business ethics and anti-corruption - norton rose fulbright · contracting out of corruption can it...

Issue 03 / June 2014

In this issue:

Contracting out of corruption

Deferred prosecution agreements

Walking a fine line in China

Principles of legal professional privilege / the Australian perspective

Business ethics and anti-corruption Asia Pacific insights

Financial institutionsEnergyInfrastructure, mining and commoditiesTransportTechnology and innovationLife sciences and healthcare

From the editor

Anti-bribery and anti-corruption legislation has had an increased impact on how Australian organisations operate locally and internationally. Ben Allen’s article ‘Contracting out of corruption: can it be done?’ sets out how organisations can protect themselves against corruption risks through corporate compliance programmes and the use of ‘anti-corruption’ clauses.

Following the recent introduction of deferred prosecution agreements into the UK legal framework, it is possible that this mechanism may also be adopted in Australia. Ben Allen compares the US and UK models and explains how deferred prosecution agreements may assist Australian authorities and enforcement bodies in their fight against serious economic crimes.

In China, I examine the ‘fine line’ between legitimate commercial dealings and commercial bribery, looking particularly at sales incentive measures widely used in the Chinese market. Given ambiguity in the legislation and uncertainties in enforcement practice, how do you know where to draw the line?

The UK Supreme Court has pronounced that legal professional privilege does not extend to confidential communications with accountants. In that case, why go to your lawyer first? Grant Bonner and Daniel Habashy explain why.

Sun HongPartner, ShanghaiNorton Rose Fulbright LLPTel +86 21 6137 [email protected]

Business ethics and anti-corruption in Asia PacificNorton Rose Fulbright advises clients across the globe on all matters relating to business ethics and anti-corruption. Within Asia Pacific, we have acted in major corruption investigations and have a track record of advising on complex, cross-border matters. We are amongst the largest international legal practices in the region. Our team operates across offices in Bangkok, Beijing, Hong Kong, Jakarta, Shanghai, Singapore, Tokyo, Brisbane, Canberra, Melbourne, Perth and Sydney.

The quarterly review Business ethics and anti-corruption: Asia Pacific insights explores the impact of anti-corruption developments in the Asia Pacific region and offers practical insights in response to topical issues. See also Business ethics and anti-corruption world A global bulletin published by Norton Rose Fulbright LLP

Business ethics and anti-corruption: Asia Pacific insights

Contents

Contracting out of corruption 01

Deferred prosecution agreements 03

Walking a fine line in China 06

Principles of legal 10 professional privilege / the Australian perspective

Contracting out of corruptionCan it be done?

Around the world, governments are taking a tougher stance on bribery and corruption through anti-bribery legislation and actively prosecuting corporations and individuals who contravene these laws. Greater enforcement of the Foreign Corrupt Practices Act 1977, the Bribery Act 2010 and the Criminal Code Act 1995 (Cth) in the United States, the UK and Australia has seen a dramatic change in the global anti-bribery and corruption landscape. Organisations that operate internationally, or that contract with third parties who do so, are particularly vulnerable to these laws and need to consider what further measures they need to take to avoid prosecution. In addition to corporate compliance programmes, the use of an anti-corruption clause in your contracts will assist.

What steps should you be taking now to combat corruption?

Anti-bribery and corruption legislation has implications for how all organisations operate locally and internationally. Having a robust compliance programme coupled with a strong ‘tone from the top’ is essential, together with effective and ongoing training of employees and a robust understanding of whistleblowing obligations. As a first step, organisations should review existing compliance programmes, policies and codes of conduct and implement improvements where needed. Such programmes should focus on internal

and external compliance reporting mechanisms and ensure such mechanisms are known to employees and are easily accessible.

At management level, organisations need to cultivate a culture that places an emphasis on compliance and ethical conduct and also ensure that any corporate compliance programme has appropriate oversight at board level. Consulting with external legal advisers experienced in investigations and compliance on the development of action plans in the event of a reported violation is critical to ensure timely responses that protect your business interests.

When an issue arises, it is also critical to ensure that an organisation’s response to any bribery or corruption complaint is appropriately documented, remembering the importance of attempting to maintain privilege over material where appropriate – whether that is through in-house counsel or the use of external lawyers.

To keep ahead of the game, organisations should review and update compliance policies, including provisions for anonymous reporting, hotlines and whistle-blower policies. Organisations should consider:

• developing programmes designed to encourage employees to report internally rather than going to the press or regulator in the first instance, ensuring that such programmes include robust anti-retaliation policies

• whether it is appropriate to offer incentives to employees for appropriate internal reporting of potential violations and cooperation in any ensuing investigation

• implementing a comprehensive action plan that will allow immediate responses to whistle-blower tips and ensure an expeditious resolution of any investigations

• offering regular training on the internal reporting policy and procedures so that employees know the process and the people involved.

Norton Rose Fulbright – June 2014 01

Contracting out of corruption

Organisations that have effective policies, codes of conduct, compliance programmes and crisis management protocols will be in a stronger position to demonstrate compliance with anti-bribery and corruption laws. But there is more that should be done.

