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A Perfect Storm – Australia’s Anti-Money Laundering and Counter-Terrorism Financing Regime

Since its commencement almost 10 years ago, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act) has created a complex set of obligations for entities (reporting entities) required to implement AML/CTF programs. The AML/CTF Act, and associated Rules, are also heavily regulated by a well-resourced and well-funded regulator (AUSTRAC) so it is not an area to be taken lightly.

However, significant events over the last few months have created a ‘perfect storm’ within the Australian AML/CTF landscape, requiring existing reporting entities to ensure that their AML/CTF Programs are watertight, robust and in line with regulator expectations. Failure to do so will result in lengthy and time-consuming regulator communications, increased likelihood of enforcement action and reputational damage within the market.

1. Poor Scorecard for Australia

The recently released Financial Action Task Force (FATF) report on Australia’s AML/CTF regime provides feedback on the effectiveness of measures put in place within Australia to address global standards.

Let’s be clear from the outset: the report shows a fair bit of room for improvement. After the adoption of the AML/CTF Act in 2006, the creation of an ever-expanding list of additional AML/CTF Rules (71 chapters and counting), annual compliance reporting, internal/external Independent Review requirements and a very active regulator, FATF still found that Australia was ‘compliant’ or ‘largely compliant’ in only 24 of its 40 recommendations.

This is not good news for Australia, and forward-thinking reporting entities should be aware of this constructive feedback.  The findings of the FATF report will ultimately trickle down to existing reporting entities, and be enforced through the AML/CTF regulator, AUSTRAC. So, expect more changes to the AML/CTF Act and Rules over the next few months and years.

2. Sheer Volume of Requirements

After the adoption of the AML/CTF Act in 2006, the AML/CTF Rules have expanded to 71 chapters which include annual compliance reporting and independent review requirements for reporting entities.

Significant AML/CTF Rule changes commenced in June 2014 in relation to Customer Due Diligence (CDD) (see our previous blog). Reporting entities are only just coming to terms with these changes, spanning five or six Chapters of the Rules, even with a relatively long implementation window. However, expect plenty more changes to the AML Act and Rules over the next few months and years after the shortfalls identified by the FATF in the current regime.

3. Tougher Enforcement Action

As the AML/CTF regulator, AUSTRAC has used its enforcement powers to issue a range of enforceable undertakings, infringement notices, remedial directions and fines against several reporting entities.

Perhaps the most widely used enforcement power is the desk or on-site compliance review. Whilst the likelihood of a client using your services to launder money may be low, the risk of an AUSTRAC desk or site review is high. Such assessments can often take several weeks and months to resolve if your AML/CTF Program does not address the key requirements and meet AUSTRAC expectations.

Perhaps the most ominous feedback from the recent FATF report (see our blog) was the finding that Australia should ‘consider opportunities to further utilise its formal enforcement powers to promote further compliance by reporting entities through judicious use of its enforcing authority’.

It is interesting to note that since the FATF visit to Australia last year AUSTRAC has already issued two infringement notices, cancelled six remittance registrations and issued fines across the bookmaking and remittance sectors.

4. New CEO and Increased Funding

Further fuel has been added to the fire with the appointment of new AUSTRAC CEO Paul Jevtovic late in 2014, adding focus, impetus, and drive to the regulation of the AML/CTF legislation in Australia.

The fairly critical FATF assessment of Australia’s AML/CTF regime will provide Mr Jevtovic with enough political leverage to introduce tougher supervision in Australia. Throw in a $20 million funding increase and reporting entities can only expect to see more of the regulator over the coming years.

* The Financial Action Task Force (‘FATF’) is the global body responsible for setting and monitoring international standards on combatting money laundering, terrorist financing and other related threats to the integrity of the international financial system.

How Can CompliSpace Help

CompliSpace provides a range of AML/CTF content and services, including assisting reporting entities to create and then maintain tailored Part A and Part B programs.

Training and testing modules covering key aspects of each AML/CTF Program will be provided to ensure that staff are trained on specific AML/CTF policies and procedures adopted by the business. On an ongoing basis, CompliSpace provides updated policies and procedures in line with changes to the AML/CTF Act, Rules or best practice.

Please contact James Cozens to discuss your AML/CTF Program requirements further.

 

ASX proposes updates to guidance on analyst and investor briefings

On 6 March 2015 the Australian Securities Exchange (the ASX) released a consultation paper (the Paper) on proposed changes to Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B (GN 8). The changes expand upon the existing ASX guidance given in relation to analyst and investor briefings, analyst forecasts, consensus estimates and earnings surprises.  The Australian Securities and Investments Commission was consulted by ASX about the changes.

The consultation period closed on Friday 24th April and the ASX received submissions from seven different entities, a mix of both publicly listed companies, law firms and industry associations (Submissions).

Not all the feedback was positive.

Why the changes?

In the Paper, the ASX acknowledges that GN 8 was only recently subject to a major re-write in May 2013.  The re-write included substantially updated materials on earnings guidance, de facto earnings guidance, earnings surprises and correcting analyst forecasts.

But ‘developments since then have indicated to ASX that listed entities and their advisers would benefit from further guidance in these areas.’  One such development was the imposition of a $1.2 million fine on Newcrest for its well-publicised poor continuous disclosure practices.  The release of ASIC Report 393: Handling of Confidential Information, which deals with the release of confidential information by ASX listed entities in investor and analyst briefings and unannounced corporate transactions, was another development.

