tag:theconversation.com,2011:/uk/topics/white-collar-crime-858/articlesWhite collar crime – The Conversation2023-05-09T18:57:09Ztag:theconversation.com,2011:article/2052832023-05-09T18:57:09Z2023-05-09T18:57:09ZWhite-collar criminals benefit from leniency provisions in NZ law – why the disparity with other kinds of crime?<figure><img src="https://images.theconversation.com/files/525027/original/file-20230509-27-xapo67.jpg?ixlib=rb-1.1.0&rect=16%2C42%2C5590%2C3690&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GettyImages</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>If you look at the justice policies of the main political parties you’ll see references to gangs (<a href="https://www.act.org.nz/law-and-order">ACT</a>), violent criminals (<a href="https://vuw-my.sharepoint.com/personal/marrioli_staff_vuw_ac_nz/Documents/MyHDocs/My%2520Documents/Publications/Cartels/National">National</a>), greater investment in policing (<a href="https://www.labour.org.nz/justice">Labour</a>), social justice (<a href="https://www.greens.org.nz/justice_policy">Green Party</a>) and problems with the criminal justice system (<a href="https://www.maoriparty.org.nz/criminal_justice#:%7E:text=The%2520M%25C4%2581ori%2520Party%2520will%253A&text=Ensure%2520fair%252C%2520equitable%2520and%2520culturally,by%2520high%2520M%25C4%2581ori%2520population%2520communities.">Te Pāti Māori</a>).</p>
<p>What you won’t see is any reference to white-collar crime. This could perhaps be because New Zealand doesn’t have a lot of it. But a more realistic view is that we don’t invest in detecting, deterring or punishing white-collar crime. We don’t even really talk about it. </p>
<p>Take cartels as an example. Cartels are essentially where two or more businesses agree not to compete. This affects competitive markets and hurts consumers, causing increased prices (via price fixing) or decreased supply (by restricting output). </p>
<p>But cartels are notoriously difficult to detect due to an absence of formal arrangements and their inherent secrecy.</p>
<h2>Leniency for whistleblowers</h2>
<p>Cartel activity was criminalised in 2021 in Aotearoa New Zealand. Anyone found guilty can now face a prison sentence, along with substantial financial penalties.</p>
<p>However, the rules offer generous <a href="https://comcom.govt.nz/__data/assets/pdf_file/0023/90437/Cartel-Leniency-Policy-and-Guidelines.pdf">leniency and immunity provisions</a> for cartel participants who reveal the existence of the cartel to the Commerce Commission. The commission won’t take legal action against the whistleblower if they cooperate in the prosecution of the other cartel members. </p>
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<p>The aim of these provisions is to destabilise cartels by encouraging whistleblowing. They serve as a deterrent because they make joining a cartel riskier by increasing the likelihood of getting caught. Requiring the whistleblower to cooperate in a prosecution increases the likelihood of successful cases due to the evidence that can be presented to the court.</p>
<p>Along with this leniency, the whistleblowing firm may remain anonymous and not suffer the reputational damage attached to other cartel participants. The disclosing individual or firm also retains all the benefits of the offending. </p>
<p>Where a firm is involved in cartel behaviour, any leniency or immunity granted is typically extended to directors, officers and employees involved in the conduct.</p>
<h2>By the numbers</h2>
<p>Such provisions have existed since 2004. Before criminalisation in 2021, leniency was automatic for self-reported cartel activity where there was no existing investigation, if the whistleblower met certain conditions, including admitting and stopping the bad behaviour and providing evidence for any prosecution.</p>
<p>Since 2012, 106 firms or individuals have been charged with anti-competitive conduct. </p>
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<span class="caption">Figures for 2022 include applications for leniency and criminal immunity.</span>
<span class="attribution"><span class="license">Author provided</span></span>
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<p>Our data shows an upward trend in leniency applications and a significant increase in applications for leniency and immunity in 2022 after criminalisation. Requests for leniency averaged 4.4 per year prior to 2022 but increased to 19 in 2022. We found that 43 of the 44 requests for leniency prior to 2022 were granted, while nine of the 19 requests in 2022 were granted. </p>
<p>A further concession made to cartels is the adjustment of penalties when it’s decided firms can’t pay the financial penalty that would otherwise apply. While not unique to cartels, four of ten recent anti-competitive cases had penalties reduced when the company claimed it couldn’t pay.</p>
<p>In one case, potential financial penalties ranged between NZ$400,000 and $650,000. In the end this was reduced to $62,500 based on what it was determined the company could pay.</p>
<h2>The problem with leniency</h2>
<p>The situation raises several questions and issues. First, the messaging is problematic. Offering leniency implies a certain level of acceptance by the community. </p>
<p>As cartel activity is often described as the most serious form of anti-competitive conduct, it’s difficult to reconcile this with an absence of sanctions for those who admit participating in it.</p>
<p>Secondly, there’s the question of equality of treatment in our justice system. Is it fair that only certain (white-collar) offenders enjoy leniency provisions? Anyone participating in cartel conduct can apply for immunity or leniency. This is not the case for those engaged in other criminal activity.</p>
<p>Third, is justice served when a firm can retain the benefits from the historic cartel activity and incur no formal sanction? This can mean the party that engages in the most serious misconduct, such as instigating the cartel, can avoid sanction. Meanwhile, less culpable participants are punished.</p>
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<p>Fourth, there’s the problem of reducing or removing financial penalties. We acknowledge the Sentencing Act requires the court to consider the ability of an offender to pay. But we also suggest a market outcome is achieved if a financial sanction results in an offending firm ceasing to trade.</p>
<p>Finally, while it can be argued that leniency provisions help detect cartels, it can also be argued that an absence of leniency provisions deters cartel activity due to the potential for sanctions. </p>
<p>What appears to be a focus on detection rather than deterrence is inconsistent with the approach taken with most other criminal activity. There may well be responses to these questions and issues that prove satisfactory to the community. But they are not obvious. </p>
<p>We need a public debate about why certain types of white-collar criminals have a standing offer of immunity or leniency for confessing to their bad behaviour and divulging the details of others who may be complicit. Justice is challenged when people engaging in the same activity receive different sanctions, and any pretence of getting tough on cartel crime is undermined.</p><img src="https://counter.theconversation.com/content/205283/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand has criminalised cartel behaviour. But by offering leniency to whistleblowers, the new rules are undermined.Lisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of WellingtonEdward Willis, Associate professor, University of OtagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1989702023-03-31T20:05:52Z2023-03-31T20:05:52ZTrump’s indictment stretches US legal system in new ways – a former prosecutor explains 4 key points to understand<figure><img src="https://images.theconversation.com/files/518810/original/file-20230331-18-y1huxn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A supporter of former President Donald Trump protests the indictment announcement near Mar-a-Lago, Fla., on March 31, 2023. </span> <span class="attribution"><a class="source" href="https://media.gettyimages.com/id/1250111292/photo/us-politics-trump-indictment.jpg?s=1024x1024&w=gi&k=20&c=zyr9SAhaiWdv6p8cj0WK5MrRYjw8yfuBis-jlqjYveE=">Chandan Khan/AFP via Getty Images</a></span></figcaption></figure><p>When former President Donald Trump turns himself over to authorities in New York on Tuesday, April 4, 2023, <a href="https://www.nytimes.com/live/2023/03/31/nyregion/trump-indicted">and is arraigned</a>, the charges on which a Manhattan grand jury indicted him will likely be made public.</p>
<p>Manhattan District Attorney Alvin Bragg <a href="https://www.politico.com/news/2023/03/31/bragg-defends-trump-indictment-00089927">obtained the indictment</a> on March 30, 2023, following a grand jury vote, but the exact charges against Trump remain sealed. Multiple media sources are reporting the indictment alleges the former president <a href="https://www.nytimes.com/2023/03/30/nyregion/trump-indictment-hush-money-charges.html">committed business fraud</a>.</p>
<p>I am a <a href="https://scholar.google.com/citations?user=VxvW--wAAAAJ&hl=en&oi=ao">former prosecutor</a> and <a href="https://law2.wm.edu/faculty/bios/fulltime/jbellin.php">law professor</a> who studies the criminal justice system. While the complexities of Trump’s case will continue to unfold, The Conversation asked me to break down the complex legal situation. Here are four key points to understand about the prosecution and what will likely come next.</p>
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<a href="https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man is shown in silhouette raising his fist and standing on a red carpet surrounded by American flags." src="https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=383&fit=crop&dpr=1 600w, https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=383&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=383&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=481&fit=crop&dpr=1 754w, https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=481&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/518816/original/file-20230331-977-8u26d4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=481&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Former President Donald Trump arrives at a campaign rally in Waco, Texas, on March 25, 2023.</span>
<span class="attribution"><a class="source" href="https://media.gettyimages.com/id/1249839528/photo/trump-rally.jpg?s=1024x1024&w=gi&k=20&c=RTjGpWxJPMebIuxg6uitVPYLCngckYXFgbgVP2ceWWc=">Jabin Botsford/The Washington Post via Getty Images</a></span>
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<h2>1. Falsified business records are the key issue</h2>
<p>From what we understand of the investigation, the charges against Trump appear to stem from a <a href="https://www.politifact.com/article/2023/mar/21/timeline-what-donald-trump-has-said-about-stormy-d/">US$130,000 payment in 2016</a> by Trump’s then-lawyer, Michael Cohen, to an adult film star, Stormy Daniels. In return, <a href="https://www.nytimes.com/2018/05/03/us/politics/stormy-daniels-trump-payment.html">Daniels promised</a> not to tell the media about her alleged affair with Trump. </p>
<p>Media reports suggest that there could be <a href="https://www.cnbc.com/2023/03/31/trump-faces-about-30-criminal-counts-in-new-york-indictment.html">about 30 counts</a> against Trump, and at least some of those counts will be felonies. </p>
<p>Just the fact that there are so many counts does not mean that there are many different criminal events or kinds of crimes alleged. Prosecutors often charge similar, repeated conduct – for example, multiple drug sales – as separate counts. In this case, the multiple counts may refer to a series of business records that record the same or similar transactions. Or the charges may, indeed, span multiple alleged criminal events.</p>
<p>Media reports indicate that Bragg does not appear to be alleging that Trump’s payment to Daniels <a href="https://www.nytimes.com/2023/03/20/briefing/donald-trump-indictment.html">was itself illegal</a>. </p>
<p>Instead, Trump will likely be charged with “<a href="https://www.npr.org/live-updates/donald-trump-indictment-arrest-new-york">falsifying business records</a>” for trying to hide the payment by lying about its nature in the records of the Trump Organization, his company.</p>
<p>Creating a false business record with the intent to defraud is a <a href="https://www.nysenate.gov/legislation/laws/PEN/175.05">Class A misdemeanor</a> offense in New York. But the offense can become a low-level <a href="https://www.nysenate.gov/legislation/laws/PEN/175.10">Class E felony</a> if Bragg can prove that Trump created false business records for the purpose of facilitating a second crime. </p>
<p>It is not yet clear what the second crime will be – or even that a second crime is being alleged – but possibilities include federal or state <a href="https://www.nytimes.com/2023/03/30/nyregion/indictment-meaning-trump-arrest.html">campaign finance violations or tax evasion.</a></p>
<h2>2. Bragg will have to prove Trump’s involvement, fraudulent intent</h2>
<p>If there is a trial, the prosecution will have to put together a series of pieces to secure a conviction on each of the charges facing Trump. </p>
<p>First, the prosecution would have to prove that the Daniels payment was recorded by Trump officials as something clearly inaccurate. It is not enough to show that the payment was recorded ambiguously – like “miscellaneous” or even “legal services.” The business records at issue must be unequivocally “false.”</p>
<p>Second, it is not necessary that Trump himself created false records. The prosecution would just have to prove that Trump was the direct cause of the false entry – meaning someone followed his specific directions.</p>
<p>Third, the prosecution would have to prove that Trump created the false record for a fraudulent purpose and, to prove a felony, with the specific purpose of committing – or covering up – another crime. </p>
<p>This is important because there could be other potentially plausible reasons the defense might offer, including that Trump sought to avoid embarrassment to his family or himself. Another option is indifference, that Trump gave little thought to how the transaction was recorded. That’s why the details of the allegedly false records, and Trump’s degree of involvement in their creation, will be central questions at trial.</p>
<p>Finally, for the felony offense, the prosecution would also have to prove that there was another crime that was either committed or covered up by using this false business record.</p>
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<span class="caption">People gather March 31, 2023, in front of Trump Tower the day after former President Donald Trump was indicted by a New York grand jury.</span>
<span class="attribution"><a class="source" href="https://media.gettyimages.com/id/1478450097/photo/new-york-grand-jury-votes-to-indict-former-president-trump.jpg?s=1024x1024&w=gi&k=20&c=Ag1AulWVzDnb7sWWsexkgNF670B17M9sXz8psVI7uwk=">Spencer Platt/Getty Images</a></span>
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<h2>3. It’s the most complex straightforward case in history</h2>
<p>While everyone will be watching to see if this case is handled like other cases, differences are inevitable. For example, the New York Police Department and court officers will need to <a href="https://www.nbcnews.com/politics/donald-trump/law-enforcement-agencies-are-prepping-possible-trump-indictment-early-rcna75493">coordinate the arrest process</a> with Trump’s Secret Service agents.</p>
<p>Further complications will arise if there is any prospect of incarceration. Based on what we know now, there is little prospect that Trump will be jailed pending trial for this <a href="https://www.justsecurity.org/85605/survey-of-past-new-york-felony-prosecutions-for-falsifying-business-records/">allegation of a nonviolent crime</a>. And even if he is ultimately convicted, it’s still unlikely he’ll be locked up, based on the nature of the charges and his lack of a prior criminal record. That said, judges have broad discretion in determining sentences. </p>
<p>That is only a small window into the logistical challenges that await the Manhattan district attorney’s office and the New York courts. If this were any other defendant, this would be a relatively straightforward case, the kind that make up the hundreds of cases in a typical prosecutor’s caseload. </p>
<p>However, Trump is not any other defendant. That means this is likely to be the most complex straightforward case in American history.</p>
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<span class="caption">Manhattan District Attorney Alvin Bragg leaves his New York office on March 22, 2023.</span>
<span class="attribution"><a class="source" href="https://media.gettyimages.com/id/1475378644/photo/speculation-grows-over-possible-indictment-of-former-president-donald-trump.jpg?s=1024x1024&w=gi&k=20&c=TZL_ajTptVaz6iq3LhHzfEs0XHnEzQMDaGUD0_-Blc4=">Scott Olson/Getty Images</a></span>
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<h2>4. The judicial process will be a messy affair</h2>
<p>Most low-level felony and misdemeanor cases are resolved before trial, especially when there is no obvious victim. Typically, the prosecution will offer a plea deal, perhaps including a term of probation, or even propose a <a href="https://www.criminaljustice.ny.gov/opca/crimcourtprogserv.htm">diversion program</a> with community service, for example, which will lead to a dismissal of the charges. </p>
<p>It will be interesting to see if Bragg makes an offer along those lines. Even if he does, defendants must typically admit guilt to take advantage of these arrangements, and Trump may refuse for political, personal or legal reasons to admit guilt.</p>
<p>So it’s likely the case will go to trial, a process that will be messy for many reasons – most importantly, the jury.</p>
<p>When choosing a jury in a criminal case, the trial judge is supposed to screen out potential jurors who are biased in favor of, <a href="https://ww2.nycourts.gov/sites/default/files/document/files/2018-06/Bamberger_JuryVoirDire_CriminalCase.pdf">or against, the defendant</a>. That’s normally easy because the jurors have usually never have heard of the defendant. </p>
<p>But most potential jurors will have opinions about Trump and many will need to be excused from jury service because of a lack of objectivity.</p>
<p>In a trial with this much media attention, there will also be people who have strong feelings about Trump and want to be on the jury. Some of them may hide their biases. That’s a problem by itself.</p>
<p>Then, once the trial starts, the media attention will shine a spotlight on the selected jurors. If it becomes clear that the jurors lied or failed to disclose information in jury selection, that could be grounds for removing them from the jury in the middle of the trial. If enough jurors are removed, the case will end in a mistrial, sending everyone back to square one.</p>
<p>So, while there is a lot about this prosecution that isn’t yet clear to the general public, one thing is clear – this will be a case with unprecedented attention and complexity.</p><img src="https://counter.theconversation.com/content/198970/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeffrey Bellin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Manhattan District Attorney will need to prove several different points in its prosecution of Trump. But securing an unbiased jury will also challenge the execution of this unprecedented case.Jeffrey Bellin, Mills E. Godwin, Jr., Professor of Law, William & Mary Law SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1911462022-09-21T23:58:48Z2022-09-21T23:58:48ZNew York’s $250 million lawsuit against Donald Trump is the beginning, not end, of this case – a tax lawyer explains what’s at stake<figure><img src="https://images.theconversation.com/files/485999/original/file-20220921-23-khyuk0.jpg?ixlib=rb-1.1.0&rect=231%2C378%2C6783%2C4196&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">New York Attorney General Letitia James announced a $250 million lawsuit against former president Donald Trump on Sept. 21, 2022 .</span> <span class="attribution"><a class="source" href="https://media.gettyimages.com/photos/attorney-general-letitia-james-speaks-during-a-press-conference-at-picture-id1425941143">Michael M. Santiago/Getty Images </a></span></figcaption></figure><p><em>New York Attorney General Letitia James hit former president Donald Trump with a <a href="https://www.nytimes.com/live/2022/09/21/nyregion/trump-fraud-lawsuit-ny-james">US$250 million lawsuit</a> on Sept. 21, 2022, citing “staggering” amounts of falsified business information and fraud.</em></p>
<p><em>The civil lawsuit alleges that Trump, his company – the <a href="https://www.trump.com">Trump Organization</a> – and three of his children lied to lenders and insurers about billions of dollars’ worth of assets. This follows a <a href="https://www.vanityfair.com/news/2022/08/letitia-jamess-trump-investigation-is-nearing-its-endgame">three-year investigation </a> into Trump’s New York-based real estate business.</em></p>
<p><em>The Conversation spoke with <a href="https://scholar.google.com/citations?user=iGSWDoAAAAAJ&hl=en&oi=ao">Bridget J. Crawford,</a> an expert on tax and property law at Pace University, to help navigate the various dimensions and the potentially broader, criminal implications of this lawsuit.</em></p>
<h2>What are Trump and his children accused of in the lawsuit?</h2>
<p>The complaint is over <a href="https://ag.ny.gov/press-release/2022/attorney-general-james-sues-donald-trump-years-financial-fraud">200 pages long</a> and contains many specific claims. But, at its heart, the complaint says the Trump Organization made false financial or business statements in order to get loans or to keep those loans on favorable terms, in a way that was dishonest or fraudulent. </p>
<figure class="align-center ">
<img alt="Vehicles pass the Trump Park Avenue building on a sunny day." src="https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/485984/original/file-20220921-24-c6n5wh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trump Park Avenue – just how much is it worth?</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TrumpLegalTroubles/a2f0eeeced6e4692ad28139ee0bfbf37/photo?Query=Trump%20Park%20Avenue&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=29&currentItemNo=0">AP Photo/Frank Franklin II</a></span>
</figcaption>
</figure>
<p>Trump didn’t allegedly overestimate the cost of buildings, which is a technical term, but rather he is accused of inflating the value of certain businesses and properties. </p>
<h2>How does overstating the value of properties help Trump?</h2>
<p>Banks want to make loans to people who are likely to be able to repay them. And how does the bank measure whether someone is likely to repay? It’s knowing the recipient of a loan has enough collateral to satisfy the bank’s concerns. Trump said he had collateral worth a certain amount. James is saying that the values are really wrong, and really wrong over a period of years, in multiple different filings. Moreover, the lawsuit says this is not just a mistake, or an, ‘Oops I got it wrong.’ Rather, the attorney general alleges a systematic pattern of fraud. </p>
<h2>What should we make of this being a civil, not criminal, action?</h2>
<p>James is bringing a lawsuit regarding the Trump Organization’s compliance with <a href="https://www.nysenate.gov/legislation/laws/CVP">New York’s civil laws</a>, meaning business and lending laws and the like – hence it is a civil suit. </p>
<p>That said, James made clear that she has also referred certain matters to both the IRS and to the federal prosecutors in the Southern District of New York for criminal investigation.</p>
<p>So this being a civil lawsuit does not mean we won’t potentially see criminal charges further down the line. Just, at this point, the New York attorney general is focused on the civil law violations. </p>
<p>In other words, this could be just the beginning of a longer story. </p>
<h2>What does the lawsuit demand in way of relief?</h2>
<p>This is where it gets interesting, I believe. James is calling for very dramatic relief, including permanently preventing Trump, along with three of his children – Donald Trump Jr., Eric Trump and Ivanka Trump – from serving as a director or officer of any corporation conducting business activities in New York. It could preclude them from having any formal business ties in New York. This would be a severe blow to the family’s business interests.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A group of people dressed in formal, dark clothing stand in front of white steps" src="https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/485998/original/file-20220921-26-9jazmu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Former president Donald Trump and four of his children are seen at Ivana Trump’s funeral in July 2022 in New York.</span>
