Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 4 Offences and civil penalties
Outline of chapter
4.1 Offences relating to the manipulation of financial benchmarks are created, including an appropriate penalty regime.
Summary of new law
4.2 Offences for manipulating financial benchmarks in two specified ways are created: doing or not doing an act or acts with an intention to influence the level at which a financial benchmark is generated or administered; and making a false or misleading statement or disseminating false or misleading information that could affect a financial benchmark.
4.3 Extended geographical scope Category B (as set out in section 15.2 of the Criminal Code, set out in the Schedule of the Criminal Code Act 1995 (the Criminal Code) is applied to each offence under this Division. Applying an extended geographical scope for these offences is critical because of the potential for financial benchmarks to be manipulated across borders.
4.4 Penalties are imposed for these offences that are based on the penalties applying to the existing market manipulation and related offences. Category B of the extended geographical jurisdiction provisions in section 15.2 of the Criminal Code is applied to the civil penalty provisions attached to contraventions of the financial benchmark manipulation provisions.
Comparison of key features of new law and current law
|New law||Current law|
|Two specific offences are created for manipulating financial benchmarks.
Penalties based on those applying to the current market manipulation offences are imposed.
The international jurisdictional scope of the offences and related civil penalty provisions is defined by reference to Category B of the extended geographical jurisdiction provisions in the Criminal Code.
|Manipulation of financial benchmarks is currently prosecuted under the general market manipulation and related provisions in Division 2 of Part 7.10 of the Corporations Act 2001 (the Corporations Act).|
Detailed explanation of new law
Schedule 1 - Amendments
Part 1 - Main amendments
Division 4 - Offences and civil penalties relating to manipulation of financial benchmarks
4.5 A person commits an offence if the person does, or does not do, an act or acts with an (that is, any) intention of influencing the level of a financial benchmark. Influencing the level at which the financial benchmark is generated or administered does not require a person to have a specific level in mind. A range of activities may legitimately contribute to or impact on the level at which a benchmark is generated or administered but activity undertaken with an intention of influencing the level of the benchmark is inappropriate and would contravene this offence. Just as market misconduct provisions apply to all financial products, and consistent with overseas developments, the offence applies to all financial benchmarks.
- For this offence, 'intention' has been specified as the fault element to apply. This imposes a higher bar for prosecution than if the standard fault element of 'recklessness' under the Criminal Code applied. Intention has been specified as the fault element to avoid the potential for the offence to have a chilling effect on market activities.
4.6 Under the geographical scope provision applied to this offence in section 908DD (see paragraph 4.13 below), this limb of the offence applies to Australian citizens, residents and bodies corporate incorporated in Australia regardless of where the conduct giving rise to the offence occurs. It also applies to other entities if the conduct giving rise to the offence takes place wholly or at least partly in Australia. [Schedule 1, item 1, subsections 908DA(1) and (3)]
4.7 A separate limb of the offence is created which applies to foreign nationals and bodies, as set out in the geographical scope provision in section 908DD. In the case of these entities the offence applies if an Australian entity (a defined term including both individuals and bodies corporate: see paragraph 4.16) suffers, or is likely to suffer, some financial or other disadvantage as a consequence of the act or omission. [Schedule 1, item 1, subsections 908DA(2) and (3]
4.8 An offence is committed by breaching either of the two limbs of the offence.
4.9 The applicable penalty is determined in section 908DC, with an extended geographical scope as defined in section 908DD. Breaches also attract a civil penalty (see paragraph 4.20 and following below), which have a similar extended geographical scope as explained in paragraph 4.14 below. [Schedule 1, item 1, subsection 908DA(3) and note]
4.10 A person commits an offence if they knowingly or recklessly make a statement or disseminate false or misleading information knowing that the statement or information could be used for the calculation of a financial benchmark. This includes by omitting any matter that without which the statement or information is misleading. This offence provision is structured in the same way as the offence in section 908DA, with a separate limb applying to Australian citizens, residents and bodies corporate incorporated in Australia as well as conduct by any person occurring wholly or at least partly in Australia. A second limb applies to foreign nationals and bodies if their false or misleading statements or information results in or is likely to result in an Australian entity suffering some financial or other disadvantage from using the financial benchmark. The same penalty provision in section 908DC applies to this offence, as well as the extended geographical scope as set out in section 908DD. A breach of this provision also attracts a civil penalty. [Schedule 1, item 1, section 908DB]
4.11 Penalties for the two offences are defined as follows:
- For an individual, imprisonment of up to 10 years and/or a fine being the greater of 4,500 penalty units ($0.945 million) or three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence [Schedule 1, item 1, subsection 908DC(1)]; and
- For a body corporate, a fine being the greatest of 45,000 penalty units ($9.45 million), three times the total value of the benefits that can reasonably be shown to have been derived from the commission of the offence, or 10 per cent of the body corporate's annual turnover during the 12 month period ending at the time the offence was committed [Schedule 1, item 1, subsection 908DC(2)].
4.12 The maximum amounts specified both for the offence and for the civil penalty are relatively high (see paragraph 4.22 below for more details on the civil penalty). However, these amounts are justified because of the seriously damaging impact of misconduct of the kind specified in the offence and the significant profits that may be achieved as a result. A high maximum penalty amount is accordingly required to achieve the desired punitive or deterrent effects. The penalty specified for the offence is modelled on the existing market manipulation and other similar offences and penalties in Part 7.10 of the Corporations Act. The civil penalty amount is the same as applies to the existing civil penalties in Part 9.4B of the Corporations Act, which provides the civil consequences of contravening civil penalty provisions.