Earnings surprise

The majority of the ASX’s proposed changes relate to the divisive and difficult topic of updating the market in relation to earnings.

Generally, the ASX is of the view that the way an entity should manage earnings expectations, in accordance with the continuous disclosure requirements in LR 3.1, is through a market announcement, not selective disclosures to analysts.

The ASX further clarifies what circumstances would or wouldn’t prompt the need for a market announcement:

  • market sensitive earnings surprise’ is a situation where an entity’s reported earnings differ so significantly from market expectations that a reasonable person would expect information about its reported earnings to have a material effect on the price or value of its securities – requiring a disclosure; and
  • ‘earnings surprise’ a situation where an entity’s reported earnings differ from the consensus estimate, but not necessarily to the extent that a reasonable person would expect information about its reported earnings to have  a material effect on the price or value of its securities – disclosure not required.

The question for entities to answer then involves an exercise of discretion and judgement, being: if there is an earnings surprise, is it ‘market sensitive’?

Earnings guidance

The ASX inserts a pargraph into section 7.1 of GN 8 confirming that subject to the existing exceptions and ‘all thing being equal’, it is ‘perfectly acceptable’ for an entity to have a policy of not providing earnings guidance to the market.

However, the ASX makes it clear that if earnings guidance is published, an entity will have made a ‘positive representation’ to the market that will set expectations in the market, and if the entity expects its earnings to differ from the published guidance, it will be in a position where it needs to assess whether the difference will be ‘market sensitive’ and require a disclosure – as per the question discussed above.

The ASX clarifies what the consequences could be for an entity that does not exercise its judgement correctly in that situation, being a potential breach of LR 3.1 and sections 674 and 1041H of the Corporations Act 2001 (Cth) (misleading conduct).

Correcting analyst forecasts and consensus estimates

Analyst forecasts and consensus estimates are relevant indicators of market expectations and an entity is obliged to make a disclosure if it becomes aware that earnings for a current reporting period will differ so much from market expectations that the information meets the test of ‘market sensitive’ information.

Section 7.4 of the Paper provides further clarification on when an entity should make corrections in light of market expectations.

It’s interesting that, as one of the publicly available submissions commented, there is no ASX definition of ‘consensus’.

What has been the reaction to the proposed changes?

The Submissions generally support ASX’s proposed changes.  That said, they also offer suggestions and criticisms.

The Australasian Investor Relations Association (AIRA), in particular, disagrees with some of the new guidance, as reported by the Financial Review.

AIRA Chief Executive Ian Matheson is quoted in that report as saying that ‘under the proposal the ASX makes the rules more complicated while also telling companies that they can ignore big errors in consensus analyst expectations if the company doesn’t provide any guidance of its own.’

In its submission to the ASX, AIRA elaborates further and believes that the amendments are unhelpful because they:

• go beyond the level of guidance that is necessary and appropriate from ASX in so far as the “guidance” relates to provisions of the Corporations Law and not the Listing Rules;
• fail to appreciate that what the ASX views as “guidance” will be viewed by many if not most listed entities as tantamount to regulatory requirements; and
• (as a consequence of the preceding two bullet points) will result in a less informed market and greater potential for earnings surprises–contrary to the best interests of both issuers and investors.
It remains to be seen if ASX incorporates some of the feedback it received into the final version of GN 8.

What does this mean for you?

Entities should be reviewing their disclosure policies in light of the proposed changes to GN 8.

Once ASX finalises GN 8, intended to be effective from 1 July 2015, changes may be required, particularly if an entity has policies and procedures in relation to earnings guidance.

CompliSpace will also be reviewing the final GN 8 and will update our disclosure policy for ASX-listed clients.

 

FATF Mutual Evaluation Report on Australia’s AML/CTF Regime –  should it be expanded to include lawyers  and real estate agents?

The recently released Financial Action Task Force (FATF) report on Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) measures provides both positive and critical feedback on the measures put in place within Australia since the regime began (almost 10 years ago now!).

In terms of credibility, the FATF sets the regulatory and operational standards and measures for combating money laundering (ML), terrorist financing (TF) and other related threats to the integrity of the international financial system.

The FATF has developed a series of Recommendations (40) that are recognised as the international standards for combating ML/TF.  Between July 2012 and August 2014 FATF spent some time analysing the level of compliance with these Recommendations within Australia.

The output from this FATF visit is a lengthy report spanning 198 pages. However, the findings are extremely useful for existing reporting entities within Australia, providing a good marker in terms of current expectations which may ultimately become the expectations of the domestic regulator, AUSTRAC.

In addition, the FATF report is also critical of the level of effectiveness of Australia’s AML/CTF system in several areas, providing recommendations on how the system could be strengthened. Forward thinking reporting entities should be aware of this constructive feedback, as should those entities currently not subject to existing AML/CTF requirements, but who should expect to be over the coming years through a second tranche of AML/CTF regulation.

In particular, the proposed second tranche of legislation could catch accountants, lawyers, jewellers, real estate agents, trust and company service providers and other designated non-financial businesses and professions (DNFBPs) as reporting entities.

