Australian Regulatory Compliance Review

Employee share schemes

Employee share schemes (or an Employee Share Ownership Plan (ESOP)) have become popular. What are the regulatory issues to consider?

Under Division 13A of the Income Tax Assessment Act 1936 (Cth) a company can establish an ESOP to invite eligible employees to purchase company shares through a tax effective salary sacrifice contribution plan (up to a maximum of $1000 pa).

The ESOP must be operated on a non-discriminatory basis within the meaning of sections 139CE and section 139GF of the Income Tax Assessment Act.

Shares acquired under the ESOP will be subject to a holding lock. Under the holding lock participants will not be permitted to dispose of shares acquired under the ESOP until the earliest of:   

•    the third anniversary of the acquisition date, or such other time as may be determined by the Board subject to the satisfaction of the exemption conditions set out in section 139CE; or   
•    the date the participant ceases employment within the meaning of subsection 139CE(5).

Disclosure and licensing obligations
ASIC Class Order 03/184 and its Policy Statement 49, discuss relief for ESOP’s from the Corporations Act share offer disclosure requirements and financial services licensing and anti-hawking obligations.

The underlying concern of ASIC in this area is balancing the promotion of employee-employer long term benefit with ensuring both adequate protection of employees and that the purpose of the offer of shares is participation not fundraising [PS 49.3 – PS49.5].

PS 49 states that there are three key conditions that must be met for this conditional relief to be granted (in addition to other conditions regulating contribution plans and the use of a trust structure):
• The aim of an ESOP offer is not to be one of fundraising [PS 49.32] – this policy is given effect by a limit of 5% on the number of shares that can be issued under an employee share scheme;
• There must be mutual interdependence [PS 49.37] – the nature of the employee-employer relationship, rather than the coverage of the ESOP scheme, will be considered on a case-by-case basis; and
• There must be adequate disclosure [PS 49.41] –disclosure relief will apply only where the shares offered to employees are in a class listed on the ASX or an approved foreign exchange. In addition, at the time of the offer the issuing corporation generally must have been listed for at least 12 months [PS 49.42]. In some exceptional circumstances ASIC may grant case-by-case relief to reduce the 12-month requirement [PS 49.43].

Taxation concessions
To meet the definition of a ‘qualifying plan’, an ESOP must involve:
• The acquisition of options or ordinary shares in the employer company;
•     The employee must not (directly or indirectly) hold or control more than 5% of the shares in the employer company; and
• The scheme must be offered to at least 75% of permanent employees.

If a plan qualifies, then the employee may elect to obtain either a $1,000 assessable income tax reduction or to defer tax liability on the shares/options for up to 10 years.

UPDATE 29 May 2007: new article

UPDATE 21 June 2007: Corporations Act changes

Reviewing your compliance programs

As Commonwealth Parliament is in recess until 6 February 2007 now is a good time to review your compliance programs, do some audits and some training.

So where do you start?

Why not start with a quick check of the laws that apply to you to make sure you haven't missed anything.

Then let's look at the fundamentals to see that you in fact have policies and procedures:

• trade practices
• privacy
• workplace relations
• occupational health and safety
• outsourcing contracts
• corporate governance
• website compliance
• marketing
• anti-money laundering
• FSR (if applicable)
• insider trading (if applicable).

Then let's do some random checks at all levels to look at compliance.

If you identify some gaps (hopefully non-material), fix them up and organise some appropriate training.

Of course, how you do this will vary with your type of business and the size of your organisation but the principles are the same: design a continuous program  that allows someone in your organisation to have an overview of compliance obligations and how they are satisfied.

Be able to document your systems and the way in which you test your systems and measure compliance.

Train your staff (both existing and new recruits) and keep up to date: don't assume anything!

Protecting customer data: a compliance essential as well as a competitive advantage

Customer privacy is no longer just an add-on for businesses; protecting confidential confidential information is now an essential part of anti-money laundering and counter-terrorism financing programs as well as a key factor in customer attraction and retention.

