Pearls and Irritations

The idea of sending the PriceWaterhouseCoopers scandal off for criminal investigation by the Australian Federal Police is such a thoroughly bad idea that one might imagine that it had been recommended by one of the major consultancies, perhaps PwC itself.

Or that it was the recommendation of some public servant or public servants keen to have the minimum external scrutiny of the incestuous relationship between senior bureaucrats and the consultancies from whom they hope to get contracts once they retire. In any event, the big consultancies will be cock-a-hoop, prepared now for some collateral sacrifices among the well-deserving as a necessary price for saving the industry.

One can make the greatest possible allowance for the forensic skills of AFP investigators working in a field of official corruption in which they have no independent investigative experience. The AFP, unlike say the American Federal Bureau of Investigation, does not do corruption or, except in national security cases supervised by others, alleged breaches of confidentiality. Has never done a successful non-systemic one of its own initiative, let alone established any sort of framework by which high-level official corruption might be detected, investigated or prosecuted. That’s because politicians long ago decided that the AFP should not be a police force of general jurisdiction, fighting crime of its own initiative, like the police forces of the states and territories. Instead, in its national crime fighting roles, it would depend on references from the government. Some fields of crime, such as social security fraud, drug importations, alleged terrorism and paedophilia with an international aspect, have general references, and the AFP could not claim to be restricted about acting, or not acting, on their impulses.

But anything with the smack of illegality or deep impropriety by ministers, their minders or senior public servants must depend on a specific reference from an official who will have carefully examined the risk of embarrassment to government. And where references occur – as with, occasionally, bribery, kickbacks or fraud while carrying out government programs – they do not often touch the intimate operations of government. There are a few eccentric officials, such as, for example Mike Pezzullo of Home Affairs, who will make a dangerous reference of his own initiative – perhaps because he optimistically believes a minister or minder is capable of being caught being responsible for a leak. But very few other officials will call in the constabulary before they have thoroughly sounded out the minister and considered the political risks and possible benefits. That’s why, for example, citizens have been waiting for more than three years for a reference from the Treasury, or Finance, the Tax Agents Registration Board or even the Public Service Commission into the PwC scandal. It didn’t need a minister to order the department to call in the cops.

There are different ways of looking at the PWC scandal. At the lowest level it is alleged that a single senior partner of PwC was told secret information in 2014 about how Australia, and other major nations, proposed to attack the tax dodging, avoidance activities of major corporations, particularly transnationals such as Apple and Google. Such bodies, acting with advice from tax consultants such as the Big Four accountancy firms and tax lawyers had devised schemes of invoicing the supply of goods and services, and licences and intellectual property, in such a way that in high taxing countries they made no or negligible profits. Instead, most of the money, and ultimately most of the profits, would be incurred in low-taxing countries, such as Singapore, or Ireland, or the Netherlands, or in traditional tax shelters such as in Caribbean nations. The rorts were taking billions of dollars from the nations where the profits were, as opposed to notionally, being made. That lost revenue might have been building hospitals, schools or nuclear submarines. Soon after the election of the Abbott government, then Treasurer, Joe Hockey did a lot of grandstanding about how Australia was going to be playing a leadership role among the nations in helping to devise simultaneous international legislation against this great social scourge – albeit one technically legal by the standards of the day.

If any partner is guilty of an offence, the whole partnership is liable.

A committee of mostly Commonwealth bureaucrats, supplemented by specialist advisers, was convened to work on the international anti-avoidance schemes. One of the advisers, alleged to have signed umpteen confidentiality oaths, was a PwC tax consultant, who lent his expertise, no doubt for a swingeing sum, to the deliberations. Though most of the money he made came from advising corporations about the structuring of their operations to minimise the tax that was payable, it is far from uncommon for tax professionals to play both sides of the street, even if their clients expected them to keep their secrets.

