Comino, Vicky --- "The Prosecution of Corporations, Jonathon Clough and Carmel Mulhern" [2005] UQLawJl 15; (2005) 24(1) University of Queensland Law Journal 235

• The Prosecution of Corporations, Jonathon Clough and Carmel Mulhern, Oxford University Press, Melbourne, Victoria, 2002, pp 239, ISBN 0195506456

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The Prosecution of Corporations, Jonathon Clough and Carmel Mulhern, Oxford University Press, Melbourne, Victoria, 2002, pp 239, ISBN 0195506456

VICKY COMINO^[*]

In the wake of major corporate collapses, such as HIH, One.Tel, Ansett and Enron, and more recently, the James Hardie debacle, attention has focused on corporate misconduct and corporate governance to a level unparalleled since the so-called ‘excesses of the 1980s’.

In their book, The Prosecution of Corporations, Jonathon Clough and Carmel Mulhern have not only made a significant contribution to legal scholarship in what is a very complex area of the law, namely how to regulate corporate misconduct effectively, but they also provide practitioners with invaluable guidance and insights.

From the outset, while the authors state that this is a book about the prosecution of corporations, they make it clear that they are not advocating the widespread use of criminal sanctions against corporations. They rightly point out that criminal liability is merely one aspect of the framework for regulating corporate behaviour and that effective regulation requires a diversity of approaches, both civil and criminal, as well as individual and corporate. This is in line with what has become known as ‘strategic regulation theory’. Although the authors do not specifically refer to ‘strategic regulation theory’, they apply the principles of its formulators, Fisse and Braithwaite,^[1] in recognizing that criminal sanctions are at the apex of a regulatory pyramid.^[2]

Accordingly, although the focus of the book is upon the criminal liability of corporations, the authors also consider the efficacy of civil penalties. In Chapter 4, they examine the civil penalty regimes under both the Trade Practices Act 1974 (Cth) (TPA) and the Corporations Act 2001 (Cth) (the Corporations Act). This discussion is particularly useful and thought-provoking.

The regime of sanctions for enforcement of the duties of corporate officers in Australia, for instance, now found in the Corporations Act, ss 180-184, was fundamentally reformed in 1993 when the current civil penalty approach was introduced. This drastically reduced the role of the criminal law. Previously, breaches of the statutory duties of company officers were offences punishable by criminal sanctions.^[3] Now, only the most serious breaches merit criminal sanctions.^[4] The vast majority of cases attract civil penalty sanctions.^[5] By reducing the role of the criminal law, it was hoped that the Australian Securities and Investment Commission (ASIC)^[6] could more effectively regulate corporate misconduct.

However, research demonstrates that until recently ASIC has brought few civil penalty proceedings. ASIC commenced a mere 14 civil penalty actions in the six years to 1999.^[7] Between September 1998 and December 2001 civil penalty actions were brought against thirty people, including former officers in the high profile cases of HIH and One.Tel.^[8] Even though this is a relatively low figure compared with the number brought under the TPA,^[9] the authors conclude that these recent civil penalty actions ‘may signal a change of policy’.^[10] However, the recent decision of the High Court in Rich v ASIC (the Rich case),^[11] suggests this hope may be in vain. The High Court held that disqualification orders sought by ASIC^[12] were ‘penal’, in the sense that ‘exposure to a disqualification order is exposure to a penalty’^[13] so that the privilege against exposure to penalties could be claimed and discovery refused. This will make ASIC’s task in these proceedings and in any subsequent proceedings of a similar nature more difficult than envisaged. More significantly, the decision lends credence to Professor John Farrar’s belief that the reforms have been ‘more cosmetic and rhetorical than real’, which begs the question whether any useful purpose is served by the retention of a civil penalty regime in the Corporations Act?^[14]

As far as prosecuting corporations is concerned, the authors again rightly point out that until the enactment of the corporate liability provisions, in Part 2.5 of the Criminal Code Act 1995 (Cth) (the Criminal Code),^[15] there had not been an established tradition of prosecuting corporations in Australia. This was attributable, in part, to the problems associated with attempting to apply traditional criminal law principles to abstract entities. Additionally, the authors suggest that the failure to allocate corporate prosecutions to one authority operating under one law, has hindered the development of a holistic view of corporate criminal liability.

The authors’ main objective is to present a holistic view of the corporate prosecution process. They argue that regardless of the subject matter of the prosecution, common principles should guide the investigation, criminal procedure, liability and sentencing of corporations.

Chapter 2, therefore, begins with a brief but clear overview of the role of the various regulatory agencies that are involved in prosecuting corporate crime in a number of key areas, namely, market regulation, consumer protection, taxation, environmental protection and workplace safety. These groups include ASIC, the Australian Competition and Consumer Commission (ACCC), the Australian Tax Office (ATO) environmental protection agencies and occupational health and safety agencies. After outlining their roles, the authors canvass the significant powers that may be exercised by these regulatory agencies to enter and search premises, require production of documents and interrogate people.

