Global Compliance News

Draft Law implementing GDPR in Portugal

The Council of Ministers recently approved Draft law n.º 67/2018 (hereinafter “Draft Law”) that will ensure the implementation of the GDPR in Portugal. This draft is still subject to changes as it will have to be approved by the Parliament, with the discussion and voting scheduled for the next 3rd of May.

Nonetheless, there are some important points to highlight in respect of the choices made by the Government:

  • On a practical note, and certainly clearing a significant backlog, according to the Draft Law, all of the notifications and authorization applications pending decision, will expire when the Draft Law enters into force.
  • In contrast, the Draft Law states that all controllers that have an authorization issued pursuant current Portuguese Data Protection Law (Law n.º 67/98, of October 26), will be exempt from undertaking a Data Protection Impact Assessment.
  • Also alleviating the burden of implementation is the possibility of having a further 6 months (i.e. until November) in order to obtain new consents in line with the requirements of the GDPR.
  • According to the Draft Law the National Commission for Data Protection (Comissão Nacional de Proteção de Dados – CNPD) will remain as the Supervisory Authority in the matter of Data Protection.
  • The competent authority for the accreditation of certification bodies for data protection will be the Portuguese Accreditation Institute, I.P. (IPAC – Instituto Português de Acreditação, I.P).
  • Following the example of other countries and the opinion of those most actively discussing the matter in Portugal, the Draft Law states that in relation to the minimum age for allowing to process children’s personal data in the context of an offer of information society services is 13 years old.
  • With respect to portability, the Draft Law states that where interoperability of the data is not technically possible, the data subject has the right to demand that the data is delivered to him in an open digital format.
  • With regard to the right to erasure (“Right to be forgotten”), the draft law provides that in cases where there is a data retention period imposed by law, the right to erasure provided for in article 17 of the RGPD can only be exercised after that period.
  • The Government has also opted to impose some limitations on data processing resulting from CCTV recording, mostly to comply with the existing legal framework set by Law no. 34/2013, of May 16 and guidelines from the Portuguese Data Protection Authority.
  • In respect of data retention periods, the Draft Law clarifies that the data retention period shall be (i) the one that is established by law or regulation or (ii) the period that is necessary for the purpose of the processing. However, it also adds that: 1) where, by the nature and purpose of the processing, it is not possible to establish the data retention period, the retention of the data shall be deemed lawful; and 2) in case the Controller or Processor is required to prove compliance with obligations, they may retain the data until the the statute of limitation period defined by law elapses.
  • Some of the more controversial choices have been with respect to data processing in the context of employment, where the draft law, besides clarifying the legal grounds for processing (generally disqualifying consent), has included some important limitations on: 1) the use of CCTV recordings, as well as on other technological means of remote surveillance (restricting it for criminal proceedings, or for the purposes of establishing disciplinary liability, carried out within a criminal proceeding); 2) the processing of biometric data of employees (only allowed for the control of attendance and control of access to the premises); 3) the transfer of personal data of employees between companies (only allowing said transfer in cases of occasional transfer of the employee, as far as the transfer of the data is proportional, necessary and appropriate to the objectives to be achieved or of assignment of employees by a company of temporary work, or secondment to another State).
  • With regards to public entities, the Draft Law contains detailed indications on the possible options for appointment of a single DPO for different entities.
  • There is also an indication that processing of personal data by public entities for purposes other than those determined by the collection of the data is allowed, provided that processing is carried out in the public interest.
  • The Draft Law also contains specific provisions concerning the processing of data in the context of: 1) public procurement proceedings; 2) health databases or centralized registers; 3) archiving purposes in the public interest; 4) scientific or historical research or for statistical purposes – making reference to the principle of data minimization and to the use anonymisation or pseudonymisation of the data, whenever the purpose of the controller may be achieved with the data in the referred conditions.
  • The technical guidelines for the application of the GDPR to public entities are to be approved by resolution of the Council of Ministers, which has meanwhile been published (Council of Ministers Resolution n.º 41/2018) and establishes the minimum compulsory and recommended technical requirements applicable to the IT systems and networks of public entities, which should be adopted until 29 of September of 2019.
  • With regards to penalties, the draft law defines 3 different levels of fines, setting minimum amounts depending on the nature of the infringer or size of the company (large enterprises – from €1.000 up to €4000; SMEs – from €500 up to €2.000; or individuals – from €250 up to €1.000): 1) very serious administrative offense (with a statute of limitation period of 3 years); 2) serious administrative offense (with a statute of limitation period of 2 years); 3) minor administrative offense (with a statute of limitation period of 1 year).
  • Another controversial option was the choice of exempting the application of fines to public entities, although defining that this option should be reviewed within 3 years, after the entry into force of the Draft Law.

Finally, the draft law foresees a list of criminal offenses similar to that which was already included in the previously existing Portuguese Data Protection Law.

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New obligation for Spanish companies to disclose their ultimate beneficial owners

On 21 March 2018, the Spanish Ministry of Justice issued Ministerial Order 319/2018 which requires Spanish non-listed companies to disclose their ultimate beneficial owners (“UBO“) to the Companies Registry and keep said information updated. The new UBO reporting measure is motivated by Directive 2015/849 of the European Parliament and of the Council on the prevention of the use of financial system for the purposes of money laundering or terrorist financing (the “Fourth Directive“) which imposes an obligation upon the Members States to hold the beneficial ownership information in a central register and make it available with certain restrictions. Paradoxically, Spain has not yet fully implemented the Fourth Directive.

Starting with the financial statements of year 2017 (which shall be filed with the Companies Registry in 2018), all non-listed companies are obliged to file, together with their annual accounts, a declaration form of beneficial ownership of the company. For these purposes, the UBO is defined as the individual who directly or indirectly owns or controls (i) more than 25% of the share capital of the company; or (ii) has more than 25% of the voting rights of the company; or (iii) through other means exercises direct or indirect control of the management of the company. Only listed companies are exempt from the UBO reporting obligation. Additionally, those companies that have an indirect UBO will need to disclose the information on the legal persons that intervene in the chain of control of the Spanish company. If a company does not have a direct or indirect UBO, it needs to identify in the form the members of its management body. In subsequent years this form will only need to be completed if there have been changes in relation to the previously identified. This UBO reporting obligation aims at improving transparency in (very often) complex ownership structures of legal entities.

The companies’ beneficial ownership information will be made available to competent authorities (including the Financial Intelligent Units), ‘obliged entities’ under the Fourth Directive (for the purpose of performing customer due diligence), and any person or organization that has a legitimate interest. This enhanced public scrutiny should prevent the misuse of legal entities and tax evasion.

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Japan EU Data Transfers – Mutual adequacy findings under APPI and GDPR

Background

Significant progress has been made over the past 11 months to bridge the differences between Japan’s privacy protection requirements under the Act on the Protection of Personal Information (APPI) and those of the EU under the GDPR.

In December 2017, Japan’s data privacy authority, the Personal Information Protection Commission (PPC) published a joint-statement with the European Commission (EC) regarding mutual adequacy findings between Japan and the EU on transfers of data.

The importance of this objective was reaffirmed in the meeting, especially in light of the recent finalization of the negotiations of the Economic Partnership Agreement (EPA) between Japan and the EU. Mutual adequacy findings enhancing free data flows will complement and enhance benefits of the Japan-EU EPA, while strengthening protection of the fundamental right to privacy.

The next agreed stage is to work on the details of solutions and accelerate the pace of the talks. Further discussions will also be held between the PPC Secretariat and the EC Directorate-General for Justice and Consumers to finalize forthcoming amendments to the PPC Rules and prospective additional Guidelines for the mutual adequacy findings as outlined below. The ambitious plan is to finalize the discussion of the necessary changes to achieve mutual adequacy on data transfers in Q1 2018 with a high-level meeting with the EU to occur early in the year.

Forthcoming Amendments to the PPC Rules for Transfer of Personal Data from Japan to the EU

To establish a fundamental framework for mutual and smooth transfers of personal data between Japan and the EU, in June 2017, the PPC proposed the following criteria to be set forth as amendments to the PPC Rules for designating a foreign country (which is an alternative measure to obtaining the data subject’s consent for a cross-border transfer of personal data from Japan to a foreign country under Article 24 of the APPI):

  1. there are statutory provisions or codes equivalent to those relating to the obligations of personal information handling business operators defined under the APPI, and the policies, procedures and systems to enforce compliance with these rules can be recognized;
  2. there is an independent personal data protection authority, and the authority has ensured the necessary enforcement policies, procedures and systems;
  3. the necessity for a foreign country designation can be recognized as in Japan’s national interests;
  4. mutual understanding, collaboration and cooperation are possible; and
  5. establishing a framework to pursue mutual smooth transfer of personal information is possible while seeking the protection thereof.

On 7 December 2017, the PPC published draft amendments to the PPC Rules reflecting the above criteria (see here – Japanese language only) and invited public consultation on the draft amendments until January 5, 2018. The result of this consultation will be made public in due course.

