House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Assistant Treasurer and Minister for Competition Policy and Consumer Affairs, the Hon Chris Bowen Mp

Chapter 2 - Criminal offences

Outline of chapter

2.1 This chapter outlines the criminal offences that target serious cartel conduct, and related provisions.

Context of amendments

2.2 Introducing indictable criminal offences targeting serious cartel conduct, which include maximum penalties for individuals of a 10-year jail sentence and/or a fine of $220,000, and fines for corporate offenders, will widen the range of regulatory responses available to deal with cartel conduct. This, in turn, should assist to deter individuals and corporations from engaging in such conduct. It will also bring Australia into line with other OECD nations that have legislated such sanctions.

Summary of new law

2.3 The current prohibitions in Part IV of the TP Act rely primarily on the corporations power in subsection 51(xx) of the Constitution for their validity. Consequently, the current Part IV prohibitions apply to a 'corporation', presently defined in subsection 4(1) of the Trade Practices Act 1974 ('the TP Act') to mean (a) a foreign corporation, (b) a trading corporation formed within the limits of the Commonwealth, (c) a corporation formed in a territory, or (d) a holding company for the three preceding types of corporations listed.

2.4 Consistent with the 1995 Conduct Code Agreement, the Bill makes provision for the cartel offences to apply to corporations, bodies corporate (that do not fall within the definition of a corporation in the TP Act) and individuals. This occurs in the following ways:

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First, corporations can be found guilty of committing an offence in Division 1 of Part IV, as the offences specifically apply to corporations.

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Second, individuals and bodies corporate can be an accessory to the commission of a Part IV offence by a corporation under the accessorial liability framework in section 79 of the TP Act.

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Third, individuals and bodies corporate can be held liable for committing an offence in the Schedule of the TP Act. These offences 'mirror' the offences in Division 1 of Part IV with the exception that they apply to a 'person'. The mirror offences form part of the Competition Code and are applied by the CPR Act of each State or Territory as a law of each of those jurisdictions.

2.5 Two new indictable offences in Division 1 of Part IV will prohibit a corporation from making, or giving effect to, a provision of a contract, arrangement or understanding with a competitor that fixes prices, restricts outputs, allocates markets between competitors, or rigs a bidding process.

2.6 The maximum fine for a corporation (under the first dot point above) is consistent with the maximum pecuniary penalty that may be applied to a corporation found to have breached the civil prohibitions.

2.7 The maximum fine for an individual found guilty of being an accessory to the commission of an offence (under the second dot point) is the same as the penalty for committing an offence (under the third dot point above) - that is, a term of imprisonment for 10 years and/or a fine of 2,000 penalty units ($220,000).

2.8 For a body corporate that is not a corporation within the meaning of that term for the purposes of the TP Act, the maximum fine applicable for being an accessory to the commission of an offence in Division 1 of Part IV or the Schedule version offence is the same as the maximum fine that applies to a corporation.

2.9 The ancillary liability framework is amended to apply to the criminal cartel offences.

2.10 Indictable criminal jurisdiction is conferred on the Federal Court of Australia and the Supreme Courts of a State, the Northern Territory and the Australian Capital Territory in relation to the criminal offences. A separate Bill will provide for committals, bail, practice and procedure, juries, sentencing and appeals.

2.11 As the criminal sanctions will be indictable criminal offences, certain principles have been applied in developing those sanctions, bearing in mind that they will be heard before a jury.

2.12 Clarity and simplicity are important. The criminal sanctions (while modelled on the relevant existing civil prohibitions in the TP Act) remove redundant language that was included in the existing civil prohibitions, therefore providing a more targeted set of sanctions in relation to serious cartel conduct. This is an important, because the criminal offences will be indictable offences, to be heard before a jury.

2.13 Second, the courts are likely to take a stricter interpretation of criminal provisions than in relation to similar civil sanctions, and to decide particular issues in favour of the defence in a case of uncertainty (in order to give effect to the principle that a party is innocent until proven guilty). To enhance certainty, the Bill inserts interpretations of terms consistent with existing common law interpretations are inserted.

Comparison of key features of new law and current law

Detailed explanation of new law

Corporate and individual offenders

2.14 The framework for implementing consistent and complementary competition laws and policies that would apply to all businesses in Australia regardless of their structure is discussed in Chapter 1.

