Conflicts of Interest Avoidance - Is there a Role for Blind Trusts?
Bernard Pulle
Economics, Commerce and Industrial Relations Group
Contents
Major Issues
Introduction
Mode of Operation of Blind Trusts
Does the creation of a Blind Trust ensure wealth cannot
be accumulated outside it without detection?
Will the current arrangements for the Declaration of
Senators' and Members' Interests be affected by the exclusion of interests
in Blind Trusts?
Experience with blind trusts in certain Commonwealth countries
including Canada
New rules of Disclosure of Interests makes use of blind
trusts untenable in the UK
System of disclosure and blind trusts under supervision
in the United States
Are there any other safeguards against conflicts of interest?
Conclusion
Endnotes
Attachment A: A Guide on Key Elements of Ministerial Responsibilities
Ministerial Conduct
Attachment B: The Bowen Committee and Blind Trusts
Attachment C: The Riordan Committee and conflicts of interest
issues
Attachment D: Registrable interests of Members of the Commonwealth
Parliament
Attachment E: Conflict of Interest: A Commonwealth Study
of Members of Parliament
Attachment F: Disclosure and Divestment of Sensitive Assets
the Preferred Option in the UK
Attachment G: Financial Disclosure and Reporting Requirements
in the United States
Attachment H: What other Regulatory Safeguards are there
against Conflicts of Interest?
On 15 October 1996, the Prime Minister stated in Parliament that it was
his intention to examine the feasibility of introducing the system of
blind trusts that exist in other jurisdictions 'whereby people who
have substantial assets other than in real estate, might have the opportunity
to put themselves at arm's length from the control of those assets while
at the same time having the opportunity of participating in ministerial
life.'(1)
On 2 April 1996, the Prime Minister had in a Press Release issued A
Guide on Key Elements of Ministerial Responsibilities (the Guide)
and in the section of this Guide dealing with Ministerial Conduct
had indicated the requirement for Ministers to divest themselves of shares
and other securities sensitive to their portfolio responsibilities. The
Guide further stated that the transfer of interests in a company to a
trust is not an acceptable form of divestment.
This paper deals with four major issues that need to be resolved before
deciding that the blind trust could be an acceptable practical alternative
to divestment.
1. Can the blind trust draw an opaque blind between the politician beneficiary
and trust assets in all circumstances involving a mix of assets?
2. Will a system of blind trusts, with the attendant secrecy, dismantle
the framework of disclosure which sustains the credibility of the Registers
of Senators and Members Interests as a conflict of interest avoidance
measure by converting them into registers of partial interests?
3. Will a disclosure regime, which permits of blind trusts supervised
by an independent authority, be a compromise which might retain the confidence
of the public that there are measures in place to avoid a conflict of
public duty and private interest?
4. In any case, is the setting up of a blind trust, whether under independent
supervision or not, an assurance that political influence has not been
resorted to accumulate wealth outside the blind trust?
This paper arrives at the following conclusions.
There is a strong case for the view that a private blind trust could
be a facade behind which the conflict of interest can survive due to the
difficulty of creating a 'truly blind trust' of assets of all types in
the hands of trustees, as was concluded by the Bowen Committee(2) in 1979.
Further, there is evidence recorded in the Carney Paper(3) in 1992, that
the use of blind trusts in other jurisdictions has not been effective.
The introduction of a system of blind trusts, with its attendant secrecy,
would convert the Registers of Senators and Members Interests into registers
of partial interests. When the Riordan Committee(4) recommended the introduction
of registers of Senators and Members Interests in 1975, it was made on
the grounds that public knowledge of private interests of decision makers
on any given matter is a means of assuring people that public decisions
are being made in the public interest. Registers of partial interests
would not meet this essential requisite.
An arrangement which might maintain public confidence is a regime of
continuous disclosure to an independent authority, within which is accommodated
a blind trust system for Ministers who desire that option. This would
be on the lines of the disclosure regime in the United States supervised
by the Office of Government Ethics.(5) However, this arrangement would
result in the surrender by each House of Parliament, of the authority
to inquire into the affairs of its members to an outside authority; a
surrender not conceded easily under the Westminster system of government.
Even under the US model, divestment of sensitive assets has become necessary
on occasion when the assets were too sensitive to be held in a blind trust
under that system.
The setting up of a blind trust is no guarantee that wealth accrued by
the improper use of political influence cannot be accumulated outside
the blind trust without detection. In these circumstances the public perception
hoped to be achieved by the blind trust, would never be achieved. It would
therefore be more meaningful to opt for a system of continuous disclosure
of interests to a register supplemented by declaration of interests during
debate in Parliament of past, present and future interests on any subject
before it, on the lines of the new rules in the UK House of Commons introduced
in 1995.(6) As a result of continuing public focus there would be no alternative
to divestment of sensitive assets where the situation requires it. The
register of interests and the declarations of interests are monitored
by the Parliamentary Commissioner of Standards who reports to the Committee
on Standards and Privileges.
The paragraphs from the Guide on Ministerial Conduct (Attachment
A (pages 13-15)), relating to directorships and divestment of investments
in the securities of companies are set out below.
Ministers are required to resign directorships in public companies
and may retain directorships in private companies only if any such company
operates, for example, a family farm, business or portfolio of investments,
and if retention of the directorship is not likely to conflict with
the minister's public duty (e.g., a minister should question the retention
of a directorship in a company in which share holdings extend beyond
the minister's own family).
Ministers are required to divest themselves of all shares and similar
interests in any company or business involved in the area of their portfolio
responsibilities. The transfer of interests to a family member or to
a nominee or trust is not an acceptable form of divestment.
Ministers are not precluded from making investments on the stock markets
or other financial and trading markets, but they should not operate
as traders and should exercise careful personal judgment in respect
of transactions.
A blind trust arrangement results in temporary divestment of assets placed
in such a trust, whereas divestment when referred to in this paper refers
to a permanent disposal of all interests in such assets.
This paper considers whether the blind trust could be an alternative
to divestment of assets sensitive to a Minister's sphere of responsibility
and whether it will improve the public perception that it is an effective
measure to avoid a conflict of public duty and private interest.
The arrangement of placing assets in a blind trust has been permitted
in several jurisdictions as an option to divestment, which is the real
solution to the problem of conflicts of interest. In Canada, under the
Federal Canada Code, a blind trust is one in which the trustee makes all
investment decisions concerning the management of the trust assets with
no direction or control by the public office holder who has placed the
assets in trust. No information is provided to the public office holder
(settlor of the trust) except information that is required by law to be
filed. A public office holder who establishes a blind trust may receive
any income earned by the trust, add or withdraw capital funds, and be
informed of the aggregate value of the entrusted assets.(7) Commentators
have observed that there is nothing inimical to the policy of the law
of trusts in making such an exception to the normal duty of the trustee
to fully account to the beneficiary.(8)
Technically, therefore, the politician beneficiary of a blind trust is
totally unaware of the composition of the investments in the blind trust.
The trustee, having power to dispose of the original investments handed
over on creation of the trust, may decide to dispose of some or all the
original investments while the beneficiary is in the political arena.
Practically, there may be limits to the ability of the trustee to change
investments without the knowledge of the politician beneficiary, particularly
where very large investments are involved. This would certainly be the
case if the assets handed over to the trustee on the establishment of
the trust included a very large or controlling interest in a listed company
or more so in a family company. Thus a periodic search of the Australian
Securities Commission (ASC) database ASCOT will reveal to the politician
beneficiary whether the original large holding in a listed or private
company has been disposed of by the trustee. Where a holding in a family
company is concerned, information on the progress of the company may be
obtained from other family members.
Thus, at one end of the spectrum of different investment portfolios,
if the initial transfer of assets to a trustee of a blind trust comprises
securities in a family company, the politician beneficiary would have
the means of knowing whether there has been any change in these investments
from other family members or a check on the ASC database ASCOT, thus defeating
the purpose of avoiding conflicts of interest by the setting up of a blind
trust. Further, being securities in a family company they may not be easily
marketable and hence will remain with the trustee until the beneficiary
concerned leaves politics. At the other end of the spectrum, a blind trust
consisting of a well diversified marketable portfolio of investments at
the commencement of a person's political career may be converted easily
by the trustee into other investments and such new investments will never
be known by the politician beneficiary. In this case the difficulty would
be to set standards as to what constitutes a 'diversified marketable portfolio'
of investments.
Given that there would be a range of blind trusts for various politicians
with a mix of investments drawn from these extreme situations, there is
reason to question the value of creating blind trusts which are in parts
opaque, merely to satisfy a public perception that some steps have been
taken to avoid conflicts of interest arising from the ownership of investments.
