The ALRC Corporate Criminal Responsibility report, tabled today, comments
Following the Financial Services Royal Commission in particular, there are widespread concerns that corporations, and senior officers within those corporations, are not adequately held to account for serious corporate misconduct. While further data is required to thoroughly assess the validity of those concerns it is true that prosecutions of corporations, relative to individuals, are extremely rare, even in heavily regulated sectors where corporations are most active.
Corporations are most often prosecuted for relatively minor regulatory offences. Smaller corporations are more likely to be prosecuted than larger corporations.
Prosecutors withdraw a significantly higher number of charges against corporations than they withdraw against individuals for corporate crimes. This suggests that existing laws present real difficulties for prosecuting corporations.
An unsophisticated response, such as simply initiating more criminal prosecutions against corporations, is not the solution. Instead, the ALRC has endeavoured to understand why there are so few prosecutions against corporations. The ALRC has examined the fundamental principles underpinning the regulation of corporations, and the proper role of the criminal law.
For corporations, regulators, investigators, and prosecutors, there is significant complexity in the Commonwealth legislative landscape. Despite the emphasis on civil enforcement, there has been a proliferation of criminal offences applicable to corporations. The ALRC has identified over 3100 offences across the 25 Commonwealth statutes most relevant to corporate misconduct. The unnecessary complexity and over particularisation of offence provisions may enable misconduct to go unchecked.
Many Commonwealth corporate offences do not reflect any underlying concept of criminality. Many offences are duplicative of equivalent civil penalty provisions. Criminal offence provisions should only apply to the most egregious corporate misconduct. All other misconduct should be subject to civil penalties instead.
Commonwealth law contains a variety of complex mechanisms for attributing criminal responsibility to corporations. The attribution mechanisms do not necessarily reflect the moral blameworthiness of the corporate entity itself. Commonwealth law should contain just one standard mechanism for attributing criminal responsibility to corporations. In order to focus squarely on corporate blameworthiness, fault should be attributed to corporations with a poor compliance culture. A corporation should be able to avoid liability by demonstrating it took reasonable precautions to prevent misconduct (ie by demonstrating an absence of corporate fault).
More recently, legislators have sought to address corporate misconduct with offence provisions that require corporations to exercise ‘due diligence’ or to take ‘reasonable measures’. Offence provisions drafted specifically for corporations may be more effective in addressing corporate misconduct.
There is concern that the paucity of corporate criminal prosecutions, and regulators’ frequent reliance on civil penalty provisions, have led to a mindset that the penalties imposed are little more than a cost of doing business.
It should be a criminal offence for a corporation to engage in a system of conduct, or a pattern of behaviour, that leads to breaches of civil penalty provisions.
Existing penalty and sentencing options for corporations are inadequate and often disproportionately affect shareholders, employees and third parties who were not connected with the corporation at the time of the offending.
New penalty and sentencing options should be introduced to empower courts to take into account impacts on third parties, and to punish those most involved in the wrongdoing.
The ALRC suggests that
Implementation of the recommendations in this Report will improve Australia’s corporate criminal responsibility regime. These recommendations will:
- result in simpler, clearer laws that reduce the regulatory compliance burden on corporations;
- better protect individuals from serious corporate misconduct by ensuring the criminal law, regulators, and law enforcement are focused on the most egregious criminal conduct;
- make corporations less likely to view civil penalties as merely a ‘cost of doing business’, by criminalising corporate systems of conduct or patterns of behaviour that lead to breaches of civil penalty provisions;
- standardise the legal tests for attribution of criminal responsibility to corporations, to provide greater certainty, consistency, and clarity;
- increase the range of penalty and sentencing options available in respect of corporate offenders to punish and rehabilitate criminal corporations more effectively;
- provide for judicial oversight of Australia’s proposed Deferred Prosecution Agreements scheme;
- make Australian corporations criminally responsible if they fail to prevent an associate from committing certain crimes overseas on their behalf;
- ensure mechanisms to hold directors and senior managers liable for corporate misconduct are monitored closely following recent judicial and legislative developments; and
- establish a national approach to the collection and dissemination of data relating to corporate crime, to facilitate the development of evidence-based criminal justice policy.
The ALRC’s main recommendations are summarised as
PROBLEM ONE: Corporations are not adequately held to account for serious corporate misconduct.
