Directors' Counsel - An important message on corporate compliance

Professor Bob Baxt explains why it is vital that companies embrace a proper culture of compliance ahead of the proposed new regime of protection for whistleblowers.

The importance of whistleblowers in ensuring that there is very clear acceptance by corporations of a culture of compliance, as enunciated by Justice French when he was a member of the Federal Court, in Re Chemeq [2006] FCA 936 (Chemeq) cannot be over emphasised. For far too long there have been statements made by regulators, the media, politicians and even some lawyers, that it is vital for company directors, especially directors of banks and insurance companies, to display a better acceptance of culture that ensures they understand what their obligations are under the law. In my respectful view, there is in fact no excuse for ignorance of the law and it is unnecessary for these statements to be made by judges.

This point has been highlighted in a recent decision of Justice Edelman, sitting in one of his last judgments in the Federal Court before being elevated to the High Court of Australia at the end of January 2017. The relevant case is a case under the competition statute, ACCC v Valve Corporation (No. 7) [2016] FCA 1553 (Valve). In this case Justice Edelman, quite appropriately, took a strong stand against companies that had little regard for Australian law, and by implication, extended that message through to directors of the relevant corporation.

The facts of the case were briefly these. The Valve Corporation (Valve), which was a US-based company operating mainly outside of Australia but also in Australia, was prosecuted by the Australian Competition and Consumer Commission (ACCC) for engaging in misleading or deceptive conduct and having made false or misleading representations to Australian consumers about certain guarantees with respect to its products, such guarantees being ensured by the operation of the Australian Consumer Law.

Justice Edelman, who heard the prosecution brought by the ACCC, treated the evidence provided by Valve to the court as “disturbing” and added, in ruling that the company had breached the relevant provisions of the legislation, that “Valve’s culture of compliance was, and is, very poor.”

He noted that while Valve believed it was not subject to Australian law, despite having operators and others connected to it, including subscribers, from Australia, he formed the view that “even if legal advice had been obtained that Valve was required to comply with Australia law the advice might have been ignored.” The case highlighted the “ACCC’s willingness to pursue proceedings against overseas corporations where such corporations are engaged in conduct in Australia which affected Australian consumers”.

Justice Edelman imposed a $3 million fine against the company. He noted that there had been very limited written guidance provided by the company in support to its staff on questions of compliance and the way in which compliance should be pursued. He added an interesting comment, which reflects a condition that is sometimes present in other companies operating in Australia, not just foreign corporations but Australian corporations as well: “Valve’s attitude to compliance was not one of a culture of proactive compliance. It was instead one in which it would take steps towards compliance if a regulator or court required it or sought it.” (see paragraph 45).

He felt what was critical in evaluating the way in which Valve behaved, and its attitude towards the compliance regime that operated under the Australian Consumer Law and related competition law, was that the lack of this culture of compliance existed throughout the levels of senior management in the company. Justice Edelman overlooked the fact that the company had changed its current terms and conditions emphasising that they were in breach of the Australian Consumer Law. He issued an injunction due to the lack of compliance culture alone, which in his view, would send a clear message to this company and to others.

Chemeq

As noted at the beginning of this article, in the case of Chemeq, the question of an appropriate culture of compliance was seen as a critical factor by Justice French when he agreed to a penalty settlement reached between the Australian Securities and Investment Commission (ASIC) and Chemeq. In emphasising that particular point, Justice French also noted that it was important to ensure that the program in place was one that was continually refreshed and that it complied with the current law. The particular program of compliance that was set up by the company had been overseen by the second chairman of what was the predecessor to ASIC, the National Companies and Securities Commission, namely Henry Bosch. Justice French “castigated” the company for failing to ensure that not only was the program put in place compliant with the current law, but that it was kept refreshed and up-to-date on a regular basis.

There is little point in developing new laws on whistleblowing if we ignore the Australian Consumer Law amendments, which will soon be enacted, and the amendments to the Australian Competition and Consumer Act (CCA). The amendments to the CCA are likely to come into effect by mid-year and will create new levels of penalties for breaches of the CCA, and, if the ACCC has its way, penalties for breaching the Australian Consumer Law will be increased significantly.

The program that ASIC embarked upon a couple of years ago to highlight the apparent lack of a culture of compliance on the part of directors of banks and insurance companies, which led to growing calls for a Royal Commission into banks and insurance companies, among other developments, has had no direct effect in establishing such a Royal Commission but has led to a number of important initiatives being taken by the Federal Government, including the development of a separate tribunal to be established to deal with complaints arising out of the banking sector. Similarly other amendments are likely to be made, which follow the recent report by the Australian Small Business and Family Enterprise Ombudsman Kate Carnell, in which she strongly urged the enhancement of the powers of ASIC (to appoint a special commissioner to deal with consumers and small businesses) as well as to enhance the approach towards compliance with the relevant laws.

ASIC is now taking a much more aggressive attitude towards breaches of the law and has recently commenced proceedings against a number of directors for alleged breaches of both corporate law and competition statutes. These actions will be generally supported by the community, and if the courts provide strong messages by imposing appropriate penalties where breaches of the law are proved, this will enhance the ability of regulators in the future.

There is no alternative, however, to companies embracing a proper culture of compliance and to ensure that it is continually updated. This involves not merely compliance with the competition and consumer laws but with all the laws that ASIC regulates. These are growing in number and will grow even more as a result of the amendments to be enacted during 2017. There is a general expectation in the community that company directors, officers and others in charge will ensure that they and their companies comply with the law. Ignorance of the law is no excuse, as the recent decision of ASIC v Sino Australia Oil and Gas Limited (in liq) (2016) 115 ACSR 437; [2016] FCA 1488 illustrated by the heavy penalties imposed on the directors who apparently did not understand the relevant rules in the Corporations Act 2001 (Cth) but continued to act in breach of this particular matter.

As noted earlier, since 2001 there has been a positive legislative obligation to promote a culture of compliance within companies. The Criminal Code Act 1995 (Cth) (brought into effect in 2001) makes it clear that such a culture is required and that was reflected in the remarks of Justice French in the Chemeq decision referred to above.

The remarks of Justice Edelman in Valve about the lack of a proper culture of compliance is a reminder of the strong remarks of Justice Heerey in ACCC v Visy Industries Holdings Pty Limited (No. 3) [2007] FCA 1617 (Visy) where he noted that the culture of Visy was non-existent and might as well have “been written in Sanskrit” for all the effort the company had taken to ensure compliance.

While the decision of Justice Edelman is one arising out of the Australian Consumer Law, it has equal relevance and importance in the area of corporate and commercial law at this time as we work towards protection for whistleblowers.