Crown and State sector defendants
Policy decisions as to type of penalty
Selecting the appropriate form of penalty
19.34Following policy decisions as to coverage, analysis of the implications and consequences of coverage for Crown and State sector defendants is required. The critical issue at this stage is consideration of the different incentives and deterrents that operate in the public sector. While pecuniary penalties may be an effective primary lever for deterrence and accountability in the private sector, that lever may be less appropriate or effective for public sector defendants. A range of options is available.
19.35Selection of the appropriate penalty type requires a regulatory theory assessment of the objectives of the pecuniary penalty regime. For instance, is the primary goal retribution for morally blameworthy contraventions, or is it promoting regulatory compliance through the provision of sufficient deterrents? It is then necessary to consider how to effectively deter public sector participants from contravening the regime. In short, pecuniary penalties are monetary penalties. There is a question whether those types of penalties are the most effective and appropriate deterrent for the Crown and other public bodies.
19.36The starting point in this aspect of the policy process is the declaratory order and assessing whether that is sufficient for regulatory purposes, or whether additional consequences are necessary to meet the objectives of the pecuniary penalty regime. Non-financial penalties should then be considered. The range of possible options includes adverse publicity orders, external investigation or inquiry, improvement or training orders, stop notices, enforceable undertakings, injunctive orders, compensation orders, and costs orders.
19.37If it is necessary to provide for a financial penalty, policymakers need to select an appropriate maximum penalty for the Crown and State sector defendants, depending on the requirements of the particular regulatory regime. Options include categorising these entities as “bodies corporate” or “organisations” for the higher maximum penalty, or including them in the maximum penalty specified for individuals. Another option is to include a middle maximum penalty level specifically for public bodies that is set at a level high enough to act as an effective deterrent.
Public sector liability for pecuniary penaltiesTop
19.38Imposing a pecuniary penalty is arguably analogous to imposing a criminal fine and may therefore be subject to the presumption against imposing fines on the Crown. While the Crown Organisations (Criminal Liability) Act provides for criminal liability of Crown organisations under certain statutes (such as the Building Act, the Health and Safety in Employment Act and the Resource Management Act 1991), it bars the imposition of fines.
19.39However, we note that two recent Bills depart from the position that fines cannot be imposed on Crown organisations.
19.40Under the criminal law, it might be argued that the prosecution is a sufficient punitive sanction against public bodies without the further imposition of a fine. However, the strength of that sanction is not as strong in the pecuniary penalty context, raising the question of what is an appropriate penalty to be imposed on public sector organisations.
19.41In some cases, a declaratory order will be sufficient and an effective deterrent, given the public and political scrutiny that would result from a declaration of breach. But, in others, it may be regarded as ineffective or a low priority to initiate a penalty proceeding against a Crown organisation with no further tangible consequences. If the available sanctions are not regarded as effective or worth pursuing, this may detract from the integrity and effectiveness of the pecuniary penalty regime overall.
19.42Therefore, it is important to ensure that Crown organisations are subject to appropriate penalties that meet the objectives of the particular regime. Financial penalties should not be ruled out but it will be context-specific as to whether financial penalties are appropriate.
The “folly” of the Crown paying itselfTop
19.43There is a potential circularity in a public body paying a financial penalty back to the Crown: “what is the point, it might be asked, of one part of the Government paying money to another part of the Government?” This objection was influential in removing fines as a penalty from the Crown Organisations (Criminal Liability) Bill, as introduced.
19.44A response to this conceptual difficulty, however, is that a financial penalty can provide the appropriate compliance incentives:
There is nothing shocking in the suggestion that the Crown – whether it acts through a government department or through a separate corporation – should be subject to [regulatory offences] … the liability of the Crown and other public authorities to fines must be seen, not as a means of making them suffer financially, but as a means of ensuring a standard of public conduct at least equal to that which the Crown demands of its subjects.
19.45Steven Price suggests that the mere fact that a particular body happens to be a government agency does not automatically render fines an inappropriate form of enforcement, noting the argument that fines are not simply returned to the infringing government body and, in fact, make public accounts more accurate in that they better reflect the costs incurred by the different branches of government. Moreover, the imposition of a fine or penalty may provide incentives for agencies, having limited budgets, to prevent the recurrence of the infringement or contravention.
19.46The issue was considered by a House of Commons Select Committee looking at whether Crown bodies should be liable for fines under health and safety legislation. Some submissions to the Committee agreed with the argument that fining a Crown body serves little practical purpose and is simply recycling public money through the Treasury and back to the relevant body to continue to provide services. However, the majority thought that fines should apply to Crown bodies for reasons such as justice being seen to be done, sending a powerful public message of culpability, strengthening accountability, and that without fines, Crown bodies might not learn from their failures.
19.47As the Commission has earlier noted, departments have legally separate appropriations with public finance legislation and practices emphasising the responsibility of individual departments and facilitating interdepartmental payments. This is reflected in the Public Finance Act 1989, which provides that the Crown is not liable for the debts of Crown entities, or other agencies or bodies controlled by the Crown. A financial penalty can help formalise the condemnation of the agency for its breach of the law and helps promote future compliance with the law by others as well as by the Crown.
19.48Potentially penalties could be applied in particular ways that reduce the circularity conundrum, such as being paid to those affected by the contravention or diverted to regulatory efforts. There is also potential for alternative orders to be made that require a public organisation to invest in future compliance.
19.49The development of significant maximum pecuniary penalties as an enforcement tool for regulatory breaches has clearly been designed and implemented with private sector participants in mind. Some public bodies simply may not be able to pay a large penalty out of current budgets, and if they could, their ability to provide future services may be significantly affected.
19.50A potential budgetary impact resulting from a breach could operate as a compliance incentive. The breaches for which significant penalties are liable to be imposed can be presumed to be sufficiently serious that compliance is clearly in the public interest. The imposition of a penalty can act as a red flag that the agency is failing to comply with fundamental statutory obligations, directing attention not only to agency compliance but also to agency resourcing.
19.51Nevertheless, a large pecuniary penalty may be too blunt an instrument for public sector organisations where its imposition creates significant risk to public service provision. Alternative orders and/or a tailored maximum penalty level that effectively addresses a public sector contravention may be in the public interest.