Legal research series the challenge of corporate law enforcement in australia



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Conclusion
If ASIC wishes to retain its reputation as a credible regulator and use pyramidal enforcement, it must demonstrate that it is more prepared to take action at the criminal level in serious cases of corporate misconduct. Otherwise, there is the perception that there is ‘justice for sale’ for those wrongdoers with deep pockets who are able to foot the bill, with the non-prosecution of corporate fraudsters discriminating in their favour and against ‘street’ offenders.196
Another closely related concern is possible abuse by ASIC of its range of enforcement options and power to negotiate settlements under pyramidal enforcement resulting in injustice.197 Questions are raised when some defendants are prosecuted, while others who have committed the same type of contravention are only visited with civil penalties or a settlement.198 The danger also exists that a particular settlement arrived at through negotiation may be too harsh or too lenient in comparison with another.199 Accordingly, ASIC must seek to be more consistent in its application of pyramidal enforcement and consistent in taking enforcement action at appropriate levels in the pyramid, which in regard to criminal prosecutions Dellit and Fisse argue can be achieved by such measures as closer monitoring of the exercise of prosecutorial discretion, and liaison between ASIC and the DPP to ensure that serious cases dealt with by ASIC that warrant prosecution are not settled or handled in such a fashion as to hinder prosecution.200 The author is not convinced that this is the answer and believes that ASIC developing its own prosecutorial arm to achieve a more consistent approach to decision-making should be considered.201
In all, strategic regulation theory is to be supported to shape ASIC’s regulatory design and practice, but, as this article contends, the difficulty for ASIC appears to be the implementation of this approach to enforcement. ASIC must strive to be consistent in the enforcement action it chooses to take and it must show that is prepared to take action at the appropriate level in the pyramid, especially to rely on criminal sanctions in serious cases of corporate wrongdoing, to ensure that its reputation as an effective regulator is not undermined. Criminal sanctions will not deter potential corporate violators unless they recognize that ASIC will do more than threaten their use.



1 This is the way ASIC describes its ‘role’: see ASIC website, www.asic.gov.au, ‘About ASIC: Our role’ (Accessed on 4 July 2009). The statement is repeated in other documents published on its website, eg. ASIC, ASIC: A guide to how we work, p 4.

2 The provisions relating to those duties are now found in the Corporations Act, ss 180- 183, formerly the Corporations Law, s 232, and the Companies Code (Code), s 229. The criminal sanctions which could be imposed were a fine or imprisonment for up to five years or both under the Corporations Law, s 1311, formerly the Code, s 570. Of course, civil remedies, which enabled recovery of loss or damage resulting from the breach could also be obtained: see Corporations Law, ss 232(7), (8) and (11), formerly the Code, ss 229(6), (7) and (10).

3 The problems associated with the use of the criminal process are well recognised: see, eg, K Schlegel, Just Desserts for Corporate Criminals, Northeatern Uni Press, Boston Mass, 1990.

4 See Senate Standing Committee on Legal and Constitutional Affairs, Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors, AGPS, Canberra, 1989 (the Cooney Committee). See also Australian Law Reform Commission (ALRC), Principled Regulation: Federal Civil and Administrative Penalties in Australia, Report 95, 2002 at [2.62].

5 Cooney Committee, ibid.

6 See discussion above, n 2.

7 Cooney Committee, above n 4, p 190.

8 Ibid, p 188.

9 Ibid, p 190.

10 See in particular the work of Braithwaite, eg, J. Braithwaite, To Punish or Persuade: Enforcement of Coal Mine Safety, State University of New York Press, New York, 1985.

