The Evolution of Australian Penalty Framework for White-Collar Crime

“Clearly what we found was with criminal penalties, we are reasonably consistent but in relation to civil and administrative penalties, we're actually somewhat inconsistent…”

Greg Medcraft

Introduction

The law regarding the white-collar crime and misconduct in Australia, has always been under criticism for being too lenient or soft. This was because of the inconsistencies and inadequacies in the penalty framework for the white-collar offences. These contentious issues were addressed by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. This research paper seeks to analyze the success of the Penalties bill in addressing the inconsistencies and inadequacies that existed in the penalty framework. The paper starts by briefly discussing the penalties which can be imposed on white-collar criminals/ offenders, i.e., criminal, civil and administrative. The paper then provides information on the regulatory authorities responsible for the regulation of white-collar crime, explaining their role and powers. Moving further, the paper analyses the situation of penalty framework for white collar crime and misconduct prior to the enactment of the Penalties bill and highlights the specific areas of contention i.e., the inconsistencies and inadequacies present within the penalty framework. After that, the paper seeks to analyze how those specific inconsistencies and inadequacies were addressed by the Penalties bill. Finally, the paper arrives at a conclusion, extrapolating on the effectiveness of the Penalties bill in fulfilling its purpose.

Penalties for White-Collar Crime

There are three types of penalties imposed on the white-collar offenders i.e., criminal, civil and administrative.

Criminal Penalties

Generally, criminal penalties are in the form of fines or imprisonment.[1] Although, the courts normally have the discretion to forgo imprisonment in exchange for the community service. In addition to the penalty, the outcome of a successful white-collar conviction is that it stays on record forever, hindering the offending individual or entity’s participation in the relevant business, and in certain cases even incapacitating them to conduct the business or commercial activity e.g., license revocation for entities, or not being able to become the company director for individuals.

Civil Penalties

On the other hand, civil penalties are the penalties imposed using civil court procedures. In addition to monetary fines, revocation of license, injunctions, banning orders, orders for compensation and reparation are also types of civil penalties.[2] The major difference between the civil and criminal penalties is the standard of proof. The standard of proof required for the imposition of a criminal penalty is ‘beyond reasonable doubt’ burden of proof. However, for the civil penalties the standard of proof is ‘balance of probability’ coupled with the ‘loss of procedural protections’ for the defender.[3] According to Michael Gillooly and Nii Lante Wallace Bruce:

“[C]ivil penalties may be broadly defined as punitive sanctions that are imposed otherwise than through the normal criminal process. These sanctions are often financial in nature, and closely resemble fines and other punishments imposed on criminal offenders. However, the process by which these penalties are imposed is decidedly non-criminal, lacking many of the procedural safeguards built into the criminal process to protect the citizen from arbitrary use of State power.”[4]

Administrative Penalties

Finally, the administrative penalties are best described by the Australian Law Reform Commission (ALRC) as the sanctions which are imposed by either the regulator or the regulator’s enforcement of a particular legislation. Imposition of an administrative penalty does not require intervention by any court or tribunal.[5] Australian Securities and Investments Commission (ASIC) and Australian Taxation Office (ATO) have the authority to impose administrative penalties. Administrative penalties are generally in the form of monetary fines and banning orders. ALRC categorized administrative penalties used by the Australian regulatory authorities, into three categories: infringement notices; pseudo or quasi penalties; and finally, automatic non-discretionary monetary administrative penalties.

The Regulatory Authorities

There are several regulatory authorities in Australia which are responsible for investigating, regulating and punishing white-collar misconduct. They are also responsible for recommending penalties or in case of administrative penalties, applying them.