Including an anti-corruption clause in your contracts

Corporate compliance measures, executed well, may give organisations some comfort that they are taking sufficient steps to prevent corrupt practices internally. More complex issues arise when contractors or third parties are retained by an organisation, as one cannot generally dictate how those third parties will conduct the internal aspects of their business. This leaves organisations vulnerable to prosecution – even where robust due diligence and risk assessments have been undertaken. Contractors can constitute a chink in their armour against bribery and corruption prosecution.

To combat this vulnerability, the International Chamber of Commerce has drafted a model anti-corruption clause to be included in contracts under which parties commit to complying with ICC rules on combating corruption or commit to put in place and maintain a corporate anti-corruption compliance programme. The purpose of such an assurance requirement is to help preserve trust between parties and prevent corruption in both the negotiation and performance of contracts.

The ICC anti-corruption clause (2012) is intended to apply to any contract that incorporates it either by reference or in full. The general aim of the model clause (or one drafted with similar effect) is to provide parties with a contractual provision that will reassure them about the integrity of their counterparts and also give the parties

certain contractual rights should corrupt practices be uncovered.

How the anti-corruption clause works

An anti-corruption clause should aim to provide the contracting organisations with a strong and simple contractual provision that shields each party from the corrupt practices of the other, while preserving the continuity of their contractual relationship. The clause should be drafted in light of the best, internationally accepted, up to date and commercially viable standards governing integrity and best practice.

An anti-corruption clause allows the parties to state that they have not and will not be involved in the giving or receiving of bribes or other corrupt conduct within the context of the contract. Should one of the parties breach an anti-corruption clause, under the contract the non-breaching party may be entitled to suspend or terminate the contract or claim damages.

The ICC suggests that in order to comply with best international practice and limit the likelihood for prosecution for breaching bribery and corruption laws, organisations should include anti-corruption clauses as a matter of routine in all significant contracts. Whether courts will, in practice, enforce such clauses, interpret them strictly or allow them as a defence against a bribery and corruption prosecution based on the default of a contract counterparty has not yet been tested.

From the viewpoint of responding to an allegation, whether such a clause would be read down or deemed invalid should not diminish the importance of its intent when combined with robust internal controls, policies and codes of conduct. At the very least, the inclusion of an anti-corruption clause signals

to all parties involved that corrupt or unethical processes and conduct will not be tolerated. Determining whether such a clause could work in your contracts will be an important first step and will enable your business to reflect its internal culture to the parties with which it deals.

For more information contact:

Ben AllenPartnerNorton Rose Fulbright AustraliaTel +61 2 9330 8190 (Sydney) Tel +61 2 6159 4423 (Canberra)[email protected]

Ben Allen is a partner with Norton Rose Fulbright based in Sydney. He is part of Norton Rose Fulbright’s global business ethics and anti-corruption group.

02 Norton Rose Fulbright – June 2014


Deferred prosecution agreementsA new weapon for Australia in its anti-fraud and corruption armoury?

Already operating in the United States, deferred prosecution agreements allow corporations involved in serious economic crime to avoid a criminal conviction by entering into an agreement with the authorities to defer prosecution. In return, corporations agree to commit to reform and restitution, which will often include the payment of financial penalties.

If adopted in Australia, deferred prosecution agreements would be a revolutionary tool for prosecutors addressing fraud and corruption issues. It had been thought that deferred prosecution agreements would not be appropriate within the Australian constitutional setting but a series of legislative amendments adopted in the UK could it seems be mirrored in Australia negating that concern.

Risks will remain for corporations once negotiations with prosecutors commence.

Deferred prosecution agreements in the US

Deferred prosecution agreements were viewed as an attractive alternative to criminal prosecution in the US from around 1999. This grew largely from the need to find a mechanism to bring corporates to account for criminal violations without inflicting harm on innocent victims. These victims included workers left unemployed as a result of a company being found guilty of an economic crime, as well as affected investors and markets.

They also appeal to corporations, as they provide a complete resolution to allegations of wrongdoing relatively quickly, without causing the company to suffer the potentially devastating consequences of criminal liability, such as loss of licensing or debarment. Adverse publicity is also usually avoided, which is often an overriding consideration for many.

However, the US model has also been widely criticised, particularly as most of the process is extra-judicial. Deferred prosecution agreements in the US largely bypass the formal legal system, raising a number of constitutional and public policy considerations. While, empirically, deferred prosecution agreements have seen high levels of compliance and enforcement, there are also fears that undue prosecutorial advantage is held throughout the process. Critics claim that the emphasis on co-operation and negotiation may mask disproportionate prosecutorial leverage. For example, all admissions made by companies during negotiations may be used in any later prosecution if an agreement is not reached. The prosecuting authority also has a unilateral right to withdraw from negotiations and pursue criminal proceedings using such information.

Notwithstanding the criticism, the number of corporations entering into deferred prosecution agreements in the US has rendered this tool one of the most effective economic crime enforcement processes in the world. The Assistant Attorney General of the US Department of Justice has commented that ‘DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe’. Since 2000, it is estimated that monetary recovery in the US as a result of deferred prosecution agreements as well as non-prosecution agreements has totalled more than US$37 billion in publicly disclosed agreements alone.

