National Integrity Spotlight – September 2023

This edition of the National Integrity Spotlight considers the latest updates from the NACC, the Federal Court’s decision in a case that considered the application of whistleblower protections retrospectively, and the latest developments in various matters relating to the PwC tax scandal and consulting services Senate Inquiry. We also consider the recent allegations relating to Michael Pezzullo, and reports issued by both the New South Wales and South Australian ICACs. 

NACC Update 

9 October 2023 marked 100 days since the National Anti-Corruption Commission (NACC) commenced operations. The NACC has provided the below update as to its progress since 1 July 2023: 

• 1,247 referrals have been received; 
• 710 referrals have been excluded at the triage stage as they do not involve a Commonwealth public official or do not raise a corruption issue; 
• 188 referrals are pending triage; 
• 69 referrals are currently in active triage; and 
• 173 referrals are currently under assessment. 

The NACC noted that, in some instances, matters have been referred to the NACC multiple times, resulting in discrepancies between the total number of referrals received and the figures relating to assessment status. 

The NACC has also opened nine preliminary investigations, and three new investigations. A further six active investigations continue from the former Australian Commission for Law Enforcement Integrity. While investigations remain underway, the NACC is unable to comment further. 

Commissioner Paul Brereton, in a video to mark the first 100 days of the NACC, observed that the overwhelming majority of referrals received were from members of the public via the online webform, with nearly 90% relating to matters that have not been publicised in the media. 

The NACC has also commenced its role in providing education and engagement activities to provide guidance on corruption risks and prevention strategies. The NACC has made 27 presentations to parliamentarians, senior public employees, agency heads, boardrooms, committees, and associations. 

Watson v Greenwoods & Herbert Smith Freehills Pty Ltd [2023] FCAFC 132 

On 30 August 2023, the Federal Court of Australia issued a unanimous decision in Watson v Greenwoods & Herbert Smith Freehills Pty Ltd [2023] FCAFC 132, determining that the whistleblower protections that came into effect on 1 July 2019 do not apply to detrimental conduct prior to that date. 

The Full Court of the Federal Court of Australia were tasked with deciding two questions from a matter currently before the Federal Court of Australia (Primary Proceeding).  

The Primary Proceeding relates to a claim by Anthony John Watson, a former partner of Greenwoods & Herbert Smith Freehills (GHSF). GHSF and Mr Watson, in his capacity as partner of GHSF, provided taxation advisory services to Lendlease Corporation Ltd (Lendlease).  

From 2013, Mr Watson claims to have disclosed concerns, to senior persons at Lendlease and partners and directors of GHSF, as to the accuracy of Lendlease’s financial statements and their compliance with Australian tax law.  

 Mr Watson claims to have made these disclosures under Pt 9.4AAA of the Corporations Act 2001 (Cth) (Whistleblower Protections) yet suffered detriment because of the disclosures. He claims to have been removed from the Lendlease account, denied paid sick leave, had his remuneration reduced and received a notice of termination.  

Although Mr Watson claims to have made disclosures from 2013, he sought to rely on the expansion of the Whistleblower Protections which commenced on 1 July 2019, as well as the analogous provisions provided under the Taxation Administration Act 1953 (Cth), which also commenced on 1 July 2019.  

The two questions before the Full Court of the Federal Court were, in essence: 

• whether sections 1317AD and 1317AE of the Corporations Act apply to detrimental conduct that was engaged in before the commencement date of the amending Act (being 1 July 219), whether or not any detriment caused by the conduct continued after that date. 
• whether sections 14ZZZ and 14ZZZA of the Taxation Administration Act apply to detrimental conduct that was engaged in before the commencement date of the amending Act (being 1 July 2019), whether or not any detriment caused by the conduct continued after that date. 

The Court held that the relevant sections of the Corporations Act and the Taxation Administration Act did not apply retrospectively. The Court applied the general rule of the common law stating that:[1] a statute changing the law ought not, unless the intention appears with reasonable certainty, be understood as applying to facts and events that have already occurred in such a way as to confer of impose or otherwise affect rights or liabilities which the law had defined by reference to past events. 

The Court indicated that if the legislature intended for the amended provisions to apply to detrimental conduct that was engaged in prior to 1 July 2019, it would have made this intention clear.2 The reasonable expectation is that the conduct will be subject to the laws in force at the time that the conduct is engaged in.3 The Court applied the same reasoning to both questions and decided that the amendments did not apply to detrimental conduct engaged in before the commencement of the amending Acts. 