Executive Summary

  • Let’s be clear from the outset, the report shows a fair bit of room for improvement. After the adoption of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (Act), the creation of an ever expanding list of additional AML/CTF Rules (71 Chapters and counting), annual compliance reporting, internal/external Independent Review requirements and a very active regulator, FATF still found that Australia was Compliant or Largely Compliant in only 24 of its 40 Recommendations.
  • FATF had no problem addressing the elephant in the room, highlighting the fact that Australia has failed to implement the second tranche of AML/CTF regulation covering non-financial businesses and profession sectors (apart from gaming and bullion) referred to as DNFBPs. In particular, lawyers and real estate agents have been identified as posing a high ML risk in Australia’s National Threat Assessment with FATF also acknowledging Australia as an attractive destination for corruption related proceeds flowing into real estate from the Asia Pacific region. This second tranche of regulation has been mooted since the Act commenced in 2006, but we still have not seen its implementation and the FATF don’t like it.
  • FATF highlighted the fact that not-for-profit (NFP) organisations ‘are particularly at risk’ of being misused for terrorist financing but that Australia has not implemented a targeted approach nor has it exercised oversight in dealing with those NFPs that might be at risk from the threat of terrorist abuse. A thorough review of the terrorist financing risks the sector is facing and the potential vulnerabilities of the sector to terrorist activities are recommended ‘priority actions’.
  • AUSTRAC got a pat on the back in terms of its supervision of what is considered to be a vast amount of reporting entities, although FATF felt that AUSTRAC is not being given enough acknowledgement due to a lack of national metrics demonstrating how well risks are being addressed by the AML/CTF regime, and the work of the regulator.
  • Rather ominously, however, was the FATF suggestion that Australia should focus more on effective supervision and enforcement of individual reporting entities’ compliance with AML/CTF obligations within the various sectors. Indeed, a priority FATF action is to ‘consider opportunities to further utilise its formal enforcement powers to promote further compliance by reporting entities through judicious use of its enforcing authority’.  It is interesting to note that since the FATF visit to Australia last year AUSTRAC has already issued two infringement notices, cancelled six remittance registrations and issued fines across the bookmaking and remittance sectors.
  • Whilst acknowledging that most legal persons or entities are registered with ASIC, with information on these entities being available through sources such as ASIC online, very little is being done with this information by reporting entities. In particular, FATF found that there was a lack of focus on addressing risks from the abuse of complex corporate structures. It should be noted, however, that the FATF visit coincided with the introduction of detailed Customer Due Diligence (CDD) requirements within Australia, as discussed in our previous blogs, where enhanced identification and verification requirements now exist with respect to beneficial ownership of legal persons.
  • Finally, the big banks scored well, although they can only really play with what is in front of them. Whilst acknowledging that the top four domestic banks have a good understanding of their AML/CTF risks and obligations, some of their controls were not in line with FATF standards, but were compliant with Australian obligations! As highlighted, detailed CDD requirements were introduced in 2014. However, many of the outstanding FATF issues have still not been addressed by the AML/CTF regime within Australia, regardless of these updated CDD changes, so there is still work to be done, particularly in terms of meeting FATF customer identification and verification standards.

The findings of the FATF report will ultimately trickle down to existing reporting entities, as well as new reporting entities who should be prepared for the adoption of the second tranche of AML/CTF regulations, such as real estate and legal services.

James Cozens, Director, Commercial, will be conducting a series of workshops over the coming weeks focusing on these findings, as well as practical guidance on the implementation of the updated CDD requirements.

22 April 2015: Workplace Relations Update for Executives On-the-Go

In this edition:

  • tribunal finds morning sickness can be a disability;
  • David v Goliath: employee loses against IBM in court; and
  • ‘conditions akin to slavery’ – employee awarded $186,039 from former employer.

Tribunal finds morning sickness can be a disability

The Victorian Civil and Administrative Tribunal (the VCAT) has recently decided that in some cases, extreme morning sickness from pregnancy can be considered a disability, and must be accommodated by employers. This case should alert employers to their obligations under anti-discrimination legislation.

The facts
Ms B worked as a full time sales consultant for a phone company in a retail store which was owned by the company TBS. Prior to discovering her pregnancy, she had a history of taking sick leave from work which, despite many medical certificates being produced, incited doubt amongst her colleagues about their legitimacy (an apparent Facebook post from the beach on a day she took sick leave was referred to in proceedings). In early September 2013 Ms B discovered she was pregnant which explained her recent ill health as being morning sickness. Throughout September, she was absent often from work. Her symptoms included frequent vomiting, dizziness and feeling faint. She was diagnosed with hyperemesis gravidarum, the most severe form of morning sickness (Kate Middleton had the same condition).

Ms B previously had a miscarriage and, on the advice of her GP, asked TBS to reduce her hours of work from 38 to 28 hours per week. Ms B submitted a medical certificate accompanying this request. On 4 October 2013 TBS refused her request and three days later Ms B resigned and left the store two weeks later.

In his evidence, the TBS Managing Director stated that he told Ms B he could not agree to her request for a reduction in hours because ‘she was employed on a full time basis and that TBS was a small business not able to reduce her hours’. He also told her that he would not be able to employ someone to cover the 10 hours per week she would no longer be working. Ms B said she felt she had no choice but to resign as a result of TBS’s refusal of her request.

Ms B later experienced money problems as her resignation meant that she could not commence Centrelink benefits immediately. She also could not find work before the birth of her son in May 2014. After the birth Ms B scored highly on a post-natal depression test.

VCAT proceedings

Ms B applied to VCAT seeking compensation under the Equal Opportunity Act 2010 (Vic) (the EO Act) for loss of wages and hurt and humiliation. This was sought on the basis that TBS had directly and indirectly discriminated against her because of her pregnancy, which included severe morning sickness, and failed to make reasonable adjustments for her as an employee with a disability (morning sickness and pregnancy).

