Corporate Liability for Corruption – Should Private Universities and Colleges be concerned?

 Changes made to the laws on corruption in 2020 have generally gone unnoticed by private higher educational institutions and other providers in the private sector of higher education. The new provisions are directed at commercial organizations which clearly include the companies that establish and manage private higher educational institutions under the Private Higher Educational Institutions Act 1996 (Act 555).[i] The implications of the changes on the operation of private universities and colleges are too serious to be ignored.

Liability under s. 17A

The changes introduced through a new s. 17A of the MACC Act 2009 came into operation in June 2020, just as the Covid-19 pandemic was beginning to take hold in the country.  The new provisions make a commercial organization (a term defined by the Act to include registered companies or partnerships) strictly liable for the corrupt conduct of its officials, agents, and other service providers of the organization even if those acts were done without the knowledge of the organization or its officers. Any director, controller, officer, partner, or manager of the commercial organization is deemed personally liable for the same offence.

The penalties are severe. The commercial organizations and its officers are liable to a fine of not less than 10 times the value of the gratification, or RM1 million, whichever is the higher; imprisonment for a term of not more than 20 years; or liable to both fine and imprisonment.

Adequate procedures to prevent corruption

To counter the severity of the offence and the penalties attached to it, s. 17A provides commercial organizations a complete defence to a charge under the section if they can show that they had ‘adequate procedures’ in place to prevent corruption in their operations. Guidelines issued by the Minister indicate what constitutes adequate procedures. Generally, they require commitment at the top level of management and their involvement in the prevention of corruption. The procedures include risk assessment, undertaking control measures, carrying out systematic reviews of those measures, the monitoring and training of staff and the setting up of whistleblower procedures.

It is a defence for directors and officers to prove that the offence was committed without their consent and that they had exercised due diligence to prevent the commission of the offence. The due diligence defence available to directors, controllers and partners is linked to the establishment and monitoring of adequate procedures.

The rationale of s. 17A

The provisions of section 17A reflect a worldwide trend to shift the responsibility of preventing corruption from enforcement agencies to the business organizations themselves. The carrot and stick approach imposes heavy penalties on businesses that benefit from the corrupt behaviour of employees and associates whilst giving them complete protection if they can show that they had instituted adequate procedures in their operational space to prevent corruption. The section will require businesses to be vigilant of corruption risks not only from people within their organizations but of those outside the organisation who fall within the definition of associates.

Who are associates?

The term associates cover a very wide class of persons including those with tenuous links to the organisation such as those who perform services for the organization. Under the section, the question of whether a person performs services for the organization is to be determined not simply by reference to the nature of the relationship between that person and the organization but by reference to all relevant circumstances. The range of persons who would fall within the definition will have to be determined by the courts but the way the section defines associates will require businesses to review how their businesses are affected by agents, suppliers, and others in their supply chain.

Why PHEIs must be concerned

The risk of corruption has been observed to be highest among businesses whose dealings include regular interactions with government agencies. If the normal operation of a business is subject to obtaining regular official approvals and permissions, the corruption risk becomes greater.

PHEIs are creatures of law that are subject to tight regulation by government agencies. They can only be established with the approval of the Minister of Higher Education. The application process involves the submission of many documents to the Ministry and responding to different official inquiries. Once established, the PHEI must then enter another series of interactions with the same Ministry to register the institution. This in turn requires approvals from the local fire department and the local council where the institution is located. Once the institution is in operation, approvals must be obtained from the Ministry to teach a course of study or training programme. Applications must be made to the Malaysian Qualification Agency for accreditation and if foreign students are involved, applications must be made to the Ministry of Internal Affairs (KDN) and Immigration Department. Interactions with different government agencies will continue over the life of the institution. According to a MOHE circular, the Ministry alone processes 23 different types of applications from PHEIs. One of the risks that PHEIs face is the likelihood of government approvals being withdrawn or modified. Act 555 creates uncertainty in many of its provisions where an approval that has been previously granted to a PHEI is withdrawn.

High-risk industry

The range of interactions with government agencies makes the private sector a textbook case of a high-risk industry. This position is compounded by the multitude of contracts that the PHEI typically makes in the ordinary course of its business. These include contracts with marketing and recruiting agents, funding agencies, and foreign universities and their agents, advertisers, newspapers, and the list goes on. These arrangements bring with them people whose actions may not always be within the control of the PHEI but may yet fall within the class of persons defined as associates of the PHEI.

Protecting Senior Officials

Another reason why PHEIs must be concerned with the new law is the exposure of a category of its senior officials to liability under s. 17A. These are officials who are employed because of their academic standing and their role in the management of the institution is limited to the educational processes of the institution. However, because they are concerned in the management of the institution, if an offence is committed under the section they would be caught in the dragnet of the section and be held liable for that offence, even if it was committed by persons far removed from their area of responsibility.