<span class="attribution"><a class="source" href="https://media.gettyimages.com/photos/donald-trump-melania-trump-barron-trump-jared-kushner-kimberly-picture-id1242030390">Jose Perez/Bauer-Griffin/GC Images</a></span>
</figcaption>
</figure>
<h2>How would an IRS investigation differ from the New York one?</h2>
<p>It would be about federal tax laws, in particular. <a href="https://www.irs.gov/compliance/criminal-investigation">The IRS will</a> be looking for an answer to this question: “Did Trump overstate the valuation of any property he gave to charity?” The New York attorney general is concerned that he did.</p>
<p>The possible overvaluation relates to two different properties in Westchester, a county outside of New York City, and in Florida. What is at issue for the IRS is whether Trump correctly claimed the proper deduction, or whether he overstated, in a fraudulent way, the value of what he gave to charity. An overstatement of what he gave away would mean that the former president took a bigger income tax deduction than the one he was entitled to. Again, this is not just a matter of, “Oops, I made a mistake.” The attorney general alleges a widespread and longstanding pattern of misrepresentation of business values.</p>
<p>By handing this part of the investigation over to the IRS, the New York attorney general is signaling that she intends to stay in her lane, so to speak. James is basically saying, “I am talking about fair business practices in New York. If there is a tax issue, I am referring it over to the IRS.”</p>
<p>But all of the issues grow out of the same core set of facts and practices – how is the Trump family valuing its businesses and properties, and is it being done in a way that is honest?</p>
<h2>Does the lawsuit increase the chances of criminal charges?</h2>
<p>It certainly increases the possibility there might be criminal charges in the future. It also fans the flames that Trump continues to stoke in claiming that he is being unfairly targeted, which appears to be part of his attempt to discredit the American legal system. In fact, he is being asked to play by the same rules that apply to everyone else.</p>
<p>I will be very interested to see whether and how the IRS responds – the IRS strives to be an apolitical organization, but unfortunately, anything involving this particular former president is treated by a vocal minority as inherently political. </p>
<h2>How common is it for this type of lawsuit to happen?</h2>
<p>It is very unusual. There would have had to be evidence of an egregious pattern of fraud for any attorney general, of any political party, to file a complaint of this sort. In fact, the whole investigation, from the length of time it has taken to the amount of money involved, makes this a very uncommon case.</p>
<h2>What happens next?</h2>
<p>The New York attorney general has asked for a variety of actions, including the removal of the current trustees of certain trusts holding Trump Organization assets.</p>
<p>Trump has already responded, calling it <a href="https://www.nydailynews.com/news/politics/us-elections-government/ny-trump-fraud-allegations-ag-letitia-james-lawsuit-gop-reactions-20220921-i6324ukflfei3bd5zhlnv5jdny-story.html">a witch hunt</a>, which is consistent with the way he has responded to lawsuits in the past. I expect he will employ any available procedural tactics to delay answering this suit as long as he can. Eventually, he will be called to respond, and he will have to answer the claims put to him.</p>
<p>If he refuses to respond, the attorney general can act to protect the public, and the Trump family businesses would not be authorized to operate in New York. Ultimately, the state can shut the businesses down, if need be.</p><img src="https://counter.theconversation.com/content/191146/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bridget J. Crawford does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New York’s lawsuit against Trump could mean he and three of his kids are prevented from operating a business again in the state – but the IRS will determine whether federal tax crimes also took place.Bridget J. Crawford, Professor of Law, Pace University Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1383852020-06-11T12:20:43Z2020-06-11T12:20:43ZState prosecutors and voters – not the feds – can hold corrupt officials accountable<figure><img src="https://images.theconversation.com/files/340211/original/file-20200607-176575-o1s54c.jpg?ixlib=rb-1.1.0&rect=68%2C0%2C3405%2C2216&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bridget Kelly, one of two aides to Gov. Chris Christie whose convictions in the Bridgegate scandal were reversed. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/bridget-anne-kelly-former-deputy-chief-of-staff-to-new-news-photo/621077788?adppopup=true">Kena Betancur/Getty Images</a></span></figcaption></figure><p><a href="https://www.northjersey.com/story/news/nation/2020/01/14/bridgegate-bridget-kelly-bill-baroni-appear-united-states-supreme-court-arguments/4422233002/">Two high-ranking officials</a> with ties to New Jersey Gov. Chris Christie <a href="https://www.theguardian.com/us-news/2016/sep/20/bridgegate-trial-fort-lee-mayor-chris-christie">hatched a plot in 2013</a> to punish the <a href="https://www.fortleenj.org/294/Mayor-Mark-Sokolich">Democratic mayor of Fort Lee, New Jersey</a>, a town adjacent to the George Washington Bridge – <a href="https://abcnews.go.com/US/george-washington-bridge-painters-dangerous-job-top-worlds/story?id=17771877">the busiest bridge in the world</a>. The reason for targeting the mayor: his <a href="https://www.burlingtoncountytimes.com/news/20200507/us-supreme-court-reverses-bridgegate-convictions">refusal to endorse Christie for reelection</a>.</p>
<p>To inflict pain on the mayor, the <a href="https://www.northjersey.com/videos/news/new-jersey/2020/05/06/bridgegate-gwb-lane-closures-traffic-problems/5173455002/">aides ordered lane closures</a> on the bridge under the guise of a sham “traffic study,” causing massive backups – with school buses idling in traffic for hours and emergency vehicles and ambulances blocked. A public uproar ensued. </p>
<p>The press swarmed, the plot unraveled and the <a href="https://www.msn.com/en-us/news/us/u-s-supreme-court-reverses-bridgegate-convictions/ar-BB13K5WA?pfr=1">state legislature</a> began an investigation, as did the <a href="https://www.nj.com/politics/2020/05/us-supreme-court-throws-out-bridgegate-convictions-6-years-after-an-epic-traffic-jam.html">U.S. attorney</a> for New Jersey.</p>
<p><a href="https://www.npr.org/sections/thetwo-way/2015/05/04/404229358/former-christie-aides-plead-not-guilty-to-bridgegate-charges">Two aides were charged</a> and <a href="https://www.cbsnews.com/news/bridgegate-convictions-overturned-supereme-court-new-jersey/">convicted</a> under a federal wire-fraud statute for misusing federally funded programs to support what was, essentially, a political stunt: closing the lanes of the bridge. </p>
<p>Those convictions were <a href="https://www.nbcnewyork.com/news/local/supreme-court-tosses-out-bridgegate-convictions/2406449/">recently reversed</a> by the Supreme Court. That decision comes in the wake of several high-profile vindications of politicians who behaved badly, leading some to question whether misfeasance and malfeasance by government officials can ever be punished. </p>
<p>The <a href="https://www.politico.com/news/2020/05/07/supreme-court-bridgegate-decision-242344">9-0 ruling</a> raised cries that the Supreme Court has crippled the anti-corruption power of federal prosecutors and opens the door to manipulation of government programs for political advantage. </p>
<p>As a long-time attorney defending public corruption cases and <a href="https://pennstatelaw.psu.edu/faculty/brand">teaching white-collar crime at Penn State law school</a>, I believe that corrupt government figures can still be held accountable – but perhaps not by federal prosecutors.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/340212/original/file-20200607-176580-gj5d53.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=453&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Supreme Court overturned the corruption conviction of former Virginia Gov. Bob McDonnell.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/former-virginia-governor-robert-mcdonnell-followed-by-news-photo/524975832?adppopup=true">Alex Wong/Getty Images</a></span>
</figcaption>
</figure>
<h2>Hinges on fraud</h2>
<p>The Bridgegate case prosecution hinged on proving that the defendants violated two federal laws against fraud. <a href="https://www.law.cornell.edu/uscode/text/18/1343">One makes it a crime</a> to carry out any scheme to defraud or to obtain money or property by means of false or fraudulent pretenses. </p>
<p><a href="https://www.law.cornell.edu/uscode/text/18/666">The other bars “obtaining by fraud”</a> the property or money of a federally funded program or entity. </p>
<p>In its reversal of the convictions, the Supreme Court said that “commandeering” the lanes – even for a political purpose – was essentially a regulatory decision. It did not involve either property or money, which the fraud laws require for conviction, and thus it was not illegal. </p>
<p>As <a href="https://www.nytimes.com/2020/05/07/us/supreme-court-bridgegate.html">Justice Elena Kagan wrote for the court</a>: “The evidence the jury heard no doubt shows wrongdoing – deception, corruption, abuse of power. But the federal statutes at issue do not criminalize all such conduct.” </p>
<p>This is in line with previous Supreme Court rulings, where the justices have refused to read unjustified or politically motivated regulatory actions as violations of the fraud statutes’ protection of money and property.</p>
<p>In <a href="https://theconversation.com/its-getting-harder-to-prosecute-politicians-for-corruption-91609">McDonnell v. United States</a>, for example, the court <a href="https://www.vox.com/2020/5/7/21250580/supreme-court-bridgegate-us-kelly-chris-christie-corruption-new-jersey">reversed the conviction</a> of Gov. Bob McDonnell of Virginia for <a href="https://www.theatlantic.com/politics/archive/2014/09/jury-finds-former-gov-bob-mcdonnell-guilty-of-corruption/455151/">honest services fraud</a>. This offense is a variation of the general anti-fraud statute which prevents officials from denying citizens their right to their honest services by failing to disclose conflicts of interest resulting in personal gain.</p>
<p>McDonnell had accepted over US$175,000 from a businessman who wanted state help. The <a href="https://www.oyez.org/cases/2015/15-474">court ruled that</a> while the case featured “tawdry tales of Ferraris, Rolexes, and ball gowns,” the prosecution’s approach was so broad as to criminalize conduct that politicians routinely and innocently engage in. </p>
<h2>Bringing it all back home</h2>
<p>There is a way that politicians can be punished if they are corrupt, without resorting to the failure-prone federal prosecutions: state laws and elections. In other words, <a href="https://www.britannica.com/topic/federalism">federalism</a>, the <a href="http://www.pbs.org/tpt/constitution-usa-peter-sagal/federalism/#.Xt6CFhNKjq0">system of government in the U.S.</a>, where the federal government carries out some responsibilities and <a href="https://www.history.com/news/federalism-constitution-founding-fathers-states-rights">the states carry out others</a>. </p>
<p>In these kinds of cases, I believe state prosecutions are more likely to be successful. And of course, there’s the other local way of holding politicians accountable: voting them out of office. </p>
<p><a href="https://supreme.justia.com/cases/federal/us/483/350/">As the Supreme Court has said</a>, federal prosecutors may not use property fraud statutes to set “standards of disclosure and good government for local and state officials.” </p>
<p>In the Bridgegate case, a <a href="https://www.politico.com/states/new-york/albany/story/2014/01/new-jersey-legislature-merges-bridgegate-investigations-010545">broad investigation by the New Jersey state legislature</a> – which could have resulted in state charges – was underway when the federal-level U.S. attorney began an investigation and effectively shut down the state’s inquiry. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=480&fit=crop&dpr=1 600w, https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=480&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=480&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=603&fit=crop&dpr=1 754w, https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=603&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/340213/original/file-20200607-176546-zs1cr8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=603&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Knapp Commission, seen here during a hearing, was a local commission created in 1970 in New York to investigate police corruption.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/former-police-commissioner-howard-leary-testifies-before-news-photo/531032374?adppopup=true">Arty Pomerantz/New York Post Archives via Getty Images</a></span>
</figcaption>
</figure>
<p>The move by federal prosecutors to pursue political corruption in the states began with the late U.S. attorney for New Jersey, <a href="https://www.nytimes.com/2017/04/11/nyregion/frederick-b-lacey-dead-new-jersey-prosecutor-and-judge.html">Fred Lacey</a>. In the 1960s and 1970s, he began using the fraud statutes against local corrupt officials in New Jersey. Federal prosecutors’ argument for elbowing into state matters like these was that local prosecutors were unlikely to go after state and local officials. <a href="https://press.uchicago.edu/ucp/books/book/chicago/P/bo3633806.html">As U.S. Attorney General Ed Meese</a> put it in 1986, “We intend to go on knocking such corrupt heads – that’s our business, that’s our duty.” </p>
<p>But at the time, prominent crime-busting Manhattan prosecutor Robert Morgenthau didn’t see it that way. </p>
<p>“Fraud, extortion, bribery – these are basically local crimes,” <a href="https://www.nytimes.com/1986/03/12/nyregion/suddenly-prosecutors-find-flood-of-tips-on-corruption.html">he said</a>. “It’s important as a matter of principle to show that local law enforcement can clean up its own house, rather than relying on the Feds to do it.”</p>
<p>There were at the time numerous examples of local law enforcement initiatives against corruption – like <a href="https://www.wnyc.org/series/knapp-commission-hearings">the Knapp commission</a> in New York City investigating police corruption. </p>
<p>But the federal prosecutions initiated by the New Jersey U.S. attorney started a trend that spread across the country. His efforts sparked a movement that led to <a href="https://www.ncjrs.gov/criminal_justice2000/vol_2/02d2.pdf">federal prosecutions of state and local officials from legislators and governors to building inspectors and garbage collectors</a>, reaching into the thousands over the decades. While lower federal courts endorsed these expansive moves by prosecutors, they have once again been curtailed by the Supreme Court.</p>
<p>As Sara Silva, a white-collar defense lawyer, said <a href="https://www.wsj.com/articles/supreme-court-throws-out-bridgegate-convictions-11588860632">in the Wall Street Journal</a> after the court threw out the convictions, the Bridgegate case is a necessary restraint on federal prosecutors who pushed the boundaries to bring public corruption cases. Silva said those kinds of prosecutions threaten to bypass the democratic process, where local voters could simply throw out a corrupt politician in the next election. </p>
<p>“It is a dangerous approach,” said Silva. “My hope is prosecutors will really listen and trust the public to respond to officials who make bad decisions by voting them out of office.”</p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/138385/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stanley M. Brand does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Supreme Court has overturned a series of corruption convictions of public officials by federal prosecutors. Can public corruption be successfully prosecuted? Yes, by the states.Stanley M. Brand, Distinguished Fellow in Law and Government, Penn StateLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1136032019-03-15T10:43:24Z2019-03-15T10:43:24ZWhy a college admissions racket would funnel bribes through a fake charity<figure><img src="https://images.theconversation.com/files/263982/original/file-20190314-28502-tm2q7k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many people aided by the campus admissions scheme wanted to attend the University of Southern California.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/College-Admissions-Bribery/5efa4f20c897430cafa584d43d3df007/2/0">AP Photo/Reed Saxon</a></span></figcaption></figure><p>Federal authorities are prosecuting dozens of suspects in the <a href="https://www.cnn.com/us/live-news/college-admissions-cheating-felicity-huffman-lori-loughlin/index.html">biggest college admissions scandal</a> ever exposed. The <a href="https://www.justice.gov/usao-ma/pr/arrests-made-nationwide-college-admissions-scam-alleged-exam-cheating-athletic">joint FBI and IRS investigation</a>, dubbed “Operation Varsity Blues,” uncovered millions of dollars in bribe money wealthy parents are accused of paying to sneak unqualified children into Stanford, Yale and other elite universities on the pretext that they were <a href="http://www.espn.com/college-football/story/_/id/26240641/college-admissions-scandal-fake-athletes-alleged-bribes-aunt-becky">star athletes</a> with <a href="https://lawandcrime.com/high-profile/felicity-huffman-accused-of-paying-15k-to-doctor-her-older-daughters-sat-scores/">high standardized test scores</a>. </p>
<p><a href="https://www.usatoday.com/story/news/education/2019/03/12/college-scam-rick-singer-william-singer-felicity-huffman-lori-loughlin/3142687002/">William “Rick” Singer</a> has pled guilty to committing fraud as the head of a college counseling and preparation business and a <a href="https://www.buzzfeednews.com/article/tasneemnashrulla/william-rick-singer-depaul-donation-college-scam">sham charity</a>, acting as the ringmaster of the entire web of wrongdoing. He is cooperating with the authorities. Among the many interesting details to emerge have to do with how Singer’s company allegedly <a href="https://www.necn.com/news/new-england/Parents-Got-Tax-Write-Off-Amidst-Alleged-College-Admission-Scandal-507055931.html">funneled much of the US$25 million</a> his clients paid in unusually high fees for guidance counselor services through the nonprofit Key Worldwide Foundation, possibly to deflect attention.</p>
<p>We are accounting <a href="https://scholar.google.com/citations?user=TLUVvS8AAAAJ&hl=en&oi=sra">scholars who</a> <a href="https://scholar.google.com/citations?view_op=list_works&hl=en&user=AZdAnBcAAAAJ">research nonprofit fraud</a>. Our data indicate that outright fake charities like this one seem to be less commonly detected than other <a href="https://doi.org/10.1177/0899764014555987">kinds of nonprofit fraud</a>, such as when real charities get swindled through embezzlement schemes by <a href="http://www.spokesman.com/stories/2019/feb/14/meals-on-wheels-former-bookkeeper-faces-wire-fraud/">rogue bookkeepers</a> and the like. Our research also sheds light on why <a href="https://apnews.com/d1ff183590374f08a80487a423cfb289">Singer and his dozens of accomplices</a> allegedly got away with their scheme for years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=567&fit=crop&dpr=1 754w, https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=567&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/264000/original/file-20190314-28468-1ac6f7g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=567&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Rick Singer has pleaded guilty to charges in the college admissions bribery scandal.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/APTOPIX-College-Admissions-Bribery/dec92fd3033f400fb18fb1237d01b9b7/8/0">AP Photo/Steven Senne</a></span>
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</figure>
<h2>Sources of scrutiny</h2>
<p>There are federal and state authorities whose job it is to catch and prosecute fraudulent charities and fake donations. The Internal Revenue Service’s <a href="https://www.irs.gov/government-entities/tax-exempt-government-entities-division-at-a-glance">Tax Exempt Government Entities</a> division is in charge of <a href="https://theconversation.com/the-real-irs-scandal-has-more-to-do-with-budget-cuts-than-bias-95026">granting nonprofit status</a> through reviews of tax exempt status applications. This division also monitors compliance with tax filings requirements and audits of nonprofits. </p>
<p>But as nonprofit scholars like <a href="https://scholar.google.com/citations?user=A8NDlp4AAAAJ&hl=en&oi=sra">Dennis Neely</a> have noted, state attorneys general are at the forefront of monitoring nonprofit activities. However, state budgets for nonprofit oversight and enforcement are too low to effectively monitor all charities within their jurisdictions.</p>
<p>Most states have fewer than <a href="http://www.urban.org/sites/default/files/alfresco/publication-pdfs/2000925-State-Regulation-and-Enforcement-in-the-Charitable-Sector.pdf">three full-time employees working on charitable oversight</a>. This leaves only a few hundred people in the country to oversee some <a href="https://theconversation.com/america-has-1-5-million-nonprofits-and-room-for-more-97528">1.5 million nonprofits</a>, despite the fact that these organizations make up <a href="https://www.bls.gov/bdm/nonprofits/nonprofits.htm">10 percent of our nation’s workforce</a>.</p>
<p>In addition, these systems are set up to catch tax cheats and bring in missing tax revenues. We see a lack of resources dedicated to monitoring the revenue flowing into and out of nonprofits, possibly because the fact that they don’t owe any income tax makes them a lower priority.</p>
<p>Another factor is the presumption that do-good organizations are not going to get swept up in criminal activity like bribery and money laundering. Likewise, regulators may presume that accountants will heed their professional duties if they suspect their clients are breaking laws. However, accountants are more likely to quit to avoid signing off on fraudulent paperwork than blow the whistle.</p>
<h2>Red flags</h2>
<p><a href="https://www.cnn.com/2019/03/14/us/college-cheating-scam-how-authorities-found-out/index.html">This scandal</a> makes us wonder whether the authorities are reading all the paperwork most tax-exempt groups are required by law to file with the IRS, known as 990 forms. Key Worldwide Foundation’s <a href="https://990s.foundationcenter.org/990_pdf_archive/461/461603030/461603030_201612_990.pdf">mission statement</a>, which appears in these tax filings, itself is suspect.</p>
<p>Despite an allusion to providing “education that would normally be unattainable to underprivileged students,” it does not say that the students it helps face economic hardship. Instead, the organization emphasizes how Key Worldwide’s “contributions to major athletic university programs may help to provide placement to students that may not have access under normal channels.”</p>
<p>Even so, what’s the rationale for a charitable foundation to contribute to major athletic programs to enable students regardless of their means to pay for school to enter college if they are eligible for sports scholarships?</p>
<p>IRS documents indicate that supposed donations to Singer’s foundation grew eight-fold from less than half a million dollars in 2013 to nearly <a href="https://www.necn.com/news/new-england/Parents-Got-Tax-Write-Off-Amidst-Alleged-College-Admission-Scandal-507055931.html">$4 million in 2016</a> as Singer’s alleged scheme used money parents pretended to be donating to the charity to pay off coaches, testing proctors and other people.</p>
<p>Key Worldwide’s tax filings also suggest that none of the foundation’s top staff earned money for their work, which is unusual for a charity that big. Gordon Ernst, the only compensated individual listed in its publicly available tax forms is one of the suspects <a href="https://media.wpri.com/nxs-wpritv-media-us-east-1/document_dev/2019/03/12/ernest%20indictment_1552409175484_76971110_ver1.0.pdf">charged with racketeering</a> for allegedly receiving $2.7 million in bribes labeled as consulting fees while coaching the Georgetown University tennis team. </p>