The UK has recently enacted legislation underpinning a major policy shift in its fight against fraud and corruption. Hopes are raised that the adoption of deferred prosecution agreements into the UK legal framework will be a new means for authorities to combat serious economic crime. The UK Attorney General’s office has already declared that they will be a new ‘weapon in the prosecutor’s armoury which will provide them with greater flexibility to pursue an alternative outcome in appropriate cases.’



The adoption of deferred prosecution agreements in the UK

The introduction of deferred prosecution agreements in the UK has been hailed as a significant step forward in the fight against serious economic crime.

The UK model seeks to incorporate a far greater level of transparency, consistency and judicial involvement than its US counterpart. The Deferred prosecution agreements code of practice provides a clear, unambiguous directive for the negotiation of deferred prosecution agreements, as well as appropriate terms for the agreement. Terms of the agreement must be ‘fair, reasonable and proportionate’ and will usually include a financial penalty, requirements for future compliance and redress for victims wherever possible.

The UK judiciary will also be highly involved in the process, with judicial approval required of both a negotiation’s progress and any final agreement reached. This arguably overcomes the major criticism of the US

model, which many see as operating outside the established legal system.

In the UK, a proposed dilution of the ‘prospects of success’ standards, required to commence negotiation of a deferred prosecution agreement, will also allow prosecutors to more effectively address corporate wrongdoing. Under this framework, the prosecutor only needs a ‘reasonable suspicion’ that an offence has been committed (and reasonable expectation that further investigation would provide more evidence), rather than a ‘realistic prospect of conviction’ as required to commence criminal proceedings. Therefore, a deferred prosecution agreement may be reached between corporations and prosecutors in circumstances where a criminal conviction may otherwise have been unlikely, lengthy or very costly to all parties.

Under the code of practice, a prosecutor may only invite a corporation to negotiate a deferred prosecution agreement if they are satisfied that the public interest will be served in doing so. If a company self-reports, this will

be taken into consideration, weighing against a decision to prosecute. The prosecutor does, however, hold the ultimate discretion as to whether to negotiate and whether to offer the company involved a deferred prosecution agreement at the conclusion of those negotiations.

Therefore, as well as providing options for companies to redress internal compliance measures, potentially reducing financial penalties and providing a means to avoid criminal liability, deferred prosecution agreements also provide UK prosecutors with the necessary means to investigate serious economic crimes and provide restitution to victims.

Fighting fraud and corruption in Australia

The global economic downturn has resulted in a growing widespread acceptance of unethical business practices across the world, according to the twelfth Ernst and Young Global Fraud Survey. Although Australia retains a high compliance rate and low



instances of corruption, a number of its largest trading partners, particularly in Asia-Pacific, rank poorly in corruption comparators. Commentators have pointed out that this makes it likely that many Australian corporations will at some point be exposed to foreign corruption and bribery.

In the financial services industry in Australia, a report on fraud, bribery and corruption by KPMG Australia surveying the 2010-2012 period concluded that A$322.2 million was lost to fraud, accounting for 86 per cent of the total value of reported fraud loss. The report found that the total value of fraud loss of A$372.7 million in the period of 2010–2012 has more than tripled since a similar 1997 survey. Out of the 281 respondents to the survey, 43 per cent of respondent firms reported fraud, with a total of 194,454 individual incidents. Further, there were 20 incidents of fraud where over A$1 million was lost, up from 11 of these incidents during the 2008–2010 period.

Australia has already been criticised by the lack of anti-corruption proceedings under the OECD Anti-Bribery Convention, enacted in 1999. This dearth of enforcement more probably signifies inadequate strategies for prosecution and a lack of incentives for voluntary reporting than it does the absence of fraudulent or corrupt practices among Australian and foreign companies.

Against this backdrop, it is clear that new strategies to address corporate wrongdoing, fraud and corruption would assist Australian authorities and enforcement bodies in their endeavours. A new weapon in the arsenal may be necessary to step up the fight against serious economic crime. The introduction of deferred prosecution agreements into the Australian legal framework would be an effective mechanism to achieve these goals.

The US example has shown that deferred prosecution agreements have the capacity to both encourage and enforce behavioural change amongst corporations, while allowing internal redress in sufficient training and compliance. Negotiated agreements, as opposed to complex investigations and criminal proceedings, are more efficient, less costly and result in a more assured outcome for all parties in many cases. Financial penalties payable under a deferred prosecution agreement also allow both an accrual of government revenue as well as redress for wrongdoing and, in some cases, compensation for victims.

There remains a risk for corporations in entering into deferred prosecution agreement negotiations. There is no assurance that once negotiations are commenced an agreement will be formulated and prosecution deferred. As seen in the US and UK, evidence raised and admissions made by companies throughout negotiations can be used in any later prosecution if an agreement is unable to be reached. The prosecutor may also choose to withdraw unilaterally from negotiations and pursue criminal proceedings based on such information. It is likely that any Australian adoption of deferred prosecution agreements would include similar processes.

Nevertheless, history has also shown that corporations are incentivised by the prospect of entering into a deferred prosecution agreement and avoiding criminal prosecution. This is especially so given the reduction in legal uncertainty and costs, negative publicity and the ability to avoid criminal liability and associated consequences. In the US, companies are increasingly more likely to self-report, thereby improving enforcement rates and outcomes for serious economic crimes.