In considering whether TBS directly discriminated against Ms B the question considered was whether TBS treated her unfairly because of her pregnancy. To answer this question VCAT referred to the following actions by the Managing Director:

  • texts from him to Ms B stating he was ‘$%#king sick of this’ and ‘you better $%#king come in’ – sent in response to Ms B telling him she could not work and he knew she was pregnant; and
  • comments he had made to her expressing his frustration and displeasure about her having to sit while on the shop floor (staff normally stood) and her frequent toilet breaks.

VCAT found that Ms B had been directly discriminated against as those actions had caused Ms B detriment, being hurt, humiliation and anxiety and constituted unfavourable treatment because Ms B was taking sick leave and additional toilet breaks as a result of her pregnancy.

However, VCAT found that allegations including that staff must stand at all times during shifts and only take breaks when customers were absent, did not constitute indirect discrimination.

Indirect discrimination occurs when a policy or procedure which appears to apply equally to all individuals in the relevant group but causes a disproportionate disadvantage or detriment to a person because of their disability.

VCAT also found that the employer did not have to make ‘reasonable adjustments’ for Ms B’s disability. An employer is required to make ‘reasonable adjustments’ to enable the person with a disability to comply with the inherent requirements of the job. If the employer fails to do so, that in itself constitutes unlawful discrimination against a person with a disability.

According to the VCAT Senior Member Ian Proctor, Ms B’s pregnancy was a ‘disability’ because the morning sickness caused the ‘malfunction of her body’, meeting one of the criteria of the definition of ‘disability’ under the EO Act. But even though she had that disability, it did not require the adjustment of her working hours in order to perform ‘the genuine and reasonable requirements of the employment’. This finding was based on the wording in Ms B’s medical certificate, where her GP had said that a reduction in hours was ‘needed’ but not ‘required’ – a strict interpretation of the wording in the EO Act.

Outcomes

This decision is noteworthy for employers as it establishes that, at least in Victoria, while pregnancy itself is not a disability (noting that it can be a separate ground of unlawful discrimination) extreme variations of conditions associated with pregnancy, such as extreme morning sickness can be considered by the courts to constitute a disability. And under the various pieces of State and federal legislation, once the disability has been established, an employer must consider what steps can reasonably be taken to enable the person with a disability to perform the inherent requirements of the job. While other States may not follow the Victorian precedent of deeming extreme morning sickness a disability, employers are reminded that disability discrimination goes beyond direct and indirect discrimination, but also failure to make ‘reasonable adjustments’.

David v Goliath: employee takes IBM to court and loses

In another discrimination case relating to working women, a female employee’s claim of sex discrimination against IBM Australia Limited (IBM) has been dismissed by the Federal Circuit Court (the Court).

The facts

Ms Y began her employment at IBM in 2003. In July 2008 she commenced maternity leave.

Prior to taking leave, Ms Y had been promoted in 2007 from band 6 to band 7 within her project team based in Canberra.

Ms Y returned to work from maternity leave on 23 July 2009. She had previously received approval from her manager, Mr C, to work part-time at 20 hours a week to accommodate the flexibility of caring for her child.

Due to a change in the direction of the project she was working on, Ms H had to skill up. In 2010 Ms Y’s work performance began to suffer.

Ms Y also raised with her local manager that she was working odd hours, which he explained was because she was not to work more than the 20 hours agreed upon.

In 2010 Ms Y’s marriage broke-down and between 2010 and 2011 her work suffered as did her personal life. Ms Y went on different periods of sick leave and was eventually dismissed on 15 March 2014.

Despite IBM having written procedures in place to help employees lodge complaints, Ms Y did not do so as she was ‘overcome by fear’.

No sex discrimination here

In short, Ms Y alleged various acts of discrimination by IBM against her, in contravention of the Sex Discrimination Act 1984 (Cth). She claimed that she was discriminated against in respect of:

  • pay or disparity in pay;
  • the allocation of administrative duties;
  • cancellation of her annual leave; and
  • being ostracised by a friend and co-worker.

All her allegations were dismissed.

Judge Street found that Ms Y had fabricated evidence – undermining her credibility, blamed IBM for her marriage break-up, and that this blame was one of the reasons for bringing the proceedings.

Judge Street was also perplexed by the applicant’s failure to ‘speak up’ in accordance with IBM grievance procedures. He noted that Ms Y is clearly ‘a highly intelligent, articulate and capable individual who is well able to formulate and make written complaints if she chose to do so’.

Costs ordered against Ms Y

Where the circumstances warrant, courts and tribunals in discrimination matters are usually keen to see matters settled reasonably, rather than dragged out in costly litigation. In this case earlier in the proceedings, IBM sent Ms Y a formal letter offering to resolve the proceedings by discontinuing the case, with each party to pay their own costs.

This type of letter – referred to as a ‘Calderbank Letter’ – has the consequence that if unreasonably rejected, Ms Y must pay a higher portion of IBM’s costs. Judge Street found that this offer of compromise was unreasonably rejected, and Ms Y was ordered to pay IBM’s costs of $150,000, in addition to her own costs of $250,000.

This case is an example of how litigating against employers is not always the best method of seeking a resolution to personal and professional misfortune.

‘Conditions akin to slavery’ – employee awarded $186,039 from former employer

In a remarkable case that followed a criminal trial on trafficking charges, an exploited employee has been awarded wages after he was kept in what the Judge called ‘conditions akin to slavery’.

