Australian corporate criminal responsibility regime to be overhauled

The Australian Law Reform Commission (ALRC) has tabled its Report in Federal Parliament, with 20 recommendations for improving Australia’s corporate criminal responsibility regime. The ALRC has not adopted each of the proposals in its 2019 Discussion Paper which were addressed in a previous Corrs Insight. 

This is the first comprehensive review of Australia’s corporate criminal regime following the enactment of the Criminal Code Act 1995 (Cth) (Criminal Code) 25 years ago. The Report was commissioned last year following the Australian Securities and Investment Commission (ASIC) Enforcement Review Taskforce in December 2017, and the Financial Services Royal Commission in February 2019. 

The ALRC’s position on corporate criminal responsibility is summarised in the following passage in the Summary Report:

“In its current form, the law relating to corporate misconduct is both unjust and unfair. The civil regulatory regime does not adequately reflect the culpability of individuals who commit the crimes for the advantage of a business. For economic crimes where a mental element is an element of the substantive offence, a regulatory response will not reflect the true responsibility of the corporation. In cases where serious economic crimes have been committed, there should be clear public confidence that justice has been done. This is not achieved under the current law, where the model for corporate liability was and remains manifestly at odds with the realities of the diffusion of managerial powers in large corporations because the law provides companies with the perverse incentive to decentralise responsibilities so as to make it impossible to identify a senior individual or group in charge of any particular operation.”[1]

At the outset, the ALRC has acknowledged the important part that corporations play in stimulating the economy, however noted that corporate misconduct “lessens trust” and can impair economic activity, so it is incumbent upon Australia’s legislative framework to strike the right balance in the interests of all Australians.[2]

Key recommendations of the ALRC

Principled criminalisation

The ALRC identifies issues with Australia’s current corporate criminal responsibility regime that have arisen as a result of an “enforcement-focused approach” to legislation.[3] This has seen a proliferation of offences for low-level contraventions, diluting the stigma associated with a corporation being found to have committed a criminal offence. [4]

In response to this, the ALRC recommends a review of existing criminal offences that apply to corporations and that corporate offences should only be enacted in the future to regulate and criminalise the more serious conduct of corporations. For example, in circumstances where it is appropriate to condemn the conduct constituting an offence, where the stigma that should attach to criminal offending would be warranted, or the deterrent effect of a civil penalty would be insufficient.

Adopting this principled approach will ease some of the regulatory burden for corporations, as well as for investigators and prosecutors who can apply their resources and efforts more appropriately to the more egregious conduct which warrants criminal sanction.

Corporate attribution and liability of individuals

The ALRC identified shortcomings in Australia’s mechanisms for attributing both the physical and fault elements of the relevant criminal offence to a corporation.

In relation to the physical elements, the ALRC recommends amendments to section 12.2 of the schedule to the Criminal Code, unless an alternative attribution method is absolutely necessary in the particular instance.

The ALRC amendments would extend liability of a corporation to include “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”. 

The ALRC considers that this relatively minor amendment is necessary to both clarify the conduct that may be attributed to a corporation and prevent section 12.2 being “read down to exclude the conduct of an agent acting at the direction of an employee with apparent authority.”[5]

The ALRC proposes two alternative options for the fault elements. Both seek to embed corporate blameworthiness as the precondition to the attribution of fault to a corporation.

One proposed option is to widen sections 12.3 and 12.4 of the schedule to the Criminal Code, so that ‘organisational fault’ can be attributed to a corporation in a broader range of circumstances.

The second approach would replace current section 12.3 with a ‘state of mind’ provision that in effect attributes fault to a corporation in circumstances where an officer, employee or agent had the relevant state of mind. If this approach is adopted, the ALRC also recommends the inclusion of a ‘reasonable precautions’ defence where the corporation proves it took appropriate steps to try to prevent the offence occurring.

Interestingly, the ALRC did not include any definitive recommendations on the individual liability for directors and executives who had the capacity to prevent corporate criminal conduct and failed to do so, as was proposed in its November 2019 Discussion Paper.

Offences specific to corporations

The ALRC recommends enacting a new broad ‘system of conduct’ or ‘pattern of behaviour’ offence for corporations, targeted at systemic corporate misconduct that should be the subject of criminal, rather than civil sanction.