Possible PPC Guidelines for Processing of Personal Data to be Transferred from EU to Japan

In February 2018, the PPC further reported on a plan to establish additional Guidelines being applicable to personal data transferred from the EU to process it in Japan under the mutual adequacy findings. The PPC recognizes the following major differences between the APPI and the GDPR, and plans to reflect them in the additional Guidelines (see here Japanese language only):

(a) Sensitive data – personal data regarding sex life, sexual orientation, and labor union membership transferred from the EU shall be treated as equivalent to “special care-required personal information (yōhairyo kojinjyōhō)” under the APPI;

(b) Scope of the data subject’s rights on the retained personal data – the data subject’s rights requesting disclosure, correction, suspension of usage, etc. shall be given to any personal data transferred from the EU regardless of the duration of the data retention period;

(c) Clarification for scope of data usage purposes – data usage purposes for personal data transferred from the EU shall be limited to the scope of the purposes specified upon collection to be confirmed through the confirmation and record retention obligations upon transfer/receipt of personal data to/from a third party under Articles 25 and 26 of the APPI;

(d) Re-transfer from Japan to another country outside of the EU – for a re-transfer of personal data by way of data subject’s consent, the data subject must be sufficiently informed of the re-transferred country’s circumstances and such country must have data protection laws equivalent to the protection under the APPI to be ensured by contracts or the like; and

(e) Anonymized data – “anonymization” of personal data transferred from the EU shall mean no one can re-identify a specific individual data subject by discarding decryption keys (different from “pseudonymization”). Such data is treated as “anonymously processed information (tokumei-kakō jyōhō)” under the APPI.

The Guidelines are intended to cover non-EU members of the EEA (Iceland, Liechtenstein and Norway) pursuant to the EEA Agreement. Please also note that the Guidelines may be mandatory in Japan, but will likely not be mandatory in other jurisdictions such the EU and the US.

Getting ready for the future

Although the mutual adequacy findings when agreed will result in aligning the regulations on the cross-border transfer of personal data between Japan and the EU, there are further differences between the APPI and GDPR, including: data protection officer (DPO) requirements, security breach notification, profiling, data portability, etc., in addition to the five major items outlined in the section above. As a result, companies handling personal data from/in the EU will have to carefully monitor further developments under the GDPR as well as relevant amendments to the PPC regulations.

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Malaysia Introduces “Corporate Liability” Bill

The Malaysian Government has proposed amendments to the Malaysian AntiCorruption Commission Act 2009 that will make corporations liable for the corrupt
practices of its associated persons. The amendments are set out in the
Malaysian Anti-Corruption Commission (Amendment) Bill 2018 (“Bill“) that was
tabled for first reading in the Malaysian Parliament on 26 March 2018.

Corporate Liability

The corporate liability provisions are modelled on the Bribery Act in the United
Kingdom. It criminalises commercial organisations (which includes Malaysian
companies and foreign companies conducting any business in Malaysia) if an
associated person corruptly gives any gratification with intent to obtain or retain
business, or an advantage in the conduct of business, for the commercial
organisation.

An “associated person” includes directors and employees, and could extend to
third party service providers.

The Bill imposes strict liability on commercial organisations, in that organisations
can be liable regardless of whether they had actual knowledge of the corrupt
actions of its associated persons. To avoid liability, organisations must be able to
demonstrate that they had in place adequate procedures designed to prevent
associated persons from undertaking corrupt practices.

Where a commercial organisation commits an offence, the directors, officers and
management are deemed to have committed the same offence unless they are
able to prove that the offence was committed without their consent and that they
exercised due diligence to prevent the offence.

The potential penalties are severe, and could be in the form of a fine of not less
than ten times the value of the gratification (if capable of being valued), or
RM 1 million, whichever is the higher, or imprisonment for a term not exceeding
20 years, or both.

In light of these penalties, commercial organisations and management will need
to step up monitoring of its associated persons for corrupt practices. Commercial
organisations should also revisit their gifts and entertainment policies and other
anti-corruption policies to ensure that they are sufficiently robust to allow the
organisation to avoid liability.

Conclusion

The Bill seeks to enhance Malaysia’s combat against corruption, in particular
corruption arising from commercial transactions. The Bill will also have the effect
of promoting better corporate governance and legal compliance in Malaysia by
requiring corporations to take a proactive role in preventing corruption.
We expect that further guidelines will be issued on the procedures that
commercial organisations will need to have in place to avoid liability. Commercial
organisations should take these guidelines into account when preparing or
revising their compliance policies

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U.S. Government to Include Digital Currency Addresses on List of Sanctioned Parties

What’s changed

The U.S. Government is considering adding digital currency addresses affiliated with individuals and entities identified to the List of Specially Designated Nationals and Blocked Persons (“SDN List”). This would put U.S. persons on notice that doing business with those digital addresses may be prohibited, increasing compliance considerations for businesses delving into the world of virtual currency.

What it means for you

On March 19, 2018, the U.S. Office of Foreign Assets Control (“OFAC”) updated its FAQs to include a section on virtual currency. In the new section, OFAC provides guidance about the various money laundering and terrorist financing risks associated with virtual currency. In particular, OFAC states that it will use sanctions to “fight against criminal and other malicious actors abusing digital currencies and emerging payment systems.” One of the strategies under consideration is the inclusion of digital currency addresses associated with blocked persons to OFAC’s SDN List.

OFAC implements and enforces U.S. sanctions against parties on the SDN List and sanctioned countries (e.g., Cuba, Iran, North Korea, Russia, Syria, Venezuela). All U.S. persons must comply with OFAC regulations, including prohibitions on dealing with parties on the SDN List. U.S. persons must also block the property (including goods, contracts, and funds of any form) of sanctioned persons and make timely reports to OFAC. Failure to do so may result in significant civil and criminal penalties. The maximum civil penalty per violation of OFAC’s regulations amounts to the greater of USD 295,141 or twice the amount of the underlying transaction.

Once OFAC starts adding digital currency addresses to the SDN List, parties will be on notice that those addresses are affiliated with sanctioned persons, and payments through such means may result in a violation of OFAC regulations. OFAC’s plans represent another step in the march towards fully regulating virtual currency operations. Little by little, virtual currencies are being brought under existing regulatory schemes, or new schemes (like the New York BitLicense) are being created to cover perceived gaps. OFAC’s plans to add digital currency addresses to the SDN List will mean greater risk for companies and a matching increase in compliance cost.

Actions to take

Companies dealing in virtual currency may already be regulated under U.S. federal and state anti-money laundering (“AML”) regulations. If your company is already AML compliant, then it may be an easy lift to adjust to this new development. Such companies should:

  • Check whether their AML compliance program covers OFAC issues.
  • Ensure that their customer identification/verification and due diligence processes consider digital profiles and virtual currency issues.
  • Ensure that your transaction monitoring systems consider the unique issues presented by dealing in virtual currency.

Confirm whether relevant employees are trained on OFAC regulations. For companies dealing in virtual currency, but are unaware as to their AML or OFAC regulatory obligations, we suggest conducting a risk assessment at your next opportunity.

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Spanish Supreme Court admits employee e-mails obtained in the course of an internal investigation as evidence

A judicial decision, issued by the employment division of the Spanish Supreme Court (judgement No. 119/2018 of February 8, 2018), has confirmed the admissibility as evidence, to justify a dismissal, of the emails of the dismissed employee obtained in the course of an internal investigation.

This decision has its origin in a claim for unfair dismissal filed by an employee of a Spanish company which had been dismissed by the company for committing very serious infringements in accordance with article 54.2 of the Spanish Workers’ Statute. In particular, it was proven that the dismissed employee had accepted a bribe from one of the company’s suppliers consisting in two bank transfers for the acquisition of a luxury car. Needless to say, this was contrary to the company’s Code of Conduct.

The company first became aware of said potential infringement because the employee had printed the bank transfers’ receipts using the company’s printer. A work colleague found them by chance in the printer and immediately informed his superior. Subsequently, the company initiated an internal investigation of the facts during which the company reviewed the employee’s e-mails and found evidences proving the receipt of the bribe.

During the judicial procedure, the employee argued that his emails had been wrongfully obtained since his right to privacy had not been respected and, therefore, the emails could not be used as valid evidence to justify the dismissal.

However, the Supreme Court has ruled that the employee’s e-mails obtained in said investigation are valid evidence for the following reasons:

  • The company has internal regulations on the use of the information systems, which limit the use of the company’s computers to professional uses and forbids their use for personal purposes.
  • Before having access to the company’s information systems, all employees must accept the provisions of the company’s IT policy. The employees/users are warned that the company reserves its right to adopt the necessary monitoring and control measures to verify the proper use of the devices of the company.
  • The monitoring of the dismissed employee’s computer was agreed as a result of the “discovery by chance” by a work colleague of the bank transfers’ receipts, which suggested a potential breach of the company’s Code of Conduct.
  • The review of the e-mails carried out by the company was not generic and random. The company used key words to filter and select those emails relevant to the case. Furthermore, there was no need in this instance to access the employee’s services, since the reviewed e-mails were stored in the company’s server.

It is important to highlight that although in previous cases heard by the Spanish Constitutional Court a third party had been present during the e-mail review (e.g. a notary public, another employee, etc.), the Supreme Court found that absence of such third party did not invalidate the company’s control actions.

Finally, the Supreme Court weighed the plaintiffs’ right to privacy against the company’s right to exercise control over its employees and concluded that, in this case, the prohibition to use the company’s information systems for personal use implied that the employee could not have a reasonable expectation of privacy. In addition, the Supreme Court found that e-mail review had been carried out in compliance with the requirements set forth by the Spanish Constitutional Court. In other words, the Supreme Court deemed that the monitoring and control of the e-mails was necessary, appropriate and proportionate.