Consulting services 

Inquiry into management and assurance of integrity by consulting services 

Gadens has previously considered the Senate Standing Committee on ‘Finance and Public Administration Inquiry into management and assurance of integrity by consulting services (Consulting services).’ The Committee has continued to hold public hearings, most recently on 26 and 27 of September, and 12 October, with a further hearing slated for 9 November 2023. Recent revelations included: 

• concerns that the Boston Consulting Group relied on ‘cosy relations’ and ‘verbal agreements’ with public sector employees to secure a lucrative extension to a contract in breach of procurement rules. Of particular concern was that the scope of work was ill-defined and may not have represented value for money; 
• KPMG denied allegations made by ABC’s Four Corners program that inflated invoices that included charges for hours not worked formed part of the $1.8bn in contracts the firm undertook for the Department of Defence over the past decade; 
• the ATO revealed that PwC was warned of concerns about the sharing of confidential information with parties, both domestic and international, over the course of several meetings in 2019 and 2020; and 
• the Committee questioned a submission made by PwC to a 2019 Senate inquiry that stated ‘structurally separating’ the auditing and consulting arms of the business would not be possible. 

 Release of PwC report 

On 27 September 2023, PwC released the ‘Review of Governance, Culture and Accountability at PwC Australia’ report undertaken by Dr Ziggy Switkowski AO. The report suggested that a ‘high-performance, results-focused culture has been used as an excuse to justify poor behaviour,’ and that the partnership prioritised profits over ethics. Dr Switkowski’s concerns included: 

• that the CEO has ‘relatively unchecked authority’ and that it is perceived that they are not accountable to the Board; 
• that there was no centralised system or issues management framework across all practice areas to monitor and track risks and incidents, with different practice areas having varying risk maturity levels; 
• that the culture generally meant that ‘bad news’ was not communicated, and mistakes were not learned from; and 
• while the Board were presented with periodic reports on risks and conduct issues, these reports focused primarily on personal conduct rather than issues of business conduct, and lacked insight as to the nature or materiality of the issues to provide useful information for the Board. 

23 recommendations were made including the appointment of three independent directors to the Board, changes to the partnership agreement, and improving oversight and transparency across the entire business. 

Treasury consultations into PwC 

On 20 September 2023, Treasury commenced a series of consultations of exposure draft legislation relating to the PwC tax scandal. Specifically, these consultations were: 

• Response to PwC – information sharing; 
• Response to PwC – whistleblower protections; 
• Response to PwC – reform of promoter penalty laws; and 
• Response to PwC – Tax Practitioners Board reforms. 

The consultations, which closed for submissions on 4 October 2023, include amendments intended to: 

• remove limitations in tax secrecy laws; 
• enable the ATO and Tax Practitioners Board to refer ethical misconduct for disciplinary action; 
• enhance the Tax Practitioners Board investigation process by extending the time period to conduct investigations; 
• increase limitation periods for the ATO to bring proceedings; and 
• extending whistleblower protections for disclosures made to the Tax Practitioners Board. 

SA ICAC releases ‘Robust Recruitment’ report 

On 29 August 2023, the South Australian Independent Commission Against Corruption (SA ICAC) released the ‘Robust Recruitment’ report prepared by the Honourable Ann Vanstone KC, highlighting observations of inadequate recruitment practices observed by SA ICAC. The report stated that deficiencies in recruitment practices ‘can not only expose a public authority to corruption, but can reduce the productivity of public administration, undermine staff morale, damage an agency’s reputation, and reduce public confidence in public administration.’ 

Key observations in the report include: 

• public authorities should have clear recruitment policies in place that set out resourcing requirements, advertisement, the selection process, how offers of employment are made, and record keeping requirements. Specifically, the Report states that failure to have policies in place risks employees formulating their own practices; 
• SA ICAC has ‘regularly observed public officers allowing conflicts of interest to influence recruitment decisions’, with the 2021 Public Integrity Survey indicating that nepotism and favouritism in the recruitment process as the most reported integrity issue; 
• a lack of pre-employment screening has allowed candidates to make fraudulent claims, including provision of false references, claiming false qualifications, exaggeration of previous employment, and claiming work experience that they do not have. It was also observed that poor screening processes have been taken advantage of, including for senior executive positions; 
• Internal candidates are particularly vulnerable to favouritism, and the perception of favouritism. Not only should internal candidates be treated similarly to external candidates, but re-screening of employees should also take place when employees change roles internally, particularly in instance where a new role involves greater access to information, financial delegations, or decision-making power; 
• that recruitment agency screening should not be considered to be complete, given SA ICAC’s observations that a lower level of scrutiny is sometimes applied by government departments in reliance on screening completed by external agencies; and 
• staff involved in recruitment or acting on employment panels should be provided with training and clear guidance, particularly around conflict of interest requirements. 

