Consultants and conflicts of interest - the PwC Australia edition

PwC has been headline story in Australian newspapers over the last few days. It has emerged that a senior PwC official leading a team advising the Finance Ministry leaked out confidential information about an Australian government's tax policy change to curb cross-border tax avoidance to the company's multinational clients thereby allowing them to pre-empt move and limit their tax outgo. See also this, this, and this. 

In 2015, Peter Collins, PwC Australia's international tax chief, leaked in breach of confidentiality agreements secret information about the Multinational Anti-Avoidance Law which was set to come into effect in January 2016 covering multinationals operating in Australia with global revenues above $1 billion. The information was disseminated internally in an email to around 50 people, including employees in other countries, with a view to helping PwC clients. 

A newspaper report outlined the sequence of events in great detail, 

By October 2014, the tranche of emails released by the Tax Practitioners Board shows that this confidential information was seeping through PwC. “Because it was provided to us on a confidential basis I ask that you don’t circulate it beyond us or discuss it outside PwC – it would really put PwC Australia and me in a real bind,” one PwC executive said, with name redacted. A frenzy of activity on both sides of the 2015 budget worked out avoidance plans and which companies to target with what the government had dubbed the “Google tax” - reflecting the role the tech sector giants had among the so-called “dirty thirty”, the worst transgressors on tax avoidance. “Controversy treasure trove if we can land a few of these,” Collins noted in August 2015...

An email from January 6, 2016 reported just how successful PwC’s tax partners had been in attracting 14 clients with the firm’s plans to combat the new tax laws, including customers who had not previously worked with the firm. Millions in revenue had already been generated from the work, “heavily helped by the accuracy of the intelligence that Peter Collins was able to supply”, the redacted email said. Collins was named Tax Institute’s corporate adviser of the year just months later, but his work had been too successful. The Australian Tax Office (ATO) had become alarmed at just how quickly these companies managed to come up with structures expertly designed to evade the new laws...

By the start of 2017, the tax office was ready to turn its attention to the peddlers of these schemes: The big four consulting firms, PwC, KPMG, EY and Deloitte. Most of the big firms complied as expected. One did not – as the ATO told Senate estimates this week. “It appeared our investigation was being frustrated through false Legal Professional Privilege (LPP) claims. We had to issue further notices to obtain information that was clearly not subject to LPP, such as internal PwC emails,” tax commissioner Chris Jordan told estimates this week. Due to these obstacles, it took the tax office far longer than expected to get the information it needed, but it was worth the wait.

Shockingly, even as it became clear to the Tax Office that Collins was leaking confidential information, it still took time to formally expose him. The investigations evolved in slow-motion with the different organs of the government taking their own time to respond. 

By late 2017, the tax office had emails that indicated Collins had shared confidential Treasury information with PwC partners, and they had hatched plans to profit from it... secrecy obligations prevented the department from sharing any of this information with Treasury, the treasurer, or any other department... Meanwhile, Collins was still attending Treasury briefings, signing another confidentiality agreement in February 2018... The tax office soon contacted the AFP, but fresh problems cropped up. The feds had the criminal investigative powers but the ATO had the information and, once again, couldn’t share much of it. The AFP has said there was insufficient information in the material provided by the ATO at the time to support a formal referral...

The matter was referred to the TPB in July 2020, and the tax body commenced investigations into Collins and PwC in 2021. The TPB’s board would finally determine there were breaches in October 2022 – four years after evidence of wrongdoing was discovered by the tax office and eight years after PwC’s first known transgression. Amazingly, no one outside the ATO, TPB or PwC was aware of the scandal at this stage. Collins was allowed to quietly leave PwC that month. The firm has not said if he is receiving the customary pension of as much as $140,000 a year. Things took a turn, however, in January this year, when Collins was finally named. 

Even after he was exposed, PwC's response was nonchalant,

But the only penalty imposed was PwC being ordered to carry out additional training on conflict of interest and Collins being banned as a tax practitioner for two years... PwC, while apologetic, played down the seriousness of the offence. “We acknowledge the TPB found that a partner of the firm did not comply with confidentiality agreements in relation to a consultation process with Treasury, which occurred in 2014,” a PwC spokesman said at the time. Privately, PwC told journalists – but more importantly, Finance – that the information was shared with a small group of people within the firm and the investigation did not find that any client arrangements or structures were impacted in connection with this matter... When PwC Australia boss Tom Seymour described the issue as a “perception problem”, politicians went ballistic... Labor senator Deborah O’Neill, through dogged questioning in Senate estimates in March, yielded the 143-page document which finally laid bare just how brazenly PwC partners had leveraged the confidential information for commercial gain. Seymour later confirmed he was a recipient of the damning emails. He stepped down as CEO and is leaving the firm in September. 

Some observations:

1. It's imperative that criminal charges be laid on Collins and all others who breached confidentiality and leaked information and those culpable be arrested. Penalties and other financial settlements, and quiet exits of those directly culpable will do little to deter future such behaviours by both individuals and the companies. This should be complemented with a ban of at least five years from any kind of contracts with any public agency. This ban should cover all the business lines of PwC given that in this case it's evident that the consulting part leaked information to the tax practice. 

