Corporate and senior manager exposure to criminal liability may be about to significantly increase
ALRC discussion paper on corporate criminal responsibility: another potential game changer
What you need to know
- The Australian Law Reform Commission has published a discussion paper proposing amendments to strengthen and simplify the federal corporate criminal responsibility regime. We focus on key areas of interest for companies, directors and officers.
- Certain proposals would potentially reduce current criminal exposure, such as removing criminal offences for low level conduct and a three tier model including civil penalty notices (akin to infringement notices).
- Others potentially increase it, like deeming corporations liable for acts of associates unless they exercised due diligence to prevent it, and personal liability for officers who do not take reasonable steps to prevent a company's contravention or who are relevantly involved.
- Other key proposals include recommending deferred prosecution agreements, factors for sentencing and non-monetary penalties.
- The ALRC is encouraging submissions.
It is a critical time for corporate criminal responsibility
The Discussion Paper comes at a time of immense interest in corporate crime. It closely follows the financial services Royal Commission, ASIC's adoption of a "Why Not Litigate?" enforcement strategy, recent criminal charges following both ASIC and ACCC investigations, increased funding to the Commonwealth Director of Public Prosecutions (CDPP) and Federal Court to hire new prosecutors and judges (respectively), and a proposal by the Federal Government to expand the federal criminal jurisdiction.
The Discussion Paper is 279 pages long, contains 23 proposed reforms, and seeks input on 12 targeted questions. We identify the key issues of interest below.
There are too many offences for conduct that isn't truly criminal
The ALRC reviewed 25 Commonwealth statutes, and identified 2,898 criminal offences that are potentially applicable to corporations. It concluded that:
- there is no principled distinction between criminal and civil prohibitions, even though criminalisation is meant to be reserved for the most serious misconduct;
- there is a great degree of complexity and duplication; and
- there is an over-reliance on specific rather than general prohibitions.
Although the ALRC did not say the volume of offences is a problem of itself, it did say that "the great majority of offence provisions address low-level contraventions that could not properly be said to involve any true criminality".
A three tier enforcement model, ranging from criminal offences to penalty notices
The ALRC proposes that "appropriate and effective regulation of corporations" would be achieved by having three categories of provisions:
- criminal offences;
- civil penalty proceeding provisions; and
- civil penalty notice provisions (which sound very much like the current "infringement notices" to us).
Criminal provisions limited to most egregious conduct
The ALRC says there should only be criminal offences for conduct that is "deserving of denunciation and condemnation," and if the deterrent characteristics of a civil penalty are insufficient.
The types of conduct the ALRC proposes would fall into this bucket include:
- fraud or dishonesty;
- serious financial misconduct that would result in significant economic harm;
- serious harm to individuals or the environment;
- physical injury to an individual;
- conduct repugnant to commonly accepted standards of decency; and
- conduct representing a marked departure from accepted standards of commercial behaviour.
Civil penalty proceedings only where evaluative judgment is required, otherwise simply notices
The ALRC recommends civil penalty proceedings only where court proceedings are required to properly establish the contravention. That is, if the contravention is clear on its face then a civil penalty notice provision should apply, but if "evaluative judgement" is needed there should be a civil penalty provision.
Escalation up: criminal offence where repeated or flagrant breach
There would be two scenarios in which breach of a civil penalty notice or civil penalty proceeding provision would be a criminal offence:
- where there are repeated breaches of the provision after the corporation has previously been found to breach the provision; or
- where the initial breach "demonstrates a flouting of or flagrant disregard for the prohibition".
Support for abolishing (and not prosecuting?) strict liability offences
- the comments about criminal offences for conduct that is not truly criminal; and
- the proposed enforcement model would effectively do so, by limiting criminal offences to the most egregious conduct on the one hand, and removing civil contraventions that do not require "evaluative judgement" from the court system on the other.
The ALRC says as much, noting that: "the majority of minor regulatory contraventions that are currently criminal offences would become CPN provisions and be removed from the court system".
These comments also call into question whether – in seeking to be seen to implement the "why not litigate" strategy, ASIC really should be pursuing criminal punishment of low-level strict liability offences even now.
