Figure 1: Example of strategic regulation enforcement pyramid82
Different types of sanctioning, however, are suitable for different areas of regulation.83 “The form of the enforcement pyramid is the subject of the theory, not the content of the particular pyramid.”84 Indeed, it is the systematic ordering of sanctions in the enforcement pyramid, with its hierarchy of progressively more severe punishments that is fundamental. It must be made clear to the regulated that non-compliance at any level will result in escalation to a higher level of adverse consequences. The regulated must know that defection from cooperation will be a less attractive option when those regulated face a regulator with an enforcement pyramid.85
Desirability of this approach for ASIC
Credible escalation and the ‘image of invincibility’?
Strategic regulation theory and the pyramidal enforcement model underpinned major reforms made concerning enforcement of the statutory directors’ duty provisions when the civil penalty regime, currently contained in Pt 9.4B of the Corporations Act, was introduced.86 Yet, what is the use of having an enforcement pyramid supporting Pt 9.4B, if, in the first place, the threat of escalation by ASIC to serious levels of response is not credible87 and secondly, the pyramid is not projected to all participants? 88
This article argues that, despite parliament arming ASIC with Pt 9.4B so that a strategic approach to regulatory enforcement could be achieved, ASIC’s implementation of that approach seems to be the difficulty. If ASIC is viewed as unwilling to rely on criminal sanctions, in cases of serious corporate contraventions, its reputation as an effective regulator may be eroded.
On the other hand, it should be noted that, even though in recent years ASIC has made greater use of civil penalty litigation, most recently against James Hardie89 and the Australian Wheat Board (AWB)90 and succeeded in obtaining many of the civil penalty orders it has sought, particularly against directors involved in high profile corporate collapses, such as those of HIH91 (although criminal proceedings have also been instituted) 92 and Water Wheel,93 civil penalties are generally regarded as a second-rate penalty regime,94 that, while acknowledging that a contravention has occurred, do not deliver the same element of moral culpability as arises with criminal sanctions.95 This is not to say that civil penalties are not a valuable enforcement tool or to deny the appropriateness of ASIC’s inclusion of them in the ‘key’ enforcement outcomes achieved by ASIC in its annual reports.96 The argument that this article seeks to make is that criminal sanctions should play a larger and more visible role in ASIC’s armoury to deal with serious contraventions.
The need for the criminal law
In the area of corporate crime,97 criminal sanctions are motivated by the desire for appropriate punishment and to serve as an effective general deterrent. Champions of the criminal justice system claim that the criminal process offers a greater deterrent for corporations and managers than other control mechanisms.98 A criminal conviction results in loss of liberty by imprisonment,99 a criminal record and damage to the defendant’s image and reputation. Chris Craigie, SC, of the Commonwealth Director of Public Prosecutions (DPP) recently made a compelling case in arguing that parliament should consider reviewing maximum penalties for corporate crime and endorsing the imposition of jail terms for serious offences by stating:
The best deterrent for serious corporate crime was jail, because those offenders often had more to lose … certainly for what you might call ordinary crime, the whole notion of deterrence by imprisonment is a more problematic one, but given the background of some people who might find themselves the subject of corporate prosecution , it’s a wholly different matter for a person who has a great deal to lose and who has hitherto had a reputation, standing in the community and a comfortable, and sometimes privileged life…For such a person the threat of the clang of the prison gate…has a particular potency it might not have for a housebreaker or professional criminal who, if he ever thought about it at all, would tend to regard the possibility of imprisonment from time to time as an occupational risk100
The bad publicity and stigma of a conviction101 far outweighs the label attached to administrative sanctions or an adverse decision in civil proceedings and/or the making of civil penalty orders.102 Coffee,103 who has studied the conduct of regulators who have both civil penalties and criminal sanctions at their disposal, also subscribes to this view. He believes that the publicity and public drama surrounding a successful criminal prosecution can generate a greater degree of deterrence than that following a successful civil penalty application, but this is part of his main argument that bureaucratic incentives resulting from the increased publicity of a criminal prosecution mean that regulators will prefer criminal sanctions rather than civil penalties.104
The traditional deterrence model, which assumes that fear of legal sanctions keeps persons law- abiding,105 thus provides the main justification for criminal sanctions and calls for the criminal justice system to play a more significant role in the war against corporate crime.106
In the United States, this is certainly the position. ASIC’s counterpart, the Securities and Exchange Commission (SEC) focusses on bringing criminal indictments against suspected major corporate wrongdoers.107 The SEC’s successful criminal prosecutions, particularly those against former Enron Chief Executive Officer, Jeffrey Skilling and its late Chairman and founder, Kenneth Lay for fraud, conspiracy and insider trading on 26 May 2006,108 will see at least one of the chief architects of this spectacular case of corporate fraud effectively spend the rest of his life in jail.109 More recently, Bernard Madoff, has been sentenced to 150 years jail for what may be the largest financial fraud in history.110 In addition, the shift towards the use of the criminal law with its emphasis on punishment and stigmatisation is evident in many areas, including environmental law, antitrust cases and health care fraud.111 In Australia, reliance on criminalisation also seems to be occurring, perhaps most importantly to deal with ‘cartels’.112
Conventional crime has historically been dealt with punitively in contrast to corporate misconduct which has been handled through administrative agencies or relatively lenient criminal legislation.113 This is consistent with the position found principally in sociological studies of regulation,114 which distinguish between regulatory offences and traditional crimes and bar the use of the criminal law to regulate conduct that is not regarded as intrinsically ‘immoral’.115
Nevertheless, this article argues that the criminal law should be accorded a more important role by ASIC. Enforcement by criminal sanctions should be the preferred way of dealing with violators in cases involving serious corporate contraventions.
