The Law Reform Commission’s Report on Regulatory Powers and Corporate Offences

Author: Sinéad Taaffe, Kevin Walsh and Tom Clarke.

November 9, 2018

The Law Reform Commission’s (“the LRC”) Report on Regulatory Powers and Corporate Offences has recently been launched by the Attorney General, Mr Seamus Woulfe SC.

The LRC’s Report (“the Report”) makes over 200 recommendations for reform in relation to regulatory powers and corporate offences.

Corporate Crime Agency

One of the key recommendations listed in the Report is the establishment of a statutory Corporate Crime Agency (“the Agency”), which would be comprised of a multi-disciplinary team and supported by a sufficiently resourced white-collar crime unit working within the Office of the Director of Public Prosecutions.

In the event that these recommendations are accepted by Government, the Agency would have the power to commence an investigation, without the necessity of a referral from a financial regulator.

Legislative Amendment

Although the Report acknowledges that existing legislation resulted in numerous significant convictions regarding financial offences previously, it also highlights the need to amend certain legislation in order to address the issue of conscious recklessness or “egregiously reckless risk-taking” by a person. One particular example outlined is an amendment to the Criminal Justice (Theft and Fraud Offences) Act 2001 which would result in any such recklessness amounting to an offence of false accounting under this act.

Common Legislative Powers

Fundamentally, the Report recognises the need for financial and economic regulators to be equipped with common legislative powers referred to as a “core regulatory toolkit” which would include the following:

  1. Power to issue a range of warning directions or notices, including to obtain information by written request and “cease and desist” notices;
  2. Power to enter and search a premises and take documents and other material, for example where relevant for product testing purposes;
  3. Power to require persons to attend in person before the regulator, or an authorised officer, to give evidence or produce documents (including provision for determining issues of privilege);
  4. Power to impose administrative financial sanctions (subject to court oversight);
  5. Power to enter into wide-ranging regulatory enforcement agreements or settlements, including consumer redress schemes; and
  6. Power to bring summary criminal prosecutions (prosecutions on indictment are referred to the Director of Public Prosecutions).

Administrative Financial Sanctions

The LRC’s proposed administrative financial sanctions (“AFS”) would include the power on the part of the Central Bank to impose a maximum sanction of €10 million in relation to companies or 10% of the entity’s annual turnover for the previous financial year if that figure exceeds €10 million, and a maximum sanction of €1 million in respect of individuals.

The Report further recommends that the Central Bank and other comparable financial and economic regulators be given the power to remove any economic benefit derived from the regulatory breach. This process is referred to in the Report as “disgorgement”.  It is of particular note that the LRC have recommended that disgorgement should be in addition and separate to any AFS imposed and should not be included in the maximum statutory sanction.

It is also recommended in paragraphs 3.126 – 3.127 of the Report that the Central Bank and comparable financial regulators be given the power to impose an AFS up to a maximum of twice the amount of the economic benefit gained from the breach and that such an amount should be in addition to any sanction imposed based on other calculating factors.

It is recommended that the procedure leading to such sanctions should be modelled on the process followed by the Solicitors’ Disciplinary Tribunal and the Medical Council’s Fitness to Practise Committee whereby an Adjudicative Panel Committee would make a determination as to the level of AFS to be imposed, having regard to stated statutory criteria.

The LRC also recommend that the determination in respect of the sanction to be imposed would ultimately be subject to oversight by the High Court.

Regulatory Enforcement Agreements

The LRC propose that Regulators who come within the scope of the Report should be given the power to enter into Regulatory Enforcement Agreements (“REA”) with regulated entities and individuals. An REA is defined in the Report as the “agreed imposition of an administrative financial sanction (AFS) between the regulator, and a regulated entity in respect of a prescribed contravention, in settlement”. It is envisaged that REAs would be entered into in place of the more formal AFS process outlined above.

It is recommended that the following apply in respect of REAs:

  1. negotiations leading to REAs should be on a “without prejudice” basis;
  2. the REA must be evidenced in writing;
  3. the REA must be publicised;
  4. the REA may include not only a specific sum by way of agreed settlement with the regulator but may also include consumer redress schemes; and
  5. the REA may be subject to being made an order of court, but that there should be no general requirement to do so.

It is expected that the REA process would be less adversarial than the AFS process and is noted in the Report as being a “more collaborative method of enforcement”.

Importantly, the LRC has suggested that one pre-requisite of an REA being available to a party should be that the party accept responsibility for the breach that has occurred and that a public statement outlining the details of the breach would issue following settlement.

Deferred Prosecution Agreements

A further statutory recommendation made in the Report relates to the regulation of companies and involves the introduction of Deferred Prosecution Agreements (“DPAs”). DPAs are described in the Report as agreements between a prosecutor and a corporate body (or other undertaking, such as a partnership) in which the prosecution agrees not to pursue a criminal charge if the corporate body fulfils specified obligations. The DPA system would be overseen and controlled by the DPP.

The effect of a DPA would be for a corporate body to avoid a criminal conviction if it complies with the terms of the DPA. On that basis, the LRC outlined its view that DPAs may encourage self-disclosure of misconduct and on that basis enhance detection and enforcement in circumstances where prosecution would be difficult.

The LRC recommended that the DPA scheme should only be available in cases concerning specified offences, in which the offence is of sufficient seriousness to warrant a prosecution on indictment.

The LRC has further recommended that in the event that DPAs are introduced, a Code of Practice (“the Code”) should be published by the DPP. The purpose of this would be to provide clarity and certainty in respect of the DPA negotiation process.

It is proposed that DPAs would emulate the UK DPA system which requires approval from the Court in respect of the conditions to be complied with.

Due Diligence Defence

The Report recommends the introduction of a due diligence type defence for a corporate body or a “relevant person” to certain regulatory offences.

The LRC has recommended the term “relevant person” should include the following:

  1. a director, manager, secretary or other officer of the corporate body;
  2. a person purporting to act in that capacity;
  3. a shadow director (comparable to the definition in the Companies Act 2014) of the corporate body; or
  4. an employee, agent or subsidiary of the corporate body.

The LRC suggest that this defence should be established by demonstrating that the corporate body or relevant person, has taken reasonable steps to exercise all due diligence to prevent any relevant criminal activity. In this regard, the establishment of appropriate risk management policies and procedures may be of assistance in establishing that due diligence has been exercised. However, the LRC has further recommended that where a regulator has jurisdiction in connection with an offence to which a due diligence defence applies, that regulator should provide guidance, which may take the form of a statutory code, setting out the measures required to satisfy the due diligence defence.

Volume 1 of the Report, which relates to regulatory powers, can be accessed here: http://www.lawreform.ie/_fileupload/Completed%20Projects/LRC%20119-2018%20Regulatory%20Powers%20and%20Corporate%20Offences%20Volume%201.pdf

Volume 2 of the Report, which relates to corporate offences, can be accessed here: http://www.lawreform.ie/_fileupload/Completed%20Projects/LRC%20119-2018%20Regulatory%20Powers%20and%20Corporate%20Offences%20Volume%202.pdf

 

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