Chapter 4Approach to investigation
4.1This chapter considers the Australian Securities and Investments Commission’s (ASIC) approach to investigating corporate misconduct. The chapter first considers concerns regarding ASIC’s receipt and investigation of reports of alleged misconduct. The chapter then considers evidence regarding ASIC’s handling of information on possible misconduct from other sources, including registered liquidators. Further, the chapter considers concerns raised in submitters’ evidence regarding ASIC’s investigatory methods.
4.2The material in this chapter is closely related to issues regarding ASIC’s approach to investigation in Chapter 5 and should be read in conjunction with that chapter.
Introduction
4.3ASIC receives a substantial amount of information on potential corporate misconduct. In general, this information comes from:
reports of alleged misconduct;
intelligence from ASIC’s supervisory and surveillance activities; and
intelligence from other agencies or regulators.
4.4Given the breadth of ASIC’s remit, it is not feasible for all matters of possible misconduct to be investigated. Rather, ASIC adopts a ‘risk-based approach’ to handling misconduct reports where investigation and enforcement resources are allocated to matters involving the most serious harm.
4.5However, concerns were raised during the inquiry regarding the effectiveness and efficiency of ASIC’s approach to handling reports of alleged misconduct. In particular, submitters contended that ASIC’s approach to handling misconduct reports sees alleged unlawful conduct go uninvestigated. In some cases, ASIC’s apparent reluctance to investigate misconduct reports appears to have compounded the harm experienced by consumers and investors.
4.6In the circumstances that ASIC does investigate alleged misconduct, ASIC has been criticised for failing to pursue matters in a timely and competent manner. Unfortunately, many of the concerns raised in this chapter echo concerns raised in other forums.
ASIC receives thousands of reports on possible misconduct
4.7Misconduct reports are one of the main ways in which information on possible unlawful behaviour is brought to ASIC’s attention. These reports cover a broad range of potentially unlawful behaviour, including:
…insider trading, inappropriate financial advice, the offering of unlicensed financial services or credit, misleading and deceptive conduct or disclosure about financial products, harmful lending practices, poor insurance claims handling, director misconduct and investment scams.
4.8Each year, ASIC receives around 8000 to 10 000 misconduct reports from members of the public. Thousands of other reports are provided to ASIC via mandatory reporting pathways, as shown in Table 4.1.
Table 4.1Misconduct reports by type, received from 2019–20 to 2022–23
| | | | |
Public and AFCA | 12 355 | 10 711 | 8688 | 8149 |
Reportable situations | 2721 | 2435 | 1969 | 1313 |
Auditor reports | 1172 | 1174 | 1393 | 1968 |
Statutory reports | 8560 | 5083 | 4645 | 6073 |
Total | 24 808 | 19 403 | 16 695 | 17 503 |
Source: ASIC, Supplementary submission 1.5, p. 46.
4.9When ASIC receives reports of alleged misconduct, ASIC considers its priorities and enforcement criteria to determine the action it will take. ASIC uses technology-based and manual methods to triage the reports and identify high risk matters which are then subject to more detailed assessments.For example:
reports of misconduct from the public—are manually triaged and assigned a risk rating that correlates to ASIC’s strategic or enforcement priorities, or the egregiousness of the conduct involved;
statutory reports from liquidators—are automatically triaged using digital tools, however supplementary liquidator reports are manually triaged and assessed in the same way as reports from members of the public; and
reportable situations form lodgements—are automatically assigned a risk score and are subject to a selective review by ASIC.
4.10According to ASIC, the criteria it uses to select cases for further action are confidential but generally include factors such as ‘the seriousness of the alleged conduct, the amount of loss suffered and the number of consumers affected’.
4.11Despite the importance of misconduct reports, the committee received evidence regarding various challenges people faced in making a report to ASIC. In particular, inquiry participants raised concerns about ASIC’s lack of transparency in handling reports of alleged misconduct from the public. For example, Madgwicks’ submission to the inquiry outlined how it made a ‘detailed’ report to ASIC in 2022 regarding a ‘potential contravention of a ASX listed corporation’ only for ASIC to refuse to confirm whether they are investigating. Madgwicks concluded that:
It seems unlikely that there has been any investigation by ASIC as the further conduct by the company does not show any regard for the director’s fiduciary duties, proper corporate governance or concern about the regulator’s oversight.
4.12Further, the committee heard from Ms Sarah Abood, Chief Executive Officer of the Financial Advice Association of Australia that ASIC ‘could better leverage and more transparently report intelligence from the financial adviser population’. Ms Abood continued:
Our members are very proud to be considered and trusted as professionals. They’re very well placed and highly motivated to identify and stop any problems on our early sector early. They do often ask us to pass on information about misconduct to ASIC. However, in many cases, no further information is provided or requested by ASIC. We’re unsure of whether any further action is being taken. This, of course, can be disheartening for those who have taken time and trouble and sometimes risk to report misbehaviour. It lessens the chances that further reports will be made.
4.13ASIC submitted that it acknowledges receipt of all misconduct reports (except for anonymous reports) and reporters are provided with a reference number.
Most reports of alleged misconduct result in no further action
4.14ASIC’s handling of misconduct reports can result in several outcomes, including investigation and possible enforcement. Most misconduct reports to ASIC, however, result in no further action. For example, in 2022–23, ASIC referred 14 per cent of misconduct reports for further action, while 63 per cent of reports resulted in no further action (and a further 14per cent were assessed as being outside of ASIC’s jurisdiction), as seen below in Table 4.2.
Table 4.2Misconduct reports by outcome, 2021–22 and 2022–23
| | |
Referred for action by ASIC | 13 | 14 |
Resolved | 11 | 8 |
-Compliance achieved | 1 | 1 |
-Warning letter issued | 6 | 4 |
-Referred to internal or external dispute resolution | 4 | 3 |
-Formal information release made under s127 of the ASIC Act | <0.5 | <0.5 |
Analysed and assessed for no further action | 66 | 63 |
-Insufficient evidence | 43 | 29 |
-No action | 23 | 34 |
No jurisdiction | 19 | 14 |
No breach or offence | 1 | 1 |
Total | 100 | 100 |
Source: ASIC, Annual Report 2022–23, October 2023, pp. 207–208.