With the assistance of Anti-Slavery Australia, a 457 Visa immigrant, Mr R, brought a case against an Indian restaurant (the Restaurant) and one of its directors (Mr T). In a judgment scathing of not only the perpetrators involved in this case, but also the integrity of the 457 Visa program, Judge Driver determined a claim for unpaid wages against the Restaurant and Mr T.

Before this case, Mr T pleaded guilty to criminal charges of trafficking a person in circumstances where he was reckless as to exploitation. The circumstances of this case provides a history of this matter.

Mr R worked as a cook in India. His English was very basic. He was approached by Mr T, who made arrangements for him to come to Australia on a 457 Visa. Immigration documents stated that he was to be paid a total package of $45,616. Upon arrival in Australia, Mr T took Mr R’s passport and secured it in his home.

Mr R commenced work at the Restaurant. He worked for 12 hours a day, seven days a week over 16 months. He lived in the Restaurant’s storeroom, although Mr T falsely claimed that he lived with him. From the Restaurant, he called Mr T for instructions on food preparation for the day. In this time, Mr R was paid a pittance which was sent to his wife overseas. He received no leave. He was told that be could not leave Australia unless he repaid Mr T $7,000 for the cost of bringing Mr R to Australia.

Mr T supported this arrangement with an array of sham documents which attempted to legitimise Mr R’s stay on his visa, and his employment.

Subsequently, he went to the police and he and his family were granted a witness protection visa allowing him permanent residence in Australia.

Mr R brought a case against the Restaurant and Mr T under the Workplace Relations Act 1996 (Cth) and the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 (Cth) for underpayment of salary, underpayment of leave and breach of contract. It is unsurprising that the Court determined that Mr R had made good his claim. The task for the Court was to calculate the amount to be paid to Mr R. This was not easy, given that the Court found that Mr T ‘has been prepared to change evidence under oath, as suits his particular case’.

In the end, the Court determined that Mr R was owed a total of $186,039, being underpaid wages plus interest.

Keeping up appearances: ASX revises guidance on trading policies

On 30 January 2015 the ASX released an updated Guidance Note 27: Trading Policies (GN 27).  The release came after some highly publicised events that have called into question certain listed entities’ approach to, and enforcement of, share trading policies.

For example, the allegations of inappropriate share trading by two directors of David Jones in 2014, which led to an ASIC investigation of perceived insider trading activity.  Ultimately, ASIC did not take enforcement action against the directors involved. However, the subsequent resignation of the directors and the damaging publicity the matter caused for David Jones (since de-listed from the ASX), demonstrates the importance of having an effective trading policy in place which is enforced properly.

One size does not fit all

GN 27 emphasises that entities shouldn’t take a ‘cookie-cutter’ approach to drafting their trading policy.   Good governance ‘demands that an entity has in place a fit-for-purpose trading policy, tailored to its particular circumstances, that regulates when and how its directors and senior executives may trade in its securites.  The purpose of such a policy is not only to minimise the risk of insider trading but also to avoid the appearance of insider trading and the significant reputational damage that may cause.’

The two key themes of avoiding ‘risk’ and the ‘appearance’ of insider trading should inform how an entity reviews its trading policy in light of the new guidance in GN 27.

Ultimately however, the market and regulators will have the opportunity to judge the appropriateness of such a policy as, in accordance with Listing Rule 12.8, the trading policy is provided to the ASX for market release.

Key points

In summary, the revised GN 27 addresses the following key topics:

  • Purpose of the policy – as explained above one size doesn’t fit all.
  • Application of policy beyond key management personnel – who, in addition to Key Management Personnel (KMP), may be subject to the policy due to their capacity to access market sensitive information ahead of the market?
    It’s suggested that the policy also apply to persons such as:

    • executive assistants to KMP;
    • finance or strategy staff;
    • the next layer of management below KMP; and/or
    • staff who may have access to KMP email or document folders, such as IT staff.
  • Ad hoc application – entities should reserve the right to impose ad hoc trading restrictions on individuals (eg. those under KMP level working on a particular market sensitive matter) and are ‘strongly encouraged’ to also designate ad hoc trading periods as ‘closed periods’.  The prescription of ad hoc closed periods needs to be treated carefully to avoid market speculation.
  • Scope of affected activities – the ASX urges entities to ‘consider carefully’ formally extending the policy to cover trading in products and activities related to securities such as derivatives, short-term trading, short-selling, hedging transactions and margin lending – rather than limiting the policy’s application to securities.
  • Procedures to clear trading – increased number of governance suggestions are given here relating to when clearances can be given and how an application to trade should be understood within the entity.  For example, a policy should state that:
    • any clearance to trade can be given or refused by an entity in its discretion; and
    • a decision to refuse clearance is final and binding.
  • Primacy of insider trading laws – is emphasised as the ‘prudent’ inclusion of information in a policy reminding KMP and employees about how the possession of insider information can affect their trading activities.

Tough penalties should deter

To ensure that KMP and employees understand the importance of their organisation’s trading policy, and to reinforce its importance, it’s worth reminding them of what’s at stake if a person contravenes the insider trading or ‘market manipulation’ prohibitions of the Corporations Act.  Insider trading and market manipulation offences attract the following penalties for individuals:

  • criminal penalties of 10 years jail and/or a fine equal to the greater of $765,000 or three times the profit gained or loss avoided;
  • a civil penalty of up to $200,000; and
  • automatic disqualification from being a director or managing a company for 5 years.

