ASIC slammed for investigating just 1 per cent of alleged breaches, according to new report

A government enforcement agency has been left red-faced after an embarrassing fact was laid bare.

Australia’s financial regulator investigates less than 1 per cent of tip-offs it receives about suspected corporate misconduct.

That’s according to a scathing report compiled by economist John Adams of Adams Economics, released on Thursday morning, which has found the Australian Securities and Investments Commission’s (ASIC) handling of misconduct complaints “is getting worse not better”.

The analysis, pulled from publicly available data from the regulator spanning the last decade from 2011 to 2021, had “worrisome implications”.

Mr Adams found that of the 134,000 reports of alleged misconduct over the last decade, only 1709 progressed to a formal ASIC investigation.

That’s 1.27 per cent of the total reports of alleged misconduct.

What’s more, the annual ratio of formal investigations compared to misconduct reports has declined over the years.

At its peak in the 2014-2015 financial period, that ratio was 1.9 per cent.

But the latest financial year which ASIC has released records for, 2020-2021, “saw the lowest annual ratio of investigations to the total reports of alleged misconduct in the past 10 years” at just 0.74 per cent.

Although Australia was hailed as a white collar crime “paradise” by a former ASIC chairman in 2014, it appears that enforcement actions have gone down, not up, since then, according to Mr Adams.

“ASIC has done just a poor job,” Mr Adams told news.com.au.

He is now calling for a parliamentary inquiry to get to the bottom of the damning figure. He says it does not appear to be a resourcing issues or a legislative issue, so has been left scratching his head over why the enforcement rate was so low.

In 2014, there was a Senate Economics References Committee inquiry into ASIC’s performance, and the regulator was also caught up in the banking royal commission in 2019. Another inquiry is very much needed, Mr Adams said.

However, ASIC denies that its enforcement is that dire, saying that 15 per cent of misconduct reports are “referred for action”. Of that, a smaller number turns into an official investigation.

“Every year ASIC receives more than 10,000 separate reports of misconduct and possible breaches,” a spokesperson told news.com.au.

“Every single report is examined and assessed – some for further examination, some for consideration by a more appropriate agency, or not warranting further action, and others referred for follow-up investigation.

“These outcomes, year by year, are publicly available on our website and published in our annual report.”

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An image from ASIC’s report, supplied by an ASIC spokesperson.

ASIC learns of potential corporate misconduct through three ways – from members of the Australian public which can include whistleblowers, breach reports submitted by auditors, and statutory documents submitted by liquidators.

According to Mr Adams, a misconduct report is considered “resolved” if ASIC can: “Involve referral to an external dispute resolution scheme, ASIC issues a warning letter to the party that may be in breach of the Corporations Act, ASIC provides assistance to the reporter in the form of guidance and information about how best to resolve the matter themselves, or ASIC takes action to achieve compliance.”

That means a “resolved” report does not necessarily mean enforcement action was taken against the person or company reported. Instead, the alleged perpetrator might just receive a letter educating them on what to avoid in the future.

The number of reports of alleged misconduct from members of the Australian public which have been “resolved” has fallen by over 63 per cent, Adams Economics found.

It went from 2628 reports that led to resolution in 2011 to only 964 reports last year.

The majority of reports were deemed “NFA” which stands for no further action.

The number of reports sent to ASIC alleged misconduct of some kind in the past decade.

The amount of reports that were deemed to need ‘no further action’.

Mr Adams also found some alarming results regarding collapses that have gone into liquidation.

ASIC records show that around 80 per cent of collapsed companies have been accused of misconduct by liquidators but only a tiny portion are investigated.

An average of 81.2 per cent of initial statutory liquidator reports submitted to ASIC alleged some form of misconduct in the past 10 years.

And yet, the percentage of all initial statutory liquidator reports submitted to ASIC in the last decade that ultimately get referred for action is on average only 1.7 per cent.

News.com.au has spoken to other experts who are alarmed at the low enforcement rates, especially when it comes to wrongdoing from collapsed businesses.

Australian Restructuring Insolvency and Turnaround Association (ARITA) CEO John Winter told news.com.au that the laws in place for corporate misconduct acted as a good deterrent, but the problem was they were never being used.

An illegal phoenix operation, for instance, which involves transferring assets from a collapsed company to a new company to avoid paying off debts, can carry up to 15 years in prison. But he is yet to see anyone face the full might of the law, and very few face any penalties.

Prosecution “is an expensive undertaking,” Mr Winter told news.com.au.

“As a regulator you have to be prepared to win some or lose some but you at least have to be prepared to go to court.”

ASIC’s mantra used to be “Why not litigate?” he said. “What we’re not seeing anymore is a willingness to pursue directors [for wrongdoing]”.

News.com.au spoke to a former worker at ASIC, who preferred to remain anonymous, who said that cases were referred to action if it was deemed they had “value for money”.

“Typically ASIC is looking for an outcome,” the insider said.

“They’re looking for the right matter. They are looking for value for money, they want an outcome, you can’t just pay $20,000 for a report to sit on a shelf.”

The amount of cases referred for action has declined despite resourcing increasing.

The small number of liquidators who are asked to submit another report, after alleging misconduct of some kind from the collapsed company they are investigating.

Mr Adams does not believe the root of the problem is a resourcing issue as if anything, proportionally, ASIC’s number of staff members increased last year, as did its overall funding.

After the banking royal commission, the regulator was given a massive boost, with plans to inject more than $404 million over four years.

That represented a 25 per cent increase compared to the previous year, Mr Adams said.

The government increased its funding to ASIC by 65.3 per cent from $471.3 million in 2011 to $779.1 million last year.

Mr Adams said: “This 65.3 per cent increase is more than the rate of inflation for this period … meaning that parliament has given ASIC a substantial real increase in its annual appropriation.”

Mr Adams met with senior members of ASIC early last month to discuss his report and they couldn’t explain why their performance was low, despite increased resources and adequate law frameworks to work in.

He is now hoping for a parliamentary inquiry in coming weeks.