04 Sep 2008

Conceal or reveal? Reporting white-collar crime

by Luke Buchanan

Corporate victims of white collar crime may decide not to report it to the police for many reasons, but that failure may itself be a criminal offence.

Frequently, the first entity (apart from the criminal) which becomes aware of the commission of a white collar crime is the corporation which employs the criminal, because the corporate employer is also the victim of the crime.

An employer's priorities will normally be to achieve reimbursement of the missing funds and termination of the perpetrator's employment. Reporting of the criminal conduct to the Police (or other appropriate authority) is not necessarily uppermost among the employer's priorities, which may sometimes consider that the matter is best dealt with in house, without involving the Police or other authorities.

The employer may well need to rethink its priorities. The above approach is fraught with danger for the employer, because failure to report the crime may itself constitute an offence, and can lead to fines for the company and, potentially, even gaol time for its officers who knew of the crime but failed to report it.

Why corporations don't report…

There are a few reasons why white-collar crime, even if detected, is under-reported to the authorities. They include:

The bargaining chip: When the perpetrator is discovered, the employer often wants reimbursement and termination of his or her employment. The threat of reporting is a way to generate additional leverage in the settlement negotiations.

Avoiding reputational damage: White-collar crime is a particularly sensitive matter and has a real potential to bring negative publicity and damage to the reputation of a corporation. In particular, management may be concerned about a loss of confidence on the part of customers and shareholders if it becomes widely known that criminal activity has occurred within the corporation, or may feel vulnerable to personal criticism if internal control mechanisms have failed to prevent fraud.

It's wrong, but is it a crime? In some cases, management may also have misgivings as to whether the offence will be able to be proved or whether it is serious enough to warrant the involvement of the Police.

Losing control: Management can be reluctant to allocate time and resources to assisting the Police with any inquiries. Once a corporation reports the commission of a crime to the Police (or other appropriate authority), management loses control over what happens next.

…And why they should

In New South Wales, the effect of section 316(1) of the Crimes Act 1900 is that a person who fails to report conduct which amounts to a serious indictable offence is liable to imprisonment for two years.

The elements of the section are:

  • a person (including a company) has committed a serious indictable offence;
  • another person (including a company) knows or believes that the offence has been committed
  • that other person has information which might be of material assistance in securing the apprehension of the offender or the prosecution or conviction of the offender; and
  • that other person fails, without reasonable excuse, to bring that information to the attention of a member of the Police Force or other appropriate authority.

A "serious indictable offence" is defined as an indictable offence which is punishable by imprisonment for life or for a term of five years or more, but section 316(1) does not require that you know the relevant conduct amounts to a serious indictable offence, only that it is an offence.

In NSW, a serious indictable offence can include:

  • larceny by clerks or servants;
  • embezzlement by clerks or servants;
  • fraudulently appropriating property by a director, officer or member of any body corporate or public company;
  • cheating or defrauding by a director, officer or member of any body corporate or public company;
  • fraudulent misappropriation of monies collected or received; and
  • obtaining money by deception.

Section 316(1) leaves no room for an employer to agree not to report to the Police (or other appropriate authority) the conduct of the officer or employee as part of a settlement, if that conduct amounts to a serious indictable offence. In fact, agreeing not to report for a quid pro quo will actually increase the maximum penalty to five years' imprisonment, under section 316(2).

Section 316(1) of the Crimes Act is not replicated in other Australian jurisdictions but that is not the case with section 316(2). The Commonwealth and most States and Territories have laws making it an offence for a person to accept a benefit in exchange for not reporting an offence, a serious indictable offence or a crime: see the Crimes Act 1914 (Cth), section 44, Crimes Act 1958 (Vic), section 326(1); Criminal Code Act 1899 (Qld), sections 133-134; Criminal Code (WA), section 136; Criminal Code 1924 (Tas), section 102(1); Criminal Code Act (NT), section 104(1).

What you can - and cannot - do

This should sound as a warning to all directors and other officers or employees of a corporation dealing with white collar crime, including in the context of settlement discussions with a fraudulent employee.

You cannot:

  • assume that an employee's misconduct is too trivial or embarrassing to report. You should take advice on the nature of that misconduct and report where necessary;
  • use reporting as a bargaining chip, because keeping quiet for money or other benefits will increase the maximum term of imprisonment from two to five years in NSW and is an offence in other States and Territories.

You can:

  • ask for reimbursement or termination as long as the quid pro quo isn't that you will not report the perpetrator to the authorities;
  • offer not to launch civil proceedings as a negotiating tool.

In short, your employee will have to take his or her chances with the criminal justice system - otherwise you will have to.

Thanks to Hannah Bushell for her help with this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.