Bottomley, Stephen --- "Jonathan Clough and Carmel Mulhern, 'the Prosecution of Corporations'" [2003] MelbULawRw 23; (2003) 27(2) Melbourne University Law Review 627

Book review

THE PROSECUTION OF CORPORATIONS
by JONATHAN CLOUGH AND CARMEL MULHERN

(Melbourne: Oxford University Press, 2002) pages i–xl, 1–239. Price A$79.95 (softcover). ISBN 0 19 550645 6.

STEPHEN BOTTOMLEY[*]

Whilst the regulation of corporate conduct has never been far removed from public attention in the past 40 years, it has clearly emerged as an issue of growing concern in the early years of the 21st century. In the wake of well-known corporate collapses and accounting failures, much of the attention has understandably been directed at the conduct and liability of directors, accountants and auditors. Questions relating to the criminal liability of these actors have featured in this public debate, although they have been subsumed by a wider concern about questions of civil liability and general business regulation. Interestingly, much less attention — if any attention at all — has been given to the issue of the criminal liability of companies themselves. Clough and Mulhern’s book is a timely reminder of the importance of the issue of corporate criminal liability and its relevance to the wider debate about corporate regulation.[1]

The analysis presented in the book has two dimensions. First, the authors present a thorough and informative discussion of the legal processes that are involved in the investigation, prosecution and eventual sentencing of criminal corporations. The second dimension is a set of arguments, surfacing throughout the book, about how those processes ought to operate. This dual analysis is signalled in the preface, where the authors announce their intention to steer ‘a middle path’ between the two extremes of an overly theoretical treatment of corporate criminality and a minimalist practical guide that ignores underlying policy and principles. In the authors’ words, they intend the book to be ‘a scholarly work which will also be of use to practitioners’.[2]

Chapter one briefly reviews some of the questions that have been encountered frequently in the literature on corporate crime: should the law prosecute the corporation or the individuals who work for it? Should we concentrate on a system of criminal liability or will the enforcement of civil liability regimes produce better results? The chapter also introduces the authors’ key policy positions that inform their analysis in later chapters. One of these positions is to take a more pragmatic, rather than theoretical approach — ‘[t]he search for the perfect model of corporate blameworthiness is misguided’.[3] Instead, the authors argue, we should concentrate on ways of bringing corporations into the individualistic framework of the existing criminal law. This gives rise to a second policy position — the importance of having an effective balance between corporate and individual liability. More specifically, Clough and Mulhern emphasise that we should be careful that the law’s response to corporate criminal liability does not undermine the protections given to individuals in the criminal law system. I return to this second policy position later in this review. There is a further policy position in this chapter which is less developed, but which is important to the book’s overall argument: the relationship between questions of corporate criminal liability and the wider notion of corporate regulation.

Early in the first chapter corporate criminal liability is described as ‘a very specific aspect of corporate regulation.’[4] It is an aspect that the authors believe has received less attention than it deserves. Faced with the conceptual and practical difficulties of prosecuting corporations, corporate regulators have turned too far towards a compliance model, and too far away from a prosecutorial approach to corporate crime. The authors express reservations about the creation of categories of ‘regulatory offences’ which, they argue, have the effect of making corporations appear less criminal. They have similar concerns about the increasing reliance on specialist corporate regulatory agencies (such as the Australian Competition and Consumer Commission (‘ACCC’) and the Australian Securities and Investments Commission (‘ASIC’)). At the end of this chapter the authors refer to the well-known model of the regulatory pyramid, developed by Fisse and Braithwaite,[5] that depicts an escalating scale of regulatory responses to corporate malpractice. In the bottom half of the pyramid we find responses such as regulatory advice and persuasion, followed by civil penalties. Criminal prosecution occupies the least used set of responses at the apex of the pyramid. The concern of Clough and Mulhern seems to be that too much attention has been given to the lower strata of this pyramid and that this may be diminishing the importance of the sanctions found at the top. They argue that, despite its infrequent use, criminal prosecution must nevertheless be ‘a viable prospect’ and not ‘an empty threat’.[6]

Chapter two offsets the conceptual and policy-oriented discussion in the previous chapter with a discussion of the various powers of investigation, search, seizure and interrogation exercised by key corporate regulatory agencies — the ACCC, ASIC, the Australian Taxation Office (‘ATO’) and the state-based environmental protection agencies. There is also discussion of the privilege against selfincrimination and legal professional privilege. A recurrent concern in the chapter is the increase in regulators’ powers[7] and the accompanying absence or removal of legal protections for corporations that are otherwise available to individuals. The High Court’s decision in Environment Protection Authority v Caltex Refining Co Pty Ltd[8] that a company cannot claim the privilege against selfincrimination is cited as an example of this trend. The argument is that any diminution of such protections in dealing with corporate criminality is dangerous because it may ultimately erode the rights of individuals, such as company officers who — just like any other citizen — warrant the ordinary protections of the criminal process.[9]