PHEIs must also be concerned because of the heavy penalties the section imposes, which may have a terminal impact on the business.

For these and other reasons not explored here, it would be prudent for PHEIs, whether large or small to institute corruption proofing procedures as a shield against liability under the new law.

 

 

Espact’s team of legal and other specialists can assist you to assess your organization’s current position vis-à-vis the Act and develop adequate procedures in line with the Ministerial Guidelines. Espact’s team also provides briefings for directors and training for staff at all levels to meet the requirements of the defence. For a free consultation, please call 03 7865 5062 during office hours.

---

[i] Under Act 555, only a registered company may apply to the Minister of Higher Education to establish a private higher education institution, whether a university, university college or a college (s.6)

Two MOHE Officials Who Made a Difference

 

Franchised Degree Programs - Pitfalls to Watch

The franchised degree is one of the most transformative concepts to have emerged in higher education. Its formulation as a legitimate mode of delivery of a university degree took place in the last decades of the 20th Century fostered by the rising demand for higher education in Asia and the problem of surplus capacity in UK and US universities. It changed the very nature of university education and the idea of the university by separating the educational program from the university offering it and making the program portable and delivered in places remote from the university. Starting with undergraduate degrees, the concept expanded to include postgraduate degrees right up to the doctoral level.

In the franchise concept, a local private college teaches the full three or four years of a degree program from a university, often a foreign one. They are described as '3+0' or '4+0' degrees to distinguish them from '2+1' or '3+1' Twinning programs. The full franchised course is delivered by the local college but the degree is awarded by the university. The university franchises the program to the local college under a written agreement that stipulates quality and other issues concerning the delivery of the program in the local college. The models of arrangement may vary from one university to another but generally, they would deal with the duration of the franchise, the selection of staff to teach the courses in the program, the required resources to teach the program and the management of student assessments are. In some arrangements, the university may also undertake to teach parts of the course in the local college assigning faculty from the university or another institution. Franchise agreements might also confer full assessment rights to the local college with supervision by the university or alternatively, the university may reserve those rights or part of those rights to itself.

Students in a franchised course are registered as students of the university and are subject to the rules and regulations of the university. Students must, therefore, pay special attention to the university's graduation requirements, its disciplinary rules and procedures. Local colleges may not explain this fact adequately to their students, relying instead on students reading the college's published regulations. The students must also note that they are at the same time bound by the college's regulations and local laws governing the conduct of students in local institutions (Private Higher Educational Institutions Act 1996). There may be conflicts and inconsistencies between the two sets of regulations and it is advisable that students are made aware of this. Ideally, a franchise agreement would deal with the duality of regulations affecting the students and make provisions in the franchise agreement to minimize or remove conflicts and inconsistencies. In any case, local laws cannot be overridden by the university's regulations or by the terms of the agreement between the college and the university.

The franchise agreement determines the mutual rights of the university and the local college. Important provisions on the duration of the franchise, the university's rights to terminate the agreement before the full term and the rights of students upon the occurrence of these events are all written into the franchise agreement. These terms have an impact on the students registered in the program but students are generally not informed of these terms. There have been instances when student rights have been seriously prejudiced by the early termination agreement of these agreements. Regrettably, there is very little in the regulatory laws of education that deal with such situations, leaving students with no alternative but to accept the solutions handed to them by the college.

Franchised programs must be approved by the Ministry of Education through the same procedures that apply to other programs delivered through a private higher educational institution. The admission requirements for the program will be determined when the program is approved by the Ministry of Education. Other conditions may also be imposed in order to make the franchised program conform to local regulations. The franchised program is also subject to all the quality assurance provisions under Malaysian laws. Typically, approval is only given if the program meets the standards for Provisional Accreditation as determined by the Malaysian Qualifications Agency or MQA.

The innovations in the franchise concept contributed significantly to the development of higher education in this country. It raised the status of private colleges to degree-teaching institutions and raised the status of teachers to university lecturers. Its continued presence adds a valuable dimension to Malaysian higher education by enhancing its international character. In this role, it stands at the same level as the foreign branch campuses that operate in this country

Constitutions Now Prescribed for Private Higher Educational Institutions

The Private Higher Educational Institutions (Amendment) Act 2017 and the Private Higher Educational Institutions (Constitutions) Regulations 2017 introduce new laws and regulations on, inter alia, the institutional constitution of PHEIs. The new 2017 Regulations introduces a set of template or model constitutions whose terms are to be adopted by the institutions.

Act 555 has always required PHEIs to be managed strictly in accordance with the institutional constitution and the Act. Indeed, it is a requirement of the Act (s. 11) that at the time when an application is made for the establishment of a PHEI, the Minister must be ‘satisfied’ ‘there is established a proper system of governance of the private higher educational institution with a constitution that shall be approved by the Registrar General’. An approved constitution is a prerequisite for the Minister’s approval to establish a PHEI. Once established, the institution must be managed in accordance with the terms of the approved constitution (s.30).