Most importantly, however, Chapter 2 examines the rules of criminal procedure that are encountered once a prosecution is commenced, with a view to highlighting the procedural difficulties in bringing a corporate entity to trial. What use are extensive investigative powers vested in the regulator if the corporation cannot be brought to trial because of the inadequacy of the rules associated with that process? Comparisons with rules from other jurisdictions, particularly the United States are also made to emphasise the inadequacy of many of Australia’s procedural rules. For example, even though the Commonwealth Director of Public Prosecutions has clear prosecution guidelines governing its decision to prosecute,^[16] there is no reference made to corporate offenders. Nor is any reference made to the criteria for determining when civil, rather than criminal, remedies should be sought. This is in sharp contrast to the federal prosecution of corporations in the US, where the US Department of Justice’s Bringing Criminal Charges Against Corporations Memorandum clearly enumerates the factors to be considered prior to charging a corporation.^[17]

Chapter 3 deals with what the authors describe as ‘the heart of the matter’, the basis upon which a corporation can be made liable for a criminal offence.^[18] The development of the common law principles which permit the attribution of criminal responsibility to corporations receives a thorough examination in this chapter, while Chapter 4 considers legislative attempts to devise effective models of corporate criminal liability. After outlining how corporations in Australia are potentially subject to five models of corporate criminal liability — vicarious liability, vicarious liability subject to due diligence or similar defences, attribution/identification, liability for omissions and organisational liability — the authors establish that their purpose is to highlight inadequacies in the law, with comparative perspectives from other jurisdictions assisting in this purpose. One such area is the general prohibition against aggregation in relation to the identification doctrine, where in order to prove an offence, it is necessary to prove that the relevant physical and fault elements of the offence can be found in the conduct of one person who represents ‘the directing mind and will of the company’: ‘you cannot add an innocent state of mind to an innocent state of mind and get as a result a dishonest state of mind’.^[19] They contrast the rule, unfavourably, with the position adopted by the US Federal Courts, where under the ‘collective knowledge doctrine’, the knowledge of a number of employees can be imputed to the company making it liable for a mens rea offence notwithstanding that no one individual possessed sufficient knowledge.^[20]

The discussion in Chapters 3 and 4, also, demonstrates that an environment of undue complexity has been created, especially in cases where two different models of corporate criminal liability may apply in the one statute. Regrettably, a notable example is in cases where it is unclear whether the corporate liability model which exists under Part 2.5 of the Criminal Code applies. Despite the Criminal Code being an attempt to unify Australian criminal law, there are a number of Acts from which Part 2.5 has been specifically excluded,^[21] which in the authors’ opinion undermine its successful implementation. The authors also state that it is hard to discern any clear explanation as to why Part 2.5 applies to some Acts and not others. Their view is that it seems that where legislation contained an existing model, that model has been retained with Part 2.5 providing a default model applicable where no other model of corporate criminal liability applied. The result has been that Part 2.5 may apply to some offences but not other offences under the same Act.^[22]

Finally, in Chapter 5, the sentencing of corporate offenders is explored. The need to impose meaningful sanctions upon corporations is recognised as being fundamental to the utility of corporate criminal liability. Following a discussion of the two main schools of thought of organisational behaviour, the neo-classical economic model^[23] and the behavioural or structural reform model,^[24] suggestions for effective sentencing options for corporate offenders are made. These include adverse publicity orders, corporate probation with remedial conditions or rehabilitative conditions attached, incapacitation and restraint and reparation. Admittedly, these suggestions are not novel; calls for alternative criminal sanctions have been made previously by proponents of strategic regulation theory.^[25] The authors, however, highlight the need for a range of sentencing options beyond fines, the most common form of penalty imposed on corporations, to allow the courts more flexibility when they seek to impose sanctions.^[26]

Chapter 6 concludes with further suggestions for reform. It starts by setting out the ‘lessons’ to be learnt from the successful prosecution of Esso Australia Pty Ltd in respect of the explosion of its Longford plant.^[27] The success of the Esso prosecution occurred almost despite the present system, although there was clear criminality, the assistance of a Royal Commission, expeditious committal proceedings, a simple model of liability and last, but not least, the will to prosecute. The chapter ends by suggesting that ‘the way forward’ requires appropriate law reform in a number of vital areas, including clear prosecutorial guidelines for regulators and clear parliamentary drafting guidelines outlining the main models of liability and their application. The authors recommend that a separate agency dedicated to corporate misconduct replace the multiplicity of regulatory agencies, each with their own enforcement divisions, currently involved in this area.

The Prosecution of Corporations is a plea for law reform to create a credible and effective system of corporate criminal liability in Australia. It is an appeal supported by the current situation with James Hardie Ltd which has only recently agreed to accept proper responsibility for its victims.

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^[*] BA, LLB (Hons), LLM, Associate Lecturer, T C Beirne School of Law, The University of Queensland.

^[1] B Fisse and J Braithwaite, Corporations, Crime and Accountability (1993).

^[2] Fisse and Braithwaite, above n 1, 140-142. They present a six-tiered pyramid of enforcement that depicts the hierarchal escalation of sanctions available to a regulator when contraventions occur. At the base of the enforcement pyramid are informal methods of control, such as warnings and persuasion, with civil penalties in the middle and criminal liability appearing only at the apex for continued non-compliance or for serious breaches of the law.