In Australia, adopting the improvements made to the deferred prosecution agreement framework by the UK legislature (by incorporating a judicial function and oversight) would make deferred prosecution agreements an effective option for authorities here in pursuit of corporate wrongdoers. The potential for alternative and individually negotiated outcomes, as well as heightened levels of voluntary reporting and compliance as provided by deferred prosecution agreements cannot be overlooked. In addressing mounting concerns over fraud and corruption in Australia by both foreign and domestic companies, deferred prosecution agreements would be a welcome additional option for authorities and in many cases, result in a more constructive outcome for corporations.

ReferenceUK Sentencing Council, Guideline for sentencing corporate offenders convicted of fraud, bribery and money laundering offences.


Ben AllenPartnerNorton Rose Fulbright AustraliaTel +61 2 9330 8190 (Sydney) Tel +61 2 6159 4423 (Canberra)[email protected]

Ben Allen is a partner with Norton Rose Fulbright based in Sydney. He is part of Norton Rose Fulbright’s global business ethics and anti-corruption group.



Walking a fine line in China Distinguishing between legitimate commercial deals and commercial bribery

Some businesses are willing to take the risk of walking a fine line between commercial dealings and commercial bribery. Moreover, the lack of clarity in this area has left many businesses unclear about the risks in the first place. We examine incentive measures widely used in China to pin down the distinction between legitimate commercial dealings and commercial bribery. Our analysis draws on judicial practice and regulatory guidance – but given the complexity of the matter being examined, it is indisputable that each case will need to be examined on its own merits.

The legal framework

China’s Criminal Law and its Anti-Unfair Competition Law are the cornerstones of China’s anti-commercial bribery regime.

Under the Criminal Law, bribe-giving refers to the giving of ‘property’ in exchange for improper benefits; bribe-taking refers to the conduct of (1) requesting property from others by taking advantage of the working position of the party making the request, or (2) accepting property from, and seeking benefits for, others in breach of applicable regulations. To constitute a criminal offence, the amount of the bribe should be relatively large.

The Anti-Unfair Competition Law prohibits bribery conducted ‘by means of giving property or other manners’ in order to sell or purchase products. Unfortunately, while the law provides for several permissible and impermissible circumstances, it fails to set out clear parameters for the offence of commercial bribery.

To put it in context, since the Anti-Unfair Competition Law is intended to curb business activities which may cause unfair competition, it is hardly unexpected that it has a broad scope which gives the Chinese enforcement agencies great discretionary powers in practice.

SAIC (the State Administration for Industry and Commerce) is one of the anti-bribery enforcement agencies in China. In 1996, it clarified the expression ‘by means of property or other manners’ in its Interim Provisions on Banning Commercial Bribery (in Chinese, «禁止商业贿赂行为的暂行规定»). The interim provisions define ‘property’ as including cash and tangible assets, promotion fees, advertising fees, sponsorship, R&D expenses, service fees, consulting fees, commissions and expense reimbursements, and ‘other manners’ as including the giving of benefits other than property, including, for instance, the opportunity or means to travel and study within China or abroad.

In 2008, the Supreme People’s Court and the Supreme People’s Procuratorate jointly released Opinions on Issues concerning the Application of Law in the Handling of Criminal Cases of Commercial Bribery (in Chinese, «关于办理商业贿赂刑事案件适用法律若干问题的意见») in an effort to guide judicial practice in this area. They define ‘property’ as cash, tangible assets, and any other benefits with a monetary value. This broad definition thus includes items such as building decoration, membership cards of

China in the 21st century exemplifies an atmosphere of great opportunity and intense competition. Against this backdrop, it has become increasingly common for businesses to adopt a variety of practices in order to make their products and services competitive. Such practices may include paying middle-men to promote sales and giving incentives to buyers directly. However, whilst revenue spikes are undoubtedly welcome, businesses should bear in mind the potential backlash arising out of these commercial arrangements. The risk that such arrangements may not comply with anti-bribery and corruption laws and therefore cause business significant damage in the long term should not be underestimated.



value, debit cards and travel expenses. Moreover, ‘improper benefits’ for which bribes are given in exchange have been interpreted as referring to benefits, assistance and convenience that are in contravention of laws, regulations, rules, policies and industrial standards.

These clarifications identify a number of forms that commercial bribery may take. In practice, determining whether a commercial arrangement is legally compliant is a challenging exercise. We examine some Chinese court cases to identify trends in the judicial enforcement practice of the anti-commercial bribery regime.

Case studies

Commercial bribery in the form of ‘consulting fees’The Construction Project Inspection Association of Yuyao City, Zhejiang

Province (the Yuyao Association) sued the local Administration for Industry and Commerce for mistaking a normal commercial arrangement as commercial bribery. The Yuyao Association was established as a non-profit-making professional association; its secretary-general is an official of the local construction project quality inspection and supervision regulatory authority (the Yuyao Authority).

In 2012, the Yuyao Association entered into an agreement with six local construction project inspection companies which allowed the Yuyao Association to charge consulting fees from these companies with respect to certain inspection projects conducted by these companies. Based on this agreement, Yuyao Association received approximately RMB2 million from four of these companies as consulting fees by 28 January 2013. The local Administration for Industry and

Commerce regarded this arrangement as commercial bribery and ordered the Yuyao Association to pay a fine of RMB50,000, in addition to confiscation of all consulting fees received. The Administration for Industry and Commerce gave the following reasons for its decision:

• The Yuyao Association had a close relationship with the Yuyao Authority – in addition to the secretary-general, working staff from the Yuyao Authority were seconded to the Yuyao Association and the former was even in control of the latter’s expenditure.

