Author: Bugg, D. Date: 3/7/2000 Venue: Australasian Law Teachers' Association Conference, University Law School of Canberra, 3 - 5 July 2000
The Enforcement of Corporations Law It is axiomatic that the proper regulation of any conduct requires effective enforcement of breaches of regulation, and so it has always been regarded as essential in protecting the interests of shareholders and creditors and in maintaining credibility of corporate regulation, both within the community and internationally, that the enforcement of that regulation obtains compliance or appropriate sanction for non compliance. Corporate Law enforcement has consistently been the subject of close scrutiny and debate and, more recently, constitutional challenge. While the issues which have given rise to that scrutiny and debate have changed little in recent years, the examination by the High Court of recent constitutional challenges to the Corporations Law and the power and functions of the DPP in pursuing breaches of that law justify further examination of the arguments advanced for a review or softening of the use of criminal sanctions for the enforcement of regulated conduct. I was appointed Commonwealth Director of Public Prosecutions on 2 August 1999, having been Tasmanian DPP for 13 years. Prosecuting Commonwealth crime, at that stage, did not seem to me to involve a significant change. The principles were the same but State criminal prosecutions had more "street" appeal and broader community impact and usually involved victims. The codified criminal law in Tasmania had been settled over many years and the role of the DPP, on behalf of the Crown, was well settled and accepted . I was subjected to the occasional foray into the High Court, usually at the hands of the late H J (John) Kable QC, a friend and very respected colleague (see for example, Williams v The Queen , Carr v The Queen and Stingel v The Queen ). These challenges tested the acceptance of settled principle but did not question the correctness of criminal prosecution and sentencing in providing the appropriate deterrent within the Criminal Justice System in Tasmania. With the exception of the well documented difficulties in conducting complex prosecutions of alleged breaches of Corporations Law by well resourced defendants there had been no other significant problem for the Commonwealth DPP in its prosecution and enforcement of Corporations Law as at the 2nd of August 1999. That was all to change on the 12 August 1999 when the High Court handed down its decision in Hopwood & Byrnes and defined the powers of the CDPP, or lack thereof, to appeal sentences imposed in South Australia under the Corporations Law of that State. There is little doubt that this decision encouraged the Bond Appeal and the Hughes' Removal Application which raised further concerns for my Office and at the same time no doubt coupled with my decision to not undertake any prosecutions arising from the Yannon investigation, encouraged those who supported an alternative approach to criminal prosecution for the enforcement of regulation of corporations to revisit their arguments. Students of the constitution would not have been surprised by the Court's approach in light of its decisions in Kable which I had to mention to make the title relevant to my experiences at the hands of that litigant's namesake including Tasmania and Wakim . The High Court clearly viewed cooperative legislative arrangements between States and the Commonwealth as acceptable provided those arrangements did not seek to empower or impose duties or functions upon Chapter III Courts (Wakim) or Commonwealth instrumentalities when that empowerment or imposition was not supported by the Constitution or a Head of Legislative Power. This additional complication provided further argument in support of the civil based enforcement regime for regulation under Corporations as opposed to the use of the Criminal Justice System which, I understand it is claimed, is not suited to regulation in a contemporary and evolving commercial sector.
Enforcement of regulation by prosecution
Criminal Codes, Penal Statutes and Regulatory regimes all attempt to control or regulate conduct. The penalties for breaches of those codes, statutes or regulations will normally reflect the seriousness of the conduct proscribed and the perceptions of law makers as to the appropriate measure of deterrence. Under Corporations Law there are three levels of enforcement, administrative, civil remedy and criminal prosecution. Acknowledging that any regulatory schemes seek, firstly, to achieve regulation by encouragement the only affective regulatory sanction must contain elements of both personal and general deterrence. The arguments suggesting the inappropriateness of criminal prosecution as an enforcement tool in corporate regulation have been met with the response that a civil penalty (debt or confiscation of proceeds) does not provide adequate personal and general deterrence. In my experience there are three stages of deterrent in the use of criminal prosecution to achieve compliance. Firstly, detection. There are few people who "break the law" knowing or expecting at the time that their wrong doing will be detected. For any regulatory scheme to be effective there must be an adequately resourced investigative agency which not only has the resources but also the power to properly investigate alleged breaches of regulation. Coercive investigative powers are available and, with refinement, will provide a convincing and effective investigative base. Secondly, the ignominy of a public charging process and prosecution. Thirdly, the imposition of a penalty upon conviction. An effective "civil penalty" regime will require investigative resourcing and empowerment in any event if there is to be the deterrent of detection but, arguably, such an approach will not achieve the remaining stages of deterrence which I have outlined. Those who advocate a different approach to prosecution of corporate offences point to the ease of proof (the civil onus), the delays with the criminal process, the inability of the Criminal Justice System to deal with complex matters and the uncertainty of trial outcomes as arguments in support of rejecting the criminal process in favour of a civil based enforcement process. I accept that simple regulatory matters (e.g. a failure to lodge an Annual Return) and matters for which a civil penalty (fine and forfeiture) is appropriate should not be considered within the scope of these discussions. They are matters for which both the process and penalty should be seen as a sufficient regulatory outcome achieving the object of compliance. I did not understand, as a newcomer, that the debate has involved these matters and therefore propose to focus on that area of wrong doing where it has been contended that the conduct is clearly criminal and so serious that prosecution recommends itself.