The argument presented in the first two chapters of the book therefore runs as follows. It is important to distinguish between ‘real crimes’ and ‘regulatory offences’. Real corporate crime (whatever that term may encompass) should be dealt with through the proper processes of criminal law and the criminal justice system. In our concern to respond effectively to criminal corporate behaviour, we should be careful to avoid overusing a compliance model in which corporate crime is treated merely as a species of ‘regulatory offence’. Such caution is warranted for two reasons. First, real corporate crime has serious consequences and should therefore be dealt with in a serious way. Secondly, the regulatory offence approach creates the danger that the rights of individuals within the corporation will be eroded.

Obviously, there is potential tension between protecting the rights of individual officers and responding seriously to corporate criminality. The scale, complexity and difficulty of prosecuting corporate defendants can present significant barriers to achieving the latter goal. One solution, of course, is to abandon the idea of corporate criminal liability altogether and rather concentrate exclusively on prosecuting the individual corporate officers.[10] This is a possibility that Clough and Mulhern consider in chapter one but, rightly in my view, they reject. They accept the idea of corporate liability, but not at the risk of the erosion of individual rights. The question then is why the individual rights of corporate personnel warrant this protection. On this point the book is less satisfying. The authors recognise the inherent — and long-recognised — tension between the role and rights of the individuals within the corporate organisation and the organisation itself. They reject the anthropomorphic concept of the company as a person,[11] arguing instead that for the purposes of criminal liability, corporations should be treated as analogous to persons.[12] Equally, they reject the idea that the corporation is simply an aggregation of, and is reducible to, its individual members. Having rightly disposed of the two extreme ends of the debate, however, I was uncertain about where this left the argument. The authors turn away from what they see as overly theoretical or philosophical treatments of this debate,[13] suggesting that organisational theories ‘should be treated with caution’.[14] But the roles that corporate officers can play as actors in, for or as the corporation necessarily interact, and further consideration of the organisational,[15] as well as the wider sociological,[16] literature on corporate and organisational behaviour would have been useful at this point.

Chapter three presents a thorough review and critique of the key legal issues that arise in establishing corporate criminal liability, including problems of establishing corporate knowledge and corporate memory. It opens with a very useful discussion of the evolution of judicial theories of vicarious liability and direct liability via the identification doctrine. Clough and Mulhern argue that whilst the distinction between the vicarious liability and direct liability of a corporation is a fine one, it is nevertheless important. Regarding vicarious liability, the authors state their preferred position clearly: it should be the exception rather than the rule. Its application should be limited to regulatory offences, not to those offences that are ‘truly criminal’.[17] The latter type of offence, they argue, is the domain of direct liability.

Since the 1972 House of Lords decision in Tesco Supermarkets Ltd v Nattrass,[18] direct liability has been determined by applying the identification doctrine. According to Tesco, the court’s task is to identify the ‘directing mind and will’ of the company and then to determine whether that person (or persons) had the required mens rea for the offence.[19] In all but the smallest of companies, this usually means that the inquiry focuses on the board of directors. As the ALRC has noted, the directing mind and will theory tends to determine liability by reference to the formal authority structure that is preset by the body corporate.[20]

Clough and Mulhern argue that the Tesco test is flawed because, as many commentators have noted, its strict application ignores the fact that corporate power is frequently exercised by personnel who are far removed from the board of directors. The authors do not, however, join other commentators in accepting the direction taken by the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission.[21] Meridian offers what the ALRC describes as a functional approach, in which the court attributes liability by asking ‘[w]hose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company.’[22] Clough and Mulhern argue that this approach ‘demonstrates an abandonment of principle in order to secure corporate convictions.’[23] It blurs the distinction between vicarious and direct liability, and it is uncertain and unpredictable. Presumably, then, the authors would not be impressed with the ALRC’s recommendation that both the formal ‘directing mind and will’ and the functional approaches ought to be combined into a single test.[24]

Chapter three also touches briefly on another important issue — the application of principles of criminal liability to corporate groups. Most middle to large size corporations do not operate as isolated entities, but as part of a larger corporate group. Corporate groups give rise to relations and structures of control and avoidance that differ from those of individual co-conspirators. The occasions for asset shifting, blame deflection and the fracturing of obligation are greater in a corporate group. Thus the intersection of ideas of criminal responsibility with the phenomenon of corporate groups is not resolved simply by analogy with crimes committed by groups of individuals. As Clough and Mulhern note, Australian courts do not recognise the corporate group for the purposes of determining liability, insisting instead that each company in the group is a separate legal entity.[25] From a corporate law perspective, it would have been interesting to see this question pursued further in the final chapter of the book, which sets out recommendations for reform.

