Penalties without purpose: Federal Court provides relief from penalty order under financial services law

On 4 June 2024, the Federal Court handed down its decision in Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578 (ASIC v Web3 Ventures).

This case concerned whether Block Earner, a cryptocurrency product provider, should be relieved of liability for a civil pecuniary penalty order pursuant to section 1317S of the Corporations Act 2001 (Cth) (Corporations Act). Having regard to the circumstances of the contravention, the Court granted relief despite the contraventions which had been established by ASIC. For understandable reasons, it is rare for applications under section 1317S to be successful. For this reason, the decision is significant.

The decision is also significant because it provides useful guidance on the application of section 1317S in situations where the regulatory regime is unclear and on the ultimate purpose of regulatory enforcement, which is to deter potential contraventions of a similar kind. Importantly, the case reflects that when a financial services provider has acted honestly and fairly in its genuine belief of compliance, the imposition of a penalty loses its original purpose.

In this article, we explore the judicial guidance provided by Jackman J and the latest state of play in relation to relief from liability for certain contraventions of civil penalty provisions. We also consider what this decision indicates in cases where the legal system may lack clear regulatory frameworks to follow.

The Court’s decision in ASIC v Web3 Ventures

In its previous decision, the Court found that Block Earner had breached the Corporations Act in relation to its cryptocurrency product called “the Earner Product”, by offering the product without an AFSL and without registering it as a managed investment scheme. In a subsequent application, Block Earner applied for relief from the pecuniary penalty order under section 1317S of the Corporations Act.

Relevantly, section 1317S of the Corporations Act provides that the court may relieve a person, either wholly or partly, from a liability imposed on the person for contravention of a civil penalty provision if it appears to the court that:

• the person has acted honestly; and
• having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention.

The Court addressed the two essential questions posed by section 1317S - specifically whether Block Earner “acted honestly”, and whether, having regard to all circumstances, Block Earner “ought fairly to be excused” for its failure in conduct.

Acting honestly

In addressing the first question, Jackman J affirmed the previous judicial interpretation of “acting honestly” and found that Block Earner acted honestly (at [7]-[8]):

It has been said that a person acts honestly if the person’s conduct is without moral turpitude, that is: (a) without deceit or conscious impropriety; (b) without intent to gain an improper benefit or advantage; and (c) without carelessness or imprudence that negates the performance of the duty in question: ASIC v Healey (No 2) at [88].

In the present case, I am satisfied that Block Earner acted honestly. … at the time the Earner product was launched, [Mr Karaboga] considered whether an AFSL was required to provide that product, and formed the view that it was not a regulated financial product and that an AFSL was not required. … He neither intended nor understood that the Earner product was a managed investment scheme or an investment facility … the effect of Mr Karaboga’s unchallenged evidence is that Block Earner concluded that there was no identified risk of Block Earner breaching any laws or regulations by implementing the Earner product.

His Honour further held against ASIC’s allegation of a shortfall in the honesty of Block Earner’s conduct by stating (at [11]-[12]):

ASIC accepts that Block Earner acted without any deceit or conscious impropriety, and without any intent to gain an improper benefit or advantage. However, ASIC submits that Block Earner’s conduct was so unreasonable as to constitute carelessness or imprudence of such a degree as to permit the Court to find that Block Earner did not meet the statutory requirement of acting honestly.

In the present case, I do not regard Block Earner as having been careless or imprudent, let alone guilty of carelessness or imprudence of such a degree as to demonstrate that no genuine attempt at all had been made to carry out the requirements of the Act or the general law. There can be no doubt, … that Block Earner did make a genuine attempt to comply with the requirements of the Act.

Ought fairly to be excused

On the second question of whether Block Earner ought fairly to be excused, Jackman J focused on the breadth of the wording of section 1317S(2)(b)(ii) based on the double play of the expressions “having regard to all the circumstances of the case” and “ought fairly to be excused”. In light of this, his Honour found the following matters could be relied on in determining the question of whether Block Earner ought to be fairly excused (at [17] to [30]):