According to strategy + business, in the United States a proposed law would require that companies with at least 10,000 digital files on individuals design a security system to protect sensitive records from unauthorized access. In addition, these companies would have to publish their data privacy procedures and conduct routine audits to evaluate vulnerabilities. Failure to follow these rules would result in fines and possible federal prosecution.

Customer privacy is much more than keeping customer information private. It also means knowing your customer and keeping customer information secure.

Security is proving to be increasingly difficult not because of hackers but because data is so portable.

Every week businesses are reporting missing computers and data: laptops have been stolen or CD's or memory sticks containing thousands of customer files have been misplaced. And computer files are not encrypted.

Or physical files are lost between offices and storage centres.

Customer privacy has now become customer security.

Trade Practices Act

The Treasurer has announced that the amendments to the Trade Practices Act made by Trade Practices Legislation Amendment Act (No. 1) 2006 will commence from 1 January 2007.

The Act implements the Government’s response to the Review of the Competition Provisions of the Trade Practices Act (Dawson Review). It creates a voluntary formal merger clearance system, and provides for changes to the existing merger authorisation process. The Act also creates a new collective bargaining notification regime, for the benefit of small business.

The Act makes a number of important changes to existing notification and review processes, makes improvements to the Australian Competition and Consumer Commission’s enforcement powers, and significantly increases the maximum penalty that can be imposed in relation to serious breaches of Australia’s trade practices laws.

Multiplex: ASIC settles continuous disclosure breach

Multiplex has had a well-publicised history of troubles with its construction of the new Wembley Stadium in London.

Recently Maurice Blackburn Cashman announced it has been instructed to commence a class action against Multiplex Limited on behalf of security holders who purchased or acquired an interest in securities in Multiplex between 2 August 2004 and 30 May 2005 (before it announced the extent of cost increases and delays at Wembley).

ASIC has now announced that it has reached agreement with Multiplex that it will set up a  compensation fund providing for a maximum $32 million for those investors affected by the failure of Multiplex to meet its continuous disclosure obligations.

ASIC identified its concern over disclosure related to the 2 February 2005 meeting of the Multiplex Board, where the Board decided to adjust the profit forecast from the Wembley project from £35.7 million to zero. However, this material change in financial position was not disclosed to the market until 24 February 2005.

When the announcement was finally made on 24 February, the Multiplex share price dropped from the 23 February price of $5.57 (Volume Weighted Average Price) to $4.76 (VWAP) on the day of the announcement.

ASIC contended that the Multiplex Board’s decision was price sensitive and should have been disclosed to the market before the commencement of trading on 3 February 2005, immediately following the resolution of the Board at its meeting on the afternoon of 2 February 2005.

In return for compensation, shareholders who accept the offer will waive their right to take any legal action in respect to the issue.

Multiplex says that in the 22 months since the ASIC investigation commenced, Multiplex has made significant advances in restructuring its governance practices and in improving its disclosure practices. During this period, a number of important initiatives have been implemented including changes to the composition of the board and to the senior management team. Multiplex has also introduced a range of new systems and processes including more robust risk management and review procedures.

Privacy Act updated

ComLaw has issued an updated consolidated Privacy Act 1988 up to 13 December 2006.

The publication includes:

• a new Part VIA inserted by the Privacy Legislation Amendment (Emergencies and Disasters) Act that applies to the handling of personal information during a declared emergency or disaster situation; and
• amendments inserted by the Anti-Money Laundering And Counter-Terrorism Financing (Transitional Provisions And Consequential Amendments) Act 2006.

APRA and general insurance

APRA's latest Insight publication (Issue 2/2006) contains an overview of the general insurance industry and the results of APRA's stage 2 reforms for the industry.