• The Yuyao Association had influence over the local construction market by virtue of its close connection with the Yuyao Authority and thus inspection reports with its imprimatur would



stand a better chance of being approved by the Yuyao Authority.

• The Yuyao Association could not justify its receipt of the consulting fees since it had not provided any real consulting services and was effectively unable to do so since it did not have any qualified staff.

• The true purpose of the consultancy payments was to buy the Yuyao Association’s influence which would help the relevant companies win business opportunities and gain a competitive advantage.

The local Administration for Industry and Commerce concluded that the payment of consulting fees to Yuyao Association was disguised commercial bribery in order to gain an anti-competitive advantage. Both the court of first instance and the court of appeal upheld the decision of the local Administration for Industry and Commerce.

Commercial bribery in the form of ‘commissions’ or ‘service fees’In 2001, the local Administration for Industry and Commerce penalised Wuxi Radio & TV Network Centre (Wuxi) for commercial bribery. The penalty was imposed because Wuxi had been collecting insurance premiums from cable TV users together with cable maintenance fees. In return for collecting the premiums, Wuxi had reached an agreement with an insurance company which granted Wuxi a service fee of 30 per cent of the premium value. The local Administration for Industry and Commerce ruled that, since Wuxi was not a qualified insurance agent, this arrangement was in breach of insurance laws and was entered into with the intention of bribing Wuxi to promote the insurance products.

In 2010, a press release disclosed that Toyota Automobile Finance (China) (Toyota Finance) was facing

administrative penalties from the local Administration for Industry and Commerce for commercial bribery – the penalty included a fine of RMB140,000 and confiscation of illegal gains of over RMB420,000. It was reported that between August 2008 and April 2010, three 4S stores in Hangzhou which distributed Toyota cars had recommended the car financing services of Toyota Finance to their customers. In return, the 4S stores had received ‘services fees’ equivalent to 4.5 per cent of the interest received by Toyota Finance under the car financing arrangements. Almost concurrently with this case, SAIC and several other regulatory authorities issued a notice which provided that the practice of automobile distributors’ charging ‘return bonus’ or ‘favour fees’ from financing/security/insurance companies while assisting the customers in handling mortgage loans or car insurances is commercial bribery.

The cases described above illustrate that regulators may take into account a variety of factors in determining whether a commercial arrangement constitutes bribery. For example, regulators have been willing to consider whether a party has breached other laws and regulations applicable to its business activities (such as licensing requirements), whether the relevant fee arrangements are justifiable and whether a party enjoys an unfair competitive advantage due to such actions.

SAIC guidance

The second SAIC internal training programme on anti-monopoly and anti-unfair competition conducted a research study on enforcement against commercial bribery and published a report based on its findings in 2012. The SAIC report does not have the force of law but the guidance it provides may be instructive.

SAIC will consider three points in determining whether commercial bribery has been constituted:

1. Has any property/inducement been given improperly in order to gain business opportunities? By ‘improper’, SAIC means any act which is not ‘reasonable, voluntary, equal, fair, in good faith or in conformity with laws and regulations’.

2. Will the giving of property/inducement affect fair competition?

3. Whose interests are affected by whatever is given in exchange by the bribe recipients? SAIC believes that it is always the third party’s interests which are affected by bribery.

In addition, the SAIC report compared commercial bribery with several common commercial arrangements. The findings are summarised as follows:

Commercial bribery v discountGenerally speaking, a normal discount, when compared to commercial bribery, should have two features: it should be written into the sales contract; and it should be truthfully recorded in the accounting books. Absence of either feature may turn the discount into a kickback, which is a type of commercial bribery.

Commercial bribery v commissionBrokers may charge agreed commissions for the introduction and facilitation of business transactions, provided that:

• the commissions are written into the contracts

• the commissions are truthfully recorded in the accounting books

• the brokers are duly qualified to conduct brokerage business



• the brokers act in good faith without compromising the principals’ interests.

Failure to meet the above conditions may turn the commissions into commercial bribery.

Commercial bribery v gifts Gifts from business operators to consumers are normally not regarded as commercial bribes. However, gifts by and between business operators in order to gain business opportunities may constitute commercial bribes, except for gifts of small value given in accordance with commercial practice and normal entertainment expenses.

Commercial bribery v sponsorship Sponsorship for public welfare with no economic benefits in return does not constitute commercial bribery. Commercial sponsorship as a marketing instrument to secure business transactions may be regarded as commercial bribery. According to SAIC, sponsorship fees in the commercial context should be consideration for promotion or advertisement activities and therefore may constitute commercial bribery if any payment is made in the name of sponsorship fees but no promotion or advertisement is provided.

Commercial bribery v sales bonus Sales bonuses usually take the form of commissions payable by principals to agents or discounts given by sellers to buyers. As long as such discounts or commissions meet the conditions described above, there is a relatively low risk that they will be regarded as commercial bribes.

