The New Trade Practices Penalty Regime: compliance is not a luxury but an essential ingredient!

by Peter McDonald

Treasurer Peter Costello has announced that the Federal Government will amend the Trade Practices Act to introduce jail terms and very large fines upon conviction for executives and companies who engage in serious cartel conduct. The proposed criminal offence will prohibit a person from entering an arrangement with a competitor to fix prices, restrict output, carve up markets or rig tenders, where the arrangement was made with the intention of dishonestly obtaining a gain from customers who fall victim to the cartel.

Key aspects of the proposal are as follows:
  • the existing civil regime will operate concurrently with the new criminal regime;

  • the ACCC will be responsible for conducting all investigations of cartel conduct, but any criminal prosecutions will be conducted by the DPP;

  • the DPP and ACCC will enter a public Memorandum of Understanding (MOU), establishing procedures for the investigation of cartel offences and the circumstances in which a matter will be referred to the DPP for prosecution. The MOU will take into account matters such as the impact of the cartel upon the public and any prior convictions of alleged offenders;

  • a new immunity policy and procedure will be developed by the DPP and the ACCC for whistleblowers in criminal cartel matters;

  • the maximum term of imprisonment for a convicted individual will be five years. The maximum fine upon conviction will be $220,000;

  • for a corporation the maximum fine will be the greater of $10 million, or three times the value of the benefit of the cartel, or where the value cannot be readily ascertained, 10 per cent of the annual turnover of the body corporate and all of its related bodies corporate.
These significant new proposed penalties should come as no real surprise to the business community. They were recommended by the Dawson Committee, which reviewed the Trade Practices Act in 2003/2004, and they have been the subject of significant lobbying by the ACCC. Recent events surrounding certain companies in the Australian cardboard manufacturing industry have highlighted the importance of this issue for the ACCC, the government and the community.

For some time, there has been a public perception, shared by regulators and by many who practise in this area, that trade practices compliance (indeed compliance in general) is not given as high a priority by many companies as it should be.

When the relevant amending legislation becomes available, we will of course be commenting on it in detail. At this point, however, we simply emphasise the importance of factoring into a company's strategic planning for the year 2005 and beyond adequate resources (both monetary and personnel) to deal effectively with compliance issues.

Additional considerations serve to make this a very sensible 'investment initiative':
  • Companies that have a very good compliance record and are shown to be compliant corporate citizens will not only avoid potentially very costly mistakes, but will also be recognised as market leaders in their industry. These companies will feel less pressured in the context of the operation of corporate regulation or investigations that may occur—either on the part of the ACCC, the Australian Stock Exchange or otherwise.

  • Regulators such as the ACCC are increasingly seeking to ensure that, not only corporate entities, but responsible individuals are prosecuted when the law is contravened. The prospect of criminal convictions and custodial sentences for certain breaches of trade practices law brings into sharp focus the personal responsibilities being placed upon executives and directors.

  • Equally important is the increased focus upon directors and other controllers of companies who fail to introduce and maintain effective compliance programs. Recent cases have shown that, where companies have failed, or there has been evidence that the companies have engaged in practices that may not be regarded as within the law, the spotlight may turn to the directors and officers responsible to ensure legal compliance. In the extreme case, shareholders could seek to recover damages from relevant directors alleging it was their failure to act with proper care that led to the company committing the offence.

  • The dishonesty element in the offence will undoubtedly be the subject of much debate. However, it does make it all the more important to have compliance programs rigorously applied, in order to pre-emptively deal with the evidentiary issue of honesty. An important part of a 'no dishonesty' defence for directors and officers may be that they had taken all reasonable steps to stamp out the conduct in question by implementing effective compliance policies. The currency and status of the program could be a two-edged sword in this regard. A compliance program that falls into disuse could provide evidence of culpability.
There will be other important changes to the Trade Practices Act included in the amending legislation, which is expected to be introduced in the Federal Parliament in the near future. While all of these will be important, especially proposed changes to the way in which mergers are being evaluated by the ACCC, none will have the direct daily potential impact on companies and their executives as the proposed criminalisation of the provisions of the Trade Practices Act dealing with serious cartels and the prospect of heavy fines the kind described above. It is an appropriate time for companies to assess their compliance strategies and programs and to take necessary action.


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