'Lifting the fear and suppressing the greed'

The Senate Economics References Committee (the Committee)  has recommended sweeping changes to the civil penalties regime contained in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commissions (ASIC) Act 2001 (Cth) to respond to perceptions that the current framework is too weak to properly regulate and deter corporate crime and breaches of regulatory provisions.

The report and its context

The Committee published its report 'Lifting the fear and suppressing the greed': Penalties for white-collar crime and corporate and financial misconduct in Australia on 27 March 2017. The broad impetus of the report, with accompanying public consultation process, is to resolve perceived procedural and remedial inadequacies in the regulation of corporate misconduct so as to bring Australia into line with community expectations and impose monetary penalties consistently with other jurisdictions.

This article will consider the recommendations that directly relate to the application of the civil penalties regime for corporate regulatory breaches, including in relation to increasing penalty amounts.[1] Any increase to the quantum of penalties will increase potential exposures for directors, officers and companies. A natural flow on from that is an increased exposure to Directors' & Officers' liability (D&O) insurers where such losses are capable of being indemnified.

The quantum of civil penalties

A primary recommendation of the report is that the quantum of civil penalties that can be imposed on individuals and bodies corporate be increased. Penalties are currently capped at:

• AUD 200,000 for individuals (introduced in 2001);[2]
• AUD 1 million for bodies corporate (introduced in 2004).[3]

The current cap levels have not been altered since their introduction and are not indexed to inflation.

Many submissions to the Committee noted that Australia's penalty system imposes penalties that are materially lower than equivalent foreign jurisdictions.  Following a breach of continuous disclosure obligations by an individual, Canada allows an administrative penalty equivalent to AUD 1.05 million, Hong Kong permits the equivalent to AUD 1.12 million, and the United Kingdom does not apply a cap.[4] These figures are almost identical for insider trading, market manipulation, misleading and deceptive conduct, and inappropriate financial advice.[5]

Further, penalties levels under the Corporations Act are lower than analogous penalties in more recent legislation. For example, an individual who conducts unlicensed credit activity may be liable for AUD 360,000 penalty under the National Consumer Credit Protection Act 2009 (Cth).[6] 

Although ASIC did not propose a particular cap, the Australian Shareholders Association (ASA) suggested a cap of AUD 5 million for a body corporate and AUD 1 million for an individual as appropriate. The ASA argued that a cap of AUD 200,000 for contraventions by individuals is too low when contrasted against current executive remunerations levels.

While the Committee recommended that the scale of civil penalties be expanded, it declined to identify appropriate numerical limits. The Committee did suggest that “and that in doing so [increasing penalties] it should have regard to non-criminal penalty settings for similar offences in other jurisdictions”. Perhaps the implicit import of the recommendation is that the government consider setting penalties for individuals at approximately AUD 1 million to bring the Australian regime in line with Canada and Hong Kong.

Disgorgement powers

ASIC submitted that penalties are sometimes considered a "cost of business" by companies – a loss that may be strategically incurred to unlock greater profits or loss-avoidance. Therefore, ASIC proposed that deterrence measures should be focussed towards negating financial benefits flowing from contravening conduct.

To this end, the Committee recommended that the government introduce disgorgement powers for ASIC in non-criminal matters. In this context, disgorgement is "the removal of financial benefit (such as profits illegally obtained or losses avoided) that arises from wrongdoing."[7] Although the Australia and New Zealand corporate regulators lack disgorgement powers in non-criminal matters, Canada and Hong Kong do provide for such powers in certain circumstances.[8]

Submissions proceeded in the context that Australia lacks a non-criminal equivalent to the Proceeds of Crime Act 2002 (Cth), which allows the Commonwealth Director of Public Prosecutions or the Australian Federal Police to trace and recoup proceeds generated by indictable Commonwealth offences.[1]

The Committee further recommended that the government provide for civil penalties in respect of white-collar offences to be set as a multiple of the benefit gained or loss avoided, as is the approach in New Zealand, Singapore and the United States.

Implications for Directors' & Officers' liability

Any increase in the quantum of penalties would create an increased exposure to D&O insurers. Further, the prospect of the introduction of disgorgement powers is likely to result in an increase in the complexity of calculating an appropriate penalty, which would likely require complex evidence to quantify gains and losses. 

The Committee deferred to the ASIC Enforcement Review Taskforce to suggest the precise quantum of penalties to be implemented in any legislative reform. The taskforce is expected to provide its recommendations to the government prior to October 2017. Therefore, while this report may spark momentum towards legislative reform, the extent of its impact will remain unclear for some time. However, the report is an important litmus test for potential political and public support for increasing ASIC’s regulatory powers. Companies and insurers should monitor this space closely for relevant legislative reform.

[1] Clyde & Co have also published an examination of anti-bribery structures recently proposed by the Australian Government.

[2] Corporations Act 2001 (Cth) (“Corporations Act”) s. 1317G (1); (1B) (b); (1F) (a)

[3] Corporations Act s. 1317G (b) (b); (1F) (b)

[4] Other countries set a figure approximate to AUD1 million, or allow a multiple of the gain made or loss avoided by breach: see below. The figures stated for Canada and Hong Kong in Australian dollars were calculated by the Committee based on the daily exchange rate published by the Reserve Bank of Australia as at 31 December 2013.

[5] These figures were submitted in Australian Securities and Investments Commission (ASIC) Submission 49, Senate inquiry into penalties for white-collar crime (April 2016), pp. 9 – 10

[6] National Consumer Credit Protection Act 2009 (Cth) s. 31 sets the cap at 2000 penalty units.

[7] Report, p. 80 [6.32]

[8] A notable exception is for breaches of continuous disclosure obligations.

[9] See Report, p. 80

With contribution from Andrew Bell.