Companies should take this ruling into account when drafting IT policies (and related documents, such as user agreements) and conducting internal investigations.

 

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China’s new era of graft-busting promises a tougher regime ahead

On 20 March 2018, China’s National People’s Congress (“NPC“) passed the Supervision Law detailing the powers and responsibilities of the National Supervision Commission (the “New Commission“). The New Commission is China’s highest anti-graft agency and was established at the first session of the 13th NPC.

Under the new law, the New Commission provides a centralized supervisory system for anti-corruption enforcement and merges the Ministry of Supervision under the State Council and the department of anti-corruption investigation of the Supreme People’s Procuratorate (“SPP“). It will also carry out the responsibilities of the Communist Party of China’s Central Commission for Discipline Inspection (“CCDI“).

Our post discusses the implications of this important development and some of the highlights of the reform.

What does this mean for Companies doing business in China?

The new law entrusts supervision commissions to oversee individuals across public sector entities including party organs, legislatures, governments, courts, procuratorates, political advisory bodies, as well as their own staff, executives of state-owned enterprises, management staff of public institutions and mass organizations (collectively referred as “Officials“).

We expect to see increased scrutiny and enforcement in the near future. Whilst the new law targets Officials with public responsibilities, parties doing business in China, including foreign companies, are also at increased risk of being implicated if their business falls within the investigation conducted under the Supervision Law. Specifically, the New Commission can detain individuals who commit official bribery or who jointly commit the crime of misconduct in office pursuant to the Supervision Law. Such individuals can include those from the private sector.

Investigators now have increased investigation and surveillance powers such as wiretapping, when they are investigating severe violations. Of interest is that the new law does not expressly restrict the target of such measures to Officials.

The new law also clearly requires the New Commission to be responsible for global assistance and information exchange in relation to anti-corruption enforcement. It envisages cooperation between the New Commission and foreign law enforcement bodies, such as the US Department of Justice and the UK’s Serious Fraud Office.

Highlights of the Reform 1.    The National Supervision Commission

The establishment of the New Commission follows the local pilot administrative reform which began in Beijing, Shanxi and Zhejiang provinces in December 2016. The New Commission is deemed to be an institutionalization of Beijing’s anti-corruption campaign in recent years.

It has the same administrative ranking as the State Council, Supreme People’s Court and SPP, and is expected to mitigate potential improper influence or interference from the government. The New Commission assumes the investigation function from the SPP, which will focus on public prosecution.

The New Commission inherits duties from the former supervision department and the procuratorate. These include the ability to take administrative disciplinary actions against Officials who have violated the law, investigate official corruption and transfer the case to procuratorates for prosecution. The latter is similar to the duties of police for other criminal violations.

2.    The Supervision Law

The new law also provides broad investigative powers to the New Commission, including the power to freeze assets and accounts, issue subpoenas, search persons or residential premises, and restrict suspects and relevant persons from travelling abroad. Among others, the New Commission replaces the practice of shuanggui and shuangzhi1 with the power to detain a corruption suspect. Shuanggui or shuangzhi was a frequently criticized secret disciplinary detention mechanism of the Chinese Communist Party.

Although the new law is silent on the right to have access to lawyers or clear redress mechanisms for detainees, compared to shuanggui, it provides a certain degree of transparency and clarity during the anti-corruption investigation. For example, the detention has to be approved with caution  and cannot continue for longer than six months. Also, in general cases, the family of the detainees have to be notified within 24 hours after the detention.

Actions to Take

Although it may take time to establish provincial and district-level supervision commissions in the short term, we recommend that companies doing business in China take steps to proactively review their existing operations and assess the risks under the new law. In particular, such review should identify whether there is any interaction with government bodies, public entities and SOEs, when such interaction is conducted using a third-party liaison vendor.

We will be closely monitoring how anti-corruption investigations and enforcement are carried out under the new regime. Meanwhile, companies should remain vigilant and continue to monitor and improve their compliance controls.

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End of US Offshore Voluntary Disclosure Program

On March 13, 2018, the US Internal Revenue Service (IRS) announced that it will end the 2014 Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. US taxpayers with undisclosed foreign (non-US) financial assets should speak with their US tax advisor before the close of the program.

Highlights

1. OVDP will close on September 28, 2018.

  1. IRS will continue the following programs:
  • Streamlined Filing Compliance Procedures;
  • Delinquent FBAR Submission Procedures; and
  • Delinquent International Information Return Submission
  1. US taxpayers with undeclared foreign financial assets should consider their compliance options and, if advisable, apply for entrance in the OVDP by September 28,
Background

US citizens and residents (which include “green card” holders) are required to report and pay tax on their worldwide income and declare their ownership of certain foreign financial assets and accounts. These requirements apply regardless of where the particular individual physically resides or lives. Failure to file the required tax returns or information reports, failure to properly declare foreign financial assets, or failure to pay any US tax required can subject the taxpayer to significant penalties.

The current OVDP began in 2014 and is a modified version of the program first offered in 2009, which provided US taxpayers with the opportunity to disclose noncompliance associated with foreign accounts.

Key requirements of the OVDP include:

  • submission of information regarding the undeclared foreign financial assets and the foreign financial institutions and intermediaries associated with such assets;
  • submission of amended (or complete original) tax returns and Reports of Foreign Bank and Financial Accounts (FBARs) for the eight most recently ended tax years;
  • payment of all tax, interest, and applicable penalties due on the submitted returns; and
  • payment of an Offshore Miscellaneous Penalty equal to either 5% or 50% of the highest aggregate value of the taxpayer’s previously undeclared foreign financial assets during the relevant period.

The penalty rate applicable to the Offshore Miscellaneous Penalty is determined based on whether any of the taxpayer’s previously undeclared foreign financial assets were held by, or established with the assistance of, a foreign financial institution or facilitator under public investigation by the IRS or US Department of Justice. The IRS maintains a list of such institutions and facilitators on their website.1

According to the IRS, 56,000 taxpayers used one of the OVDPs and have paid a total of $11.1 billion in back taxes, interest, and penalties. The number of OVDPs peaked in 2011, when 18,000 people came forward but has steadily declined falling to 600 OVDPs in 2017.

As announced on March 13, 2018, the IRS will close the OVDP on September 28, 2018. After which, the IRS intends to provide additional information on future disclosures of offshore noncompliance.

Streamlined Success

The current Streamlined Filing Compliance Procedures were also introduced in 2014 and are intended to ease the compliance burdens and help more taxpayers come into compliance.

To complete a Streamlined filing, taxpayers must:

  • submit amended (or complete original) tax returns for the three most recently ended tax years;
  • submit amended (or complete original) FBARs for the six most recently ended tax years;
  • certify that previous failures to comply were due to non-willful conduct; and
  • pay all tax and interest due on the submitted

Non-willful conduct is defined as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

For non-US resident taxpayers eligible for a Streamlined filing, all penalties will be waived. For US resident taxpayers eligible for a Streamlined filing, the IRS will apply an Offshore Miscellaneous Penalty equal to 5% of the highest aggregate value of the previously undeclared foreign financial assets during the six most recently ended tax years.

Streamlined filings continue to be used and have helped about 65,000 additional taxpayers come into compliance. While the Streamlined filing procedures continue to be popular, the IRS has said that it may end the program at some future point.
In addition to the Streamlined filing procedures, the IRS will also continue to offer procedures for filing delinquent FBARs or international information returns (which are used to declare ownership of foreign financial assets) without penalty if the taxpayer already reported and paid tax on any associated income.

Key Difference Between the OVDP and Streamlined

The OVDP is designed for taxpayers with exposure to potential criminal liability due to willful failure to report foreign financial assets. On the other hand, the Streamlined procedures are designed for taxpayers that certify their failure to report foreign financial assets did not result from willful conduct on their part.

Time to Act

Given that the OVDP will soon end, we encourage US citizens and residents with undisclosed foreign financial assets to speak to their tax advisor as soon as possible, especially taxpayers whose failure to comply may be the result of willful conduct. To participate in the current OVDP, taxpayers must submit a standard form disclosure letter and attachments related to each undeclared foreign financial asset, all of which must be received by the IRS, or post-marked by the US postal service, on or before September 28, 2018.

 

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China to Integrate its Three Antitrust Agencies into a Single Authority

On 13 March 2018, the Chinese government released plans to amalgamate the three agencies currently responsible for antitrust enforcement into a single department. On 17 March 2018, the national legislators, the National People’s Congress, voted and approved the plans.

China currently has three separate antitrust enforcement agencies: the Antimonopoly Bureau of the Ministry of Commerce, the Price Supervisions and Antimonopoly Bureau of the National Development and Reform Commission and the Anti-unfair Competition Bureau of the State Administration of Industry and Commerce. MOFCOM is responsible for merger review, NDRC oversees price-related anti-competitive conduct and arrangements and the SAIC deal with non-price-related anti-competitive conduct and arrangements. The consolidated authority will combine the antitrust investigation functions and merger review functions of the three existing agencies, and consolidate their personnel into a single department. The department will be housed within the national administration for market supervision, a newly created administration within the State Council.

The plans are part of a larger reshuffle of the state ministries that will see the number of full ministries reduced by 8 to 26, and the number of reporting agencies reduced by seven.

