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Economics References Committee
Criminal, civil and administrative penalties for white-collar crime
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Economics References Committee
CHAIR (Senator Ketter)
Whish-Wilson, Sen Peter
Hume, Sen Jane
Dastyari, Sen Sam
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Economics References Committee
(Senate-Tuesday, 6 December 2016)
CHAIR (Senator Ketter)
ACTING CHAIR (Senator Hume)
- Senator WHISH-WILSON
Content WindowEconomics References Committee
Criminal, civil and administrative penalties for white-collar crime
ZIRNSAK, Dr Mark, Director, Justice and International Mission Unit, Uniting Church in Australia, Synod of Victoria and Tasmania
Committee met at 08:57
CHAIR ( Senator Ketter ): I declare open this public hearing of the Senate Economic References Committee. The committee is hearing evidence in the committee's inquiry into criminal, civil and administrative penalties for corporate and financial misconduct or white-collar crime. The Senate referred this inquiry to the committee on 25 November 2015, for report by 28 February 2017. I welcome you all here today. The committee has received 138 submissions so far, which are available on the committee's website. This is a public hearing and a Hansard transcript of the proceedings is being made.
Before the committee starts taking evidence, I remind all witnesses that, in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee. Such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public but, under the Senate's resolutions, witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to ask to give evidence in camera. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may of course also be made at any other time. I would ask photographers and cameramen to follow the established media guidelines and the instructions of the committee secretariat. Please ensure that senators' and witnesses' laptops and personal papers are not filmed. Finally, on behalf of the committee, I would like to thank all of those who have made submissions and sent representatives here today for their cooperation in this inquiry.
I now welcome Dr Mark Zirnsak, from the Justice and International Mission Unit of the Uniting Church Synod of Victoria and Tasmania. Thank you for appearing before the committee today. I invite you to make a brief opening statement should you wish to do so, and then we will go to questions.
Dr Zirnsak : While this inquiry is largely looking at the penalties, in our submission we also raise that for this to be effective it needs to be combined with increased resources for detecting and carrying out enforcement. Penalties alone will not act as a deterrent without greater detection. There is growing criminological research in this space, on these crime types, that is demonstrating that that is the case. We raise the concern that if there is a perception that someone will not be caught then effectively penalties will not be effective.
We point out in the case of things such as bribery and money laundering an example of a recent piece of work that Global Witness did in New York. They sent an undercover person into 14 law firms. This person pretended to be acting on behalf of an African minister wanting the law firm to open a shell company to conceal a transfer of money from this African country into the US so that the home country and the US authorities would not know the source of the funds. In this particular case, 13 of the law firms were willing to set up an anonymous shell company. Only one law firm actually said, 'No, we will not be part of that.' That is a US example. You might hope that Australian law firms would do much better than that. But it does give a sense that, despite potentially very strong penalties for law firms engaging in that kind of criminal activity in a hypothetical sense, their sense of detection is not high and therefore the penalty alone is not a deterrent.
Our submission also points out the importance of whistleblower protection and reward. We think that is a strong recommendation this committee should make. I do note that there is now an entire inquiry that will be directed to looking at whistleblowers, but it certainly would not hurt to have this committee reinforcing the importance of whistleblower protection and reward and that Australia has fallen behind other countries in providing that legislation.
Clearly when it comes to penalties we have outlined that the sanctions need to outweigh the benefits that a person might gain from that criminal activity. We cited the example of John Gay in the Gunns insider trading case where the initial line was $50,000. There was a civil case subsequently that raised the penalty to $500,000, but the estimate of the benefit that he gained was $800,000. So there still appeared to be a net gain for the person in that case from a purely monetary point of view. You may reasonably argue that being publicly named and having the effect on your career is a penalty in itself. I would acknowledge that that is the case.
Finally, the submission touched on the need for greater transparency. Greater transparency is a necessary step towards deterrence in this space. We note that the US is far more open about cases it carries out even where there is not a penalty and it seizes assets in unexplained wealth cases and those kind of things, which we think acts as a greater deterrent. We give the example that in our engagement with the current Australian government there has been a lot less willingness to be transparent about some of their law enforcement actions in this space. I am happy to take questions.