2.15 As the corporations power in subsection 51(xx) of the Constitution provides the principal source of power for the prohibitions in Part IV of the TP Act, the criminal offences in Part IV of the TP Act apply to a corporation. 'Corporation' is presently defined in subsection 4(1) of the TP Act to mean (a) a foreign corporation, (b) a trading corporation formed within the limits of the Commonwealth, (c) a corporation formed in a territory, or (d) a holding company for the three preceding types of corporations listed.

2.16 However, the TP Act enables corporations, bodies corporate that do not qualify as a corporation for the purposes of the TP Act, and individuals to be found guilty of committing a criminal cartel offence.

2.17 The application of criminal cartel offences to corporations applies by way of the creation of two new indictable offences in Division 1 of Part IV that prohibit a corporation from making, or giving effect to, a provision of a contract, arrangement or understanding with a competitor that fixes prices, restricts outputs, allocates markets between competitors, or rigs a bidding process.

2.18 The application of the criminal offences to individuals occurs in two ways.

2.19 First, individuals can be an accessory to the commission of the Part IV offence by a corporation under the accessorial liability framework in section 79 of the TP Act. A definition of cartel offence provision is added to mean section 44ZZRF or 44ZZRG. [Schedule 1, items 32 to 36, subsections 79(1), (1AA), (1AB), (5) and (7)] .

2.20 Second, individuals can be held directly liable for committing a mirror version of a Part IV offence. The mirror version offences are contained in the Schedule of the TP Act. While the Schedule version offences 'mirror' the offences in Division 1 of Part IV, they apply to persons generally, because the Schedule version is not reliant upon a Commonwealth head of power for its validity. Instead, the mirror offences form part of the Competition Code and are applied by the CPR Act of each State or Territory as a law of each of those jurisdictions. [Schedule 1, item 126, subsections 44ZZRF(4) and 44ZZRG(4)]

2.21 A body corporate that does not meet the definition of a 'corporation' for the purposes of the TP Act may be found guilty of being an accessory to the commission of the Part IV offence by a corporation under the accessorial liability framework in section 79 of the TP Act, or of committing a Schedule version offence, because those offences apply to persons generally (as the Schedule version is not reliant upon a Commonwealth head of power for its validity). [Schedule 1, item 126, subsections 44ZZRF(4) and 44ZZRG(4)]

Elements of the cartel offences

Criminal Code Act - provisions relevant to the new offences

2.22 Chapter 2 of the Criminal Code applies to the criminal cartel offences because these offences are Commonwealth offences, although Part 2.5 (Corporate criminal responsibility) does not apply [Schedule 1, item 18, subsection 6AA(2)] . As a consequence, various principles of the Criminal Code apply to the new indictable criminal cartel offences that are created in Part IV of the TP Act (but not to the Schedule version of the offences). Some of these principles are set out below.

2.23 Subsection 3.1 of the Criminal Code provides that a criminal offence consists of physical elements and fault elements.

2.24 In relation to the physical elements, subsection 4.1(1) of the Criminal Code provides that a physical element of an offence may be conduct, or a result of conduct, or a circumstance in which conduct, or a result of conduct, occurs. Subsection 4.1(2) defines conduct to mean an act, an omission to perform an act, or a state of affairs.

2.25 In relation to the fault elements, subsection 5.1(1) of the Criminal Code provides that a fault element for a physical element may be intention, knowledge, recklessness or negligence, and subsections 5.2 to 5.5 define how these terms apply to the physical elements identified above.

2.26 Subsection 5.6 indicates the particular fault elements that will apply to specific physical elements if the law creating the offence does not specify a fault element for a physical element (referred to below as 'default fault elements').

Making a contract etc . containing a cartel provision

2.27 A corporation commits an indictable offence if the corporation makes a contract or arrangement, or arrives at an understanding, and the contract, arrangement or understanding contains a cartel provision. [Schedule 1, item 19, subsections 44ZZRF(1), (4)]

2.28 Cartel provision is discussed in Chapter 1 above, but is a provision that effectively fixes prices, restricts outputs in the production or supply chain, allocates customers, suppliers or territories between competitors, or rigs a bidding or tendering process.