The plans have a number of potential benefits for businesses active in China and their legal advisers:

  • Resolving ambiguity between the responsibilities of the NDRC and SAIC: under the current model, it is not always clear whether an infringement will fall under NDRC or SAIC jurisdiction. In practice, alleged infringements often include both price related and non-price related aspects.
  • One stop shop for immunity/leniency applicants: at present, both the NDRC and SAIC have their own separate immunity/leniency policies. Presently, it is not always a straightforward decision as to which agency to apply to (bearing in mind the lack of a clear distinction in their responsibilities). The emergence of a single agency removes this problem. Certainty is critical to ensuring potential whistle-blowers have the right incentives to use a leniency programme. International experience suggests that an effective leniency regime is key to driving antitrust enforcement. Reforms which remove uncertainty are therefore likely to benefit both the business community and the agency.
  • Resolving ambiguity in rules/guidelines: at present, NDRC and SAIC have adopted overlapping guidance on how the Antimonopoly Law should be enforced. For example, both agencies published drafts of antitrust guidelines on intellectual property rights[1]. The emergence of a single agency will likely lead to a single set of guidance for how the AML is to be interpreted and applied, providing greater certainty to businesses and their advisers.
  • Better division of labour/industry specialisation: the plan may allow for a more effective deployment of resources in respect of antitrust enforcement and merger control in China. It is no secret that MOFCOM in particular has faced resourcing issues, with an ever increasing workload. In the first 10 months of 2017, MOFCOM had received 360 notifications in total. Pooling resources as part of a consolidated authority may better allow for the development of industry expertise and experience (in line with the reorganisation of MOFCOM’s Antimonopoly Bureau that took place in September 2015).

It is still unclear who will lead the consolidated authority. Also, it remains to be seen how the existing internal rules of the three agencies regarding to antitrust enforcement will be consolidated.

[1]NDRC published its draft antitrust guidelines on intellectual property rights on 31 December, 2015 for public comments and SAIC published its seventh edition of draft antitrust guidelines on intellectual property rights on 5 February, 2016 for public consultation.

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The first UK contested prosecution for failure to prevent bribery provides a salutary warning to Irish businesses

The Irish Criminal Justice (Corruption Offences) Bill 2017 is currently progressing through the Irish Parliament. The Bill consolidates seven anti-corruption Acts from as far back as 1889 up to 2010. It also introduces a range of new offences which modernise the Irish anti-corruption code.

S18 proposes one such new offence. It provides that a body corporate will also be guilty of an offence, if an offence under the new Act is committed by an officer, employee, agent or subsidiary of that body corporate with the intention of obtaining or retaining business for the body corporate, or an advantage for it in the conduct of its business. The language of the new offence closely mirrors the existing s7 of the UK Bribery Act 2010 here.

It will be a defence for a body corporate to prove that it “took all reasonable steps and exercised all due diligence to avoid the commission of the offence.” The equivalent UK provision refers to the body corporate having “had in place adequate procedures designed to prevent persons associated with [it] from undertaking such conduct.” While the language here does differ, if anything it seems that Irish defendants could be held to a higher standard, it is likely that similar factors will be taken into account in both cases in deciding whether a defendant has met the requisite requirements.

The first contested prosecution under s7 has just concluded in the UK. In that case, a refurbishment contractor was invited to tender for certain valuable contracts which it won. It was alleged that the tender process had been tainted by bribery involving an employee from the company tendering the contract and from the contractor. This had involved a system of fake invoicing. Both pleaded guilty to offences under the UK Bribery Act.  The contractor was subsequently prosecuted and convicted under s7 of that Act.

What is interesting from an Irish perspective as we await the enactment of the new offence, is the contractor’s argument that it had adequate procedures in place designed to prevent bribery and ultimately the high standard that it was held to by the jury which rejected this defence.

In summary, the contractor unsuccessfully argued that as it was a small localised business employing 30 individuals from a single open-plan office, it did not require sophisticated controls to prevent bribery for its controls to be “adequate” under the UK Bribery Act. There were proper controls in place for the payment of invoices. The company ethos was to behave with honesty and integrity and there were existing policies to this effect. These measures were seen as inadequate.

It is also of note that the contractor conducted its own internal investigation, then self-reported the improper activity to the authorities and fully cooperated with their subsequent investigation.

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Trump on Trade: What New US Steel and Aluminum Duties Mean For Businesses

On 8 March, President Trump signed two proclamations – one on steel imports and one on aluminum imports (available here and here). As expected, the president is imposing, as from 23 March 2018, an additional 25% duty on steel, and an additional 10% duty on aluminum, imported from all countries except Canada and Mexico. The proclamations foresee the possibility of exclusions for particular steel and aluminum product imports, and contemplate further discussions with U.S. allies regarding possible country exemptions. Affected users of imported steel and aluminum products may want to consider the utility and viability of seeking product exclusions for their imports.

Meanwhile, a number of U.S. trading partners have raised concerns regarding the proposed tariffs, and have mooted the possibility of safeguard measures that could affect imports of steel and aluminum into their markets as well as potential retaliatory measures against the United States

Steel

  • The 25% additional duty will apply to “steel articles” imported from all countries except Canada and Mexico.
  • “Steel articles” are defined by reference to Harmonized Tariff Schedule (HTS) 6-digit subheadings, as follows: “7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTS classifications”.
  • The 25% additional duty will apply to articles entered, or withdrawn from warehouse for consumption as from 23 March 2018.

Aluminum

  • The 10% additional duty will apply to “aluminum articles” imported from all countries except Canada and Mexico.
  • “Aluminum articles” are defined by reference to Harmonized Tariff Schedule (HTS) classifications, as follows: “(a) unwrought aluminum (HTS 7601); (b) aluminum bars, rods, and profiles (HTS 7604); (c) aluminum wire (HTS 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (HTS 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (HTS 7608 and 7609); and (f) aluminum castings and forgings (HTS 7616.99.51.60 and 7616.99.51.70), including any subsequent revisions to these HTS classifications”.
  • The 10% additional duty will apply to articles entered, or withdrawn from warehouse for consumption as from 23 March 2018.

Provisions Applicable to Both Steel and Aluminum Duties

  • Canada/Mexico exemptions: Imports from Canada and Mexico are exempted from the additional duties for now; the proclamation describes the special relationship the United States has with these countries and concludes that steel and aluminum imports from these countries should be exempted, but includes the qualifier “at least at this time”; this exemption may be tied to progress in NAFTA renegotiations and could be withdrawn by the president with little notice; also, the president makes clear his intention to exempt articles produced in Canada or Mexico, not to exempt articles transshipped through Canada or Mexico (e.g., one cannot avoid the additional U.S. duty by shipping steel or aluminum produced in China through Canada).
  • Possible country exemptions: Countries with which the United States has “a security relationship” (e.g., allies, like the EU, Australia, Japan and Korea) are encouraged to discuss with the Administration “alternative ways to address the threatened impairment of the national security” presented by imports from those countries; this could possibly lead to a series of “voluntary-restraint-type” arrangements being negotiated where exporting countries agree to limit exports to certain levels to avoid the additional duties.
  • Product exclusions: The proclamations foresee a petition-based, product exclusion process run by the Department of Commerce (with input from other agencies); the standard for exclusion will be whether the article (i) is produced in the United States “in a sufficient and reasonably available amount or of a satisfactory quality or (ii) is subject to specific national security considerations; petitions need to be filed by “a directly affected party located in the United States” (i.e., foreign suppliers do not qualify); Commerce is to issue formal procedures for this process by 18 March.
  • Duration: The duties, which begin on 23 March 2018, are to remain in effect until “expressly reduced, modified, or terminated”.

These additional duties will have a meaningful impact on the market that will go well beyond producers and importers.

All businesses that utilize steel or aluminum in their products are expected to be affected. As a result, there are a number of steps all companies should be taking to assess the potential impact. For example, supply contracts should be reviewed (even for downstream – e.g., finished products) to determine whether cost increases due to increased customs duties can be passed on. Businesses should also be considering whether to apply for product exclusions. Although the exclusion application procedures will not be released for several days, companies should be preparing now; this exclusion process is expected to be similar, procedurally, to that being used currently in the Section 201 cases. Also, it is not clear whether exclusions will be granted with retroactive effect, so it would be advisable to submit petitions as early in the process as possible.

Several countries have expressed their displeasure with the imposition of these additional duties and intention to take action of their own. Likely actions range from challenging the U.S. duties at the World Trade Organization (a process that would take years), to imposing duties of their own. The duties of their own could take the form of “safeguard” duties to combat a likely increase in imports of steel and aluminum, as product that had previously been going to the United States seeks new markets, or retaliatory duties imposed on politically-sensitive imports from the United States (e.g., agricultural products, coal, motorcycles, bourbon, blue jeans).

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Brief Review of the Newly Revised Chinese Anti-Unfair Competition Law

On 4 November 2017, the Anti-Unfair Competition Law of the People’s Republic of China (the AUCL) was amended for the first time since its promulgation and implementation 24 years ago in 1993, and the revised AUCL (the Revised AUCL) came into effect on 1 January 2018. Since announcing the proposed revision of the AUCL, there have been heated discussions, especially within and amongst intellectual property related industries and professionals. The revisions to the AUCL reflect changes to and developments in the socialist market economy over the past two decades, and specifically seek to refine legal concepts in the area of anti-unfair competition law, increase the legal responsibilities of business operators and strengthen enforcement measures, so as to create a more advanced anti-unfair competition system.