There is no principled basis underpinning the provisions that apply the criminal law to corporations.
Corporations should be subject to a criminal offence only when:
a. denunciation and condemnation of the conduct is warranted;
b. the stigma of being a ‘criminal’ would be appropriate;
c. the deterrence from a civil penalty would be insufficient;
d. the potential harm that may occur justifies a criminal offence; or
e. it is in the public interest.
Breaches of the criminal law by corporations will more readily be recognised as serious, with ‘criminal corporations’ experiencing significant reputational harm. Corporations will be more likely to direct their attention and efforts to preventing criminal conduct, and less likely to take a tick-a-box approach to regulatory compliance.
B. Too many criminal offence provisions relevant to corporations
The law contains too many criminal offences. Many of them prohibit low-level misconduct. Most of them are never enforced.
- Too often, the law contains both a ‘civil penalty provision’ and a ‘criminal offence’ for essentially the same misconduct by a corporation.
Corporations are rarely taken to court for committing a criminal offence, even when there has been evidence of serious corporate misconduct.
If a proposed law includes a new criminal offence provision for corporations, government should be required to explain publicly why it is appropriate and necessary. Simpler, clearer laws will reduce the regulatory compliance burden on corporations. Ensuring criminal offence provisions only apply to the most serious corporate misconduct will enable criminal investigators and prosecutors to apply their efforts and resources more appropriately. Greater scrutiny of proposed new criminal offence provisions for corporations will help to prevent the spread of criminal law to lower level misconduct. Over time, there will be fewer offence provisions directed at corporations. Those that do exist will reflect serious misconduct by corporations.
C. Infringement notices are used inappropriately to regulate criminal conduct
- Infringement notices (equivalent to speeding tickets) are used regularly as an enforcement response to criminal offences committed by corporations. These notices do not convey adequately the seriousness of criminal misconduct.
Infringement notices should not be available as an enforcement response for criminal offences committed by corporations. Public confidence in the criminal justice system will improve when serious corporate misconduct is subject to more formal criminal law processes and safeguards.
PROBLEM TWO: The law does not facilitate fair, consistent prosecution of corporations
A. Multiple inconsistent mechanisms for attributing criminal responsibility to corporations
- The law is currently inconsistent as to when a corporation (rather than individuals, like directors or managers) will be held responsible for a crime.
- The law contains many different methods of determining whether a corporation is responsible for a crime.
- The law does not respond appropriately to instances of systematic misconduct by corporations.
- These aspects of the law cause confusion for corporations, regulators, and prosecutors.
Recommendations 5 and 6
The law should contain one clear method of determining when a corporation is responsible for a crime. That method should apply in the vast majority of situations. A corporation should be criminally responsible for the conduct of a person acting on its behalf. The nature of the relationship between the person and the corporation should be more important than the person’s job title or job description, when determining whether the person is acting “on behalf of” the corporation. Simpler, clearer laws will reduce the regulatory compliance burden on corporations. There will be greater certainty for regulators, investigators and prosecutors. Prosecutors will have greater confidence in laying charges against corporations when appropriate. Fewer withdrawals of prosecutions will occur due to the ability to undertake timely investigations and evidence gathering.
B. Inconsistency in attributing fault to corporations
- The law contains multiple inconsistent ways of determining whether a corporation has the requisite state of mind for an offence.
- One of the main existing tests is whether a “high managerial agent” of the corporation has the necessary state of mind. This test is more difficult to apply to large corporations than to smaller corporations.
The law should contain one way of determining whether a corporation is considered at fault for particular misconduct. This should reflect the moral blameworthiness of the corporation. A corporation should be considered at fault when an employee, officer or agent of the corporation has the relevant state of mind for the particular criminal offence. A corporation should have a defence of having taken ‘reasonable precautions’. Simpler, clearer laws will reduce the regulatory compliance burden on corporations. There will be greater certainty for regulators, investigators and prosecutors. Small and large corporations will be treated equally when attributing fault to a corporation. There will need to be evidence of the moral blameworthiness of the corporation itself before it is found to be criminally liable.
C. Little accountability for corporate conduct overseas
- Overseas crimes by Australian corporations are rarely, if ever, prosecuted.
