Reporting

The review was announced by the Federal Government in April 2019, following the Financial Services Royal Commission and given concerns that the criminal law may not be appropriately framed to address corporate misconduct. Its broad-ranging terms of reference referenced the complexity of the current regime under the Commonwealth Criminal Code, and charged the ALRC with considering necessary or desirable reforms.

The Attorney-General has described the final report as “representing one of the most detailed examinations ever undertaken of the nation’s corporate accountability framework”.

The 20 recommendations contained in the final report – which are far-reaching and would require significant legislative reform if implemented– are targeted at strengthening criminal enforcement action against corporations, reducing regulatory burden through simpler and clearer laws, and enhancing penalty and sentencing options.

Notably, the ALRC updated its approach to a number of proposals over the course of the review, including those related to individual liability for corporate conduct, following strong feedback from stakeholders, including the AICD. The AICD’s position on the ALRC’s original discussion paper can be found here.

Key takeaways for directors

No immediate change to individual liability mechanisms

While the report does not propose any immediate reforms to individual liability mechanisms, it does recommend that the Government consider undertaking a review of the effectiveness of individual accountability mechanisms for corporate misconduct within five years of the proposed new Financial Accountability Regime (FAR) entering into force.

The ALRC considers that the FAR provides a promising framework for enhanced individual liability and, if proven effective, the ALRC suggests that the Government consider extending the regime to other sectors. Read the AICD’s analysis of FAR here.

The ALRC contemplates that the proposed review will encompass accessorial liability provisions and directors’ and officers’ duties, with a key concern clearly being to ensure accountability within large complex organisations.

The report discusses the important role that directors and senior managers play in creating and maintaining corporate cultures, and the role that liability plays in ensuring corporate compliance. It also, however, notes support for the view put forward in the discussion paper that directors were already exposed to significant liability given their oversight role and may not be the most appropriate targets of any reform efforts.

In our view, the proposed review would present an important opportunity to review the cogency of the current regime and accountability mechanisms. It should not, however, preclude targeted reviews in the interim where the case for reform is compelling. A long-standing concern of the AICD has been to ensure appropriate protections are available for directors who perform their roles with integrity and commitment, but who operate in a complex and compliance focused regulatory environment.

Prominent examples of gaps in our current regulatory framework include the limited scope of the Corporations Act business judgment rule and the inconsistent application of the COAG Principles on Director Liability by Commonwealth and State governments.

The ALRC’s final position on individual liability is a significant shift from its earlier proposal, which contemplated the imposition of deemed individual liability for any corporate misconduct based on the ability to “influence” such conduct. This proposal received strong opposition from stakeholders, including from the AICD (with the concern being the broad application of such a concept, and the need to ensure that any reform in this area must be fair and balanced).

New approach to corporate criminal attribution (with corporate culture to continue to play a role)

The report also contains recommendations in relation to corporate criminal attribution (ie, the process by which corporations can be held liable for criminal offences), which are intended both to simplify the current framework and make enforcement more straightforward.

The AICD supported standardisation – subject to principled exceptions, which the final report now contemplates - of the legal test for attribution of criminal responsibility to corporations.

Of particular note is that the ALRC has recommended a legal test for attributing the conduct of particular individuals (officers, employees, and agents) to a corporation, when the corporation has endowed those individuals with “actual or apparent authority”. This model is a shift from the ALRC’s original position in its discussion paper which proposed a broad definition of “associates”, and reflects feedback from the AICD and others. Notably under the final ALRC proposal, where a third party is involved, the corporation will still be liable if that third party is acting at the direction of, or with the agreement or consent of, an individual with apparent authority.

The ALRC has also provided two options for attributing fault to corporations, both of which are intended to reflect notions of corporate blameworthiness, by either requiring proof of “authorisation or permission” by the corporation, or expressly ascribing a defence of “reasonable precautions”.

Irrespective of the legal complexity, it is clear that in practice corporate culture will remain a focal point, and will play a role in whether criminal responsibility can be attributed to a corporation. The report includes significant discussion on the importance of corporate culture, including noting that “defective corporate cultures” translated into actual corporate misconduct within the financial services context examined by the Financial Services Royal Commission.

Under both attribution models proposed by the ALRC, corporate culture – albeit, to different extents - would impact on whether liability can be sheeted home to a corporation.

Other notable recommendations

Other key recommendations included in the final report include the following:

  • Corporate conduct should be regulated primarily by civil regulatory provisions, with the force of the criminal law reserved for the most serious misconduct: The AICD has consistently supported the simplification and reduction in the number of criminal offences, particularly where there is overlap with civil provisions and where criminal liability can attach to minor regulatory infractions. We also support a principled approach to corporate criminal offences. The ALRC acknowledges that given the consequences of this recommendation, it would need to be implemented in a staged manner with a realistic timeline. For example, first, it could be applied to new legislation and legislative amendments (although the ALRC acknowledges that this may not be possible with all amending legislation, particular where amendments are made to legislation with a complex existing penalty framework. In such a context, a longer implementation period may be required). Secondly, it could be implemented through periodic systematic reviews of relevant legislation.
  • “Systemic law breaking” should be addressed through new criminal laws that address systems of conduct or patterns of behaviour that result in multiple contraventions of civil penalty provisions – this novel proposal would require corporations to be “reckless” as to whether the system or pattern would result in civil contraventions.
  • New sentencing factors - A proposed list of factors to be considered when sentencing a corporation (in the context of both criminal offences and civil penalty orders), including whether the corporation had a corporate culture conducive to compliance at the time of the offence (a slight re-framing of the original reference to “internal culture” in response to stakeholder feedback, including from the AICD).
  • New penalty options - The introduction of non-monetary penalty options (eg publication or disclosure, community service, corrective action and being barred from participating in certain commercial activities) "to empower courts to take into account impacts on third parties, and to punish those most involved in the wrongdoing". Notably, the ALRC also recommends that courts should be able to make orders dissolving a corporation, if it is the only appropriate sentencing option. Such a sentence would only be applied in exceptional circumstances, with the Court needing to be satisfied that dissolution represents the only appropriate sentencing option.
  • Broader potential application of failure to prevent offences - That the Government consider applying the failure to prevent offence in the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 to other Commonwealth offences that might arise in the context of transnational business (eg tax evasion, human trafficking, financing of terrorism and slavery and slavery-like offences).

Next steps

The Attorney-General has noted that the Government will now consider each of the ALRC’s 20 recommendations.

The AICD looks forward to continuing to engage with policy-makers, regulators and other stakeholders as these important policy issues are worked through.