The local and international operations of professional firms such as PwC are arranged as partnerships, rather than as corporations. In each country, a PwC might have thousands of employees of whom about 900 are partners who divide among each other the profits from the many types of activities of the whole operation. This might be auditing work. It might be advising companies and agencies about restructuring their management, cutting its costs, or getting better controls over various types of expenditure or risk. It might be advising companies and agencies about the policies and programs they ought to put in place to deal with modern circumstances. It might involve putting an independent external eye over operations to see whether what was being done could or should be done better. It might involve a client contracting expertise that they lacked, where it wasn’t worth the investment of maintaining in-house expertise. The biggest single client is government, but many work primarily among large corporations. Small fry can’t afford such services.

Sometimes that expertise might be experience. For example, the AFP has contracted in the experience, expertise and reputation (for what it is worth) of Mick Fuller, the former NSW police commissioner and now PwC contractor to advise his friend, the AFP Commissioner, about what can be done to improve the efficiency, effectiveness and performance of the ACT policing part of AFP operations. A good many gigs in the consultancy industry do not arise from tenders, but from a feeling on the part of clients that they need a particular type of advice.

Only about five per cent of the PwC consultants are tax specialists, but they are the ones who make the most money, and, usually, are the ones at the centre of overall management. Among some of these insiders, it occurred to them that the inside knowledge of the consultant might provide commercial opportunities. Big tax avoiders, particularly transnational ones, could be approached with well-informed advice about restructuring their operations ahead of the international guillotine. PwC could obviously not disclose the source of their information, but there were many ways of showing themselves to be ahead of the game in their predictions of what was going to occur. It is alleged that almost all the tax consultants participated in this scheme. The Department of Finance has instructed that anyone who did participate must remove themselves from government consultancies. The person alleged to have breached confidence has been struck off from practising in tax for two years but may now be facing criminal charges. So too could other participants If the AFP can demonstrate their witting knowledge of what, to not mince words, was a plan to help defraud Australian taxpayers for the primary benefit of transnational operators.

Chinese walls and compartmentalisation are PR devices, not really recognised by the law.

The government, which pretends to be very angry, is by no means restricted to this option. Police investigation and prosecution has the advantage of isolating the alleged malefactors in this particular alleged illegality and bringing them before the courts. Some could go to jail. Others might get big fines. Even better, ordinary old PwC partners who had no idea of the “joke” being played on taxpayers could be insulated from fines or punishment. This is something all such partners want. They claim that PwC has Chinese walls and compartmentalised operations to prevent epidemics of conflict of interest. It would be wrong, they suggest, that the law assumes from the Partnership structure of the firm, which allows them to clothe their operations in secrecy and permits massive tax advantages, that all partners are jointly and severally liable for the misdeeds of their colleagues. As, for example, when all the McKinsey partners had to contribute to the US$1 billion settlement with the US government over McKinsey’s homicidal role in stimulating an illegal oxycodone market.

A good many government officials know that this special pleading by non-tax partners is moral and legal nonsense, and merely a part of the price that must be paid for one’s place at the trough. They also know that the courts are extremely sceptical about so-called Chinese walls, compartmentalised information, and claims that consultants can ethically work for all sides. But that does not mean that the officials who now realise that some of their consultant colleagues were slimy are now screaming for vengeance. The more squeamish or soft headed will worry about the personal impact on some of their cronies. They will predict, Sir Humphrey-like, that punishing everyone could have widespread effects, some possibly undesirable. (There are, of course, potentially desirable effects, including the sudden creation of pressure inside the PwCs of the world, to have controls to prevent such misconduct).