The SAIC has also given written rulings from time to time differentiating between normal commercial deals and commercial bribery. For example, in an SAIC response dated 22 June 1999,

SAIC clarified that a ‘headcount fee’ or ‘parking fee’ paid to travel agencies or tour guides by stores for the purpose of introducing tourists to the stores constituted commercial bribery. In a separate response on 30 December 1997, SAIC stated that payments made by beer companies to hotel or restaurant staff to re-purchase bottle caps (of the beer sold) are commercial bribes.

Conclusion

The diverse forms of commercial activities and commercial bribery make it difficult to clearly delineate the two. Notwithstanding the attempt of enforcement authorities to clarify the position, a grey area still exists. Ambiguity in the legislation and uncertainties in enforcement practice have added significant complexity to the compliance landscape in China. Therefore, it is advisable to take a cautious approach in doing business in China, in particular in the engagement of third party agents and offers of ‘competitive’ incentives to commercial counterparties.

Businesses should be more self-aware and put themselves in the SAIC’s position when reviewing any proposed arrangement. This method will allow businesses to question the underlying objective for a practice that does not appear to be entirely above board and, thus, to identify non-compliant acts at the outset instead of on a post hoc basis. Generally speaking, to the extent that a commercial deal is properly made, complies with all applicable laws and regulations, has a justifiable commercial substance, is transparent in its documentation and reasonable in its fee arrangements, the risks are fairly minimal.

Adopting best practice compliance norms at the outset will allow businesses to avoid the pitfalls that

taking the easier route would cause them to encounter. It may seem onerous, but it will yield dividends.


Sun HongPartnerNorton Rose Fulbright LLPTel +86 21 6137 [email protected]

Qinghua SongAssociateNorton Rose Fulbright LLPTel +86 21 6137 [email protected]

Sun Hong is a partner with Norton Rose Fulbright based in Shanghai and Song Qinghua is an associate, also in Shanghai. They are part of Norton Rose Fulbright’s global business ethics and anti-corruption group.



Legal professional privilege is an important common law immunity of which companies and individuals may avail themselves in Australia and common law jurisdictions generally.

Where regulators are investigating alleged conduct of companies or individuals, those parties would be well advised to seek legal advice first, before seeking other professional advice – so that where their communications are capable of being properly privileged, they may be.

The UK Supreme Court has recently reminded us that legal advice privilege (including litigation privilege) is restricted to communications between legal adviser and client. Lord Neuberger in R v Special Commissioner of Income Tax1 made it clear the privilege does not extend to confidential communications with accountants.

The privilege

In Daniels Corp v ACCC the majority of the High Court of Australia said:

It is now settled that legal professional privilege is a rule of substantive law which may be availed of by a person to resist the giving of information or the

1 [2013] 2 AC 185

production of documents which would reveal communications between a client and his or her lawyer made for the dominant purpose of giving or obtaining legal advice or the provision of legal services, including representation in legal proceedings.

The High Court then noted:

Legal professional privilege is not merely a rule of substantive law. It is an important common law right or, perhaps, more accurately, an important common law immunity.2

The common law is not the only source of privilege in Australia – the Uniform Evidence Acts3 also create a similar privilege, which allows a party to refuse to disclose certain confidential communications and documents.

In the Federal Court of Australia, the Commonwealth Evidence Act 1995 only applies to the ‘adducing’ of

2 (2002) 213 CLR 543 at [9] and [11]. See also R v Special Commissioner of Income Tax [2013] 2 AC 185 at 215; and Upjohn Co v United States (1981) 449 US 383.

3 The Evidence Act 1995 (Cth), Evidence Act 1995 (NSW), Evidence Act 2001 (Tas), Evidence Act 2008 (Vic), and the Evidence Act 2011 (ACT) are all in similar terms. These Acts are sometimes termed the Uniform Evidence Acts although there are some differences between them.

evidence [i.e. citing as evidence]. In New South Wales, the Evidence Act 1995 applies to all pre-trial stages the subject of the Uniform Civil Procedure Rules as well as to the ‘adducing’ of evidence. The Victorian Evidence Act 2008 applies to all pre-trial stages of litigation as well as to ‘adducing’ of evidence at trial.4

The test for legal professional privilege in Australia

Common lawUnder common law, legal professional privilege protects from disclosure the contents of all oral and written communications passing between a lawyer (solicitor or barrister) and their client (and in some instances a third party) which refer to the lawyer/client relationship and which are confidential in character.

Evidence Acts in AustraliaThe provisions of the Commonwealth Evidence Act which deal with the subject of client legal privilege are sections 118 and 119.

4 In NSW, the Evidence Act 1995 (NSW) applies to pre-trial procedures by virtue of s131A of that Act which extends the application of client legal privilege to “disclosure requirements”. Disclosure requirements are defined as including summons or subpoenas, pre-trial discovery, non-party discovery, interrogatories, notices to produce, requests to produce documents under Div 1 of Part 4.6. Section 131A of the Victorian Act (which commenced operation on 1 January 2010) is in similar terms to s131A of the NSW Act (but it also includes search warrants). Confirmed in Perry & Sagar v Powercor Australia Ltd [2011] VSC 308 at [44]. Section 131A of the Evidence Act (ACT) (which commenced operation on 1 March 2012), is in similar terms to the NSW Act.

