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Corporations Amendment (Asia Region Funds Passport) Bill 2018 [2018] AUSStaCSBSD 108 (9 May 2018)

Corporations Amendment (Asia Region Funds Passport) Bill 2018

Reversal of the evidential burden of proof ^[17]

1.23 Proposed subsection 1213L(1) provides that a person who obtains a copy of a register of members of a foreign passport fund under section 1213K^[18] must not use information obtained from a register of members of a notified foreign passport fund^[19] to contact or send material to a member, or disclose information knowing that the information is likely to be used for that purpose. A breach of proposed subsection 1213L(1) is punishable by a pecuniary penalty of 60 penalty units. Proposed subsection 1213L(2) provides an exception (offence-specific defence) to that offence, providing that the offence does not apply if the use or disclosure is relevant to the holding of the interests recorded in the register or the exercise of the rights attaching to them, or the use or disclosure is approved by the operator of the relevant fund.

1.24 In addition, proposed subsection 1213M(1) creates an offence of strict liability, which applies where the operator of a foreign passport fund is required under the home economy for the fund to prepare a report in relation to the fund, and to make that report available to members of the fund in that home economy, without charge. The operator would commit the offence if the operator fails to give Australian members of the fund a copy of the report and (if necessary) a summary in English of all or part of the report, in accordance with proposed section 1213M. Proposed subsection 1213M(6) provides an exception (offence-specific defence) to that offence, providing that the offence does not apply if the operator of the fund is required under another provision of the Corporations Act 2001 (Corporations Act) to lodge the relevant report, or to give the report to Australian members of the fund.

1.25 Subsection 13.3(3) of the Criminal Code Act 1995 provides that a defendant who wishes to rely on any exception, exemption, excuse, qualification or justification bears an evidential burden in relation to that matter.

1.26 At common law, it is ordinarily the duty of the prosecution to prove all elements of an offence. This is an important aspect of the right to be presumed innocent until proven guilty. Provisions that reverse the burden of proof and require a defendant to disprove, or raise evidence to disprove, one or more elements of an offence, interferes with this common law right. While in the instances outlined above the defendant bears an evidential burden (requiring the defendant to raise evidence about the matter), rather than a legal burden (requiring the defendant to positively prove the matter), the committee expects any such reversal of the evidential burden of proof to be justified.

1.27 The committee also notes that the Guide to Framing Commonwealth Offences^[20] provides that a matter should only be included in an offence-specific defence (as opposed to being specified as an element of the offence) where:

• it is peculiarly within the knowledge of the defendant; and

• it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter.^[21]

1.28 With respect to the reversal of the evidential burden of proof in proposed subsection 1213L(2), the explanatory memorandum states:

The rationale for the defendant bearing the evidential burden of proof for all exceptions is that the information is peculiarly within the defendant's knowledge. In this case, the defendant is best placed to show that the material was relevant to the member's interests, or the fund had approved the person contacting the members.^[22]

1.29 While the committee notes this explanation, it is not apparent that the matters in proposed subsection 1213L(2) are peculiarly within the knowledge of the defendant. In particular, whether the operator of a fund has approved the use or disclosure of information in a register appears to be a matter of which the operator would be particularly apprised. The committee further notes that a defendant being 'best placed' to point to evidence in relation to a matter does not equate to the matter being peculiarly within the defendant's knowledge.

1.30 The explanatory memorandum provides no explanation for the reversal of the burden of proof in proposed subsection 1213M(6). Moreover, it is not apparent that the matters in that subsection (that is, whether the defendant is authorised or required under the Corporations Act to lodge the relevant report or to give that report to Australian members of the fund) would be peculiarly within the knowledge of the defendant. Rather, they appear to be factual matters which could be established by the prosecution through reasonable inquiries.

