The Financial Services Royal Commission in the COVID-19 world

18/11/2020 | 7 mins

Edition | Lessons from the Banking Royal Commission for the COVID-19 world

Elise Bant explains the significance of the findings of the Royal Commission into the banking sector and a new report by the Australian Law Reform Commission for our understanding of how to hold corporations criminally accountable – an issue that has received renewed attention during the pandemic.

Two recent events have highlighted the ongoing impact of the Financial Services Royal Commission in this COVID-19 world. First, financial regulator, the Australian Securities Investment Commission, has launched two further actions against powerful financial corporates, arising out of the ‘fees for no services’ scandal. The second is that the Australian Law Reform Commission’s Final Report into Corporate Criminal Responsibility was tabled in Parliament. Both aim to help hold delinquent corporations to account. Whether they can succeed in part depends on choices by both government and courts about how much corporations should be treated like 'natural' people.

Let me explain. One of the most significant hurdles to holding corporations responsible for many forms of serious wrongdoing is to show a sufficiently blameworthy corporate ‘state of mind’. Regulators or prosecutors cannot prove that a corporation has been dishonest, for example, without addressing what it knew and intended. If the corporation cannot be proven to have the required knowledge or intention to act as it did, its behaviour is open to being re-characterised as simply mistaken or careless. In the eyes of the law, this can reduce the seriousness of even very harmful and long-term misconduct. This is precisely what we saw play out in the Financial Services Royal Commission. As Commissioner Hayne explained in his Final Report at page 139, Mr Thorburn (a senior executive at NAB) told the Commission that NAB didn’t intend and didn’t realise that it was taking people’s money for nothing, over many years. He accepted that money just kept falling into NAB’s pockets. Sure, the behaviour looked dishonest but, apparently, no-one on the ground realised it was happening. It was all due to ‘systems errors’ and administrative mistakes.

Precisely the same important questions about the corporate state of mind arise in the current health crisis. A key question in the Ruby Princess debacle, for example, has been what its operating company (Carnival) knew: Did they knowingly or recklessly allow infected customers to disembark – did they deliberately mislead Australian authorities? The same question can be levelled at the manufacturers of hand sanitisers that falsely claim that their products have levels of alcohol that, if true, would make them effective against COVID-19. While that conduct is clearly misleading and so contrary to law, the level of penalty awarded will depend, in part, on whether that conduct was deliberately or knowingly misleading: that is, not merely misleading but deceptive into the bargain.

Commissioner Hayne was fully aware of the importance of calling out conduct as dishonest, rather than simply careless or contrary to law. He went through a lot of trouble in his report to explain how the ‘fees for no services’ cases involved dishonest conduct, because if that is established it is a powerful and public denunciation of corporate wrongdoing, with major financial, legal and reputational consequences.

But he had to go into that detail precisely because it is so difficult to prove dishonesty against corporations. The problem is that corporations aren’t human, or ‘natural’ persons: they are artificial persons created by law. They don’t have minds, as such. So what the law does is look for responsible individuals within the company, who have the required knowledge or intention. Typical examples are directors and senior executives. Their state of mind is then ‘attributed’ to the corporation. But this sort of approach fails when it comes to big corporations, like the major banks, or big pharmaceutical companies. Often (as we also heard in the Commission, see for example the Final Report at page 397) the directors of big corporations leave the day-to-day operations to others to manage. And knowledge will often be split across departments, managers and employees, and across a range of tasks. So, ironically, while the law’s approach to corporate state of mind might work for small companies because their directors will be ‘hands on’, it tends to fall apart where it is needed most, with big companies that cause widespread harm.

In its latest action on ‘fees for no service’, ASIC has taken up Commissioner Hayne’s challenge, alleging that the company’s conduct was contrary to the law’s requirement, under section 912A Corporations Act, that financial services licensees must do all things necessary to conduct their business ‘efficiently, honestly and fairly’. This goes well beyond the usual allegations of negligence and misleading conduct and, if successful, can result in far more serious consequences. Penalties are set by reference to a range of factors, but the presence of dishonesty is a powerful consideration favouring the top end of the range. It may also be a powerful factor supporting the ultimate penalty: loss of their licence.

Here, the ALRC Final Report is particularly important in two ways. First, in its careful review (see discussion around Recommendation 7), it emphasises that there is another way to prove dishonesty, which doesn’t rely on pinning blame on some individual cog in the corporate wheel. That is through proving a toxic ‘corporate culture’ which encourages the breach of the law. As set out in the Criminal Code Part 2.5, corporate culture is found in the attitudes, policies, rules, course of conduct or practices of a corporation. Secondly, the ALRC’s discussion of the strengths and weaknesses of this model opens the door to developing better laws that are even better tailored for the reality of corporations. The truth is that directors, managers and employees retire, get fired, resign, get promoted and otherwise move. The particular identity, knowledge and intention of these people may be short-lived, in the life of the corporation. What persists, though, are the systems, policies and practices that dictate what happen on the next person’s watch.

“So, if we want to know what corporations ‘think’, we should look at their systems, policies and practices. These tell us what the corporation intends – its corporate purposes. That simple insight gives us a way forward, towards a better way of holding delinquent corporations to account. ”

It also potentially turns the practice of blaming ‘systems errors’ on its head. That is because it is precisely those systems that reveal corporate intention, knowledge and, yes, blameworthiness. Interestingly, the ALRC has also recommended (Recommendation 8) that breaches of civil laws by corporations may give rise to more serious, criminal liability, when they form part of ‘corporate systems of conduct or patterns of behaviour that lead to breaches of civil penalty provisions’. This is because systematic misconduct is more culpable and harmful. I agree: but we may add that it is more blameworthy precisely because it reveals the corporation’s true state of mind.

If we embrace this simple idea – that we understand what a corporation thinks by examining its systems, policies and practices – then we are a step further towards having a legal system that is ‘fit for purpose’ in an age dominated by corporate traders.

Professor Elise Bant

Elise Bant is Professor of Private Law and Commercial Regulation at The University of Western Australia. In 2019, she was awarded Australian Research Council Future Fellowship FT190100475 to investigate better ways of holding corporations to account for commercial fraud.


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