The Government should consider applying the new model of ‘failure to prevent’ offences to misconduct overseas by Australian corporations. Corporations will be more likely to comply with key Australian laws in their operations overseas.
PROBLEM THREE: The consequences of corporate misconduct are inadequate
A. Repeated civil penalties may be treated as a “cost of doing business”
- The criminal law is not designed to address corporate misconduct which occurs due to failures in (or the deliberate design of) the corporation’s systems, practices, procedures and policies.
- Civil (ie non-criminal) regulation primarily involves financial penalties, and so may be treated by corporations as merely a cost of doing business.
There should be new criminal laws that address systems of conduct or patterns of behaviour that result in multiple contraventions of civil penalty provisions. Corporations will have significant incentive to improve their compliance systems. Corporations will be less likely to ignore regulatory requirements. Clearer and simpler laws will reduce the regulatory compliance burden on corporations and provide greater certainty for regulators, investigators and prosecutors.
B. Current penalty and sentencing options for corporations are inadequate
- The law contains little statutory guidance for courts when sentencing a corporation, leading to uncertainty and inconsistency.
The law should require courts to consider a number of specified factors when sentencing a corporation. Corporations and the general public will be able to have greater confidence that corporations are being sentenced appropriately and consistently for criminal corporate misconduct.
- Sentencing options are generally limited to financial penalties, which may be viewed as a “cost of doing business”.
- Financial penalties are often not imposed until several years after the offending conduct, at which time they impact disproportionately on shareholders, employees, and others who were not connected with the corporation at the time of the offending.
Courts should be able to impose a range of non-monetary penalties when sentencing a corporation, including: • publication or disclosure; • community service; • corrective action; • facilitating redress; and/or • not participating in certain commercial activities.
Courts should be able to make orders dissolving a corporation, if it is the only appropriate sentencing option.
Courts should be able to make orders disqualifying a person from managing corporations, if that person managed a corporation that has been dissolved by a court. Sentences for corporations will better reflect the purposes of corporate criminal law. Sentences for corporations will be less likely to unfairly affect innocent third parties. Victims of corporate crime will be more likely to receive compensation from the responsible corporation. The public will be better protected from corporations and managers who have previously been responsible for serious criminal offences.
- Each government in Australia has different rules about whether a corporation that has been convicted of a criminal offence can be awarded contracts for government work.
- There is no clear guidance in the Australian Government’s Procurement Rules on the relevance of a corporation’s criminal convictions.
- Permitting convicted corporations to undertake government work can undermine public trust in government, endanger public health and safety, and increase the risk of misuse of public funds.
The Australian Government, together with state and territory governments, should develop a national debarment regime. Corporations with an interest in undertaking government work will have a significant incentive to ensure the corporation is not involved in criminal activity. The public will be able to have greater trust in the process of awarding government contracts.
- When determining a sentence for a convicted corporation, courts are reliant on limited information about the impact of a corporation’s offending on any victims and the public at large.
Recommendations 16 and 17
Courts should be able to make orders for the preparation of pre- sentence reports for corporations, and should be able to consider victim impact statements. Courts will be able to hand down more appropriate sentences to convicted corporations. For example, courts will be able to tailor non-monetary penalties that take into account the corporation’s compliance culture, as well as any steps the corporation has taken to improve its procedures, to discipline its personnel, and to compensate victims or repair any harm. Victims of corporate crime will have a voice when corporations are sentenced. Courts will be better able to assess the impact of the misconduct, and the suitability of a compensation or redress order.
C. Proposed Deferred Prosecution Agreement (DPA) scheme does not provide sufficient transparency
- The proposed DPA scheme makes no provision for public oversight of agreements reached between the prosecutor and the corporation.
- The proposed scheme is susceptible to the same criticisms as those made of enforceable undertakings in the Financial Services Royal Commission.
There should be judicial oversight of DPAs and publication of the reasons for any approval of a DPA in open court. The public will have greater confidence in the process and will be less likely to fear that private deals are being done between prosecutors and corporations.
PROBLEM FOUR: There is insufficient data relating to corporate crime
- It is difficult to obtain complete, timely, and accessible data relating to corporate defendants in the criminal justice system. This obscures the nature and extent of corporate crime.
National principles and policies for the collection, maintenance, and dissemination of criminal justice data should be developed.