The effectiveness of the blind trust and its variant the frozen trust
to resolve the problems of conflicts of interest was considered by the
Bowen Committee in its report Public Duty and Private Interest.(9)
A frozen trust, as its name implies, is one in which the trustee maintains
the holdings essentially as they were when the trust was established.
The Bowen Committee concluded that blind trusts would be ineffective as
it could see no effective way by which a trust could be rendered completely
'blind' and would be a facade behind which the conflict of interest would
survive. It also concluded that the blind trust or the frozen trust, would
not be an alternative to complete divestment when sensitive assets are
involved in a conflict of interest situation. A brief background of the
appointment of the Bowen Committee and its observations on the blind trust
system is included in Attachment B (pages 17-19).
Further, the costs of setting up and administering a trust would be considerable
where a large investment portfolio is involved and may not be commensurate
with the perceived benefits.
The case for the blind trust rests on the proposition that it will meet
the public perception that improper influence has not been used to accumulate
wealth. This perception will only be valid if the establishment
of a blind trust on entering political or public life, means that any
wealth acquired by the use of political influence or the influence of
public position cannot be accumulated outside the blind trust without
detection. This question will be considered in the ensuing paragraph.
The investigation required to ascertain such gains will be no different
from undertaking an investigation into insider trading profits in the
corporate world. It is relevant to note that in 1974 the Rae Committee
had documented in its report Australian Securities Markets and their
Regulation, the following five major reasons for failures in the detection,
investigation and proof of insider trading in Australia:
The difficulty of tracing from company records or records of brokers
the beneficial owners of shares which are registered in the names of nominee
companies of banks, brokerage houses and investment banking companies.
Where shares are registered in the names of proprietary companies, further
investigation might show that the shares in the proprietary company were
held in the names of accountants, solicitors, or others acting as trustees
under trust deeds in the shares of the company for insiders or their families.
The use of foreign companies, trustees and banks and the use of Swiss
and other European banks.
The difficulty of proving that a person who engaged in share transactions
did so with knowledge of confidential information.
The difficulty of undertaking a timely investigation in Australia and
overseas as insider trading in shares in listed Australian companies involves
national and international ramifications .(10)
Tomasic, Jackson and Woellner, referring to the difficulties encountered
in the detection and prosecution of insider trading offences almost 22
years after these findings of the Rae Committee, observe that these problems
still exist.
It is remarkable that as we approach the end of the 1990s the problems
of dealing with insider trading described by the Rae Committee are still
apparent. This was well documented in the hearings of the House of Representatives
Committee on Legal and Constitutional Affairs in its inquiry into insider
trading and other forms of market manipulation (the Griffiths Committee).(11)
Thus the creation of a blind trust by itself will prove nothing in regard
to the integrity, honesty and proper use of political position as
it can give no guarantee that wealth accrued by the improper use of political
influence and public position during the politician's career as a Minister
has not been retained in a string of nominee companies, trusts and other
arrangements outside the blind trust.
The Riordan Committee(12) which inquired into and reported on the arrangements
relative to the declaration of interests of Members of Parliament did
not specifically examine the feasibility of the use of blind trusts as
a safeguard against conflicts of interest and duty. This may not have
been necessary because the underlying principle of its recommendation
for a register of interests was that the balance between demands for total
divestment of private interests to avoid conflicts of interest and the
need to discharge public duty based on public interest is best served
by disclosure. The real aim of the register is that it should serve as
a means of assuring the people that public decisions are made in the public
interest.(13) Divestment was recommended where any shares held came within
a Ministers sphere of responsibility. Attachment C (pages 21-22) sets
out the salient features of the recommendations of the Riordan Committee.
At present Members make declarations of their interests to the Registrar
of Members' Interests in the House of Representatives. Similar arrangements
are in place in the Senate. The registrable interests relating to companies
in the document titled the Registration of Members' Interests - Requirements
of the House of Representatives(14), are set out in Attachment D (pages
23-25). These registrable interests could cover a Member's involvement
with a company not merely as a direct shareholder but as an indirect shareholder
through interposed trusts, partnerships and other companies. Paragraph
(2)(m)(15) would also cover the case of a member of a company limited
by guarantee where no shares have been issued. The registrable interests
of Senators is substantially the same as for Members except that there
is no counterpart of paragraph (2)(m) to cover membership of companies
limited by guarantee without shares.
In addition to the declarations that a Senator must make to the Registrar
of Senators' Interests, a Senator is also required to declare any relevant
interest at the beginning of a speech where the Senator participates in
debate in the Senate, committee of the whole Senate, or a committee of
the Senate or of the Senate and the House of Representatives. An extract
from the Resolution of the Senate is included in Attachment D.(16) It
will be noted that this declaration covers only present interests and
possibly future interests in the subject matter and such declarations
are not required when directing a question seeking information. The House
of Representatives does not have at present a similar requirement for
declaration of interest in debate, with the removal of this requirement
with effect from 1 January 1989. In the UK House of Commons the new rules
introduced in 1995 relating to declaration and advocacy of interests require
a declaration of any past, present or future interest relevant to any
proceedings in Parliament, additional to the annual registration of interests
as indicated in Attachment F (pages 29-31).
Should a system of blind trusts be permitted by the Prime Minister for
Ministers, as an alternative to divestment of sensitive investments, new
resolutions of the Senate and the House of Representatives will be required
to exclude from the declarations of registration of interests of Ministers
who are Senators or Members the investments that are held in blind trusts.
Further an amendment will be required to the Senate resolution dealing
with declaration of interest in debate for Ministers with interests in
blind trusts. While the House of Representatives amended resolution is
assured, an amendment to the Senate resolution in respect of the declaration
of Senators' interests cannot be assumed given the relative positions
of the parties in the Senate. The significant consequence of such a change,
even if it can be achieved, is that it will exclude the interests in blind
trusts from declarations of Senators and Members. The declarations will
only contain a partial disclosure of interests.
Public access to the interests in blind trusts of Ministers who are Senators
or Members will not be feasible as that will bring details of such investments
within the knowledge of the Senators or Members concerned and defeat the
main purpose for the introduction of the blind trust system. On the other
hand to deny public access will undermine public confidence in the blind
trust system as well as the Register of Senators' and Members' interests
containing an incomplete declaration of interests, as the people will
have no assurance that decisions are made by Ministers in the public interest.
An incomplete declaration of interests resulting from the introduction
of a system of blind trusts will therefore undermine the main principle
for which the register of interests was introduced. In the words of the
Riordan Committee which recommended it:
A democratic society by definition is an open society. The cornerstone
of the parliamentary system of government is its essential right to be
fully informed and to make its decision in the light of that information.
There are no grounds for declaring that certain facts are not relevant.
If it is accepted that parliamentary democracy is in essence government
of the people, by the people, for the people, who can infallibly maintain
that Parliamentarians' interests are irrelevant to their activities? The
nation, their constituents, expect them to be like Caesar's wife - above
suspicion.(17)
A compromise arrangement that might ensure public confidence is
a regime of strict continuous disclosure to an independent authority,
within which is accommodated a blind trust system for Ministers who desire
that option. This is the system that prevails in the United States and
is considered in Attachment G (pages 33-36).
The experience in certain Commonwealth countries, including Canada, where
blind trusts have been permitted as an alternative to a strict disclosure
and reporting regime, would appear to support the anticipations of the
Bowen Committee that there are limits to the public benefits to be derived
by the establishment of blind trusts. This was the conclusion reached
by Gerard Carney, Associate Professor of Law at Bond University, in a
research paper (the Carney Paper) undertaken in 1992, on conflict of interest
legislation and practices in Commonwealth countries.
[T]he advantage of a trust resembles that of divestment in that the interest
is removed at least from the Minister's control to avoid a conflict of
interest arising but unlike divestment, a trust enables the asset to be
restored to the Minister upon ceasing to hold public office. How effective
blind or frozen trusts are, is doubtful. All of the reports reviewed on
the subject regard this type of avoidance mechanism to be ineffective.(18)
The observations of the Aird Report,(19) the Parker Report(20) and the
Starr-Sharp(21) Report on the operation and effectiveness of the blind
trust system in Canada which are recorded in the Carney Paper, indicate
that blind trusts were not effective and were not an alternate to a full
disclosure and reporting regime under official supervision. The Aird Report
pointed out that as there was no way of preventing a Minister from obtaining
information from family members of a family business or company, full
disclosure of interests in a family company was preferred to a blind trust.
The Parker Report recommended the abolition of blind trusts. Extracts
from these reports are included in Attachment E (pages 27-28).
In the UK, the guidelines issued by the Prime Minister on 19 May 1992,
titled Questions of Procedure for Ministers (QPM), would appear to have
opted for divestment where there is doubt about an interest in an investment.
