'Gatekeepers' to the board: regulators' changing expectations of general counsel

• Published date: 14 August 2023
• Law Firm: Corrs Chambers Westgarth
• Author: Mr Mark Wilks, Abigail Gill, Sandy Mak, Andrew Lumsden and Katrina Sleiman

General counsel have never been under such intense scrutiny. Regulators including the Australian Securities and Investments Commission (ASIC) are zeroing in on officers like general counsel, whom ASIC regard as 'gatekeepers', and seeking to hold them responsible for ensuring the prevention of corporate misconduct.

What are the regulators' expectations of general counsel in managing and highlighting risk? And how do these dynamics impact the role and the potential liability of general counsel?

For many years, those of us interested in the area of governance and directors' duties have been watching ASIC's prosecution 'slate' waiting for the next big 'stepping stone' prosecution.

Many thought it would come out of the Crown Resorts Sydney, Melbourne and Perth casino inquiries, which identified much evidence of senior officers having overseen endemic widespread and serious non-compliance over a number of years - non-compliance that, if not strictly illegal, had caused significant reputational damage and consequent financial loss to the company (including its employees) and its shareholders. Notwithstanding this, there were no cases launched by ASIC against any officers for these missteps.

But then came the Star prosecution, in which ASIC commenced civil penalty proceedings in the Federal Court against 11 current and former directors and officers of The Star Entertainment Group Limited (ASX: SGR) (Star) (discussed in detail below). What made Star different? Maybe it was a perfect storm (at least for the 11 individuals involved) of:

• an ASIC Commissioner with a strong belief in 'Gatekeeper Theory' and looking to test it as an enforcement thesis (below); and
  
  
• ' serious and systemic' breaches of federal law occurring over a number of years.

But maybe the biggest issue was the senior management of Star not observing what was happening at Crown and taking immediate steps to stop behaviour that ASIC thinks Star management knew, or ought to have known, gave rise to risks posed by gambling junket Suncity (and junkets generally) in respect of non-compliance with anti-money laundering laws. To ASIC, it seems this foreseeable risk ought to have been better managed by the defendants.

Star - the facts of the case

ASIC commenced civil penalty proceedings in the Federal Court against 11 current and former directors and officers of Star for alleged breaches of their care and diligence duties owed to the company under s 180(1) of the Corporations Act 2001 (Cth). One of those officers was the former group General Counsel. ASIC alleges that Star's board and executives failed to give sufficient focus to the risk of money laundering and criminal associations that were inherent in the operation of a large casino with an international customer base.

This is another 'stepping stone' case brought by ASIC, and is one of very few cases ASIC has sought to bring under s 180(1) of the Corporations Act against officers who are not directors.

The Star prosecution follows the traditional mechanism for a stepping stone case. ASIC alleges that Star's officers failed to exercise the degree of care and diligence that a reasonable person would have exercised in her or his position during the relevant period to 'prevent a foreseeable risk of...