Principles of legal professional privilege / the Australian perspective Distinguishing between legitimate commercial deals and commercial bribery



Section 118Legal adviceEvidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of a confidential communication made between the client and a lawyer (or between two or more lawyers acting for the client) – or the disclosure of the contents of a confidential document (whether delivered or not) prepared by the client, lawyer or another person5 – for the dominant purpose of the lawyer (or one or more of the lawyers) providing legal advice to the client.

Section 119LitigationEvidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of a confidential communication between the client and another person (or between a lawyer acting for the client and another person) that was made – or the disclosure of the contents of a confidential document (whether delivered or not) that was prepared – for the dominant purpose of the client being provided with professional legal services relating to an Australian or overseas proceeding (including the proceeding before the court) or an anticipated or pending Australian or overseas proceeding, in which the client is or may be, or was or might have been, a party.

The rationale for privilege

The rationale for protecting evidence on the basis of privilege is to promote the public interest by preserving the confidentiality of communications between lawyer and client, and encouraging the client to make a full

5 On 1 January 2009 amendments to s118(c) of the Evidence Act commenced (the words “the client or lawyer” were replaced with “the client, lawyer or another person.”).

and frank disclosure of the relevant circumstances to the legal adviser.

As the majority of the Australian High Court noted in Esso Australia Resources Ltd v Commissioner of Taxation of the Commonwealth of Australia,6 the ‘privilege exists to serve the public interest in the administration of justice by encouraging full and frank disclosure by clients to their lawyers’.

Previously, a majority of the Australian High Court in Grant v Downs7 stated:

The existence of the privilege reflects, to the extent to which it is accorded, the paramountcy of this public interest over a more general public interest, that which requires that in the interests of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available.

Where does it apply?Legal professional privilege applies to all forms of compulsory disclosure and is not confined to judicial or quasi-judicial proceedings.8 For that reason it is not merely a rule of evidence. In Grant v Downs, the majority further noted:

As a head of privilege legal professional privilege is so firmly entrenched in the law that it is not to be exorcised by judicial decision. None the less there are powerful considerations which suggest that the privilege should be confined within strict limits.9

Legal professional privilege is a right that will not be taken to have been abrogated by statutory provisions except by express language or clear and unmistakable implication. As Deane J stated in Baker v Campbell:

6 (1999) 201 CLR 49 at 64.7 (1976) 135 CLR 674. Stephen, Mason and Murphy JJ in a

former “sole purpose” test case.8 Baker v Campbell (1983) 153 CLR 52.9 (1976) 135 CLR 674 at 685.

It is a settled rule of construction that general provisions of a statute should only be read as abrogating common law principles or rights to the extent made necessary by express words or necessary intendment.10

Dominant purpose testBefore the Australian High Court’s decision in Esso v Australia Resources Ltd v Commissioner of Taxation,11 the common law relating to privilege in Australia was based on a sole purpose test.

After the introduction of the Commonwealth and NSW Evidence Acts in 1995, there was tension between the legislative dominant purpose test and the common law sole purpose test. Before Esso, the position was that the adducing of evidence in court proceedings (where the Evidence Act applied) was covered by the dominant purpose test whereas discovery and inspection of documents was covered by the common law sole purpose test as espoused in Grant v Downs. The position now at common law is that the dominant purpose test applies.

In Esso, a majority of the High Court, held:

As a practical matter, the choice presently confronting this court is between sole purpose and dominant purpose. The dominant purpose test should be preferred.12

The decision in Esso brought Australia into conformity with other common law jurisdictions, such as the United Kingdom, New Zealand and Canada.13 It also brought the common law in line with the Evidence Acts.

10 (1983) 153 CLR 52 at 116.11 (1999) 201 CLR 49.12 (1999) 201 CLR 49 at 73, by Gleeson CJ, Gaudron and

Gummow JJ13 See R (Morgan Grenfell & Co. Ltd) v Special Commissioner

of Income Tax [2003] 1 AC 563; Re Director of Investigation and Research and Shell Canada Ltd (1975) 55 DLR (3d) 713 and R v Uljee [1982] 1NZLR 561.



Communications

The authorities make it clear that privilege at common law applies to communications. In Commissioner of Australian Federal Police v Propend Finance Pty Ltd,14 a member of the Australian High Court held that ‘…legal professional privilege does not protect documents, as such, but protects communications between lawyer and client.’

Toohey J said that:

privilege does not attach to a piece of paper. It attaches to a communication, written or oral, and it is the communication that is at issue. While it is natural to speak of legal professional privilege in terms of documents, it is the nature of the communication within the document that determines whether or not the privilege attaches.15

Third partiesAt both common law and under the Evidence Acts, confidential communications (or documents, respectively) with third parties by a client or a lawyer for the dominant purpose of assisting in actual or contemplated litigation are privileged from production.

ConfidentialityIt is a requirement of legal professional privilege that the communication must have an element of confidentiality. There was no controversy at common law that for advice privilege the communication must have an element of confidence.

