Oireachtas Joint and Select Committees

Tuesday, 26 February 2019

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Law Reform Commission Report on Regulatory Powers and Corporate Offences: Engagement

Mr. Raymond Byrne:

I thank the Chairman and members of the committee. The Law Reform Commission is a statutory research and advisory body. While our title says "law reform", we cannot actually do law reform as this is a matter for the committee members as legislators. We are delighted that the committee has taken an interest in this particular report in the context of the committee's discussion on accountability in banking. We are highly conscious that the committee has previously taken a great interest in the work of the commission, most recently in the detailed scrutiny it carried out on the Consumer Insurance Contracts Bill 2017 that was related to the previous work of the commission. We thank the committee for the great interest it has already shown in our work. We try to include draft Bills or schemes of Bills in our reports, which we hope the Government and the Oireachtas will find helpful.

We place great emphasis in our written opening statement - I will not go through all of it given the time constraints today - and take very seriously the consultative process of how we put together programmes of law reform, under which we carry out most of our work, and in the consultative process on the fourth programme of law reform, considering both the issue of the powers of financial and economic regulators and the related issue of corporate criminal liability. Many of our consultees indicated that it was important to examine both of these areas. We recognise that the committee is particularly focused on financial services and on the role of the Central Bank.

In the consultations that we held on the fourth programme, other regulators were also mentioned as being important as to the systemic risks to the State that might arise in the future. Our report includes not just issues relating to the Central Bank and its powers, but also other sectoral regulators on which we note there have been a number of policy documents, including the 2013 document Regulating for a Better Future and the 2017 document on measures to improve Ireland's accountability on the issue of financial and economic regulation and white collar crime, as it is sometimes described.

We take consultation as a very important part of our work and receive a tremendous amount of input in that respect from Government offices, relevant interested parties and NGOs, in the analysis that we carry out. That was certainly the case with this particular report, to include the context of the 2016 annual conference where we focused on this particular area. We heard from a number of national and international speakers with expertise in both regulatory powers and in corporate criminal liability.

We recognise that in the choices we make in a report there are number of possible options in looking at many of the complex issues. We are very conscious that this is a matter that must be moved on to the Government and the Oireachtas for final decision on whether to implement the recommendations of the commission.

The banking crisis that emerged in 2008 and the activities of banks that led up to that was certainly a context and background to this report. We are very conscious also that a number of studies have been done, notably by the banking inquiry that was carried out in the Houses of the Oireachtas. We looked at that in how we analysed the issues that needed to be addressed.

We are also very conscious of some of what the former Governor of the Central Bank, Patrick Honohan described as "egregiously reckless risk-taking". We recognise that there were issues that needed to be identified in order to examine what further reforms might be needed.

We acknowledge that there have been quite a number of significant changes enacted since 2008 both at national level here in the Oireachtas and at EU level with the Single Supervisory Mechanism. We also note in our report a number of reforms that had previously been made, for example in the Criminal Justice (Theft and Fraud Offences) Act 2001, had been used effectively in criminal prosecutions. We do not propose or comment on particular cases or their outcomes but we note that in the report.

There are more than 200 recommendations. I am informed by our maths experts in the research team that there are, in fact, 202 recommendations but I will not go through all of them. I will focus on a number of the key recommendations here.

On the proposal for a corporate crime agency, we have looked at the extent to which financial and economic regulators have sufficient powers in their regulatory toolkit in order to make sufficient financial sanctions and make regulatory enforcement agreements or settlements. We also looked at the issue of egregiously reckless risk-taking and what reforms might be done in the criminal law in that area. We also looked at the role that deferred prosecution agreements, DPAs, or in effect the suspension of criminal prosecutions, play and the extent to which these DPAs might have a role to play in the overall context of ensuring accountability.

In considering the first of those proposals, that being, on a corporate crime agency, we are conscious that the Government's 2017 paper, entitled "Measures to Enhance Ireland's Corporate, Economic and Regulatory Framework", made a number of important recommendations, some of which are being acted on now. One recommendation was on the establishment of a corporate enforcement authority as a replacement for the Office of the Director of Corporate Enforcement, ODCE, as a separate entity rather than as a unit within the parent Department. The LRC's proposal on a corporate crime agency is separate from that. Our proposal would see a corporate crime agency with power to engage in prosecutions that did not fall within the remit of any of the regulators, be it the Central Bank, the Competition and Consumer Protection Commission, CCPC, ComReg or the proposed corporate enforcement authority. Under the relevant Bill, which is under pre-legislative scrutiny at the moment, the corporate enforcement authority would be limited to enforcement of the Companies Act 2014. The LRC's proposal is that the corporate crime agency would have a wider remit.

We understand from the detailed pre-legislative scrutiny of the corporate enforcement authority Bill conducted this month by another committee that the review group on anti-fraud and anti-corruption structures is engaged in a review of our recommendation. We also understand that the group is to make its own recommendations later this year.

The associated proposal in the LRC's report was that there ought to be a continuation of the dedicated unit on corporate crime that is already established in the Office of the Director of Public Prosecutions. It has dealt with prosecutions post 2008. The LRC recommends that the unit work closely with the proposed corporate crime agency. It is important that the committee be aware that the LRC recommended strongly in its report that, based on experience of poorly resourced agencies, the corporate crime agency and the dedicated unit in the DPP's office should be properly and fully resourced. This matter is outside the remit of the LRC and we cannot carry out that kind of economic analysis of what sort of resources would be required, but we emphasised this recommendation in our report.

