Criminal, civil and administrative penalties for white collar crime

Submission 73

Senate Economics Committee

Inquiry
Penalties for White Collar Crime
Submission
(Dr) Evan Jones
Department of Political Economy, University of Sydney, retired.
16 March 2016

Terms of Reference
This submission will cover material that comes under the categories:
a. evidentiary standards across various acts and instruments;
b. the use and duration of custodial sentences; and, marginally
f. penalties used in other countries, particularly members of the OECD;
1.

Introductory comments: transparent anomalies

This is a worthwhile inquiry, investigation of the issue of the treatment of white collar crime
being long overdue.
The specific area of my experience is that of white collar crime in the banking sector. That area
is representative of the dramatic disparity that reigns in the treatment of white collar crime.
A bank employee found guilty of corrupt conduct (say, pilfering of customer moneys) will
readily end up in gaol (a custodial sentence). A bank found ripping off and destroying the lives
of hundreds of small business/farmer borrowers or thousands of investors will receive a rap over
the knuckles at best.
A comparable disjuncture exists with respect to the treatment of those found guilty of insider
trading. Such people will typically receive gaol sentences. The recent sentence of a Hanlong
Mining Executive to 8 years plus is an outlier but symbolic of the disdain that the authorities
hold for this sin.
Evidently, the readiness with which the crime is attributable to the individual perpetrator is a
factor in these prosecutions, but it cannot be the only or dominant factor. There is clearly a
mentality amongst officialdom regarding the relative significance of various forms of white
collar crimes. Deeply entrenched crime arising from or condoned by the most senior ranks of

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Australian banks goes unrecognised and unpunished. Whether that mentality has been
subconsciously arrived at is ultimately irrelevant. The anomaly is flagrant.
The societal costs of the crimes that currently attract gaol sentences are localised, readily
remedial or trivial compared to the substantial societal costs bank corporate crime, the latter
attracting no penalty whatsoever.
2.

White collar banking crime at the top: long-standing, rampant, unpunished

Unconscionable conduct and fraud are regularly and pervasively practiced by Australian banks
several with a prominent record (NAB, CBA). The crimes are recognisable from the mid-1980s
onwards, not long after the sector began to be comprehensively deregulated.
It is incontrovertible that these crimes have persisted over thirty years because of the failure of
the relevant regulators, the failure of the court system and the tolerance of the political class. The
failure transcends that due to faulty regulatory structures or incompetence. Complicity is
definitely a part of that failure.
The elaborate farce that was the 1991 Martin banking inquiry and report is Exhibit A for the
complicity dimension. Self-regulation (sic) was the preferred outcome (banking ombudsman,
code of banking practice) of that inquiry, since then operating as an illusory front, and it has been
carte blanche for the banks since that time.
Bank CEOs and other senior executives now effectively have immunity for the crimes
committed by themselves or by personnel within the organisations over which they preside.
The impunity with which bank CEOs and other senior executives present themselves to
authorities (including in Parliamentary inquiry testimony), the media and the public in the face of
yet another scandal highlights that senior banks are well cognisant of this immunity.
CBA CEO Ian Narevs po-faced performance when recently queried on the CommInsure fraud is
Exhibit A for this supreme self-confidence. CBA Chief Counsel David Cohens cocksure
dissembling at the 2012 Post-GFC Banking inquiry and the 2015-16 Impairment of Customer
Loans inquiry is also representative of the genre.
3,

Let the punishment fit the crime: send bank CEOs to gaol

In my view, the only means of erecting a decisive inhibition to this corrosive state of play is to
create a penal structure in which bank senior management is threatened with personal criminal
liability for their organisations crimes.
Senior regulators in Australia (ASICs Greg Medcraft, RBAs Glenn Stevens, etc.) have
belatedly discovered the concept of a corporations culture and they have remonstrated on the
need for cultures in the banking sector to be renovated. Heal yourself, urge the regulators. All
hot air. The effect of this finger-wagging can be seen in the aftermath of APRAs 2004

