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Corporate crime: the role of government



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THE HON. WAL FIFE, Μ. P.

Minister for Business and Consumer Affairs and Minister Assisting the Prime Minister in Federal Affairs

"CORPORATE CRIME: THE ROLE OF GOVERNMENT"

The Government places a high premium on restricting the amount of

regulation of the private business sector. Accordingly, in focusing on

corporate crime it must maintain an extremely sensitive concern for the

dilemma posed by the need to control corporate crime without restricting

and overburdening legitimate business. A balance has to be struck between

excessive Government involvement in business and the protection of the rights

of others in the community.

Today I wish to say something about the way in which the Government

sees its role in combatting corporate crime.

Before turning to the detail of the Government's approach, I should

first establish with you what I mean by "corporate crime". For purposes of

my address today, I am regarding corporate crime as being principally con­

cerned with offences committed by a company or its officers against the

community.

By contrast, I tend to regard most offences committed by officers

against a company as falling within the ambit of the broader category of

"white-collar" or "economic" crime.

Governments have a number of important roles to play in combatting

corporate crime. Clearly they have a responsibility to ensure that the law

adequately proscribes those activities which the community regards as

undesirable and provides for punishment which fits the crime.

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But the role of Government does not end there. There is little

point in having legislation on the statute books which is desirable and

appropriate if Governments do not also provide the means by which those

laws can be effectively enforced. There are of course a number of enforce­

ment agencies in Australia which are concerned with combatting corporate

crime, not least of which is the Australian Federal Police. I am pleased

to see that Sir Colin Woods, its Commissioner, was able to. accept your

invitation to address you today.

However, the enforcement agencies that you,,as accountants, would

be most familiar with are the various State and Territory corporate affairs

commissions. Advances have been made in recent years in improving the

effectiveness of those commissions.

But a far more significant development in effective enforcement

will come with the establishment of the National Companies arid Securities

Commission^ I introduced a Bill into the Commonwealth Parliament on

the 28th of August to establish the National Commission. I expect that the

Bill will be passed this Parliamentary Session and that members of the

Commission will be appointed early next year. . . .

The establishment of the National Commission is consistent with the

main recommendation of the Rae Committee that the widespread abuses it had

uncovered in the securities markets could only be overcome by a national

regulatory body. The National Commission will replace the present fragmented

and unco-ordinated regulatory structure in Australia by a single national

system of surveillance and administration. As such, its establishment

represents a watershed in the regulation of the securities markets and the

corporate sector in Australia.

At best, corporate crime has led to a widespread cynicism in the

general community that the business sector should not be trusted. At

worst, corporate crime has caused or significantly contributed to some of

our major company collapses in Australia, with all the attendant publicity

of corporate duplicity and the savings of small investors being wiped out.

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The danger of allowing this to go unchecked is that it invites

excessive regulation from Governments which unfairly burdens the vast .

majority of companies and company officers that are honest. I suggest

therefore that the direction of future developments must be towards creating

a climate of public opinion in which corporate crime is regarded with

sufficient indignation or even outrage, that potential offenders are deterred.

It is important that a start be made in overcoming what some people

have expressed as the problem of moral neutrality - that is, the fact that .

there is not always a clear correlation between what is commercially

acceptable and what is legally acceptable.

There are many examples pf this sort of attitude and I was

particularly pleased therefore to read recently of the remarks- made by the

President of the Institute of Chartered Accountants, Mr. John Bishop, when

he urged members to oppose artificial or contrived schemes of tax avoidance.

It is said that the essential elements present in most instances of

white-collar and corporate crime are firstly, a financial or psychological

need; secondly, a moral justification; thirdly, an opportunity; and finally a

perceived likelihood of not being caught.

Governments can do something about this last element by increasing

the chance of detection and indeed, the decision to establish the National

Commission is evidence of this. But governments are virtually powerless

to influence the other 3 elements. As to the first element, Governments

can not overcome the financial and psychological needs of all potential

corporate criminals. The psychological needs which have been manifested

in corporate crime range from pressures arising out of marital problems

to the intellectual challenge involved in beating the system.

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Governments face similar difficulties in attempting to minimise the

second element, namely "moral justification". This is an area in which

governments must rely on corporate management to play their part. If

the senior people in a company condone or themselves participate in

activities which, though legal, are unethical, then this can be expected to

encourage others within the company to do likewise. Conversely, if the

senior management do not engage in activities against the interests of the

community, one of the fringe benefits may well be that other employees will

also be less likely to engage in fraud, larceny or other crimes against the

company.

Governments must also rely heavily on corporate management to

minimise the third element, namely the opportunities to commit crimes.

We must rely on auditors to see that adequate controls exist to prevent

offences being committed and detect them when they have been committed.

