Contents

Chapter 5
Role of pecuniary penalties

Effectiveness and efficiency

5.20Any policy decision about the inclusion of one or more forms of penalty in a regime should take into account whether the penalty will be effective and efficient in achieving the desired outcomes of the regime. For example, a desired outcome will usually be the deterrence of the law-breaking conduct. This may be for a number of reasons, including: to uphold the integrity of the law; to protect the public interest; and because deterrence is the best way to ensure the efficient and effective operation of a particular sector or industry (for example by minimising market distortions). The question, then, is what sort of penalty will effectively and efficiently deter the type of conduct and potential offender at hand?

5.21It follows that a form of penalty should not be used where it would be an ineffective deterrent. For example, large monetary penalties may serve a limited purpose against conduct where usually there is little chance of the offender being able to pay. Equally, small monetary penalties may not be effective where they can easily be absorbed by the offender.

5.22Another factor to consider is the economic argument that the most socially desirable penalty is the cheapest one to impose and administer.80 For instance, pecuniary penalties might create efficiencies because they are considered more likely to “settle” (by the parties coming to an agreement about a penalty) than criminal offences. In both cases, in fact, out-of-court settlement is not possible, as both pecuniary penalties and criminal penalties have to be imposed by a court.81 However, a substantial difference between pecuniary penalties and criminal offences is that an admission of liability on the part of a defendant to a criminal charge is likely to result in a conviction. It might also be thought that since pecuniary penalties can only result in a monetary penalty, the penalty itself is cheaper to administer. Finally, there are wider social consequences to making people criminals, in terms of the potential impact on their employment and travel opportunities. A penalty that effectively deters while not imposing a conviction may sometimes be desirable.

5.23Notwithstanding the above, whether a form of penalty will be effective and efficient should not be the only consideration as to what penalty/penalties should be included in a statute. It may be that while pecuniary penalties will effectively and efficiently deter a form of conduct, public opinion about the type of offending will only support accountability in the form of criminalisation in the traditional sense. Nevertheless, an assessment that considers the effectiveness and efficiency of the penalty is essential.

In what circumstances might pecuniary penalties be effective and efficient?

5.24In our Issues Paper, we noted that a number of circumstances exist in which pecuniary penalties are thought to be an effective and efficient form of penalty. We describe these below. However, we also noted that there are limitations to some of the arguments involved. We caution that, because of the limitations, it will always be necessary for policymakers to carefully assess the regimes for which they are responsible and robustly make the case for one form of penalty over another. We emphasise that it is not desirable to simply adopt an existing pecuniary penalty regime as a precedent without engaging fully and transparently in the necessary policy analysis.

Responsive regulation

5.25Pecuniary penalties are an effective enforcement tool where they are designed to provide a form of intermediate penalty, consistent with theories of “responsive regulation”.82 This view was strongly supported by submissions from regulators and government agencies. They suggested that regulators are less able to effectively deter behaviour and enforce compliance with their regimes if they are confined to a choice between criminal offences (targeting severe breaches) and infringement offences (targeting low-level breaches). This is thought particularly pertinent where the overriding purpose of a statutory regime is to obtain compliance with legislative standards, rather than merely seeking to outlaw certain conduct and condemn breach. The lack of an intermediate form of penalty may leave regulators hamstrung between two choices: deterring beneficial, regulated activities by having to use the “blunt stick” of criminal offences; or failing to adequately punish breach by having only minor sanctions at their disposal. For instance, if all compliance failures are punished by way of criminal offence, people may be deterred from running companies or innovating in regulated fields. These arguments are strongest for those regimes that seek to impose legislative standards on the conduct in question, rather than making it completely illegal.
5.26The theory of responsive regulation posits that regulatory compliance is most likely to be achieved when a regulatory regime is enforced by way of a hierarchy (or pyramid) of interventions. Lower-level responses can be followed by a range of orders and penalties that progressively increase in seriousness, so that non-compliance at any level on the pyramid can be tackled by the appropriate intervention or sanction. Theories of responsive regulation have dominated academic debate about regulatory law for the past three decades.83 They also feature prominently in the policy material of pecuniary penalty regimes in both Australia and New Zealand. The Commission agrees that regulators should not be hamstrung by having inadequate tools at their disposal to oversee and enforce their regimes, and accepts that pecuniary penalties can play an important role.
5.27We note, however, that not all existing pecuniary penalty regimes in New Zealand reflect the responsive regulation model. In many cases, pecuniary penalties are not an intermediate penalty, but are the gravest form of penalty for the particular conduct under the statute. The absence of criminal penalties in those regimes arguably conflicts with ideas of responsive regulation, which acknowledge that regulation of corporate conduct is at its most effective when a “dynamic and integrated approach to enforcement is made available, that is, when a range of sanctions, civil and criminal, individual and corporate can potentially be applied”.84 Where pecuniary penalties are to be used alongside criminal penalties, it is not always clear why criminal penalties might have been used for some breaches of the regime and pecuniary penalties for others. Nor is it always clear how a regulator is expected to exercise its discretion as to which penalty to pursue in individual circumstances, when it has the option of both.

