Federal Court finds getting and acting on legal advice may help avoid civil penalties 

ASIC v Web3 Ventures (penalty) [2024] FCA 578

What you need to know

• In a recent decision, the Federal Court has relieved a crypto asset provider from paying pecuniary penalties for offering unlicensed financial advice and an unregistered MIS.
• The Court has power to relieve liability for contraventions of civil penalty provisions under the Corporations Act (and also the National Consumer Credit Protection Act, with a similar provision under the ASIC Act). Under s 1317S of the Corporations Act, liability can be relieved where the person has acted honestly and, having regard to all the circumstances, they ought fairly be excused from liability in whole or part.
• The Court accepted that there was genuine legal uncertainty as to whether the provider was required to hold an Australian Financial Services Licence and register an MIS under the Corporations Act. The provider had no appetite for compliance risk and had sought (undisclosed) legal advice before launching the product. No substantive harm or profit had resulted from the breaches. In those circumstances, the Court considered relief from liability appropriate.
• Notably, the provider was able to persuade the Court to relieve liability without waiving privilege in the underlying legal advice. It will be interesting to see if this approach is maintained in other cases.
• The case is unlikely to be of wide application - the provider's legal position was reasonably arguable and genuinely held and the law complex and uncertain; there was no material loss or damage to the provider's clients; the provider had ceased to offer the product; and there was significant deterrence arising from media about the case.

What you need to do

• In dealing with new and emerging financial markets and products including cryptocurrency, or complex legal issues, consider how you could demonstrate, if required, that you reached the view that there was no real risk in taking a particular course, including by acting in accordance with legal advice.
• In the worst case scenario where your view proves incorrect, having sought legal advice may be one factor which would support relief from liability. However, the scope for relief is fairly narrow and calculated risk-taking is not likely to be relieved, nor situations where there was substantial profit or harm from the breach.
• Keep an audit trail demonstrating how you have assessed (internally and externally) the requirements of applicable legal and regulatory standards to any financial product offered, and the views you have reached. This may support the contention that you acted honestly and ought fairly be excused.

Can obtaining legal advice mitigate the risk of pecuniary penalties for breaches of the law?

In a recent decision on penalty, the Federal Court has relieved a crypto asset provider from pecuniary penalties for breaches of the Corporations Act partly as a result of the provider having obtained legal advice in an area of legal uncertainty and (wrongly) concluding that there was no identified risk of a breach of the law.

When can liability for civil penalties be relieved?

Relief from liability for breaches of civil penalty provisions is available for Corporations Act and National Consumer Credit Act breaches, and for individuals under the ASIC Act. Essentially, the contravenor must show that:

• They acted honestly (and reasonably, for ASIC Act cases).
• Having regard to all the circumstances of the case, they ought fairly be excused from the contravention.

If so, liability can be excused in whole or part.

There is a similar defence to certain contraventions of the ASIC Act by a corporation where, for example, the contravention was due to reasonable mistake and the defendant took reasonable precautions and exercised due diligence to avoid the contravention.

The jurisdiction to relieve liability is rarely exercised but is important to consider when liability for a civil penalty has been established.

The decision to relieve liability

In Australian Securities and Investments Commission (ASIC) v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578, Jackman J found that a crypto asset provider (Block Earner) should be relieved from liability to pay a pecuniary penalty. Block Earner had previously been found to have (i) provided financial services without a an Australian Financial Services Licence (AFSL) and (ii) operated an unregistered management investment scheme when offering its "Earner" cryptocurrency product for around eight months from March to November 2022. See our previous commentary on the liability decision here.

Had Block Earner acted honestly?

Jackman J first considered whether Block Earner had acted honestly.

There was unchallenged evidence that at the time of launching the Earner product, Block Earner had at senior levels (CEO, Head of Risk and Compliance) carefully considered whether the Earner product required an AFSL. They concluded that the product aligned with Block Earner's risk appetite, as set out in Block Earner's Enterprise Risk Management Framework, which stated that "Block Earner has no appetite for breaches in laws and regulations").

It was evident from ASIC's evidence, including a written statement Block Earner had been compelled to provide under s 19 of the ASIC Act, that Block Earner had also obtained external legal advice on its legal obligations. Jackman J accepted this as establishing that Block Earner had acted honestly and carefully, notwithstanding that privilege was not waived in the advice. The fact of the advice supported the position that Block Earner had honestly sought to comply with the law and had not identified a risk of non-compliance (given its low risk appetite for compliance breaches).

Given the important question, for the purposes of relief from liability, about whether a person has taken a calculated risk of breach, it is interesting that the Court was prepared to accept that Block Earner had not identified a risk of breach based on the risk appetite statement and the fact of the advice. Legal advice frequently contains qualifications on topics of substantial legal uncertainty. There is a question, which may be pursued in other cases, whether it is manifestly inconsistent with the maintenance of privilege to rely on the fact of legal advice to support the inference that the contravenor did not identify a legal risk, without disclosing the substance of the advice.

Ought Block Earner fairly to be excused?

Jackman J took account of the following factors in assessing whether it should be excused from penalty:

• The conduct "arose from an honest view about the application of technical definitions of financial products" (although it was noted that the contravention was nonetheless "serious").
• No loss or damage was suffered (although it was noted that the potential risk of loss to customers was "real and significant"). There was also no substantial profit from the breaches.
• The contraventions arose in an uncertain regulatory environment, where even government bodies had expressed doubt as to the regime's application to crypto asset providers.
• Block Earner had received adverse media coverage as a result of the proceedings which was "unfair and misleading".
• Block Earner had shown an active "willingness […] to engage with government and regulatory bodies" on effective ways to regulate its products.

Ultimately, Jackman J considered that Block Earner ought fairly be excused, particularly as Block Earner obtained legal advice and did not consider that there was any risk in launching the Earner product.

Assessment of penalty

It is worth noting that in any event, the Court would not have ordered a penalty even if relief had not been granted - despite the contravention being "serious" with potential for harm. So these same factors may lead to no penalty being imposed even where relief from liability is not available for a particular civil penalty provision.

Comment

Whilst of obvious interest to participants in emerging or technically complex areas of financial services, this decision is of relatively narrow scope due to the lack of any harm arising from the contraventions and the specific product at issue being subject to significant regulatory uncertainty.

Accordingly, obtaining and relying on legal advice is clearly not a panacea in later penalty proceedings, should they arise. There may also be difficulties in relying upon legal advice in such circumstances without waiving privilege. It is notable that Jackman J was willing to place such weight on Block Earner's legal advice without waiver or sight of the advice (which, for example, could have contained qualifications or limitations) and it should not be assumed that all courts would be prepared to do so.

However, the case could nonetheless be relevant in some instances involving difficult or novel questions of compliance alongside contraventions with limited or no prejudicial effect or damage. This highlights the importance of taking legal advice before proceeding in such areas, judging whether to take a particular course having regard to applicable risk appetite statements and keeping a careful audit trail of factors considered and advice obtained, so that the honesty of a party's conduct can be demonstrated to a court if necessary.

Want to know more? 

• ASIC v Block Earner: when are crypto asset based products regulated Financial Products? (19 February 2024)

Authors: Mark Bradley, Partner; Rani John, Partner; Daniel Pannett, Senior Associate and Claire Potter, Associate.