I will not go through all of the powers that would be found in a full toolkit of regulatory powers for financial and economic regulators, but of the six core ones mentioned in our submission, we speak in particular about the power to impose administrative financial sanctions and emphasise that, in order to ensure that it would meet constitutional requirements, it must be subject to court oversight and approval. This would be similar to the Central Bank's current powers in terms of what can be imposed as a maximum sanction of €10 million and-or 10% of turnover for companies and a maximum sanction of €1 million for individuals. In addition, all financial and economic regulators should have the power to enter into regulatory compliance agreements or settlements. This would include the power to impose financial sanctions, put in place consumer redress schemes and agree to put in place corporate compliance policies. The committee will be aware that the Central Bank already has these powers. We make some recommendations on how we believe they could be improved, particularly in terms of the investigative process, but we also recommend that other regulators, such as the competition commission and ComReg, be given those powers as well. We have made recommendations on the process by which inquiries are conducted by the Central Bank. Their efficiency could be improved comparable to what has been put in place in the Medical Council's fitness to practise process.

Regarding the use of criminal law in this context, the former Governor of the Central Bank referred to the need to have in place appropriate criminal law enforcement mechanisms to deal with egregiously reckless risk taking. The LRC examined two related aspects of this, namely, the extent to which the Criminal Justice (Theft and Fraud Offences) Act 2001 should be amended and whether there was a case to be made for the introduction of an offence specifically called "reckless trading". The LRC came to the conclusion that it would be appropriate to amend the Act in order to provide that there should be an explicit reference to recklessness in that context.

That would mean, for example, in the context of the offence of false accounting under the 2001 Act, that it would occur not only where the accounts were fabricated knowingly and intentionally - the current law - but also where it was done with subjective recklessness, namely, where the defendant consciously disregarded a risk that the victim would be deceived by the false accounting. On the 2001 Act, the commission concluded in its chapter dealing with reckless trading that it would not be appropriate to put in place an offence of reckless trading on the basis that it would either be an offence that would not be enforceable in practice or that it would have a potentially chilling effect on legitimate risk-taking.

On the other aspect of powers to take a criminal prosecution, the commission examined whether a statutory deferred prosecution agreement, DPA, should be introduced. This is a procedure whereby a prosecution can be suspended or put in abeyance by the prosecution, pending compliance and subject to compliance with strict conditions set out in the deferred prosecution agreement which would be a published document, rather than a private agreement. The commission recommended that there was a case to be made for introducing deferred prosecution agreements, subject to the control of the Director of Public Prosecutions who would work closely with financial and economic regulators in determining whether a DPA was suitable in a particular case. We recommended that the model that had been in place in the United Kingdom since 2013 under legislation which required court approval for any proposed DPA was the preferred model. There is a DPA model in the United States, with which members will probably be familiar, but it is not on a statutory basis. It is not subject to court approval and is at the discretion of a relevant prosecutor. Therefore, the commission concluded that it would not be an appropriate model to use.

Another issue that arises in the context of criminal law in respect of corporate liability is due diligence. The committee might be glad to know that this is the last of the main issues on which I will address it today. The commission recommended that for most corporate offences of a regulatory type, it would be appropriate to have in place a due diligence defence. For example, where an organisation has put in place suitable risk management procedures, this would be a defence. If an organisation does not have in place suitable risk management policies and procedures, it would mean that there would be a conviction. The purpose is for this approach to fit with the approach taken by a lot of the regulators to encourage organisations to put in place the resources required to have a sufficient risk management appetite, whether in the context of financial services or any other aspect of economic activity in which the corporate entity would be engaged. The commission considered, taking account of all of the literature in this area, that it would be appropriate to have the defence in place for most of the regulatory type offences for which regulators had responsibility. It would not be appropriate as a defence in the case of a fraud offence because it would involve either intentional or knowing behaviour or, if the commission's recommendations were to be implemented, reckless behaviour. It would be illogical and inconsistent to say that if an organisation had policies and procedures in place to prevent it from doing something intentionally, it could be a defence. We also recommend, in the context of organisations taking legal advice, that it could be taken into account but only in sentencing. In other words, it would not be a defence in a prosecution.

In the context of a related issue, sometimes referred to as officially induced error, the question is whether, if a regulator in the financial and economic area gave advice which seemed to indicate that everything was in compliance with the legislation, it would be a defence. The commission was of the view that the matter would have to be dealt with on a case-by-case or factual basis. If the facts of the case established that there was so-called officially induced error, in which instance it was reasonable to rely on the advice of a regulator, and that the advice had been authoritative and applied, it would either be a defence or prevent a prosecution from proceeding. We note that the Supreme Court, in a decision last Thursday, appeared to indicate that such a defence would be available in an appropriate case, but in the particular circumstances of the case before it, it did not apply.

What we tried to do was insofar as we could take account of international best practice in the review of literature carried out by the research team on behalf of the commission in developing the report which was published last October.

The international literature from the OECD, the EU and those with expertise in this area indicates that administrative financial sanctions and the power to enter into regulatory settlements are key parts of a good regulatory toolkit. While the commission suggests that the criminal law reforms which are proposed in the report do not in any sense guarantee that the issues which have arisen in the past can be prevented in the future, it recommends that they could provide an element of deterrence in terms of the risk-taking that has been referred to by the former Governor, Professor Honohan, in the past. We recognise that it is up to the Government and the Oireachtas, including this committee, to determine whether all of these recommendations ought to be implemented. On behalf of the commission, I welcome the committee's interest in this area. My colleagues and I will be very happy to take any questions that members might have.