5.28The point to be reiterated, then, is that while pecuniary penalties ought to be considered for statutory regimes where an enforcement agency needs a range of tools to enable it to effectively obtain compliance with the regime, this, in itself, will not be where the policy development process should stop. Further consideration needs to be given to how they will be used and which particular breaches they are appropriate for, in concert with other forms of penalty and orders.

Corporate breach

5.29Pecuniary penalties are considered effective and efficient at deterring breaches in the corporate context. First, corporate actors usually breach a regime for financial gain. As substantial monetary penalties, pecuniary penalties directly target the benefit sought from the breach. In general, Parliament has been receptive to setting very high maximum penalties for pecuniary penalties – often, higher than for monetary criminal penalties.85 This has meant that they can be set at a level that will (it is hoped) deter even the largest corporate offenders.

5.30Secondly, it can be difficult to prove corporate offending to the standard required for a criminal offence. Often complex evidence is required to establish the contravention, and numerous people may have played some role in the transaction or events concerned. Therefore, the circumstances of the breach can be hard to prove. Where there is a requirement to prove some degree of intention or knowledge on the part of the offender, it may be extremely difficult to identify who had that intention or knowledge and is therefore morally responsible. In these circumstances, pecuniary penalties may therefore be more effective than criminal penalties in both deterring breach (because the person thinks there is a higher chance of being caught) and in punishing breach (because the conduct only needs to be established to the civil standard).

5.31Thirdly, there is an assumption that corporate offenders are likely to enter into a comparatively detailed cost-benefit analysis of their offending. They are more likely to take a measured assessment of the likely gain from breach when compared to the potential penalty and risk of getting caught. Penalties that directly target the motivation for the offending, threaten a very high maximum penalty, and that might be easier to prove, are likely to be effective against such people.

5.32Fourthly, corporate contraventions often fall into the category where the emphasis is more squarely on preventing breach before it happens, rather than merely penalising offending after the event. This is because of the difficulties of identifying the offending, and also because of the nature of some forms of corporate offending. For example, the Biosecurity Act 1993 aims to minimise the risk that harmful organisms will be released or spread, an occurrence that could have a substantial negative impact on the environment, the economy and public health. The emphasis under that Act is rightfully on the prevention of release, rather than merely penalising breach after the fact. The regime needs a form of penalty that will encourage a person to comply with its standards and requirements from the outset. Substantial financial penalties that might reduce the appeal of the cost savings that accompany “corner cutting”, for example, are likely to be effective.

5.33All of these factors might indicate that pecuniary penalties are particularly useful in the corporate context. But again, the limitations to the arguments must be considered. Notably, the perceived need for substantial maximum monetary penalties should not necessarily lead to pecuniary penalties. Criminal penalties include monetary penalties: arguably Parliament could be asked to increase maximum fines for certain criminal offences. Indeed, it is being asked to do so in the Commerce (Cartels and Other Matters) Amendment Bill.86

5.34Also, the arguments above rely on assumptions about deterrence. They do not give a full answer as to why pecuniary penalties might be favoured over other forms of penalty. For example, while pecuniary penalties might deter corporate breach well, do they deter it better than criminal penalties would? One of the policy justifications for the criminalisation of hardcore cartel conduct is that pecuniary penalties are, in that area, an inadequate deterrent.

5.35Furthermore, the extent to which the lower standard of proof makes pecuniary penalties a better deterrent is unclear: to what extent do corporate actors really assess the relevant standard of proof when deciding whether or not to breach the law? It may also be asked whether the lower standard of proof is that much easier to meet, given that courts apply it in a way that takes the gravity of the penalty into account.87 In its submission, the Commerce Commission said:

… we believe that the ease of obtaining civil penalties is significantly overstated. It is certainly not the case that we inevitably succeed in our civil proceedings … [P]art of the reason for this is … that where we allege serious commercial wrong-doing courts have held us to a high standard of proof by flexibly applying the balance of probabilities standard. The practical outcome is that we do not perceive a marked difference between the standard we have to meet for the civil cases we take, as opposed to the criminal cases we take.

5.36In any event, the statement that pecuniary penalties should be used because the lower standard of proof makes them easier to establish has obvious dangers. The same argument could be made about any form of offending.

5.37Once again, the key message is that although pecuniary penalties may be an effective deterrent for some corporate contraventions, any policy proposal for them must properly assess the nature of the actors and conduct at hand.

An alternative to private civil action

5.38Arguments have been made that pecuniary penalties can “plug a gap” where the deterrent value of private civil action is reduced. This may be thought to occur where any harm caused by the breach may be so widely dispersed that private individuals are unlikely to sue, or it may be difficult to measure the harm in a way that would lead to a substantial damages award.88 Pecuniary penalties, then, are sometimes used to supply the lacking deterrence.

5.39This argument does not fully justify the use of pecuniary penalties. To the extent that such a gap might exist, it could be plugged in other ways, for example by criminal offences, or an enforcement body being able to seek compensation orders on behalf of others. In any event, the degree of deterrence supplied by the threat of private civil action is very difficult to measure. On its own, then, this argument is not a sufficient reason to adopt pecuniary penalties.

5.40However, they can provide a benefit as a practical tool that enables regulators to reduce the need for litigation by combining penalty and compensation actions in one set of civil proceedings. Where, then, it is unlikely that third parties will take civil proceedings, the pecuniary penalty model can create efficiencies and cost savings, because the regulator can both obtain a penalty for the purpose of condemning the breach, and access compensation on behalf of victims, through one set of proceedings.

Conclusion

5.41The circumstances described above may justify using pecuniary penalties in a statutory regime and are, undoubtedly, relevant factors to be worked through as part of a policy process that leads to the adoption of pecuniary penalties. The strength of the argument for pecuniary penalties depends on how many of the circumstances are present. Nevertheless, any policy process needs transparently to take into account the limitations described above.

80See R Rose “Corporate Criminal Liability: A Paradox Of Hope” (2006) 14 Waikato L Rev 52 at 57, n 40:
Civil liability is efficient because it avoids criminal law’s costly procedural protections, including the jury trial right and the beyond-reasonable doubt standard of proof”: and “civil liability is better because it imposes less stigma – ‘an inherently wasteful means of inflicting disutility’: no one receives the corporation’s lost reputation, whereas someone (government or a private party) receives the fine.
81In all regimes currently in force, the court needs to approve a settlement of pecuniary penalty proceedings, although see the discussion in ch 13 about s 46A of the Financial Markets Authority Act 2011. In the criminal sphere, sentence negotiation – whereby a prosecutor and defendant agree on a proposed sentence in return for a guilty plea – is not permitted in New Zealand: see Crown Law Office Solicitor-General’s Prosecution Guidelines (2013) at [18.7.3].
82I Ayres and J Braithwaite Responsive Regulation: Transcending the Deregulation Debate (Oxford University Press, New York, 1992).
83See, for example, R Baldwin and J Black “Really Responsive Regulation” (2008) 71 MLR 59.
84B Fisse and J Braithwaite Corporation, Crime and Accountability (Cambridge University Press, Cambridge, 1993) at 122.
85However, see now the Commerce (Cartels and Other Matters) Amendment Bill 2012 (341-2), cl 14, which sets the criminal fine at the same, very substantial, level as the pecuniary penalty.
86Commerce (Cartels and Other Matters) Amendment Bill 2012 (341-2), cl 22.
87See the discussion in ch 7.
88For example, under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, the “harm” targeted is harm to public confidence in the financial system and New Zealand's international reputation.