Another option – far better I think – would be to refer the matter to the National Anti-Corruption commission, which formally opens for business, under the leadership of Justice Paul Brereton soon. An initial, secret, NACC investigation has the capacity to require witnesses to give evidence. It could cast a wide net before focusing on the main villains. It could discover behaviour by consultants as well as public officials, that fell short of breaching the criminal law, but which nonetheless amounted to corruption, serious negligence or reckless mismanagement. It could gather evidence from experts – including accountants though preferably not from PwC – about ways of strengthening defences against such abuses. It could rise over the dead bodies of Anthony Albanese and Mark Dreyfus to do what was once their policy and their promise – have hearings in public. It could recommend police action against those who clearly broke the law. It could issue a report letting the public know how government is being systematically rorted by consultancies who treat the public interest with contempt, aided and abetted by some officials whose focus is on attending to “stakeholders” (those who make a profit from government) rather than ordinary punters and the public interest.

Another possibility, which is ever richer in possibility, is having a royal commission, with powers going well beyond those of the NACC. The NACC must put its focus on actual cases of which it has some knowledge. It would, for example, have to restrict itself initially to the alleged malfeasances of PwC. But there are good grounds for thinking that the sins of PwC, even in tax, are by no means restricted to this consultancy firm. Indeed, one could argue that it is time for a good hard look at the whole business of using consultants, and the problems these cause for government, including the problems of conflict of interest, the revolving door, cosy crony relationship, and the frequent lack of arms-length relationships. The argument for such an inquiry is not to satisfy a public appetite for scandal. Nor to show again that insiders, under either party in power, frequently treat the public as chumps. Rather it comes from the fact that the business of government would be cheaper, and more effective and more efficient, as well as more open and transparent, if a host of poor practices were to be eradicated.

The corruption commission, or better still a royal commission could focus on the broader problems, not a few provable misdeeds by individuals.

Only public exposure will achieve this. None of the 1980s-era reforms to government came primarily from within the political or the administrative sphere. They came, usually against the resistance of both, from public pressure, usually from media exposure of abuses. This is equally true of the Albanese-era reforms. Indeed, most of what the public knows about the PwC scandal comes from media disclosure, not the alertness of bureaucrats, or the willingness of politicians, particularly Morrison-era ones, to do anything about it. Everything that ministers and departments have done about pressing for consequences for PwC has come very slowly, long after the decision-makers have known the details, and only from a dawning realisation that the public is not willing to let matters be swept under the carpet.

The Albanese government has at least the advantage of coming into power after a seriously bad government. It was one that had become complacent in power, used to using the resources of government for partisan advantage, including the improper and unsupervised transfer of public money to its private sector mates and party donors, often without the pretence of process. It was addicted to secrecy and lying. It ignored the standard checks and balances. None of this could have happened without the active assistance of senior officials in Prime Minister and Cabinet, Treasury and Finance – the agencies supposed to be supervising the cleaning up, often with the same officials, of the mess that Morrison left. These are agencies, along with other ones such as Defence, Home Affairs and Attorney-Generals which could now be said to have house-trained their new ministers, so that they see most issues through bureaucratic rather than political eyes. Look, for example, at how the senior agencies, and ministerial offices, treat FOI with contempt, despite all the promises they made. Look at how a human rights administration deals with the rights of asylum seekers. Look at the pseudo-sincerity with which Anthony Albanese uses the phrases of old Communist China to declare that one should not comment upon the “internal affairs” of another state – in this case the human rights abuses and open corruption of the Indian government. Look at the way that Mark Dreyfus presides over the maltreatment of whistle-blowers.

There are, of course, other executive government ways of dealing with the abuses of a PwC. Strictly one may not even require a particular law, using instead a degree of arbitrary power against the threat of strong legislation. One does not require a judicial or quasi-judicial determination to ban a consultancy – perhaps all consultancies – for ripping off the taxpayer. Commonwealth regulatory agencies, such as corporate, banking, consumer and competition agencies, have negotiated heavy penalties or fines against corporations guilty of cartel-like behaviour and ripping off consumers. There’s a measure of this, pending outcomes with the police investigation, with Finance and PwC. We should have a combination of the lot. I wrote last week that if I were the government, I wouldn’t settle with PwC for a dollar less than $1 billion. That’s a fraction of the tax revenue put at risk – probably actually lost.

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