Debunking the outrageous myths of Kiwi white-collar crime

By Graeme Hunt

Friday 16th November 2001

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JOHN KIRK: Politician off the rails

JIM JEFFS: First modern corporate fraudster

LT WILLOUGHBY SHORTLAND: Abuse of public office

ALLAN HAWKINS: Heralding a new age of corporate crime?

JOHN McARTHUR: Junk-bond king

In 1966, An Encyclopaedia of New Zealand noted that riots, organised crime and rackets were "absent from New Zealand," armed robbery rare, the murder rate low, and bribery and corruption "not problems." There was no mention of dishonesty offences.

Thirty-five years later the picture is different. Riots are rare but violent crime is on the rise, although not to the extent radio talkback hosts and some politicians would have us believe. And since the 1970s at least, the public has been made aware of the emergence of two new classes of offending - white-collar and corporate crime.

There is no doubt there has been an increase in the number of professional people - mostly "gentlemen" - misappropriating or stealing clients' money. But the extent to which this represents an outbreak of white-collar and/or corporate crime is highly debatable. While there were scapegoats aplenty after the spectacular company failures that followed the 1987 sharemarket crash, few of those deemed responsible were charged with serious offences, let alone convicted.

Many failed property developers of that bleak period are back in business, embarrassed but not destroyed by their experience in the 1980s, and a few former executives of collapsed investment companies have returned to the business world.

What has changed in the past 35 years is people's attitude toward big business.

Big business has never been held in especially high regard in New Zealand. During the long period when farming generated the bulk of New Zealand's export receipts, business was not infrequently portrayed as a refuge for profiteers and economic manipulators.

Much of the early propaganda from the Labour Party, like that of its predecessor, the Liberal Party, focused on the alleged abuse from, and failings of, the capitalist "class" and how such abuse could be ameliorated by the intervention of the state.

The late Conrad Bollinger, in his entertaining epistle on the liquor trade, Grog's Own Country (1959), painted a picture of an industry morally and socially corrupt, run by rich, greedy businessmen keen to abuse their market dominance and willing to bribe or bully politicians when their interests were threatened.

The irony is that the distrust of business was, until the excesses of the 1980s, greatest during the period of state control. This is because the import-licensing regime, far from meeting its 1938 aim of bringing about industrial efficiency and protecting foreign exchange reserves, distorted the economy by rewarding those lucky enough to gain an import licence or able to make the list of the government's preferred suppliers.

As Britain's accession to the European Economic Community loomed closer in the 1960s, the New Zealand economy started out on the slow road of economic restructuring, and manufacturing and a number of other private-sector pursuits gained respectability.

Still, as late as the 1970s, the housewives' lobby Carp (the Campaign Against Rising Prices) was railing against food processor Sir James Wattie over alleged profiteering. But there was no talk of white-collar or corporate crime, just the effect of private-sector "monopolies" (or what people considered monopolies) on prices.

When the JBL group collapsed in 1972 as a result of bad management, a shortage of working capital and the arrogance of its chairman and managing director, Jim Jeffs, the commercial world felt as if it had been kicked in the groin.

There had not been a corporate collapse of any consequence since the failure of the Dunedin-based Standard Insurance Co in 1961 and the Intercity Distributors group in 1958. Before that, people had to look back to the 1930s to the scandal surrounding John McArthur's Investment Executive Trust of New Zealand.

The JBL failure led to criminal charges being laid against a number of the group's executives, including the high-living Jeffs, who was sent to jail. While JBL was seen by the government and the public as an aberration, in fact it heralded a decade of corporate instability, marked by the spectacular failures of Cornish Lamphouse in 1974 and Securitibank in 1976, and the near-collapse of the Public Service Investment Society in 1979.

Yet there was still little talk, and no general feeling, that New Zealand was being engulfed by a wave of white-collar or corporate crime.

Between 1988 and 1991, when New Zealand listed companies fell over like ninepins, wiping away a large swathe of shareholders' funds in the process, words like "shonky" and "rort" entered the national lexicon for the first time. The National government's $620 million bailout of the state-controlled Bank of New Zealand in 1990 - a move that appeared to favour undeservedly the minority shareholder, Fay Richwhite & Co - hardened public attitudes toward the behaviour of big business and its influence on the economy.

The jailing of Equiticorp Holdings' founder, Allan Hawkins, and other directors on fraud charges in 1993 was further evidence to many that New Zealand had caught up with the rest of the world in white-collar and corporate crime.

Maverick National MP Winston Peters, later the founder-leader of the New Zealand First party, took the debate a stage further, accusing big business (and their bankers, lawyers and accountants) of defrauding the national exchequer by joining or promoting tax-driven investment schemes at home and entering sweetheart tax deals abroad.

The result was the three-year winebox inquiry which, although it failed to uncover corruption or significant tax fraud, exposed a level of corporate shenanigans not seen publicly in New Zealand for a century.

Regrettably, much of the debate about white-collar and corporate crime is based on ignorance because many of the business activities politicians and members of the public portray as crimes are not.

Tax planning, as distinct from deliberate tax avoidance or evasion, is legal and a majority of businesspeople consider it legitimate. Similarly, failing in business, avoiding paying creditors or going bankrupt are, generally speaking, not crimes, no matter how offensive they might seem to the victims. Insider trading, likewise, is not yet a crime, although it carries some stiff civil sanctions.

For these reasons, this book is titled Hustlers, Rogues & Bubble Boys, reflecting the fact that many of those referred to are not criminals in the legal sense, even if some people think their alleged ethical shortcomings, sharp practice or shonky behaviour amount to criminality. My deference to the legal description of criminality reflects the reality of New Zealand defamation law - a distinction that does not exist to the same extent in the US, where the expression "white-collar crime" was reputedly coined in 1939.

American sociologist Edwin H Sutherland, who is credited with first using the term, argued that whether a person was arrested and convicted for a criminal act was secondary to the issue of whether that person had committed an act that could reasonably be regarded as a violation of criminal law. At one point Sutherland even extended his "criminal" definition to include behaviour he considered ought to have been declared a criminal offence.

Sutherland's views have wide currency today, not least because the US has a heritage of white-collar and corporate criminality dating back to the birth of the republic. Indeed, the US' first superintendent of finance, the talented Robert Morris, died in 1806 after spending three years in a debtors' prison, having squandered one of the largest fortunes in North America through manic land speculation.

Commentators here used to say there was little evidence of public-sector criminality in New Zealand, and they made no mention of white-collar or corporate crime. Yet recent research, including some I undertook for my book, The Rich List, suggests our early colonial administrations were far from models of propriety. While bribery was uncommon, if not completely absent, jobbery - the practice of using a public position for private gain - was common, if not universal.

Jobbery went hand in hand with land speculation, and one of the earliest offenders was the talentless Lt Willoughby Shortland, Lt-Governor William Hobson's handpicked police magistrate and later colonial secretary. Land speculation itself is not a crime, though Shortland's liaison with the northern trader, James Clendon, and other speculators would render him unsuitable for public office by today's standards.

Public service rules, and in some areas acts of Parliament, have long outlawed jobbery, but cases do arise from time to time - generally where low-level offenders sell for private gain confidential or privileged information from organisations such as the Immigration Service, Inland Revenue and Work and Income New Zealand.

The most difficult area of offending, from both detection and enforcement perspectives, is fraud. Indeed, despite the inclusion of the terms 'fraudulently," "intent to defraud" and "fraudulent" in the 1961 Crimes Act, the terms were not defined properly until a court case in 1976. Britain has fared little better in this regard, with "fraudulently" giving way to "dishonestly" in English statutes. This was in response to several expensive fraud trials that failed to produce convictions because jurors, usually laypeople unfamiliar with financial markets and commercial structures, tended to view "fraud" as associated with technicalities that had to be explained by a lawyer rather than in its wider meaning of "dishonesty."

What is obvious to any reporter who has had the misfortune to cover a fraud trial is that even where the accused has broken the law or failed to meet some legal obligation, it is extremely difficult to prove he or she has committed fraud; the person must be shown to have acted dishonestly, ie with the intention of permanently depriving another of his or her property.

As Christchurch lawyer James Rapley, a former member of the Serious Fraud Office, noted in 2001: "Crimes of dishonesty do not always clearly define the unlawful act and then set out the mental elements necessary to find the accused culpable or blameworthy." By "mental elements" he meant the accused's intention to commit the unlawful act.

Having said that, there are some instances of fraud so blatant that the criminal intent of the perpetrators cannot be questioned. These are mainly committed by foreigners - often Nigerians, Pakistanis and Ukrainians - and like most globalised western nations, New Zealand has become a target for this type of crime.

Typically the offences involve letter scams, stolen or "hacked" credit cards, or theft from bank accounts. Frequently the internet is the catalyst for the crime, sometimes the source of it. These crimes are hard to detect, hard to stop and virtually impossible to police.

The victims can range from wealthy movie stars to middle-income businesspeople tempted by get-rich-quick schemes.

This book, the first comprehensive look at white-collar mischief in New Zealand since the start of European settlement, does not suggest New Zealand is suffering a white-collar or corporate crimewave, or that the country's business and ethical standards have gone to the dogs - quite the reverse.

In 19th-century New Zealand there were some blatant abuses by public officials and speculators (often one and the same) and in the 20th century, especially during the periods of import licensing and price control, rorts abounded but there were few prosecutions.

We now live in a consumer age where people are far more likely to demand justice or cry "fraud" if a company they have invested in, or provided services to, collapses.

Though understandable, their allegations are, from my experience as a journalist since 1974, usually misplaced.

Failure is as much a part of the free-market system as success; we could not have one without the other.

No one enjoys seeing a business falter, especially if its failure hurts others, but such is the blunt reality of the market system.

This is an extract from Graeme Hunt's book, Hustlers, Rogues & Bubble Boys: White-Collar Mischief in New Zealand, published this week by Reed Publishing (NZ), $39.95. Mr Hunt is NBR's editor-at-large

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