Why is criminal prosecution inappropriate
Prosecuting serious corporate wrong doing has been said by one of my predecessors to be a task which is "not for the faint hearted" . I agree but if the Criminal Justice System is to be held out as providing the only effective process for the imposition of the ultimate deterrent then we need to address those arguments by which it is contended that the flaws within the system justify adoption of an alternative approach. There are many examples which illustrate that the Criminal Justice System struggles to cope with complex fraud trials. The trials are ultimately dealt with but their duration far exceeds that which was ever contemplated by those who established, and those who maintain support for, trial by jury in the Criminal Justice System. In addition lengthy trials involving complex issues, or those made complex by the management of the trial process, the presentation of the prosecution and the conduct of the defence, usually giving rise to a number of successful grounds of appeal. I commend the excellent consideration of the complex trial by Dr Chris Corns in 1997 . As Justice Frank Vincent has said: "There is a good argument that trials of this length cannot be property and fairly accommodate within a system that was simply no developed to encompass them". It must be remembered however that not all complex trials involve prosecutions for corporate wrong doing and not all prosecutions for corporate wrong doing are complex and give rise to a lengthy trial process. Pleas of guilty and shorter uncomplicated trials are not mentioned in arguments for the abandonment of the criminal process as an enforcement tool. The process of proof of guilt of criminal offences is fundamentally adversarial and for this reason the "contest" between the prosecution and the defence and the practise of members of some investigative agencies in the past of not playing by the rules (Police verbals) see Williams v The Queen (supra) has created a culture of mistrust and contest giving rise to lengthy pretrial manouverings aimed principally at discovering in minute detail every piece of evidence or material gathered during the investigation even if not relevant to any aspect of the prosecution or defence. Even with the introduction of safeguards (electronic recording and pretrial disclosure) and the involvement of the DPP in most committals these practises continued and became so excessive that they lead to the serious modification if not abandonment of the committal process in some jurisdictions in Australia . All Directors of Public Prosecutions in Australia have, as part of an ongoing attempt to achieve openness in the trial process, published guidelines governing the decision to prosecute and the disclosure of material gathered during the investigative process. Unfortunately the culture of mistrust has however lead to a less than balanced approach towards these and other attempts at reforming the criminal trial process. With a few minor exceptions an accused person is still not obliged to cooperate in simplifying the issues to be determined during the trial. The culture of the adversarial system has maintained the practise followed by a number of defence counsel of insisting upon the prosecution proving every fact and matter even if those facts and matters are not in dispute. The expectation that a technical flaw will appear in the trial process through a "dropped catch" in the Crown case has in turn lead to excessive prosecution practises, which amount to nothing more than dotting Is and crossing Ts and which now themselves are the subject of criticism (e.g. calling too many witnesses, tendering too many documents and laying too many charges) . I would not be surprised if the point will not soon be reached where obstructive and obfuscating tactics by the defence are considered an abuse of process warranting professional (and judicial) sanction. A Criminal Justice System which imposes no burden upon the accused or his legal representatives to identify issues but at the same time requires the prosecution to make full disclosure of evidentiary material, provide particulars of charges and even information relevant to the credibility of prosecution witnesses and call every witness overlooks the significant and unwarranted hardship such requirements imposed upon the community's representatives in compiling and presenting material in many cases for which they are not required. The accusatorial system cannot, without some modification, cope with the pressures such requirements impose upon it particularly if the only basis for maintaining this imbalance is the so called right to silence, or privilege against self incrimination. Without a determined approach from all interested parties the Criminal Justice System will soon be found unable to cope with the trials of complex fraud and criminal