When Should Officers be Liable for Corporate Crime?

Research and consultations in the course of the ALRC’s Inquiry into Corporate Criminal Responsibility have highlighted the important role played by senior management in ensuring compliance throughout the different parts of a corporation. While corporations can be ‘a person’ under law, they are also made up of individuals – some of whom have authority and capacity to direct conduct on behalf of the corporation.

Stakeholders have expressed concern that the current regulatory framework establishing individual liability for corporate conduct both undermines genuine efforts at compliance, while simultaneously failing to hold errant senior corporate officers to account.

In particular, the ALRC is concerned that the current framework does not adequately address the responsibility of senior officers that oversee business models predicated on unfair or exploitative practices.

The ALRC agrees with the view that directors may not be the most appropriate focus with respect to compliance in the day-to-day activities of corporations, and as such does not propose any changes to directors’ liability. In contrast, the proposals focus on those senior officers (CEOs, CFOs, heads of department, etc) who are in a position to influence the day-to-day conduct of corporations.

The current law

In order to better understand the current regulatory framework applying to individuals in the context of corporate misconduct, the ALRC reviewed a set of 25 key Commonwealth statutes that are relevant to corporations. Of those, the ALRC identified 26 provisions in 18 statutes that currently make an individual (typically an officer or executive officer) liable for an offence committed by the corporation.

This type of liability is distinct from accessorial liability, in that the officer need not be directly or indirectly involved in the conduct constituting the contravention. It is also distinct from directors’ duties, which set out specific positive obligations for persons engaged in the position of director.

Instead, these lesser-known managerial liability provisions make an officer liable for a contravention committed by the corporation as a result of the officer’s position within the corporation.

An array of inconsistent liability provisions

Many of these managerial liability provisions create deemed (direct) liability, under which the individual is deemed – based on their position in the corporation – to have engaged in the conduct and is liable accordingly. Others make an individual liable for a separate offence of failing to prevent a contravention by the corporation.

 

For the purpose of analysis, the ALRC identified four categories of managerial liability, and found a wide spread of each throughout the 18 statutes reviewed. (These categories are explained in detail in the Discussion Paper and Appendix I.)



Section 8Y of the Taxation Administration Act 1953 (Cth), for example, applies to a ‘person (by whatever name called and whether or not the person is an officer of the corporation) who is concerned in, or takes part in, the management of the corporation’. That section provides that, where a corporation commits a taxation offence, such a person ‘shall be deemed to have committed the taxation offence and is punishable accordingly.’

In contrast, the Environment Protection and Biodiversity Conservation Act 1999 (Cth) creates a separate offence where an executive officer, who was in a position to influence the conduct of the body corporate in relation to conduct that contravened a provision of the Act, failed to take ‘all reasonable steps to prevent’ the contravention. Unlike the provision under the Tax Act, this offence also includes a fault element, requiring that the individual had knowledge of the contravening conduct, or was reckless or negligent as to whether the conduct would occur.

Less than a third of the managerial liability provisions identified by the ALRC require proof of fault on the part of the officer to be held liable. Most only require that the person who engaged in the conduct (individual or corporate) satisfied the relevant fault element.

A streamlined approach

The ALRC considers that some form of deemed liability – as presently exists in 18 Commonwealth statutes – may be an important tool in ensuring that those individuals who have a key role in encouraging and overseeing compliant conduct within a corporation are personally responsible for that conduct, and therefore improve corporate compliance with the law. Accordingly, the ALRC is attracted to models that posit liability based on an individual’s capacity to influence the criminal conduct that occurs, rather than the person’s formal title or designation. The ALRC considers that there is value in rationalising the current variety of managerial liability provisions into one common formulation, to be applied wherever it is appropriate.

Importantly, the proposals do not introduce a new kind of liability – they simply harmonise 26 distinct existing sources of liability and propose a more general application. This would make it easier for officers to understand and comply with their obligations.

Who may be liable under the proposed approach?

The proposals are framed to ensure that liability only attaches to officers in a position of sufficient influence and involvement in the day-to-day affairs of the corporation such that they should be expected to meet certain standards in the prevention of misconduct within the parts of the corporation under their management.

That is, the proposals reflect the position that senior managers – including the CEO, CFO, and heads of department – have greater capacity to ensure compliance throughout the corporation than the board of directors per se, whose role is one of governance, more than management.

This represents a narrowing of liability compared to the current deemed liability provisions, many of which purport to impose liability on any ‘officer’ of the corporation, which could potentially include both directors and lower level employees.

