I never had that one in my games, so I can't comment on if it is working or not. However, to be of some help, I looked through the files. This isn't a quest but a random event. The InternalName is RandomEvent_AdventureProblem_3.
I have gotten this reward two times from a random event quest, I can also confirm it does not work as intended - occupation penalties still appear for conquered cities.
We have verified the issue here and a dev is working on resolving it.
Thanks.
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