Chapter 3
Higher penalties and improved detection powers for insider trading and market misconduct offences
3.1
This chapter examines the bill's provisions to enhance the Australian
Securities and Investments Commission's (ASIC) search warrant powers to detect
insider trading and market manipulation offences and enable an interception
agency to apply for telecommunications interception warrants to investigate
these offences. The chapter begins by outlining the bill's provision to
increase criminal penalties for insider trading and market misconduct offences.
Higher penalties for insider trading and market misconduct offences
3.2
The bill increases the penalties associated with breaches of the insider
trading and market misconduct provisions in section 7.10 of the Corporations
Act. This misconduct includes false trading and market rigging,
artificially maintaining a trading price, dissemination of information about illegal
transactions, false or misleading statements, inducing persons to deal in
financial products and dishonest conduct in relation to a financial service or
product.[1]
Currently, the maximum criminal penalty for insider trading is five years
imprisonment and/or 2000 penalty units, while the maximum criminal penalty for
market manipulation offences is five years imprisonment and/or 200 penalty
units.
3.3
In his Second Reading Speech, the Parliamentary Secretary to the
Treasurer, the Hon. Mr David Bradbury MP, explained that insider trading and
market manipulation can 'distort Australia's financial markets and cause
serious harm to their fair and efficient functioning'. Further, he noted that
the benefit to be gained from engaging in insider trading or market
manipulation often far outweighs the maximum penalty that can currently be
imposed for a breach.[2]
3.4
Accordingly, the bill will increase the maximum criminal penalties for
both insider trading and market manipulation to ten years' imprisonment and/or
the greater of 4500 penalty units, or three times the profit gained or loss
avoided.[3]
Currently, 4500 penalty units is $4 950 000 for a corporation and
$495 000 for an individual.
3.5
Witnesses to this inquiry supported these amendments.
Improved offence detection powers
Search warrant powers
3.6
The bill amends the current search warrant power in the ASIC Act to permit
ASIC to apply for a search warrant without first having to issue a notice to
produce for the material sought. Treasury told the committee that the Act's current
requirement for a notice to produce has meant that ASIC's search warrant power is
rarely used. When the power is sought, the documents are often destroyed.
Accordingly, the search warrants employed by ASIC are often only used in
criminal proceedings under section 3 of the Crimes Act.[4]
3.7
While the bill removes the notice to produce requirement from the
Corporations Act, the new search warrant provisions will retain various other protections.
An application to the court for a search warrant may only be made in a
situation where a notice to produce a document under sections 30, 30A, 31, 32A
and 33 could also be issued. These notices may only be issued where the
requirements of section 28, regarding the permitted purposes for seeking
records, are actually satisfied.
Sections 28 and 35 of the ASIC Act
3.8
ASIC's power to apply for a search warrant is set out in section 35 of
the ASIC Act. This section obliges ASIC to require the production of corporate
records under another provision of Division 3 and only if those records are not
produced may ASIC then apply for a search warrant.[5]
Division 3 (section 28) relates to section 35 insofar as it sets out the
parameters within which ASIC may exercise its powers.
3.9
Section 28 of the ASIC Act requires that ASIC's search warrant powers
are only exercised:
- in connection with the performance or exercise of ASIC's functions
or powers under the corporations legislation;
-
for the purposes of ensuring compliance with the corporations
legislation;
-
in relation to an alleged or suspected contravention of the
corporations legislation, or another law which relates to a corporation; and
- in connection to an investigation under Division 1 of the ASIC
Act.