Senator WHISH-WILSON: Thank you for the work you and your network do on so many levels. It has been very useful for us over the years getting your research and evidence. I want to highlight also that I initiated this inquiry following the economics committee inquiry into ASIC. One of the key recommendations from that, amongst the 42 recommendations, was to have a separate study into penalties for white-collar crime. That, I understand, was announced by Minister O'Dwyer about a month ago. So it has finally happened, but it was well and truly after this inquiry was underway. I just want to get on the record that I hope it actually takes into account the information we determine today.
What is your view on imprisonment versus fines? We have seen quite a difference in submissions to the inquiry on the necessity of doing jail time versus other punitive measures. Do you have any view on the appropriateness of, for example, mandatory sentencing for things such as insider trading or other frauds?
Dr Zirnsak : Ecumenically there is a very strong view that prison should always be a last resort and that the evidence for prison having benefits in a criminal justice system are low compared to other potential forms of sanction. We have tended to take the view that prison may be necessary to protect the community from further harm and, in some cases, may be necessary for deterrence, but there is evidence that deterrence can also be delivered through other forms of sanction.
Our general view on this would be imprisonment may be necessary, in extreme cases, but other forms of sanction may apply. In these kinds of crimes, if there is transparency, the potential for that public disclosure does in itself add a penalty, in addition to what we think should be adequate civil penalties, to ensure that there is no profit out of the crime. Other sanctions might be being banned from certain roles, certain industries, not being able to be a director, depending on the type of crime. There are a range of sanctions that could be applied, in the case of white-collar crime.
Senator WHISH-WILSON: I am interested in your perspective because you do so much work, internationally, and you have a very big network all around the world. Do you agree with Greg Medcraft's comment, about a year ago, that Australia is a haven for white-collar crime?
Dr Zirnsak : We would be concerned about the levels that are there, and in private conversation with corporate firms that investigate fraud they seem to indicate there are very high levels of fraud that take place in Australia, most of which goes unreported. So, often, companies are embarrassed by frauds and therefore do not take action against them. That is of concern because it would add to that broader perception that you will not get detected and you will not get caught, and it helps exacerbate crime.
Senator WHISH-WILSON: Could you expand a little more for the committee on that evidence you have?
Dr Zirnsak : It has been private conversations with firms that carry out investigation, internally, into frauds. That was the advice they passed on to us.
Senator WHISH-WILSON: Essentially, their own systems are picking up fraudulent behaviour and they are dealing with it internally through their own disciplinary action or removing—
Dr Zirnsak : This is a firm brought in by another company, when a company thinks there is fraud going on and needs an investigator to go in. What these firms are saying to us is they have no shortage of business. There is a huge caseload of fraud that takes place. So there is a sense that Australia's penalties have not been adequate in Australia's detection and enforcement systems and have not been adequate as a deterrent system. A lot of this crime is not being pursued through the justice system but is being dealt with internally by companies. That comes at a cost.
Senator WHISH-WILSON: I am obviously not going to ask you to disclose any of your private conversations and sources, as I know it is very important to your research. Do these investigative firms have some kind of compulsion, where they have to report cases of fraud to the authorities, or is it a client-in-confidence arrangement?
Dr Zirnsak : It is a client-in-confidence arrangement, as far as I understand it. As I said, the conversations seem to indicate that many of their clients do not want the internal fraud made public. They worry about reputational damage and those kinds of impacts on their business. It sounds to me like, in a lot of cases, they are willing to deal with it internally. They might dismiss the person but there is no sanction, and the person might end up walking away still with a significant benefit.
Senator WHISH-WILSON: Or potentially going on to do it somewhere else.
Dr Zirnsak : Correct.
Senator WHISH-WILSON: We have dealt with this, with financial advice, with registers of dodgy planners and that kind of thing. Are you able to give us some examples of the companies that do this kind of investigative work? Are they the big four accounting companies or—
Dr Zirnsak : No, there are other firms. The ones I would think of would probably end up disclosing who I had my conversations with, so that is why—
Senator WHISH-WILSON: I will not push you on that, but that is a significant cause of concern—if the statistics we have in front of us are significantly underestimating the occurrence of this kind of behaviour.