1.31 As the explanatory materials do not address, or do not adequately address, the issue, the committee requests the minister's detailed justification for the reversal of the evidential burden of proof in proposed subsections 1213L(2) and 1213M(6). The committee's consideration of the appropriateness of a provision that reverses the burden of proof is assisted if it explicitly addresses relevant principles as set out in the Guide to Framing Commonwealth Offences.^[23]

Strict liability offences carrying custodial penalties^[24]

1.32 The bill seeks to create a number of strict liability offences, and to extend a number of existing strict liability offences to foreign passport funds. The majority of these offences attract a pecuniary penalty only. However, the following provisions also attract a custodial penalty:

• Item 91 seeks to insert proposed subsection 314A(9), which would apply strict liability to the following offences relating to the operator of a notified foreign passport fund:

• failing to provide an Australian member of the fund with a copy of the annual financial report and associated auditor's report;

• failing to provide a notice to each Australian member of the fund, notifying the member that they may elect to receive a hard copy or an electronic copy of the reports; and

• failing to provide the reports in English or, if the member so elects, in an official language of the home economy of the fund;

Each of the offences would attract a penalty of 10 penalty units, three months imprisonment, or both;

• Item 98 seeks to amend section 319(1A) of the Corporations Act to extend an existing strict liability offence to the operator of a notified foreign passport fund. The offence would apply where the operator fails to lodge relevant financial reports with the Australian Securities and Investments Commission (ASIC) under proposed subsection 319(1AA), and is punishable by 60 penalty units, 1 year's imprisonment, or both;

• Item 101 seeks to amend  subsection 321(1A)  of the Corporations Act to extend an existing strict liability offence to the operator of a notified foreign passport fund. The offence would apply where the operator fails to comply with a direction from ASIC to lodge financial reports and associated auditor's reports, and is punishable by 10 penalty units, three months' imprisonment, or both; and

• Item 105 seeks to amend subsection 322(2)(b) of the Corporations Act to extend an existing strict liability offence to the operator of a notified foreign passport fund. The offence would apply where a report lodged with ASIC by a notified foreign passport fund is subsequently amended, and the operator fails to lodge the amended report with ASIC within 14 days, or to give a copy of the amended report free of charge to any Australian member of the fund who requests it. The offence is punishable by 10 penalty units, 3 months' imprisonment, or both.

1.33 Under general principles of the criminal law, fault is required to be proved before a person can be found guilty of a criminal offence (ensuring that criminal liability is imposed only on persons who are sufficiently aware of what they are doing and the consequences it may have). When a bill states that an offence is one of strict liability, this removes the requirement for the prosecution to prove the defendant's fault. In such cases, an offence will be made out if it can be proven that the defendant engaged in certain conduct, without the prosecution having to prove that the defendant intended this, or was reckless or negligent. As the imposition of strict liability undermines fundamental criminal law principles, the committee expects the explanatory memorandum to provide a clear justification for any imposition of strict liability, including outlining whether the approach is consistent with the Guide to Framing Commonwealth Offences.^[25]

1.34 The committee also notes that the Guide to Framing Commonwealth Offences states that the application of strict liability is only considered appropriate where the offence is not punishable by a term of imprisonment and only punishable by a fine of up to 60 penalty units for an individual.^[26] In this instance, the bill proposes to create offences of strict liability subject to three months' imprisonment, and to expand existing strict liability offences subject to terms of imprisonment between three months and one year.

1.35 With respect to the offences that would be created by proposed section 314A, the explanatory memorandum states that the application of strict liability is appropriate in order to provide a strong deterrent for directors of operators of notified foreign passport funds against contravening the reporting requirements, and indicates that the offences are comparable to those that apply to directors of Australian companies.^[27]

1.36 The explanatory memorandum does not provide a justification for extending existing strict liability offences attracting custodial penalties to notified foreign passport funds, beyond indicating that similar offences in the Corporations Act apply to Australian companies, registered schemes and reporting entities.^[28] However, the statement of compatibility provides some further explanation in this respect, stating:

Several of the strict liability offences that are extended to operators of notified foreign passport funds by the new law do not comply with the Guide because they either exceed the maximum recommended penalty suggested by the Guide or impose a term of imprisonment. Each of these offences is an existing offence that already applies in respect of conduct by a company, registered scheme or reporting entity. Extending these offences so that they apply to conduct by an operator of a notified foreign passport fund is...necessary because it is important that the deterrent effect in each circumstance is no less strong than it is for Australian companies, registered schemes and disclosing entities. For this reason equivalent penalties have been imposed for these offences.^[29]

1.37 While noting this explanation, the committee reiterates its longstanding view that it is not considered appropriate to apply strict liability in circumstances where a custodial penalty may be imposed. Moreover, while the committee appreciates the importance of treating foreign passport funds and Australian companies, registered schemes and reporting entities equally, it does not consider consistency with existing offences sufficient to justify applying strict liability to offences attracting custodial penalties. In this regard, the committee considers it would be possible to achieve consistency by making all penalties (that is, those proposed to be imposed on foreign passport funds and those that already apply to Australian entities under the Corporations Act) consistent with the Guide to Framing Commonwealth Offences.