<p>The foundation’s <a href="http://990s.foundationcenter.org/990_pdf_archive/461/461603030/461603030_201612_990.pdf#page=29">tax filings state that it has no records</a> proving that it gave away the grants listed in its paperwork. Nor did the charity say whether it tried to prove that it had determined its grantees’ eligibility by checking a box on its forms. Purported grantees, such as the Bay Area nonprofit <a href="https://www.nbcbayarea.com/investigations/College-Admissions-Scam-Follow-the-Money-Behind-the-Key-Worldwide-Foundation-507070751.html">Friends of Cambodia</a>, are coming forward to deny they got any money.</p>
<p>However, we can’t rule out that some grants could have been real and intended to throw off suspicions.</p>
<p><iframe id="oJ2aU" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/oJ2aU/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Following up</h2>
<p>It remains to be seen how this scandal will change oversight and regulations at the federal and state level as well as at every step in the college admissions process.</p>
<p>Any clients who were eligible to take advantage of the <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions">charitable deduction</a> could have defrayed some of the fees they paid Singer to bribe coaches and testing personnel through a tax break subsidized by the federal government. While it is clear that the foundation broke the law if it used donations for personal gain and not for a charitable purpose, we do not yet know whether the government will treat <a href="https://news.bloombergtax.com/daily-tax-report/parents-in-college-admissions-scandal-could-see-steep-tax-fines">all donations</a> to the foundation as tax evasion or not or what penalties are in store. </p>
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<a href="https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/264003/original/file-20190314-28479-112luk7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The NCAA penalized the University of Louisville men’s basketball program over a sex scandal involving exotic dancers paid to strip and have sex with recruits and players that cost coach Rick Pitino his job.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Louisville-Pitino-Basketball-/dd58f6afa1d04ac4b3c93b08fef7007e/18/0">AP Photo/Timothy D. Easley</a></span>
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<p>The National Collegiate Athletic Association, a nonprofit that regulates college sports, monitors athletic programs carefully. The NCAA constantly looks out for bribery, performance-enhancing drug abuse and ineligible athletes, among other violations. </p>
<p>It has already <a href="https://www.law.com/newyorklawjournal/2019/03/14/poor-overseers-or-victims-ncaa-opens-probe-into-colleges-in-admissions-cheating-scandal-389-61915/">opened investigations</a> into the coaches charged in this scandal. In our view, the NCAA should go further by reviewing its own systems and safeguards to ensure that nothing like this is happening elsewhere and never happens again.</p>
<p>Some universities are beginning to take action too. The <a href="https://www.bostonglobe.com/metro/2019/03/14/six-usc-student-applicants-linked-college-admissions-bribery-scheme-denied-acceptance/8yVrSYe1sxh2VGy1LGMbzM/story.html">University of Southern California</a>, for example, has revoked its acceptance of all future students it suspects benefited from Singer’s services. Universities should also be carefully reviewing their own liability and identifying ways to monitor and prevent admissions fraud rather than just declaring that they are the <a href="https://news.yale.edu/2019/03/12/university-statement-federal-investigation-admissions-bribery-scheme">victims of a crime</a>.</p>
<p>One first step is to closely evaluate any grants they may have received from Key Worldwide, the fake charity. According to tax returns it filed with the IRS, the foundation said it gave the University of Southern California water polo team $100,000 in 2014 and Chapman University $150,000 in 2016, among other major grants. Many if not most of these outlays could be as fake as the charity itself allegedly was.</p>
<p>But we believe that universities would be wise to proactively scour their records to find out if they have this money in their coffers before any new pay-to-play charges are lodged against them.</p><img src="https://counter.theconversation.com/content/113603/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There is no system in place to detect charitable fraud on the scale allegedly committed by a counseling company and its sham nonprofit.Sarah Webber, Associate Professor of Accounting, University of DaytonDeborah Archambeault, Associate Professor of Accounting, University of DaytonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1115072019-02-13T02:23:32Z2019-02-13T02:23:32ZYes, we can put bank bosses in jail, but is that the best way to hold them to account?<figure><img src="https://images.theconversation.com/files/258602/original/file-20190212-174894-1upmhar.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Kenneth Hayne has referred over 20 entities to regulators for investigation.</span> <span class="attribution"><span class="source">from shutterstock.com</span></span></figcaption></figure><p>When Kenneth Hayne handed down the banking royal commission’s final report, he <a href="https://www.abc.net.au/news/2019-02-05/kenneth-hayne-royal-commission-report-labor-versus-liberals/10779476">urged the corporate watchdog</a> to investigate several entities for criminal charges. The Australian Securities and Investments Commission (ASIC) has <a href="https://www.abc.net.au/news/2019-02-08/amp-executives-will-face-criminal-charges/10793402">since announced</a> it is preparing cases against executives of some of the big players.</p>
<p>The day of the report, Treasurer Josh Frydenberg <a href="https://www.afr.com/business/banking-and-finance/asic-funding-boost-to-put-supervisors-in-big-banks-amp-20180806-h13lja">reiterated a government commitment</a> made last year to boost the enforcement powers and resources of agencies such as ASIC and the Commonwealth Director of Public Prosecutions (DPP) to launch criminal prosecutions. The government would also extend the jurisdiction of the Federal Court <a href="https://www.lawyersweekly.com.au/politics/24956-federal-court-s-jurisdiction-to-expand-on-corporate-criminality-post-rc">to include “criminal corporate crime”</a>.</p>
<p>Frydenberg said the government would provide a legislative framework necessary, and better resources, for regulators to hold those who abuse our trust to account. But this is unnecessary – the legislative framework is already there. And then there’s also the question of whether criminal convictions and terms of imprisonment are the best way to deal with the issue. </p>
<h2>Dishonest conduct</h2>
<p>A key finding of the report was that entities may have committed breaches of the <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/">Corporations Act</a> – the main legislation regulating Australian companies. The relevant section in the act is <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1041g.html">“Dishonest conduct” (1041G)</a>, inserted in 2001. It says “a person must not, in the course of carrying on a financial services business in this jurisdiction, engage in dishonest conduct in relation to a financial product or financial service”. Those convicted face a maximum ten years imprisonment.</p>
<p>This is the main criminal offence at play here – dishonesty. It is dishonest for a finance company to charge for a service they know will not be provided. It is dishonest for a bank to continue to charge dead people for services rendered.</p>
<p>That said, convictions under 1041G have usually occurred where individuals have been found seeking to deliberately <a href="https://www.moneymanagement.com.au/news/financial-planning/adviser-convicted-dishonest-conduct">line their own pockets</a>. Commissioner Hayne has therefore upped the ante by prodding ASIC to consider whether at least two corporate entities, not just individuals, have breached 1041G.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/compensation-scheme-to-follow-haynes-indictment-of-financial-sector-110981">Compensation scheme to follow Hayne’s indictment of financial sector</a>
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<p>Hayne’s observation could not be in greater contrast to one made in the wake of a similar investigation two decades ago. In 1996 the Howard government initiated their <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">inquiry into the financial services sector</a>. The inquiry’s chairman Stan Wallis had claimed Australia’s tough corporate governance rules were a major reason for the perceived under-performance of companies at the time. </p>
<p>In a June, 2000 speech to the Centre for Corporate Public Affairs, Wallis <a href="http://www.austlii.edu.au/au/journals/DeakinLRev/2002/1.html#fn28">advocated winding back</a> boardroom independence rules since “too much attention to corporate governance can cloud a board’s judgement”. Governance, he said, had become an end in itself, and, as a result, directors were predisposed to being risk-averse rather than bold. </p>
<p>But now the regulator’s guillotine is being sharpened, not blunted, and with good reason. The amount charged by financial institutions for services never received is <a href="https://www.abc.net.au/news/2019-02-08/amp-executives-will-face-criminal-charges/10793402">reportedly more than $1 billion</a>. Hayne has referred 24 entities to regulatory authorities. We can <a href="https://theconversation.com/compensation-scheme-to-follow-haynes-indictment-of-financial-sector-110981">virtually guarantee</a> prosecutions will be launched in relation to these alleged misdeeds.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1094921458898227200"}"></div></p>
<h2>So, how can a conviction occur?</h2>
<p>First, ASIC needs to look beyond what was reported to the royal commission to find clear evidence of wrongdoing. With sufficient evidence, the matter is referred to the DPP. The DPP in turn needs to be satisfied of the probability of a conviction, by virtue of offences under the Corporations Act.</p>
<p>Mr Frydenberg doesn’t need to extend jurisdictions, or boost enforcement powers. The law that the DPP needs is there already.</p>
<h2>But do the people want this?</h2>
<p>If one believes the political commentary that tells us there is a heightened contempt among the public today for white-collar offending, then perhaps bosses should be jailed. But there’s also some evidence suggesting that the public’s intolerance of, and reaction to, such behaviour is not as radical as many believe. </p>
<p><a href="https://psycnet.apa.org/record/2008-18732-001">Research conducted in England</a> led the author to conclude that punishment preferences of the public are </p>
<blockquote>
<p>rational and reasoned, and the emotive aspects of their attitudes were primarily regretful rather than vengeful […] there were signs that the desire to express condemnation and disapproval of offenders’ conduct was counterbalanced by recognition of the need for humane and just penal policies.</p>
</blockquote>
<p>In other words, there is an argument the public don’t consider senior managers who have already been humbled by the Commissioner, or humiliated by the commission’s lead barrister Rowena Orr QC, need to go behind bars.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commission-the-real-problem-is-how-we-value-executives-and-workers-111094">Banking Royal Commission: the real problem is how we value executives and workers</a>
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<p>Criminologist John Braithwaite’s seminal work, <a href="http://johnbraithwaite.com/wp-content/uploads/2016/06/Crime-Shame-and-Reintegration.pdf">Crime, Shame and Reintegration</a>, explored shame in a leader’s falling short of public expectations. His hypothesis was that fear of shame is a major social force for preventing criminality, not threat of imprisonment. </p>
<p>Punishing key financial services leaders by naming them, highlighting their failings, accepting their contrition, disqualifying them, and seeking restitution from them is as likely to satisfy the public’s demand for appropriate consequences as any prison term.</p>
<hr>
<p><em>Editor’s note: This article previously referred to a provision in the Commonwealth Criminal Code Act 1995, which related to corporate culture. The relevant part of the Act is no longer applied to financial institutions, however, so reference to it has been removed.</em></p><img src="https://counter.theconversation.com/content/111507/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rick Sarre has previously received funding from the Australian Research Council. He is a member of the Australian Labor Party State Council.</span></em></p>The government doesn’t need to extend jurisdictions, or boost enforcement powers to prosecute corporations that have behaved dishonestly. The law for prosecution is there already.Rick Sarre, Adjunct Professor of Law and Criminal Justice, University of South AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1090562018-12-19T21:02:10Z2018-12-19T21:02:10ZThe Trump Foundation is shutting down, but the president and his family still could face liability<figure><img src="https://images.theconversation.com/files/251350/original/file-20181218-27749-qdp2vd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Did a Trump Foundation charity event in 2016 boost his candidacy?</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump-Foundation-Investigation/88c49b3322614123a4303a3507ed868e/22/0">AP Photo/Andrew Harnik</a></span></figcaption></figure><p>The Donald J. Trump Foundation will <a href="https://ag.ny.gov/press-release/ag-underwood-announces-stipulation-dissolving-trump-foundation-under-judicial">shut down</a> and distribute the money it has left to charities approved by the New York state attorney general, while the <a href="https://ag.ny.gov/press-release/attorney-general-underwood-announces-lawsuit-against-donald-j-trump-foundation-and-its">state’s lawsuit against the president</a> and his three oldest children alleging <a href="https://theconversation.com/why-new-york-state-is-suing-the-trumps-5-questions-answered-98375">violations of state laws governing charities</a> proceeds.</p>
<p>Under the deal New York Attorney General Barbara Underwood reached with the foundation two weeks before she will <a href="https://www.newsweek.com/letitia-james-donald-trump-new-york-attorney-general-trump-tower-meeting-1255344">leave her post</a> and be replaced by fellow Democrat <a href="https://www.nbcnews.com/politics/donald-trump/incoming-new-york-attorney-general-plans-wide-ranging-investigations-trump-n946706">Letitia James</a>, the state attorney general’s office will wield <a href="https://ag.ny.gov/sites/default/files/stipulation_re_dissolution_execution_version.pdf">veto power over which charities</a> receive the foundation’s remaining US$1.7 million in assets.</p>
<p>Meanwhile, Underwood’s lawsuit against Donald Trump and three of his children – Donald Jr., Ivanka and Eric – will go forward even as the family foundation winds down. Underwood’s lawsuit seeks more than <a href="https://www.reuters.com/article/us-usa-trump-trump-foundation/new-york-sues-trump-and-his-charity-over-self-dealing-idUSKBN1JA26G">$2.8 million in restitution</a> plus additional penalties from these four members of the Trump family for allegedly misusing charitable assets and to temporarily prohibit them from serving on the board of any nonprofit incorporated or authorized to conduct business or solicit donations in the state.</p>
<p>As a <a href="https://scholar.google.com/citations?user=v51-MK0AAAAJ&hl=en&oi=ao">scholar of federal</a> and <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1358581">state tax law</a>, I believe that this agreement marks at most a modest victory for Underwood in her effort to hold Trump and his children accountable for alleged violations of state charity law. The more serious test will be whether a state court holds Trump personally liable for using his foundation to aid his campaign and benefit himself.</p>
<h2>A courtroom defeat</h2>
<p>Underwood and the foundation reached this agreement less than one month after the attorney general scored a preliminary win in her lawsuit against the Trumps. </p>
<p>That <a href="https://ag.ny.gov/press-release/attorney-general-underwood-announces-lawsuit-against-donald-j-trump-foundation-and-its">lawsuit details several apparent violations</a> of federal and state law by the Trump Foundation dating back to 2007. </p>
<p>Among the most flagrant of these is a $25,000 contribution that the foundation made in 2013 to the re-election campaign of Florida Attorney General Pam Bondi. Not only did that run afoul of laws barring foundations from contributing to political campaigns, but the <a href="http://www.politifact.com/florida/article/2016/sep/21/donald-trump-pam-bondi-and-25k-was-it-pay-play/">Trump Foundation now admits</a> that it misreported the gift in federal and state tax filings.</p>
<p>The lawsuit also alleges that Trump allowed his campaign to distribute more than $2.8 million in foundation funds to advance his presidential bid in the run-up to the 2016 Iowa caucuses – money that the attorney general says Trump should be required to pay back. And it alleges that he used tens of thousands of dollars of foundation money to benefit his hotels and golf clubs. </p>
<p>The Trump Foundation asked Judge Saliann Scarpulla, a trial court judge in Manhattan, to dismiss the lawsuit, but Scarpulla ruled in late November that the <a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=5gpi0UXWZTG2BxZsqSlyBA==&system=prod">case could move forward</a>. </p>
<p>The litigation in Scarpulla’s court is just one example of the legal woes the president’s foundation faces. In addition, New York authorities are probing whether the president or his charity <a href="https://www.apnews.com/7cbf9bb9fa8a4aae8a68cf26b70ce556">broke state criminal tax laws</a>. And Underwood has <a href="https://ag.ny.gov/sites/default/files/irs_final_letter.pdf">alerted the IRS</a> and the <a href="https://ag.ny.gov/sites/default/files/fec_final_letter.pdf">Federal Election Commission</a> about the foundation’s possible federal tax and campaign law violations.</p>
<h2>A settlement</h2>
<p>In her November decision, Scarpulla said that she had been “<a href="https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=5gpi0UXWZTG2BxZsqSlyBA==&system=prodsource?">actively encouraging</a>” the parties to reach an agreement to dissolve the foundation but that they so far had “been unable to do so.” </p>
<p>After his 2016 election, <a href="https://www.theguardian.com/us-news/2016/dec/24/trump-university-shut-down-conflict-of-interest">Trump said he wanted to dissolve the foundation</a> to avoid “even the appearance of any conflict with my role as President.” But <a href="https://codes.findlaw.com/ny/notforprofit-corporation-law/npc-sect-1002.html">New York law</a> requires the state attorney general’s approval before that can happen.</p>
<p>Underwood’s predecessor, <a href="https://www.theguardian.com/us-news/2016/dec/27/trump-foundation-charity-spending-investigation">Eric Schneiderman, refused</a> to grant that approval because of ongoing investigations into the alleged misuse of foundation funds. After <a href="https://www.theatlantic.com/politics/archive/2018/05/the-stunning-speed-of-eric-schneidermans-resignation/559922.">he resigned</a> in May 2018 amid allegations that he physically abused four women, Underwood took over. She asked the court to dissolve the foundation in June.</p>
<p>The agreement signed by Underwood’s office and a lawyer for the Trumps gives the foundation what it has wanted all along: permission to wind down.</p>
<p>The agreement does allow the New York attorney general’s office to approve which charities get the foundation’s remaining funds. But <a href="https://codes.findlaw.com/ny/notforprofit-corporation-law/npc-sect-1002.html">New York law</a> gives the state attorney general approval authority over a charity’s plan to distribute its remaining assets any time charities – including private foundations – voluntarily dissolve. </p>
<p>Rather than being what Underwood called “<a href="https://www.vox.com/2018/12/18/18146487/trump-foundation-charity-ny-attorney-general-lawsuit">an important victory for the rule of law</a>,” the agreement to shut down the Trump Foundation looks to me more like a small and largely symbolic win.</p>
<h2>A civil action</h2>
<p>It remains to be seen whether Trump will bear any real financial consequences for allegedly using his family foundation as a personal and political piggy bank. </p>
<p>Scarpulla has ordered him and his oldest children to respond to the lawsuit by mid-January. By then, New York Attorney General-elect Letitia James, who currently serves as New York City’s public advocate, will have assumed the state’s top law enforcement role.</p>
<p>She plans to <a href="https://www.nbcnews.com/politics/donald-trump/incoming-new-york-attorney-general-plans-wide-ranging-investigations-trump-n946706">ramp up the state’s probes of Trump</a>, his family and his businesses.</p>
<p>“We will use every area of the law to investigate President Trump and his business transactions and that of his family as well,” James told NBC News on Dec. 12.</p>
<p>That could – in theory – include an inquiry to determine whether Trump committed <a href="https://codes.findlaw.com/ny/tax-law/tax-sect-1801.html">criminal tax fraud</a> in connection with his family foundation. </p>
<p>The New York attorney general’s lawsuit is a civil action, not a criminal proceeding, and not all tax law violations rise to the level of a crime. New York law imposes criminal consequences for only a few tax-related offenses – most notably, tax fraud.</p>
<p>Under New York law, <a href="https://codes.findlaw.com/ny/tax-law/tax-sect-1801.html">criminal tax fraud</a> occurs when a person “knowingly” submits “materially false or fraudulent information” in connection with a tax return. To hold someone criminally liable, the prosecution must prove that the person acted “willfully” – which means with “intent to defraud” or to avoid “a known legal duty.” Criminal tax fraud is, at a minimum, a <a href="https://codes.findlaw.com/ny/tax-law/tax-sect-1802.html">class A misdemeanor</a>, punishable by <a href="https://codes.findlaw.com/ny/penal-law/pen-sect-70-15.html">up to one year</a> in jail.</p>
<p>The <a href="https://theconversation.com/as-new-york-looks-into-whether-the-trump-foundation-broke-the-law-criminal-charges-remain-unlikely-100315">hurdles to criminal prosecution are high</a> and several of the foundation-related accusations against Trump relate to activity outside the relevant statute of limitations. In my view, any effort by New York state to prosecute the Trump Foundation, the president or his relatives for criminal tax fraud would encounter significant and likely insurmountable legal obstacles.</p>
<p><em>This is an updated version of an article originally published on <a href="https://theconversation.com/as-new-york-looks-into-whether-the-trump-foundation-broke-the-law-criminal-charges-remain-unlikely-100315">July 23, 2018</a>.</em></p><img src="https://counter.theconversation.com/content/109056/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Hemel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A New York judge will decide whether Trump owes more than $2.8 million in restitution.Daniel Hemel, Assistant Professor of Law, University of ChicagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1010182018-09-26T10:21:35Z2018-09-26T10:21:35ZFraud can scuttle nonprofits but the bigger and older ones fare better<figure><img src="https://images.theconversation.com/files/236764/original/file-20180917-158246-1tewite.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Fraud has organizational consequences.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/arrested-businessman-handcuffs-bribetaker-briber-concept-695743297">Shutterstock.com/smspsy</a></span></figcaption></figure><p>After a director of the Fairmont-Marion County Food Pantry <a href="http://www.timeswv.com/news/local_news/fairmont-man-charged-with-embezzlement/article_97c35443-db46-5046-b1b4-c82c245b8693.html">embezzled more than US$50,000</a>, it had to close for two months in 2009 – leaving 1,200 West Virginians who depended on it in a temporary lurch.</p>
<p>The effects of this kind of malfeasance may appear straightforward. Charities caught committing fraud become untrustworthy in their donors’ eyes. Without money, they no longer can serve the public. </p>
<p>That food pantry overcame that crisis and reopened. But as <a href="https://scholar.google.com/citations?user=TLUVvS8AAAAJ&hl=en&oi=sra">scholars who</a> <a href="https://scholar.google.com/citations?view_op=list_works&hl=en&user=AZdAnBcAAAAJ">research nonprofit fraud</a>, we wanted to discover what long-term consequences befall organizations that are supposed to do good things when some of their staff are caught doing bad things.</p>
<h2>The frequency of fraud</h2>