Dr Zirnsak : A number of these firms do surveys and they publish those survey results. They would indicate fairly high—if you compare what the survey results show versus the number of cases that actually go through the justice system it is, obviously, a smaller proportion of cases that end up in the justice system compared to what companies are self-supporting to those surveys—
Senator WHISH-WILSON: Would those cases that go to the justice system essentially be like a whistleblower going to ASIC or the Federal Police or someone else directly? Do you know where we could get any source of information as to how often corporations pass these things on to the authorities?
Dr Zirnsak : No. I am not aware of where that—
Senator WHISH-WILSON: It would be very interesting to know how often corporations themselves go to authorities to ask for these things to be investigated. I can see the reputational risk being a significant thing for a corporate entity, not wanting to have these things made public. They would want to deal with them themselves. As you say, if these things are not dealt with properly, they are a disincentive. It is not effective.
One thing I am interested in—and it has been raised directly by one of the witnesses coming up—is the difference between white-collar crime being for individuals, or should be for individual cases and corporate crime, which is a term that covers a whole range of activities that a corporation could perhaps be pursued for. Do you buy that distinction? Do you see any issues with individual cases, the old 'bad apple' syndrome, which we seem to hear about a lot—for example, in relation to the banks? Do you think it is easy for corrupt individuals or individuals who have committed crimes to hide behind corporate structures in this country?
Dr Zirnsak : My experience with companies would be that, I think, there is a growing awareness among corporations that the culture they set will often determine the level of criminal activity that might take place within them. I heard a very useful, recent quote, which was: 'A corrupt environment is not one where people carry out corruption, but is one where the majority fear reporting corruption,'—or in this case white-collar crime—'when they detect it.' That actually creates that enabling environment for people to carry out this. Good companies are increasingly understanding that they need to create environments where individuals cannot carry that out. There is a difference, clearly, between where a corporation has had an employee that has engaged in criminal activity against all the systems that the company has put in place versus a company that, effectively, has given a wink and a nod to the kind of criminal activity the person might be carrying out. I think they are very different cultures and need to be dealt with in very different ways. Ultimately, though, we would argue that individuals have to be held to account. That might mean individuals further up the management structure—everyone who has been, effectively, accessories to the crime in one way or another—
Senator WHISH-WILSON: Who have benefited from the crime.
Dr Zirnsak : Exactly.
Senator WHISH-WILSON: Do you think that within that corporate structure there should be some sort of onus on the buck stopping with a senior manager or the head of reporting? The evidence provided to the economics committee on the CBA financial planning arm was that a large number of individuals were involved in fraudulent behaviour. Those managers were promoted and moved sideways in the organisation, yet they had benefit through their bonuses for a number of years. Should we be examining a structure for punitive measures for senior managers in corporations that have allowed this kind of thing to occur?
Dr Zirnsak : I think so. I think that is necessary. When we examined the deferred prosecution agreement—the first one out of the UK—with Standard Bank, in that case colleagues in another non-government organisation raised concern about the final settlement. In that case it was largely the agents in Tanzania, from memory, onto whom the blame was passed. But even in the bank's own disclosure of facts, it was quite clear that it looked like senior managers in London had effectively signed off on, in this case, a bribe being paid. According to the NGO, effectively the allegation was there was no holding to account of the senior managers who were at least giving a wink and a nod to what was going on in Tanzania, and all the blame was able to be passed on back down there. I do not think that creates a good corporate structure. Accountability needs to flow back up the chain.
Senator WHISH-WILSON: Do you think the example of Iceland, where the CEOs of banks went to jail for a long time, is too extreme an example?
