21 October 2020
8 min read
#Dispute Resolution & Litigation
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Following the publication of Commissioner Hayne’s Final Report in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Commission), there have been moves towards simplifying the laws around corporate criminal responsibility and ensuring greater oversight of corporations. This article considers how the reform agenda in relation to corporate crime has progressed in 2020 following the recent tabling of the Australian Law Reform Commission’s (ALRC) report titled Corporate Criminal Responsibility (ALRC Report)[1] in Parliament.
The current regime
There are a number of inherent difficulties in attributing criminal liability to corporations. For one, corporations do not have a mind of their own – it is difficult to blame them for conduct that has been committed by its officers. The ALRC found that prosecutions against corporations were relatively rare, typically long, complex and contested by well-resourced defendants. They often did not lead to a conviction. Rather, they were commonly pursued as part of a broader strategy to prosecute the individuals who had engaged in corporate misconduct.[2]
Part of the reason for this dearth in prosecutions is the fact that the corporate criminal law regime is complex. Part 2.5 of the Commonwealth Criminal Code Act 1995 (Cth) Sch 1 (Code) sets out the default method for attributing criminal liability to body corporates and prescribes that the Code applies to corporations in the same way it applies to individuals. However, the Code’s approach to attribution of criminal responsibility was not taken up in other Commonwealth legislation, with much legislation introduced after that time adopting a different model to attribute fault. There are also many exceptions and carve-outs to liability which corporations may take advantage of.
Reforms of corporate criminal responsibility in Australia
On the back of the Banking Commission, as well as having regard to other reports such as the Final Report of the ASIC Enforcement Review Taskforce released in December 2017, the Commonwealth Government has taken steps to reform this area.
Review and suggestions for reform by the ALRC
On 10 April 2019, the Commonwealth Attorney-General asked the ALRC to conduct a comprehensive review into the Commonwealth corporate criminal responsibility regime. The ALRC was tasked to identify reforms that could effectively hold corporations to account for criminal misconduct. The final report, Corporate Criminal Responsibility, was tabled in Parliament on 31 August 2020.
The ALRC Report identified the ‘over proliferation’ of offences as a key issue for authorities prosecuting corporate criminal conduct. Corporations were often prosecuted for relatively minor offences, or not prosecuted at all. The complexity of the regime created a burden on regulators and weakened the rationale for criminal responsibility. Rather than reserving criminal conduct for the most serious offences, the majority of offence provisions address low-level conduct.
The ALRC proposed 20 recommendations, which if adopted, would involve far-reaching legislative reform. We set out some of the notable recommendations below:
New offences proposed for corporations
On 2 December 2019, the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 (Bill) was tabled in the Senate. The reforms associated with this Bill are aimed at combating challenges associated with detecting and addressing serious corporate crime.
Relevantly, the Bill introduced a new corporate offence of ‘failing to prevent bribery of foreign public officials.’ In its Report, the ALRC recommended extending the ‘failure to prevent’ offence to other Commonwealth offences that may arise in the context of transnational business.
Deferred Prosecution Agreements
The Bill also introduced a Commonwealth Deferred Prosecution Agreement (DPA) regime. DPAs allow corporations who have engaged in serious corporate crime to negotiate agreements to comply with a range of specified conditions in order to avoid being prosecuted.
The DPA scheme was designed to encourage corporations to self-report misconduct, thereby avoiding long, drawn-out prosecutions and the associated reputational and financial costs. There are benefits for regulators and prosecutors as well, as they face many challenges in establishing corporate criminal liability.
The ALRC commented on the lack of transparency in the proposed DPA scheme in its Report. It recommended judicial oversight of DPAs and publication of any reasons.
Where to from here?
COVID-19 has dominated the minds of the public and governments in 2020, pulling the spotlight from reform of the corporate sector. However, regulators continue to pursue enforcement action (we are involved in a number of cases) and the Commonwealth Government has been taking steps in its reform program.
While dealing with the logistical and financial implications of this pandemic, corporations should not put compliance on the back burner. As the pressures of the financial impact of the slowing economy begin to mount, there could be an ensuing spike in corruption, fraud and other crimes of this nature. Additionally, the recent introduction of the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 (Cth) may encourage individuals to report incidences of corporate misconduct and corruption.
It is clear that the culture of corporations will still be a priority, and will impact the court’s assessment of liability of the corporation for both criminal and civil penalties. A corporation’s compliance system (or lack thereof) and culture of compliance, will be taken into account. Additionally, whether a corporation has taken genuine steps to remediate their cultures on discovery of the misconduct will be relevant.
Positive changes will demonstrate a corporation has strong prospects of rehabilitation. For example, in Commonwealth Director of Public Prosecutions v Nippon Yusen Kabushiki Kaisha [2017] FCA 876, the penalty handed to Nippon Yusen Kabushiki Kaisha – the defendant in the first criminal prosecution for cartel offences in Australia – was halved due to a range of mitigating factors, including that it took steps to change its culture such as establishing systems and programs to prevent reoffending, and established itself as a ‘good corporate citizen’.
Specific steps that corporations have taken in strengthening compliance measures include:
Corporations should avoid simply throwing money towards a compliance system without developing a ‘corporate will’ to ensure compliance. By way of example, AMP Financial Planning Pty Ltd (AMPFP) said it spent around $48 million on its compliance system.[3] However, Justice Lee found this system to be “expensive, but…inadequate” as, even with this system in place, AMPFP failed to address the misconduct of a financial advisor, despite more senior AMPFP representatives being aware that he was engaging in misconduct. AMPFP also failed to investigate whether the misconduct was a broader issue among its other employees. The value of a compliance system will be measured by those who are responsible for both its operation and enforcing its requirements.
In the current environment, corporations should take steps to ensure that their oversight and risk programs are sufficient to identify and respond to misconduct. They will need to take proactive steps to identify non-compliance and take swift action to prevent further breaches. Corporations operating overseas should ensure that proper oversight and control is extended to third parties and intermediaries working with the business.
Draft Guidance issued by the Commonwealth Government identified some factors for the development of an effective compliance program, including a robust culture of integrity, demonstrated pro-compliance conduct by senior members and the Board, effective risk assessment and due diligence procedures, as well as careful and proper use of third parties.[4] Although this guidance was released in relation to foreign bribery, we consider that these factors will be integral to any corporate compliance program.
If companies do identify corporate misconduct within its ranks, they may be encouraged to consider self-reporting misconduct to achieve a better outcome. Although there are benefits to self-reporting, there are risks inherent in this process as well. If the Commonwealth Government adopts the ALRC’s recommendations of creating greater transparency within the system, it may need to balance the results against greater assurances for companies in ensuring that they will achieve a favourable negotiated outcome. Greater transparency will also create greater risks for corporations. For example, any published reasons could leave corporations open to civil claims or class actions.
Additionally, further reviews of individual responsibility for corporate crimes will likely be undertaken at a later stage, once the proposed Financial Accountability Regime is introduced in order to implement the recommendations of the Banking Commission.
Authors: Alana Giles & Katerina Stevenson
[1] Australian Law Reform Commission, Corporate Criminal Responsibility, Report No 136 (2020), 66-7.
[2]Australian Law Reform Commission, Corporate Criminal Responsibility, Discussion Paper No 87 (2019), 75 (ALRC Discussion Paper).
[3] [2020] FCA 69, [176].
[4] Draft Guidance on adequate procedures to prevent the commission of foreign bribery, [82].
Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.
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