Power, corruption and lies: a new order for the corporate criminal responsibility regime in Australia?

The Australian Law Reform Commission’s new Corporate Crime Report is a call to action for Australian businesses: it’s not enough to have policies in place to prevent corporate misconduct if they do not create a culture of compliance.

Background

The new report from the Australian Law Reform Commission (ALRC) into Australia’s corporate criminal responsibility regime (Corporate Crime Report) was tabled in the Commonwealth Parliament on 31 August 2020.

The ALRC’s review follows the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (FSRC), which forensically examined allegations of misconduct of financial services corporations, directors and senior executives, resulting in referral of 24 cases of misconduct by financial service companies to financial regulators for civil or criminal proceedings.

The Corporate Crime Report contains 20 recommendations that propose a fundamental overhaul of the regulatory landscape for corporations in Australia, to create an environment where breaches of the criminal law by corporations will be more readily recognised as serious and where ‘criminal corporations’ will be subjected to significant reputational harm.

The proposed recommendations:

• could significantly increase the compliance burden on Australian corporations, including those with a foreign presence; and
• provide a range of new sentencing alternatives for corporations found to have engaged in criminal conduct, including the dissolution of companies found guilty of criminal conduct or debarment from receipt of lucrative government contracts, as well as recommending publication or disclosure of offences, community service obligations, facilitating redress and/or not participating in certain commercial activities.

The Corporate Crime Report instead proposes a new order: a principled approach to regulating criminal conduct by corporations, and removing the proliferation of lower order criminal offences littering statute books (at least 3100 offences across 25 Commonwealth statutes), many of which the Report concludes are never utilised and have no regulatory or deterrent effect.

This overhaul is proposed on the basis that 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’.

Key actions for Australian businesses

The key takeaways for Australian businesses are that, regardless of the ultimate legislative changes arising from the Corporate Crime Report, a robust and pro-active approach will be necessary to ensure a culture of compliance.

Given the likelihood of legislative change arising from the Corporate Crime Report, prudent and sensible actions for Australian businesses to take in the short-term would include:

• undertaking risk assessments and due diligence on business practices and the overall organisation compliance culture;
• implementing and revising whistle-blower reporting mechanisms;
• carrying out staff training, awareness campaigns and implementing other strategies aimed at capability raising; and
• developing and maintaining compliance and enforcement strategies (including regularly reviewed and updated policies and procedures).

Key recommendations

We highlight some of the Report’s key recommendations in more detail below.

Attribution of fault – ‘moral blameworthiness’ of the corporation

The Corporate Crime Report considers in detail the attribution of fault for corporate criminal offences, concluding that Commonwealth law contains a variety of complex mechanisms for attributing criminal responsibility to corporations but that these do not necessarily reflect the moral blameworthiness of the corporate entity itself.

Instead, the Corporate Crime Report recommends that Commonwealth law should be harmonised and contain just one standard mechanism for attributing criminal responsibility to corporations, being that a corporation should be considered at fault when an employee, officer or agent of the corporation has the relevant state of mind for the commission of the particular criminal offence. The Corporate Crime Report also proposes that the physical element for the criminal offence would be met by a body corporate if it is committed by an officer, employee or agent acting with actual or apparent authority or a person acting at the direction of an officer, employee or agent.

The Law Council of Australia has already raised significant concerns about this proposed recommendation, noting that it could lead to a corporate entity being found guilty if any level of employee of the corporation committed an offence while acting within the scope of their role.

This is because, under the recommendations, an employee would not need to hold office as a director or ‘high managerial agent’ (whose responsibilities may be fairly assumed to represent the body corporate’s policy as was currently required). The Law Council has pointed out that the recommendations may leave corporations, including small businesses and charities who are corporations, liable for the actions of junior employees.

A corporation would be able to avoid liability by demonstrating it took reasonable precautions to prevent misconduct (ie by demonstrating an absence of corporate fault or moral blameworthiness).

