Month: October 2019

On October 4, the Australian Securities & Investments Commission (ASIC) announced that it had brought criminal charges against Colonial Mutual Life Insurance Society Ltd (CommInsure), a subsidiary of leading Australian bank Commonwealth Bank of Australia (CBA), under the “hawking” (cold-calling) provisions in section 992A of the Corporations Act 2001. ASIC alleged that on 87 occasions between October and December 2014, CommInsure, through its agent (telemarketing firm Aegon Insights Australia Pty Ltd (Aegon)), unlawfully sold life insurance policies known as Simple Life over the telephone, and that CommInsure provided customer contact details to Aegon from CBA’s existing customer database.

Subsection 992A(1) of the Corporations Act generally prohibits “offer[ing] financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person.”  Subsection 992A(3) of the Act provides certain exceptions to the general prohibition (e.g., the call recipient must receive a Product Disclosure Statement before becoming obligated to purchase the financial product being offered).  In this case, ASIC alleged “that the calls to CBA customers were unsolicited, and that CommInsure did not comply with all of the hawking exceptions in section 992A(3) of the Corporations Act.”

Each violation of section 992A by a corporate entity is punishable by a fine equating to 125 penalty units (AUD$21,250).  If convicted on all counts, CommInsure would be fined up to AUD $1.785 million.

N.B.:  This prosecutions has attracted attention in the Australian media because criminal charges for hawking violations are reportedly rare.  As Reuters reported, however, during the 2018 Australian Royal Commission inquiry into financial sector misconduct, “other insurers admitted to habitually breaking anti-hawking laws.”  One life insurance company, Clearview Group, admitted to violating the hawking provisions more than 300,000 times, and to “targeting poor and vulnerable individuals.”  In response, ASIC had indicated in July 2109 “that it was planning to have the country’s top lenders prosecuted for overly aggressive sales of insurance products.”

On October 2, The Mainichi reported that Kansai Electric Power Co.  (KEPCO) disclosed that “two [KEPCO] executives who were responsible for its nuclear business both received more than 100 million yen ($929,000) as gifts from a former official of a town hosting one of its nuclear plants.”  KEPCO stated that 20 KEPCO officials had received ¥318.45 million ($2.98 million) worth of gifts, which “included U.S. dollars, gold coins, and gift coupons for tailored suits.” KEPCO managing executive officer Satoshi Suzuki received the largest amount (¥123.67 million, or $1.16 million) and former deputy president Hideki Toyomatsu the second largest amount (¥110.57 million, or $1.03 million).

According to The Mainichi, KEPCO employees accepted gifts from the late former deputy mayor of the town of Takahama, Eiji Moriyama, from 2006 until Moriyama’s death in 2019.  KEPCO’s nuclear power division – which Toyomatsu headed and Suzuki currently serves as acting chief — is located in Fukui Prefecture, where Takahama is located.

A report that KEPCO released on October 1 stated that Moriyama “had a wide network of connections with Japanese lawmakers and he had threatened to obstruct operation of the company’s nuclear power facilities if it did not comply with his wishes.”  In addition, KEPCO Chairman Makoto Yagi stated that Moriyama’s offering of gifts escalated after “the March 2011 earthquake and tsunami in northeastern Japan, which triggered the Fukushima nuclear crisis.”

An independent panel is to be established to investigate the facts relating to the 20 KEPCO officials and Moriyama.  KEPCO President Shigeki Iwane (who the KEPCO report said had received ¥1.5 million ($14,000) from Moriyama) and Yagi (who received ¥8.59 million ($80,275)) said that “they will decide what to do after looking at a report it compiles by the end of this year.”

KEPCO reportedly imposed a 20 percent reduction in remuneration for two months on Yagi and Toyomatsu, and a 20 percent reduction in remuneration for one month for Iwane.  KEPCO also stated that the officials had returned or repaid most of the gifts, but that ¥34.87 million yen ($325,866) worth of gifts remain unreturned.

N.B.: These revelations relating to the Moriyama “gifts” have attracted substantial attention in Japan — in part because last week KEPCO had held a press conference about the “gifts” but refused to disclose details, “citing the need to protect personal information.”  Even at its October 3 press conference, KEPCO disclosed only 12 of the 20 officials who received “gifts” from Moriyama.

