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Non-compliance and the top of the enforcement pyramid

When a regulator faces a case of non-compliance, they have the choice to act via prosecution, or civil seeking penalties, however each course of action has its own complexities. The path taken could also send a strong or weak message about the seriousness of the breach.

These responses to non-compliance are the most serious and sit at the top of the regulatory enforcement pyramid. They should be reserved for non-compliances that have had the greatest consequences or potential consequences.

But which course of action is the right way to respond to non-compliance? We have previously looked at the importance of a risk-based assessment of non-compliance, and this approach will clearly indicate to a regulator when prosecution or civil penalty proceedings are warranted. We’ve also looked at when a light touch response to non-compliance can be justified.

One of the key benefits and reasons why a regulator will prosecute or seek civil penalties is for general deterrence.

A successful prosecution or civil penalty action should provide a clear message to the regulated community that the regulator will not tolerate this kind of conduct and will take action. This, in turn, promotes voluntary compliance.

How practical is it for regulators to prosecute or seek civil penalties?

To consider this question I will compare Victorian state-based regulators with Commonwealth regulators (given these are the jurisdictions I practice in).

Victorian state and local government regulators have full control over their discretion to prosecute. They bear the costs of a prosecution and in many instances are entitled to any fines ordered by the courts.

There are very few examples of civil penalty provisions in state-based legislation and therefore prosecution is the most serious response a regulator can make to a breach. Victorian state-based prosecutions are supported by a relatively efficient criminal mention procedure that operates in the Magistrates Courts. Whilst the mention procedure is not perfect, most prosecutions by local and state regulators progress relatively quickly and uncontested matters are resolved on average, in three to four months. Decisions are usually made orally and the regulator can prosecute most matters in a cost effective way either using in-house prosecutors or outsourcing to external legal service providers or the bar.

Compare this with some Commonwealth regulators. The discretion to prosecute is generally reserved for the Commonwealth Director of Public Prosecutions (CDPP). This provides the Commonwealth with a decision-making body that is at arm’s length to the regulator and can act in a consistent manner across the Commonwealth. This policy is sound, however, it also has the consequence of regulators having limited control over their overall enforcement strategy.

A Commonwealth regulator may have the best risk-based framework for responding to noncompliance, but if the CDPP determines that it will not prosecute because of its broader considerations to resource enforcement across the Commonwealth, the regulator no longer has the option of prosecution.

This decision may come after several months of investigation which the alleged offender is aware of. Therefore an inability to prosecute may send a message to the alleged offender that they have gotten away with their breach. The regulator may have the ability to seek civil penalties for the breach instead. Indeed, in recent years many Commonwealth regulatory frameworks have been amended to include civil penalties.

How practical and efficient are civil penalty proceedings?

The Federal Court is the court used for civil penalty proceedings brought by Commonwealth regulators. This is a court of record where decisions are not usually made on the spot and where the time taken to complete even an uncontested civil penalty proceeding can be several months or more than one year. This of course means that civil penalty proceedings are extremely costly for Commonwealth regulators. I should say I have no criticism of the Federal Court. The point I make is that court procedures have not been set up to accommodate an efficient process for civil penalty matters which could make the process more streamlined and cost effective.

Coupled with this, although the Commonwealth regulator may recover a proportion of its costs of conducting civil penalty litigation, any penalties awarded will generally not go to the regulator so they will end up out of pocket when compared with a prosecution where although any penalties ordered also go into consolidated revenue, the costs are borne by the CDPP.

If civil penalty proceedings are costly and cumbersome and if the CDPP is not prepared to prosecute,
this leaves the Commonwealth regulator with nowhere to go on serious breaches of the law.

What is the background of civil penalties?

Civil penalties were first introduced into Commonwealth legislation in the mid-90s. The policy intention was that the civil penalty process would be a convenient alternative to prosecution because the civil standard of proof and civil procedures would make it easier for regulators to enforce their regulatory frameworks.

However, the courts have been less willing to treat civil penalty proceedings as purely civil. Defendants in civil penalty matters have been allowed to avoid making full discovery or fully pleading their defence on the basis that they are entitled to exercise privileges against self-exposure to a civil penalty.

Also, the standard of proof, although the civil standard, requires the courts to have regard to the potential consequences, which in some cases can be millions of dollars of potential fines. This has the potential to lift the standard of proof close to the criminal standard of beyond reasonable doubt. As a result, proceedings in civil penalty matters have become a hybrid of criminal and civil proceedings. The end result is that the aspiration that civil penalty powers would make it easier for regulators to enforce has arguably not come to fruition.

Where does this leave Commonwealth regulators?

I’d suggest that in practice it leaves Commonwealth regulators with limited options at the top of their enforcement pyramid.

What might be the solution? I’d suggest, somewhat controversially perhaps, that one or more of the following options would assist:

  • Consider whether Commonwealth regulators should have the discretion over whether to prosecute Commonwealth offences in the way that Victorian state based regulators do;
  • Consider whether the Federal Courts could develop specific procedural rules for the management of civil penalty litigation with a view to making these proceedings more streamlined and cost effective; and
  • Consider whether Commonwealth regulators should be entitled to recover any penalties ordered in civil penalty (and/or criminal) matters so that the cost of enforcement can be off-set by the results of enforcement.

Where Commonwealth regulators are facing increased obligations to be risk-based, ensuring that they have all the enforcement tools required, both in theory and in practice, is an essential part of the puzzle.

Author Bio

The Mandarin

The Mandarin staff journalists.