Australia a haven for bank control fraud

By Leith van Onselen

LF Economics’ Lindsay David and Philip Soos lodged a detailed submission to the 2016 Parliamentary Inquiry into Penalties for White-Collar Crime, which has just been released, whereby they argue that Australia is a haven for white-collar criminality and control fraud.

Below is the Executive Summary:

Over the last decade, concerns have been growing among the Australian public regarding the activities of the private sector, especially the corporate sector, in its dealings with consumers. The FIRE (finance, insurance and real estate) sector is at the forefront of accusations regarding fraud and other criminal wrongdoings. Almost every week, there is coverage in the mass media of criminal activity allegedly carried out by the FIRE sector against investors, businesses, households and individuals. Despite this media attention, there is evidence to suggest regular and widespread criminality has been committed by the FIRE sector since the 1980s.

It is argued by LF Economics there exists systemic criminal activity in the FIRE sector, placing consumers at grave risk of having their finances and livelihoods destroyed. The evidence pointing to this is based on the research of the world’s leading academic specialist in banking, financial and corporate fraud, Professor William K. Black, and Australia’s leading financial consumer activist and President of the Banking & Finance Consumers Support Association (BFCSA), Denise Brailey.

The term control fraud refers to those committed by the controlling agents of firms: executives and managers. These frauds are the domain of white-collar criminals and are rendered largely invisible by organisational power and influence, like the church abuse scandal. Control frauds are generated and amplified by the neo-liberal agenda which has significantly and regressively altered Australia’s credit-based banking system since the 1980s, operating by the modes of privatisation, deregulation, self-regulation, desupervision and de facto decriminalisation. This institutional setup has and will inevitably continue to generate increasingly larger toxic and recurring control frauds.

While penalties for white-collar crime need to be strongly expanded, acting on the available evidence is the first prerequisite to enforcing the rule of law against white-collar criminality as both government and regulators are seemingly reluctant to take action against control frauds in operation. Accountability and transparency needs to be restored in our banking and financial system, as confidence in the economy is built on the essential pillar of trust. The committee should recommend another inquiry with the widest terms of reference possible, focusing on the numerous control frauds plaguing the economy, and a Royal Commission which will inevitably uncover a cesspit of immense criminality committed by the FIRE sector, covered up by regulators.

a) Evidentiary standards across various acts and instruments;

b) The use and duration of custodial sentences;

c) The use and duration of banning orders;

d) The value of fine and other monetary penalties, particularly in proportion to the amount of wrongful gains;

e) The availability and use of mechanisms to recover wrongful gains;

f) Penalties used in other countries, particularly members of the Organisation for Economic Co-operation and Development [OECD]; and

g) Any other relevant matters.

LF Economics argues there are systemic control frauds operating within the Australian FIRE sector, with the full knowledge of ASIC, APRA and the RBA. None of these public organisations, however, have taken any meaningful action to identify, uphold the law and impose penalties on those engaged in white-collar criminality, let alone suggesting such penalties be increased. The authorities know of these control frauds but refuse to act upon this knowledge (enforce the rule of law); this is the first issue the inquiry must address in order to understand how to better approach penalties such as custodial sentencing, banning orders, monetary penalties, enforced undertakings and mechanisms to recover wrongful gains.

Due to the lack of both identification of control fraud and enforcement of existing laws on the part of government, modification of penalties for while-collar crimes may do little to stem control fraud. As part of an inclusive analysis, however, changes to penalties is an important step needed to bring the highly criminogenic FIRE sector into line. Accordingly, LF Economics strongly supports the strengthening of penalties for such crimes in Australia as suggested in the recommendations below, including the submission to this inquiry by Denise Brailey: financial consumer activist, criminologist and president of the Banking & Finance Consumers Support Association (BFCSA). There are other submissions bringing much needed insights to this neglected aspect of penalties for white-collar crimes.

