Bell review puts in-house lawyers under the spotlight

It’s putting it lightly to say Star Entertainment came out of the Bell inquiry, which late last year probed allegations of money laundering, organised crime, fraud and foreign interference at the gambling giant’s Star Sydney casino, with less than flying colours.

Indeed, among a litany of damning findings of the three-volume final report, released in September by Adam Bell SC, was that Star acted unethically and deceptively on its use of controversial Chinese debit cards for high-rollers, failed on its dealings with Triad-linked Macau-based junket operator Suncity, and fell short in its obligations to local regulators.

The report, which found star unfit to hold a casino licence, led to a clean-out of senior management, promises of corporate renewal and a record $100 million fine for Star.

It also exposed, experts say, what happens when in-house lawyers fail to act beyond narrow corporate interests, with NSW Independent Casino Commission boss Phillip Crawford labelling Star’s legal team “very heavily implicated” in the venue’s poor conduct.

Perhaps it’s little wonder, then, that key players in the ASX-listed gaming operator’s legal team have exited in recent times, and were among its top brass in the inquiry’s spotlight.

Paula Martin, Star’s former Chief Legal and Risk Officer, was the highest-ranking Star lawyer to testify at the public hearings, while senior Star lawyers Andrew Power and Oliver White also faced days of gruelling questions from counsel assisting Naomi Sharp, SC.

All three Star lawyers, criticised by Bell’s report for their “unsatisfactory understanding” of when legal professional privilege (LPP) should be claimed, are now gone from Star, while Martin was also one of 11 current and former Star directors and officers sued by the Australian Securities and Investment Commission (ASIC). ASIC accuses the ex-Star secretary and group general counsel of not adequately addressing money laundering risks linked to Suncity, and of not appropriately escalating money laundering issues to Star’s board.

For Richard Copp, a senior lecturer at Griffith University, the problems that beset Star’s in-house lawyers – and that were exposed via the inquiry – are common to corporate Australia.

“It’s really the old chestnut of the tension between cost-cutting/short term profitability versus ability to do the job effectively,” says Copp, a specialist in corporations law.

“Everyone everywhere including in-house counsel is being called on to do more for less, and this is just an example of where Star tipped the balance too much in favour of efficiency and short-term profitability.”

This tension, as he notes, is not new. As the Law Society of NSW points out, solicitors going in-house often need to have a much greater commercial and strategic focus and less of a technical legal focus, while at the same time having to remember: “you are a solicitor”.

“First and foremost you are an officer of the court with ethical and professional obligations. You will need to exercise judgment and balance commercial considerations against legal ones,” the body, representing the state’s approximately 32,000 solicitors, advises.

Beyond professional ethics, Western Sydney University senior lecturer Michael Brogan suggests the legal missteps at Star reflect lapses in personal ethics.

Brogan, who teaches legal ethics and professional responsibility at the University’s law school, says a key takeaway for in-house teams from the problems at Star is that it’s up to every individual lawyer “to have their ethical obligations at the forefront of what they do.”

“Despite the instructions one receives from a client or employer, or the directions from a supervisor, an individual lawyer needs to ensure the legitimacy of what they are doing,” he says.

A second takeaway is the need to be familiar with the psychological effect of groups on the individual, so-called “group-think”.

That’s because, according to Brogan, while group-think is great at building corporate consensus and developing a sense of team, it can lead to decisions and actions where  ethical issues are not questioned, disregarded or rationalised.

“Essentially, ‘if the group thinks it is ok it must be ok’ or ‘if we always do it this way it must be correct’. Sadly, there are myriad examples of that being untrue.”

Pressures on in-house counsel – especially to maximise profits – may have always existed, but what’s changed now, Griffith’s Dr Copp argues, is that they’ve become “ubiquitous”.

He says it is often the case today that in-house legal teams are among the first areas of a company to feel the effect of corporate cost-reduction efforts. This, in extreme cases, heightens the risk of overburdening individuals and legal teams within an organisation, leading to failings.

As the academic explains, there’s an incentive “in the interests of profitability and getting shareholders their return” for in-house legal teams “to be shaved back”.

“It doesn’t have to be just in terms of bums on seats it could also be ‘we won’t give you the salary increases you need’, or we won’t meet the budget you want’, those sorts of things.

“The predominant business model is ‘let’s maximise investor wealth and senior management wealth on the back of everybody else’ and everybody else is called on to do more with less resources.”

The observations accord with Bell’s assessment, in volume one of his report, of Martin being given “too many responsibilities” at Star, including both the company’s legal and risk roles in addition to company secretarial responsibilities.

“In an organisation of the size and complexity of Star there would have been justification in having a separate person focused on company secretarial responsibilities,” Bell writes, noting this would have put in place “a guardian” of Star’s governance and culture.

Overwork is also pinpointed by BlackBay Lawyers managing partner Victoria-Jane Otavski as a workplace feature that often lets down in-house legal teams. For that reason Otavski, a lawyer with experience in commercial, litigation, dispute resolution and employment areas, says it’s key that companies regularly assess lawyer workloads.

Regular checks, she says, ensure “tasks are properly allocated and prioritised, particularly to ensure that juniors are not over-burdened and allocated work outside their capacity”.