Welsh’s research argues that this is already the case,116 in keeping with the stated policy of ASIC and the Commonwealth Director of Public Prosecutions (DPP)117 to issue criminal prosecutions in all cases where the evidence would support one.118 She relies on data compiled from ASIC media releases issued between 2001 and 2006 and the civil penalty judgments119 to make the case that the number of criminal prosecutions commenced by ASIC during this period outnumbered the civil penalty proceedings issued. However, on closer analysis of the data, while the reality might be that there were more criminal cases undertaken by ASIC than civil penalty proceedings,120many of the criminal cases under s 184 of the Corporations Act were against directors of proprietary companies (proprietary companies tend to be much smaller than public companies), rather than of (typically larger and more high profile) public companies.121 Of the 18 criminal prosecutions that Welsh identifies as being commenced in 2003, for example, quite a few concerned directors and officers of proprietary companies. The criminal prosecutions include those of Ms Donna Tung Sing Ho for dishonestly using her position as an officer of Bo Long International Development Co Pty Ltd to gain an advantage for herself or Mr Henry Shui SingHo, where Mr Ho and Mr Mark Andrew Sweeney were also charged with being involved in the alleged contraventions, relating to the alleged use of company funds to purchase real estate and motor vehicles for personal use; and Mr Hiromi (Henry) Kawada for his involvement in two Australian-registered companies Comestock Corporation (Australia) Pty Ltd (in liquidation) (Comestock) and Jillbridge Pty Ltd,122 as well as Mr Harunobu Fukasato, who ASIC alleged failed to act honestly as an officer of Comestock.123 ASIC’s 2003 media releases also feature information about other criminal cases commenced earlier that typically involve directors of proprietary companies. The criminal cases include those against Mr Hasan Kaygusuz, former company lawyer and accountant for Jorbai Pty Ltd (Jorbai), a failed dairy products distribution company, who pleaded guilty to being knowingly concerned in the commission by Mr Bruce Edward Carr and Ms Kym Jeanette Clendenning of dishonestly using their positions as officers of Jorbai;124 Messrs Damien Gerald Francis Durkin and Timothy Rhys Hawker Williams, former directors of Cotech Pty Ltd committed to stand trial on insolvent trading charges;125 Mr Sebastian Mark Tomarchio, former director of G & R Tomachio Pty Ltd, which traded as Tomarchio Orchards, who was sentenced to two and a half years imprisonment after pleading guilty to charges of dishonestly using his position to gain an advantage for himself;126 Mr Brian Patrick Khan, who ASIC alleged had improperly and dishonestly used his position as a director of Kiumph Pty Ltd to benefit himself or entities associated with him;127 and Mr Christopher Beresford James for dishonestly using his position as an officer of Unleycal (Wholesale) Pty Ltd to gain an advantage for another company, Unleycal Pty Ltd, which operated a car dealership and traded as Unley Mitsubishi, and Unleycal (Wholesale).128
By presenting this data and highlighting the preponderance of criminal prosecutions brought by ASIC against directors and officers of proprietary companies, the author is not ignoring the important criminal action ASIC has taken to date in some high profile matters, most notably against the directors of HIH.129 Nor is the author trivialising the importance of the criminal actions ASIC has properly commenced against directors and officers of proprietary companies.130 Arguably, however, when directors of usually larger public companies breach their duties, their actions have more far-reaching and serious consequences. ASIC must therefore not fail to advertise its triumphs in the criminal arena, as well as ensure that it uses criminal sanctions in appropriate cases against high profile corporate wrongdoers.