The Prime Minister is to be the final judge whether the investment should
be retained or not. It would appear that the option of a blind trust was
not available under the QPM of 19 May 1992.
However, Ministers of the Crown who are Members of the House of Commons
are subject to the rules of registration, declaration and advocacy in
the same way as all other Members. The Guide to the Rules relating to
the Conduct of Members introduced in 1995 provides for enhanced disclosure
both in the Register as well as declaration of interests, in the course
of debate in the House or in Committee or participating in any other proceedings
of the House. A declaration of interest involves a declaration of any
past, present or future interest relevant to those proceedings. The salient
features of the disclosure regime in the UK House of Commons is included
in Attachment F (pages 29-31). Interests in shareholdings require detailed
disclosure where they are greater than 1 per cent of the issued share
capital of the company or body, or where less than 1 per cent of the issued
share capital but more than 25,000 in nominal value. It will thus be seen
that there is no scope for creating a blind trust in respect of such holdings
as any shares held in trust for the beneficial interest of a Member must
be disclosed, the need to disclose defeating the purpose for which the
blind trust may have been set up. In the case of a Minister who is a Member
of Parliament, the blind trust option not being available under the Guide
to the Rules for the Conduct of Members, the only option is divestment
if any shares come within the sphere of responsibility of the Minister.
The preamble to the United States Ethics in Government Act 1978
states that the purpose of this legislation is to preserve and promote
the accountability and integrity of public officials and of the institutions
of the Federal Government and to invigorate the Constitutional separation
of powers between the three branches of Government. The President, the
Vice President and each executive branch officer or employee, whose position
is above a certain classification is required to comply with burdensome
financial disclosure and reporting requirements set out in Appendix 4
of the Ethics in Government Act 1978 as modified by the Ethics
Reform Act 1989. The financial disclosure and reporting requirements
also apply, among others, to a Member of Congress, a judicial officer,
the Director of the Office of Government Ethics and any civilian employee
in the Executive Office of the President. Federal officials are required
to file detailed personal financial statements upon nomination or appointment
to a position and on an annual basis during the term of the official's
government service.
There are two forms of trusts which are recognised under the Ethics
in Government Act 1978. It will be appreciated that a disclosure regime
is the antithesis of a blind trust system without supervision. Thus the
US model in order to reduce supervision has categorised trusts into a
Qualified Diversified Trust (QDT) and a Qualified Blind Trust (QBT). The
QDT is one which has a diversified portfolio of readily marketable securities
and is exempt from the reporting requirements. The QBT with investments,
which fall short of the standards set for a diversified portfolio of readily
marketable securities, is subject to the reporting requirements. An outline
of the administration of these two forms of trusts is set out in Attachment
G ( pages 33-36).
The Riordan Committee in recommending the setting up of a Register of
Interests of Members of Parliament in 1975 had examined whether there
were any constitutional or legislative safeguards to regulate the conduct
of Members of Parliament. It reported on the role of sections 44(v) and
45(iii), the government contractors and retainer disqualification provisions
respectively of the Constitution. It also reported on the bribery and
undue influence disqualification in section 211 (now section 326) of the
Commonwealth Electoral Act 1918 and Standing Order 196 of the House
of Representatives dealing with the disentitlement to vote if there is
a pecuniary interest in the subject matter. While it appeared that these
measures were in place to deal with questions of conflicts of interest,
the Riordan Committee concluded that none of these provisions can be said
to give the assurance that decisions affecting the public will be taken
in the public interest.(22)
It must be mentioned that since the Riordan Committee Report in 1975,
changes to the Corporations Law may affect Ministers in two respects.
The 1991 amendments to the Corporations Law have exposed Ministers,
who trade in securities of companies coming within their sphere of responsibility,
to the insider trading provisions under certain circumstances. Further,
the related party transactions provisions of the Corporations Law
introduced in 1992 in answer to the corporate excesses of the 1980s and
the accounting standards relating thereto, may affect Ministers where
they have dealings with commercial entities within their sphere of responsibility.
Comments on the likely impact of section 44(v) of the Constitution on
assets in a blind trust and the impact of the insider trading provisions
and related party disclosures on matters of conflicts of interest are
also considered briefly in Attachment H (pages 37-41).
If a system of blind trusts for Ministers is to be implemented, the US
model is available for adaptation. The official supervision of blind trusts
may compensate for the sacrifice of full disclosure in some measure. This
would of course involve the need for an independent authority, such as
the Office of Government Ethics as in the United States, outside the control
of Parliament to monitor the disclosure regime as well as the system of
blind trusts. In the absence of such supervision both the blind trust
system and the disclosure could be seen to lack credibility and therefore
defeat the purpose for permitting blind trusts.
The Bowen Committee recommended that a statutory body to be called the
Public Integrity Commission (the Commission) be established with powers
of a Royal Commission under the Royal Commission Act 1902. The
Commission would not act on its own initiative but would investigate and
report on matters referred by the Prime Minister concerning Ministers,
by a House concerning a Minister, a Senator or Member, by the then Public
Service Board concerning a public servant or by a Minister concerning
a statutory office holder. The Commission would be an investigatory and
fact finding body only. There would be provision for reports of the Commission
to be tabled in Parliament. Any disciplinary action on the basis of a
report by the Commission would be the responsibility of the person or
body by whom the matter was referred and not that of the Commission. This
latter recommendation would ensure that each House of Parliament would
maintain its independence in respect of disciplinary questions concerning
its members.(23)
It is relevant to note that in the United Kingdom, the Committee on Standards
in Public Life(24) also thought it necessary to recommend, in May 1995,
that the House of Commons should appoint a person of independent standing,
who should have tenure and not be a career member of the House of Commons
staff, to be Parliamentary Commissioner of Standards, by analogy with
the Comptroller and Auditor General. The Commissioner should be responsible
for maintaining the Register of Members' Interests, for advice and guidance
to MPs on matters of conduct, for advising on the Code of Conduct for
MPs and for investigating allegations of misconduct.
The evidence in the Carney Paper(25) published by the Commonwealth Secretariat
in London in 1992 confirms that the findings of the Bowen Committee were
correct in regard to the ineffectiveness of the blind trust in avoiding
conflicts of interest in Commonwealth countries.
Finally, the creation of a blind trust by itself will prove nothing in
regard to the integrity, honesty and proper use of political position
as it can give no guarantee that wealth accrued by the improper use
of political influence and public position during the politician's career
as a Minister has not been retained in a string of nominee companies,
trusts and other arrangements outside the blind trust. In the circumstances,
continuing disclosure, on the lines of the new rules in the UK House of
Commons, with divestment of sensitive assets where this is inevitable,
has much to commend itself.
- Current House Hansard; 15 October 1996; p. 5244.
- Public Duty and Private Interest; Report of the Committee of Inquiry
established by the Prime Minister on 15 February 1978 (July 1979) and
Attachment B.
- Conflict of Interest: A Commonwealth Study of Members of Parliament
by Gerard Carney; Commonwealth Secretariat London ( December 1992) and
Attachment E.
- Report on Declaration of Interests; Joint Committee on Pecuniary Interests
of Members of Parliament; 1975 - Parliamentary Paper No. 182; AGPS,
Canberra 1976 and Attachment C.
- Attachment G.
- Attachment F.
- Conflict of Interest: A Commonwealth Study of Members of Parliament
by Gerard Carney; Commonwealth Secretariat London ( December 1992);
p.96.
- Principles of the Law of Trusts, HAJ Ford & WA Lee, (second edition)
The Law Book Company, para.[937], p. 426.
- Public Duty and Private Interest; Report of the Committee of Inquiry
established by the Prime Minister on 15 February 1978 (July 1979); paras.
1.1 to 1.7; pp 1 to 2.
- Report from the Senate Select Committee on Securities and Exchange
-Parliamentary Paper No. 98 (1974).
- Corporations Law; Principles, Policy and Process (Third Edition);
Butterworths (1996); p. 851.
- Report on Declaration of Interests by the Joint Committee on Pecuniary
Interests of embers of Parliament; Parliamentary Paper No. 182 (1975)
-Chairman , The Hon. J.M. Riordan, MP.
- Ibid., p. 26.
- Resolutions adopted by the House of Representatives on 9 October 1984
amended on 21 March 1985, 13 February 1986, 22 October 1986, 30 November
1988 and 9 November 1994.
- Ibid., para. (2)(m).
- Resolution adopted 17 March 1994; amended 21 June 1995.
- Joint Committee on Pecuniary Interests of Members of Parliament: Report
on Declaration of Interests, Parliamentary Paper No. 182 (1975); p.
