High Court of Australia flags bigger penalties for corporate misconduct

High Court of Australia expands concept of a “benefit” for civil penalty and criminal sentencing principles – larger corporate penalties are on the way!

On 1 August 2023, the High Court handed down judgment in The King v Jacobs Group (Australia Pty Ltd) [2023] HCA 23. This judgment will substantially impact the level of penalties that corporations will be required to pay when they are found to have contravened various Commonwealth laws when the penalty is assessed on the value of a “benefit” directly or indirectly obtained from the offending conduct.

The conduct and the prosecution

The case involved an appeal on sentencing by the Crown, in relation to one charge of conspiracy to bribe foreign public officials contrary to the Criminal Code Act 1995 (Cth) (Criminal Code) concerning to the conduct of Jacobs Group (Australia) Pty Ltd (formerly Sinclair Knight Merz Pty Ltd (Jacobs) in securing contracts for various aid-funded infrastructure projects in Vietnam between 2008 and 2012. Jacobs pleaded guilty to three charges and was convicted and sentenced.

The dispute between Jacobs and the Crown, from the sentencing hearing to the High Court involved the proper construction of s 70.2(5) of the Criminal Code, which is a provision that prescribes the maximum monetary penalty for that offence as a fine not more than the greatest of the following:

(a) 100,000 penalty units;

(b) if the court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the conduct constituting the offence – 3 times the value of that benefit;

(c) if the court cannot determine the value of that benefit – 10% of the annual turnover of the body corporate during the period (the turnover period) of 12 months ending at the end of the month in which the conduct constituting the offence occurred.

Lower court findings

The Sentencing Judge accepted the submissions of Jacobs that any penalty should be determined, for the relevant charge, on a “net benefit” amount it received for performing its contractual obligations under the contracts, less expenses paid to third parties to perform its obligations, but excluding expenses associated with the offending conduct. The NSW Court of Criminal Appeal refused the Crown’s appeal, based on an argument that a benefit was the entire amount received under the contracts.

The High Court was asked to rule on the meaning of a “benefit”. The penalty provision and the use of the concept of a “benefit” appears in a range of other Commonwealth legislation imposing civil and criminal penalties on corporations and has broad relevance to how corporations and regulators will assess potential penalties for corporate misconduct.

Question before the High Court

The only issue before the Court was whether:

• The value of the benefit obtained was the amount Jacobs received for performing the contracts (referred to as the contract price, or gross amount) (the Crown case); or
• The benefit was that amount net of costs or outgoings incurred in performing the contract, excluding costs or expenses paid as part of the offending conduct, being the net amount (the Jacobs case).

Both the Sentencing Judge and the NSW Court of Criminal Appeal favoured the net amount approach.

High Court’s analysis of “benefit” in determining a penalty

The High Court unanimously held (with Edelman J delivering a separate judgment) that the Crown case had to succeed on a proper construction of the Criminal Code and the meaning of “benefit”. The concept of “benefit” in the Criminal Code had to be consistent with international law and to ensure “effective, proportionate and dissuasive criminal penalties”, as required by reason of Australia’s accession to the OECD Anti-bribery Convention in 1999. As the Court noted, the meaning of “benefit” was unlimited – the “value of an advantage as provided or as obtained, no more and no less.” The Court held there was no proper basis for suggesting a benefit was a net amount, taking into account deductions for any expenses. There can be no “netting-off” good amounts and bad amounts in determining the relevant benefit. The Court rejected any narrow interpretation of the meaning of the phrase “…the value of the benefit”.

The value of the benefit obtained and reasonably attributable to the offending conduct is the amount the company received for performing the contracts. This is consistent with a clear recognition underlying the nature of a “benefit” in assessing penalties, that …”if an advantage is secured by a bribery offence, the whole advantage is tainted by the illegality, as are all costs incurred (external and internal).” This reflected a proportionate and dissuasive approach to sentencing (for foreign bribery offences) that was required under international law.

In this case, the Crown and Jacobs accepted that the gross amount of the benefit received was $10,130,354. Applying the statutory 3x multiplier under s 70.5(2) of the Criminal Code, the maximum penalty was $30,391,062, being greater than the amount of the fixed penalty unit fine (of 100,000 units, then being $11 million). It was that amount that constituted the maximum penalty upon which sentencing should proceed. The case was returned to the sentencing judge (Adamson J) to reassess penalties. It is likely that despite the Sentencing Judge applying a significant discount for the voluntary disclosure and ongoing cooperation, Jacobs will face the likelihood of a more substantial fine.

Impact on business for misconduct

The importance of this case is that in any civil or criminal prosecution where a company may be exposed to a penalty where the value of a “benefit” improperly obtained is an issue, the starting point in determining the value of any likely penalty is to look at the price or value of something received for performing the contracts. If the value of the contract price received by a company runs into the millions or tens of millions of dollars, it is that starting point which sentencing courts must use to determine an appropriate sentence and then consider any factors that warrant a discount, in accordance with well-established sentencing principles.

This is likely to result in substantially higher penalties being sought by civil regulators and criminal prosecutors. Corporations may be more encouraged to consider early voluntary disclosure of misconduct. However, while early disclosure and cooperation can be taken into account by a sentencing court, it is still discretionary. The recent proposed reforms to Australia’s foreign bribery laws missed the opportunity to provide a statutory deferred prosecution scheme to provide a more transparent framework for corporations to seek to resolve corporate misconduct. The Jacobs judgment significantly increases the stakes, even in a plea deal negotiation, as regulators and prosecutors will start high on penalties and be reluctant to move low. This is all the more reason to proactively have a corporate culture that does not tolerate or condone misconduct and to actively monitor your supply chain.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).