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intervention in NABs 2003 trading desk scandal. NAB (despite a new CEO and a new Board
Chairman) was intent to carry on as usual before the ink on APRAs report was dry. It is no
accident that APRAs report was never mounted on APRAs site, and was soon taken down on
the NABs site.
To establish a meaningful inhibitory structure, one needs to start with the desired outcome
(custodial sentences for bank senior executives) and work backwards to how one gets there.
The task, of course, is formidable. The central problem is the imputation of responsibility for the
crimes of corporate personnel, in the face of the black hole that is the joint stock corporation.
And behind that problem is a more subtle deeper problem confronting that the anti-societal
actions of corporate executives are indeed criminal and appropriately fall within the coverage of
criminal law, rather than merely being the subject of civil action by the aggrieved.
Even amongst the legal profession, this key issue exercises little interest and little traction.
Instead, the issue is an academic specialty. The key banking law textbooks, fodder for the next
generation of experts, in Australia are silent on bank criminality they are a disgrace. General
criminal law texts appear to cover the issue only fragmentedly in a handful of pages.
Moreover, there is not much to be learned from overseas experience. The global financial (note
the descriptor) boom and subsequent global financial crisis were products of senior executiveendorsed corruption on a global scale. Yet in which country have members of the banking
executive class gone to gaol?
In the US, belly of the beast, guilty corporations received significant fines but which are
meaningless to the perpetrators. CEOs were committed to gaol from Enron and Worldcom why
not from the banks? Ah, the protected species. Instead, those criminal organisations had tens of
billions of public funds thrown at them, crippling their economies with the greatest burden
placed on the guiltless and the most vulnerable. That is the current state of play.
Only in Iceland, to my knowledge, have bankers been sent to gaol. Then send a study group to
Iceland to work out how to do it.
4.

Corporate immunity to criminal prosecution

I have had no legal training. I offer what follows as speculation on the problem in Australia in
controlling corporate criminality.
(The text below has been drawn and modified from an article I placed on the web in August
2015, titled To fix Australias banking culture: Start sending bank CEOs to gaol.)
Facilitation of the creation of the joint stock corporation in the late 19th Century, unencumbered
by any restrictions on its operation, would dramatically transform the nature of capitalism and
economic society.

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The legal legitimisation occurred relatively benignly in Britain and its colonies, but opponents in
the U.S. realised its significance. They observed the American States competing via a race to the
bottom in terms of the minimisation of registration requirements, with New Jersey setting the
pace but with the previously inconsequential Delaware as the ultimate victor (n.b. where is
Murdochs many-tentacled News Corporation incorporated?). Nicholas Shaxons 2012 Treasure
Islands documents the more recent inglorious context of this process.
The 2003 book by the Canadian lawyer Joel Bakan, The Corporation: The pathological Pursuit
of Profit and Power, and the subsequent film, brought the nature of the beast to a broad public.
The corporations legal personhood has facilitated its subsequent pathological behaviour, but
the fictional basis of that legality has facilitated general immunity from an official sanction that
would otherwise apply to flesh and blood people.
Thus, we arrive at the Australian banking sector and the Big Four that dominates it. Although
second string under the global banking giants, the Big Four are in the top rank globally in
profitability a product of their absolute dominance of the domestic economy and of politics
besides.
The banking sectors immunity from prosecution for criminal activity is linked to political
acquiescence, but also to the legal minefield that lies within the corporations fictional
personhood.
The Commonwealth Criminal Code Act 1995 is currently 384 pages long. The component
devoted to corporate crime (parts 2.5 [s12] and 2.6 [s13]) is a mere 6 pages long. The size of the
Act has been increased since 1995 by almost a factor of ten, but the brief section devoted to
corporate crime remains untouched.
The Act was long in gestation, traversing most of federal Labors period in office (1983-96). It
was an attempt to appropriate criminal law, including that for corporations, from the States, to
ensure nation-wide uniformity, and to facilitate a basis for much federal regulation regarding
corporate behaviour. The Act was complemented by the referral of the Corporations power from
the States in 2001, embodied in the Corporations Act 2001.
Of importance here, the progenitors of the 1995 Act were conscious of the criminality in the
financial sphere that reigned in the late 1980s, with a desire to bring such under control. Down
the track, nothing has been effected in that domain; on the contrary.
The Corporations Act 2001 currently sits at over 2800 pages, but it is strikingly incomplete.
There is extensive coverage of receiver/liquidator responsibilities and prohibitions (Chapter 5,
External Administration). Given the ongoing lawlessness of this sector, not least in the service
of corrupt banks, this legislation evidently lacks regulatory and judicial enforcement.
Remarkably, there appears to be almost no coverage in this door-stopping Corporations Act of
corporate fraud. The Act covers company officer fraud against the company itself, but it does not