Under the proposed approach, liability would only attach to persons who meet the threshold requirement of ‘being in a position to influence the conduct of the body corporate in relation to the contravention’. Where prosecutors can prove that an officer was in such a position of influence with respect to a contravention by a corporation, that officer may be civilly liable, unless they can prove that they took ‘reasonable measures to prevent the contravention’.

The approach provides a clear defence for officers who genuinely endeavour to prevent misconduct in the parts of the corporation that they manage, in that they need only demonstrate that they took ‘reasonable measures’ to prevent the misconduct. Under the current law, we should already expect that any senior corporate officer is taking reasonable measures to ensure compliance in the parts of the corporation that they manage. Accordingly, the proposals do not involve any new form of liability, or impose any new obligations or burden on officers in relation to corporate fault.

Limitation on criminal liability

Under Proposal 10, individuals will only be criminally liable for the conduct of the corporation where they:

  • meet the threshold requirement of being in a position to influence the conduct of the body corporate in relation to the contravention;
  • failed to take reasonable measures to prevent the contravention; and
  • did so intentionally, knowingly, or recklessly.

Compared to many of the existing managerial liability provisions – such as s 8Y of the Tax Act – this offers clearer protection for officers who have acted honestly and genuinely attempted to ensure compliance throughout the parts of the corporation over which they have influence.

Questions for further consideration

This issue is the subject of ongoing consideration by the ALRC, and submissions from the public are very welcome. In particular, in the Discussion Paper the ALRC asked whether these proposals should apply to ‘officers’, ‘executive officers’, or some other category of persons, and whether there are any existing deemed liability provisions in particular statutes that should not be replaced by the common formulation proposed, for any reason.

In its Discussion Paper on Australia’s corporate criminal responsibility regime released on 15 November 2019, the ALRC proposes a new model of corporate regulation that aims to achieve more appropriate and effective regulation of corporations. Central to this is the adoption of a principled distinction between the use of criminal and civil regulation.

A lack of principle exists in the current regulatory regime

The existing ‘regulatory pyramid’ said to underpin corporate regulation in Australia is focused on particular enforcement mechanisms, as illustrated below:

 

Sanctions are meant to ascend in order of the seriousness of the contravention, with the criminal law reserved for the most egregious contraventions. The ALRC’s research has revealed, however, that Commonwealth law as it exists in the statute book does not reflect these principles. For example:

  • There is a proliferation of criminal offences.
  • Criminalisation is not reserved for the most serious breaches of the law, and many minor regulatory breaches constitute criminal offences. [1]
  • There is a significant degree of overcomplexity and duplication in existing offence provisions.
  • There is a lack of principled distinction between offences and civil penalty provisions.
  • Infringement notices are available for a range of criminal and civil contraventions, including those that require an evaluative judgment.

The combined effect of these shortcomings is an overregulation by the criminal law of low-level contraventions and a lack of recourse to the criminal law with respect to serious contraventions. The latter point was also identified by the Financial Services Royal Commission.[2] The result is a significant regulatory burden (for both corporations and regulators) that does not achieve principled regulation in any meaningful sense – thus diluting the efficacy of corporate criminal responsibility and undermining the rule of law.

Rebalancing criminal and civil regulation

The ALRC’s model recalibrates the regulatory pyramid for corporations into one focused on the nature of the contravention. Unlawful conduct by corporations would be divided into three categories (in descending order of seriousness):

  • criminal offences
  • civil penalty proceeding (CPP) provisions; and
  • civil penalty notice (CPN) provisions.

As illustrated in the proposed new pyramid below, the primary form of regulation under the model would be civil, rather than criminal:

The ALRC proposes that the same conduct would not be prohibited by both a criminal offence and a CPP provision, unless the criminal offence captures a greater level of wrongdoing (such as by requiring proof of a fault element).  The majority of minor regulatory contraventions that are presently criminal offences would become CPN provisions and be removed from the court system. Infringement notices as they currently exist would be abolished and notice-based enforcement would only be available for a contravention that is a CPN provision. It would not be available for a criminal offence or a CPP provision.

In terms of the volume of criminal offences, the model reduces the exposure of corporations to criminal sanctions. In doing so, it seeks to make corporate regulation more effective – by strengthening the force of the criminal law through reserving criminalisation for contraventions that could properly be considered to be criminal, and improving upon the civil penalty system.

Principled criminalisation

The ALRC takes the view that the existing distinction between criminal and civil regulation of corporations lacks a principled basis. The ALRC considers that the criminal responsibility of a corporation is only justified when the contravention captured by the offence is such that the condemnatory and expressive effect of the criminal law (and the additional deterrence that results from such characteristics of the criminal law) is necessary over and above the deterrent effect of a civil penalty.

