In brief 6 min read
During Royal Commission hearings last year, Commissioner Hayne ominously asked one witness: Does that raise a question of the criminal law? We examine this question, which is one that financial service providers are likely to be sensitised to in the current environment.
- Parts of the Royal Commission's Final Report are written in the language of the criminal law: the language of deterrence and denunciation.
- Prompted by Commissioner Hayne's findings, among other things, regulators are increasingly looking at criminal enforcement options.
- An enhanced penalties regime has been enacted1, raising the number and severity of criminal penalties under the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) and lowering various barriers to enforcement.
- There is an increasing focus on personal responsibilities of directors and senior managers for corporate misconduct, which is complemented by the Banking Executive Accountability Regime and its proposed extensions across the financial services sector. Enforcement action in the criminal sphere can raise risks of personal consequences for senior managers and directors.
Commissioner Hayne's question naturally leads to another: what are the questions of the criminal law?
Of course, these are numerous, but some of the key themes include:
- Attribution – how do corporate entities have criminal liability for conduct of individuals?
- Individual liability – what are the risks for individuals, including directors and officers?
- Internal response – what should be considered in the internal response when questions of the criminal law arise?
- Criminal investigation process – what will the criminal investigation process involve?
- Criminal enforcement – what issues arise in criminal enforcement?
This year, the Australian Law Reform Commission is conducting a review of the corporate criminal responsibility regime that will be considering many of these issues, with a view to recommending options for reforming legislation to strengthen and simplify the Commonwealth corporate responsibility regime.
A consultation paper is to be published in November 2019.
The application of these themes is highly fact dependent. For example:
- Regulatory offences – There is an array of 'regulatory offences' that are 'not criminal in any real sense, but are acts which in the public interest are prohibited under a penalty.2 These are typically strict liability and have low penalty amounts. For these offences, many of the bigger questions of the criminal law may not arise.
- Intention offences – By contrast, offences that require a mental state (eg 'dishonesty') are more serious, have higher penalties (often including potential imprisonment), and raise more of the themes of the criminal law. A notable example of an intention offence is section 1041G of the Corporations Act – dishonest conduct in relation to a financial product or service. This now has a maximum penalty of 15 years' imprisonment. The new penalties regime emphasises the distinction between 'regulatory offences' and intention offences, with the same conduct frequently having a strict liability offence (relatively low penalty) and a more serious offence where the conduct was intentional or reckless.
- Books and records – For companies, it is also important to consider offences relating to the accuracy of corporate books and records. These can be triggered even where the principal conduct cannot be established. Some of the relevant laws include s1307 of the Corporations Act, which relates to the falsification of books relating to the affairs of a company; and s1309 of the Corporations Act, which relates to providing false or misleading information to a director, auditor, shareholder or the ASX. There is also a more recent offence in the Criminal Code for making or altering an accounting record so as to receive (or give) a benefit that is not legitimately due.
Some issues that financial services providers are focused on in the current environment have strong resonance in the criminal law.
The topical theme of corporate culture goes to the heart of criminal liability and legal risk:
- Attribution – Under the Commonwealth Criminal Code, a company can be liable where its corporate culture directed, encouraged, tolerated or led to the offence, or if it failed to create and maintain a corporate culture that required compliance.
- Criminal investigation – At the conclusion of the criminal investigation process, the Commonwealth Director of Public Prosecutions must consider not only whether charges can be established but also whether it is in the public interest to lay criminal charges. A consideration in that process can be: whether the corporation had an appropriate governance framework in place to mitigate the risk… and the extent to which there was a culture of compliance with that framework.3
- Criminal penalties – Corporate culture and compliance can have a significant impact on penalties imposed. In a recent case, the penalty amount was reduced by 50% in recognition of a significant compliance uplift after the relevant conduct occurred.4
Questions of individual responsibility and accountability also thread their way through the themes of the criminal law:
- Attribution – A company can be liable where its high managerial agents expressly, tacitly or impliedly authorised or permitted the commission of the offence.
- Individual liability – Individuals actively involved in the offence can have their own criminal liability to consider, including extensions of criminal liability (attempt, aiding, abetting, counselling or procuring, incitement or conspiracy). The serious nature of criminal allegations and the potential quantum of penalties can also give rise to secondary civil liability for directors and officers, and can raise questions about the fulfilment of accountability obligations under the Banking Executive Accountability Regime.
- Internal response – The potential for individual liability, and the extent of exposure that employees have in a criminal investigation process, also has significant impact on the internal response to issues, including considerations relating to independence, or even secrecy, of the internal investigation so to avoid tipping off. On the other hand, the potential individual consequences heighten the need for an investigation process that is robust and fair.
The role of regulators
The role of regulators, and how institutions interact with them, also takes on some different dimensions where criminal law issues arise:
- Internal response – In addition to considering breach reporting requirements and business-as-usual relationships with regulators, internal investigations need to closely monitor whether and when it might be in the company's interests to voluntarily self-report to law enforcement agencies. The decision to self-report can have significant impacts on the exercise of the prosecutorial discretion and on the amount of penalties.
- Criminal investigation process – Australia (unlike many other jurisdictions) has no specialist enforcement agency for serious white-collar matters. Rather, corporate criminal matters can fall within the remit of the Federal Police (which must balance these matters against other priorities – counter-terrorism, drugs etc) or the civil regulators. Compared with other jurisdictions, Australia has a more rigid and absolute division between the functions of the Director of Public Prosecutions and the investigating agency. This can lead to considerable uncertainty throughout the investigation phase, and greatly slows down the criminal investigation and enforcement process.
- There are ancient procedural protections under the criminal law, including the privilege that individuals have against incriminating themselves. There are examples of prosecutions that have gone awry where investigating agencies have overstepped in the use of their powers in a criminal context. There are also significant unanswered questions – eg how an accountable person under the BEAR regime is meant to be open, constructive and cooperative and also preserve their common-law rights.
Ultimately, however, the biggest questions of the criminal law arise in the enforcement phase.
Serious white-collar matters might be complicated, document heavy or involve complex financial interactions. However, that does not give them any privileged status. They are (generally) tried by a jury under the procedures that apply for all criminal matters.
It is no accident then the questions that are the foundation for criminal liability – whether conduct in relation to a financial product or service is dishonest according to the standards of ordinary people, whether influence was improper or a benefit legitimately due etc –are framed in terms that can be answered by 12 normal people according to their perception of ordinary standards.
- Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth).
- Sherras v De Rutzen  1 QB 918, 922.
- Australian Federal Police and Commonwealth Director of Public Prosecutions, Self-Reporting of Foreign Bribery and Related Offending by Corporations (8 December 2017).
- CDPP v Nippon Yusen Kabushiki Kaisha  FCA 876.