4.13 Applying an extended geographical scope to these offences is critically important given the ease with which financial transactions resulting in the manipulation of a benchmark can be conducted across borders in today's global financial markets. Failure to provide a wide geographical scope for these offences would represent a serious gap that would be highly likely to prevent the effective enforcement of the financial benchmark regulatory regime by Australian regulators.
4.14 Extended geographical jurisdiction - Category B as set out in section 15.2 of the Criminal Code is applied to each offence under this Division (see Table 4.1 below for a summary table explaining this provision). Under this category, the offences apply to Australian citizens, residents and bodies corporate incorporated in Australia regardless of where the conduct giving rise to the offence occurs. The offences apply to foreign nationals and bodies corporate if the conduct giving rise to the offences occurs at least partly in Australia. They also apply if the conduct occurs entirely abroad, provided that the conduct results or is likely to result in an Australian entity suffering financial or other disadvantage. However, under these circumstances there is a defence available if there is no corresponding offence in the domestic law of the jurisdiction where the conduct occurs. [Schedule 1, item 1, subsection 908DD(1)]
4.15 The same extended geographical jurisdiction is applied to the civil penalty provisions created under section 1317E in relation to the offences in this Division (see paragraph 4.21 and following below). It is also made clear that the Attorney-General's consent must be obtained before proceedings can be commenced against a foreign person or body corporate for conduct occurring wholly outside Australia. This provision is based on section 16.1 of the Criminal Code. Similarly, provisions explaining in further detail when an act is taken to have occurred in Australia are based on section 16.2 of the Criminal Code. Sections 16.1 and 16.2 of the Criminal Code also apply to the offences in this Division, by virtue of the application of the extended geographical jurisdiction - Category B. [Schedule 1, item 1, subsections 908DD(2) to (8)]
4.16 A definition of Australian entity, which means an Australian citizen, a resident of Australia within the meaning of the Criminal Code and a body corporate incorporated under a law of the Commonwealth or of a State or Territory, is inserted in the main definitions section in Chapter 7 of the Corporations Act. [Schedule 1, item 7, section 761A]
4.17 A note to the definition of financial product in section 761A is amended to take account of the new inclusions in this term created by this Bill; for example, through section 1040B with respect to bank accepted bills (BABs) and negotiable certificates of deposit (NCDs) (see paragraph 4.18 below). [Schedule 1, item 8, section 761A, Note to the definition of 'financial product']
4.18 A new section 1040B is inserted in Part 7.10, which addresses market misconduct and other prohibited conduct relating to financial products and services. This makes BABs and NCDs financial products and Division 3 financial products (within the meaning of Division 3) for purposes of that Part. This has the effect of applying the important offences in that Part, including those relating to market manipulation and artificially maintaining a trading price, to conduct relating to these two products. This section is inserted in order to remove any ambiguity as to whether conduct relating to BABs and NCDs is captured under Part 7.10. Where a term used in the Part is defined outside of the Part by reference to financial product the term is to be interpreted as including BABs and NCDs. Such terms include 'financial service', which is defined in section 766A and 'financial market', which is defined in section 767A. The Acts Interpretation Act 1901 provides that words in the plural number include the singular. [Schedule 1, item 14, section 1040B]
4.19 Section 1312 of the Corporations Act allows a penalty of five times the maximum amount of the penalty applying to an offence committed by an individual to be imposed on a body corporate committing the offence, and exempts specified provisions from this rule. The offences related to the manipulation of financial benchmarks in this Division are specified as exempt from this rule, because the penalties applying to them as set out in section 908DC already make provision for higher penalties for bodies corporate. [Schedule 1, item 21, paragraph 1312(2)(aa)]
4.20 An amendment is made to the note in subsection 1312(2) drawing the reader's attention to the fact that not all penalty amounts are set out in Schedule 3 to the Corporations Act. The penalty amounts for the three offences added to section 1312 (see previous paragraph) are, for instance, set out in section 908DC and not in Schedule 3. [Schedule 1, item 22, subsection 1312(2) (note)]
4.21 The provisions relating to the manipulation of financial benchmarks in Division 4 of new Part 7.5B are made civil penalty provisions by inserting a reference to subsections 908DA(1) and (2) and subsections 908DB(1) and (2) in the table in the Corporations Act at subsection 1317(1) setting out the list of these provisions. A Court can make a declaration of contravention if it is satisfied that a breach of these provisions has occurred, which then allows penalties and orders for compensation to be imposed. [Schedule 1, item 24, subsection 1317E(1)(after table item 17), table item 17B]
4.22 A note is inserted directing the reader's attention to section 908DD because it contains matters that may be relevant for making declarations of contravention for the new civil penalty provisions in table item 17B. Section 908DD clarifies the extended geographic jurisdiction of these provisions, Category B, which may be important in determining whether a declaration of contravention can be made in certain circumstances (see paragraph 4.14 above for a detailed explanation). [Schedule 1, item 25, note 3 at the end of subsection 1317E(1)]
4.23 A Court may make a declaration of contravention if it is satisfied that a breach of one of the offences in Division 4 of new Part 7.5B has occurred. A penalty payable to the Commonwealth may then be imposed up to the amount of $200,000 for an individual and $1 million for a body corporate. [Schedule 1, item 26, subsections 1317G(1DE) and (1DF)]
Application and transitional provisions
4.24 All the offences in Division 4 of new Part 7.5B apply from the start day of the Bill (which will be the later of 1 January 2018 and the day after which the Bill receives the Royal Assent). [Schedule 1, item 31, sections 1639 and 1641]