These powers have progressively expanded over the years in response to major corporate collapses and instances of serious corporate misconduct. A recent example is the legislation giving ASIC and the Australian Federal Police (AFP) broad new search powers to investigate insider trading offences.
Equally, as business affairs grow in complexity and sophistication, regulators are opting to use their coercive information-gathering powers more often.
From 2007 to 2010, ASIC issued over 18,500 notices requiring companies and individuals to produce information, attend interviews or provide it with assistance. In the 2009/10 year, the ATO conducted 117 investigations for serious evasion and fraud and used its access without notice powers on 10 occasions.
Operation Wickenby – the joint initiative between the ATO, ASIC, AFP, Australian Crime Commission, Commonwealth Director of Public Prosecutions, Australian Government Solicitor and AUSTRAC aimed at cracking down on tax fraud and offshore tax havens – has driven a large portion of raid activity. As at 31 January 2011, Wickenby investigations alone resulted in 62 people charged, 16 convictions and nearly 2000 completed audits.
Accountants in the spotlight
Most search and access powers can be exercised against persons who, while not the subject of the investigation, may hold information or documents relevant to the offences at issue. This has made accountants, as integral advisers on their clients’ business affairs and custodians of key documentation, prime targets for regulatory raids.
Accountants should therefore ensure they are adequately prepared for a visit from a regulator as mismanagement of the situation can have serious repercussions for their clients’ prospects as well as their own professional reputations. Taking prudent measures during the raid can help protect everyone’s interests and safeguard legal positions should the matter later end up in court.
In the event of a raid
First things first – check who they are and what they want. Before allowing access, you should establish which regulator is on your doorstep and sight the inspector’s official identification. The names of all members of the regulator’s team should also be noted and this can be done by simply requesting their business cards.
Ask to see the search warrant, section 263 notice or other written authorisation and take a photocopy. Also check the validity of the authorisation, such as whether it’s for the correct premises and the right day and review the type of evidential material that can be obtained.
Call your client and the lawyers
If the execution of the notice or warrant relates to a client, you should inform the client of the search immediately and urge them to seek legal advice about their position. Do not discuss the substance of the matter with the client at that time.
Under no circumstances should substantive matters be discussed over the telephone as there is a strong likelihood that communication interception techniques such as phone tapping are in place.
You should also notify your own lawyer and, if appropriate, obtain legal representation during the raid. You can ask the regulator to wait for your lawyer to arrive but this will be at their discretion. If they refuse, do not obstruct them, but note their reasons for not waiting.
Actively manage your interactions with the regulator
Successful handling of a raid involves an understanding of both your legal obligations and rights. Some precautions to protect your interests include:
- ensure the regulators are supervised and never leave them alone on your premises
- take notes of all key interactions, including time, identity of the officers involved and details of any questions put to you
- generally speaking, you should not volunteer information or answer questions. The only questions you are obliged to answer are those identifying yourself or the documents
- verify that the only documents inspected, copied or seized are those relevant to the matters spelt out in the warrant or authorisation and make a note of those documents
- be aware that the authorities are not entitled to seize computers or take digital images of entire hard disks. It’s not unusual for this request to be made to ‘save time’
- if the authority requests the opportunity to perform a keyword search, take a note of those key words.
How much cooperation is needed?
It’s important for accountants to cooperate with any regulator that is lawfully exercising a right of search and seizure. Specific things you should do or not do in your interactions with the regulator include:
- respond to all reasonable requests in a courteous and responsive way
- do not knowingly deceive or mislead the regulator
- do not obstruct their lawful search activities such as by cutting off the power
- do not conceal, modify or destroy any records that may be relevant, as these actions may later be viewed as evidence of a ‘guilty mind’ if the matter goes to trial. Once the raid has started an immediate notice should be sent to all staff requesting they do not destroy any documents, including electronic documents and emails.
Generally speaking, a regulator’s requests must be complied with even if they appear oppressive, disruptive or costly. The only exceptions are where legal professional privilege applies or where the request is so unreasonable that bad faith is implied.
If you believe the regulator is not acting lawfully, you should nevertheless comply with their request but make it abundantly clear you are opposed to their actions. Make detailed notes as these can support a legal challenge down the track.
What the laws say
Accountants should understand that their duty to cooperate stems from various sources. Legislation enacting the regulator’s search and seizure powers generally makes refusal to comply a criminal offence punishable by fines or imprisonment.
For example, the Commissioner’s powers to access premises and produce information under sections 263 and 264 of the Income Tax Assessment Act 1936 are backed up by penalty provisions in sections 8C and 8D of the Taxation Administration Act 1953 (Cth) which state these are absolute and strict liability offences with limited available defences.
Various professional codes of conduct also shape an accountant’s obligation to cooperate with a regulator. The APES 110 Code of Ethics for Professional Accountants issued in December 2010 requires professionals to act in the public interest rather than exclusively to satisfy their clients’ needs and to act with integrity and honesty in all professional and business relationships.
In addition, accountants who are also registered tax or BAS agents under the new Tax Agent Services Act 2009 must observe a separate code of legislated professional and ethical standards specific to registered tax and BAS agents. Important requirements here are a tax agent’s duty to act honestly and with integrity, and not to knowingly obstruct the proper administration of the taxation laws.
Failure to observe professional codes of conduct can also attract severe outcomes including deregistration or suspension of an individual’s right to practice.
Assert legal professional privilege
One of your key duties during a raid is to preserve legal professional privilege (LPP) over documents that are in your control. Documents subject to LPP are protected from compulsory disclosure.
To qualify for LPP, a document must have been created by a lawyer for the main purpose of giving legal advice or preparing for litigation. Documents created by the client for the main purpose of obtaining legal advice or preparing for litigation are also entitled to LPP.
Segregating privileged documents can help preserve LPP. If you are unsure and unable to check with a lawyer whether particular documents are privileged, you should expressly reserve your client’s rights to continue to claim privilege. Ensure the disputed documents are appropriately sealed and establish a protocol for how they are to be held pending the resolution of claims. For instance, they may be placed in the custody of the court or a third party such as the Law Society.
If a regulator insists on inspecting, copying or seizing material that you believe is privileged, you should allow their request but make it very clear that privilege is not waived. Again, take detailed notes of the incident.
In summary
In an environment of heightened regulatory enforcement, the accounting profession must be prepared for the possibility of a visit from the regulator. Being too forthcoming can get your client into hot water; too restrained and you run the risk of criminal penalties.
The stakes are high, so managing the situation in a way that protects your clients and your own professional interests is crucial.
It is sensible and prudent practice for any professional firm to have an action plan and ensure anyone involved, from the receptionist right through to the contact partners, is trained on what to do when a regulator arrives.
Being forearmed will help everyone keep a cool head when the temperature rises in the thick of a raid.
