04 May 2018
Article by Suzie Leask, Senior Associate
Crackdown on Corporate Misconduct - What Directors and Businesses Need to Know
In the wake of Financial Services Royal Commission evidence, the federal government has announced a long awaited initiative to introduce harsher criminal and civil penalties under the Corporations Act for corporate and financial misconduct. The new regime has been years in the making and will prioritise the implementation of at least 30 of the recommendations in the December 2017 Report by the ASIC Enforcement Review Taskforce (Taskforce), which was established to review the adequacy of ASIC’s enforcement regime in response to the Murray Financial System Inquiry.
According to Treasurer Scott Morrison and the Hon Kelly O’Dwyer MP
(Minister for Revenue and Financial Services), the reforms will significantly increase ASIC’s powers and boost available fines and penalties, representing the most significant increases to the maximum civil penalties in over 20 years. Once implemented, this will be a critical change to the corporate governance landscape for companies. Directors should now more than ever make sure their ‘house’ and corporate governance is in order.
Increased Criminal Penalties and longer Prison Terms for Directors
The maximum penalties for 19 of the most serious criminal offences under the Corporations Act (including dishonest conduct as a director, officer or employee of a company; corporate fraud offences including using a position as a director for personal gain; and offering securities without appropriate disclosure) will be harmonised and increased to those currently applicable for market misconduct and insider trading offences, namely:
10 years imprisonment, and/or
The larger of:
- 4500 penalty units ($945,000), OR
- 3 times the benefits obtained.
The larger of:
- 45,000 penalty units ($9.45million), OR
- 3 times the benefits obtained, OR
- 10% annual turnover.
A further 43 offences will be subject to significant increases in maximum prison terms.
Expanded Civil Penalty Regime - Heftier Financial Penalties for Directors and Companies
The reforms will see 48 contraventions under the Corporations Act become subject to civil penalties, including:
- Providing defective disclosure documents for takeovers, compulsory acquisitions and buy-outs
- Offering securities without appropriate disclosure
- Providing financial services without holding an AFS licence
- Breaching certain licensee obligations under the Corporations Act and Credit Act
- Failing to meet breach reporting requirements, and
- Contravening a banning order.
Proposed New Civil penalties
The maximum civil penalty amounts that can be imposed by the courts will be increased to the maximum of:
||Current Maximum Penalty
||Corporations Act: $200,000
National Consumer Credit Protection (NCCP) Act: $420,000
The greater of:
- 5,000 penalty units ($1.05million), OR
- 3 times the benefit obtained or loss avoided
||Corporations Act: $1million
NCCP Act: $2.1million
The greater of:
- 50,000 penalty units ($10.5million), OR
- 3 times the value of the benefits obtained or losses avoided, or
- 10% the annual turnover in 12 months preceding the contravening conduct
Maximum capped at 1 million penalty units ($210million)
ASIC’s new powers and additional remedies
Under the new regime, ASIC will have expanded powers and additional available remedies including:
- Seeking additional ‘disgorgement remedies’ to strip wrongdoers of illegally obtained profits or losses avoided
- Banning individuals from performing any role in a financial services company where they are found to be unfit, improper or incompetent
- Strengthening ASIC’s power to refuse, revoke or cancel financial services and credit licences where the licensee is not fit or proper, and
- Boosting ASIC’s tools to investigate and prosecute serious offences including greater flexibility to use seized materials and granting ASIC access to telecommunications intercept material.
Timetable not yet announced but directors are on notice
Supported by the Australian Institute of Company Directors
and a range of other industry stakeholders, the rationale for these stronger penalties and increased ASIC powers is to provide a credible deterrent that has enough teeth to ensure appropriately harsh levels of punishment for individuals that engage in criminal behaviour and increased protection of consumers from corporate and financial misconduct. While the government has not yet provided a timeline for these legislative amendments to be implemented, company directors should be on notice that ASIC’s enforcement toolkit is soon to be well and truly strengthened and wrongdoers will face a range of penalties that reflect the gravity of their corporate misconduct. Indeed, given that these changes flow from an earlier Inquiry and Taskforce Report, we expect there to be additional initiatives arising out of the ongoing Financial Services Royal Commission and we will be keeping a close eye on how those outcomes shape the changing face of corporate governance.
If you have any questions or concerns about your company’s obligations or director’s duties under the Corporations Act or the proposed new penalty regime, contact one of our Corporate + Commercial lawyers today on 1300 565 846 or email us at firstname.lastname@example.org.
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