conduct. However it must be remembered that complex trials are not merely confined to the prosecution of complex corporate fraud matters. "The English Consultation Paper on Long Criminal Trials, and Findlay's study of Juries, both found that it is not just fraud cases that are complex and time consuming. Mr Justice Henry also emphasised that it is simplistic to explain long criminal trials simply in terms of how the prosecution frame charges. According to Henry J, the nature of the facts of the case and the type of elements which the Crown must prove (most notably "dishonesty") are far more determinative of the trial length. Chan's study (1995) found that length of trial was affected by the type of charges with conspiracy to pervert the course of justice, frauds, and drugs, being the most significant" (see Corns, supra, at page 32). With identifiable and open disclosure practises the community, and the Courts in particular, should have sufficient confidence in the disclosure process to be more insistent upon stricter timetables for the conclusion of the usual "fishing" expedition engaged in by well resourced defendants during the pretrial process. Likewise charging policies which now identify a selection of offences as representing the criminal conduct of the accused, and at the same time acknowledge that the insistence upon a thorough investigation of every aspect of the alleged offending will not only delay the ultimate charging of the suspect but also unnecessarily complicate the subsequent criminal trial, should reduce the number of trials made complex through a prolonged fact finding and disclosure process. I accept that the complexities of modern commercial transactions and the speed with which they are affected test the capacity of the trial process to comfortably deal with some issues. But speed and complexity of commercial transaction impose a burden not only on the trial process but also on the investigator and the investigating agencies irrespective of whether that transaction will be the subject of a civil or criminal process at a later point. Another criticism identifies delay and it has been accepted that it is not unusual for matters of some complexity to take up to 2 to 3 years from investigation to prosecution and even longer. Unfortunately the lengthy case is usually the exception and criticisms of delays sometimes do not acknowledge not only the issues of complexity but also the delay in discovering the wrong doing and the problems which that delay causes in both investigating and prosecution. "In recent years, the inherent complexity of much criminal activity has been exacerbated by more intelligent offenders, tehnological developments facilitating international transfers, often through the creation of hundreds of companies around the world. It is not unusual for the crimes to be discovered several years after the event, leading to problems in the collection of evidence and the ability of witnesses to recollect relevant events . The Jury Trial is also regarded by many as an unsatisfactory process for the determination of issues of fact arising from complex commercial transactions. The problem is not assisted with the prosecution of Commonwealth offences requiring unanimous verdicts of guilt. The resources available to the defendant will in many cases govern the length, complexity and problems arising in the trial. The trial in which every technical point, collateral challenge and reviews are taken imposing upon the jury and trial judge an almost unmanageable task of issue identification are usually conducted by very well resourced defendants. (In the prosecution of Grimwade and Wilson the Crown was required to prove that the prospectus was false whereas the falsity of the prospectus was ultimately irrelevant to the defence which contended that the defendant had never seen the prospectus). The accused without resources, indigent under the Dietrich Test presents other difficulties not only for the prosecution and the Court but also legal aid authorities. The Attorney General has established an expensive cases fund aimed at assisting Legal Aid Commissions in dealing with Commonwealth prosecutions with the sometimes quite complex tensions between the indigent accused, requiring representation, limited legal aid funds and the desire to have complex matters dealt with expeditiously.. The involvement of a well intentioned Trial Judge on behalf of an unrepresented accused has problems of its own . Within those two extremes the self funded but moderately resourced accused is likely to be less argumentative, motivated to save costs through issue resolution and, in many instances, a person who will ultimately plead guilty following plea discussions with the prosecution. (National statistics indicate that approximately 65% of persons charged with indictable offences in Superior Courts plead guilty).
