Things To Think About

First: The Rise and Rise of the ‘General Duty’ Offence

A particular style of corporate offence has been gaining favour in the last few years – a style we might call a ‘failure of general duty’ offence.  It eschews technical detail, preferring plain, general and value-based language, doing away with mens rea.    So far as I am aware, this style of offence first surfaced in workplace safety law, following Robens’ recommendation, in chapter 5 of his 1974 Report (UK),  that the common law general duty of employers to provide safe systems of work be enshrined in legislation.  In Victoria, current OHS legislation provides:

“An employer must, so far as is reasonably practicable, provide and maintain for employees of the employer a working environment that is safe and without risks to health.” Failure to do so is an indictable offence: Section 21(1) OHS Act 2004 (Vic)

Even though value-based terms like ‘reasonably practicable’ and ‘safe’ have long appeared in criminal offences (see, eg, any of the indecency offences, or the partial defence of ‘excessive self-defence‘) they have generally been excluded from ‘regulatory offences’ on the basis that businesses need clarity around their obligations.  Robens argued back in 1974 that a general duty provides employers with greater clarity about their obligations than narrow and technical laws.   Many would say he has been proven correct in the forty-odd years since then.  The OHS general duty offence has stood the tests of time and judicial scrutiny, and proven to be a useful tool for workplace regulators.

Legislators have taken note of this success, and similar offences are proposed with increasing frequency.  In April this year, the UK Joint Committee on Human Rights has recommended “that the Government brings forward legislation to impose a duty on all companies, including parent companies, to prevent human rights abuses, with failure to do so becoming an offence“.  The UK has already enacted legislation criminalising failure to prevent bribery, and failure to prevent tax evasion. On our own shores, the Victorian EPA expects the Victorian parliament to enact a new ‘general duty to minimise risks of harm to human health and the environment‘ offence by the end of 2018; and in April this year, CAANZ recommended Australia adopt ‘a general safety law so that traders are required to ensure their products are safe before they enter the market’.  There’s something in the water.

Second: Deferred Prosecution Agreements and the Self-Policing Corporation

It looks like Commonwealth regulators will soon be able to use Deferred Prosecution Agreements (DPAs).  So how should they use them?

Professor Jennifer Arlen of NYU makes an engaging and interesting argument for a predictable, inflexible and uniform-across-all-regulators policy to determine whether which enforcement tool the regulator will use to respond to a given instance of corporate offending.  She says prosecution must be reserved for those corporations who self-detect offending, but fail to report it, and corporations who fail to self-detect, and also fail to fully cooperate with a regulator’s investigation.  Their sentences should be very steep.  Corporations who self-detect and report, or don’t self-detect but fully cooperate, should avoid prosecution, and receive a significantly reduced penalty under a DPA or other instrument, with strict conditions attached – see the article for the finer detail.  It’s a kind of re-working of the Ayers and Braithwaite pyramid – but instead of the seriousness of the offending determining which action the regulator takes, it’s the way the offender acts post-offence that determines the action.  She argues that such a policy, if properly balanced, provides certainty to corporations that it is in their interest to self-detect and self-report offending.

She says an additional benefit is that:

“If you had a multi-tiered system where we all know which category of firm goes into which bucket, you will know if you see a deferred prosecution agreement, it’s this kind of firm, if you see a conviction, it’s this kind of firm. We don’t have that yet. If we did have that, then the system would be better. When you heard conviction, it would tell you something about the firm. It would have meaning.” Interview with the Corporate Crime Reporter

A difficulty with Arlen’s proposal is that no allowance is made for evidentiary issues. It may be that a corporation knowingly commits an offence and fails to report it, then refuses to cooperate in the regulator’s investigation, but the regulator has insufficient evidence to prove the offence beyond reasonable doubt.  But the regulator may have sufficient evidence to satisfy the civil standard, or civil penalty standard of proof.  Alternatively, there may be sufficient evidence to justify prosecution, but the offence may be difficult to prove, and juries may supply unpredictable verdicts – this is most likely when the offence has mens rea elements. What if the regulator assesses the likelihood of conviction at 60% but considers it almost certain that civil penalty litigation would succeed? Proceeding with a prosecution has attendant risks of acquittal and/or conviction for less serious alternative charges; those outcomes reduce the general deterrence achieved by the regulator’s other enforcement actions.  So what species of litigation should the regulator prefer?