11 See discussion above, n 2.

12 The civil penalty regime was introduced by the Corporate Law Reform Act 1992 (Cth) and became effective from 1 February 1993. The regime has been amended a number of times since its introduction in 1993. Most significantly, the number of provisions enforced by the regime has been expanded twice, first in July 1998 and later in March 2002, reflecting the preference in Australia for corporate law breaches to be enforced using civil and administrative remedies rather than criminal penalties: see author’s previous work for a fuller discussion of the civil penalty regime, the reasons for its introduction and the regulatory framework underpinning it, eg, V. Comino, “Civil or criminal penalties for corporate misconduct: Which way ahead?”(2006) 34 ABLR 428 at pp 431 – 435. See also, eg, N Andrews, “If the dog catches the mice. The civil settlement of criminal conduct under the Corporations Act and the Australian Securities and Investments Act” (2003) 15 Aust Jnl of Corp Law 137, for a general discussion of this preference for civil and administrative rather than criminal penalties to deal with corporate law breaches. In March 2007, the federal Treasury undertook a review, Sanctions in Corporate Law, inviting discussion on the issue of the greater use of civil, rather than criminal sanctions for breaches of corporate law: see The Treasury, Review of Sanctions in Corporate Law, www.treasury.gov.au (Accessed on 1 November 2007). More recently, the Corporations and Markets Advisory Committee (CAMAC) has proposed civil penalties for market manipulation and for securities dealers to record all phone calls and text messages after the then Minister for Superannuation and Corporate Law, Nick Sherry, had asked it to look into charges that some short sellers were deliberately spreading damaging rumours about stocks - or engaging in rumourtrage – following the stock market carnage in late 2008. ASIC also wants civil penalties introduced for rumourtrage in addition to existing criminal penalties to provide “access to the full range of regulatory options” and ensure that rumourtrage is “met by a scalable response”: see P. Durkin, “ASIC worried over margin loan disclosure”, AFR, 16 March 2009, p 7.

13 A person who contravened a civil penalty provision was guilty of a criminal offence if that person contravened the provision knowingly, intentionally or recklessly and (i) was dishonest and intended to gain an advantage or (ii) intended to deceive or defraud someone. The criminal sanctions which applied for a successful prosecution of the criminal offence were a fine of up to $200,000 or imprisonment for up to 5 years or both. The current position is that the criminal penalty regime, formerly in Pt 9.4B, continues to apply to substantive provisions of the Corporations Act, which provide that contravention is an offence. The Corporations Act, s 184, dealing with criminal breaches of the statutory duties of corporate officers is an example of such a provision. Criminal penalties, namely a fine and /or imprisonment, also continue to be prescribed in the Corporations Act, s 1311 (3), Sch 3.

14 Where a civil penalty provision was breached, the consequences could include the court prohibiting the person from managing a corporation for a specified period of time and/or imposing a pecuniary penalty of up to $200,000 upon that person. The available orders continue to be pecuniary penalties and management disqualification orders. Pt 9.4B now, however, deals only with the imposition of pecuniary penalties. The imposition of management banning orders is dealt with under s 206C of Pt 2D.6 of the Corporations Act, entitled “Disqualification from managing corporations”. Pt 2D.6 prescribes all methods by which a “person can be disqualified from management”, which includes contravention of a civil penaty provision.

15 See Comino, “Civil or criminal penalties for corporate misconduct”, above n 12, p 433 -435. The Cooney Committee recommended that Parliament enact an enforcement pyramid, which proposed three vital levels of sanctions ASIC could use to regulate the conduct of directors. There would be civil remedies at the base, civil penalties in between and criminal sanctions at the apex, instead of the then existing two levels of criminal and civil sanctions.

16 See discussion below, Vizard, James Hardie and AWB. But note Welsh’s research: M. Welsh, “Civil Penalties and Strategic Regulation Theory: The Gap Between Theory and Practice” (2009) 33 Uni Melb Law Review (forthcoming), discussed below, nn 116 – 120.

17 In the academic literature a distinction is usually made between regulatory offences and ‘real crimes’ (indictable offences, such as murder and robbery in contrast to summary or simple offences). Those who deny the criminal nature of regulatory offences argue that such offences are ‘lesser matters’, which people do not view in the same manner as traditional crimes, so that their criminalisation is inconsistent with public morality: see later discussion, n 115. This article distinguishes between regulatory wrongs, eg, failure to lodge returns on time – and ‘serious’ wrongs: fraud, breach of statutory/fiduciary duty – which are often one-off matters and necessarily should result in high level action, civil penalty or criminal proceedings. See also later discussion, The need for the criminal law, in particular nn 98 - 104.