Expansion of ‘failure to prevent’ corporate bribery offences – Australian companies guilty for conduct occurring overseas

Recommendation 19 of the Corporate Crime Report proposes the expansion of the strict liability ‘failure to prevent’ corporate criminal offences in the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 (Cth) (Corporate Crime Bill), which is presently being debated before the Senate (and which mirror the offences in the UK Bribery Act).

The Corporate Crime Bill proposes that corporations be held criminally liable for failing to prevent foreign bribery activities by their associates (which includes company officers, employees, subsidiaries, external contractors and agents – and could include joint venturers), unless the corporation can provide evidence that it had ‘adequate procedures’ in place to minimise the risk of those activities occurring.

The Corporate Crime Report proposes an expansion of the ‘failure to prevent’ offences in the Corporate Crime Bill to include other transnational misconduct by a corporation and its associates, including foreign tax evasion and modern slavery offences.

Effectively the proposed changes would put Australian corporations with a foreign presence in a position where they must put in place ‘adequate procedures’ to minimise the risk of transnational misconduct, or face harsh criminal penalties in Australia for conduct that occurs overseas. The ‘strict liability’ nature of the proposed offences means that the onus will fall on the corporation to establish that it had ‘adequate procedures’ in place in order to avoid criminal liability.

The Corporate Crime Report proposes that adequate procedures would include undertaking risk assessments and due diligence, implementing whistle-blower reporting mechanisms, carrying out staff training and maintaining compliance and enforcement strategies.

The ‘adequate procedures’ defence mirrors that in the UK Bribery Act. The decision of R v Skansen Interiors Limited (unreported, Southwark Crown Court (2018)) has established that there is a ‘high bar’ required to be jumped over to satisfactorily rely on an ‘adequate procedures’ defence against allegations of failure to prevent bribery.

Repeat patterns of conduct – punishment for corporate design failures, rather than allowing corporations to get away with paying ‘the price of doing business’

The Corporate Crime Report also recommends the introduction of ‘system of conduct offences’ as a new category of offence (Recommendation 8). The ALRC’s view is that often corporations will pay civil penalties imposed as ‘the price of doing business’, stifling effective reform of poor corporate cultures in favour of continued profits.

These new offences would criminalise multiple or repeated contraventions of prescribed civil penalty provisions that constitute a system of conduct or pattern of behaviour by a corporation.

This recommendation is proposed to provide a significant incentive to corporations to improve their compliance systems and to ensure that corporations will be less likely to ignore regulatory requirements.

Individual liability – no immediate changes

Although no immediate changes are proposed to individual liability mechanisms (moving away significantly from the ‘deemed individual liability’ mechanisms that were initially proposed for individuals who could influence the criminal conduct), the Corporate Crime Report instead recommends that the Government consider undertaking a review of the effectiveness of individual accountability mechanisms for corporate misconduct within five years.

Potential new penalties – dissolution of companies, debarment from Commonwealth Government work

The Corporate Crime Report concludes that current penalty and sentencing options for corporations are inadequate and irregularly enforced, leading to uncertainty and inconsistency. Furthermore, the significant delay in criminal proceedings, often occurring after a significant period of time has elapsed from the misconduct, further leads to a perception that civil penalties are just the ‘price of doing business’.

The Corporate Crime Report proposes a significant re-working of the criminal penalty and sentencing regime for corporations, including:

• making orders dissolving a corporation if it is convicted of an indictment and dissolution is the only appropriate sentencing option in all the circumstances (Recommendation 13);
• allowing the disqualification of a person from managing a corporation for a period of time if the person was involved in the management of a corporation that was dissolved (Recommendation 14); and
• requiring a corporation to publish information, correct an action or facilitate redress or to disqualify the corporation from undertaking certain activities (Recommendation 12).

In addition to this, the Corporate Crime Report includes the recommendation that there be a national debarment regime, which would exclude corporations with a history of misconduct from working on lucrative government contracts (Recommendation 15).

Notably, the Report does not propose a process whereby a ‘criminal corporation’ can redeem itself such that access to government work may subsequently be permitted.