ASIC

The most notable of these regulatory authorities is ASIC. The primary purpose of ASIC is to regulate corporations, financial services industry, managed investment schemes, and people engaged in credit activities, according to the Commonwealth laws.[6] It is also worth noting that majority of the organizations or individuals involved in the white-collar crime or misconduct fall under the ambit of ASIC’s regulation. ASIC uses multiple methods to regulate corporate and financial conduct e.g., enforcement action, surveillance, education, communicating and engaging with the stakeholders, and policy advice etc.[7] As mentioned above ASIC also has the power to impose sanctions and provide remedies. These ‘enforcement tools’ include, ‘punitive action’, ‘protective action’, ‘preservative action’, ‘corrective action’ and ‘compensatory action’. In addition to these, ASIC also regulates by negotiations or by issuing infringement notices.[8]

ASIC derives its power to impose or seek penalties from multiple statutes, including the Corporations Act 2001, the ASIC Act 2001, the National Consumer Credit Protection Act 2009 (NCCP Act), the Superannuation Industry (Supervision) Act 1993 (SIS Act).[9] Moreover, ASIC also has the authority to charge the offenders who committed fraud under ASIC administered legislation and as well as under state and territorial criminal legislation.[10] Furthermore, the Proceeds of Crime Act 2002 (POC Act) gives ASIC the power to instruct the Australian Federal Police (AFP) and Commonwealth Director of Public Prosecutions (CDPP) bring an action to confiscate the profits or the proceeds acquired through criminal activity.

ATO

Moving forward, the ATO is responsible for collecting and imposing monetary penalties for the offences related to taxation and superannuation, administering more than 80 different types of penalties. The penalties imposed by the ATO are classified into 4 categories i.e., criminal penalties for serious tax crime, civil penalties, penalties for summary taxation offences and administrative penalties.[11]

AFP

A number of offences are investigated by the AFP as serious financial crimes, e.g., money laundering, fraud, corruption and bribery of the public officials, both foreign and Commonwealth.[12]

Moreover, the AFP is known to work and cooperate with the other regulatory authorities so that steps can be taken in the form of civil and administrative penalties to address the damage cause by the white-collar crime and misconduct. It noted that:

“Such measures are crucial in circumstances where criminal liability cannot be proven, but the conduct has resulted, or will result, in harm being caused to the community, or a profit or gain being wrongfully obtained.”[13]

Furthermore, apart from imposing the penalties, the AFP along with other regulatory authorities (e.g., ASIC, AUSTRAC, ATO etc.) employs other methods to detect, investigate, prevent and deter serious financial crime, by drawing on other powers, especially the one conferred by the PCA 2001 and Crimes Legislation Amendment (Proceeds of Crime and Other Measures) Act 2014. The mentioned Acts grant the AFP the power to confiscate the proceeds of the crime without conviction.[14]

CDPP

The CDPP has always played a significant role in combatting white collar crime. Regulatory authorities such as ASIC, AFP, Australian Competition and Consumer Commission (ACCC), ATO etc., refer to the CDPP, the matters relating to the white-collar crime.[15] Furthermore, the CDPP contributes to the efforts to combat white collar crime by providing ‘expert prelegal advice’ and prosecution services.[16]

ACCC

As the name suggests, the primary purpose of ACCC is to protect consumers by regulating the competition in Australia. It is pertinent to note that, the ACCC does not have the authority to determine whether there has been a breach of Australia’s competition policy as enshrined in the Competition and Consumer Act (CCA) 2010; or the authority to penalise the entity in breach. Although, it does have the authority to investigate the potential breaches of the competition law. Upon the discovery of a breach, it refers the matter to court so that appropriate remedies and penalties can be applied.[17] Moreover, if the breach is serious then the ACCC may forward the evidence to the CDPPP so that appropriate criminal penalty can be applied. In addition, ACCC has been granted non-court-based enforcement remedies by the CCA 2010 which grant it with ‘the flexibility to respond to conduct proportionate to the potential harm’. Examples of these ‘non-court-based’ enforcement remedies are administrative resolution, infringement notices, undertakings enforceable by court etc.

AFSA

The Australian Financial Security Authority (AFSA) is a part of the Attorney General’s portfolio. The primary purpose of AFSA is to regulate trustee services and personal insolvency practitioners by applying and enforcing personal property security and bankruptcy laws. Like ACCC, AFSA does not have the power to impose penalties on its own, rather it serves an investigatory function and then referring the matter to the CDPP for further progress.[18]

Attorney-General's Department

The AG’s Department is responsible for the overseeing the offences under the Criminal Code Act 1995 (the Criminal Code). These offences include bribery (domestic and foreign), money laundering, false accounting offences and forgery, and fraud.[19]

In summary, the AFP investigates the Commonwealth offences, CDPP prosecutes those offences and ASIC, ACCC, ACC, ATO perform a more enforcement and prosecutorial function regarding the white-collar offences.[20]

Other Initiatives

It is not uncommon for the regulatory authorities in different jurisdictions, to coordinate and cooperate with each other in order to tackle white-collar crime and misconduct.

