Culture and accountability to remain in spotlight with ALRC review

The pending ALRC review into criminal liability means corporate culture and accountability are still under scrutiny, says Professor Pamela Hanrahan.

Companies have always been awkward subjects of the criminal law. This is because criminal responsibility usually requires the prosecution to prove, beyond reasonable doubt, that the defendant had a particular state of mind — known as the fault element — at the time the offending occurred. The general principle is that a person is not criminally responsible for their actions unless their conduct involved both the requisite physical element — an act or failure to act — and the requisite fault element: generally intentionality, knowledge or recklessness.

The Attorney-General’s guidelines for framing Commonwealth criminal offences note: “The requirement for proof of fault is one of the most fundamental protections in criminal law. This reflects the premise that it is generally neither fair, nor useful, to subject people to criminal punishment for unintended actions or unforeseen consequences unless these resulted from an unjustified risk (i.e. recklessness).” For that reason, laws creating offences of strict and absolute liability where there is no need to prove fault “should only be used in limited circumstances, and where there is adequate justification for doing so”.

The fact that the criminal law cares about the defendant’s state of mind is one of the reasons prosecuting companies is so difficult. Companies are real legal persons, which means they are subjects of law, including criminal law, but they are artificial ones. They do not have minds of their own. They think and act through the people who direct and manage them. The challenge for law is to work out how to discern the state of mind of the company itself, where many people are involved in the chain of events that results in the contravening conduct.

Within months of the release of the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Australian Law Reform Commission (ALRC) announced that it would conduct a review of the basis on which criminal liability is attached to companies. The terms of reference — released in April 2019 — include an examination of the way the Criminal Code Act 1995 (Cth) attributes the fault element to conduct engaged in by companies.

Since 1995, the code has included provisions that allow for the fault element to be made out where the company’s poor culture was the cause of the offending. The legislation says that, where “intention, knowledge or recklessness is a fault element in relation to a physical element of an offence… that fault element must be attributed to a body corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence”. The means by which such an authorisation or permission may be established include “proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision” or “proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision”.

“Corporate culture” is defined as “an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities take place”.

This provision was intended to address the conceptual difficulty the criminal law faced in attributing fault in corporate offending. That difficulty had been starkly evident in the failed UK prosecution of the company that owned the car ferry Herald of Free Enterprise. The ferry sank off the Belgian port of Zeebrugge in March 1987, for the loss of 193 lives, after its bow doors were left open. A judicial inquiry found that: “From top to bottom, the body corporate was infected with the disease of sloppiness… [revealing] a staggering complacency…. Individually and collectively, they lacked a sense of responsibility” for the safe operation of its vessels. The company was prosecuted for manslaughter, but the prosecution failed because the court was unable to find that the “controlling mind and will” of the company had the requisite state of mind to establish criminality.

The laws subsequently enacted in the UK and Australia, including the code provisions, were intended to address this difficulty by looking to the culture of the company — rather than the state of mind of its controlling mind and will — to establish culpability. However, as the terms of reference for the ALRC review suggest, the success of this strategy has been limited. In more than two decades, poor culture has never been successfully relied upon to establish the fault element of a criminal offence committed by a company.

One issue identified by the banking Royal Commission is that the culture provisions of the code do not apply to offences created by Chapter 7 of the Corporations Act 2001 (Cth), which contains the financial services laws. Whether this exclusion should remain will be considered by the ALRC.

Community attitudes towards corporate wrongdoing have hardened over the past decade and the banking Royal Commission has contributed to that. There is a view that companies whose failure to comply with the law causes significant harm to customers, employees, the environment or the community ought to be prosecuted and not allowed to escape the consequences of their actions through negotiated civil or regulatory settlements. Companies cannot be imprisoned, but the stigma of a criminal conviction remains real and powerful, particularly if it comes with significant fines.

The code does not make having or presiding over a poor culture an offence. It is important to remember that. Its function is to overcome the conceptual difficulty of attributing the fault element of offending to an artificial person — the company — so that the criminal consequences of its actions can be attributed to the company. The ALRC will want to understand why the code provisions have not been used effectively to date, to see whether reform is necessary.

But the ALRC terms of reference also include an examination of “mechanisms which could be used to hold individuals (for example, senior corporate office holders) liable for corporate misconduct”. One suggestion has been that, where the fault element for the corporate offending is established by a poor culture, the individuals who allowed that culture to develop should be personally accountable alongside the company. This was hinted at some years ago by a former chair of the Australian Securities and Investments Commission. Such a step would have significant implications for directors, and should be contemplated only as part of a principled re-examination of the bases for imposing criminal liability on accessories to corporate offending.

The ALRC report is due on 30 April 2020.

We can expect its work to keep the complex issues of corporate criminal accountability in the news for some time to come.