21.
- Conflict of Interest: A Commonwealth Study of Members of Parliament
by Gerard Carney; Commonwealth Secretariat London (December 1992); para.
titled Trusts; p. 97.
- Ibid., p. 146; Report on Ministerial Compliance with the Conflict
of Interest Guidelines and Recommendations with respect to those Guidelines
(1986) (the Aird Report).
- Ibid., p. 146; Report of Chief Justice W.D. Parker - Commission of
Inquiry into the Facts and Allegations of Conflict of Interests concerning
the Hon. Sinclair N. Stevens (1988) ( the Parker Report).
- Ibid., p. 146; Ethical Conduct in the Public Sector - Report of the
Task Force on Conflict of Interest (1984) (the Starr-Sharp Report).
- Joint Committee on Pecuniary Interests of Members of Parliament: Report
on Declaration of Interests, Parliamentary Paper No. 182 (1975); p.
10.
- Public Duty and Private Interest; Report of the Committee of Inquiry
established by the Prime Minister on 15 February 1978 (July 1979); paras.12.41
to 12.51; pp 110 to 112
- First Report of the Committee on Standards in Public Life; Vol. 1(May
1995); Cm 2850-1; HMSO; para. 17; p. 4.
- Conflict of Interest: A Commonwealth Study of Members of Parliament
by Gerard Carney; Commonwealth Secretariat London (December 1992); p.
97
This is an extract from pages 10 to 12 of the A guide on key elements
of ministerial responsibilities (the Guide)
dealing with Ministerial Conduct released on 2 April 1996. In the
accompanying Press Release the Prime Minister stated that the Guide
does not seek to provide answers to questions of detail and that it
sets out in summary form the main principles, conventions and rules by
which government at the Commonwealth level is conducted.
Ministerial Conduct
It is vital that ministers and parliamentary secretaries do not by their
conduct undermine public confidence in them or the government.
Ministers must be honest in their public dealings and should not intentionally
mislead the Parliament or the public. Any misconception caused inadvertently
should be corrected at the earliest opportunity.
Ministers should ensure that their conduct is defensible, and should consult
the Prime Minister when in doubt about the propriety of any course of
action.
Along with the privilege of serving as a minister or parliamentary secretary
there is some personal sacrifice in terms of the time and energy that
must be devoted to official duties and some loss of privacy. Although
their public lives encroach upon their private lives, it is important
that ministers and parliamentary secretaries avoid giving any appearance
of using public office for private purposes.
The nature of their duties is such that they may need to have regard to
the interests of members of their immediate families (to the extent that
ministers know their interests) as well as their own when ensuring that
no conflict or apparent conflict between interests and duties arises.
Ministers (this and subsequent references to ministers should be read
as including parliamentary secretaries) must not engage in any professional
practice or in the daily work of any business. They must not accept retainers
or income from personal exertion other than that laid down as their remuneration
as ministers and parliamentarians. Notes on the meaning of 'personal exertion'
are included in the explanatory notes which the Prime Minister sends out
with statements of interests forms.
Ministers are required to resign directorships in public companies and
may retain directorships in private companies only if any such company
operates, for example, a family farm, business or portfolio of investments,
and if retention of the directorship is not likely to conflict with the
minister's public duty (e.g., a minister should question the retention
of a directorship in a company in which share holdings extend beyond the
minister's own family).
Ministers are required to divest themselves of all shares and similar
interests in any company or business involved in the area of their portfolio
responsibilities. The transfer of interests to a family member or to a
nominee or trust is not an acceptable form of divestment.
Ministers are not precluded from making investments on the stock markets
or other financial and trading markets, but they should not operate as
traders and should exercise careful personal judgement in respect of transactions.
Ministers are required to make statements of interests in accordance with
arrangements determined by the Prime Minister. The Prime Minister writes
to ministers outlining these arrangements.
Ministers should perform their public duties uninfluenced by fear or favour
- that is, by any expectation that they will benefit or suffer as a consequence.
Ministers should not accept any benefit where acceptance might give an
appearance that they may be subject to improper influence (eg because
the giver has or seeks to have a contractual relationship with government
or has any other special interest in government decisions).
Ministers may accept benefits in the form of gifts, sponsored travel or
hospitality only in accordance with the relevant guidelines (provided
by the Prime Minister when he writes to ministers about their statements
of interests).
Ministers should not exercise the influence obtained from their public
office, or use official information, to obtain any improper benefit for
themselves or another.
Particular attention needs to be paid to ensuring that the scope for adverse
comment is minimised if it is proposed to appoint someone who is the close
relative or associate of a minister.
Subject to provisions in legislation or other formal documents relating
to the establishment of government bodies or positions, government appointments
are to be made on the basis of merit, taking into account the skills,
qualifications, experience and any special qualities required of the person
to be appointed.
If the approving authority (which may be Cabinet or a minister) is satisfied
that this condition is demonstrably met, then spouses, parents, children
or other close relatives of ministers, parliamentarians, ministerial staff
or heads of departments or other agencies should not be discriminated
against in selection processes on account of family relationships.
There is a longstanding practice that ministers do not appoint close relatives
to positions in their own offices. In addition, close relatives of a minister
should not be appointed to any other minister's office irrespective of
the level of the position, except with the specific approval of the Prime
Minister. And a minister's close relative should not be appointed to any
position in an agency in that minister's own portfolio if the appointment
is subject to the agreement of the minister or Cabinet.
Appointment proposals should identify the elements of merit, skills, qualifications,
experience and special qualities on which they are based.
Ministers are provided with facilities at the public expense in order
that public business may be conducted effectively. Their use of these
facilities should be in accordance with this principle. It should not
be wasteful or extravagant. As a general rule, official facilities should
be used for official purposes. The distinction between official and personal
conduct is not always clear (e.g., in relation to the provision of hospitality/
entertainment and use of car transport) but ministers should ensure that
their actions are calculated to give the public value for its money and
never abuse the privileges which, undoubtedly, are attached to ministerial
office.
Background to the appointment of the Bowen Committee
The brief background to the appointment of the Bowen Committee was that
following the Report on the Declaration of Interests of the Riordan
Committee, which was tabled on 30 September 1975, no action had been taken
to implement its recommendations due to the ensuing change in Government
At about the same time the British Parliament had appointed a select Committee
to consider arrangements to be made in regard to declaration of members'
interests. Apart from the British precedent, arrangements for declaration
of interests were made in the parliamentary practice of a number of other
countries including the United States, Canada and New Zealand.
In a press release issued on 16 December 1977, the then Prime Minister
stated that he did not regard the report of the Riordan Committee on Pecuniary
Interests as putting forward adequate solutions to resolving questions
of conflicts of interest and that he did not consider a statement of pecuniary
interests to the Parliament as providing an adequate procedure to determine
whether there has been any breach of the high standards which are properly
required of those in public office. This was followed by the appointment
of the Bowen Committee on 15 February 1978 by the then Prime Minister
with terms of reference which included the requirement:
(1) To recommend whether a statement of principles can be drawn up on
the nature of private interests, pecuniary or otherwise, which could conflict
with the duty of any or all persons holding positions of public trust
in relation to the Commonwealth.
(2) To recommend whether principles can be defined which would promote
the avoidance and if necessary the resolution of any conflicts of interest
which the Inquiry may, under paragraph (1) above, find to be possible.
After the Bowen Committee was appointed, and following the resignation
of a senior officer of a Commonwealth Government Department to take up
employment with a company that had made a successful bid for a Commonwealth
Government tender, the then Prime Minister on 14 March 1978 specifically
referred for the consideration of the Bowen Committee, the question of
post-separation employment which could give rise to conflicts between
public duty and private interests.(1)
Observations of the Bowen Committee on Blind Trusts
The effectiveness of the blind trust and its variant the frozen trust
to resolve the problems of conflicts of interest was considered by the
Bowen Committee. A frozen trust, as its name implies, is one in which
the trustee maintains the holdings essentially as they were when the trust
was established.
The Bowen Committee concluded that blind trusts would be ineffective
and could be a facade behind which the conflict of interest would survive.
It also concluded that the blind trust or the frozen trust, would not
be an alternative to complete divestment when sensitive assets are involved
in a conflict of interest situation.
The Committee believes that such trusts could be a facade behind which
the conflict of interest would survive, for it can see no effective way
by which a trust could be rendered completely 'blind'. Unless the assets
were diversified the officeholder could easily ascertain whether the trustee
still retained them and, in practice, might find it nearly impossible
to avoid knowing. If a public official were designated the trustee for
such purposes, there might be greater confidence in the 'blindness' of
the arrangement than if the officeholder were allowed to select a relative
or former business associate. On the other hand, an officeholder obliged
to transfer assets to an official trustee might be doubtful whether the
trustee's commercial acumen would guarantee the income or capital growth
which his own or commercial management might have produced over the same
period. As for the frozen trust, its impact on a conflict of interest
situation is so limited that the Committee doubts that it would have the
effect on public confidence claimed for it.
