Conflicts of Interest Avoidance - Is there a Role for Blind Trusts?


Current Issues Brief 14 1996-97

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?

Major Issues

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.

Introduction

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.

Mode of Operation of Blind Trusts

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.

Does the creation of a Blind Trust ensure wealth cannot be accumulated outside it without detection?

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.

Will the current arrangements for the Declaration of Senators' and Members' Interests be affected by the exclusion of interests in Blind Trusts?

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).

Experience with blind trusts in certain Commonwealth countries including Canada

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).

New rules of Disclosure of Interests makes use of blind trusts untenable in the UK

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.

System of disclosure and blind trusts under supervision in the United States

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).

Are there any other safeguards against conflicts of interest?

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).

Conclusion

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.

Endnotes

  1. Current House Hansard; 15 October 1996; p. 5244.
  2. 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.
  3. Conflict of Interest: A Commonwealth Study of Members of Parliament by Gerard Carney; Commonwealth Secretariat London ( December 1992) and Attachment E.
  4. 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.
  5. Attachment G.
  6. Attachment F.
  7. Conflict of Interest: A Commonwealth Study of Members of Parliament by Gerard Carney; Commonwealth Secretariat London ( December 1992); p.96.
  8. Principles of the Law of Trusts, HAJ Ford & WA Lee, (second edition) The Law Book Company, para.[937], p. 426.
  9. 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.
  10. Report from the Senate Select Committee on Securities and Exchange -Parliamentary Paper No. 98 (1974).
  11. Corporations Law; Principles, Policy and Process (Third Edition); Butterworths (1996); p. 851.
  12. 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.
  13. Ibid., p. 26.
  14. 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.
  15. Ibid., para. (2)(m).
  16. Resolution adopted 17 March 1994; amended 21 June 1995.
  17. Joint Committee on Pecuniary Interests of Members of Parliament: Report on Declaration of Interests, Parliamentary Paper No. 182 (1975); p. 21.
  18. Conflict of Interest: A Commonwealth Study of Members of Parliament by Gerard Carney; Commonwealth Secretariat London (December 1992); para. titled Trusts; p. 97.
  19. Ibid., p. 146; Report on Ministerial Compliance with the Conflict of Interest Guidelines and Recommendations with respect to those Guidelines (1986) (the Aird Report).
  20. 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).
  21. Ibid., p. 146; Ethical Conduct in the Public Sector - Report of the Task Force on Conflict of Interest (1984) (the Starr-Sharp Report).
  22. Joint Committee on Pecuniary Interests of Members of Parliament: Report on Declaration of Interests, Parliamentary Paper No. 182 (1975); p. 10.
  23. 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
  24. First Report of the Committee on Standards in Public Life; Vol. 1(May 1995); Cm 2850-1; HMSO; para. 17; p. 4.
  25. Conflict of Interest: A Commonwealth Study of Members of Parliament by Gerard Carney; Commonwealth Secretariat London (December 1992); p. 97

Attachment A: A Guide on Key Elements of Ministerial Responsibilities

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.

Attachment B: The Bowen Committee and Blind Trusts

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

  1. 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.
  2. Ibid., paras. 5.36 ,5.37 & 5.38; p. 41.

Attachment C: The Riordan Committee and conflict of interest issues

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

  1. 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.
  2. Ibid., p. 26.
  3. Ibid., p. 10.
  4. Ibid., p. 27.
  5. 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

  1. 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.
  2. Ibid., para.(2)(a).
  3. Ibid., para.(2)(b).
  4. Ibid., para. (2)(d).
  5. Ibid., para. (2) (e).
  6. Ibid., para. (2)(f).
  7. Ibid., para. (2) g).
  8. Ibid., para. (2)(m).
  9. Ibid., para. (2)(m).
  10. Ibid., para. (2)(m).

Attachment E: Conflict of Interest: A Commonwealth Study of Members of Parliament

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

  1. Conflict of Interest: A Commonwealth Study of Members of Parliament by Gerard Carney; Commonwealth Secretariat London (1992).
  2. Ibid., p. 146; Report on Ministerial Compliance with the Conflict of Interest Guidelines and Recommendations with respect to those Guidelines (1986) (the Aird Report).
  3. 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).
  4. Ibid., p. 146; Ethical Conduct in the Public Sector - Report of the Task Force on Conflict of Interest (1984) (the Starr-Sharp Report).
  5. Ibid., p. 97.
  6. Ibid., p. 98.
  7. Ibid., p. 98.
  8. Ibid., p. 98.

Attachment F: Disclosure and Divestment of Sensitive Assets the Preferred Option in the UK

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

  1. 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.
  2. 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.
  3. Ibid., para. 7.
  4. Ibid., para. 31.
  5. First Report of the Committee on Standards in Public Life; Vol. 1(May 1995); Cm 2850-1; HMSO; para 17; p. 4.

Attachment G: Financial Disclosure and Reporting Requirements in the United States

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

  1. 18 United States Code (U.S.C.).
  2. Note to 5 CFR Sec. 2634.406(a)(2)(ii).
  3. as defined in 12 USC 1841 ©.
  4. as defined in 15 USC 80b-2(a)(11).
  5. 5 CFR Sec.2634.403(b (5).
  6. 5 CFR Sec.2634. 403 (b).
  7. 5 CFR Sec.2634.404 (b)(2).
  8. sec.202(f) (8).
  9. Title 5 USC & subchapter III of Chapter 84 of such title.
  10. USC Title 5 Sec 102(i).

Attachment H: What other Regulatory Safeguards are there against Conflicts of Interest?

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

  1. Joint Committee on Pecuniary Interests of Members of Parliament; Report on Declaration of Interests; (1975) Parliamentary paper No. 182;, p. 10.
  2. 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
  3. 132 CLR 270.
  4. Ibid., p. 280.
  5. Ibid., p. 286 to 287.
  6. Ibid., p. 287.
  7. The Guidelines; subparagraphs 3(1)(c)(iv)(B)&(C).
 

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