Better late than never! ASIC Enforcement wrap: May 2022

May 2022 continued to be an active month for ASIC enforcement. 

We summarise below interesting cases and areas of focus that industry participants should be aware of.

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Cyber Security Climbing Higher on ASIC’s Agenda

In an Australian first, on 5 May 2022, the Federal Court ruled against an Australian Financial Services licensee, RI Advice, for breaching its license obligations to act efficiently and fairly when it failed to have adequate risk management systems to manage its cybersecurity risks.

In one of the incidents, an unknown malicious agent obtained unauthorised access to an authorised representative’s file server, resulting in the potential compromise of confidential and sensitive personal information of several thousand clients and other persons.

The Federal Court ordered RI Advice to engage a cybersecurity expert to further improve its cybersecurity and cyber resilience, and to pay ASIC’s costs in the proceeding in the amount of $750,000.

Reforms were introduced in 13 March 2019 that a failure to comply with certain AFS licensing obligations, including obligations relating to how cyber risks are addressed, may give rise to a civil penalty.

This also ties in with a speech given by ASIC’s Chair Joseph Longo at the Law Council of Australia on 4 June 2022 setting out the key themes that ASIC is focusing in the next 12 months. With regards to cyber security, Joseph said that: 

“ASIC is focused on driving good cyber risk and operational resilience practices. We expect our regulated population to actively manage cyber risk as a key part of their legal and compliance obligations.

That means making sure that the measures they have in place to detect, mitigate, and respond to cyber risk adequately address that risk based on the size and complexity of their business and the sensitivity of the information they hold.”

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ASIC Cancels Registration of SMSF Auditors

ASIC has cancelled the registration of 10 auditors of self-managed superannuation funds (SMSFs) who failed to lodge their annual statements.

Since 1 July 2013, all auditors of SMSFs must be registered with ASIC, and lodge an annual statement with ASIC within 30 days of the anniversary of their registration.

Between 2016 to 2018, these same 10 SMSF auditors’ had their registration cancelled by ASIC. The registrations were reinstated following a request to ASIC to review the previous cancellation decision, but on a clearly stated expectation that they would comply with their on-going obligations to lodge their annual statements.

A more general takeaway from this announcement is that while a first-time breach of a compliance obligation may be met with some leniency by ASIC, repeated breaches will entail much more severe action by the regulators.

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Crackdown on Illegal Phoenix Activity Continues

In May 2022, ASIC disqualified the following directors from managing corporations due to their involvement in multiple failed companies:

• Robert John Walker for his involvement in Tazzy Tyres Wholesale Pty Ltd (ACN 614 938 939), Tazzy Tyres Accessories Pty Ltd (ACN 142 192 032), Tazzy Tyres Retail Pty Ltd (ACN 614 939 614), Tazzy Tyres Pty Ltd (ACN 157 851 833);
• Tony Alexzander for his involvement in A.C.N. 600 323 742 Pty Ltd (de-registered) (formerly Volcanic Constructions Pty Ltd), A.C.N. 607 562 363 Pty Ltd  (de-registered) (formerly Total Blox Labour Hire Pty Ltd), Freenay Pty Ltd (ACN 623 252 899), and Total Blox Pty Ltd (ACN 128 191 622);
• Benjamin David Coventry Brown for his involvement in Mistyak Pty Ltd (ACN 067 416 899), and SL Consulting (QLD) Pty Ltd (ACN 142 901 871); and
• James Sackl for his involvement in Dash Technologies Pty Ltd (ACN 611 629 773), Ad Astra Institute Pty Ltd (ACN 611 629 693), Karma3 Upcycling Pty Ltd (ACN 619 998 104), Sino Resources Group (Aust) Pty Ltd (ACN 609 061 234), and Universal Personnel Pty Ltd (ACN 166 106 681).

The disqualification ranged between three to five years.

A common thread that connects these cases was:

• ASIC found that the directors have breached their duties towards the failed companies; and
• The failed companies owed significant sums of money towards various creditors, typically at least $1million, with a bulk of it owed to the ATO.

As the banning by ASIC is an administrative decision, these directors have the right to seek a review of the decision by the Administrative Appeals Tribunal.

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Don’t be Penny-Wise and Pound-Foolish – When your company is placed in liquidation

On 16 May 2022, Colin Zampatti was convicted of dishonestly breaching his directors’ duties towards R.C.G. Pty Ltd (A.C.N. 008 781 539), a company which was placed in liquidation.

After RCG was placed in liquidation, Mr Zampatti continued to invoice and collect rental income payable under the terms of the lease, without disclosing his conduct to the company’s liquidator, collecting a total of $2,338.60 in undisclosed rent.

A director is required to disclose all of the assets and liabilities of the company to an appointed liquidator, and not use their position for their own benefit and to the detriment of the company.

On sentencing, Mr Zampatti was fined $2000.  

However, as a result of the conviction, Mr Zampatti is also automatically disqualified from managing corporations for five years pursuant to section 206B of the Corporations Act 2001. 

The automatically disqualification provisions kick in is when a person is convicted of an offence that involves dishonesty and is punishable by imprisonment for at least 3 months. At the time of Mr Zampetti’s conduct, breach of directors’ duties carried a maximum term of five years imprisonment.

This shows that even if the offence involved a comparatively small sum of money, the punishment and ramifications can be significant if it involves dishonesty. A conviction will significantly curtail your ability to participate in the management of corporations in the future.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

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