4.15Moreover, the rate at which ASIC accesses misconduct reports as requiring no further action has increased significantly in recent years, having doubled from 33 per cent in 2011–12 to 66 per cent in 2021–22.
4.16According to ASIC, there are a range of circumstances which can lead to a misconduct report being assessed as requiring no further action. These include:
the alleged perpetrators reside outside of Australia;
the issue is being addressed by another agency;
the issue is better suited to alternative dispute resolution;
the issue does not relate to current priorities of ASIC;
the conduct is aged;
the evidence supporting the allegation is limited;
the issue has been previously considered by ASIC;
the issue relates to matters for which there has been law reform;
the issue is of importance only to the parties in dispute; and
the issue is a private legal matter and intervening would be of limited benefit.
4.17ASIC’s reliance on some of the above circumstances as a reason not to pursue cases was criticised during the inquiry. For instance, MrMarkAlan, a lawyer who represented a whistleblower in relation to the Nuix initial public offering, told the committee:
The bad behaviour seems to be continuing with companies in Australia. I don't think it's enough for ASIC to repeatedly say that it is hampered by the lack of evidence, the factual matrix being complex or there were large quantities of data and written material to be reviewed. That's what ASIC is there to do. If ASIC, despite its financial and human resources, seems or feels it is powerless to stop these crashes occurring, I think it is up to ASIC to articulate what it needs to stop them occurring.
4.18Several other submitters raised concerns about ASIC’s ‘no further action’ outcome.
4.19ASIC has spoken to the proportion of reports of alleged misconduct for which no further action is taken, compared with the proportion of reports referred for further action or formal investigation. ASIC has emphasised that their purpose is to ensure the fair, efficient operation of markets and financial services, and to promote confidence and participation in the financial system. They explained that, like any regulator, they can only progress a finite number of actions, and do not seek to act on a fixed proportion of reports of alleged misconduct.
ASIC commences only a small number of investigations each year
4.20ASIC has significant powers to investigate suspected breaches of corporate law, credit law and related matters. In general, ASIC may commence an investigation in response to a misconduct report or as a result of ASIC’s surveillance activities.
4.21However, ASIC investigates only a relatively small number of cases of possible corporate misconduct each year. Over 12 years from 2011–23 to 2022–23, ASIC commenced an average of 162.5 investigations per year. In the last three years, ASIC has commenced an average of 117 investigations, a 28 per cent decline over the 12-year-average.
Table 4.3Investigations commenced and completed, 2014–15 to 2021–22
| | | | | | | |
Commenced | 206 | 126 | 151 | 134 | 110 | 107 | 134 |
Completed | 175 | 124 | 126 | 103 | 132 | 158 | 139 |
Source: ASIC, SupplementarySubmission 1.5, p. 54.
4.22ASIC routinely defends its approach to investigation. ASIC submitted that it undertakes only a small number of investigations as they are ‘resource intensive’ and, therefore, directed at the ‘most serious matters’. Indeed, the Chair of ASIC, Mr Joseph Longo, recently claimed that ASIC is resourced only to do ‘around 150 to 200 investigations a year’. Further, Mr Longo suggested that while increasing ASIC’s budget could result in more ASIC investigations he questioned whether such an increase would result in a decrease the complaints about ASIC.
4.23In response to the declining number of ASIC investigations between 2014–15 and 2021–22, ASIC claimed that its enforcement resources are increasingly focussed on addressing instances of consumer harm. ASIC told the committee:
While the number of formal investigations commenced under s13 of the ASIC Act has declined over the period, the number of civil and criminal actions commenced has increased over the same period. This reflects an increasing proportion of ASIC’s enforcement resources being dedicated to resource-intensive court-based action during this period.
4.24However, the small number of cases pursued by ASIC has raised concerns that only a fraction of the information on possible corporate misconduct that ASIC receives is subject to formal investigation. Analysis of ASIC data by Adams Economics found that between 2011–12 to 2020–21 the average annual ratio of ASIC investigations to reports of alleged misconduct, breach reports and supplementary statutory reports from liquidators was just 1.27 per cent. Furthermore, Adams Economics’ analysis suggests that the annual ratio of investigations to total reports of alleged misconduct peaked in 2014–15 and fell to a low of just 0.74 per cent in 2020–21.
4.25Participants in the inquiry expressed concern regarding ASIC’s low rate of investigation, including the findings of Adams Economics’ analysis. For example, the former Chair of ASIC, Mr James Shipton, described Adams Economics’ figures as ‘sobering’ and argued that they show ASIC is overwhelmed and needs greater capacity. Further, the Small Business Development Corporation argued that ASIC needed to undertake a ‘significantly larger number of investigations and prosecutions’ for it to effectively penalise those engaged in misconduct.
4.26Despite these concerns, ASIC argued that Adams Economics’ analysis was ‘oversimplified and superficial’. Further, ASIC defended its approach to investigation by claiming critics ‘misunderstand’ its role and that ASIC is not a ‘complaint resolution body’. As ASIC submitted:
We have been criticised for the proportion of reports of alleged misconduct that are progressed to formal investigation and enforcement. This criticism misunderstands the nature of our regulatory task. ASIC is not a complaint resolution body; its purpose is not to resolve individual consumer disputes and complaints. ASIC’s purpose is to gather information from many sources, across the range of entities that we regulate, and use it to make strategic decisions about when to intervene and how to do so.
4.27Indeed, ASIC has sought to emphasise that it ‘does not intervene in disputes, give legal advice or act on behalf of individuals’. Additionally, ASIC told the committee it does not routinely seek compensation for individuals affected by corporate misconduct, nor is ASIC resourced to do so. Rather, ASIC states it ‘will advise the complainant of their right to take their complaint to either the firm’s IDR process or to AFCA to pursue a remedy’.