As the amendments to Article 2 (on the scope of applicability of the AUCL), Article 6 (on “confusing behaviors”), Article 9 (on trade secret violations) and Article 12 (on unfair competition activities committed on the internet) are particularly worthy of note, the abovementioned amendments will form the subject of the discussion below.

I. Article 2 of the Revised AUCL – refinement of its scope and clarification that it operates as a “catch all” provision

In practice, Article 2 of the AUCL was often used as a general catch-all provision, and played an important role in “catching” new or atypical acts of unfair competition.

In a draft revision of the AUCL, attempts were made to clarify the applicability of Article 2. Originally, draft Article 15 provided that with regard to behavior which has a serious adverse impact on the competitive environment and in respect of which the applicability of Article 2 falls to be considered, the Administration for Industry and Commerce under the State Council shall, independently or together with relevant departments under the State Council, investigate and render an opinion on whether the act should be regarded as an act of unfair competition, and report the same to the State Council for its decision. However, as such an amendment would increase uncertainty and the difficulty in applying Article 2, draft Article 15 was not adopted. Instead, Article 2 was revised, and Article 17 included to confirm that legal liability will attach to all acts of unfair competition which compromise the legitimate rights and interests of business operators. Such amendments enlarge the scope of Article 2, and in the eyes of many academics and practitioners, confirm that Article 2 of the Revised AUCL is a general provision that can be directly relied upon.

II. Article 6 of the Revised AUCL – clarification of the term “confusing behavior”

1. Meaning of “confusing behavior”

Article 6 of the Revised AUCL replaces Article 5 of the AUCL, and no longer includes paragraphs (1) and (4) in Article 5. As a result of the amendments, “counterfeiting another’s registered trademark” and “forging or fraudulently using quality marks on goods, or geographical indications, so as to mislead consumers as to the quality of the goods” will no longer be considered acts of unfair competition. The deletions aim to clarify the boundaries between, amongst other laws, the Revised AUCL, the PRC Trademark Law and the PRC Product Quality Law.

Further, the revised Article 6 elaborates on the meaning of “confusing behavior”. Behaviour is only “confusing” if it is or is likely to be misleading in that it causes or is likely to cause another to misidentify the source of the goods or to mistakenly believe that there exists some sort of connection between the goods and the brand owner. Under Article 6, there are four types of “confusing behavior”, the first three of which are deemed to have the effect of misleading people in the abovementioned manner: (1) using or copying the name, packaging or decoration of another’s famous goods, (2) using another’s trade name, (3) using another’s domain name, website name or any other name in the internet context, and (4) other confusing behaviors. Type (4) is a residual open-ended category and would catch for instance the use / copying of the overall appearance of another’s goods, the names and colour schemes used in the marketing of another’s goods etc., provided that confusion can be established.

Additionally, previously, Article 5 required the “name, packaging and decoration of famous goods” to have achieved “well-known status” under sub-section (2) of paragraph 1 before they could be afforded protection, whereas this “well-known status” requirement did not apply to other names, such as trade names (though a Supreme People’s Court interpretation stipulated that only those trade names that are known to the relevant public and enjoy a certain degree of fame could be afforded protection). Now, instead of imposing a “well-known status” requirement, Article 6 of the Revised AUCL imposes a “certain degree of influence” requirement, which extends to all types of names. Such amendment is logical as it is only when names, indications etc. have achieved a certain degree of influence and are familiar to the public that confusion can arise.

The “certain degree of influence” requirement sets a lower threshold than the “well-known status” requirement. For further guidance as to what the “certain influence” requirement entails, reference can be made to Article 32(1) of the PRC Trademark Law (re prior use of trademarks with a certain degree of influence), and the way in which the provision has been applied in practice.

2. Stipulation of the legal consequences for engaging in confusing behavior and provision for harsher administrative penalties

Article 18 of the Revised AUCL clearly stipulates the potential legal consequences that could follow from violating Article 6, including an order to cease the infringing acts, a confiscation order in respect of the infringing commodities, and/or administrative fines. Article 18 also increases the maximum amount of administrative fines that can be imposed, from up to three times the amount of the illegal turnover to, if the illegal turnover is greater than RMB 50,000 (approx. USD 7,400), up to five times the amount of the illegal turnover, and if the illegal turnover is less than RMB 50,000 or if no illegal turnover is generated, up to RMB 250,000 (approx. USD 37,000).

3. More practical legal measures to correct confusing trade names

In practice, some enterprises take advantage of loopholes in the trade name registration system to register another’s registered trademark or trade name as one’s own trade name. Such registrations easily cause consumer confusion and infringe upon the lawful rights of prior right-holders.

Article 58 of the PRC Trademark Law, which came into effect on 1 May 2014, provides that: “Where one uses another’s registered trademark or unregistered well-known trademark as or in one’s own trade name in a manner that misleads the public and results in unfair competition, such matter shall be handled in accordance with the PRC Anti-Unfair Competition Law.” Article 6(2) of the Revised AUCL corresponds with Article 58 of the PRC Trademark Law.

However, prior right-holders often face problems enforcing administrative and judicial decisions, mainly because the current legal regime requires the infringing entity registering or using the prior right-holder’s name to be the one to change or deregister the infringing trade name, and in many cases, the infringing party refuses to cooperate. Article 18(2) of the Revised AUCL aims to rectify this legislative shortcoming by providing that: “Where a registered trade name is in violation of the provisions of Article 6, the registrant shall apply for a change of name in a timely fashion. Before the change is effected, the original enterprise registration authority shall replace the registrant’s name with its uniform social credit code”. This provision for the first time clearly stipulates in legislation specific administrative corrective measures that are to be taken to combat inappropriate trade names, which will be of help in the fight against copycat brand names.

Having regard to this change, prior right-holders should, when they initiate civil litigation against infringing parties, request the infringing party to change its trade name, rather than deregister its infringing trade name. Otherwise, the administrative authorities responsible for effecting the name change may refuse to cooperate on the basis that the court decision requires deregistration instead of modification.

As mentioned above, under the Revised AUCL and other relevant regulations, prior right-holders can require the original enterprise registration authority to replace the infringing party’s trade name with its unified social credit code on the State Enterprise Credit Information Disclosure System if the infringing party refuses to change its trade name. However, even if the original enterprise registration authority replaces the infringing party’s trade name with its unified social credit code, it remains to be seen what would happen if the infringer continues to use the infringing trade name. The infringer may still possess and use its business licence and other certificates listing the infringing trade name, and the administrative management authorities will need to issue additional regulations to address this issue.

III. Article 9 of the Revised AUCL – trade secrets

The Revised AUCL broadens the definition of “trade secrets”, from one which requires the secret to have “practical value” to: “… technical information or business information which is unknown to the public, has commercial value and in respect of which the right owner has taken corresponding measures to ensure its confidentiality.”

Additionally and more importantly, the Revised AUCL makes provisions for third-party infringement in cases where the proprietor of the trade secret is the employer of the trade secrets infringer. Under the Revised AUCL, a third party will be held to have infringed upon a proprietor’s trade secret if the third party was aware that the proprietor’s employee or ex-employee, another organization or an individual had obtained the trade secret through illegal means. This is a commendable improvement as it increases protection of employers’ trade secrets and deters third-party infringement.

Another important change is the increase in penalties for violating trade secrets. Under Article 17 of the Revised AUCL, the maximum statutory compensation payable in civil cases is now RMB 3 million (approx. USD 441,000), up from RMB 1 million (approx. USD 147,000). Furthermore, administrative penalties have increased under Article 21 of the Revised AUCL, and parties who have violated trade secrets are now liable to be punished with fines of between RMB 100,000 and RMB 500,000 (approx. USD 15,000 to USD 74,000), or between RMB 500,000 and RMB 3,000,000 (approx. USD 74,000 to USD 441,000) in serious cases. Finally, the revised law requires authorities to maintain the confidentiality of trade secrets during investigation.

IV. Article 12 of the AUCL – addition of new provisions on internet related unfair competition activities

With the continuous development of social and economic conditions as well as the internet in China, a large number of cases in respect of internet related unfair competition activities have arisen. Previously, the good faith principle under Article 2 of the AUCL was often used by courts in such cases. However, Article 12 of the Revised AUCL now specifically addresses unfair competition activities conducted on the internet, which are specified to include (1) inserting links to a network product or service offered by another without that other’s consent, which, when clicked on, automatically redirect the user to pages of other targets; (2) misleading, deceiving or forcing users to revise, shut down or uninstall a network product or service offered by another; (3) maliciously making a network product or service offered by another incompatible with one’s own products or services, and (4) engaging in any other act that interferes with or sabotages the normal running of a network product or service offered by another.

Article 12(1) to (3) is a codification of recent important court decisions, such as Baidu v Qihoo (the flagging search results and hijacking traffic case) ((2014) Min Shen Zi No. 873) and Tencent v Qihoo (the “Kou Kou Bodyguard” case) ((2013) Min San Zhong Zi No. 5). As an exhaustive list cannot comprehensively capture every act of unfair competition committed on an evolving internet with constantly changing technologies and business models however, Article 12(4) was also included to serve as a catch-all provision to cover unforeseeable internet cases.