This conclusion (together with the principles set out below) has been reached following a detailed review of the theoretical literature about the nature of the criminal law and, as this is an inquiry primarily into the criminal responsibility of a corporation itself as an entity, of the differing scholarly justifications for allowing criminal responsibility to attach to a corporation itself.[3] Given that a corporation has “no soul to be damned, and no body to be kicked”, the key question in criminalising conduct by a corporation itself is how to distinguish liability for a criminal offence from civil regulation. The ALRC suggests that this can be done through ensuring the “distinctively moral voice”[4] of the criminal law is retained in this context.

To achieve principled criminalisation, the ALRC proposes that a contravention of a Commonwealth law by a corporation should only be designated as a criminal offence when:

  • the contravention by the corporation is deserving of denunciation and condemnation by the community;
  • the imposition of the stigma that attaches to criminal offending is appropriate;
  • the deterrent characteristics of a civil penalty are insufficient; and
  • there is a public interest in pursuing the corporation itself for criminal sanctions.

In recognition of the debates about what makes something sufficiently wrongful to be properly characterised as a crime, these principles are necessarily broad. They do not adopt an essentialist position on that debate. Instead, they focus on the distinctive characteristics of the criminal law. They are designed to guide decision making by drafters and policy-makers, rather than dictate any fixed outcome.

Reform of civil penalty provisions

Under the ALRC’s model, civil contraventions would be designated either:

  • as a civil penalty proceeding provision when the contravention involves actual misconduct by the corporation (whether by commission or omission) that must be established in court proceedings; or
  • as a civil penalty notice provision when the contravention is prima facie evident without court proceedings.

The distinction ensures that contraventions that require an evaluative judgment and the proper decision making process of judicial adjudication to properly establish liability cannot be enforced through CPNs.

The changes brought about by the model can be illustrated through considering several example contraventions:

For contraventions that would attract a CPN, the operation of the proposed CPN scheme is as follows:

This is broadly similar to how infringement notices operate currently, though CPNs will be available for a different range of contraventions.

Escalating across the criminal and civil divide

In removing low level offences from the criminal sphere, the ALRC appreciates that  there is a need to be able to escalate particular contraventions across the criminal and civil divide in appropriate circumstances. In recognition of this, the model would include the adoption of two ‘escalation mechanisms’ for:

  • repeated contraventions; and
  • flouting or flagrant disregard of a civil prohibition.

The proposed regulatory model for corporations in operation

A summary of the operation of all features of the proposed model in their totality can be seen in the graphic below:

The ALRC invites submissions upon all of the proposals made in the Discussion Paper, including all aspects of its proposed model.

[1] Eg, a failure to inform ASIC of a change in registered office hours or a failure to place an ACN on certain company documents are criminal offences: see Corporations Act ss 153, 145(3).

[2] Commonwealth of Australia, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report: Volume 1 (2019) 433.

[3] Chapter 2 of the Discussion Paper outlines the theoretical rationale for corporate criminal responsibility in detail. Chapter 3 then analyses the current state of Commonwealth law, with Chapter 4 drawing Chapters 2 and 3 together to propose the new regulatory model.

[4] AP Simester and Andreas von Hirsch, Crimes, Harms and Wrongs: On the Principles of Criminalisation (Hart Publishing, 2011) 4.

The Australian Law Reform Commission (ALRC) today released a Discussion Paper, Corporate Criminal Responsibility (DP 87).

Building on the work of the Hayne Royal Commission, the ALRC has found that Commonwealth criminal law as it applies to corporations is impenetrably complex and in need of significant reform. There is an overregulation by the criminal law of low-level contraventions and a failure to effectively use the criminal law for serious contraventions.

As a result, there is no principled regulation in any meaningful sense — diluting the efficacy of corporate criminal responsibility and undermining the rule of law.

If to be labelled a criminal is to have any sting, the criminal law must be exclusively focused on serious morally reprehensible conduct, and yet:

It is a criminal offence for a corporation to fail to notify ASIC of a change in office hours.

The ALRC seeks stakeholder submissions on 23 proposals for reform to the Commonwealth’s corporate criminal law regime, and asks 11 questions on particular areas of reform. The Discussion Paper addresses a number of aspects of corporate criminal liability, including:

• the principled division between criminal offences and civil penalty provisions;
• the method for attributing criminal liability to corporations;
• individual liability for corporate offences;
• deferred prosecution agreements;
• penalties and the sentencing process;
• illegal phoenix activity (deliberate liquidation with the intent to avoid creditors and continue operations through a new entity); and
• the implications of the transnational nature of business and extraterritorial offences.

