The King v Jacobs Group: High Court opens the door for larger foreign bribery penalties

The King v Jacobs Group (Australia) Pty Ltd [2023] HCA 23

What you need to know

• Section 70.2(5) of the Criminal Code (Cth) prescribes a maximum monetary penalty for the offence of a corporation bribing, or conspiring to bribe, a foreign public official. That penalty is not more than the greater of: 100,000 penalty units; three times "the value of the benefit" (if a court can determine that value); or, if the court cannot determine the value, 10% of the corporation's annual turnover in a 12 month period ending the month in which the offending conduct occurred.
• In its recent judgment in The King v Jacobs Group (Australia) Pty Ltd , the High Court considered the meaning of "value of the benefit" under section 70.2(5) for the purpose of determining how the appropriate maximum penalty for a foreign bribery offence should be calculated.
• The High Court held that "value of the benefit" should be understood as the total money received for performance of the contract (the "gross benefit"), overturning the New South Wales Court of Criminal Appeal's interpretation of this phrase as meaning the "net" benefit (the total money received less the legitimate costs of performance).
• The High Court's decision represents a "win" for prosecutorial authorities, with the financial consequences of foreign bribery offending now being potentially more severe.
• This decision has potential implications for calculating maximum penalties for other corporate offences. Formulations similar to the "three pronged" approach to calculating a penalty under section 70.2(5) of the Criminal Code are also used in a number of other Commonwealth statutes which impose penalties, including the Corporations Act and the Competition and Consumer Act.

Background to the High Court decision

We reported on the New South Wales Court of Criminal Appeal (CCA) decision in an earlier update.

The CCA proceedings concerned an appeal against the sentence imposed on Jacobs Group for conspiring to cause bribes to be offered to foreign public officials, contravening sections 11.5 and 70.2(1) of the Criminal Code.

The relevant conduct was engaged in by Sinclair Knight Merz Pty Ltd (SKM). SKM was involved in two conspiracies in the Philippines and Vietnam where bribes were paid to foreign officials in order to facilitate the awarding of public infrastructure project contracts to SKM. This conduct involved making payments to third party companies and receiving fake invoices for services which were not provided.

SKM was subsequently acquired by Jacobs Group. The conduct came to light during Jacobs Group's due diligence carried out in advance of that acquisition. On becoming aware of the conduct, Jacobs Group reported it to the AFP, and went on to give significant assistance to the AFP with investigations over a six year period by providing business records, draft witness statements, factual analyses, and arranging for the AFP to interview relevant employees.

Sentencing outcome

Upon pleading guilty to three offences, Jacobs Group was required to pay a pecuniary penalty of $1.35 million. In her sentencing remarks, Justice Adamson of the New South Wales Supreme Court observed that while the offending fell within the mid-range of objective seriousness, Jacobs Group's contrition and remorse for the offending, self-reporting, and the considerable assistance it gave to the AFP meant that significant sentencing discounts were appropriate.

The key issue for the subsequent appellate proceedings was her Honour's interpretation of section 70.2(5) of the Criminal Code. This section applied to only one of Jacobs Group's three offences, owing to the time at which the section came into force.

Section 70.2(5) provides that, where it is possible to determine the value of the benefit that a company obtained from the offending, the maximum penalty is the greater of 100,000 penalty units ($11 million at the time of the offence), three times the value of that "benefit", or 10% of annual turnover of the company in the year the offence occurred. Justice Adamson interpreted "benefit" to mean the net benefit the company gained from the conduct, rather than the gross value of the contracts it procured as a result of the conduct. The practical result of this interpretation was to reduce the maximum available penalty for the third offence from approximately $30.4 million to $11 million.

Court of Criminal Appeal judgment

As we noted in our previous update, the New South Wales CCA (Bell CJ, Walton and Davies JJ) declined to interfere with the sentencing outcome.

The CCA accepted the correctness of Justice Adamson's approach to interpreting section 70.2(5). The Court reasoned that the value [to the offender] of the benefit of a contract procured through bribery lay "in the opportunity for monetary gain from its performance," noting that "there will simply be no benefit to an offender if the body corporate that has engaged in the bribery breaks even or makes a loss from its contractual performance." (at [95], emphasis added).