2.29 The making of a contract, arrangement or understanding requires conduct by at least two persons. However, each physical element must be framed in terms of the conduct of the offender. The offence therefore comprises two physical elements:

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that the corporation makes a contract or arrangement, or arrives at an understanding; and

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that the contract, arrangement or understanding contains a cartel provision.

2.30 As the first element does not specify a fault element, subsection 5.6 of the Criminal Code automatically applies a default fault element to the relevant physical element. The physical element refers to the act of 'making a contract or arrangement, or arriving at an understanding'. It would therefore be characterised as an element of conduct within the Criminal Code definition. The default fault element would therefore be intention.

2.31 The second element could be characterised as a circumstance in which conduct, or a result of conduct, occurs. The offence specifies a particular fault element of 'knowledge or belief' in relation to the second physical element (that a contract, arrangement or understanding contains a cartel provision).

Giving effect to a cartel provision

2.32 A corporation also commits an offence if a contract, arrangement or understanding contains a cartel provision, and the corporation gives effect to the cartel provision. [Schedule 1, item 19, subsections 44ZZRG(1), (5)]

2.33 The phrase gives effect to is defined in current subsection 4(1) of the TP Act. In relation to a provision of a contract, arrangement or understanding, it 'includes do an act or thing in pursuance of or in accordance with or enforce or purport to enforce'.

2.34 Consistent with the first offence, this offence also comprises two physical elements:

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that the contract, arrangement or understanding contains a cartel provision; and

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that the corporation gives effect to the cartel provision.

2.35 The first element could be characterised as a circumstance in which conduct, or a result of conduct, occurs. The offence specifies a particular fault element of 'knowledge or belief' in relation to the first physical element (that a contract, arrangement or understanding contains a cartel provision). [Schedule 1, item 19, subsection 44ZZRG(5)]

2.36 As the second physical element does not specify a fault element, subsection 5.6 of the Criminal Code automatically applies a default fault element to the relevant physical element. The physical element refers to the act of 'giving effect to a cartel provision'. It would therefore be characterised as an element of conduct within the Criminal Code definition. The default fault element would therefore be intention.

Ancillary offences

2.37 The ancillary offences in section 79 of the TP Act apply to the cartel offences in Part IV of the TP Act, rather than the ancillary offences in Part 2.4 of the Criminal Code [Schedule 1, items 31 to 36, section 79] . This ensures consistency between:

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the Commonwealth and State ancillary offences which are created by the Bill;

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the various ancillary provisions in the TP Act that apply to criminal and civil prohibitions (in sections 75B, 76, 78 and 79); and

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the ancillary provisions in the TP Act and related Acts (that is, the mirror consumer protection provisions in the Australian Securities and Investments Commission Act 2001 ).

2.38 Relying on the ancillary liability provisions in section 79 of the TP Act in relation to the criminal offences ensures that they also apply to contraventions of the Schedule version of Part IV.

2.39 The maximum penalty for a breach of ancillary liability in relation to the cartel criminal offences is, for individuals, a term of imprisonment of ten years and/or a fine of $220,000. [Schedule 1, item 33, paragraph 79(1)(e)]

Attempt

2.40 The ancillary offence of attempting to contravene a cartel offence provision or a Part VC provision is provided. An attempt to contravene a cartel offence provision could be characterised as an offence against subsection 11.1 of the Criminal Code, rather than taking the defendant to have committed a Part IV offence by reason of section 79 of the TP Act. Reliance on subsection 79(1) ensures that the States need not apply the ancillary liability provisions of the Criminal Code to the Schedule version of Part IV. [Schedule 1, item 31, paragraph 79(1)(aa)]

2.41 In order to provide consistency between the operation of this ancillary offence and the equivalent ancillary offence in section 11.1 of the Criminal Code, the interpretive provisions of subsections 11.1(2) to (6) of the Criminal Code are applied to the offence in section 79 in the same way that they apply to the Criminal Code offence of attempt. [Schedule 1, item 34, subsection 79(1AB)]

Conduct by directors, servants or agents

2.42 Current section 84 has the effect that a person may breach certain provisions of the TP Act in consequence of the behaviour of one of their employees, agents, or, in the case of a body corporate, directors.

