Thompson, Lynne --- "Securing Compliance" [2002] ALRCRefJl 12; (2002) 80 Australian Law Reform Commission Reform Journal 59

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Reform Issue 80 Autumn 2002

This article appeared on pages 59 – 62 & 71 of the original journal.

Securing Compliance

By Lynne Thompson*

Defining the focus of the Australian Law Reform Commission’s inquiry into the use of civil and administrative penalties has been challenging.

The terms of reference for the inquiry direct the ALRC to consider how best to achieve effective and efficient regulation and supervision and to counter regulatory contraventions with a fair, effective and practical system of decision making and enforcement. The ALRC must consider the balance that ideally should be maintained between the use of the criminal justice system and administrative and civil penalties to deter and punish wrongdoing in regulatory and supervisory regimes.

The ALRC has used the general term ‘regulatory penalties’ to define penalties imposed for contravention of federal laws. Regulatory penalties are broadly concerned with facilitating social and economic activity. Contravention of regulatory requirements is not necessarily morally wrong, but is punished because it reduces the integrity and efficiency of the regulatory system.

A major concern throughout the inquiry has been the difficulty in categorising penalties as criminal, civil or administrative. While the difference between criminal and civil penalties is often simply a question of whether an offender might be sentenced to a term of imprisonment, distinguishing between the conduct giving rise to criminal and civil regulatory penalties can be more difficult.

Corporations & the criminal/civil distinction

Defining the nature of contraventions in respect of which regulatory penalties may be imposed has required the ALRC to reconsider the need to retain a distinction between regulatory contraventions with criminal and civil consequences. This distinction is particularly problematic in relation to corporations since they cannot be imprisoned and demonstration of a ‘guilty mind’ is difficult to establish.

The idea of the use of civil penalties as a tool for social and regulatory control, particularly in relation to on-going activities, has some validity. In general, the focus of non-criminal regulatory contraventions is on the physical elements of the contravention – the fact of pollution; or the effect of the contravention; or the distortions in prices – rather than on the intent of the person responsible for the contravention. Non-criminal penalties are particularly suited to contraventions involving corporations because they do not generally require proof of the corporation’s intent, and they can have flexibility to address systematic and long-term contraventions as well as imposing punishment for past offences. Non-criminal regulatory offences often lack an essentially ‘criminal’ element. They are a means of ensuring compliance with government policy regulating a wide range of activities that have a public impact, or they are minor breaches of the law.

Most commentators support the need for a criminal/civil distinction. While many caution against the over-use of criminal sanctions because indiscriminate use of the criminal law for non-serious conduct would diminish its value as an indication of society’s condemnation, most commentators support its use for the most serious of offences. The ALRC considers there is no compelling reason to do away with the criminal/civil distinction and develop a continuum of offences.

There are cogent arguments in favour of retaining the criminal law for those offences that, in relation to individuals, concern dishonesty or fraud or, in some circumstances, reckless behaviour. The parallels are with the general criminal law. Where individuals have been implicated in corporate criminal behaviour there is a role for criminal prosecutions. For corporations there are sound arguments for use of the criminal law where the behaviour of the corporation has caused, or is capable of causing, significant harm to others.

Some offences described as ‘regulatory’ nevertheless fall to be dealt with by criminal law if the consequences of a breach are sufficiently serious. The purpose of the use of criminal law in these circumstances is to indicate society’s concern about and condemnation of the behaviour of the corporation.

The major formal distinction between civil and criminal regulatory penalties is that only criminal penalties can take the form of imprisonment. Where the regulatory penalty is a financial one, there is no distinction in principle between the purposes of criminal and civil regulatory penalties. Both are imposed in retribution for a contravention of legislation; both are calculated by reference to the level of ‘badness’ of the conduct and the aim of deterring further such conduct. However, the procedural, social and other consequences flowing from a penalty categorised as civil may be very different from those of a penalty categorised as criminal.

Even if the outcome is really little more than symbolic for the corporation, in that it cannot be imprisoned and would face a monetary penalty whether its conduct were criminal or non-criminal, the use of the criminal law is a mark of its wrongdoing and has implications for the corporate officers who might be charged with aiding and abetting. Examples of serious regulatory offences might be intentionally dumping toxic waste where it will cause harm, or knowingly selling unsafe goods. What needs to be considered further is the use of a greater range of sentencing options, especially in relation to corporate crime.

To ensure that the criminal/civil distinction has integrity, there must be clear principles determining where it is appropriate for legislators to provide for criminal penalties for regulatory contraventions. The ALRC cautions about the use of the criminal law for regulatory penalties unless the conduct being proscribed is regarded as deserving of moral censure – either because of its parallels with the general criminal law or because of the seriousness of its effect.

The role of fault

Criminal offences should generally depend on proof of the necessary mental state or the commission of an act so serious that parliament is prepared to make it a strict or absolute liability offence. Penalties should also be identified as ‘criminal’ where a prison sentence may be imposed as part of the punishment, or where a prison sentence may follow a failure to pay a pecuniary penalty.

Unless there are compelling reasons to make fault an ingredient, the general principle should be that a non-criminal regulatory contravention should consist only of a physical element. If fault is to be an element, the ALRC recommends that, unless there are strong reasons otherwise, it should be recklessness or negligence. The chief focus of penalties for such contraventions should be to promote compliance with the relevant legislation by deterring the offender and others from non-compliance.

Civil penalties — a role for punishment?