Submitters' concerns with the
provision
3.10
Several groups have expressed concern with the bill's search warrant
provision. Mr Stephen Blanks, Secretary of the New South Wales Council for
Civil Liberties, contrasted the bill's provision on search warrant powers with
the process that ASIC uses to apply for a search warrant under the Crimes
Act 1914. He noted that the primary way that ASIC is able to obtain search
warrants is through the Crimes Act. Through this avenue, there must be a suspected
criminal offence for which the search warrant is necessary. Mr Blanks reasoned:
To the extent that the power in the ASIC Act is additional to
and separate from the power in the Crimes Act, one assumes that the power in
the ASIC Act is going to be used in situations where there is not an
investigation of a criminal offence underway...To have a search warrant as the
first port of call in a non-criminal investigation is inconsistent with the principles
applying to coercive powers that have been floating around for at least the
last 10 years.[6]
3.11
Mr Malcolm Stewart, Vice President of the Rule of Law Institute,
elaborated on this issue. He explained to the committee that currently, ASIC
must have a reasonable suspicion that an offence has been committed. Under the
provisions of the bill, however:
There no longer has to be any reasonable suspicion of
anything. There does not have to be the commission of any offence or reasonable
suspicion of that offence—there does not even need to be a reasonable suspicion
of a contravention in a civil sense of any of the acts that ASIC oversees
either.[7]
3.12
The Institute fears that the bill's provision 'confers on a regulator
even more coercive powers than it already has' and that this power is
operationally unnecessary.[8]
Mr Stewart told the committee that as insider trading and market manipulation
are criminal offences, ASIC already has adequate powers to gain a search
warrant under section 3 of the Crimes Act. He argued that ASIC does not need
this additional power to gain a document on a premises.[9]
3.13
The Senate Standing Committee for the Scrutiny of Bills also criticised
the bill's provisions on ASIC's search warrant powers. It expressed concern
that the Explanatory Memorandum does not explain the reasons for the bill's
search warrant power provisions and in particular:
...whether the proposed power is too broad, what safeguards
are in place to ensure that their use would be for a proper purpose and
proportionate to the circumstances, and whether they are consistent with other
similar powers.[10]
ASIC's view (and a response)
3.14
In evidence to the committee, ASIC's Deputy Chairman Ms Belinda Gibson,
emphasised that the Commission does not currently have power to obtain a search
warrant under civil and administrative actions. She argued that ASIC needs the
new powers to ban a financial participant pending a criminal determination, and
thereby protect the public from a person who has breached the Act.[11]
3.15
Ms Gibson gave the following example to illustrate ASIC's need for
search warrant powers in addition to the current Crimes Act option:
If you take an instance where we suspect a Ponzi scheme by
which we think a financial adviser is taking investors’ money, that would be a
criminal act. To prepare and take a case to trial can take many years. It may
be that we could use the evidence in an administrative banning and so protect
the public by stopping that person giving financial advice and then work up a
case. In the Crimes Act, we could not use evidence we might get from a
telephone intercept about the operations of that scheme in a banning proposition;
we could only use it in a criminal prosecution.[12]
3.16
Nonetheless, Ms Gibson told the committee that ASIC does not envisage
using its new search warrant powers frequently. She noted that the Australian
Federal Police has many other responsibilities and that executing the search
warrant is 'very resource intensive'. She added: 'I envisage that we would
generally only use a search warrant power where we think there might be
destruction' (of evidence).[13]
Section 28
3.17
ASIC told the committee that in its view, section 28 of the Act does
constrain the use of section 35. Ms Gibson added there 'could be some
legislative tweak to make that clearer, but the words of section 35 invoke
section 28'.[14]
3.18
However, the Rule of Law Institute has criticised the bill for removing
the two step process currently required under section 35. It argued that the
effect of the proposed amendment is that ASIC's power to issue a search warrant
is no longer limited by the parameters contained in section 28.[15]
The Institute argued that ASIC's power to apply for a search warrant should be
subject to specified safeguards which ensure that it is for a proper purpose in
connection with its statutory functions. However, even this safeguard would
allow ASIC to obtain a search warrant in circumstances where there may be no
breach of the Corporations Act or any other law or provision. The Institute
thereby recommended that ASIC's power to apply for a search warrant be subject
to the safeguards contained in section 28 of the ASIC Act.
