Australia: "Lifting The Fear And Suppressing The Greed": The Upwards Criminal Enforcement Trend In Australia, Recommended Penalty Reform And What This Means For Insurers And Insureds

Last Updated: 14 September 2017
Article by Janette McLennan and Sarah Sharp

Market Misconduct

In Australia the corporate regulator, the Australian Securities and Investments Commission (ASIC), can institute criminal proceedings or civil penalty proceedings against directors and officers for a range of breaches of the Corporations Act 2001 (Cth) (the Corporations Act). This is the central piece of legislation which governs the duties of those who direct or manage corporations in Australia (beyond the common law and equity) and it imposes a range of sanctions against those who misinform the market and for general corporate misconduct.

In recent times, there has been a spike in criminal prosecutions instituted by the regulator in Australia against individual directors and officers, along with a steady continuation of enforcement action taken by way of civil penalty proceedings. This is a trend we expect to continue. Whilst both enforcement options are instituted in order to establish a contravention of the general law and to obtain the imposition of an appropriate penalty, it has often been said that a civil penalty action is "quasi-criminal". However, the High Court of Australia has recently confirmed that "a civil penalty proceeding is precisely calculated to avoid the notion of criminality as such"1. Irrespective of the form in which such claims are brought, insurers will continue to have to grapple with 'the old chestnut' of whether a conduct exclusion is enlivened, which is a question that depends on an examination of the nature of the conduct and factual findings ultimately made.

We set out below a statistical analysis of these regulatory litigation trends, against the background of the Senate Economics References Committee Report released on 27 March 2017: 'Lifting the fear and suppressing the greed: Penalties for white-collar crime and corporate and financial misconduct in Australia' (the Senate Report).

At this stage it is not clear which recommendations from the Senate Report will be progressed in the Australian Parliament, but significant reform is expected. We expect harsher financial penalties and other sanctions to be imposed on individuals and corporations – particularly for civil penalty offences - to bring Australian enforcement into line with community expectations and trends in global markets.

Lifting the Fear and Suppressing the Greed

The Senate Report is focused on penalties for white-collar crime and corporate and financial misconduct in Australia. It is the product of a referral from the Upper House of the Parliament of Australia for an inquiry into inconsistencies and inadequacies of current criminal, civil and administrative penalties for corporate and financial misconduct or white-collar crime.

A key recommendation from the report is that the Australian Federal Government gives consideration to increasing the current level of civil penalties for market misconduct offences. That recommendation is predicated upon submissions received from the public expressing the view that current monetary penalties are inadequate. A central submission relied upon by the Committee in relation to the inadequacy of penalties was of the Australian Shareholders' Association, which pointed to the disparity between the maximum civil penalty of AUD200,000 for individual directors and officers for breaches of duty on the one hand, and executive remuneration levels on the other. It was also found that current civil penalty levels are out of step with international equivalents.2

Regulatory Litigation Trends

The penalty regime found in the Corporations Act is important to assist in promoting investor confidence and market integrity. ASIC has said that on average it has 96 matters under investigation at any one time.3 Not all of those matters proceed to enforcement action through the Courts. Before going down a civil penalty or criminal prosecution route (the most severe enforcement tool), ASIC has a number of enforcement avenues available to it which range in severity, including education programs, enforceable undertakings and infringement notices. These tools may enable stakeholders to engage with the regulator at an early stage to reach a swift and inexpensive resolution compared with Court action.

Not all matters are capable of such an early resolution. The table below sets out the number of civil penalty matters against individuals that have been commenced by ASIC compared with the number of criminal prosecutions referred to the Director of Public Prosecutions in the past three years,4 up to the end of the first quarter in 2017:

The data demonstrates that Australia has had its fair share of corporate scandals in recent years, and that criminal penalties have overtaken civil penalties as the primary vehicle by which the regulator seeks to combat white collar crime. In those cases, the standard of proof (beyond reasonable doubt) is higher, and as such, only the clearest of cases are likely to be confined to such a vehicle.

The criminal matters in the above table overwhelmingly capture traditional white collar-crime. This was considered in the Senate Report as "financially motivated non-violent crimes committed by businesses or individuals acting from a position of trust or authority."5 They include matters such as insider trading, fraud, engaging in phoenix activity, dishonest use of position to gain an advantage, the making of false and misleading statements to ASIC, individuals acting as directors whilst disqualified, embezzlement, falsifying books and records and so on.

However, the table also includes matters where the regulator has a choice to make as to the vehicle with which to pursue a penalty. For example, ASIC has for many years been keen to ensure market integrity by taking action to deter and punish those involved in making a misleading disclosure to the Australian Securities Exchange (ASX)6 and/or the non-disclosure of material information7 to the market in contravention of the ASX listing rules.8 Whilst both are civil penalty offences, individual directors can also be pursued criminally for aiding, abetting, counselling or procuring the commission of an offence by the corporation which they manage or direct.9 Such matters are also included in the above analysis.