18 Researchers in this field include J. Scholz, “Deterrence, Cooperation and the Ecology of Regulatory Enforcement (1984) 18 Law and Society Review 179; and C. Dellit and B. Fisse, “Civil and Criminal Liability under Australian Securities Regulation: The Possibility of Strategic Enforcement” in G. Walker and B. Fisse (eds), Securities Regulation in Australia and New Zealand, Oxford University Press, Auckland, 1994, p 580. This chapter was not retained in later edition (1998). See also G. Gilligan, H. Bird and I. Ramsay, Research Report: Regulating Directors’ Duties – How Effective are the Civil Penalty Sanctions in the Corporations Law? Centre for Corporate Law and Securities Regulation, The University of Melbourne, 1999, Pt IV, pp 8-16. Strategic regulation theory is not confined to corporate regulation. It has been used extensively in other fields, including occupational health and safety regulation: see, eg, N. Gunningham and R. Johnstone, Regulating Workplace Safety: Systems and Sanctions, Oxford University Press, Oxford, 1999; environmental regulation: see, eg, G. Richardson, A. Ogus and B. Burrows, Policing Pollution: A Study of Regulation and Enforcement, Clarendon Press, Oxford, 1983; and trade practices regulation: see, eg, C. Parker, “The Compliance Trap: The Moral Message in Responsive Regulatory Enforcement” (2006) 40 Law and Society Review 591. Parker applied strategic regulation theory to enforcement of the cartel provisions in Pt IV of the Trade Practices Act 1974 (Cth).

19 See Gilligan, Bird and Ramsay, ibid, p 9.

20 Braithwaite, To Punish or Persuade, above n 10.

21 For individual offenders the criminal sanction of imprisonment is regarded as the ultimate penalty, while for corporate offenders, sanctions, such as deregistration, punitive injunctions, adverse publicity orders and licence revocation are regarded as equivalent penalties.

22 I. Ayres and J. Braithwaite, Responsive Regulation, Transcending the Deregulation Debate, Oxford University Press, New York, 1992.

23 Ibid, p 19.

24 Ibid.

25 Ibid, p 21. By adopting the terms ‘deterrence’ versus ‘compliance’, Ayres and Braithwaite rely on one of the leading formulations provided by Reiss of the binary model of enforcement strategies or styles, which has been important in the academic literature in seeking to enhance our understanding of law enforcement and the part it plays in the regulatory process: see A. Reiss Jr, “Selecting Strategies of Social Control over Organizational Life” in K. Hawkins and J. Thomas (eds) Enforcing Regulation, Kluwer-Nijhoff Publishing, Boston, The Hague, Dordrecht and Lancaster, 1984. The other leading formulations are those of Hawkins and Bardach and Kagan. The terms Hawkins employs in describing this model are ‘compliance’ and ‘sanctioning’: see K. Hawkins, Environment and Enforcement: Regulation and Social Definition of Pollution, Clarendon Press, Oxford, 1984, p 3, while Bardach and Kagan in their identification of the two basic styles of regulation call one style of enforcement typified by the title of their study: Going by the Book as ‘regulatory unreasonableness’ and the other, ‘regulatory reasonableness’: see Bardach and Kagan, Going by the Book: The Problem of Regulatory Unreasonableness, Temple University Press, Philadelphia, 1982.

