makes a protected for fighting corruption.72 Commonwealth disclosure. Since the introduction of the legislation includes the Criminal Code Act Protected Disclosures Act there has been 1995, which covers bribery of public officials, wider acknowledgement that employees and the Crimes Legislation Amendment should have the opportunity to report corrupt (Serious and Organised Crime) Act 2010, activity without potential repercussions. which increased the penalties for bribery The Organised Crime and Anti-corruption offences. Individuals may now be sentenced Legislation Bill was introduced to the New to up to 10 years in prison or a fine in excess Zealand Parliament in June 2014. The of AUD$1 million for such offences, and objectives of the bill are: companies a fine of up to AUD$17 million or • three times the value of benefits obtained by to ensure that law enforcement agencies 73 have the power to deal with organised the bribery, whichever is the greater. crime and corruption Other Commonwealth legislation with • to improve New Zealand’s ability to relevance to corruption includes the Public collaborate with overseas agencies Service Act 1999, the Commonwealth in combatting organised crime Electoral Act 1918, the Financial Management and corruption. and Accountability Act 1997 and the Proceeds of Crime Act 2002. Each state and territory has its own anti-corruption provisions and whistle-blower legislation. 29 future[inc]

FIGURE 13: PERCENTAGE OF COMPANIES FROM NZ (NZX 50), AUSTRALIA, UK, US AND EUROPE THAT PROHIBIT GIVING AND RECEIVING BRIBES74

57%

72% EUROPE 44%

UNITED KINGDOM NEW ZEALAND

AUSTRALIA 47% 69% UNITED STATES

INTERNATIONAL CONVENTIONS WHAT ARE OTHER Australia and New Zealand are both COUNTRIES DOING? signatories to the OECD Convention on Perhaps the most notable action to address Combating Bribery of Foreign Public Officials corruption in recent times has been the in International Business Transactions. The introduction of the Bribery Act 2010 in the 41 countries that have signed up to the OECD United Kingdom. This piece of legislation is Convention account for 80% of world exports. widely cited as a game changer in setting the Both countries have also signed the United standard for corruption on a global basis. Nations Convention against Corruption, The Bribery Act, which has been in force since although New Zealand is one of only a few July 2011, departs from prior legislation in countries that have not yet ratified the three key aspects: United Nations Convention. • significant increases in the seriousness of Signatories of the two conventions are penalties: unlimited fines, confiscation of required to have strong mechanisms in property, disqualification of directors and place to address bribery and corruption. up to 10 years in prison Signatories to the OECD Convention must • broad coverage: prosecutions can extend have legislation making bribery of foreign to those who have links to the United public officials a criminal offence. Obligations Kingdom, regardless of where the corrupt under the convention also extend to activity took place investigations and prosecutions. • extension of criminal liability to These conventions, however, have been organisations that fail to prevent bribery. criticised by some as being “split between keen sleazebusters and countries like Russia and China.”75 30 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

The Bribery Act is being credited for a The OECD is more direct in their criticism of significant increase in both public and private New Zealand, making the following comments sector AB&C compliance programmes in the on New Zealand’s introduction of the OECD UK (from 57% to 86% of surveyed respondents Convention on Combatting Bribery: in the period from 2009 to 2011). This increase “While the Working Group welcomes New is attributed to the potential liability for Zealand’s recent efforts to implement the organisations that do not have robust AB&C Convention, it has serious concerns about 76 policies and procedures in place. It is possible the lack of enforcement of the foreign bribery that the Bribery Act could result in prosecution offence. Since becoming a Party to the for Australian or New Zealand individuals Convention in 2001, New Zealand has not who make facilitation payments in the UK prosecuted any foreign bribery cases. Only (see discussion page 20). four foreign bribery allegations have surfaced. The equivalent legislation in the US is the New Zealand opened its first investigations Foreign Corrupt Practices Act 1977. While into two of these allegations in July 2013.” the US legislation doesn’t have the same It reiterates its earlier recommendation reach as that in the UK, its objectives are that New Zealand broaden its criteria for similar in that it makes companies and the liability of legal persons to allow for the officials criminally liable for bribery. Like the effective prosecution of such entities for UK Act, the US legislation applies to those foreign bribery. who are connected to the US, regardless of whether the corrupt activity takes place there. The low number of foreign bribery allegations Penalties include substantial fines (up to raises concerns on the levels of awareness, US$100,000 for an individual or US$2 million reporting and detection. There are further for a company) and prison sentences of up to concerns surrounding outdated perceptions five years. Further penalties that may follow that New Zealand individuals and companies under the Foreign Corrupt Practices Act do not engage in bribery may undermine .80 are the withdrawal of export approvals and detection efforts exclusion from government contracts.77 Australia was chastised by the OECD in 2013 for failing to enforce, among other ARE WE DOING ENOUGH? things, foreign bribery laws: “out of 28 Australia and New Zealand have both foreign bribery referrals that have been recently been criticised for what is perceived received by the Australian Federal Police, to be a lackadaisical approach to addressing 21 have been concluded without charges.”81 corruption. Transparency International The same report recommended that New has been quick to comment on Australia’s Zealand increase its efforts to investigate slip in rankings in their corruption index. and prosecute foreign bribery. Australia’s Independent Broad-Based Anti‑Corruption Commission was criticised for being “far too limited” in its scope, and the Independent Commission against Corruption received similar criticism for not being at a Commonwealth level.78 Nor does New Zealand escape censure, with Transparency International observing, “statistics indicate there are gaps in the way New Zealand companies are tackling bribery and corruption.”79 31 future[inc]

WHAT SHOULD WE BE DOING ABOUT CORRUPTION?

