corporate misconduct

The bill, referred to as the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 Cth), increases civil and criminal penalty amounts, including terms of imprisonment, for a wide array of offences and civil penalties administered by ASIC.

The current version of the bill and accompanying explanatory materials can be viewed here.

What imprisonment terms are increasing?

The Bill increases the maximum imprisonment term for a range of criminal offences in the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth), and the National Consumer Credit Protection Act 2009 (Cth).

For instance, the penalty for directors who breach s 184 of the Corporations Act by dishonestly using their position or information known to them to gain an advantage for themselves or someone else, or who cause detriment to the corporation, would increase from 5 to 10 years imprisonment.

The bill also increases the maximum imprisonment term for a director of a company, registered scheme or disclosing entity who fails to take all reasonable steps to comply with, or secure compliance with, certain financial reporting and audit obligations under the Corporations Act.

In a welcome move, the bill also removes imprisonment as a penalty for strict and absolute liability offences. The sound rationale for this is that an individual should not face an imprisonment term for offences which did not involve deliberate or reckless conduct.

Financial penalties for criminal offences

The bill proposes to introduce new formula for calculating the maximum financial penalty for criminal offences across ASIC-administered legislation.

The formula, which is based on a multiple of the term of imprisonment for the applicable offence, results in significant increases for directors and companies. The formula also aims to promote greater consistency in terms of the maximum penalties applicable for misconduct across ASIC-administered legislation.

For individuals, where the term of imprisonment is less than 10 years, the maximum individual fine will be the imprisonment term in months multiplied by 10, leading to the number of penalty units applicable for the offence (one penalty unit is currently $210).

For example, if the maximum imprisonment term for an offence is 3 months, the maximum financial penalty will be 3 months multiplied by 10, being 30 penalty units (30 x $210 = $6,300).

For bodies corporate, the fine for an individual is again multiplied by 10. If you take the above example, an offence with a maximum imprisonment term of 3 months, would result in a maximum financial penalty of $63,000 (30 x $210 x 10 = $6,300).

For offences where the imprisonment term is 10 years or more, a different formula applies. For individuals, the maximum penalty for individuals is:

  • the greater of 4,500 penalty units ($945,000), or
  • if the amount can be determined, the benefit derived or detriment avoided because of the offence, multiplied by three.

For instance, if an individual gains a windfall of $1.2m as a result of an offence, the maximum penalty faced by an individual for the offence will be $3.6m.

Corporations also face significantly larger financial penalties for criminal offences, with maximum penalties being calculated by the greater of:

  • 45,000 penalty units ($9.45m); or
  • if the amount can be determined, the benefit gained or detriment avoided, multiplied by three; or
  • 10 per cent of the annual turnover of the body corporate.

New financial penalties for civil penalty provisions

Under the bill, maximum penalties for civil penalty provisions would increase for both individuals and corporations.

The maximum penalty for civil penalty provisions for individuals would increase to the greater of:

  • 5,000 penalty units ($1.05m); or
  • if the amount can be determined, the benefit derived or detriment avoided because of the contravention, multiplied by three.

For corporations, the maximum civil penalty will increase to the greater of;

  • 50,000 penalty units ($10.5m); or
  • if the amount can be determined, the benefit derived or detriment avoided because of the contravention, multiplied by three; or
  • 10 per cent of the annual turnover of the corporation, up to a maximum value of 1 million penalty units ($210m).

In addition, the bill would provide the courts with the power to make a “relinquishment order”. This order aims to recover any financial benefit that might have been gained from misconduct. It effectively operates to deprive the individual or corporation from any financial benefits or profits gained from the breach of the civil penalty provision. A relinquishment order could apply in addition to any pecuniary penalty.

New civil penalty provisions

The bill would also see the expansion of the civil penalty regime under ASIC-administered legislation. For example, currently ASIC is not able to seek a pecuniary penalty for a breach of s 912A of the Corporations Act, which contains the general obligations for financial services licensees, including the obligation to provide financial services efficiently, honestly and fairly. The bill would amend the Corporations Act to enable ASIC to seek pecuniary penalties for breaches of this obligation. This would be a significant expansion of ASIC’s regulatory tools in relation to financial services licensees.

AICD position

On 18 October 2018, the AICD provided a submission to the government responding to an exposure draft. The exposure draft was released for public comment prior to the introduction of the current version of the bill now before Parliament. The bill and the exposure draft did not differ in any significant respect.

In its submission responding to the exposure draft, the AICD recognises that some penalties for corporate misconduct within ASIC-administered legislation have not represented an adequate deterrent for wrongdoing. For this reason, the AICD supported a number of the measures proposed by the government. The AICD also supported the expansion of the civil penalty regime. However, we have also underlined the need for strong enforcement action given there will be limited deterrence if few proceedings are ever commenced.

You can view the AICD’s submission here.