06 May 2019

ALRC to review the corporate criminal responsibility regime

This article was authored by Lyndon Goddard, Alex Morris and Peta Stevenson.     

On 10 April 2019, the Commonwealth Attorney-General announced that the Australian Law Reform Commission (ALRC) would undertake a comprehensive review of Australia’s corporate criminal responsibility regime.

The Attorney-General appointed Justice Robert Bromwich, a judge of the Federal Court and a former Commonwealth Director of Public Prosecutions, to the ALRC to assist with the review. The ALRC report is due on 30 April 2020.

The terms of reference are broad and require the ALRC to consider:

  • the policy rationale for Pt 2.5 of the Commonwealth Criminal Code (which deals with corporate criminal responsibility);
  • the efficacy of Pt 2.5 of the Criminal Code as a mechanism for attributing corporate criminal liability;
  • the availability of other mechanisms for attributing corporate criminal responsibility and their relative effectiveness, including mechanisms which could be used to hold individuals (eg, senior corporate office holders) liable for corporate misconduct;
  • the appropriateness and effectiveness of criminal procedure laws and rules as they apply to corporations; and
  • options for reforming Pt 2.5 of the Criminal Code or other relevant legislation to strengthen and simplify the Commonwealth corporate criminal responsibility regime.

The ALRC will also consider the recommendations of the Hayne Royal Commission and the ASIC Enforcement Review Taskforce.

Following are some reflections on the context in which the review is occurring and some possible points of focus in the ALRC’s ultimate report.

The review’s context: a heightened sensitivity to corporate responsibility

The review was announced on the day before the federal election was called and in the immediate aftermath of the Final Report of the Hayne Royal Commission. With the federal government debating the implementation of Justice Hayne’s recommendations, the Opposition Leader Bill Shorten is opining that “[i]f no one out of the banks goes to jail, if no one gets prosecuted or charged, I think Australians will say there’s been a cover-up”.[1]

In this regard, Justice Hayne referred 24 cases of misconduct to financial regulators for possible civil or criminal proceedings, and wrote to the Australian Securities and Investments Commission (ASIC) last year about criminal or other proceedings against certain banks.

ASIC has stated that its approach to breaches of law by financial services providers is now “why not litigate?”. Only late last year (in a case unrelated to the Royal Commission), the former chief financial officer of Leighton Holdings, Peter Gregg, was found guilty of falsifying Leighton’s accounts. He is awaiting sentencing.

Overseas, American presidential candidate Elizabeth Warren proposes that criminal liability extend to any executive of a large company who negligently oversees a crime or certain civil violations committed by that company.[2] This proposal would reduce the applicable fault element on the part of a company executive. Warren’s suggestion comes partly in the light of her criticisms of executives at Wells Fargo, which is still grappling with the aftermath of its bank account fabrication scandal.

Holding senior corporate officers liable for their company’s misconduct

Nestled in the middle of the ALRC review’s terms of reference is a direction that the ALRC should consider “whether Part 2.5 of the [Criminal] Code needs to incorporate provisions enabling senior corporate officers to be held liable for misconduct by corporations”. Some commentators have already inferred that this is likely to be the real thrust of the reason for commissioning this review.[3]

Indeed, in announcing the ALRC review, the Attorney-General cited the “complexity” of the current liability regime and “its challenges as a mechanism for attributing corporate criminal liability”.[4] Part 2.5 of the Criminal Code has been frequently criticised as suffering from “evidential burdens too high to meet with any practical certainty”.[5]

One potential avenue of legislative amendment would be to remove the limitation on application of Pt 2.5 of the Criminal Code to financial services and markets offences contained in the Corporations legislation. Relevantly, s 12.3 of the Criminal Code provides that if intention, knowledge or recklessness is a fault element of an offence, then the fault element must be attributed to a body corporate where it “expressly, tacitly or impliedly authorised or permitted the commission of the offence”. Such authorisation or permission may be found to have been present where a corporate culture existed to encourage or tolerate the commission of the offence. By contrast, the fault elements that apply to offences relating to financial services and markets contained in the Corporations legislation are based on vicarious liability.

In 2015 ASIC proposed that Pt 2.5 of the Criminal Code instead be applied.[6] A potential consequence of this would be to facilitate convictions of both corporates, and executives as accessories. This proposal was not taken up, perhaps because ‘corporate culture’ was seen as a nebulous concept that ASIC was not well placed to regulate. It may, however, be more palatable in the current environment.

