What does the ASIC court action against directors and officers of Star mean for boards? We break down what you need to know.
ASIC has launched civil penalty proceedings against 11 current or former Star Entertainment Group directors and executives for alleged breaches of their statutory duty of care and diligence (section 180 of the Corporations Act).
This is the first time ASIC has pursued an entire board for an alleged s180 breach since the landmark Centro litigation, and is a novel claim in that it relates to non-financial risk management.
The case follows public criticism of the regulator for failing to take legal action against the board of Crown Group, and the lack of cases against directors following the Financial Services Royal Commission.
ASIC Chair Joe Longo has publicly acknowledged that there was disappointment with the regulator’s decision not to pursue the Crown directors and officers, but that ASIC’s potential case lacked reasonable prospects of success and suffered from time limitations.
The Star legal action reinforces ASIC’s focus on directors taking an active oversight role, especially in relation non-financial risk management, and is a timely reminder of the regulator’s expectations.
ASIC alleges that Star’s board and executives failed to give sufficient focus to the risk of money laundering and criminal associations, and has sought declarations that the defendants breached their duty and that the court impose pecuniary penalties and disqualification orders.
In announcing the case, the ASIC Chair said “…directors and officers are a critical part of the conduct of business in Australia. Their duty is to understand the operations of the company over which they preside, and the particular risks faced by the business. They are required to bring an inquiring mind to business operations. It is not ‘set and forget’”.
In further media comments, the ASIC Chair emphasised the regulator had brought the case against all directors to reinforce the board’s collective responsibility and that part of a NED’s role is to “address foreseeable, observable risks”.
ASIC’s action is against the directors as individuals, not the corporation. Star is facing multiple actions from AUSTRAC and State regulators via separate enforcement channels.
In its statement of claim, ASIC alleges that Star board members:
- Approved the expansion of Star’s relationship with certain individuals with reported criminal links, rather than addressing money laundering risk by inquiring into whether Star should be dealing with them; and
- When provided with information about money laundering risks affecting Star, did not take steps to make further enquiries of management about those critical risks and that this was a breach of their director’s duty obligations.
ASIC further alleges that the former MD and CEO and key executives breached their duties by:
- Not adequately addressing the money laundering risks that arose from dealing with Asian gambling junket Suncity and its funder, as well as continuing to deal with them despite becoming aware of reports of criminal links; and
- Not appropriately escalating money laundering issues to the Board.
According to media reports, to date, at least two of the defendants will deny the allegations against them.
What is the duty under s180(1)?
Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director in the company’s circumstances and had the same responsibilities of that director.
Whether a director has exercised a reasonable degree of care and diligence is determined by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to flow to the company.
As has been written previously, the business judgment rule is of relatively limited scope in Australia, with detailed analysis from Allens Linklaters, commissioned by AICD, available here.
Star - Implications for directors
Members should be watching the case closely as it represents the first time that ASIC has sought to pursue an entire board for alleged breaches of their director’s duties tied to non-financial risk management.
In contrast to Star, ASIC proceedings over recent times have focused on only a subset of directors. For example, in Cassimatis, just the executive directors were pursued, while in Vocation, the action was against the former Chair, CEO and CFO.
ASIC’s pursuit of the Star directors and executives is also significant in examining the scope of the statutory duty of care and diligence. In particular, previous ASIC actions have related to financial reporting (e.g. Centro) or market disclosure (eg James Hardie) whereas in Star, the alleged breach of director’s duties relates to compliance with specific regulatory obligations of the corporation.
The case serves as a reminder for all directors - especially those of large, listed entities and companies with a high public profile - that ASIC expects boards to adopt an active oversight role, especially with respect to risk management. Notably, since the Financial Services Royal Commission, ASIC has adopted a stronger focus on non-financial risk management, including publishing a detailed report on the role of directors and officers.
For directors of entities facing complex non-financial risks in particular, they should be continuing to constructively test and probe management on the adequacy of controls and seeking external assurance.
Where significant problems are identified, the board should play an important role in requiring that management resolves those issues to the directors’ satisfaction, as quickly as practicable. Similarly, directors should be scanning the external environment, including media reporting, to help inform their perspective.
Further guidance for directors on non-financial risk management
Directors looking for further guidance on non-financial risk management are encouraged to read ASIC’s aforementioned report, which includes suggested questions for boards, as well as Commissioner Hayne’s final report (summarised here) and the APRA review into the Commonwealth Bank (analysed here).
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