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Australian Law Reform Commission - Reform Journal |
Reform Issue 79 Spring 2001
This article appeared on pages 44 – 47 & 74 of the original journal.
Penalties: Policy Principles & Practice in Government Regulations
By Jonathan Dobinson*
As part of its program of broad public consultation and research on its inquiry into the use of civil and administrative penalties in Australia, the ALRC brought together leading Australian and international experts in regulatory theory and practice for a two-day conference in Sydney in June this year.
The Australian Law Reform Commission’s inquiry into federal civil and administrative penalties comes at a time of heightened public interest in regulatory practice. There are daily news features on the role, successes and failings of regulation. Recent issues raised in the regulation debate include:
• How closely should regulators monitor business and respond to corporations that appear to be in difficulty? Do we need harsher penalties for individuals to deter corporate crime and mismanagement? These issues have been debated extensively in relation to the roles of the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) and the collapses of HIH Insurance, One.tel and Ansett.
• How do regulators choose whom they act or not act against? There has been media comment on the Australian Taxation Office’s announcement that it intends reducing the penalty interest payable on tax debts relating to some investments in mass-marketed ‘tax effective’ schemes.1 There have also been media debates on ‘high profile’ cases brought by ASIC (for example, the Nicholas Whitlam and Water Wheel cases).
• How ‘heavy handed’ should regulators be in enforcing the law, such as the ‘watchdog’ approach of the Australian Competition and Consumer Commission (ACCC) in the implementation of the GST?
• Publicity has also been given to the number and harshness of administrative penalties imposed by Centrelink on welfare recipients as part of the ‘mutual obligation’ system.
The ALRC conference Penalties: Policy, Principles and Practice in Government Regulation was held in Sydney in June 2001 and opened by the Attorney-General of Australia, the Hon Daryl Williams AM QC MP. It was attended by government agencies and departments, legal and compliance professional bodies, community and business groups, academics, individuals and organisations. Conference speakers and participants tackled complex issues such as regulation in a high-tech environment, globalisation and global regulation, managing discretion, the blurring of criminal and civil enforcement paradigms, and how to identify effective regulation.
Blurring of civil and administrative paradigms
A major issue to emerge from the conference is the categorisation of penalties as administrative, civil or criminal. At present, these divisions have significant consequences for procedures relating to proof, enforcement and protections for the regulated. However, the ALRC has found that it is not always clear whether a penalty is administrative, civil or criminal and the distinctions are often blurred.
In his opening address to the conference, the Attorney-General outlined that civil and administrative penalties are clearly of use to governments in regulating behaviour and ensuring compliance with legislation. However, he warned that as use of civil and administrative penalties grows, these schemes must complement, not usurp, the criminal justice system. Conduct that is criminal should be recognised and pursued as such, and conduct best dealt with by civil or administrative penalties should be treated accordingly. The Attorney-General stated that the development of clear and consistent principles for the framing of civil and administrative penalties will help ensure this will happen. In addition, it will offer a way to ensure a proper role for innovative civil and administrative penalties as well as for the criminal trial process.
Professor John Coffee Jr, Adolf Berle Professor of Law at Columbia University, argued that the civil and criminal paradigms have been blurred and should be regained. In redrawing the distinction he contended that the criminal law should be reserved for conduct that society believes lacks any social utility. Civil law should be used to deter or price forms of misbehaviour where regulated activity has positive social utility, but breaches may have a negative impact on others.
Other commentators, such as Professor Arie Freiberg of the University of Melbourne, argued that we should attempt to avoid labels and create a modern system of sanctions based on both rewards and penalties attended by protections of individual interests affected by government intrusion. Professor John Braithwaite of the Australian National University argued that the distinction between criminal and civil law had been muddied to the extent that the ‘civil/criminal divide in this country no longer has legal integrity with respect to the impositions of penalties’. To cope with this reality, he proposed a radically different approach of ‘responsive regulation’, which aims to satisfy the justice claims of victims, offenders and community stakeholders, not just to fix proportionate penalties for offenders.
Corporate and individual liability
A related issue concerns corporate and individual liability for civil and administrative penalties. Australian regulatory legislation already imposes a range of binding obligations on directors in corporations law,2 environmental protection3 and taxation4 legislation. Further, Part 2.5 of the Criminal Code Act 1995 (Cth) extends the criminal liability of corporations in a number of key areas.
There was much discussion at the conference about Part 2.5 of the Commonwealth Criminal Code and the value of individual and corporate liability. Mr Brent Fisse, a partner at the law firm Gilbert & Tobin, argued that the goal of ascribing corporate responsibility for offences and breaches of civil penalty provisions will only be achieved when legal systems recognise internal corporate systems of justice and exploit their capacity for delivering individual accountability. Mr Fisse stated that there is no future in trying to rely exclusively on individual criminal liability or individual civil penalties in conventional prosecutions and enforcement proceedings.
Many speakers used the conference as an opportunity to campaign for tougher sanctions for white-collar crime, in particular penalties under the Trade Practices Act 1974. Professor Allan Fels AO, Chairman of the ACCC, called for tougher penalties for price-fixing and market sharing, including prison terms. Justice Raymond Finkelstein of the Federal Court of Australia argued that Australia’s efforts in combating trade practices violations could immediately be strengthened if courts imposed stiffer penalties. Justice Mark Weinberg of the same Court noted that imprisonment is the only penalty that corporate offenders seem to fear.