<p>First, we identified charities that had committed a publicized act of fraud. Then we scoured public filings, news stories and social media for evidence of life after the fraud.</p>
<p>We found that <a href="https://doi.org/10.1002/nml.21313">1 in 4</a> of these nonprofits closed down for good within three years. That is <a href="https://nccs.urban.org/frequently-asked-questions">significantly higher</a> than the <a href="https://www.urban.org/research/publication/impact-great-recession-number-charities-subsector-and-revenue-range">overall 4 to 16 percent rate at which nonprofits became defunct</a> during <a href="https://ideas.repec.org/a/bpj/bejeap/v8y2008i1n22.html">the same time period</a> – the years 2000 to 2012.</p>
<p>Once we saw the big picture, we investigated the factors driving this outcome. We wanted to know if it had to do with the structure of the organizations, the people who commit fraud or the type of fraud committed.</p>
<p>As it turns out, it was a little bit of each.</p>
<p>Other researchers had already documented that newer organizations are more likely <a href="http://dx.doi.org/10.2307/2095567">to shut down</a> than older ones. Similarly, smaller organizations are more likely to fold than larger ones. </p>
<h2>Some downsides to being a newbie</h2>
<p>As we explained in the journal <a href="https://doi.org/10.1002/nml.21313">Nonprofit Management & Leadership</a>, we found that these concepts hold true with nonprofits after fraud is publicized. Older organizations and ones with bigger budgets and more assets were more likely to survive fraud that had come to the public’s attention than their newer, smaller counterparts.</p>
<p>Consider the fate of the United Way in D.C. The former head of that large nonprofit, which was raising more than $90 million annually, <a href="https://philanthropynewsdigest.org/news/former-head-of-d.c.-united-way-pleads-guilty-to-fraud">stole almost $500,000 from it</a>. After this wrongdoing came to light in 2002, the organization scaled back some services but <a href="https://unitedwaynca.org/about-us/financials/">continued to exist</a>.</p>
<p>Why? Organizational theory experts Michael Hannan and John Freeman have <a href="http://dx.doi.org/10.2307/2095567">identified several reasons</a>.</p>
<p>Notably, the leaders and staff of newer organizations tend to lack skills and experience, which leads to problems with reliability and accountability. Newer nonprofits may also lack the structure, systems and routines that older organizations typically possess.</p>
<p>Smaller organizations have the disadvantage of being less able to withstand financial shocks than their larger counterparts because they operate on smaller budgets and lack deep pockets. They may also have trouble fundraising, and often find it difficult to compete for good employees. These struggles can make it harder to recover from a crisis.</p>
<h2>Who done it to whom</h2>
<p>It also matters what type of fraud took place.</p>
<p>When the nonprofit committed a fraud against the public, the organization was less likely to survive than in cases when an employee or a volunteer preyed on the nonprofit.</p>
<p>When an executive-level employee at the nonprofit committed the fraud, the nonprofit was less likely to survive than if a <a href="https://doi.org/10.1016/j.jcrimjus.2005.04.005">lower-level employee</a> did it.</p>
<p>For example, the Virginia-based nonprofit <a href="https://www.newsadvance.com/news/local/nonprofit-closes-local-office-after-executive-sentenced/article_4533ea1b-789c-5170-b023-74c9e30572f7.html">Domestic Values Education and Support Inc.</a>, a domestic violence counseling group, was forced to shut down following the theft of funds by the organization’s chief financial officer.</p>
<p>Senior managers have easier access to the organization’s funds, financing and official paperwork, potentially making the <a href="http://journals.sagepub.com/doi/pdf/10.1177/0149206305279598">fraud they commit</a> consequential enough to lead to the organization’s ruin.</p>
<h2>What is a nonprofit to do?</h2>
<p>Of course, charities can’t instantly become older and larger to avoid risk. However, newer and smaller nonprofits can model the behavior of their older and larger counterparts by adopting fraud prevention and governance measures.</p>
<p>For example, <a href="https://doi.org/10.1002/nml.21226">a recent study by Young-Joo Lee</a>, an expert in public and nonprofit management, finds that older and larger nonprofits are more likely to adopt good governance policies.</p>
<p>For example, adopting strict rules regarding the approval of expenditures, and limiting who gets access to cash, can sign checks or use an organizational credit card reduce opportunities to commit fraud.</p>
<p>Other best practices include improving the oversight of personnel screening during the hiring process and supervising staff members well.</p>
<p>We also recommend that nonprofits adopt whistleblower policies, establish tip hotlines and give all employees the chance to be in-house watchdogs if they spot wrongdoing. It also helps to have actively involved boards of directors that include trustees with enough financial expertise to keep an eye on the nonprofit’s managers.</p><img src="https://counter.theconversation.com/content/101018/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Adopting best practices like making it easier for staffers to blow the whistle when they observe wrongdoing can help.Sarah Webber, Associate Professor, Department of Accounting, University of DaytonDeborah Archambeault, Associate Professor, University of DaytonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1012322018-08-20T10:32:11Z2018-08-20T10:32:11ZHow the Trump Foundation illustrates the limits of charity regulations<figure><img src="https://images.theconversation.com/files/231389/original/file-20180809-30446-16en17a.jpg?ixlib=rb-1.1.0&rect=0%2C50%2C4062%2C1784&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Donald Trump at his Mar-a-Lago club</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Pakistan-Trump-Tweet/d3031a79889b4e7b9a4df45ce8ef4bfa/1/0">AP Photo/Evan Vucci</a></span></figcaption></figure><p>Since 2008, nearly every donation Donald Trump’s foundation has made near his Mar-a-Lago mansion and club in Florida funded charities that hosted events there, according to recent <a href="https://www.mypalmbeachpost.com/news/national-govt--politics/trump-foundation-donated-charities-that-booked-galas-mar-lago/mfh5YFm3bK8iUOVQ8UnXKN/">investigative reporting</a>.</p>
<p>This pattern, first reported by The Palm Beach Post, follows an accusation <a href="https://ag.ny.gov/press-release/attorney-general-underwood-announces-lawsuit-against-donald-j-trump-foundation-and-its">New York Attorney General Barbara Underwood</a> made when she <a href="https://theconversation.com/why-new-york-state-is-suing-the-trumps-5-questions-answered-98375">filed a lawsuit against</a> the foundation, Trump and three of his adult children for an alleged “pattern of persistent illegal conduct.” </p>
<p>I am a <a href="https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=Ellen+Aprill&btnG=">scholar of nonprofits</a> who has researched their regulation since I served in the Treasury Department’s Office of Tax Policy in the late 1980s. I find these reports about the Trump Foundation disturbing because they give the impression that the foundation was benefiting Trump’s business interests. And that is at odds with the purpose of philanthropy.</p>
<p>At the same time, based on the evidence currently available, I do not believe that the Trump family will have to pay penalties, much less face criminal charges, even if the reports of self-serving charity are true.</p>
<h2>A suspicious pattern</h2>
<p>The newspaper found that eight charities received donations, typically of US$25,000, from the Trump Foundation after they changed plans to hold their <a href="https://theconversation.com/let-them-eat-caviar-when-charity-galas-waste-money-82961">galas and other events</a> at Mar-a-Lago instead of at other venues.</p>
<p>The most notable on the list was the <a href="https://aroundwellington.com/february-2015-58th-international-red-cross-ball/">Red Cross Ball</a>, although that organization did <a href="https://www.mypalmbeachpost.com/business/five-more-charities-pull-out-mar-lago-events/kmSbC6rQkcaxNhagItqfjL/">cancel its 2018 soiree</a> altogether and it will hold its next ball at the <a href="https://www.mypalmbeachpost.com/business/norton-museum-opening-feature-return-red-cross-gala/gU9WJgc5XREDKCNnZn2hLJ/">Norton Museum of Art</a>.</p>
<p>These gifts from the Trump Foundation to the nonprofits that doubled as Mar-a-Lago’s clients make it seem as if the donations were a quid pro quo for doing business with Trump. Even if the charities managed to use that glitzy venue at a bargain rate, any explicit arrangement would still <a href="https://www.irs.gov/pub/irs-tege/eotopicq85.pdf">violate relevant tax laws</a> that prohibit transactions that benefit foundation insiders.</p>
<p>The nonprofits, however, deny that there were any strings attached to their gifts from the Trump Foundation. Instead, they say, the donations came as a “surprise.” </p>
<p>One reason why this venue moving stood out is that it clashed with a regional trend. More than two dozen charities that had held <a href="https://www.palmbeachdailynews.com/news/local/25th-group-moves-from-mar-lago-palm-beach-symphony-changes-concert/upjDb4qMuTKo7l25Tt9wGN/">events at Mar-a-Lago stopped</a> doing that in the 2017-2018 gala season.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/231387/original/file-20180809-30458-gnawru.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=498&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mar-a-Lago.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Irma-Mar-a-Lago/141096aa989e40ac875ee2dc620fb7e7/1/0">(AP Photo/Lynne Sladky</a></span>
</figcaption>
</figure>
<h2>Self-dealing rules</h2>
<p>Since 1969, the Internal Revenue Code has included a set of <a href="https://www.irs.gov/charities-non-profits/private-foundations/taxes-on-self-dealing-private-foundations">onerous excise taxes</a> – a kind of fine designed to prevent <a href="http://www.ulib.iupui.edu/collections/philanthropy/mss023">self-dealing by private foundations</a>, such as when they make business transactions that involve insiders, like their board members or executives.</p>
<p>These penalties apply in many different situations. They can be a way to punish <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/private-foundations">private foundations</a> for lavishing donations on people and charities closely related to their leaders. More typically, foundations pay off the debts insiders owe or manipulate prices. </p>
<p>Although the tax code provisions that spell out what constitutes using philanthropic money for non-charitable purposes are broadly defined, I do not believe that they would apply with the Trump Foundation’s alleged behavior involving Mar-a-Lago fundraising events. </p>
<p>Nonetheless, this alleged pattern does reinforce <a href="https://theconversation.com/how-the-trump-foundation-could-undercut-the-public-trust-in-charitable-giving-98529">widespread concerns about how that foundation</a> operated.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/231391/original/file-20180809-30443-193ptfb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Philanthropy requires more than following the letter of the law.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/3d-illustration-crossword-presenting-concept-rules-208677412">Shutterstock.com/Ribah</a></span>
</figcaption>
</figure>
<h2>Not technically illegal</h2>
<p>While it might seem that using assets of the Donald J. Trump Foundation to benefit Mar-a-Lago clients who rent the venue for their fundraising events could have broken tax rules, no evidence of an agreement between the foundation and the charities that held Mar-a-Lago events has come to light.</p>
<p>But in my view, private foundations have a responsibility to do more than merely comply with tax laws in a technical sense. They have a duty to serve public, not private, interests.</p>
<p>Giving the impression that the foundation’s charitable gifts were somehow tied to driving business to Mar-a-Lago, like New York Attorney General Underwood’s accusations, I believe, demonstrates the Trump Foundation’s failure to see its purpose as pursuing a charitable mission.</p><img src="https://counter.theconversation.com/content/101232/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ellen P. Aprill has received funding from NYU and the Urban Institute for papers presented at conferences of the NYU Center for Philanthropy and the Law. None of these papers discussed the Donald J. Trump Foundation. One such paper did address charitable self-dealing more generally. </span></em></p>Donations from the Donald J. Trump Foundation to Charities Hosting Events at Mar-a-Lago violate the spirit but not the letter of federal tax law.Ellen P. Aprill, Professor of Law; John E. Anderson Chair in Tax Law, Loyola Law School Los AngelesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1003152018-07-23T10:23:12Z2018-07-23T10:23:12ZAs New York looks into whether the Trump Foundation broke the law, criminal charges remain unlikely<figure><img src="https://images.theconversation.com/files/228669/original/file-20180720-142414-ntof00.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A demonstrator in New York demanding that President Donald Trump's tax returns be made public</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Trump-Tax-Returns/bd9c38944e384b4c8c5bb24a202d81bf/2/0">AP Photo/Mary Altaffer</a></span></figcaption></figure><p><a href="https://apnews.com/7cbf9bb9fa8a4aae8a68cf26b70ce556">New York authorities</a> have opened an investigation into the Donald J. Trump Foundation to determine whether the president or his charity broke state tax laws.</p>
<p>The state tax probe is just the latest example of the legal trouble the president’s foundation faces. In addition, <a href="https://ag.ny.gov/press-release/attorney-general-underwood-announces-lawsuit-against-donald-j-trump-foundation-and-its">New York Attorney General Barbara Underwood is suing the foundation</a> for allegedly <a href="https://theconversation.com/why-new-york-state-is-suing-the-trumps-5-questions-answered-98375">violating state laws governing charities</a>. And she has <a href="https://ag.ny.gov/sites/default/files/irs_final_letter.pdf">alerted the IRS</a> and the <a href="https://ag.ny.gov/sites/default/files/fec_final_letter.pdf">Federal Election Commission</a> about the foundation’s possible federal tax and campaign law violations.</p>
<p>As a <a href="https://scholar.google.com/citations?user=v51-MK0AAAAJ&hl=en&oi=ao">scholar of federal</a> and <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1358581">state tax law</a>, I believe that these allegations raise serious concerns about Trump’s management of the charity that bears his name. I think it is unlikely, however, that the New York state investigation into the Trump Foundation will lead to any criminal charges.</p>
<h2>A civil lawsuit and a potential criminal probe</h2>
<p>Underwood’s lawsuit is a civil action, not a criminal proceeding. She is asking a state court to dissolve the foundation, to order the president to pay <a href="https://www.reuters.com/article/us-usa-trump-trump-foundation/new-york-sues-trump-and-his-charity-over-self-dealing-idUSKBN1JA26G">US$2.8 million in restitution</a> plus additional penalties and to temporarily prohibit Trump and his three oldest children from serving on the board of any nonprofit based in the state.</p>
<p>That case, in my view, is strong. Underwood’s petition details several apparent violations of federal and state law by the foundation dating back to 2007. Among the most flagrant of these is a $25,000 contribution that the foundation made in 2013 to the re-election campaign of Florida Attorney General Pam Bondi. Not only does that run afoul of laws barring foundations from contributing to political campaigns, but the <a href="http://www.politifact.com/florida/article/2016/sep/21/donald-trump-pam-bondi-and-25k-was-it-pay-play/">Trump Foundation now admits</a> that it misreported the gift in federal and state tax filings.</p>
<p>The Trump Foundation’s <a href="https://www.cnbc.com/2018/07/19/new-york-governor-opens-door-to-a-criminal-case-against-the-trump-foun.html">allegedly illegal actions have led to some speculation</a> that the president or others associated with his charity could face criminal charges. But not all tax law violations rise to the level of a crime. New York law imposes criminal consequences for only a few tax-related offenses – most notably, tax fraud.</p>
<p>Under New York law, <a href="https://codes.findlaw.com/ny/tax-law/tax-sect-1801.html">criminal tax fraud</a> occurs when a person “knowingly” submits “materially false or fraudulent information” in connection with a tax return. To hold someone criminally liable, the prosecution must prove that the person acted “willfully” – which means with “intent to defraud” or to avoid “a known legal duty.” Criminal tax fraud is, at a minimum, a <a href="https://codes.findlaw.com/ny/tax-law/tax-sect-1802.html">class A misdemeanor</a>, punishable by <a href="https://codes.findlaw.com/ny/penal-law/pen-sect-70-15.html">up to one year</a> in jail.</p>
<p>Before bringing criminal tax fraud charges, <a href="https://codes.findlaw.com/ny/executive-law/exc-sect-63.html">the attorney general would need</a> a criminal referral from either the governor or the state’s top tax official. New York Gov. <a href="https://www.cnn.com/2018/07/18/politics/andrew-cuomo-trump-foundation/index.html">Andrew Cuomo’s office says</a> his administration is willing to provide a referral. But there are several more hurdles that state authorities would have to overcome before they would have a plausible criminal case.</p>
<h2>Barriers to prosecution</h2>
<p>The first barrier is New York’s <a href="https://codes.findlaw.com/ny/criminal-procedure-law/cpl-sect-30-10.html">statute of limitations</a>. Prosecution for misdemeanor tax fraud must begin within three years of the crime’s commission. That would rule out most of the actions outlined in Underwood’s lawsuit. </p>
<p>Prosecutors, however, can look back five years in cases of felony tax fraud. That could potentially make charges related to the Trump Foundation’s misreporting of the Bondi gift fair game. But for tax fraud to be a felony rather than a misdemeanor, it must result in an underpayment to the state of <a href="https://codes.findlaw.com/ny/tax-law/tax-sect-1803.html">more than $3,000</a>. The Bondi incident probably falls below that threshold. </p>
<p>A second challenge is showing that foundation officials or Trump family members acted “willfully.” For example, Underwood’s petition alleges that the Trump Foundation made false statements in a 2016 filing when it said that an Iowa fundraiser was a foundation event rather than a presidential campaign stop. But even if the foundation mischaracterized the event in its filing, the foundation’s statements fall short of the out-and-out lie that would typically support criminal tax fraud charges.</p>
<h2>What’s next?</h2>
<p>For now, <a href="https://twitter.com/amyspitalnick/status/1019689611193352194">Underwood’s office says</a> it still is “evaluating the evidence” to determine whether a criminal prosecution related to the Trump Foundation might be warranted.</p>
<p>In the meantime, she will proceed with the civil lawsuit. The judge in that case has <a href="https://www.bloomberg.com/news/articles/2018-06-26/trump-foundation-urged-by-judge-to-settle-suit-on-dissolution">urged both sides</a> to settle the claims against Donald Trump Jr., Ivanka Trump and Eric Trump, and has scheduled an <a href="https://lawandcrime.com/trump/judge-in-trump-foundation-case-shifted-around-her-calendar-to-hold-key-hearings-before-midterm-elections/">October court date</a> for the claims against the president and his charity. </p>
<p>The potential for a criminal prosecution is emerging as a major issue in the race to succeed Underwood, who isn’t running, as New York’s next state attorney general. One candidate vying for the Democratic Party nomination, Zephyr Teachout, has <a href="https://twitter.com/ZephyrTeachout/status/1019988349111726081">called for a criminal probe</a> into the Trump Foundation, and she has suggested that a criminal prosecution could lead to the <a href="https://www.apnews.com/4bb39566ecf74810a2a1a23745627c0d">release of Trump’s own tax returns</a>.</p>
<p>Nonetheless, in my view, any effort by New York state to prosecute the Trump Foundation, the president or his relatives for criminal tax fraud would encounter significant and likely insurmountable legal obstacles.</p>
<h2>A better path to public disclosure</h2>
<p>And given the significant obstacles standing in the way of a criminal prosecution of the Trump Foundation or the Trumps, I think it is unlikely that the state’s ongoing probe will result in the president’s tax returns becoming public. Even if the state attorney general does move forward with charges, it is far from clear that the president’s personal tax returns would be released as part of a prosecution focused on his foundation.</p>
<p>In any event, New York has a much better way to ensure that voters can review the president’s own tax filings. It <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2959113">could pass a law</a> requiring the release of state tax returns filed by the president. Trump’s New York state tax returns include most of the information contained in his federal returns, and state tax filings are not covered by the federal tax return confidentiality statute.</p>
<p>Half of New York state’s <a href="https://www.nysenate.gov/legislation/bills/2017/a7462/amendment/original">Assembly members have signed on as co-sponsors to a bill</a> that would lead to the release of the president’s state tax returns. <a href="https://www.nysenate.gov/legislation/bills/2017/s5572/amendment/a">Similar legislation is pending in the state Senate</a>, yet leaders in both chambers have not scheduled any votes so far.</p><img src="https://counter.theconversation.com/content/100315/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Hemel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are other ways for the state to make the president’s tax returns part of the public record that are more likely to work.Daniel Hemel, Assistant Professor of Law, University of ChicagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/864512017-11-06T01:24:07Z2017-11-06T01:24:07ZTaxpayers are subsidizing hush money for sexual harassment and assault<figure><img src="https://images.theconversation.com/files/193264/original/file-20171103-1011-su99sq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The secret settlements that leave the reputations of alleged sexual abuse perpetrators intact are also tax-deductible.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/locker-bank-vault-storage-cash-documents-71417005?src=jK7LyeHElAbODzkiDUjnpA-1-63">Lisa S./Shutterstock.com</a></span></figcaption></figure><p>Many of the recent stories about sexual abuse claims against disgraced Hollywood mogul <a href="http://www.slate.com/blogs/the_slatest/2017/10/10/a_list_of_sexual_assault_and_harassment_allegations_against_harvey_weinstein.html">Harvey Weinstein</a>, former Fox News host <a href="https://www.gq.com/story/megyn-kelly-bill-oreilly-the-receipts">Bill O’Reilly</a> and <a href="http://wjla.com/news/entertainment/looking-back-at-the-sexual-harassment-media-stories-that-dominated-coverage-this-year">other powerful actors, journalists and executives</a> mention settlements either they or their employers made to silence women who accused them of misconduct. </p>
<p>These settlements often require alleged victims to sign a nondisclosure agreement – essentially a pledge of secrecy – in exchange for a cash payment. They are designed to keep the reputations of allegedly abusive high-flyers intact, an arrangement that can allow repeated wrongdoing. </p>
<p>As a law professor who focuses on <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=182574">white-collar crime</a>, what I find striking about these contracts is how they can be treated as tax-deductible business expenses. That means American taxpayers are helping foot the bill for keeping despicable behavior in the shadows.</p>
<p>I don’t believe that secret payments to settle sexual abuse claims should be tax-deductible. Here’s why.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193217/original/file-20171103-1014-1p3ya0r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Before Fox News fired Bill O'Reilly, there was a great deal of outrage over his alleged sexual abuse.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/TV-Fox-O-Reilly/3b446a6e30c04fa9b231a077f9856ea7/30/0">AP Photo/Bebeto Matthews</a></span>
</figcaption>
</figure>
<h2>Secret settlements</h2>