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recognise the pervasive potential of company/company officer fraud against the companys
clients (embodying the anomaly described in part 1 above).
There is a massive section in the Corporations Act on the finance sector (Chapter 7, Financial
Services and Markets). The chapter covers what has come to be called wealth management a
section also clearly ineffective, save for the temporary banishing of the odd low level crooked
financial adviser.
But there is curiously no mention of bank lending facilities, and, thus, no acknowledgement of
the intrinsic capacity for fraud by a bank against its borrowing clients.
At root there is the problem of attribution. With corporate criminality, whence the culprit?
One track has been to pursue the owners, by lifting the corporate veil. But in listed public
companies, the owners are not merely diffuse but generally passive.
How to get at the operating entity itself? Considerable academic legal scribbling has been
devoted to the line that in order to find the corporate entity guilty of a crime one had to locate
the directing mind and will. The object of this pursuit, I think, was to be able to attribute guilt
not to the directing mind but to the entity itself. But the effort expended appears to have led,
apart from occasional successes overseas, to a general impasse.
The progenitors of the 1995 Commonwealth Criminal Code Act attempted to cut through the
impasse by harnessing a radical line of argument. The directing mind and intent was also to be
found in, because embodied in, a corporations culture. Citing Tahnee Woolf, The Criminal
Code Act 1995 (Cth): towards a realist vision of corporate criminal liability, Criminal Law
Journal, October 1995), fault should be attributable to the entity where:
the corporation had a criminogenic corporate culture, that is, where its general attitudes,
policies, rules and codes of conduct encouraged the performance of the prohibited conduct.
This is a radical step indeed. Corporate culture is not a touchy-feely addition to the text but is
integral as a causative medium. Revisiting the relevant section of the 1995 Act:
12.3 (2) The means by which such an authorisation or permission [for an offense] may be
established include:
(b) proving that a high managerial agent of the body corporate intentionally, knowingly or
recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or
permitted the commission of the offence; or
(c) proving that a corporate culture existed within the body corporate that directed, encouraged,
tolerated or led to non-compliance with the relevant provision; or
(d) proving that the body corporate failed to create and maintain a corporate culture that
required compliance with the relevant provision.