It does not help when the LNP and ALP both refuse to investigate serious allegations of widespread control fraud (euphemistically called “misconduct in the financial services industry”) via a Royal Commission as put forward by Greens Senator Peter Whish-Wilson. Both political parties take campaign contributions from the FIRE sector which may explain their reluctance to investigate the allegations of control fraud. Long trails of victims are now left to fend for themselves, unassisted and blatantly ignored by regulators that should be striving to bring justice to these victims. Regulators refusing to investigate and prosecute criminality may themselves be in breach of law.

Given the paucity of analysis and investigation into these issues, LF Economics takes the liberty of expanding upon (g) by offering a comprehensive analysis of why control frauds are thriving in the current economic and political environment. By doing so, a strong case emerges whereby penalties for white-collar crimes are in need of strengthening.

And here is the Conclusion:

The government and public have been subject to a false and misleading view of the FIRE sector that is overly focused on its continued expansion as a profit centre to be maximised rather than a cost centre to be minimised. The ‘big end of town’, particularly the Big Four banks, are dictating political views, legislative processes and policy directions, made possible by the swarm of lobbyists paid out of record-breaking profits generated by massive private sector indebtedness. The evidence of losses, the constant barrage of consumer grievances, a steady stream of complaints against ASIC, the regulator’s favouritism of the engineers and lenders’ undue influence over the ombudsmen services should give the committee pause when considering future recommendations to stem control frauds. Victims repeatedly express that a Royal Commission will let them tell their stories and assist in uncovering mountains of evidence of foul criminality in the FIRE sector.

Australians have been betrayed by the regulatory agencies’ neglect and continual siding with lenders and corporate management, despite their full knowledge of the catastrophic pain endured by many who have lost their homes, assets and life savings. The committee should take note of the immense suffering of victims. A strict focus on rules, regulations, standards, codes and penalties will have a negligible effect on control frauds because these crimes are simply ignored in reality. Two decades of fruitless inquiries and tweaking of innumerable rules and regulations has merely contributed to the losses endured by typical ‘mum and dad’ investors, now into many tens (perhaps hundreds) of billions of dollars. The nation already has an abundance of appropriate laws and regulations to contain and dismantle these control frauds, yet regulators are averse to enforcement, rendering these powers null and void. Australia’s record household sector indebtedness and associated mortgage control fraud risks bringing the FIRE sector down and seriously impairing the economy.

This inquiry should not be limited to yet another narrow probe into the FIRE sector. The evidence strongly suggests that control frauds are currently in operation, with the FIRE sector actively seeking new targets to raid. An extensive analysis of the evidence is contained in the body and appendices of this submission. For government to effectively uncover the full extent of control frauds and begin cleansing a patently corrupt FIRE sector, a Royal Commission is necessary. LF Economics urges the committee to strongly recommend this course of action.

The submission, which tops 150 pages, explains in detail how bank control fraud takes place and provides numerous examples.

Hopefully this issue will gain some much-need attention from the MSM and our politicians, and ultimately culminate in a banking Royal Commission.

The full submission can be downloaded here.

Well done messrs Lindsay David and Phil Soos.

Unconventional Economist
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  1. Top work, David & Soos. This is a giant issue that will bring wealth destruction to bank shareholders and borrowers alike.

    Australia could create another world first by recognising and contesting control fraud BEFORE the bubble bursts.

  2. All for a thorough review of FIRE. But having read all the above I still don’t quite understand what Control Fraud actually is. I’ll endeavour to read the links, but the above did not make it clear, alluded to things but not actually clear. Still a good start, FIRE has done much damage & most of economy is bluffed by FIRE.

    • I basically means systemic, company wide fraud instigated by those high up the chain of command at the exec,CEO, board level.

      As a hypothetical example, while a lowly mortgage broker like Peter Fraser may be fudging the income declared in loan application form, it is done with the knowledge of bank (all the way to the top) and they are the ones who are ultimately responsible. i.e. this is not a garden variety, lone wolf type of fraud.

