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.
Interpretation
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).