The possibility of incurring these penalties should encourage all KMP and employees to review the trading policy and ensure that they understand how it operates and applies to them.

The recent sentences of the insider trading pair Lukas Kamay and Christopher Hill to a respective seven and three year jail terms should serve as a practical example of the serious consequences of breaching insider trading laws.

Training and eduction important for awareness

Entities and their company secretaries also need to review their compliance practices to ensure that employees and directors are aware of the policy and understand how to comply with it.  Awareness and compliance can be achieved through regular training and education.  GN 27 reminds entities that failing to have such measures could constitute a failure to comply with Listing Rule 19.2 to honour the ‘spirit, intention and purpose’ of the Listing Rules.

In GN 27 the ASX advises that it’s up to the entity to determine what these measures should be, but in particular, it should have appropriate record keeping procedures to capture details of applications by KMP for clearances to trade under a trading policy and its decisions on such applications.

Other steps include:

  • having contractual obligations that KMPs and employees must comply with the trading policy;
  • including a copy of the trading policy in ‘new starter’ packs; and
  • circulating reminders via email of the start and finish dates for a trading window or black-out period as they are about to occur.

GN 27 also lists measures an entity can take to monitor compliance with the policy such as requiring the KMP to notify it of the details of their holdings, including HINs or SRNs.

The key to effective compliance is a ‘compliance culture’ so in terms of conveying the meaning and importance of the trading policy, all entities should encourage a culture of awareness of the policy.

What’s next?

Although the ASX has not prescribed a deadline for compliance with GN 27, entities should be reviewing their existing trading policies in light of the suggestions made in it.  Changes may be required to update the policy, especially to ensure that the trading policy is ‘fit for purpose’ for that entity.

An updated version of the policy should be given to ASX if material changes have been made.  Even if material changes have not been made, the policy can still be given to ASX for consistency – especially if your organisation publishes  the policy on its public website.

 

Compliance Standards ISO 19600 and AS 3806 – differences explained

We last wrote about ISO 19600:2014 Compliance Management – Guidelines (ISO 19600) in our article ‘A New Global Standard for Compliance: ISO 19600‘. Since that time ISO 19600 has been adopted as the international standard.

ISO 19600 was developed under the auspices of the International Organization for Standardisation (the ISO). Although at the date of publication, ISO 19600 has not officially replaced the existing Australian Standard for Compliance AS 3806:2006 (AS 3806), given that ISO 19600 is largely based on AS 3806 and that it was developed by a committee based in Australia, official recognition is likely to come soon. This has been confirmed in our conversations with Standards Australia, although prior to the adoption of ISO 19600 as the new Australia Standard, it will need to go through the usual public consultation period.

When ISO 19600 is recognised in Australia, it will be important for many organisations to understand the differences between the new standard and AS 3806. This article is designed to assist in this process.

A new approach

Whilst AS 3806 speaks of a compliance ‘program’, ISO 19600 speaks of a compliance ‘management system’. The difference is not just semantic, it demonstrates a different approach to compliance.

ISO 19600 places emphasis on compliance as being ’embedded’ in the culture of the organisation and ‘integrated with the organisation’s financial, risk, quality, environmental and health and safety management processes and its operational requirements and procedures’. It makes it clear that compliance is a responsibility of an organisation’s governing body, and not a mere ‘function’ of the organisation.

Structure of the standards

One of the first differences you will notice between the standards is that they have a fundamentally different structure.

AS 3806 divides 12 principles into four key themes:

  • commitment;
  • implementation;
  • monitoring & measurement; and
  • continual improvement.

ISO 19600 on the other hand, refers to seven key themes each with multiple elements. The seven key themes are:

  • context of the organisation;
  • leadership;
  • planning;
  • support;
  • operation;
  • performance evaluation; and
  • improvement.

The structure of ISO 19600 is designed to place emphasis on the organisational elements that are required to support compliance.

New concepts

Definitions

ISO 19600 uses standard terminology to bring it into line with other ISO standards. This standard terminology is explained by the ISO.

A compliance ‘management system’ is defined as a ‘set of interrelated or interacting elements of an organisation to establish policies and objectives and processes to achieve those objectives’. This contrasts to the previous ‘compliance program’, defined as ‘a series of activities that when combined are intended to achieve compliance’.

Some other notable new definitions include:

  • compliance – meeting all the organisation’s compliance obligations;
  • compliance obligations – requirement or commitments that an organisation has to or chooses to comply with; and
  • compliance risk – effect of uncertainty on compliance objectives.

Whereas many organisations confine themselves to dealing with their ‘legal and regulatory’ obligations, ISO 19600 makes it clear that the concept of compliance is much more expansive and extends to obligations such as those set out in an organisation’s standard operating procedures. This fits in with our thinking at CompliSpace where we often refer to the key compliance areas as being:

  • legal and regulatory;
  • organisational (including obligations arising from policies and procedures as well as risk treatments); and
  • contractual.

Risk management

The internationalisation of this compliance standard also brings with it a blink-and-you’ll-miss-it change. ISO 19600 states that ‘compliance risk assessment constitutes the basis for the implementation of the compliance management system’. This is a significant inclusion as it makes risk management an essential part of a compliance program.

Previously it was possible to say that ‘whilst risk cannot live without compliance, compliance can live without risk’. This is no longer the case.

Notably, this change matches commercial practice where most organisations, consciously or unconsciously, prioritise the treatment of their compliance obligations based on their perceived risk of non-compliance.

