Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 2 Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018

2.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.2 The Bill introduces a stronger penalty framework to combat misconduct and improve community confidence in the corporate and financial sector. The Bill amends the Corporations Act, ASIC Act, Credit Act and Insurance Contracts Act.

2.3 The amendments made by the Bill:

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update the penalties for certain criminal offences in ASIC administered legislation, including:

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increasing the maximum imprisonment penalties for certain criminal offences;

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introducing a formula to calculate financial penalties for criminal offences;

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removing imprisonment as a penalty and increasing the financial penalties for all strict and absolute liability offences;

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introduce ordinary criminal offences that sit alongside strict and absolute liability offences;

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modernise and expand the civil penalty regime by increasing financial penalties for contraventions and making a wider range of offences subject to civil penalties;

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harmonise and expand the infringement notice regime;

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introduce a new test that applies to all dishonesty offences under the Corporations Act;

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introduce relinquishment as a remedy available in civil penalty proceedings;

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clarify that the courts are to give priority to compensating victims over ordering the payment of financial penalties; and

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clarify that contraventions of section 184 of the Corporations Act can occur even when the relevant corporation gains an advantage from the contravention.

Human rights implications

2.4 Consideration has been specifically given to the guidance in the Parliamentary Joint Committee on Human Rights' Guidance Note 2: Offence provisions, civil penalties and human rights and to the Attorney-General's Department's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011 edition.

2.5 The impact of the Bill on the following human rights has been considered:

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the right to fair trial under article 14 of ICCPR; and

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the imposition of strict liability offences, and increases to maximum terms of imprisonment, under the Guide.

Removal of terms of imprisonment for strict and absolute liability offences

2.6 Currently certain strict and absolute liability offences carry imprisonment terms as a potential penalty. Strict liability and absolute liability remove a fault element that would otherwise attach to a physical element and are generally only appropriate in limited circumstances.

2.7 Given that the proof of fault is one of the most fundamental protections in criminal law, it is not considered appropriate for the existing strict and absolute liability provisions to continue to attach a punishment by terms of imprisonment.

2.8 The Bill addresses this by ensuring that all strict and absolute liability offences within the Corporations, ASIC, and Credit Acts do not carry imprisonment as a potential penalty. These amendments uphold the principals set out under Article 14 of the ICCPR.

Increases to terms of imprisonment for certain criminal offences

2.9 This Bill increases the maximum imprisonment term for some criminal offences that have the potential to cause serious harm. The Bill increases or introduces terms of imprisonment for existing offences that were already subject to punishment by imprisonment or a penalty fine.

2.10 Courts are unable to sentence an offender for more than the maximum penalty prescribed by the legislation. This Bill improves a court's ability to ensure that punishment of seriousness misconduct aligns with community standards and expectations by increasing the maximum terms of imprisonment. The judiciary continues to have discretion to consider the level of criminal culpability, and impose a penalty that is appropriate in the circumstances, up to the maximum term. The maximum penalty is generally reserved only for the most egregious cases.

2.11 A number of the offences are designed to sanction contraventions of fundamental obligations that protect consumers and investors. Monetary sanctions may not be a sufficient deterrent for contravention of those offences given that the committing of the offence may result in a substantial monetary gain. To deter such behaviour, and to ensure committing an offence is not merely factored in as a cost of doing business, increases to the imprisonment terms are appropriate. This will neutralise any financial benefits or gains obtained from illegal behaviour, and prevent further misconduct by the offender.

2.12 To the extent the amendments increase the maximum term of imprisonment, they do not amend any of the criminal process or procedural rights that currently exist and are upheld in accordance with article 14 of the ICCPR.

2.13 The increased penalties will apply to offences that are committed, or begin to be committed, after the Bill commences, and therefore apply prospectively, therefore upholding article 15 of the ICCPR.

Increase to maximum fine for criminal offences

2.14 In addition to increasing imprisonment terms, the Bill also makes amendments to increase the financial penalty for criminal offences. The maximum financial penalty for criminal offences is calculated through a new formula, where, if the term of imprisonment is less than 10 years, the individual fine formula is the imprisonment in months multiplied by 10.

2.15 The Bill makes amendments to increase the financial penalty fine if the term of imprisonment for an offence is 10 years or more:

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4,500 penalty units; or

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the benefit derived or detriment avoided because of the offence multiplied by three.

2.16 The financial penalty for offences with 10 years or more imprisonment is appropriate, given that the offences in the Corporations, ASIC and Credit Acts are of a corporate nature. The increase in penalties reflects the seriousness of misconduct and aligns with community standards and expectations.

2.17 The new penalty fine amounts are the maximum that a court can impose.

2.18 Those involved in committing such offences could receive large financial benefits from their misconduct, especially in the larger corporate and financial business sectors. To deter such behaviour, and to ensure paying a financial penalty does not become a cost of doing business, a ratio of 10 for individuals is appropriate. The higher penalty amounts for offences of the most egregious in nature are also appropriate to deter engaging in such behaviour and effectively sanction misconduct.

