INSIGHT

ALRC's Discussion Paper released: a clearer, consistent and more rational framework for addressing corporate misconduct in Australia

By Christopher Kerrigan, Cindy McNair, Ed Copeman
Corporate Governance Risk & Compliance

In brief 12 min read

The Australian Law Reform Commission released for consultation today a set of proposals aimed at overhauling the federal corporate criminal responsibility regime. This comes in the wake of criticisms that the current system is ineffective at preventing, deterring and prosecuting serious corporate crime. Whilst the reforms offer a clearer, consistent and more rational framework for addressing corporate misconduct in Australia, some elements (such as the adoption of a general 'associate' model for criminal attribution) will no doubt raise concern given their capacity to significantly extend corporate liability. We examine some of the key proposals and their likely impact. Partner Christopher Kerrigan and Senior Overseas Practitioner Cindy McNair report.  

How does it affect you?

If the Australian Law Reform Commission (ALRC)'s proposals are adopted by the Australian Government:

  • there would be one method for attributing criminal liability to corporations across all Commonwealth legislation. The method would be vicarious liability for crimes committed by any person or entity acting for or on behalf of the corporation, unless the corporation is able to prove it exercised due diligence to prevent the relevant misconduct;
  • there would be fewer criminal offence provisions and a clearer framework for what misconduct should be punished by civil penalty notice, civil penalty proceedings and criminal prosecution, with criminal offences reserved for conduct that requires denunciation and condemnation, and where the deterrent effects of a civil penalty would be insufficient;
  • senior officers would be civilly liable for corporate offences if they were in a position to influence the conduct but failed to take reasonable measures to prevent the offence, and criminally liable if they engaged in the conduct the subject of a civil penalty intentionally, knowingly or recklessly; and
  • courts will be furnished with a broader array of non-monetary orders that can be made in respect of criminal and civil misconduct, including disclosure obligations and corrective action.

The ALRC is also seeking submissions on whether a deferred prosecution agreement (DPA) scheme should be introduced in Australia.

Submissions on the ALRC's Discussion Paper are due on 31 January 2020, with its Final Report to be provided to the Attorney General on 31 April 2020. We will be making submissions on the ALRC's proposals and we encourage you to get in touch if you would like to discuss.


Our perspective: a positive step, with some reservations

We welcome the general direction of the ALRC's proposed reforms in providing a clearer, consistent and more rational framework for addressing corporate misconduct in Australia. There will be concern in some quarters as to the ALRC's adoption of a general 'associate' model for criminal attribution (which would extend corporate liability significantly) given the lack of need for a formal relationship before someone can be an associate or knowledge on a corporation's part of an associate's actions.

We also see the ALRC's new model for individual liability as joining an already overcrowded area of regulation that now includes the Banking Executive Accountability Regime and its anticipated expansion to non-prudentially regulated entities, as well as the existing publicly enforceable directors' and officers' duties regime. We welcome the proposal that it would not apply to directors. Lastly, we consider that DPAs can serve an important role under the new proposed framework. These agreements give prosecutors and companies an alternative to the binary choice of prosecuting or not prosecuting. In the US and the UK, such agreements have proved successful in encouraging greater self-reporting and proactive cooperation by companies, reducing investigation length and cost, improving the corporate culture of organisations, and achieving significant financial penalties while avoiding some of the disproportionate collateral legal and reputational consequences that can ensue when a company is convicted of an offence.

Principal findings from the ALRC's review

The ALRC reviewed a cross-section of Commonwealth legislation, and analysed data received from the Office of the Commonwealth Director of Public Prosecutions (CDPP) and consultations with various stakeholders.

Based on its review, the ALRC found there to be:

  • an over-proliferation of criminal offences (more than 2,500), which not only created a significant regulatory burden, but diluted the rationale for corporate criminal liability;
  • a lack of a principled rationale for distinguishing between conduct the subject of a civil penalty and conduct that would constitute a criminal offence; and
  • numerous and different methods for attributing criminal liability to corporations.

Major proposed reforms

A new, principled approach to regulating corporate behaviour

At a broad level, the most significant change proposed by the ALRC is a recalibration of the way civil and criminal penalties are used to regulate corporate conduct (see Proposals 1-7). This reform, if implemented, would see an overall 'reduction in the exposure of corporations to criminal prosecutions'1 as criminal sanctions will be reserved for only the most serious instances of corporate wrongdoing (ie those which deserve public denunciation and condemnation). All other regulatory infringements or breaches of the laws governing corporate conduct would be dealt with on a civil basis. As the ALRC has concluded:

'the distinctive role of corporate criminal responsibility lies in its ability to achieve objectives of retribution and condemnation. If the condemnatory force of the criminal law is not necessary for a particular contravention, then it is not appropriate to hold the corporation criminally responsible'.2

The recalibrated model would divide corporate enforcement provisions into three categories according to the severity of the conduct they are intended to address:

  • Criminal offence provisions (COPs);
  • Civil Penalty Proceeding provisions (CPPs); and
  • Civil Penalty Notice provisions (CPNs).3

In the table below, we summarise the ALRC's approach to these three categories.