The Committee does not regard either the blind trust or the frozen trust
as a satisfactory alternative to complete divestment when sensitive
assets are involved. Further, there would be significant administrative
difficulties in operating blind trusts if it was accepted that the attempt
was worthwhile. For example, special income taxation provisions would
probably be required to maintain the confidentiality of trust operations
from the officeholder who was its beneficiary and at the same time ensure
that the trust bore its appropriate rate of tax.
The Committee believes that divestment is appropriate in the Australian
context only for certain types of interest. Where there is so close an
association between the interests and the officeholder's responsibilities
that the other options of disclosure and avoidance are not appropriate,
divestment may be required. Ministers administering their own departments
often act by themselves without convenient opportunity to disclose and
seek authorisation such as would be available to them in Cabinet. Those
public servants who have to make frequent, perhaps daily, decisions in
a particular area may find it impractical to arrange for someone else
to act for them when a conflict of interest arises, or to have the authorisation
of a superior on each occasion. In both cases, it is better to divest
the interest which causes the difficulty and get on with the job(2).
The blind trust may not, therefore, be an alternative to divestment of
investments to avoid an actual or potential conflict of interest. The
technique of resorting to a blind trust by a politician is at best a temporary
divestment and should be one option in a periodic disclosure and reporting
regime subject to official supervision. Thus, in the United States the
setting up of a blind trust is merely one option in an onerous disclosure
and reporting regime required under the Ethics in Government Act 1978,
which is administered and monitored by the Office of Government Ethics.
Endnotes
- Public Duty and Private Interest; Report of the Committee of Inquiry
established by the Prime Minister on 15 February 1978 (July 1979); paras.
1.1 to 1.7; pp. 1 to 2.
- Ibid., paras. 5.36 ,5.37 & 5.38; p. 41.
The Riordan Committee(1) did not examine the feasibility of the use of
blind trusts as a safeguard against conflicts of interest and duty. In
its report - Report on Declaration of Interests - the Riordan Committee
recommended that Ministers of the Crown, on assuming office, should resign
any directorship and dispose of any shares in a public or private company
which might be seen to be affected by decisions taken within the Minister's
sphere of responsibility.
The main recommendation of the Riordan Committee was that there should
be a register of interests of Members of Parliament with a degree of public
access on the basis that the real aim of the register is that it should
serve as a means of assuring the people that public decisions are made
in the public interest.(2) The Riordan Committee stated quite unequivocally
that its object in proposing a register of interests was not to detect
fraud, bribery, undue influence or impropriety(3). The report of the Riordan
Committee titled - Report on Declaration of Interests, which was
tabled in Parliament on 30 September 1975, dealt with Members of Parliament
in Part 1 and dealt with the Public Service, Ministerial Officers and
Executives and Employees of the Media in Part 11.
The Report on Declaration of Interests made reference to the practice
at that time for Ministers to make a disclosure of any pecuniary interests
falling within the ambit of their portfolios to the Prime Minister. The
Committee did not consider this a satisfactory arrangement as the public
which was excluded from knowledge of such disclosures could not make a
judgment on the decision of the Prime Minister to permit Ministers to
retain certain investments. The Riordan Committee therefore recommended
the divestment of shares sensitive to a Minister's portfolio responsibilities.
Having regard to the paramount importance of the Ministers of the Crown
in the decision-making process, the Committee is of the opinion that this
informal disclosure does not go far enough. It is not sufficient that
the Prime Minister of the day should be satisfied that Ministers are participating
in decision-making without regard to their own interests. The public must
receive this same assurance.
Therefore, the Committee recommends that Ministers of the Crown, on
assuming office, should resign any directorship and dispose of any shares
in a public or private company which might be seen to be affected by decisions
taken within the Minister's sphere of responsibility(4).
The Riordan Committee also considered whether there were any safeguards
already in place for the avoidance of conflicts of interest. The Riordan
Committee examined the role of sections 44(v) and 45(iii) of the Constitution,
section 211 of the Commonwealth Electoral Act and Standing Order 196 of
the House of Representatives which were in place to deal with questions
of conflicts of interest and concluded that none of these provisions can
be said to give the assurance that decisions affecting the public will
be taken in the public interest(5).
Section 44(v) of the Constitution, known as the government contractors'
disqualification, is the provision that disqualifies a person from being
elected or sitting as a Senator or Member of the House of Representatives,
if that person has a direct or indirect pecuniary interest in any agreement
with the Commonwealth. The only exception provided in the section is where
the direct or indirect pecuniary interest arises from being a member of
an incorporated company of more than 25 members, where the company concerned
has an agreement with the Commonwealth.
Section 45(iii) of the Constitution prohibits the acceptance of retainers
by Senators and Members.
Section 211 of the Commonwealth Electoral Act provides that any person
convicted of bribery or undue influence at an election shall for two years
from the date of conviction or finding by the Court of Disputed Returns
be incapable of being chosen or sitting as a Member of either House .
Standing Order 196 of the House of Representatives provides that no member
shall be entitled to vote in which he or she has a direct pecuniary interest
not held in common with the rest of the subjects of the Crown.
A detailed examination of these provisions is outside the scope of a
paper of this nature this paper, but in Attachment H the possible impact
of section 44(v) on a system of blind trusts in respect of investments
in the securities of a company is briefly considered.
Endnotes
- Report on Declaration of Interests by the Joint Committee on Pecuniary
Interests of Members of Parliament; Parliamentary Paper No. 182 (1975)
-Chairman , The Hon. J.M. Riordan, MP.
- Ibid., p. 26.
- Ibid., p. 10.
- Ibid., p. 27.
- Ibid., p. 10.
The registrable interests relating to companies as set out in the document
titled the Registration of Members' Interests - Requirements of the
House of Representatives(1), is in accordance with the Resolutions
of the House of Representatives. The registrable interests in relation
to holdings in or associations with companies are as follows:
(1) shareholdings in public and private companies( including holding
companies) indicating the name of the company or companies(2)
(2) family and business trusts and nominee companies,
(i) in which a beneficial interest is held, indicating the name of the
trust, the nature of its operation and beneficial interest, and
(ii) in which the Member, the Member's spouse, or a child who is wholly
or mainly dependent on the Member for support, is a trustee ( but not
including a trustee of an estate where no beneficial interest is held
by the Member, the Member's spouse or dependent children), indicating
the nature of the trust, the nature of its operation and the beneficiary
of the trust;(3)
(3) registered directorships of companies;(4)
(4) partnerships indicating the nature of the interests and the activities
of the partnerships;(5)
(5) liabilities indicating the nature of the liability and the creditor
concerned;(6)
(6) the nature of any bonds, debentures and like investments;(7)
(7) membership of any organisation where a conflict of interest with
a Member's public duties could foreseeably arise or be seen to arise(8);
and
(8) any other interests where a conflict of interest with a Member's
public duties could foreseeably arise or be seen to arise.(9)
These registrable interests could cover a Member's involvement with a
company not merely as a direct shareholder but as an indirect shareholder
through interposed trusts, partnerships and other companies. Paragraph
(7)(10) would also cover the case of a member of a company limited by
guarantee where no shares have been issued. The registrable interests
of Senators is substantially the same as for Members except that there
is no counterpart to the requirements of paragraph (7) to cover membership
of companies limited by guarantee without shares
Notification of such registrable interests is due within 28 days of making
and subscribing an oath or affirmation as a Member of the House of Representatives
or within 28 days of any alteration of those interests occurring. A Member
who knowingly fails to provide a statement of registrable interests or
any alteration of those interests within the stipulated time shall be
guilty of a serious contempt of the House of Representatives and shall
be dealt with by the House accordingly.
Declaration of interest in debate and other proceedings in the Senate
5. That, notwithstanding the lodgement by a senator of the senator's registrable
interests and the registrable interests of which the senator is aware
(a) of the senator's spouse; and (b) of any children who are wholly or
mainly dependent on the senator for support, and the incorporation of
that statement in a Register of Senators' Interests, a senator shall declare
any relevant interest;
(a) at the beginning of his or her speech if the senator participates
in debate in the Senate, committee of the whole Senate, or a committee
of the Senate or of the Senate and the House of Representatives, and
(b) as soon as practicable after a division is called for in the Senate,
committee of the whole Senate or a committee of the Senate or of the Senate
and the House of Representatives, if the senator proposes to vote in that
division;
and the declaration shall be recorded and indexed in the Journals of
the Senate or minutes of proceedings of the committee and any Hansard
report of those proceedings or that division, but it shall not be necessary
for a senator to declare an interest when directing a question or seeking
information in accordance with standing order 72 or 74.
