Reducing corruption requires greater trustworthiness axiom

29 May 2012

The Ernst and Young 12th Global Fraud Survey released last week reflects trends in other recent surveys that corruption worldwide is worsening. Despite countries seeking to strengthen their enforcement regimes and their anti-corruption legislation, findings have deteriorated compared with those from previous surveys.

The survey indicates just how different the business community is in many jurisdictions compared with New Zealand.

The global average is that 39% of respondents report that corrupt practices occur frequently in their countries. In rapid-growth markets, corruption is common place, with 84% of Brazilians say it is widespread. In 2011, of 36 enforcement actions under the US Foreign Corrupt Practices Act, 31 related to activities in Asia, Eastern Europe and Latin America. Many of these prosecutions related to payments to people working in state owned enterprises.

Ernst and Young found that hard times strain ethical standards, with survey respondents saying that they are willing to make illicit payments (15% cf 9% in the previous survey) and misstate financial performance (5% cf 3%) to survive the economic downturn.

While 81% of respondents say codes of conduct are in place and senior managers strongly promote their commitment to them, there is seldom consistent training, only a minority of managers model expected standards, and there is little enthusiasm for enforcing breaches.

The failure to prevent bribery and corruption reflects a mixed commitment to giving effect to the “6 trust elements”, which the OECD has identified as collectively essential if corruption is to be moderated.

These require; setting standards; promoting those standards; integrating those standards into work practices; the modelling of standards by managers, employees knowing the consequences of breaching the standards; and acting decisively when breaches occur.

www.ey.com/GL/en/Services/Assurance/Fraud-Investigation—Dispute-Services/Global-Fraud-Survey—a-place-for-integrity

www.ssc.govt.nz/sites/all/files/integrityandconduct-survey2010-findings-summary.pdf

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May 29, 2012

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Good intentions and Statements of Intent

28 May 2012

The importance of trustworthy State servants is stressed in the Statements of Intent of both the State Services Commissioner and the Auditor General released following the Budget last week. The Commissioner allocated two pages (21-22) of his 28 page SOI. The Auditor General allocated 5 pages (17-21) of her 75 page document.

The content is largely complementary. Both include international surveys to validate their focus on strengthening public trust and confidence in government. The Transparency International Corruption Perceptions Index has become an entrenched measure for both agencies. OAG is also using the Worldwide Governance Indicators as a measure.  Although the indicators were not collated in 2011, the release of a new set indices is anticipated in early June. Interestingly, New Zealand’s score for political stability is lower than for the other five indicators.

While both SOIs refer to State Services integrity surveys (2007, 2010) as performance measures, the absence of any mention to a further survey suggest that none will be conducted in either 2012 or 2013.

Integrity standards are flagged as “the critical underpinning” of the Commission’s role in identifying emergent risks to the trust and integrity of the system, including trust and integrity frameworks and setting required levels of transparency. The Commissioner indicates that he will investigate issues regarding the integrity and conduct of State servants.

With the importance of public trust and confidence confirmed, how will both agencies react to evidence in the Yan/Liu trial in the High Court?  The Herald reported the evidence of a Citizenship Officer wanting to make inquiries with Australian immigration authorities: –

…. “I had a phone call that I was told not to ask any more questions because there was a lot of political pressure to send the file to Wellington.

“I was told to just process the file, send it to Wellington, don’t worry about asking any more questions.

“I have been working there for seven years and that was the first time I have had my boss phone me about an application.”

Asked who called him, Mr Gambo named the general manager of citizenship, Geoff May.

Mr Gambo said he told Mr Yan at a meeting in May 2008 that it was unlikely he would get citizenship because there were so many unresolved issues.

“He said to me, ‘I’m confident it will be okay. I’ve got a lot of support from the MPs’.”

In cross-examination, defence lawyer David Jones, QC, suggested to Mr Gambo that he was lying and said there was no documentation of his conversation with Mr Yan.

Mr Gambo denied he was lying and another Internal Affairs citizenship officer, Judith Broad, was later called to give evidence.

She recalled Mr Gambo telling her and other staff members that Mr Yan was confident of getting citizenship despite the questions over his application.

“He came back into the back office and said, ‘Mr Liu is very confident he is going to get citizenship because he has got lots of backing and support from MPs’,” said Ms Broad.

She described this as “shocking…”

How does this stack up with the obligation to be “professional and responsive”, to treat everyone “fairly and with respect” and to “act lawfully and objectively”? Or is it explained by “respecting the authority of the government”.

According to the Herald, the Serious Fraud Office director has approached the Auditor-General to signal interest in the case.

ssc.govt.nz/soi2012

http://oag.govt.nz/2012/statement-of-intent/docs/statement-of-intent-2012-15.pdf

http://info.worldbank.org/governance/wgi/index.asp

www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10808608

www.ssc.govt.nz/sites/all/files/Understanding-the-Code-of-Conduct-April2010.pdf

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May 28, 2012

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Has the Treaty rubber hit the Tuhoe road?