Act 555 as it now stands only requires the constitution to be approved by the Registrar General. There are no provisions in the Act or in any Regulations issued under the Act that stipulate the provisions that are to be included in the constitution other than the implied requirement in s. 11 of the Act that the constitution incorporates ‘a proper system of governance of the PHEI’.

The MOE’s preoccupation with the institutional constitution can be traced back to August 2009. The Ministry (then the Ministry of Higher Education), held a workshop to draft standard constitutions for private universities and colleges. To the Ministry’s circular inviting participants to the workshop (JPT/GS(R) 3000-600 (14) dated 19 August 2009) was attached a copy of a constitution of a public university. Participants in the workshop included representatives from both sectors of higher education as well as officials from the Ministry of Higher Education. The discussions of August 2009 produced the first set of two draft template constitutions for private colleges and universities. These were circulated to all institutions in the private sector at the end of 2009. The templates were based on the model constitution in Schedule I of the Universities and University Colleges Act 1971 with modifications ostensibly to fit the needs of PHEIs. The first versions circulated in 2010 were replaced with later versions in 2012 which are the current official ‘standard’ constitutions for private universities and colleges. Both versions were issued through circulars from the Ministry without any reinforcement through legislation or statutory regulations.

The 2017 amendments to s. 30 and the proposed issuance of new regulations on the constitutions appear to stem from doubts about the enforceability of the earlier circulars that issued the template constitutions. There are no provisions under the Act that empowers the minister to prescribe any provisions to be included in the institutional constitution. The Registrar’s powers, as noted earlier, are limited to approving the constitution, not determining what the constitution should contain. The Act is silent as to the provisions that have to be included in the constitution.

The lack of power is addressed through an amendment to the current s. 30. Section 10 of the Amendment Act replaces the current section with a new section that reads as follows;

“Constitution

30. (1) The constitution of a private higher educational institution shall contain provisions for such matters as may be prescribed. (emphasis added)

Subject to the provisions of this Act, every private higher educational institution shall be managed in strict accordance with its constitution.

The constitution shall not be amended without the prior approval of the Registrar General.

Any private higher educational institution which contravenes the provisions of this section shall be guilty of an offence.”

As mentioned earlier, the current s. 30 only provides that the ‘constitution shall not be amended without the prior approval of the Registrar General’. The amended section 30 requires the constitution of a PHEI ‘to contain provisions for such matters as may be prescribed.’

In May 2019, the MOE circulated two template constitutions to PHEIs for their feedback. The provisions in these constitutions are essentially the same provisions that were found in the documents circulated to PHEIs in 2012. The structure and provisions in the latest documents are still based on the model constitution of the University and University Colleges Act 1971 with modifications to fit PHEIs.

The governance system embedded in the proposed constitutions presents several problems. The most serious is that they are drafted on the erroneous assumption (it is submitted), that the private higher educational institution established under the Act is an entity capable of acting on its own. Based on this assumption, the draft constitutions ignore the role and position of the company that established the institution and instead directs all its provisions at the PHEI as if it can be separated from the company and be treated separately and exclusively. This is misconceived. Unlike the university established under the UUCA, the private higher educational institution is not an incorporated body with the attributes of a legal person. It must rely on the company to animate it, to give it the capacity to act. The institution emanates from the company and only the company can act on its behalf. The new s. 75A added by the 2017 amendments recognizes the PHEI’s dependence on the company. Any attempt to prescribe a constitution for the management of private universities and colleges must direct the requirements at the company establishing those institutions and require the company to apply the prescribed constitution in managing the institution it created. The PHEI is, in reality, a company carrying on the business of a university or college. Critical to that definition is the company’s status as an incorporated entity with all the attributes of a legal person. Further, since the institution exists under the aegis of the company, one must look to the locus of control in the company to carry out the activities of the PHEI, which is the Board of Directors of the company. Section 211(1) of the Companies Act 2016 provides that ‘the business and affairs of the company shall be managed by, or under the direction of the Board'. It is questionable therefore if a document such as the draft constitution which is issued through delegated powers of another enactment can transfer the management powers of a registered company to another body such as the BOG created under the draft constitution. Any attempt by the draft constitutions to place management functions on a Board of Governors will not be effective in law unless the BOG is created by the company and managed through its board of directors or under the direction of the board of directors. The BOG cannot usurp the powers of the board of directors of the company. For this reason alone, the regulations may not be enforceable under existing laws on the validity of such regulations.

Apart from issues concerning the legality of the provisions in the two constitutions, the bicameral governance system that is prescribed in them is unwieldy, bureaucratic and inefficient as a management structure and is not the only model available to PHEIS. The ‘prescribed’ constitutions with a single governance model may also not fit the vastly different ownership models that are found in the population of PHEIs.