3.19
Treasury's interpretation is that these safeguards are already in place
in the bill:
The section quite clearly states that the search warrant may
seek the production of books that could be required to be produced—and we
listed a whole range of sections in our introductory speech. Those sections are
tied to section 28 of the ASIC Act. Section 28 lists a whole range of purposes
for which books can be sought, and none of those powers can be exercised unless
it is for one of those purposes. For the search warrant power, although it does
not explicitly refer to the section 28 purpose, it says it can only seek books
for which you could actually seek under the other sections—and you can only
seek books under those other sections.[16]
Calls to review the search warrant
provision
3.20
The committee is aware of proposals to review the bill's search warrant
powers. The Rule of Law Institute recommended in its submission that the Senate
Economics Legislation Committee:
...should seek advice from ASIC which reassures the Senate
that ASIC has in place central records, procedures and safeguards to ensure
that it does not act in an arbitrary manner.[17]
3.21
The Senate Standing Committee for the Scrutiny of Bills has sought the
Treasurer's advice about the scope of ASIC's proposed search warrant powers and
the safeguards against the abuse of these powers. Pending this advice, the
committee has noted that these provisions may be considered 'to trespass unduly
on personal rights and liberties, in breach of principle 1(a)(i) of the
Committee's terms of reference'.[18]
Telecommunications interception powers
3.22
The bill also includes the insider trading and market misconduct
provisions in Part 7.10 of the Corporations Act in the list of serious offences
in section 5D of the Telecommunications Interception Act 1979.
Accordingly, an interception agency will be able to apply for
telecommunications interception warrants in the course of investigations into
insider trading and market manipulation offences.[19]
3.23
ASIC itself will not be a telecommunications intercept (TI) agency. The
main TI agency will be the Australian Federal Police (AFP). ASIC will have a
role assisting the AFP in its prosecution of offences using the information
that the AFP obtains.[20]
3.24
The Parliamentary Secretary's Second Reading Speech explained the need
for enhanced telecommunications interception powers to detect insider trading
and other market manipulation offences. Mr Bradbury told parliament that:
...these offences by their very nature involve complex
networks of people, technological sophistication and avoidance of paper and
traceable communications. In addition, the transactions often occur in real
time, meaning that telephone conversations are often the only evidence of the
offence.[21]
3.25
The Senate Standing Committee for the Scrutiny of Bills also expressed
concern that the provisions relating to telecommunications interception
warrants may trespass unduly on personal rights and liberties, in breach of
principle 1(a)(i) of the committee's terms of reference.
3.26
The New South Wales Council for Civil Liberties commented in its
submission that:
It is alarming to observe the extent of function creep of
powers, originally justified in relation to terrorist offences and those that
threaten life or serious bodily harm, to lesser crimes. The proposed change
would permit the full range of warrants to be issued to interception agencies,
for offences concerning insider trading and market manipulation. It is
paradoxical for a bill which seeks to protect the privacy of shareholders in
one respect to then allow such intrusions. CCL shares the concern raised in
their submission by the Rule of Law Institute on this matter.[22]
3.27
Others supported the bill's provision on TI powers. Chartered
Secretaries Australia, for example, told the committee that:
...we are supportive of the provision of telephone interception
warrants in relation to insider trading and market manipulation. Our reason for
that is that we think that those particular issues are extremely difficult to
prove without those powers and we think that the same public policy rationale
should apply to their use for insider trading and market manipulation—that is, telephone
interception warrants—as currently applies to their use in the investigation of
money laundering and cybercrime. They are very difficult to crimes to prove and
we think without those powers they remain very difficult crimes to prove. That
is why we support them.[23]
ASIC's view of the bill's telecommunications
interception powers
3.28
ASIC told the committee in its evidence that it does not expect the new
telecommunications intercept powers to be frequently used. Ms Gibson noted that
the magistrate would have to be satisfied that it would assist the
investigation. The investigator—the AFP—would need evidence of 'a pattern of
successful trading across a succession of stocks by a potential trader and
would then be able to see a person building a position in a stock'. Ms Gibson