Australia and New Zealand perform well on global measures, but are simultaneously criticised for a lack of action. In this final section of the report, we review a range of options that could be adopted in Australia and New Zealand to address corruption and protect our future reputations as honest countries in which to do business. 32 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

WILL REGULATION HELP? 2. NO PUBLIC SECTOR Increasing regulation is unlikely to be the CONTRACTS FOR THOSE solution to corruption. Regulation is good WITH PAST CONVICTIONS for establishing the practices that are, and Prohibit the awarding of public sector are not, acceptable in society. It is also good contracts to organisations, individuals, for communicating the consequences when or their affiliates, where they have 83 unacceptable practices are discovered. It is corruption or fraud convictions. Canada less good in the prevention and detection has adopted this approach, which has phases. Nonetheless, regulation has a place been discussed more widely for some in the toolkit to address corruption. Perhaps time (for example, not awarding public the best example is the introduction of the sector contracts to organisations or Bribery Act 2010 in the United Kingdom. individuals with tax debts) but is yet to receive traction in either Australia or OPTIONS FOR THE WAY New Zealand. FORWARD 3. NO PUBLIC SECTOR CONTRACTS We need to be sending the message that we FOR COMPANIES WITHOUT are taking the issue of corruption seriously in CORRUPTION POLICIES Australia and New Zealand. Below, we raise Require organisations bidding for public ten options for consideration: options with the sector contracts to have effective integrity potential to enhance our global reputations as initiatives in place.84 The OECD provides countries with low levels of corruption. good practice guidelines in relation to internal controls, ethics and compliance.85 1. INCREASE TRANSPARENCY IN AWARDING PUBLIC SECTOR 4. INCREASE USE OF ASSET CONTRACTS CONFISCATION The public sector is particularly While there is legislation that allows vulnerable to accusations of bribery for asset confiscation in certain and corruption. Increased transparency circumstances, there has been little can assist – particularly when it comes visible appetite to follow through with 82 to the awarding of lucrative contracts. this action. A working group set up by Actions such as disclosing bids once public the G20 in 2010 has drawn up rules sector contracts have been awarded on seizing corrupt assets (and denying will result in greater accountability in visas to corrupt officials).86 the contracting process. 33 future[inc]

5. ENCOURAGE AB&C POLICIES AND 8. HARSHER SANCTIONS, PRACTICES IN THE PRIVATE SECTOR APPLIED MORE BROADLY The key tools for detecting corruption The OECD notes that “effective include control of third parties, frequent enforcement also goes hand in hand with compliance audits, forensic data analytics, effective, proportionate and dissuasive clear corporate policy and training sanctions; in this regard, the range of programmes.87 sanctions available for foreign bribery in New Zealand may be insufficient.”88 The 6. REWARDS FOR WHISTLE-BLOWERS UK Bribery Act 2010 is a good example We have mechanisms in place to support of how harsher sanctions, applied to whistle-blowers when they disclose illegal a broader range of offenders, may activity. Should we go further and reward assist with reducing corruption. It is also them? This practice has a formal term in important that where sanctions exist, the legal system: a writ of qui tam is where they are seen to be followed through. an individual helps with a prosecution and receives some proportion of either 9. LIMIT TAX DEDUCTIBILITY OF the penalty imposed, or any fraudulently “FACILITATION PAYMENTS” obtained funds eventually collected. Some There appears to be a fine line between countries already offer rewards for tax what is a bribe (illegal) and what is a whistle-blowing. facilitation payment (legal). The fact that facilitation payments are tax deductible, 7. BETTER CROSS-BORDER provided that they are minor and not COOPERATION ON BRIBERY illegal in the country of receipt, sends The OECD recommends enhancing cross- the signal that they are acceptable. border cooperation, particularly on foreign bribery investigations and prosecutions. 10. REQUIRE AB&C POLICIES IN NZX We have already noted the criticism of AND ASX LISTING RULINGS both Australia and New Zealand for their Transparency International recommends failure to prosecute foreign bribery. including bribery and facilitation payment guidance into the NZX Corporate Governance Good Practice Code. This recommendation could also be extended to the ASX Corporate Governance Council. We could go even further and require all listed companies to have AB&C polices. How we move forward in the FIGHT AGAINST The importance of having a concerted CORRUPTION needs to be prominently debated. and cohesive effort to address corruption has been widely noted.89 34 ARE AUSTRALIA AND NEW ZEALAND CORRUPT?

CONCLUSION

Australia and New Zealand are not highly Australia and New Zealand have a – corrupt: at least, not yet. But we are trading potentially small – window of opportunity increasingly often with countries more to ensure that we keep our good reputations. corrupt than our own, and we have been How we move forward in the fight against criticised by global bodies for our apparent corruption needs to be prominently debated, lack of attention to corruption. This lack with a focus on improving communication of of attention may be responsible, at least good AB&C policies (such as those outlined in part, for low numbers of prosecutions by the OECD); strengthening transparency and convictions. in the public sector; increasing enforcement action where corruption is discovered; and expanding sanctions for corrupt activity.

We have no shortage of legislation, institutions, and frameworks tasked with addressing the issue of corruption. BUT ARE THESE TOOLS BEING USED? Are they STRONG ENOUGH TO TAKE ACTION when issues arise? 35 future[inc]

CORRUPTION IS THE ENEMY OF DEVELOPMENT, and of good governance. It must be got rid of. Both the government and the people at large must come together to achieve this national objective.90

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