Insights

25/10/18

Increased penalties proposed for corporate and financial sector misconduct

On 24 October 2018, the Federal Government introduced into Parliament draft legislation intended to strengthen penalties for corporate and financial sector misconduct.  If passed, the legislation will double maximum prison terms for serious offences to 10 years, with terms also increased for a number of other offences.

The legislation also proposes to significantly increase the maximum civil penalties imposed by the Corporations ActASIC ActCredit Act, Insurance Contract Act and Credit Code.  Maximum civil penalties for corporations are proposed to increase from $1 million per contravention to the greater of 50,000 penalty units (currently $10.5 million); 3 times the benefit gained or detriment avoided from the contravention; or 10% of annual turnover (to a maximum of 1 million penalty units, currently equivalent to $210 million).  The proposed amendments would bring corporate and financial sector civil penalties closer to the civil penalties which apply to contraventions of the Competition and Consumer Act and to the financial penalties which apply to offences under the Corporations Act.

Current media, political and public focus on corporate conduct and regulatory compliance is likely to lead to increased enforcement action in the coming months and years, reinforcing the potential impact of the proposed changes.

Click below for an outline of the proposed changes.                        

Proposed changes

If the draft legislation is enacted, maximum criminal and civil penalties for certain offences and civil penalty provisions under the Corporations ActCredit ActInsurance Contracts Act and Credit Code will increase as follows.  References are to provisions of the Corporations Act unless stated otherwise.

Serious criminal offences

Change to Maximum Penalty

Maximum prison terms for individuals convicted of certain serious offences will increase from 5 to 10 years.

Significant maximum financial penalties are proposed to be introduced for individuals and corporations convicted of certain serious offences:

  • For individuals: the greater of:
    • 4,500 penalty units (currently $945,000); or
    • 3 times the benefit gained or detriment avoided from the contravention.
  • For corporations: the greater of:
    • 45,000 penalty units (currently $9.45 million);
    • 3 times the benefit gained or detriment avoided from the contravention; or
    • 10% of annual turnover.

Affected Conduct

The serious offences proposed to attract maximum 10 year prison terms include offences relating to individuals:

  • intentionally, recklessly or dishonestly contravening their duties as officers or directors (s 184)
  • dishonestly failing to comply with financial and audit obligations (s 344(2))
  • intentionally or recklessly breaching their duties as officers or employees of the responsible entity of a registered scheme (ss 601FD, 601FE)
  • knowingly or recklessly providing defective disclosure documents or statements (ss 952D, 952F, 1021D)

The increased maximum financial penalties outlined above are proposed to apply to offences where the maximum prison term is 10 years or more.

Other criminal offences

Change to Maximum Penalty

Maximum prison terms for individuals convicted of certain other offences will increase from between 3 months and 2 years to between 1 and 5 years.

Significant maximum financial penalties are proposed to be introduced for individuals and corporations convicted of certain other offences:

  • For individuals: either:
    • if a fine is stated, the fine stated; or
    • if the offence can attract a prison term, the number of penalty units which is equivalent to the prison term (in months) multiplied by 10 (eg for an offence attracting a maximum prison term of 1 year, 120 penalty units (currently, $25,200)).
  • For corporations: either:
    • if a fine is stated, the fine stated; or
    • if the offence can attract a prison term, the number of penalty units which is equivalent to the prison term (in months) multiplied by 100 (eg for an offence attracting a maximum prison term of 1 year, 1,200 penalty units (currently, $252,000)).

Affected Conduct

Increased maximum prison terms are proposed for around 45 offences including offences relating to:

  • misleading or deceptive statements in or omissions from takeover, compulsory acquisition and buyout documents (s 670A(3))
  • failing to give disclosure documents within the time required (s 952C(3))
  • obligations on AFSL holders, including in relation to providing assistance, notice of certain matters and/or statements to ASIC (ss 912C(3), 912D(1B), 912E(1), 952L(2), 982D, 991B(2), 991E(1) and (3), 99C(3))

Some increases are significant.  For example, the current imprisonment term for a breach of the prohibition on disqualified persons managing corporations will increase from 1 year to 5 years.

The maximum financial penalties outlined above are proposed to apply to offences where the maximum prison term is less than 10 years.

Strict and absolute liability offences

For strict and absolute liability offences:

  • imprisonment will be removed as a penalty;
  • which currently carry prison termsfinancial penalties will instead apply (calculated using the individual and corporate fine formulae outlined in the “Other criminal offences” section above); and
  • which do not currently carry prison termsfinancial penalties have been increased to at least 20 penalty units for individuals and 200 penalty units for corporations.

New ordinary criminal offences are to be introduced to sit alongside certain existing strict and absolute liability offences and will attract significantly higher penalties (including prison terms) than those equivalent strict and absolute liability offences.

The ordinary criminal offences will apply where a person commits both the physical and fault elements of the offence.

Civil penalties

Change to Maximum Penalty

The maximum financial penalties applicable for contraventions of civil penalty provisions are to be increased from $200,000 for individuals and $1 million for corporations to:

  • For individuals: the greater of:
    • 5,000 penalty units (currently $1.05 million); or
    • 3 times the benefit gained or detriment avoided from the contravention.
  • For bodies corporate: the greater of:
    • 50,000 penalty units (currently $10.5 million);
    • 3 times the benefit gained or detriment avoided from the contravention; or
    • 10 per cent of annual turnover up to a maximum value of 1 million penalty units (currently $210 million).

The civil penalty regime will be extended to cover more provisions in the Corporations Act, ASIC Act, Credit Act, Insurance Contracts Act and Credit Code.

Affected Conduct

The increased maximum financial penalties outlined above are proposed to apply to civil penalty provisions in the Corporations Act, ASIC Act, Credit Act, Insurance Contracts Act and Credit Code, including provisions relating to

  • Continuous disclosure obligations
  • Misleading and deceptive conduct
  • Market integrity rules
  • Insider trading
  • Directors’ and officers’ duties
  • Insolvent trading
  • Conflicted remuneration
  • Market manipulation

The additional provisions to which the civil penalty regime will be extended include provisions relating to:

  • the registration of managed investment schemes
  • obligations in relation to disclosure documents
  • general obligations on AFSL holders, including under s 912A and to notify ASIC of certain matters under s 912D
  • insurers’ duties of utmost good faith

Infringement notices

Change to Maximum Penalty

The existing infringement notice regime currently applicable to certain provisions of the ASIC Act and Credit Act will be extended to:

  • all strict and absolute liability offences in the Corporations Act
  • certain prescribed offences and civil penalty provisions in the Corporations Act
  • s 33C of the Insurance Contracts Act.

Penalties for infringement notices will vary by provision:

  • for strict and absolute liability offences in the Corporations Act, the maximum penalty payable will be 50% of the maximum pecuniary penalty payable for that offence
  • for applicable civil penalty provisions in the Corporations Act, the maximum penalty payable will be 12 penalty units for individuals (currently $2,520) and 60 penalty units for corporations (currently $12,600)
  • for Credit Act offences, the maximum amount payable will be 20% of the maximum penalty that a Court can impose and for a single contravention of Credit Act civil penalty provisions, the maximum amount payable will be 50 penalty units for individuals (currently $10,500) and 250 penalty units for bodies corporate (currently $52,500).

Affected Conduct

The additional provisions to which the infringement notice regime will be extended include provisions relating to:

  • obligations on AFSL holders, including to notify ASIC of certain matters under s 912D
  • conflicted remuneration (s 963E(1),(2), 963G(1), 963J, 963K)
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