Dr Zirnsak : That probably feels extreme. I think the level of sanction depends on the level of complicity with the activity. Obviously, it is very different if there is a direct instruction: 'Go and carry this criminal activity out,' versus, 'I kind of indirectly created an environment in which there was pressure on the employees.' A good example of a person talking about that was in the documentary (Dis)Honesty: the Truth about Lies. There is an interview there with a guy who engages in some criminal activity, and he talks about the entire environment. It was insider trading. He was saying it was standard for everyone in the company. His perception was everybody in the company was engaged in insider training and, therefore, if you wanted to get ahead you needed to be engaged in that criminal activity. That would be an example of where an environment has been created within that organisation. He believed that. Whether that was widely held, and whether his perception was correct—it may not be, but if that is the perception it does encourage people to think: 'I need to bend the rules at the very least. In some cases I need to engage in criminal activity if I want to keep my job.'
CHAIR: I was a little bit surprised, Dr Zirnsak, when you seemed to downplay the significance of incarceration as a deterrent. In your submission you do point out the disproportionate nature of welfare crime and its punishment as compared to this, and you instanced the example of Mr Gay. Can you elaborate on that? I would have thought there needed to be some proportionality within the system. Are you saying that perhaps imprisonment for welfare crime needs to be looked at?
Dr Zirnsak : Yes, I would suggest there is probably an evening up needed between the two. We are saying there is an inconsistency. We certainly were not trying to say that, therefore, we should be applying incarceration to corporate crime the same way we do with current social security fraud. We were indicating there did seem to be—we were quoting the perception of others, law firms, looking at this who say that it does appear, because of the nature of the offender, to be different treatment. Middle-class management people appear to get lighter treatment than social security fraud, even though their motivation is often far less out of need and more out of greed.
Our understanding of the criminological research seems to suggest that imprisonment as a deterrent is not as effective, for example, as detection and the effective use of other sanctions, so catching it at the lower level on the regulatory pyramid. If you had the choice between having a handful of high profile, very strong imprisonment sentences versus lots of detection with more middle level sanctions, then our understanding would be the system where you have more detection and more middle level sanctions is probably a much greater deterrent and far more effective than simply: 'I'll take my chances. It's about one chance in a 100 I get caught, but if I get caught I'm going to go to prison for a long time.' Our understanding is that the research increasingly suggests that is not as effective as the other one.
But we would say in extreme cases imprisonment may be a necessary step. It may be a necessary step to protect the community from further harm and it may be a necessary step to send a signal about deterrence in some cases for really egregious crimes being committed. But our overall view is that prison should always be a last resort. But that would be a matter for the courts and the judges to assess as to what is best in terms of community safety and rehabilitation of the person who has committed the crime.
CHAIR: In terms of what I call the gatekeepers of the culture, which is the accounting profession—and I note in the survey that you cite something like 49 per cent of respondents have known of a specific situation where a colleague has been pressurised by a line manager or a partner to do something that could lead to a law-breaking activity—I know that ASIC is very much focused on changing the culture. There does not seem to be enough being done here to lift ethical standards within the profession. Is your organisation doing some work in that area?
Dr Zirnsak : Only in the sense of our public campaigning trying to ensure that there is pressure on the corporate sector to improve their ethics and improve their behaviour in this space. Interestingly, just yesterday I got an email from an accountant who is alleging that he was working for a firm engaged in tax evasion. He has just been sacked because he refused to participate in it. He sent us an email asking—he would like to disclose it to authorities, but he is worried that he might be subject to civil action by the company due to breach of confidentiality about their activities. It is not a great sign that he, as a professional accountant, does not immediately think that he can report this. Creating an environment where people feel they are able to go forward when they detect criminal activity but then having to worry that the company might come back at them for breach of confidentiality if there is clearly a case of criminality is a concern.
CHAIR: I note the survey also found that 55 per cent of those surveyed believe that industry bodies were not doing enough to promote awareness of ethical standards, while 85 per cent said they would take seriously the prospect of punishment from their industry body.
Dr Zirnsak : I certainly think the industry bodies have a role to play. They have limited resources too. They have a role to play and their own members may feel they could be doing more in this space based on those surveys.
Senator HUME: You spoke about enforcement capability in yoursubmission. Do you have any indication of what the cost of that enforcement capability might be, whether it be for the corporations themselves or the enforcement agencies?
Dr Zirnsak : The submission does include that the estimated cost of organised fraud was about $6.3 billion. But is your question: what is the current cost for the enforcement activity to try and counter that?
