Dakin, Helen --- "Civil & Administrative Penalties: Discretion & Fairness in Penalty Procedures" [2001] ALRCRefJl 24; (2001) 79 Australian Law Reform Commission Reform Journal 38

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Reform Issue 79 Spring 2001

This article appeared on pages 38 – 43 of the original journal.

Civil & administrative penalties: discretion and fairness in penalty procedures

The Australian Law Reform Commission is in the process of bringing together its analysis of federal legislative provisions on penalties, writings on regulatory theory, practical problems of regulation, and legal and constitutional principles.

Helen Dakin* writes, the ALRC expects to release a discussion paper early in the new year.

The ALRC’s task is to identify principles that should govern the imposition of civil and administrative penalties. These principles could provide guidance in relation to:

• procedures for imposing and reviewing penalties;

• the setting of maximum levels of penalty;

• matters that should be taken into account in imposing penalties;

• enforcement of penalties;

• the privileges and protections that should apply to people on whom penalties are imposed, such as privilege against self-incrimination; and

• provision for appeal and review mechanisms.

Such principles must take into account a variety of factors including the widely differing contexts of legislation, the different purposes and functions of requirements in different areas of activity, and the way the provisions operate in practice.

This article addresses one of the practical issues with the administration of civil and administrative penalties: the discretion exercised by decision makers at each stage of the investigation and in the imposition of a penalty.

The nature of regulatory discretions

The term ‘discretion’ covers a vast range of decisions made by a large number of people. The number of penalties in relation to which some or all of these discretions must be exercised is substantial. The ALRC has examined provisions from some 82 Commonwealth Acts, containing over 2,200 criminal, civil and administrative penalties. This array of penalty provisions necessitates thousands of decisions daily about how the law and regulations affect particular persons or corporations.

Discretion mitigates the rigidity and inflexibility of legal rules, and enables decision makers to particularise their responses to individual or unanticipated circumstances. Some areas of enforcement are drafted to require a large degree of discretion, to allow appropriate responses to continuously changing technical, economic and political environments.

The interpretation of legal rules by administrative agencies is a key area of regulatory discretion. Interpretative discretion determines the operational meaning of statutory or policy directives, and the assumptions and values purportedly underlying such directives. Subsequent discretions to target, investigate or initiate proceedings against suspected non-compliers are based on this initial interpretative discretion.

Accountability for the exercise of discretion is itself crucial in achieving fair and effective regulation. These issues have been addressed during the ALRC’s consultations to date, and were the subject of important discussion at the ALRC’s conference.

Scope of regulators’ discretion

Discretion plays a part in every stage of decision making, from the decision to seek or follow up information to the determination of a penalty. Dr Julia Black has noted that ‘the very nature of rules, their need for interpretation in application, means that rules are shot through with discretion’.¹ This is no less the case where legislation sets out to impose penalties than where it requires a determination to be made by a judicial or other officer. Taxation and social security legislation both impose set penalties in certain circumstances; but these will not take effect until an officer has determined that the penalty applies, defined the events giving rise to the penalties and perhaps considered whether there are mitigating circumstances or the penalty should be reduced or remitted.

Points at which discretion is exercised

The imposition of a particular penalty may arise from a series of discretions exercised by a number of officers at different times. The following list outlines a number of points at which discretion is exercised by regulators and their officers. The list is not exhaustive, and not all the stages outlined below apply to all penalty decisions.

Regulators’ decisions to set priorities for regulatory action

A starting point is the setting of enforcement priorities by a regulator. Investigation and enforcement action will be targeted according to these priorities. Such decisions are essential to make the most effective use of the regulator’s resources.

Regulators cannot proceed in respect of all matters referred to them. When selecting matters to pursue they are necessarily selective and ‘influenced by the potential for the action to have a substantial deterrent effect, to promote general compliance with the Act and/or achieve redress (or compensation) for interests adversely affected by the conduct in question’.² Regulators operating in areas with a high level of public interest are subject to a greater degree of political and public pressure in their enforcement decisions.