In terms of the penalties that can be imposed for engaging in acts of unfair competition on the internet, Article 24 of the Revised AUCL sets out the administrative penalties. In respect of civil liabilities, unlike Article 6 (re engaging in confusing behavior) and Article 9 (re violating trade secrets), the newly Revised AUCL does not set out a statutory compensation scheme for violations of Article 12, and in previous unfair competition cases involving the internet, courts have awarded compensation of up to RMB 5 million (approx. USD 735,000) (e.g., Tencent v Qihoo “Kou Kou Bodyguard” case)

In sum, the newly Revised AUCL provides more specific guidance on what constitutes “confusing behavior” and an act of unfair competition on the internet, and also adopts broad descriptions and catch-all provisions to address new forms of unfair competition in the market. Additionally, the AUCL increases penalties for specific acts of unfair competition and provides for more practical remediable measures to be adopted. These provisions will help maintain market order and the competitive environment, and safeguard the legitimate interests of business operators. We await application of the relevant provisions and measures by way of administrative and judicial enforcement, to further clarify the meaning and applicability of provisions of the Revised AUCL.

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UK: “Adequate procedures” and self reporting under the spotlight as jury rejects Section 7 defence

A UK refurbishment contractor has been found guilty under Section 7 of the UK Bribery Act 2010 (the “UKBA”) for failure to prevent bribery. The case represents the first time that a jury has considered an “adequate procedures” defence under the UKBA and provides a timely reminder to companies of the risks of self reporting offences under the UKBA to the UK authorities.

An Act not to be taken lightly

Skansen Interiors, a small-scale UK based refurbishment company, was charged under Section 7 of the UKBA (failure to prevent bribery) in relation to allegations that Skansen’s former managing director paid bribes to secure refurbishment contracts worth £6 million. As well as filing a suspicious activity report with the UK National Crime Agency, Skansen voluntarily self reported the conduct to the City of London Police and co-operated with the police’s investigation. The UK Serious Fraud Office (the “SFO”) encourages companies to self report misconduct, potentially in return for more lenient treatment, including a Deferred Prosecution Agreement (a “DPA”). There have been four such DPAs agreed with the SFO to date, but none have been agreed with the Crown Prosecution Service (the “CPS”).

Despite the decision to self-report and cooperate, the CPS pursued a Section 7 charge against Skansen and separate charges against the two individuals involved. Section 7 of the UKBA holds companies strictly liable for failing to prevent bribery by those associated with them.

At trial, Skansen sought to argue that the policies and procedures it had in place at the relevant time satisfied the “adequate procedures” defence available under Section 7(2) of the UKBA. It is a full defence to a Section 7 charge for an organisation to prove that, despite a particular case of bribery, it nevertheless had adequate procedures in place to prevent persons associated with it from paying, offering or giving bribes. In particular, Skansen’s defence sought to draw to the jury’s attention the company’s modest size (a workforce totalling approximately thirty) and limited geographical reach to argue that the company did not need sophisticated procedures to be in place for them to be “adequate”. Skansen also argued that staff did not need a detailed policy to tell them not to pay bribes because such a prohibition was common sense and the company should be able to rely on the integrity and honesty of its employees to help avoid bribery. Skansen also sought to rely on broadly worded policies that enforced ethical conduct even though, at the relevant time, it had no specific anti-bribery policy. Existing financial controls, requiring transactions to be given the green light by numerous individuals and standard form clauses relating to bribery in contracts were also raised in support of the case for the defence.

However, this was not enough to convince the jury that the company’s procedures were adequate and a guilty verdict was returned. The company avoided a financial sanction by virtue only of its dormant status, which had left it without any funds to pay any fines which may have been forthcoming.

A warning to all

Although Skansen was a small, UK based company, the facts of this case are of importance to all companies operating within the jurisdiction of the UKBA.

First, although this case did not involve a self report to the SFO, it serves as an important reminder to all companies that self reporting misconduct to the UK authorities does not guarantee that a company will not be prosecuted for that misconduct. Even if a company fully investigates allegations of misconduct, self reports to the authorities, and co-operates fully with any ensuing investigation, the UK authorities may still determine that the company and/or any culpable individuals should be prosecuted. The SFO have made it clear on a number of occasions that offering DPAs will not become the default method of dealing with corporate wrongdoing. Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts. As a result, the decision whether or not to self report suspected wrongdoing is a very fine balance to strike and is a decision that should be taken with the benefit of specialist advice after consideration of all relevant factors. The SFO’s guidance on self reporting can be found here.

Second, the case provides an insight into what factors may and may not be taken into account by a jury when considering whether anti-bribery procedures are “adequate”. The Ministry of Justice guidance accompanying the UKBA repeatedly makes clear that adequate bribery prevention procedures only need to be proportionate to the bribery risks that an organisation faces. More specifically, the guidance notes that if an organisation is small or medium sized “the application of the principles is likely to suggest procedures that are different from those that may be right for a large multinational  organisation” and that “[t]o a certain extent the level of risk will be linked to the size of the organisation and the nature and complexity of its business, but size will not be the only determining factor.” Clearly in this case the jury did not consider that the steps Skansen had taken to prevent bribery were adequate, despite the small size of the company and its limited geographical reach. The case therefore serves as a reminder to small and medium sized companies to ensure that a rigorous risk assessment is conducted in relation to bribery risks and robust procedures are in place to deal with those risks that comply with the six guiding principles set out in the Ministry of Justice’s Guidance. That guidance can be found here. The case also highlights the importance of documenting steps taken to implement “adequate procedures”, irrespective of the size of the organisation, even if the conclusion is that there is no need for a policy (although that conclusion is likely to be rare for most companies). For all companies, large and small, the case suggests that, when it comes to considering adequate procedures, juries will give short shrift to ineffective policies and procedures that are not designed to target the considered bribery risks faced by the company and/or are not properly documented and communicated.

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UK Product Recall Code of Practice Launched

7 March 2018 saw the long-awaited public launch of the UK Government’s new
Code of practice on consumer product safety related recalls and other corrective
actions (the “Code”). A copy of the Code can be obtained here and a link to the BEIS
press release is here.

Preparation of the Code was one of the recommendations of the UK Government’s Working Group on Product Recalls and Safety (see further our alert here), was sponsored by the Department of Business Energy and Industrial Strategy (“BEIS”) and was facilitated by the British Standards Institute (“BSI”). Baker McKenzie partners John Leadley and Kate Corby, supported by Senior Associate Jo Redmond, participated in the drafting committee and summarise below the key messages of the Code.

COVERAGE AND SCOPE

The Code is informed by behavioural insights research and sets out best practice guidance for both businesses (in Part One) and regulators (in Part Two) alike concerning effective monitoring, assessment, notification and correction (including recall if needed) of product safety issues. The Code applies to all sectors that are not otherwise covered by alternative sectorspecific national guidance (such as food, medicines, medical devices and vehicles). It is intended for use by all business sizes, from small companies right up to large multi-nationals, and for both B2C and B2B entities. The Code assumes that businesses placing products on the market have already addressed their responsibility to supply only safe products and guidance on this requirement is therefore not included. However, Annex A to the Code, contains a summary of important aspects of the regulatory context and potential strict liability for defective products.

The advice for businesses focuses first on planning: how can a business best prepare itself to react to a situation where one of its products is or becomes unsafe?

Detailed consideration is given to what information should be included in a product safety incident plan (“PSIP”), how that should be communicated throughout the business and who is accountable for it. Key topics for businesses to consider when preparing a PSIP (or evaluating an existing one), include:

  1. understanding where all component parts come from and ensuring that traceability records up and down the supply chain are clear and up to date; and
  2. having in place detailed plans to cover:
    • monitoring to enable the swift identification of product safety-related trends;
    • risk assessment and root cause analysis processes;
    • legal notification requirements
    • internal and external communications; and
    • corrective action decision-making.

Having a thorough, up to date and widely understood PSIP will assist a business with responding quickly to a product safety issue and, assuming the PSIP is implemented correctly, that reflex will directly benefit consumers by ensuring that the risk of harm to them is understood and appropriate measures taken promptly to address that risk.

MANAGING A CORRECTIVE ACTION

The primary concern of any business when reacting to a (potential) safety issue must be addressing the risk of harm to consumers. The Code provides useful guidance on how to do so by implementing a corrective action plan, which will of course need to be tailored to effectively deal with the particular facts and challenges of each safety issue.

For example, the Code provides guidance on developing an effective communications plan, as well as a suggested contacts list. Successful communication with consumers is a fundamental component of an effective corrective action plan, and the lengthy guidance in the Code reflects this. The Code also sets out the fundamentals of a legal notification plan and encourages businesses to make sure that relevant regulators are brought into the picture at an appropriate and early stage.

Taking all of these elements together, the Code includes a helpful flow-chart of a “typical corrective action sequence” and provides guidance on what corrective action might be appropriate in a given scenario. The Code also provides guidance on how to conclude your corrective action and a framework for considering what lessons can be learned from an incident to further improve future reaction to a safety issue.

ADVICE TO REGULATORS

Part Two of the Code covers best practice on how regulators can:

  1. effectively monitor incidents and analyse the associated data;
  2. support businesses in: (i) the preparation of their PSIP, (ii) monitoring of incidents and (iii) implementing appropriate corrective action; and
  3. respond proportionately if a business fails to take proper action in response to a safety

The Code also describes the regulatory framework, setting out the roles and responsibilities of the relevant entities that have a regulatory responsibility for consumer product safety. It then lists considerations applicable to how market surveillance authorities can ensure their staff are equipped to perform the role required of them and what data feeds in to the decisions they will have to make in the course of their duties.

