Reflections on the first year of ASIC’s immunity policy for market misconduct

February 2022  |  SPECIAL REPORT: CORPORATE FRAUD

Financier Worldwide Magazine

February 2022 Issue

In February 2021, the Australian Securities and Investments Commission (ASIC) published its immunity policy for individuals who may have committed, with at least one other person, market misconduct or other conduct prohibited by Part 7.10 of the Corporations Act 2001 – a policy which no doubt was intended to provide ASIC with a powerful new tool for combatting what ASIC has described as “many of the most serious, complex and difficult-to-detect contraventions in financial markets”.

However, after almost a year since its introduction, there have been no reports of any individual being granted immunity under the policy, and a number of commentators have speculated as to whether the policy, and in particular ASIC’s decision to exclude corporate entities from its scope, will be effective. In the meantime, a proposed deferred prosecution agreement (DPA) scheme, which, if it had been introduced, would have complemented the immunity policy, has been languishing in the Australian parliament for several years.

In this article we explore the operation and requirements of the immunity policy, and the shape of the proposed DPA scheme, and provide some insights into the way in which these two schemes might interact in the future.

ASIC immunity policy

The ASIC immunity policy provides the opportunity to apply for immunity from contraventions of Part 7.10 of the Act, which includes offences of insider trading, market manipulation, false trading, market rigging and misleading or deceptive conduct in relation to financial products and services. Under this policy, ASIC may grant an individual immunity from civil penalties and recommend that the commonwealth director of public prosecutions (CDPP) grant the individual immunity from criminal prosecution.

Applicants for immunity under the policy are required to make a detailed disclosure of information to ASIC and will only qualify for immunity if several strict conditions are satisfied, including that the individual must be the first person to apply for immunity in respect of the misconduct, and that ASIC has not already commenced an investigation when the disclosure is made.

The individual must also: (i) think that they (with at least one other person) may have contravened a provision in Part 7.10, and admit to ASIC that they have participated in the misconduct; (ii) have not been the instigator or coerced another person to participate in the misconduct; (iii) have ceased, or be prepared immediately to cease, their involvement in the misconduct; and (iv) have provided full, frank and truthful disclosure when making their application and undertake to provide their full and ongoing cooperation with ASIC throughout its investigation and any ensuing court proceedings, including appearing as a witness for the prosecution in any court proceedings regarding the misconduct.

While the policy allows ASIC a measure of discretion to determine which individuals satisfy the narrow immunity criteria, the criteria are objectively clear, and the potential availability of immunity provides more incentive than ever before for individuals to disclose their own potential wrongdoing to ASIC. Before the introduction of the policy, the protections afforded to whistleblowers were limited to protections in relation to their whistleblowing, with no immunity being afforded to the whistleblower in respect of their involvement in the underlying misconduct.

Despite the obvious benefit of being granted immunity under the policy, ASIC has, in the nearly 12 months since the introduction of the policy, given no update as to whether anyone has sought immunity under the policy, and there have been no published court decisions indicating that anyone has sought or been granted immunity under the policy. It may be the case that very few individuals have, to date, sought immunity under the policy, although it may be too soon to tell – ASIC has reported in its ‘2020-21 Annual Report’ that, for those prosecutions which were concluded in the financial year, the average amount of time that it took to complete an investigation and reach a court decision was 40 months for criminal actions and 26 months for civil actions.

The decision to exclude corporate entities from the potential protection may have limited the effectiveness of the policy. Unlike the Australian Competition and Consumer Commission’s immunity policy for cartel conduct, which has been around, in one form or another, for nearly two decades and which is available to corporate entities (with the ability to seek derivative immunity for related bodies corporate and current and former directors, officers and employees of the applicant), ASIC’s policy is only available to individuals.

It is not clear why ASIC chose to limit the policy to individuals, although it may have been concerned not to ‘cut across’ the fact that financial services licensees have strict reporting obligations under section 912D of the Act in relation to contraventions and likely contraventions of Part 7.10. As sound as that reasoning may be, it ignores the fact that corporate entities that do not hold financial services licences are capable of contravening the provisions of Part 7.10.