4.28Nonetheless, some submitters contended that ASIC should be more active in individual matters brought to ASIC’s attention. For example, Dr Evan Jones argued that ‘[i]t is precisely ASIC’s role to champion individual disputes in the courts because the victims lack the resources to do so.’ Moreover, several submitters criticised ASIC’s approach to investigation and enforcement for reflecting underlying philosophies which, in their view, failed to protect consumers. For instance, some submitters raised concerns that ASIC’s approach to regulation and enforcement was undermined by a philosophy of caveat emptor. As the Australian Citizens Party submitted:
ASIC’s failings are not a management problem. Rather, they are baked into the structure of the regulator itself. ASIC cannot be fundamentally committed to regulation when it is committed to the discredited “efficient markets theory” ideology and a hands-off approach to regulation. Instead, ASIC has been faithful to the doctrine of caveat emptor—let the buyer beware—which blames the consumer for any losses they suffer, even if those losses are the work of unscrupulous individuals, and more often than not, financial criminals to whom ASIC’s weak and ineffective regulation is no deterrent.
4.29In addition, the committee received evidence that some ASIC investigations have been marred by poor practices and capabilities. For example, some inquiry participants raised concerns that ASIC investigators lacked appropriate legal and commercial knowledge relevant to the investigation. In other instances, evidence suggests it appears ASIC investigations have taken an inordinately long time to progress, or were hampered by administrative issues. ASIC has defended its investigation of some of these matters.
4.30Two instances of alleged corporate misconduct appear to exemplify the lack of communication and significant delays which infect at least some ASIC investigations. Mr Petrus Helberg advised the committee that despite his working within a company whose financial products were alleged to be misleading, false or deceptive, ASIC repeatedly declined the witness’ offer to provide information about the suspected major fraud. Regarding ASIC’s investigation of Kalkine Pty Ltd, witnesses recounted that ASIC has been largely noncommunicative and unresponsive. At the time of writing, ASIC has not yet decided whether regulatory action should be taken against Kalkine, despite numerous reports of misconduct over a number of years. This contrasts with the actions of the New Zealand regulator, which has decisively intervened against Kalkine New Zealand and ordered that they cease making sales calls.
Missed opportunities to prevent harm to consumers and investors
4.31The committee received approximately 150 public submissions from individuals who expressed significant concerns regarding ASIC’s approach to investigation. In general, these submissions claimed that ASIC had failed to appropriately investigate various matters of corporate misconduct.
4.32In some cases, submitters alleged that ASIC was aware of misconduct occurring for a significant period before acting. As such, submitters were often critical of ASIC for not doing more to protect them, as consumers and investors, from the serious harms of unlawful corporate conduct. These harms included:
losing their life savings to various instances of corporate misconduct;
losing their home;
other forms of serious financial hardship, including difficulty paying for basic services or compromised retirement outcomes; and
significant mental health and emotional impacts.
4.33The following section details a range of cases in which submitters contended ASIC’s approach to investigation missed important opportunities to prevent harm to consumers and investors.
Courtenay House Capital Trading Group
4.34Courtenay House Capital Trading Group (Courtenay House) operated a Ponzi scheme which raised approximately $180 million from around 585 Australians between 2011 and 2017. Courtenay House told investors that funds they deposited with the company would be traded in foreign exchange and futures markets for attractive returns. However, only around three per cent of investors’ funds were actually traded and ‘monthly amounts paid to investors were derived from capital deposited from new investors’.
4.35Three individuals have been prosecuted in relation to Courtenay House.
4.36ASIC’s regulatory response to Courtenay House was protracted. Indeed, ASIC was aware of concerns regarding Courtenay House some years prior to taking action to wind up the scheme, as show below in below in Table 4.4.
Table 4.4Key dates from ASIC's response to Courtenay House
| |
September 2014 | ASIC became aware of concerns relating to Courtenay House when investigating ‘a different matter’. ASIC ‘registered an internal activity to consider these concerns’. |
January to March 2015 | ASIC received two reports in January and February 2015 that alleged Courtenay House of unlicensed conduct and misleading investors. In response, ASIC ‘issued a warning letter to Mr Iervasi on 31 March 2015 requesting he remove the Courtenay House website and cease unlicensed conduct.’ |
March 2016 | ASIC received a report from a licensed financial planner which alleged Courtney House ‘was offering unlicensed financial advice’ and ‘purported returns were unrealistic’. |
August 2016 | ASIC ‘commenced a surveillance’ of Courtenay House. |
January 2017 | ASIC received a ‘further report from an anonymous witness’. |
March 2017 | ASIC ‘commenced a formal investigation into Courtenay House’. |
April 2017 | ASIC applied to the NSW Supreme Court to freeze assets’ of the Courtenay House companies and persons of interest. |
May 2017 | The NSW Supreme Court appointed liquidators who found that Courtenay House ‘had been running a Ponzi scheme since 2011’. |
May 2020 | ASIC ‘referred a brief of evidence to the Commonwealth Director of Public Prosecutions (CDPP) recommending charges against MrIervasi relating to running a Ponzi scheme’. |
August 2020 | ASIC referred charges against Mr Papoulias and Mr Sipina to the CDPP regarding their role in the Ponzi scheme. |
Source: ASIC, answers to written questions on notice set 50, 6 September 2023 (received 29 September 2023).
Concerns regarding ASIC’s regulatory response
4.37The committee heard that shortcomings in ASIC’s response to Courtenay House was a key factor in the financial losses experienced by victims. For instance, MrsSusan Barnett, Managing Director of SRG Advisory, told the committee that ASIC’s investigation ‘failed to identify shortcomings in the business model and legislative compliance’. Further, Mrs Barnett noted that prior to the collapse of Courteney House, ASIC received complaints about the company including from a ‘licensed financial planner who asserted it was a Ponzi scheme’.
4.38Submissions from victims often commented that they had undertaken due diligence in relation to Courtenay House, including by obtaining information on the company from ASIC, checking ASIC’s banned and disqualified register, and meeting with Courtenay House staff at their offices.
4.39Moreover, one victim explained that ASIC’s lack of regulatory action had the effect of making Courtenay House appear legitimate:
ASIC’s inaction over several years only went to further legitimize Courtenay House in the eyes of both existing and new investors, including ourselves. As late as August 2016, ASIC staff claimed that there were no red flags on Courtenay House or its directors whatsoever, even though the liquidators found that Courtenay House had never submitted a tax return since it had been established in 2012.