      • In all fairness to Peter Fraser and Mortgage Brokers everywhere, having actually read the report yesterday it cites Denise Brailey as saying she has NEVER seen a LAF doctored by a Broker. They are all altered inside the Banks.

        Read the report, I implore you.

      • Mining BoganMEMBER

        My brother the mortgage broker agrees with you Aaron. He would tell clients that he’d pass the application on but to not get their hopes up. He was constantly surprised to see loans approved.

        The bank rewarded him well too. Trips away. Tickets for big sports events. Which bank?

    • Bill Black: Control fraud

      Control fraud occurs when a trusted person in a high position of responsibility in a company, corporation, or state subverts the organization and engages in extensive fraud for personal gain. The term Control fraud was coined by William K. Black to refer both to the acts of fraud and to the individuals who commit them.

      “The Office of the Comptroller of the Currency (OCC) has published a list of the “worst of the worst” – the ten worst lenders in the ten worst markets for nonprime mortgage foreclosures. The absolute worst lender on that list is New Century. That makes it the worst of the worst of the worst. It also makes LST the worst of the worst of the worst economists writing about the fraud epidemics that drove the financial crisis.

      The LST article is remarkably and inexcusably awful. At the time it was written it was representative of the lack of quality of orthodox economic “scholarship” about elite financial frauds. That has changed. As Mian and Sufi explained in their recent study demonstrating pervasive fraud in liar’s loans:

      We know from a large body of research that both non-agency securitized mortgages and low-doc mortgages were associated with a high incidence of fraud (e.g., Ben-David (2011); Jiang, Nelson, and Vytlacil (2014), Griffin and Maturana (2014); Piskorski, Seru, and Witkin (2015)).

      The most recent studies by very conservative financial scholars that actually study elite financial frauds have confirmed what we have been explaining for decades. While LST did not have access to these two recent studies, one of the studies (Piskorski, Seru, and Witkinl) was done on the basis of a New Century data set that the authors shared with other scholars who requested access, including the Jiang study that LST cite. Piskorski, Seru, and Witkin and Mian and Sufi exemplify how economists can conduct a real “forensic” investigation of fraud. The press picked up both the Piskorski, Seru, and Witkin and the Mian and studies’ findings. Here is the key passage from a story in which Piskorski was interviewed.

      The authors specifically studied two types of mortgage misrepresentations: mortgages taken for primary residences that were not, in fact, primary residences, and mortgages taken for one property, while the second mortgage on the same property was concealed.

      They compared loan-level mortgage data with credit reports and used New Century, a now-bankrupt subprime lender, as a case study. By comparing the loans with the credit profiles of their borrowers, they found that the loans New Century sold did not accurately reflect what the bank knew in their credit files.

      While the data cannot establish how blatant the fraud was or how it was motivated, other research and insider accounts show that fraud was endemic among mortgage lenders in the years leading up the housing crash. And it wasn’t a case of a single bad company — the authors studied major companies and found similar results for all originators across the board.

      “We didn’t find out this is the only the problem of a few bad apples. That would be kind of good news,” Piskorski said. “This is a really pervasive problem, and every single institution in the data misrepresented mortgages.”

      This wasn’t a few cases of fraud, either. According to the study, 27 percent of loans obtained by non-owner occupants misreported their true purpose, and 15 percent of loans with second liens incorrectly reported that such loans were not present.

      LST got New Century wrong despite an extensive, publicly available record that refuted their claims. LST ignored that record, failed to conduct any forensic examination of New Century, failed to conduct an effective hypothesis testing, and failed to alert their readers to any of these facts. They produced a travesty that exposes many of the pathologies of theoclassical economics.

      LST have no excuse because their citations include George Akerlof and Paul Romer’s classic 1993 article – “Looting: The Economic Underworld of Bankruptcy for Profit.” LST, however, simply assumed that New Century could not be a control fraud. Here is the sole basis they provide for this assumption (with its accompanying footnote). LST use the acronym “NC” to refer to New Century.