Having regard to these matters, and finding that there was nothing in the Explanatory Memorandum supporting the "gross value" construction contended for by the Crown, the CCA accepted that Adamson J was correct in construing "benefit" as what the company "in fact gained from the conduct" (at [99]); which is to say, "benefit" is to be construed as the "net benefit".

Argument before the High Court

The Crown appealed the NSW CCA's conclusion on how to determine the maximum penalty for the third offence, having regard to what the legislature meant by "benefit".

The Crown's submissions

The Crown submitted that having regard to the text, context and purpose of section 70.2(5)(b), "the value of the benefit" should properly be construed as the contract price without deductions for the costs of performing the contract.

The Crown argued that Parliament did not use the word "profit" (where it might have done so had it meant "net benefit"). It was possible that a contract to perform work may break even or be performed at a loss but could still produce an advantage by allowing a corporation to obtain a foothold in a market and providing employment.

The Crown also put emphasis on the purpose of section 70.2(5), being to "stamp out" the harm caused to Australia and to "international good governance and commerce" caused by foreign bribery. The extrinsic materials to the legislation (the Explanatory Memorandum, the Second Reading Speech and the OECD report on bribery in international transactions), all pointed to section 70.2(5) being directed towards ensuring that the penalty for foreign bribery was not "a mere cost of doing business."

Jacobs Group's submissions

Jacobs Group submitted that both the primary judge and the NSW CCA correctly construed the value of the benefit in the legislation to be the "net" benefit, ie. the value of the contract, less the expenses incurred (save for the "tainted" expenses of the bribe itself).

The High Court's judgment

In a joint majority judgment, Chief Justice Kiefel and Justices Gageler, Gordon, Steward, Gleeson and Jagot allowed the Crown's appeal. They directed that the NSW CCA redetermine the sentence on the relevant offence. Justice Edelman, in a separate judgment, agreed with the majority's orders.

In short, the Court found that section 70.2(5)(b) required "the value of the benefit" to be determined as the total amounts received under the contract, with no deduction to be made for any costs incurred by Jacobs Group in performance of the contract.

The majority found that the context and purpose for which section 70.2(5) was introduced, was "to increase the fine for legal persons for the offence of bribing a foreign public official to a level that is effective, proportionate, and dissuasive within the meaning of Art 3.1 of the OECD Convention". This required that the provision could be construed to "yield a certain content, capable of consistent application."

The majority also accepted the Crown's submissions that a party who breaks even or makes a loss on a contract, may still receive a benefit from the performance of the contract. For example, such a contract could be a part of a loss leader strategy in a new and foreign market.

The Court rejected the distinction between "tainted" and "untainted" costs of performing a contract contended for by Jacobs Group. It took the view that the whole of any advantage secured by a bribery offence is tainted by the illegality, as are all costs incurred.

Another reason given for not accepting the "net" benefit reading was a concern that it would introduce a new highly contested field of battle just to resolve the maximum penalty, which would tend to undermine the purpose of ensuring "effective, proportionate and dissuasive" penalties for bribery offences as required by the OECD Convention.

The majority also found that, in any event, costs incurred by a party in performing a contract corruptly procured could be taken into account in the "instinctive synthesis" undertaken by a court in weighing the different sentencing factors. That is, while such costs could not be taken into account in applying the legislative formula for calculating the maximum applicable penalty, they could potentially be one of a number of factors considered by a trial judge "to ensure the penalty imposed is proportionate to all circumstances of the offence."

The way forward

The High Court's decision should be seen as a "win" for prosecutorial authorities, as it could significantly expand the potential maximum pecuniary penalties that corporations may have to pay for engaging in foreign bribery.

Jacobs Group's penalty, for example, was calculated having regard to the maximum available penalty for an offence of this type being $11 million, but this will now need to be redetermined by the NSW CCA in light of the High Court's finding that the maximum available penalty is approximately $30.4 million.

The High Court's decision underscores the intent of both legislative and judicial branches of government to aggressively discourage Australian companies from bribing foreign public officials, and from conspiring with others to do so.

The High Court's decision also has potential implications for the calculation of maximum penalties for other corporate offences. Formulations similar to the "three pronged" approach to calculating a penalty under section 70.2(5) of the Criminal Code are used in a number of other Commonwealth statutes which impose financial penalties on companies for breaches, including the Corporations Act and the Competition and Consumer Act.

Authors: Rani John, Partner; Peter Richard, Expertise Counsel; Phimister Dowell, Lawyer