A range of regulatory tools
Another major theme of the conference was the need for regulators to be given a range of tools to obtain compliance. Ms Debra Valentine, former General Counsel of the US Federal Trade Commission, articulated that regulators need to be given remedial authority that is sufficiently broad and flexible to enable the agency to adequately halt violations, deter future violations and even reverse the harm caused. This was echoed by Ms Jillian Segal, Deputy Chair of ASIC, who listed the range of tools that ASIC uses in seeking compliance. She noted that ASIC has increased its use of administrative remedies as they are often a speedy alternative to civil and criminal proceedings and achieve the desired regulatory outcome.
Dr Julia Black, Senior Lecturer in Law at London School of Economics, while stating that rules only partly determine how decision makers exercise discretion, also argued that these rules need to include a wide range of sanctions that punish the recalcitrant, require them to take some form of remedial action and encourage the development of effective systems of internal compliance.
The form and substance of rules
To develop general principles that can be applied by the legislature and regulators when drafting legislation and operational guidelines the ALRC is currently analysing the form and substance of rules and how they operate.
In her keynote address on ‘Managing Discretion’, Dr Black observed that rules can influence the regulatory approach adopted by enforcement officers. General rules that are vague or impose evaluative standards implicitly confer discretion to those applying the rule. However, general rules may also develop a quite particular interpretation, and can facilitate sanctioning in instances where detailed rules do not cover the conduct in question. In contrast, the use of precise, ‘bright line’ rules can facilitate a sanctioning approach if it is clear on the face of the rule what conduct is required or prohibited. However, a mass of detailed rules can in fact increase discretion rather than reduce it and, rather than facilitate enforcement, it can bring it to a halt, as there are simply too many rules to monitor.
A number of speakers also addressed the need for rules to be constructed to allow local regulators to interact with international regulators. For example, Ms Valentine argued that in a global and high-tech economy it will become increasingly necessary for all actors to coordinate to ensure fair compensation to victims and prevent over-deterrence. In the future, and particularly if different cases are proceeding in different forums, both regulators and the regulated will need to consider various procedures for cooperation and coordination to achieve fair outcomes.
Negotiated penalties
Mr Alan Ducret, Queensland Regional Director of the ACCC, also favoured a ‘coordinated approach’, specifically in relation to negotiated penalties. In his paper on the role of courts and tribunals in regulatory arrangements, he acknowledged that the process of court-sanctioned negotiated penalties places great responsibility on the regulator to ‘get it right’. However, he stressed that if the regulator recommends a penalty within a range that the court considers appropriate, the court should not impose a different penalty. He called for a ‘coherent, consistent and well publicised approach to penalty’ that:
• recognises the need for a ‘carrot-and-stick’ approach to encourage honesty, disgorgement of illicit gains, and long-term compliance;
• assists all parties to calculate appropriate penalties; and
• assists offenders to understand the implications of decisions they must make.
Clearly, negotiation between the regulator and regulated parties can facilitate the achievement of collective goals through responsive, flexible and efficient enforcement. In addressing the issue of remedial compliance strategies, Ms Karen Yeung, Lecturer in Commercial Law at the University of Oxford, acknowledged the benefits of negotiation and bargaining. However, she also spoke of a number of risks. First, the imbalance in the respective bargaining positions of the regulator and citizen may undermine the consensual nature of any agreement reached between the parties. Secondly, because bargaining is a largely private and bilateral process, it may diminish the extent to which the values of due process, participation, openness, transparency, accountability and substantive fairness are reflected in the regulatory process.
Such risks point to the need for procedural safeguards to guide the way in which the bargaining process is conducted to ensure that these risks are minimised, but in a manner that does not unduly impede or discourage the negotiation process.
General principles
The Penalties conference raised many issues relevant to the ALRC’s current inquiry. As noted above, it has been suggested that the development of general principles to guide legislators will greatly assist the operation of civil and administrative penalties. However, notwithstanding the call for general principles, is it practicable and beneficial to seek to do so as part of this inquiry?
One threshold issue identified at the conference by Mr Ian Davis, the ALRC Commissioner leading the current inquiry, is whether broad concepts such as fairness and accountability can serve practically as the basis of statements of principle. He stated that the concepts of control and correctability, for example, can be translated into procedural steps such as avenues of appeal, notice requirements and the regulated party’s right to be heard before a penalty decision is finally reached. However, it could be more difficult to reduce a concept such as ethicality to a more concrete form as it relies much more on the approaches adopted by regulators on a day-to-day basis. That is not to say that general guidelines cannot be prepared,5 but they may be confined to more general statements of principles rather than concrete statements of procedure.
* Jonathan Dobinson is a Legal Officer, working on the Australian Law Reform Commission’s inquiry into the use of civil and administrative penalties in Australia.
Endnotes
1. ‘Tax Office reduces interest applying to some mass marketed “tax effective” scheme debts’ ATO Media Release Nat 01/30 <http://www.ato.gov.au/content.asp?doc=/content/corporate/mr200130.htm> (25 May 2001).
2. R Schulte, ‘The Future of Corporate Limited Liability in Australia’ (1994) 6 Bond Law Review 64, 85.
3. T Howard, ‘Liability of Directors for Environmental Crime: the Anything-But-Level Playing Field in Australia’, 17(4) Environmental and Planning Law Journal 250, 271.
4. V Morabito ‘Will the New Millennium Breathe New Life into Section 252(1)(j) of the Income Tax Assessment Act 1936 (Cth)?’ (2000) 18 Company and Securities Law Journal 237, 261.
5. Some regulators currently publish guidelines and statements of standards that relate to these matters. For example, the Australian Taxation Office’s Taxpayers’ Charter.
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