Enforcement by Civil Penalty
As I have already said I do not suggest that there should be enforcement by criminal prosecution of minor regulatory breaches or those where a civil penalty or forfeiture outcome is appropriate. The dishonest misappropriation or misapplication of funds which defrauds either the shareholders or creditors of a Company or imperials assets of another should, normally, be prosecuted as conduct deserving of prosecution and punishment within the Criminal Justice System. The investigation of these matters, on detection, will normally be undertaken by ASIC. Consultation with and briefing of the DPP by ASIC occurs with these serious matters and directions and guidelines predicate this consultative and briefing process. The question of the efficacy of criminal prosecutions as a compliance tool for corporate regulation is centred on those matters where the conduct is considered serious and, after consultation, deserving of prosecution. I do not hold with the view that a civil penalty (pecuniary penalty and/or forfeiture and/or disqualification) is an appropriate sanction for conduct of this nature. It provides no effective deterrent either personal or general and merely represents an economic risk the realisation of which is absorbed within the process of dishonest gain undertaken by the offender. The civil path will likewise not be free from frustratingly obstructive challenges and procedural delays by the well resourced "suspect". Faced with such obstacles the resolution by negotiation may not satisfy the complaints of those adversely affected by serious misconduct. By comparison with my experience as a State Prosecutor there appears to be a lack of broad community interest in prosecutions of serious corporate wrong doing. In many cases a shareholder loss is deemed by some as only hurting the wealthy investor victims. The lack of a victim is not a helpful test for the appropriateness of a prosecution. The misconduct which we are considering is serious and will be the cause of loss or imperilment of assets of the company, shareholders and/or creditors. I can understand the desire of some sectors of the corporate world to obtain a cooperative solution for corporate regulation where compliance is achieved by negotiation. The vast majority of companies and their officers would appropriately fit within such a regulatory regime. However there is a real risk of an uncomfortable familiarity developing between regulator and regulated and I cannot see the States' accepting a totally self regulating scheme to the exclusion of criminal sanctions where the serious misconduct under consideration will, in all probability, involve the commission of a crime under State Criminal Law. Applying civil enforcement to "the offence" which is complex and difficult to prosecute will require an equally detailed and thorough investigation which ever path is followed and I suspect the process will be made just as difficult to pursue by the well resourced suspect. If recovery of ill gotten gains is a justification for following a civil based assets seizure and penalty path the person who is well resourced will not only be able to resist recovery but also conceal the object of that recovery process. (Extradition from foreign countries is not available for non criminal matters). The impecunious offender would face no sanction and thus there would develop a distinction whereby the impecunious would suffer criminal prosecution through the lack of "a satisfactory" alternative and the financially successful offender would "purchase" an outcome from the profits of that wrong doing. In any event a criminal prosecution ought, with care, be able to be run concurrently with a civil recovery process. Market manipulation and insider trading, while feeding off market driven profit motives are not exempt from criminal conduct and should not be held out as such. Prompt "civil" regulatory intervention by the regulator to limit damage and restore confidence in the market should not be a bar to a subsequent or concurrent prosecution.
Recent Constitutional Issues
Hopwood and Burns (3), and Bond (4), were concerned with appeals against sentence by the Commonwealth DPP in the States of South Australia and Western Australia respectively. The former was determined on the provisions of the South Australian Criminal Law Consolidation Act and the latter on the limitations read into the meaning of "institute and carry on prosecutions" in S17 of the DPP Act. Simple amendments will overcome the problems raised by these decisions. Hughes (5) involves a more interesting problem and while I am satisfied that the bulk of the corporations prosecutions undertaken by my Office will be unaffected by the difficulties which it is said this case causes the opportunity still exists for constitutional challenges to be made in prosecutions under Corporations Law. The difficulties or complications which these recent decisions raise must be worked through and, where they constitute a bar or serious obstacle to the use of either investigative or prosecutorial functions overcome by cooperative means. They do not provide either by way of addition to previous criticisms or by themselves a justification for turning away from the use of the Criminal Justice System for providing the ultimate sanction to achieve compliance with corporate regulation.
I support the continued use of the Criminal Justice System to achieve compliance in that area of offending to which I have confined my comments. User groups within the Criminal Justice System are neither deaf to the criticisms nor blind to the problems which exist in providing timely outcomes from prosecutions of complex matters. The most recent collective effort was a Procedural Reform Conference held in Melbourne in late March following which representatives from each of the States and the Commonwealth participated in a Deliberative Forum which produced a series of recommendations for consideration by the Standing Committee of Attorneys General. It is my belief that this work will provide the Attorneys General with an appropriate starting point to achieve procedural reform in the Criminal Justice Systems of this country which will overcome a number of the problems which I have commented upon in this paper.