^[3] The criminal sanctions which could be imposed were a fine or imprisonment for up to 5 years or both under Corporations Law, s 1311, formerly the Code, s 570.

^[4] Contraventions of ss 181-183, when committed with the prescribed mental element are criminal offences. The same criminal sanctions apply, namely a variable fine or imprisonment for up to 5 years or both under the Corporations Act, s 1311(2)-(3), Schedule 3, Penalties, although the level of fines has been increased from $20,000 to $200,000.

^[5] Civil penalty sanctions are limited to two types of civil penalties, a pecuniary penalty of up to $200,000 under Corporations Act, s 1317G and a management disqualification order under Corporations Act, s 206C.

^[6] Since its establishment on 1 January 1991, ASIC has enjoyed sole responsibility for regulation of companies and securities and futures markets. It is the ‘Corporations Act watchdog’.

^[7] G Gilligan, H Bird and I Ramsay Research Report: Regulating Directors’ Duties — How Effective are the Civil Penalty Sanctions in the Corporations Law? (1999) vii.

^[8] See G Moodie and I Ramsay, ‘The Expansion of Civil Penalties Under the Corporations Act’ (2002) 30 ABLR 77, 77.

^[9] For an interesting discussion of the differences between the civil penalty regimes under the TPA and Corporations Act, see J Clough and C Mulhern, The Prosecution of Corporations (2002) 162-165.

^[10] ASIC has succeeded in its civil penalty actions against former officers of HIH, which resulted, for instance, in Rodney Stephen Adler being banned from being a director for 20 years and liable to pay a pecuniary penalty of $900,000 and $8 million compensation see, ASIC v Adler (No 5) (2002) 20 ACLC 1148 (Santow J). Interestingly, in the subsequent criminal proceedings against Adler, he pleaded guilty and on 14 April 2005, he was sentenced to four and a half years imprisonment with a non-parole period of two and a half years (see R v Rodney Stephen Adler [2005] NSWSC 274).

^[11] [2004] HCA 42; (2004) 78 ALJR 1354 (High Court of Australia: Gleeson CJ, McHugh, Gummow, Hayne, Callinan and Heydon JJ; Kirby J dissenting).

^[12] ASIC sought orders, pursuant to Corporations Act, ss 206C and 206E, that each of the appellants be disqualified from managing or being a director of any company for such period as the court thinks fit.

^[13] [2004] HCA 42; (2004) 78 ALJR 1354, 1362.

^[14] J Farrar, Corporate Governance Theories, Principles and Practice (2^nd ed, 2005) 234.

^[15] Part 2.5 forms part of Chapter 2 of the Criminal Code dealing with general principles of criminal responsibility and applies to all Commonwealth offences as of 15 December 2001: Criminal Code, s 2.2(2), but see later discussion at n 20.

^[16] See Commonwealth Director of Public Prosecutions, ‘Prosecution Policy of the Commonwealth,’ accessible at <http://www.cdpp.gov.au/Prosecutions/Policy/> . Accessed 1 June 2005.

^[17] This Memorandum, dated 16 June 1999 and known as ‘the Holder Memo,’ is accessible at <http://www.usdoj.gov/criminal/fraud/policy/Chargingcorps.html> . Clough and Mulhern refer to this document as being section 162 of the US Department of Justice Attorneys Manual (at 55-56).

^[18] Clough and Mulhern, 64.

^[19] See, eg, Armstrong v Strain [1952] 1 KB 232, 246 (Birkett J, citing the trial judge, Devlin J).

^[20] See, eg, US v Bank of New England [1987] USCA1 247; 821 F 2d 844, 855 (1^st Circ, 1987).

^[21] See, eg, Occupational Health and Safety (Commonwealth Employment) Act 1991 (Cth), s 15A; TPA, s 6AA and Corporations Act, s 769A.

^[22] See Corporations Act, s 769A where Criminal Code, Part 2.5, is rejected for offences under Chapter 7, in favour of s 769B which applies the vicarious liability model employed in the TPA.

^[23] This model attempts to understand human behaviour by applying neo-classical economic theory. In the criminal context, economic theory posits that a person commits a crime because the expected benefits outweigh the expected costs see, eg, R. Posner, Economic Analysis of Law (4^th ed, 1992), ch 14 for a discussion of economic analysis and corporations.

^[24] Behavioural theorists recognise that a corporation is made up of human actors who have their own agendas and interests, see, eg, Fisse and Braithwaite, above n 1, ch 4 for an excellent summary of organisational theories.

^[25] See, eg, Fisse and Braithwaite, above n 1, 144.

^[26] For example, even though Esso Australia Pty Ltd was successfully prosecuted and fined $2,000,000 in relation to the Longford explosion, which was the largest fine that has been imposed for a workplace offence in Australian history (see the sentencing judgment, Director of Public Prosecutions v Esso Australia Pty Ltd [2001] VSC 263 (the Esso case)), no alternative sanctions were available, with the trial judge, Cummins J, making reference to the ‘limited penalties’ under the Occupational Health and Safety Act 1985 (Vic) (see Esso at [13]).

^[27] Ibid.