      Before going in detail over NC’s strategy following the 2004 monetary shock, it is interesting to note that the managerial team at NC had significant ownership stakes in the company. In 2001, Robert Cole, Brad Morrice and Edward Gotschall owned, according to EXECUCOMP, namely 15% of the company. With a market capitalization of around $277 Millions, this represented a $42 Million stake for the founding team. In 2005, because of multiple equity offerings, the ownership stake of the three founders went down to 7%. However, thanks to a striking increase in market capitalization (from $277M to $2B), their dollar stake did actually go up from $42M to $147M. As a consequence, we remark that during the entire period our sample covers, the top executives of New Century had significant incentives to maximize shareholder value. This evidence brings strong support to the risk-shifting view we develop in the remaining of the paper relative to explanations that would be based on “looting”.20

      20 Besides, we have checked the insider filings on the SEC’s EDGAR website. Between 2003 and the default of NC, the founder-managers have sold less stocks than they were granted, in particular through stock-option exercise.

      “This evidence” (A) is not “evidence” and (B) provides zero logical support for their assumption that it would demonstrate that the NC was not an accounting control fraud. It is not “evidence” because the LST authors assumed their conclusion – they assumed that NC’s “market capitalization” was not the product of accounting fraud. The reality, which LST studiously ignored in order to mislead the reader and policy makers, was that NC’s reported “profits” that drove the “striking increase in market capitalization” were fictional. They were produced by the accounting control fraud “recipe” for a lender. LST know this to be true from a raft of publicly available information from multiple sources. LST, however, provide none of that information to their readers. The information destroys their assumption that bankers who own stock in a company will never loot the company (an assumption also disproved by the relevant literature and history). The LST authors fail to engage Akerlof and Romer, the criminologists, the financial regulators, the secondary market participants, investigative, and judicial findings that had falsified their claim about stock ownership decades earlier. Indeed, Akerlof and Romer, the National Commission on Financial Institution Reform, Recovery and Enforcement, and the criminologists confirmed that we (the financial regulators) were correct that dominant (often 100%) ownership of an S&L by its controlling officers was a factor that greatly increased the risk of looting. LST hide all these findings from the reader. There are many reasons why a fraudulent CEO faces restraints in stock sales or simply waits too long to sell.

      The first question is whether NC followed the accounting control fraud “recipe” for a lender. The answer, indisputably, is “yes.” (I provide details below.) The recipe for a fraudulent lender (purchaser) of loans has four “ingredients.”

      Grow like crazy by
      Making (or buying) really crappy loans at a premium nominal yield while
      Employing extreme leverage and
      Providing only grossly inadequate allowances for loan and lease losses (ALLL)

      In NC’s case, in addition to the (deliberately and pathetically inadequate) ALLL on loans it held in portfolio (allowances that its controlling officers reduced as fraud, defaults, and losses surged in its massively expanding liar’s loans) the most relevant loss allowances were for repurchases of loans that it (A) fraudulently originated and (B) fraudulently sold to the secondary market through fraudulent “reps and warranties.”

      Lenders led by honest bankers, of course, would never follow this recipe because it produces the classic three “sure things” – (1) the bank is guaranteed to report record (albeit fictional) profits in the near term, (2) the controlling officers will promptly be made wealthy through modern executive compensation, and (3) the firm will suffer catastrophic losses.

      There is a literature on how to distinguish between accounting control fraud, incompetence, and “gambling for resurrection.” The beginning of that literature is cited by Akerlof and Romer.” – snip

      Disheveled Marsupial…. imagine the employment opportunity and experience for an army of forensic accountants with various supporting roles…. even after the job is done they would filter out into the broader market with that knowlage….

  3. I wonder if this will get much more than a token mention in the broader news? Whenever I speak to my mum, who watches a lot of free-to-air news, I’m often regaled with stories of out of control youths and governments that are too soft on them. Rarely does she talk about white collar crime or the harm they’re doing to our economy. A while back I asked her how often they have stories on white collar criminals and she said rarely.