4.40Despite this, hundreds of people lost money to Courtenay House with often catastrophic impacts. For example, victims submitted that their financial loses included $200000; $900000; $2.64 million of personal investments and $4.39 million of SMSF investments; and their life savings. In some cases, victims were forced to sell their homes. Moreover, submitters experienced adverse impacts on their health, financial well-being and on their family relationships.
4.41Several submitters raised concerns about the length of time it took ASIC to act in relation to Courtenay House. Further, some submitters expressed anger that ASIC was not more transparent about the concerns in relation to Courtenay House. In some cases, victims deposited money in the scheme just days and weeks prior to ASIC taking action to freeze Courtenay House’s assets.
Sterling Group
4.42Sterling Group was a group of companies which, among other operations, controlled a complex investment scheme that resulted in devasting financial loses for hundreds of Australians when the company collapsed in 2019.
4.43Sterling Group offered various financial products to investors, including the Stirling Income Trust (SIT), the Silverlink Income Rights Trust and Sterling New Life Lease (SNLL). Of particular concern was the SNLL; a managed housing investment scheme under which retirees would purchase units in the SIT, usually in the order of hundreds of thousands of dollars, to ‘cover the rent payable for a long-term property lease of up to 40 years’. For those retirees, their access to housing became dependent on the financial performance of Sterling Group and was severely compromised when the company collapsed.
4.44As detailed in the committee’s 2022 inquiry, 527 people invested around $30million in the SIT. The SNLL product was purchased by 101 people—62 tenant-investors entered through the SIT while 39 tenant-investors contributed a further $7.56 million through Silverlink’.
4.45In November 2023, three people were charged in connection with the SIT.
Concerns regarding ASIC’s regulatory response
4.46A number of people affected by the Sterling Group collapse wrote to the committee regarding their ongoing concerns about ASIC’s response to the case. For instance, Sterling First Action Group claimed that:
ASIC lacked the ‘ability to effectively undertake regulatory action and enforcement’, given that Sterling Group was purportedly managed by directors involved in previous high-profile company collapses;
ASIC failed to take regulatory action in response to early reports of misconduct and non-compliance;
ASIC failed to use its enforcement powers appropriately to control the operations of Sterling Group and protect investors;
ASIC did not allocate adequate resources to ensure its investigation and
enforcement actions in response to Sterling Group were timely; and
ASIC was not transparent with investors when investigating Sterling Group.
4.47Further, submitters emphasised that if ASIC had acted sooner to end Stirling First’s operations, then the financial devastation experienced by consumers could have been prevented, particularly to vulnerable retirees. Victims of the Sterling Group collapse submitted they were experiencing a range of significant adverse impacts. These included compromised and uncertain retirement outcomes, and loss of, or facing eviction from, their homes.
4.48In 2021, the Chair of ASIC summarised the considerations relevant to the ASIC’s intervention in the Sterling Group:
We appreciate that those who have suffered losses have wished for us to have moved faster at times or to have intervened earlier. Any action we take must be based on the collection of proper evidence. We must follow due process before we can intervene, particularly in circumstances where there is incomplete or conflicting information. Our role also requires us to regularly make difficult choices about which reports of misconduct to examine and which apparent breaches to investigate. Our finite resources as well as those of the prosecuting authorities and courts mean we cannot pursue all possible breaches of the law.
4.49Nonetheless, one submitter considered that ASIC had ‘created such a web of complications to justify their poor duty of care’ to those affected by the Courtenay House collapse. Moreover, at least one submitter argued that given ASIC was aware of unlawful corporate conduct by Sterling Group, ASIC should be liable to pay compensation to the victims of the scheme.
Greywolf Resources NL
4.50The committee heard from Mr Garry Delaney, who invested nearly $400000 with Greywolf Resources NL (Greywolf) in 2010 and reported alleged misconduct to ASIC in November 2012. ASIC assessed Mr Delayney’s report and advised him that ASIC ‘would not be taking any action’.
4.51Between 2010 and 2022, ASIC received 22 misconduct reports in relation to Greywolf, in addition to five audit reports and one statutory report from a registered liquidator. The misconduct reports raised concerns regarding:
…misleading statements, offers without a prospectus, failure to lodge financial statements, failure to retain sufficient books and records, failure to pay back loans, possible related party transactions, possible misappropriation, possible insolvency and failure to hold shareholder meetings.
4.52ASIC appears to have taken limited action in response to Greywolf. ASIC wrote to Greywolf in relation to concerns regarding misleading statements, failure to lodge financial reports, and fundraising disclosure. ASIC also commenced court proceedings against Greywolf for not lodging financial reports and discontinued the proceedings when Greywolf supplied the reports. However, ASIC states that it did not pursue allegations of misconduct because:
there was little evidence of money being received from retail investors;
there was insufficient material provided to support the allegations;
there were avenues for aggrieved parties to take private legal action; or
there were competing priorities among the other reports of misconduct.
4.53ASIC states that it was not aware of investor losses at Greywolf until August 2022, when the Australian Broadcasting Corporation’s Four Corners program reported on significant instances of poor corporate conduct at Greywolf. This included raising significant capital from retirees and other vulnerable investors using misleading information about Greywolf’s operations.
Disputes regarding loan products
4.54During the inquiry, the committee received evidence from a number of submitters who raised concerns that ASIC had failed to pursue matters of alleged misconduct by financial service institutions in relation to loans to individuals or small businesses.
4.55For instance, Mr Niall Coburn, a barrister and former ASIC investigator, made representations to the committee regarding the experience of ‘many of the farmers who have lost their properties to the banks’. Mr Coburn stated that the alleged misconduct experienced by farmers in relation to agricultural loans they held with the banks included:
…predatory lending or asset-based lending amounting to unconscionable conduct (section 12CB ASIC Act), fraud and forgery and failure to act efficiently, honestly and fairly (in breach of section 912A of the Corporations Act). The alleged misconduct also involves breaches of the banks’ own internal compliance procedures and various forms of the Banking Code of Practice which amount to breaches of ASIC licence conditions.
