Law Reform Commission Annual Conference 2012

1. Law Reform CommissionAnnual Conference 2012 11 December 2012

2. Law Reform – The Current Economic and Fiscal Crisis Reflections on Weaknesses with respect to Accountability Paul Appleby

3. Outline of Presentation • Accountability in action to date • Some domestic causes of the crisis • What contribution law can make to improve governance and accountability in the future – some reflections • Concluding Comment

4. Accountability in Action • New Government elected at the last Election • Outsiders now lead important national bodies • Bank boards/senior management replaced – three persons face criminal charges • Value of bank investments virtually wiped out • 2008 audit work on the banks is under scrutiny • Oireachtas banking inquiry is planned

5. Some Domestic Causes of the Crisis • Dominance of the growth agenda in the banks • Many bank NEDs were inexperienced in banking • Contrarian views were discouraged • Remuneration packages related to short-term gain • Critical accounting rules were flawed • Auditors’ silence on the risks facing the banks • Inadequate responses of banking supervisers

6. How the Law might improve Governance and Accountability • Legal changes are not a panacea, but… • Banking supervisors should have effective and wide powers to curb risks and impose sanctions • Law should criminalise all forms of misconduct • Penal sanctions must anticipate the worst case • Sanction options should be extended • Investigative efficiencies should be facilitated • Improvements to audit should be made

7. Directors’ Compliance Statements – A Missed Opportunity? • In 2003, new law required directors to: • state that they were responsible for securing compliance with tax, company and other important obligations • confirm annually that internal procedures were designed to secure compliance and that they had reviewed the effectiveness of those procedures • In 2004, a similar law was enacted for banks • However, these laws were never operated • Honohan: The FR “deferred to industry pressure”

8. Create New Offences/Extend Others • Criminalise reckless trading • Extend the fraudulent trading offence in companies to other entities • Make indictable the offence of managing a bank contrary to sound administrative and accounting principles • Extend this offence to other licensed entities

9. Introduce Dissuasive Sanctions • Fine of €1,297 and imprisonment for six months: a deficient sanction for bank management failures • Review all EU Regulation offences to see if new sanctions limits should be adopted (Euro Comms Act 2007 provides for €500k fine and three years) • Most indictable offences in company law only attract a maximum financial penalty of €12,697 • Consider higher financial penalties for company breaches of law

10. Develop Sanction Options • Extend the use of disqualification to sanction misconduct in other areas • Provide for voluntary disqualification/restriction undertakings as an alternative to Court actions • Examine extending the administrative penalties available in financial services law to other areas • Introduce the concept of deferred prosecution agreements

11. Improve/Enhance Investigations • Extend unduly short time limits for investigation • Create general presumptions in favour of the admissibility of documentary evidence: • where a person seems to have created a document and in respect of the statements attributed to him/her in it • where no evidence to the contrary is offered by suspects during investigation and • where the Court is satisfied as to the document’s relevance and necessity

12. Improve/Enhance Investigations • Alleviate the inhibiting impact of legal professional privilege and the exclusionary rule of evidence which give rise to major difficulties • Extend presumption of guilt to company officers who permitted a default unless they can show that they took steps to prevent it or were unable to do so because of circumstances beyond their control • Implement planned whistle-blowing legislation

13. Improve Bank Audit Effectiveness • Consider having both the Central Bank and banks appoint bank auditors and determine audit scope • Have the annual transparency reports of major audit firms include statistics on their exercise of professional scepticism in conducting audits • Provide generally that no audit firm should audit a bank for more than eight years and that the audit partner must be changed after five years

14. Conclusion • A common recent complaint in the accountability area is the time that important investigations take • This is primarily a function of the amount of material to be examined as well as weaknesses and inefficiencies in the law • Investigators must operate with great care within the law. Faster outputs require legal reform • Hope that my reflections today provide food for thought and will help the Commission in its work