Generally, penalties serve a variety of purposes such as punishment, specific or general deterrence, compensation, protection, education, and most serve more than one. An issue is how far penalties for non-criminal regulatory offences should be used to punish.

It has been argued that the increasing availability of civil penalties is a means of imposing penalties equivalent to criminal fines in circumstances where there are difficulties with proving intention, and the procedural defences and protections afforded to defendants are reduced. Civil monetary penalties are not necessarily lower, and are sometimes higher, than criminal penalties. The more a penalty is seen as having retributive elements, the more the courts will seek, with good reason, to insist on procedural protections equivalent to those afforded by criminal procedure. However, if the aim of a penalty is ultimately to compensate loss or to require a disgorgement of profits, there is less concern about procedural protections such as the privilege against self-incrimination, as this looks more like a traditional civil action.

Because penalties in the criminal arena increase with the perceived seriousness of an offence, reflecting a wish to demonstrate retribution and moral opprobrium, there is an understandable perception that the higher the civil penalty, the higher the element of retribution, particularly where the penalty is not obviously linked to the damage that has been caused or the profit that has been made.

Equally, where retribution is not regarded as the purpose of the penalty, even though the outcome may be serious, the courts are less likely to move towards quasi-criminal procedural protections. Although the focus of ‘general deterrence’ is to influence the behaviour of others in the regulated community, it is difficult to escape the conclusion that ‘specific deterrence’ has some punitive aspects. The penalty is set at a level such that the offender will be deterred from repeating the conduct. In both cases, it is important to maintain the integrity of the penalty scheme by ensuring that any penalty is proportionate to the offence.

Corporate and individual defendants

The growth in the use of civil penalties can be ascribed in part to the difficulties with corporate prosecutions: imprisonment of the corporation is not possible and, if the corporation has no body, mind or soul, a criminal punishment cannot serve its true shaming purpose. One issue for the ALRC, therefore, is whether to recommend a distinction between corporate defendants and individual defendants, reserving the criminal law for individuals who are reckless or intentionally dishonest intending to gain an advantage but using civil penalties for corporate defendants. This would both recognise the role of individuals in corporate misconduct and also give individuals the procedural protections of criminal proceedings that, it might be argued, are not necessary for corporate defendants.

Procedural consequences

Another major issue identified by the ALRC is the procedural consequences of classification of regulatory penalties as criminal, civil or administrative. There are a number of distinctions between criminal and civil actions both in the proceedings themselves and in the consequences that follow. Perhaps the most important difference is that criminal proceedings result in a criminal conviction with the attendant consequences. The consequences of a criminal conviction are far more serious for individuals than for corporations, not only because a corporation cannot be imprisoned, but also because of the ramifications for an individual of a criminal conviction in matters such as holding public office or corporate directorships. Additionally the stigma of a criminal conviction falls more heavily on an individual. However, the ALRC’s consultations have revealed support for maintaining criminal liability for corporations as well as for individuals.

The difficulty arises then in determining how corporate culpability should be demonstrated and how penalties imposed on corporations can have a ‘shaming’ element. The use of adverse publicity orders has been suggested. Many commentators criticise the reliance on monetary penalties as the dominant form of corporate penalty. The ALRC considers that there is a need to ensure that a range of penalties is available to ensure that corporations are sanctioned appropriately.

Choice of proceedings

Much of the legislation under review in the inquiry allows criminal and civil proceedings to be undertaken simultaneously or sequentially in respect of the same conduct. The need to prove fault, or the mental element, is usually an important difference between criminal offences and civil contraventions, with criminal proceedings generally requiring proof of the mental element making up the offence together with the relevant physical element.

Where legislation distinguishes between criminal offences and civil contraventions on the basis of fault, the ALRC believes that it is important that there be transparent and clear guidelines governing the choice of proceedings and proposes recommending that regulators make such guidelines available through websites and other publicly accessible means. Similarly, to avoid confusion, the ALRC proposes recommending that where parallel or sequential proceedings are possible, there should be no role for fault as an element in the non-criminal regulatory contravention. That is, in the case of parallel or sequential proceedings, the non-criminal contravention should be made up of the physical element only.

Fairness

The Discussion Paper sets out the ALRC’s proposed approach to applying general principles of fairness to penalty schemes. What has become clear from the ALRC’s review of federal penalty schemes is that the increasing use of administrative penalties raises significant issues about fairness in the processes used to impose and determine penalties.

Issues of particular concern to the ALRC include the availability of guidelines as to how penalty powers will be exercised in order to allow members of the regulated community to clearly understand the regulator’s expectations about compliance. Guidelines may also facilitate consistent exercise of discretion by regulator staff.

Future of the inquiry

The Discussion Paper sets out the ALRC’s proposed approach to applying general principles of fairness and consistency to the huge range of regulatory penalties. It indicates the principles the ALRC considers useful and ways in which the ALRC proposes these should be applied; and asks questions about practical concerns relating to current practices and the options for reform.

The final report will be presented to the Attorney-General at the end of November 2002. In preparing the report the ALRC will take into account all submissions, and will conduct consultations to develop its proposals further. The ALRC would like to hear from anyone with an interest in any of the matters covered in the reference, whether by formal submission or informally by email or telephone. The closing date for submissions is 31 August 2002.

*Lynne Thompson is a Senior Legal Officer with the Australian Law Reform Commission, and is working on the inquiry into civil and administrative penalties.