“Equally, the senior levels of in-house teams should not be overburdened and properly supported to ensure they have the bandwidth to properly discharge their duties.”

The Sydney-based lawyers adds that “hiring additional staff, encouraging appropriate delegation and improving efficiency and productivity by implementing new technologies and streamlining processes are measures outside the immediately obvious option of engaging external counsel to assist in managing high-intensity or excess workloads”.

Additionally, Otavski highlights cultural problems at Star around compliance that contributed to the company’s shortcomings, as noted in last year’s Bell report.

The report points, for instance, to Star’s internal lawyers signing off on a 2019 review for the Star board’s risk and compliance committee in which nothing was said about transactions of concern in Salon 95 – an illicit VIP gaming room run by Suncity inside the casino where an illegal cage operated – despite the transactions being indicative of money laundering.

“Endemic cultural problems” at the gaming operator, according to the report, contributed to the failure of the reporting line from Star’s legal team to the board.

This includes not only on issues like Salon 95’s “concerning cash dealings”, but also a failure to mention to the board that Star held a copy of a Hong Kong Jockey Club report that raised “extremely serious” concerns about the probity of Suncity and its founder Alvin Chau.

Chau, the former chairman of Suncity,  was earlier this year sentenced to 18 years in jail in Macau after being found guilty of charge of criminal association, illicit gambling and fraud.

On this front, Otavski says the Star scandal should act as a wake-up call for in-house legal teams on the importance of encouraging a culture of compliance

“The development and maintenance of corporate governance and culture focused on regulatory compliance, excellence and accountability is fundamental,” she says.

“In-house legal teams should work hand-in-hand with company’s management and any regulatory teams to assist in protecting the interests of all stakeholders.

“It is important that they see their role not just as facilitators of particular transactions, daily operations or projects but as examples and advisors on ethical and responsible practices.”

Meanwhile, on the issue of LPP – the rule that allows a person to resist producing documents or information due the lawyer-client relationship – Mr Bell found Ms Martin had an unsatisfactory understanding of the law.

This led, his report found, to her incorrectly claiming privilege over KPMG reports critical of Star’s anti-money laundering/counter-terror financing program and withholding them from Austrac, Australia’s financial crimes regulator.

What’s more, according to the Bell report, Star’s in-house team also had a practice of marking email communications, reports and other documents as privileged without properly considering whether there was a basis for claiming privilege.

Following on from Star’s lapses on LPP, Holding Redlich’s Millie Clayton says it’s timely for in-house lawyers to refresh their understanding of when LPP applies.

Clayton says, in the current regulatory environment, and given the potential reputational damage to in-house counsel being named in media for wrongly’ claiming LPP, in-house counsel need to review the circumstances where the protection of LPP attaches.

She further reminds that where legal advice is provided by an in-house lawyer, it must be shown that the document was brought into existence in the course of the performance of the lawyer’s professional role to attract LPP.

“Merely marking a document as privileged does not attract privilege,” Ms Clayton says. ”Consistent with this, ‘Subject to Legal Professional Privilege’ should not be blindly applied to documents or correspondence as a matter of practice or policy.”

To safeguard against poor practice, she urges in-house legal teams to have internal policies and procedures in place that provides a practical guide on how LPP should be applied. Factors to consider in making a call on the application of LPP include a document’s content, its context, and any relevant evidence relating to it.

“It is imperative that one turns their independent mind to considering whether LPP applies on a case-by-case basis,” the Sydney-based lawyer says.

Training also has a role to play. On this front, Clayton urges companies to ensure in-house counsel obtain independent annual education on LPP so that “fundamental misunderstandings of the applicability of LPP does not occur”.

“This should apply not only in the context of in-house legal counsel but in relation to lawyers who assess claims for LPP in the course of discovery for clients,” she adds.

In the context of Star, the Bell report picked up the need for better training on LPP, recommending the company’s Sydney casino “ensure and certify” that its in-house lawyers receive independent training on the topic each year.

The problems inside Star’s legal team echo scandals overseas involving shortcomings by in-house counsel. In the UK, for instance, failings in the legal community and its regulators contributed to the devastating impacts of the long-running Post Office scandal, which saw the wrongful prosecution of British postal workers for offenses including theft and fraud.

That disaster, which involved in-house lawyers playing a significant role via a range of professional misjudgement, last year sparked calls for UK legal services regulators to bolster action and support to ensure lawyers meet their professional obligations.

In NSW, it’s yet to be seen whether a similar groundswell for legal reform will occur in the wake of the Star revelations. Blackbay’s Otavski notes the focus, so far, has been on the need to maintain high professional and ethical standards at in-house legal teams.

“The inquiry makes clear that the actions or inactions of in-house legal teams can drastically influence the waters in which a corporation charters and exacerbate the difficulties it ultimately faces,” she says.

“Legal teams should look beyond the immediate business interest of a corporation and at all times maintain independence, impartiality and act with their ethical duties front in mind.”

UWS’s Brogan agrees, saying the ethical lapses at Star suggest a lack of processes – “one might say ‘developing a culture” – to build in ethics to everyday functions of the legal team.

“From decision-making to team meetings, from communications with each other to professional development programs, there must be obvious and consciously considered processes that make the maintenance of ethical standards the norm.”