In chapter four, the authors turn from common law to statutory models of corporate criminal liability. The chapter begins by examining specific statutory regimes — particularly the Trade Practices Act 1974 (Cth) — in which liability is imposed either on corporations or on corporate officers. They note the frequent use of provisions that deem the corporation to be liable for the relevant actions of its officers or agents.[26] The purpose of such provisions is ‘to facilitate enforcement rather than to reflect corporate criminality’.[27] Again, the authors’ concern is that this apparent erosion of criminal law principles in order to facilitate enforcement risks eroding protection for corporate officers: ‘the rights of the individual should not be sacrificed simply on the grounds of pragmatism.’[28]

Chapter four then compares the approach taken by the United States Model Penal Code with Part 2.5 of the Criminal Code Act 1995 (Cth) (‘Criminal Code’). The latter is commended as being ‘arguably the most sophisticated model of corporate criminal liability in the world’,[29] even though its operation has been hampered by exclusion from other legislation.[30] The most innovative aspect of the Criminal Code is that corporate fault can be established by proving the existence within a body corporate of a culture that directs, encourages, tolerates or leads to noncompliance.[31] The principal advantage of this provision is that it seeks to abandon Tesco’s anthropomorphic search for the directing mind and will of the company. It recognises corporations for what they are — organisations — and accepts that organisations are capable of wrongdoing and of bearing blame in a way that is distinguishable from the actions of individuals. Clough and Mulhern recognise and approve of this, but at the same time they express reservations about the practicability of the ‘nebulous concept’[32] of corporate culture. More significantly, the authors note a number of difficulties with the practical application of the concept, leading them to conclude that ultimately the corporate culture provisions ‘display more academic purity than practical utility’ and that they are thus likely to ‘remain largely of academic interest’.[33]

The chapter concludes with analyses of two topics: the use of civil penalties and enforceable undertakings in response to corporate crime, and corporate manslaughter. Notwithstanding the depiction of civil penalties as ‘a creeping intrusion’ into the traditional criminal law domain,[34] the authors conclude that penalties have the advantage of reserving the use of criminal law for situations where it is necessary ‘to maintain a public threat of severe punishment for those who cause the most harm in the most blameworthy circumstances’.[35] This image of criminal law as ‘the option of last resort’[36] takes us back to the idea of the regulatory pyramid referred to in chapter one.

Chapter five concludes the examination of the process of corporate prosecution by looking at the sentencing of corporate offenders. The chapter includes an analytical overview of the main sentencing options for corporate offenders: adverse publicity; corporate probation (for example, supervised undertakings); fines; and incapacitation or restraint (for example, orders to cease trading for a specified period or deregistration). The authors begin from the premise that the idea of punishment as retribution or condemnation is not applicable to a corporate offender because it cannot suffer or feel shame. Instead, they suggest that ‘the punishment of corporations is purely utilitarian and should be evaluated from a utilitarian perspective’.[37] The primary utilitarian purposes of punishing corporate offenders are deterrence and rehabilitation. To achieve these goals, the authors argue, it is necessary to understand how corporations react to punishment. Here the book touches upon some of the sociological and organisational literature referred to above. They consider two models: neoclassical economics and behavioural theory. The first — depicted largely as a cost-benefit approach — is rejected because of its unrealistic reliance on the idea of corporations as simple rational actors. Behavioural approaches are better, the authors argue, because they recognise that ‘corporations develop an internal sociology of their own that impacts upon the behaviour of individual personnel’.[38]

Clough and Mulhern conclude with a short chapter that is promisingly entitled ‘The Way Forward’. Rather than drawing together the many conceptual and policy threads in the book, the chapter sets out some suggested reforms considered necessary to make corporate criminal liability a ‘viable prosecutorial option’.[39] The list includes the promulgation of clear prosecutorial guidelines to assist regulators in choosing between criminal and civil options, and between corporate and individual prosecution. The authors also call for sentencing legislation that is directed specifically at corporate offenders. The most interesting suggestion, especially in light of the attention given to the role of corporate regulators in the wake of the recent report of the HIH Royal Commission,[40] is the creation of a single, separate agency to take over the investigative and prosecutorial role of existing agencies such as the ACCC, ASIC and the ATO. Clough and Mulhern claim that the implementation of this suggestion would, among other things, avoid the duplication of resources (with different agencies each investigating the same corporation) and facilitate the detection of offences that cross a range of statutes.[41]