It is interesting that earlier empirical work conducted by Helen Bird and her colleagues at the University of Melbourne concerning ASIC’s enforcement patterns also made a similar finding that ASIC was more likely to pursue court-based enforcement in relation to private companies rather than public companies.131 That work examined 1438 court-based ASIC enforcement actions completed during the period from January 1997 to December 1999. While it also found the predominant use by ASIC of penal enforcement (which it defined as either civil penalty or criminal matters) over civil enforcement activities,132 it found that 1243 matters involved proprietary companies and 79 actions involved an Australian public company.133
As Hawkins,134 whose work made a significant contribution to the scholarship on sociological theories of regulation, declares, even though enforcement by punitive sanctions is a strategic tool of last resort where other regulatory measures have failed to secure compliance,135 the formal machinery of the criminal law is appropriate and should be applied in cases where there is perceived moral blameworthiness in the actions of the violator, where what is really being sanctioned amounts to a “symbolic assault on the legitimacy of the regulatory authority”.136 Here, Hawkins identifies two types ofculpable conduct which invite the regulatory agency’s ultimate sanction, namely serious one-off cases and ‘the bad’ cases, the malicious and the obdurate who have resisted the legitimate efforts of the agency to enforce its legal mandate. This approach is, of course, consistent with strategic regulation theory and pyramidal enforcement with strategic regulation theory forming part of the sociological theories of regulation. The criminal law should, also, apply in cases where there are ‘criminal acts of dishonesty’137 leading to personal or corporate benefit.
Although Stephen Vizard did not benefit as a result of his insider trading activities,138 his case, where there was deliberate and repeated dishonest conduct, is certainly a case where criminal action should have been brought.139 The same is true of the HIH debacle, where criminal proceedings have been pursued,140 the AWB scandal,141 and notorious James Hardie case,142 just to name a few serious high profile matters.
In the case of Vizard, the puzzling question must be posed: why wasn’t the decision to launch a criminal prosecution made when the evidence seems to support that Vizard was guilty of insider trading? As far as the civil penalty proceedings ASIC issued against him are concerned, Vizard confessed to insider trading.143
ASIC has said that the decision not to pursue a criminal case was not theirs, but was “entirely up to the federal Director of Public Prosecutions”,144 who stated that “it did not have enough evidence to institute a criminal charge”.145 The DPP would not prosecute Vizard in the absence of a signed witness statement from his accountant, Greg Lay, who refused to provide one. This is despite the fact that Lay had already given sworn evidence to ASIC concerning Vizard’s insider trading activities and could have been compelled to testify against Vizard - although not himself - under the ASIC Act 2001 (Cth) ( the ASIC Act), s 19.
Interestingly, Tony Hartnell, a former ASIC chairman, was reported at the time as saying that:
a major problem is that prosecutors refuse to use that section of the ASIC Act. The
criminal procedure acts of the various states which do require signed witness statements
are not in line with the federal law. The DPP simply ignores the federal legislature. That
section about compulsory examination may as well be removed from the Act.146
This raises an important structural dilemma regarding enforcement for ASIC. While it enjoys a
good relationship with the DPP,147 consideration ought to be given to ASIC, like the SEC, 148
developing its own prosecutorial arm to ensure that a more consistent approach to decision-
making, more particularly, whether to institute criminal proceedings, could be achieved. It seems
that, at present, as evidenced by the DPP’s refusal to prosecute Vizard in the absence of a signed
witness statement, that the DPP has high prosecution standards, essentially requiring proof
beyond any doubt, not reasonable doubt.149 The DPP also appears reluctant to prosecute
technical corporate offences where the facts are often complex and where the maximum
sentence for a successful prosecution is only five years,150 preferring instead to concentrate its
efforts on other types of criminal behaviour that can be dealt with under state laws, which carry
longer sentences.151 This also raises a significant issue requiring serious consideration namely,
whether there is a need to increase the maximum jail time for corporate crime under the
Corporations Act? In spite of the opposition that would undoubtedly be mounted by business
groups in the community to any increase, Adler’s sentencing, for instance, to four-and-a-half
years152 and release from jail after only two years, seems completely inadequate. The punishment
does not fit the crime.