One observation we can make is that following the regime introduced into the Corporations Act in 2004 allowing ASIC to issue an infringement notice and impose a financial penalty to avoid future action by ASIC, there were very few cases in which ASIC pursued a director for a criminal penalty for breaches of the continuous disclosure requirements. However, that has started to change.

For any individual that has committed an offence of aiding and abetting a continuous disclosure breach, and leaving aside the possibility of a term of imprisonment being imposed, there is no discretionary Court ordered disqualification (as may be the case when civil penalties are pursued). If convicted, the individual will be automatically disqualified from managing a corporation for a period of five years.10 This compares with discretionary disqualification where a director or officer is pursued for a civil penalty breach.

In civil penalty matters generally (irrespective of whether they involve the continuous disclosure provisions of the Corporations Act), the Court is able to exercise a discretion, with orders ranging from life disqualification to much less (for example, between a few months and 3 years).11 Factors which tend toward longer periods of disqualification involve large financial losses combined with dishonesty and intent to defraud. From the insurer's perspective, these are the cases that are easiest to decline cover, but at the other end of the spectrum (e.g. disqualifications of up to three years), the factors can be quite different in terms of personal gain (or lack thereof) and contrition / remorse. These cases can involve contravention over a short period of time, which results from negligent conduct by the corporation or an individual, rather than deliberate or reckless conduct.12 In those cases, an insurer may (depending on the nature of the claim, factual findings and specific policy terms and conditions) be required to indemnify.

The more difficult cases are those which attract the benefit of cover for part of the claim. Those are the ones in which insurers and the insured may find themselves having to consider and attempt to negotiate on what would be a fair and equitable allocation of defence costs. These costs can be financially crippling for the individual defendant and may also involve the insurer having to secure assets at an early stage in case it needs to exercise a clawback right.

Predicted Reforms and Impact on Insurers/Insureds

Significant reform is expected following release of the Senate Report. In the words of the Committee:

"Providing an overall assessment of the adequacy and consistency of current penalties for white-collar crime and misconduct is not straightforward. Just as the types of wrongdoing that might be considered white-collar crime and misconduct are extremely varied, so too are the penalties available in relation to that wrongdoing. However, the committee agrees that, broadly speaking, there appear to be serious inadequacies and inconsistencies in the current penalty framework."13

Those inconsistencies are illustrated by the broad discretion for disqualification in civil penalty matters and the automatic disqualification consequences in certain criminal matters, with the potential for a civil penalty contravention to be met with a longer disqualification period.

One clear expectation we have is that the reform process will address current perceived inadequacies in the penalty framework, including increased financial penalties for non-criminal matters (currently only AUD200,000 for an individual and AUD1million for a corporation). No specific penalty amount has been recommended by the Senate Committee, but it has urged the Australian Parliament to have regard to penalties in other jurisdictions for similar offences.14 The current flexibility for ASIC to pursue civil and criminal proceedings will also remain but tougher civil penalties could equate to an increase in civil penalty actions.

Any increase in the quantum of penalties will also have the consequence of increasing exposures for insurers if such penalties are capable of being indemnified. In the regulatory litigation environment, insurers will continue to have to engage proactively with conduct exclusions and advance defence costs along the way.

This article was written with the assistance of Matthew Blake, paralegal.

Footnotes

1. Joint judgment delivered by French CJ, Kiefel, Bell, Nettle and Gordon JJ on 9 December 2015 in Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate; Construction, Forestry, Mining and Energy Union v Director, Fair Work Building Industry Inspectorate [2015] HCA 46.

2. Other recommendations made in the Senate Report relate to increasing clarity around evidentiary thresholds in litigation procedure in civil penalty proceedings, enhancing accessibility to registered of banned and disqualified individuals and increasing ASIC's disgorgement powers where misconduct has resulted in illegal gains by a company or individual.

3. ASIC's Market Integrity Report: July to December 2015.

4. These are the matters we are aware of sourced from public records. The statistics do not include enforcement proceedings commenced against corporations. For the purposes of our current analysis we have focused only on individual directors and officers.

5. As above.

6. See sections 1309(1) and 1311(1) Corporations Act.

7. Information is material if a reasonable person would expect it to have a material effect on the price or value of the entity's securities.

8. See section 674(2) of the Corporations Act.

9. See s 11.2 of the Criminal Code.

10. Section 206B of the Corporations Act.

11. See ASIC v Adler (2002) 42 ACSR 80.

12. See ASIC v Chemeq Limited [2006] FCA 936 and French J's non-exhaustive list of influential factors in considering penalty.

13. Senate Report, para 2.47.

14. Senate Report, para 6.52.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Janette McLennan
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions