Some relevant principles
16.10In our Issues Paper, we suggested the following principles might be relevant to the setting of maximum pecuniary penalties:
- Maximum penalties should reflect the worst class of case in each particular category.
- Maximum penalties should be designed to encourage compliance with the regulatory system at hand, and so be set at a level to deter the classes and sizes of participants in that regulatory field.
- Maximum penalties should balance the promotion of compliant behaviour with ensuring that people remain willing to enter the market and take sensible commercial risks.
16.11Seven submitters agreed that these were appropriate guiding principles. We remain of the view that these principles provide appropriate guidance for setting maximum penalties. We elaborate further on them below. We have also identified additional matters that we consider should guide policymakers when setting maximum pecuniary penalties. These relate to:
- the very high maxima that, at present, tend to accompany pecuniary penalties;
- the need to treat like conduct alike;
- the setting of maximum penalties for pecuniary penalty provisions that have parallel criminal offences;
- the use of commercial gain and turnover as a measure of a penalty; and
- continuing penalties.
16.12We address all of these issues below.
Reliance on very high maximum penalties
16.13As noted above, pecuniary penalties tend to be accompanied by very high maxima. In general, they are considerably higher than the financial penalties that accompany most criminal offences. Rather than indicating that the breaches are more serious or more culpable than common criminal offending, this usually reflects the context in which they sit. Turning again to the Commerce Act penalties, they tend to be directed at contraventions by large corporations with high market share (and therefore commercial power) and deep pockets. Given that companies can stand to save or gain millions of dollars through the breach of competition law, it is important to set a maximum penalty that provides an effective disincentive. The largest pecuniary penalty in New Zealand, $12 million imposed on Telecom for breach of section 36 of the Commerce Act 1986, should be viewed in the context of the maximum penalty that could have been imposed (10 per cent of Telecom’s annual turnover), namely $279.2 million. Similarly, in Chief Executive of the Department of Internal Affairs v Atkinson, penalties of $100,000 and $50,000 were imposed, but they should be viewed in the light of the commission payments thought to be gained as a result of the contravention of the Unsolicited Electronic Messages Act 2007.
16.14However, policymakers should resist transplanting existing formulas for maximum pecuniary penalties from one regime to another. It should not be assumed that pecuniary penalties can inevitably be set very high, and they should not be chosen by policymakers as an enforcement mechanism merely because of a perceived view that they allow higher maxima than criminal offences. In any policy development process, the penalty should be assessed with the specific type of contravention, conduct and/or actor in mind, and should be able to be defended on this basis.
Maximum penalties that reflect the worst type of caseTop
16.15In the criminal sphere, there is a principle that the maximum penalty should be set with the worst type of case in mind. This is confirmed by section 8 of the Sentencing Act 2002, which provides that:
8 Principles of sentencing or otherwise dealing with offenders
In sentencing or otherwise dealing with an offender the court—
(b) must take into account the seriousness of the type of offence in comparison with other types of offences, as indicated by the maximum penalties prescribed for the offences; and
(c) must impose the maximum penalty prescribed for the offence if the offending is within the most serious of cases for which that penalty is prescribed, unless circumstances relating to the offender make that inappropriate; and
(d) must impose a penalty near to the maximum prescribed for the offence if the offending is near to the most serious of cases for which that penalty is prescribed, unless circumstances relating to the offender make that inappropriate; and
(e) must take into account the general desirability of consistency with appropriate sentencing levels and other means of dealing with offenders in respect of similar offenders committing similar offences in similar circumstances.
16.16As the Law Commission has previously observed, most law-breaking does not fall within the bracket of the “worst class of case”. Both criminal offences and many breaches that can lead to pecuniary penalties tend to be broadly defined, with widely varying degrees of seriousness encapsulated within one form of breach. Certainly in the criminal field, the result is that statutory maximum penalties tend to be set far above the sentences that would be appropriate for the ordinary run of offences of each type coming before the courts, and provide a poor guide as to what the sentences for those offences ought to be. There is, therefore, only an indirect and sometimes marginal relationship between the maximum penalty for an offence and the bulk of sentences imposed for that offence. The extent of the relationship will also vary from offence to offence, depending on the breadth of the offence definition and the consequent spread of offending relative to the worst class of case.
16.17It seems reasonable to expect the same for pecuniary penalties. It may, therefore, never eventuate that a pecuniary penalty imposed on a body corporate in a particular case is in fact set at the greater of $10 million, three times the commercial gain or 10 per cent of the turnover of the body corporate involved. Instead, it seems to us that the key principle is that the maximum penalty in legislation should not exceed that which would be imposed for the “worst class of case”.
16.18The second principle noted at [16.10] relates to deterrence. The emphasis that is placed on the deterrent and denunciatory aims of penalties varies according to the type of conduct and actors involved, and the aims and nature of the statutory regime as a whole. One of the aims of the criminal law is deterrence, but its dominant purpose is to denunciate and to set conduct apart as deserving serious moral condemnation. Pecuniary penalties have been adopted in circumstances where the emphasis has been more squarely on deterrence. This is reflected in the policy material that has supported pecuniary penalty regimes. Cases under the Commerce Act and the Unsolicited Electronic Messages Act have also emphasised deterrence as the principal purpose of the pecuniary penalties contained within those Acts.
16.19In our view, neither criminal penalties nor pecuniary penalties can be said to be exclusively denunciatory or exclusively deterrent. Pecuniary penalties deter by the imposition of a penalty that exceeds mere profit stripping or compensatory measures, and they can be imposed whether or not there has been any gain or harm. It is clear to us that they have a denunciatory impact. This fact contributes to us identifying pecuniary penalties as punitive and so requiring special consideration as to which procedural rules and safeguards should result. However, where a penalty’s emphasis is more squarely on deterrence, this has a legitimate influence on the level at which the maximum penalty should be set.
16.20A penalty that is likely to deter an owner-operator may not be sufficient to deter a large multi-national. Our reference to “the classes and sizes of participants in that regulatory field” highlights the importance of tailoring a maximum penalty to the actors it targets.
16.21Where a regulatory system will target participants who are broadly similar in nature with similar resources, this is a more straightforward exercise. In fields with a wide variety of participants, this is more difficult, as a maximum penalty set at a level to deter well-resourced participants may be so large that it discourages smaller operators from entering the regulatory field and may even cause smaller players to leave it.
Minimal deterrence of beneficial behaviourTop
16.22The third principle raised in our Issues Paper recognises the delicate balancing process required in setting maximum penalties. Set too high, pecuniary penalties may have an over-deterrent effect, which could deter people from engaging in socially beneficial activities (for example, providing goods and services to the public or participating in financial markets), or to do so in a risk-averse manner to the detriment of society or industry.
16.23This was illustrated by concerns raised about proposed amendments of the Electricity Industry Act in 2010. The Electricity Industry Bill 2009, as introduced, would have increased the maximum pecuniary penalty the Rulings Panel could impose from $20,000 to $2 million. Following submissions that the increase “may discourage market participants from providing certain services and encourage undue risk aversion” the Ministry of Economic Development recommended in its departmental report that the maximum penalty be reduced to $200,000.
Treating like conduct alikeTop
16.24Both the Legislation Advisory Committee Guidelines (LAC Guidelines) and the Sentencing Act 2002 emphasise the importance of sentence parity for similar criminal offences or offences of comparable culpability. The LAC Guidelines state that policymakers should consider “the level of maximum penalties provided across the statute book for similar offences of similar severity”. They contain the caveat, however, that the ad hoc development of criminal offences has resulted in disparate maximum penalties for behaviour of similar seriousness on the statute book, so absolute consistency will not be possible. Notwithstanding this, there is a clear expectation that like offences will be treated alike and historical inconsistency does not obviate the desirability of enhanced consistency now. The Ministry of Justice’s vetting role is performed partly with this aim in mind.
16.25The same approach should be taken with pecuniary penalties. Relative to each other, the penalties should reflect appropriately the differing levels of culpability.
Parallel offences and pecuniary penaltiesTop
16.26An area of particular difficulty is where there are “parallel” pecuniary penalty provisions and criminal offences – that is, penalty provisions and offences in a single regulatory regime that target the same conduct, except that the criminal offence requires proof of intention or recklessness. While one would expect to find some consistency in the way the various statutes use parallel pecuniary penalties and offence, the examples at [16.7] illustrate this is not the case.
16.27A question arises as to whether there are principles that should dictate the approach to be taken where there are parallel penalty and criminal offence maxima. Should there be a consistent approach, and if not, what factors justify such a range of practices?
16.28One might argue that a criminal fine should be set lower, because regulating conduct through criminal law can have additional punitive effects, at least for natural persons, which do not attach to pecuniary penalties. Higher maxima for pecuniary penalties may reflect the fact that the imposition of such a penalty is not attended by a criminal conviction. Likewise, criminal offences can also lead to imprisonment. For example, the maximum monetary (criminal) fine for a person who takes an action contrary to the Health and Safety in Employment Act 1992, knowing that it is reasonably likely to cause serious harm to any person, is $500,000. This must be regarded as a high culpability offence, yet the monetary penalty is lower than many pecuniary penalties. However, a sentence of up to two years’ imprisonment can be imposed as an alternative to, or in addition to, the monetary fine. Finally, whereas in the pecuniary penalty context increasing deterrence is usually achieved by increasing the maximum penalty, the criminal law presents the option of escalating to a higher form of penalty, namely imprisonment.
16.29On the other hand, the parallel criminal offences must be committed with some degree of intent or recklessness. It follows that they carry a higher level of moral blameworthiness. One could argue that this means they should carry a higher maximum fine than their parallel pecuniary penalties.
16.30In the Issues Paper, we concluded that where there are parallel criminal offences and pecuniary penalties, the criminal offence should be reserved for the more egregious, morally blameworthy conduct and on that basis it should carry a higher maximum fine than its parallel penalty provision. Therefore we preferred the approach of the Anti-Money Laundering and Countering Financing of Terrorism Act, which clearly adopts a “pyramid” approach to enforcement, with pecuniary penalties lower on the pyramid than criminal offences, and therefore carrying a lower statutory maximum. We were also concerned that setting pecuniary penalties higher than parallel criminal offence fines might create perverse incentives for regulators to seek a pecuniary penalty where criminal proceedings would actually be more appropriate.
16.31We also note the approach used in some Australian statutes. In some cases, the pecuniary penalty must not exceed the maximum that could have been imposed if the defendant had been convicted for the parallel criminal offence. This reflects the view that pecuniary penalty provisions are lower on the “enforcement pyramid” in that regime, and the regime seeks to ensure that criminal offences are treated as the more egregious.
16.32We received mixed responses to this question in submissions. Some submitters favoured a flexible approach that allowed a higher penalty to be set in the pecuniary penalty context. Two did not think that doing so would create the perverse incentive referred to above. In contrast, other submitters agreed that criminal prosecutions should be reserved for graver conduct and that the respective penalties should reflect this approach.
16.33We recognise that a criminal conviction has a punitive effect on its own. But this effect is impossible to quantify. People place different weight on a criminal conviction depending on their circumstances and priorities, and the stigma attaching to a conviction differs for the type of conduct in question. For instance, breach of Easter Sunday trading laws will not necessarily attract a high amount of public opprobrium, even though that is a criminal offence. We also recognise that since a criminal conviction will often be a serious punishment, the circumstances where it is appropriate for a maximum pecuniary penalty to exceed the monetary value of an equivalent criminal fine may be limited. One situation where this may well be appropriate is where the criminal offence also carries an alternative penalty of imprisonment.
16.34We have not reached a conclusion on this point. In our view, the points above could be used both to suggest that pecuniary penalties should be higher than criminal penalties, and vice versa. It is not clear to us how much weight ought to be given to factors such as the differing forms of penalty, the type of conduct involved and the type of actor involved. This is a question that demands, in our view, consideration by experts in economic and deterrence theory as well as in legal principle.
Use of commercial gain and turnover as a measure of a penaltyTop
16.35A number of Acts use a multiple of the commercial gain from the breach and/or 10 per cent of turnover of the body corporate (and all associated bodies corporate), as measures of the maximum penalty. The paucity of case law on these penalties makes it difficult to determine whether the courts find such formulations easy to administer. Although there are a number of penalty judgments under the Commerce Act regime, most of these adopt penalties that have been jointly recommended by the parties, which limits the analysis of how such penalties are reached. Likewise, many judgments appear more concerned about horizontal consistency; that is, that companies with similar levels of involvement (and therefore culpability) in a contravention should be subject to comparable penalties. This applies between cases, as well as between different parties in the same case.
16.36We consider that linking a maximum penalty to three times the commercial gain resulting from the breach can be a useful formulation, particularly where deterrence of breach for financial benefit is sought. The approach is accepted as an effective deterrent against those who would make a rational decision to breach with the intention of making a profit or avoiding a loss. It has been designed with a specific purpose and with specific offenders in mind. In addition, arguably there can be little objection to this approach on the grounds of uncertainty about the potential penalty – the persons targeted are likely to be in a position to calculate their maximum possible liability.
16.37Penalties linked to the turnover of a body discriminate between defendants according to their capacity to pay. Statutes indicate that they have been devised as an alternative maximum where there may be difficulty in assessing the commercial gain from a breach. Again, arguably there is no inherent uncertainty about the potential penalty in those cases since a potential offender should be in a position to assess 10 per cent of the turnover of their organisation. Such a penalty also accords with deterrence objectives, because the maximum potential penalty would be likely to account for the potential gain from the offending as well as compensate for any low chance of detection.
16.38However, we do have reservations about this formulation. Guidelines issued by the Australian Attorney-General’s Department recommend such penalties should “generally be avoided because of a lack of connection between an organisation’s total turnover and the contravening conduct”. Arguably, they are also in conflict with the principle set out above that the maximum penalty in legislation should not exceed that which would be imposed for the “worst class of case”. We find it hard to believe that a New Zealand court would ever impose a penalty of $279.2 million. We consider that such a formulation should be used rarely, but we also suggest it is a question that would benefit from a multi-disciplinary review of how maximum penalties are set.
16.39Telecommunications (Interception Capability and Security) Act 2013 contains a daily penalty for continuing contraventions. A court can order payment of up to $50,000 for each day the breach continues (on top of an initial penalty of up to $500,000). There are no guiding factors for when that is appropriate.
16.40The LAC Guidelines state the following in relation to continuing criminal offences:
Continuing offences with daily penalties introduce the possibility of large, indeterminate fines. Generally, such a penalty will not be desirable, as certainty is a cornerstone of the criminal law. A more appropriate remedy may be an order requiring discontinuance, or some other relief designed to end the unlawful activity.
16.41These kinds of provisions introduce uncertainty in the size of penalty that can be imposed. We agree with the LAC Guidelines that they are not generally desirable. At present a provision of this kind appears in only one pecuniary penalty regime and against a limited class of possible defendants under that regime (telecommunications network operators).
16.42Rather than creating continuing penalties, it is preferable that the length and severity of the breach should be taken into account by courts at the penalty imposition stage. If the intention is to bring an ongoing breach to an end, policymakers should consider other means of achieving it. A discontinuance order or an early warning system may be alternative options.
R7 The Government should instigate a review of how maximum criminal and pecuniary penalties should be set in legislation.
G17 Maximum pecuniary penalties should be set with the specific contravention, conduct and actor in mind
Pecuniary penalties should not be chosen as an enforcement mechanism merely because of a view that they allow higher maximum penalties than criminal offences. Also, the maximum penalties in existing pecuniary penalty statutes should not merely be transplanted to new regimes. In any statute, they should be set with the specific contravention, conduct and actor in mind.
Penalties that rely on a multiple of commercial gain or percentage of turnover might be considered where deterrence of breach for financial benefit is sought. However, since turnover penalties discriminate between defendants according to their capacity to pay, and lack connection to the actual contravening conduct, they should be used sparingly.
The following principles should be applied:
- Maximum pecuniary penalties should:
(i) reflect the worst class of case in each particular category;
(ii) be designed to encourage compliance with the regulatory system at hand and so be set at a level to deter the classes and sizes of participants in that regulatory field; and
(iii) balance the promotion of compliant behaviour with ensuring that people remain willing to enter the market and/or take sensible commercial risks.
- Like conduct should be treated alike.