    Why is it regulators, governments and the media haven’t wanted to talk about this until recently?

    • ErmingtonPlumbingMEMBER

      Because they are all one and the same. Banks are plutocratic instutions, as are media coporations and Government serve them or get pulled down.

      Of all the grubby, competing interests out there, it should be no supprise, that the group of organisations, that only exist to represent Worker interests, finds itself under the gaze of a Royal comission and its members subject to “special” laws and penalties only proscribed to them.

      The whole game is rigged. Get your mum to watch this,

  4. Lindsay and Philip are playing this smart. In not so distant future when house of cards collapses and fraud gets fully exposed they be given their 15 min of glory which I hope will lend them a good job somewhere.

    • I agree with most of this submission. However, the high pitched tone does them a disservice for a submission to a Parliamentary Inquiry. It allows their arguments to be written off as reactionary and unbalanced. Why throw in the the neo-lib agenda angle? Just stick to the facts. They should have kept a much cooler tone and the message would have gone further is my 2c.

      • Was about to say. The emotive language risks discrediting the entire content. I thought they were more professional than this.

      • “Why throw in the the neo-lib agenda angle?”

        I don’t know…. maybe because its the accurate framing of events…. which gosh… might enable the unwashed to inform themselves… so you don’t have some jerk off calling you a boomer or sheeple or some other derogatory compartmentalization.

        Disheveled Marsupial…. I mean what if say 4 corners did a segment on neoliberalism which encompasses all sociopolitical – economic activity, rather than some sub set like ID masturbation. Never know the priests… cough econnomist…. might have their magic powers an garb stripped off them…

  5. Massive Control Fraud in Oz? Hoocoodanode?
    Parliament, the National Circus that sold out the nation to the Banksters, that’s who.
    Remind everyone that the difference between blue collar and white collar crime is billions.

    • Remind everyone that the difference between blue collar and white collar crime is billions.

      There is another important difference: 10 years in prison more for blue collar crime

      but the only reason for the very existence of the state is to protect rich from the poor, not the other way around

      • Too bloody true.
        Tatt covered union heavies make much better newspaper copy than well presented FIRE sector scum who steal orders of magnitude more through obscure financial-legal chicanery.

  6. Well done, excellent work.

    I believe that many borrowers are not innocent in this either – excess debt provided to them could have been rejected/not used, instead of “giving it a crack” and complaining at failure.

    • If you watch the link I proffered up thread you will hear Bill talk about Grisham’s law, if your not familiar with it please inform yourself. In a nut shell… if people at the top of the game cheat and win don’t be surprised when everyone else joins in… its just simple social psychology.

      Disheveled Marsupial…. one would think with all the sporting examples of Grisham’s law it would be apparent, cough…. Lance Armstrong, doping in all sports, salary caps, win at all costs attitude….

      • Thanks skip, another interesting behavioural theory. It will be interesting to see how the law sees the decisions made by both parties on debt liability if/when the everboom slows or turns.

      • Andy….

        It depends on what informs the law… Bill Blacks past success in the S&L scandal is historical record.

        Disheveled Marsupial…. curious…. why do you fixate on borrowers and not the 1st order of agency – ?????

      • “its just simple social psychology.”

        A lot of flawed economic theories and modelling could be easily fixed if they paid a little more attention to social and behavioural psychology. Of course a lot of the findings don’t sit neatly with their belief in the rational individual or rational choice theory etc, so they’re not going to do that.

      • Skippy, I think the focus on the borrower is just the result of near constant neo-lib propaganda from the media over the last few decades about ‘individual responsibility’, but is really just victim blaming, and a nice way of distracting attention from the real culprits.

      • I am sure there are many true victims, the debate lies in what constitutes a victim. We can’t paint all those who were given “too much” debt as victims though – plenty would have known better, such as the reporter featured on 4 corners.