The features of the offence would include:

• a focus on the concept of a ‘system of conduct’ or ‘pattern of behaviour’;
  
  
• a requirement that at least two contraventions of the same serious civil penalty provision result from the conduct; and
  
  
• the need to prove intention or recklessness as fault elements.[6]

A key threshold issue for the enforcement of such an offence will be the interpretation of ‘system of conduct’ and ‘pattern of behaviour’. The ALRC notes that these concepts have already received some judicial interpretation, which “provides clarity as to how the offence might be proved”.[7] We expect this new offence may be interpreted to focus on whether the corporation engaged in deliberate or reckless conduct which permitted these issues to persist. 

In addition to this, the ALRC has indicated it is generally supportive of the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 (Cth), which will introduce into Australian law the concept of a “failure to prevent offence” in the context of foreign bribery (as well as a Deferred Prosecution Agreement scheme; although the ALRC has recommended some enhancements to the Bill, including a requirement for judicial approval).

This offence is similar to the framework for foreign bribery enacted in the UK Bribery Act and tax evasion legislation. These offences place a significant emphasis on the corporation’s ability to prove it had an effective compliance program in place to prevent the offence.

The ALRC has also indicated there are other examples of transnational misconduct, such as foreign tax evasion and modern slavery, where a failure to prevent offence might also be appropriate.

Sentencing

Almost half of the ALRC recommendations relate to the potential sanctions of corporations. At present, the sanction options available to a court for a convicted corporation are generally limited to a fine, which are seen to be inadequate to deal with corporate offenders, including because the cost is generally borne by parties who were not involved in wrongdoing (e.g. shareholders) and a fine may convey the impression that offences are simply a ‘cost of doing business’.

The ALRC recommends expanding the potential sanction included in the Crimes Act 1914 (Cth) that are available to a court when sentencing a corporation. Additional proposed sanctions include orders requiring 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 organisation reform;
  
  
• facilitate redress of any loss suffered, or any expense incurred, by reason of the offence; or
  
  
• not undertake specified commercial activities.

The ALRC also recommends courts be empowered to make equivalent orders for civil penalty contraventions.

Further, the ALRC has also proposed a broader range of factors should be considered in any sentencing decision for a corporation. These include corporate culture, efforts made to mitigate the likelihood of future offending and voluntarily self-reporting any offence. 

Finally, the ALRC recommends the introduction of a debarment regime at both Commonwealth and state level, which would prevent convicted corporations from entering into government contracts. This regime would replicate those already adopted in the European Union, USA and Canada. 

Implications for corporate Australia

Whilst the Federal Government has acknowledged the ALRC’s recommendations, whether it will implement each of them remains to be seen. If it elects to do so, corporations in Australia will likely welcome the ALRC’s overarching intention to take a more considered approach to corporate criminal responsibility by removing existing laws that attribute criminal responsibility to low level breaches while criminalising conduct that involves the most serious of breaches. This approach will inevitably ease corporate Australia’s regulatory burden, as well as clearly defining the types of conduct that do (and do not) amount to breaches of the criminal law.

However, the ALRC’s recommendation for an expansion of the type of criminal conduct that can be attributed to a corporation broadens the scope of potential liability to, for example, conduct engaged in by a third-party at the direction of the corporation. As a result, organisations may be required to exercise greater oversight over individuals who would now be considered to be acting on behalf of the company.

While the scope of the new ‘system of conduct’ or ‘pattern of behaviour’ offence is not yet clear, broad definitions of these concepts may well see the over criminalisation of civil breaches, one of the very issues the ALRC has sought to address in this Report.

In relation to sanctions, the ALRC is seeking to provide greater options for the courts in dealing with corporate breaches of the criminal law, beyond traditional monetary penalties. The factors influencing sanctions emphasise the importance of having a robust corporate culture which does not tolerate serious corporate misconduct. Corporations which take prophylactic measures designed to prevent risks of non-compliance and appropriate responsive and remedial steps when issues are identified, are less likely to be liable for criminal wrongdoing, harsh sanctions or civil penalty orders if the ALRC’s recommendations are implemented.

A corporation’s interests are also likely to be furthered by adopting policies, and implementing practices and procedures, which make it clear that non-compliance will not be tolerated and that risks of serious corporate misconduct will be identified, assessed and appropriate remedial actions undertaken.

This is important in circumstances where any question of whether directors exercised reasonable care and diligence as required under s 180(1) of the Corporations Act 2001 (Cth) may involve consideration of the foreseeable risk of harm to the corporation’s reputational interests such as compliance with the law.[8] The ALRC’s recommendations emphasise that it is in the interests of corporations and senior management to take a proactive approach to these issues.