The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018 was passed by Parliament on 18 February 2019.
The Bill –introduced into Parliament in October last year - strengthens civil and criminal penalties for corporate and financial sector misconduct, writes Sally Linwood, senior AICD policy adviser.
Notably, the Bill incorporates amendments pushed by the Opposition to increase the cap on civil penalties for corporations and the maximum term of imprisonment for certain serious criminal offences.
The Bill implements a number of recommendations made by the ASIC Enforcement Review Taskforce in December 2017. In some cases (for example, in relation to civil penalty amounts), the Bill goes further than the Taskforce’s recommendations on the basis that a stronger response was considered warranted.
The AICD supports the introduction of stronger penalties, recognising the need for adequate deterrence to misconduct, and for regulators to be able to properly hold people to account through the legal system. Tougher penalties, however, won’t be enough without active enforcement.
Implications for directors
The stronger penalties underscore the substantial obligations under the law on both directors and officers. Legal duties and obligations will be top of mind for directors, and will compel a closer look at risk and compliance management policies and processes.
Further, the new civil penalties introduced for important obligations owed by Australian Financial Services Licence (AFSL) holders will prompt a review of processes, procedures and systems in place to facilitate compliance.
These reforms further embolden and empower ASIC, which has recently released an update on implementing Royal Commission recommendations, confirming a “why not litigate” approach and its intended establishment of a functionally separate Office of Enforcement. Directors should consider whether their organisation’s approach to dealing with the regulator remains appropriate, in light of the Financial Services Royal Commission Final Report.
Key changes to Corporations Act
New civil penalty provisions
The Bill extends the civil penalty regime to a number of other obligations under the Corporations Act, which means that breaches will now attract financial penalties imposed by the courts.
Importantly, a civil penalty has been introduced for obligations owed by AFSL holders under the Corporations Act to:
- do all things necessary to ensure the financial services covered by the licence are provided efficiently, honestly and fairly (under section 912A); and
- report significant breaches or likely breaches to ASIC within 10 business days of becoming aware of the breach or likely breach (under section 912D).
This represents an expansion of ASIC’s regulatory tools in relation to financial services licensees, and a notable shift in the enforcement landscape given a penalty regime will now apply to subjective concepts like ‘fairly and efficiently’.
Increased civil penalties
Penalties under the Corporations Act and the ASIC Act have been increased for both individuals and corporations.
For an individual, the maximum pecuniary penalty has been increased to the greater of 5,000 penalty units ($1,050,000) or the benefit derived (or detriment avoided) because of the contravention multiplied by three.
For a corporation, the maximum pecuniary penalty has been increased to the greater of 50,000 penalty units ($10,500,000), or the benefit derived (or detriment avoided) because of the contravention multiplied by three, or 10 per cent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units ($525 million). This is an uplift from previous iterations of the Bill, with the Opposition successfully pushing to increase the cap to 2.5 million penalty units from 1 million penalty units ($210 million).
In addition, courts will now have the power to make a ‘relinquishment order’. This order aims to recover any financial benefit that might have been gained from misconduct. It will effectively operate 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.
Increased terms of imprisonment
The maximum imprisonment penalties for certain criminal offences have been increased to reflect the seriousness of the misconduct.
In particular, terms of imprisonment are increased from five years to 15 years (rather than 10 years as proposed in previous iterations of the Bill) for certain serious criminal offences including:
- intentionally, recklessly or dishonestly breaching directors’ and officers’ duties (s 184);
- dishonestly failing to comply with financial and audit obligations (s 344(2));
- intentionally or recklessly breaching the duties of officers or employees of the responsible entity of a registered scheme (ss 601FD, 601FE); and
- knowingly or recklessly providing defective disclosure documents or statements (ss 952D, 952F, 1021D).
Maximum prison terms for individuals convicted of certain other offences will increase (in some cases by up to five years), and significant maximum financial penalties have also been introduced. There are a large number of offences affected, including misleading or deceptive statements in or omissions from takeover, compulsory acquisition and buyout documents; and obligations on AFSL holders, including in relation to providing assistance, notice of certain matters and/or statements to ASIC.
Regulator reaction
ASIC has welcomed the passage of the Bill, and noted that penalty provisions will now be of greater deterrence value.
In its media release, ASIC Deputy Chair Daniel Crennan QC commented that ‘ASIC will now be in a stronger position to pursue harsh civil penalties and criminal sanctions against those who have breached the corporate laws of Australia’.
