Another financial crime band-aid

News out this morning that ASIC Chairman James Shipton has greenlit the prospect of tactical taskforces to be embedded in our banks (for up to 8 weeks at a time) in an attempt to address the surging and endemic misconduct present in our banking system.

Treasurer and chief Royal Commission resister, Scott Morrison, has backed the idea with $70.1m of additional funding. These teams would principally guide governance and management systems identifying, reporting and remediating misconduct.

“Then these folks will be given a space, in my experience that’s usually a conference room, and then they will have points of contact on a daily basis and say ‘OK, we would like to speak to the person in charge of this, we would like to sample some documents related to this issue, we would like a demonstration of your technology systems’ and maybe speak to the person who designed the technology system,” Mr Shipton said. “At the end of the week, I might want to have a catch-up with the chief risk officer,” he said.

So after all the revelations exposed over a royal commission of conflicted, systemic, problems that have taken years and in some cases decades to surface, the response is to plant a couple of corporate cops in a back office bank boardroom with a tray of bagels and pot of brew?

I struggle to see what this might achieve. Six to eight weeks is the length of a decent holiday (or sabbatical) for someone who cannot attend a board meeting without lighting up a cigar and breaking into maniacal laughter about some new public rort in the pipeline. For the rest, however, business as usual, with a mind on the p’s and q’s will prevail as it always does in the corporate ecosystem.

Our take is that this is another band-aid. Massive fines for companies have almost no effect on the executives who oversaw the crimes. The fines are paid by shareholders. Most of the executives benefitted financially from their crimes through inflated salaries and bonuses for generating the revenue that eventually turned out to be illicit.

At the moment, the risk/return tradeoff for breaking the law at a large financial company is:

  • Upside: is getting a salary + bonus in the hundreds of thousands or millions of dollars
  • Downside: lose your job. Shareholders of your former company pay a fine

For many people, that is a very attractive payoff. And so it is no surprise that the crimes occur across almost every major financial institution.

The problem, in my view, is that ASIC finds that it can successfully impose hundreds of millions of dollars in fines for companies breaking the law, but it cannot successfully put an executive in jail for the same crime.

Until executives actually go to jail for breaking the law we are not going to see a change in behaviour.

The Royal Commission today also raised the prospect of criminal behaviour:

“[Was there] any contemplation of a criminal proceeding? Ever?” Mr Hayne said.

Ms Smith said that was not contemplated, prompting Mr Hayne to ask: “Did you think yourself that taking money to which there was no entitlement raised a question for criminal law?”

Ms Smith replied that she did not.

Rather than a token ASIC agent trailing executives for six weeks at a time, Parliament would be far better served working out how to change the laws so that ASIC can successfully prosecute executives who break the law.

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