Ombudsman comments on banking law and customer issues

The Banking and Financial Services Ombudsman's Bulletin 52 revisits some interesting banker-customer issues that are worth reading including :

• the measure of damages in the case of misleading conduct: there may have been a loss of the opportunity to gain the benefit elsewhere but if the expected benefit was not available in the market, or the disputant would not have been in a position to take up the opportunity elsewhere, there will be no loss (Gates v CML).
• can a bank customer keep money deposited to their account as a result of an obvious error?
  "It is our experience that some bank customers believe that they are entitled to keep money deposited to their account as a result of an obvious error.Although the Monopoly card ‘Bank error in your favour’ may suggest that you get to keep the windfall, in fact the legal position is otherwise.The law in relation to mistaken payments, as between the person who makes the payment and the person who receives it, is clear. The person who receives it is obliged to return the payment unless, in good faith, they have changed their position to their detriment."

Anti-money laundering implementation

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and the Anti-Money Laundering and Counter-Terrorism Financing (Transitional
Provisions and Consequential Amendments) Act 2006 commenced on 12 December 2006 when it received Royal Assent.

The AML/CTF Act will be implemented in stages as set out in section 2.

The AML/CTF Act applies to businesses providing designated financial services and gambling services and bullion dealers ("designated services" is defined in Part 1, section 6).

Austrac will remain the key AML/CTF regulator: it will monitor reporting entities’ obligations and be responsible for undertaking intelligence assessments for Australian government and law enforcement agencies.

The first stage of implementation took effect on 13 December 2006. These provisions include the:

• cross border movements of physical currency and bearer negotiable instruments (Part 4)
•  electronic funds transfer instructions (Part 5)
• register of providers of designated remittance services (Part 6)
• regulations which may prohibit or regulate the entering into of transactions with residents of prescribed foreign countries (Part 9).
• record keeping requirements (Part 10 Divisions 1, 2, 4 and 7): a reporting entity must make a record of a designated service. The reporting entity must retain the record for 7 years.
• Parts 11 to 18 including offences such as the tipping off offences and other general offences in relation to false or misleading information or documents, and general administrative provisions including audit, information gathering and enforcement powers of Austrac.

Remittance services

The first AML/CTF Rules relate to reportable details of movements of bearer negotiable instruments and movements of physical currency, and the AML/CTF Rules regarding the registrable details in respect of the register of providers of designated remittance services.

Next stages

The next stages of implementation will be:

• 13 June 2007—AML/CTF compliance reports (Part 3, Division 5), correspondent banking (Part 8) and records about  correspondent banking (Part 10, Division 6)
  
• 13 December 2007—identification procedures generally including for pre-commencement customers and certain low-risk customers (Part 2 except for Division 6 which will commence on 13 December 2008),AML/CTF programs (Part 7), records of identification procedures (Part 10, Division 3) and records of AML/CTF programs (Part 10, Division 5)   
• 13 December 2008— ongoing customer due diligence (Part 2, Division 6), reporting obligations (Part 3, Divisions 1 to 4 and 6).

Are bribes tax deductible?

Sections 26-52 and 26-53 of the Income Tax Assessment Act 1997, introduced in 2000, deny taxpayers a deduction for bribes paid to foreign or domestic public officials. Deductions may be allowable, however, for facilitation payments under subsections 26-52(3)-(5).

The ATO 2006-07 Compliance Program includes a focus on bribes and facilitation payments.

The ATO has published its guidelines for Tax Office auditors dealing with bribery of Australian and foreign public officials.

These guidelines were developed for ATO auditors and are intended to: 

• set out the key aspects of the law in this area
• provide some practical ways to identify and deal with concealment of bribes
• provide advice on record-keeping and audit techniques where bribery is suspected
• give guidance on how to refer cases were bribery is suspected, and
• provide direction on how to obtain information from Australia's treaty partners.

To ensure that only legitimate expenses are claimed as deductions and legitimate input tax credits are claimed, this year the ATO is: 

• reviewing significant, one-off, regular or embedded payments by Australian businesses to entities in jurisdictions where bribes or facilitation payments are said to be ‘part of doing business’
• checking that businesses with particular international trade profiles have appropriate codes of conduct and systems in place to detect bribes and international facilitation payments, and
• reviewing organisations that do not have appropriate systems in place.