4.56Mr Coburn contends that ASIC has systemically failed investigate complaints of serious misconduct involving Australia’s major banks. Indeed, Mr Coburn told the committee that of complaints made to ASIC by the 63 farmers he represented, ASIC had not investigated any of them. Moreover, Mr Coburn submitted that it was difficult to understand why ASIC had decided not to commence a formal investigation under section 13 of the ASIC Act given that the farmers’ complaints appear to meet ASIC’s enforcement criteria.
4.57ASIC rejected assertions that it ‘did not properly consider reports of misconduct made over the years in relation to farming loans’. Further, ASIC stated:
Given the laws in place at the time of the conduct (which occurred from 1997 to mid-2010s) and ASIC’s limited jurisdiction in relation to commercial lending, the main applicable provision is unconscionable conduct under the ASIC Act. In each case, the available evidence did not support such an action.
4.58Submitting in relation to ASIC’s investigation and enforcement of alleged breaches of the National Consumer Credit Protection Act 2009 in the mortgage market, Mr David Lindsay argued that ASIC does not properly investigate serious allegations of mortgage fraud, including by not conducting interviews with affected mortgage holders or using their evidence in court proceedings.
Underutilising statutory reports by registered liquidators
4.59Registered liquidators play a key role in investigating corporate misconduct in Australia. When a company is being dissolved, liquidators investigate the company’s affairs and are required by law to report to the company’s creditors, members and ASIC.
4.60Liquidators also provide initial statutory reports to ASIC under subsections 422(1), 438D(1) or 533(1) of the Corporations Act or under regulation 5.5.05 of the Corporations Regulations 2001. These reports contain information on company directors who appear to be failing to meet their legal responsibilities, for example engaging in phoenixing activity, fraud and insolvent trading.
4.61The damages associated with unlawful conduct by company directors is significant. For example, the committee heard from Mr Bill O’Chee, Partner of Himalaya Consulting, that a conservative estimate of the deficiency of assets to liabilities—debt that will not be repaid to creditors—for companies that became insolvent in 2018–19 was over $8 billion. Of that, over $1 billion was owed to the Commonwealth in the form of unpaid taxes and charges. Further, from 1July2022 to 30 June 2023 insolvencies of small to medium size entities resulted in 96 per cent of creditors receiving only 0 – 11 cents in the dollar.
4.62The Australian Restructuring and Insolvency Turnaround Association (ARITA) told the committee that illegal phoenixing alone had an annual cost to the Australian community of more than $4 billion. Further, the Small Business Development Corporation submitted that is ongoing:
Despite the introduction of the 2019 phoenixing reforms, this unlawful activity is continuing with countless reports of suspected phoenixing across the country. Commentators have estimated that up to 10 per cent of recent company collapses across Australia are the result of illegal phoenix operators.
4.63The committee also heard that liquidators are well-credentialled to report corporate misconduct to ASIC. As MrWinter, Chief Executive Officer of ARITA explained:
…the difference between a community report or even an AFCA report that comes through is that liquidators are charged with the primary responsibility of investigating corporate malfeasance. They are trained to do this. They are trained to look at the evidence, to ascertain whether or not directors have failed in their statutory duties or they have phoenixed, failed to pay tax money or traded insolvent et cetera. These are the frontline investigators of bad corporate behaviour.
4.64Despite the unique position of liquidators to report misconduct, evidence provided to the committee shows that few liquidator reports are investigated by ASIC and even fewer reports lead to the prosecution of directors.
4.65ARITA estimates that liquidators make an estimated 9000 to 10 000 misconduct reports to ASIC each year. Yet, evidence suggests that ASIC responds to the majority of initial statutory reports from liquidators with an automated, no further action email within 40 seconds of the report being submitted. In one example, the committee heard that a report submitted by an ‘experienced and highly regarded liquidator’ was automatically rejected even though the report involved illegal phoenix activity of around a quarter of a million dollars.
4.66In another example, MrPeterKeenan, an accountant of 30 years’ experience in the insolvency sector who submitted numerous reports to ASIC under section 533 of the Corporations Act, told the committee that:
In many of those reports I asserted that, prima facie, one or more company officers had broken corporate laws, insolvency laws, breached their duties and/or engaged in other misconduct. The written response from ASIC and CAC was invariably that it had decided not to investigate.
For many years insolvency practitioners who experienced the same outcomes have complained about the corporate regulator’s inadequate enforcement action with respect to insolvency offences.
4.67Indeed, ASIC’s insolvency statistics suggest that alleged misconduct contained in liquidators reports are falling through the cracks. For instance, MrO’Chee observed that in 2018–19 administrators’ reports to ASIC contained thousands of suspected potential breaches, including: 16 874 breaches of civil obligations; 772alleged criminal offences that occurred prior to appointment and 2154 alleged criminal offences that occurred after appointment; and 185 alleged other offences. Additionally, Mr O’Chee noted that in 77.9 per cent of the cases that administrators reported to ASIC in 2018–19, the administrator identified that they had documentary evidence of the alleged offence occurring.
4.68In 2021–22, ASIC received 3767 initial statutory reports from liquidators alleging possible misconduct and a further 332 supplementary reports were provided (of 593 supplementary reports requested by ASIC). Professor Jason Harris submitted that in 80 per cent of the cases where liquidators did provide a supplementary report, ASIC considered there ‘was insufficient evidence to warrant commencing a formal investigation’. Professor Harris continued:
Only 20% of supplementary reports (remembering these are themselves only a small subset of all misconduct reports each year) were then referred for further investigation (or 66 reports, out of 3,767 total reports). ASIC does not provide further information as to how many of those matters resulted in formal enforcement action and if so what the results of that action were.
4.69Professor Harris argued that while ASIC had ‘recently introduced AI tools to assist with reviewing misconduct reports’ this would ‘not result in higher levels of enforcement activity because ASIC is refusing to take action where there is little or no evidence’. Additionally, Professor Harris noted ‘there is usually little or no evidence in circumstances where the books and records have been destroyed or lost (or likely never kept in the first place)’.