Some of these issues were touched upon this month in Whitebox. In that case, the Full Federal Court overturned Gore, affirming ASIC’s position that s272 Corporations Act 2001 (Cth), when alleged by ASIC as a civil penalty contravention, does not require proof of criminal mens rea elements. The court observed at [15]:

“A mental element being required to be established can be the difference between particular proceedings being viable or not. In criminal proceedings, the inability to prove a necessary state of mind beyond reasonable doubt is not just a significant reason for acquittal, but a significant reason for criminal proceedings not being commenced or maintained in the first place. If a similar requirement to prove criminal fault elements exists for civil penalty proceedings, then it may reasonably be anticipated this will have an important impact on the decision whether to commence criminal or civil penalty proceedings, not least by significantly narrowing the difference between the two types of proceedings.” Australian Securities and Investments Commission, in the matter of Whitebox Trading Pty Ltd v Whitebox Trading Pty Ltd [2017] FCAFC 100

I’d love to hear from readers with a view as to whether this reality can be accommodated within Arlen’s proposal.

While we’re on the subject of self-policing companies, let’s remember that whistleblowers are an essential part of that utopian ideal.  Whistleblowers require not only protection, but also incentives to report internally, or, failing that, externally. How many times have we seen major prosecutions made possible only because a whistleblower tipped off authorities? An example from this month is yet another shipping company illegally dumping waste at sea.

For further reading on DPAs, see Seve and Perez’s article, which deals in part with the “French DPA”, introduced late last year (but not yet utilised).  And if you’re confused by Arlen’s references to ‘monitorships’ – a common feature of the US DPA – have a look at this excellent overview.  The UK DPP publishes a DPA policy here.

Third: How Big Should Corporate Fines Be?

A few items this month, set side-by-side, beg the question: how should a court determine the size a corporate penalty?

Our first news item is that Takata, which was handed a US$1B criminal fine for conduct connected to its manufacture of deadly airbags that were used in the production of sixty million cars, has filed for bankruptcy.  Both its US subsidiary and Japanese parent have gone into external administration.   The second news item is that Brazilian prosecutors have agreed a criminal ‘leniency agreement’ with J&F Investimentos over bribery allegations – and the accused has been given 25 years to pay its US$3.2B fine.  I’m not aware of any criminal sentence granting such a long period to pay – though 10 years was granted in the UK DPP’s first corporate manslaughter conviction.   And third, Karpoff, Lee and Martin have provided an excellent analysis of US foreign bribery cases; they conclude, among other things:

“that penalties are too small to deter bribery at the margin.  Our baseline estimate that the probability of getting caught in any given year is 6.4%, implying that total penalties imposed on bribe payers would have to increase by 8.3 times to drive the average ex ante NPV to zero.  On the other hand, if the penalties remain at historical levels, the probability of detection would have to rise to 52.8% to achieve the same objective.  At current levels, bribe-tainted projects will continue to be profitable, at least on an ex ante basis.”

Most (if not all) Australian jurisdictions have legislation requiring the sentencing court to consider the means of an offender when determining the size of a fine.  That’s generally interpreted to mean that a fine must not ‘crush’ the offender and ought to be payable within a ‘reasonable’ time.  Given the fluidity of the corporate form, and its capacity to enter external administration arrangements, what does ‘crushing’ really mean? (And what is a ‘reasonable’ period to pay?)   I haven’t seen much judicial commentary on this point – if you have, please let me know.

Fourth: Jury Issues

In Victoria, an accused now only has three peremptory challenges: she used to have six.  As a young lawyer instructing in sex offence trials, it appeared to me that these challenges were regularly used to deny young women and professionals (and young women professionals) a seat on the jury.  The reduction of peremptory challenges was proposed by the VLRC to ensure that juries better reflect the diversity of the community.  Meanwhile, in determining whether certain ID evidence was properly admitted at trial, the High Court considered how jurors were likely to treat that evidence.  Jeremy Gans summarises the court’s opinion in his inimitable way:

“the High Court unanimously says it should have been admitted. They agree completely that it’s terrible evidence, but the disagreement is that they don’t see that there’s any danger of the jury being misled, and that’s precisely because the evidence is so very bad that the jury couldn’t possibly have missed how bad it was.” Interview with Damien Carrick for The Law Report

The Law Report interview is worth a read if you’re interested in photo ID best practice, as overseas models are discussed.