26 Ibid.

27 See Scholz, “Deterrence, Cooperation and the Ecology of Regulatory Enforcement”, above n 18.

28 Ibid, p 180.

29 See discussion above, nn 27- 28.

30 Ayres and Braithwaite, Responsive Regulation, above n 22, p 21.

31 Ibid.

32 Ibid, pp 21- 22.

33 The fieldwork on the impact of adverse publicity on corporations is summarised in B. Fisse and J. Braithwaite, The Impact of Publicity on Corporate Offenders, State University of New York, Albany, 1983; on pharmaceutical companies in J. Braithwaite, Corporate Crime in the Pharmaceutical Industry, Routledge and Kegan Paul, London, 1984; on coal mining companies in Braithwaite, To Punish or Persuade, above n 10; on Australian regulatory agencies in P. Grabosky and J. Braithwaite, Of Manners Gentle: Enforcement Strategies of Australian Business Regulatory Agencies, Oxford University Press, Melbourne, 1986; and a preliminary report on the work of nursing home regulation is provided in J. Braithwaite, T. Makkai, V. Braithwaite, D. Gibson and D. Ermann, The Contribution of the Standards Monitoring Process to the Quality of Nursing Home Life: A Preliminary Report, Department of Community Services and Health, Canberra, 1990.

34 Ayres and Braithwaite, Responsive Regulation, above n 22, pp 19 and 22.

35 Ibid. See also Dellit and Fisse, above n 18, 1994, p 575.

36 Ibid, p 20.

37 See Fisse and Braithwaite, above n 33. See also discussion below, nn 41 -49, particularly James Hardie, which is a good case study illustrating this point. But see J. McConvill, “Directors’ duties to stakeholders: A reform proposal based on three false assumptions” (2005) 18 Aust Jnl of Corp Law 88 at 89. McConvill provides an interesting discussion of the James Hardie case from another perspective.

38 See Ayres and Braithwaite, Responsive Regulation, above n 22, p 22. Note, however, the tendency of the ALRC in its report in 2002 to recommend against publicity unless sanctioned by court order: see ALRC, Principled Regulation: Federal Civil and Administrative Penalties in Australia, Report 95, above n 4. A problem with publicity is that it can be used by the regulated as well as the regulator. In a recent case concerning a company, Promina Group Limited (Promina), who paid a $100,000 fine complying with an infringement notice that ASIC issued against it on 21 February 2001 pursuant to the administrative penalty regime under the Corporations Act, Pt 9.4AA (ASIC alleged that Promina contravened the continuous disclosure provisions “by failing to inform ASX Limited (ASX) that it had received a proposal from Suncorp-Metway Limited (Suncorp) to acquire all the ordinary shares of Promina”: see ASIC, “Promina pays $100,000 fine”, Media Release 07-69, 20 March 2007), notwithstanding that this was publicised by ASIC, Promina proceeded to issue its own publicity disputing any contraventions and stating that it paid up because it was in the best interests of its shareholders: see < http:www.afr.com.au/pubs/ldr/foracma/07.htm> .

39 Ibid.

40 See, eg, ALRC, Background Paper 7, “Review of civil and administrative penalties in federal jurisdiction”, Penalties, Policy, Principles and Practice in Government Regulation, Conference, Sydney, 7- 9 June 2001, p 13.

41 Ibid. The Environmental Defenders Office expressed to the ALRC that reputation was extremely important to large public companies. Yet, in the area of environmental protection, it reported that many of the worst offences were committed by ‘fly by night’ companies, who offend, get caught and then reappear in different forms: Environmental Defenders Office, Consultation, Sydney, 7 December 2000. See also Grabosky and Braithwaite, Of Manners Gentle, above n 33, pp 216-217. On a related issue, this study found that one of the main reasons that most Australian regulatory staff believe large firms are more law-abiding than small business is because of their increased sensitivity to publicity. Another reason is that they have the resources to employ compliance personnel. Such findings are not new and have international counterparts: see, eg, J. Black, “Managing Discretion’, Paper presented to ALRC Penalties, Policy, Principles and Practice in Government Regulation Conference, above n 40, p 12.

42 The subsidiaries, Amaba Pty Ltd and Amaca Pty Ltd, were the companies in the James Hardie Group that were involved in the manufacture and sale of asbestos, which gave rise to ‘long- tail’ liabilities to asbestos victims.