This book may be assessed in terms of Clough and Mulhern’s own criterion: have they produced a scholarly work that is also of use to practitioners? I am not in a position to judge its utility for practitioners, although the book is noteworthy for its detailed coverage of the whole of the corporate criminal prosecution process, from investigation to sentencing. Regarding its scholarly qualities, the book does raise some interesting questions — some of them staples of the corporate crime literature, others fresh inquiries. It is, in this respect, a thought-provoking book. However, my lingering feeling is that in their effort to avoid an overly ‘theoretical’ approach, the authors have left some important questions unresolved. Nevertheless, for its considered engagement of questions of policy with those of process and procedure, this book is a useful and timely addition to the literature on corporate criminal liability.

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[*] BA, LLB (Macq), LLM (UNSW); Director of the Centre for Commercial Law, The Australian National University; Professor of Law, The Australian National University.

[1] The Australian Law Reform Commission’s (‘ALRC’) recent report — Principled Regulation: Federal Civil and Administrative Penalties in Australia, Report No 95 (2002) — also makes a contribution to this debate, with chapters on corporate criminal responsibility, the liability of corporate officers and penalties for corporations. These topics form the substance of the analysis presented by Clough and Mulhern. The book makes passing reference to the ALRC’s inquiry.

[2] Jonathan Clough and Carmel Mulhern, The Prosecution of Corporations (2002) viii.

[3] Ibid 5.

[4] Ibid 2.

[5] Brent Fisse and John Braithwaite, Corporations, Crime and Accountability (1993) 141–5.

[6] Clough and Mulhern, above n 2, 13–14.

[7] One incidental but curious comment in this context is the reference to ‘the so-called “excesses”’ of corporate Australia in the 1980s: ibid 22. The inverted commas hint at some doubt about the widespread labelling of 1980s corporate practice in Australia as ‘the decade of corporate excess’, but the authors do not explain the reason for this apparent reservation.

[8] [1993] HCA 74; (1993) 178 CLR 477.

[9] See Clough and Mulhern, above n 2, 23–4, 26.

[10] See, eg, Gilbert Geis and Joseph Dimento, ‘Should We Prosecute Corporations and/or Individuals?’ in Frank Pearce and Laureen Snider (eds), Corporate Crime: Contemporary Debates (1995) 72.

[11] Clough and Mulhern, above n 2, 6. See also at 111.

[12] Ibid 6.

[13] Ibid 9.

[14] Ibid 5.

[15] Clough and Mulhern do refer to Meir Dan-Cohen, Rights, Persons and Organizations: A Legal Theory for a Bureaucratic Society (1986): Clough and Mulhern, above n 2, 4. However, these ideas are not explored further.

[16] See, eg, Robert Jackall, Moral Mazes: The World of Corporate Managers (1988) for a rich study of the role of individual actors within large corporate structures. There is a footnote reference to similar work by Robert Jackall later in the book: Clough and Mulhern, above n 2, 191 fn 56.

[17] Clough and Mulhern, above n 2, 101.

[18] [1971] UKHL 1; [1972] AC 153 (‘Tesco’).

[19] Ibid 171 (Lord Reid).

[20] ALRC, above n 1, [7.57].

[21] [1995] UKPC 5; [1995] 2 AC 500 (‘Meridian’).

[22] Ibid 507 (Lord Hoffman) (emphasis in original).

[23] Clough and Mulhern, above n 2, 100.

[24] ALRC, above n 1, [7.63].

[25] See Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1.

[26] See, eg, Trade Practices Act 1974 (Cth) s 84(2).

[27] Clough and Mulhern, above n 2, 127.

[28] Ibid 135.

[29] Ibid 138.

[30] See, eg, Corporations Act 2001 (Cth) s 769A; Trade Practices Act 1974 (Cth) s 6AA(2). See also Clough and Mulhern, above n 2, 138 fn 81.

[31] Criminal Code s 12.3(2).

[32] Clough and Mulhern, above n 2, 144.

[33] Ibid 148.

[34] Ibid 168.

[35] Ibid 169.

[36] Ibid.

[37] Ibid 186.

[38] Ibid 191.

[39] Ibid 219.

[40] Commonwealth, HIH Royal Commission, The Failure of HIH Insurance (2003) vol 1, ch 8.

[41] Clough and Mulhern, above n 2, 219–20.