Such punishments are required to break the comfortable equilibrium wherein the consultants have come to expect and internalise into their pricing the penalties and short and limited bans as the financial cost of such unethical and illegal practices. This equilibrium can be broken only with pattern breaking and prohibitive punishments. Such punishments should become the new norm with consultants. Only such actions will inform individuals that these are irregularities amounting to moral turpitude and will immediately invite termination and criminal liability. 

The corporates too should take the cue and exercise their corporate responsibility by avoiding the consultant. The consulting industry associations should realise the seriousness of the problem, and take strong enough action that signals the shift from the previous comfortable equilibrium. 

Underlining this point is the fact that despite all the mounting evidence of clear leakages, and despite even the Tax Practitioner's Board, the industry watchdog, banning Collins from tax practice for two years, PwC has not formally fired anyone. All the partners who have left have been "stood down". In the absence of information to the contrary, given the several examples from consulting and finance, it's likely that even those who have been stood down have been done so with generous severance packages. 

2. Stunningly, PwC is still refusing to reveal the names of the 50 or so senior employees who received the emails from Collins and the clients who benefited from this information. This requires a completely independent investigation by an agency appointed by the regulator or the government (and certainly not by PwC). For a start, given the seriously sensitive nature of the information that was sent in these emails, did these partners report its contents to the company's risk or internal control units, or atleast their managers? If they did not, and especially if none did, it's compelling enough to argue that such information transfers across the company are common enough.

Then there's the issue of what happened on the information leaked. What did each recipient do with the information? Their mails and subsequent actions will have to be scrutinised, including that of those  contacted within the company. It's important that this case be used to identify all the failures in internal controls to monitor and prevent such illegal practices. It's also important to also identify and document the internal mechanism of such practices, which are most certainly prevalent in other consultants and in other countries. 

This can be used to formulate guidelines that explicitly call out the possibility of such practices and pre-empt them with specific monitorable actions and with prohibitive punishments. These guidelines should become part of all consulting contracts. I have discussed them in an earlier post here. 

When illegal and unethical practices have become the norm, and are not being acted on because of the difficulties with documenting them to the legally mandated standards, it's required to explicitly identify them and formulate safeguards and measures to prevent them. That's the requirement now. 

3. This raises an important question that I had alluded to in an earlier post about why such core policy design activities were given to consultants. As an oped in SMH wrote,

Why on earth was PwC – a substantial contributor to the global problem of cross-border tax minimisation – involved in designing Australia’s response to that very problem? Anyone could see this was going to be a problem.

It’s impossible to police such work and very difficult to establish any wrongdoing. And, as this case, demonstrates, even if something comes out it would take an inordinately long time by when the damage would have been done. In all such engagements, the confidentiality clauses exist only in name. Having consultants manage sensitive policy design should therefore be strictly prohibited.

4. This is important since the main business of consultants comes from their corporate advisory services. The government advisory is a small share of the total revenues. Public sector consulting provides consultants with access to extremely sensitive and commercially high value information. It's therefore highly valued, and explains why consultants go the extra-length to offer free consulting services to the government. Apart from specific knowledge about the policy proposal, it also helps them understand the government processes and the people involved.

Given everything we know about the reality of corporate ethics and governance globally, we are kidding ourselves if we believe that a company whose main business is corporate advisory (in the same areas where they help governments make laws) will not use privileged information for its private benefit. 

Consultants had the potential to advise private clients how to win grants while the consultants’ own staff were part of the apparatus approving them. Ken McAlpine, who was a policy adviser and a chief of staff in Victoria’s Brumby government, tweeted this week how widespread the practice is. “They all do it. PwC, EY, KPMG and Deloitte. They design and administer programs for government and they also help private sector clients chase government grants. They’ve been doing it for years,” tweeted McAlpine, who now works as a lobbyist. “The pressure to share this information must be intense.”

5. Such practices by consultants are now commonplace with numerous examples that have surfaced in recent months from the US, Germany, the UK, South Africa, etc. It's most certainly happening and widely prevalent across consultants working with governments in India. It's only a matter of time before some of them surface as scandals that have caused massive losses to the government. It's therefore essential that the model contract document for hiring consultants be amended to incorporate these safeguards. This post has some useful suggestions in this regard. 

Update 1 (06.07.2023)

It has now come to light that PwC tipped off Google on Australian law changes,

PwC tipped off Google on the timing of a controversial Australian tax law, based on inside information gleaned by one of the accounting firm’s partners, it has been revealed. The tech company is the first to be named as a recipient of confidential information in a scandal that has engulfed PwC Australia and led to the firing of eight partners. A PwC partner who acted as an adviser to the Australian government passed information about upcoming laws to colleagues, who used it to tout for business on the US West Coast, according to internal emails unearthed in an investigation by Australian lawmakers. A Google employee received an email from a PwC partner in August 2015 that said Canberra would be pressing ahead with a tax clampdown on multinationals the following year, despite pressure to delay the new legislation... A January 2016 email celebrated $2.5mn in new business in North America, which one partner wrote had been “heavily helped by the accuracy of the intelligence that Peter Collins was able to supply”. The Australian tax partners had worked “extensively” with other PwC firms around the world, including in the US, Netherlands and Singapore, the email said.