2.43 Amendments to current section 84:

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insert into subsection 84(1) references to the cartel offences and parallel civil penalty provisions, so that in proceedings related to a cartel offence or a cartel civil penalty provision, the state of mind of directors, employees or agents of a corporation can be imputed to the corporation [Schedule 1, item 41, subsection 84(1)] ;

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insert into subsection 84(3) references to the cartel offences and civil penalty provisions, so that in proceedings related to a cartel offence or a cartel civil penalty provision, the state of mind of an employee or agent of a person other than a body corporate can be imputed to that person [Schedule 1, item 43, subsection 84(3)] ; and

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provide that a person other than a body corporate is not liable to be punished by imprisonment if they are convicted of an offence in circumstances where they would not have been convicted if subsection 84(3) or 84(4) had not been enacted [Schedule 1, item 48, subsection 84(4A)] .

2.44 Consistent with modern drafting practice, current section 84 is also amended to remove references to 'servants' and replace those references with the term 'employee'. [Schedule 1, items 41 to 47, subsections 84(1) to (4)]

Maximum fines

Individuals

2.45 The maximum fine for individuals (2,000 penalty units, or $220,000) found guilty of breaching a criminal offence in the Schedule version of Part IV [Schedule 1, item 126, subsections 44ZZRF(4) and 44ZZRG(4)] or under the criminal ancillary liability arrangements [Schedule 1, item 33, paragraph 79(1)(e)] is lower than the $500,000 maximum civil pecuniary penalty. It is, however, consistent with the maximum fine that may be imposed on an individual if he or she is convicted of a consumer protection offence in Part VC of the TP Act, and with other Commonwealth offences. This addresses concerns expressed by the Senate Scrutiny of Bills Committee regarding the need for greater consistency between Commonwealth penalty provisions.

2.46 The discrepancy recognises that the consequences of criminal conviction for an individual can be especially strong.

For example, an individual may be ineligible to hold an office, unable to obtain a licence to undertake certain activities, ineligible to travel to a range of other countries and be deported from Australia if not an Australian citizen.

2.47 This discrepancy also reflects the availability of alternative sanctions that apply in relation to criminal offences.

For example, the proceeds of crime regime will apply to the cartel criminal offences.

2.48 Further, these arrangements are consistent with Commonwealth criminal policy, as set out in A Guide to Framing Commonwealth Civil Penalties and Enforcement Powers , which provides that '[t]he effect of a criminal conviction should be taken into account when considering the relative penalties for an overlapping criminal offence and civil penalty. The appropriate maximum financial penalty under a civil penalty provision will often be higher than the appropriate maximum fine for a criminal offence. ... Setting a civil penalty higher than a fine for a corresponding offence is consistent with Commonwealth practice.'

2.49 Recommendation 26-3 of the Australian Law Reform Commission's Report 95: Principled Regulation was cast in similar terms, recognising that fines (criminal) and pecuniary penalties (civil) serve different purposes.

Corporations

2.50 The cartel offences in Division 1 of Part IV of the TP Act set out a formula for determining the maximum criminal fines for corporations found to have breached those offences [Schedule 1, item 19, subsections 44ZZRF(3) and 44ZZRG(3)] . This formula is equivalent to the formula for determining the maximum penalty that applies to a corporation found to have breached a civil penalty provision in Part IV of the TP Act.

2.51 The terms annual turnover, benefit and obtaining are defined in Division 1 of Part IV [Schedule 1, item 19, section 44ZZRB] . These terms appear in the penalty formula for determining the maximum fine for corporations [Schedule 1, item 19, subsections 44ZZRF(3) and 44ZZRG(3)] .

2.52 In relation to annual turnover , the same term appears in current subsection 76(1A) of the TP Act, which sets out a three-part penalty formula applying to corporations found to have breached a civil penalty provision in Part IV of the TP Act. (While the formula contains three parts, it allows for the application of one of two different penalties, with the third part forming an alternative second penalty). While annual turnover forms part of the third limb of the section 76 penalty formula (under which the penalty is 10 per cent of the annual turnover of the body corporate during the 12 months prior to the commission of the prohibited act), the term itself is defined for the purposes of section 76 in subsection 76(5). While the definition of annual turnover in Division 1 of Part IV is consistent with the definition in section 76 [Schedule 1, item 19, section 44ZZRB] , this separate definition is necessary because:

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the criminal offences in Division 1 of Part IV apply to corporations, whereas section 76 applies to corporations found to have breached the civil penalty prohibitions; and

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the Bill specifically provides that in determining a meaning of an expression used or a provision of the TP Act (other than Division 1, subsection 6(2(C)), paragraph 76(1A)(aa) or subsection 93AB(1A)), Division 1 of Part IV is to be disregarded.