However uncomfortable these revelations are, KEPCO needs to refrain from future piecemeal disclosures, and to expedite the independent panel’s review process.  The day after the October 2 KEPCO press conference, an unnamed former KEPCO senior official in charge of its nuclear business admitted that “he received ‘an outrageous gift’ after meeting Moriyama for the first time in the late 1990s, although he did not divulge what was received.”  That official also said that he returned the gift to Moriyama about six months later, which “enrag[ed]” Moriyama.

That former official’s statements indicate that that the panel needs to expand the scope of its investigation well beyond 2006.  It also needs to report as quickly as possible and comprehensively on the full scope and extent of KEPCO officials’ acceptance of Moriyama’s “gifts.”  The longer that KEPCO officials draw out the process, the more likely that public anger, and calls for top management’s ouster, will intensify.

On October 1, Reuters reported that according to the Brazilian Federal Police, Brazilian meatpacking company BRF SA “has admitted to bribing food inspectors with bank deposits and health benefits.”  This admission is related to the Federal Police’s ongoing investigation of BRF as part of “Operation Weak Flesh.”  The Federal Police initiated that operation in March 2017 to probe corruption of Ministry of Agriculture agricultural inspectors by owners of meat processing plants in three Brazilian states.

As part of the fourth phase of Weak Flesh, the Federal Police said that BRF had provided evidence that it had paid approximately R$19 million ($4.56 million) in bribes until 2017, when the company overhauled its management.  Subsequently, certain former BRF executives were taken into custody.

BRF itself is not under investigation, according to the Federal Police, but is cooperating with authorities.  As a result, police did not find it necessary to conduct raids to gather evidence, and BRF stated that none of its offices or production sites were targeted in the latest phase of the investigation.

Reuters also reported that according to a person familiar with the matter who requested anonymity, investigators are negotiating “a formal leniency agreement with BRF in return for its continued cooperation.”

N.B.: The statement that Brazilian Police indicated that BRF is not under investigation is worthy of note, in light of the report that the authorities are seeking a leniency agreement with BRF. Previously, the police had publicly “cited evidence that five laboratories accredited by the Agriculture Ministry colluded with the analysis department of BRF to ‘falsify’ test results related to the safety of its industrial process.”  Another media report indicated that the police are now focusing on farm inspectors who received bribes from BRF, and stated that “there are cases of inspectors who received R$600,000 [$145,871] through fake contracts.”

On September 24, the U.S. Department of Justice announced that Igor Yurkovetsky pleaded guilty in the District of Minnesota to a criminal violation of the Sherman Act.  The information charged Yurkovetsky with participating in a conspiracy, from about July 2012 until as late as May 2018, to rig bids at online public auctions of surplus government equipment that the U.S. General Services Administration (GSA) held.

According to the Department, the GSA operates GSA Auctions, which conducts online auctions allowing the general public “the opportunity to bid electronically on a wide variety of federal assets, including computer equipment that is no longer needed by government agencies.”  Proceeds of GSA auction sales are distributed to the government agencies that made the equipment available for auction, or to the U.S. Treasury general fund.

The Department stated that “the primary purpose of the conspiracy was to suppress and eliminate competition,” and that “the co-conspirators obtained the equipment by agreeing which co-conspirators would submit bids for particular lots offered for sale by GSA Auctions and which co-conspirator would be designated to win a particular lot.”

Yurkovetsky, who reportedly agreed to cooperate in the ongoing investigation of this conspiracy, is the second person charged in that investigation. The Assistant Attorney General for the Justice Department’s Antitrust Division, Makan Delrahim, promised, “This charge will not be the last in this investigation.”

N.B.:  Although more facts about the alleged bid-rigging conspiracy are likely to emerge as the Antitrust Division continues its investigation, antitrust-compliance and legal officers in companies that conduct auctions as part of their operations should bring this plea to the attention of senior executives.  Business executives need to recognize that bid-rigging is a core criminal violation that the Antitrust Division has long made an enforcement priority, and that the Sherman Act’s prohibitions apply whether the auctions in question are brick-and-mortar or virtual and government or private.

On September 30, the Independent Broad-based Anti-corruption Commission (IBAC), a commission charged with investigating public corruption and police misconduct in the State of Victoria (Australia), issued a special report on corruption risks associated with local government procurement (Report).  The Report presented findings from two of its investigations into alleged corruption in the local government sector: Operation Dorset, which focused on an unnamed former project manager in the capital works department of the Darebin City Council; and Operation Royston, which focused on Lukas Carey, who was a manager responsible for sports and recreation for the City of Ballarat Council.