<p>Sexual harassment <a href="https://www.eandblaw.com/employment-discrimination-blog/2016/02/04/sexual-harassment-at-work-a-crime/">becomes a crime</a> only when there is a nonconsensual touching or sexual contact that can be prosecuted.</p>
<p>Victims of sexual harassment in the workplace usually can pursue personal injury claims by seeking damages from the executive or colleague responsible for it – or their employer – to compensate for emotional distress and any physical injury the abuse caused. These cases are mostly litigated at the state level, if they ever reach a courtroom.</p>
<p>The broader cost of these confidential agreements to society is that they leave perpetrators free to prey on new victims who are unaware that they may be walking into a trap when they meet privately with a powerful executive or someone who simply has <a href="https://www.washingtonian.com/2017/11/01/matt-taibbi-politics-prose-event-canceled-sidwell/">greater seniority and influence</a>.</p>
<p>Some states have tried to stop or at least curb this practice.</p>
<p>For example, Florida’s <a href="http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0000-0099/0069/Sections/0069.081.html">Sunshine in Litigation Act</a> prohibits courts from entering an order that conceals information related to a public hazard, which is defined as something or someone “that has caused and is likely to cause injury.”</p>
<p><a href="https://www.rcfp.org/secret-justice-alternative-dispute-resolution/secret-settlements-hazardous-cases">Other states</a> with anti-secrecy laws include Texas, Virginia, North Carolina, New York, Oregon and Georgia. </p>
<p>That kind of solution, however, only goes a short way toward protecting the public because it is limited to cases that go to court. For example, a former Weinstein Company employee withdrew her complaint to management without ever resorting to a legal filing by <a href="https://www.boston.com/culture/entertainment/2017/10/12/weinstein-co-may-have-known-of-settlements-since-2015">accepting a settlement</a> in 2015. A <a href="https://www.nytimes.com/2017/10/05/us/harvey-weinstein-harassment-allegations.html?_r=0">total of eight women</a> have collected between roughly US$80,000 and $150,000 each due to secret agreements not to disclose Weinstein’s alleged misconduct, The New York Times reported in October.</p>
<p>When settlements stave off the filing of a sexual harassment complaint in court, the agreements aren’t subject to mandates like Florida’s Sunshine in Litigation Act.</p>
<p>California State Sen. <a href="http://variety.com/2017/biz/news/bill-settlement-ban-sexual-harassment-harvey-weinstein-1202593778/">Connie Leyva</a> plans to introduce a bill that would go even further. Her legislation would ban all secret nondisclosure agreements in financial settlements that arise from sexual harassment, assault and discrimination cases.</p>
<p></p><hr><p></p>
<p><iframe id="Djcal" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Djcal/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<h2>Ordinary business expenses</h2>
<p>The payments associated with these settlements can be treated as a business expense. That means they are tax-deductible, as long as they are related to the conduct of the company’s ordinary operations.</p>
<p>Although it might seem odd to say that sexual harassment is within the realm of a company’s business, the many accusations against Weinstein involved encounters that were at least purportedly related to future movie productions.</p>
<p>Either an employer or the person accused of harassment can pay the money required by these settlements. In O’Reilly’s case, Fox has said it knew that he had reached a new settlement with an accuser before it renegotiated his contract earlier this year. Fox’s insistence that the company was unaware of the size of the settlement – <a href="http://deadline.com/2017/10/james-murdoch-oreilly-settlement-was-news-to-me-1202194410/">$32 million</a> – makes it clear that O'Reilly wrote the check.</p>
<p>Even the attorney’s fees for negotiating the settlement are deductible as another ordinary business expense.</p>
<p>Until about 50 years ago, payments related to violations of what the courts deemed violations of “public policy” were not tax-deductible. Congress changed that in 1969. Section 162 of the <a href="https://www.law.cornell.edu/uscode/text/26/162">U.S. tax code</a> now only explicitly prohibits the deduction of bribe payments, health care kickbacks, lobbying expenditures and any fines or penalties paid to the government for violating the law.</p>
<p>Just about everything else is deductible. But <a href="http://www.queensemploymentattorney.com/blog/2016/03/is-income-from-a-sexual-harassment-settlement-taxable/">most victims</a> of sexual harassment and abuse <a href="http://californiaceo.net/tax-planning-sexual-harassment-claims">do not get a break</a>. That’s because the law exempts payments only for <a href="https://www.law.cornell.edu/uscode/text/26/104">physical injuries</a>, not for payments related to emotional distress. </p>
<p>Who else gets to deduct their settlement <a href="https://uspirgedfund.org/sites/pirg/files/reports/USPIRG_SettlementsReport.pdf">payments for misconduct</a>?</p>
<p>One good example is BP. The oil giant got to write off over $15 billion of its <a href="https://www.forbes.com/sites/robertwood/2015/10/06/bps-20-8-billion-gulf-spill-settlement-nets-15-3-billion-tax-write-off/#2ef4a0c25c5b">$20.8 billion settlement</a> with the federal government over its massive Gulf Coast oil spill, allowing it to potentially shelter years of income from federal taxes. </p>
<p>Another is <a href="http://www.businessinsider.com/tax-deductible-of-jp-morgan-settlement-2013-11">JP Morgan</a>. Its $13 billion settlement for faulty mortgages allowed the company to deduct about $7 billion from its taxes. A similar settlement by <a href="https://newrepublic.com/article/132628/goldman-sachs-settlement-5-billion-sham">Goldman Sachs</a> for subprime mortgages it packaged into securities resulted in a $5 billion settlement of which over half was tax deductible.</p>
<h2>Changing the law</h2>
<p>One way to discourage corporate misconduct is to raise the cost of engaging in it. </p>
<p>Congress is now weighing whether to close many loopholes as part of a broad <a href="https://www.pbs.org/newshour/politics/gop-tax-bill-would-be-broadest-tax-code-rewrite-in-30-years">tax package</a>. In my opinion, that makes this the ideal time to stop allowing deductions for secret settlements of sexual abuse claims from corporate or personal income taxes.</p>
<p>Ending this tax break would make this kind of confidentiality agreement more costly for perpetrators and the companies that let them off the hook. That would give corporate accountants and human resources departments a powerful incentive to <a href="https://theconversation.com/how-companies-can-learn-to-root-out-sexual-harassment-85862">root out</a> the problem.</p>
<p>There are no surefire ways to end sexual harassment and assault in the workplace. But making it cost more to hide this misconduct might help make it less commonplace.</p><img src="https://counter.theconversation.com/content/86451/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter J. Henning does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Secret payments in exchange for silence regarding work-related sexual abuse are usually tax-deductible. How about changing that?Peter J. Henning, Professor of Law, Wayne State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/750592017-03-23T23:46:33Z2017-03-23T23:46:33ZASIC’s CommInsure pass shows why badly behaving bankers will never fear jail time<p>In October 2014, the Australian Securities and Investments Commission (ASIC) Chairman, Greg Medcraft, was <a href="http://www.smh.com.au/business/australia-paradise-for-whitecollar-criminals-says-asic-chairman-greg-medcraft-20141021-119d99.html">pretty forthright</a></p>
<blockquote>
<p>This is a bit of a paradise, Australia, for white collar criminals.</p>
</blockquote>
<p>Just a day later, reportedly after a phone call with Finance Minister Senator Mathias Cormann, he <a href="http://www.smh.com.au/business/asic-backflips-on-criminals-paradise-comments-20141022-119v22.html">attempted to clarify</a> his remarks.</p>
<blockquote>
<p>I correct that. Basically the point is that we want to make sure we don’t become a paradise.</p>
</blockquote>
<p>But as with much of what it has tried to do in the past five years, ASIC has been spectacularly unsuccessful, aiding the creation of a white-collar paradise, rather than hindering it.</p>
<p>But what would a white-collar hell hole look like? Mr Medcraft, gives us his perspective:</p>
<blockquote>
<p>The thing that scares white-collar criminals is going to jail and that’s what scares them everywhere in the world…The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough. All you’re doing is giving them a slap on the wrist [and] that is not deterring people.</p>
</blockquote>
<p>So since 2014, has ASIC been working assiduously to jail and fine white collar criminals, so they won’t do it again? Not in this paradise - ASIC hasn’t. Two examples, just this month, illustrate this.</p>
<p>First, ASIC has just <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-348mr-update-on-asics-investigation-into-comminsure/">released</a> its long-awaited report into the CommInsure scandal <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm#transcript">unearthed</a> originally by the ABC and Fairfax.</p>
<p>In summary, the ASIC report says that: Yes, CommInsure was using out of date medical definitions to deny claimants who were dying; Yes, CommInsure had to pay out millions to claimants who were found to have valid claims after all; Yes, Comminsure’s systems were inadequate and could not be properly audited.</p>
<p>But also no, there is no evidence of undue pressure on doctors to change their opinions; Yes, the firm’s claims processes were less than “best practice”; Yes the claims processes were inconsistent; No, there was no evidence that medical opinions were altered.</p>
<p>ASIC concluded that everything, despite evidence of unfeeling and incompetent behaviour, was legal! </p>
<p>And what punishment did ASIC mete out for such atrocious behaviour? In the sternest tones, Mr. Medcraft sent CommInsure a quiet little <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-065mr-asic-accepts-enforceable-undertakings-from-westpac-and-anz-to-address-inadequacies-within-their-wholesale-fx-businesses/">note</a> asking them to “engage an independent expert by July 2018 to conduct an implementation review”, into recommendations by a half dozen “independent inquiries”.</p>
<p>ASIC is telling CommInsure to do what it should have been doing all along. Let’s forget the past and mistreatment of customers, it’s paradise for firms that prey on the sick and dying.</p>
<p>But it’s not enough to be legal. </p>
<p>In the UK, Payment Protection Insurance (PPI) was, and is, perfectly legal. But that did not stop UK regulators <a href="http://www.telegraph.co.uk/news/2017/03/02/prepare-ppi-plague-fca-planning-42m-ad-campaign-will-spark-nuisance/">forcing banks</a> to pay some £23 billion (and counting) in remediation to customers for mistreatment of claimants who were sold inappropriate PPI contracts. ASIC is still reviewing the local insurance industry’s marketing and sales practices, but don’t hold your breath.</p>
<p>ASIC <a href="http://www.smh.com.au/business/banking-and-finance/cbas-insurance-arm-comminsure-told-to-reassess-rejected-heart-attack-claims-to-2012-20170322-gv4dif.html">claims</a> it has asked the government for more powers to tackle bad behaviour of the type exhibited by CommInsure as regards claims, but is still waiting on the reply.</p>
<p>However, ASIC does not have to wait. Back in 2015, ASIC <a href="https://theconversation.com/asics-fashion-faux-pas-44590">put its hand up</a> to be the “conduct regulator” and defined “conduct risk” as:</p>
<blockquote>
<p>The risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees. </p>
</blockquote>
<p>This means that ASIC does not have to prove illegality, merely inappropriate or unethical conduct, to take action. Having shelled out millions of dollars buying off mistreated claimants, not even CommInsure would claim that their behaviour was either appropriate or ethical. </p>
<p>But rather than do its job on tackling misconduct, ASIC has chosen to hide behind a shabby, legalistic defence. </p>
<p>Another example comes from mid-March, when ASIC <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-065mr-asic-accepts-enforceable-undertakings-from-westpac-and-anz-to-address-inadequacies-within-their-wholesale-fx-businesses/">announced</a> that it had accepted an “enforceable undertaking” with Westpac and ANZ regarding manipulation of a key Foreign Exchange (FX) benchmark. This is where the bank voluntarily enters into a binding agreement to do certain tasks that settle a contravention of the law. In this case failing to ensure that their systems and controls were adequate to address risks relating to the manipulation of the FX.</p>
<p>Just a few months ago, ASIC had <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-455mr-asic-accepts-enforceable-undertakings-from-nab-and-cba-to-address-inadequacies-within-their-wholesale-spot-fx-businesses/">accepted</a> a similar enforceable undertaking with the other banking pillars, the National Australia Bank (NAB) and the Commonwealth Bank. So, all four of the Big Four banks were implicated in manipulating key FX benchmarks. This is despite the claims by their CEOs, at the now-regular <a href="http://www.theaustralian.com.au/business/financial-services/banks-inquiry-nab-westpac-face-parliamentary-hearings/news-story/126e5f5215be19405cc9ec190f663afe">senate committee hearings</a>, that there was, to their knowledge, no “systemic” misbehaviour.</p>
<p>So what were the four banks accused of? Using Westpac as an example of the sort of conduct found by ASIC in all of the banks, over a period from 2008 to 2013, Westpac staff: disclosed confidential customer information to their mates in the market; disclosed the banks’ own positions to supposed competitors; changed their own positions after receiving insider information; and colluded with external parties to fix the market for their own profit. Similar, insider trading and collusion was reported for other banks.</p>
<p>In overseas jurisdictions, <a href="http://www.reuters.com/article/us-banks-forex-settlement-idUSKBN0O50CQ20150520">regulators</a> hit banks with over US$10 billion of fines for exactly the same misconduct, and also <a href="https://www.bloomberg.com/news/articles/2016-08-29/fed-bans-and-fines-ex-barclays-trader-in-fx-manipulation-probe">fined and banned</a> traders. In <a href="https://www.fca.org.uk/markets/market-abuse/regulation">Europe</a>, such conduct has been made officially illegal. </p>
<p>So what did ASIC do to scare the local white-collar wannabees? </p>
<p>They did not fine the banks nor bar the traders, but agreed with the banks that they would make “community benefit payments” of between A$2.5 and A$3 million each to support “financial literacy”. Yes, you heard right- $3 million for charity. </p>
<p>No fines, no sackings, no remediation for customers who were duded, no resignations, no cutting of bonuses, no apologies from the board. No repayment of ASIC’s legal fees (which the taxpayer picks up). No, just A$3 million measly dollars – a tiny amount compared to the banks’ billion dollar profits.</p>
<p>No wonder it’s paradise for white-collar criminals when the policeman has gone off snorkelling.</p>
<p>On the other hand, maybe there’s some genius in ASIC’s madness (for not rocking the boat)?</p>
<p>With Brexit, bankers are already starting to jump from the <a href="https://www.theguardian.com/business/2017/mar/21/goldman-sachs-staff-london-brexit-frankfurt-paris">City of London</a> , where better to set up shop than in Sydney or Melbourne? </p>
<p>No nasty Financial Conduct Authority, handing out big fines, just ASIC. No obnoxious Prudential Regulation Authority, just sleepy old APRA. No parliamentary committees <a href="https://www.ft.com/content/3cef50e6-d42b-11e6-b06b-680c49b4b4c0">harping on</a> about breaking up the banks. No <a href="https://www.fca.org.uk/markets/market-abuse">laws to stop market manipulation</a>. And most definitely, no <a href="http://www.parliament.uk/bankingstandards">Banking Royal Commissions</a>.</p>
<p>We can already see the <a href="http://www.afr.com/news/politics/where-the-bloody-hell-is-our-national-australia-brand-20150930-gjxy9u">marketing campaign</a></p>
<blockquote>
<p>It’s paradise for white-collar criminals down here, where the bloody hell are you?</p>
</blockquote><img src="https://counter.theconversation.com/content/75059/count.gif" alt="The Conversation" width="1" height="1" />
ASIC is telling CommInsure to do what it should have been doing all along. Let’s forget the past and mistreatment of customers, it’s paradise for firms that prey on the sick and dying.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/628122016-07-25T14:08:51Z2016-07-25T14:08:51ZPublic wants tougher sanctions for irresponsible behaviour in business<figure><img src="https://images.theconversation.com/files/131779/original/image-20160725-12618-8bif7e.jpg?ixlib=rb-1.1.0&rect=20%2C107%2C925%2C535&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Philip Green: hit hard by MPs.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-58510568/stock-photo-london-september-philip-green-attends-london-fashion-week-on-september-in-london.html?src=RBx5TgR_dXrShwQjVMQ0Wg-1-5">Shutterstock</a></span></figcaption></figure><p>Philip Green has been branded the <a href="http://www.bbc.co.uk/news/business-36879241">“unacceptable face of capitalism”</a> by British MPs investigating the demise of high street <a href="https://theconversation.com/the-uk-government-response-to-bhs-will-set-the-tone-for-attitudes-to-work-59220">department store BHS</a>. For many, however, the word “unacceptable” could be deleted. This is what so many now know is the normal face of capitalism. It is business as usual. </p>
<p>As the dust settles from the short-lived Tory leadership contest, the new prime minister, Theresa May, has outlined a radical agenda for economic reform. In a speech overtly directed to reach beyond the comfortable middle-classes and traditional Tory heartlands, May <a href="http://www.huffingtonpost.co.uk/entry/prime-minister-theresa-may-takes-office-with-a-promise-to-look-after-working-people_uk_57866b22e4b08078d6e7cbb5">set out her vision</a> of “a country that works not for the privileged few, but for every one of us”.</p>
<p>Observers might be forgiven for delivering a well-worn shrug, recalling similar platitudes by her predecessor David Cameron such as “<a href="http://www.theguardian.com/politics/2009/oct/08/david-cameron-speech-in-full">we’re all in this together</a>”. And May, just as Cameron did before her, <a href="https://next.ft.com/content/d7d17eb6-4760-11e6-8d68-72e9211e86ab">also promises</a> to “get tough on irresponsible behaviour in big business” without actually saying how.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/131686/original/image-20160724-26805-wd05j1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Playing it tough.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/pandx1/8637383860/in/photolist-eafRio-r6MbBY-9YxkrF-bHg7zi-fNUw62-oFoUqr-aaEEiJ-aaRnuz-8h8S3d-nMMe5a-36nuCv-82xXMA-ry5Hg3-p6WjAy-p2anLt-anUgst-oXHgkm-tCQxUo-8eu9sw-5eEwts-s7459G-8ZL12h-nPEXsp-jkxxoM-oJczrk-boGXXe-boGbkV-bJwvAK-boCLj2-9fwx2P-8MkCzy-bpve2B-boGXXP-rtB6JM-bHqWEp-e7nKJB-82uN1P-7hdDhQ-aSahrt-91T6pF-hPqoK7-pWEMQm-sokxMD-ruhjXV-o7oteU-kC2Rmu-8h83Zo-bpTzCn-boD1mV-boCLiv">Minoru Karamatsu/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>At this moment in politics, the new prime minister could not have chosen a better target. Those disenfranchised voters have watched a clown car of high-profile scandals careering into the public imagination over recent years. From Green’s management and ownership dealings at BHS to industrial scale <a href="https://theconversation.com/uk/topics/tax-avoidance">tax avoidance</a>; from <a href="https://theconversation.com/uk/topics/libor">Libor manipulation</a> to the near-standardised practice of <a href="https://www.theguardian.com/business/2011/may/05/how-ppi-scandal-unfolded">PPI mis-selling</a> by banks and building societies, corporate malfeasance has become a matter of expectation rather than exception. The scale of serious harms inflicted upon society through such practices is almost inestimable in its enormity – and this needs to be taken into account. </p>
<h2>Taking offence</h2>
<p>Corporate wrongdoing, however, rarely attracts criminal sanctions in contemporary Britain. Slaps on the wrist or fines are easier (and cheaper) to enforce. This apparent contradiction serves to remind us that criminal justice is a selective process that defines and classifies certain activities as being deserving of criminalisation and others as not.</p>
<p>To investigate this bias, we commissioned a <a href="https://www.crimeandjustice.org.uk/publications/redefining-criminality">YouGov survey</a> of public attitudes towards the seriousness of particular offences. Respondents were given two examples. One was of corruption and fraud committed by people or corporations in positions of power and which are not commonly processed through the criminal justice system; the other was an example of a “traditional” crime that does go through that process.</p>
<p>Examples of these traditional crimes included shoplifting, joyriding and handling stolen goods. Each of these offences are officially recorded as “theft offences”, for which there are between 150,000 and 200,000 convictions a year in England and Wales.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=340&fit=crop&dpr=1 600w, https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=340&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=340&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=428&fit=crop&dpr=1 754w, https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=428&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/131685/original/image-20160724-26841-d5k1cw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=428&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Joy riding.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/cactusmelba/4207815787/in/photolist-7pQa34-cj1KK7-cfsbVf-cfsd9U-4Fd8es-cfsdRN-o2i4EK-jNDQi2-jFWdDX-o3aRU8-pPe8JC-9Cry2t-av9t3m-aJUBg-o1ZL3R-6Kt51J-o1QiCh-nK2Fkz-o2hHLX-nJsGNP-dg7WdG-dvDFU-kqXuVT-4piwbZ-cYGGGC-aQACFt-4piw5p-fkLCyt-o2e61p-nK2WVm-dXZGW8-dXZH5K-5E1hq5-oSjjmw-pQFTqR-pNWaRX-pQS9qN-i8ZeY-nZdeYZ-nKFwBf-pycpLD-aT9EQx-pyfEJs-ao4AqA-nK2Ufm-pPecFA-pNW7Cx-99n2H5-nJrt1w-o2ov1w">jason/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>The results indicated a strong public concern with bias in the criminal justice system:</p>
<ul>
<li><p>95% reported that they viewed an accountancy firm hiding evidence of tax fraud from inspectors as on par with, or more serious than, shoplifting. Only 2% of the British public regard shoplifting as a more serious offence.</p></li>
<li><p>95% reported that they viewed a pharmaceutical company deliberately overcharging the NHS as on par with, or more serious than, joyriding. Only 2% regard joyriding as a more serious offence.</p></li>
<li><p>95% reported that they viewed a bank knowingly defrauding customers by overcharging as on par with, or more serious than, handling stolen goods. Only 2% regard handling stolen goods as a more serious offence.</p></li>
<li><p>90% reported that they viewed an investment firm manipulating stock prices as on par with, or more serious than, handling stolen goods. Only 6% regard handling stolen goods as a more serious offence.</p></li>
</ul>
<h2>Shame game</h2>
<p>The overwhelming suggestion from those responses to our survey is that the public is wholeheartedly behind that promise to “get tough on irresponsible behaviour in big business”. <a href="https://www.crimeandjustice.org.uk/publications/redefining-criminality">In our publication Redefining Criminality</a>, published by the Centre for Crime and Justice Studies, we suggest three possible sanctions for companies that act irresponsibly that would provide a step in the right direction, including: “Shaming provisions”, “corporate probation” and even a “corporate death penalty”.</p>
<p>This incapacitation of a business would be the ultimate sanction. In cases where the organisation is “put to death”, companies would effectively be nationalised or put into the hands of a receiver, as is the case in bankruptcy procedures in many jurisdictions.</p>
<p>However, in these extraordinary times, with an economic downturn looking increasingly imminent, how likely is it that the new prime minister will follow through with the “getting tough” rhetoric? </p>