2.19 These increases will neutralise any financial benefits or gains obtained from illegal behaviour.

2.20 To the extent the amendments increase the maximum penalty for criminal offences, they do not amend any of the criminal process or procedural rights that currently exist and are upheld in accordance with article 14 of the ICCPR. The increased penalties will apply to offences that are committed, or begin to be committed, after the Bill commences, and therefore applies prospectively, therefore upholding article 15 of the ICCPR.

2.21 To the extent the increases in financial penalties apply to bodies corporate, they do not engage any human rights.

New ordinary criminal offences that sit alongside strict and absolute liability offences

2.22 The Bill makes amendment to introduce a number of new ordinary criminal offences that now sit alongside strict and absolute liability offences. This will strengthen the enforcement options available to ASIC.

2.23 The default fault elements of the Criminal Code apply to these new offences. This is consistent with paragraph 2.2.4 of the Guide.

2.24 Equivalent ordinary offences to strict and absolute liability offences have been introduced, and have a higher penalty to reflect that committing the ordinary offence is a deliberate act, and therefore comes with a higher level of culpability. Maintaining the existing strict and absolute liability penalty amounts for ordinary offences does not adequately reflect the importance of these obligations in maintaining consumer confidence and integrity in the corporate and financial industry. Penalties for ordinary offences have therefore been increased.

2.25 The introduction of the new ordinary criminal offences do not amend any of the criminal process or procedural rights that currently exist and are upheld in accordance with article 14 of the ICCPR.

2.26 The increased penalty amounts are adequate to sanction misconduct for the worst possible case.

2.27 The new ordinary criminal offences will apply to offences that are committed, or begin to be committed, after the Bill commences, and therefore applies prospectively, therefore upholding article 15 of the ICCPR. To the extent the new ordinary criminal offences apply to bodies corporate, they do not engage any human rights

Increase to penalties for strict and absolute liability offences

2.28 The Bill makes amendments to increase financial penalties and remove imprisonment as a penalty, for strict and absolute liability offences.

2.29 Financial penalties for all strict and absolute liability offences have increased to reflect the seriousness of the offence. Where a strict and absolute liability offence currently carries an imprisonment term as a penalty, the penalty has been converted to a financial penalty using the individual fine formula, explained above. Imprisonment as a punishment for strict and absolute liability offences has been removed. This is consistent with the Guide.

2.30 The Guide suggests an appropriate penalty for a strict liability offence is 60 penalty units for an individual and 300 penalty units for a body corporate. For absolute liability offences, the Guide suggests an appropriate penalty to be 10 penalty units for an individual and 50 penalty units for a body corporate. The individual and body corporate fine formulae in some instances have increased some strict and absolute liability penalties to be higher than 60 penalty units for individuals and higher than 300 penalty units for body corporates. While the amendments depart from the Guide, the increase in penalty now reflects the seriousness of the offence and is appropriate as it makes the amounts more proportionate to the other penalty increases and acts as a sufficient deterrent. Furthermore, the increases in the financial penalties also offset the removal of imprisonment as a possible sanction for committing strict or absolute liability offences.

2.31 The application of strict and absolute liability offences removes the requirements to prove fault. These offences are existing strict and absolute liability offences in the Corporations Act. The application of strict and absolute liability offences are appropriate to ensure the integrity of the financial sector, as consumers put their trust in these classes of people (for example, company directors, financial advisors, superannuation trustees), therefore failure to comply with their obligations can result in detriment to the consumer. Strict and absolute liability offences reduce non-compliance and act as an appropriate deterrent.

2.32 Furthermore, strict liability offences preserve the defence of honest and reasonably mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for person who may be accused of such offence.

2.33 While the amendments increase the maximum penalty for strict and absolute liability offences, they do not amend any of the process rights that currently exist. The increased penalties will apply to offences that are committed after the Bill commences, and therefore apply prospectively, therefore upholding article 15 of the ICCPR.

New strict liability offence

2.34 The Bill introduces one new strict liability offence. Section 250SA of the Corporations Act is now a strict liability offence. Section 250SA of the Corporations Act provides that at the listed company's Annual General Meeting, the chair must allow for a reasonable opportunity for members to ask questions or make comments on the remuneration report. Section 250S is a strict liability offence and is a similar provision except it is in relation to asking questions and making comments on the management of the company. Sections 250S and 250SA of the Corporations Act are similar and therefore a breach should result in the same maximum penalty. The penalty for contravening sections 250S and 250SA of the Corporations Act is 20 penalty units for an individual and 200 penalty units for a body corporate.