President of the ALRC, the Hon Justice Sarah Derrington, said, “These proposals seek to simplify and provide a coherent regulatory framework that achieves principles-based regulation.”

This Inquiry comes at a time of renewed focus on protecting Australian consumers from egregious conduct by corporations. Corporate regulation must both improve corporate behaviour and be alive to the impact that corporations have on the health of the Australian economy as a whole. Accountability for misconduct must be necessarily balanced with the need to ensure that corporations have flexibility to innovate.

On 10 April 2019, the ALRC received Terms of Reference from the Attorney-General, the Hon Christian Porter MP, to conduct the first comprehensive review of Australia’s corporate criminal responsibility regime since the enactment of the Criminal Code. Over the past 7 months, the ALRC has conducted nearly 60 consultations across industry, regulators and legal professionals.

The ALRC is seeking submissions to the Discussion Paper until 31 January 2020.

The Final Report is due to the Attorney-General on 30 April 2020.

Corporate Criminal Responsibility (ALRC DP 87) and summary reports are available for viewing or free download at

https://www.alrc.gov.au/publication/discussion-paper-87/

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Find out what on earth a deodand and frankpledge is here!

In the seminal case of Saloman v A Saloman & Co Ltd, Lord Macnaghten held that once it has been incorporated, a company “is at law a different person altogether” from its shareholders. That case firmly established the cardinal principle of corporate law that a company is a separate legal individual. Modern legislation such as the Corporations Act 2001 (Cth) affirms that a corporation has all the legal powers and responsibilities of a natural person. While there are clear commercial and economic benefits as a result of the creation of the corporation, the construction of a legal artifice of ‘the legal person’ raises fundamental questions about the applicability of the criminal law to that artifice. A corporation cannot be sent to jail. It has no soul that may be damned.

Having created the legal person, when it comes to crimes, the law has focused on two key technical questions:

• When or in what circumstances will the actions of a human be attributable to the corporation? and

• How will those individuals’ actions be attributable? What is the legal test?

Lord Reid in Tesco Supermarkets Ltd v Nattrass spoke of how a corporation could act only through its agents, and so the question was to identify who was the “directing mind and will” of the corporation. But if a corporation is treated in law as a separate individual, is this the most appropriate approach to ascribing corporate criminal liability? To draw an analogy having decided that a bus is a legal person in its own right, when it comes to criminal law, the law focuses on the bus driver’s actions and thoughts to determine the bus’ culpability.

Chief Justice Bathurst, in a lecture to the Forbes Society, has traced how the modern corporation evolved out of medieval corporations, merchant guilds, and societies, into the trading companies of the seventeenth century and then into the joint stock company. Rather than looking at the history of the corporate form itself, today I will consider some medieval antecedents of corporate liability. These are the principles of deodand and frankpledge. I will suggest that these concepts give us some insights into how we conceptualise the utility or otherwise of attaching criminal liability of corporations.


Photo courtesy of Eugene Byrne, https://www.historyextra.com/period/victorian/what-is-a-deodand/ 

—  The reality we have found is that when you actually map the criminal laws which are applicable to corporations, what you find is much closer to a rhomboid than a neat pyramid. The scope and scale and pervasiveness of criminal offences which are potentially applicable to corporations, is shocking. — 

Read Venetia’s full speech here

Venetia speaking alongside Professor Ross Grantham, UQ, Dr Vicky Comino, UQ and Associate Professor Francesca Bartlett, UQ.

 

 

Justice Derrington, President of the ALRC, presented at the Freedom19 Conference in Sydney.


“On Thursday of last week, the Attorney-General released an exposure draft of religious
freedoms reforms, which he intends to present to Parliament in final form in October. The
exposure draft traverses many of the issues that were within the ALRC’s original terms of
reference for our Religious Freedoms Inquiry. Consequently, the Attorney has issued the
ALRC Amended Terms of Reference.”



 — Of shields and swords – let the jousting begin! — 

Read the full speech here – let the jousting begin!

Today the Attorney-General released an exposure draft Religious Discrimination Bill and amended the terms of reference for the ALRC’s inquiry into religious exemptions. The ALRC media release in response to the amended terms of reference is available here.

In May and June 2019, the ALRC held four seminars on the future of law reform in conjunction with the Law Schools at UNSW, ANU and Melbourne University. To find out more about each seminar you can read a short summary: