Fraudsters thumb noses at tough rules

Peter O'Brien

Friday 23rd January 2004

Paradox lovers will have noted corporate fraud and mismanagement have become more and more spectacular as worldwide securities and company regulations get tougher and tougher.

The list of criminal investigations and management foul-ups lengthened in recent weeks with news from Italy, South Korea, Australia, the US and, at a much minor level, New Zealand.

Italy-based dairy company Parmalat and its chief Calisto Tanzi produced the biggest financial collapse since the Enron scandal in the US.

The Italian authorities were never an international model for regulators but were slowly improving their performance under EU pressure and local dissatisfaction.

False accounting, which apparently saw about 10 billion euros go "missing" in the accounts, and allegations that Tanzi misappropriated massive funds, illustrated the inability of regulatory authorities and their rules to control people determined to engage in fraud.

There was nothing new in that.

We had similar incidents closer to home over the years. In the 1890s there were the collapse of the Colonial Bank and the near-collapse of the Bank of New Zealand, the latter receiving its first government bailout before those of the 20th century.

What are known as "rogue traders" were responsible for the shambles. Both banks had associations with politicians who later fell on bad times.

The then colonial treasurer Joseph Ward (later Sir Joseph and New Zealand prime minister) went bankrupt, before a phoenix-like re-arising. Parliamentarian William Larnach shot himself in Parliament Buildings, the only suicide to have happened there.

On to the Standard Insurance crash and liquidation of the early 1960s, which was basically the result of its Sydney manager misusing a power of attorney when guaranteeing loans from other financiers to wobbly companies and then flouting head office orders to stop issuing guarantees.

Standard's liquidators proceed against him in 1964 in the Sydney Equity Court. He was found guilty of malfeasance involving nine transactions and ordered to pay £A211,848 to the company's assets by way of compensation (from Gordon Parry: Underwriting Adventure A centennial history of The National Insurance Company of New Zealand Limited).

The mid-1960 saw fraudulent activities at Australian company Australian Factors where executives conspired to present falsified monthly accounts to the board.

Those people, like others before and since, had their activities exposed, raising questions about desperation overcoming commonsense.

They all got found out, a consideration that was probably far from the mind of South Korea's SK Group chairman Son Kil-seung who has been accused of embezzlement and tax fraud to the level of about $NZ1 billion equivalent.

Son was apparently given a suspended jail sentence only six months ago for corporate fraud, so he should go down heavily this time, assuming the charges are proved and the notorious South Korean business/political axis fails to save a major figure.

The country was quick to introduce new rules to control its conglomerates and their excesses in the wake of the late 1990s Asian crisis.

The net seemed big enough to let big fish swim through the holes.

Similar situations happened in Japan, another country which swore to improve corporate behaviour and, to its credit, is still arresting people.

The US got stuck in to mutual fund traders who have long engaged in dodgy practice, which favours short-term traders against long-term share/unit holders.

In a securities industry's equivalent of plea-bargaining they agreed to pay millions of dollars in negotiated compensation and fee reductions to investors, thus avoiding court actions, which could see enormous penalties and possible loss of licences.

Australia is mounting a similar probe and our Securities Commission is doing the same. Both countries' regulators have said they reckoned things were OK. Maybe, but nothing will be OK while managers' personal incomes are based partly on fee income levels and trading returns.

They are recipes for potential unethical practices, only discovered after the event, irrespective of rule tightening.

The most interesting, but weirdest, "rogue trading" had to be forex trading at National Australia Bank.

It has been well-publicised that the unauthorised deals went on for three months as traders bet on a decline in the Australian currency's relationship to the US dollar.

Funny that. NAB's report for the year ended September 30 said "the global recovery and increased commodity pries are also likely to mean a higher Australian dollar against both the US dollar and sterling."

Chief executive Frank Cicutto told the annual meeting on December 19 the Australian dollar was likely to remain relatively strong against the backdrop of an improving international outlook and probable rising interest rates in the company's major operating economies.

The bank and regulators are investigating the "rogues," but they seemed to have ignored the bank's considered predictions.

Also, where were the in-house controls, assuming every day's deals are voice-taped; witness the Bank of New Zealand's forex losses in the 1990s.

The government here and the stock exchange recently promulgated tighter rules over company and director activities. Good on them, but nothing stops rogue traders and potential criminals.

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