There are a number of practical reasons why individuals may be less inclined to seek immunity under the policy than corporations. First, corporations, particularly large corporations, can and regularly do undergo changes of management structure and personnel, and those changes can cause corporations to reflect on past conduct with ‘fresh eyes’.

Second, corporations, particularly large corporations, will have internal legal advisers and compliance functions that can advise as to potential criminal or civil penalty liability, and will budget for external legal advice, whereas individuals may be reluctant to seek and pay for legal advice unless they are aware of a significant risk.

Third, corporations, particularly those with an in-house legal or compliance function, are more likely to be aware of the existence of ASIC’s immunity policy than an individual may be, unless that individual has received training on the policy.

Finally, unlike a corporation, an individual who makes a disclosure to ASIC but is not granted immunity under the policy risks being exposed to a custodial sentence (in addition to exposure to a significant criminal fine or civil penalty).

Deferred prosecution agreement scheme

The shortcomings of the policy might have been remedied if the Australian parliament had passed proposed legislation originally introduced in 2017 and then reintroduced in 2019 to establish a DPA scheme for serious corporate crimes.

The proposed DPA scheme extended to several Part 7.10 offences (among other offences including foreign bribery, false accounting, money laundering and proceeds of crime offences, and sanctions offences) and would have given corporate entities a similar incentive to that available to individuals under the immunity policy, proactively to report any potential instances of misconduct under those Part 7.10 provisions. At least in theory, it may have been possible for an individual to seek immunity under the policy and also seek a DPA on behalf of any company involved in the misconduct and of which the individual was a director or officer.

However, perhaps as a consequence of the coronavirus (COVID-19) pandemic, the current bill has, to date, failed to make it to the lower house from the senate, where it was introduced by the Australian government some two years ago.

The government says that the bill strikes the right balance and is not a ‘free pass’ for big corporates that have engaged in serious corporate crime. As drafted, the scheme was to require that, in reaching a DPA, prosecution be deferred on the proviso that the company complies with certain conditions. Generally, much like the requirements of ASIC’s immunity policy, those conditions would have included admitting to a set of agreed facts and cooperating with any related investigation. Appropriately for corporate entities, the conditions would also have included implementing a programme designed to prevent future misconduct and paying a financial penalty.

There remains significant support for a DPA scheme in Australia, for reasons similar to those in support of the ASIC immunity policy – it provides Australian agencies with another tool to facilitate efficient and effective identification and investigation of major corporate misconduct. The types of offences that are covered by the DPA scheme are typically difficult to identify and prosecute but can have identifiable negative effects on Australian companies and the economy.

The existence of a DPA scheme could encourage companies to come forward with instances of identified misconduct and provide greater certainty of outcome, which may prove attractive to companies wanting to report and resolve misconduct.

Australia is headed for a federal election in the first half of 2022, which is likely to further delay the consideration of the DPA bill. There is therefore a very real possibility that the bill will lapse again and be required to be reintroduced a second time.

Looking forward into 2022

Time will tell whether the current Liberal/National coalition government will seek to prioritise the proposed DPA regime ahead of the 2022 election and, if not, whether the proposed regime will garner support from a Liberal/National or Labour government in the next parliament.

ASIC has stated that it intends to review its immunity policy every two years, with the first review likely to occur at some point in the last quarter of the 2022 calendar year. If the proposed DPA scheme fails to pass through parliament, ASIC may be tempted, as part of that review, to look at extending the immunity policy to corporate entities (perhaps excluding financial services licensees).

 

Richard Harris is a partner, Jason Oliver is special counsel and Kate Bouffler is a lawyer at Gilbert + Tobin. Mr Harris can be contacted on +61 (2) 9263 4413 or by email: rharris@gtlaw.com.au. Mr Oliver can be contacted on +61 (2) 9263 4491 or by email: jxoliver@gtlaw.com.au. Ms Bouffler can be contacted on +61 (2) 9263 4207 or by email: kbouffler@gtlaw.com.au.

© Financier Worldwide

BY

Richard Harris, Jason Oliver and Kate Bouffler

Gilbert + Tobin

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.