24 May 2012
 

Yesterday was Budget day. But possibly yesterday’s goings on in Parliament will be a footnote in history compared with the sentencing in the High Court in Auckland of Tame Iti.

 
 

The sentencing of the Urewera Four relates to weapons training by a bunch of misguided, would-be militants in the backblocks of Gisborne. What it may well highlight is the schizophrenic rationale for governance in New Zealand.

 
 

Each year we celebrate the signing of the Treaty of Waitangi. We have been educated to revere the Treaty as the authority for government. The theory is that Maori ceded sovereignty – while perhaps retaining tino rangatiratanga. Authority was not acquired by conquest or occupation of Maori lands, beaches and rivers. The Queen’s realm was established over New Zealand because Maori ceded sovereignty through the Treaty.

 
 
Q. Who are the Maori who ceded sovereignty?
A. Maori with rangatira who signed the Treaty.
Q So who from the Urewera signed the Treaty?
A Nobody.
Q So were Tuhoe party to the Treaty?
A There were no Tuhoe signatories, so Tuhoe cannot be a party.
Q So if Tuhoe is not part of the Treaty why is the Urewera part of New Zealand?
A Probably because colonial interests shaped and wrote New Zealand law and history.
Q Has that always been the case?
A No. William Swainson, the Attorney General from 1841- 1856 advised that iwi who were not party to the Treaty were outside the mutual obligations of the signatories. Tuhoe was uncommitted by the Treaty; they lived outside of the rule and protection of the Crown.
Q So why is Urewera policed as indivisible from New Zealand?
A Because of occupation, custom and tradition.
Q But does that reflect the Treaty?

A What Treaty!

 
 

and that is why Governor Fitzroy’s Maori Exemption Order was resisted by colonial interests and over-ruled by the Colonial Office. Perhaps now, 170 years later, a different perception of fairness may emerge.

 
 

http://tvnz.co.nz/national-news/urewera-raids-kiwis-should-thankful-police-stepped-in-489873

 

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May 25, 2012

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Renewed interest in corruption commissions in NZ and Australia

24 May 2012
 

In most jurisdictions, politics seems to bring out the worst in politicians! The Auditor General’s inquiry announced yesterday into the Liu citizenship award in 2008 is unlikely to reflect well on New Zealand politicians. Some part of Australian politics always seems to be in a corruption spotlight. A consequence perhaps is the support by moves by the Greens parties in both countries to introduce a national anti corruption agency.

 
In the Federal Parliament, the unedifying circumstances which led to the Speaker standing down and another government member moving, under corruption allegations, to the cross benches has encouraged the Greens to promote legislation for an integrity commissioner and an anti corruption agency. Senator Xenophon – an independent – has indicated support for the legislation. He has criticised the Federal Government’s promotion of an MPs’ code of conduct as a “sideshow” compared with the importance of a national ICAC to cover MPs and public servants. In New Zealand proposals for MPs code of conduct has never had much support on either side of the House.
 

Senator Xenophon said he would aim to have legislation introduced next month. The Leader of the Opposition has indicated that the bill will not be supported.

 
Any national ICAC will extend the impact of similar agencies in New South Wales, Queensland, Western Australia and Tasmania. The introduction of an equivalent body in Victoria – the Independent Body Against Corruption – remains bogged down nearly a year after the planned commencement. In South Australia ICAC legislation, opposed by the Government, is part of the way to enactment .
 

Several bloggers regularly advocate the necessity of an ICAC-equivalent if New Zealand is to lessen the instances of corruption.

 
 

www.stuff.co.nz/national/politics/6968060/Labour-MP-Shane-Jones-stood-down

 

www.lawyersweekly.com.au/news/new-vic-anti-corruption-body-under-fire

 

www.theaustralian.com.au/national-affairs/in-depth/xenophon-to-back-greens-national-anti-corruption-commission-plan/story-fndsip4d-1226363183240

 

www.whaleoil.co.nz/2012/05/independent-commission-against-corruption/

 

www.anticorruption.co.nz/2012/05/07/banks-com-proves-how-nz-supports-corruption

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May 24, 2012

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Ethics free zone in top US graduate schools?

23 May 2012
 
An extract from “Inside Job”, a book by Charles Ferguson about university corruption and the financial crisis, was published in the Guardian on Monday. It explains the muted contribution of US academics to understanding the global financial crisis. Many with power in universities are ”in bed” with business and financial sectors.
 
While the medical and scientific communities have spent decades distancing themselves from the influence money, schools teaching economics, law, business and political science schools have not.
 
“…Over the past 30 years, significant portions of American academia have deteriorated into “pay to play” activities. These days, if you see a famous economics professor testify in Congress, or write an article, there is a good chance he or she is being paid by someone with a big stake in what’s being debated. Most of the time, these professors do not disclose these conflicts of interest, and most of the time their universities look the other way.”
 
“Half a dozen consulting firms, several speakers’ bureaus and various industry lobbying groups maintain large networks of academics for hire for the purpose of advocating industry interests in policy and regulatory debates. The principal industries involved are energy, telecommunications, healthcare, agribusiness – and, most definitely, financial services…”
 
The extract illustrates links that the top graduate schools have with banking and financial sectors. Some academics are paid up to $135,000 per appearance by entities in that sector, but are not required by their employing university to disclose the connection – and few do so voluntarily.
 
“…The problem of academic corruption is now so deeply entrenched that these disciplines, and leading universities, are severely compromised, and anyone considering bucking the trend would rationally be very scared…”
 
Ferguson claims that these financial interests affect academic research and policymaking. With some exceptions, there has been no interest in challenging industry practices. This perhaps explains “….how an entire industry came to be structured such that employees are encouraged to loot and destroy their own firms …. and …why deregulation and economic theory fail so spectacularly…”
 
It seems ironical that a British paper should champion the standards of the print media, but the extract notes that while universities have few disclosure requirements and few academic publications require the disclosure of interests, “….newspaper reporters are strictly prohibited from accepting money from any industry or organisation they write about…”
 
Ferguson also notes that “… most institutions continue to oppose further disclosure and … refused even to discuss the subject…”
 

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May 23, 2012

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Latvia puts NZ on the slippery slope

 
22 May 2012
 
Latvia may not be a economic powerhouse, or a market of any importance to New Zealand, but last week it named New Zealand as a corrupt jurisdiction and removed it from its European Union corporate and banking white list. New Zealand shared the ignominy with Russia. Yet other seemingly less regulated states like India and Brazil apparently meet the corruption controls and anti money laundering requirements.
 
The drama involves an Auckland company – already removed from the New Zealand register- laundering $680m at a Riga bank. The irony is that Latvia features as one of seven EU countries where 80% of respondents say that corruption is a major problem; a status Latvia shares with Lithuania, Spain, Malta, Italy, Ireland, and Austria. Latvia seeks to position itself as a trustworthy Scandinavian state, although with New Zealand placed as the least corrupt public administration by Transparency International. Latvia in 61st place and with a marking of much less than half of New Zealand’s, it has some way to go.
 
The Economist reported last year that after several years of substantive improvements in fighting corruption, circumstances have slipped recently to levels present at the time Latvia joined the EU.
 
The real embarrassment for New Zealand arising from Latvia’s actions is that it should have been grouped with Russia as having a corrupted banking system.
 
 
 

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May 22, 2012

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Integrity may hit the rocks

21 May 2012
 
The Guardian has published leaked details of the UK Cabinet Office’s Reward, Efficiency and Reform Group (Rerg) recommendations. These propose that Civil Service pay will be based on four regions with salaries between 7% – 10% lower than UK average pay. Not surprisingly, relationships with the Government which have been drifting apart, may soon be on the rocks.
 
The Cabinet Secretary for the last six months, who was responsible for Rerg and cutting costs across departments, resigned last week after falling out with the Cabinet Minister.
 
And the Head of the Civil Service is reported to have had a spectacular dispute with the Prime Minister’s strategy director over the perceived failure of the Civil Service to implement radical change. The strategy director resigned having “lost” a debate that 90% of the work done by civil servants could be outsourced to think tanks, charities and private companies.
 
The Head of the Civil Service tweeted on Saturday that “ I am a champion of change in the Civil Service but I will also defend what is good about it. We need to hang on to [Civil Service] values – integrity, honesty, objectivity, impartiality.”
 
Will the ship of state hit the rocks?
 
For the imaginative, there has been an analogy in Australia over the weekend. A 26,000 tonne bulk carrier MV Integrity, drifting without power, threated to hit the Great Barrier Reef. However the crew “managed” ballast, enabling the ship to float over Shark Reef and into clear water. It is now being towed to port.
 
Integrity is no longer at risk of being driven onto the rocks and breaking up!
 
 

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May 21, 2012

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Don’t bank on it…

18 May 2012

It appears that some merchant bankers are losing the lucky streak which for years made their large profits. When things go bad, they continue to do so in a spectacular way. The US$ 16 bn loss by a Merrill Lynch dealer in 2008 however makes this month’s US$ 2 bn loss by JP Morgan look of less significance.

The reaction of the chief executive at JP Morgan seems to confirm that banking is about gambling – and that sometimes the economic hedge doesn’t work. He was prepared to apologise for embarrassing errors and bad judgment, but seemed to rationalise the loss as sloppiness. It was not a matter of ethics. He said that “….it is something the bank will admit, …learn from, …fix…and move on…”

The SEC which is now investigating, may be less charitable. Penalties will inevitably be added to JP Morgan’s losses. So far this year the SEC has levied penalties of up to US$10 million. But any penalty may well be seen as little more than a licence fee.

In an unrelated matter, the Financial Services Authority,  U.K.’s financial regulator, has fined a Swiss bank and its manager responsible for controls on money-laundering. The bank maintained lax control at its 12 branches in the U.K despite about half of deposits coming from doubtful jurisdictions. Its high risk control list excluded many countries where the bank had offices. It didn’t conduct due dilience on many at-risk customers, and excluded them from expected controls.

The bank was fined GBP525,000 and the employee GBP 25,000. The employee has retired from the bank, unlike the trader at JP Morgan.

Unsurprisingly banks rate in the lower quartile of most surveys assessing the ethics of, or public confidence in, national institutions. However in the 2011 survey of the world’s 110 most ethical companies, five are banks – of which four operate in New Zealand – ANZ Bank, National Australia Bank, Westpac and Robobank. JP Morgan was not on the list!

In the New Zealand UMR Mood of the Nation report for 2012, confidence in banks rates ahead of unions, Parliament and the media but below other surveyed institutions.

http://m.guardian.co.uk/ms/p/gnm/op/view.m?id=15&cat=business&gid=/business/2012/may/10/jp-morgan-market-loss-hedging&type=article

http://ethisphere.com/past-wme-honorees/wme2011/

www.umr.co.nz/Reports.php#

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May 18, 2012

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UK Audit Office suggests that you cannot trust contractors

17 May 2012
 
A National Audit Office report into contracting by the Department of Work and Pensions has found that all is not well! Fraud by contracting firms runs to hundreds of thousands of pounds. The report explores abuse of public money by the major contractor- A4e (perjoratively referred to by journalists as “all for Emma”, the former chair of the contractor). The conclusion is that the contracting model used by government agencies is not fit for purpose.
 
Government contracting is a complex craft that agencies – and their Ministers – have not mastered. The experience seems to be that contractors outwit agencies and seldom deliver in the public interest. “… anything to do with people and human services, which are going to offer the most lucrative contracts, is anything but simple. What constitutes a job? A4e showed how definitions are elastic. Measuring whether claimants are being treated well, or effectively, requires continuous contract monitoring and rigorous inspection. And that, by adding to the cost of the contract, changes the economics of outsourcing…”
 
The National Audit Office found that the “black box” model of procurement “does not specify how a provider should achieve outcomes … the how is as important as the how many…” NAO criticises the inadequacy of performance measurement – there is a need to standardise contractors’ standards, to inspect their behaviour, to collect data from people complaining to and about the contractor – and to audit contractors’ auditors. But that begins to look rather like the traditional bureaucratic way of doing things – of checks and balances. And that increases costs, negates the possibility of staff reductions, and diminishes commercial viability.
 
Suggestions at the Public Accounts Committee have included extending coverage of the Freedom of Information Act to government contractors. And the facetious may also feel that contractors should be subject to whistleblowing legislation and to the oversight of the Ombudsman. Perhaps providers competing for All of Government contracts should be required to imbue their staff with the spirit of service!
 
 
 

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May 17, 2012

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Fraud is not going away

16 May 2012
 
The certainties of death and taxes seem joined now by the ubiquity of fraud. Year on year there are numerous surveys including those by KPMG, Ernst & Young, and Deloitte that disclose the growing instance of fraud.
 
The findings in the United States Association of Certified Fraud Examiners’ Report to the Nation published last week seem to confirm the pattern of those other surveys.
 
 
Some average statistics include;
 
  • Organisation’s lose 5% of their revenue to fraud – globally this would total approximately $3.5 trillion.
  • The median loss was $140,000 and nearly half of victim organisations recover nothing.
  • Frauds last for about 18 months before detection.
  • Most detection of fraud follows from a tipoff – increasing to more than 43% from 40% in 2010.
 
Only banks and financial institutions lose more to fraud than government and public administration.
 
Offenders with higher levels of authority cause larger levels of loss – executives take $573,000, managers take $180,000 and employees take $60,000.
 
More than 77% of fraud occurs in six business areas – accounting, operations, sales, upper management, customer services or purchasing.
 
Most fraudsters are first offenders – with 87% never previously having been charged with an offence before detected for a fraud.
 
ACFE identifies behavioural “red flags” as;
 
  • living beyond means (36%)
  • financial difficulties (27%)
  • unusually close relationships with vendors/customers (19%)
  • excessive “control issues” (18%).
 
 
Edward Gibbon Wakefield, considered a fraudster by sections of colonial New Zealand, died today in 1862.
 
 
 
 

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May 16, 2012

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