Case Studies

Corporate fraud is widespread in commercial life, harming consumers, fair traders and society as a whole. Yet too often large and powerful organisations are structured to allow them to avoid or limit responsibility, to hide behind excuses of ‘system errors’ and ‘miscommunications’. The law treats companies as artificial ‘legal persons,’ even though companies don’t truly have ‘minds’ to think, or ‘bodies’ to act, in the same way as actual people.  But where do we find the corporate mind?

Traditionally, the law says that a corporation’s directing mind and will is found in its board of directors. What the directors know and intend, the company knows and intends. When dealing with small companies, this approach works fine. But it is hugely problematic when dealing with the reality of modern, complex corporations.

Modern corporations are often structured to create information silos, and to keep relevant knowledge below board level. In a complex corporation employees number in the thousands and employees may well have no idea of how their individual role contributes to what is, overall, unlawful conduct. They are just doing their job. This diffusion of responsibility can ensure that a corporation’s board (and, through it, the company itself) remains blissfully ignorant of unlawful activities being carried out on its behalf. In many cases, the real problem isn’t what any one person did, knew or intended, but that the corporation’s overall systems, policies and procedures were highly flawed and inherently likely to encourage or result in misconduct.

My research into corporate fraud, has identified a powerful new model of corporate responsibility emerging in Australia, called Systems Intentionality, which operates in addition to traditional approaches. On this approach, a corporation’s state of mind is manifested, or revealed, in the systems, policies and processes it applies. This idea is something we can all understand. Systems are inherently and obviously purposeful —they aim to produce some outcome — and a certain amount of knowledge is necessary to make a system work and so can be taken as read when the system is applied.

When I intend to make a cake, for example, I use a system (a recipe) designed for the purpose. And I must follow the recipe by using my knowledge of the required ingredients (flour, eggs and so on) and process (what is meant by beating eggs). So too, the model of Systems Intentionality explains that corporations intend the systems they implement and know what is necessary for those systems to function. It is even possible to say that corporations must think and act through systems. Individual directors and employees come and go: what remains behind are the systems, policies and processes that dictate the behaviour of the next round of directors and employees.

ASIC v National Exchange [2005] FCAFC 226

National Exchange sent unsolicited off-market offers to members of a demutualised company, Aevum Ltd. The offer price was at a substantial undervalue of their true worth. 257 shareholders accepted this low-ball offer despite a correct range of values being disclosed on the second page of the offer document. This is an example of where, on Systems Intentionality model, the business model was predatory in design. It could only be profitable if it took advantage of older and inexperienced sellers. The corporation must have known of the existence of vulnerable shareholders to adopt and operate the business model for profit.

Stubbings v Jams 2 [2022] HCA 6

Borrowers with no income were told to set up a company to borrow for business purposes. They became personal guarantors with their residential property as security. All dealings were done through professionals such as introducers, solicitors and accountants who provided various certificates of advice. This is an example of information silos built into the business model. By using third party service providers as part of their core business, lenders were distancing themselves from the knowledge of the individual borrower’s circumstances. The purpose of the system was to create an information barrier between lender and borrower.

Fees for no service

AMP charged dead people life insurance and financial advice fees through automated fee deduction systems. The systems were set to deduct fees on an ongoing basis without any functioning, adjustment, monitoring or corrective mechanisms. Given the nature of the products it is inevitable that the conditions justifying fees will change. It took five years and many complaints for AMP to respond to the problem. As designed, these systems were guaranteed to result in unlawful fee deductions. Absence of corrective mechanisms indicates an intentional decision not to be concerned about the accuracy of payments. From the perspective of Systems Intentionality this conduct is clearly open to characterisation as both dishonest and unconscionable. Read more...

Not so super

Westpac undertook a hugely successful campaign to encourage customers to roll over any superannuation held with other funds into their accounts.  Under their licence Westpac was authorised to give only general product information but not permitted to give any personal financial advice. Westpac employees wrote to and telephoned members, offering ‘free’ searches for other accounts and ‘assistance’ with arranging consolidation of their accounts. They were trained in a prescribed marketing and sales technique often resulting in Westpac representatives giving personal advice. Part of the strategy was to suggest to its customers that the decision to consolidate their funds is straightforward – a ‘win-win’.  From Systems Intentionality perspective this campaign can be described as a system of conduct which was likely to lead to unlawful behaviour.

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