<p>She is, after all, known as a militantly pro-business and anti-red tape parliamentarian, with a record of voting down any policy that gets in the way of her friends <a href="http://www.independent.co.uk/voices/theresa-may-prime-minister-andrea-leadsom-policies-voting-record-human-rights-what-did-she-mean-a7130961.html">in the city of London</a>. MPs might happily aim their headline-friendly fire at Green in a report, but beyond the empty rhetoric we are at a loss to see how the latest in a long line of corporate profit-maximising prime ministers might respond to an intensifying public demand to create a country that does indeed work “not for the privileged few, but for every one of us”.</p><img src="https://counter.theconversation.com/content/62812/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Ellis receives funding from the Economic and Social Research Council</span></em></p><p class="fine-print"><em><span>David Whyte does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Philip Green has been vilified by MPs just as Theresa May vows to take on bad behaviour in big business. New research reveals just how urgent a task this is for voters.David Whyte, Professor of Socio-legal Studies, University of LiverpoolDavid Ellis, Post-Doctoral Researcher, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/549552016-03-31T00:30:58Z2016-03-31T00:30:58ZHow can we arrest the rise in white-collar crime in Australia’s property industry?<p>Consumers lose out when a real estate agent acts fraudulently. This includes actions such as false and misleading advertising, deceptive conduct and misappropriation of trust funds.</p>
<p>So <a href="https://www.researchgate.net/publication/298808572_The_Ethical_Considerations_for_Occupational_Licensing_in_Property_-_Why_is_White_Collar_Crime_on_the_Increase">what is behind</a> the increase in white-collar crime and fraudulent behaviour? And are there are any preventative measures that could be implemented to reduce the impact on consumers?</p>
<h2>The scale of the problem</h2>
<p>There are various property agency laws and codes of ethics that set out appropriate standards of behaviour for property agents.</p>
<p>In New South Wales, occupational licensing for property agents and certificates of registration <a href="http://www.austlii.edu.au/au/legis/nsw/consol_act/psabaa2002385/">are mandatory</a> if working in the property industry. Occupational licensing for this category is managed under the auspices of individual state and territory <a href="http://www.fairtrading.nsw.gov.au/">Fair Trading offices</a>.</p>
<p><a href="https://www.researchgate.net/publication/298808572_The_Ethical_Considerations_for_Occupational_Licensing_in_Property_-_Why_is_White_Collar_Crime_on_the_Increase">My research</a> concluded that education plays a pivotal role, coupled with industry experience, in combating white-collar crime in the property industry.</p>
<p>From 2003, the NSW regulator diminished the existing higher educational requirements and abolished the need for industry experience. This has been followed by significant increases in consumer and trader complaints in real-estate transactions. </p>
<p>These complaints include non-disclosure of a vested interest, misrepresentation, unethical conduct and fraud.</p>
<iframe src="https://datawrapper.dwcdn.net/1U7Xm/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="632"></iframe>
<p>The table above indicates an increase in complaints from 1756 to 3754 in a decade.</p>
<p>In 2012-13 Fair Trading reported only 1,444 complaints, which represented a decrease of 17.77%. However, there does appear to be an anomaly with the following year, which reported an increase of 113.78%. Therefore, it is possible that the complaints for 2012-13 could have been partly accounted for in the following financial year – hence the disparity.</p>
<p>If this is the situation, then an average calculation would indicate that complaints increased in 2012-13 and 2013-14 by an average of 48% for each year. This appears more in line with trends during the earlier years.</p>
<p>My <a href="https://www.researchgate.net/publication/298808407_White_Collar_Crime_and_Property_Agents_A_Selection_of_Convictions_involving_Trust_Accounting_Fraud">2013 study</a> identified ten randomly selected court cases from 2010 to 2013 that related to trust accounting fraud. Of these, five cases disclosed the amounts misappropriated – which totalled A$2,107,261.</p>
<p>I undertook <a href="https://www.researchgate.net/publication/298808572_The_Ethical_Considerations_for_Occupational_Licensing_in_Property_-_Why_is_White_Collar_Crime_on_the_Increase">further research</a> on five court cases that occurred during the 2013-14 financial year. The misappropriation of trust funds ranged from $813,936.00 to $1,434,111.43. The penalties ranged from jail sentences, extending from a bond for good behaviour to 18 months’ imprisonment, to disqualification from holding a licence or certificate and working in the property industry.</p>
<h2>The way forward</h2>
<p>Consumer complaints and trust accounting fraud continue to increase. Over the last decade, the property industry has continuously lobbied the regulator for an improvement in the educational requirements for the certificate of registration and licence categories. </p>
<p>My research developed a model of occupational corruption. Based on this, it <a href="https://www.researchgate.net/publication/298808407_White_Collar_Crime_and_Property_Agents_A_Selection_of_Convictions_involving_Trust_Accounting_Fraud">recommends</a> the following preventative measures be implemented:</p>
<ol>
<li><p>A major overview of the educational course curriculum and associated mandated qualifications. All certificate of registration holders should complete a Certificate IV qualification. All licensed holders should complete a diploma qualification, both within the property services training package and the relevant category of employment.</p></li>
<li><p>An increase in the mandated units and training hours required before starting work in the property industry. The previous industry experience of a minimum of two years should be reintroduced.</p></li>
<li><p>A points system where agents must submit their business and personal financial details to Fair Trading in order to obtain or renew their property licence. This will identify the agents whose businesses are not trading profitably and who might be considered high risk in trust accounting ethics and processes. The issuing of the licence should be linked back to obtaining a nominated minimum point score that reflects the financial viability of the licence holder or business.</p></li>
<li><p>An interview system, where agents applying for their licence are required to undertake an oral examination. In Australia, the Australian Property Institute and the Royal Institution of Chartered Surveyors have for decades successfully applied this method of assessment to the valuation profession.</p></li>
</ol><img src="https://counter.theconversation.com/content/54955/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hera Antoniades does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Consumers lose out when a real estate agent acts fraudulently – be that false advertising, deceptive conduct or misusing trust funds. Research shows a link between such misconduct and lower regulatory and educational standards.Hera Antoniades, Senior Lecturer, School of Built Environment, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/431092015-06-17T01:54:03Z2015-06-17T01:54:03ZThreat of jail could help prevent the next bank-led financial crisis<figure><img src="https://images.theconversation.com/files/84774/original/image-20150611-11398-d3h6mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Only one banker has been forced to serve prison time as a result of the global financial crisis.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Despite bankers playing a central role in the global financial crisis, <a href="http://www.reuters.com/article/2013/11/22/us-creditsuisse-serageldin-idUSBRE9AL13620131122">only one</a> has been jailed as a result, leading many taxpayers and investors to ask why more haven’t been criminally held to account.</p>
<p>The answer is complex, related to the layers and layers of organisational obfuscation that works towards making nobody responsible for anything. Everyone is to blame for the crisis but at the same time nobody’s to blame.</p>
<p>In his annual Mansion House speech last week, Bank of England chief Mark Carney warned that “<a href="http://www.bbc.com/news/business-33087604">the age of irresponsibility is over</a>” and said: </p>
<blockquote>
<p>“Markets responsible for trillions of pounds of global trade were stained by excess, collusion and abuse and that ‘ethical drift’ had taken hold. And Criminal sanctions should be updated, with market abuse rules similarly extended and maximum prison terms lengthened.”</p>
</blockquote>
<p>In making these comments, Carney, and the UK Chancellor (Treasurer) George Osborne, were endorsing the long awaited <a href="http://www.bankofengland.co.uk/markets/Pages/fmreview.aspx">Fair and Efficient Markets Review</a> which called for increased criminal sanctions for market manipulation. The UK government is considering a new statutory offence of a “corporate failure to prevent economic crime” and is examining the rules on “establishing corporate criminal liability” more widely.</p>
<p>Australia is considering similar sanctions. At a Senate Estimates hearing this month, ASIC chief Greg Medcraft <a href="http://www.abc.net.au/news/2015-06-03/asic-considers-criminal-sanctions-for-poor-company-culture/6517684">let slip that the regulator was considering tougher sanctions.</a></p>
<p>Medcraft said:</p>
<blockquote>
<p>“Under section 12.2 of the Commonwealth criminal code, a company can be held responsible as an accessory for a breach of certain Commonwealth laws by its employees if the company’s culture encouraged or tolerated the breach.”</p>
</blockquote>
<p>He then brought out the big stick:</p>
<blockquote>
<p>“It’s a provision we need to think about more - and it’s one, frankly, we are.”</p>
</blockquote>
<p>Jailing an individual for deficiencies in an organisation’s culture appears pretty far fetched, but that is exactly what <a href="https://www.ag.gov.au/Publications/Pages/CriminalCodePractitionerGuidelinesMarch2002.aspx">Section 12 of the Commonwealth Criminal Code</a> appears to provide for.</p>
<p>The Criminal code is, as one would expect, full of legalese but does actually define “culture” quite clearly as:</p>
<blockquote>
<p>“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”.</p>
</blockquote>
<p>One of the key words here is “policy”, such as official company policies on fraud or behaving ethically towards customers. Having put in place such policies, the criminal code is pretty clear that corporations are required to enforce them, otherwise the corporation might be considered guilty of a “corporate culture of non-compliance or of failure to maintain a corporate culture of compliance, with the law”. </p>
<h2>Apportioning blame</h2>
<p>In a recent case in the US, <a href="http://peopleriskmanagement.com/2015/02/16/does-the-sp-settlement-change-everything/">Standard & Poor’s was fined</a> a whopping US$1.375 billion for misconduct in mis-rating complex securities before the global financial crisis. The argument that the US Department of Justice made was fairly novel. In mis-rating securities, it argued, bank employees broke the rules in their company’s Code of Conduct. Since investors read (and believed) the organisation’s Code of Conduct and S&P didn’t enforce it, it was guilty.</p>
<p>In Australian terms, S&P had a “culture” of non-compliance. So, in theory, if employees of Australian financial institutions do not follow their codes of conduct and break the law, then the institution would also be at fault, under section 12 of the Criminal code. </p>
<p>But how does a regulator move from attributing blame to a corporation to charging a senior officer of the firm, such as a chairman or CEO?</p>
<p>Section 12 identifies four so-called “fault elements”: intention, knowledge, recklessness and negligence, which can give rise to an individual and then a corporate offence. </p>
<p>In the UK, the 2013 Banking Reform Act introduced a <a href="https://www.gov.uk/government/news/banking-reform-act-becomes-law">new criminal sanction</a> for “reckless misconduct that leads to bank failure”. Although the new legislation has been somewhat neutered by requiring a bank to actually fail before jailing the culprits, it is nonetheless a major step forward. But Section 12 appears to have no such limitation. </p>
<h2>How could a senior banker be considered reckless?</h2>
<p>Section 5 of the code identifies that a person is reckless with respect to a “result” if: “(a) he or she is aware of a substantial risk that the result will occur; and (b) having regard to the circumstances known to him or her, it is unjustifiable to take the risk”. Interestingly, the code states that the question of whether taking a risk is unjustifiable is one of fact, not opinion.</p>
<p>This, of course, hangs on the meaning of “substantial risk” but the code provides a definition that “the risk is substantial if a reasonable observer would have taken it to be substantial at the time the risk was taken”.</p>
<p>Let us assume that a reasonable observer, such as the<a href="http://www.theaustralian.com.au/archive/business-old/treasury-warning-on-home-price-bubble/story-e6frg9gx-1225956866267"> Head of the Treasury department</a> or Reserve Bank Governor <a href="http://www.abc.net.au/news/2015-06-10/rba-governor-stevens-says-weak-economy-leaves-rate-cuts-open/6535718">Glenn Stevens</a>, was concerned about overvalued house prices in the major capital cities. </p>
<p>Having heard the reservations of these experts, senior bankers must consider the risks of lending into such a market. It does not mean they should not lend but that the risks they take should be justifiable. In practical terms, they must proactively manage these risks. </p>
<p>If senior managers have not put in place the systems to report and monitor such risks then they cannot reasonably argue that the risks are justifiable - they just won’t know and therefore could be considered reckless.</p>
<p>On the other hand, if reporting systems have been put in place, but the senior managers do not read the reports in detail and take action where necessary that too could be considered reckless.</p>
<p>And if the senior managers do all of the right things but do not ensure the risks are being managed properly by frontline staff, that could also be considered reckless. In other words, it is not enough for senior managers to say “do something”, they also need to ensure that it is done by subordinates, otherwise the culture is at fault.</p>
<p>When someone is sent to jail for such an offence, although justified, it is an admission of failure. It is always better (and less expensive) to put prevention measures in place.</p>
<h2>What would prevention look like?</h2>
<p>Using the example of runaway house prices, pressure could be brought to bear on senior bankers by the mere action of officially identifying a “substantial risk”, such as with Stevens’ comments. That should trigger a response from banks, even if only to say “it’s under control”, which can then be tested by regulators.</p><img src="https://counter.theconversation.com/content/43109/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Jailing bankers for failing to uphold an ethical code is possible - it’s simply a matter of enforcing current laws.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/428972015-06-05T06:42:40Z2015-06-05T06:42:40ZAlan Bond’s lesson for Australia: we get the fraudsters we deserve<figure><img src="https://images.theconversation.com/files/84079/original/image-20150605-14141-rd9r26.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">They said he'd never make it.</span> <span class="attribution"><span class="source">AAP Image/Tony McDonough</span></span></figcaption></figure><p>Australia in the 1950s was a simpler place when Alan Bond arrived, a penniless migrant to Perth from the hard streets of London. With little education and few skills, he got by as best he could. </p>
<p>He always seemed to have a chip on his shoulder, perhaps explained by his modest roots. His Swan Lager TV advertisements, made in the 1980s featured the lyrics – “They said you’d never make it, but you finally came through”. The words were a nod to Bond himself – a champion underdog for other plain old underdogs.</p>
<p>He made versions of his Swan Lager ads for other mates who were laughed at and pilloried by the establishment, including Daryl Somers. It was pretty clear who the “they” were in the lyrics – the big end of town, the intelligentsia, lawyers and unfriendly politicians. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/KR84ZJM9Xig?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>Originally working as a sign writer in Perth to make a quid, Bond soon realised the money to be made in property development in Perth’s sprawling eastern and northern suburbs. He learnt early that the price of something and its true value were often very different things. He bought large swathes of land, subdivided them and sold them off for (literally) <a href="http://www.abc.net.au/tv/enoughrope/transcripts/s981486.htm">bags of cash</a>.</p>
<h2>Not an entrepreneur</h2>
<p>Bond was often called an entrepreneur, but that was never really true. Entrepreneurs create wealth by creating value. In the totality of Bond’s life, when all is said and done, his ventures destroyed value, or certainly created very little of enduring value. </p>
<p>His eponymous university on the Gold Coast – perhaps his most tangible legacy – was itself a product of <a href="https://www.timeshighereducation.co.uk/news/bond-break-up-clash/96379.article">shady intrigue</a> between Bond and his Japanese backers, EIE, mixed up in a property deal that had all of the expected elements of Bjelke-Petersen’s Queensland. When Bjelke-Petersen sued Bond’s Brisbane TV channel in 1983, Bond settled to the tune of A$400,000. Bjelke-Petersen had made it clear not paying up would have consequences for Bond’s business dealings in Queensland. <a href="http://www.abc.net.au/stateline/qld/content/2005/s1356642.htm">It was graft by any other name</a> – but Bond it seemed was a willing victim. It was corruption hiding in plain sight. </p>
<p>In the truest sense of the word, Bond was no entrepreneur. He was instead a grand arbitrageur – playing between asset and capital markets where value was not well understood. He was always looking for a deal. He borrowed where lenders misunderstood the risks of lending to someone like him, and he had an uncanny knack of seeing assets whose values were misunderstood – and generally underestimated.</p>
<p>Bond was far from selective in what he bought, and indeed what he sometimes paid. In the end, this was his undoing. He bought Van Gogh’s Irises in 1987, in hindsight not a bad investment. When it came to paying up, however, there was no money, so it went on to the Getty Museum in Los Angeles where it still hangs. A great fan of the French impressionists, it was a <a href="http://www.independent.co.uk/news/business/bond-jailed-for-three-years-for-art-fraud-1310776.html">shady deal</a> involving Manet’s La Promenade that eventually got him locked up in 1996. He may have had the Manet, but he never had the money.</p>
<p>There was no money either when he agreed to buy Channel Nine from the Packers for a billion dollars just before the stock market crash of 1987. The late Kerry Packer once observed that you only get one Alan Bond in your lifetime and indeed that deal, among all of the others, made the Packer family. Bond’s agreement was built on money he didn’t have and so he borrowed and borrowed wherever he could. Bond always understood one way to get rich was on the basis of “OPM” – other people’s money.</p>
<p>Shuffling debts between various corporate entities bought him some time, but also ended up the basis of a major fraud conviction while he was still in prison for his Manet swindle, extending his jail term to almost four years.</p>
<p>The prior events would have chastened and humbled most, but not Bond. When he was finally free in 2000, he returned to business, accumulating a couple of hundred million before his death.</p>
<h2>Bond’s lessons for us all</h2>
<p>Bond was what social scientists might call an “outlier”. He had extraordinary self-belief which, when coupled with his complete disregard for basic probity, was a recipe for financial mischief. This much was always well known, and yet investors time and again were drawn to his charms like a moths to a flame.</p>
<p>His cosy relationship with corrupt politicians has been repeated many times since his heyday, as recent events at NSW’s ICAC show. Constant vigilance on this front is clearly required in Australia. We consider ourselves an honest and upright nation – far too much evidence, over a long period, suggests otherwise.</p>
<p>As investors, Bond has lessons too. We have been far too forgiving for far too long for crimes which occur in the boardrooms of Australia, despite them sometimes directly impacting our own investments. While this tolerance occurs, the likes of Bond will thrive.</p>
<p>Taken together, Bond’s main lesson for us is that we get the fraudsters and crooks we deserve. While we are tolerant of white collar crime as something less serious than the blue collar type, Bond will provide the archetype for others to follow.</p><img src="https://counter.theconversation.com/content/42897/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is a member of the ALP and NTEU. Through his superannuation, he probably lost money to one or other of Alan Bond's frauds.</span></em></p><p class="fine-print"><em><span>Nigel Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bond was often called an entrepreneur but that was never really true.John Rice, Professor of Management, University of New EnglandNigel Martin, Lecturer, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/421742015-05-27T02:19:41Z2015-05-27T02:19:41ZWe all lose from banker greed, so it’s time to remove conflicts<p>The <a href="https://theconversation.com/banking-excuses-wearing-thin-as-fines-top-us-200-billion-41977">latest banking scandal</a> has faded from the headlines, leaving some of the world’s largest banks with US$6 billion in fines to pay, and ongoing investigations that may or may not result in jail time for the traders involved.</p>
<p>The fines for foreign exchange manipulation join a pool of <a href="http://www.thestreet.com/story/12955055/1/bank-fines-total-184-billion-with-174-cases-left-report.html">more than US$200 billion</a> levied against large banks in the past five years for offences such as manipulation of <a href="https://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">LIBOR</a>, <a href="http://www.reuters.com/article/2012/12/11/us-hsbc-probe-idUSBRE8BA05M20121211">money laundering</a> and for <a href="http://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial">sanctions busting</a>. ASIC has still to report on its investigation into possible manipulation in the Australian <a href="http://www.smh.com.au/business/asic-launches-investigation-into-foreign-exchange-benchmarks-20140320-355wo.html">foreign exchange</a> market.</p>
<p>In these, and dozens of other cases, bank staff have colluded to manipulate the markets or move money illegally through the financial system. In doing so they made untold profits, before they were caught red-handed. </p>
<p>But if the banks and bankers made millions, who lost out?</p>
<p>This is not an easy question to answer because these are so-called “victimless crimes”. In such scandals it is very often not possible to identify precisely who would have lost money as a result of the misconduct. </p>
<p>In the <a href="https://theconversation.com/explainer-how-bankers-fixed-forex-trades-and-why-its-criminal-37525">Forex</a> and <a href="https://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">LIBOR</a> scandals, traders “nudged” financial benchmarks one way or another depending on which direction made them money, just because they could. In fiddling the system, they believed that no one was getting hurt, or at least no human with whom one could empathise. </p>
<p>Certainly, shareholders have been hurt by massive fines, which after all come out of their dividends, minus a little bit clawed back from traders’ bonuses. But shareholders are faceless - mere numbers in an ever-changing share register. And one could argue that shareholders were beneficiaries of the illegal activity when it was profitable (ignoring the fact that shareholders come and go all of the time).</p>
<h2>The real losers</h2>
<p>In fact, the main losers are even more faceless and remote than shareholders, who at least get a chance to turn up for a drink at annual meetings. The real losers are those who have their money in pension or investment funds. Most funds have some foreign currency exposure, even if it is only holdings in the largest US and UK stock market indices (the ones we see on our TV every morning). It turns out that every day the currency values of those indices were manipulated, if only by a fraction.</p>