Proposed new corporate criminal responsibility framework

CRIMINAL
Criminal offence provision

For serious misconduct by a corporation that involves public denunciation or condemnation, the stigma of criminality and where the deterrent characteristics of a civil penalty are insufficient. Would not apply to the same conduct governed by civil penalties unless the company has repeatedly contravened a CPP or CPN provision, or otherwise shown a 'flouting' or 'flagrant disregard' of such a provision.

CIVIL
Civil penalty proceeding

For serious misconduct that requires deterrence, but no requirement for public denunciation or condemnation. Would need to be proven by a regulator through court proceedings.

Civil penalty notice

Administrative process for failures to comply with regulatory requirement, where non-compliance is prima facie evidence of violation. Would allow recipient to make representations to regulator to withdraw the notice or challenge a decision not to withdraw in court. A CPN would not be available as an alternative to a CPP.

While the ALRC has articulated this model at a conceptual level, it would be left to the Australian Government to flesh out the details of which provisions should fall into the civil or criminal category. The ALRC has suggested the following conduct may be relevant when considering whether a COP is appropriate:

  • fraud or dishonesty;
  • serious financial misconduct, or conduct that would result in significant economic harm;
  • serious harms to individuals or the environment;
  • physical injury to an individual;
  • conduct repugnant to commonly accepted standards of decency; or
  • conduct representing a marked departure from accepted standards of commercial behaviour.4
Single attribution model for corporate criminal responsibility

Another significant reform proposed by the ALRC is eliminating the differing ways for attributing criminal liability to a corporation under Commonwealth legislation. A single statutory methodology is suggested, designed to ensure attribution accords with fundamental criminal law principles (particularly blameworthiness and culpability) (see Proposal 8).

Under the ALRC's proposal, the conduct and state of mind of an 'associate' (ie any person or entity acting on behalf of a corporation) will be directly attributable to the corporation, unless it can prove it exercised due diligence to prevent the conduct. Thus, the burden would fall on the corporation to establish it exercised the requisite due diligence. In this regard:

  • the ALRC notes 'due diligence is an elastic concept that takes its meaning from the context in which it must be exercised'5 and suggests guidelines be developed similar to those which have been proposed for the foreign bribery offence and 'adequate procedures' defence in the Criminal Law Amendment (Combatting Corporate Crime) Bill 2017 (Cth) (CLACCC Bill) and the failure to prevent offences in the UK; and
  • at least for large corporations, the ALRC suggests that the existence of an effective corporate whistleblower protection policy should be a relevant factor in determining whether a corporation has satisfied the due diligence defence.

the existence of an effective corporate whistleblower protection policy should be a relevant factor in determining whether a corporation has satisfied the due diligence defence.

We see the ALRC's proposed test as 'lowering the bar' for most Commonwealth offences, including those under Part 2.5 of the Commonwealth Criminal Code contained in Schedule 1 of the Corporate Criminal Code Act 1995 (Cth), which require the CDPP to prove that a corporation 'authorised or permitted' the offence. However, for some offences, including offences under Chapter 7 of the Corporations Act 2001 (Cth) (Act), the proposed model will 'raise the bar' by introducing a 'due diligence' defence that does not otherwise exist.

The focus on 'associates' also represents a functional approach to attribution, which will direct the inquiry to 'the substance of the relationship'6 between the person or entity and the corporation, rather than the presence of any formal role or title. Under this approach, conduct by subsidiaries or third parties will not automatically be attributable to a corporation unless they can be said to have been acting for the corporation. In some instances, this will broaden the scope of conduct a corporation can be criminally liable for.

The ALRC is of the preliminary view that its proposed attribution model should also apply to civil contraventions by corporations, subject to certain caveats (eg making the due diligence defence available for civil proceedings only if it exists under current legislation).

Reframing individual liability for corporate misconduct

Currently, there are numerous Commonwealth statutes that make individuals liable for corporate misconduct. To address the complexity and inconsistency across these provisions, the ALRC is proposing to streamline the diverse methods for attributing corporate fault to individuals into one consistent approach. Under its proposed model, 'officers' (which would not include directors) will be civilly liable where:

  • a corporation commits an offence, or engages in conduct the subject of an offence provision;
  • the officer was 'in a position to influence'7 the corporation's conduct in relation to the contravention; and
  • the officer cannot prove they 'took reasonable measures to prevent the contravention'8 (see Proposals 9-10).