Senator HUME: Yes.
Dr Zirnsak : No, I do not have an estimate.
Senator HUME: I actually have not seen an estimate of that anywhere in any of the submissions. One of the things that a lot of the submissions mention, though, is overdeterrence. Do you have any comments to make on this issue of overdeterrence? What the potential compliance costs to business, to regulators and to courts might be?
Dr Zirnsak : If they are overdeterring—do you mean the company is taking more steps than it needs to to stamp it out?
Senator HUME: Yes, exactly right. I am wondering where the fine line is. Where is the balance between deterring the behaviour and the cost to business and the cost of doing business?
Dr Zirnsak : Being in meetings with corporates where we have talked about corruption and white-collar crime, it has not come up. It is interesting that it is coming up through this inquiry, but certainly in the meetings where I have been with businesses the concern is always the other way.
Senator HUME: The organisations I have always worked in have had an internal education program that has been unequivocal about a zero tolerance for errant behaviour. At senior levels of the organisations I have worked in, there was enforced leave time where you had to turn in your phone and turn in your laptop and you were forensically audited while you were on compulsory leave. I am interested in the increased focus on white-collar crime and whether you think that that is somewhat a reaction to the global financial crisis or whether it is the fact that we are seeing more white-collar crime because the enforcement agencies are doing their job.
Dr Zirnsak : I have a couple of points I would make there. I actually think the increased focus on white-collar crime, yes, is a response to the global financial crisis. I think there is greater awareness of corporate crime. Whether there is more white-collar crime now than there was in the past, we cannot know. Often with criminal activity, it is very hard because you cannot go out and survey people, 'How many frauds did you commit this year?' You cannot get accurate statistics. Often, greater reporting does not necessarily mean that there is more; it simply means more has been detected. That is always the challenge about knowing what was the base level of white-collar crime that was taking place before this. I do not think you can draw any conclusions on that, if what the statistics tell you are the detection rates or people's willingness to report, or to declare their suspicions that things are going on.
You raise training. Increasingly, the behavioural science understanding of this is that training alone is not enough. I go back to the work by Dan Ariely and it is kind of covered in that documentary I talked, (Dis)Honesty: the Truth about Lies. Their experiments are showing that you can give people training in ethics, but if there is no ongoing reinforcement of that, the training itself has very little impact on actual human behaviour. So it is not going to act as a deterrent. Giving people a training session but then their work environment does not keep reinforcing that is not really going to have an impact. So the work environment has to reflect that.
Senator HUME: You spoke about the buck stopping with senior management. That is an interesting issue. Obviously if there is fraudulent behaviour at senior management levels that is very important. However, what if it is neglect? What if it is a lack of oversight as opposed to intentional? Where do you think that we draw the line there?
Dr Zirnsak : There are different strands of law, and the law would often make a difference between reckless behaviour and behaviour with knowledge. But if a corporation has created an environment in which criminal activity has been able to flourish or people have felt pressure to have to engage in white-collar crime in order to do their jobs, then I think management needs to be held to account for that.
Senator DASTYARI: In a paper that this committee produced last year, and released at the start of this year, we were looking at the penalties for white-collar crime specifically. One of the points of discussion was looking at a whole lot of matters to do with the US. I know you have already spoken about people having financial—'reward' is probably the wrong word—compensation for giving up evidence. This is what we found in our research. It came out that people in like places like the FBI have a lot more leniency and power when it comes to cutting deals with companies to create an environment where they come forward with issues. An example was, if you find someone who has conducted themselves poorly or has behaved corruptly at mid-level management, there is an incentive to come forward with that to report it, and, by reporting it, you effectively cut off the wound. The AFP had told us privately that they felt quite restricted from being able to do those kinds of arrangements. In some cases, there is more of an incentive for the company to never report it as fraud, whereas the US system encourages them to report it as fraud. Could you just touch on that?