Notable Litigation & Regulatory Actions

It’s been a good month for the ACCC, with the High Court dismissing appeals by Air New Zealand and Garuda, (affirming there was a market in Australia in which the appellents had engaged in anti-competitive conduct) and the Federal Court finding that Get Qualified engaged in unconscionable conduct (among other things).

In other unconscionability news, Adele Ferguson reports that a class action will shortly be filed by Australian consumers alleging that McMillan Shakespeare engaged in unconscionable conduct when selling its extended warranties to new car purchasers.

In the UK, Tesco has been sentenced, in a joint OHS and environmental prosecution, to pay total penalties and costs of £8million.  The case concerned a leak of 23,500 litres of petrol at one of its premises.  Meanwhile, the SFO has “charged Barclays Plc and four individuals with conspiracy to commit fraud and the provision of unlawful financial assistance contrary to the Companies Act 1985″.  That litigation concerns actions the bank took to raise capital in the lead-up to the GFC, and one commentator has described the filing as “send[ing] a very strong message that the SFO is now fearless in terms of the companies and individuals it pursues.”

In another bold move, the European Commission has seen fit to issue Google a €2.42 billion fine for anti-competitive conduct.  The fine relates to Google giving an ‘illegal advantage’ to its own product, the Google comparison shopping service.

A few US cases get a mention this month.  First, a couple of white-collar ‘involuntary manslaughter’ cases.  I noted previously that the jury trial of Barry Cadden, head pharmacist of New England Compounding Center, who had been charged with involuntary manslaughter and other charges, had commenced.  The US DOJ alleged he knew his company’s medicines were being produced in an unsafe way, and he permitted the company to send the drugs to market regardless. (The DOJ’s description of NECC’s manufacturing facilities is horrifying.)  A jury acquitted him of the homicide charges, but convicted him of fraud and other offences: he was sentenced to 9 years’ imprisonment.  One person who may be relieved to hear of that outcome is the director of Michigan’s Department of Health and Human Services, Nick Lyon, who was this month “charged with involuntary manslaughter and misconduct in office over the Flint water crisis”.

Waymo is suing Uber for a ‘calculated theft’ of its technology. The case gets a mention because, rather unusually, the presiding (civil) judge referred the matter to the US Attorney-General to consider a prosecution under the Defend Trade Secrets Act.  According to one US lawyer, “that’s probably not a good sign… I don’t think you want to be in that position.” Indeed.

And finally “[t]he Federal Reserve Board on Tuesday announced a $41 million penalty and consent cease and desist order against the U.S. operations of Deutsche Bank AG for anti-money laundering deficiencies.”

Law & Policy Updates

Some agency changes of note: the UK government has announced plans to subsume the SFO within the National Crime Agency – a move that has very few supporters – and  “[o]n 8 June, the member states which are part of the enhanced cooperation on the creation of the European Public Prosecutor’s Office (EPPO) agreed on legislation setting out the details of its functioning and role.”

Closer to home, ASIC is celebrating its new funding model.  And Victoria’s WorkSafe has published guidance on the new WHS Regulations.

But the most exciting news of all may be Virginia Law School’s new Corporate Prosecution Registry – a database containing “detailed information about every [US] federal organizational prosecution since 2001, as well as deferred and non-prosecution agreements with organizations since 1990”.  Amazing!

Event Calendar

18 July 2017: Financial Conduct Authority’s AGM (London and live streamed)

20-21 July 2017: Competition Matters 2017 (Wellington)

27-28 July 2017: ACCC & AER Regulatory Conference (Brisbane)

3-4 October 2017: Corruption Prevention and Integrity Conference (Melbourne)

27 November 2017: UN Forum on Business and Human Rights (Geneva)

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