Priorities may reflect a regulator’s assessment of risk,³ changes in the statutory mandate of an agency (such as the responsibilities given to the ACCC during the introduction of the GST), the scope of geographical operations, resource limitations such as budgetary funding, staffing, and the personality of chief regulators. Among the most important factors dictating an agency’s approach to enforcement are its workload and resources. Resource constraints, the strength of evidence, the need for cost-effective remedies and processes, and timeliness are significant factors in determining how or whether to respond to or investigate a breach.

Decisions to investigate certain persons or activities

Officers within the regulator must interpret the set enforcement priorities in determining their approach to investigation and enforcement. Decisions to target certain individuals or corporations, or classes of individuals or corporations, are also affected by considerations such as the aims of the legislation; the regulator’s internal strategies; and the experience and priorities of the individual officer or team.

Decisions on the approach to take in a particular case

Strategic decisions, such as whether the regulatory action will emphasise education, cooperation or punishment, are made at a number of levels; but individual officers or their supervisors may determine what approach is most appropriate in a particular case.⁴ This may involve decisions as to whether it is necessary or appropriate to use formal investigatory powers, and how wide the scope of any investigation should be.

The Commonwealth Director of Public Prosecutions, Damian Bugg QC, has noted that the approach taken at this stage has a substantial effect on the availability of review at later stages: if a decision is taken to prosecute, the procedures leading up to the commencement of court action may be open to scrutiny. Bugg has suggested that where the early procedures have involved persuasion and conciliation, and it is subsequently decided to take a more formal and adversarial approach, it may be advisable to appoint a new officer at the time a formal investigation is begun.⁵

Decisions where breaches of legislation have been established

Where an officer of a regulator considers, as a result of investigation or by other means, that a person has breached legislative requirements, the officer has a range of choices as to the action to take. The officer may decide that the breach is trivial, or should not be pursued for other reasons such as the circumstances in which the breach took place, or because the evidence is not sufficiently compelling, or because the likely result would not justify the resources required.

Alternatively, the officer may decide to seek a penalty but will have to choose between a range of procedures depending on how seriously the breach is regarded. There may be a choice between issuing an infringement notice, commencing civil proceedings for a civil penalty, and prosecuting the person. Again, the choice made will be affected by the priorities or performance targets set by the regulator. The selection of particular enforcement actions may be influenced by:

• a history of previous contraventions of the law, including overseas;

• apparent blatant disregard of the law;

• the quality of evidence of the breach;

• significant public detriment or a significant number of complaints;

• the potential for action to have a worthwhile educative or deterrent effect;

• a significant new market issue; or

• a likely outcome that would justify the use of the resources.

Negotiation and settlement

Having decided that there is a breach that should be acted on, officers of the regulator may decide or be persuaded to engage in negotiations as to the amount to be imposed or the orders to be sought. Various legislative mechanisms enable such negotiations, such as the power of ASIC and the ACCC to accept enforceable undertakings or to negotiate agreed penalties that are then submitted to the court.

Amount of penalty

Where a court finds that a civil or criminal penalty should be imposed, judges must exercise their discretion as to sentencing. Even where penalties have been negotiated between the parties, the judge must decide whether to accept the agreed penalty or impose a different one.

In some cases where penalties are set by legislation, officers of the regulator have a discretion to remit part or all of the penalty. Published guidelines can set out the ways in which this discretion will be exercised. In 1998 the ACCC published ‘Co-operation and Leniency in Enforcement’.⁶ The policy provides two levels of ‘amnesty’ or concession: (1) immunity from prosecution; and (2) leniency in the imposition of a civil penalty. The immunity is an informal policy-based immunity revocable by the regulator or DPP, unlike a statutory immunity undertaking issued by the DPP, of which the court is bound to take notice. Nonetheless, it is a promise that the ACCC will most likely keep if the objective of the amnesty policy — encouraging voluntary disclosure of unlawful conduct — is to be met. The leniency aspect of the amnesty policy operates as a reduction in the level of penalty applied by the regulator.