In Operation Dorset, IBAC reported that the project manager had received cash, gifts, and other benefits from an unnamed “Company A,” which received more than AU$16 million in city contracts.  That investigation also identified a number of other conflicts of interest, including (1) the manager’s failure to declare his prior association with a number of contractors (“Companies A and B”); (2) the manager’s having a  controlling and financial interest in “Company C”; and (3) the manager’s “direc[t] and inappropriate[e] involve[ment] in amending invoices submitted by Company A and Company B.”

In Operation Royston, IBAC found that IBAC found that Carey “was instrumental in setting up Company D (which was solely owned and operated by his wife) and engaging the company on behalf of council.”  His actions

played a critical role in his family obtaining a financial advantage ($55,885 in contracts awarded to Company D between June and October 2015). This advantage was obtained in circumstances where Mr Carey dishonestly represented parts of his own university thesis as work performed by Company D. Mr Carey was also actively involved in engaging three associates on behalf of council. Again he played a critical role in those companies obtaining a financial advantage ($128,238 in contracts between 2013 and 2015) in exchange for which he solicited and received secret commissions totalling $47,745.

That investigation also found various conflicts of interest including (1) Carey’s failure “to declare his familial connection with Company D and associations with Companies E, F and G”; (2) Carey’s “direc[t] and inappropriate[e] involve[ment] in the management of Company D, including its purported work for the council and submitting invoices for payment by council”; and (3) Carey’s failure “to comply with the [Ballarat] council’s policies in areas including procurement, declaration of conflicts of interest and information management.”  In both cases, IBAC found that the city councils had failed to provide adequate oversight of senior employees, which resulted in missed opportunities to detect and correct the managers’ conduct.

The Report also identified various key corruption risks and opportunities.  These included the need for competitive processes for sourcing suppliers; the need for “clear policies and rigorous [conflict of interest] processes that are actively monitored and tested”; the importance of adequate internal controls; segregation of duties and rotation of employees involved with procurement; robust information-management processes; ongoing monitoring of expenditures; random internal checks and an internal audit program; and the risks of allowing employees great autonomy without meaningful supervision and oversight.

On the latter issue, one of the supervisors of the Darebin manager said:

I thought [he] was doing a great job, he was very efficient and knowledgeable so I continued the current system where he had [a] lot of freedom to just get things done quickly. He got twice as many projects done as other people.

The Report stated that as a result of the IBAC investigation,

• Carey pleaded guilty to obtaining financial advantage by deception, attempting to commit an indictable offence, and soliciting secret commissions, and was sentenced to three years’ imprisonment and ordered to repay AU$31,200 to the City of Ballarat Council;
• Carey’s wife, the sole director of Company D, pleaded guilty to obtaining a financial advantage by deception and attempting to commit an indictable offence, and was fined AU$3,000 and ordered to repay $20,500 to the council;
• The sole director of Company E pleaded guilty to charges of paying secret commissions, and was fined AU$15,000 without conviction;
• The sole director of Company F pleaded guilty to charges of paying secret commissions, and was fined AU$8,000 and sentenced to 200 hours of community work without conviction.

The Report recommended “that all Victorian councils consider their procurement policies, systems and practices to identify how they can strengthen their resistance to corruption.”  It also found “merit in local government suppliers being subject to a code of conduct.”  Such a code of conduct, as IBAC put it, “could explicitly outline the standards expected of suppliers, including in relation to reporting suspected misconduct or corrupt conduct on the part of council employees and other suppliers.”

N.B.: This report demonstrates the need for state and local governments to have strong and consistent oversight and internal controls for their procurement activities, as well as clear codes of conduct for all government employees.  While national governments and global companies often attract far more public attention when fraud or corruption affect their procurement activities, states and cities often have substantial procurement budgets comparable to those of some smaller nations and companies.  As the IBAC Report noted about Victoria,

Victorian councils play a pivotal role in providing and maintaining a wide range of services, programs and infrastructure for their communities. With responsibility for the management of community infrastructure worth approximately $90 billion and delivery of more than $7 billion in critical public services every year, councils spend between 45 per cent and 60 per cent of their annual budgets on procurement.