1.38 As the explanatory materials do not adequately address this issue, the committee requests the minister's more detailed justification for the application of strict liability to the offences created or extended by items 91, 98, 101, and 105, which attract penalties of between three months' and one years' imprisonment.

Broad delegation of legislative power^[30]

1.39 A number of provisions in the bill give the power to ASIC or the regulations to provide that the Corporations legislation^[31] applies in certain circumstances as if specified provisions were omitted, modified or varied, and to allow ASIC to exempt entities from all or specified provisions of the Corporations legislation.

1.40 Division 3 of proposed Part 8A.7 provides for the continued application of the Corporations legislation in certain circumstances. Within that Division:

• proposed section 1216K provides that ASIC may, by legislative instrument or notifiable instrument,^[32] declare that the Corporations legislation continues to apply in relation to a fund that has been deregistered as an Australian passport fund or removed as a notified Australian passport fund, and to an entity in relation to such a fund, as if specified provisions were omitted, modified or varied;

• proposed section 1216L provides that regulations may provide that the Corporations legislation continues to apply in relation to a fund that has been deregistered as Australian passport funds or removed as a notified foreign passport fund, and to an entity in relation to such funds as if specified provisions were omitted, modified or varied.

1.41 Modification, variation, or omission may apply to all or specified provisions of the Corporations legislation, to all former passport funds and associated entities, to classes of funds or entities, and to individual funds or entities.

1.42 Proposed Part 8A.8 seeks to give ASIC the power to exempt entities from provisions in proposed Chapter 8A and the Passport Rules,^[33] and to modify such provisions as they apply to an entity. That Part also seeks to allow the regulations to exempt passport funds and associated entities from any and all provisions of the Corporations legislation, and to modify the Corporations legislation as it applies to such funds and entities. Within proposed Part 8A.8:

• proposed section 1217 seeks to allow ASIC, by legislative instrument or notifiable instrument,^[34] to exempt an entity from a provision of proposed Chapter 8A, and to declare that the Chapter applies to an entity as if specified provisions were omitted, modified or varied;

• proposed section 1217A seeks to allow ASIC, by legislative instrument or notifiable instrument,^[35] to exempt an entity from the provision of the Passport Rules, and to declare that the Passport Rules apply to an entity as if specified provisions were omitted, modified or varied; and

• proposed section 1217B seeks to allow the regulations to exempt passport funds and entities from all or specified provisions of the Corporations legislation, or provide that the Corporations legislation applies as if specified provisions were omitted, modified or varied.

1.43 The relevant exemptions, omissions, modifications and variations may apply to all or specified provisions of the Corporations legislation or the Passport Rules, and to all passport funds and associated entities, classes of funds or entities, and individual funds or entities.

1.44 Finally, items 114 and 115 seek to amend section 343 of the Corporations Act, to provide that the regulations may modify the operation of Chapter 2M (which relates to matters such as the preparation of financial reports and the keeping of records) in relation to a notified foreign passport fund.

1.45 The bill would therefore appear to allow delegated legislation (including regulations and other legislative and notifiable instruments) to modify both primary and delegated legislation, and to exempt certain passport funds and associated entities from all or specified provisions of primary and delegated legislation.

1.46 Provisions enabling delegated legislation to modify the operation of primary legislation are akin to Henry VIII clauses, which authorise delegated legislation to make substantive amendments to primary legislation (generally the relevant parent statute). The committee has significant scrutiny concerns with Henry VIII-type clauses, as such clauses impact on the level of parliamentary scrutiny and may subvert the appropriate relationship between the Parliament and the Executive. Consequently, the committee expects a sound justification to be included in the explanatory memorandum for the use of any clauses that allow delegated legislation to modify the operation of primary legislation.