Under this formulation, it will not be necessary to secure a conviction against the corporation before prosecuting an individual. The Act would be further amended to make it a criminal offence if an officer engaged in conduct the subject of the civil penalty if they did so intentionally, knowingly or recklessly.

the ALRC has chosen to focus its proposal on holding the senior or executive management team accountable for serious crimes committed by a corporation.

In making its proposal, the ALRC stated that this 'failure to prevent' model, focused on managerial liability of individuals (whether or not they are formally appointed as officers of a corporation), is already commonly found in existing individual liability provisions, and that it adopted this model over others 'on the basis that it sets clear responsibilities for senior officers to ensure corporate compliance throughout the parts of the company over which they have influence'.9 The ALRC recognised that directors, who are already subject to extensive statutory regulation, 'may not be the most appropriate target where the objective is to ensure compliance at all levels of a corporation, across all lines of business, in the course of day-to-day operations'.10 In contrast, senior executives, including heads of departments, 'ha[ve] been too often shielded from responsibility in relation to conduct over which they had significant influence or supervision',11 oftentimes as a result of 'opaque reporting structures' or 'a fog of diffused accountability'.12 Accordingly, the ALRC has chosen to focus its proposals on 'ensur[ing] that senior officers can be held liable when serious crimes are committed by the company'.13

Broadening non-monetary penalties and sentencing options

The ALRC proposes to broaden the existing suite of non-monetary penalty orders for both criminal and civil misconduct. This would equip courts with a more diverse range of mechanisms that can be tailored to fit the harm caused by, and/or the severity of, the misconduct (Proposals 12-17). Under these proposals, in addition to imposing pecuniary penalties and disgorgement orders, a court could order a corporation to:

  • publicise or disclose certain information;
  • undertake activities for the benefit of the community;
  • take corrective action within the organisation, such as internal disciplinary action or organisational reform;
  • refrain from undertaking specified commercial activities; and
  • be dissolved (for offences).

Sitting behind these new penalties would be new legislative statements on the purposes and principles of sentencing, as well as guidance on the factors a court should consider when sentencing corporations and making civil penalty orders (such factors to include self-reporting, corporate culture and remediation and compliance uplift work).

The ALRC is also proposing that a national debarment regime be developed to make disqualification from government contracts a possible consequence of a corporate conviction, rather than a court-imposed penalty (Proposal 18).

A question mark for Deferred Prosecution Agreements

In light of these proposed reforms, the ALRC poses the question whether 'a deferred prosecution agreement scheme for corporations be introduced in Australia as proposed by the [CLACCC Bill], or with modifications' (Question E). While recognising strong policy rationales in favour of a DPA regime, including 'inducing corporate self-reporting, full cooperation and remediation',14 the ALRC is cognisant of the concern that DPAs will turn prosecutors into 'judge and jury',15 and also allow corporations to evade 'the expressive function of the criminal law'16 and deprive victims of the validation from having their wrongdoer's conduct being identified and condemned as criminal.

Other proposals and questions

The Discussion Paper also raises several other proposals and questions aimed at tackling illegal phoenixing and transnational crime, and improving protections for whistleblowers, including:

  • providing ASIC and the ATO with powers to issue interim restraining notices in respect of assets held by a company where it has a reasonable suspicion that there has been, or will imminently be, a creditor-defeating disposition (Proposals 21-23);
  • asking whether due diligence obligations of Australian corporations in relation to extraterritorial offences should be expanded (Question L); and
  • asking whether the whistleblower protections in the Act and other legislation should be amended to apply extraterritorially and to provide for a compensation scheme (Questions C and D).

Key dates

Submissions on the Discussion Paper are due by 31 January 2020. The ALRC will be providing its final recommendations to the Attorney-General by 30 April 2020.

Footnotes

  1. Australian Law Reform Commission, Corporate Criminal Responsibility (Discussion Paper No 87, 15 November 2019) [4.25].

  2.  Ibid [1.22] and Chapter 4 generally.

  3.   Ibid [4.17].

  4. Ibid [4.29].

  5. Ibid [6.27].

  6. Ibid [6.20].

  7. Ibid [7.67].

  8. Ibid.

  9. Ibid [7.82].

  10. Ibid [7.83].

  11. Ibid [7.31].

  12. Ibid [7.33].

  13. Ibid [7.74].

  14. Ibid [9.44].

  15. Ibid [9.59].

  16. Ibid.