What you need to know:
– the penalties available to the Australian Securities and Investments Commission (ASIC) to counter corporate wrongdoing are more lenient than many overseas jurisdiction
– ASIC has recognised this and has submitted that an overhaul is required if the penalties are to have their desired deterrent effect
– if ASIC is successful, corporate wrongdoers in Australia will no longer be able to profit from their illegal activity without heavy pecuniary penalty.
ASIC is pushing for a review of the penalties available for corporate wrongdoing. Many of the penalties available under the current ASIC regime were last updated over a decade ago. ASIC penalties lack teeth, as we discuss below. ASIC recognises the current penalty regime is inadequately equipped to deter white collar criminals in Australia and an overhaul is due.
Why all the fuss?
If white collar criminals approach their actions with a cost/benefit analysis, a soft regulatory approach in Australia may result in potential wrongdoers deciding the penalty is worth the illegally obtained benefit.
In its August 2013 submission to a Senate enquiry into ASIC’s performance, ASIC suggested that a ‘stronger penalty regime would allow ASIC to deliver better market outcomes… and improve the cost-effectiveness of enforcement actions by maximising their impact and deterrent effect’.
Within six months of this submission, ASIC released its Report on Penalties for Corporate Wrongdoing (Report). ‘Corporate wrongdoing’ refers to misconduct that occurs in the corporate, financial market or financial services sectors.
The findings of the Report will inform ASIC’s submission to the Financial System Inquiry, and if successful, the penalties for corporate wrongdoing in Australia may become more onerous.
How did the Report approach the problem?
The purpose of the Report was to outline the penalties available under the Corporations Act 2001 and to compare them with overseas jurisdictions, as well as considering the Australian context through other domestic regulators (which is not addressed in this article).
The Report examined penalties available for market misconduct (e.g. insider trading) and financial services misconduct (e.g. false and misleading representations).
What were the results?
The Report generally concludes that the criminal penalties available to ASIC are broadly consistent with those available overseas. However, the civil monetary penalties are not as widely available and are significantly lower in Australia.
For insider trading, the maximum prison term in Australia is equal to Canada, Hong Kong and the United Kingdom, but is well below the United States’ prison terms. The maximum fine for insider trading in a criminal prosecution for a corporation in Australia is $7.7 million (or three times the benefits gained or 10 percent of annual turnover), which is greater than Canada ($5.3 million or three times the benefits gained) and Hong Kong ($1.4 million), but significantly lower than the United Kingdom (unlimited) and the United States ($27.9 million).
The obvious deficiencies in ASIC’s arsenal under the Corporations Act 2001 can be seen in the comparison of maximum civil penalties. The largest civil penalty available for a corporation in Australia is $1 million, compared to Canada ($1.1 million), Hong Kong (unlimited), United Kingdom (unlimited) and the United States (up to three times the benefit gained).
In addition, all of the international jurisdictions reviewed have disgorgement available as a civil penalty. Disgorgement is the removal of the financial benefit that arises from wrongdoing. Australia does not have any equivalent disgorgement provisions in the ASIC-administered legislation. The lack of a disgorgement provision undermines the core aim of deterrence under ASIC’s regime and can encourage unjust enrichment for calculating offenders.
Example in action
The former CEO of UCL Resources Ltd (UCL) was found guilty of insider trading. He received two years’ imprisonment, suspended while on a two year good behaviour bond.
His nephew and another man profited from this inside information through the purchase of shares which earned them $20,000. They were also found guilty of insider trading, and were given two year good behaviour bonds and fined $2,769 and $13,805, meaning they still profited from their crimes. Had disgorgement been available, the profit could have been removed.
This is a clear example of a cost/benefit analysis leading to a negative criminal outcome. Moving forward, at the very least, the addition of a disgorgement provision to ASIC’s penalty regime would prevent this type of criminal profiting.
More recently, a trader at the National Australia Bank and a staff member at the Australian Bureau of Statistics (ABS) were arrested for insider trading after sensitive information from the ABS was used to personally profit from foreign exchange derivative products. Both men face up to 10 years imprisonment. A punishment of that magnitude may signal the start of change to the lenient regime.