1.47 The committee will also have concerns about provisions that enable delegated legislation to exempt persons or entities from the operation of primary legislation, or that modify or exempt persons or entities from the operation of other delegated legislation. These provisions have the effect of limiting, or in some cases removing, parliamentary scrutiny. Consequently, the committee will be concerned about provisions of this kind—particularly where they permit exemptions or modifications that apply to a broad range of entities or legislative provisions—and expects a justification for the use of such provisions to be included in the explanatory memorandum.

1.48 With respect to ASIC's power to continue and modify the application of the Corporations legislation (proposed section 1216K), the explanatory memorandum states:

This power is designed to enable ASIC to deal flexibly with any issues that may require continuing regulatory oversight after an Australian passport fund has been deregistered or a notified passport fund has been denotified. In particular, the power is designed to enable ASIC to undertake continuing regulatory oversight in order to protect the interests of any members who became members after the fund became a passport fund. The MOC [Memorandum of Cooperation], which was agreed by all economies participating in the Asia Region Funds Passport regime, expressly recognises the potential need for deregistered funds to be subject to the same obligations applicable to registered funds...
ASIC's exercise of this power is generally subject to the same scrutiny and oversight as other Henry VIII clauses in the Corporations Act, including merits review and disallowance by Parliament.^[36]

1.49 The explanatory memorandum provides no justification for allowing the regulations to continue and to modify the application of the Corporations legislation, merely restating the operation and effect of the relevant provisions and noting that the regulations will be subject to the standard rules that apply to legislative instruments under the Legislation Act 2003.^[37]

1.50 With respect to ASIC's power to modify and to exempt entities from the operation of Chapter 8A, the explanatory memorandum states:

The new exemption and modification powers allow ASIC to provide administrative relief in circumstances where the strict operation of the Corporations Act produces unintended or unforeseen results that are not consistent with the policy intention for the Passport, including the intention of the MOC. Issues may arise that were not contemplated at the time of drafting because the Passport is a new regime, the funds industry is undergoing rapid innovation, and many foreign passport funds are structured differently to MISs [managed investment schemes] or use arrangements that are not available in Australia. In this context, it is appropriate for ASIC to be able to provide relief where the issues to be addressed are too individual and specific to justify addressing them by legislative means.
The exemption and modification powers in the new law are subject to the usual safeguards, including administrative review by the AAT, judicial review and consideration in appropriate circumstances by the Commonwealth Ombudsman.^[38]

1.51 The explanatory memorandum indicates that this explanation also applies to ASIC's power to modify and to exempt entities from the Passport Rules.^[39]

1.52 With respect to the regulation-making power regarding exemptions from and modifications to the Corporations legislation (proposed section 1217B), the explanatory memorandum states:

This power provides the flexibility required to deal with unintended consequences that may arise as the Passport is introduced. The modification powers provided under this section represent a necessary tool to deal with such circumstances to ensure that the laws as they relate to passport funds operate appropriately.
These regulations will be disallowable, are subject to the sunsetting scheme and must be notified on the FRL.^[40]

1.53 Finally, the explanatory memorandum provides the following explanation for extending the power to modify the operation of Chapter 2M of the Corporations Act to notified foreign passport funds:

This power provides the flexibility required to deal with the unintended consequences and extends the existing modification by regulations power in relation to companies, registered schemes and disclosing entities.
These regulations will be disallowable, are subject to the sunsetting scheme and must be notified on the FRL.^[41]

1.54 The committee appreciates that the proposed powers to modify and exempt entities from the operation of the Corporations legislation are intended to ensure the necessary flexibility to deal with unintended consequences associated with the implementation of the Asia Region Funds Passport, and to address issues that may require continuing oversight.

1.55 However, the committee does not generally consider administrative flexibility alone to be sufficient justification for broad delegations of legislative power (such as the power for delegated legislation to modify the operation of primary legislation, as proposed by the bill). The committee also remains concerned that the bill does not appear to provide for any limitation on ASIC's powers of modification and exemption, or on the ability for regulations to provide for modifications to, and exemptions from, the Corporations legislation. For example, the bill does not set out any conditions that must be satisfied before such powers are exercised.