2.53 Benefit also appears in the third limb of the fining formulae provided in the criminal offences in Division 1 of Part IV [Schedule 1, item 19, subsections 44ZZRF(3) and 44ZZRG(3)] . It is defined (consistent with the definition in subsection 136.1(9) of the Criminal Code) to include any advantage and is not limited to property [Schedule 1, item 19, section 44ZZRB] . In setting a fine, the Court would therefore be able to consider financial or pecuniary and non-financial or non-pecuniary advantages, such as the maintenance of a particular customer base or market share, or an undefined increase in the profit obtained from the sale of a good or service.

2.54 Obtaining appears in the second limb of the fining formulae provided in the criminal offences in Division 1 of Part IV. It is defined (consistent with the definition in section 130.1 of the Criminal Code) to include obtaining for another person or inducing a third person to do something that results in another person obtaining [Schedule 1, item 19, section 44ZZRB] . The word 'obtained' is used in the fining formulae under the criminal offences in Division 1 of Part IV, in the context of the total value of the benefits that have been obtained by one or more persons and are reasonably attributable to the commission of the offence [Schedule 1, item 19, subparagraphs 44ZZRF(3)(b)(i) and 44ZZRG(3)(b)(i)] . While it appears in a different form than the defined term that applies to Division 1 of Part IV, section 18A of the Acts Interpretation Act 1901 provides that in any Act, unless the contrary intention appears, where a word or phrase is given a particular meaning, other parts of speech and grammatical forms of that word or phrase have corresponding meanings. On that basis, it is considered that there is a consistent meaning applied to the term 'obtaining' and 'obtained'.

Bodies corporate

2.55 A body corporate that does not meet the definition of a corporation for the purposes of the TP Act may also be found guilty of committing a Schedule version offence, because those offences apply to persons generally, as the Schedule version is not reliant upon a Commonwealth head of power for its validity. [Schedule 1, item 126, subsections 44ZZRF(4) and 44ZZRG(4)]

2.56 The cartel offences in the Schedule version also set out a fining formula for determining the maximum criminal fines for bodies corporate found to have breached those offences [Schedule 1, item 126, subsections 44ZZRF(3) and 44ZZRG(3)] . This formula is equivalent to the formula for determining the maximum penalty that applies to a corporation found to have breached a civil penalty provision in Part IV of the TP Act, as well as the formula for a corporation found to have breached a Division 1 cartel offence (with the exception that the formula for the Schedule version offences refers to a 'body corporate' rather than a 'corporation') [Schedule 1, item 17, subsection 6(5A)] .

Location of fines

2.57 As the offences in the TP Act apply to corporations, bodies corporate and individuals, the fines for variously committing a criminal offence are found in different locations, including:

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for corporations: co-located with the two offences in Division 1 of Part IV [Schedule 1, item 19, subsections 44ZZRF(3) and 44ZZRG(3)] ;

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for individuals and bodies corporate: co-located with the ancillary offences in section 79 [Schedule 1, item 33, paragraph 79(1)(e)] , and with the mirror versions of the criminal offences in the Schedule [Schedule 1, item 126, subsections 44ZZRF(4) and 44ZZRG(4)] ; and

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for individuals and bodies corporate: co-located with the Schedule version of the criminal offences [Schedule 1, item 126, subsections 44ZZRF(3) and 44ZZRG(3)] .

2.58 While the location of maximum fines are spread through various provisions of the TP Act, the general principle is that, regardless of location:

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the maximum fines for individuals (either for a breach of an ancillary offence, or for a breach of the Schedule version of the Part IV offences) are the same; and

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the maximum fines for corporation and for bodies corporate are the same.