The Commissioner of Taxation in Australia has indicated interest in a published leniency policy, stating that the ATO is ‘attracted to a notion that any further reduction in penalties should be conditional on future good compliance. If a workable approach could be found, the penalty otherwise foregone would become effectively a good tax behaviour bond for a specified period’.⁷

Enforcement discretion

Finally, even where a penalty has been imposed, if the person fails to pay the amount or otherwise disregards it, the regulator must decide what, if any, enforcement action to take.

Attempts to structure discretion

Dr Black has pointed out that discretion is

intimately related to trust: the more the person is trusted to make the right choices as to courses of action, the more it is felt discretion can be given to them to make those choices. The less they are trusted, the more it is sought to reduce that discretion to confine those choices in some way.⁸

The terms of a statutory grant of discretion shape its operational scope. Grants of discretion may, for example, be plenary or subject to certain conditions, qualifications or limitations. Legislation can limit an agency’s purposes or policy goals; limit the subject matter of regulation; permit action only after prerequisite findings; or limit agency choice of regulatory method.⁹ More precise statutory objectives and more tightly drafted statutes also influence the structure of discretion.

Statutory rules can be drafted prescriptively or very broadly, depending upon the degree of discretion desired by parliament. As Baldwin and Hawkins noted, the ‘appropriateness of different devices to limit discretion may depend on an assessment of a body’s status and functions’.¹⁰ In some instances rules may not improve the exercise of discretion but rather produce more mischief or fail to work, particularly in non-routine cases.¹¹ Other methods of structuring discretion may be more appropriate:

To structure discretion in the one instance may serve as a device for the rapid processing of cases at the cost of individualisation, while in another area, such as aviation or broadcasting licensing, structuring may have the very different effect of allowing powerful economic interests to have more say in policy-making and greater opportunity to co-ordinate their planning with the regulatory strategies in force.¹²

Discretion may be structured through the appropriate delegation of discretionary powers to particular staff or classes of staff within an agency. The ATO controls the exercise of discretion by delegating the Commissioner of Taxation’s statutory authority to make penalty decisions.¹³ A recent audit found that ATO delegations ‘appear to operate effectively’ through centrally managed guidelines and online information, although a small number of staff ‘were unsure of their requirements’.¹⁴

The difficulty with using rules to structure discretion is that the rules themselves are necessarily subject to interpretation. In her paper delivered at the ALRC’s conference, Dr Black noted:

The presence of rules does not mean that rules will be the sole or even dominant factor influencing how discretion is exercised, and their absence does not mean the decision maker is unbound in his or her decision: bureaucratic and organisational norms will continue to operate, as will broader political and economic pressures, and moral and social norms.¹⁵

Ways of achieving accountability

Contemporary theory has moved on from considering ways to restrain the exercise of discretion to acknowledging that some degree of discretion is both inevitable and valuable, allowing flexibility to adapt to new situations and to respond to individual circumstances. Dr Black commented:

The assumption ... that discretion can be ‘managed’ both to confine its exercise to certain actors and to limit the way that those actors use the discretion given, is ... ambitious, if not misguided. Further, the idea that some legal actors can be completely deprived of discretion is simply erroneous ... All those involved in the regulatory and legal process will be exercising discretion.¹⁶

Although it is very difficult to confine discretion prospectively, accountability and fairness can be achieved by ensuring that certain procedural safeguards apply. Most important among these are the right to be heard before a decision is made affecting one’s interests; the ability to seek to correct a decision by appeal or review; and consistent treatment of like cases. The need for these safeguards is less compelling in cases where the penalties are relatively insignificant; in such cases, the need for efficiency in regulation must come into the balance.¹⁷