43 Part of the corporate restructure involved the James Hardie Group entering into a scheme of arrangement to move control from Australia to the Netherlands and set up as a Dutch company that took with it $1.9 billion in assets from the Group: see discussion in J. Farrar, Corporate Governance: Theories, Principles, and Practice (3rd ed), Oxford University Press, Melbourne, 2008, p 511, where Farrar also points out that the Netherlands does not have a treaty with Australia for the enforcement of civil court judgments. See also Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549; 7 ACLC 841.

44 MRCF was set up as a separate entity not related by shareholding or in any other way to the other companies in the James Hardie Group.

45 The Special Commission of Inquiry handed down its report in September 2004: see D.F. Jackson, QC, “Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation”, September 2004 (the Jackson report). This report is available online at < http:www.cabinet.nsw.gov.au/hardie/PartA.pdf> (Accessed on 4 July 2009). Significantly, the Jackson report found that: James Hardie had under-funded the MRCF by about $2 billion; having pocketed the proceeds, James Hardie had the capacity and moral obligation to compensate the victims; James Hardie made misleading and deceptive statements in regard to the establishment of the Foundation; this conduct required investigation by Commonwealth authorities; and serious questions were raised about the conduct of a number of professional firms.

46 In December 2005, James Hardie Industries NV (JHINV) and James Hardie 117 Pty Ltd had entered into an agreement to provide long term funding for compensation arrangements for victims of asbestos-related diseases in Australia with the New South Wales Government and the Asbestos Injuries Compensation Fund Limited, as trustee for the Asbestos Injuries Compensation Fund, which was amended on 21 November 2006 (Final Funding Agreement). But this agreement, which occurred against a background of a threat by the New South Wales government to pass legislation to unravel the restructuring of the Group if no settlement was reached was also subject to conditions precedent (referred to in JHINV’s announcement to the ASX dated 1 December 2005), including shareholder approval.

47 Part of the 2001 corporate reconstruction of the James Hardie Group concerned the transfer of its jurisdiction of incorporation from New South Wales to the Netherlands.

48 But note later discussion at n 165.

49 See later discussion at n 89.

50 Ibid: see, eg, P Yeager, “Realms of Reason: Notes on the Division of Moral Labor in Corporate Behaviour”, Paper to Edwin Sutherland Conference on White-Collar Crime, Indiana University, 1990. His paper is on deontological reasoning in business organisations.

51 Ibid. During Braithwaite’s fieldwork, business actors constantly argued that the common view of them as motivated only by money was a simplistic stereotype. While acknowledging that they were primarily motivated by economic factors, they claimed that they gave serious consideration to business responsibility, ethics, and obligations to abide by the law and to be responsive to non-shareholding stakeholders in the corporation.

52 Ibid, p 24.

53 Braithwaite, above n 10.

54 Ayres and Braithwaite, Responsive Regulation, above n 22, p 24.

55 See ibid, pp 24-25.

56 Ibid, p 25.

57 Ibid: see, eg, M. Lansky, “Violence, shame and the family” (1984) 5 International Journal of Family Psychiatry 21 at 23. Lansky makes this point about the dangers of treating violence in patients as an eruption that must be held down by regulation of movement, physical or chemical restraint, concluding that a model of “holding down” both inhibits dialogue about the interpersonal vulnerabilities which lead to violence and justifies “a type of regulation that humiliates the patient and complicates the return of self-regulation”.

58 Ibid: see Bardach and Kagan, above n 25. In their work, Bardach and Kagan argued that, in the United States, many regulators were being too legalistic in their approach to enforcing regulation via ‘regulatory unreasonableness’. Other difficulties with such an approach include the tendency to give essentially compliant firms a positive disposition to resist or to reduce their efforts to comply with the intent of the law, aiming instead for only the minimal level of compliance required with the rules, and a propensity towards unnecessarily complex rules, the ‘regulatory ratchet effect’, where in regulatory design and rule-making, there is a tendency towards making new rules and increasing the complexity of existing rules to cover loopholes: see discussion, below n 62.

59 Ibid.

60 Ibid, pp 25-26.

61 Ibid, p 26.

62 Ibid, citing the work of Bardach and Kagan, above n 25 and Braithwaite,
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