Federal indictable jurisdiction

2.59 Current section 163 confers jurisdiction on the Federal Court in prosecutions under the TP Act. However, the current offences in the TP Act (for example, in Part VC) are summary offences, while the cartel offences will be indictable offences. The cartel offences will be the first Commonwealth offences in Australia able to be heard by the Federal Court upon indictment. This necessitates changes to the Federal Court to enable this to occur. Such changes (to provide for committals, bail, practice and procedure, juries, sentencing and appeals) are the subject of amendments contained in the Federal Court of Australia Amendment (Criminal Jurisdiction) Bill.

2.60 Amendments to current section 163 will confer jurisdiction on the Federal Court (with exceptions) where subsection 163(2) of the TP Act has effect as a law of the Commonwealth. [Schedule 1, item 117, subsection 163(2)]

2.61 Current section 86 confers jurisdiction on various courts with respect to matters instituted under the TP Act. Current subsection 86(2) confers jurisdiction on State and Territory courts with respect to civil proceedings instituted under Parts IVA, IVB, and Division 1, 1A or 1AA of Part V by a person other than the Minister or the ACCC. Amendments confer jurisdiction on the Supreme Courts of the States and Territories to grant injunctions and make orders under sections 86C (non-punitive orders), 86D (adverse publicity orders), 86E (disqualification orders) or 87 (general ancillary orders) in relation to cartel matters. [Schedule 1, items 49 to 51, subsections 86(3A), (3B) and (4)]

2.62 Current section 163A confers jurisdiction on the Federal Court to make declarations and orders of prohibition, certiorari or mandamus. Amendments ensure that if a prosecution relating to the criminal cartel offences is commenced in a State or Territory Supreme Court, the Federal Court does not have jurisdiction with respect to declarations and orders in relation to the offence being prosecuted. This vests the Supreme Court with federal jurisdiction to hear collateral challenges. Therefore, where prosecutions are commenced in a Supreme Court, related declarations and orders are to be made in the same court. [Schedule 1, items 122 to 124, section 163A]

2.63 Amendments also vest the State and Territory Supreme Courts with federal jurisdiction with respect to certain declarations and orders if those courts are hearing appeals arising out of prosecutions of the criminal cartel offences. Where there is an appeal arising out of a prosecution of the criminal cartel offences, the Federal Court will not have jurisdiction with respect to certain declarations or orders for certiorari, prohibition or mandamus. [Schedule 1, items 122 to 124, section 163A]

Judge overseeing trial may make related civil orders

2.64 A judge presiding at a trial against a person for contravening the cartel criminal offences may, at any time the judge considers it appropriate, grant certain related civil orders. This is consistent with current section 79(4), which enables a court to make such orders in relation to a contravention of the consumer protection criminal offences in Part VC. This will ensure that a separate civil trial on those matters is not necessary. [Schedule 1, item 19, section 44ZZRI]

2.65 For that purpose, State Supreme Courts are vested with federal jurisdiction in respect to any matter in respect of which a civil proceeding is instituted in that court. Subject to constitutional limitations, a Territory Supreme Court is also vested with jurisdiction in respect to any matter in respect of which a civil proceeding is instituted in that court. The amendments also clarify that this jurisdiction vested on those courts is an exception to the general principle, that the Federal Court has exclusive jurisdiction in relation to all other trade practices matters. [Schedule 1, item 51, paragraph 86(4)(ba)]

Enforcement and recovery of fines

2.66 Fines imposed under the TP Act can be enforced and recovered under section 79A. This provision is applied to the enforcement and recovery of fines imposed for a breach of the cartel offences. [Schedule 1, item 37, subsection 79A(1)]

Application and transitional provisions

2.67 Subsection 163(2) of the TP Act, which provides the Federal Court with exclusive jurisdiction in so far as section 163 has effect as a law of the Commonwealth, is repealed. However, the effect of that subsection is 'saved' in relation to prosecutions instituted before the commencement of the relevant provisions of the Bill. [Schedule 1, item 118, subsection 163(2)]

2.68 The changes to provide the Federal Court with federal indictable jurisdiction, as provided by this Bill, will not apply in relation to any proceeding that is instituted before the commencement of Schedule 1 of the Federal Court of Australia Amendment (Criminal Jurisdiction) Bill. [Schedule 1, item 121, subsection 163(6)]