The prime example such instances is the establishment of the Serious Financial Crime Taskforce (SFCT) in 2015 by the Australian government. The purpose of this taskforce was to disrupt and deter complex and serious financial crime. SFTC carried forward and extended the scope of the partnerships made in 2006 by the Project Wickenby, which itself was established to combat tax fraud. According to AG’s Department:

“The SFCT brings together knowledge, resources and experience of law enforcement and regulatory agencies, including the AFP, ATO, ACC, AG’s Department, AUSTRAC, ASIC, CDPP and Australian Border Force (ABFT).”[21]

The regulatory scope of the SFCT is not limited to just Australia. It targets the misconduct such as international tax evasion, phoenix fraud, trust fraud etc., in Australia and as well as internationally. The SFCT has been known to partner up with regulatory authorities and executive organizations of the countries that have signed the Australia’s Tax Information Exchange Agreements and bilateral treaties.[22] The SFCT, along with 11 other regulatory authorities, was a part of the Fraud and Anti-Corruption (FAC) Centre. The FAC was created in 2014 to combat fraud and corruption.[23]

Penalty framework prior to the Penalties Bill 2018

Prior to the enactment of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 (the Penalties Bill), the penalty framework of Australia was considered ‘too soft’. Critics argued that the penalty framework was ‘inadequate and inconsistent’. Several regulatory authorities made the same claim in their submissions to the Economics Reference Committee (the Committee) in 2017. The Australian Shareholders’ Association (ASA) in its submission to the committee explicitly stated that the penalties imposed for white-collar offences are inadequate:

“The civil and administrative penalties which are currently available and actually imposed are not strong enough to deter offenders and criminal convictions, where available, are pursued only in limited cases. ASA believes that there is a need for more criminal prosecutions and increased civil and administrative penalties for white-collar crime.”[24]

Similarly, the Uniting Church (JIMU) submitted that, compared to the penalties imposed on offenders charged with committing social security fraud, the penalties which were imposed on white collar offenders were ‘too lenient’. JIMU further argued that the white-collar offences involved relatively higher proceeds of crime than the social security fraud and that the offenders were acting out of greed rather than financial hardship, making it even worse.[25]

It stated that:

“…due to the inconsistencies in legislation the outcome for white-collar criminals who are convicted can be much less detrimental than for those who are convicted of other types of fraud such as welfare or identity fraud. Penalties for social security fraud in Australia can include steep fines and up to ten years in prison, even though the amounts defrauded are generally much smaller, and the people committing the fraud are often people who are already suffering extreme financial hardship.”[26]

On the other hand, some regulatory authorities were satisfied with the penalty framework of their relevant areas of concern. One such regulatory authority was ATO which, in its submission, explained that the penalties for tax related offences were adequate and consistent in relation to that of the other countries. The ATO further stated that the penalty framework for the tax related offences was ‘fit for purpose’ due its structure and the wide range of penalties available and as well as the maximum level of penalties and sanctions that could be imposed on the offenders. Moreover, the powers conferred on the ATO enabled it to collect the proceeds of the penalties it imposed, effectively.[27]

Likewise, the ACCC as well agreed that the penalty framework for the breaches of the Australian competition policy is ‘broadly appropriate and in line with international trends.[28] The ACCC although, did suggest that the element of proportionality is missing in the penalty framework and that it is required that changes are made to the penalty framework so that the penalties are proportional to the level of breaches.[29] The ACCC further noted that even though the penalties imposed for the breaches of Australian competition law are adequate, the penalties imposed for the breaches of Australian consumer law are not. According to the ACCC the penalties for the breaches of Australian consumer law, ‘ought to be more comparable to competition law penalties that also operate across the economy’.[30] The ACCC opined that in order to have a ‘powerful deterrent effect’, the maximum penalties imposed for the breaches of Australian consumer law have to increase. It gave the example of $1.1 Million penalty for the corporations which are in breach of the consumer law, stating that it is too low for large corporations and that the harm cause by the breaches of consumer law is as damaging as the harm caused by the breaches of competition law, warranting more serious penalties.[31]