4.70Given the above evidence, Professor Harris considered that ASIC’s track record on taking enforcement action on matters arising from misconduct reports from liquidators has been ‘manifestly inadequate for many years’. Further, MrO’Chee concluded that ASIC’s rate of investigation of liquidators reports ‘was not good enough, because it is not doing justice to the victims of financial crime’. The Australian Small Business and Family Enterprise Ombudsman considered that ASIC should play a greater role in improving the financial acumen of businesses, noting that ASIC data shows many business failures are the result of poor business practices.
4.71Unsurprisingly, liquidators expressed frustration that their reports, which raise significant concerns regarding corporate misconduct, just ‘go into a blackhole’. This frustration is compounded by the effort required by liquidators in making statutory reports to ASIC. As ARITA explained to the committee:
They put a lot of effort into it. Significantly, the Australian liquidator marketplace of 650 liquidators has to write off about $100 million a year of unrecoverable fees because they are appointed to businesses where there's no money left to even pay their fees let alone to hand money to creditors. They are statutorily required to undertake very significant investigation work purely for the benefit of ASIC and its enforcement regime.
4.72In certain cases, making reports to ASIC regarding the conduct of liquidators themselves can be challenging. For example, ARITA made six referrals regarding alleged misconduct by liquidators to ASIC, under section 40–100 of the Insolvency Law Reform Act 2016. While ASIC responded to most of these within the statutory timeframe, there were instances where ARITA had to follow up with ASIC to seek a response. ARITA believes that ASIC should be treat these referrals with a ‘very rapid response in order to try to isolate any evidence and protect further harm occurring to the community’.
4.73Other submitters also provided evidence on instances in which ASIC may not have properly investigated alleged misconduct by a liquidator.
Better leveraging liquidators reports
4.74Some inquiry participants considered that there is substantial scope for ASIC to improve the way it leverages the information on potential misconduct contained in reports from registered liquidators.
4.75ARITA called for better engagement from ASIC with registered liquidators. ARITA said it had previously sought to work with ASIC to understand how liquidators can provide reports better suited to ASIC’s needs. However, it appears that ASIC has declined to support this work by sharing information on the risk weightings ASIC applies to liquidators’ reports. As Mr Winter told the committee:
If ASIC doesn't want these reports, if there are clear hurdles that need to be crossed in terms of the significance of the malfeasance, then, of all people, liquidators should be told. They don't need to waste their time, which they're often not remunerated for, digging around and investigating these things if they know ASIC isn't going to do anything with it. Where we do know that ASIC will respond, if we are able to see what that is, then those things should be given an elevated path. Indeed, we've asked in the past as to whether or not there could be a channel to expedite matters of serious concern. The portal is the portal; that is what we've been told.
4.76ARITA’s calls for greater clarity on ASIC’s reporting requirements were supported by other submitters. For example, the Australian Small Business and Family Enterprise (ASBFEO) recommended that ASIC provide ‘greater clarity about how it makes decisions on which reports of misconduct progress to the next stage of investigation’. The ASBFEO said it understood ASIC’s concerns that transparency on the filters applied in its automated algorithm for incoming insolvency practitioner reports may ‘enable malfeasant business to avoid ASIC’s detection’. However, the ASBFEO remained concerned about the ‘number of reports of misconduct that do not see any investigation or enforcement action’ and ‘the economic impacts of unchecked misconduct’, including from illegal phoenix activity. The ASBFEO argued that:
A clear understanding of how ASIC decides which reports progress would allow practitioners to target their investigation efforts. This would minimise costs to the businesses and their creditors, and result in greater enforcement action against illegal phoenixing.
4.77Further, the ASBFEO raised concerns that, at present, ASIC does have not have ‘flexibility to adopt a tailored approach in responding to disputes, including availability of operator support where automated support is not appropriate or helpful’. The ASBFEO stated that including such flexibility, would allow insolvency practitioners to ‘dispute matters of serious misconduct where a report was not progressed to the supplementary reporting stage by ASIC’s algorithm’. Further, the ASBFEO recommended ASIC include data in its insolvency statistics on ‘on the estimated size of the business, extent of phoenixing activity, the outcomes of liquidations, insolvency-related fees per appointment’.
4.78ASBFEO also called for legislative reform that would allow for it, and other dispute resolution agencies, to act as ‘super-complainants’. Such a designated report pathway would enable such ‘agencies to substantiate serious complaints to ASIC and trigger its review, allowing the relevant agencies to better assist with serious disputes’. The Small Business Development Corporation called also called for a ‘super complaints’ function that ‘would enable trusted small business representative bodies to fast-track recommendations for investigations or actions’.
4.79The committee notes that many of the issues raised in this inquiry regarding registered liquidator reports to ASIC were considered in detail during the 2023 inquiry into corporate insolvency in Australia by the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS). The committee also notes that much of the evidence referred to in this section was received prior to the publication of the PJCCFS report.
4.80On 11 April 2024, ASIC released a consultation paper on guidance for reporting by external administrators and controllers. The consultation, in part, seeks to address recommendations from the PJCCFS inquiry for:
…a comprehensive review of whether the current statutory reporting obligations for insolvency practitioners are best serving the integrity, efficiency, and efficacy of the Australian corporate insolvency framework, including (but not limited to) the ability of ASIC to appropriately process, utilise and respond to initial statutory reports within our current resources.
In the interim the committee also recommended that ASIC consider whether any timely changes can be made to the regulations on reporting thresholds and ASIC’s response to insolvency practitioner reports.
4.81Further, the consultation paper sets out ASIC’s proposed guidance on its expectation that ‘[a]n external administrator or controller is not required to carry out extensive investigations or incur significant costs in completing the initial statutory report’.
4.82In discussing the consultation, ASIC Commissioner Kate O’Rourke said that ASIC has heard the feedback regarding the ‘inconsistencies and ambiguities’ in its processes for receiving reports from liquidators, including that ASIC does not appear taking in action in relation when it requests supplementary reports. Commissioner O’Rourke added that ASIC ‘…is embarking on a body of work to improve how we screen, analyse and action (where required) the reports we receive from registered liquidators.’