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[s12.3] (6) corporate culture means an attitude, policy, rule, course of conduct or practice
existing within the body corporate generally or in the part of the body corporate in which the
relevant activities takes place.
ASICs Greg Medcraft, for once, has been useful in bringing the Criminal Code to
Parliamentarians attention, at Senate Estimates hearings on 3rd June. Medcraft notes:
Under s12.2 of the Commonwealth Criminal Code, a company can be responsible for a breach
of certain commonwealth laws if a companys culture encouraged or tolerated the breach.
We think that when an officer breaches a law ASIC administers and culture is responsible
then the officers and the firm should be responsible.
We think the officer and the firms should be subject to civil penalties and administrative
sanctions, as accessories.
At the hearings, Medcraft claimed that he is hampered by inadequate powers and the demanding
burden of proof regarding criminal charges (Criminal Code Act, Part 2.6 [s13]).
Yet there are instances where that burden of proof might be not insurmountable. And once a
precedent is established
Consider the CBA takedown of close to 1000 BankWest borrowers after its takeover in
December 2008. A prima facie case can readily be made that 12.3 (2) (b) applies here that the
takedown was strategically organised and implemented at the top. Most of the foreclosed
borrowers receiving public exposure were demonstrably viable operations. This takedown was
transparently a fraud on a major scale. Attribution of guilt to the very top should be a lay down
misere.
The authorities (ASIC, RBA, APRA, Federal Treasury) should have sent in the police and
appropriated sequestered documents relevant to the BankWest takeover and the associated
takedown. That, of course, requires a de-politicisation of the Australian Federal Police. More, it
requires the establishment of an expert team within the AFP of trained specialists to investigate
corporate financial crime at the national level. (Note the scandalous failure of these bodies to
pursue the progenitors of the Trio Capital scandal, personnel known to have had criminal
backgrounds.)

The BankWest borrower takedown was not a one-off affair, but a spectacular
culmination of 30 years of criminal activity. Now add CommInsure. The latter scam provides
another lay down misere for the attribution of guilt.
The unrepentant criminality of the CBA, the sometime Peoples bank, is utterly intolerable.

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The CBA, of course, is not the only culprit. The NAB has been engaging in fraudulent and
unconscionable treatment of small business and farmer borrowers from at least the mid-1980s, if
more generally under the radar. Recurrent changes of leadership at the top have not changed the
NABs modus operandi. This judgement includes the most recent CEO appointment in mid 2014
and the most recent Board Chairman in late 2015 (inexcusably, a former Secretary of the federal
Treasury).
As Senator John Williams noted after he crossed the floor in late June 2015 to support a Greens
motion for a Royal Commission (albeit into one dimension of banking malpractice):
Im sick of Australians being robbed by rogues.
Returning to the Criminal Code Act, we read:
12.1 General principles
(1) This Code applies to bodies corporate in the same way as it applies to individuals.
(2) A body corporate may be found guilty of any offence, including one punishable by
imprisonment.
Crimes punishable by imprisonment! One cant send a body corporate to gaol. Ergo, 12.1 (2)
applies to real people.
By all means indict rogue non-senior bank staff lending officers, recovery heavies, legal staff
functionaries. In individual victim cases, such people are readily identifiable although even
these categories remain generally immune. However, senior management, CEOs and general
legal counsel, should be in the front line.
Some bank crimes against SME/farmer borrowers clearly originate at the top. Other bank crimes
against such clients originate under the initiative of rogue lending officers. But the stories that
have been given to me over the last 15 years highlight that the latter are perennially condoned
upstairs and given the full weight of the banks resources.
And they are condoned upstairs, either explicitly or implicitly, because the rogue officers are an
integral part of a criminogenic corporate culture.
The appropriation of responsibility by the bank as corporate entity for all failures and
unconscionable or fraudulent actions by individual bank officers, regardless of seniority, is on
full display when the bank litigates against the borrower for a breakdown of the relationship, a
breakdown attributable to the bank itself.
The buck stops at the top. The hierarchy of remunerations (lavish at the top) is evidently
structured under the presumption that those at the top are most responsible for the successes
(i.e. profit generation) of the company. Are then those at the top not most responsible for the
companys moral failures and criminal activities?

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The Commonwealth Criminal Code Act appears to provide leverage to indict bank CEOs and
other senior executives. It has been lying fallow for two decades, while bank immunity for
criminality powers on. Our regulators (and establishment ex-banker David Murray) have
admitted that bank culture is rotten, but act as if nothing can be done externally to fix it.
On the contrary, the legislation is already in place. And the legislation acknowledges the
potentially adverse role of corporate culture. True, the hurdles are formally high. But how much
more incriminating evidence does one need?
What is noticeably absent is political will.