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Harsher penalties urged for PwC-style false privilege claims
Federal agencies say firms and companies caught making false legal professional privilege (LLP) claims to obstruct and delay investigations into their clients should face new and tougher penalties.
Greater sanctions and court-appointed LPP examiners are among suggestions regulators and enforcement agencies made to a Treasury and federal attorney-general department review into how practice applies to Commonwealth investigations.
The ATO and PwC were in a long-running battle over expansive claims before the tax scandal broke. Natalie Boog
The review, commissioned as part of the government’s response to the PwC tax leaks scandal, follows a series of critical judgments about law firms’ loose attitudes towards LPP and amid a trend of firms growing their consulting divisions, using potential access to privilege as a selling point.
LPP – also known as client-lawyer privilege – is a statutory and common law rule that protects the confidentiality of legal advice provided to clients. The privilege attaches to the client, not their advisers.
But creative approaches to the rule, including “routing” otherwise non-confidential communications through a lawyer in an attempt to engage the privilege, have attracted the ire of regulators and politicians.
At the same time, courts have tightened their interpretation of the privilege. Earlier this year, the Full Federal Court rejected Optus’ privilege claim over a Deloitte report, commissioned via Ashurst, into a major cyberattack in 2022. The Australian Tax Office has also won privilege cases against PwC, Glencore and Carlton & United Breweries in recent years.
A consultation paper released on Tuesday by the two departments said the review had uncovered “behaviours related to LPP which have the effect of obstructing and frustrating investigations”.
There were also concerns “bad actors” may seek to take advantage of the time-consuming process to resolve disputed LPP claims.
Stakeholders said the most common strategies were firms making LPP claims without a reasonable basis, failing to engage with requests from agencies on time, and making blanket claims over impugned communications, often amounting to hundreds of thousands of documents.
They expressed frustration with current arrangements for litigating disputes over whether documents should attract privilege or not. Mediation options were seen as lengthy, costly and unrealistic, given the vast swaths of documents required to be reviewed by an individual third party.
Court procedures – where applicant agencies are required to select a random sample of documents for assessment without knowing their contents – were seen as a “limitation”, the paper said.
Agencies told the review that current penalties “may not adequately deter improper claims”, and called for expanding existing penalties or creating new offences for false claims, which rarely come to light.
Changing practice
The paper said the growth of multidisciplinary consulting and legal practices was complicating the assessment of LPP claims.
Law firms – led by MinterEllison and Ashurst – have established and grown consulting divisions, and some, such as HPX Group and Norton Rose Fulbright, have explicitly marketed potential access to legal privilege as a selling point for clients.
ATO second commissioner Jeremy Hirschhorn told the Senate earlier this year that some law firms’ attitude to LPP was “disappointing”. He said the trend of adding consulting businesses to law firms threatened to repeat the mistakes of the big four accounting firms, where in-house lawyers were found by the Federal Court to have been used to provide an improper imprimatur of privilege.
“The landscape in which … legal services are provided is changing, and this is creating challenges for agencies, clients and lawyers in relation to LPP and Commonwealth investigations,” the discussion paper says.
“These ways of seeking and providing services often require lawyers to work closely with professionals from other disciplines. This can result in the creation of communications that have a range of purposes, which can make it more difficult to assess whether the test for LPP is met.
“The mere fact that a lawyer has drafted or possessed a communication will not in itself … substantiate a claim for LPP.”
Attorney-General Mark Dreyfus said legal professional privilege was “a fundamental tenet of our legal system, but abuse of it can undermine investigations and erode trust”.
Submissions to the review are open until the end of February.
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