recalled only 'three or four instances' in her three years working at ASIC
where there was a suspected ring of insider traders.[24]
3.29
Treasury also outlined the process for telecommunications interception:
In the normal course of events we would expect ASIC to
conduct its normal investigations, using its normal powers, to come across a
circumstance where it believes a TI warrant is justified. Because it cannot
apply itself, it would have to go to an intercept agency and convince that
agency to apply resources to the investigation. So it would actually have to
convince that TI agency, just on the information that it has already gathered,
that there is sufficient evidence to justify that step and also that the
offences that are allegedly occurring are sufficiently serious enough for it to
prioritise its own work and to actually start an investigation. Of course, that
agency, once it was convinced, would then have to go to court and would have to
convince the court that there was sufficient evidence and it was sufficiently
serious to justify the issue of a warrant.[25]
ASIC's coercive powers
3.30
This inquiry has also elicited broader comment critical of the extent
and secrecy of ASIC's coercive powers. The Rule of Law Institute highlighted in
its submission that there is no published information on how ASIC executes its
current powers. It argued that ASIC should make publicly available:
-
the basis upon which ASIC initiates a coercive order;
- whether it does so based on a reasonable suspicion that there has
been a breach of the law;
-
how it ensures that the approving officer is a different person
and in a different division from the initiating or recommending officer; and
- how often it conducts an internal review of its extensive set of
coercive powers and what these reviews have concluded.[26]
3.31
To this end, the Institute recommended that the proposed amendments to
the ASIC Act be excised from the bill and referred to the Australian Law Reform
Commission as part of a review of the use of coercive powers by regulators. It
also recommended that ASIC publish on its web site a set of procedures which
demonstrate that it has appropriate checks and balances to ensure that it uses
its coercive powers 'sparingly and with appropriate discretion'.[27]
3.32
The New South Wales Council for Civil Liberties noted that law
enforcement agencies are required to report to the relevant Attorney General
and to Parliament the numbers of interception warrants applied for and executed
each year, and on the success of those cases in obtaining evidence. It argued
that similar reporting requirements should be placed on ASIC's search powers
before the bill's amendment comes into force.[28]
3.33
The committee asked ASIC to comment on the criticism that it does not
report enough on its use of coercive powers. Ms Gibson responded:
...we were looking into our reporting of the use of our coercive
powers and we were reviewing that benchmark with other regulatory agencies. Our
preliminary view is that there is not extensive reporting of the exercise of a
‘notice to produce’ document or so on, but we are looking at whether there
should be some better reporting of those coercive powers. We do not use
telephone intercepts now so I cannot report that we would be using any. On the
question of accessing search warrants, I have some data on that. In all cases
we have to keep search warrants with the federal police. That is required by
the legislation and that will not change. We have had some 20 investigations
over the last three years for which the police would have executed some 82
warrants overall.[29]
Committee view
3.34
The committee recognises that the issue of ASIC's coercive powers, and
the need for a better system of public disclosure of the use of these powers,
is an issue that is broader than this inquiry. These issues are nonetheless
relevant to several witnesses' concerns that any new coercive powers that ASIC
acquires through this legislation are adequately safeguarded and properly
disclosed.
Recommendation 1
3.35
The committee recommends that if ASIC does acquire new search warrant
and telecommunications interception powers to investigate insider trading and
market misconduct offences, it is required to state in its Annual Report:
- the number of times it has used each of these powers;
- the number of times that ASIC referred an insider trading or
market misconduct matter to the AFP for investigation for the possible use of
the phone interception power; and
- the nature of the use of these powers in each circumstance.
3.36
The committee notes that law enforcement agencies are required to report
to the relevant Attorney General and to Parliament the numbers of interception
warrants applied for and executed each year.[30]
ASIC, and the interception agencies that investigate insider trading and
corporate misconduct offences, should be subject to similar disclosure
requirements.
Recommendation 2
3.37
The committee recommends that the bill be passed.
Senator Annette Hurley
Chair
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