<p>If you are in a superannuation fund, you are a victim. The amount you personally have lost will never be known, and is not likely to be large. But over a lifetime it will add up to something worth being concerned with.</p>
<p>We know this because at the same time as some of the banks admitted their guilt to regulators last week, they also settled private lawsuits with a number of pension funds, most notably the <a href="http://www.wsj.com/articles/citigroup-settles-investors-private-forex-lawsuit-1432143569">Oklahoma Firefighters Pension Fund</a>. It turns out they settled early because they knew that they were about to plead guilty to crimes that may have <a href="http://blogs.reuters.com/alison-frankel/2015/01/06/bank-defendants-and-forex-not-all-rate-rigging-class-actions-are-alike/">class actions</a> raining down on them for years (with even more shareholder pain).</p>
<p>This raises the question, why did those we pay to manage our pension funds not pick up this misconduct? </p>
<h2>With great power…</h2>
<p>The asset management industry has grown massively over the past twenty years. In a <a href="http://www.imf.org/external/pubs/ft/gfsr/2015/01/pdf/c3.pdf">recent report into the industry</a>, the IMF estimated that globally the industry has assets under management of some $76 trillion which is “equivalent to 100% of world GDP and is equivalent to 40% of global financial assets, including loans”. In other words, the industry controls assets equivalent to about 4/10th of the banking system, but, unlike banks, the industry is not regulated on a global basis but by local securities regulators, such as the US Securities and Exchange Commission (SEC) and ASIC.</p>
<p>More importantly, the industry, like banking, has consolidated and smaller asset managers have been acquired by major banking and insurance corporations. In a <a href="https://www.sec.gov/divisions/investment/comments-ofr-asset-management-study.shtml">2013 study</a>, US regulator the Office of Financial Research, found that of the top 25 asset managers: nine are subsidiaries of large banks, such as JPMorgan, Deutsche and UBS; seven are subsidiaries of the world’s largest insurers, such as AXA and Prudential; while the remaining nine are independents, such as Blackrock (the largest) and Fidelity. </p>
<p>Why did these firms not pick up manipulation of the benchmarks that would negatively impact returns to their investors? Possibly because they were not looking for it. As the OFR said:</p>
<blockquote>
<p>“Regulation of asset managers often focuses on limiting conflicts of interest between asset managers and their clients, which can help mitigate these risks. However, such regulation focuses on helping ensure that managers adhere to their clients’ desired risk-return profiles, but does not always address collective action problems and other broader behavioural issues that can contribute to asset price bubbles or other market cycles.”</p>
</blockquote>
<p>Australia, which has the third largest Asset Management Industry in the world according to <a href="http://www.austrade.gov.au/Invest/Reports-Resources/Benchmark-Report">Austrade</a> is similarly concentrated, with four of the top five banks among the top ten asset managers, with Commbank and Macquarie <a href="https://www.austrade.gov.au/ArticleDocuments/2792/Investment-Management-Industry-in-Australia.pdf.aspx">leading the pack</a>. Whether there is manipulation or not, there is a conflict of interest here as, for example, asset managers in Colonial First State are working for the same company as FX traders at Commbank. If one could believe that all such conflicts of interests were being managed by the directors and senior managers of large banks then there would be little to worry about. </p>
<p>But evidence from elsewhere leads us to believe senior bankers have turned a blind eye to such misconduct. For example, State Street, the third largest asset manager in Australia, was <a href="https://www.fca.org.uk/news/state-street-uk-fined-transitions-management-failings">fined</a> last year by the UK Financial Conduct Authority for, in a clear conflict of interest, adding undisclosed mark-ups for its trading divisions to clients’ accounts. </p>
<h2>Time for answers</h2>
<p>While much publicity has been given to the wrongdoers in the latest financial scandals, and more will be generated when charges are eventually laid, we are forgetting the victims. There needs to be an investigation into why the asset management industry was not able, or seemingly willing, to go head to head with traders in the best interests of their customers. And the boards and management of large banks should be asking the same question also. </p>
<p>Australia is ideally placed to take a lead on this. Guy Debelle, Assistant Governor at the RBA, recently co-chaired an <a href="http://www.financialstabilityboard.org/2014/09/r_140930/">international inquiry</a> into the FX manipulation scandal which recommended, among other things that “banks establish and enforce their internal systems and controls to address potential conflicts of interest arising from managing customer flow”. Maybe the RBA should prompt ASIC to take up the challenge?</p><img src="https://counter.theconversation.com/content/42174/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As long as fund managers and traders work for the same companies, the problems plaguing the financial sector will continue.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/412362015-05-05T20:17:23Z2015-05-05T20:17:23ZHockey targets white collar crime, but forgets whistleblowers<p>Treasurer Joe Hockey has <a href="http://jbh.ministers.treasury.gov.au/media-release/035-2015/">announced</a> a new Serious Financial Crime Taskforce to crack down on white collar crime.</p>
<p>Mr Hockey said that: </p>
<blockquote>
<p>The Government will provide $127.6 million over four years for investigations and prosecutions that will address superannuation and investment fraud, identity crime and tax evasion. </p>
</blockquote>
<p>The new taskforce includes the Australian Taxation Office, Australian Crime Commission, Australian Federal Police, Attorney-General’s Department, Australian Transaction Reports and Analysis Centre, Australian Securities and Investments Commission, Commonwealth Director of Public Prosecutions and Australian Customs and Border Protection Services, according to a <a href="http://jbh.ministers.treasury.gov.au/media-release/035-2015/">press release</a> issued by his office. </p>
<p>In what will be a popular – even populist – initiative, the taskforce will scrutinise a very diverse community of wrongdoers known as white collar criminals.</p>
<p>Good luck to them. Mr Hockey may wish to reflect, for a moment, on the turbulent history of similar efforts by other countries to fight white collar crime.</p>
<h2>Lessons from the UK and US</h2>
<p>The UK equivalent of the new taskforce, the <a href="http://www.sfo.gov.uk/">Serious Fraud Office</a> (SFO) – known in some quarters as the Seriously Flawed Office – has had a very <a href="http://www.bbc.com/news/business-19323170">chequered</a> history. The SFO has handled some very high profile cases – but convictions have been few and far between. </p>
<p>The SFO was created in the late 1980s as a result of public outrage about financial scandals involving some very colourful characters, such as publisher and MP Robert Maxwell, who was accused of defrauding pension funds.</p>
<p>Maxwell <a href="https://news.google.com/newspapers?nid=1298&dat=19911106&id=4-wQAAAAIBAJ&sjid=FowDAAAAIBAJ&pg=6332,1034224&hl=en">died</a> after falling off his yacht in 1991 but his sons and advisers were charged with <a href="http://www.lawgazette.co.uk/news/the-trial-of-the-century-the-maxwell-case-lessons-to-be-learned-from-the-usa/19993.fullarticle">fraud</a>.</p>
<p>Just last month, some 20 years after the trial was started, the Maxwell brothers were <a href="http://www.irishtimes.com/business/maxwell-brothers-cleared-of-fraud-by-london-jury-1.23684">acquitted</a> of charges of defrauding the Maxwell pension funds. Other charges remain, but after this rebuff it is likely that the SFO will drop them. </p>
<p>You see, charging people with fraud is easy. Securing a conviction is extremely difficult. After sitting through weeks and months of mind-numbing detail that only a forensic accountant would love, juries made up of the average man or woman on the street are often left confused and many end up acquitting.</p>
<p>As long as the accused in such cases have pockets deep enough to keep hiring good QCs, they can – like the Maxwells did – spin litigation out for decades until everyone gets tired and gives up.</p>
<p>But it is not only the SFO who have found it difficult to bring down prosecutions in cases of financial misconduct. The equivalent authorities in the US have not fared much better.</p>
<p>After all the <a href="http://fcic.law.stanford.edu/">investigation</a> and soul-searching that followed the GFC, only one senior financial executive, former Credit-Suisse trader <a href="http://www.reuters.com/article/2013/11/22/creditsuisse-serageldin-idUSL2N0J71BG20131122">Kareem Serageldin</a>, has been jailed.</p>
<h2>New taskforce for an old problem</h2>
<p>Of course, the new Serious Financial Crime Taskforce will not be Australia’s first effort to fight white collar crime.</p>
<p>The Australian Tax Office’s <a href="https://www.ato.gov.au/General/The-fight-against-tax-crime/News-and-results/Project-Wickenby---getting-results/">Project Wickenby</a>, famous for pursing actor Paul Hogan, has had some success in prosecuting small fry for tax evasion but their success rate is only <a href="https://www.ato.gov.au/printfriendly.aspx?url=/General/The-fight-against-tax-crime/Our-focus/">44 convictions</a> out of 76 charged. Project Wickenby winds up this year. They have <a href="https://www.ato.gov.au/printfriendly.aspx?url=/General/The-fight-against-tax-crime/Our-focus/">recouped</a> almost A$1 billion out of tax liabilities of $2.1 billion identified. </p>
<p>A big number, sure, but still a <a href="http://www.smh.com.au/federal-politics/political-news/corporate-tax-inquiry-bhp-reveals-effective-tax-rate-in-singapore-20150427-1mu1tk.html">drop in the ocean</a> compared to the hundreds of millions the ATO misses out on every year.</p>
<p>It so happens that Mr Hockey’s announcement about the new Serious Financial Crime Taskforce comes during the same week the government <a href="http://www.abc.net.au/news/2015-04-27/crime-agencies-tipped-to-merge-in-budget-shake-up/6423132">hinted</a> one agency that has traditionally helped tackle white collar crime – the Australian Institute of Criminology (AIC) – was to be wound up and folded into the Australian Crime Commission to save money.</p>
<h2>Blowing the whistle</h2>
<p>One key element is missing from Mr Hockey’s announcement. Because white collar criminals are typically hiding in plain sight, one of the most effective deterrents is whistle blowing. </p>
<p>If people believe that they will get dobbed in by their colleagues, they will be less tempted to commit crime. An example in Australia is that of the <a href="http://www.abc.net.au/am/content/2004/s1025337.htm">foreign exchange scandal</a> at National Australia Bank (NAB) in 2004, which was only brought to light by a junior staff member blowing the whistle. Prosecutions followed and white collar criminals went to jail.</p>
<p>The US gets it. There, the Securities and Exchange Commission (SEC) now hosts an <a href="https://www.sec.gov/whistleblower">Office of the Whistleblower</a>, and the SEC has recently announced an <a href="http://www.sec.gov/news/pressrelease/2015-73.html">award</a> of over US$1 million to a compliance officer who blew the whistle on their company. The Office has handed out over US$50 million to other whistleblowers in the last four years.</p>
<p>Joe Hockey should follow suit. To assist the new Serious Financial Crime Taskforce, the Treasurer should immediately introduce legislation to strengthen whistleblower protection in Australia by creating an office similar to that in the US SEC.</p><img src="https://counter.theconversation.com/content/41236/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If Treasurer Joe Hockey is serious about cracking down on white collar crime, he should bolster the new Serious Financial Crime Taskforce with stronger whistleblower protection legislation.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/389162015-03-17T23:22:28Z2015-03-17T23:22:28ZSeven-year sentence for insider trading unlikely to deter others<p>The seven-year sentence for insider trading handed down by Justice Hollingworth of the Victorian Supreme Court yesterday is one of the harshest imposed on a white-collar criminal in living memory. </p>
<p>One of the offenders, former NAB foreign exchange trader Lukas Kamay, <a href="http://www.theage.com.au/victoria/lukas-kamay-christopher-hill-hatched-insider-trading-scheme-in-fitzroy-north-pub-20141211-124ulc.html">received confidential information</a> on labour force and retail sales figures from his friend, Christopher Hill, who worked at the Australian Bureau of Statistics. The original investment by Kamay was only A$1,000 on August 13, 2013 and by May 9, 2014 was worth A$6.98 million. Tipster Christopher Hill received A$20,000 from Kamay for the confidential information and the court imposed a lesser sentence of three years and three months.</p>
<p>In her <a href="http://scv2.webcentral.com.au/sentences/sentence_kamay_hill/index.html">sentencing</a>, Justice Hollingworth said she wanted to deter other young people in the corporate world from engaging in criminal conduct.</p>
<p>White-collar crimes tend to receive much lower criminal sentences than other crimes, such as armed robbery or assault. The major enforcer is the Australian Securities and Investments Commission (ASIC) working with the prosecutor, the Commonwealth Director of Public Prosecutions (DPP). Although ASIC has been successful in over 90% of litigation, in the last five years an average of just 14 people were sent to jail each year for all corporate crimes.</p>
<p>Over the last 20 years, the majority of people caught for insider trading have not made much money out of the transactions and have been accidentally <a href="https://theconversation.com/insider-trading-gets-more-scrutiny-but-convictions-may-not-flow-19683">investigated by a tip-off</a> or as part of a broader investigation. So the fact that Kamay received a $7 million profit is significant. But other NAB rogue traders, <a href="http://www.smh.com.au/news/business/former-nab-traders-jailed/2006/07/04/1151778911857.html">David Bullen and Vincent Ficarra</a> in 2006 reportedly caused the bank to lose A$160 million. Bullen received an effective sentence of 44 months, while Ficarra was given a term of 28 months.</p>
<h2>A patchy record</h2>
<p>Between 1973 and 2000 only 17% of insider trading cases in Australia were successful, according to <a href="https://theconversation.com/infographic-insider-trading-in-australia-33408">research</a> conducted by Professor Ian Ramsay and colleagues. This rate rose to 65% between 2001 to 2013. Only 3% of convictions led to a sentence exceeding three years and 27% of convictions resulted no jail time at all. Other high profile cases have included Steven Xiao with 104 charges netting A$1.4 million; John Gay in 2013, netting $800,000 and John Hartman in 2010, who made A$1.9 million. In 1999, the author and finance professor, Mark Freeman published findings that 5% of all trades on the stock market are tainted with insider trading.</p>
<p>The two questions worth analysing are whether the penalties are severe enough (the maximum a judge can impose) and whether the penalties actually act as a deterrent. </p>
<p>The Corporations Act does impose a severe penalty for insider trading, when compared to all other crimes included within the corporations’ legislation. The maximum penalty for an individual (compared to a company) is imprisonment for up to 10 years or fines - up to the greater of A$765,000 or three times the benefits obtained. This depends on whether the the court can determine the total value of the benefits that have been obtained by one or more persons and are reasonably attributable to the commission of the offence.</p>
<p>For companies the fine can be the greater of A$7.65 million, three times the total value of the benefits obtained, or 10% of the body corporate’s annual turnover during the 12-month period in which the offence was committed. Professors Ayres and Braithwaite research on regulatory enforcement (1992) provides the ‘pyramid of enforcement’, which has criminal sentencing at the very top of the regulators toolkit.</p>
<p>In practice, it is very hard to obtain a conviction, unless the defendant pleads guilty, as Kamay did. Under the law, three main contraventions of the Act relating to insider trading are found in section 1043A:</p>
<ul>
<li><p>actually trading in (acquiring, buying or selling) the financial products</p></li>
<li><p>procuring (actively encouraging another) to buy or sell the financial products and</p></li>
<li><p>communicating the confidential inside information to someone who is likely to use the secrets to trade in the financial products.</p></li>
</ul>
<p>The bigger question is whether this maximum penalty and the sentence imposed on the particular facts of Kamay and Hill would have any impact on other potential insider traders. </p>
<p>The judge said: </p>
<blockquote>
<p>“The crimes were motivated by pure greed and the DPP was right to describe the conduct as the ‘worst instance of insider trading to have come before the courts in this country’.” </p>
</blockquote>
<p>However, it is unlikely to really deter future insider traders. They will either not evaluate the risks of being caught or think they are smarter than the regulators or internal controls of the large corporations that employ such traders. Reducing the opportunities for crime to occur are a critical part of a <a href="http://www98.griffith.edu.au/dspace/bitstream/handle/10072/29205/8427_1.pdf?sequence=1">two-stage crime prevention process</a> developed by Professor Richard Wortley in 1998. </p>
<p>Insider trading and market manipulation are not just about the issue of trust and making an unfair and secret profit. The larger problem is one of market confidence and as such all listed companies, financial institutions and the regulators have a strong onus and commitment to detect and prevent insider trading. </p>
<p>The use of technology is making it easier and quicker to identify suspicious transactions and this has to be a positive for the whole of the Australian securities markets.</p><img src="https://counter.theconversation.com/content/38916/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Adams does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The sentences handed to insider traders Lukas Kamay and Christopher Hill send a strong message, but preventing the opportunity for such crimes to occur is just as important.Michael Adams, Dean, School of Law, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/378912015-02-26T19:31:20Z2015-02-26T19:31:20ZWhite collar crime and metadata: beware of building a new honeypot<figure><img src="https://images.theconversation.com/files/72882/original/image-20150224-32226-luacdh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Regulators like ASIC are turning to metadata to help make their cases against white collar criminals.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>With the struggle by law enforcement agencies to keep pace with new technologies has come calls by the agencies for additional investigatory powers.</p>
<p>The <a href="http://www.smh.com.au/digital-life/digital-life-news/metadata-retention-those-with-nothing-to-hide-have-nothing-to-fear-says-australian-federal-police-assistant-commissioner-tim-morris-20150222-13ljzi.html">call</a> for communications service providers to retain two years of their customers’ metadata is simply the latest round in this debate. While much of the current discussion has centred on consumer data and policing agencies, the proposal also covers the communications of businesses, and the Australian Securities and Investments Commission (ASIC) is one of the agencies seeking access.</p>
<p>Analysing two years’ retained metadata about your communications would give any law enforcement agency enormous insight into your life and, potentially, leverage over you. Using the data they could easily identify completely legal but otherwise embarrassing confidential events in your life, such as whether you have, for example, had an affair, an abortion, called a suicide help-line, a brothel or alcoholics anonymous. </p>
<p>Having the power to analyse two years’ retained metadata about a business’ communications creates different risks: for example, knowing whether the senior executives of a listed company are talking often with a bankruptcy advisory firm or an investment bank’s mergers/acquisitions team could create enormously valuable trading opportunities prior to the release of that information to investors and the general public.</p>
<p>The benefits of granting additional powers designed to increase the efficiency of law enforcement agencies need to be balanced against a range of risks, including the need to protect civil liberties and the possibility of unintended consequences. </p>
<h2>What ASIC wants</h2>
<p>The government’s current plan for data retention law includes provisions which would limit which law enforcement agencies could gain warrantless access to the retained metadata. In its submission to the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Intelligence_and_Security/Data_Retention">Parliamentary Joint Committee for Intelligence and Security Inquiry into Data Retention</a>, ASIC argued the proposed Bill would reduce its existing powers to access telecommunications data and stored communications for the purposes of investigating white collar criminal activities, such as insider trading, market manipulation and financial services fraud.</p>
<p>Over the last five years, ASIC has secured convictions against 129 people for serious offences under the Corporations Act (including sentences of more than 13 years’ incarceration in some instances) and 2404 people for less serious offences, though it did not specify how many of these convictions depended upon evidence gained from metadata.</p>
<p>ASIC currently has access to telecommunications data under sections 178-179 of the Telecommunications Interception Act. It claims it has used that information in over 80% of its insider trading investigations, including in the <a href="http://www.afr.com/p/business/companies/how_used_linkedin_to_bust_the_nab_G8l59FUftwlEtCGtlBiceL">Lucas Kamay (NAB) and Christopher Hill (ABS) case</a>.</p>
<p>ASIC uses a <a href="https://theconversation.com/insider-trading-gets-more-scrutiny-but-convictions-may-not-flow-19683">variety of techniques</a> to investigate white collar crimes, including data analytics of trading patterns. It also receives reports of suspicious trading activities from industry participants and the general public.</p>
<p>Metadata is particularly useful for ASIC when seeking to identify potential suspects (and their accomplices) and their methods/patterns of communication, so that further surveillance of ongoing behaviour can be undertaken. While metadata itself does not definitively prove the identity of who was talking on a particular phone, typing a text message or sitting behind a keyboard, it can suggest who was most likely to have been doing those things (i.e. in many cases, the registered owner of the account). The actual identities of the participants can then be confirmed through follow-up surveillance.</p>
<p>Metadata can provide information on the methods that two or more people are using to communicate (whether by landline, mobile phone, SMS, Skype, etc). It can also provide a rich history of both patterns of communication (which devices are in contact with which other devices, when and how often) and interruptions to such patterns of communication, such as ceasing to communicate by mobile phone or changing phone SIMs, which could indicate the suspects believe they are under surveillance.</p>
<p>In some trials, evidence of the timing of communications can be critically important. For example, when NAB trader Lukas Kamay received confidential information from Christopher Hill about yet-to-be-released Australian Bureau of Statistics’ data, Kamay was able to profit by placing leveraged foreign exchange trades on the value of the Australian dollar. ASIC only became aware of this activity after it was tipped off by Kamay’s forex brokerage firm, Pepperstone Financial, and while access to metadata played a small part in the investigation, it was traditional surveillance which resulted in the convictions of Kamay and Hill.</p>