Annex C of the Code sets out a checklist for assessing a PSIP, which we expect regulators may use as a framework for discussions with businesses about the Code.

COMMENT

Provision of government endorsed practical and granular guidance of this nature which sets out the Government’s expectations of businesses and regulators should only be viewed as a positive step forward. We understand that BEIS intends the Code essentially to be seen as mandatory, and will be expecting businesses in sectors covered by the Code to follow it. The Code also provides useful insight into what guidance regulators will be expected to follow in this context.

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Argentina: New Law on Corporate Criminal Liability approved

The National Congress finally approved the Law on Corporate Criminal Liability (the Law) for corruption offenses.

Criminal offenses listed by the Law

Legal entities may be sanctioned for the following corruption offenses:
(i) national and transnational bribery and influence peddling, (sections 258 and 258 bis Argentine Criminal Code – “ACC”);
(ii) improper and unlawful transactions of public officials (section 265 ACC);
(iii) illegal exaction committed by a public official (section 268 ACC);
(iv) illicit enrichment of public officials and employees (section 268, subsections 1 and 2 ACC); and
(v) false balance sheets and reports (section 300 bis ACC).

Criminal Liability of the Company

According to the Law, legal entities will be responsible for the offenses above detailed committed with their intervention, or in their name, interest or benefit.

The legal person will not be prosecuted if the individual acted in its exclusive benefit with no profit for the company.

The Law also establishes the responsibility of the companies originated from mergers, acquisitions, or any other reorganization process.

Statute of limitations

The Law provides for a special statute of limitations of 6 years to initiate the criminal action, regardless of the statute of limitations that each above-mentioned offenses establish for the authors and accomplices.

Penalties

The penalties provided by the Law for legal entities include fines of up to five times the improper benefit obtained; the suspension of commercial activities; special disqualification to participate in public tenders or bids; loss or suspension of governmental subventions, among others.

The penalties will be imposed considering their compliance program; the surveillance omission; amount of money involved; size and economic capacity of the company; and the spontaneous reporting of such offenses as a result of early detection or internal investigation.

If the company complies with (i) spontaneous denounce of the offense, (ii) implementation of an adequate compliance program and (iii) the return of the illegal benefit obtained as a result of the offense, will be exempted of liability and administrative consequences.

Adequate Compliance Program

The Law establishes guidelines for the judge to consider while imposing penalties to the legal entities, such as the level of control and supervision that each company adopted, through implementing an adequate compliance program, which should be prepared considering the specific risks of their commercial activity, their size and economic capacity. Such compliance program should contain, at least, the elements detailed in section 23 of the Law.

Application of the Law

The Law will not be applied retroactively to offenses that occurred prior to its enactment. The ACC would now be applicable to transnational bribery committed abroad by an Argentine citizen and/or legal entities domiciled in the country.

Aggravated penalties for corruption offenses

The Law establishes new additional penalties (fines) for corruption offenses, as incorporates fines from 2 to 5 times the undue benefit obtained.

Promulgation and entry into force

The Law will be effective after 90 days counted as of its publication in the Official Gazette.

Companies should seek the implementation of necessary measures to prevent, detect and alert the authorities about the commission of corruption crimes in their company.

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Indonesian Competition Commission Forced to Announce Shut Down of its Operation

In the last couple of days, we have been seeing extraordinary developments in the long-running process of the appointment of new members of the Indonesian Competition Commission (Indonesian acronym: KPPU). On 27 February 2018, the KPPU issued a press release to the effect that effective on 28 February 2018, the KPPU is being shut down. This development is due to the House of Representatives not being able to complete its selection of new Commissioners for the President to appoint before the term of the current Commissioners was due to expire on 28 February. It appeared that the President was not able to extend the terms of the current Commissioners in time to cover until the new Commissioners could be appointed. However, on 28 February, we learned that the President has signed a Decree extending the terms of the current Commissioners until 27 April 2018 or until new Commissioners are appointed.

A shutdown of the KPPU would mean that the KPPU will cease accepting merger filings and cease processing all submitted filings. Merger filings that have entered the substantive review phase would be suspended. Likewise the KPPU would suspend all of its investigations and Court appeals. This obviously would cause delays to businesses that are dealing with KPPU and increase uncertainty for parties that are facing KPPU investigations or appealing KPPU decisions.

While today we learned that the KPPU is resuming operation, the potential for shutdown in the future remains, considering that the extended term of the current Commissioners is for two additional months only. It is not clear that the House of Representatives would be able to complete its selection of new Commissioners by then.

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UK: Privilege in Internal Investigations

Our Compliance & Investigations team identified six aspects of any investigation that you will need to consider carefully in light of the recent Bilta judgment, summarised in our infographic.

We wrote a post earlier this month on the decision in Bilta (UK) Ltd v Royal Bank Of Scotland Plc & Anor in which the Chancellor of the High Court confirmed that, given the right set of facts, it remains open to parties to claim litigation privilege over documents created during an internal investigation conducted against the backdrop of a criminal investigation. This represented a different approach to that taken in SFO v ENRC, a decision which casts doubt on the extent of protection available under litigation privilege in those circumstances. Our report on the ENRC decision is available here.

Background

The substantive proceedings involve a claim by liquidators against RBS for its alleged role in a wider missing trader intra-community fraud (“MTIC Fraud“) in 2009. The fraud was said to have involved companies trading in European Union Allowances, or “carbon credits”, failing to account to HMRC for the VAT which accrued on those trades and, instead, paying their VAT receipts to third parties before going into liquidation. Some of the trades in question had been executed by representatives of RBS and the liquidators have now alleged that, in doing so, RBS wilfully shut its eyes to what was an obvious fraud.

In late 2009, HMRC commenced an investigation into the alleged MTIC Fraud. Part of that investigation included a verification of purportedly fraudulent trades that had involved RBS and in relation to which RBS had reclaimed VAT repayments from HMRC as input tax. RBS cooperated with HMRC’s investigation throughout 2010 and 2011. On 29 March 2012, HMRC wrote to RBS to inform it that HMRC considered there to be sufficient grounds to recover c. £90 million of input tax from RBS and, in response to that notice, RBS commissioned its own internal investigation into the alleged fraud. That investigation culminated in a report that was in 2014 provided to HMRC “to assist with an investigation into the factual circumstances surrounding the onboarding of and trading relationship with [five emissions trading counterparties]”.

RBS’ Investigation Documents and Litigation Privilege

In Bilta, an application was made for disclosure of the documents created by RBS in the course of its internal investigation into the alleged MTIC Fraud (the “Investigation Documents“). RBS’ position was that the Investigation Documents (as opposed to the final report submitted to HMRC) were protected from disclosure by litigation privilege.

It was common ground between the parties that the Court should apply the test set out in Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] AC 610 to determine whether RBS was entitled to its claim of litigation privilege. Three Rivers provided that, for a party to be able to claim litigation privilege, the following three criteria must be satisfied:

  1. litigation must be in progress or in contemplation;
  1. communications must have been made for the sole or dominant purpose of conducting that litigation; and
  1. the litigation must be adversarial, not investigative or inquisitorial.

The parties agreed that limbs (1) and (3) were met for the Investigation Documents. The question therefore was whether the second limb was met – whether the communications were made for the “sole or dominant purpose of conducting that litigation”. In his judgement, Sir Geoffrey Vos concluded that the Investigation Documents were prepared for the dominant purpose of conducting contemplated litigation with HMRC and that limb (2) was therefore satisfied, for the reasons set out below.

When is a communication made for the “sole or dominant purpose of conducting litigation“?

In ENRC, Andrews J had rejected a claim of litigation privilege over investigatory documents on the basis that said documents had been created for the purposes of a report that was to be shared with the SFO in the context of without prejudice discussions and at a time when ENRC’s relationship with the SFO was “collaborative rather than adversarial“. In those circumstances, the investigatory documents could not be said to have been prepared for the sole or dominant purpose of conducting litigation.

The claimants in Bilta relied heavily on the ENRC decision, alleging that the purpose of RBS’ investigation into the MTIC Fraud was not litigious, but rather to supply a full and detailed account of the relevant facts to HMRC and to persuade HMRC not to seek recovery of input tax. Bilta submitted that the Investigation Documents did therefore not meet the second limb of the test set out above.

However, the Court took a different approach on this occasion, noting that “the exercise of determining the sole or dominant purpose in each case is a determination of fact“. With that in mind, Sir Geoffrey Vos commented that one could not “properly draw a general legal principle from [Andrews J’s] approach” in ENRC and advocated a “realistic, indeed commercial view of the facts“. The Judge considered that HMRC’s letter dated 29 March 2012, which confirmed that HMRC viewed that it had “sufficient grounds” to deny RBS’s claim to input tax, was a watershed moment in the investigation. It was akin to a Letter before Claim and RBS’ decision to conduct its own investigation into the matter was to be equated with preparations for a response to a Letter before Claim. It followed that, while RBS’ investigation was conducted in the context of ongoing discussions with HMRC, those discussions were part of the continuum that formed the road to the litigation that was considered, rightly, as it turned out, to be almost inevitable. In those circumstances, RBS’ cooperation with HMRC did not preclude its investigation being conducted for the dominant purpose of litigation.