4.83In discussing the consultation, ASIC Commissioner Kate O’Rourke said that ASIC has heard the feedback regarding the ‘inconsistencies and ambiguities’ in its processes for receiving reports from liquidators, including that ASIC does not appear taking in action in relation when it requests supplementary reports. Commissioner O’Rourke added that ASIC ‘…is embarking on a body of work to improve how we screen, analyse and action (where required) the reports we receive from registered liquidators.’
Opportunities to better use information on possible misconduct
4.84Several inquiry participants provided evidence regarding opportunities for ASIC to better utilise information on possible misconduct from other sources, including reports from AFS license holders on reportable situations and reports from whistleblowers.
Reports from AFS license holders on reportable situations
4.85Under section 912DAA of the Corporations Act 2001 and section 50B of the National Consumer Credit Protection Act 2009, Australian financial services licensees and credit licensees are required to report reportable situations (previously referred to as ‘breach reports’) to ASIC, generally within 30 calendar days.
4.86In general, reportable situations include:
significant breaches or likely significant breaches of ‘core obligations’;
investigations into whether there is a significant breach or likely breach of a ‘core obligation’ if the investigation continues for more than 30 days;
the outcome of such an investigation if it discloses there is no significant breach or likely breach of a core obligation;
conduct that constitutes gross negligence or serious fraud; and
conduct of financial advisers and mortgage brokers who are representatives of other licensees in certain prescribed circumstances.
4.87Under the reportable situation obligations, ASIC receives a very large number of reports. Indeed, the Law Council described ‘almost real-time data on the state of compliance with the financial services law’.
4.88and the vast majority of these reports result in a ‘no further action’ outcome. In 2022–23, ASIC received 28 493 reportable situation reports from licensees and 160 reportable situation reports from licensees reporting another licensee. Of the reports ASIC received in 2022–23, 93 per cent were assessed as requiring no further action.
4.89Further, the committee received evidence that has been a substantial rise in the number of reportable situations for which ASIC takes no further action, having increased from around 50 per cent in 2011–12 to 90 per cent in 2021–22. In response to a question on notice, ASIC explained there has been significant rise in number of breaches and the ‘no further action’ rate for reportable situation reports is ‘naturally correlated with the increase in reports received’.
4.90Below, Figure 4.1 summarises the reportable situation reports received by ASIC in the last two financial years.
Figure 4.1Reportable situations by type and outcome, 2022–23 and 2021–22
Source: ASIC, Annual report 2022–23, October 2023, p. 209.
4.91Submitters to the inquiry raised concerns regarding the range of conduct required to be reported under the reportable situations regime and the resultant compliance costs for industry. For example, the Financial Services Council (FSC) submitted that the reportable situations regime ‘does not strike the right balance between market efficiency and deterrence of serious misconduct’. In particular, the FSC stated that the reportable situations regime has created significant additional costs and resourcing pressures on industry and the number of minor breaches reported should be reduced.
4.92Further, Ms Cheyenne Walker, Managing Director, Australian Independent Compliance Solutions Pty Ltd, told the committee that while good processes and procedures were put in place in relation to reportable situations:
…there is so much heartache with the advisers in trying to deem if something that is reportable or not; that is reporting breaches and then having no responses, or having breaches that are investigated but where there doesn't seem to be much client harm, or anything associated with that. It is just not working practically, even though in theory it should be a good idea.
4.93The committee also received evidence concerning ASIC’s capacity to investigate and enforce the matters contained in the reportable situation reports. For instance, the Financial Services Committee of the Law Council of Australia (Law Council) raised a concern that the ‘effectiveness of the reportable situations regime is undermined by the wide variety of incidents that are deemed reportable’. Further, the Law Council submitted it was unclear whether ASIC has the ‘systems or processes to adequately triage and review’ a voluminous number of reportable situation reports and questioned whether ASIC had capacity to appropriately investigate and enforce suspected breaches. The Financial Advice Association of Australia raised concerns that ASIC would become ‘overloaded’ with reports of an administrative or technical nature, rather than substantive matters involving consumer harm.
4.94Additionally, the Financial Planning Association of Australia submitted the following about the provisions of the reportable situations regime under the Corporations Act:
…sections 912EA(1)(a) and 912EB(1)(a) restrict the obligation to notify the affected client of a reportable situation, and the requirement to investigate the reportable situation, to situations where personal advice has been provided to the affected client. This effectively provides an exemption from these obligations to all other financial services creating a significant gap in consumer protection, including the provision of personal advice to sophisticated investors and wholesale clients, general advice, the issuing of a product and other financial services.
Reports from whistleblowers
4.95Whistleblower protection provisions are of critical importance to support disclosures made in the public interest to address corporate misconduct. Indeed, research suggests that company insiders are ‘often best placed to detect instances of misconduct’. ASIC has also emphasised the importance of whistleblowers:
Whistleblowing is a key part of transparent, accountable and safe workplace culture. Whistleblowers provide early warning and visibility of issues, and can help identify and call out misconduct and harm to consumers and the community.
4.96Under the Corporations Act, an eligible whistleblower may access legal rights and protections in connection with their disclosure. In general, the criteria for protection as a whistleblower include:
the whistleblower being a current or former employee or other specified close associate of the organisation to which the disclosure relates, or been a spouse, relative or dependent of that person;
the disclosure is made in relation to a specified organisation type, including a company, incorporated association or other body corporate that is a trading or financial corporation;
the disclosure must be made to a certain person, including to a senior person within the organisation or a third-party, such as ASIC.
the whistleblower must have reasonable grounds to suspect the disclosure relates to misconduct or an improper state of affairs.