Although this issue did not arise in the Vizard case, another important concern regarding
criminal proceedings under the Corporations Act is the requirement that those proceedings be
instituted within a period of five years from the date of the act or omission alleged to constitute
the offence, although the Minister has the power to extend that time.153 As Alan Cameron,
another former ASIC chairman points out:
It is not at all clear what the philosophical justification for such a limitation is in the
corporate context when that is just the sort of crime that tends to be discovered later and
the proof of such matters eventually turns more on documents and other physical
evidence, and where some at least of the putative defendants are the ones who control the
documents and have the capacity to cover up their abuses for years.154
The author agrees that:
The lack of a statute of limitations ensures in the case of other kinds of crime that there is
no reward for those who are capable of successfully concealing their criminal acts or
omissions for any period of time. The same should be the case for corporate crime.155
As far as Vizard is concerned, even though the civil penalty proceedings ASIC brought against
him were ultimately successful and resulted in him being banned for ten years from managing a
corporation and ordered to pay pecuniary penalties of $390,000,156 the overwhelming view
seems to be that ASIC and the DPP went soft on Vizard.157
In spite of ASIC issuing civil penalty proceedings against former James Hardie directors and executives over the asbestos scandal,158 and its recent success in the New South Wales Supreme Court, which has upheld these proceedings against the entire James Hardie board,159 regrettably, on 5 September 2008, ASIC announced that it would not be taking criminal proceedings.160 It is intriguing that this decision does not seem to have caused the resentment or criticism surrounding ASIC’s failure to prosecute Vizard or the public outrage relating to James Hardie’s controversial restructure and disastrous compensation scheme in 2001 that turned out to be under-funded by about $2 billion.161 Part of the reason could be that provided by ACTU secretary, Jeff Lawrence, who was reported as saying:While it was ‘preferable’ that the perpetrators had also faced criminal charges, unions hoped ‘substantial penalties’ would result from the civil case. The most important thing is that funding has been secured to asbestos victims, this has always been the primary focus.162
AWB is another important case, where the public will be looking closely at whether ASIC institutes any criminal actions.163 This is especially so as ASIC appeared, even before the fallout from the current financial crisis, to come under mounting pressure to adopt a tougher approach to enforcement. Pressure built as a result of a spate of property developer collapses, namely of Westpoint,164 Fincorp165 and Australian Capital Reserve (ACR),166 although they all involved high risk investments, and the spectacular collapse of stockbroking firm, Opes Prime.167 Commentators hoped for a change in direction under ASIC’s new chairman, Tony D’Aloisio, a former ASX Ltd chief executive.168
ASIC, with D’Aloisio at its helm, should focus its efforts on rigorously enforcing the law rather than continue to allow itself to be exposed to the criticism that it fails to do so, as happened under the chairmanship of Jeffrey Lucy.169 The view that ASIC fails to adequately enforce the law is also borne out by the results of the stakeholder survey,170 that preceded ASIC’s recent strategic review and restructure, to help it identify what it did well and where improvements were needed.171 One of the ways that ASIC can overcome criticisms is to ensure that it uses the criminal law in the enforcement pyramid, underlying Pt 9.4B more, to punish corporate misconduct in serious cases, especially against high profile wrongdoers, and thus prove that it is a serious regulator, crucially portraying an ‘image of invincibility’.172
‘Image of invincibility’
Ayres and Braithwaite also consider the question of how regulatory agencies, such as ASIC can project an image of invincibility to organisations that may be more powerful than themselves.173 Interestingly, they take the talents of the Australian sheep-or cattle-dog, who can exercise “unchallenged command over a large flock of sheep or herd of cattle every member of which is bigger than herself”,174 and who can force the retreat of a man, even a man with a knife- when the man is bigger, more intelligent, and more lethally armed, as their starting-point:
The first point to make about the regulatory accomplishments of the dog is that dogs are delightfully friendly to other creatures who cooperate with them. Second, dogs are convincing at escalating deterrent threats while rarely allowing themselves to play their last card. They bark so convincingly that a bite may seem more inevitable and terrifying than it is. And they know how to escalate interactively - in way that is strategically responsive to the advance and retreat of the intruder. Friendliness can turn to a warning bark, then a more menacing growl, posture and raising of fur transforms her - she is bigger and seems ready to pounce, teeth are bared, slightly at first, the dog advances slowly but with a deliberateness that engenders irrational fears that a sudden rush will occur at any moment The dog’s remarkable regulatory strategies are based on TFT strategy (the intruder will be extended friendliness when reintroduced as a friend; the sheep will be protected, led to food and drink when they cooperate). The success is also based on finesse at dynamic interactive deterrent escalation, and at projecting an image of invincibility.175
