Corporate and Financial Sector Penalties increase

The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2018 has passed both Houses (with amendments) and is awaiting Royal Assent.

UPDATE: Royal Assent given on 12 March 2019. The new penalties apply from 13 March 2019.

The purpose of the Act is to strengthen the criminal and civil penalties for financial sector misconduct that apply under the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001 (the ASIC Act), the National Consumer Credit Protection Act 2009 (the Credit Act), and the Insurance Contracts Act 1984. All of these Acts are administered by ASIC.

The Act amends the ASIC administered legislation to:

  • introduce increased penalties for criminal offences, including increased maximum imprisonment and financial penalties
    – the Act introduces a formula for calculating the maximum financial penalties for criminal offences that explicitly links it to the potential imprisonment term or to the turnover of the body corporate
    – the Act also removes imprisonment as a possible penalty for strict and absolute liability offences;
  • increase the maximum financial penalties that apply to civil offences and expands the range of offences subject to civil penalties;
  • expand the infringement notice regime across the ASIC administered legislation;
  • introduce disgorgement (called relinquishment in the Act) as a potential civil penalty;
  • clarify that courts are to prioritise the compensation of victims over the application of financial penalties.

The maximum prison penalties for the most serious offences will increase to 15 years. These include breaches of director’s duties, false or misleading disclosure and dishonest conduct.

Civil penalties for companies will significantly increase to a maximum 10 per cent of annual turnover, to be capped at $525 million.

Maximum civil penalties for individuals will increase to $1.05 million or three times the benefit gained, whichever is greatest. Civil penalties will apply to a greater range of misconduct, including licensee’s failure to act efficiently, honestly and fairly, failure to report breaches and defective disclosure.

The changes (except for those relating to laws not yet passed) commence the day after the Act receives Royal Assent.

ASIC’s response
In the FSRC Interim Report Commissioner Hayne observed that increased penalties for misconduct will have only limited deterrent (or punitive) effect unless there is greater willingness to seek their application by ASIC.

In response ASIC says it now has an enforcement culture that requires investigations to be conducted with a clear view of the regulatory outcomes to be achieved and with a focus on the question, “why not litigate?’.

Following the Final Report of the Royal Commission, the Government’s Response and ASIC’s Internal Enforcement Review, ASIC has resolved to establish an Office of Enforcement within ASIC. The Office of Enforcement will be responsible to the Commission for investigation and enforcement of contraventions of the laws that ASIC administers.

Increased penalties
Thirteen offences under the Corporations Act have had their maximum imprisonment term increased to 15 years, aligning these penalties with the maximum penalties for the most serious misconduct under the Corporations Act. Offences which currently carry a maximum imprisonment penalty of ten years in the Corporations Act include entering into agreements or transactions to avoid the payment of employee entitlements (section 596AB of the Corporations Act), market manipulation (section 1041A of the Corporations Act) and insider trading offences (section 1043A of the Corporations Act).

Additionally, a number of offences for which there were no existing imprisonment penalties now have maximum penalties of imprisonment applied. For example, there is a significant increase in the penalties for making false and misleading statements in a license application (subsection 1308(8) of the Corporations Act) where the maximum penalty has increased from five penalty units (currently $1,050) to five years imprisonment.

Formula for applying pecuniary penalties for criminal offences
The Act introduces a formula into the Corporations Act, the ASIC Act and the Credit Act to calculate possible additional fines for criminal offences where imprisonment is the only penalty specified. These financial penalties can be applied instead of imprisonment or in addition to imprisonment.

These formulas link financial penalties to the maximum term of imprisonment applicable to the offence. Higher pecuniary penalties apply for more serious criminal conduct (with terms of imprisonment of 15 years or more).

The maximum pecuniary penalty amounts for criminal offences under each Act are now as follows:
For individuals
If the maximum term of imprisonment is less than 15 years, then the maximum financial penalty that can be applied to an individual is the number of penalty units equal to the term of imprisonment in months multiplied by 15.
If the maximum term of imprisonment is 15 years or more, then the maximum pecuniary penalty that can be applied is the greater of:
• 5,000 penalty units (currently $210 each, totalling $1,050,000) or
• if the court can assess the benefit derived and detriment avoided as a result of the criminal offence, three times that amount.
For body corporates
If the maximum term of imprisonment is less than 15 years for the offence then the maximum financial penalty that can be applied to a body corporate is the maximum penalty that applies to individuals multiplied by 15.
If the maximum term of imprisonment is 15 years or more, then the maximum financial penalty is the greatest of:
• 50,000 penalty units
• if the court can assess the benefit derived and detriment avoided as a result of the criminal offence, three times that amount and
• ten per cent of the annual turnover of the body corporate for the 12 month period ending in the month that the body corporate committed, or began committing the criminal offence

Maximum pecuniary penalty amounts for civil contraventions
The maximum pecuniary penalty amount that may be applied by a court (called a pecuniary penalty order) for a contravention of a civil penalty provision within the ASIC administered legislation is specified in each of the Acts, as follows:
For individuals
Under the Corporations Act the proposed maximum pecuniary penalty that can be applied to an individual for a contravention of a civil penalty provision is the greatest of:
• 5,000 penalty units ($1.05 million) or
• if the court can assess the benefit derived and detriment avoided as a result of the contravention, three times that amount.
Under the ASIC Act, the Credit Act and the Insurance Contracts Act the maximum pecuniary penalty that can be applied for a contravention of a civil penalty provision is the greater of:
• the penalty specified for that civil penalty provision or
• if the court can assess the benefit derived and detriment avoided as a result of the contravention, three times that amount.
For body corporates
Under the Corporations Act, the ASIC Act, the Credit Act and the Insurance Contracts Act the maximum proposed pecuniary penalty for a contravention of a civil penalty provision by a body corporate is the greatest of:
• ten times the penalty applicable to an individual, which in the case of the Corporations Act is 50,000 penalty units ($10.5 million) or
• if the court can assess the benefit derived and detriment avoided as a result of the contravention, three times that amount or
• ten per cent of the annual turnover of the of the body corporate for the 12 month period ending in the month that the body corporate committed, or commenced the civil contravention
– this penalty based on turnover is capped at a maximum amount of 2.5 million penalty units ($525 million).

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