ASIC frustrated by paltry penalties

by Calida Smylie28 Mar 2014
ASIC’s trifling penalties do not do enough to deter white collar fraudsters from breaking the law, believes the commission’s chairman Greg Medcraft.

In his opening address at this year’s ASIC annual forum earlier this week, Medcraft highlighted the need to “inject fear” into would-be criminals.

“It is frustrating – both for us and the public – when the penalty available to respond to misconduct is much less than the profit someone made in the process. If this is so, unscrupulous players in the market may quite rationally decide to make the trade by looking at the risk versus reward. And in doing so, break the law,” he said.

Medcraft acknowledged frustration surrounding some of ASIC’s penalties, which were found to be significantly lower than those overseas in a recent senate inquiry into the commission’s performance.  

“On setting penalties, behavioural insights need to be considered in what motivates people to break the law,” Medcraft said. “Often this is the fear versus greed equation. We need penalties that incentivise the right behaviour.”

Unscrupulous players in the market may quite rationally decide to make the trade by looking at the risk against the reward, and only tough penalties will have a powerful deterrent effect, he said.

“We’ve got to have penalties that inject fear and overcome the urge some may experience to break the law when driven by greed.”

Medcraft also acknowledged problems at the lower end of the penalty scale, saying more proportionate sanctions, like infringement notices, can work better and have a more timely and efficient outcome.

ASIC’s shows that while the regulator’s maximum criminal penalties – jail and fines – are broadly consistent with those available in other countries, there are significantly higher prison terms in the US, and higher fines in other overseas countries for certain offences.

There is a broader and tougher range of civil and administrative penalties in other countries, including the ability to remove financial benefit from wrongdoing.

In comparison to other Australian regulators, the maximum civil penalties available to ASIC are lower than those available to other regulators and are fixed amounts, not multiples of the financial benefits obtained from wrongdoing.

“Those who intentionally break the law and cause severe damage should face tough penalties. This will make them – and others – think twice about their actions,” Medcraft said.

The University of New South Wales faculty of law said Australian maximum civil penalties for insider trading are $200,000. However, they are unlimited in Hong Kong and the UK, in the US either $1,100,000 or three times the benefit gained, and in Canada $1,050,000.

At the forum, the chair of the US Securities and Exchange Commission (SEC) –who spoke via video link – also spoke on corporate wrongdoing penalties.

Mary Jo White said not only should the punishment fit the crime, but it should also send a strong message of deterrence to other would-be wrongdoers.

“Our sanctions must have teeth and we must send a strong public message about our cases,” she said, noting SEC’s current maximum penalties per violation are US$160,000 for an individual and US$775,000 for companies.

She said when the sanctions are not enough to fit the crime, SEC works with its prosecution counterparts to leverage the punishments for the most serious white collar fraudsters.

“We then strive to publicly send the strong messages of deterrence that flow from our cases – through the media, the bully pulpit and in industry and educational conferences where the SEC staff are speakers,” she said.

In its corporate wrongdoing report ASIC acknowledged that it has been more than a decade since there was any sort of comprehensive review of its penalties regime.

The reporting date for the senate inquiry into ASIC’s performance is 30 May, and the findings will inform ASIC’s submission to the government’s financial system inquiry.

 

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