4.97The committee notes that Australia’s whistleblower protection provisions have been considered in other forums, including in the 2017 inquiry of the Joint Parliamentary Committee on Corporations and Financial Services into Whistleblower protections in the corporate, public and not-for-profit sectors. Furthermore, in 2019 the Corporations Act was amended to strengthen the whistleblower protection regime for the corporate, financial and credit sectors. Associate Professor Vivienne Brand and Mr Jordon Tutton submitted that data from ASIC shows there was a significant increase in the number of whistleblower reports made following the 2019 reforms:
from July 2016 to June 2019 (under the previous laws), ASIC received on average 227 disclosures each year. Further action was not required for about 94 per cent of disclosures; and
from July 2019 to June 2022 (under the 2019 reforms), ASIC received on average 745 disclosures each year. Further action was not required for about 92 per cent of disclosures.
4.98Nonetheless, inquiry participants noted the challenging position whistleblowers can find themselves in under Australia’s whistleblower regime. Further, inquiry participants considered the ways in which Australia’s whistleblower regime could be improved to support better corporate law enforcement outcomes. For example, Associate Professor Andrew Schmulow of the University of Wollongong’s School of Law told the committee:
Whistleblower protection in this country is like a bait-and-switch trick. You're told that there's whistleblower protection, and then anybody who tries to bring themselves under whistleblower protection is publicly crucified upside down so that all the other whistleblowers get the message: there will be no protection. You must remember that, when a whistleblower blows the whistle, it is potentially the end of his or her career. What they've done in the United States is provide whistleblowers with substantial protection, including a payout on the rest of what they could have expected to earn in a career that they have now torched. I think they are the kinds of protections that we need.
4.99Support for better incentives and protections for whistleblowers was also expressed by other submitters. For example, Mr Allan Fels AO, former Chair of the Australian Competition and Consumer Commission, told the committee:
I've always been an advocate for rewards for whistleblowers. That is practised quite a lot in America. Certainly, in the field that I know about, which is antitrust, it's pretty common to do it. Whistleblowers tend to come out very poorly. Probably more could be done to protect them. I can't be very specific, but my sense is that more could be done to protect them. In the end, the incentives for whistleblowing, in economic terms, are very poor. You don't come out ahead by being a whistleblower; you get some satisfaction in that you help to uncover illegality.
4.100International models of whistleblower protection were also raised in evidence from other inquiry participants. Associate Professor Vivienne Brand and MrJordan Tutton submitted that data from whistleblower incentive regimes in the United States and Canada suggest ‘incentive schemes generate valuable information, leading to detection of corporate wrongdoing and contributing to enforcement outcomes’. Associate Professor Brand’s and Mr Tutton’s submission drew attention to the experience of the United States Securities and Exchange Commission (SEC) Whistleblowers Office, which has stated that whistleblowers play a ‘critical role’ in its enforcement efforts, including to provide information in support of enforcement action which resulted in ‘more than $6.3 billion in total monetary sanctions’ in 2022.
Committee view
4.101As noted at the beginning of this report, Australia’s regulatory architecture for corporations and financial services places ASIC in a unique position to receive information on alleged corporate misconduct. It follows that ASIC must have an appropriate capacity to investigate those reports.
4.102On balance, evidence to the inquiry suggests that ASIC’s capacity to investigate corporate misconduct is severely diminished. In turn, Australia’s capacity to detect and, where appropriate, prosecute breaches of corporate law is greatly undermined.
4.103The statistics on the number of reports of alleged misconduct that ASIC receives compared with the fraction of reports which are investigated by ASIC are deeply concerning to the committee. ASIC receives tens of thousands of misconduct reports each year, yet over the last five years ASIC has only commenced an average of 127investigations per year. The committee considers ASIC’s investigation of such limited cases of alleged corporate misconduct is deeply problematic.
4.104By investigating so few misconduct reports, ASIC fails to do justice to the many thousands of Australians who become the victims of corporate crime each year. ASIC is a law enforcement agency and it should investigate the substantive allegations of unlawful conduct that are brought to its attention. While ASIC’s capacity constraints lead it to make choices about which matters to pursue, it is profoundly unsatisfactory from a justice perspective that significant allegations of unlawful conduct go uninvestigated. Further, ASIC’s lack of transparency about how it determines which matters to pursue, and how those investigations are undertaken, is a serious limitation on assessing ASIC’s performance.
4.105Furthermore, the committee considers it inappropriate that ASIC relies on such a wide range of circumstances to determine that a report of alleged misconduct should result in no further action. Indeed, last financial year this resulted in 63 per cent of misconduct being assessed as requiring no further action. People affected by corporate crime should have the opportunity to access redress not only through private litigation, or external dispute resolution, but through the investigation and enforcement actions of ASIC as a law enforcement body.
4.106In taking too long to commence an investigation, ASIC can compound the financial harm Australians experience as a result of corporate misconduct. In the committee’s view, substantive reports of alleged misconduct should be an immediate trigger for ASIC to commence an investigation, particularly when it involves harm to consumers. Evidence to this committee shows that when a consumer or investor loses their savings to unlawful corporate conduct, their financial wellbeing often becomes severely compromised. This can have catastrophic consequences on victims' ability, and that of their families, to pay for basic necessities such as housing, energy, health care and education.
4.107Corporate crimes must be investigated by ASIC with a level of urgency that is proportionate to the consumer and investor harm. Further, the committee considers that the Australian Government should weigh the considerable impact on the economy of having billions of dollars each year lost each year to corporate misconduct against the benefit of having a system of corporate regulation with sufficient capacity to investigate and deter those crimes. In the committee’s view, it is a false economy for Australia to have an overburdened and capacity-constrained regulator.
4.108Registered liquidators, auditors and industry are required by law to provide substantial amounts of information to ASIC on possible misconduct. Evidence to the committee shows that this often creates a considerable compliance burden for those entities, particularly given ASIC does not investigate the vast majority of those reports. The committee considers that it should be a core priority of ASIC to work with liquidators, auditors and industry to ensure that the reports they provided can be used, and investigated, by ASIC in a substantive way.
4.109ASIC’s rate of investigation of alleged corporate misconduct has been a perennial concern and it is clearly not meeting the expectations of the Australian community. Given the harms of corporate misconduct to consumers and investors and, more broadly, to the Australian economy, the committee considers it should be an urgent national priority to improve the systems for receiving and investigation reports of alleged misconduct.