Other potential issues of interest

Dishonesty offences

The ASIC Enforcement Review Taskforce, chaired by former King & Wood Mallesons partner Kate Mills, noted that there is currently no consistent definition of dishonesty in Commonwealth law. The Criminal Code contains a definition of dishonesty which includes both an objective and a subjective element,[7] but it does not apply for all purposes.[8] At the time of the ASIC report, a similar definition applied in s 1041G of the Corporations Act, although that approach was not consistent throughout the Act.[9] By contrast, the Australian common law position is that an objective test applies.[10]

The Taskforce report recommended that a single, objective test should at least apply throughout the Corporations Act, if not also in the Criminal Code. And in the Royal Commission report, Justice Hayne drew attention to the potential applicability of s 1041G to the ‘fees for no service’ scenarios that had been uncovered during the Commission.

Since then, the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) has amended s 1041G with the effect of removing reference to the subjective element of the test for dishonesty. However, it may be that the ALRC review considers an extension of this objective test throughout the Corporations Act and the Criminal Code.

Committal procedures and the Federal Court’s experience

At the end of the terms of reference, the ALRC is directed to consider “the effectiveness of present Commonwealth criminal procedural laws with a focus on their interaction with state and territory criminal procedural law, particularly in relation to committal hearings”. Currently, state and territory courts are invested with jurisdiction to hear committal proceedings in relation to offences against laws of the Commonwealth. Trials for corporate crimes are generally heard in state or territory Supreme Courts.

In circumstances where New South Wales, Western Australia and Tasmania have substantially altered traditional committal procedure, there is national inconsistency in the way that proceedings relating to Commonwealth offences reach the trial stage. Further, for cases that are ultimately heard in the Federal Court (as is expected for trials of criminal cartel offences against the Competition and Consumer Act 2010 (Cth)), procedural awkwardness is compounded.

This year’s federal budget announced a funding boost of $35 million for the Federal Court, for the purpose of expanding its jurisdiction to include corporate crime (in addition to its existing jurisdiction for criminal cartel offences). That Court is yet to hear a jury trial, with its first expected later this year, and the ALRC review will be well placed to consider modification (or abolition) of committal procedure to Commonwealth offences that are destined for that jurisdiction.

[1] SBS News, ‘Bankers should see charges, jail: Shorten’, 8 February 2019, https://www.sbs.com.au/news/bankers-should-see-charges-jail-shorten.

[2] See Elizabeth Warren, ‘Corporate executives must face jail time for overseeing massive scams’, The Washington Post, 2 April 2019, https://www.washingtonpost.com/opinions/elizabeth-warren-its-time-to-scare-corporate-america-straight/2019/04/02/ca464ab0-5559-11e9-8ef3-fbd41a2ce4d5_story.html?noredirect=on&utm_term=.a5daa1f562d4.

[3] See, eg, Michael Pelly, ‘Criminal law review to target boards, executives’, The Australian Financial Review, 10 April 2019, https://www.afr.com/business/legal/whitecollar-crime-review-to-focus-on-directors-executives-20190409-h1dbqk.

[4] Ibid.

[5] See, in the context of foreign bribery, Simon Bronitt and Zoe Brereton, ‘Foreign Bribery Submission: Combatting bribery of foreign public officials’, 10 May 2017, https://www.ag.gov.au/Consultations/Documents/Proposed-amendments-to-the-foreign-bribery-offence-criminal-code-act-1995/Foreign-bribery-submission-Bronitt-Brereton.pdf, [3.1].

[6] See discussion in John Colvin and James Argent, ‘Corporate and personal responsibility for “culture” in corporations?’ (2016) 34 Company & Securities Law Journal 30.

[7] Consistently with the test adopted in R v Ghosh [1982] QB 1053, until it was rejected by the UK Supreme Court in Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67.

[8] Instead, it only appears in certain contexts (eg, s 130.3 in relation to the proper administration of government), and not in the general provisions of Ch 2.

[9] See Alex Steel, ‘Submission on Position Paper 7: Strengthening Penalties for Corporate and Financial Sector Misconduct’, 24 November 2017, https://static.treasury.gov.au/uploads/sites/1/2017/12/UNSW-Steel.pdf.

[10] See Peters v The Queen (1998) 192 CLR 493.

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