Continual improvement

ISO 19600 includes a flowchart which shows how the components of a compliance management system fit within the continual improvement principle, which is part of other ISO standards.

The future of ISO 19600

In an ISO press release Martin Tolar, Chair of the ISO project committee ISO/PC 271 that developed ISO 19600, states that ISO 19600 is ‘expected to serve as a global benchmark for compliance officers, businesses, commentators, academics – and regulators and the courts of course. And thanks to the standard’s customisable guidance, all organisations can benefit.’

We have contacted Standards Australia to enquire as to whether or not it is intended that ISO 19600 will replace AS 3806. Standards Australia confirmed that ISO 19600 will be adopted as an AS/NZS standard and a version will be released for public comment by June this year as part of the normal standard development process. Subject to public comment, the content of ISO 19600 is intended to be adopted in a new AS/NZS standard. At that time it will replace AS 3806.

In the meantime, AS 3806 will continue to be the relevant Australian Standard and organisations can decide whether to sit back and wait, or to upgrade their existing compliance programs to the new ISO 19600 standard in anticipation of its adoption.

Two new ‘10002’ complaints handling standards – now that’s confusing

When the new ISO 10002:2014 standard was released in July 2014, a quick comparison with the old International ISO 10002:2004 and Australian AS/ISO 10002:2006 standards (which are essentially the same document) revealed only minor technical amendments. Hardly worth writing about.

So when the Council of Standards Australia released AS/NZS 10002:2014 in October 2014, we nearly didn’t bother downloading it. After all, one could well be excused for presuming that the new Australian standard was simply another adoption of the international standard. Luckily, we did bother, because a simple comparison of the weight and thickness of the two documents immediately gave rise to a suspicion that something was amiss.

Yes, you guessed it – the new International Standard ISO 10002:2014 and the new Australian Standard AS/NZ 10002:2014 are in fact very different documents. Even reading this article you may have missed the fact that even though the numbering convention ‘10002’ is consistent, the new Australian Standard has dropped the ‘ISO’ that preceded the old 2006 standard.

For clarity, ISO refers to the International Organisation for Standardisation, the international standards governing body, whilst AS refers to Standards Australia – the Australian standards governing body.

So what is going on? What are the implications for Australian businesses and regulators that reference these standards?

As to ‘what’s going on’ – we are not sure. The reasons why there is now an Australia standard, as well as an ISO standard, have not been made explicitly clear.

As to the ‘implications for Australian businesses and regulators’ we are also not sure. Whilst many regulators refer to the AS/ISO 10002:2006 standard as providing useful guidance, at least one, the Australian Securities and Investments Commission (ASIC) is required to take AS/ISO 10002:2006 into account when making or approving standards or requirements for Internal Dispute Resolution procedures (Refer to ASIC Regulatory Guide 165 – Internal and External Dispute Resolution). So which standard now applies? Your guess is as good as ours.

Benefits of complaints handling standards

Before you give up and do your own thing, let us say that in general we are great supporters of standards.

Standards Australia produces standards for Australian industries, which are often adopted and mandated by regulators. Standards Australia has a policy of adopting International Standards wherever possible, hence why the international standard was adopted in AS/ISO 10002:2006.

The benefits of using standards to conduct business are explained by the ISO, which states that ‘International Standards are strategic tools and guidelines to help companies tackle some of the most demanding challenges of modern business. They ensure that business operations are as efficient as possible, increase productivity and help companies access new markets’. The same benefits apply to the application of standards produced by Standards Australia.

As noted above in some industries, such as financial services, it is a legal requirement to develop policies and procedures which comply with prescribed standards. For other organisations, compliance with standards may be recommended as part of good governance practices.

If you’ve read any of our previous blogs on complaints handling you will be aware of our support for organisations encouraging complaints from their clients. This is because complaints can identify issues in your business which provide opportunities for you to fix and improve your products and services. An effective complaints handling process is not just a customer service tool – it is a governance tool.

So, what are the differences between the new standards?

Both ISO 10002:2014 and AS/NZS 10002:2014 are revisions of ISO/AS 10002:2006. Both use the same numbering (10002:2014).

In the case of ISO/AS 10002:2006 and AS/NZS 10002:2014, both use:

  • (almost) the same title – ISO/AS10002:2006 ‘Customer satisfaction – Guidelines for complaint handling’ and AS/NZS 10002:2014 ‘Quality management – customer satisfaction – Guidelines for complaints handling';
  • a similar structure; and
  • share similar headings.

In simple terms, the difference between the standards is that ISO 10002:2014 focuses on customer satisfaction, whilst AS/NZS 10002:2014 focuses on the complaints handling process.

In ISO 10002:2014, customer satisfaction is key

ISO 10002:2014 focuses on how an organisation handles the complaints it receives about its products and services. This is in line with the predecessor to this standard, AS/ISO 10002:2006. The intention of ISO 10002:2014 is to ‘benefit an organisation and its customers, complainants and other interested parties’. The standard begins with the introductory statement that the implementation of the process described in the standards can:
  • ‘enhance the ability of the organisation to resolve complaints in a consistent, systematic, and responsive manner, to the satisfaction of the complainant and the organisation; and
  • help an organisation create a customer-focused approach to resolving complaints, and encourage personnel to improve their skills in working with customers’ (our emphasis).

Throughout the standards, references are made to ‘enhancing customer satisfaction’ and creating a ‘customer-focused environment’.