6.(1) For the purposes of interpretation of paragraphs 1 to 5 of this
resolution 'spouse' includes de facto spouse.
(2) 'De facto spouse' means a person who is living with another person
of the opposite sex as the spouse of that other person on a bona fide
domestic basis although not legally married to that other person.
(Resolution adopted 17 March 1994; amended 21 June 1995)
Endnotes
- Resolutions adopted by the House of Representatives on 9 October 1984
amended on 21 March 1985, 13 February 1986, 22 October 1986, 30 November
1988 and 9 November 1994.
- Ibid., para.(2)(a).
- Ibid., para.(2)(b).
- Ibid., para. (2)(d).
- Ibid., para. (2) (e).
- Ibid., para. (2)(f).
- Ibid., para. (2) g).
- Ibid., para. (2)(m).
- Ibid., para. (2)(m).
- Ibid., para. (2)(m).
Extracts from the Carney Paper
The Carney Paper(1) reviews reports on the operation of different trusts
under the Federal Canada Code which permitted three forms of trusts: the
Blind Trust, the Frozen Trust and the Retention Trust. A blind trust as
defined in the Federal Canada Code has already been defined in the paragraph
of this paper on the Mode of Operation of Blind Trusts (pages 1-3).
A frozen trust is one in which the trustee maintains the holdings essentially
as they were when the trust was established. Assets requiring active decision
making by the trustee, such as convertible securities and real estate
or assets easily affected by Government action are not considered suitable
for a frozen trust. A retention trust is one in which the trustee maintains
rights in holding companies, established for estate planning purposes.
The following observations of the Aird Report(2), the Parker Report(3)
and the Starr-Sharp(4) Report which are recorded in the Carney Paper,
indicate that blind trusts were not effective and were not an alternate
to a full disclosure and reporting regime under official supervision.
The Aird Report preferred full disclosure by way of a register of interests
because the transfer of family businesses to blind trusts still involved
the family and so the Minister would still be aware of the affairs of
the Business.(5)
The Aird Report although not a 'strong supporter' of blind trusts did
suggest that if they were retained as one alternative, then there should
still be disclosure of the assets placed into the trust and that the trustee
be the Commissioner or a nominee. Additionally, it suggested that the
Commissioner deliver to the Provisional Auditor a list of all Ministers
who have blind trusts and of every business entity in which they or their
families possess an interest, to enable the auditor to investigate their
involvement (if any) in any transactions with Government departments or
agencies the records of which may be requested by the Auditor under S.
10 Audit Act.(6)
The Parker Report was more critical and recommended the abolition of
blind trusts.
Finally, the conclusion of the Parker Report was to recommend the abolition
of blind trusts: 'a confusing and unnecessary device as has nothing to
do with divestment and yet results in misplaced confidence by Ministers
and the public that there has been some form of divestment - when there
was not.(7)
That the blind trust arrangement achieves at best only the doubtful benefit
of temporary divestment was stressed by the Starr-Sharp Report.
The Starr-Sharp Report concluded that there was no feasible alternative
to trusts if the objective is one of temporary divestment. But what are
the advantages of temporary divestment? As long as a Member or Minister
knows or suspects which assets are held by the trust, temporary divestment
is not an object worth pursuing. If divestment is unacceptable, then disclosure
with adequate enforcement procedures appears to be the only option.(8)
The Carney Paper concludes that if full divestment was not achievable,
then disclosure with adequate enforcement procedures was the only option.
Endnotes
- Conflict of Interest: A Commonwealth Study of Members of Parliament
by Gerard Carney; Commonwealth Secretariat London (1992).
- Ibid., p. 146; Report on Ministerial Compliance with the Conflict
of Interest Guidelines and Recommendations with respect to those Guidelines
(1986) (the Aird Report).
- Ibid., p. 146; Report of Chief Justice W.D. Parker - Commission of
Inquiry into the Facts and Allegations of Conflict of Interests concerning
the Hon. Sinclair N. Stevens (1988) ( the Parker Report).
- Ibid., p. 146; Ethical Conduct in the Public Sector - Report of the
Task Force on Conflict of Interest (1984) (the Starr-Sharp Report).
- Ibid., p. 97.
- Ibid., p. 98.
- Ibid., p. 98.
- Ibid., p. 98.
In the UK, the guidelines issued by the Prime Minister on 19 May 1992,
titled Questions of Procedure for Ministers (QPM), would appear to have
opted for divestment where there is doubt about an interest in an investment.
In any event the Prime Minister is to be the final judge whether the
investment should be retained or not. An article in The Financial
Times of 20 May 1992 highlights the salient features of the QPM.
It would appear that the option of a blind trust was not available under
the QPM of 19 May 1992. The First Report of the Committee on Standards
in Public Life recommended that the first paragraph of QPM should be
amended to say: 'It will be for individual Ministers to judge how best
to act in order to uphold the highest standards. It will be for the
Prime Minister to determine whether or not they have done so in any
particular circumstance.(1) ' (emphasis added)
The Committee on Standards in Public Life was appointed on 25 October
1994, following a fall in public confidence in the financial probity
of Members of Parliament (MPs) which coincided with an increase in the
number of MPs holding paid consultancies which related to their Parliamentary
role.
The Guide to the Rules relating to the Conduct of Members introduced
in 1995 provides for enhanced disclosure both in the Register as well
as declaration of interest in the course of debate in the House or in
Committee or participating in any other proceedings of the House. A
declaration of interest involves a declaration of any past, present
or future interest relevant to those proceedings. In addition certain
employment agreements must be deposited with the Parliamentary Commissioner
for Standards.
Paragraph 5 states.:
The resolutions of the House of Commons, agreed on 19 July and 6 November
1995, supplement and strengthen the established rules on disclosure
of financial interest. There are two distinct but related methods of
disclosure of personal financial interest: registration of interests
in a Register which is opened to public inspection and declaration of
interest in the course of debate in the House and in other contexts.
The main purpose of the Register is to give public notification on a
continuing basis of those pecuniary interests held by Members which
might be thought to influence their parliamentary conduct or actions.
The main purpose of declaration of interest is to ensure that fellow
members of the House and the public are made aware, at the appropriate
time when a Member is making a speech in the House or in Committee or
participating in any other proceedings of the House, of any past, present
or expected future pecuniary interest which might be reasonably thought
to be relevant to those proceedings. The Resolution of 19th July 1995
provides for declaration of interest in respect of all written notices
(paragraph 42). The Resolution of 6th November 1995 relating to certain
employment agreements requires the deposit of such agreements with the
Commissioner for Standards (paragraphs 35 and 36)(2)
Ministers of the Crown who are Members of the House of Commons are
subject to the rules of registration, declaration and advocacy in the
same way as all other Members. In addition, Ministers are subject to
further guidelines and requirements laid down by successive Prime Ministers
in order to ensure that no conflict arises, nor appears to arise, between
their private interests and their public duties. ('Questions of Procedure
for Ministers'). These rules are not enforced by the House of Commons.(3)
The Guide to the Rules Relating to the Conduct of Members list 10 categories
of 10 Categories of Registrable Interests. Category 9 relates to Shareholdings
and requires the following disclosures.
Shareholdings: Interests in shareholdings held by the Member, either
personally, or with or on behalf of the Member's spouse or dependent
children, in any public or private company or other body which are:
(a) greater than 1 per cent of the issued share capital of the company
or body; or
(b) less than 1 per cent of the issued share capital but more than 25,000
in nominal value.
The nature of the company's business in each case should be registered.
When determining whether or not shareholdings are registrable under
the criteria set out above, Members should include not only holdings
in which they themselves have a beneficial interest but also those in
which the interest is held by, or on behalf of, their spouse or dependent
children. For each registrable shareholding, the entry should state
the name of the company or body, briefly indicate the nature of the
business, and make clear which of the criteria of registration is applicable.(4)
It will thus be seen that there is no scope for creating a blind trust
in respect of such shareholdings as any shares held in trust for the
beneficial interest of a Member must be disclosed; the need to disclose
defeating the purpose for which the blind trust may have been set up.
In the case of a Minister who is a Member of Parliament the blind trust
option not being available under the Guide to the Rules for the Conduct
of Members, the only option is divestment if any shares come within
the sphere of responsibility of the Minister. In the unlikely event
of the Prime Minister of the day not requiring divestment under the
Questions of Procedure for Ministers, the Minister would be required
under the rules of declaration of interests, as distinct from the rules
for the registration of interests, to declare his or interests in such
shares at each debate in which the Minister participates thus making
the position of the Minister untenable. The only practical option, to
avoid the public becoming aware that there may be a continuing clash
of private interest and public duty, is divestment.
