Clik here to view.
Apportioning blame
In a recent case in the US, Standard & Poor’s was fined a whopping US$1.375 billion for misconduct in mis-rating complex securities before the global financial crisis. The argument that the US Department of Justice made was fairly novel. In mis-rating securities, it argued, bank employees broke the rules in their company’s Code of Conduct. Since investors read (and believed) the organisation’s Code of Conduct and S&P didn’t enforce it, it was guilty.
In Australian terms, S&P had a “culture” of non-compliance. So, in theory, if employees of Australian financial institutions do not follow their codes of conduct and break the law, then the institution would also be at fault, under section 12 of the Criminal code.
But how does a regulator move from attributing blame to a corporation to charging a senior officer of the firm, such as a chairman or CEO?
Section 12 identifies four so-called “fault elements”: intention, knowledge, recklessness and negligence, which can give rise to an individual and then a corporate offence.
In the UK, the 2013 Banking Reform Act introduced a new criminal sanction for “reckless misconduct that leads to bank failure”. Although the new legislation has been somewhat neutered by requiring a bank to actually fail before jailing the culprits, it is nonetheless a major step forward. But Section 12 appears to have no such limitation.