They are in the best position to provide an independent check on manage­

ment's stewardship of the company and governments must be able to rely

on them to properly perform this role.

I now wish to turn to the question of legislative sanctions for

corporate crime which is an area in which governments do have a key role

to play. It has been observed by some commentators that the sentences

imposed for corporate crimes or economic crimes generally, have tended

to be less severe than those in respect of other crimes.; This'm would

appear to be the case. However, we must avoid rushing in with simple

solutions, such as drastic increases in penalties, without first assessing

their likely impact.

Whereas criminal sanctions are generally aimed at either retribution,

rehabilitation or deterrence, or some amalgam of these, the principal aim

of criminal sanctions in the area of corporate crime has been deterrence.

Therefore, one could be forgiven for expecting that an increase in penalties

would increase the deterrent effect. But that simply begs two questions - on

whom are those increased penalties to be imposed?, - and what form will

they take?

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As to the first question, there must be a critical appraisal in

respect of every objectionable activity perpetrated by a company as to whether

the desired effect could best be achieved by punishing the company or by

punishing the officers involved. I have instructed my Department to examine

the companies and securities industry legislation with this question in mind.

The answer is not an easy one. y

On the one hand it can be argued that if the company is punished this

will encourage better corporate supervision of employees. Furthermore, the

likelihood of successful prosecution may be increased if criminal sanctions

are imposed on a company rather than on individual officers if, by so doing,

the need has been obviated to prove criminal intent on the part of individual

company officers. Also, on occasions, it will be clear that certain

individuals in the company have committed a crime which benefits the

company without having left sufficient evidence of their identity. There is

also the possibility that in some instances where there is sufficient evidence

to prosecute some individuals it may be unfair to do so,, particularly if they

were merely acting under direction from more senior officers who were

the real culprits.

But on the other hand, making the company liable reduces the scope

of possible forms of punishment. For one thing, imprisonment is not

possible as a sanction against a company. Furthermore, whether or not a

particular fine will achieve its deterrent effect will largely depend on the

size of the company involved. Imposing a fine on a small company might

force it out of business whilst the same amount on a larger company might

just impose a cost which had been assessed as a worthwhile business risk

to take, considered in conjunction with the risk of being caught.

The principal argument, however, against fining the company in this

way is that the punishment may, in the end result, be passed on to share­

holders and creditors who have played no part in committing the offence.

I do not pretend to have all the answers to questions about the

appropriate form and quantum of criminal sanctions. I simply make the

point that, in imposing sanctions to deter corporate crime, a close examina­

tion of all factors is necessary without blindly assuming that increasing the

severity of punishment is necessarily the answer. The evidence suggests

that in many areas this is simply not true. Much can be gained from in­

creasing the certainity of punishment rather than from increasing the

severity. ‘ ■

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I said that, by imposing strict liability on companies, a much greater

deterrent effect could be expected. But strict liability offences are hard to

justify 5the basic thrust of criminal law has always been that it should only

penalise those who are in some way morally culpable. I think" we should

not generally depart from that course.

Some interesting suggestions have been made in the United States

aimed at incorporating most of the deterrent advantages of strict liability

offences whilst still giving some weight to the principle that criminal

offences should not exist in the absence of moral culpability.

One solution, which appears in the U. S. Model Penal Code, is to

penalise companies for all sorts of offences committed by their officers

but to enable those companies in their defence to prove that they, through

one of their senior executives acted with due diligence to prevent it. I

find this solution attractive because it provides an incentive for company

management to stress to employees that unethical and illegal conduct will

not be tolerated.

It also encourages companies to implement safeguards to prevent

corporate crime. , .

My Department is undertaking a fundamental re-appraisal of company

and securities law to ensure that the law is effective in the fight against

corporate crime. I have asked my Department, as part of this re-appraisal,

to prepare a Discussion Paper for circulation to the public on a number of

issues. I trust that members of your profession will take the opportunity to

participate in any ensuing debate. I would anticipate that as a result of that

public debate, concrete proposals might emerge which I could put forward

for consideration by the Ministerial Council for Companies and Securities for

inclusion in the national legislation.

In conclusion, I would like to thank your chairman arid the Joint

Professional Development Committee of the accounting bodies for providing

me with this opportunity to indicate the importance which I attach to

combatting corporate crime.

I trust that your deliberations this afternoon will be as successful

as they were this morning. .

. ■ ' - 7 - . .

Address delivered in Canberra on 6 October 1979 to the Seminar

on "Corporate Crime - Implications for Management, Auditors

and Others" arranged by the Joint Professional Development

Committee (A. C . T . ) of the Institute of Chartered Accountants

in Australia and the Australian Society of Accountants.