This problem has been addressed in recent years from a number of points of view. In relation to taxation penalties, the Australian National Audit Office recommended a number of measures to improve the filing and analysis of information collected by the ATO, to assist officers in making appropriate decisions within their discretion. These measures, all of which were agreed to by the ATO, include establishing quality assurance methods in the administration of penalties; using statistical and demographic data to monitor the effect of the penalty administration system on compliance; and investigating the possibility of developing online ‘decision support tools’ to assist staff in ensuring consistent and efficient administration of penalties.¹⁸

Conclusion

In considering the principles that should apply to civil and administrative penalties, the ALRC continues to develop its understanding of the vast, changing and complex world of regulation in the federal sphere. In applying general principles of accountability, transparency and fairness it is essential to have a sound understanding of the context in which regulatory rules and principles operate.

Ultimately, the practical application of legislation, rules and principles is and should be in the hands of the executive and the judiciary. The role of Parliament and individual Ministers is limited to setting parameters for the exercise of discretion, and appointing those who will exercise it. In developing its recommendations the ALRC will seek to ensure that effective procedural safeguards are in place, to assist decision makers in exercising their discretion and to ensure that wrong or unfair decisions can be rectified.

The ALRC is continuing to develop its ideas in the light of the issues discussed here, and expects to publish a discussion paper in the new year. The ALRC welcomes submissions and comments on this important review.

*Helen Dakin is a Legal Officer, working on the Australian Law Reform Commission’s inquiry into the use of civil and administrative penalties in Australia.

Endnotes

1. J Black, ‘Managing Discretion’ (Paper presented at the ALRC Conference Penalties: Policy, Principles and Practice in Government Regulation, Sydney, 7-9 June 2001).

2. Australian Competition and Consumer Commission, Annual Report 1999-2000, Commonwealth of Australia, Canberra, 2000.

3. This approach is discussed in M Sparrow, The Regulatory Craft, Brookings Institution Press, Washington DC, 2000.

4. J Black, ‘Managing Discretion’ (Paper presented at the ALRC Conference Penalties: Policy, Principles and Practice in Government Regulation, Sydney, 7-9 June 2001).

5. D Bugg, ‘Comments on Paper ‘Managing Discretion’ by Dr Julia Black’ (Paper presented at the ALRC Conference Penalties: Policy, Principles and Practice in Government Regulation, Sydney, 7-9 June 2001).

6. Australian Competition and Consumer Commission Media Release 112/99, 29 June 1999.

7. Australian National Audit Office, Administration of Tax Penalties, 31 Australian Government Publishing Service, Canberra, 2000, para 1.18.

8. J Black, ‘Managing Discretion’ (Paper presented at the ALRC Conference Penalties: Policy, Principles and Practice in Government Regulation, Sydney, 7-9 June 2001).

9. T Wilkins and T Hunt, ‘Agency Discretion and Advances in Regulatory Theory: Flexible Agency Approaches Toward the Regulated Community as a Model for the Congress-Agency Relationship’ (1995) 63 George Washington Law Review 479, 507.

10. R Baldwin and K Hawkins, ‘Discretionary Justice: Davis Reconsidered’ (1984) Public Law 570, 596.

11. R Baldwin and C McCrudden, Rules and Government, Clarendon Press, Oxford, 1995, 22-23.

12. R Baldwin and K Hawkins, ‘Discretionary Justice: Davis Reconsidered’ (1984) Public Law 570, 589.

13. Australian National Audit Office, Administration of Tax Penalties, 31 Australian Government Publishing Service, Canberra, 2000.

14. Ibid, para 2.34.

15. J Black, ‘Managing Discretion’ (Paper presented at the ALRC Conference Penalties: Policy, Principles and Practice in Government Regulation, Sydney, 7-9 June 2001).

16. Ibid.

17. These issues are discussed in I Davis, ‘Principles of Accountability and Fairness’ (Paper delivered at the ALRC Conference Penalties: Policy, Principles and Practice in Government Regulation, Sydney, 7-9 June 2001).

18. Australian National Audit Office, Administration of Tax Penalties, 31 Australian Government Publishing Service, Canberra, 2000.