Is corporate exposure to criminal liability about to increase?

What you need to know

• The Australian Law Reform Commission has made 20 recommendations to improve Australia's corporate criminal liability regime.

• Critically, the report recommends that a new test for attributing conduct to corporations should be adopted to replace a range of existing statutory tests.

• The report has held off for now on recommending proposals for individual liability, given other recent developments in this area.

• Other key recommendations include criminalising corporate systems of conduct or patterns of behaviour that result in multiple breaches of civil penalty provisions; support for the proposed new offence of failure to prevent foreign bribery; and the enactment of legislation to introduce deferred prosecution agreements.

The Australian Law Reform Commission's 574 page Final Report on Corporate Criminal Responsibility submitted in April was tabled in Parliament and publicly released on 31 August 2020.

Our update last November Corporate and senior manager exposure to criminal liability may be able to significantly increase reviewed the proposals in the Discussion Paper. 

One attribution rule

The federal criminal law is currently defined by a "smorgasbord" of different models to attribute criminal conduct to corporations which exist at Common Law, in the Commonwealth Criminal Code and other statutes.

The existence of multiple and overlapping attribution models has been said to create uncertainty as to the application and scope of corporate liability. To address this, the ALRC proposes that a single attribution model be adopted (except in particular circumstances where a unique model of attribution may be required).

Although a single attribution model was proposed in the ALRC's Discussion Paper released in November 2019, the single model proposed in the Final Report is less expansive, and seemingly responds to criticisms made against the model proposed in the Discussion Paper.

The model deals with attributing both the physical and mental elements of an offence.

Attributing the physical element (the "doing" of the act) of the offence to the Corporation

The ALRC proposes that a physical element of an offence is taken to be committed by a body corporate if committed by:

• an officer, employee, or agent of the body corporate, acting within actual or apparent authority; or

• any person acting at the direction, or with the agreement or consent (express or implied), of an officer, employee, or agent of the body corporate, acting within actual or apparent authority.

In other words, to prove the physical element of the offence, a prosecutor would need to prove the physical acts (or the result or circumstances as needs be), by the individual, and prove authority (either direct or through an intermediary acting as directed).

Relevantly, the proposal uses the familiar terms of "officers, employees, and agents" which sit in current s12.2 of the Criminal Code. The ALRC has dropped the proposal (as put forward in the its Discussion Paper) that a functional definition of "Associate" be adopted, which would have looked to the substance of the relationship between the person and the corporation, and potentially extended liability beyond officers and employees to anyone (including the rogue employee) performing a service for or on behalf of the company.

Attributing the fault element (the "guilty mind" or intention) of an offence to the Corporation 

The ALRC has put forward two alternative proposals for attributing the fault element to a body corporate.

Both of the proposals are described by the ALRC as being "incremental changes within the current legislative structure".

"What is Option 1?"

Option 1 is a revision of the current attribution model in Part 2.5 of the Criminal Code. As it retains the broad model of Part 2.5, many of its expansive feature remain. For example, pursuant to Option 1, a prosecutor would be able to prove fault either by reference to:

1. the board;
2. an individual (officers, employees, or agents of the body corporate acting within authority, subject to a defence of taking reasonable precautions); or
3. a "corporate culture" which encourages non-compliance.

Most notably, this reworked Part 2.5 model retains "corporate culture" as a method of attribution (subject to a minor amendment to the definition of ‘corporate culture’ in s 12.3(6)). However, it would repeal s 12.3(2)(d), an existing provision which attributes fault to a corporation for failing to create or maintain a good corporate culture.

Corporate culture attaches fault to the "organisation" of a company, rather than via individuals. Although it has been said that it is difficult to establish or prove a bad "corporate culture", this method of attribution means that a prosecutor can establish fault without having to prove that one individual had the requisite state of mind (as is the case with "Option 2").

"What is Option 2?"

As Option 2 is a modified version of the "TPA Model" (the statutory method of attribution that first appeared in section 84 of the Trade Practices Act 1974 and is reflected in most Commonwealth statutes where Part 2.5 has been expressly carved out), it invokes a relatively simple, longstanding test that looks to attribute to a corporation the actions and states of mind of a broad group of individuals, while retaining a defence of "reasonable precautions". A defence of reasonable precautions supports the notion that criminal liability should only attach to a corporation where the corporation can be said to be blameworthy.

The key feature of this model is that the conduct and state of mind of particular individuals may be attributed to a corporation. The conduct of an individual is deemed to be the conduct of the corporation when:

• the individual was a director, employee, or agent;
• that individual engaged in the conduct;
• the conduct was undertaken on behalf of the corporation; and
• the conduct was within the scope of actual or apparent authority.

As compared to Option 1, under Option 2 fault would ultimately need to reside in an individual. A prosecutor must prove that a single officer, employee, or agent of the corporation had the requisite state of mind at the relevant point in time. Thus, instances of "corporate omission" or corporate fault are not attributable under Option 2.

Although Option 2 does not recognise "organisation fault" and may therefore be said to be less expansive than Option 1, the ALRC describes the Revised TPA Model as being "more prosecutorially friendly" due to the familiarity of prosecutors and investigators with the model.

Criminalise contraventions of civil penalty provisions

A further key recommendation is to create a "system of conduct" type of offence to criminalise systemic contravention of civil regulatory provisions by a corporation.

The ALRC proposes that the "system of conduct" offence would be enlivened when (a) a corporation engages in conduct (either intentionally or recklessly); (b) that conduct constitutes a system of conduct (assessed objectively); and (c) the system of conduct results in "two or more" contraventions of the same prescribed civil penalty provision (or civil penalty provisions with similar characteristics).

This recommendation is explicitly intended to address many of the types of conduct that were the subject of the Financial Services Royal Commission, and the concern that civil fines are treated as a "cost of doing business" by large corporations.

Pulling back on individual liability

In the Discussion Paper, the ALRC proposed personal liability for individuals when a corporation commits certain offences. These were civil penalties for officers where they were in a position to influence the conduct of the corporation, and a criminal offence of engaging intentionally, knowingly, or recklessly in conduct the subject of a relevant civil penalty provision.

In the Final Report, the ALRC pointed to an accountability gap but did not make substantive recommendations in light of other developments, notably the proposed Financial Accountability Regime, discussed in our update here, and the decision of the High Court in ASIC v King, discussed in our update here. Instead, the ALRC recommended that the Australian Government undertake a wide ranging review of the effectiveness of individual accountability mechanisms for corporate misconduct within five years of the entry into force of the proposed Financial Accountability Regime or equivalent.

Failing to prevent bribery

In December 2019 the Federal Government introduced the Crimes Legislation Amendment Bill. If enacted, the Bill will introduce a new offence of failure to provident bribery of a foreign public official.

The ALRC was broadly supportive of the failure to prevent foreign bribery offence, and considered that the "failure to prevent" method of attribution might be appropriate for other offences that might arise in the context of international business. We have analysed this new proposed offence in our alerts here and here.

Deferred prosecution agreements

That same Bill also seeks to introduce a Deferred Prosecution Agreement scheme which will enable a corporation to negotiate outcomes for identified criminal conduct in certain circumstances.

The ALRC Report recommended that the Bill be amended to vest the power to approve a DPA in a Federal Court Judge, permit the parties to make oral submissions and require the publication of reasons for any approval. This is to address concerns about DPA's being mere administrative orders, and would increase their "expressive" power.

Authors: Ian Bolster, Partner; Stephen Speirs, Senior Associate; and Andrew Westcott, Senior Expertise Lawyer.