Comment

Bilta confirms that any claim of litigation privilege over investigation documents needs to be assessed on the specific facts of each case. It may be a comfort for corporates to hear the Chancellor’s view that the controversial ENRC decision should not necessarily be used to draw any general legal principles on this issue. That decision is itself due to be heard by the Court of Appeal in July 2018 and it may be that the approach taken in Bilta is a sign of the direction in which that appeal will be decided. In the meantime, it is important to remember that both are first instance decisions; given the uncertainty around this area, the safest approach will usually be to assume that documents created during an internal investigation will not be protected by litigation privilege.

If the analysis in Bilta is to be favoured over that in ENRC, claims of litigation privilege over investigation documents will face less difficulty with the dominant purpose element of the Three Rivers test. However, if your investigation involves a cross-border element, that in turn raises questions around different jurisdictions’ varying approach to privilege. For example, voluntary disclosure of a privileged document to a regulator or prosecutor in the UK risks constituting a waiver of privilege in the US, not only over the document disclosed but also over other relevant privileged documents dealing with the same subject matter. You can read more here. This disparity in approach to the scope of privilege across jurisdictions requires a nuanced risk assessment at the outset of any cross-border investigation.

The application of litigation privilege in the context of internal investigations remains a tricky area on which corporates should continue to work closely with their legal advisers. In circumstances where an internal investigation spans multiple jurisdictions, each with different approaches to the question of privilege, the issue is more complex still and needs to be approached holistically rather than in isolation under English law. We have developed our thinking in this area in conjunction with our international network of offices and in many jurisdictions we have the benefit of having experienced what works and what doesn’t work in practice. We would be delighted to discuss our thinking and strategy with you.

The full judgment can be read here: Bilta (UK) Ltd v Royal Bank Of Scotland Plc & Anor [2017] EWHC 3535 (Ch).

So what should you be doing now to protect yourself, your team and your organisation while the landscape is unclear?

Click here to access our recent e-alert on the judgment.
Click here for our article on the original ENRC decision on the website Fraud Intelligence.
Click here for the details of our Connected Compliance report.

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South Africa: Catch me if you can

“You can’t fire me, I resign!” sounds like something one of Harvey Spectre’s clients might say. But if your employment relationship is not in Hollywood, but South Africa, what would the legal position be in respect of resignation to avoid dismissal? May an employee resign in the face of disciplinary action to avoid dismissal? The truth will raise even a seasoned scriptwriter’s well-sculpted eyebrow.

Notice periods are inherent in every employment contract. The Basic Conditions of Employment Act (BCEA) prescribes a minimum notice period. Thus, even where there is no written employment contract between parties, the employee may terminate the employment contract by providing the notice prescribed in the BCEA. If the parties agreed to a longer notice period in a written employment contract, the employee has to serve the longer notice period. Of course, where the employee agrees to work for a fixed period, the contract will typically provide that the employee may not give notice (resign) prior to the expiry of the fixed term.

This becomes very relevant when the employer initiates disciplinary action against the employee and the employee seeks to avoid having his or her employment terminated by means of dismissal. In a country with a 27% official unemployment rate, finding a job is difficult: finding a job with the tag of having been dismissed from your previous employment is nigh impossible. An employee facing a hearing could thus resign with the hope of avoiding the disciplinary enquiry.

Employers feeling strongly that the reason for termination should reflect “dismissal” rather than “resignation” would typically continue with the disciplinary hearing during the notice period, even where the employee plays truant or refuses to participate. Thus, provided the employer could wrap up the hearing before the end of the notice period, it could dismiss the employee even where the employee had resigned.

But what happens when the employee does not serve out the notice period? The employment contract provides that the employee must give the contractual notice to resign. If the employee fails to serve notice, the employee would be in breach of the employment contract. As many often forget, the employment contract – though clothed with notions of equity and fairness and infused with the common law and supplemented with statutory rights – is still a contract. If one party to the contract breaches it, the other may exercise its right on how to deal with such a repudiation. It can either accept the breach and sue for damages or approach a court for an order of specific performance (asking the court to order the other party to do what it agreed to do in the contract). However, considering that specific performance would mean that a court forces an employee to continue working for an employer, our courts are reluctant to order specific performance against an employee where the employee breached the contract.

Forcing employees to work against their will sounds a lot like slave labour, even when they get paid for their labour. In select circumstances our courts have been willing to order employees to return to work and serve out their notice periods or the remainder of their employment contracts. For example, in cases where an airline could not readily replace a pilot who otherwise would have to serve a three-month notice period, or where a football coach did not want to stay bound to a fixed-term contract in order to take up a position with another club. In both instances, the court agreed that it could make an exception to the general apprehension to force an employee to continue an employment relationship.

But, in Mtati v. KPMG Services (Pty) Ltd (2017) the court went one step further. It held that the employee terminated the employment relationship when she resigned, notwithstanding the fact that she did not serve the requisite notice period. The court concluded that once the employee resigns, even without notice, her status changes from being an employee to an erstwhile employee. In this case, the court interdicted the employer from proceeding with the hearing and dismissing the employee. An employee could thus assail an adverse finding in a hearing and exit an employment relationship as having resigned rather than being dismissed.

It remains conceivable that an employer may approach the court, on an urgent basis, to interdict an employee’s resignation and obtain an order holding the employee to the contractual notice period. It is difficult to conceive those facts that will cause a court to agree that the employer will suffer irreparable harm, warranting the court interdicting the resignation to allow the disciplinary hearing to be concluded. The upshot of the law as it stands is that we are likely to see more employees opting to resign rather than stay and face the music when confronted with allegations of misconduct.

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DPAs Coming to Canada

The Canadian government has announced the results of its public consultation on corporate criminal wrongdoing and enforcement, which received written submissions from businesses, individuals, NGOs, and law firms, including Baker McKenzie. The government revealed that a majority of participants in the consultation process favoured the implementation of a deferred prosecution agreement (DPA) option for Canadian prosecutors dealing with corporate criminal misconduct. As a result of the consultation, the government announced its intention to introduce a DPA system in Canada, which will bring us in line with key trading partners, including the U.S., U.K., and Australia as we move toward a globalized enforcement environment. As we have written since 2014 (herehere, and here), Canada is long overdue for a robust DPA system with appropriate judicial oversight, which, when employed in the right circumstances, will serve as a much needed tool in Canada’s efforts to combat corporate misconduct and to encourage self-reporting, compliance and good governance. The specifics of the DPA legislation are yet to be announced, however the government’s statement indicates that Canadian DPAs will be implemented, as we have advocated, with judicial supervision, similar to that of the U.K. regime. Stay tuned for more insights and analysis as the details of the DPA legislation begin to take shape. Baker McKenzie has been involved in the successful negotiation, implementation, and monitoring of DPAs in other jurisdictions resulting from multi-jurisdictional internal investigations. Please contact us if you have any questions.

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Australia: ACCC’s Enforcement and Compliance Priorities for 2018

The ACCC has now released its enforcement and compliance priorities for 2018. Below is a brief summary of the key highlights.

Cartel prosecutions will continue to be an area of focus

Cartel prosecutions will be squarely in focus during 2018, with the ACCC noting that it has five current referrals with the Commonwealth Director of Public Prosecutions and a number of investigations that are at an advanced stage. The following cases are expected to be heard this year:

  • criminal proceedings against Japanese shipping company K-Line for alleged cartel conduct concerning the shipping of cars, trucks and buses into Australia;
  • criminal proceedings against Country Care Group, its Managing Director and a former employee for alleged cartel conduct involving assistive technology products used in rehabilitation and aged care. This is the first time that individuals have been prosecuted under the Australian criminal cartel provisions;
  • proceedings against four companies and three individuals for alleged cartel conduct in relation to the supply of polycarbonate roof sheeting to retailers in Australia; and
  • the ACCC’s appeal in its case against PZ Cussons for alleged cartel and anti-competitive conduct involving the supply of ultra-concentrated laundry detergent.

The ACCC is also awaiting judgment on its appeal in respect of misuse of market power and exclusive dealing proceedings brought against Pfizer in relation to the supply of atorvastatin to pharmacies.

Anti-competitive conduct: industry priorities

The ACCC said that anti-competitive conduct in the construction, financial services, agriculture and energy sectors will be under scrutiny in 2018.

On 16 November 2017, the ACCC announced the establishment of a Data Analytics Unit to help identify and enforce competition laws in relation to the use of artificial intelligence and machine learning in price-fixing. This new unit will work with the ACCC’s investigation teams and economists and is expected to be deployed in a number of market studies across different industry sectors.

Consumer protection

ACCC announced that it will also focus on:

  • consumer issues in the automotive industry, following the release of its new car retailing study in late 2017 and its ongoing investigation into the Takata airbags recall;
  • consumer issues in the provision of broadband services, including addressing misleading speed claims and statements made during the transition to the NBN;
  • competition and consumer issues arising out of the use of digital platforms, with a focus on concerns arising out of its current digital platforms inquiry; and
  • product safety, including for consumers in the online marketplace.

The ACCC’s proceedings against NIB Health Funds and its appeal in the case against Medibank Private (both of which involve allegations of misleading or deceptive conduct and unconscionable conduct) are expected to be heard this year. The ACCC is also appealing the Federal Court’s decision in proceedings against LG Electronics for alleged misleading representations made to certain consumers about their right to a repair, replacement or refund for faulty televisions.

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