Deferred Prosecution Agreements – judicial oversight

The Corporate Crime Bill currently being considered by the Senate proposes to introduce a Deferred Prosecution Agreement (DPA) regime to address corporate misconduct, under which the Commonwealth Director of Public Prosecutions may negotiate an agreement with a corporation that has been found to have engaged in serious corporate misconduct, including foreign bribery, fraud, or dealing with the proceeds of crime.

A DPA would require corporations to comply with a range of conditions and would operate as an alternative to a court finding that the corporation has committed a criminal offence.

The Corporate Crime Report observes that the proposed DPA scheme in the Corporate Crime Bill makes no provision for public oversight of agreements reached between the prosecutor and the corporation. Given this, the Corporate Crime Report concludes that the proposed scheme is susceptible to similar criticisms as those made of enforceable undertakings during the FSRC, namely that they represented ‘regulatory capture’ with regulators dominated by the interests they regulated and not acting in the public interest by negotiating generous deals with offenders.

Instead, the Corporate Crime Report proposes that judicial oversight of the DPA scheme be introduced, to ensure that there is independent oversight and to maintain public confidence that private deals are not being done between prosecutors and corporations for criminal offences.

Where to from here?

The Corporate Crime Report represents the first major examination of Australia’s corporate criminal responsibility regime since the enactment of the Criminal Code Act (Cth) in 1995. The Federal Government has committed to reviewing the Corporate Crime Report and its recommendations, but to nothing further.

Despite the possibility that the Federal Government’s commitment to merely review the report and recommendations represents little more than tokenism in the face of the detailed and wholesale reform of the corporate criminal responsibility regime proposed by the ALRC, it is important to remember the broader context in which this reform agenda has arisen.

During the course of the ALRC’s inquiry, further measures to strengthen the corporate regulatory environment have been introduced or implemented by the Federal Government, including the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 (Cth), the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 (Cth), the Corporate Crime Bill and a Proposal Paper for the introduction of a Financial Accountability Regime. The Commonwealth Modern Slavery Act 2018 (Cth) also came into operation on 1 January 2019.

Considered in context (and in conjunction with the Federal Government’s long-delayed commitment to introduce a Commonwealth Anti-Corruption Commission), the ALRC report represents a further step in Australia’s commitment to expand the arsenal available to law enforcement agencies to bring corporate, corruption and bribery enforcement action and remove impediments to successful prosecution of these offences (and also address its obligations under the OECD Foreign Bribery Convention).

After the introduction of a similar suite of legislation in the United Kingdom, there was a significant increase in corruption, bribery and corporate crime investigations. Given this, Australian corporations (particularly those with a foreign presence) would be well served by conducting a pre-emptive review of their compliance mechanisms, supply chain systems and corporate culture.

On the basis of the Corporate Crime Report, the revolution in enforcement of corporate wrongdoing in Australian law which began after the FSRC will continue to progress at rapid pace. The accountability bar for Australian corporations continues to rise.

Protecting your business – what you should do

The Corporate Crime Report is a call to action for Australian businesses: it is not enough to have policies in place and to offer training if the content of the policies and the training are not clear enough, not tailored to the specific context of the organisation (including as it changes over time) or not reinforced effectively and repeatedly. Corporations need to do more than simply drafting pro-forma policies in order to avail themselves of an ‘adequate procedures’ defence, or to be able to robustly defend their corporate culture against allegations of systemic, corporate design failures.

Given this, it is an important exercise for corporations to engage an independent evaluation of your corporation’s operations and compliance with your corporate crime, corruption and anti-bribery obligations.

Hall & Wilcox can assist with all aspects of a detailed review of policies and procedures for your business, including:

• undertaking risk assessments and due diligence;
• implementing and revising whistle-blower reporting mechanisms;
• carrying out staff training and capability raising; and
• developing and maintaining compliance and enforcement strategies (including appropriately tailored policies and procedures given the nature of your business, industry and workforce).