In terms of Standing Order No. 121A of the House of Commons, the Committee
on Standards and Privileges oversees the work of the Parliamentary Commissioner
of Standards
The Committee on Standards in Public Life(5) too thought it necessary
to recommend in May 1995, that the House of Commons should appoint a
person of independent standing , who should have a tenure and not be
a career member of the House of Commons staff, to be Parliamentary Commissioner
of Standards, by analogy with the Comptroller and Auditor General. The
Commissioner should be responsible for maintaining the Register of Members'
Interests; for advice and guidance to MPs on matters of conduct; for
advising on the Code of Conduct for MPs; and for investigating allegations
of misconduct initially.
Endnotes
- First Report of the Committee on Standards in Public Life (the Nolan
Committee - Chairman Lord Nolan) Standards in Public Life (May 1995);
Vol 1; Cm 2850-1;p.49; para 13.
- Committee of Standards and Privileges; Third Report - The Code of
Conduct and the Guide to the Rules Relating to the Conduct of Members
(12 July 1996); London: HMSO; para. 5.
- Ibid., para. 7.
- Ibid., para. 31.
- First Report of the Committee on Standards in Public Life; Vol.
1(May 1995); Cm 2850-1; HMSO; para 17; p. 4.
1. Ethics in Government Act 1978
The US Ethics in Government Act 1978 as modified by the Ethics
Reform Act 1989 requires persons covered thereunder to file detailed
personal financial statements, upon nomination or appointment to a position
and on an annual basis during the term of the official's government
service. The principal restrictions on the financial activities
of federal officials are found in Sec. 208(a)(1). It prohibits a federal
official from participating in any decision-making on a matter in which
he, his spouse, a minor child, a partner, an organisation in which he
is serving as officer, director, trustee, partner or employee, or any
organisation with whom he is negotiating or has any arrangement concerning
prospective employment, has a financial interest. The penalty for failure
to comply is imprisonment for up to five years and fines up to US $50,000.
The prohibition in Sec. 208(a) is waived in the circumstances provided
in Sec. 208(b). Under Sec. 208(b)(1) the prohibition is waived if the
employee first advises the Government official who appointed him or
her, of any financial interest in the matter which will be affected
by the decision and receives, in advance, a written determination that
the interest is not so substantial as to affect the integrity of the
services which the Government may expect from the employee concerned.
The prohibition in sec. 208(a) is also waived by Sec. 208(b)(2) if the
financial interest is exempted from the operation of Sec. 208(a) by
general rule or regulation as being too remote or too inconsequential
to affect the integrity of Government officers' or employees' services.
The disclosure and reporting requirements which are burdensome, can
be avoided, among others, by the option provided by the legislation
to establish a Qualified Diversified Trust (QDT) to hold certain prescribed
financial assets of an official in a truly blind trust. There is provision
for the creation of a Qualified Blind Trust (QBT) of assets which do
not qualify to be transferred to a QDT. A QBT could, in due course when
the initial assets transferred to it have been disposed of and reinvested
in other assets, qualify to be a QDT. A QBT thus gives only limited
cover from the strict requirements of the disclosure and reporting requirements
of the Ethics in Government Act 1978.
It is proposed to consider briefly how blind trusts are administered
in the United States in minimising conflict of interest between the
politician's official duties and his or her interests in any investments
held by the trustee on his or her behalf.
2. Qualified Blind Trust
A qualified blind trust (QBT) must satisfy the following requirements.
2.1 Qualifications of trustees
A trustee of a blind trust must satisfy the requirements in Sec 202(f)(3)
designed to ensure independence from the beneficiary. The Office of
Government Ethics has restricted the permissible trustees of blind trusts
to financial institutions(2) that meet the independence test.
Eligibility to serve as a trustee is limited to a financial institution,
not more than 10 per cent of which is owned or controlled by a single
individual which is a bank,(3) or an investment advisor.(4)
2.2 No restriction on transfer of trust assets
Sec. 202(f)(3)(B) provides that any asset transferred to the trust
should be free of any restriction with respect to its transfer or sale,
unless such restriction is expressly approved by the supervising ethics
office of the reporting officer. During the term of the trust, the interested
parties shall not pledge, mortgage, or otherwise encumber their interests
in the property held by the trust.(5)
2.3 Other requirements of the trust instrument
Sec.202(f)(3)(D) requires that the proposed trust instrument and the
proposed trustee be approved by the Office of Government Ethics(6).
Sec. 202(f)(3)© lists out other conditions which the trust instrument
must comply with to ensure restrictions on communications between the
trustee and a party having any interest in the trust assets. These include:
- the condition that the trustee must not consult or notify any interested
party of the exercise of his discretion and authority in the management
and control of the trust assets;
- the trust tax return shall be prepared by the trustee or his designee,
and such return and any information relating thereto shall not be
disclosed to any interested party - this prohibition does not extend
to a summary of the trust income in appropriate categories being supplied
by a trustee to an interested party to enable an interested party
to complete a personal tax return; and
- a condition that the reporting individual shall not attempt to obtain
information with respect to the holdings of the trust including the
obtaining of a copy of the trust tax return which has been filed or
any information relating thereto.
3. Qualified Diversified Trusts
The US Ethics in Government Act 1978, provides in Sec. 202(f)(4)(B),
for the creation of a qualified diversified trust (QDT) where the assets
placed in the trust consist of a well-diversified portfolio of readily
marketable securities for the benefit of a reporting individual. However,
it is a requirement that none of the assets consist of securities of
entities having substantial activities in the area of the reporting
individual's primary area of responsibility. Such assets which qualify
to be transferred to a QDT will not be considered to be a financial
interest of the reporting individual for the purpose of the conflict
of interest rules.
The standards for a diversified portfolio set by Federal Regulations(7)
require the value of the securities concentrated in any particular or
limited industrial, economic or geographic sector to be no more than
20 per cent of the total; and the value of the securities of any single
issuer (other than the United States Government) to be no more than
5 per cent of the total. Under the marketability standard a security
will be considered readily marketable if daily price quotations for
the security appear regularly in newspapers of general circulation and
the trust holds the security in a quantity that does not unduly
impair liquidity.
4. Exclusion of investments in Investment Funds and Retirement Plans
from the reporting requirements
It is relevant to note that the financial disclosure and reporting
requirements do not require a reporting individual to report the financial
interests held by a widely held investment fund (whether such fund is
a mutual fund, regulated investment company, pension or deferred compensation
plan, or other investment fund), provided certain conditions are satisfied.
To qualify for this concession the fund must be publicly traded or
the assets of the fund must be widely diversified. Further the reporting
individual must neither exercise control over nor have the ability to
exercise control over the financial interests held by the fund.(8)
Also a reporting individual shall not be required to report financial
interests in or income derived from any retirement , including Thrift
Savings Plan(9); or any other retirement system maintained by the United
States for officers or employees of the United States, including the
President, or for members of the uniformed services; or benefits received
under the Social Security Act.(10)
Endnotes
- 18 United States Code (U.S.C.).
- Note to 5 CFR Sec. 2634.406(a)(2)(ii).
- as defined in 12 USC 1841 ©.
- as defined in 15 USC 80b-2(a)(11).
- 5 CFR Sec.2634.403(b (5).
- 5 CFR Sec.2634. 403 (b).
- 5 CFR Sec.2634.404 (b)(2).
- sec.202(f) (8).
- Title 5 USC & subchapter III of Chapter 84 of such title.
- USC Title 5 Sec 102(i).
1. Blind Trusts and the Government Contractor's disqualification
in section 44(v) of the Constitution
As mentioned in the paper, the Riordan Committee examined the role
of sections 44(v) of the Constitution and concluded that its provisions
were not intended to give the assurance that decisions affecting the
public will be taken in the public interest.(1) Section 44(v) of the
Constitution is the provision that disqualifies a person from being
a Senator or Member of the House of Representatives if that person
has a direct or indirect pecuniary interest in any agreement with
the Commonwealth. It provides -
Any person who-
(v) Has any direct or indirect pecuniary interest in any agreement
with the Public Service of the Commonwealth otherwise than as a member
and in common with other members of an incorporated company consisting
of more than twenty-five persons:
shall be incapable of being chosen or of sitting as a senator or member
of the House of Representatives.