1.56 Additionally, where the Parliament delegates its legislative power in relation to significant legislative schemes (including the power to modify and exempt entities from the operation of primary legislation), the committee considers that it is appropriate that specific consultation obligations (beyond those in section 17 of the Legislation Act 2003) apply to the making of legislative instruments, and that compliance with those obligations is a condition of the relevant instruments' validity. The committee notes that no such requirements are currently set out in the bill.

1.57 The committee requests the minister's more detailed advice as to:

• the justification for why it is proposed to allow delegated legislation (regulations, and declarations and exemptions made by ASIC) to modify and exempt funds and entities from the operation of primary and delegated legislation;

• whether it would be appropriate to amend the bill to insert (at least high-level) guidance concerning the exercise of ASIC's powers, and the making of regulations, to modify and exempt funds and entities from the operation of primary and delegated legislation; and

• the type of consultation that it is envisaged will be conducted prior to the making of delegated legislation (that is, regulations, declarations and exemptions), and as to whether specific consultation obligations (beyond those in section 17 of the Legislation Act 2003) can be included in the bill, with compliance with those obligations a condition of relevant instruments' validity.

[17] Schedule 1, item 1, proposed subsection 1213L(2), and Schedule 1, item 1, proposed subsection 1213M(6). The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(i).

[18] Proposed section 1213K provides for a right to obtain a copy of the register of members of a foreign passport fund, the manner in which the application must be made, and the manner and language in which the register must be provided.

[19] Proposed Part 8A.4 relates to notified foreign passport funds. Pursuant to proposed section 1213C, a foreign passport fund becomes a 'notified foreign passport fund' if the operator lodges a notice with ASIC of intention to offer interests in the fund to persons within Australia and, within the consideration period for the notice (15 days from lodgement), ASIC has not rejected the notice or notified the operator that insufficient information has been provided.

[20] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, pp. 50-52.

[21] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, p. 50.

[22] Explanatory memorandum, p. 68.

[23] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, pp. 50-52.

[24] Schedule 1, items 91, 98, 101 and 105. The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(i).

[25] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, pp. 22–25.

[26] Attorney-General's Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011, p. 23.

[27] Explanatory memorandum, p. 63.

[28] Explanatory memorandum, pp. 80-81.

[29] Statement of compatibility, p. 157.

[30] Schedule 1, item 1, proposed sections 1216K, 1216L, 1217, 1217A and 1217B, and Schedule 2, items 114 and 115. The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(iv).

[31] Pursuant to section 9 of the Corporations Act, 'Corporations legislation' includes the Corporations Act, the Australian Securities and Investment Commission Act 2011, and certain rules of court made because of a provision of the Corporations Act. 'Corporations legislation' also includes the Passport Rules (see below).

[32] Proposed subsection 1216K(3) provides that a declaration relating to all entities, a specified class of entities, all former passport funds or a specified class of such funds must be made by legislative instrument. Proposed subsection 1216K(4) provides that a declaration relating to a specified entity or specified former passport fund must be made by notifiable instrument.

[33] Pursuant to proposed section 1211A, 'Passport Rules' means rules made by the minister under proposed section 1211, as in force from time to time.

[34] Proposed subsection 1217(6) provides that an exemption or declaration relating to all entities, a specified class of entities, all passport funds or a specified class of funds must be made by legislative instrument. Proposed subsection 1217(7) provides that an exemption or declaration relating to a specified entity or fund must be made by notifiable instrument.

[35] Proposed subsection 1217A(7) provides that an exemption or declaration relating to all entities, a specified class of entities, all passport funds or a specified class of funds must be made by legislative instrument. Proposed subsection 1217A(8) provides that a declaration relating to a specified entity or fund must be made by notifiable instrument.

[36] Explanatory memorandum, p. 121.

[37] Explanatory memorandum, pp. 121-122.

[38] Explanatory memorandum, pp. 117-118.

[39] Explanatory memorandum, p. 118.

[40] Explanatory memorandum, p. 120.

[41] Explanatory memorandum, p. 120.