• Block Earner’s conduct arose from an honest view about the application of technical definitions of financial products in the Corporations Act;
• legal advice from a large law firm had been obtained, which concluded there was no identified risk of a breach of any laws, in the context that the personnel of Block Earner were not legally qualified;
• no loss or damage was suffered by investors by providing the Earner Product (although the Court did find that investors were exposed to a real risk of loss);
• the contraventions arose in an uncertain regulatory environment regarding the application of the Corporations Act to crypto asset service providers;
• Block Earner had received unfair or incorrect media coverage as a result of the proceedings which has affected its legitimate and lawful business. In this regard, His Honour noted at [20] that “while adverse publicity in a general sense is often an inevitable consequence of wrongdoing and in most cases does not influence the assessment of the appropriate penalty, adverse publicity of an unfair or incorrect kind initiated by the prosecuting authority itself goes beyond the natural and probable consequences of the relevant wrongdoing, and may be taken into account in mitigation of penalty”; and
• Block Earner had actively participated in policy discussions with key industry stakeholders regarding crypto-related products and had sought to engage with the government on proposals relevant to the impact of cryptocurrency on existing financial services. His Honour observed that such participation supported finding that Block Earner had, at all times, sought to conduct its business in a lawful manner and not in a way which contravened the Act.

As a counterargument, ASIC raised a policy concern (at [34]) arguing that granting Block Earner relief could discourage financial product promoters, especially those related to crypto assets, from thoroughly assessing whether their offerings are regulated, potentially leading to false impressions about the regulatory standards expected in this field.

This was firmly rejected by Jackman J. His Honour stated (at [35]-[36]):

I accept that the complexity and uncertainty of much of this area of law heightens the imperative that such promoters obtain legal advice from experienced and competent lawyers before launching their products and services, but that is what Block Earner did in the present case. … In light of the fact that Block Earner obtained legal advice from a leading law firm and concluded that its appetite for no risk of breaches of laws or regulations was satisfied, I do not think that granting relief from liability is likely to send the wrong signal to other industry participants.

Jackman J went on to make further statements of principle relevant to the rule of law and the value of predictability in the legal system more broadly. These included that (at [38]-[39]):

The lawgiver expects that subjects will comply with the laws that have been previously announced to them, and the subjects expect to be able to go about their lives by way of self-directed conduct in the knowledge that they are the laws which will be applied … These are, of course, matters of degree, and I have already referred to the views of Commonwealth government bodies as to the lack of clarity and predictability in the law applicable to the present case. Importantly, Professor Finnis says of the promulgation of laws that it is “not fully achieved by printing ever so many legible official copies of enactments, decisions, forms and precedents; it requires also the existence of a professional class of lawyers whose business it is to know their way around the books, and who are available without undue difficulty and expense to advise anybody who wants to know where he stands” … A person who acts in that manner in obtaining the advice of a competent lawyer is entitled, as a general matter, to be accorded the dignity of responsible self-direction and autonomy which the rule of law is designed to secure, even though a court may ultimately find that the law was breached, and should not be treated censoriously.

Accordingly, subject to the circumstances of the particular case, a person who perceives there to be legal uncertainty in a proposed course of conduct, who then obtains legal advice from a person who is qualified to give it competently, and who then genuinely concludes that there is no identified risk of breaching the law, ought fairly to be excused from liability for a civil pecuniary penalty for later engaging in that conduct and thereby breaching the law, at least in circumstances where the person does not thereby derive a substantial profit or cause substantial harm. …

One critical constraint to this general principle is set out by Jackman J at [41]:

It is also worth clarifying that the general proposition set out in paragraph 39 will not be applicable merely because the defendant asserts that it concluded, after receiving competent legal advice, that there was no identified risk of breaching the law. The more unreasonable the conclusion, the more will be required from the defendant…

Finally, Jackman J disregarded ASIC’s argument that the lack of contrition by Block Earner should negate the application of section 1317S relief. His Honour found this insignificant unless there was a clear indication of a propensity for contravention. 

Concluding remarks

As emphasised by Jackman J’s judgment in ASIC v Web3 Ventures, navigating the regulatory requirements in an evolving area such as cryptocurrency is inherently challenging and marred by ambiguity. The Court’s decision provides welcome clarity on the principle that licensees who take honest and diligent steps to comply with the law, despite that complexity and ambiguity, should not be penalised for what is later revealed to be an unintentional breach of the law.

The decision may also have broader application to other areas of the law which are inherently complex and where limited judicial guidance has been provided by courts.

While the Court found that competent legal advice can help protect financial service providers when grappling with this complexity and ambiguity, the Court’s decision also turned on other factors such as Block Earner’s genuine participation in industry discussion and the fact that the product had been closed before any customers had suffered a loss. Also fundamental to the Court’s decision was its observation that cryptocurrency was an uncertain area of law, suggesting that relief may not be readily available in situations where the applicable legal requirements are more well-established.