Tellingly, the references to ‘customer satisfaction’ and ‘customer-focused’ approach are absent from AS/NZS 10002:2014. Although the headings and structure of the two standards appear to be the same, AS/NZS 10002:2014 in fact treads a different path.

In AS/NZS 10002:2014, process is key

The focus of AS/NZS 10002:2014 on the quality of a complaint management system, as opposed to the satisfaction of the complainant, is a significant change in the approach to complaints handling. ‘Customer’ is no longer a defined term in the new standard – the less personal ‘complainant’ is instead the preferred term.

AS/NZS 10002:2014 provides greater guidance to an organisation on how to make their complaint management system accessible, efficient and effective.

Other differences from ISO 10002:2014 include:

  • more detailed guiding principles, such as:
    • ensuring no detriment to the complainant;
    • equity;
    • communication; and
    • prevention of ongoing disputes;
  • greater emphasis on the organisation’s management being actively responsible for ensuring good complaints handling and greater details of the role and responsibilities of staff managing complaints;
  • new points in the complaints review process, including ensuring that and organisations communication, public relations and media activities are informed by its complaint management policy, processes and outcomes;
  • greater emphasis on the management of complaints (rather than handling) including:
    • the new definition of ‘a complaints management system’ as one that ‘encompasses all aspects of policies, procedures, practices, staff, hardware and software used by an organisation for the management of a complaint'; and
    • new elements to the operation of the complaint management system such as providing support in the making of a complaint, early resolution, addressing the complaint and monitoring implementation of recommendations/remedies.

In comparison to the 8 annexures included in AS 10002:2006 and ISO 10002:2014, there are now 15 annexures in AS/NZS 10002:2014 (including 4 revised annexures and 10 new annexures). Some of the new annexures are:

  • guidance on accessibility;
  • unreasonable conduct by complainants;
  • dispute prevention and management; and
  • a three level model of complaint handling.

So the result is that, AS/NZS 10002:2014 is quite a different document to ISO 10002:2014.

AS/NZS 10002:2014 – the influence of public sector agencies

Despite AS/NZS 10002:2014 stating that ‘this Standard is intended to provide guidance to organisations of all sizes and in all sectors’, its philosophy appears to be directed more towards agencies in the public sector than private organisations. Notably the new Australia standard appears to have been developed primarily by representatives from government agencies including:

  • Australian Communications Consumer Action Network;
  • Australian Competition and Consumer Commission;
  • Australian Taxation Office;
  • Consumers Federation of Australia;
  • Electricity and Gas Complaints Commissioner;
  • Financial Ombudsman Service;
  • Monash University;
  • NSW Ombudsman;
  • Public Transport Ombudsman, Victoria; and
  • Society of Consumer Affairs Professionals.

The focus on adhering to a more detailed complaints management system, rather than achieving customer satisfaction, may reflect the lack of flexibility public organisations have to achieve client satisfaction. Many public sector agencies are bound by prescriptive rule-based decision making, and therefore may not in all cases be able to achieve customer satisfaction. This is in comparison to private sector counterparts who, in accordance with their own policies, can offer solutions and even compensation to address a customer complaint and try and achieve their satisfaction and, ultimately, retain their business.

The emphasis in AS/NZS 10002:2014 on effective management of complaints starts from the premise that an organisation may not be able to ‘fix’ the cause of the complaint. It recognises that a complaint can be resolved by assuring a complainant that their complaint was dealt with properly, in accordance with a stipulated process.

These complaints handling procedures, which focus on procedural fairness and objective decision making, can also be a part of a public sector organisation’s legal obligations.

So, which standard should you follow? ISO 10002:2014 or AS/NZS 10002:2014?

There is no simple, definitive answer to this question – each organisation will need to look at its needs (and legal obligations), and examine its structure and objectives, to make a decision about which standard should be followed. Generally however, if your organisation has an international scope, ISO 10002:2014 may help to achieve consistency across your organisation, whilst meeting many of the requirements under AS 10002:2014.

Clearly, the client focussed objectives of ISO 10002:2014 and the process-driven objectives of AS/NZS 10002:2014 mean that they are not directly compatible.

Although adopting AS/NZS 10002:2014 and attempting to combine elements of ISO 10002:2014 may be an option, consideration should be given to potentially conflicting objectives of the individual standards.

The benefits and disadvantages of either approach will need to be considered and evaluated. External advice may also prove useful.

Where to from here?

Although the new complaints handling standards have been released and adopted by the various standards agencies, businesses with complaints handling obligations should not let this cause them alarm.

The requirement to have complaints handling policies – which arise, for example, under financial services law, have not been updated.

For example, ASIC RG165 Licensing: Internal and external dispute resolution and the Corporations Regulations 2001 (Cth) (regs 7.6.01(1) and 7.9.77(1)) still references the old AS/ISO 10002:2006. The decision that policymakers make with respect to adopting either ISO 10002:2014 or AS/NZS 10002:2014 will provide guidance to organisations about which standards they should adopt. The ACCC, in their guidelines for debt collectors, also references AS/ISO 10002:2006. 

If you have followed AS/ISO 10002:2006 in the past and are wondering whether to update your existing complaints handling policies and proceduresmaybe the most sensible approach is to sit back and ‘wait for a little water to go under the bridge’. Then take time to review the various commentaries that are likely to be published by industry regulators and subject matter specialists before making a decision.

If you don’t have a complaints handling system in place we recommend that you read our previous blogs on complaints handling and take steps to put a system into place as soon as possible, as you are missing one of the most critical weapons available in an organisation’s governance arsenal.

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