Penalties must “inject fear” into would-be white collar criminals

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It is frustrating that the penalties available for ASIC to use can be far less than the profit a white collar fraudster stands to gain through breaking the law, said the commission’s chairman Greg Medcraft, highlighting the need to “inject fear” into would-be criminals in his opening address at the ASIC annual forum 2014.

In the speech he acknowledged public and private 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 told the audience. “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.

He hopes ASIC’s report on corporate wrongdoing, which was subsequent to the senate inquiry, will insight public debate about ASIC’s penalty issues.

The report shows that while ASIC’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.

The University of New South Wales faculty of law notes that Australian maximum civil penalties for insider trading are $200,000; however they are unlimited in Hong Kong and the United Kingdom, in the US the greater of $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 put forward her perspective on the issue of penalties for corporate wrongdoing.

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 that SEC’s current maximum penalties per violation are US$160,000 for an individual and US$775,000 for companies.

She said that when the sanctions aren’t 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 the 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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  • Innocent Observer on 27/03/2014 3:05:02 PM

    Andrew, the problem that Medcraft is talking about is that ASIC have maximum penalties they can apply, and the penalties are weak.

    My understanding is that the idea is not to increase the breadth of penalties, but to increase their severity. I.e, less time throwing the book at an adviser for forgetting to sign their own SoA, and more time smashing the living daylights out of the determined crooks. Deceptive/fraudulent behaviour should come with a mandatory life time ban from the industry, plus a mandatory prison sentence (even if only a month or two).

    The reason I want ASIC to have more powers is because I want the crooks out of the industry so that the rest of us "good guys" can get on with our jobs.

  • Andrew on 27/03/2014 12:02:53 PM

    I would imagine the starting part of any penalty should be that you shouldnt profit from the crime (isnt that the current law ?) so that should take away the reward from the behaviour and the normal penalties should then also apply. If you make $10m from the trade you lose it and have the other penalties as well. Mr Medcraft wants "Penalties to incentivise the right behaviour" what country are we in ? How about apply the current laws properly and then if it is not working review the laws. I 100% agree that we want to improve the reputation of our industry however you dont want to make the penalty for breathing so severe that the good operators exit and leave only the people that are disregarding the current laws and will disregard the future laws as well.

    If you illegally make $10m from a trade and you do gaol time, dont get the $10m and are banned from working in the industry again I think that is a severe penalty and that is how I understand the law to be now.

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