Several regulatory authorities in their submission to the Committee came to a consensus that the biggest deficiency in the penalty framework was the degree of civil penalties enshrined in the Corporations Act 2001. An example was the civil penalty of $200,000 for individuals and $1 Million for corporations, had been there since the enactment of the Corporations Act which, if compared to the seriousness of the offences or the proceeds of the breach, was inadequate.?It was further highlighted by ASIC that in other jurisdictions the range of non-criminal monetary penalties was broader than those available in Australia. It argued that there is a need for imposing penalties which are a multiple of profit gained or loss avoided by the breach and as well as for the power to take away the profits gained, or loss avoided (disgorgement).[32]

Concerns were also raised regarding the sufficiency of criminal penalties for white collar crime, especially the maximum prison terms. The representative of Law Council of Australia, Greg Golding stated that:

“… there is a need to review Australia's penalty regime to ensure that there is conformity and appropriate similarity across criminal penalties. We believe that there is a disparity that has crept into the law over the years that needs to be reviewed for consistency purposes.”[33]

An example of such inconsistencies was highlighted by CDPP in the chapter 7 of the Criminal Code relating to the offence of general dishonesty. The offence carries with it a penalty of five years imprisonment. However, other similar offences have a higher penalty e.g., under Corporations Act, engagement in dishonest conduct regarding the provision of financial product or service; and the offence of dishonestly conspiring to profit or causing loss to the Commonwealth, both have the maximum penalty of ten years imprisonment.[34]

Due to gradual changes in law penalties for some offences did increase, however, these relatively new penalties were inconsistent. The prime example of such inconsistencies was the imposition of different penalties for similar offences. The penalties for offences such as insider trading, market manipulation and dishonest conduct in the financial services were increased from five years to ten years. In addition, the pecuniary penalties were also increased. However, penalties for similar offences, such as intentional failure of an investment scheme’s official to act honestly and the offence of dishonest use of position by a director, did not change.[35]

In certain cases, this gradual change in law and enactment of new statutes, added to the inconsistency of the penalty framework. The new legislation introduced penalties which were significantly higher than the ones enshrined in prior legislation for similar offences. It was highlighted by the ASIC in its submission to the Committee that the relatively newer legislation such as the National Consumer Protection Act 2009 introduced civil penalties which were even higher than the criminal penalties imposed for same conduct under Corporations Act. It gave the example that the criminal penalty imposed on an individual who is charged with the offence of facilitating unlicensed financial services is a fine of $36,000, whereas the civil penalty for similar conduct i.e., engaging in an unlicensed credit activity, is up to $360,000 according to the National Credit Act.[36]

The Enactment of the Penalties Bill

The existence of these inconsistencies and inadequacies in the penalty framework warranted a change in legislation. For this reason, the Penalties bill 2018 was enacted. The Penalties bill amended the Corporations Act 2001, ASIC Act 2001, Insurance Contracts Act 1984, National Consumer Protection Act 2009, and addressed the inconsistencies and inadequacies that existed in the penalty framework, prior to its enactment.?It not only introduced harsher civil and criminal penalties e.g., longer prison sentences, but also granted the regulatory authorities with more powers to police and regulate corporations and financial institutions. The key changes that were introduced by the Penalties bill were with regards to severity of criminal offences for corporations and individuals, severity of civil penalties for corporations and individuals, scope of the civil penalties that can be imposed, infringement notices, and the dishonesty offences under the Corporations Act. It is pertinent to note that the Act did not have a retroactive effect, i.e., it only applied to the offences that took place after its enactment.