Although Ayres and Braithwaite acknowledge the problems which arise in achieving the same degree of finesse in the area of human regulation, they draw on some empirical work for a number of suggestions. The first suggestion results from Hawkins’ important study of British water pollution control.176 While these water boards were anything but benign big guns in reality, their field officers played a game of regulatory bluff. The fines that flowed from prosecution were actually puny, yet they were dealt with by a degree of misrepresentation of the awful consequences of prosecution and by inspectors alluding to adverse publicity and the humiliation of a court appearance, instead of concentrating on the size of the fines. Accordingly, the image to be built up and reinforced is for regulators “to display the enforcement process as inexorable, as an unremitting process, in the absence of compliance, towards an unpleasant end”, even in cases where there may be a weak relationship between the reality and the image of the enforcement powers of regulatory agencies as benign big guns.177
Unlike the British water boards, ASIC has important enforcement powers at its disposal.178 The real question is whether it will use those powers in appropriate cases to build an image of invincibility.179 Although ASIC has taken action in some important and high profile cases, perhaps most notably the criminal proceedings it has issued in relation to the HIH disaster, its handling of other matters is undermining this image of invincibility. They include the failure to instigate a criminal case against Vizard, the length of time it is taking to deal with Rich and Silbermann in the long-running One.Tel proceedings180 and criticism generally for “being on the backfoot”181 in not acting promptly when it should arguably have been aware of problems concerning Westpoint and Fincorp.182 It is interesting that all this criticism pre-dated the current financial crisis and resulting global meltdown, where now, more than ever, it is important for ASIC to be seen to act appropriately to prevent confidence being eroded in what is the worst financial crisis since the Great Depression.
Projecting the pyramid of enforcement
It is also useful if pyramidal enforcement is to guide the design of ASIC’s enforcement strategies and practice to ensure that the pyramid is clearly projected to all participants.183 Regrettably, the suggestions made by Dellit and Fisse in 1994 about how this could be achieved have not been followed. Those suggestions include: amending the Corporations Act to manifest the pyramid, preferably by adding a new division which outlines an enforcement strategy and which lays the groundwork for implementing it,184 as well as, making sure that the strategy is projected by and within ASIC.185
Problems of moving up and down the pyramid in practice
The importance of having access to a range of sanctions which is, of course, the position under the Pt 9.4B pyramid to achieve responsive regulation is highlighted by Ayres and Braithwaite. If the regulated are being cooperative, the regulator should respond by being cooperative, but if the regulated are being uncooperative, the regulator should escalate up the pyramid.186
Difficulties, however, can arise with the practice of regulators like ASIC. Moving up and down the regulatory pyramid is not as easy in practice as it seems.187
In its review of the use of civil and administrative penalties in the federal sphere, the ALRC noted Fiona Haines’ argument that “escalation of sanctions, while appearing reasonable to the regulator, can prompt companies to move to reduce their vulnerability to scrutiny and liability”.188 But, of greater significance is the approach of Christine Parker. According to Parker, with whom the author agrees, in order to improve the practice of regulation, regulators must appreciate why and how contraventions occur and the practices and constraints that may be used to encourage compliance:
A sophisticated compliance analysis of regulation implies a sophisticated understanding of the target population. What will make compliance difficult for them? What will motivate them to want to comply? What technical changes will compliance mean for their business or manufacturing processes? What financial impacts will compliance have? This level of understanding of the target population is unlikely to be achieved without significant consultation with, listening to, and research of members of target populations.189
In this regard, some interesting comments have been made concerning ASIC’s failure to take
action in relation to the property collapses of Westpoint and Fincorp. While there is the view
that investors cannot expect to be protected from their own greed or stupidity:
[I]t should not be too much to expect ASIC to keep a closer watching brief. ASIC also
seems to be quarantined from market intelligence.190
The announcement by D’Aloisio on 8 May 2008 of a strategic review, aimed at making ASIC “closer to the market”191 and that has since been completed, is therefore to be commended. Importantly, it has resulted in a new structure and new appointments,192 which hopefully should go some way in helping ASIC to better fulfil its role as enforcer and regulator.193 One commentator has said that a number of ‘outwardly focused’ stakeholder teams targeting particular areas, including retail investors and consumers, superannuation funds and financial advisers, have replaced the former ‘silo’ directorates, where the intention has been to replace “cumbersome, bureaucratic, process-oriented units with smaller, flexible customer-centric ones”.194 Yet another commentator stated that “the corporate watchdog has moved to beef up its market expertise with a series of senior executive appointments”, noting that “more than a third came from the private sector”.195 While these changes have been favourably reported on in the press, ASIC must tread a careful path, lest it be criticised for being ‘captured’ by business.