2.35 A strict liability offence for contravening section 250SA is appropriate and consistent with the requirements in the Guide. For instance, this offence is not punishable by imprisonment and the fines for the offence do not exceed 60 penalty units for individuals or 300 penalty units for body corporates. The application of strict liability is appropriate to reduce non-compliance and ensures members are allowed a reasonable opportunity to ask questions on the remuneration report at the annual general meeting.

2.36 Furthermore, strict liability offences preserve the defence of honest and reasonably mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for the person who may be accused of such offence.

2.37 The penalty for this offence applies prospectively, therefore upholding article 15 of the ICCPR.

Increase to the maximum civil penalty and expanding the civil penalty regime

2.38 The Bill makes amendments to introduce new civil penalty provisions and to increase and align the civil penalty provisions in the Corporations Act, ASIC Act, Credit Act and Insurance Contracts Act. If an individual contravenes a civil penalty provision, ASIC may apply to the court and the court can order individual defendants to pay:

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5,000 penalty units; or

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the benefit derived or detriment avoided because of the contravention, multiplied by three.

2.39 The Guidance Note observes that civil penalty provisions may engage criminal process rights under articles 14 and 15 of the ICCP R, regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of articles 14 and 15 of the ICCPR.

2.40 While the civil penalty provisions are not classified as criminal under Australian law, consideration must be had to the nature, purpose and severity of the penalties.

2.41 While the purpose of the increase to the maximum civil penalty is to act as a sufficient deterrent for misconduct, the penalties are restricted to people who should be aware of their obligations, such as financial advisors, superannuation trustees and company directors.

2.42 The maximum penalty for contravening a civil penalty provision for an individual is either 5,000 penalty units or the benefit derived or detriment avoided, multiplied by three. The increased penalty ensures civil penalties for individuals proportionately align with the increase in civil penalties for bodies corporate, and act as a sufficient deterrent for misconduct.

2.43 In practice, it is intended that courts would determine which method provides the greatest penalty, and then use discretion to impose an appropriate penalty up to that amount. The penalty is the maximum that a court can impose, taking into account the facts and circumstances of each case.

2.44 The method for calculating the pecuniary penalty applicable provides flexibility and ensures the penalty reflects the seriousness of the contravention and community expectations. It will further ensure that incurring a civil penalty is not considered a cost of doing business, and provides an appropriate penalty amount to deter and punish misconduct.

2.45 The new maximum penalty is justified where consequences of not complying can cause consumer detriment. Not complying with the obligations under the Corporations Act, ASIC Act, Credit Act and Insurance Contracts Act can harm consumers and create distrust in the financial services sector. The maximum penalty is considered appropriate to adequately deter misconduct.

2.46 While the civil penalty amounts are intended to deter misconduct, none of the civil penalty provisions carry a penalty of imprisonment. The civil penalty provisions should not be considered 'criminal' for the purpose of human rights law due to their application in a financial services regulatory context. Therefore, the civil penalty provisions do not create criminal offences for the purposes of articles 14 and 15 of the ICCPR.

2.47 Furthermore, the increased penalty for civil penalty provisions will apply to offences that are committed after the Bill commences, and therefore applies prospectively, therefore upholding article 15 of the ICCPR.

Reverse evidential burden

2.48 The Bill draws on standard provisions from the Regulatory Powers Act to modernise the civil penalty frameworks in the Corporations, ASIC, Credit and Insurance Contracts Acts.

2.49 The modern framework includes the ability for a person to rely specifically on a defence of mistake of fact, but also on any exception, exemption, excuse, qualification or justification provided by the law creating the civil penalty provision.

2.50 If a person wishes to rely on the defence of mistake of fact, or any exception, exemption, excuse, qualification or justification provided by the law creating the civil penalty provision, the person will have the evidential burden in relation to those matters. That is, the person has the burden to adduce or point to evidence to establish a matter exists, or does not exist, in relation to those matters.

2.51 It is appropriate in these instances that the onus is reversed and placed on a defendant to adduce or point to evidence to establish a relevant matter exists or does not exist. Knowledge of matters relating to a mistake of fact, or any exemption, excuse, qualification or justification provided by the law creating the civil penalty provision, is peculiarly within the knowledge of the defendant. Placing this burden on the defendant is further justified because it would be significantly more difficult and costly for the prosecution to disprove elements that are squarely within the knowledge of the defendant.

Conclusion

2.52 To the extent that the Bill engages the rights under articles 14 and 15 of the ICCPR it is compatible with human rights as the limitations:

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achieve the legitimate objective of protecting the general public from corporate misconduct;

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are rationally connected to the objective by improving the likelihood of compliance with the regulatory regimes; and

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impose proportionate penalties, including providing for terms of imprisonment where monetary fines do not act as a sufficient deterrent, to deter future misconduct.

2.53 Therefore this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.