Changes in criminal penalties

A major change in the criminal penalties was the increase in the maximum prison sentences of serious offences. As mentioned above, prior to the enactment of the Penalties bill the maximum sentence for the serious criminal offences, e.g., dishonest conduct regarding the provision of financial product or service; and the offence of dishonestly conspiring to profit or causing loss to the Commonwealth, was ten years. The Penalties bill increased the maximum sentence for serious offences such as abuse of position, acting in bad faith as a director, engaging in dishonest conduct etc., to 15 years imprisonment. Moreover, prison sentences for some less serious offences were also increased. In addition to imprisonment, the pecuniary penalties were also increased for serious criminal conduct especially the offences under Corporations Act, Insurance Act and Credit Act.[37]A formula was introduced to determine the pecuniary penalties for the offences which had less than 10 years imprisonment sentence under the ASIC Act, Corporations Act, and Credit Act. The pecuniary penalty imposed has to be 10 times the number of months of the prison sentence of the offending individual or body corporate. If a fine was imposed, then the penalty was 10 times the fine imposed. This new ‘harmonious’ approach addressed the inconsistencies in the previous penalty framework.[38]

Changes in civil penalties

The civil penalties were also made harsher by the Penalties bill, increasing the sum of monetary penalties imposed. For example, for individuals under the Corporations Act, the maximum penalty for the breach was $200,000, under ASIC Act $10,500-$420,000 or 50-2000 penalty units, and under the Credit Act $420,000 or 2000 penalty units. This was increased by the Penalties bill to $1.05 Million or 5000 penalty units or according to the court’s discretion, three times the profit received, or loss avoided through the breach. Similarly, prior to the enactment of the Penalties bill, the maximum penalty for corporations was up to $1 Million under Corporations Act, $31,500-$2.1 million or 150-10,000 penalty units under ASIC Act, and $2.1 Million or 10,500 penalty units under Credit Act. This too was increased to $10.5 Million or 50,0000 penalty units, three times the profit gained, or loss avoided through breach, or 10% of the annual turnover up to $525 Million (2.5 million penalty units).

The scope of the civil penalties was also broadened by the Penalties bill to cover additional provisions of the financial services laws.[39] These provisions included: s.912A Corporations Act (the general obligations of Australian Financial Services Licensees (AFSL); s.912D Corporations Act (AFSL’s obligation to lodge breach reports); Chapter 7 Corporations Act (disclosure requirements); s.47 Credit Act (credit licensees’ general obligations); s.13(1) of Insurance Act (duty to act in utmost good faith); and s.33C (1) of Insurance Act (obligation to provide key facts sheet), etc. According to the Penalties bill breaches of these provisions will attract the penalties laid out in the bill.

Changes regarding infringement notices

The enactment of the Penalties bill also extended the scope of infringement notices. All the strict liability and absolute liability offences enshrined in the Corporations Act were now under the ambit of infringement notice regime in addition to the civil penalty provisions and prescribed offences. Moreover, several provisions of the Credit Act[40] and as well as the s.33C of the Insurance Act[41], fall under the infringement notice regime.?The penalties under the infringement notices are imposed according to the type of offence or breach. For the strict and absolute offences along with certain other offences, then penalty imposed is the 50% of the maximum pecuniary penalty for that offence.[42] Similarly, with regards to civil penalty provisions, the maximum penalty for individuals is $2520 or 12 penalty units whereas, for corporations it is $12,600 or 60 penalty units.[43] The maximum infringement notice penalty for the offences that fall under Credit Act, is 20% of the maximum pecuniary penalty for that offence whereas, for the civil penalty provisions under the Credit Act the infringement notice penalty is $10,500 for individuals or 250 penalty points for individuals and $52,000 or 250 penalty units for corporations.[44]

Disgorgement

One of the major changes brought on by the Penalties bill was disgorgement of profits aka relinquishment orders. Relinquishment order, when made, take away any financial benefit that was gained through a breach of civil penalty provision.[45]?Even if a pecuniary penalty is imposed on an offender who breached the civil provisions, the court can still make a relinquishment order in addition to the pecuniary penalty.[46]

Dishonesty

The Penalties bill also addressed the inconsistency regarding the white-collar offences related to dishonesty. It introduced a new definition of dishonesty under the Corporations Act, which applied to all the relevant offences under the Corporations Act e.g., s.1041G (general prohibition on dishonest conduct) and s.1041F (inducing persons to deal). The requirement to prove objectively that the dishonest conduct was intentional, was eradicated and it only needed to be proved that the conduct was dishonest objectively. The new test for the dishonesty was the ‘single limb’ test laid out in the case of Peters v R (1998) CLR 493.