        Adult decisions have adult consequences, and it’s ludicrous that ALL blame go to the bank. Case by case basis – some outcomes need the bank to take the hit (profit), some the fraudulent officer (criminal), some the borrower (bankruptcy).

        Skin in the game & action-consequence would go a long way to enabling the rational individual to exist.

        “Victim blaming” take the rose coloured glasses off, there’s more to this than such a simple/absolute view.

      • Andy…

        You might want to ask yourself why people had to borrow so much money in the first bloody place when productive has been so high for so long, then square where all that productivity went…

        Disheveled Marsupial…. sure as hell was not back into socially productive enterprises…


    This is great stuff.

    I’d rather flush my money down the toilet than spend it on soi-disant financial “advice” from thieves and mongrel dogs…ermmm…I mean financial advisers employed by major financial institutions. Your chances of running up against a Don Nguyen are far too great to make it worthwhile.

    And I guess this is the point of the report. My confidence in the trustworthiness of the FIRE sector, including the major banks, is zero. I have a shitload of money in term deposits at the moment that I’d like to invest more profitably but I don’t trust the financial industry or the stock market. Multiply that lack of confidence across the community and the whole system starts to choke. Without the rule of law, we’re buggered.

      • I agree as well. The pain is quite high and comments here by people about bank collapses are also a worry. I would like to see an MB article on the wisdom of leaving significant counts of cash in the bank, given the multiplicity of comments from MB readers about the folly of leaving money in the bans

    • I hope you have those accounts spread between many different institutions. Because when it comes to bail-in time, they’re going to try and replace your deposits with bank IOU’s (maybe even equity). They won’t touch an account if it’s small enough.

      The Cyprus “template”. They’re pricks, but you already knew that.

  8. For an eye opening (bulging!) experience, type “xxxx bank scandal” into Google, where “xxxx” is the name of an Australian bank. The depth and breadth of corruption over time, across institutions, and across activities such as financial advice, insurance etc is astounding. And this is only the stuff that has made the news. The successful scams that are robbing people blind and ruining their lives are the ones we don’t know about because 4 Corners et al haven’t got around to them yet.

    • One of my favourites was payment sequencing.

      You have $5 in your account.

      Your pay comes in +$1000
      Then the bank’s account fee is charged -$10

      All good right? Nope, because they could change the ordering any way they like, so they charge the fee, push your account into overdraw and hit you with a $70 “dishonour” fee before crediting your pay.

      It caught up with them eventually, but I’m sure the penalty failed to match the reward. Pricks I say.

      • A variant of that was assigning automatic credit card payments to the previous month – effectively resulting in the absurd situation where a monthly payment was being made, but because it was assigned to the previous month, a late payment charge was being applied as if no payment happened. NAB.

  9. RBA (bank) and APRA( bank supporter who got Bail-ins legislated a couple years ago) are vested interests.
    Of course they dont get in the way of Bank Profits or Control fraud. Remember Glen telling us to stop whinging and buy houses, spend, a couple years ago? Deflation? sure deflate further by lowering interest rates. Help the Banks and their overseas borrowing and get the AUD to fall to help the asian home buyers launder money and break the laws of their country.

  10. Must Read — – Coming to all Countries
    “Derivatives Crisis Of Banks…Worldwide”
    Interesting Historical Note: When Lehman Brothers failed, it had $35 Trillion in Derivative Exposure. Now compare this with today’s Deutsche Bank Derivative Exposure of a cardiac-arrest $75 Trillion in DERIVATIVES…and you will understand WHY DB share value is relentlessly and methodically falling in recent years. In fact, today May 3rd, Deutsche Bank stock has already been hammered down more than 6% in today’ early hours of New York trading.

    Indeed: “Derivatives are weapons of mass destruction” – Warren Buffett

    • Deutsche Bank Derivative Exposure is a huge control issue in house, try unwinding that bird nest, lack of sound internal controls…. but hay…. 34T in tax havens means some made it across home plate….