This section is referred to as 'the government contractor's disqualification'
and applies where any person has a direct or indirect pecuniary interest
or arguably, the potential of a monetary reward from an agreement
with the Commonwealth. The word 'indirect' which qualifies 'pecuniary
interest' would possibly include a benefit which can be valued in
monetary terms, even though it does not flow directly to the recipient.
It is not necessary for a person to be a party to the agreement to
be cut down by section 44(v); a mere indirect pecuniary interest arising
to a third party out of the successful negotiation, execution or termination
of the agreement may suffice to bring that third party within the
provisions of section 44(v).
If a prospective Senator or Member creates a blind trust to avoid
a possible conflict of interest, the question posed by the disqualification
in section 44(v) of the Constitution is whether an agreement entered
into by the trustee, unbeknown to the beneficiary, which directly
or indirectly benefits the prospective Senator or Member as a beneficiary
of the trust would disqualify him or her. The same question would
arise in respect of an agreement entered into by the trustee of a
blind trust set up by a serving Senator or Member.
Thus the actions of a trustee of a blind trust which may indirectly
benefit a beneficiary may attract the government contractor's disqualification,
even if the person so benefiting was unaware of the agreements being
entered into by the trustee of the blind trust.
The only exclusion in the section is where the direct or indirect
pecuniary interest arises from being a member of an incorporated company
of more than 25 members. This exception would apply to a company limited
by guarantee as well, with more than 25 members. This exclusion would
accrue to the beneficiary of a blind trust where the trustee holds
shares in such a company or is a member of a company limited by guarantee
and has no share capital and the company has entered into an agreement
with the Commonwealth. The full scope of the disqualification under
this section remains to be interpreted by the High Court and this
is also the view of Gerard Carney, Associate Professor of Law, Bond
University.
The Constitution remains to be interpreted as to the precise
scope of this disqualification and although the High Court has not
yet considered this issue, Barwick CJ sitting as a Court of Disputed
Returns in Re Senator Webster did restrict the effect of section
44(v) to contracts the nature of which is such that the Government
would be able to influence the Member in the performance of his or
her parliamentary duties.(2)
In Re Webster(3), Barwick CJ sitting as the Court of Disputed
returns, had to consider a Senate Reference under section 204(now
section 376) of the Commonwealth Electoral Act 1918 whether
Senator Webster was or had become incapable of being chosen or sitting
as a Senator under s 44(v) or 45(iii)? As the disqualification under
section 44(v) is automatic and had penal consequences, Barwick CJ
took the view that the provision should be given a strict interpretation.
In interpreting the section Barwick CJ then went on to consider the
purposes which section 44(v) is intended to achieve. The section was
based on the traditional English prohibition which was designed to
diminish the power of the Crown to exert corrupt influence over Parliament.(4)
On this interpretation the mere existence of an agreement with the
Commonwealth would not be adequate to attract the disqualification
in section 44(v). It must be established that the contract must be
of a continuing nature and that the Executive Government must be able
to influence the Senator or Member in the performance of his or her
parliamentary duties.
While the basis of the decision in Re Webster was that there
was no continuing agreement to which section 44(v) would apply to
the facts of that case, there were obiter dicta in Barwick CJ's decision
that might have a bearing on the full scope of this constitutional
provision. In particular the obiter statement that for the purposes
of section 44(v), in certain circumstances a shareholder may have
an interest in an agreement made by the company with a third party,
although under the general law it is well established that a shareholder
does not have any legal or equitable interest in the assets, including
agreements, of the company.(5) However Barwick CJ stated, obiter again
, that if a member or a shareholder of a company is to come within
section 44(v), it will be necessary to show an interest in such an
agreement in a capacity other than as a member or shareholder.(6)
Where a person has an interest in an agreement in more than one capacity,
the benefit of the exclusion may not be claimed if the dominant interest
arises not as a member of the company, but where the person stands
to benefit most from the agreement, in the other capacity. Thus a
Member or Senator creating a blind trust cannot rest assured that
the mere creation of a blind trust will exclude him or her from the
operation of section 44(v) of the Constitution on the grounds that
he or she was not aware of the agreements that a trustee of a blind
trust may have entered into in respect of companies covered by this
provision and in which the Senator or Member has investments.
2. Exposure of Ministers to the Insider Trading provisions of the
Corporations Law?
A significant impact of the reform of the insider trading legislation
of 1991 was to bring any person, who has acquired price sensitive
information in relation to the securities of a company and who trades
in such securities, within the ambit of this legislation. A Minister
who in the course of attending a Cabinet meeting or in administering
a department comes into possession of price sensitive information
in relation to the securities of a company is now an insider for the
purpose of the insider trading legislation. Prior to the 1991 amendments,
to be an insider a person had to be connected to a company. A person
was considered to be connected to a company if the person was an officer
of the company, a substantial shareholder or a person occupying a
position within the company which may reasonably be expected to give
access to inside information. Thus under the pre-1991 legislation
a person who became a Minister and only had non-substantial holdings
in the securities of a company was outside the reach of the insider
trading provisions. If the Minister was a director of a company at
the time of assuming office resignation as a director would have taken
the Minister outside the insider trading provisions providing the
holdings in the securities of the company were not substantial.
Under the existing legislation even a minority holding of shares
in a private or listed company may expose a Minister to the insider
trading provisions of the Corporations Law should he or she
trade in those shares at a time when price sensitive information known
to the Minister was not available to the public. Again from the aspect
of the insider trading provisions, divestment would be necessary.
The creation of a blind trust may not provide a defence from the operation
of the insider trading provisions.
3. Disclosure of related party transactions by Commercial Authorities
under the administration of Ministers
Accounting Standard AAS 22 on Related Party Disclosures governs
disclosure of transactions a person has with the entity he or she
controls either directly or indirectly through intermediaries. Such
transactions are generally referred to as related party transactions.
The Corporations Law requires companies to comply with Accounting
Standard AASB 1017 on related party transactions which is similar
to AAS 22. The object of accounting standard AAS 22 on Related
Party Disclosures is to ensure that disclosure will be a deterrent
to persons who are in fiduciary positions, such as directors of public
companies, from making gains out of transactions with the entities
they control. More specifically it is intended to deter gains which
would not normally be available to others dealing with such entities.
It is complementary to the insider trading provisions introduced in
1991.
The guidelines for Financial Statements of Commonwealth Authorities
(the Guidelines) issued by the Minister for Finance under
the Audit Act 1901 in March 1995 apply to Commonwealth Authorities
in preparing financial statements for the years ending on or after
30 June 1995. Under the Guidelines, Commonwealth authorities
are required to comply with Australian Accounting Standards issued
by the Australian Accounting Research Foundation (AAS series)
in preparing financial statements of their commercial activities.
However the Guidelines have excluded Ministers as related parties
of the commercial entities for which they have responsibility in applying
AAS 22. In consequence, transactions of Ministers with commercial
entities they control do not require to be disclosed in the financial
statements of Commonwealth commercial entities.(7) It will enhance
the public perception that deterrent measures are in place to avoid
conflict of private interest and public duty, if the disclosure requirements
imposed on entities controlled by directors of public companies by
the Corporations Law is also imposed on business enterprises
controlled by Ministers. On the other hand to exclude commercial entities
controlled by Ministers from the disclosure requirements will add
to the cynicism that those who make the law for ensuring probity in
the corporate world do not wish to covered by the same standards.
The unrestricted application of AAS 22 would entail disclosure of
transactions every commercial entity of the Commonwealth has with
every Minister of the Commonwealth. This is because every Minister
of the Commonwealth is a member of the Federal Executive Council constituted
under section 64 of the Constitution. The Federal Executive Council
and Ministers are responsible for all the departments and activities
carried on by them and various Commonwealth Authorities. It appears
that the practical problems associated with the recording and disclosing
of transactions was the basis for restricting the application of AAS
22. A way out may be to empower the Auditor-General to disclose any
unusual and material benefits where the Auditor-General as auditor
of these commercial entities considers it necessary to do so in the
public interest. Further, the Guidelines for the disclosure of information
on related party transactions of Commonwealth commercial entities
are against the trend for more disclosure that has been found necessary
in the 1990s in the case of public companies to prevent the abuse
of fiduciary positions.
Endnotes
- Joint Committee on Pecuniary Interests of Members of Parliament;
Report on Declaration of Interests; (1975) Parliamentary paper No.
182;, p. 10.
- Conflict of interest: A Commonwealth Study of Members of Parliament;
Gerard carney; Associate Professor of Law, Bond University (December
1992); Commonwealth Secretariat, London.; p. 15
- 132 CLR 270.
- Ibid., p. 280.
- Ibid., p. 286 to 287.
- Ibid., p. 287.
- The Guidelines; subparagraphs 3(1)(c)(iv)(B)&(C).
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