Michael Pezzullo 

On 25 September 2023, Michael Pezzullo stepped down from his position as head of the Department of Home Affairs pending an investigation after his messages with Scott Briggs were leaked. In the messages from August 2018, Mr Pezzullo allegedly attempted to unduly influence the political process by communicating his leadership and ministerial preferences.  

The matter has been referred to the Australian Public Service Commissioner and an inquiry has commenced, with Ms Lynelle Briggs appointed to lead an independent inquiry. The Commissioner has powers under sections 41(2)(m) and 41A of the Public Service Act to undertake inquiries into alleged breaches of the Code of Conduct by Agency Heads. 

NSW ICAC finding of corruption for Hurstville City / Georges Rivers councillors 

On 30 August 2023, the NSW Independent Commission Against Corruption (NSW ICAC) found that three former Hurstville City/Georges River councillors engaged in serious corrupt conduct by receiving or giving benefits relating to two large development proposals without declaring conflicts of interest. 

The NSW ICAC report, Investigation into the conduct of three former councillors of former Hurstville City Council, now part of Georges River Council, and others, sets out the serious corrupt conduct engaged in by Vincenzo Badalati, Constantine Hindi and Philip Sansom, which included in Mr Badalati and Mr Hindi accepting approximately $170,000 from a developer in in 2015 and 2018 as an inducement to use, or reward for having used, their positions as councillors to favour the interests of the developer for two proposed developments. Mr Sansom was found to have engaged in serious corrupt conduct by accepting payment for return flights for a trip to China for him and his partner in March and April 2014, with the knowledge that the payment was to influence his decision in relation to various developments. All three councillors attended meetings and voted in favour of the relevant development projects and failed to declare their interests in the matters.  

NSW ICAC has sought the advice of the Director of Public Prosecutions as to whether prosecution should be commenced. 

AFP Operation Birks 

Operation Birks which was led by the Australian Securities and Investment Commission (ASIC) and the Australian Federal Police (AFP) has recently released information on a complex cyber fraud scheme targeting financial services providers and superannuation funds. 

The operation tracked down a major cybercrime ring that was responsible for stealing more than $3.3 million through large-scale online fraud and attempting to steal a further $7.5 million from victims’ superannuation and share accounts, resulting in a woman being sentenced to five years and six months imprisonment. 

Specifically, a website was created that mimicked the legitimate website of a superannuation fund and was designed to harvest usernames and passwords from members. This information was used to gain access to accounts where funds were withdrawn and deposited in fraudulent accounts. 

The scheme was ultimately brought down by a North Melbourne woman, who used a series of false identities that used information purchased on the dark web, would place a new sim card in her phone for each account she hacked. The woman accidentally used one of these sim cards to order kebabs to her home, which was pinged by the AFP. 

ASIC Deputy Chair Sarah Court said, “Data breaches within Australia’s financial system are significant threats, with consequences that can affect people’s savings for retirement. Driving good cyber-risk and operational resilience practices in financial services and markets is a continuing priority for ASIC. Where appropriate, we will act to address digitally enabled misconduct, including scams. We encourage all entities to be cyber vigilant and act quickly to protect consumers.” 

At the recent AFR Cyber Summit, ASIC warned board directors that they will seek to make examples of boards who are ill prepared for cyberattacks, by taking legal action against companies who have not taken steps to protect customer data. 

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Authored by: 
Cinzia Donald, Partner (Lavan)
Kelly Griffiths, Partner
Daniel Maroske, Partner
Kathy Merrick, Partner
Anna Fanelli, Senior Associate
Monique Kotevski, Lawyer (Lavan)
Emma Bolton, Solicitor

[1]Watson v Greenwoods & Herbert Smith Freehills Pty Ltd [2023] FCAFC 132 at [33].