Conclusion

After carefully addressing issues pinned down in the introduction with the help of various resources available in form of reports, journal articles and even legislations, it is fair to say that drawing a straightforward conclusion is not easy. The responsible institutions have gone through every phase of this difficult problem where they applied harsh consequences on violations, like what can be seen in the scenario where AUSTRAC and Westpac reached an agreement on the penalty of $1.2 Billion on Westpac after they were found in contravention of Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). Similarly, the recent imposition of the administrative penalties of $30,000 and $21,000 by the ASIC on the Societe Generale Securities Australia Pty and CommInsure for the breaches of Corporations Act supplement the fact that the Penalties bill has been effective in fulfilling its purpose.

However, it is important to note that hyperactive policing and scrutinizing of business troubles the existing small business holders and frightened the ones planning to start a business, therefore, acting as a barrier to enter the market for small business owners. Moreover, it was apparent that big corporations found it easy to avoid whereas many promising enterprises had fallen victim to such grave interruption by the government in their private dealings. On the other hand, having a softer approach towards these issues gave rise to a certain level of exploitation that served the larger industries the benefit to greater extent without reciprocity.

?

[1] Australian Law Reform Commission Reports “Principled Regulation: Federal Civil and Administrative Penalties in Australia” (2004)

[2] Australian Law Reform Commission 'Principled Regulation' (2017) 73–74

[3] Australian Law Reform Commission 'Principled Regulation' (2017) 81

[4] Michael Gillooly 'Civil Penalties in Australian Legislation' (1994) 13 University of Tasmania Law Review 269

[5] Australian Law Reform Commission 'Principled Regulation' (2017) 78 79

[6] Australia Securities and Investment Commission “Information sheet 151: ASIC's approach to enforcement” (2013) 4

[7] Ibid

[8] Ibid

[9] Australia Securities and Investment Commission “Penalties for corporate wrongdoing” (March 2014) 387

[10] Ibid

[11] Australian Taxation Office, Submission 29, An explanation of each of these penalty types is provided in the ATO's submission 4–6.

[12] Ibid

[13] Ibid

[14] Ibid pp. 4–5.

[15] Commonwealth Director of Public Prosecutions, Submission 53 1

[16] Ibid

[17] Australian Competition and Consumer Commission, Submission 40, p. 2.

[18] Australian Financial Security Authority, Submission 25 1 10

[19] Ibid.

[20] Ibid.

[21] Ibid.

[22] Attorney-General's Department, Submission 52, p. 3; Australian Federal Police, factsheet, 'Serious Financial Crime Taskforce', https://www.afp.gov.au/sites/default/files/PDF/seriousfinancial-crime-taskforce-factsheet.pdf

[23] Ibid.

[24] Australian Shareholders' Association Submission 34 1

[25] The Justice and International Mission Unit of the Synod of Victoria and Tasmania, Uniting Church in Australia, Submission 39, 11.

[26] Ibid

[27] Australian Taxation Office, Submission 29 3.

[28] Australian Competition and Consumer Commission, Submission 40 1-40

[29] Ibid

[30] Ibid

[31] Ibid

[32] Ibid

[33] Mr Greg Golding, Chair, Foreign Corrupt Practices Working Group, Business Law Section, Law Council of Australia, Proof Committee Hansard, 6 December 2016, p. 15.

[34] Mr Shane Kirne, Practice Group Leader, Commercial Financial and Corruption, Commonwealth Director of Public Prosecutions, Proof Committee Hansard, 6 December 2016, pp. 53–54.

[35] Australian Securities and Investments Commission, Submission 49, p. 13.

[36] Australian Securities and Investments Commission, Submission 49, p. 13

[38] ?Penalties Bill, sch1, s1311B (3); sch 2, s93D(3); sch 3, s288C(2)

[39] Penalties Bill, sch 1, s1317E.

[40] Penalties Bill, sch 3, s47

[41] Penalties Bill, sch 4, s33C.

[42] See e.g., Penalties Bill, sch 1, s1317DAP(2)(a).

[43] See e.g., Penalties Bill, sch 1, s1317DAP(2)(b).

[44] Penalties Bill, sch 3, s288L(2)(a).

[45] Penalties Bill, sch 1, s1317GAB; sch 2, s12GBCC; sch 3, s167C.

[46] Penalties Bill, sch 1, s1317GAB.