Under the Evidence Acts the position is very clear, as sections 118 and 119 refer to confidential communications

14 (1997) 188 CLR 501 at 543 per Gaudron J.15 Ibid at 525.

and documents.16 Section 117(1) of the Evidence Acts defines ‘confidential communication’ to mean:

a communication made in such circumstances, that when it was made:

(a) the person who made it; or

(b) the person to whom it was made;

was under an express or implied obligation not to disclose its contents, whether or not the obligation arises under the law.

It is the lack of the obligation of confidence that makes solicitors’ trust accounts, backsheets and fee notes ineligible, generally, for the protection of legal professional privilege.17

Waiver

The issue of waiver is pertinent to clients who are often tempted to refer to legal advice to bolster their position in the course of negotiations and correspondence with other parties.

Waiver of privilege may be express or implied. Ordinarily, a waiver of privilege by express words or conduct is likely to be uncontroversial. Accordingly, most of the case law dealing with waiver has been in relation to implied waiver. Waiver may be implied in two ways:

1. by ‘issue waiver’, when a party directly or indirectly puts into issue the substance of privileged communications, including putting into issue his or her state of mind

16 State of NSW v Jackson [2007] NSWCA 279 at [37].17 Lake Cumbeline Pty Ltd v Effem Foods Pty Ltd (1994) 126

ALR 58.

2. by the partial disclosure of privileged material, where it would be inconsistent and unfair to permit a party to disclose and use part of a document whilst claiming privilege over the remainder of it.

Common lawIn Mann v Carnell, the Australian High Court moved away from considerations of fairness towards the ‘inconsistency’ test. The majority (Gleeson CJ, Gaudron, Gummow and Callinan JJ)18 held that:

Waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is ‘imputed by operation of law’. This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege… What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large.

Why lawyers first?

Where you need the assistance of other professionals in Australia it is wise to consult your lawyers first and then have your lawyers instruct experts

18 (1999) 201 CLR 1 at 13. In Mann v Carnell the disclosure did not occur in the context of litigation nor was the content of the legal advice “put in issue”. See also Commissioner of Taxation v Rio Tinto Ltd [2006] FCA FC 86 at [53] [56].



to assist them. The United Kingdom Supreme Court decision in R v Special Commissioner of Income Tax reminds us of this important consideration.

Lord Neuberger gave the lead judgment for the majority, holding that legal advice privilege should not be extended to communications in connection with advice given by professional people other than lawyers, even where that advice is legal advice which that professional person is qualified to give.19

Regarding the current state of the law, Lord Neuberger observed that there are clear judicial statements of high authority to the effect that legal advice privilege only applies to communications in connection with advice given by members of the legal profession.20

The current editions of major textbooks have proceeded on that basis.21

Parliament has also on a number of occasions legislated in this field on the assumption that legal advice privilege only applies to advice given by lawyers, and in these circumstances it would therefore be inappropriate for the court to extend the law.22

In addition to these reasons, extending legal advice privilege to any case where legal advice is given by a person who is a member of a profession which has as an ordinary part of its function the giving of legal advice would be likely to lead to a clear and well understood principle becoming uncertain.23

This is because it is unclear which occupations would be members of a profession for this purpose; there would be room for uncertainty, expenditure and inconsistency if

19 [2013] 2 AC 185 at [51]20 [2013] 2 AC 185 at [30]21 [2013] 2 AC 185 at [32]22 [2013] 2 AC 185 at [52]23 [2013] 2 AC 185 at [52]

the court had to decide whether a group constitutes a profession for the purposes of legal advice privilege, and it is unclear how a court would decide whether a profession is one which has as an ordinary part of its function the giving of legal advice.24

Lord Neuberger observed that, apart from these concerns, the extension of legal advice privilege to cases where legal advice is given from professional people who are not qualified lawyers raises sensitive questions of policy.

These questions should be left to Parliament in order to be considered through the legislative process, with its wide powers of inquiry and consultation and its democratic accountability.25

In separate dissenting judgments, the minority (Lord Clarke and Lord Sumption) considered that legal advice privilege extended to advice given by members of a profession which has as an ordinary part of its function the giving of skilled legal advice26, and that recognising the privilege attaching to the legal advice of accountants would not be extending the scope of legal advice privilege.27

Lord Sumption considered that English law has always taken a functional approach to legal advice privilege28, and on this view the availability of legal advice privilege depends on the character of advice which the client is seeking and the circumstances in which it is given, and not on the adviser’s status, provided that the advice is given in a professional context.29

Their Lordships’ decision is a timely reminder of the importance of the legal professional privilege and the

24 [2013] 2 AC 185 at [53]-[57]25 [2013] 2 AC 185 at [52] and [62]26 [2013] 2 AC 185 at [114] and [148]27 [2013] 2 AC 185 at [128]28 [2013] 2 AC 185 at [123]29 [2013] 2 AC 185 at [114] and [142]

important role lawyers play in the administration of justice in common law jurisdictions.


Grant BonnerPartnerNorton Rose Fulbright AustraliaTel +61 2 9330 [email protected]

Daniel HabashyAssociateNorton Rose Fulbright AustraliaTel +61 2 9330 [email protected]

Grant Bonner is a partner with Norton Rose Fulbright based in Sydney and Daniel Habashy is an associate, also in Sydney. They are part of Norton Rose Fulbright’s global business ethics and anti-corruption group.



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