Corporate criminal liability: complex, unruly and uncertain

While the term corporate crime does not conjure up disturbing or threatening images that might be associated with some other crimes, corporate crimes are serious matters. Along with premeditated intent, committing a corporate crime often requires detailed insider knowledge and understanding of finance, markets, trading, and other confidential areas of business.

While there are laws and regulations in place for corporations which are designed to hold their directors, officers, and employees to account for criminal actions, few prosecutions are brought against companies because of the complexity and uncertainty surrounding criminal liability.

Furthermore, many of the offence provisions in Australian regulations are for low-level infractions and do not address inherently criminal conduct.

“It is very complicated and very uncertain because you have to prove criminal liability at the highest possible standard of proof that is beyond reasonable doubt,” says Professor Dimity Kingsford-Smith, Minter Ellison Chair of Risk and Regulation at UNSW Law.

Reform and change are needed in many areas of corporate criminal liability, says Prof. Kingsford-Smith, who was speaking ahead of a webinar on Risk and Regulation: Corporate Criminal Liability, which will be held on Thursday 12 November from 12.30-1.30pm.

Potential areas for improvement include greater clarity, better crafting of legislation and uniformity of the rules for attribution of the crime to the company.  Also, a better understanding about when to use strict liability or absolute liability in attributing criminal liability to companies – especially as these offences bypass the need to find intent to commit an offence.

“It's possibly acceptable to use strict liability and absolute liability for repeated very low-level infringements. But strict liability or absolute liability for high-level, ethically loaded conduct failings by companies tends to make the conduct of companies and people in companies seem more blameworthy than it really is,” says Prof. Kingsford-Smith.

It would be clearer if, for example, disclosure failings were lowered to civil contraventions of some description – leaving true criminal liability for truly criminal behaviour: “dishonesty, fraud, market manipulation, deliberate, misleading and deceptive conduct where the person clearly knows what they were doing on behalf of the company was wrong”.

“That would show more clearly what is truly criminal, what is truly civil,” says Prof. Kingsford-Smith. “Companies should then have the usual moral opprobrium of society, prosecution and if guilty, a court being able to denounce the company's conduct, if it's appropriate to attribute that conduct to the company.”

UNSW Centre for Law Markets and Regulation (CLMR) Director, Professor Dimity Kingsford Smith Image: Supplied

Following the ASIC Enforcement Review Taskforce in December 2017, and the Financial Services Royal Commission in February 2019, the Australian Law Reform Commission (ALRC) issued Report 136 in August 2020, in which it made substantial recommendations for the reform of corporate criminal liability.

The ALRC said there is a distinct purpose for corporate criminal responsibility – one that reserves criminal law for instances of corporate misconduct that cannot adequately be regulated by civil penalties.

Mark Standen, Partner and Head of MinterEllison’s Corporate HQ Advisory area and a Fellow of the Governance Institute Australia, says he is concerned by the current limited applicability of Part 2.5 in the Criminal Code.

“When you look at the ALRC’s recommendation eight, for example, you find that it talks about the need for new criminal laws that address systems of conduct or patterns of behaviour that result in multiple civil penalty contraventions.”

Mr Standen says the proposed shading of civil penalty breaches into a criminal offence is a troubling aspect of the report.

“Given para 12.3 of the Criminal Code already deals with ‘a culture of compliance’ requirement – it does worry me that some of the ALRC’s recommendations are duplicating an existing legislative response which could be made available to a much broader range of corporate conduct.”

Mark Standen, Partner and Head of MinterEllison’s Corporate HQ Advisory area and a Fellow of the Governance Institute Australia. Image: Supplied

Prof. Kingsford-Smith says the recommendations should lead to some improvements to complexity and clearer roadmaps to corporate liability.

However, the area of criminal individual liability is still in need of reform.

Prof. Kingsford-Smith says that often, the corporation and its managers or staff are both liable as they are, in a sense, in a joint enterprise.

However, sometimes, she says, circumstances exist when authority or standard of proof are involved, when individuals can be found liable for the action prohibited by law – but you can't quite get to the point where the attribution of those acts and intent is enough to make the company liable.

“There are sometimes significant difficulties in prosecuting companies when you see it that way,” Prof. Kingsford-Smith says.

Mr Standen notes the ALRC's conclusion that the case for reform of the substantive law relating to individual liability has not been made will be welcomed by corporate Australia. He also says that the recommendation for a review within five years after the introduction of the proposed Financial Accountability Regime of the effectiveness of individual accountability mechanisms (including accessorial liability, directors' and officers' duties and sector-specific accountability-mapping regimes) is a significant 'walking back' from the position taken by the ALRC in its earlier Discussion Paper.

In the context of individual liability for corporate misconduct, he said the “great hope” appears to be the Financial Accountability Regime. This is a highly sectoral approach “based on those institutions which are regulated by APRA (Australian Prudential Regulation Authority) with a test which goes to prudential reputation and prudential standing”, Mr Standen says.

“And for the company, possibly civil penalty consequences under the Financial Accountability Regime, and potential civil penalty consequences for individuals up to $1.1 million, but not criminal liability.

“The ALRC Report has left us with much still to consider and work through.”

For more listen to the Risk and Regulation: Corporate Criminal Liability webinar on Thursday 12 November 12.30-1.30pm. For more information please register here. This webinar is facilitated by the Centre for Law, Markets and Regulation (CLMR) and explores the complexity and uncertainty surrounding the criminal liability of corporations.