<p>Access to retained metadata would grant ASIC the ability to search the history of patterns of conduct between suspects, such as whether they were repeatedly communicating and trading just prior to the announcement of market-sensitive information, even in situations where ASIC only became aware of the possibility of illegal activities well after they had actually occurred. It may also assist them to identify additional co-conspirators.</p>
<h2>A new honeypot?</h2>
<p>To be able to undertake such analysis, ASIC would need metadata to be retained from businesses as well as from individuals. Under the Bill, such metadata would be stored by communications providers, such as mobile phone companies and ISPs. This poses a risk for some businesses as their communications metadata contains highly valuable confidential information.</p>
<p>In its drive to increase the effectiveness of its fight against white collar crimes, it is possible ASIC and the government may unintentionally increase the risk of such crimes occurring while also making them harder to detect.</p>
<p>Communications service providers forced by the proposed legislation to store metadata are likely to provide security sufficient to protect against unauthorised access based upon the risk profile of their average customer, rather than for their most-at-risk customers. This raises the possibility of third parties seeking to gain unauthorised access to businesses’ financially sensitive information through their retained metadata, whether third party hackers using zero-day exploits, or trusted public servants (like Hill) looking to supplement their government pay cheques.</p>
<p>Insider trading and market manipulation may become harder to detect because third party hackers will no longer need to directly <a href="http://www2.fireeye.com/rs/fireye/images/rpt-fin4.pdf">attack</a> listed companies and their advisers, but instead could indirectly gain information by attacking metadata repositories. If a communications service provider pooled all of its customers’ metadata into a single database, then this may represent the equivalent of an inadequately secured goldmine for white collar criminals. </p>
<p>We should not rush to implement a system of metadata retention before all of the costs and benefits of such a proposal are fully considered.</p><img src="https://counter.theconversation.com/content/37891/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Selby is also affiliated with the UNSW Cyberspace Law and Policy Community, other members of which made separate submissions to the PJCIS Inquiry into Data Retention. In 2001, he was seconded as an in-house counsel for Telstra's Retail eCommerce legal team. He previously worked as an Internet lawyer for Mallesons Stephen Jaques (now King & Wood Mallesons). </span></em></p>Businesses as well as individuals could soon see their metadata retained, making the data storage points even more attractive to criminals.John Selby, Lecturer - Faculty of Business and Economics, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334082014-10-26T19:07:34Z2014-10-26T19:07:34ZInfographic: insider trading in Australia<figure><img src="https://images.theconversation.com/files/62807/original/gkgyj32h-1414373889.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Screen shot at PM</span> </figcaption></figure><p>The typical insider trader is male, aged between 30 and 49, and holds a company director position, according to a new study from researchers at the University of Melbourne.</p>
<p>The <a href="http://newsroom.melbourne.edu/news/insider-trading-study-shows-stronger-enforcement">study</a> analysed all insider trading enforcement cases since legislation to prohibit insider trading was introduced in 1971.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=3059&fit=crop&dpr=1 600w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=3059&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=3059&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=3844&fit=crop&dpr=1 754w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=3844&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=3844&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><em>The authors of the study are Victor Lei and Ian Ramsay and the title of the study is “Insider Trading Enforcement in Australia” (2014) 8 Law and Financial Markets Review 214-226.</em></p><img src="https://counter.theconversation.com/content/33408/count.gif" alt="The Conversation" width="1" height="1" />
The typical insider trader is male, aged between 30 and 49, and holds a company director position, according to a new study from researchers at the University of Melbourne. The study analysed all insider…Charis Palmer, Deputy Editor/Chief of StaffEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/245002014-03-24T06:07:24Z2014-03-24T06:07:24ZWanted: crime-fighting academics to catch corporate criminals<figure><img src="https://images.theconversation.com/files/44124/original/b6xw32d5-1395078827.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">By day, they were mild-mannered business studies academics.</span> <span class="attribution"><a class="source" href="http://commons.wikimedia.org/wiki/File:Cosplay_of_superheroes.jpg">Olaf Gradin</a></span></figcaption></figure><p>“Behind every great fortune lies a great crime.” This maxim is attributed to 19th century man of letters Honoré de Balzac – the suggestion being that business activity of any kind is inherently corrupt and criminal. </p>
<p>This is something of an overstatement, an exaggeration even. In fact this exact aphorism, though widely attributed to Balzac, is actually a paraphrase of a passage from his 1835 novel Father Goriot: “The secret of a great success for which you are at a loss to account is a crime that has never been found out, because it was properly executed.”</p>
<p>Balzac’s actual words about wealth are more balanced and circumspect than the bastardised lore. But if you were to scan the FT and the business pages of media outlets in recent years you may conclude that the Bastardised Balzac on business is closer to the truth: rate-fixing scandals like <a href="http://www.bbc.co.uk/news/business-26584942">Libor</a> and <a href="https://theconversation.com/changing-traders-and-tech-wont-stop-currency-rigging-22921">currency exchange</a>, institution-led money-laundering schemes for global crime and terror syndicates, tax avoidance, fraud and deception all occur on an industrial scale. </p>
<p>Given this apparent white-collar crime wave, it seems that the most logical way to analyse the activities of big business or finance is through thinking like criminologists. So could it be that business studies is in fact the new criminology?</p>
<h2>The new wave of business studies</h2>
<p>Back in the 1970s a generation of young academics set about challenging conventional wisdom in criminology. The result was the so-called new or radical criminology. These radicals believed that all groups and classes engage in crime but poorer groups are simply more likely to be labelled as criminals and prosecuted. </p>
<p>This class-focused approach to crime is all well and good, but it tends to overlook how businesses engage in criminality during their normal commercial activities. To avoid this, we need not so much another new form of criminology but a new business studies with a focus on criminal intent. </p>
<p>The starting point for this new form of business studies requires two things: understanding the criminal impact of institutions, and the victimhood of business activities.</p>
<h2>De-humanising crime</h2>
<p>The standard definition of crime is that it involves some form of behaviour that harms, or intends to harm, individuals or the public at large. When considering who is responsible for criminal harm, the justice system and public discussions about crime tend to be obsessed with the individual wrongdoer or offender. News reporting that demonises certain individuals as criminals actually humanises criminality. There is a fascination with what American criminologist Alexander Liazos famously called “<a href="http://www.clas.ufl.edu/users/marilynm/Theorizing_Black_America_Syllabus_files/Poverty_of_the_Sociology_of_Deviance.pdf">nuts, sluts and perverts</a>”. </p>
<p>As such, the reporting and analysis of crime tends to give scant attention to the bigger picture: how powerful business institutions engage in unethical, illegal and destructive behaviour. These activities get less attention, not so much because they take place under the radar, but because they are part and parcel of the normal, taken-for-granted processes and routines of the business world. </p>
<p>Effectively we need to dehumanise corporate crime. Blame the system – the structure of incentives, the regulatory framework (or lack of one), the nature of governance – not the “bad apple” banker.</p>
<h2>Recognising the victims</h2>
<p>The idea that crimes committed by businesses have no – or few – actual victims is a great fallacy. In part, this false impression is down to the fact that such crimes so rarely result in prosecutions. These crimes, especially those involving finance, are complex and not easily understood by judges, let alone juries. The perpetrators meanwhile are apparently respectable, institutions and individuals alike.</p>
<p>If we think of victimhood in the world of business crime, we have another clue as to why punishment does not always follow. These victims are not always directly visible or physically affected; often they are diffuse, distant and detached from those perpetrating the crime. Victims can be submerged in financial data and technical analysis. Reports on fraud or mis-selling are no match for the emotive language of nuts, sluts and perverts.</p>
<p>When victims like these it is all too easy to ignore the criminal. The result according to the UK’s former leading public prosecutor, <a href="http://www.telegraph.co.uk/finance/recession/4784942/Sir-Ken-Macdonald-attacks-regulation-of-City-bankers.html">Ken Macdonald</a>, is that if you “mug someone in the street … you go to prison, but mug their savings … you can buy a yacht”. In other words: crime pays especially when the crime is business.</p>
<h2>A call to arms</h2>
<p>The logical conclusion is that academics should take on the mantle of crime fighters. More specifically, business and management academics should be at the forefront of this anti-crime initiative, for it is they who know where the dead bodies of white-collar crime are buried. </p>
<p>What I am suggesting is that we should make the switch from business to crime analysts. The change is necessary and it has been done in allied fields like journalism. To take one prominent example, former Rolling Stone reporter and political commentator <a href="http://www.rollingstone.com/contributor/matt-taibbi">Matt Taibbi</a> started penning financial pieces in 2009. As Taibbi’s coverage of the American banking industry deepened, his financial journalism became <a href="http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216">crime stories</a> and his modus operandi became that of a crime reporter. </p>
<p>Business academics could put their specialist knowledge and research skills in service of exposing crime: in effect we could become investigative social scientists, being willing to explore and reveal the true extent of business crime.</p>
<p>The question is whether we are willing to embrace this investigative rather than professional academic role. The professional and institutional pressures from our ivory prisons demand that we fall into line: that means producing peer-reviewed publications that offer only a glancing nod to what matters socially and politically. Meanwhile, the true extent of business criminality goes criminally under-reported.</p><img src="https://counter.theconversation.com/content/24500/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mike Marinetto does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>“Behind every great fortune lies a great crime.” This maxim is attributed to 19th century man of letters Honoré de Balzac – the suggestion being that business activity of any kind is inherently corrupt…Mike Marinetto, Lecturer in Business Ethics, Cardiff UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/215452013-12-16T15:23:16Z2013-12-16T15:23:16ZHamstrung SFO not capable of holding bankers to account<figure><img src="https://images.theconversation.com/files/37880/original/2ykcbdqv-1387203580.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Road signs in Iceland</span> </figcaption></figure><figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/37879/original/nqnh88bg-1387203560.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The threat of jail for white collar fraud keeps Icelandic banks on track.</span>
<span class="attribution"><span class="source">Dickelbers</span></span>
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</figure>
<p>Iceland has sent four former directors of its bank <a href="http://www.bbc.co.uk/news/business-25349240">Kaupthing</a> to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record.</p>
<p>The Serious Fraud Office (SFO) is the main agency for investigating and prosecuting major fraud. It was formed in 1988 after a spate of high-profile cases. A government-sponsored inquiry into share price rigging at <a href="http://news.bbc.co.uk/1/hi/business/34910.stm">Guinness</a> in the 1980s concluded that too many executives at major corporations had a “cynical disregard of laws and regulations … cavalier misuse of company monies … contempt for truth and common honesty. All these in a part of the City which was thought respectable”. </p>
<p>But rather than changing corporate laws, amending personal liability of directors, or creating an effective enforcement agency, the government created the SFO.</p>
<p>Last week, the SFO’s case against businessman <a href="http://www.theguardian.com/law/2013/dec/10/corruption-trial-businessman-collapes-serious-fraud-office-victor-dahdaleh">Victor Dahdaleh</a> collapsed because at the last minute it could not provide evidence of alleged graft. This is not the only case the SFO has botched. It spent between £25-40m investigating price-fixing by <a href="http://www.telegraph.co.uk/news/newstopics/lawreports/joshuarozenberg/3546193/Biggest-SFO-case-finally-collapses.html">pharmaceutical companies</a> supplying the UK’s National Health Service (NHS), but the case collapsed because of errors in the interpretation of law.</p>
<p>Previously, the SFO was very slow in taking action against <a href="http://www.theguardian.com/law/2013/sep/13/bae-systems-lost-serious-fraud-office">BAE Systems</a> over allegations of corrupt practice. The SFO mislaid 32,000 documents relating to the case. It is currently facing a lawsuit for damages from the <a href="http://www.telegraph.co.uk/finance/financial-crime/10154448/Vincent-Tchenguiz-vows-to-butcher-SFO-over-dropped-fraud-case.html">Tchenguiz brothers</a> after dropping a three-year investigation into the collapse of Icelandic bank Kaupthing.</p>
<h2>Bigger beasts</h2>
<p>In 2012-13, the <a href="http://www.sfo.gov.uk/media/256255/30597%20hc%209.pdf">SFO</a> brought 12 cases covering 20 individuals, eventually securing 14 convictions and recovering £11.4m from fraudsters. But it rarely went after the bigger beasts. <a href="http://www.theguardian.com/business/2012/dec/11/hsbc-bank-us-money-laundering">Money laundering</a> and <a href="http://www.theguardian.com/business/2012/aug/14/standard-chartered-pay-fine-regulator">sanctions busting</a> by British banks did not appear on its radar. The SFO has hardly been visible in investigating and prosecuting the misdemeanours of bankers who brought the UK economy close to collapse.</p>
<p>In mitigation, it might be argued that the SFO’s failures are the outcome of the politics of government cuts. In 2008-09, the SFO had an investigations and prosecutions budget of £52m. Despite the banking crash, <a href="http://www.bbc.co.uk/news/business-18671255">LIBOR rigging</a> and other scandals, the UK government has drastically reduced SFO’s resources. </p>
<p>For 2013-14 its <a href="http://www.sfo.gov.uk/media/256255/30597%20hc%209.pdf">budget</a> is £30m and will decline to £28.8 million for 2014-15. That is a cut of over 44% since the start of the global financial crisis.</p>
<p>Faced with a reduced budget and pay freezes, the SFO has been losing experiencing staff and outsourcing a lot of its legal work, often paying very <a href="http://www.legalweek.com/legal-week/news/2306747/sfo-spending-more-on-legal-fees-despite-government-funding-cuts">high fees</a>. Such practices make it difficult to build in-house expertise and an institutional memory.</p>
<p>Other countries seem to assign higher priority to fraud investigation. The US equivalent, the Securities and Exchange Commission (SEC), has an annual budget of US$1.674 billion (about £1.1 billion). It is therefore in a far stronger position to <a href="http://www.sec.gov/News/Page/List/Page/1356125649507">take on the bigger beasts</a>. The SEC has its shortcomings, but it is more likely to get a result than the SFO.</p>
<h2>Ineffective patchwork</h2>
<p>The SFO’s failures are indicative of Britain’s failure to build durable and effective institutional structures to fight financial crime. Rather than a single powerful and well resourced agency, there is an ineffective patchwork of institutions. </p>
<p>These include the Financial Conduct Authority (<a href="http://www.fca.org.uk/">FCA</a>), the Office of Fair Trading (<a href="http://www.oft.gov.uk/">OFT</a>), The National Crime Agency (<a href="http://www.nationalcrimeagency.gov.uk/">NCA</a>) Her Majesty’s Revenue and Customs (<a href="http://www.hmrc.gov.uk/">HMRC</a>), the <a href="http://www.cps.gov.uk/">Crown Prosecution Service</a> , the <a href="http://www.londonstockexchange.com/home/homepage.htm">London Stock Exchange</a> and the <a href="http://www.frc.org.uk/">Financial Reporting Council</a>, to name just a few. The overlapping and often unclear boundaries result in duplication, waste, obfuscation, delays, poor accountability and outright failures.</p>
<p>Any effective fight against globalised financial crime needs to streamline its institutional structures. In the age of globalisation the UK cannot fight financial crime on a shoestring, with puny organisations. Large parts of the patchwork should be replaced by a UK equivalent of the SEC. </p>
<p>But a new organisation would not be able to combat wealthy elites or giant corporations without significant resources. This might be expensive, but it is an investment that would pay off.</p><img src="https://counter.theconversation.com/content/21545/count.gif" alt="The Conversation" width="1" height="1" />
Iceland has sent four former directors of its bank Kaupthing to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record. The…Prem Sikka, Professor of Accounting, Essex Business School, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/40252011-11-01T19:40:44Z2011-11-01T19:40:44ZTrading on reputation: the trials of Rajat Gupta and the SEC<figure><img src="https://images.theconversation.com/files/5059/original/gupta.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Former Goldman Sachs and Procter & Gamble director Rajat Gupta faces securities fraud charges. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The Department of Justice in the United States has significantly broadened the reach of its investigation into insider trading. </p>
<p>The <a href="http://www.guardian.co.uk/business/2011/oct/26/goldman-sachs-director-rajat-gupta-charged">charging</a> of a former director of Goldman Sachs and Procter & Gamble, Rajat Gupta, with securities fraud is designed to send a clear message to Wall Street and the judiciary that the regulatory system is capable of ensuring warranted trust. </p>
<p>It suggests that reputation does not provide impunity from investigation. It also addresses ongoing public and judicial concern about public enforcement, which has focused on either securing settlements that do not involve admissions of liability or on the prosecution of low-level actors. </p>
<p>The accusation that Rajat Gupta breached directors duties and committed securities fraud in passing on confidential information to Raj Rajaratnam, the head of Galleon Investments, had been flagged in the latter’s insider trading trial earlier this year. Rajaratnam was convicted and sentenced to 11 years imprisonment. </p>
<p>No evidence has yet been proffered that Gupta profited from the circumstantial evidence that he provided confidential information in relation to investments in Goldman Sachs and quarterly earnings at Proctor & Gamble. </p>
<p>The reputational damage, however, is complete. </p>
<p>The charges, which he denies, provide a humiliating capstone to what had been a storied career. Rajat Gupta served as chief executive of the consultancy firm McKinsey & Co before retiring to the boardrooms of two of the most influential corporations in the United States.</p>
<p><figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=782&fit=crop&dpr=1 600w, https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=782&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=782&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=983&fit=crop&dpr=1 754w, https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=983&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/5060/original/rajrajaratnam.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=983&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Raj Rajaratnam was sentenced to 11 years in prison.</span>
<span class="attribution"><span class="source">AAP</span></span>
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</figure> </p>
<p>According to the US Attorney for the Southern District, “Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders…He broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr Gupta’s breach of duty.”</p>
<p>The Securities and Exchange Commission (SEC) simultaneously lodged a civil case. It cited what it claimed was evidence of an extensive and sophisticated insider trading network. As with the Southern District Attorney, the emphasis for the SEC in bringing the case was linked to the betrayal of trust. </p>
<p>When taking enforcement action, regulatory agencies need to balance the effect of conviction with the political costs associated with bringing complex and uncertain cases to trial. </p>
<p>Beyond the merits of an individual action, achieving wider demonstration effect requires changing both the content and context of the underpinning system of oversight. This requires two components. </p>
<p>First, the preparation of the case and its subsequent staging — including the critical initial presentation of the evidential base —needs to reconfigure media representations of what constitutes acceptable conduct. This applies despite the legal strength of the material claim. Trial strategies tend to focus on competing narratives. It is, therefore, essential to “own” the media agenda. </p>
<p>Second, the litigation needs to be capable of recalibrating — without credible dissension — the broader policy agenda. To be successful, therefore, prosecutorial strategies need to facilitate the positive framing of policy issues. This involves not only the regulator’s own conception of its interpretation of appropriate purpose and accountability, but also judicial and broader societal understandings. This coupling explains the emphasis on trust in both narratives. </p>
<p>The problem faced by the regulatory authorities, particularly the SEC, is that there is increasing scepticism that the enforcement agendas are fair, reasonable adequate or in the public interest. </p>
<p>The Federal Court judge, Jed Rakoff, who is responsible for hearing the Gupta case, is exceptionally sceptical of the SEC’s general approach. In a previous settlement reached by the SEC against Bank of America, he argued that it risked privileging “the façade of enforcement” in agreeing settlements that no not contain acceptance of wrongdoing. </p>
<p>Judge Rakoff refused to endorse the proposed settlement with Citigroup last week over litigation that it had engaged in deceptive and misleading conduct in a complex derivative transaction.</p>
<p>The charging of Gupta draws attention to the fact that the SEC recognises the limitations of previous strategies. If convicted, Wall Street has much to fear.</p><img src="https://counter.theconversation.com/content/4025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin O'Brien receives funding from the Australian Research Council on two grants linked to the future of financial regulation.</span></em></p>The Department of Justice in the United States has significantly broadened the reach of its investigation into insider trading. The charging of a former director of Goldman Sachs and Procter & Gamble…Justin O'Brien, Professor of Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.