Dr Zirnsak : It is a good point. I actually do think having systems that encourage people to come forward is important—and having some flexibility for law enforcement to do that. Obviously there are lines that need to be drawn on this. Some of those would be obvious. If someone has been an architect of a criminal activity, you do not want to let them off the hook, even if they self-report. The court system might take care of that later on. Contrition is often considered in sentencing. But clearly where someone has been drawn into the activity and may have played a minor role and may not have initially realised—I have certainly spoken to lawyers who indicated they were asked to do corporate restructures and, after being involved in the work for quite a while, they started to realise it was probably a tax evasion arrangement that was being orchestrated and they were being caught up in that unintentionally.
We looked at the evidence from the US on deferred prosecution agreements for corporates. One of the criticisms that was made about that was that it resulted in a lot lower proportion of individuals being prosecuted. I think, from memory, the numbers went: 80 per cent of cases prior to deferred prosecution agreements resulted in individuals being prosecuted; after the deferred prosecution agreements, only 25 per cent of cases involved individuals being prosecuted. We thought that was alarming, but we then looked at the raw numbers and, in the 10 years before deferred prosecution agreements, from memory it was around 10 people who were actually prosecuted, whereas, in the 10 years after deferred prosecution agreements, there had been 42 prosecutions. So what you saw was, yes, a lower proportion of cases actually resulting in individuals being prosecuted but a massive increase in the number of cases being actually detected and dealt with through the system. That in our minds seemed to indicate a net benefit, but we did note—and the submission goes quite into it—the Yates memo recently, where there was this concern by the US Attorney's office that there was a risk that individuals were being let off the hook through these deferred prosecution agreements and a strong resetting to say that negotiations might happen with a company, particularly where the management of the company has not been complicit in the criminal activity and has then come forward to reveal it but the individuals involved are being still held to account. I think that is important.
Senator WHISH-WILSON: Just one last question, because I think we are running out of time: in terms of recommendations, both ASIC and the other agencies who are appearing today have talked about increased penalties, especially for civil prosecutions. Do you agree with the suggestion that a penalty should be three times the value of ill-gotten gains?
Dr Zirnsak : Absolutely.
Senator WHISH-WILSON: Also, do you think ASIC should be given disgorgement?
Dr Zirnsak : Absolutely, and I think the increasing knowledge of law enforcement is that the penalties have to take the profit out of time. So, there is this increasing across these kinds of financial crime types, and even in other crime types. We do quite a lot of work around human trafficking, which, at the end of the day, is driven primarily by a desire of those involved to make profit. So, law enforcement recognises that anything you can do to take the profit out of the crime acts as a massive deterrent to the criminal activity. So yes, I think increased penalties and disgorgement are both very valid things to be pursued in this space.
Senator WHISH-WILSON: Certainly I think we will go into more detail with the agencies. I am very interested as to why, for example, they do not already have disgorgement powers. Do you have any insights for the committee as to why ASIC has not been given these powers?
Dr Zirnsak : No. It is a gap, but I think it would be great if this committee recommended that the gap be closed, and clearly the agency itself wants it. And we know that agencies also tend to find that their own staff are a lot more motivated when they actually think that the outcome they are going to achieve is actually going to have an impact. We are quite clear on that. In discussions around other things that we have seen and raised with some of the law enforcement authorities it is quite clear that where they feel the penalties for something are inadequate it does not act as a strong motivation for them, whereas when they think they are really going to make a difference through their activity it is a much greater motivation for their staff.
Senator WHISH-WILSON: Some submitters we will also be hearing from shortly have said that it is essential to allow judges to keep discretion on the level of penalties, whereas from the agencies themselves we are hearing quite a different suggestion—that there should be these mandatory limits that should be set. That is obviously clearer cut from my point of view, but—
Dr Zirnsak : I think there should be at least a mandatory limit to wipe out the profit that was made from the criminal activity, and the penalty should be higher than that, because clearly if all you do is lose what you gained, that is still not necessarily a significant enough deterrent. I do think that is the case. Also, those kinds of penalties are only going to be on what the detected benefit was as well, so there is some risk that a person may have gained a greater benefit that goes undetected. This is not unknown in Australian law. I know, for example, that in the antibribery section of the Criminal Code there already is this ability to level a penalty that is a multiple of the benefit gained through the bribe if that can be determined by the court.
CHAIR: Thank you very much, Dr Zirnsak.