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.
5.23Notwithstanding 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.
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.
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.
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.
5.34Also, 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.
… 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.
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.
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.
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.