Corporate liability for acts of associates
The ALRC proposes adopting a "single method" for holding companies liable for the acts of directors and employees, in place of the current regime involving multiple and overlapping models across the common law, Commonwealth Criminal Code and other statutes.
The key features of the proposed uniform regime would be:
- body corporates are deemed to have engaged in conduct of their associates unless they prove they exercised due diligence to prevent it; and
- where "state of mind" is relevant, it is enough if an associate had the state of mind, or the body corporate authorised or permitted the conduct.
While the "due diligence" defence offers some protection, this model would significantly expand potential exposure to criminal liability.
What is an "associate"?
The term "associates" would replace ‘officers, employees, and agents’. This is a functional approach that looks at the substance of the relationship between the person and the corporation rather than his or her formal title.
What is "due diligence"?
The ALRC says that "due diligence" is an elastic concept that takes its meaning form the context in which it must be exercised.
Liability for officers who do not prevent a company's misconduct
- First, civil penalties for 'officers' where they were in a position to influence the conduct of the corporation and failed to do so, unless the officer proves that they took reasonable measures to prevent the contravention. So long as the officer was in a position to influence, no further fault would need to be proved.
- Secondly, a criminal offence of engaging intentionally, knowingly, or recklessly in conduct the subject of a relevant civil penalty provision.
It would not be necessary that a conviction be secured against the corporation before prosecuting an individual (although the elements of the offence engaged in by the corporation would need to be made out during the prosecution of the individual).
It will be very important for officers 'in a position to influence' the conduct of a corporation to consider implementing measures to prevent contraventions.
Introduction of deferred prosecution agreements
At their simplest, deferred prosecution agreements are agreements between prosecutors and a corporation that suspend criminal proceedings in exchange for compliance with agreed conditions.
Deferred prosecution agreements were proposed under the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2017, but the bill lapsed at the end of the Parliamentary session on 1 July 2019. The ALRC indicated that the Combatting Corporate Crime Bill will be "reintroduced shortly".
Under the model in that bill, the agreements would not be filed with a court. Rather, the proposed Australian model would require the approval of the agreement by an authorised person (a retired judge).
The introduction of deferred prosecution agreements could considerably expand the application of criminal enforcement, as matters could be resolved without needing to prove the offence beyond reasonable doubt.
The ALRC promotes them as likely assisting to achieve the following four goals:
- ensuring companies want to prevent misconduct;
- encouraging self-reporting, full cooperation and remediation;
- deterring individuals from committing corporate misconduct (on the assumption that prosecutors will use information provided by companies to pursue the individuals responsible for the conduct); and
- achieving outcomes expeditiously.
Factors relevant to sentencing corporations
The ALRC has proposed various non-exhaustive factors to be considered when sentencing a corporation.
Examples of factors to be considered when imposing criminal penalties include:
- measures that the corporation has taken to reduce the likelihood of it committing a subsequent offence;
- the extent of any efforts by the corporation to compensate victims and repair harm;
- whether the company has undertaken any internal investigations or disciplinary actions; and
- any advantage realised by the corporation.
Examples of factors to be considered when imposing civil penalties include:
- the type, size, internal culture, and financial circumstances of the corporation;
- the existence at the time of the contravention of a compliance program within the corporation designed to prevent and detect the unlawful conduct; and
- the involvement in, or tolerance of, the contravening conduct by management.
Options to impose non-monetary penalties
The ALRC proposes non-monetary sentencing options for corporations that have committed a federal offence or have contravened a civil penalty provision, including:
- publicity/disclosure orders;
- community service orders;
- probation/corrective orders;
- disqualification orders; and
- dissolution (otherwise described as the 'corporate equivalent of capital punishment').
The introduction of non-monetary penalties displaces the perception that corporations will only ever be subject to fines.
Other matters considered
While we have sought to focus on the key matters of interest, there are many others discussed in the paper that may be of interest. In particular, there are proposals regarding: whistleblower laws, phoenixing, transnational business, a 'failure to prevent' offence model for serious crimes, and the abolition of committal hearings.
We would be happy to talk further with you about any of those if they are of interest.
Call for submissions
The ALRC is inviting submissions on the Discussion Paper by 31 January 2020, with the ALRC's Final Report set to be published on 30 April 2020.
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